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

                                  -------------
                                    FORM 10-K
                                  -------------


/X/   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
      ACT OF 1934
For the fiscal year ended December 31, 2005

                                       or

/ /   TRANSITION  REPORT  PURSUANT  TO SECTION  13 OR  15(d) OF  THE  SECURITIES
      EXCHANGE  ACT OF 1934
For the transition period from ____________ to ____________

                         Commission file number: 0-18267

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

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

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

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

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

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

Indicate by check mark if the  registrant is a well-known  seasoned  issuer,  as
defined in Rule 405 of the Securities Act. /_/ Yes /X/ No

Indicate  by  check  mark if the  registrant  is not  required  to file  reports
pursuant to Section 13 or Section 15(d) of the Act. /_/ Yes /X/ No

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

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

Indicate by check mark whether the registrant is a large  accelerated  filer, an
accelerated  filer, or a non-accelerated  filer (as defined in Rule 12b-2 of the
Exchange Act). Large Accelerated Filer /_/ Accelerated Filer /_/ Non-Accelerated
Filer /X/

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

The aggregate  market value of the  outstanding  common stock of the  registrant
held by  non-affiliates  of the registrant as of June 30, 2005 was approximately
$12.9 million.

Number of shares of common stock outstanding as of March 15, 2006: 889,483,510

<PAGE>

                                Table of Contents
<TABLE>
<CAPTION>

                                                                                    Page
                                                                                    ----
PART I
<S>  <C>                                                                               <C>
Item 1.    Business                                                                    3
Item 1A.   Risk Factors                                                                8
Item 1B.   Unresolved Staff Comments                                                  16
Item 2.    Properties                                                                 16
Item 3.    Legal Proceedings                                                          16
Item 4.    Submission of Matters to a Vote of Security Holders                        17

PART II

Item 5.    Market for Registrant's Common Equity, Related Stockholder Matters
            and Issuer Purchases of Equity Securities                                 18
Item 6.    Selected Financial Data                                                    19
Item 7.    Management's Discussion and Analysis of Financial Condition and
            Results of Operations                                                     21
Item 7A.   Quantitative and Qualitative Disclosures About Market Risk                 31
Item 8.    Financial Statements and Supplementary Data                                31
Item 9.    Changes in and Disagreements with Accountants on Accounting and
            Financial Disclosure                                                      31
Item 9A.   Controls and Procedures                                                    32
Item 9B.   Other Information                                                          32

PART III

Item 10.   Directors and Executive Officers of the Registrant                         33
Item 11.   Executive Compensation                                                     35
Item 12.   Security Ownership of Certain Beneficial Owners and Management and
            Related Stockholder Matters                                               38
Item 13.   Certain Relationships and Related Transactions                             41
Item 14.   Principal Accounting Fees and Services                                     45

PART IV

Item 15.   Exhibits, Financial Statement Schedules                                    46

Signatures                                                                           S-1
</TABLE>

                                       2
<PAGE>

                                     PART I

     This Annual Report on Form 10-K contains  forward-looking  statements  that
reflect our current  estimates,  expectations  and projections  about our future
results,  performance,  prospects and opportunities.  Forward-looking statements
include all statements that are not historical facts. These statements are often
identified  by  words  such as  "anticipate,"  "believe,"  "could,"  "estimate,"
"expect,"  "intend,"  "plan,"  "may,"  "should,"  "will,"  "would"  and  similar
expressions. These forward-looking statements are based on information currently
available to us and are subject to numerous risks and  uncertainties  that could
cause our actual  results,  performance,  prospects or  opportunities  to differ
materially  from  those  expressed  in,  or  implied  by,  the   forward-looking
statements we make in this Annual Report. We have included  important factors in
the cautionary  statements included in this Annual Report,  particularly in Item
1A. "Risk  Factors,"  that could cause our actual  results to differ  materially
from the results referred to in the  forward-looking  statements we make in this
Annual  Report.  You  should not place  undue  reliance  on any  forward-looking
statements.  Except  as  otherwise  required  by  federal  securities  laws,  we
undertake  no  obligation  to  publicly  update  or revise  any  forward-looking
statements,  whether  as a result of new  information,  future  events,  changed
circumstances or any other reason after the date of this Annual Report.

     "NCT"  (which may be referred to as "we," "us," or "our")  means NCT Group,
Inc. or NCT Group, Inc. and its subsidiaries, as the context requires.

     The  NCT  Group,  Inc.  name  and  logo,  NoiseBuster(R),   ClearSpeech(R),
ProActive(R),  Sight & Sound(R)  and  Artera  Turbo(TM)  are  either  registered
trademarks or  trademarks  of NCT Group,  Inc. in the United States and/or other
countries.  All other  trademarks,  service marks or trade names  referred to in
this Annual Report are the property of their respective owners.

ITEM 1.   BUSINESS

General

     NCT Group, Inc. develops and licenses technologies based upon its portfolio
of patents and related rights and extensive  technological  know-how.  We have a
strong technology base with approximately 570 domestic and international patents
and related  rights.  We operate in three  segments:  communications,  media and
technology. Our major focus is the development of our communications businesses,
particularly  our Artera Turbo network  optimization  and Internet  acceleration
services,   and  our  audio  and   communications   products   produced  by  our
majority-owned subsidiary, Pro Tech Communications, Inc.

     We  have  strategic   licensing   relationships   with   manufacturers  for
integration of certain of our technologies into their products and applications,
from which we earn licensing  fees,  ongoing per unit royalties and  engineering
fees.

     Our strategy is to leverage our existing base of  proprietary  technologies
by licensing  our  technologies  and by developing  new  products,  services and
applications.  We  continue to  establish  distribution  channels  and strive to
increase  consumer  awareness  of  our  products,  services,   applications  and
technologies.  At the same time,  we continue to strive to lower the cost of our
products and services and to enhance their technological performance.

     We classify revenue  recognized from our product lines in our statements of
operations  as  technology   licensing  fees  and   royalties,   product  sales,
advertising,  and engineering and  development  services.  Our product lines and
licenses  that  comprised  more than 15% of our total  revenue in any one of the
last three years are as follows:

     o    Flat panel  transducer  technology  licensed to New  Transducers  Ltd.
          ("NXT")  was   accounted  for  in  our  media  segment  and  comprised
          approximately  44% and 39% of our  total  revenue  in 2003  and  2004,
          respectively; and

     o    Product revenue from the sale of our  communications  headset products
          was  accounted  for  in  our  communications   segment  and  comprised
          approximately  24%, 22% and 31% of our total revenue in 2003, 2004 and
          2005, respectively.

     We were incorporated in Delaware in 1986 and changed our name to NCT Group,
Inc. in 1998. Our principal  executive offices are located at 20 Ketchum Street,
Westport,  Connecticut  06880,  our telephone  number is (203)  226-4447 and our
Internet address is www.nctgroupinc.com. The information on our Internet website
is not incorporated into this Annual Report.

                                       3
<PAGE>

Operations

     We operate our business through three segments:  communications,  media and
technology.  Each of our operating  segments  targets the  commercialization  of
products and technologies in specific markets. Please see Notes 24 and 25 to the
Notes to Consolidated  Financial  Statements  contained elsewhere in this Annual
Report  for  additional   information   regarding  our  operating  segments  and
geographic areas.

Communications Segment

     Our  communications  segment  includes our Artera Group,  Inc. and Pro Tech
Communications,  Inc.  subsidiaries.  Artera Group  develops and markets  Artera
Turbo, a software-based,  network optimization and Internet acceleration service
for service providers,  small businesses,  enterprises and government  networks.
Pro Tech engineers,  designs and distributes audio and communications  solutions
and other products for  consumers,  business  users and  industrial  users.  Our
communications  segment also develops and markets our ClearSpeech noise and echo
cancellation algorithms and related microphones and speakers.

Artera Turbo

     Artera  Turbo is a  software-based  service  that  improves  the  effective
performance of communication  lines for Internet-based  applications such as web
browsing, e-mail and file transfers. The service accomplishes these improvements
by employing a number of patent-pending, performance enhancement techniques that
decrease  the  size and  increase  efficiencies  in the  movement,  storage  and
delivery of electronic data.

     Artera Turbo accelerates web browsing, web-based file transfers,  uploading
and downloading of all native File Transfer  Protocol (FTP) file transfers,  and
all types of e-mail from simple  web-based  e-mail systems,  such as Hotmail and
Yahoo Mail, to Post Office  Protocol3  (POP3) and Simple Mail Transfer  Protocol
(SMTP)  based  e-mail  systems,  such as Microsoft  Outlook,  Microsoft  Outlook
Express and Microsoft  Exchange.  Artera Turbo provides effective speeds of more
than five times the normal speed of a 56k dial-up line,  in other words,  speeds
comparable  to digital  subscriber  lines (DSL).  Artera Turbo also  accelerates
other connections  including cable, DSL and integrated services digital networks
(ISDN).

     We have  expanded our  emphasis  beyond the  residential  market to include
opportunities  for Artera Turbo in the service provider and enterprise  markets.
In May 2005,  we  introduced a new version of Artera Turbo for Internet  service
providers and other network  applications.  Our Artera Turbo server  software is
clientless, meaning no software installation on individual personal computers is
required and, therefore,  a service provider or other network  administrator can
implement  the service  more  readily.  Artera  Turbo  server  software not only
increases data transmission speeds, but also reduces bandwidth  utilization.  In
October  2005, we announced  that we have entered into a worldwide  distribution
agreement  with  Siemens plc.  Siemens  intends to  distribute  our Artera Turbo
technology under the name "Siemens Bandwidth  Accelerator." Siemens is currently
focusing on large-scale  service providers and enterprises in the United Kingdom
and expects to bundle and  integrate  Artera Turbo  technology as a component of
the complete,  customized  information  technology  solutions Siemens offers its
customers.  In addition, we continue to pursue other strategic  partnerships for
distribution of our clientless version of Artera Turbo in the Americas,  Europe,
the Middle East and Asia.

Rev The Web

     In April 2005, we commercially  introduced a new web accelerator brand, Rev
The Web. Rev The Web uses a permission-based, ad-assisted business model that we
believe  will enable us to compete  more  effectively  in a market  fraught with
competitive  pricing and distribution  pressures.  Rev The Web is a free service
that uses Artera  Turbo-based  technology to enable users to access the Internet
an average of five times as fast  through a dial-up line and three times as fast
through a broadband  connection,  such as DSL or a cable modem.  This service is
targeted to the residential web accelerator  market,  principally dial-up users.
In return for the free  services,  users are required to complete a survey about
their interests and are served a limited number of advertisements based on their
responses as well as on behavioral  information  they authorize us to collect on
them.  We  currently  have  arrangements  with  ad  serving  companies  who  are
responsible for selling Rev The Web's advertising inventory.

                                       4
<PAGE>

Pro Tech

     Pro Tech  engineers,  designs  and  distributes  audio  and  communications
solutions and other products into the contact center,  quick-service restaurant,
consumer audio and industrial safety markets. Pro Tech's products include:

     o    Apollo headsets and amplifiers for use in contact centers;
     o    ProCom headsets for use in quick-service restaurants;
     o    NoiseBuster noise canceling consumer audio headphones; and
     o    NoiseBuster  noise  canceling  safety  earmuffs  for use in high noise
          industrial environments.

     Pro Tech is also  pursuing  the  development  of new  products  to  address
additional  markets of opportunity,  including  spectator racing,  two-way radio
communications  and  aviation.  Pro Tech intends to enter many of these  markets
through the  expansion of its  NoiseBuster  line of electronic  noise  canceling
products as well as passive products designed for higher noise settings.

ClearSpeech

     Our  ClearSpeech  business  specializes in the research and  development of
signal   processing   algorithms  and  related   hardware  for  enhancing  voice
communications.  We have developed  solutions for a wide range of  communication
system  challenges,  including  third  generation  (3G)  cellular  video phones,
drive-thru service facilities,  security and surveillance equipment,  hands-free
communication  systems,  Formula 1 and NASCAR racing,  digital mobile radios and
automotive  speech  recognition  applications.  Our ClearSpeech  suite of signal
processing  technology includes echo cancellation and noise reduction algorithms
for human listeners and for speech recognition applications.

Media Segment

     Our media segment, through our Hospital Radio Network business, distributed
a micro broadcasting  system that delivers  place-based  broadcast and billboard
advertising.  We used our proprietary  digital technology to deliver advertising
messages  interspersed  with CD-quality music programming to hospitals and other
health care  facilities.  In September  2005,  we decided to modify the business
model for our Hospital Radio Network business. Instead of continuing to directly
operate this business,  under our modified  business model, we are licensing our
proprietary  technology used in this business to third parties. In exchange,  we
will receive a percentage of the advertising  revenues  generated by these third
parties through  existing and new  installations of our Sight & Sound systems in
health care facilities.

Technology Segment

     Our  technology   segment  consists  of  our  Advancel  Logic   Corporation
subsidiary,  which  participates  in the  native  Java  embedded  microprocessor
market.   We   have   licensed   certain   Advancel-developed    technology   to
STMicroelectronics   SA  for  smart   card   applications,   and   since   2003,
STMicroelectronics  has been  shipping  orders of its smart cards  incorporating
this technology.

Technology and Intellectual Property

     We rely on a combination of patent,  trademark,  copyright and trade secret
laws  in the  U.S.  and  elsewhere  as well as  confidentiality  procedures  and
contractual provisions to protect our proprietary technology. We also enter into
confidentiality  and  invention  assignment  agreements  with our  employees and
confidentiality  agreements with our consultants and other third parties.  As of
February 28, 2006, we held  approximately  570 patents and related rights and an
extensive library of know-how and unpatented technology. We have patent coverage
in the U.S., Canada, Japan, Europe, Korea,  Australia,  Hong Kong and Taiwan. We
hold or have rights to 294 inventions as of February 28, 2006, including 92 U.S.
patents and approximately 478 corresponding foreign patents. We have pending 117
U.S. and foreign  patent  applications.  Our  engineers  have made 164 invention
disclosures  for which we are in the process of preparing  patent  applications.
Our patents have  expiration  dates  ranging from 2006  through  2019,  with the
majority of the material patents upon which we rely expiring in 2011 and beyond.

     We have made  substantial  investments in our  technology and  intellectual
property  and  have  incurred  development  costs  for  engineering  prototypes,
pre-production  models and  field-testing of several products and  applications.
Our  intellectual  property  strategy  has been to  build  upon our base of core
technology that we have developed,  acquired or exclusively  licensed with newer
advanced technology patents developed by, purchased by or

                                       5
<PAGE>

exclusively  licensed  to us.  In  many  instances,  we  have  incorporated  the
technology  embodied in our core patents into patents covering  specific product
applications,   including   product  design  and  packaging.   We  believe  this
building-block approach provides greater protection to us than relying solely on
the core patents.

     Our core patents and advanced patents and patent  applications  include the
following technologies:

     o    Artera Turbo information and traffic optimization management;
     o    electronic noise control for headsets;
     o    filters for signal enhancement and speech filtering; and
     o    our method and apparatus for delivering audiovisual information.

     Our key technologies include the following:

     Information   and   Traffic   Optimization    Management   Software.    Our
patent-pending  Artera Turbo technology enhances the effective speed of Internet
activities, including web browsing, e-mail and file transfers, for any residence
or small  to  medium  sized  business,  government  facility,  Internet  service
provider or large  enterprise.  Artera  Turbo works via a series of  proprietary
data management  techniques.  These involve optimization  processes Artera Turbo
performs on an information stream to reduce the number of bytes transferred over
the network  (reduction of the size of data  transferred).  These techniques are
the subject of three patents pending owned by us. We believe that the aspects of
our Artera Turbo  technology that are patents pending are unique to us. While it
is not possible to patent all of our data optimization  technology,  our patents
pending cover the unique implementation techniques we have developed.

     Electronic  Noise  Canceling.  Our electronic  noise  canceling  technology
minimizes low frequency  acoustical  noise, or rumbling sounds.  This technology
electronically  couples a sound wave with its exact  mirror  image wave,  called
anti-noise,  resulting in a significant  reduction of the offensive noise before
it reaches the user's ears. The technology is particularly effective against low
frequency  noise,  such as noise  generated by computer  fans,  HVAC systems and
motor or engine-driven equipment. Products incorporating this technology include
our NoiseBuster consumer audio headphones and noise canceling safety earmuffs.

     Signal Enhancement. Our signal enhancement technology can be used to reduce
unwanted  signals  that  enter  into a  communications  network,  such  as  when
background  noise enters  telecommunications  or radio  systems from a telephone
receiver or microphone.  We have developed a line of patented  algorithms called
ClearSpeech that perform various signal enhancement  functions.  Our ClearSpeech
Adaptive Speech Filter  algorithm  removes noise from voice  transmissions.  The
filter is effective  against a variety of stationary  noises whose amplitude and
pitch change slowly compared to the spectral variations  characteristic of human
speech.  Our ClearSpeech  Acoustic Echo Cancellation  removes acoustic echoes in
hands-free,  full-duplex communication systems. Acoustic echo cancellation 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. Our ClearSpeech Reference Noise Filter isolates and
removes interfering signals, such as background radio,  television,  machine and
siren noise, so  communications  can be heard more clearly.  The reference noise
filter  algorithm was designed to remove  interference  from a desired signal in
applications where a reference signal for the interference is available.

     Digital  Broadcasting  Station System  Software.  Our digital  broadcasting
station system software technology is utilized in our micro broadcasting systems
to deliver customized music programming to each broadcasting  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.

     Protecting our  intellectual  property rights is costly and time consuming.
Maintenance  and  annuity  fees  for  our  extensive   patent  portfolio  are  a
significant  portion  of our  expenses  and  typically  range from  $300,000  to
$600,000  annually.  We incur  maintenance  fees to maintain  our  granted  U.S.
patents and annuity fees to maintain  foreign patents and the pendancy of patent
applications.  If, due to financial  constraints,  we are required to reduce our
level of  operations,  we will  not be able to  continue  to meet the  extensive
monetary  outlay for  maintenance and annuity fees to prevent all of our patents
and  applications  from  becoming  abandoned.  If this  occurs,  we will have to
prioritize our portfolio accordingly.

                                       6
<PAGE>

Research and Development

     Our  research  and  development  personnel  focus on product,  software and
algorithm  development that provides the technological  basis for our technology
licensing and commercial products,  and on basic research that helps provide the
scientific  advances that ultimately lead to new products and technology.  As of
February 28, 2006, our product and development  team consisted of  approximately
20 development engineers and scientists.

     Our research and development  expenses totaled  approximately $3.0 million,
$3.6  million and $4.0 million for the years ended  December 31, 2003,  2004 and
2005,  respectively.  We anticipate  that we will  continue to make  significant
research and  development  expenditures  to maintain and expand our  competitive
position.  This  includes  improving our current  technologies  and products and
developing newer technologies and products.

Marketing and Sales

Communications Segment

Artera Turbo

         Artera Turbo is available in a single user residential version, a small
business local area network (LAN) software gateway version, a service provider
version, a clientless server software version that can optimize and enhance
speed at the network level and an enterprise version that can support 250 or
more concurrent users on a LAN. In the residential market, we market the service
through a channel of Internet service providers who generally private label the
service. We market our clientless server software directly to Internet service
providers. We currently target the enterprise market through our strategic
partnership with Siemens.

Rev The Web

     We have arrangements with leading ad serving companies who sell our Rev The
Web  advertising  inventory.  We also have the  capability  of  selling  our own
advertising.

Pro Tech

     We sell our Pro Tech  products  directly  as well as  through a network  of
distributors. Key target markets include consumer audio, industrial safety, call
centers and major quick-service restaurant chains.

ClearSpeech

     We license our ClearSpeech  algorithms to manufacturers  for  incorporation
into various products. A major customer is OKI Electric Industry Co., Ltd, which
incorporates our ClearSpeech noise  cancellation  algorithm into its large-scale
integrated  circuits.  Our  ClearSpeech  technology  is also  incorporated  into
speaker and microphone products that are sold through a network of distributors.

Media Segment

     Our  Hospital  Radio  Network  sales  initiatives  are targeted to engaging
licensees of our micro broadcasting  system technology,  who, in turn, will work
to expand  the  number  of  participating  health  care  facilities  and to sell
advertising on their networks.

Technology Segment

     Our Advancel  microprocessor  technology  is  incorporated  into smart card
applications developed and marketed by STMicroelectronics.

Significant Customers

     Our  customers  that  comprised  more than 10% of our total revenue for the
year ended  December  31, 2005 are Sharp,  OKI  Electric and NXT at 19%, 16% and
12%,  respectively.  We did not  realize  any  additional  cash from NXT revenue
during 2005.

                                       7
<PAGE>

Competition

     We have a number of direct and  indirect  competitors  for our products and
services.  Our major  competition for our Artera Turbo service offering includes
Internet accelerator services offered by Propel,  Proxyconn and Slipstream.  Our
primary   competitors  for  Pro  Tech's   lightweight   telephone  headsets  are
Plantronics and GN Netcom, for its NoiseBuster  headphones are Bose and Sony and
for its NoiseBuster  safety earmuffs are Aearo and Bacou. Our major  competition
for our ClearSpeech noise and echo cancellation  algorithms  includes Lucent and
Texas Instruments. Finally, our Hospital Radio Network business competes against
other  on-site music  providers,  such as Muzak,  and against other  advertising
media. In addition,  we believe that a number of other large companies,  such as
major   domestic   and  foreign   communications,   computer   and   electronics
manufacturers  have research and development  efforts  underway that potentially
could be competitive with our products and services.

     Many of our  competitors  and potential  competitors  are  well-established
companies that have  substantially  greater  financial,  technical,  production,
sales and marketing,  and product  development  resources than we do. We believe
that our  competitive  advantages  for our products  and  services  include high
performance  resulting  from our  proprietary  technology,  superior  design and
construction,  and low  cost,  but that our  competitive  disadvantages  include
limited name recognition,  limited marketing and distribution resources and long
production lead times.

Employees

     As of  February  28,  2006,  we  had  58  employees.  These  include  20 in
engineering  and  development,  8 in operations and  production,  9 in sales and
marketing,  8 in management and administration,  and 13 in finance,  accounting,
human resources,  legal,  information technology and intellectual property. None
of our  employees  is  represented  by a labor  union.  We believe our  employee
relationships are good.

Available Information

     We file reports,  proxy  statements and other documents with the Securities
and Exchange Commission  ("SEC").  You may read and copy any document we file at
the SEC's public reference room at 100 F Street, N.E.,  Washington,  D.C. 20549.
You should call  1-800-SEC-0330  for more  information  on the public  reference
room.  Our SEC filings are also  available to you on the SEC's  Internet site at
http://www.sec.gov.

     We  maintain  an  Internet  website at  www.nctgroupinc.com.  Our  periodic
reports filed with the SEC  (including  annual  reports on Form 10-K,  quarterly
reports on Form 10-Q,  current  reports on Form 8-K and Section 16 reports)  are
available   free   of   charge   on  our   Investor   Information   website   at
www.nctgroupinc.com/investors  as soon as  reasonably  practicable  after  these
reports are  electronically  filed with the SEC. The  information  posted on our
website is not incorporated into this Annual Report.


ITEM 1A.  RISK FACTORS

     You  should  carefully  consider  the  following  information  about  risks
described below,  together with the other  information  contained in this Annual
Report  and in our  other  filings  with the SEC,  before  you  decide to buy or
maintain an investment in our common stock. We believe the risks described below
are the risks that are material to us as of the date of this Annual  Report.  If
any of the following risks actually occur,  our business,  financial  condition,
operating  results and future growth  prospects  would likely be materially  and
adversely affected. In these circumstances, the market price of our common stock
could  decline,  and you may lose all or part of the  money  you paid to buy our
common stock.

     We do not  believe we have,  and we are  unsure  whether we will be able to
generate,  sufficient  funds to  sustain  our  operations  through  the next six
months.

     Our  management  believes  that  currently  available  funds  will  not  be
sufficient  to sustain our  operations  at current  levels  through the next six
months.  At December 31, 2005, we had $0.5 million in cash and cash  equivalents
and a working capital  deficiency of $136.8 million.  Our ability to continue to
operate at current  levels  depends  upon,  among other  things,  our ability to
generate  sufficient  revenue from the licensing of our technology,  the sale of
our  products  and the  receipt of  continued  funding  from Carole  Salkind,  a
beneficial owner of approximately 95% of our common stock.

     We have been  primarily  dependent upon funding from Ms. Salkind to sustain
our operations during the last three years. As of February 28, 2006, we owed Ms.
Salkind approximately $95.5 million under outstanding

                                       8
<PAGE>

convertible  notes.  Although Ms.  Salkind is under no obligation to continue to
provide  funding  to us,  we  believe  that  she will  continue  to do so in the
immediate  future.  This belief is based primarily upon her continued funding of
us despite  our  failure to repay our  convertible  notes upon  maturity.  Since
January 2001, we have generally  defaulted on the repayment of obligations  owed
to Ms.  Salkind as they become due.  Ms.  Salkind  has  generally  allowed us to
refinance  maturing notes,  along with accrued interest and penalties,  into new
notes. In addition, Ms. Salkind has continued to provide us with new funds. From
time to time, we have obtained oral  assurances  that Ms.  Salkind will continue
funding our operations.  However,  we have no legally binding assurance that Ms.
Salkind will continue funding us in the near-term or that the amount, timing and
duration of funding from her will be adequate to sustain our operations.

     In the  long-term,  our ability to continue as a going concern is dependent
on generating  sufficient  revenue from technology  licensing fees and royalties
and product sales. Our ability to generate significant revenue from any of these
or other sources is uncertain.  Historically,  our operations have not generated
sufficient  revenue to cover our costs.  In the event that our operations do not
generate sufficient cash, we could be required to reduce our level of operations
while attempting to raise additional  working capital.  We can give no assurance
that additional financing will be available to us on acceptable terms or at all.
The failure to obtain any necessary  additional  financing would have a material
adverse  effect on us. If adequate  funds are not available or are not available
on  acceptable  terms,  our  ability  to fund our  operations  and any  intended
expansion,  to take advantage of business  opportunities,  to develop or enhance
products or services or to otherwise  respond to competitive  pressures would be
significantly   limited,  and  we  might  need  to  significantly   restrict  or
discontinue our operations.

     The report of our  independent  registered  public  accounting firm for the
year ended December 31, 2005 contains a qualification relating to our ability to
continue as a going concern.

         The report of our independent registered public accounting firm on our
consolidated financial statements as of December 31, 2005 and for the years then
ended contains an explanatory paragraph stating that there is substantial doubt
as to our ability to continue as a going concern. Our financial statements do
not include any adjustments that might result from the outcome of this
uncertainty. This uncertainty may affect our ability to raise additional capital
and may also negatively impact our relationships with current and potential
suppliers, customers and licensees.

     We have incurred  substantial  losses since our inception and expect future
losses to continue for the foreseeable future.

     We have incurred  substantial losses since our inception,  including losses
of $32.7  million,  $59.1 million and $40.7 million for the years ended December
31, 2003,  2004 and 2005,  respectively,  and we had an  accumulated  deficit of
$395.0 million at December 31, 2005. We expect that we will continue incurring a
loss until, at the earliest,  we generate  sufficient revenue to offset the cost
of our operations,  including our continuing product  development  efforts.  Our
future  revenue  levels  and  potential  profitability  depend on many  factors,
including  the demand for our  existing  products and  services,  our ability to
develop and sell new products and services and our ability to control costs.  We
can give no assurance that we will experience any significant  revenue growth or
that we will ever achieve profitability. Even if we do achieve profitability for
a fiscal  year,  we may be unable to sustain  profitability  on a  quarterly  or
annual  basis in the  future.  It is possible  that our  revenue  will grow more
slowly  than  we  anticipate  or  that   operating   expenses  will  exceed  our
expectations.

     We have  substantial  outstanding  indebtedness  and we generally have been
unable to repay our indebtedness as it becomes due.

     We have  substantial  levels of outstanding  debt. As of December 31, 2005,
our consolidated indebtedness was approximately $83.6 million, net of discounts,
with stated  interest at annual rates  ranging from 6% to 12%,  including  $78.1
million,  net of discounts,  of convertible notes issued to Carole Salkind.  The
face amount of debt due Ms.  Salkind as of December 31, 2005 was $83.6  million,
of which all but $5.0 million  will mature in 2006.  Our  consolidated  interest
expense,  net totaled  $16.5  million,  $55.7  million and $67.9 million for the
years ended December 31, 2003, 2004 and 2005, respectively,  primarily resulting
from the  amortization  of debt  discounts and beneficial  conversion  features,
mostly  attributable  to  allocation  of the fair  value of  warrants  issued in
conjunction with the debt and, to a lesser extent, original issue discounts. Our
ability  to  meet  our  debt  service  obligations  will  depend  on our  future
operations,  which are subject to prevailing industry and other conditions, many
of which are beyond our control.  Our  indebtedness to Ms. Salkind is secured by
substantially  all of our assets. In the event of any default on our obligations
relating to this indebtedness,  Ms. Salkind could declare her indebtedness to be
immediately due and payable,  and in certain cases,  she could then foreclose on
our assets. A default relating to our indebtedness could have a material adverse
effect on our business and financial condition.

                                       9
<PAGE>

     To date,  as our debt matures,  we generally  have been unable to repay the
principal  and interest due on the debt.  Typically,  the interest  rates on our
debt  increase  upon our failure to repay  principal  when due, with the default
rates of interest  ranging from 13% to 18% per annum.  In  addition,  all of our
debt held by Ms.  Salkind  imposes a default  penalty of 10% of the principal in
default  upon our  failure to repay the debt when due.  Of the $83.6  million in
indebtedness  held by Ms. Salkind as of December 31, 2005,  approximately  $42.5
million  represents  cash loans made by Ms. Salkind  (rather than non-cash items
such as interest and default penalties rolled into new notes, legal settlements,
premiums on equipment loans and original issue discounts).

     Our  current  stock  price may  restrict  our  ability to raise  additional
capital through sales of our equity securities.

     On February 28, 2006, the last reported sales price of our common stock was
$0.0029 per share,  which is less than the $0.01 par value of our common  stock.
Delaware law restricts  sales of unissued shares of common stock at a price less
than the par value of the common  stock.  The  purchaser  of such  shares may be
assessed  for any  difference  between the par value and the sales price at less
than par value. As a result, we do not intend to sell newly issued shares of our
common  stock at any time the  purchase  price of such shares would be less than
the par value of our common stock.  Similarly, in the future we do not intend to
issue  derivative  securities  with a conversion or exercise price less than par
value. These restrictions may inhibit our ability to raise additional capital at
times  when the  market  price of our  common  stock is less than its par value.
Furthermore, while we have issued certain convertible and exercisable securities
at conversion  prices based on fair market value at the time of issuance,  which
were  below par  value,  we do not  intend to  fulfill  conversion  or  exercise
requests for these  securities at conversion or exercise  prices less than $0.01
per share unless and until we amend our certificate of  incorporation  to reduce
or  eliminate  the par  value  of our  common  stock.  While we  intend  to seek
stockholder  approval  of  such an  amendment  at our  next  annual  meeting  of
stockholders,  we can give no assurance that our stockholders would approve such
an amendment.  Holders of certain of our derivative securities may claim a right
to  contractual  liquidated  damages if we do not fulfill  their  conversion  or
exercise requests.

     We have committed to reserve,  issue and register more shares of our common
stock than we are currently  authorized to issue and we are accruing  liquidated
damages as a result. We may be required to seek a further increase in the number
of our  authorized  shares of common stock in order to reduce or  eliminate  the
accrual of liquidated damages and to obtain any available future financing.

     Through the issuance of  convertible  debt,  convertible  preferred  stock,
options,  warrants and other securities, we have made commitments to reserve and
issue  shares  of our  common  stock  that  exceed  the  number of shares we are
authorized  to  issue  under  our  certificate  of  incorporation.  Many  of the
instruments  related to our  derivative  securities  include  liquidated  damage
provisions  triggered  by our  failure to honor  valid  conversion  or  exchange
requests or to comply with resale registration obligations. We have not complied
with  certain  of our  resale  registration  obligations.  As a result  of these
failures,  as of  December  31,  2005,  we have  incurred,  but  not  yet  paid,
liquidated damages totaling approximately $5.9 million, and we continue to incur
liquidated  damages of approximately  $0.1 million per month. At our 2005 annual
meeting of  stockholders,  held on June 28, 2005, our  stockholders  approved an
amendment  to our  certificate  of  incorporation  to increase the number of our
authorized  shares of  common  stock to 5.622  billion  shares.  This  increase,
however,  is not sufficient for us to satisfy all of our commitments to reserve,
issue and register for resale  shares of our common stock.  As a result,  we can
give no  assurance  that  this  increase  will be  sufficient  to  permit  us to
substantially  reduce or  eliminate  liquidated  damage  accruals  in any future
period.  In order to reduce or eliminate the accrual of liquidated  damages,  we
may need to seek stockholder approval of a further increase in the number of our
authorized shares of common stock. If approved,  any further increase could lead
to further dilution for our existing stockholders

     In  addition,  we may need to seek a  further  increase  in our  authorized
shares of common stock in order to obtain future  financing,  if such  financing
would  be  available  to us on  acceptable  terms,  or at  all.  Any  additional
financing involving our common stock or derivative  securities  convertible into
our  common  stock  could  also  lead  to  further  dilution  for  our  existing
stockholders.

                                       10
<PAGE>

     We have generated  limited revenue from the licensing of our technology and
the sale of our products and services and we can provide no assurance  regarding
future revenue levels.  The markets for some or all of our key product lines may
not grow or develop.

     Although we have actively  marketed the licensing of our  technologies  and
the sale of our products and services,  our  operating  revenue has been limited
and  sporadic.  Our annual  revenue  generally  decreased in each year from 2000
through 2005,  with only a small increase in 2004 over 2003.  Some or all of our
key product and service lines, such as our Artera Turbo offerings,  may not grow
or  customers  may decline or forego use of our  products or services in some or
all of these areas. Our failure to establish significant demand for our products
and services would adversely impact our business, financial condition, operating
results and cash flow.  Currently,  a significant portion of our planned revenue
growth is  attributable  to our Artera  Turbo  service  offerings.  Although  we
believe that demand for these  offerings  will grow, we can give no assurance as
to any level of future  demand.  Lack of growth in this business will  adversely
affect our revenue levels.

     We depend upon our indirect  distribution  channel to promote and sell many
of our products and services.

     In addition to marketing our products and services directly through our own
direct  sales  force,  we market  and sell our  products  and  services  through
indirect  channels.  Our indirect channel network includes master  distributors,
resellers,  finders  and  consultants.   Conducting  business  through  indirect
distribution channels presents a number of risks, including:

     o    our  distributors  and resellers can cease  marketing our products and
          services with limited or no notice and with little or no penalty;
     o    we  may  not  be  able  to  replace  existing  or  recruit  additional
          distributors or resellers if we lose any of our existing ones;
     o    our distributors and resellers may not be able to effectively sell new
          products and services that we may introduce;
     o    we do not have  control  over the  business  practices  adopted by our
          distributors and resellers;
     o    our distributors and resellers may also offer competitive products and
          services  and may not give  priority to  marketing  our  products  and
          services; and
     o    we may face conflicts  between the activities of our indirect channels
          and our direct sales and marketing activities.

     The failure of our suppliers to provide quality components or products in a
timely manner could adversely affect our results.

     Our  growth  and  ability to meet  customer  demands  depend in part on our
capability to obtain timely deliveries of components, subassemblies and products
from our  suppliers.  We buy  components  and  subassemblies  from a variety  of
suppliers and assemble them into finished products.  We also have certain of our
products  manufactured for us by third party suppliers.  The cost, quality,  and
availability of these goods are essential to the successful  production and sale
of our  products.  Obtaining  components,  subassemblies  and finished  products
entails various risks, including the following:

     o    We obtain certain  components,  subassemblies and products from single
          suppliers  and  alternate  sources  for these  items  are not  readily
          available.  An  interruption  in supply from any of our single  source
          suppliers  in  the  future  would  materially   adversely  affect  our
          business, financial condition and operating results.
     o    Prices of components, subassemblies and finished products may rise. If
          this  occurs  and we are not able to pass  these  increases  on to our
          customers or to achieve  operating  efficiencies that would offset the
          increases,  it would have a material  adverse  effect on our business,
          financial condition and operating results.
     o    Due  to  the  lead  times  required  to  obtain  certain   components,
          subassemblies and products from certain foreign suppliers,  we may not
          be able to react quickly to changes in demand,  potentially  resulting
          in  either  excess  inventories  of such  goods  or  shortages  of the
          components, subassemblies and products. Failure in the future to match
          the timing of purchases of components,  subassemblies, and products to
          demand could increase our  inventories  and/or  decrease our revenues,
          consequently  materially  adversely affecting our business,  financial
          condition and operating results.

                                       11
<PAGE>

     o    Most of our suppliers are not obligated to continue to provide us with
          components  and  subassemblies.  Rather,  we buy most  components  and
          subassemblies  on a purchase order basis. If our suppliers  experience
          increased  demand or shortages,  it could affect  deliveries to us. In
          turn,  this would affect our ability to manufacture  and sell products
          that are dependent on those components and  subassemblies.  This would
          materially  adversely  affect our  business,  financial  condition and
          operating results.

     We face significant competition from well-established companies.

     We face  formidable  competition  in each of the  industries  in  which  we
operate.   Many  of  our  competitors  have  substantially  greater  management,
technical, financial, marketing and product development resources than we do. In
addition,  many of our competitors have  substantially  greater name recognition
and shorter production and distribution lead times than we do. For example,  our
Pro Tech business faces substantial competition from Sony, Bose and Plantronics,
and some of our Artera  Turbo  service  offerings  compete  with other  Internet
accelerators offered by Propel, Proxyconn and Slipstream.  While we believe that
the  quality  of our  products  and  services  equals  or  exceeds  those of our
competitors,  we can  give  no  assurance  that  we  will  be  able  to  compete
effectively against these companies.

     Our success  depends  upon our ability to develop new products and services
and to enhance our existing products and services.

     The industries in which we operate are characterized by rapid technological
advances,  evolving standards,  changing customer needs and frequent new product
introductions and enhancements.  To keep pace with  technological  developments,
satisfy  increasingly  sophisticated  customer  requirements  and achieve market
acceptance, we must enhance and improve our existing products and services, such
as our Artera Turbo  service  offerings,  and we must also continue to introduce
new products and services. If we are unable to develop new products and services
or adapt our current  products and services to meet changes in the  marketplace,
if we are unable to enhance and improve our products  and services  successfully
in a timely  manner,  or if we fail to position  and/or  price our  products and
services to meet market demand,  customers may not buy our products and services
and our  business and  operating  results  will be  adversely  affected.  If our
enhancements to existing  products and services do not deliver the functionality
that our customers demand,  our business and operating results will be adversely
affected. In addition,  industry adopted and de facto standards for the Internet
are rapidly  evolving.  We can give no assurance  that the standards on which we
choose to develop new  Internet-based  products  and  services  will allow us to
compete effectively for business  opportunities as they arise in emerging areas.
Accelerated  product and service  introductions  and short  product  life cycles
require high levels of  expenditures  for research  and  development  that could
adversely affect our operating results. Further, any new products or services we
develop may not be  introduced  in a timely manner and may not achieve the broad
market acceptance necessary to generate significant revenue.

     If we cannot hire enough  qualified  employees or if we lose key employees,
it will  adversely  affect  our  ability  to manage our  business,  develop  our
products and services and increase our revenue.

     We believe any future  success  depends to a large extent on the  continued
service of our senior  management  and other key employees and the hiring of new
qualified employees.  In our industries,  substantial and continuous competition
exists for highly skilled  business,  product  development,  technical and other
personnel. We may experience increased compensation costs that are not offset by
either  improved  productivity  or higher  prices.  We may not be  successful in
recruiting new personnel and in retaining and motivating existing personnel. Any
changes  in  management  may be  disruptive  to our  operations.  We do not have
long-term employment agreements with our employees.

     We might  experience  significant  errors or security flaws in our software
offerings.

     Despite  testing  prior to  release  of our  software  offerings,  software
products  frequently  contain errors or security  flaws,  especially  when first
introduced  or when new versions are released.  Software  errors in our products
and services  could affect the ability of our products and services to work with
other hardware or software  products,  could delay the development or release of
new  products  and  services or new  versions of products and services and could
adversely affect market acceptance of our products and services.  Security flaws
in our products could expose us to claims as well as harm our reputation,  which
could impact our future  sales.  The  detection  and  correction of any security
flaws can be time  consuming and costly.  If we  experience  errors or delays in
releasing  new products or services or new versions of products or services,  we
could lose revenue. Software errors could also subject us to

                                       12
<PAGE>

product  liability,  performance  and/or warranty claims,  which could adversely
affect our business and operating results.

     Third  parties  are  asserting  rights  with  respect to certain of our key
intellectual property. We may not be able to protect our intellectual property.

     As more fully  described  below in Item 3.  "Legal  Proceedings  - Founding
Midcore  Shareholder  Litigation,"  we are  currently  defendants  in a  lawsuit
brought by two of the  former  shareholders  of a  corporation  that  became our
Midcore Software  subsidiary.  Among other remedies,  the plaintiffs'  complaint
seeks a declaration that the intellectual  property acquired from the plaintiffs
by the corporation that became Midcore Software (which intellectual  property is
currently  used in our Artera Turbo service  offerings) be held in trust for the
benefit  of the  plaintiffs.  If the court  were to  declare  such a trust,  the
plaintiffs  would be entitled to equitable  remedies that could  include,  among
other  things,  all or a portion of the  revenues  generated  by our use of this
intellectual property. While we cannot predict the outcome of this proceeding at
this time, we intend to defend against the plaintiffs' claims vigorously.

     In general, we rely on a combination of copyright, patent, trademark, trade
secrets,  confidentiality  procedures and contractual commitments to protect our
proprietary  information.  Despite our efforts,  these measures can only provide
limited  protection.  Unauthorized  third  parties  may try to  copy or  reverse
engineer  portions of our products or otherwise  obtain and use our intellectual
property.  Any  patents  owned  by  us  may  be  invalidated,   circumvented  or
challenged.  Any of our pending or future  patent  applications,  whether or not
being currently challenged,  may be issued with a narrower scope than the claims
we seek, if at all. In addition,  the laws of some  countries do not provide the
same level of protection of our proprietary  rights as do the laws of the United
States.  If we cannot protect our proprietary  technology  against  unauthorized
copying or use, we may not remain competitive.

     Our business may be harmed if we are found to have  infringed  intellectual
property rights of third parties.

     In the future,  third parties may assert claims against us alleging that we
have infringed their  intellectual  property rights. If we do not succeed in any
such  litigation,  we could be required to expend  significant  resources to pay
damages,  develop non-infringing  intellectual property or to obtain licenses to
the  intellectual  property that is the subject of the litigation.  However,  we
cannot be certain that any such licenses, if available at all, will be available
to us on  commercially  reasonable  terms.  Also,  defending these claims may be
expensive and divert the time and efforts of our management and other employees.

     Changes in  regulatory  requirements  may  adversely  impact our  operating
results or reduce our ability to generate revenues if we are unable to comply.

     Many  of  our  products  must  meet  the  requirements  set  by  regulatory
authorities in the numerous  jurisdictions in which we sell them. As regulations
and local laws  change,  we must modify our products to address  those  changes.
Regulatory  restrictions  may increase the costs to design and  manufacture  our
products, resulting in a decrease in our margins or a decrease in demand for our
products if the costs are passed along.  Compliance with regulatory restrictions
may impact the technical  quality and  capabilities  of our  products,  reducing
their marketability.

     While we believe that we currently  have  adequate  control  structures  in
place,  we are still  exposed  to  potential  risks from  legislation  requiring
companies to evaluate  controls under Section 404 of the  Sarbanes-Oxley  Act of
2002.

     We are working toward  evaluating our internal controls systems in order to
allow management to report on, and our independent registered public accountants
to attest to, our internal controls,  as required by the Sarbanes-Oxley  Act. We
are performing the system and process  evaluation and testing (and any necessary
remediation)  required in an effort to comply with the management  certification
and public  accountant  attestation  requirements of Section 404 of the Sarbanes
Oxley Act. As a result, we expect to incur additional  expenses and diversion of
management's  time.  While  we  anticipate  being  able to fully  implement  the
requirements relating to reporting on internal controls and all other aspects of
Section  404 in a timely  fashion,  we cannot  be  certain  as to the  timing of
completion of our evaluation,  testing and remediation  actions or the impact of
those on our  operations  since  there  is no  precedent  available  by which to
measure compliance adequacy. If we are not able to implement the requirements of
Section 404 in a timely manner or with adequate compliance,  we might be subject
to sanctions or investigation by the SEC. Any such action could adversely affect
our financial results.

                                       13
<PAGE>

     The sale or  availability  for future  sale of  substantial  amounts of our
common stock could adversely affect our stock price.

     The sale or  availability  for sale of  substantial  amounts  of our common
stock, including shares issuable upon exercise of derivative securities,  in the
public  market could  adversely  affect the market price of our common stock and
materially  impair our ability to raise capital through future  offerings of our
common  stock.  As noted  above,  through  the  issuance  of  convertible  debt,
convertible  preferred stock,  options,  warrants and other securities,  we have
made  commitments  to  reserve  and  issue  shares  of  our  common  stock  that
significantly  exceed the number of shares we are currently  authorized to issue
under  our  certificate  of  incorporation.   At  our  2005  annual  meeting  of
stockholders,  held on June 28, 2005, our stockholders  approved an amendment to
our certificate of incorporation to increase the number of our authorized shares
of common stock to 5.622 billion shares. As a result,  holders of our derivative
securities are entitled to convert at least a portion of these  securities  into
shares of our common stock.  The number of shares  issuable  under many of these
derivative securities is a function of the price of our common stock because the
number of shares issuable under several of our agreements varies with the market
price. At February 28, 2006, based on the closing bid price of $0.0029 per share
on that date, our outstanding commitments,  including derivative securities were
convertible into an aggregate of approximately 35.7 billion shares of our common
stock.  The  issuance  and sale  into the  market  of a  substantial  number  of
additional  shares of our common stock would have a substantial  dilutive effect
on our current  stockholders  and could  cause a  significant  reduction  in the
market price of our common stock.

     In addition,  we have entered into a private  equity credit  agreement with
Crammer  Road LLC.  This  agreement  provides  that we must put to Crammer  Road
shares of our common stock  having an  aggregate  value of at least $5.0 million
(the minimum commitment amount) and may put to Crammer Road shares of our common
stock having an aggregate  value of up to $50.0 million (the maximum  commitment
amount)  over the three  year term of the  agreement.  The sale of shares of our
common  stock to Crammer  Road to satisfy the $5.0  million  minimum  commitment
amount  under  the  private  equity  credit  agreement  is  likely  to result in
substantial  dilution to the  interests of our other  stockholders.  There is no
upper  limit on the number of shares that we may be required to issue to satisfy
our minimum commitment amount. This will have the effect of further diluting the
proportionate equity interest and voting power of holders of our common stock.

     Holders of our common  stock are also  exposed to  additional  market price
risks from potential  low-risk short selling  strategies  that may be adopted by
third  parties  and that could  contribute  to the  future  decline of our stock
price.

     A substantial  number of our  convertible and  exchangeable  securities are
convertible  or  exchangeable  at a price per share that is 20% to 25% less than
the five-day average closing bid price of our common stock  immediately prior to
conversion or exchange.  In addition,  the terms of these derivative  securities
generally do not prohibit the holders of these securities from short selling our
common  stock.  Short  selling  is the act of  borrowing  stock to sell with the
expectation  of the price  dropping and the intent of buying the stock back at a
cheaper  price to replace  the  borrowed  stock.  As a result of these  factors,
holders of these derivative securities may decide to sell our common stock short
in an  effort  to  drive  down the  price of the  common  stock by  creating  an
imbalance of sell-side interest. Such a strategy involves low risk to the holder
of these  derivative  securities  due to the  discounted  conversion or exchange
prices they enjoy that provide a hedge against  potential price  increases.  The
use of such a  strategy  by one or  more  of the  holders  of  these  derivative
securities could cause a significant reduction in the market price of our common
stock.

     In addition,  any shares  issued to Crammer  Road under our private  equity
credit  agreement  will be issued at a 7%  discount  to the average of the three
lowest  closing bid prices for the ten trading days  immediately  following  the
notice date of a put. Based on this  discount,  Crammer Road has an incentive to
sell immediately to realize the gain on the 7% discount.  These discounted sales
could cause our stock price to decline.  A significant  downward pressure on the
price of our common stock caused by the sale of material amounts of common stock
under the private equity credit  agreement  could encourage short sales by third
parties.  These sales could place additional  downward  pressure on the price of
our common stock by increasing the number of shares being sold.

     Our common  stock is illiquid and you may have  difficulty  in selling your
shares.

     Our common  stock is traded on the OTC  Bulletin  Board.  As a result,  the
holders  of our  common  stock may find it more  difficult  to  obtain  accurate
quotations  concerning  the market  value of our shares.  Stockholders  also may
experience  greater  difficulties in attempting to sell their shares than if our
common  stock were  listed on a stock  exchange  or quoted on the  Nasdaq  Stock
Market. Because our common stock is not traded on a stock exchange or Nasdaq and
because the market price of our common  stock is less than $5.00 per share,  our
common stock is

                                       14
<PAGE>

classified  as "penny  stock,"  subject to the  requirements  of the penny stock
rules of the SEC.  The  penny  stock  rules  impose  additional  sales  practice
requirements on broker-dealers  who sell penny stock securities to persons other
than established customers or accredited investors. For example, the broker must
make a  special  suitability  determination  for the  purchaser  and  must  have
received the purchaser's  written consent to the transaction  prior to the sale.
The rules also require that the broker deliver certain disclosures to purchasers
of penny stocks.  These additional burdens may discourage brokers from effecting
transactions  in our  common  stock,  which  could  severely  limit  the  market
liquidity of our common stock and the ability of stockholders to sell our common
stock in the market.

     Our stock price may be volatile and your investment could lose value.

     Historically,  the market price of our common stock has been volatile.  The
trading  price of our common  stock  could be subject  to wide  fluctuations  in
response to various factors, some of which are beyond our control. These factors
include:

     o    quarterly variations in our operating results;
     o    announcements  by us or our  competitors  of new products or services,
          significant   contracts,    commercial    relationships   or   capital
          commitments;
     o    our  reliance  on  licensing   revenue  that  is   unpredictable   and
          non-recurring;
     o    our  ability to  develop  and market  new and  enhanced  products  and
          services on a timely basis;
     o    commencement of, or involvement in, litigation;
     o    concerns about our liquidity and viability; and
     o    general  trends  involving  the economy or OTC  Bulletin  Board traded
          companies.

     In  addition,  the stock market in general,  and the market for  technology
companies in particular,  have experienced  price and volume  fluctuations  that
have often been unrelated or  disproportionate  to the operating  performance of
those  companies.  These market and industry  factors may  seriously  affect the
market price of our common stock regardless of our actual operating performance.

     We do not intend to pay  dividends on our common stock for the  foreseeable
future.

     We have never declared or paid any cash  dividends on our common stock.  We
currently  intend  to  retain  any  future  earnings  and do not  expect  to pay
dividends on our common stock in the foreseeable future. In addition, we may not
declare,  pay or make any dividends or other distributions upon our common stock
unless we give the holder of our series H preferred  stock 30 days' prior notice
and pay all accrued dividends on our series H preferred shares.

     Some provisions in our certificate of  incorporation  and by-laws may deter
third parties from acquiring us.

     Our certificate of  incorporation  and our by-laws contain  provisions that
may make the  acquisition of our company more difficult  without the approval of
our board of directors, including the following:

     o    only our board of  directors or the chairman of our board of directors
          may call special meetings of our stockholders;
     o    our stockholders may take action only at a meeting of our stockholders
          and not by written consent;
     o    we have authorized  undesignated  preferred  stock, the terms of which
          may  be  established  and  shares  of  which  may  be  issued  without
          stockholder approval; and
     o    we require advance notice for  stockholder  proposals of up to 90 days
          prior to a meeting at which stockholder proposals may be introduced.

These  anti-takeover  defenses could discourage,  delay or prevent a transaction
involving  a change in control of us.  These  provisions  could also  discourage
proxy  contests and make it more  difficult  for you and other  stockholders  to
elect  directors of your choosing and cause us to take other  corporate  actions
you desire.

     Section 203 of the Delaware  General  Corporation  Law may delay,  defer or
prevent a change in control that our stockholders  might consider to be in their
best interest.

     We are  subject to Section  203 of the  Delaware  General  Corporation  Law
which, subject to certain exceptions,  prohibits "business combinations" between
a publicly-held  Delaware corporation and an "interested  stockholder," which is
generally defined as a stockholder who becomes a beneficial owner of 15% or more
of a

                                       15
<PAGE>

Delaware  corporation's  voting stock for a three-year period following the date
that such stockholder became an interested  stockholder.  Section 203 could have
the effect of delaying,  deferring or  preventing a change in control of us that
our stockholders might consider to be in their best interests.

ITEM 1B.  UNRESOLVED STAFF COMMENTS

     Not applicable.


ITEM 2.   PROPERTIES

     Our principal  executive offices and corporate  headquarters are located in
Westport,  Connecticut where we lease approximately  18,700 square feet pursuant
to a lease that expires in March 2010. We also lease  approximately 2,400 square
feet in Hanover, Maryland for certain of our engineering activities.  This lease
expires in March 2008.

     Our Artera Turbo product development  operations are located in Middlebury,
Connecticut where we lease  approximately  6,400 square feet pursuant to a lease
that expires in March 2009.

     Our European operations are conducted primarily in Cambridge, England where
we lease  approximately  4,000  square feet  pursuant to a lease that expires in
April 2007.

     Pro Tech's  executive,  sales and  manufacturing  facilities are located in
Fort Pierce,  Florida where we lease approximately 6,000 square feet pursuant to
a lease that expires in February 2009.

     We believe our facilities  provide us with adequate space for the near term
consistent with our current business plans.

ITEM 3.   LEGAL PROCEEDINGS

Founding Midcore Shareholder Litigation

     In April 2004,  Jerrold Metcoff and David Wilson filed a complaint  against
us  and  Michael  Parrella,   our  Chairman  and  Chief  Executive  Officer,  in
Connecticut state court, which complaint was subsequently  amended to add Carole
Salkind and her spouse,  Morton Salkind,  as defendants.  The plaintiffs  allege
that we and Mr. Parrella  breached a number of  representations,  warranties and
obligations  under or  relating  to the August 29,  2000  Agreement  and Plan of
Merger by which  Metcoff,  Wilson and others sold to us 100% of the  outstanding
shares of a corporation that became our subsidiary, Midcore Software, Inc. Among
those  obligations  was the  obligation for us to issue to Metcoff and Wilson an
aggregate of 60,359,576 shares of our common stock,  which we have not done. The
plaintiffs  also allege that we and Mr. Parrella  engaged in intentional  and/or
negligent misrepresentations,  fraudulent transfers of intellectual property and
other company assets, unfair trade practices and breaches of an implied covenant
of good faith and fair  dealing.  The  complaint,  as  amended,  seeks  damages,
punitive damages, interest and attorneys' fees, and seeks a declaration that the
intellectual  property  acquired  from the  plaintiffs by the  corporation  that
became Midcore Software,  Inc. (which intellectual property is currently used in
our Artera  Turbo  service  offerings)  be held in trust for the  benefit of the
plaintiffs.  The damages,  punitive damages, interest and attorneys' fees sought
in the substitute  complaint are all for unspecified amounts, but in other court
filings in the case, the plaintiffs have alleged that the total cash amount they
are owed exceeds $4.2 million.  Mr. Parrella has told us that he intends to deny
the material allegations against him.

     On October 3, 2005, at our request,  the court  required the  plaintiffs to
revise their second amended  complaint with respect to, among other things,  the
removal of certain  references  to members of our board of directors  other than
Mr. Parrella. On October 19, 2005, Metcoff and Wilson filed a revised complaint.
On November 2, 2005, we filed a request to further revise the revised complaint.
On December 20, 2005,  the court  required the  plaintiffs to further revise the
revised  complaint.  On January 4, 2006, the  plaintiffs  filed a second revised
complaint.  On January 27, 2006, we filed a motion to strike  certain counts set
forth in the plaintiffs' second revised  complaint,  including certain claims of
breach of  contract  and breach of  contractual  representation  and  warranties
against  various  corporate  defendants  and claims of breach of fiduciary  duty
against  Mr.  Parrella.  This  motion is  currently  pending  before  the court.
Discovery in the case is ongoing.

     In November  2005,  Messrs.  Metcoff and Wilson filed a separate  complaint
against John McCloy,  Sam Oolie,  Irene Lebovics and Cy Hammond  (members of our
board of directors) in Connecticut state court asserting claims against them for
breaches of fiduciary  duty and unfair trade  practices in  connection  with the
transactions

                                       16
<PAGE>

relating  to the August 29,  2000  Agreement  and Plan of Merger.  The  damages,
punitive  damages,  interest and attorneys' fees sought in the complaint are for
unspecified  amounts.  Messrs.  McCloy,  Oolie and Hammond and Ms. Lebovics have
indicated to us that they intend to deny the allegations against them.

     On December  5, 2005,  Metcoff and Wilson  filed an amended  complaint.  On
January 12, 2006,  the four  defendants in this action filed a request to revise
the amended  complaint,  and, on February 10, 2006, the  plaintiffs  filed their
objections to the request to revise. This motion is currently pending before the
court.

     We have agreed to indemnify Messrs. Parrella, McCloy, Oolie and Hammond and
Ms. Lebovics,  to the extent  permitted by our certificate of incorporation  and
applicable law, for any liabilities  (including  legal fees) they may incur as a
result of the claims  against them in these  actions.  We  submitted  the claims
against  Messrs.  Parrella,  McCloy,  Oolie and Hammond and Ms.  Lebovics in the
cases to our director and officer  indemnification  insurance carrier, which has
denied coverage of any of the claims against Messrs. Parrella, McCloy, Oolie and
Hammond and Ms. Lebovics.

     Carole Salkind has demanded that we indemnify  her, in connection  with her
security  interests under our promissory notes to her, for legal fees she incurs
in the action against her.  During the year ended December 31, 2005, Ms. Salkind
incurred   approximately   $16,600  in  such  legal  fees,   of  which  we  paid
approximately $5,400 during that period.

Artera Trademark Oppositions

     In December 2002,  Altera  Corporation filed oppositions to the granting of
all of our pending U.S. trademark  registration  applications for "Artera Turbo"
and  of  some  of our  pending  U.S.  trademark  registration  applications  for
"Artera." In February  2006, we entered into a settlement  agreement with Altera
Corporation  pursuant to which,  among other  things,  we agreed to withdraw our
U.S.  trademark  registration  and  applications for "Artera" and not to use the
term  "Artera"  alone  as a  corporate  name,  business  name or  trademark.  In
addition,  we agreed to amend our U.S. trademark  registration  applications for
"Artera  Turbo"  to  apply  to,  among  other  things,  "computer  software  for
optimizing Internet and Intranet network bandwidth  utilization and accelerating
data transmission over communication lines." In return, Altera agreed to dismiss
its pending oppositions against the applications for "Artera Turbo."

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

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

     No  matter  was  submitted  to a vote  of  our  stockholders,  through  the
solicitation of proxies or otherwise, during the fourth quarter of 2005.

                                       17
<PAGE>

                                     PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
          ISSUER PURCHASES OF EQUITY SECURITIES

     Our common stock currently  trades on the NASD OTC Bulletin Board under the
symbol "NCTI." The following table sets forth the high and low bid prices of our
common  stock,  as  reported  on the NASD OTC  Bulletin  Board,  for each of the
periods listed. The quotations shown reflect inter-dealer prices, without retail
mark-up,  mark-down  or  commission  and may not  necessarily  represent  actual
transactions.

                                  2004                      2005
                         ----------------------     ---------------------
                           High          Low          High         Low
                         --------      --------     --------    ---------
     1st Quarter          $0.078        $0.039       $0.0200     $0.0172
     2nd Quarter          $0.059        $0.026       $0.0190     $0.0090
     3rd Quarter          $0.037        $0.019       $0.0190     $0.0050
     4th Quarter          $0.022        $0.016       $0.0075     $0.0037

     As of February 28, 2006,  we had  approximately  4,200 holders of record of
our common stock, representing approximately 30,000 beneficial owners.

Dividends

     We have never declared or paid any cash  dividends on our common stock.  We
currently   anticipate   that  we  will  retain  any  future  earnings  for  the
development,  operation  and  expansion  of our  business  and to pay down debt.
Accordingly,  we do not anticipate declaring or paying any cash dividends on our
common  stock in the  foreseeable  future.  Our  board of  directors  will  have
discretion in determining whether to declare or pay dividends, which will depend
upon our financial condition,  operating results,  capital requirements and such
other factors as the board of directors deems relevant.  In addition, we may not
declare,  pay or make any dividends or other distributions upon our common stock
unless we give the holder of our series H preferred  stock 30 days' prior notice
and pay all  accrued  dividends  on our series H  convertible  preferred  stock.
Furthermore,  certain  senior  equity  securities  of our  subsidiaries  contain
limitations   on  the  payment  of  dividends  on  the  common  stock  of  these
subsidiaries.

                                       18
<PAGE>

ITEM 6.   SELECTED FINANCIAL DATA

     The  following  selected  consolidated  financial  data is derived from our
historical  financial  statements  and  should be read in  conjunction  with our
consolidated  financial  statements  and Item 7.  "Management's  Discussion  and
Analysis of Financial  Condition  and Results of  Operations"  that are included
elsewhere in this Annual Report.

<TABLE>
<CAPTION>

                                                                            (in thousands, except per share amounts)
                                                                                    Years Ended December 31,
                                                             ----------------------------------------------------------------------
                                                                  2001           2002          2003         2004           2005
                                                             -------------   ------------  ------------  ------------   ------------
                                                             Restated (a)    Restated (a)  Restated (a)  Restated (a)
<S>                                                          <C>             <C>           <C>           <C>            <C>
RESULTS OF OPERATIONS AND
 LOSS PER SHARE:
REVENUE:
 Technology licensing fees and royalties                     $   5,411       $   4,493     $   3,013     $   3,422      $  2,201 (p)
 Product sales, net                                              4,568           2,697         1,708         1,902         2,003
 Other revenue                                                     132              24            49             4            26
                                                             ------------    -----------   -----------   ------------   ------------
       Total revenue                                         $  10,111       $   7,214     $   4,770     $   5,328      $  4,230
                                                             ------------    -----------   -----------   ------------   ------------
COSTS, EXPENSES AND OTHER INCOME:
 Cost of product sales                                       $   2,568       $   1,279     $     787     $   1,089      $  1,060
 Cost of other revenue                                               2               -            60             3             -
 Selling, general and administrative                            15,538          13,908        17,068 (i)     9,599  (l)    7,340 (q)
 Research and development                                        4,882           3,283         2,984         3,600         4,034
 Other operating (income) expense, net                          36,314  (c)     11,897 (g)         -         5,932  (m)        -
                                                             ------------    -----------   -----------   ------------   ------------
       Operating costs, expenses and other income               59,304          30,367        20,899        20,223        12,434
Non-operating items:
 Other (income) expense, net                                    15,520  (d)     10,087 (h)      (909)(j)   (12,009) (n)  (35,595)(r)
 Interest expense, net                                           6,141  (e)      8,566        16,420 (k)    55,676  (o)   67,915 (s)
                                                             ------------    -----------   -----------   ------------   ------------
       Total costs and expenses                              $  80,965       $  49,020     $  36,410     $  63,890      $ 44,754
Loss attributable to minority interest                             473             458             -             -            59
                                                             ------------    -----------   -----------   ------------   -----------
Loss before discontinued operations and
  cumulative effect of accounting change                     $ (70,381)      $ (41,348)    $ (31,640)    $ (58,562)     $(40,465)
Loss from discontinued operations                               (5,132)         (2,289)       (1,070)         (489)         (273)(t)
Cumulative effect of change in accounting principle             (1,582) (f)          -             -             -             -
                                                             ------------    -----------   -----------   ------------   ------------
NET LOSS                                                     $ (77,095)      $ (43,637)    $ (32,710)    $ (59,051)     $(40,738)
Less:
Preferred Stock dividends                                          309             204           342           332           325
Beneficial conversion features                                     392              46             -             -             -
                                                             ------------    -----------   -----------   ------------   ------------
Loss attributable to common stockholders                     $ (77,796)      $ (43,878)    $ (33,052)    $ (59,383)     $(41,063)
                                                             ============    ===========   ===========   ============   ============

Loss per share attributable to common stockholders:
 Loss attributable to common stockholders before
  discontinued operations and change in accounting principle $   (0.19)      $   (0.08)    $   (0.06)    $   (0.09)     $  (0.06)
 Loss on discontinued operations and
    change in accounting principle                               (0.02)          (0.01)            -             -             -
                                                             ------------    -----------   -----------   ------------   ------------
 Basic and diluted net loss per share                        $   (0.21)      $   (0.09)    $   (0.06)    $   (0.09)     $  (0.06)
                                                             ============    ===========   ===========   ============   ============
Weighted average common shares outstanding -
     Basic and diluted (b)                                     377,084         446,423       563,543       645,000       693,521
                                                             ============    ===========   ===========   ============   ============

                                                                                      As of December 31,
                                                             -----------------------------------------------------------------------
                                                                 2001          2002          2003            2004          2005
                                                             ------------   ------------- -------------  -------------  ------------
BALANCE SHEET DATA:                                          Restated (a)   Restated (a)  Restated (a)   Restated (a)
 Total assets                                                $  20,009      $   13,569    $   12,775     $   5,454      $  4,720
 Total current liabilities                                      59,003          84,330       109,289       126,412       138,352
 Total long term liabilities                                     7,765           5,011         2,746         5,063         5,027
 Accumulated deficit                                          (218,894)       (262,531)     (295,241)     (354,292)     (395,030)
 Capital deficit (u)                                           (55,507)        (84,461)     (107,574)     (134,666)     (147,314)
 Working capital deficit                                       (54,680)        (82,197)     (107,178)     (123,889)     (136,807)
</TABLE>

                                       19
<PAGE>

Notes:
-----

(a)  Reflects  restatement  for the  adjustment of the fair value of outstanding
     options, warrants and embedded derivatives.

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

(c)  Primarily consists of a $1.9 million charge for costs of exiting activities
     attributable to closing facilities and certain operations;  a $14.1 million
     charge for the  impairment of goodwill (net of a $2.1 million  reduction of
     deferred revenue);  $19.3 million,  net, for repurchased licenses (composed
     of an  $18.0  million  write  down for the  acquisition  of  shares  of our
     subsidiary,  DMC New York,  Inc.,  representing  repurchased  licenses  and
     accrual for obligation to acquire remaining licenses and $1.3 million,  net
     of a $2.7 million reduction of deferred revenue, for reacquisition of other
     licenses from two  licensees);  and a $1.5 million write down of investment
     in Top Source Automotive.

(d)  Primarily  consists of $7.0  million for  other-than-temporary  declines in
     value of  available-for-sale  securities;  a $2.3 million  realized loss on
     sale of trading  securities  (NXT);  $1.2 million for default  penalties on
     debt;  a $1.0  million  reserve for notes  receivable;  and a $0.2  million
     charge  resulting  from the  adjustment  of the fair  value of  outstanding
     options, warrants and embedded derivatives.

(e)  Includes  $3.3  million  relating  to the  amortization  of  original  debt
     discounts;   $0.9  million  relating  to  the  amortization  of  beneficial
     conversion  features on  convertible  debt;  $0.7 million of debt  issuance
     costs; and $1.2 million of interest charges on indebtedness.

(f)  Upon the adoption of SFAS No. 138 effective  January 1, 2001, the reduction
     in the fair  value of  derivatives,  consisting  of a warrant  to  purchase
     common stock of a licensee,  was reported as a cumulative  effect of change
     in accounting principle.

(g)  Primarily consists of a $9.2 million charge for repurchased licenses due to
     additional  costs  incurred  to  acquire  12,000  shares of DMC New York in
     exchange for shares of our series H  convertible  preferred  stock,  a $2.1
     million  impairment of other  intangible  assets,  and $0.3 million for the
     impairment of goodwill.

(h)  Primarily  consists  of $3.9  million  for finance  costs  associated  with
     non-registration of shares; $0.8 million for other-than-temporary  declines
     in  value  of  available-for-sale   securities;  $0.4  million  of  default
     penalties on debt; and a $5.7 million gain resulting from the adjustment of
     the fair value of outstanding options, warrants and embedded derivatives.

(i)  Includes a $3.8 million increase in consulting  expenses resulting from the
     issuance of options.

(j)  Primarily  consists of a $5.3 million gain on litigation  settlements and a
     $1.6  million  gain  resulting  from the  adjustment  of the fair  value of
     outstanding options, warrants and embedded derivatives, partially offset by
     $4.1 million for finance costs associated with  non-registration  of shares
     and $2.1 million of default penalties on debt.

(k)  Includes $5.9 million for the amortization of original debt discounts; $5.6
     million  for  the  amortization  of  beneficial   conversion   features  on
     convertible  debt; $2.9 million of interest  charges on  indebtedness;  and
     $1.1 million for amortization of additional debt discounts.

(l)  Reflects an $8.3 million decrease from prior year in consulting expenses.

(m)  Includes a $5.9 million charge for the impairment of goodwill.

(n)  Includes  expense of $6.8  million from  default  penalties on  convertible
     notes and income of $23.6 million resulting from the adjustment of the fair
     value of outstanding options, warrants and embedded derivatives.

                                       20
<PAGE>

(o)  Primarily  attributable to the increase in immediate  expensing of the fair
     value of warrants  (original  issue  discounts  and  beneficial  conversion
     features)  allocated to debt. Interest expense included the amortization of
     original issue discounts,  beneficial  conversion  features and interest on
     debt  we  issued  of  $19.6  million,   $19.1  million  and  $1.6  million,
     respectively.

(p)  Decrease  was due to having fully  recognized  the license fee revenue from
     the NXT license as of March 31, 2005.

(q)  Decrease was due primarily to a reduction in other  compensation  resulting
     from the waiver by three  executives of a portion of their  incentive bonus
     earned  in  2004  and   amendment  of  the  incentive   cash   compensation
     arrangements applicable to the three executives.

(r)  Includes  expense of $9.5  million from  default  penalties on  convertible
     notes and income of $42.5 million resulting from the adjustment of the fair
     value of outstanding options, warrants and embedded derivatives.

(s)  Primarily  attributable to the increase in immediate  expensing of the fair
     value of warrants  (original  issue  discounts  and  beneficial  conversion
     features)  allocated to debt.  Interest  expense  included  amortization of
     original issue discounts,  beneficial  conversion  features and interest on
     debt  we  issued  of  $29.3  million,   $32.1  million  and  $5.9  million,
     respectively.

(t)  The loss  represents  the  reclassification  of our Hospital  Radio Network
     business as a discontinued operation in the fourth quarter of 2005.

(u)  We have never declared or paid dividends on our common stock


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

Overview

     We design  products  and develop and  license  technologies  based upon our
portfolio of patents and related proprietary rights and extensive  technological
know-how.  Our business  operations are organized into three operating segments:
communications,   media  and  technology.  Our  operating  revenue  consists  of
technology  licensing  fees  and  royalties,  product  sales,  advertising,  and
engineering  and  development  services.  Operating  revenue  for the year ended
December 31, 2005 consisted of approximately 52.0% in technology  licensing fees
and royalties,  47.4% in product sales and 0.6% in other revenue. The mix of our
revenue  sources during any reporting  period may have a material  impact on our
operating  results.  In  particular,   our  execution  of  technology  licensing
agreements,  and the timing of the revenue recognized from these agreements, has
not been predictable.

Going Concern Risks

     Since inception,  we have experienced  substantial  recurring losses, which
amounted to $395.0  million on a  cumulative  basis  through  December 31, 2005.
Internally  generated funds from our revenue sources have not been sufficient to
cover our  operating  costs.  The  ability of our  revenue  sources,  especially
technology  license fees,  royalties and product sales, to generate  significant
cash for our operations is critical to our long-term success.  We cannot predict
whether we will be successful in obtaining market acceptance of our new products
or technologies or in completing our current licensing  agreement  negotiations.
To the extent our internally  generated funds are not adequate,  we believe that
we will need to obtain  additional  working  capital  through equity and/or debt
financings. However, we can give no assurance that any additional financing will
be  available  to us on  acceptable  terms or at all. In  addition,  in order to
obtain  additional  financing through the sale of shares of our common stock, we
will need to obtain the approval of our stockholders of additional amendments to
our  certificate  of  incorporation  to  sufficiently  increase  the  number  of
authorized  shares of our common stock and to reduce or eliminate  the par value
of our common stock.  However,  we can give no assurance  that our  stockholders
would approve either or both of these amendments.

     Our  management  believes  that  currently  available  funds  will  not  be
sufficient  to sustain our  operations  at current  levels  through the next six
months.  These funds consist of available cash and the funding  derived from our
revenue sources.  Cash and cash equivalents amounted to $0.5 million at December
31, 2005 and our working capital  deficit was $136.8 million.  We have been able
to continue our  operations by raising  additional  capital  through the sale of
convertible  notes.  We have been  primarily  dependent upon funding from Carole
Salkind during

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<PAGE>

the last three years.  In the event that external  financing is not available or
timely,  we will be required to substantially  reduce our level of operations in
order to conserve  cash.  These  reductions  could have an adverse effect on our
relationships with our customers and suppliers.  Reducing operating expenses and
capital  expenditures  alone may not be adequate,  and  continuation  as a going
concern is dependent  upon the level of funding  realized  from our internal and
external funding sources, all of which are currently uncertain.

     Our consolidated  financial  statements have been prepared assuming that we
will continue as a going concern,  which contemplates  continuity of operations,
realization of assets and  satisfaction of liabilities in the ordinary course of
business.  Our ability to continue as a going concern is dependent  upon,  among
other things, the achievement of future profitable operations and the ability to
generate  sufficient  cash from  operations,  equity and/or debt  financings and
other funding sources to meet our obligations.  The  uncertainties  described in
the preceding  paragraphs raise substantial doubt at December 31, 2005 about our
ability to continue as a going concern. Our 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.

Critical Accounting Policies and Estimates

     The  following  discussion  of  our  financial  condition  and  results  of
operations is based on the consolidated  financial  statements  included in this
Annual Report, which have been prepared in accordance with accounting principles
generally  accepted in the United States.  The  preparation  of these  financial
statements  requires us to make estimates and judgments that affect the reported
amounts  of  assets,   liabilities,   revenue  and  expenses,  and  the  related
disclosures of contingencies.  We base these estimates on historical  experience
and on various other  assumptions  that are believed to be reasonable  under the
circumstances,  the results of which form the basis for making  judgments  about
the carrying values of assets and liabilities that are not readily apparent from
other sources. On an on going basis, we evaluate our estimates,  including those
related to  amortization  and  potential  impairment  of  intangible  assets and
goodwill.  Actual  results  may differ  from  these  estimates  under  different
assumptions or conditions.

     An accounting  policy is deemed to be critical if it requires an accounting
estimate  to be made  based  upon  assumptions  about  matters  that are  highly
uncertain at the time the  estimate is made,  and if  different  estimates  that
reasonably could have been used, or changes in the accounting estimates that are
reasonably likely to occur  periodically,  could materially impact the financial
statements.

     The methods,  estimates  and  judgments  we use in applying our  accounting
policies  have a  significant  impact on the results we report in our  financial
statements,  which we discuss under the heading  "Results of Operations"  below.
Some of our  accounting  policies  require us to make  difficult and  subjective
judgments,  often as a result of the need to make  estimates of matters that are
inherently  uncertain.  Below, we discuss the critical policies that required us
to  make  difficult  or  subjective   assumptions  or  estimates  regarding  our
consolidated  financial  statements included in this Annual Report. We also have
other policies that we consider key accounting policies; however, these policies
do not  require  us to  make  estimates  or  judgments  that  are  difficult  or
subjective.

Revenue Recognition

     Revenue is recognized when earned.  Technology licensing fees are generally
recognized  upon  execution  of the  agreement  but are  deferred  if subject to
completion of any performance criteria and later recognized once the performance
criteria have been met. Artera Group recognizes  revenue ratably over the period
service is provided known as the subscription period.  Revenue from royalties is
recognized ratably over the royalty period based upon periodic reports submitted
by the royalty  obligor or based on minimum royalty  requirements.  Revenue from
product  sales is  recognized  when the product is shipped and title has passed.
Revenue from subscription  services  (included in product sales) is deferred and
recognized  ratably  over the period when the service is provided  (subscription
period).  The mix of our revenue sources during any reporting  period may have a
material  impact on our  operating  results.  In  particular,  our  execution of
technology  licensing  agreements and the timing of the revenue  recognized from
these agreements has not been predictable.

     At December 31, 2005, our deferred revenue aggregated $0.4 million. We will
not realize any additional cash in connection with recognizing  revenue from our
deferred revenue.

Goodwill, Patent Rights, Other Intangible Assets

     The  excess of the  consideration  paid over the fair  value of net  assets
acquired  in business  combinations  is  recorded  as  goodwill.  We also record
goodwill  upon the  acquisition  of some or all of the  stock  held by  minority

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<PAGE>

stockholders of a subsidiary, except where such accounting is, in substance, the
purchase of licenses  previously  sold to such  minority  stockholders  or their
affiliates.

     Annually,  or if an event  occurs or  circumstances  change that would more
likely  than not reduce the fair value of a  reporting  unit below its  carrying
amount,  we test our goodwill for  impairment.  We also  recognize an impairment
loss on  goodwill  acquired  upon  the  acquisition  of stock  held by  minority
stockholders  of  subsidiaries  if the  subsidiary's  minority  interest  has no
carrying value,  the subsidiary has a capital  deficit and the projected  future
operating results of the subsidiary are not positive.

     At December 31, 2005, we evaluated  the goodwill  allocated to our Advancel
reporting  unit and our NCT Hearing  reporting unit and determined no impairment
existed for Advancel or NCT Hearing.

     In our 2004  annual  assessment  of the  goodwill  of and the  value of the
Midcore/Artera  Group reporting unit, we considered the results of operations in
relation to previous estimates of activity,  as well as estimates of anticipated
operations.  Based  on  our  inability  to  develop  the  anticipated  lines  of
businesses  and  to  realize   results  as  budgeted,   in  part  because  of  a
reorganization at our former enterprise systems business partner during the last
quarter of 2004, we determined,  for the purposes of our assessment of goodwill,
not to anticipate the development of additional lines of business.  As a result,
our assessment of the value of the reporting unit, based on existing operations,
was not  sufficient  to carry  the  goodwill  without  impairment.  Based on our
assessment,  as of December  31,  2004,  we  concluded  that the goodwill of the
Midcore/Artera  Group  reporting  unit was fully  impaired  and we  recorded  an
impairment of $5.9 million.

     At December 31, 2005,  our goodwill,  net, all of which is allocated to the
Advancel and NCT Hearing  reporting units was $1.3 million.  Our next evaluation
is scheduled for December 31, 2006.

     Patent rights and other intangible  assets with finite useful lives,  which
include the cost to acquire  rights to patents and other rights under  licenses,
are  stated  at cost and  amortized  using  the  straight-line  method  over the
remaining  useful  lives,  ranging  from one to  seventeen  years.  Amortization
expense  for the  years  ended  December  31,  2004 and 2005 was less  than $0.1
million. At December 31, 2005, our patent rights and other intangibles, net were
$1.0 million.

     We evaluate  the  remaining  useful life of  intangible  assets with finite
useful lives each reporting period to determine whether events and circumstances
warrant a revision to the remaining  period of  amortization.  If the evaluation
determines that the intangible  asset's  remaining useful life has changed,  the
remaining  carrying  amount of the intangible  asset is amortized  prospectively
over that  revised  remaining  useful  life.  Our  evaluations  to date have not
indicated that any revisions are necessary.  Our next  evaluation is planned for
March 31, 2006. We evaluate our  intangible  assets with finite useful lives for
impairment  whenever events or other changes in circumstances  indicate that the
carrying  amount may not be  recoverable.  The testing for  impairment  includes
evaluating the undiscounted  cash flows of the asset and the remaining period of
amortization  or useful life.  The factors used in evaluating  the  undiscounted
cash flows include current operating results, projected future operating results
and cash flows and any other material  factors that may affect the continuity or
the  usefulness of the asset.  If impairment  exists,  the  intangible  asset is
written down to its fair value based upon discounted  cash flows,  which results
in a charge in our  results of  operations  equal to the  determined  impairment
amount.  In  addition,  if we  determine  that  a  reduction  in  the  remaining
amortization  period was warranted,  our  amortization  expense would  increase,
which would reduce our operating  results.  In light of our continuing losses, a
potential  indicator  of  impairment,  we  test  our  patent  rights  and  other
intangible  assets with finite  useful lives for  impairment  at each  reporting
period. Our next evaluation is planned for March 31, 2006.

Accounting for Derivative Instruments

     We have issued and  outstanding  convertible  debt and certain  convertible
equity  instruments  with  embedded  derivative  features  which we  analyze  in
accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities,"  and EITF Issue No. 00-19,  "Accounting  for  Derivative  Financial
Instruments  Indexed to, and  Potentially  Settled in A Company's Own Stock," to
determine  if  these   instruments  have  embedded   derivatives  that  must  be
bifurcated.   Under  EITF  No.  00-19,  the  estimated  value  of  the  embedded
derivative,  if any, is bifurcated  from its host instrument on the date of sale
or  issuance  of the  securities  or debt  based  on a  valuation  utilizing  an
appropriate  valuation  model.  The  embedded  derivative  is  classified  as  a
liability and is  marked-to-market  and adjusted to fair value at each reporting
date and the change in fair value is  recorded  to other  income  (expense).  In
addition,  freestanding  warrants are accounted for as equity or  liabilities in
accordance with the provisions of EITF Issue No. 00-19. As of December 31, 2005,
we could not be sure we had adequate authorized shares for the

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<PAGE>

conversion or exercise of all outstanding  instruments due to certain conversion
rates  which vary with the fair value of our common  stock,  and  therefore  all
embedded  derivatives  and  freestanding  warrants  are  recorded at fair value,
marked-to-market  at each reporting  date, and are carried on a separate line of
the accompanying  balance sheet. If there is more than one embedded  derivative,
their value is considered in the aggregate.

Recently Issued Accounting Pronouncements

     In December 2004, the Financial  Accounting Standards Board ("FASB") issued
SFAS No. 123 (Revised 2004) "Share-Based Payment" that prescribes the accounting
for  share-based  payment  transactions  in which a  company  receives  employee
services  in  exchange  for  (a)  equity  instruments  of  the  company  or  (b)
liabilities that are based on the fair value of the company's equity instruments
or that may be settled by the  issuance  of such  equity  instruments.  SFAS No.
123(R)  addresses all forms of  share-based  payment  awards,  including  shares
issued under employee stock purchase plans, stock options,  restricted stock and
stock appreciation rights. SFAS No. 123(R) eliminates the ability to account for
share-based compensation  transactions using APB Opinion No. 25, "Accounting for
Stock Issued to Employees,"  that was  previously  allowed under SFAS No. 123 as
originally  issued.  Under SFAS No.  123(R),  companies  are  required to record
compensation expense for all share-based payment award transactions  measured at
fair value.  In April  2005,  the SEC  delayed  the  effective  date of SFAS No.
123(R).  Accordingly,  this  statement is effective for us beginning  January 1,
2006.  We do not  anticipate  that the  adoption of SFAS No.  123(R) will have a
material effect on our consolidated financial position, results of operations or
cash flows.

     In May 2005,  the FASB issued SFAS No. 154,  "Accounting  Changes and Error
Corrections--A Replacement of APB Opinion No. 20 and FASB Statement No. 3." SFAS
No.  154  requires   retrospective   application  to  prior  periods'  financial
statements for changes in accounting  principle,  unless it is  impracticable to
determine  either the  period-specific  effects or the cumulative  effect of the
change. SFAS No. 154 also requires that retrospective application of a change in
accounting  principle be limited to the direct  effects of the change.  Indirect
effects   of  a  change   in   accounting   principle,   such  as  a  change  in
non-discretionary  profit-sharing  payments resulting from an accounting change,
should be recognized in the period of the accounting  change.  SFAS No. 154 also
requires that a change in  depreciation,  amortization,  or depletion method for
long-lived  non-financial  assets be  accounted  for as a change  in  accounting
estimate affected by a change in accounting principle. SFAS No. 154 is effective
for accounting  changes and corrections of errors made in fiscal years beginning
after December 15, 2005. Early adoption is permitted for accounting  changes and
corrections  of errors made in fiscal  years  beginning  after May 2005.  We are
required to adopt the  provisions of SFAS No. 154, as  applicable,  beginning in
fiscal 2006.

     In June 2005,  the FASB's  Emerging  Issues Task Force (the "EITF")  issued
Issue No.  05-4, "The Effect of a Liquidated  Damages  Clause on a  Freestanding
Financial Instrument Subject to EITF Issue No. 00-19, 'Accounting for Derivative
Financial  Instruments  Indexed to, and Potentially  Settled in, a Company's Own
Stock.'" EITF 05-4 addresses  financial  instruments,  such as convertible notes
and stock purchase warrants,  which are accounted for under EITF 00-19, that may
be  issued  at the  same  time and in  contemplation  of a  registration  rights
agreement that includes a liquidated  damages clause.  The consensus of EITF No.
05-4 has not been finalized.

     In June 2005, the EITF reached a consensus on Issue No. 05-6,  "Determining
the Amortization Period for Leasehold  Improvements." The guidance requires that
leasehold   improvements   acquired  in  a  business  combination  or  purchased
subsequent  to the  inception  of a lease be  amortized  over the  lesser of the
useful life of the assets or a term that includes  renewals that are  reasonably
assured at the date of the business  combination  or  purchase.  The guidance is
effective for periods  beginning  after June 29, 2005. We have adopted EITF 05-6
and the  adoption  of  EITF  05-6  did  not  have a  significant  effect  on our
consolidated financial statements.

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<PAGE>

Restatement  of  Consolidated   Financial   Statements  to  Reflect   Derivative
Accounting

     During our fiscal  2005  audit,  we  determined  that the method we used to
account for certain options,  warrants and other convertible  equity instruments
with  freestanding  derivatives  or  embedded  derivative  features  was  not in
accordance with the requirements of EITF No. 00-19. Therefore,  the consolidated
balance  sheet  for the  year  ended  December  31,  2004  and the  consolidated
statements of operations, the consolidated statements of capital deficit and the
consolidated  statements of cash flows for the years ended December 31, 2003 and
2004,  included  in this  Annual  Report  have  been  restated  to  comply  with
applicable   accounting   pronouncements   regarding  the  issuance  of  various
securities and the derivative  features embedded  therein.  The effects of these
restatements  are described in Note 1 to the Consolidated  Financial  Statements
and the discussions below are based on the restated information. The changes are
all non-cash and have no effect on the previously  reported  amounts of net cash
used in operations for any of the periods noted above.

Results of Operations

Year Ended December 31, 2005 Compared to Year Ended December 31, 2004

     Revenue.  For the year ended December 31, 2005,  total revenue  amounted to
$4.2  million,  compared to $5.3  million for year ended  December  31,  2004, a
decrease of $1.1 million, or 20.8%, due primarily to decreases in our technology
licensing fees and royalties resulting from having fully recognized the deferred
license fee revenue from the NXT license as of March 31, 2005. Total revenue for
the year ended December 31, 2005 consisted of approximately  52.0% in technology
licensing fees and  royalties,  47.4% in product sales and 0.6% in other revenue
as  compared  to the year ended  December  31,  2004 of  approximately  64.2% in
technology  licensing  fees and  royalties,  35.7% in product  sales and 0.1% in
other revenue.

     Technology  licensing  fees and  royalties  were $2.2  million for the year
ended December 31, 2005 as compared to $3.4 million for the same period in 2004,
a decrease of $1.2 million,  or 35.3%. This decrease was due primarily to having
fully  recognized  the deferred  license fee revenue  from the NXT license.  The
technology  licensing  fees for the  years  ended  December  31,  2004  were due
primarily to the  recognition  of deferred  revenue from the NXT license fee. We
expect to experience a significant decline in our royalties from Sharp beginning
sometime in 2006.  Our revenue from Sharp for the years ended  December 31, 2005
and  December  31,  2004  was  approximately  $0.8  million  and  $0.7  million,
respectively.

     For the years ended  December  31, 2005 and 2004,  product  sales were $2.0
million and $1.9  million,  respectively.  Gross profit on product  sales,  as a
percentage of product sales,  for the years ended December 31, 2005 and 2004 was
47.1% and 42.7%, respectively.  For the years ended  December 31, 2005 and 2004,
97% and  92%,  respectively,  of our  product  sales  were  attributable  to our
communications  segment.  The mix of our product sales within our communications
segment for the year ended  December 31, 2005  included 66% of Pro Tech products
and 16% of Artera Turbo  subscriptions  whereas the year ended December 31, 2004
included 63% of Pro Tech  products and 18% of Artera  Turbo  subscriptions.  Our
subscriber base that generated the Artera Turbo product sales for the year ended
December 31, 2005 consisted of residential users.

     Other revenue was $26,000 for the year ended  December 31, 2005 compared to
$4,000 for the year ended December 31, 2004.

     Costs and  expenses.  Total costs and expenses for the year ended  December
31,  2005 were  $44.8  million  compared  to $63.9  million  for the year  ended
December 31, 2004, a decrease of $19.1  million,  or 29.9%,  due primarily to an
increase  in  other  income  of  $23.6  million  primarily  resulting  from  the
adjustment  of the fair value of  outstanding  options,  warrants  and  embedded
derivatives.  Total  costs and  expenses  for the year ended  December  31, 2004
included a $5.9 million  expense for the  impairment  of goodwill.  There was no
similar charge in 2005.

     Cost of product sales was $1.1 million in each of the years ended  December
31, 2005 and 2004.  Cost of other  revenue was zero for the year ended  December
31, 2005 compared to $3,000 for the year ended December 31, 2004.

     For the year ended December 31, 2005,  selling,  general and administrative
expenses  totaled  $7.3  million as compared to $9.5  million for the year ended
December 31, 2004, a decrease of $2.2 million,  or 23.2%.  This decrease was due
primarily to a reduction in other  compensation  partially  due to the waiver by
three  executives in 2005 of a portion of their  incentive  bonus earned in 2004
and the amendment of the incentive cash compensation

                                       25
<PAGE>

arrangements  applicable  to the  three  executives.  The  amounts  waived  were
approximately  $326,000,  $107,000 and $158,000 for our Chief Executive Officer,
President and Chief Financial Officer, respectively.

     For the years ended  December 31, 2005 and 2004,  research and  development
expenditures totaled $4.0 million and $3.6 million,  respectively.  Our research
and  development  efforts  during the years  ended  December  31,  2005 and 2004
related primarily to Artera Group research and development efforts including the
development of other components of our Artera Turbo and Rev The Web offerings.

     As a result of our  December  2004  assessment  of the value of the Midcore
/Artera Group business unit, we determined  that  operations were not sufficient
to carry the goodwill without impairment. Therefore, as of December 31, 2004, we
recorded an impairment of $5.9 million. There were no similar charges in 2005.

     For the year ended  December  31, 2005,  other  income,  net totaled  $35.6
million as compared to $12.0  million for the year ended  December 31, 2004,  an
increase of $23.6  million,  or 196.7%.  The  increase  was due  primarily to an
increase of $18.9  million  resulting  from the  adjustment of the fair value of
outstanding  options,  warrants  and  embedded  derivatives  and a reversal of a
charge of $6.3  million  resulting  from a waiver  of  liquidated  damages  by a
preferred stockholder.  The year ended December 31, 2004 included a $3.6 million
loss on the  settlement of expense in connection  with the PRG  litigation and a
$4.6  million  gain  on  the   dissolution   and  liquidation  of  Artera  Group
International Limited.

     For the year ended December 31, 2005,  interest expense,  net totaled $67.9
million as compared to $55.7  million for the year ended  December 31, 2004,  an
increase of $12.2  million,  or 21.9%.  The  increase  in  interest  expense was
primarily  attributable to the expensing of the original issue discount  arising
from  the  allocation  of  proceeds  to the  fair  value  of  warrants  and  the
amortization  of  beneficial  conversion  features  arising from  allocation  of
proceeds to warrants and any  beneficial  conversion  rates on the related debt.
Interest  expense for the year ended December 31, 2005 included  amortization of
original issue discounts of $28.3 million, amortization of beneficial conversion
features of $32.1 million and interest on debt issued by us of $5.9 million.

     For the year ended December 31, 2005, consolidated net loss includes a loss
from  discontinued  operations of  approximately  $0.3 million.  The loss is the
result of modifying the business model for operating our Hospital Radio Network.
In  September  2005,  we decided to modify the  business  model for our Hospital
Radio Network business. Instead of continuing to directly operate this business,
under our modified  business model, we are licensing our proprietary  technology
used in this  business  to  third  parties.  In  exchange,  we  will  receive  a
percentage of the advertising  revenues generated by these third parties through
existing  and new  installations  of our Sight & Sound  systems  in health  care
facilities.

     We have  estimated  net operating  loss  carryforwards  of $258.3  million,
estimated   capital  loss   carryforwards  of  $3.6  million  and  research  and
development  credit  carryforwards  of  approximately  $2.4  million for federal
income tax  purposes at December 31,  2005.  No tax benefit for these  operating
losses has been recorded in our consolidated  financial statements.  Our ability
to utilize our net operating loss and capital loss  carryforwards may be subject
to an annual limitation.  The limitation of these carryforwards may be triggered
by  ownership  changes,  specifically  any tax-free  reorganization  or a change
involving  a  5%  stockholder.  Under  contractual  restrictions,  many  of  the
beneficial  owners of 5% or more of our common stock are prohibited from holding
in excess of 9.99% of our common stock at any given time.  Carole Salkind has no
such contractual restriction. At her election at any time, she may convert notes
issued by us and accrued  interest  thereon  into shares of our common stock (if
sufficient   authorized  shares  are  available  for  such  conversion)  thereby
triggering an ownership change which would result in a limitation of our ability
to utilize net operating loss carryforwards.

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

     Revenue.  For the year ended December 31, 2004,  total revenue  amounted to
$5.3  million,  compared to $4.8 million for year ended  December  31, 2003,  an
increase of $0.5 million, or 10.4%, due primarily to increases in our technology
licensing fees and royalties. Total revenue for the year ended December 31, 2004
consisted of  approximately  64.2% in technology  licensing  fees and royalties,
35.8% in product  sales and 0% in other  revenue as  compared  to the year ended
December  31,  2003 of  approximately  63.2% in  technology  licensing  fees and
royalties, 35.8% in product sales and 1.0% in other revenue.

     Technology  licensing  fees and  royalties  were $3.4  million for the year
ended December 31, 2004 as compared to $3.0 million for the same period in 2003,
an increase of $0.4  million,  or 13.3%.  The increase  was due  primarily to an
increase in royalties  resulting  from the license of our  ClearSpeech  adaptive
speech filter algorithm to Sharp for use in third generation cellular phones. In
addition, our technology licensing fees increased by $0.1

                                       26
<PAGE>

million  resulting from the  cross-release  agreement  with Infinite  Technology
Corporation. The technology licensing fees for the years ended December 31, 2004
and 2003 were due primarily to the recognition of deferred  revenue from the NXT
license.  As of December 31, 2004, our deferred revenue  attributable to NXT was
$0.5  million.  No additional  cash will be realized  from our deferred  revenue
balance.

     For the years ended  December  31, 2004 and 2003,  product  sales were $1.9
million and $1.7  million,  respectively.  Gross profit on product  sales,  as a
percentage of product sales,  for the years ended December 31, 2004 and 2003 was
42.7% and 53.9%,  respectively.  For the years ended December 31, 2004 and 2003,
99% and  98%,  respectively,  of our  product  sales  were  attributable  to our
communications  segment.  The mix of our product sales within our communications
segment for the year ended  December 31, 2004  included 63% of Pro Tech products
and 18% of Artera Turbo  subscriptions  whereas the year ended December 31, 2003
included  70% of Pro Tech  products and 3% of Artera  Turbo  subscriptions.  Our
subscriber base that generated the Artera Turbo product sales for the year ended
December 31, 2004 consisted of residential users.

     Costs and  expenses.  Total costs and expenses for the year ended  December
31,  2004 were  $63.9  million  compared  to $36.4  million  for the year  ended
December 31, 2003, an increase of $27.5  million,  or 75.5%,  due primarily to a
$39.2 million increase in interest expense, net, partially offset by an increase
in other income of $11.1 million primarily  resulting from the adjustment of the
fair value of outstanding options, warrants and embedded derivatives.

     Cost of product sales was $1.1 million for the year ended December 31, 2004
and $0.8 million for the year ended  December 31,  2003.  The increase  resulted
from an expansion of our Artera Turbo data centers.

     For the year ended December 31, 2004,  selling,  general and administrative
expenses  totaled $9.5  million as compared to $17.1  million for the year ended
December 31, 2003, a decrease of $7.6 million,  or 44.4%.  This decrease was due
primarily to an $8.3  million  decrease in  consulting  expense  resulting  from
decreased  non-cash  charges from the issuance of options that  occurred  during
2003.

     For the year ended December 31, 2004, research and development expenditures
totaled $3.6 million as compared to $3.0 million for the year ended December 31,
2003, an increase of $0.6 million,  or 20.0%. This increase was due primarily to
a $0.5 million  increase in  compensation  and benefit  costs  related to Artera
Group.  Our research and development  efforts during the year ended December 31,
2004 included development of components of our Artera Turbo service.

     As  a  result  of  our  December  2004  assessment  of  the  value  of  the
Midcore/Artera  Group  business  unit, we determined  that  operations  were not
sufficient to carry the goodwill  without  impairment.  Therefore as of December
31, 2004, we recorded an impairment of $5.9 million.

     For the year ended  December  31, 2004,  other  income,  net totaled  $12.0
million compared to other income of $0.9 million for the year ended December 31,
2003,  an increase of $11.1  million.  The increase was due primarily to a $23.5
million increase  resulting from the adjustment of the fair value of outstanding
options,  warrants  and  embedded  derivatives  and a $1.5  million  decrease in
finance  costs for  non-registration  of common  shares  underlying  convertible
notes,  partially  offset by a $4.7  million  increase in default  penalties  on
convertible  notes and a $3.6 million  settlement of expense in connection  with
the PRG  litigation.  Other  income,  net  includes a $4.6  million  gain on the
dissolution  and  liquidation of Artera Group  International  Limited.  The year
ended  December 31, 2003  included  gains on the  settlement  of lawsuits in the
amount of $5.3 million.

     For the year ended December 31, 2004,  interest expense,  net totaled $55.7
million  compared to $16.5  million for the year ended  December  31,  2003,  an
increase of $39.2  million,  or 237.6%.  The  increase  in interest  expense was
primarily  attributable to the expensing of the original issue discount  arising
from  the  allocation  of  proceeds  to the  fair  value  of  warrants  and  the
amortization  of  beneficial  conversion  features  arising from  allocation  of
proceeds to warrants and any  beneficial  conversion  rates on the related debt.
Interest  expense for the year ended December 31, 2004 included  amortization of
original issue discounts of $25.6 million, amortization of beneficial conversion
features of $24.7 million and interest on debt issued by us of $4.6 million.

     We estimated net operating loss carryforwards of $208.0 million,  estimated
capital loss  carryforwards of $3.6 million and research and development  credit
carryforwards of  approximately  $2.6 million for federal income tax purposes at
December 31, 2004. No tax benefit for these  operating  losses has been recorded
in our  consolidated  financial  statements.  Our  ability  to  utilize  our net
operating  loss and  capital  loss  carryforwards  may be  subject  to an annual
limitation.  The limitation of these carryforwards may be triggered by ownership
changes,  specifically  any tax-free  reorganization  or a change involving a 5%
stockholder. Under contractual restrictions, many of the

                                       27
<PAGE>

beneficial  owners of 5% of our  common  stock are  prohibited  from  holding in
excess of 9.99% of our common  stock at any given  time.  Carole  Salkind has no
such contractual restriction. At her election at any time, she may convert notes
issued by us and accrued  interest  thereon  into shares of our common stock (if
sufficient  authorized  shares are available for such  conversion).  We evaluate
changes in our ownership as necessary to determine if any of the changes trigger
an ownership change which would result in a limitation of our ability to utilize
net operating loss carryforwards.

Liquidity and Capital Resources

     We have experienced  substantial  losses since  inception,  which have been
recurring and amounted to $395.0 million on a cumulative  basis through December
31, 2005. These losses,  which include the costs for development of technologies
and products for commercial use, have been funded primarily from:

     o the issuance of our and our subsidiaries' convertible debt;
     o the sale of our and our subsidiaries' common stock;
     o the sale of our and our subsidiaries' convertible preferred stock;
     o technology licensing fees;
     o royalties;
     o product sales;
     o advertising revenue; and
     o engineering and development services.

     We believe that internally  generated  funds are currently  insufficient to
meet our  short-term  and long-term  operating and capital  requirements.  These
funds include  available  cash and cash  equivalents  and revenues  derived from
technology  licensing  fees and  royalties  and  product  sales.  Our ability to
continue as a going  concern is  substantially  dependent  upon future levels of
funding  from our revenue  sources,  which are  currently  uncertain.  If we are
unable to generate sufficient revenue to sustain our current level of operations
and to execute our business plan, we will need to obtain additional financing to
maintain our current level of operations. We are attempting to obtain additional
working capital through debt and/or equity financings.  However,  we can give no
assurance that additional  financing will be available to us on acceptable terms
or at all. At our 2005 annual  meeting of  stockholders,  held on June 28, 2005,
our  stockholders  approved an amendment to our certificate of  incorporation to
increase the number of  authorized  shares of our common stock to 5.622  billion
shares.  This increase in the number of our  authorized  shares of common stock,
however,  is not  sufficient  for  us to  satisfy  all  potential  requests  for
conversions and exchanges of our and our  subsidiaries'  derivative  securities.
The failure to obtain any necessary  additional  financing would have a material
adverse effect on us, including causing a substantial  reduction in the level of
our operations.  These reductions, in turn, could have a material adverse effect
on  our  relationships  with  our  licensees,   customers  and  suppliers.   The
uncertainty  surrounding  future levels of funding from our revenue  sources and
the availability of any necessary  additional financing raises substantial doubt
at December 31, 2005 about our ability to continue as a going concern.

     We have entered into financing  transactions  because internally  generated
funding sources have been  insufficient  to maintain our operations.  During the
year  ended  December  31,  2005 and to date in 2006,  we have  continued  to be
primarily dependent upon funding from Carole Salkind.  Although we do not have a
formal  agreement  requiring  her to do so, we  believe  that Ms.  Salkind  will
continue to provide  funds to us. Our belief that funding from her will continue
is based  primarily upon her continued  funding of us during 2003, 2004 and 2005
despite our failure to repay her notes as the notes matured. However, we have no
legally  binding  assurance  that Ms.  Salkind  will  continue to fund us in the
short-term or that the amount,  timing and duration of the funding from her will
be adequate to sustain our business operations.

     Our  monthly  net cash  used in  operating  activities  for the year  ended
December 31, 2005 was approximately $0.7 million.  Approximately $0.6 million is
used  currently  to fund  payroll and  payroll-related  costs (such as taxes and
health  insurance)  and  the  balance  is  used  for  other  operating  expenses
(including  rents,  utilities and arrearage  arrangements).  In the absence of a
significant  infusion of new capital, we anticipate our monthly net cash used in
operating  activities  over the next 12 months will not exceed this  approximate
level,  assuming  continued  funding  from  Carole  Salkind or other  sources to
satisfy the requirements not funded by royalty collections and product sales.

     At  December  31,  2005,  our  cash and cash  equivalents  aggregated  $0.5
million.  Our working  capital  deficit was $136.8 million at December 31, 2005,
compared to a deficit of $123.9 million at December 31, 2004, a deterioration of
$12.9 million.  Our current assets were  approximately  $1.5 million at December
31, 2005  compared to  approximately  $2.5  million at December  31,  2004.  Our
current  liabilities  were  approximately  $138.4  million at December  31, 2005
compared to  approximately  $126.4 million at December 31, 2004. The increase in
current

                                       28
<PAGE>

liabilities  was primarily due to the issuance and  refinancing  of  convertible
notes to Carole Salkind of $36.0 million (net of discounts), partially offset by
the  issuance  and  change in fair value of certain  derivatives  classified  as
liabilities of $22.7 million and a decrease in accrued expenses of $1.8 million.
At December 31, 2005, our current  liabilities  consisted of indebtedness ($78.6
million),  accrued  liabilities  ($15.5  million  -  see  Note  9  of  Notes  to
Consolidated Financial Statements), preferred stock subject to conversion into a
variable  number of  shares of $25.2  million,  derivative  liabilities  of $8.0
million,  other  current  liabilities  ($7.1  million  - see Note 14 of Notes to
Consolidated  Financial Statements),  accounts payable ($3.1 million),  deferred
revenue  ($0.4  million  -  see  Note  12 of  Notes  to  Consolidated  Financial
Statements), and shares of subsidiary subject to exchange rights ($0.7 million -
see Note 13 of Notes to Consolidated Financial  Statements).  We anticipate that
we may not be  required to settle all of our current  liabilities  in cash.  For
example,  we plan to issue debt or equity securities to satisfy our $4.0 million
obligation to reacquire  certain  licenses (see Note 14 of Notes to Consolidated
Financial  Statements).  In each case,  we evaluate  how the failure to meet our
obligations  as they become due will impact our ability to operate the business.
Most of our  indebtedness  (and accrued  interest  thereon) is convertible  into
shares of our common stock and may be converted to the extent we have sufficient
shares of authorized  but unissued  common stock.  At December 31, 2005, we owed
four law firms an  aggregate of  approximately  $1.6 million and these firms are
allowing us to make monthly payments over an extended period of time.

     At  December  31,  2005,  we were in default  of $0.5  million of our notes
payable and $5.7 million of our convertible  notes. We cured $0.6 million of the
default  of  convertible  notes in  January  2006 by  issuing  a new  note.  The
following table summarizes our indebtedness in default at December 31, 2005.

<TABLE>
<CAPTION>

                                                                                 (In millions)
                                                               New                  Defaults
                                  Indebtedness              Defaults                 Cured               Indebtedness
                                   In Default                during                  during                In Default
Notes Payable:                     12/31/04                the Period              the Period              12/31/05
                               ---------------           ---------------         --------------        ---------------
<S>                            <C>                       <C>                     <C>                   <C>
Former Employees / Other       $           0.5 (a)       $             -         $            -        $           0.5 (a)
                               ---------------           ---------------         --------------        ---------------
  Subtotal                     $           0.5           $             -         $            -        $           0.5
                               ---------------           ---------------         --------------        ---------------

Convertible Notes:
Carole Salkind Notes           $             -           $          90.8         $        (90.2)       $           0.6
8% Notes                                   2.6 (a,b)                                         -                     2.6 (a,b)
6% Notes                                   2.5 (a)                                           -                     2.5 (a)
                               ---------------           ---------------         --------------        ---------------
  Subtotal                     $           5.1           $          90.8         $        (90.2)       $           5.7
                               ---------------           ---------------         ---------------       ---------------
Grand Total                    $           5.6           $          90.8         $        (90.2)       $           6.2
                               ===============           ===============         ===============       ===============
</TABLE>

Notes:
----
(a) Default due to nonpayment.
(b) Default due to cross-default provision (default on other debt).

     Net cash used in operating  activities for the year ended December 31, 2005
was $7.9  million  primarily  due to funding  our fiscal  2005 net loss of $40.7
million, as adjusted to reconcile to net cash.

     Our  deferred  revenue  balance at December 31, 2005 was $0.4  million.  No
additional cash will be realized from our deferred revenue balance.

     Net cash used in investing  activities  was $0.9 million for the year ended
December 31, 2005  reflecting  the purchase of data center  equipment for Artera
Group.

     At each of December 31, 2005 and 2004,  our  available-for-sale  securities
had fair market values of less than $0.1  million.  These  securities  represent
investments in technology companies and, accordingly, the fair market values and
realizable  values of these securities are subject to price volatility and other
market conditions.

     Net cash  provided by  financing  activities  was $7.6 million for the year
ended  December  31,  2005 and was  primarily  due to the  issuance  and sale of
convertible notes to Carole Salkind.

     At December 31, 2005, our short-term  debt was $78.6 million,  shown net of
discounts of  approximately  $5.0  million on our  consolidated  balance  sheet,
compared to $42.3 million of short-term debt, net at December 31, 2004. The cash
proceeds  from debt issued in 2005 were  primarily  used for  general  corporate
purposes.  At December 31, 2005, our debt was comprised of $83.6 million of face
value of convertible notes due Carole Salkind,

                                       29
<PAGE>

shown net of discounts of  approximately  $5.5 million (of which $5.0 million is
classified  as long term debt),  $0.6 million of  outstanding  notes payable and
$4.9 million of convertible debt.

     During the year ended  December 31, 2005,  we issued an aggregate of $115.8
million face value of convertible notes to Carole Salkind,  as consideration for
$7.6  million  of cash and the  refinancing  of $90.2  million in  principal  of
matured convertible notes, along with $4.4 million of interest,  $9.5 million of
default  penalties  (10% of the  principal in default) and premiums on equipment
loans and original issue discounts of $4.1 million.

     As described above, as of December 31, 2005, we were in default  (primarily
from non-payment) on $6.2 million of our indebtedness.

     We  believe  that  the  level of  financial  resources  available  to us is
critical to our ability to continue as a going  concern.  From time to time,  we
may need to raise  additional  capital through equity or debt financing in order
to sustain our operations or capitalize upon business  opportunities  and market
conditions. We expect that from time to time our outstanding short-term debt may
be replaced with new short or long-term borrowings.  Although we believe that we
can  continue  to access the  capital  markets in 2006 on  acceptable  terms and
conditions, our flexibility with regard to long-term financing activity could be
limited by the  liquidity of our common  stock on the open  market,  our current
level of short-term debt and our credit ratings.

     In  addition,  many of the  factors  that  affect our ability to access the
capital  markets,  such as the liquidity of the overall  capital markets and the
current  state  of the  economy,  are  outside  of our  control.  We can give no
assurance  that we will  continue  to have  access  to the  capital  markets  on
favorable terms. In addition, our subsidiaries are at a stage where they may not
separately be able to obtain financing or other funding based upon their lack of
or limited performance history and borrowing base assets.

     In July 2005, we entered into a second amended and restated  private equity
credit  agreement with Crammer Road that superseded and replaced our amended and
restated  private equity credit  agreement dated as of September 30, 2004, which
in turn,  replaced a similar agreement dated as of July 25, 2002. The new credit
agreement  gives us the right to sell to Crammer Road shares of our common stock
having an aggregate  value of up to $50.0  million  pursuant to puts made by us.
The agreement  requires us to sell to Crammer Road at least an aggregate of $5.0
million of our common stock at a 7% discount from the market value of our common
stock  determined  at the time of a put.  Through  December 31, 2005,  we sold a
total of  18,756,756  shares of our common stock to Crammer Road pursuant to our
private equity credit agreement for gross proceeds of approximately  $134,000 at
prices determined pursuant to the provisions of the agreement, which prices were
less than $0.01 per share,  the current par value of our common stock.  Delaware
law restricts  sales of unissued shares of common stock at a price less than the
par value of the common  stock.  We have put  shares  under the  private  equity
credit  agreement  that were sold below par value.  We are currently  engaged in
discussions with Crammer Road regarding this shortfall. In the future, we do not
intend to sell shares  pursuant to the private equity credit  agreement when the
purchase price of such shares would be less than par value.

     We  intend  to use the  2005  private  equity  credit  agreement  to  raise
additional cash. However, the equity credit line may not be a reliable source of
new cash  capital  for us. We must  maintain  an active  trading  market able to
absorb large  quantities of traded shares of our common stock. If the market for
our common stock has an insufficient  volume of shares traded,  large quantities
of shares of our common stock sold by Crammer Road to satisfy our puts may drive
down the price of our common  stock due to lack of demand for those  shares.  In
addition,  the shares to be issued to  Crammer  Road  under the  private  equity
credit  agreement  will be issued at a 7%  discount  to the average of the three
lowest  closing bid prices for the ten trading days  immediately  following  the
notice date of a put. Based on this  discount,  Crammer Road has an incentive to
sell immediately to realize the gain on the 7% discount.  These discounted sales
could cause our stock price to decline.  A significant  downward pressure on the
price of our common stock caused by the sale of material amounts of common stock
under the private equity credit  agreement  could encourage short sales by third
parties.  These sales could place additional  downward  pressure on the price of
our common stock by increasing the number of shares being sold. Furthermore,  as
discussed  above, we do not intend to sell shares pursuant to the private equity
credit  agreement  at any time the  purchase  price of such shares would be less
than the par value of our common stock.

     We have no lines of credit with banks or other  lending  institutions  and,
therefore, have no unused borrowing capacity.

                                       30
<PAGE>

Capital Expenditures

     During  2005,  we incurred  approximately  $0.8 million for the purchase of
data  center   equipment  for  Artera  Group.  In  connection  with  Pro  Tech's
introduction  of a new  NoiseBuster  safety  earmuff,  we have  incurred  25% of
approximately $0.1 million in tooling costs and anticipate the remaining tooling
costs (for the mold needed for the  product)  payable as  follows:  25% with the
first commercially produced shipment of product and the 50% remainder based upon
unit production,  not to exceed 12 months. We expect to finance these costs from
working capital.  Other than these expenditures,  we had no material commitments
for capital expenditures as of December 31, 2005 and no material commitments are
anticipated in the near future.

Contractual Obligations

     The following is a summary of our  contractual  obligations  as of December
31, 2005:

<TABLE>
<CAPTION>

                                                                  (in thousands of dollars)
                                                                    Payments Due by Period
                            ---------------------------------------------------------------------------------------
                                                Less than 1                                          More than 5
                               Total               Year           1 - 3 Years       3 - 5 Years          Years
                            ---------------   ---------------   ---------------   ---------------   ---------------
<S>                         <C>               <C>                <C>               <C>                <C>
Convertible Notes Payable   $       88,749    $       83,749    $            -    $        5,000    $            -
Notes Payable                          576               576                 -                 -                 -
Leases                               2,446               675             1,679                92                 -
                            ---------------   ---------------   ---------------   ---------------   ---------------
     Total                  $       91,771    $       85,000    $        1,679    $        5,092    $            -
                            ===============   ===============   ===============   ================  ===============
</TABLE>

Off-Balance Sheet Arrangements

     As part of our ongoing business, we do not participate in transactions that
generate relationships with unconsolidated  entities or financial  partnerships,
which would have been  established for the purpose of  facilitating  off-balance
sheet  arrangements or other  contractually  narrow or limited  purposes.  As of
December  31,  2005,  we  were  not  involved  in  any  material  unconsolidated
transactions.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Our primary market risk exposures  include  fluctuations in interest rates.
We are exposed to short-term  interest rate risk on some of our obligations.  We
do not use  derivative  financial  instruments  to hedge  cash  flows  for these
obligations.  In the normal course of business,  we employ established  policies
and procedures to manage these risks.

     Based upon a hypothetical 10% proportionate increase in interest rates from
the average level of interest  rates during the last twelve  months,  and taking
into  consideration  commissions paid to selling agents,  growth of new business
and the expected  borrowing  level of debt,  the  expected  effect on net income
related to our financial instruments would be immaterial.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The response to this item is submitted as a separate section of this Annual
Report. See Item 15 and Financial Statement Index on page 46.

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

     Not applicable.

                                       31
<PAGE>

ITEM 9A.  CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

     Our management,  with the  participation of our Chief Executive Officer and
Chief Financial Officer,  evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rule 13a-15(e)  under the Securities  Exchange Act
of 1934,  as amended) as of December 31,  2005.  Based on that  evaluation,  our
Chief  Executive   Officer  and  Chief  Financial  Officer  concluded  that  our
disclosure  controls and  procedures  as of December 31, 2005 were  effective in
ensuring that information required to be disclosed by us in reports that we file
or submit under the  Securities  Exchange Act of 1934, as amended,  is recorded,
processed,  summarized  and reported  within the time  periods  specified in the
SEC's  rules and forms.  We believe  that a control  system,  no matter how well
designed and operated,  cannot provide absolute assurance that the objectives of
the control  system are met, and no evaluation of controls can provide  absolute
assurance  that all control  issues and  instances  of fraud,  if any,  could be
detected within a company.

Changes in Internal Controls

         There were no changes in our internal control over financial reporting
that occurred during the quarter ended December 31, 2005 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.

ITEM 9B.  OTHER INFORMATION

     Not applicable.

                                       32
<PAGE>

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The  following  table sets forth  certain  information  about our executive
officers and directors as of February 28, 2006.

 Name                      Age   Position
 ----                      ---   --------

 Michael J. Parrella        58   Chief Executive Officer and Chairman of the
                                  Board
 Irene Lebovics             53   President and Director
 Cy E. Hammond              51   Senior Vice President, Chief Financial Officer,
                                  Treasurer and Director
 R. Wayne Darville          53   Chief Operating Officer of Artera Group, Inc.
 Irving M. Lebovics         54   Senior Vice President, Global Sales
 Michael J. Palmieri        39   Vice President, General Counsel and Secretary
 Stephan Carlquist          50   Director
 John J. McCloy II          67   Director
 Sam Oolie                  68   Director
 Robert N. Rose             54   Director

     No family  relationships  exist  among  any of our  executive  officers  or
directors,  except that Irving Lebovics, Senior Vice President, Global Sales, is
the spouse of Irene Lebovics, our President and a director.

     Michael J. Parrella has served as our Chief Executive  Officer since August
1995,  as our  Chairman of the Board  since  April 2000 and as a director  since
1986. He previously  served as our President from August 1995 to April 2000, our
Executive  Vice  President  from November 1994 to July 1995 and as our President
and Chief  Operating  Officer from February 1988 to November 1994. Mr.  Parrella
also serves as an officer or director of various  subsidiaries,  including  as a
director  of  Pro  Tech  Communications,  our  publicly  traded,  majority-owned
subsidiary.

     Irene  Lebovics  has  served as our  President  since  April  2000 and as a
director since April 2001. She previously served as our Executive Vice President
from  February  1999 to April  2000,  our  Secretary  from  February  1999 until
September  2001, a Senior Vice  President from January 1993 to February 1999 and
as a Vice  President  from July 1989 to January  1993.  Prior to joining us, Ms.
Lebovics held various positions in product marketing with Philon,  Bristol-Myers
and in  advertising  with McCaffrey and McCall.  Ms.  Lebovics also serves as an
officer or director of various subsidiaries, including Chairperson of Pro Tech.

     Cy E.  Hammond has served as our Senior  Vice  President,  Chief  Financial
Officer and Treasurer  since January 1996 and as a director since March 2004. He
previously  served as a Vice President from February 1994 to January 1996 and as
Controller  from January 1990 to January 1994.  Prior to joining us, Mr. Hammond
served as Treasurer and Director of Finance for Alcolac,  Inc., a  multinational
specialty  chemical  producer,  and in several senior  finance  positions at the
Research  Division of W.R. Grace & Co.,  including  management of the division's
worldwide  financial  operations.  Mr.  Hammond  also  serves as an  officer  or
director of various subsidiaries, including as a director of Pro Tech.

     R. Wayne Darville has served as Chief Operating  Officer of our subsidiary,
Artera  Group,  since August 2002.  He  previously  served as Chief  Information
Officer of Artera  Group from May 2002 to August 2002.  Prior to joining  Artera
Group,  Mr.  Darville  served as Vice  President of Technology  and  Information
Systems and as Vice President of Networks of Interoute Telecommunications, Inc.,
from March 1999 to January 2002. From September 1995 to February 1999, he served
as Vice  President of  Westinghouse  Communications,  overseeing  operations and
security of that company's  international  networks.  From August 1989 to August
1995,  he served as General  Manager of CC&S  Services,  Inc., a  subsidiary  of
Frontier Communications,  where he directed the creation of data centers serving
information technology systems for incumbent local exchange carriers.

     Irving M.  Lebovics has served as our Senior Vice  President,  Global Sales
since June 1999. He previously  served as our Vice  President,  Worldwide  Sales
from  February  1998 to June 1999.  Prior to  joining  us,  Mr.  Lebovics  was a
principal of Enhanced Signal Processing, which exclusively sold our technologies
to large original equipment  manufacturers,  from January 1996 to February 1998.
From 1993 to 1996,  Mr.  Lebovics  served as Vice  President  of Sales of Kasten
Chase Applied Research, a wide area network hardware and software provider.

                                       33
<PAGE>

     Michael J. Palmieri has served as our Vice  President,  General Counsel and
Secretary since  September 2005. He previously  served as our Senior Counsel and
Assistant  Secretary  from July 2004 to August  2005.  Prior to joining  us, Mr.
Palmieri was Special  Counsel at the law firm of Kelley,  Drye & Warren LLP from
July 2000 to April 2003 and an  Associate  and later  Counsel at the law firm of
Shipman & Goodwin LLP from September 1991 to July 2000.

     Stephan  Carlquist  has served as a director  since  October  2005.  He has
served as Chief Executive Officer of Xynteo Ltd.  (formerly Synecta Limited),  a
management  consulting  firm  located in the United  Kingdom,  since March 2004.
Previously,  Mr.  Carlquist  served as President of Electrolux IT Solutions from
July 1998 to February 2004.

     John J. McCloy II has served as a director since 1986. He previously served
as our Chief  Executive  Officer  from  September  1987 to  November  1994,  our
Chairman of the Board from September 1986 to November 1994, our Chief  Financial
Officer from November 1990 to February 1993 and as our Secretary-Treasurer  from
October  1986 to  September  1987.  Since  1981,  Mr.  McCloy 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 Gravitas Technology, Inc.
and is a director of the Sound  Shore Fund,  Inc.,  Ashland  Management  and the
American Council on Germany.

     Sam Oolie has served as a director since 1986. He has served as Chairman of
Oolie Enterprises,  a private investment company,  since 1985 and as Chairman of
the  Board,  Chief  Operating  Officer  and Chief  Financial  Officer  of NoFire
Technologies,  Inc., a manufacturer of high performance fire retardant products,
since  August  1995.  Mr.  Oolie  currently  serves as a  director  of  Comverse
Technology,  Inc., a manufacturer  of voice storage and  forwarding  systems and
message management computer services.

     Robert N. Rose has served as a director since October 2005.  Since 1995, he
has been  associated  with Bear,  Stearns & Co., Inc. and currently  serves as a
Senior  Managing  Director  where  he is  engaged  in  institutional  sales  and
marketing for a wide range of financial products and services.  Prior to joining
Bear Stearns,  Mr. Rose was a Managing  Director at Credit Agricole Futures Inc.
and a Senior Vice President at Lehman Brothers.

Board of Directors and Committees

     Our board of directors currently consists of seven directors.  The standing
committees of the board of directors are the audit  committee,  the compensation
committee and the nominating committee.

     The members of the audit committee are Messrs.  McCloy and Oolie. The audit
committee  oversees our independent  registered public  accountants and oversees
our  management  on matters  relating to  accounting,  financial  reporting  and
disclosure,   internal  controls  and  compliance  with  laws,  regulations  and
corporate  policies.  Although the board of directors has  determined  that both
audit  committee  members are  "independent"  as defined  under the rules of the
Nasdaq Stock Market for general board purposes,  Mr. McCloy does not satisfy the
additional  independence  criteria applicable to audit committee members because
of a consulting  relationship between us and a company controlled by Mr. McCloy.
See Item 13.  "Certain  Relationships  and Related  Transactions  - SpringerRun,
Inc." below. In addition,  the board of directors has determined that Mr. McCloy
qualifies as an "audit committee financial expert" as defined by the SEC.

     The members of the compensation committee are Messrs. Carlquist, McCloy and
Oolie. The compensation committee reviews,  recommends and approves salaries and
other  compensation  of  our  executive  officers.  The  compensation  committee
administers our stock incentive  plans,  including  reviewing,  recommending and
approving stock and option awards to our executive officers.

     The  member  of the  nominating  committee  is  Mr.  Rose.  The  nominating
committee identifies  individuals  qualified to become directors and selects, or
recommends  that the board select,  the candidates for all  directorships  to be
filled by the board or our stockholders.

Code of Ethics

     We have  adopted  a Code of Ethics  that  applies  to our  Chief  Executive
Officer and all senior  financial and accounting  officers,  including our Chief
Financial Officer,  or persons performing similar functions.  The Code of Ethics
is filed as Exhibit 14 to this Annual Report.

                                       34
<PAGE>

Section 16(a) Beneficial Ownership Reporting Compliance

     Section 16(a) of the Securities Exchange Act of 1934, as amended,  requires
our  directors  and  executive  officers  and persons who own more than 10% of a
registered  class of our equity  securities to file reports of ownership of, and
transactions  in,  our  securities  with the  SEC.  These  directors,  executive
officers  and  stockholders  are also  required to furnish us with copies of all
Section  16(a) forms they file.  Based solely on a review of the copies of forms
furnished to us, and written  representations from certain reporting persons, we
believe that our  directors,  executive  officers and 10%  stockholders  met all
applicable filing  requirements  during the fiscal year ended December 31, 2005,
except that Carole  Salkind,  a  beneficial  owner of  approximately  95% of our
common  stock,  filed  two late Form 4s during  2005  covering  a total of three
transactions.

ITEM 11.  EXECUTIVE COMPENSATION

Summary Compensation Table

     Set forth below is information for the three years ended December 31, 2005,
2004 and 2003 relating to compensation  received by our Chief Executive  Officer
and our other four most highly compensated executive officers whose total annual
salary and bonus for the fiscal year ended  December 31, 2005 exceeded  $100,000
(collectively, the "Named Executive Officers").

<TABLE>
<CAPTION>

                                                                                                     Long-Term Compensation
                                                                                              ----------------------------------
                                                 Annual Compensation                                       Awards
                              ---------------------------------------------------------       ----------------------------------
                                                                                               Restricted            Securities
    Name and Principal                                              Other Annual                  Stock              Underlying
         Position             Year     Salary ($)   Bonus ($)(a)    Compensation ($)(b)         Awards (#)       Options/SARs (#)(c)
---------------------------   ----     ----------   -------------   -------------------       -------------      -------------------

<S>                           <C>       <C>         <C>                  <C>                                       <C>
Michael J. Parrella           2005      $320,016    $ 83,847  (d)        $20,688                     -             179,189,000
   Chief Executive            2004       320,016     902,444  (e)         20,688                     -               8,805,000
   Officer and Chairman       2003       320,016     433,412  (f)         20,688                     -               9,260,000
   of the Board

Irene Lebovics                2005       200,000      27,670  (d)         12,000                     -              42,276,000
   President                  2004       200,000     300,397  (e)         12,000                     -               3,800,000
                              2003       200,000     143,526  (f)         12,000                     -               4,000,000

Cy E. Hammond                 2005       180,000      41,923  (d)         12,000                     -              32,817,000
   Senior Vice President,     2004       180,000     451,222  (e)         12,000                     -               3,425,000
   Chief Financial Officer    2003       180,000     216,706  (f)         12,000                     -               3,600,000
   and Treasurer

R. Wayne Darville             2005       200,000       -                                             -               6,840,000
   Chief Operating Officer,   2004       200,000     100,000  (d)            -                    120,000  (g)         800,000
   Artera Group, Inc.         2003       200,000       -                     -                       -                 800,000

Irving Lebovics               2005       160,000      20,000               9,000                     -              11,995,000
   Senior Vice President,     2004       157,500       -                   9,000                     -                 760,000
   Global Sales               2003       150,000       -                   9,000                     -                 800,000
</TABLE>

Notes:
-----
(a)  The bonus  amounts  listed in this column  indicate the bonuses  earned and
     accrued with respect to each Named Executive Officer in the year indicated.
     The  bonus  amounts  actually  paid  (in  cash or  shares  of our  series I
     preferred stock) to each Named Executive Officer in each of the years ended
     December 31, 2003,  2004 and 2005,  whether for amounts earned in the given
     or prior years, are as follows:

                                    Bonus Amounts Paid During the Year Ended
                                                  December 31,
                                   -------------------------------------------
                                      2003            2004            2005
                                   -----------    -------------    -----------
    Michael J. Parrella             $  -             $ 655,000      $ 193,000
    Irene Lebovics                     74,000           37,000        153,000
    Cy E. Hammond                     127,500           56,000        233,000
    R. Wayne Darville                  -                -             100,000
    Irving Lebovics                    -                -              20,000
                                   -----------    -------------    -----------
                                    $ 201,500        $ 748,000      $ 699,000
                                   ===========    =============    ===========

(b)  Other  annual  compensation   consists  of  automotive  lease  payments  or
     automotive allowances paid to the Named Executive Officers.

                                       35
<PAGE>

(c)  The options granted in 2003 and 2004 were subject to stockholder  approval,
     which  occurred  in June 2005,  of a  sufficient  increase in the number of
     authorized  shares of our common  stock and shares  available  for issuance
     under our 2001 Stock and Incentive Plan.

(d)  Bonus amounts  accrued and unpaid as of December 31, 2005, and the years in
     which the amounts were earned are as follows:

                                          Amounts Accrued and Unpaid at
                                         December 31, 2005 Relating to:
                                   --------------------------------------------
                                      2004            2005            Total
                                   -----------    -------------    ------------
    Michael J. Parrella             $ 359,914        $  83,847       $ 443,761
    Irene Lebovics                    112,327           27,670         139,997
    Cy E. Hammond                     166,706           41,923         208,629
    R. Wayne Darville                  -                -               -
    Irving Lebovics                    -                -               -
                                   -----------    -------------    ------------
                                    $ 638,947        $ 153,440       $ 792,387
                                   ===========    =============    ============

(e)  Bonus amounts  accrued and unpaid as of December 31, 2004, and the years in
     which the amounts were earned are as follows:

                                           Amounts Accrued and Unpaid at
                                          December 31, 2004 Relating to:
                                    --------------------------------------------
                                       2003            2004            Total
                                    -----------    -------------    ------------
    Michael J. Parrella             $  -            $  878,925       $  878,925
    Irene Lebovics                     71,434          300,397          371,831
    Cy E. Hammond                     106,741          451,222          557,963
    R. Wayne Darville                  -               100,000          100,000
    Irving Lebovics                    -                -                -
                                    -----------    -------------    ------------
                                    $ 178,175       $ 1,730,544      $ 1,908,719
                                    ===========    =============    ============

     In March 2005, four of the five Named Executive Officers received shares of
     our series I  convertible  preferred  stock in exchange for of a portion of
     bonuses  accrued but unpaid as of December 31, 2004 as follows:  Michael J.
     Parrella - $125,000; Irene Lebovics - $46,000; Cy E. Hammond - $72,000; and
     R. Wayne  Darville -  $100,000.  See Item 13.  "Certain  Relationships  and
     Related   Transactions  -  Executive   Officer  Series  I  Preferred  Stock
     Purchases."

     In March 2005,  Messrs.  Parrella  and Hammond  and Ms.  Lebovics  waived a
     portion of their bonus amounts  accrued and unpaid as of December 31, 2004,
     as follows:  Michael J. Parrella - $326,011; Irene Lebovics - $106,504; and
     Cy E. Hammond - $158,256.  The 2004 bonus amounts for these Named Executive
     Officers presented in the tables above do not reflect these waivers.

(f)  Bonus amounts  accrued and unpaid as of December 31, 2003, and the years in
     which the amounts were earned are as follows:

                                        Amounts Accrued and Unpaid at
                                        December 31, 2003 Relating to:
                             ---------------------------------------------------
                                2001            2002        2003         Total
                             -----------   -----------   ----------   ----------
    Michael J. Parrella      $  61,597     $ 136,473     $ 433,412    $  631,482
    Irene Lebovics              -             -            108,434       108,434
    Cy E. Hammond               -             -            162,741       162,741
    R. Wayne Darville           -             -             -             -
    Irving Lebovics             -             -             -             -
                             -----------   -----------   ----------   ----------
                             $  61,597     $ 136,473     $ 704,587    $  902,657
                             ===========   ===========   ==========   ==========

(g)  As of December 31, 2005,  the  aggregate  value of the shares of restricted
     stock  held by Mr.  Darville  was $480  (120,000  shares).  All  shares  of
     restricted stock held by Mr. Darville were awarded on September 30, 2004.

                                       36
<PAGE>

Option Grants in 2005

     The  following  table  summarizes  options  granted to the Named  Executive
Officers during 2005.

<TABLE>
<CAPTION>

                                             Individual Grants
                         ---------------------------------------------------------
                                                                                          Potential Realized Value
                          Number of       Percent of                                       at Assumed Annual Rates
                          Securities    Total Options                                     Stock Price Appreciation
                          Underlying      Granted to       Exercise                         for Option Term (b)
                            Options       Employees         Price      Expiration      -----------------------------
         Name             Granted (a)      in 2005        Per Share       Date               5%               10%
  ------------------     ------------    -----------     -----------   -----------     -------------     -----------

<S>                       <C>               <C>             <C>         <C>   <C>       <C>             <C>
  Michael J. Parrella     179,189,000       49.3%           $0.006      10/19/12        $ 437,688       $ 1,019,998

  Irene Lebovics           42,276,000       11.6%           $0.006      10/19/12          103,263           240,248

  Cy E. Hammond            32,817,000        9.0%           $0.006      10/19/12           80,159           186,604

  R. Wayne Darville         6,840,000        1.8%           $0.006      10/19/12           16,707            38,935

  Irving Lebovics          11,995,000        3.3%           $0.006      10/19/12           29,299            68,279
</TABLE>

Notes:
-----
(a)  These  options were  originally  scheduled to vest over time in  accordance
     with  specified  vesting  schedules.  On  December  16,  2005,  the vesting
     schedules of all  non-vested  options held by our employees and  directors,
     including  the  options  listed in the table  above,  were  accelerated  to
     immediately vest all such options.

(b)  The dollar amounts in these columns are the result of  calculations  of the
     exercise price at the assumed 5% and 10% rates of  appreciation  compounded
     annually  through the expiration  date.  Actual gains realized,  if any, on
     stock  option  exercises  and common stock  holdings  are  dependent on the
     future performance of our common stock and overall market conditions.

2005 Option Exercises and Year-End Option Values

     The following table sets forth  information with respect to the exercise of
options  during  2005  and the  unexercised  options  held by each of the  Named
Executive  Officers as of December 31, 2005.  On December 16, 2005,  the vesting
schedules  of all  non-vested  options  held  by our  employees  and  directors,
including the options listed in the table below, were accelerated to immediately
vest all such options.

<TABLE>
<CAPTION>

                                                                       Number of Shares
                          Number of                                       Underlying                       Value of Unexercised
                           Shares                                   Unexercised Options at                In-the-Money Options at
                          Acquired                                    December 31, 2005                      December 31, 2005
                             On              Value       ----------------------------------------    -------------------------------
        Name             Exercise (#)      Realized      Exercisable (#)        Unexercisable (#)     Exercisable     Unexercisable
--------------------    --------------    ----------     ---------------        -----------------    -------------   ---------------

<S>                                                        <C>
 Michael J. Parrella          -               -            235,918,634                  -                  -                -

 Irene Lebovics               -               -             56,368,073                  -                  -                -

 Cy E. Hammond                -               -             43,756,024                  -                  -                -

 R. Wayne Darville            -               -              9,120,000                  -                  -                -

 Irving Lebovics              -               -             15,993,415                  -                  -                -
</TABLE>

Compensation Arrangements with Certain Executive Officers

     Certain of our executive officers are eligible to receive an incentive cash
bonus  consisting  of a percentage of the value,  in cash or  otherwise,  of the
transactions  consummated by us with third parties.  In 2005, these transactions
consisted  primarily  of an  aggregate  principal  amount  of  $6.1  million  in
financing  transactions  with  Carole  Salkind and an  aggregate  amount of $2.2
million in product sales and royalty and licensing revenue.  Effective September
30, 2005,  this incentive bonus  arrangement  was modified to calculate  bonuses
based  on a  percentage  of  product  sales,  licenses,  royalties  and  similar
revenues. The participants included in this arrangement and the percentages used
to calculate their incentive bonuses are as follows:

                                       37
<PAGE>

                      Participant             Percentage
                ------------------------     -------------

                  Michael J. Parrella           1.00%
                    Irene Lebovics              0.33%
                     Cy E. Hammond              0.50%

     In March 2005, due to our financial condition, Messrs. Parrella and Hammond
and Ms.  Lebovics  waived a portion of their bonus amounts accrued and unpaid as
of December 31, 2004, as follows: Michael J. Parrella - $326,011; Irene Lebovics
- $106,504; and Cy E. Hammond - $158,256.

Compensation of Directors

     Directors  who are also  full-time  employees of ours receive no additional
compensation  for serving as a director.  Our  non-employee  directors,  Messrs.
Carlquist,  McCloy, Oolie and Rose, also did not receive any cash fees for their
service as directors  during 2005, but received  options to purchase  6,000,000,
16,626,000,  17,376,000 and 6,000,000 shares, respectively,  of our common stock
at an exercise price of $0.006 per share, which was the fair market value of our
common stock on the date of grant  (October 19, 2005).  The options expire seven
years from the date of grant. These options originally were scheduled to vest as
follows:  50% on the date of grant and 50% on the third  anniversary of the date
of grant,  subject to specific  acceleration  events.  On December 16, 2005, the
vesting schedules of all non-vested options held by our employees and directors,
including  the  options  granted to our  non-employee  directors  in 2005,  were
accelerated to immediately vest all such options.

Compensation Committee Interlocks and Insider Participation

     During 2005, Stephan Carlquist, John McCloy and Sam Oolie served as members
of the  compensation  committee of our board of directors.  Mr. McCloy served as
our Chief  Executive  Officer from  September  1987 to November  1994 and as our
Chairman of the Board from  September  1986 to November  1994.  In addition,  he
served as our Chief Financial Officer from November 1990 to February 1993 and as
our  Secretary-Treasurer  from October 1986 to September  1987.  Mr. McCloy also
currently serves as the Chairman of SpringerRun,  Inc, a company we have engaged
to perform consulting  services for us. See Item 13. "Certain  Relationships and
Related  Transactions  -  SpringerRun,  Inc." During 2005, no executive  officer
served on the compensation committee or the board of directors of another entity
whose executive officer served on our compensation committee.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
          RELATED STOCKHOLDER MATTERS

     The following table sets forth information  regarding  beneficial ownership
of our common stock as of February 28, 2006 by:

o    each person known by us to beneficially own more than 5% of our outstanding
     common stock;

o    each of our Named Executive Officers and directors; and

o    all of our executive officers and directors as a group.

     Beneficial ownership is determined in accordance with the rules of the SEC.
These rules generally  attribute  beneficial  ownership of securities to persons
who possess  sole or shared  voting  power or  investment  power with respect to
those  securities  and include shares of common stock issuable upon the exercise
or conversion of options, warrants,  convertible preferred stock and convertible
notes that are  immediately  exercisable or  convertible  or are  exercisable or
convertible  within 60 days.  Except as otherwise  indicated,  all of the shares
reflected in the table are shares of common  stock and all persons  listed below
have sole voting and  investment  power with respect to the shares  beneficially
owned by them, subject to applicable community property laws. The information is
not necessarily  indicative of beneficial  ownership for any other purpose.  The
calculations  assume  sufficient  authorized  shares  of our  common  stock  are
available for issuance upon conversion or exchange of derivative securities.

                                       38
<PAGE>

                                                 Shares of
                                                Common Stock
                                                Beneficially             Percent
            Beneficial Owner                       Owned                of Class
--------------------------------------       -----------------          --------

 Executive Officers and Directors (a):
 Michael J. Parrella                             248,435,403  (b)         22.9%
 Irene Lebovics                                   74,409,061  (c)          8.2%
 Irving Lebovics                                  74,409,061  (d)          8.2%
 Cy E. Hammond                                    45,924,170  (e)          5.2%
 Sam Oolie                                        23,507,825  (f)          2.7%
 John J. McCloy                                   22,473,012  (g)          2.6%
 R. Wayne Darville                                12,255,835  (h)          1.4%
 Stephan Carlquist                                 6,005,000  (i)            *
 Robert N. Rose                                    6,000,000  (j)            *
 All Current Executive Officers and              440,010,306  (k)         34.7%
 Directors as a Group (10 persons)
 5% or Greater Stockholders:
 Carole Salkind                               15,820,808,045  (l)         95.1%
 Crammer Road LLC                              8,632,805,811  (m)         91.4%
 Alpha Capital Aktiengesellschaft              1,406,137,552  (n)         62.6%
 Libra Finance S.A.                              831,901,692  (o)         50.0%
 Austost Anstalt Schaan                          580,970,762  (p)         41.3%
 Balmore S.A.                                    473,492,413  (q)         36.4%
 Acme Associates, Inc.                           240,500,000  (r)         22.3%


Notes:
-----
*  Less than one percent.

(a)  The business address of our officers and directors named in the table above
     is 20 Ketchum Street, Westport, CT 06880.

(b)  Includes  235,918,634  shares  issuable  upon  the  exercise  of  currently
     exercisable options, 13,333 shares held by or in custody for Mr. Parrella's
     children,   3,000,000  shares  issuable  upon  the  exercise  of  currently
     exercisable  options that were transferred by Mr. Parrella to his children,
     5,033,400  shares  issuable  upon the  exercise  of  currently  exercisable
     options  held by his son,  Michael J.  Parrella,  Jr., an officer of Artera
     Group, and 4,470,036  shares held by Mr.  Parrella's  spouse.  Mr. Parrella
     disclaims  beneficial  ownership  of the  shares  held  by his  spouse  and
     children.

(c)  Includes   56,368,073  shares  issuable  upon  the  exercise  of  currently
     exercisable  options  and 590,517  shares  owned  jointly  with her spouse,
     Irving  Lebovics,  our Senior Vice President,  Global Sales.  Also includes
     15,993,415  shares  issuable  upon the  exercise of  currently  exercisable
     options held by Mr. Lebovics, as to which Ms. Lebovics disclaims beneficial
     ownership.

(d)  Includes   15,993,415  shares  issuable  upon  the  exercise  of  currently
     exercisable options and 590,517 shares owned jointly with his spouse, Irene
     Lebovics, our President.  Also includes 56,368,073 shares issuable upon the
     exercise of currently exercisable options held by Ms. Lebovics, as to which
     Mr. Lebovics disclaims beneficial ownership.

(e)  Includes   43,756,024  shares  issuable  upon  the  exercise  of  currently
     exercisable options.

(f)  Includes   23,168,012  shares  issuable  upon  the  exercise  of  currently
     exercisable  options,  20,000  shares  owned by Oolie  Enterprises,  75,000
     shares  owned by Mr.  Oolie's  spouse and 44,313  shares  held by the Oolie
     Family Support Foundation.  Mr. Oolie disclaims beneficial ownership of the
     shares owned by his spouse and the foundation.

(g)  Includes   22,168,012  shares  issuable  upon  the  exercise  of  currently
     exercisable options and 300,000 shares held by the John J. McCloy II Family
     Trust for which Mr. McCloy's spouse serves as trustee,  and as to which Mr.
     McCloy disclaims beneficial ownership.

(h)  Includes  120,000 shares of restricted  stock and 9,120,000 shares issuable
     upon the exercise of currently exercisable options.

(i)  Includes   6,000,000   shares  issuable  upon  the  exercise  of  currently
     exercisable options.

                                       39
<PAGE>

(j)  Consists of  6,000,000  shares  issuable  upon the  exercise  of  currently
     exercisable options.

(k)  Includes  427,525,570  shares  issuable  upon  the  exercise  of  currently
     exercisable options.

(l)  Ms.  Salkind's  address is 18911 Collins Ave., Apt. 2403 Sunny Isles Beach,
     Florida 33160. Includes  10,171,147,475 shares issuable upon the conversion
     of  convertible  notes in the aggregate  principal  amount of $95.5 million
     (assuming  full   conversion  of  the  notes  and  accrued   interest)  and
     5,104,923,499 shares issuable to Ms. Salkind upon the exercise of currently
     exercisable  warrants.  Also includes 5,000 shares owned by Morton Salkind,
     Ms.  Salkind's  husband and a former director of NCT, and 1,875,000  shares
     issuable  upon the  exercise of currently  exercisable  options held by Mr.
     Salkind,  shares as to which Ms. Salkind  disclaims  beneficial  ownership.
     Also includes  240,500,000  shares  issuable upon the exercise of currently
     exercisable options held by Acme Associates, Inc. (see footnote (r) below);
     23,000,000  shares  issuable  upon the  exercise of  currently  exercisable
     options held by Motorworld,  Incorporated;  23,000,000 shares issuable upon
     the  exercise of  currently  exercisable  options  held by  Inframe,  Inc.;
     24,500,000  shares  issuable  upon the  exercise of  currently  exercisable
     options held by Avant  Interactive,  Inc.;  22,550,000 shares issuable upon
     exercise of currently exercisable options held by Turbo Networks, Inc.; and
     23,000,000  shares  issuable  upon the  exercise of  currently  exercisable
     options held by Maple Industries,  Inc. Ms. Salkind is the sole stockholder
     of Acme Associates,  Motorworld, Inframe, Avant Interactive, Turbo Networks
     and Maple  Industries.  Also includes  8,350,000  shares  issuable upon the
     exercise of currently  exercisable  options held by Leben Care, Inc. (whose
     sole stockholder is Ms. Salkind's son, Steven Salkind) and 3,375,000 shares
     issuable  upon the exercise of currently  exercisable  options held by Stop
     Noise,  Inc. (whose sole  stockholder is Steven  Salkind),  as to which Ms.
     Salkind disclaims beneficial ownership.

(m)  Crammer Road LLC's business address is Cayside,  2nd Floor,  P.O. Box 30592
     SMB, George Town, Grand Cayman, Cayman Islands,  British West Indies. David
     Sims of Navigator  Management  Ltd. has voting and  dispositive  control of
     these  shares on behalf of  Crammer  Road.  Includes  8,608,003,023  shares
     issuable upon the  conversion of our series H preferred  stock,  along with
     accretion.  Also includes  1,250,000  shares  issuable upon the exercise of
     currently  exercisable  warrants.  Pursuant  to a  contractual  restriction
     between Crammer Road and us, Crammer Road is prohibited  from  beneficially
     owning more than 9.9% of our common stock at any given time.

(n)  Alpha Capital  Aktiengesellschaft's  business  address is Pradafant 7, 9490
     Furstentums,  Vaduz, Liechtenstein.  Konrad Ackermann, Director, has voting
     and  dispositive  control  of these  shares  on  behalf  of Alpha  Capital.
     Includes   19,455,556  shares  issuable  upon  the  exercise  of  currently
     exercisable  warrants,  742,089,353  shares  issuable  upon the exchange of
     various  convertible  notes  issued by Artera  Group,  along  with  accrued
     interest, 234,649,976 shares issuable upon the exchange of shares of series
     B preferred stock of Pro Tech, along with accretion, and 409,942,667 shares
     issuable upon the conversion of convertible  notes issued by us, along with
     accrued  interest.  Pursuant  to  contractual  restrictions  between  Alpha
     Capital and us, Alpha Capital is prohibited from  beneficially  owning more
     than 9.99% of our common stock at any given time.

(o)  Libra Finance  S.A.'s  business  address is c/o Trident Trust Company (BVI)
     Limited,  Trident  Chambers,  Box 146, Road Town,  Tortola,  British Virgin
     Islands.  Seymour Braun has voting and dispositive  control of these shares
     on behalf of Libra Finance.  Includes  5,000,000  shares  issuable upon the
     exercise of currently  exercisable  warrants,  413,906,471  shares issuable
     upon the  exchange of shares of series A preferred  stock of Artera  Group,
     along with accretion,  and 407,274,032  shares issuable upon the conversion
     of convertible notes issued by us, along with accrued interest.

(p)  Austost  Anstalt   Schaan's   business   address  is  Landstrasse  8,  9496
     Fuerstentum,   Balzers,   Liechtenstein.   Thomas   Hackl  has  voting  and
     dispositive  control  of  these  shares  on  behalf  of  Austost.  Includes
     445,777,270  shares  issuable  upon the  exchange  of  shares  of  series A
     preferred  stock of Artera Group,  along with  accretion,  and  123,410,336
     shares issuable upon exchange of a convertible note issued by Artera Group,
     along with accrued interest.

(q)  Balmore S.A.'s business address is c/o Trident Chambers, P.O. Box 146, Road
     Town,  Tortola,  British  Virgin  Islands.  Gissela  Kindle  has voting and
     dispositive  control  of  these  shares  on  behalf  of  Balmore.  Includes
     445,777,270  shares  issuable  upon the  exchange  of  shares  of  series A
     preferred  stock of Artera  Group,  along with  accretion,  and  15,975,807
     shares  issuable upon the exchange of a  convertible  note issued by Artera
     Group, along with accrued interest.

                                       40
<PAGE>

(r)  Acme Associates,  Inc.'s business address is 322 Green Pond Road, Hibernia,
     New Jersey  07842.  As noted in footnote (l) above,  Carole  Salkind is the
     sole  stockholder  of  Acme  Associates.  Consists  of  240,500,000  shares
     issuable upon the exercise of currently exercisable options.

Equity Compensation Plan Information

     The following  table  summarizes  certain  information  with respect to our
equity compensation plans as of December 31, 2005.

<TABLE>
<CAPTION>

                               Number of securities to         Weighted-average
                             be issued upon exercise of       exercise price of          Number of securities
              Plan              outstanding options          outstanding options        remaining available for
            Category                 and rights                   and rights                future issuance
      ---------------------    -----------------------      -----------------------    --------------------------
<S>                                 <C>                            <C>                        <C>
      Equity compensation
      plans approved by
      stockholders                  437,524,381                    $0.0528                    218,520,150
      Equity compensation
      plans not approved
      by stockholders                55,589,000                    $0.0060                         -
                               -----------------------      -----------------------    --------------------------
      Total                         493,113,381                    $0.0476                    218,520,150
                               =======================      =======================    ==========================
</TABLE>

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Secured Convertible Notes and Warrants Issued to Carole Salkind

     Beginning in 1999, we have issued  convertible  notes to Carole Salkind,  a
beneficial  owner of  approximately  95% of our common stock and the spouse of a
former  director of NCT. At February 28, 2006, the aggregate  principal  balance
outstanding of these notes was approximately $95.5 million. Substantially all of
our assets  secure the notes.  We have  sustained our  operations  over the last
three  years  primarily  from the  funding  received  from Ms.  Salkind  and are
dependent  upon this funding to continue  operations.  Although we do not have a
formal  agreement  requiring  her to do so, we  believe  that Ms.  Salkind  will
continue to provide  funds to us. Our belief that funding from her will continue
is based primarily upon her continued  funding of us to date despite our failure
to repay her notes as the notes matured. Since January 2001, we have established
a history of defaulting on the repayment of  obligations  owed to Ms. Salkind as
these  obligations  become due. Ms. Salkind has allowed us to roll over maturing
notes, along with accrued interest  (including  interest at a default rate equal
to the note's stated rate plus 5% after  default) and a default  penalty (10% of
the principal in default),  into new notes that generally mature six months from
the date of the  rolled-over  note.  In  addition to the  financing  provided by
rolling over maturing  notes,  Ms.  Salkind has continued to provide us with new
funds. From time to time, we have obtained oral assurances that Ms. Salkind will
continue  funding us.  However,  we have no legally  binding  assurance that Ms.
Salkind will continue funding us.

     At Ms.  Salkind's  election,  the notes are convertible  into shares of our
common  stock at fixed  conversion  prices  representing  the fair  value of our
common stock on the date of issuance.  In addition,  the notes are  exchangeable
for shares of common stock of any of our subsidiaries (other than Pro Tech) that
makes a public offering of its common stock (at the public offering price).  The
notes  contain  various  events of default,  the  occurrence of any one of which
provides,  at Ms. Salkind's election,  that the outstanding  principal,  accrued
interest and default penalty become immediately due and payable.

     Of the debt owed to Ms.  Salkind as of February  28,  2006,  $43.8  million
represents  cash loans made by Ms.  Salkind  (rather than non-cash items such as
interest  and  default  penalties  rolled  into new  notes,  legal  settlements,
premiums on equipment loans and original issue discounts).  Through February 28,
2006, Ms. Salkind has loaned us a total of approximately  $44.6 million in cash.
She  converted  one $500,000 note into shares of our common stock and was repaid
one $250,000 note.

                                       41
<PAGE>

     Listed  below are the  convertible  notes  issued to Ms.  Salkind  that are
outstanding as of February 28, 2006:

                                                              Conversion
   Issue Date            Due Date           Principal           Price
-----------------    -----------------    ---------------    -------------
    12/22/04             12/22/09          $   5,000,000       $ 0.0166
    08/24/05             02/24/06                979,260         0.0080
    08/24/05             02/24/06                300,000         0.0080
    09/26/05             03/26/06              3,255,754         0.0060
    09/26/05             03/26/06                350,000         0.0050
    09/30/05             03/30/06                444,873         0.0050
    10/14/05             04/14/06              1,001,330         0.0049
    10/14/05             04/14/06                300,000         0.0049
    10/18/05             04/18/06                968,035         0.0049
    10/31/05             04/30/06              1,625,612         0.0044
    10/31/05             04/30/06                325,000         0.0041
    11/15/05             05/15/06                300,000         0.0100
    12/07/05             06/07/06                959,384         0.0100
    12/07/05             06/07/06                300,000         0.0100
    12/22/05             06/22/06              2,077,980         0.0100
    12/22/05             06/22/06(a)             375,000         0.0100
    01/11/06             07/11/06(a)             375,000         0.0100
    01/12/06             07/12/06             31,637,249         0.0100
    01/24/06             07/24/06(a)             375,000         0.0100
    02/07/06             08/07/06             15,653,600         0.0100
    02/13/06             08/13/06             27,034,868         0.0100
    02/13/06             08/13/06                652,655         0.0100
    02/13/06             08/13/06(a)             375,000         0.0100
    02/27/06             08/27/06(a)             850,000         0.0100
                                          ---------------
                                           $  95,515,600
                                          ===============
Notes:
-----
(a)  Note is payable upon the earlier of demand or the due date.

     Between  January 1, 2005 and December 31,  2005,  we issued Ms.  Salkind 8%
convertible notes in the aggregate principal amount of $114.7 million in a total
of 38 loan  transactions and one 12% convertible note in the principal amount of
$1.0 million.  Of these notes, $115.4 million mature six months from the date of
issuance  and $0.4 million are due upon the earlier of demand or six months from
the date of issuance.  In addition, of the $115.8 million in notes, $7.6 million
were issued in  exchange  for $7.6  million in cash from Ms.  Salkind and $104.1
million were issued to refinance  matured notes,  finance interest  installments
and premiums on equipment loans and original issue discounts of $4.1 million.

     In 2005,  we did not repay any of the  indebtedness  due Ms.  Salkind,  but
refinanced  matured  notes into new notes and issued notes for interest due on a
five-year  note.  The  aggregate  principal  amount  of  the  refinancing  notes
represents the principal  refinanced ($90.2 million),  default penalties (10% of
the principal in default, or $9.5 million) and accrued interest ($4.4 million).

     Between  January 1, 2006 and February 28,  2006,  we issued Ms.  Salkind 8%
convertible notes in the aggregate  principal amount of $76.3 million in a total
of seven loan  transactions  and one 12% convertible  note in the amount of $0.7
million in exchange for $1.4  million in cash.  Of these  notes,  $75.0  million
mature six months  from the date of issuance  and $2.0  million are due upon the
earlier of demand or six months from the date of issuance.  Of the $77.0 million
in notes, $2.0 million were issued in exchange for $2.0 million in cash from Ms.
Salkind  and $75.0  million  were issued to  refinance  matured  notes,  finance
interest  installments and premiums on original issue discounts of $0.6 million.
The aggregate principal amount of the refinancing notes represents the principal
refinanced  ($65.1  million),  default penalty (10% of principal in default,  or
$7.0 million) and accrued interest ($2.9 million).

     In connection  with the issuance of convertible  notes to Ms.  Salkind,  we
have  issued to her  warrants  to  purchase  shares of our common  stock.  As of
February  28,  2006,  we have  issued to Ms.  Salkind  warrants  to  purchase an
aggregate of  5,104,923,499  shares of our common  stock at a weighted  exercise
price per share of $0.0181  including  warrants that were issued between January
1, 2005 and February 28, 2006 to purchase an aggregate of  3,317,000,000  shares
of our common stock at a weighted average price of $0.0114.

     In addition, on January 11, 2002, we granted Ms. Salkind a five-year option
to acquire a 10% equity  interest in Artera Group at an exercise price of 10% of
the  pre-money  enterprise  value  attributed  to  Artera  Group  in  the  first
transaction  following January 11, 2002 in which an unrelated investor purchases
or commits to  purchase  an equity  interest  in Artera  Group for payment of at
least $5 million.  For  example,  if an unrelated  investor  pays $20

                                       42
<PAGE>

million to  purchase a 20% equity  interest  in Artera  Group,  Ms.  Salkind may
acquire a 10% equity interest for $10 million.

Agreements with Affiliates of Carole Salkind

     On January 7, 2005, we entered into a three-year  consulting agreement with
Morton Salkind,  Carole Salkind's  spouse,  to provide us ongoing  financial and
consulting  advisory services as we may reasonably request from time to time. As
compensation for these consulting services, we have agreed to pay to Mr. Salkind
a monthly $5,000 cash fee payable at the end of the term of the agreement and to
provide  Mr.  Salkind  with  the use of an  automobile  owned or  leased  by us,
together with auto insurance  coverage,  through the term of the agreement.  Our
expected  costs to provide this  automobile  are $10,800 per year.  Mr.  Salkind
served as a member of our board of directors  from July 1997 until January 1999.
Mr.  Salkind is a  successful  businessman  who has vast  experience  in various
industries,  including  among  other  things,  experience  as  an  entrepreneur,
ownership of various  companies,  seasoning as a  businessman  who has served as
chief  executive  officer of many  business  ventures,  active  oversight of the
performance of companies,  determination of the strategic and tactical direction
of  companies  and an  understanding  of our  proprietary  technologies  and the
marketplace.

     In March  2005,  we sold 510 shares of our series I  convertible  preferred
stock to Steven Salkind,  Carole  Salkind's son, in exchange for an aggregate of
unpaid  cash  consulting  fees  of  $510,000  accrued  through  June  12,  2005,
representing  all cash  consulting fees payable to various  entities  affiliated
with Carole Salkind pursuant to expired  consulting  agreements (but not payable
to Morton  Salkind  personally  pursuant to his January 2005  agreement).  These
consulting  fees  had  previously  been  assigned  to  Steven  Salkind  by these
entities. See "Executive Officer Series I Preferred Stock Purchases" below for a
description of the terms of our series I preferred stock.

Executive Officer Series I Preferred Stock Purchases

     In March 2005,  we sold an aggregate  of  212.33253  shares of our series I
convertible  preferred stock to four executive  officers in exchange for accrued
but unpaid incentive cash bonuses of $343,000  (before income tax  withholding).
The specific terms of each of these purchases are as follows:

<TABLE>
<CAPTION>

                                                                                             Net Bonus Amount
                                                                                Gross           After Tax
                            Name                                            Bonus Amount        Withholding     Shares Purchased (a)
                            ----                                            ------------     ----------------   --------------------
<S>                                                                         <C>                <C>                        <C>
Michael J. Parrella, Chief Executive Officer and Chairman of the Board      $  125,000         $  81,000                  81

Irene Lebovics, President                                                       46,000            27,000                  27

Cy E. Hammond, Senior Vice President and Chief Financial Officer                72,000            41,000                  41

R. Wayne Darville, Chief Operating Officer, Artera Group, Inc.                 100,000            63,333             63.33253
</TABLE>

Note:
----
(a)  We did not receive cash proceeds for these purchases.

     Our series I  preferred  stock has a stated  value of $1,000 per share.  No
dividends  are payable on the series I preferred  stock.  The series I preferred
stock is junior in rank to our series H convertible  preferred stock, but senior
in rank to our  common  stock and has  preferences  over our  common  stock with
respect to  distributions  and payments  upon our  liquidation,  dissolution  or
winding  up. The  holders  of series I  preferred  stock  have no voting  rights
(except as may be  required by law).  Each share of series I preferred  stock is
convertible into approximately 47,619 shares of our common stock,  determined by
dividing  the $1,000  stated value by the fixed  conversion  price of $0.021 per
share.  This conversion price is higher than the fair market value of our common
stock on March 16, 2005 (the date the  purchase  agreements  were  executed)  of
$0.0185 per share.

     In July and August 2005, the four executive officers converted all of their
shares of series I preferred stock into an aggregate of 10,111,072 shares of our
common stock.

SpringerRun, Inc.

     In July 2003, we entered into a consulting agreement with SpringerRun, Inc.
John McCloy II, a director of NCT, is Chairman of the Board of Directors,  Chief
Executive  Officer and a 40% stockholder of  SpringerRun.  John McCloy II's son,
John  McCloy III,  is  President,  Treasurer,  Secretary,  a Director  and a 25%
stockholder  of  SpringerRun.  John  McCloy  II's  son,  Rush  McCloy,  is a 25%
stockholder  of  SpringerRun.  Under  this  consulting  agreement,   SpringerRun
provides consulting services to us, consisting  primarily of raising capital and
debt

                                       43
<PAGE>

financing, identifying potential joint ventures and other strategic transactions
and  finding  distributors,  licensees  and  end  users  for  our  products  and
technologies. The initial term of the SpringerRun agreement was one year, but it
was extended by the parties for a second year and is automatically  extended for
additional  one-year terms unless  terminated prior to the start of any one-year
term by either party. Under the agreement, we have agreed to pay SpringerRun the
following  compensation:  6% of the amount of any equity  financing  arranged by
SpringerRun plus 5% of this amount payable in warrants to purchase shares of our
common stock;  1% of the amount of any debt financing  arranged by  SpringerRun;
and 7% of our net  revenues  resulting  from  joint  ventures  or  distribution,
license or end user agreements arranged by SpringerRun for the first three years
of these  agreements  and 5% of net  revenues  resulting  from these  agreements
thereafter.  In lieu of cash, some of the  compensation  described above may, at
SpringerRun's  request  and if agreed to by us, be paid in shares of our  common
stock or in the  shares of any joint  venture  entity  entered  into by us.  The
material  terms and  conditions of this  agreement,  including the  compensation
formulas, are comparable to those used by us with similarly situated,  unrelated
consultants. We have paid expenses aggregating approximately $7,000 on behalf of
SpringerRun  through February 28, 2006. The  compensation  earned by SpringerRun
under the  agreement  through  February  28, 2006 was $1,033 and has been offset
against the expenses paid by us on behalf of SpringerRun.

Spyder Technologies Group, LLC

     Prior to December  16,  2005,  from time to time on an "as  needed"  basis,
Spyder Technologies Group, LLC provided technical  consulting services to Artera
Group pertaining to Artera Turbo. On May 1, 2005, we amended this arrangement to
change the cash compensation payable to Spyder from $20 per hour to $365 per day
(or $45.63 per hour for a pro rata portion thereof based on an eight-hour  day).
No  additional  compensation  is paid for hours in  excess of eight per day.  In
addition,  Spyder received a one-time  payment of approximately  $11,900,  which
effectively  made the rate  increase  retroactive  to January 1, 2005.  Jonathan
Parrella,  the son of Michael J.  Parrella,  our  Chairman  and Chief  Executive
Officer,  is President of and holds a 25% ownership interest in Spyder.  Michael
J. Parrella, Jr., the son of Michael J. Parrella and an officer of Artera Group,
holds a 17%  ownership  in  Spyder.  Bulldog  Communications,  Inc.  holds a 20%
ownership interest in Spyder. Bulldog Communications,  Inc. is owned 20% by each
of Michael J. Parrella and his wife and three children: Karen Parrella,  Michael
Parrella,  Jr.,  Jonathan  Parrella and Daniel Parrella.  Michael J. Parrella is
also the Chairman of the Board, and Karen Parrella is the President,  of Bulldog
Communications.

     On December 16, 2005, we, Artera Group and Spyder entered into a Consulting
Agreement, pursuant to which, among other things:

     o    Spyder  serves as a consultant  to Artera  Group and performs  certain
          computer and data processing services for which Spyder receives a cash
          consulting fee of $365.00 per day;

     o    Spyder  assigned  to Artera  Group any and all of  Spyder's  rights in
          certain intellectual property developed by Spyder prior to the date of
          the consulting agreement, for which Spyder will receive a fee of 2% of
          the net  revenues  received  by  Artera  Group  from its "Rev the Web"
          service, and

     o    Spyder  assigned  to Artera  Group any and all of  Spyder's  rights in
          certain  intellectual  property developed by Spyder from and after the
          date of the consulting agreement;

Spyder  earned  aggregate  technical  consulting  fees of $86,840,  $115,206 and
$82,787 for the years ended December 31, 2003, 2004 and 2005, respectively.

Crammer Road LLC

     In July 2005, we entered into a second amended and restated  private equity
credit  agreement  with Crammer Road LLC, a beneficial  owner of more than 5% of
our common stock,  that superseded and replaced our amended and restated private
equity credit agreement dated as of September 30, 2004, which in turn,  replaced
a similar agreement dated as of July 25, 2002. The new credit agreement gives us
the right to sell to Crammer Road shares of our common stock having an aggregate
value of up to $50.0 million pursuant to puts made by us. The agreement requires
us to sell to Crammer  Road at least an  aggregate of $5.0 million of our common
stock at a 7% discount  from the market value of our common stock  determined at
the time of a put.  Through  February  28, 2006,  we sold a total of  18,756,756
shares of our common  stock to Crammer Road under this  agreement,  resulting in
gross proceeds of $133,700.

     Effective  July 19,  2005,  Crammer  Road  rescinded  its February 17, 2004
notice to convert 189 shares of our series H convertible preferred stock into an
aggregate of 52,487,414 shares of our common stock. In addition,

                                       44
<PAGE>

Crammer Road released us from all damages  resulting  from our failure to effect
the requested  conversion,  including liquidated damages incurred by us pursuant
to the terms of the  series H  preferred  stock.  As of August 1,  2005,  we had
incurred,  but not paid,  liquidated  damages of $6.3 million as a result of our
failure to effect the conversion.

Bear Stearns & Co., Inc.

     In July 2005,  we engaged  Bear,  Stearns & Co.,  Inc.,  to serve as Artera
Group's exclusive financial advisor with respect to its strategic  alternatives.
Robert N. Rose, a member of our board of directors since October 2005, currently
serves as a Senior Managing Director of Bear, Stearns & Co., where he is engaged
in institutional  sales and marketing for a wide range of financial products and
services.

ITEM 14.  PRINCIPAL ACCOUNTING FEES AND SERVICES

Audit and Non-Audit Fees

     The following  table sets forth the aggregate  fees billed or accrued by us
for the audit and other  services  provided  by Eisner  LLP for the years  ended
December 31, 2004 and 2005.

                                         Year Ended December 31,
                                      ------------------------------
                                          2004             2005
                                      --------------   -------------
            Audit Fees (a)              $ 347,000        $ 332,000
            Audit-Related Fees            -                -
            Tax Fees (b)                  55,000           40,000
            All Other Fees                -                -
                                      --------------   -------------
                 Total                  $ 402,000        $ 372,000
                                      ==============   =============
Notes:
-----
(a)  Represents fees billed and accrued for  professional  services  rendered in
     connection with the annual audit and quarterly  review of our  consolidated
     financial  statements  included  in our  annual  reports  on Form  10-K and
     quarterly  reports  on Form  10-Q  and in  connection  with our  filing  of
     registration statements with the SEC.

(b)  Represents  fees billed for  professional  services  rendered in connection
     with  federal  and  state tax  return  preparation  and other tax  matters.
     Includes  $3,250 in each of 2004 and 2005 allocated to Pro Tech, a publicly
     traded subsidiary included in our consolidated tax returns.

Audit  Committee  Policy  on  Pre-Approval  of Audit and  Permissible  Non-Audit
Services of Independent Registered Public Accountants

     Our audit  committee  has  pre-approved  all audit  services and  permitted
non-audit services provided by our independent registered public accountants and
the  compensation,  fees and terms for these  services.  The audit committee has
also  determined  not to adopt any  blanket  pre-approval  policy but instead to
require  that the audit  committee  pre-approve  the  compensation  and terms of
service  for  audit  services  provided  by the  independent  registered  public
accountants and any changes in terms and compensation  resulting from changes in
audit scope,  company  structure or other matters.  The audit committee has also
determined to require  pre-approval by the audit  committee of the  compensation
and terms of  service  for any  permitted  non-audit  services  provided  by the
independent  registered public  accountants.  Any proposed non-audit services in
excess  of  pre-approved  levels  require  further  pre-approval  by  the  audit
committee.  Our Chief Financial Officer reports regularly to the audit committee
on the services performed and fees incurred by the independent registered public
accountants for audit and permitted non-audit services during the prior quarter.

                                       45
<PAGE>

                                     PART IV

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES

(a)(1)  Financial Statements

The following financial statements are filed as part of this Annual Report:

<TABLE>
<CAPTION>

                                                                                          Page
                                                                                          -----
<S>                                                                                          <C>
  Report of Independent Registered Public Accounting                                       F-1
  Consolidated Balance Sheets as of December 31, 2004 and 2005                             F-2
  Consolidated Statements of Operations and Consolidated Statements of Comprehensive       F-3
    Loss for the years ended December 31, 2003, 2004 and 2005
  Consolidated Statements of Capital Deficit for the years ended December 31, 2003,        F-4
    2004 and 2005
  Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2004        F-5
    and 2005
  Notes to the Consolidated Financial Statements                                           F-6

(a)(2)   Financial Statement Schedules

The following financial statement schedule is filed as part of this Annual Report:

                                                                                          Page
                                                                                          ----
  Report of Independent Registered Public Accounting Firm on Schedule II                   F-57
  Schedule II.  Valuation and Qualifying Accounts                                          F-58
</TABLE>

All other  schedules  are omitted  because they are not required or the required
information is shown in the financial statements or notes thereto.

(a)(3)  Exhibits

The following  exhibits are filed herewith or are  incorporated  by reference to
exhibits previously filed with the SEC:

Exhibit
Number         Description of Exhibit
------         ----------------------

3.1(a)         Second Restated  Certificate of Incorporation of NCT Group,  Inc.
               (incorporated   herein  by  reference  to  Exhibit  3(a)  to  the
               registrant's   Pre-Effective  Amendment  No.  1  to  Registration
               Statement  on Form S-1  (Registration  No.  333-60574),  filed on
               September 5, 2001).

3.1(b)         Certificate  of  Amendment  of  Second  Restated  Certificate  of
               Incorporation  of  NCT  Group,  Inc.   (incorporated   herein  by
               reference to Exhibit 3.1 to the  registrant's  Current  Report on
               Form 8-K dated June 28, 2005 (File No. 0-18267)).

3.2            By-laws of NCT Group, Inc.  (incorporated  herein by reference to
               Exhibit 3(b) to the registrant's Pre-Effective Amendment No. 1 to
               Registration  Statement on Form S-1 (Registration No. 333-60574),
               filed on September 5, 2001).

3.3(a)         Certificate of  Designation,  Preferences  and Rights of Series H
               Convertible  Preferred  Stock of NCT  Group,  Inc.  (incorporated
               herein  by  reference   to  Exhibit  3(c)  of  the   registrant's
               Pre-effective  Amendment No. 5 to Registration  Statement on Form
               S-1 (Registration No. 333-60574) filed on August 9, 2002).

3.3(b)         Certificate   of  Amendment  of   Certificate   of   Designation,
               Preferences and Rights of Series H Convertible Preferred Stock of
               NCT Group, Inc. (incorporated herein by reference to Exhibit 3(a)
               of the registrant's Quarterly Report on Form 10-Q for the quarter
               ended March 31, 2003 (File No. 0-18267)).

3.4            Certificate of  Designation,  Preferences  and Rights of Series I
               Convertible  Preferred  Stock of NCT  Group,  Inc.  (incorporated
               herein by  reference to Exhibit 3.1 of the  registrant's  Current
               Report on Form 8-K dated March 16, 2005 (File No. 0-18267)).

                                       46
<PAGE>

10.1*          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  of  the
               registrant's Registration Statement on Form S-8 (Registration No.
               333-11213).

10.2*          NCT Group,  Inc.  2001 Stock and  Incentive  Plan (as amended and
               restated  as of  September  17,  2004)  (incorporated  herein  by
               reference to Exhibit 10.2 to the  registrant's  Annual  Report on
               Form  10-K  for the  year  ended  December  31,  2004  (File  No.
               0-18267).

10.3           Consulting Agreement, dated July 2, 2003, between NCT Group, Inc.
               and  SpringerRun,  Inc.  (incorporated  herein  by  reference  to
               Exhibit 10(az) to the registrant's  Quarterly Report on Form 10-Q
               for the quarter ended September 30, 2003 (File No. 0-18267)).

10.4(a)        Reseller  Agreement,  dated  September  1, 2003,  between  Artera
               Group,  Inc. and Spyder  Technologies  Group,  LLC  (incorporated
               herein  by  reference  to  Exhibit  10(ao)  of  the  registrant's
               Quarterly Report on Form 10-Q for the quarter ended September 30,
               2003 (File No. 0-18267)).

10.4(b)        Amendment  No. 1 to the  September  1, 2003  Reseller  Agreement,
               dated  August 1, 2004,  between  Artera  Group,  Inc.  and Spyder
               Technologies  Group,  LLC  (incorporated  by reference to Exhibit
               10(fg)2 of the  registrant's  Post-Effective  Amendment  No. 1 to
               Registration  Statement on Form S-1 (Registration No. 333-60574),
               filed on October 7, 2004).

10.5(a)        Master  Distributor  Agreement,  dated September 1, 2003, between
               Artera   Group,   Inc.  and  Spyder   Technologies   Group,   LLC
               (incorporated  herein  by  reference  to  Exhibit  10(ap)  of the
               registrant's  Quarterly Report on Form 10-Q for the quarter ended
               September 30, 2003 (File No. 0-18267)).

10.5(b)        Amendment  No. 1 to the  September  1,  2003  Master  Distributor
               Agreement,  dated August 1, 2004,  between Artera Group, Inc. and
               Spyder Technologies Group, LLC (incorporated  herein by reference
               to Exhibit 10(fg)1 of the registrant's  Post-Effective  Amendment
               No. 1 to  Registration  Statement on Form S-1  (Registration  No.
               333-60574), filed on October 7, 2004).

10.6(a)        Master  Distributor  Agreement,  dated  October 1, 2003,  between
               Artera   Group,   Inc.  and  Spyder   Technologies   Group,   LLC
               (incorporated  herein  by  reference  to  Exhibit  10(dl)  of the
               registrant's   Pre-Effective  Amendment  No.  9  to  Registration
               Statement  on Form S-1  (Registration  No.  333-60574),  filed on
               February 4, 2004).

10.6(b)        Amendment and Waiver to Master Distributor  Agreement (for Puerto
               Rico and The  Caribbean),  dated August 1, 2004,  between  Artera
               Group,  Inc. and Spyder  Technologies  Group,  LLC  (incorporated
               herein  by  reference  to  Exhibit  10(fg)3  of the  registrant's
               Post-Effective  Amendment No. 1 to Registration Statement on Form
               S-1 (Registration No. 333-60574), filed on October 7, 2004).

10.7           Finder Agreement dated August 1, 2004 between Artera Group,  Inc.
               and  Spyder  Technologies  Group,  LLC  (incorporated  herein  by
               reference to Exhibit  10(fg) of the  registrant's  Post-Effective
               Amendment   No.  1  to   Registration   Statement   on  Form  S-1
               (Registration No. 333-60574), filed on October 7, 2004).

10.8           Consulting Agreement, dated as of December 16, 2005, by and among
               NCT Group,  Inc.,  Artera  Group,  Inc.  and Spyder  Technologies
               Group, LLC.

10.9           Secured  Convertible  Note dated  December 22, 2004 issued by NCT
               Group, Inc. to Carole Salkind  (incorporated  herein by reference
               to Exhibit 10.01 of the  registrant's  Current Report on Form 8-K
               (File No. 0-18267), filed on December 22, 2004).

10.10          Secured  Convertible  Note dated  October  14, 2005 issued by NCT
               Group, Inc. to Carole Salkind  (incorporated  herein by reference
               to Exhibit 10.2 of the  registrant's  Current  Report on Form 8-K
               dated October 14, 2005 (File No. 0-18267)).

10.11(a)       Form of 12% Secured Convertible Note issued by NCT Group, Inc. to
               Carole Salkind.

                                       47
<PAGE>

10.11(b)       Schedule of 12% Secured  Convertible  Notes  issued by NCT Group,
               Inc. to Carole Salkind and outstanding as of February 28, 2006.

10.12(a)       Form of Secured  Convertible Note (new financings through October
               31,   2005)  issued  by  NCT  Group,   Inc.  to  Carole   Salkind
               (incorporated by reference to Exhibit 10.8(a) of the registrant's
               Annual  Report on Form 10-K for the year ended  December 31, 2004
               (File No. 0-18267)).

10.12(b)       Schedule of Secured  Convertible  Notes (new  financings  through
               October 31, 2005) issued by NCT Group, Inc. to Carole Salkind and
               outstanding as of October 31, 2005.

10.13(a)       Form of Secured  Convertible Note  (refinancings  through October
               31,   2005)  issued  by  NCT  Group,   Inc.  to  Carole   Salkind
               (incorporated by reference to Exhibit 10.9(a) of the registrant's
               Annual  Report on Form 10-K for the year ended  December 31, 2004
               (File No. 0-18267)).

10.13(b)       Schedule  of  Secured  Convertible  Notes  (refinancings  through
               October 31, 2005) issued by NCT Group, Inc. to Carole Salkind and
               outstanding as of October 31, 2005.

10.14(a)       Form of Secured  Convertible Note (new financings on November 15,
               2005 and  December 7, 2006)  issued by NCT Group,  Inc. to Carole
               Salkind  (incorporated  by  reference  to Exhibit  10.1(a) of the
               registrant's  Current  Report on Form 8-K dated  December 7, 2005
               (File No. 0-18267).

10.14(b)       Schedule of Secured Convertible Notes (new financings on November
               15,  2005 and  December  7, 2006)  issued by NCT Group,  Inc.  to
               Carole Salkind and outstanding as of December 7, 2005.

10.15(a)       Form of Secured  Convertible Note (refinancings after October 31,
               2005) issued by NCT Group,  Inc. to Carole Salkind  (incorporated
               by  reference  to  Exhibit  10.2(a) of the  registrant's  Current
               Report on Form 8-K dated December 7, 2005 (File No. 0-18267)).

10.15(b)       Schedule of Secured Convertible Notes (refinancings after October
               31,  2005)  issued  by NCT  Group,  Inc.  to Carole  Salkind  and
               outstanding as of February 28, 2006.

10.16(a)       Form of Secured  Convertible  Note (demand)  issued by NCT Group,
               Inc. to Carole  Salkind  (incorporated  by  reference  to Exhibit
               10.1(a)  of the  registrant's  Current  Report  on Form 8-K dated
               December 22, 2005 (File No. 0-18267).

10.16(b)       Schedule  of Secured  Convertible  Notes  (demand)  issued by NCT
               Group,  Inc. to Carole Salkind and outstanding as of February 28,
               2006.

10.17(a)       Form of Warrant (new financings  through October 31, 2005) issued
               by NCT Group,  Inc. to Carole Salkind  (incorporated by reference
               to Exhibit  10.10(a) of the  registrant's  Annual  Report on Form
               10-K for the year ended December 31, 2004 (File No. 0-18267)).

10.17(b)       Schedule of Warrants (new  financings  through  October 31, 2005)
               issued by NCT Group, Inc. to Carole Salkind and outstanding as of
               October 31, 2005.

10.18(a)       Form of Warrant (refinancings through October 31, 2005) issued by
               NCT Group,  Inc. to Carole Salkind  (incorporated by reference to
               Exhibit 10.11(a) of the  registrant's  Annual Report on Form 10-K
               for the year ended December 31, 2004 (File No. 0-18267)).

10.18 (b)      Schedule  of Warrants  (refinancings  through  October 31,  2005)
               issued by NCT Group, Inc. to Carole Salkind and outstanding as of
               October 31, 2005.

10.19(a)       Form of Warrant (new financings after October 31, 2005) issued by
               NCT Group,  Inc. to Carole Salkind  (incorporated by reference to
               Exhibit  10.3(a) of the  registrant's  Current Report on Form 8-K
               dated December 7, 2005 (File No. 0-18267)).

10.19(b)       Schedule of Warrants  (new  financings  after  October 31,  2005)
               issued by NCT Group, Inc. to Carole Salkind and outstanding as of
               February 28, 2006.

                                       48
<PAGE>

10.20(a)       Form of Warrant  (refinancings  after October 31, 2005) issued by
               NCT Group,  Inc. to Carole Salkind  (incorporated by reference to
               Exhibit  10.3(a) of the  registrant's  Current Report on Form 8-K
               dated December 7,2005 (File No. 0-18267)).

10.20(b)       Schedule of Warrants (refinancings after October 31, 2005) issued
               by NCT  Group,  Inc.  to Carole  Salkind  and  outstanding  as of
               February 28, 2006.

10.21(a)       Subscription   Agreement   between   NCT   Networks,   Inc.   and
               Subscribers:   Austost   Anstalt   Schaan;   Balmore  S.A.;  Amro
               International,  S.A.;  Nesher Ltd.;  Talbiya B. Investments Ltd.;
               and  The  Gross   Foundation,   Inc.;   dated   January  9,  2001
               (incorporated  herein  by  reference  to  Exhibit  10(ap)  of the
               registrant's   Pre-effective  Amendment  No.  3  to  Registration
               Statement  on Form S-1  (Registration  No.  333-47084),  filed on
               January 26, 2001).

10.21(b)       Form of Convertible  Note of NCT Networks,  Inc. dated January 9,
               2001  (incorporated  herein by reference to Exhibit 10(aq) of the
               registrant's   Pre-effective  Amendment  No.  3  to  Registration
               Statement  on Form S-1  (Registration  No.  333-47084),  filed on
               January 26, 2001).

10.21(c)       Exchange Rights Agreement among NCT Group,  Inc. and Subscribers,
               dated  January  9,  2001  (incorporated  herein by  reference  to
               Exhibit 10(ar) of the registrant's  Pre-effective Amendment No. 3
               to  Registration   Statement  on  Form  S-1   (Registration   No.
               333-47084), filed on January 26, 2001).

10.22(a)       Subscription Agreement,  dated April 4, 2001, among Artera Group,
               Inc., Alpha Capital  Aktiengesellschaft  and Amro  International,
               S.A.  (incorporated  herein by reference to Exhibit 10(bj) of the
               registrant's Registration Statement on Form S-1 (Registration No.
               333-60574), filed on May 9, 2001).

10.22(b)       Form  of  Note  dated  April  4,  2001  (incorporated  herein  by
               reference  to  Exhibit  10(bk) of the  registrant's  Registration
               Statement on Form S-1 (Registration No. 333-60574),  filed on May
               9, 2001).

10.22(c)       Exchange  Rights  Agreement by and among NCT Group,  Inc. and the
               Holders  identified  on Schedule A thereto,  dated as of April 4,
               2001  (incorporated  herein by reference to Exhibit  10(ab)(2) of
               the  registrant's  Pre-effective  Amendment No. 1 to Registration
               Statement  on Form S-1  (Registration  No.  333-60574),  filed on
               September 5, 2001).

10.23(a)       Subscription  Agreement among Artera Group, Inc. and Subscribers:
               Alpha Capital  Aktiengesellschaft  and Amro International,  S.A.,
               dated as of May 25, 2001  (incorporated  herein by  reference  to
               Exhibit 10(aj) of the registrant's  Quarterly Report on Form 10-Q
               for the quarter ended June 30, 2001 (File No. 0-18267)).

10.23(b)       Form of Convertible Note dated May 25, 2001 (incorporated  herein
               by reference to Exhibit  10(aj)(1) of the registrant's  Quarterly
               Report on Form 10-Q for the quarter ended June 30, 2001 (File No.
               0-18267)).

10.23(c)       Exchange  Rights  Agreement by and among NCT Group,  Inc. and the
               Holders  identified  on  Schedule A thereto,  dated as of May 25,
               2001  (incorporated  herein by reference to Exhibit  10(aj)(2) of
               the  registrant's  Quarterly  Report on Form 10-Q for the quarter
               ended June 30, 2001 (File No. 0-18267)).

10.24(a)       Subscription  Agreement among Artera Group, Inc. and Subscribers:
               Alpha Capital Aktiengesellschaft;  Amro International,  S.A.; The
               Gross  Foundation,  Inc.; Leval Trading,  Inc.;  Nesher Ltd.; and
               Talbiya  B.   Investments   Ltd.,  dated  as  of  June  29,  2001
               (incorporated  herein  by  reference  to  Exhibit  10(ak)  of the
               registrant's  Quarterly Report on Form 10-Q for the quarter ended
               June 30, 2001 (File No. 0-18267)).

10.24(b)       Form of Convertible Note dated June 29, 2001 (incorporated herein
               by reference to Exhibit  10(ak)(1) of the registrant's  Quarterly
               Report on Form 10-Q for the quarter ended June 30, 2001 (File No.
               0-18267)).

                                       49
<PAGE>

10.24(c)       Exchange Rights  Agreement  (Notes) by and among NCT Group,  Inc.
               and Holders  identified  on Schedule A thereto,  dated as of June
               29, 2001  (incorporated  herein by reference to Exhibit 10(ak)(2)
               of the registrant's Quarterly Report on Form 10-Q for the quarter
               ended June 30, 2001 (File No. 0-18267)).

10.25          Exchange  Rights  Agreement  (Preferred)  by and among NCT Group,
               Inc. and Austost Anstalt Schaan; Amro International, S.A.; Nesher
               Ltd.;  Leval  Trading,  Inc.;  ICT N.V.;  Balmore S.A.; The Gross
               Foundation,  Inc.; Talbiya B. Investments Ltd.; United Securities
               Services, Inc.; and Libra Finance S.A., dated as of June 29, 2001
               (incorporated  by reference to Exhibit 10(al) of the registrant's
               Quarterly Report on Form 10-Q for the quarter ended June 30, 2001
               (File No. 0-18267)).

10.26          Letter,  dated  November  9,  2001,  to each  of the  Subscribers
               identified on Schedule A thereto (being the subscribers in Artera
               Group,  Inc.  convertible  notes dated January 9, 2001,  April 4,
               2001,  May 25,  2001,  and  June  29,  2001)  amending  terms  of
               conversion of these  convertible  notes  (incorporated  herein by
               reference  to Exhibit  10(ar) of the  registrant's  Pre-effective
               Amendment   No.  3  to   Registration   Statement   on  Form  S-1
               (Registration No. 333-60574), filed on December 21, 2001).

10.27(a)       Subscription  Agreement,  dated January 10, 2002,  between Artera
               Group,  Inc. and Alpha Capital  Aktiengesellschaft  (incorporated
               herein  by  reference  to  Exhibit  10(a)  of  the   registrant's
               Quarterly  Report on Form 10-Q for the  quarter  ended  March 31,
               2002 (File No. 0-18267)).

10.27(b)       Security Agreement, dated January 10, 2002, between Artera Group,
               Inc. and Alpha Capital Aktiengesellschaft (incorporated herein by
               reference to Exhibit 10(b) of the  registrant's  Quarterly Report
               on Form  10-Q for the  quarter  ended  March 31,  2002  (File No.
               0-18267)).

10.27(c)       Convertible  Note in the  principal  amount  of  $550,000,  dated
               January 10, 2002,  issued by Artera Group,  Inc. to Alpha Capital
               Aktiengesellschaft  (incorporated  herein by reference to Exhibit
               10(c) of the  registrant's  Quarterly Report on Form 10-Q for the
               quarter ended March 31, 2002 (File No. 0-18267)).

10.28(a)       Subscription Agreement,  dated March 11, 2002, between NCT Group,
               Inc. and Alpha Capital Aktiengesellschaft (incorporated herein by
               reference to Exhibit 10(f) of the  registrant's  Quarterly Report
               on Form  10-Q for the  quarter  ended  March 31,  2002  (File No.
               0-18267)).

10.28(b)       Convertible Note in the principal amount of $400,000, dated March
               11,   2002,   issued  by  NCT  Group,   Inc.  to  Alpha   Capital
               Aktiengesellschaft  (incorporated  herein by reference to Exhibit
               10(h) of the  registrant's  Quarterly Report on Form 10-Q for the
               quarter ended March 31, 2002 (File No. 0-18267)).

10.29(a)       Subscription Agreement,  dated April 22, 2003, between NCT Group,
               Inc. and Alpha Capital Aktiengesellschaft (incorporated herein by
               reference to Exhibit 10(u) of the  registrant's  Quarterly Report
               on Form  10-Q for the  quarter  ended  June 30,  2003  (File  No.
               0-18267)).

10.29(b)       Convertible Note in the principal amount of $235,000, dated April
               22,   2003,   issued  by  NCT  Group,   Inc.  to  Alpha   Capital
               Aktiengesellschaft  (incorporated  herein by reference to Exhibit
               10(t) of the  registrant's  Quarterly Report on Form 10-Q for the
               quarter ended June 30, 2003 (File No. 0-18267)).

10.30(a)       Subscription  Agreement,  dated July 23, 2004, between NCT Group,
               Inc. and Alpha  Capital  Aktiengesellschaft  and Longview Fund LP
               (incorporated  herein  by  reference  to  Exhibit  10(ey)  of the
               registrant's  Pre-Effective  Amendment  No.  12  to  Registration
               Statement on Form S-1 (Registration No. 333-60574), filed on July
               28, 2004).

10.30(b)       Security Agreement,  dated July 23, 2004, between NCT Group, Inc.
               and  Alpha  Capital   Aktiengesellschaft  and  Longview  Fund  LP
               (incorporated  herein  by  reference  to  Exhibit  10(ez)  of the
               registrant's  Pre-Effective  Amendment  No.  12  to  Registration
               Statement on Form S-1 (Registration No. 333-60574), filed on July
               28, 2004).

                                       50
<PAGE>

10.30(c)       Secured  Convertible Note in principal amount of $400,000,  dated
               July 23,  2004,  issued  by NCT  Group,  Inc.  to  Alpha  Capital
               Aktiengesellschaft  (incorporated  herein by reference to Exhibit
               10(fa)  of the  registrant's  Pre-Effective  Amendment  No. 12 to
               Registration  Statement on Form S-1 (Registration No. 333-60574),
               filed on July 28, 2004).

10.30(d)       Secured  Convertible Note in principal amount of $500,000,  dated
               July 23,  2004,  issued by NCT Group,  Inc. to  Longview  Fund LP
               (incorporated  herein  by  reference  to  Exhibit  10(fb)  of the
               registrant's  Pre-Effective  Amendment  No.  12  to  Registration
               Statement on Form S-1 (Registration No. 333-60574), filed on July
               28, 2004).

10.30(e)       Convertible Note in principal  amount of $40,000,  dated July 23,
               2004,   issued  by  NCT  Group,   Inc.   to  Libra   Finance  S.A
               (incorporated  herein  by  reference  to  Exhibit  10(fc)  of the
               registrant's  Pre-Effective  Amendment  No.  12  to  Registration
               Statement on Form S-1 (Registration No. 333-60574), filed on July
               28, 2004).

10.30(f)       Convertible Note in principal  amount of $50,000,  dated July 23,
               2004,  issued by NCT Group,  Inc. to Bi-Coastal  Consulting Corp.
               (incorporated  by reference to Exhibit 10(fd) of the registrant's
               Pre-Effective  Amendment No. 12 to Registration Statement on Form
               S-1 (Registration No. 333-60574), filed on July 28, 2004).

10.31          Consulting Agreement, dated as of January 7, 2005, by and between
               NCT  Group,  Inc.  and  Morton  Salkind  (incorporated  herein by
               reference to Exhibit 10.5 to the registrant's Quarterly Report on
               Form  10-Q  for the  quarter  ended  March  31,  2005  (File  No.
               0-18267).

10.32(a)       Form of Preferred  Stock  Purchase  Agreement  between NCT Group,
               Inc. and certain NCT Group, Inc. executive officers (incorporated
               herein  by  reference  to  Exhibit  10.1(a)  to the  registrant's
               Current  Report  on Form 8-K  dated  March  16,  2005  (File  No.
               0-18267)).

10.32(b)       Schedule  of  Purchasers  (incorporated  herein by  reference  to
               Exhibit  10.1(b) to the  registrant's  Current Report on Form 8-K
               dated March 16, 2005 (File No. 0-18267)).

10.33(a)       Second  Amended and Restated  Private  Equity  Credit  Agreement,
               dated as of July 13,  2005,  by and between NCT Group,  Inc.  and
               Crammer  Road LLC  (incorporated  herein by  reference to Exhibit
               10.1 to the  registrant's  Current  Report on Form 8-K dated July
               13, 2005 (File No. 0-18267)).

10.33(b)       Registration Rights Agreement,  dated as of July 13, 2005, by and
               between NCT Group, Inc. and Crammer Road LLC (incorporated herein
               by reference to Exhibit 10.2 to the  registrant's  Current Report
               on Form 8-K dated July 13, 2005 (File No. 0-18267)).

14             NCT Group,  Inc. Code of Ethics for the CEO, CFO and Other Senior
               Financial Officers  (incorporated  herein by reference to Exhibit
               14 of the  registrant's  Annual  Report on Form 10-K for the year
               ended December 31, 2003 (File No. 0-18267)).

21             Subsidiaries of NCT Group, Inc.

23             Consent of Eisner LLP.

31.1           Certification  of  Chief  Executive   Officer  pursuant  to  Rule
               13a-14(a) under the Securities Exchange Act of 1934.

31.2           Certification of Chief Financial  Officer pursuant Rule 13a-14(a)
               under the Securities Exchange Act of 1934.

32.1           Certification  of  Chief  Executive   Officer  pursuant  to  Rule
               13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C.
               Section  1350,  as  adopted   pursuant  to  Section  906  of  the
               Sarbanes-Oxley Act of 2002.

* Management contract or compensation plan or arrangement.

                                       51
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                     CONSOLIDATED FINANCIAL STATEMENT INDEX

<TABLE>
<CAPTION>

                                                                                     Page
                                                                                     ----
<S>                                                                                     <C>
Report of Independent Registered Public Accounting Firm                               F-1

Consolidated Balance Sheets as of December 31, 2004 (restated) and 2005               F-2

Consolidated Statements of Operations and Consolidated Statements of                  F-3
  Comprehensive Loss for the  years ended December 31, 2003 (restated),
  2004 (restated) and 2005

Consolidated Statements of Capital Deficit for the years ended December 31, 2003      F-4
  (restated), 2004 (restated) and 2005

Consolidated Statements of Cash Flows for the years ended December 31, 2003           F-5
  (restated), 2004 (restated) and 2005

Notes to the Consolidated Financial Statements                                        F-6

Report of Independent Registered Public Accounting Firm on Schedule II                F-57

Schedule II - Valuation and Qualifying Accounts                                       F-58
</TABLE>

                                       52
<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders of
NCT Group, Inc.


We have audited the accompanying  consolidated balance sheets of NCT Group, Inc.
and  subsidiaries  (the  "Company")  as of December  31, 2004 and 2005,  and the
related  consolidated  statements of  operations,  comprehensive  loss,  capital
deficit and cash flows for each of the years ended  December 31, 2003,  2004 and
2005.  These  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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

In our opinion, the financial statements enumerated above present fairly, in all
material  respects,  the consolidated  financial position of NCT Group, Inc. and
subsidiaries  as of December 31, 2004 and 2005 and the  consolidated  results of
their operations and their  consolidated  cash flows for each of the years ended
December 31, 2003,  2004 and 2005 in  conformity  with U.S.  generally  accepted
accounting principles.

As discussed more fully in Note 2, the consolidated  financial  statements as of
and for the year ended  December 31, 2004 have been restated to reflect  certain
derivative  instruments  as  liabilities  measured at fair  market  value and to
recognize changes in their fair value in net loss.

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



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

New York, New York
March 3, 2006

With respect to last paragraph of Note 13
March 23, 2006

With respect to Note 26
March 24, 2006

                                      F-1
<PAGE>

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

<TABLE>
<CAPTION>

                                                                                        (In thousands of dollars, except share data)
                                                                                                           December 31,
                                                                                              --------------------------------------
                                                                                                  Restated
                                                                                                    2004                 2005
                                                                                              -----------------    -----------------
<S>                                                                                           <C>                  <C>
ASSETS
Current assets:
 Cash and cash equivalents                                                                    $        1,359       $          451
 Investment in available-for-sale marketable securities (Note 4)                                          24                   20
 Accounts receivable, net (Note 5)                                                                       528                  640
 Inventories, net  (Note 6)                                                                              364                  253
 Other current assets (includes $127 and $98, respectively, due from officers) (Note 8)                  248                  181
                                                                                              -----------------    -----------------
           Total current assets                                                                        2,523                1,545

Property and equipment, net (Note 7)                                                                     470                  849
Goodwill (Note 2)                                                                                      1,252                1,252
Patent rights and other intangibles, net (Note 2)                                                      1,089                1,021
Other assets  (Note 8)                                                                                   120                   53
                                                                                              -----------------    -----------------
                                                                                              $        5,454       $        4,720
                                                                                              =================    =================
LIABILITIES AND CAPITAL DEFICIT
Current liabilities:
 Accounts payable                                                                             $        1,909       $        3,095
 Accrued expenses-related parties (Note 9)                                                             7,331                3,649
 Accrued expenses-other (Note 9)                                                                       9,937               11,811
 Notes payable (Note 10)                                                                                 603                  576
 Stockholder convertible notes (Notes 11 and 20)                                                      37,140               73,111
 Current maturities of convertible notes (Note 11)                                                     4,513                4,884
 Deferred revenue (Note 12)                                                                              885                  350
 Shares of subsidiary subject to exchange into a variable number of shares (Note 13)                     709                  656
 Preferred stock subject to conversion into a variable number of shares                               25,690               25,157
 Derivative liabilities                                                                               30,705                7,965
 Other current liabilities (Note 14)                                                                   6,990                7,098
                                                                                              -----------------    -----------------
           Total current liabilities                                                                 126,412              138,352
                                                                                              -----------------    -----------------

Long-term liabilities:
 Stockholder convertible notes (Note 11)                                                               5,000                5,000
 Other liabilities (Note 14)                                                                              63                   27
                                                                                              -----------------    -----------------
           Total long-term liabilities                                                                 5,063                5,027
                                                                                              -----------------    -----------------

Minority interest in consolidated subsidiaries                                                         8,645                8,655
                                                                                              -----------------    -----------------

Capital deficit (Note 15):
Preferred stock, $.10 par value, 10,000,000 shares authorized:
  Convertible series I preferred stock, zero and 510 shares issued and
  outstanding, respectively (liquidation amount zero and $510,000, respectively)                           -                  510
Common stock, $.01 par value, authorized 645,000,000 and 5,622,000,000 shares,
  respectively issued and outstanding, 641,970,392 and 838,983,565 shares, respectively                6,420                8,389
Additional paid-in capital                                                                           213,120              238,537
Accumulated deficit                                                                                 (354,292)            (395,030)
Accumulated other comprehensive income                                                                    86                  280
Common shares payable, 3,029,608 and zero shares, respectively                                             -                    -
                                                                                              -----------------    -----------------
           Total capital deficit                                                                    (134,666)            (147,314)
                                                                                              -----------------    -----------------
                                                                                              $        5,454       $        4,720
                                                                                              =================    =================

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

                                      F-2
<PAGE>

<TABLE>
<CAPTION>

NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Note 2)
                                                                                 (In thousands of dollars, except per share amounts)
                                                                                           For the Years Ended December 31,
                                                                                ----------------------------------------------------
                                                                                    Restated            Restated
REVENUE:                                                                              2003                2004             2005
                                                                                 -------------       -------------     -------------
<S>                                                                              <C>                 <C>               <C>
   Technology licensing fees and royalties                                       $     3,013         $     3,422       $     2,201
   Product sales, net                                                                  1,708               1,902             2,003
   Other revenue                                                                          49                   4                26
                                                                                 -------------       -------------     -------------
          Total revenue                                                                4,770               5,328             4,230
                                                                                 -------------       -------------     -------------

COSTS, EXPENSES AND OTHER INCOME:
   Cost of product sales                                                                 787               1,089             1,060
   Cost of other revenue                                                                  60                   3                 -
   Selling, general and administrative (includes $8,514, $173 and $2
       stockholder consulting expenses, respectively) (Note 20)                       17,060               9,452             7,284
   Research and development                                                            2,984               3,600             4,034
   Provision for doubtful accounts                                                         8                 147                56
   Impairment of goodwill, net (Note 2)                                                    -               5,932                 -
                                                                                 -------------       -------------     -------------
          Total operating costs and expenses                                          20,899              20,223             12,434
Other items:
   Other (income) expense, net (includes expenses to stockholder of $2,103
      $6,752 and $9,522, respectively) (Notes 17 and 20)                                (909)            (12,009)          (35,595)
   Interest expense (includes expenses to stockholder of $13,820
      $53,765 and $66,081, respectively)                                              16,456              55,693            67,929
   Interest income                                                                       (36)                (17)              (14)
                                                                                 -------------       -------------     -------------
          Total costs and expenses                                                    36,410              63,890            44,754
Loss attributable to minority interest                                                     -                   -                59
                                                                                 -------------       -------------     -------------
Loss from continuing operations                                                      (31,640)            (58,562)          (40,465)
Loss from discontinued operations (Note 3)                                            (1,070)               (489)             (273)
                                                                                 -------------       -------------     -------------
NET LOSS                                                                         $   (32,710)        $   (59,051)      $   (40,738)

Less:  Preferred stock dividends (Note 15)                                               342                 332               325
                                                                                 -------------       -------------     -------------
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS                                     $   (33,052)        $   (59,383)      $   (41,063)
                                                                                 =============       =============     =============

Net loss per share attributable to common stockholders:
Net loss attributable to common stockholders from continuing operations          $     (0.06)        $     (0.09)      $     (0.06)
Net loss from discontinued operations                                                      -                   -                 -
                                                                                 -------------       -------------     -------------
   Basic and diluted                                                             $     (0.06)        $     (0.09)      $     (0.06)
                                                                                 =============       =============     =============

Weighted average common shares outstanding -
   Basic and diluted                                                                 563,543             645,000           693,521
                                                                                 =============       =============     =============


NCT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Note 2)
                                                                                              (In thousands of dollars)
                                                                                           For the Years Ended December 31,
                                                                                 ---------------------------------------------------
                                                                                     2003                2004               2005
                                                                                 -------------       -------------     -------------

NET LOSS                                                                         $   (32,710)        $   (59,051)      $   (40,738)
Other comprehensive income (loss):
   Currency translation adjustment                                                      (601)              1,218               200
   Adjustment of unrealized gain or loss / (unrealized loss) on
      available-for-sale marketable securities                                           (53)                 38                (4)
                                                                                 -------------       -------------     -------------
COMPREHENSIVE LOSS                                                               $   (33,364)        $   (57,795)      $   (40,542)
                                                                                 =============       =============     =============

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

                                      F-3
<PAGE>

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

<TABLE>
<CAPTION>

                                                                                 Convertible
                                                                                Preferred Stock
                                                                                ---------------
                                                                                    Series I         Common Stock      Additional
                                                                                -------------------------------------    Paid-in
                                                                                Shares    Amount    Shares    Amount     Capital
                                                                                -------   -------  --------  --------  -------------
<S>                 <C> <C>                                                               <C>       <C>      <C>       <C>
Balance at December 31, 2002 restated                                                -    $    -    483,474  $  4,835  $ 171,454
Shares issued upon conversion of preferred stock                                     -         -     23,058       231        554
Dividends and amortization of discounts on beneficial conversion
    feature to subsidiary preferred shareholders                                     -         -          -         -       (343)
Reversal of redemption adjustment on subsidiary preferred                            -         -          -         -        125
Exchange of subsidiary convertible debt for common stock                             -         -     42,093       421      1,333
Shares issued for settlement obligations/prepayments                                 -         -     93,345       933      5,488
Beneficial conversion feature on convertible debt                                    -         -          -         -      7,327
Embedded conversion option                                                           -         -          -         -     (3,369)
Net loss                                                                             -         -          -         -          -
Currency translation adjustment                                                      -         -          -         -          -
Change in valuation of available-for-sale marketable securities                      -         -          -         -          -
Adjustment of monetary value on subsidiary shares - adoption of SFAS 150             -         -          -         -       (138)
Expenses related to prior sale of stock                                              -         -          -         -        (14)
                                                                                -------   -------  --------  --------  -------------
Balance at December 31, 2003 restated                                                -    $    -    641,970  $  6,420  $ 182,417
Sale of series H preferred stock, net of issuance expenses                           -         -          -         -         25
Dividends and amortization of discounts on beneficial conversion
    feature to subsidiary preferred shareholders                                     -         -          -         -       (333)
Beneficial conversion feature on convertible debt                                    -         -          -         -     30,884
Net loss                                                                             -         -          -         -          -
Currency translation adjustment                                                      -         -          -         -          -
Change in valuation of available-for-sale marketable securities                      -         -          -         -          -
Other                                                                                -         -          -         -        127
                                                                                -------   -------  --------  --------  -------------
Balance at December 31, 2004 restated                                                -    $    -    641,970  $  6,420  $ 213,120
Conversion of debt                                                                   -         -     13,370       134        (70)
Issuance of NCT common stock under private equity agreement                          -         -     18,757       188        (54)(b)
Stock award to employee                                                              -         -        120         1          -
Issuance of series I preferred stock                                                 1       976          -         -        155
Shares issued upon conversion of preferred stock                                     -      (466)   164,766     1,648        (90)(a)
Dividends and amortization of discounts on beneficial conversion
    feature to subsidiary preferred shareholders                                     -         -          -         -       (325)
Beneficial conversion feature on convertible debt                                    -         -          -         -     25,865
Net loss                                                                             -         -          -         -          -
Currency translation adjustment                                                      -         -          -         -          -
Change in valuation of available-for-sale marketable securities                      -         -          -         -          -
Other                                                                                -         -          1        (2)       (64)
                                                                                -------   ------- ---------  --------  -------------
Balance at December 31, 2005                                                         1    $  510    838,984  $  8,389  $ 238,537
                                                                                =======   =======  ========  ========  =============

<PAGE>

                                                                                               Accumulated
                                                                                   Accumu-        Other
                                                                                   lated      Comprehensive    Payable
                                                                                  Deficit         Income        Shares      Total
                                                                                -----------   -------------  ----------- -----------
Balance at December 31, 2002 restated                                           $ (262,531)   $     (516)    $    2,296  $  (84,462)
Shares issued upon conversion of preferred stock                                         -             -              -         785
Dividends and amortization of discounts on beneficial conversion
    feature to subsidiary preferred shareholders                                         -             -              -        (343)
Reversal of redemption adjustment on subsidiary preferred                                -             -              -         125
Exchange of subsidiary convertible debt for common stock                                 -             -              -       1,754
Shares issued for settlement obligations/prepayments                                     -             -         (2,296)      4,125
Beneficial conversion feature on convertible debt                                        -             -              -       7,327
Embedded conversion option                                                               -             -              -      (3,369)
Net loss                                                                           (32,710)            -              -     (32,710)
Currency translation adjustment                                                          -          (601)             -        (601)
Change in valuation of available-for-sale marketable securities                          -           (53)             -         (53)
Adjustment of monetary value on subsidiary shares - adoption of SFAS 150                 -             -              -        (138)
Expenses related to prior sale of stock                                                  -             -              -         (14)
                                                                                -----------   -------------  ----------- -----------
Balance at December 31, 2003 restated                                           $ (295,241)   $   (1,170)    $        -  $ (107,574)
Sale of series H preferred stock, net of issuance expenses                               -             -              -          25
Dividends and amortization of discounts on beneficial conversion
    feature to subsidiary preferred shareholders                                         -             -              -        (333)
Beneficial conversion feature on convertible debt                                        -             -              -      30,884
Net loss                                                                           (59,051)            -              -     (59,051)
Currency translation adjustment                                                          -         1,218              -       1,218
Change in valuation of available-for-sale marketable securities                          -            38              -          38
Other                                                                                    -             -              -         127
                                                                                -----------   -------------  ----------- -----------
Balance at December 31, 2004 restated                                           $ (354,292)   $       86     $        -  $ (134,666)
Conversion of debt                                                                       -             -              -          64
Issuance of NCT common stock under private equity agreement                              -             -              -         134
Stock award to employee                                                                  -             -              -           1
Issuance of series I preferred stock                                                     -             -              -       1,131
Shares issued upon conversion of preferred stock                                         -             -              -       1,092
Dividends and amortization of discounts on beneficial conversion
    feature to subsidiary preferred shareholders                                         -             -              -        (325)
Beneficial conversion feature on convertible debt                                        -             -              -      25,865
Net loss                                                                           (40,738)            -              -     (40,738)
Currency translation adjustment                                                          -           198              -         198
Change in valuation of available-for-sale marketable securities                          -            (4)             -          (4)
Other                                                                                    -             -              -         (66)
                                                                                -----------   -------------  ----------- -----------
Balance at December 31, 2005                                                    $ (395,030)   $      280     $        -  $ (147,314)
                                                                                ===========   =============  =========== ===========

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

Footnotes:
---------
(a)  Includes  $(75,000)  representing  the  difference  between  the  aggregate
     conversion price of the preferred  shares,  which was based on a formula in
     the  certificate of designation of the preferred  stock,  and the aggregate
     par value of the shares of common stock issued upon conversion.
(b)  Represents the differences  between the aggregate sales price of the shares
     sold,  which  was based on the fair  market  value of the  shares,  and the
     aggregate par value.

                                      F-4
<PAGE>

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

<TABLE>
<CAPTION>

                                                                                               (In thousands of dollars)
                                                                                           For the Years Ended December 31,
                                                                                        --------------------------------------
                                                                                          Restated      Restated
                                                                                            2003          2004         2005
                                                                                        -----------   -----------  -----------
<S>                                                                                     <C>           <C>          <C>
Cash flows from operating activities:
  Net loss                                                                              $ (32,710)    $ (59,051)   $ (40,738)
  Adjustments to reconcile net loss to net cash used in operating activities:
    Depreciation and amortization                                                             724           383          408
    Common stock, warrants and options issued as consideration for:
       Compensation and operating expenses (includes $8,349, zero
       and zero, respectively, stockholder consulting)                                      8,429           216           22
    Provision for inventory                                                                  (122)           59         (141)
    Provision for doubtful accounts and uncollectible amounts                                  21           118           (3)
    Loss (gain) on disposition of fixed assets                                                 33            (1)         171
    (Gain) loss on settlement of lawsuit                                                   (4,888)        3,625            -
    Gain on dissolution of Artera International                                                 -        (4,567)           -
    Finance costs associated with non-registration of common shares                         2,207           711          819
    Finance costs associated with non-conversion or exchange of common shares                   -            41          (41)
    Preferred stock dividends as interest                                                     720           718          710
    Default penalty on notes (with a stockholder)                                           2,103         6,752        9,522
    Interest converted to principal (with a stockholder)                                    1,933         3,433        4,372
    Amortization of discounts on notes (includes $6,415, $25,528 and $28,241,
      respectively, with a stockholder)                                                     7,048        25,579       28,354
    Amortization of beneficial conversion feature on convertible notes (includes
      $5,463, $24,610 and $31,840, respectively, with a stockholder) (Note 11)              5,623        24,741       32,113
    Impairment of goodwill, net (Note 2)                                                        -         5,932            -
    Issuance of convertible note of subsidiary for placement fees                              40             -            -
    Realized loss on available-for-sale securities (Note 4)                                     -            77            -
    Realized loss on fair value of warrant (Note 4)                                             1             -            -
    Settlement of debt                                                                       (231)            -            -
    Loss attributable to minority interest                                                      -             -          (59)
    Change in fair value of derivative liabilities                                         (1,593)      (23,615)     (42,460)
    Changes in operating assets and liabilities, net of acquisitions:
       Increase in accounts receivable                                                        (31)         (286)        (109)
       Decrease in inventories                                                                235            85          252
       Decrease in other assets                                                               210            66          135
       Increase (decrease) in accounts payable and accrued expenses                         2,070         7,547         (752)
       Decrease in other liabilities and deferred revenue                                  (2,154)       (2,124)        (427)
                                                                                        -----------   -----------  -----------
    Net cash used in operating activities                                               $ (10,332)    $  (9,561)   $  (7,852)
                                                                                        -----------   -----------  -----------
Cash flows from investing activities:
  Capital expenditures                                                                  $    (150)    $     (79)   $    (887)
  Proceeds from sale of equipment                                                               -             -           20
                                                                                        -----------   -----------  -----------
    Net cash used in investing activities                                               $    (150)    $     (79)   $    (867)
                                                                                        -----------   -----------  -----------
Cash flows from financing activities:
  Proceeds from:
    Issuance of stockholder convertible notes, net (Notes 11 and 20)                    $  10,440     $   9,110    $   7,561
    Issuance of convertible notes and notes payable, net (Notes 10 and 11)                    590           873            -
    Sale of common stock                                                                        -             -          134
    Repayment of notes                                                                       (322)         (107)         (81)
                                                                                        -----------   -----------  -----------
    Net cash provided by financing activities                                           $  10,708     $   9,876    $   7,614
                                                                                        -----------   -----------  -----------
Effect of exchange rate changes on cash                                                 $     (44)    $     135    $     197
                                                                                        -----------   -----------  -----------
Net increase (decrease) in cash and cash equivalents                                          182           371         (908)
Cash and cash equivalents - beginning of year                                                 806           988        1,359
                                                                                        -----------   -----------  -----------
Cash and cash equivalents - end of year                                                 $     988     $   1,359    $     451
                                                                                        ===========   ===========  ===========

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

                                      F-5
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


1.   Background:

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

     We have has experienced  substantial net losses since our inception,  which
cumulatively amounted to $395.0 million through December 31, 2005. Cash and cash
equivalents  amounted to $0.5 million at December  31,  2005. A working  capital
deficit of $136.8 million existed at December 31, 2005. At December 31, 2005, we
were in default of $0.5  million of our notes  payable  and $5.7  million of our
convertible  notes. We replaced $0.6 million of the convertible notes in default
in January 2006 by issuing a new note. Our management  believes that  internally
generated  funds are  currently  insufficient  to meet our operating and capital
requirements.  These  funds  include  available  cash and cash  equivalents  and
revenue derived from technology  licensing fees and royalties and product sales.
Through the issuance of convertible debt,  convertible preferred stock, options,
warrants and other  securities,  we have made  commitments  to reserve and issue
shares of our common stock that exceed the number of shares we are authorized to
issue under our certificate of incorporation. Our ability to continue as a going
concern is substantially dependent upon our revenue sources and future levels of
funding, which are currently uncertain.  If we are unable to generate sufficient
revenue to sustain our current level of  operations  and to execute our business
plan, we will need to obtain additional  financing to maintain our current level
of operations.  We are attempting to obtain  additional  working capital through
debt and equity financings (see Note 26). However, we can give no assurance that
additional  financing will be available to us on acceptable terms or at all. The
failure  to obtain  any  necessary  additional  financing  would have a material
adverse effect on us, including causing a substantial  reduction in the level of
our operations.  These reductions, in turn, could have a material adverse effect
on our relationships with our licensees, customers and suppliers.

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

     The  accompanying  consolidated  financial  statements  have been  prepared
assuming that we will continue as a going concern, which contemplates continuity
of  operations,  realization  of assets and  satisfaction  of liabilities in the
ordinary  course of  business.  Our ability to  continue  as a going  concern is
dependent  upon,  among  other  things,  the  achievement  of future  profitable
operations and the ability to generate  sufficient cash from operations,  equity
and/or debt  financing and other funding  sources to meet our  obligations.  The
uncertainties  described in the preceding  paragraphs raise substantial doubt at
December  31,  2005  about our  ability  to  continue  as a going  concern.  The
accompanying  consolidated  financial  statements do not include any adjustments
relating to the  recoverability  and  classification  of the carrying  amount of
recorded  assets or the  amount and  classification  of  liabilities  that might
result should we be unable to continue as a going concern.

2.   Summary of Significant Accounting Policies:

Basis of Presentation:

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

                                      F-6
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


our 83% owned  subsidiary,  borne by NCT for the years ended  December 31, 2003,
2004  and  2005  amounted  to $0.2  million,  $0.2  million  and  $0.3  million,
respectively.  Future earnings of our  majority-owned  subsidiaries  which would
otherwise be attributable to minority shareholders'  interests will be allocated
to minority  shareholders  only after future  earnings are sufficient to recover
the cumulative  losses absorbed by NCT in excess of NCT's  allocable  percentage
($2.7 million at December 31,  2005).  Investments  in less than  majority-owned
affiliates over which we exercise significant  influence are accounted for under
the equity method. All other investments in affiliates are carried at cost.

Restatement  of  Consolidated   Financial   Statements  to  Reflect   Derivative
Accounting:

     We have restated our financial  results for the fiscal years ended December
31,  2003 and 2004 and for each of the interim  periods  ended March 31, June 30
and September 30, 2004 and 2005 to reflect  additional  non-operating  gains and
losses related to the  classification  of and  accounting  for certain  options,
warrants and other financial  instruments with embedded derivative features.  We
had  previously  classified  options and warrants to purchase  stock and certain
other  convertible  equity  instruments as equity.  Because at December 31, 2005
(and earlier  balance  sheet  dates),  we could not be sure that we had adequate
authorized  shares  of  common  stock  for the  conversion  or  exercise  of all
outstanding  instruments  (due, in part, to certain  conversion rates which vary
with the fair value of our common stock), EITF No. 00-19 requires us to classify
these instruments as liabilities.  Therefore, we are required to record the fair
value of the  options  and  warrants,  embedded  derivatives  and certain of our
preferred stock at fair value on our consolidated balance sheets. Changes in the
fair values of these instruments will result in adjustments to the amount of the
recorded  liabilities and the corresponding gain or loss will be recorded in our
consolidated  statements of  operations.  At the date of the  conversion of each
respective instrument or portion thereof (or exercise of the options or warrants
or portion  thereof,  as the case may be), the  corresponding  liability will be
reclassified  as equity.  In  addition,  we accrued  non-registration  penalties
related to our series H preferred  stock at  December  31,  2004  totaling  $1.4
million for which we were not liable and have reversed such accruals.


     The  accompanying  consolidated  financial  statements  for the year  ended
December 31, 2004 have been restated to effect the changes  described above. The
impact of the adjustments  related to the  classification  of and accounting for
the  conversion  features and warrants for the year ended  December 31, 2004 are
summarized below.


Consolidated Balance Sheet
<TABLE>
<CAPTION>
                                                                             Preferred
                                                          December 31, 2004     Stock       Options
                                                            As Previously     Subject to      and       Debt    December 31, 2004
Liabilites and Capital Deficit                                Reported       Conversion(a)  Warrants  Discount    As Restated
--------------------------------------------------------  -----------------  -----------    --------  --------    ------------
<S>                                                           <C>            <C>            <C>       <C>         <C>
   Liabilities
Accounts payable                                              $    1,909     $        -     $      -  $      -    $    1,909
Accrued expenses-related parties                                   8,745         (1,414)(b)        -         -         7,331
Accrued expenses-other                                             9,862             75                                9,937
Notes payable                                                        603              -            -         -           603
Stockholder convertible notes                                     40,565              -            -    (3,425)(c)    37,140
Current maturities of convertible notes                            4,513              -            -         -         4,513
Deferred revenue                                                     885              -            -         -           885
Shares of subsidiary subject to exchange into a variable
 Number of shares                                                    709              -            -         -           709
Preferred stock subject to conversion into a variable                  -         25,690 (d)        -         -        25,690
 number of shares (Note 15)
Derivative liabilities (Note 16)                                       -              -       30,705(e)      -        30,705
Other current liabilities                                          6,990              -            -         -         6,990
                                                              -------------  -----------    --------  --------    ------------
   Total current liabilities                                      74,781         24,351       30,705    (3,425)       126,412

Stockholder convertible notes                                      5,000              -            -         -         5,000
Other liabilities                                                     63                                                  63
                                                              -------------  -----------    --------  --------    ------------
   Total other liabilities                                         5,063              -            -         -         5,063

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

   Capital Deficit
Convertible series H preferred stock                              19,203        (19,203)           -         -             -
Common stock                                                       6,420                                               6,420
Additional paid in capital                                       245,746         12,454      (62,837)   17,757       213,120
Accumulated deficit                                             (354,490)       (17,602)      32,132   (14,332)     (354,292)
Accumulated other comprehensive income                                86                                                  86
                                                              -------------  -----------    --------  --------    ------------
   Total capital deficit                                         (83,035)       (24,351)     (30,705)    3,425      (134,666)

                                                              -------------  -----------    --------  --------    ------------
   Total liabilities and capital deficit                        $ 5,454      $        -     $      -  $      -    $    5,454
                                                              =============  ===========    ========  ========    ============
</TABLE>

Footnotes:
---------
(a)  Including related dividends, penalties and correction of accrual.
(b)  Primarily reflects reversal of liquidated damages from the non-registration
     of series H preferred stock.
(c)  Reflects  reclassification and recalculation of debt discount to fair value
     of  the  related  warrants  now  recorded  as  a  component  of  derivative
     liabilities (see Footnote (e) below).
(d)  Reflects  reclassification  of $19.2 million of preferred stock  originally
     recorded in equity,  now  recorded  as a  liability  at fair value of $25.7
     million.
(e)  Represents the fair value of outstanding  non-employee options and warrants
     originally recorded in equity, now recorded as a liability at fair value of
     $30.7 million.

                                      F-7
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


Consolidated Statements of Operations

<TABLE>
<CAPTION>
                                                                         Preferred
                                                    December 31, 2003      Stock          Options
                                                     As Previously       Subject to         and        Debt        December 31, 2003
                                                        Reported       Conversion (a)     Warrants    Discount        As Restated
                                                    ----------------   -------------     ----------  ----------     ----------------
<S>                                                 <C>                                                             <C>
   Total revenue                                    $         4,770               -              -           -      $         4,770
   Total operating costs and expenses                        20,899               -              -           -               20,899
                                                    ----------------   -------------     ----------  ----------     ----------------
                                                            (16,129)              -              -           -              (16,129)
   Other (income) expense, net                               (1,187)            318            (40)                            (909)
   Interest income                                           14,288             709                      1,423               16,420
                                                    ----------------   -------------     ----------  ----------     ----------------
   Loss from continuing operations                          (29,230)         (1,027)            40      (1,423)             (31,640)
   Loss from discontinued operations (Note 3)                (1,070)              -              -           -               (1,070)
                                                    ----------------   -------------     ----------  ----------     ----------------
   Net loss                                                 (30,300)         (1,027)            40      (1,423)             (32,710)
   Less:  Preferred stock dividends (Note 15)                 2,949          (2,607)             -           -                  342
                                                    ----------------   -------------     ----------  ----------     ----------------
   Net loss attribitable to common stockholders     $       (33,249)   $      1,580      $      40   $  (1,423)     $       (33,052)
                                                    ================   =============     ==========  ==========     ================

                                                    December 31, 2004     Stock          Options
                                                     As Previously     Subject to          and         Debt        December 31, 2004
                                                        Reported      Conversion (a)     Warrants    Discount          As Restated
                                                    ----------------   -------------     ----------  ----------     ----------------
   Total revenue                                    $         5,328               -              -           -      $         5,328
   Total operating costs and expenses                        20,223               -              -           -               20,223
                                                    ----------------   -------------     ----------  ----------     ----------------
                                                            (14,895)              -              -           -              (14,895)
   Other (income) expense, net                                6,575           5,031        (23,615)          -              (12,009)
   Interest income                                           42,667             697              -      12,312               55,676
                                                    ----------------   -------------     ----------  ----------     ----------------
   Loss from continuing operations                          (64,137)         (5,728)        23,615     (12,312)             (58,562)
   Loss from discontinued operations (Note 3)                  (489)              -              -           -                 (489)
                                                    ----------------   -------------     ----------  ----------     ----------------
   Net loss                                                 (64,626)         (5,728)        23,615     (12,312)             (59,051)
   Less:  Preferred stock dividends (Note 15)                 7,089          (6,756)             -           -                  333
                                                    ----------------   -------------     ----------  ----------     ----------------
   Net loss attribitable to common stockholders     $       (71,715)   $      1,028      $  23,615   $ (12,312)     $       (59,384)
                                                    ================   =============     ==========  ==========     ================
</TABLE>
Footnote:
--------
(a)  Including related dividends, penalties and correction of accrual.

Estimates:

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

Income Taxes:

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

Cash and cash equivalents:

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

Revenue Recognition:

     Revenue is recognized when earned. Revenue from product sales is recognized
when the product is shipped and title has passed. Revenue from advertising sales
is recognized when the advertisements are aired or displayed.  Our Artera Group,
Inc.  subsidiary  recognizes revenue ratably over the period service is provided
(the subscription period). Revenue from royalties is recognized ratably over the
royalty period based upon periodic  reports  submitted by the royalty obligor or
based on minimum royalty requirements.

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

                                      F-8
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


Marketable Securities:

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

     Marketable  debt securities that we have the positive intent and ability to
hold to maturity are classified as  held-to-maturity  securities and recorded at
amortized cost. Securities not classified as either  held-to-maturity or trading
securities are classified as available-for-sale  securities.  Available-for-sale
securities   are  recorded  at  market  value   (except  if  another  value  was
contractually  provided)  with the  change in market  value  during  the  period
excluded  from the  statements  of  operations  and  reflected as a component of
comprehensive income unless it is occasioned by an other-than-temporary  decline
in value and  recorded  net of income  taxes as a separate  component of capital
deficit.  We review  declines  in value of our  portfolio  when  general  market
conditions  change  or  specific  information   pertaining  to  an  industry  or
individual  company  becomes  available.  The factors we  consider in  assessing
whether a decline is other than temporary include:  our evaluation of the length
of the time and the extent to which the market  value of the  industry  has been
depressed  or the  market  value  of the  security  has  been  less  than  cost;
evaluation  of financial  condition  and  near-term  prospects of the  business,
including  cash  sufficiency  and  new  product   developments;   assessment  of
observable  marketplace-determined values and trends; and our intent and ability
to retain our  investment  in the business  for a  sufficient  period of time to
allow for any  anticipated  recovery in market  value.  At December 31, 2004 and
2005,   all   of   our   marketable   securities   have   been   classified   as
available-for-sale securities.

Inventories:

     Inventories  are stated at the lower of cost or market.  Cost is determined
using the first-in, first-out (FIFO) method for Pro Tech and is determined using
the average cost method for all other  inventories.  We assess the realizability
of inventories by periodically conducting a physical inventory and reviewing the
movement of inventory  to determine  the value of items that are slow moving and
obsolete.  The  potential  for  near-term  product  engineering  changes  and/or
technological   obsolescence  and  current   realizability   are  considered  in
determining the adequacy of inventory  reserves.  At December 31, 2004 and 2005,
our inventory reserves were $0.3 million and $0.2 million, respectively.

Property and Equipment:

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

Deferred Charges:

     Deferred  charges,  included on the  consolidated  balance  sheets in other
assets,  primarily  represent  costs  related  to the  installation  of  digital
broadcast station systems at customer locations. Such installation costs consist
of labor costs  attributable to contractor  installation and outside  management
fees. We amortize such deferred  charges over the lesser of the estimated useful
life or the life of the site  agreement.  In the  event a site is  removed,  the
unamortized deferred charges relating to that site are then expensed in full. In
each of the years ended December 31, 2003, 2004 and 2005, we amortized less than
$0.1 million.  At December 31, 2004 and 2005, deferred charges were $0.1 million
and zero, respectively.

Software Costs:

     Our  policy  is  to  capitalize  costs  in  connection  with  the  internal
development  or  purchase of computer  software  products to be sold,  leased or
otherwise marketed after  technological  feasibility has been established.  When
software costs are capitalized,  they are included in property and equipment and
amortized  over the  products'  estimated  useful  life.  During the years ended
December 31, 2004 and 2005, no software costs were capitalized.

                                      F-9
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


Goodwill and Intangible Assets with Indefinite Useful Lives:

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

     Under  the Financial  Accounting  Standards  Board  ("FASB")  Statement  of
Financial Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," we
ceased  amortizing  goodwill and intangible  assets with indefinite useful lives
and began testing them for impairment at least annually and whenever there is an
impairment indicator. Our reporting units with goodwill at December 31, 2004 and
2005 consist of NCT Hearing in the communications operating segment and Advancel
Logic Corporation within the technology operating segment. We have no intangible
assets with  indefinite  useful  lives.  The  carrying  value of our goodwill by
operating   segment   consists  of  $0.9   million  and  $0.3   million  in  our
communications  and technology  segments,  respectively for each at December 31,
2004 and 2005.

     We evaluate the carrying value and period of  amortization  of our goodwill
at each December 31 date.  The factors used in the  evaluation  include  current
operating results,  projected future operating  results,  and any other material
factors that affect the  continuity  of the  business.  Goodwill  impairment  is
evaluated at the  reporting  unit level,  comparing  the  carrying  value of the
reporting  unit with its  estimated  fair value.  If the fair value  exceeds its
carrying  value,  no  impairment  is  recognized.  If the carrying  value of the
reporting  unit exceeds its fair value,  then the carrying value of the goodwill
is compared to the implied fair value of the goodwill. If the implied fair value
of the goodwill exceeds its carrying value, no impairment is recognized.  If the
carrying value of the goodwill exceeds its implied fair value then impairment is
recognized to the extent of the excess.

     In our 2004  annual  assessment  of the  goodwill  of and the  value of the
Midcore/Artera  Group reporting unit, we considered the results of operations in
relation to previous estimates of activity,  as well as estimates of anticipated
operations.  Based  on  our  inability  to  develop  the  anticipated  lines  of
businesses  and  to  realize   results  as  budgeted,   in  part  because  of  a
reorganization at our former enterprise systems business partner during the last
quarter of 2004, we determined,  for the purposes of our assessment of goodwill,
not to anticipate the development of additional lines of business.  As a result,
our assessment of the value of the reporting unit, based on existing operations,
was not  sufficient  to carry  the  goodwill  without  impairment.  Based on our
assessment,  as of December  31,  2004,  we  concluded  that the goodwill of the
Midcore/Artera  Group  reporting  unit was fully  impaired  and we  recorded  an
impairment charge of $5.9 million.

Patent Rights and Other Intangible Assets with Finite Useful Lives:

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

     We also evaluate the useful lives each reporting period. The factors we use
in evaluating the period of  amortization  include  current  operating  results,
anticipated  future operating results and any other material factors that affect
the continuity of the business. Based on our evaluation as of December 31, 2005,
we determined no impairment  was present with respect to the license  granted to
Pro Tech.  Based on our evaluation as of December 31, 2004 and December 31 2005,
our  evaluations  have  not  indicated  that any  revisions  are  necessary  and
determined no impairment  existed.  Our next  evaluation is planned for our next
reporting date.

     Patent  rights and other  intangible  assets,  which  includes  the cost to
acquire  rights to patents and other rights under  licenses,  are stated at cost
and are amortized using the  straight-line  method over the remaining  estimated
useful lives, ranging from one to seventeen years. Amortization expense was $0.3
million,  $0.1 million and $0.1  million for the years ended  December 31, 2003,
2004 and 2005, respectively. Accumulated amortization of patent

                                      F-10
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


rights and other  intangible  assets was $4.4  million and $4.5  million for the
years ended  December  31, 2004 and 2005,  respectively.  The other  intangibles
subject to  amortization  are categorized  below.  We estimate the  amortization
expense for each of the next five years will be approximately $68,000.

<TABLE>
<CAPTION>

                                                       (In thousands of dollars)
                                                           December 31, 2005
                                            -----------------------------------------------
                                            Gross Carrying     Accumulated      Carrying
                                                Amount        Amortization        Value
                                            --------------   --------------   -------------
<S>                                         <C>              <C>              <C>
Intangible assets subject to amortization
   Patents                                  $       4,147    $      (3,971)   $        176
   Licensed technology                              1,330             (485)            845
                                            --------------   --------------   -------------
Total                                       $       5,477    $      (4,456)   $      1,021
                                            ==============   ==============   =============
</TABLE>


Other Assets:

     Other  long-lived  assets are reviewed for  impairment  whenever  events or
changes in circumstances  indicate that the carrying amount of the asset may not
be  recoverable.  Recoverability  of assets to be held and used is measured by a
comparison of the carrying amount of the asset to  undiscounted  future net cash
flows expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured as the amount by which the
carrying amount of the assets  exceeded the fair value of the assets.  Assets to
be disposed of are  reported at the lower of the  carrying  amount or fair value
less the costs to sell the assets.  There were no such impairments for the years
ended December 31, 2003, 2004 and 2005.

Advertising:

     Advertising    expenses    include    commissions   paid   to   advertising
representatives and agencies and are expensed as incurred.  Advertising expenses
for each of the years ended December 31, 2003, 2004 and 2005 were less than $0.1
million and are included in selling, general and administrative expenses.

Comprehensive Loss:

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

Foreign Currency Translation:

     Local currencies are generally  considered the functional  currency for our
foreign  subsidiaries.  We translate our foreign  assets and  liabilities at the
exchange  rates in effect at each balance  sheet date.  Revenue and expenses are
translated  using average rates for the year.  The  resulting  foreign  currency
translation  adjustments are included in accumulated other comprehensive  income
as a component of capital deficit.  The foreign currency  transaction  gains and
losses are included in the  consolidated  statements of operations  and were not
material  for the years ended  December  31,  2003,  2004 and 2005.  The foreign
currency  translation  adjustment of $1.2 million and $0.2 million for the years
ended December 31, 2004 and 2005,  respectively,  is  attributable to our United
Kingdom operations.

                                      F-11
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


Loss per Common Share:

     We report loss per common share in accordance with SFAS No. 128,  "Earnings
Per Share." The per share  effects of potential  common shares such as warrants,
options,   convertible  debt  and  convertible   preferred  stock,   aggregating
approximately 24.3 billion shares, have not been included as the effect would be
antidilutive  (see Notes 13, 15 and 16). A number of our commitments  require us
to reserve and/or  register for resale a number of shares of our common stock in
excess of the number of shares actually  issuable (see Note 15). At December 31,
2004, we had 112.9 million shares for which we had received demand notices under
acquisition  or other  agreements.  At December  31,  2005,  we had 60.4 million
shares for which we had  received  demand  notices  under  acquisition  or other
agreements.  As a result,  we  included  3,029,608  shares in shares  payable at
December 31, 2004 (the  remaining  number of authorized  but unissued  shares at
December 31, 2004) due to an excess commitment and zero shares in shares payable
at December 31, 2005 due to an increase in the number of our  authorized  shares
of common stock from 645 million to 5.622 billion shares.

     When  preferred  stock is  convertible  into common  stock at an  effective
conversion rate that represents a discount from the common stock market price at
the time of issuance, the discounted amount is an assured incremental yield, the
"preferred  stock dividend  requirement,"  to the preferred  stockholders and is
accounted for as an embedded dividend to preferred  stockholders.  The allocated
fair value is deemed to be a "preferred stock beneficial conversion feature" and
is accounted for as a component of additional paid-in capital. We have reflected
such beneficial conversion feature and preferred stock dividend requirement as a
preferred  stock dividend and as an adjustment to the net loss  attributable  to
common  stockholders.  If we are required to classify the  preferred  stock as a
liability,  such  amounts are  included in interest  expense and other  (income)
expense, net on our statement of operations.  (see "Derivative  Instruments" and
Note 15 "NCT Group, Inc. Preferred Stock")

Concentrations of Credit Risk:

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

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

Significant Customers:

     In each of the years  ended  December  31,  2003,  2004 and  2005,  revenue
derived  from  certain  customers  comprised  more than 10% of our  consolidated
revenue ("significant customers").  Our significant customers for the year ended
December 31, 2005 were Sharp,  OKI Electric and New  Transducers  Ltd.  ("NXT"),
which  accounted  for  19%,  16% and 12% of  total  revenue,  respectively.  One
customer,  NXT, was a significant  customer in the years ended December 31, 2003
and 2004 and accounted for 44% and 39% of our total revenue in such years.

                                      F-12
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


Fair Value of Financial Instruments:

     Our financial instruments consist of cash and cash equivalents,  short-term
investments,  accounts receivable, other receivables,  accounts payable, accrued
expenses,  notes payable and other  liabilities.  At December 31, 2004 and 2005,
the fair value of these instruments  approximated  their carrying value (carried
at cost) because of the short-term  maturity of the instruments.  Fair values of
other  investments  classified as  available-for-sale  were  estimated  based on
market prices.  The fair value of notes payable  approximates the carrying value
based on interest rates that are currently  available to us for issuance of debt
with similar terms and remaining maturities. The terms and conditions, including
interest  rate,  conversion  rates,  maturity and warrants  issued as additional
compensation,  of the  stockholder  convertible  notes payable entered into with
Carole Salkind are not objectively determined due to the related party nature of
these instruments.  The face value of the stockholder  convertible notes held by
Carole  Salkind  at  December  31,  2004 and 2005 was  $58.1  million  and $83.6
million,  respectively.  At December 31, 2004 and 2005, these  outstanding notes
were convertible into 2.8 billion and 8.5 billion shares,  respectively,  of NCT
common stock with a fair value of $55.1 million and $34.0 million, respectively.

Stock-Based Compensation:

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

<TABLE>
<CAPTION>

                                                             (In thousands of dollars, except per share amounts)
                                                                       For the Years Ended December 31,
                                                             ---------------------------------------------------
                                                               Restated            Restated
                                                                 2003                 2004            2005
                                                             --------------     --------------    --------------
<S>                                                          <C>                 <C>               <C>
Net loss attributable to common stockholders                 $   (33,052)        $   (59,383)      $   (41,063)
Total stock-based employee compensation
    expense determined under fair value based
    method for all awards, net of related tax effects             (1,077)             (1,285)           (1,775)
                                                             --------------     --------------    --------------
Pro forma net loss attributable to common stockholders       $   (34,129)        $   (60,668)      $   (42,838)
                                                             ==============     ==============    ==============
Net loss per common share (basic and diluted):
     As reported                                             $     (0.06)        $     (0.09)      $     (0.06)
                                                              ==============    ==============    ==============
     Pro forma                                               $     (0.06)        $     (0.09)      $     (0.06)
                                                              ==============    ==============    ==============
</TABLE>

     The  weighted-average  fair  values  at date of grant for  options  granted
during the years ended  December 31, 2003,  2004 and 2005 were $0.04,  $0.03 and
$0.005, respectively,  and were estimated using the Black-Scholes option pricing
model with the following weighted-average assumptions:

                                               Years ended December 31,
                                  ----------------------------------------------
                                     2003               2004             2005
                                     ----               ----             ----
Expected life in years                 3.5               3.5              6.3
Interest rate                         2.25%         1.94% - 3.16%        4.28%
Volatility                             100%              100%             100%
Dividend yield                           0%                0%               0%

                                      F-13
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


Derivative Instruments

     We have issued and  outstanding  convertible  debt and certain  convertible
equity  instruments  with  embedded  derivative  features  which we  analyze  in
accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities,"  and the FASB's  Emerging  Issues Task Force (the "EITF") Issue No.
00-19,   "Accounting  for  Derivative  Financial  Instruments  Indexed  to,  and
Potentially Settled in A Company's Own Stock," to determine if these instruments
have embedded  derivatives  that must be bifurcated.  Under EITF No. 00-19,  the
estimated value of the embedded derivative,  if any, is bifurcated from its host
instrument on the date of sale or issuance of the  securities or debt based on a
valuation  utilizing an appropriate  valuation model. The embedded derivative is
classified as a liability and is marked-to-market  and adjusted to fair value at
each  reporting  date and the change in fair value is recorded to other (income)
expense, net. In addition,  freestanding warrants are accounted for as equity or
liabilities  in accordance  with the  provisions of EITF Issue No. 00-19.  As of
December 31, 2005,  we could not be sure we had adequate  authorized  shares for
the  conversion  or  exercise  of all  outstanding  instruments  due to  certain
conversion  rates  which  vary  with the fair  value of our  common  stock,  and
therefore all embedded  derivatives  and  freestanding  warrants are recorded at
fair  value,  marked-to-market  at each  reporting  date,  and are  carried on a
separate  line of the  accompanying  balance  sheet.  If there is more  than one
embedded derivative, their value is considered in the aggregate.

Recently Issued Accounting Pronouncements

     In December 2004, the FASB issued SFAS No. 123 (Revised 2004)  "Share-Based
Payment" that prescribes the accounting for share-based payment  transactions in
which  a  company  receives   employee  services  in  exchange  for  (a)  equity
instruments of the company or (b)  liabilities  that are based on the fair value
of the company's  equity  instruments  or that may be settled by the issuance of
such equity  instruments.  SFAS No. 123(R)  addresses  all forms of  share-based
payment  awards,  including  shares issued under employee stock purchase  plans,
stock options,  restricted stock and stock appreciation  rights. SFAS No. 123(R)
eliminates  the ability to account  for  share-based  compensation  transactions
using APB  Opinion  No. 25, that was  previously  allowed  under SFAS No. 123 as
originally  issued.  Under SFAS No.  123(R),  companies  are  required to record
compensation expense for all share-based payment award transactions  measured at
fair value. SFAS No. 123(R) is effective for us beginning January 1, 2006. We do
not anticipate  that the adoption of SFAS No. 123(R) will have a material effect
on our consolidated financial position, results of operations or cash flows.

     In May 2005,  the FASB issued SFAS No. 154,  "Accounting  Changes and Error
Corrections--A Replacement of APB Opinion No. 20 and FASB Statement No. 3." SFAS
No.  154  requires   retrospective   application  to  prior  periods'  financial
statements for changes in accounting  principle,  unless it is  impracticable to
determine  either the  period-specific  effects or the cumulative  effect of the
change. SFAS No. 154 also requires that retrospective application of a change in
accounting  principle be limited to the direct  effects of the change.  Indirect
effects   of  a  change   in   accounting   principle,   such  as  a  change  in
non-discretionary  profit-sharing  payments resulting from an accounting change,
should be recognized in the period of the accounting  change.  SFAS No. 154 also
requires that a change in  depreciation,  amortization,  or depletion method for
long-lived  non-financial  assets be  accounted  for as a change  in  accounting
estimate affected by a change in accounting principle. SFAS No. 154 is effective
for accounting  changes and corrections of errors made in fiscal years beginning
after December 15, 2005. Early adoption is permitted for accounting  changes and
corrections  of errors made in fiscal  years  beginning  after May 2005.  We are
required to adopt the  provisions of SFAS No. 154, as  applicable,  beginning in
fiscal 2006.

     In June 2005,  the EITF issued Issue No.  05-4,"The  Effect of a Liquidated
Damages Clause on a Freestanding  Financial Instrument Subject to EITF Issue No.
00-19,   'Accounting  for  Derivative  Financial  Instruments  Indexed  to,  and
Potentially  Settled  in, a  Company's  Own  Stock.'"  EITF No.  05-4  addresses
financial  instruments,  such as convertible notes and stock purchase  warrants,
which are  accounted  for under EITF No.  00-19,  that may be issued at the same
time and in  contemplation  of a registration  rights  agreement that includes a
liquidated  damages  clause.  The  consensus  of EITF  No.  05-4  has  not  been
finalized.

     In June 2005, the EITF reached a consensus on Issue No. 05-6,  "Determining
the Amortization Period for Leasehold  Improvements." The guidance requires that
leasehold   improvements   acquired  in  a  business  combination  or  purchased
subsequent  to the  inception  of a lease be  amortized  over the  lesser of the
useful life of the assets or a term that includes  renewals that are  reasonably
assured at the date of the business  combination  or  purchase.  The

                                      F-14
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


guidance is effective for periods beginning after June 29, 2005. We have adopted
EITF No.  05-6 and the  adoption  of EITF  No.  05-6 did not have a  significant
effect on our consolidated financial statements.

3.   Discontinued Operations:

     In September 2005, we decided to modify the business model for our Hospital
Radio Network ("HRN") business. Beginning October 1, 2005, instead of continuing
to directly  operate this business,  under our modified  business  model, we are
licensing our proprietary  technology used in this business to third parties. In
exchange,  we will receive a percentage of the advertising revenues generated by
these third parties through existing and new  installations of our Sight & Sound
systems in health  care  facilities.  Our initial  licensee  is a company  whose
president is a former operations manager of HRN.

     This modification of the business model meets the criteria  established for
recognition as discontinued  operations under SFAS No. 144,  "Accounting for the
Impairment or Disposal of Long-Lived Assets."  HRN represents a component of our
media  segment  comprised  of  operations  and cash  flows  that can be  clearly
distinguished, operationally and for financial reporting purposes, from the rest
of the  segment.  At December  31,  2005,  HRN was  classified  as  discontinued
operations and its results of operations are separately reported for all periods
presented.  The assets and liabilities  related to these  activities at December
31,  2005 were de minimis  and have not been  segregated.  Changes in cash flows
related to these activities are included in, and are not separately stated from,
continuing activities in the statement of cash flows.

     The  results  of  operations  from  this  business  are  reflected  in  the
statements  of  operations  as  "Loss  from  discontinued  operations"  and  are
summarized as follows:

<TABLE>
<CAPTION>

                                                                    (In thousands of dollars)
                                                              For the Years Ended December 31,
                                                 ------------------------------------------------------------
                                                       2003                 2004                 2005
                                                 ------------------   ------------------   ------------------

<S>                                              <C>                  <C>                  <C>
Net revenue                                      $              88    $             147    $              60

Cost of sales                                                    7                   15                   10
Selling, general and administrative expense                    451                  117                   61
Research and development expense                               700                  504                  262
                                                 ------------------   ------------------   ------------------
Costs and expenses                                           1,158                  636                  333
                                                 ------------------   ------------------   ------------------

                                                 ------------------   ------------------   ------------------
Loss from discontinued operations                $          (1,070)   $            (489)   $            (273)
                                                 ==================   ==================   ==================
</TABLE>


4.   Marketable Securities:

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


                                    (In thousands of dollars)
                Cost                       Market                       Market
                Basis       Unrealized      Value      Unrealized       Value
              01/01/04     Gain (Loss)    12/31/04     Gain (Loss)    12/31/05
             -----------  -------------  -----------  -------------  -----------
ITC          $     38     $       (28)   $       10   $          2   $      12
Teltran            11               3            14             (6)          8
             -----------  -------------  -----------  -------------  -----------
Totals       $     49     $       (25)   $       24   $         (4)  $      20
             ===========  =============  ===========  =============  ===========

                                      F-15
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


     We review  declines in the value of our  investment  portfolio when general
market conditions change or specific information pertaining to an industry or an
individual  company  becomes  available.  At December 31, 2005, a net unrealized
loss of  $4,000  was  included  on the  consolidated  balance  sheet  as part of
accumulated other comprehensive income.


5.   Accounts Receivable:


                                               (In thousands of dollars)
                                                       December 31,
                                          -------------------------------------
                                                2004                2005
                                          -----------------   -----------------
Technology license fees and royalties     $         472       $         533
Joint ventures and affiliates                        34                  34
Other receivables                                   375                 424
                                          -----------------   -----------------
                                          $         881       $         991
Allowance for doubtful accounts                    (353)               (351)
                                          -----------------   -----------------
     Accounts receivable, net             $         528       $         640
                                          =================   =================


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


6.       Inventories:


                                                     (In thousands of dollars)
                                                           December 31,
                                                  ------------------------------
                                                       2004             2005
                                                  -------------    -------------
Finished goods                                    $        491     $        248
Components                                                 215              206
                                                  -------------    -------------
                                                  $        706     $        454
Reserve for obsolete and slow moving inventory            (342)            (201)
                                                  -------------    -------------
     Inventories, net                             $        364     $        253
                                                  =============    =============


     At  December  31, 2004 and 2005,  net  inventories  determined  by the FIFO
method were $344,000 and $239,000,  respectively, and net inventories determined
by the average cost method were $20,000 and $14,000, respectively.

                                      F-16
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


7.   Property and Equipment:


                                              (In thousands of dollars)
                                                     December 31,
                                       ---------------------------------------
                                             2004                 2005
                                       ------------------   ------------------
Machinery and equipment                $           1,284    $           946 (a)
Furniture and fixtures                               585                337
Tooling                                              494                491
Leasehold improvements                               394                388
Other                                                433                402
                                       ------------------   ------------------
                                       $           3,190    $          2,564
Accumulated depreciation                          (2,720)             (1,715)(a)
                                       ------------------   ------------------
     Property and equipment, net       $             470    $            849
                                       ==================   ==================



Footnote:
--------
(a)  Includes the write-off of fully  depreciated  Distributed Media Corporation
     ("DMC")  assets  of   approximately   $0.8  million  and  the  addition  of
     approximately  $0.8 million for the purchase of data center  equipment  for
     Artera Group.

     Depreciation  expense for the years ended December 31, 2003,  2004 and 2005
was $0.4 million, $0.1 million and $0.3 million, respectively.

8.   Other Assets:

                                                  (In thousands of dollars)
                                                        December 31,
                                                  ------------------------
                                                      2004        2005
                                                  -----------  -----------

Notes receivable                                  $    1,000   $    1,000
Due from officer (Note 20)                               127           98
Other                                                    223          181
                                                  -----------  -----------
                                                  $    1,350   $    1,279
Reserve for uncollectible amounts (a)                 (1,102)      (1,098)
                                                  -----------  -----------
   Other current assets                           $      248   $      181
                                                  ===========  ===========


Advances and deposits                             $       70   $       53
Deferred charges                                          50            -
                                                  -----------  -----------
   Other assets (classified as long term)         $      120   $       53
                                                  ===========  ===========

Footnote:
--------
(a)  On January 9, 2001,  Artera Group  accepted an aggregate of $1.0 million of
     non-recourse, non-interest bearing notes receivable due January 2, 2002, as
     partial  consideration for its January 9, 2001 6% convertible notes payable
     to six accredited investors (see Note 11). The notes are fully reserved and
     remain  unpaid at December  31,  2005.  In 2004,  the reserve  increased in
     anticipation of  non-collection  of amounts due from a former officer.  The
     portion  of the  reserve  related  to the note  receivable  from the former
     officer (plus accrued interest) is in excess of the amount owed to him (see
     Note 20).

                                      F-17
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


9.   Accrued Expenses:

                                                      (In thousands of dollars)
                                                            December 31,
                                                    ----------------------------
                                                       Restated
                                                         2004           2005
                                                    --------------  ------------
Non-conversion fees due to related parties          $     3,972     $         -
Non-registration fees due to  related parties                31             216
Interest due to a stockholder                             1,012           2,641
Consulting fees due to a stockhokder                        483               -
Incentive compensation due to officers                    1,833             792
                                                    --------------  ------------
    Accrued expenses-related party                  $     7,331     $     3,649
                                                    ==============  ============

Non-registration fees                               $     4,436     $     5,721
Interest                                                  1,458           2,136
Commissions payable                                         372             124
Other                                                     3,671           3,830
                                                    --------------  ------------
    Accrued expenses-other                          $     9,937     $    11,811
                                                    ==============  ============

Total accrued expenses                              $    17,268     $    15,460
                                                    ==============  ============


10.  Notes Payable:

<TABLE>
<CAPTION>

                                                                                    (In thousands of dollars)
                                                                                           December 31,
                                                                                  -----------------------------
                                                                                      2004            2005
                                                                                  -------------   -------------
<S>                                                                               <C>             <C>
Note due investor                                                                 $       385     $       385
      Interest at 8% per annum payable at maturity;  effective interest
      rate of 80.3% per annum resulting from the issuance of warrants
      and finders fees; matured April 7, 2003 (a); default interest
      accrues at 18% per annum
Note due stockholder of subsidiary                                                         40              14
      Interest at 12% per annum; monthly payments (including interest)
      of $1.5 through November 2005, remainder matures October 15, 2006 (b)
Note due former employee                                                                  100             100
      $100 bears interest at 8.25% per annum, compounded annually;
      past due (a)
Other financings                                                                           78              77
      Interest ranging from 7% to 9% per annum;
      $35 due July 15, 2003 (a); $42 all other

                                                                                  -------------   -------------
                                                                                  $       603     $       576
                                                                                  =============   =============
</TABLE>


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

(b)  On  August  1,  2005,  Pro  Tech  refinanced  the  remaining  principal  of
     approximately  $17,000 from the note due a non-officer  stockholder  with a
     modification  of  terms.  The  debt  instruments  were  deemed  not  to  be
     substantially  different in accordance  with EITF Issue No. 96-19 "Debtor's
     Accounting for a Modification or Exchange of Debt Instruments."

                                      F-18
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


11.  Convertible Notes Payable:

<TABLE>
<CAPTION>

                                                                                    (In thousands of dollars)
                                                                                           December 31,
                                                                                    --------------------------
                                                                                     Restated
Stockholder Convertible Notes:                                                         2004           2005
                                                                                    ------------  ------------
<S>                                      <C>                                        <C>           <C>
Issued to Carole Salkind - (a) (see Note 20)                                        $   58,120    $   83,649
Weighted average effective interest rate of 78.7% per annum; accrues
interest 8% per annum except $6,000 at 12%; collateralized by substantially all
of the assets of NCT; convertible into NCT common stock at prices ranging
from $0.0037 - $0.0166 or exchangeable for common stock of NCT
subsidiaries except for Pro Tech; maturing the earlier of demand
or by quarter as follows:
                                      2004      2005
                                  ----------  -----------
Past Due:                         $       -   $     576
  Demand notes                            -         375
  June 30, 2005                      26,408           -
  September 30, 2005                 26,712           -
  March 31, 2006                          -      69,841
  June 30, 2006                           -       7,857
  December 31, 2009                   5,000       5,000
Less: unamortized debt discounts                                                       (15,980)       (5,538)
                                                                                    ------------  ------------
                                                                                    $   42,140    $   78,111
Less: amounts classified as long-term                                                   (5,000)       (5,000)
                                                                                    ------------  ------------
                                                                                    $   37,140    $   73,111
                                                                                    ============  ============


                                                                                    (In thousands of dollars)
                                                                                          December 31,
                                                                                    --------------------------
                                                                                     Restated
Convertible Notes:                                                                      2004          2005
                                                                                    ------------  ------------
8% Convertible Notes (b)                                                            $    2,641    $    2,626
Weighted average effective interest rate of 30.8% per annum;
generally convertible into NCT common stock at 80% of the five-day
average closing bid price preceding conversion; past due; issued as follows:
Issue Date                 2004         2005
----------              ----------  ------------
  March 14, 2001        $     17    $      17
  April 12, 2001               9            9
  January 10, 2002           550          550
  March 11, 2002             400          400
  April 22, 2003             235          235
  September 4, 2003          440          440
  July 23, 2004              990          975
6% Convertible Notes (c)                                                                 2,474         2,474
Weighted average effective interest rate of 85.8% per annum;
convertible into NCT common stock at 100% of the five-day average
closing bid price preceding conversion; issued as follws:
Issue Date                 2004         2005
----------              ----------  ------------
  January 9, 2001       $    818    $     818
  April 4, 2001              325          325
  May 25, 2001                81           81
  June 29, 2001            1,250        1,250
                                                                                    ------------  ------------
                                                                                    $    5,115    $    5,100
Less: unamortized debt discounts                                                          (602)         (216)
                                                                                    ------------  ------------
                                                                                    $    4,513    $    4,884
                                                                                    ============  ============
</TABLE>

                                      F-19
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


Footnotes:
---------
(a)  During 2004, we issued an aggregate of $91.8 million of  convertible  notes
     as  consideration  for $9.1 million of cash,  rollover of $67.5  million in
     principal for matured  convertible  notes,  $3.4 million of interest,  $6.8
     million  of  default  penalties  and  $5.0  million  as  consideration  for
     settlement of certain legal claims. We recorded original issue discounts of
     $31.6 million to the notes based upon the fair value of warrants granted to
     Ms. Salkind.  In addition,  beneficial  conversion  features totaling $31.4
     million  have been  recorded as a discount to the notes.  During  2005,  we
     issued an aggregate of $115.8 million of convertible notes as consideration
     for $7.6 million of cash,  refinancing  of $90.2  million in principal  for
     matured  convertible  notes or demand notes for which demand had been made,
     $4.4  million of  interest,  $9.5  million of  default  penalties  and $4.1
     million as  consideration  (premiums on equipment  loans and original issue
     discounts)  related to the convertible  notes.  We recorded  original issue
     discounts  of $23.8  million to the notes  based upon the fair value of the
     warrants  granted  to  Ms.  Salkind.  In  addition,  beneficial  conversion
     features  totaling  $25.9  million have been  recorded as a discount to the
     notes.  These  discounts are being  amortized  over the term of the related
     notes. For the years ended December 31, 2003, 2004 and 2005, $12.0 million,
     $50.1 million and $60.0 million,  respectively,  of amortization related to
     these  discounts  is  classified  as interest  expense in our  consolidated
     statements of operations.  Unamortized  discounts of $16.0 million and $5.5
     million have been reflected as a reduction to the face value of convertible
     notes in our  consolidated  balance sheet as of December 31, 2004 and 2005,
     respectively. The default provisions in these notes impose a penalty of 10%
     of the principal  payments in default and default interest from the date of
     default on the principal in default at the stated interest rate plus 5%. As
     of December 31, 2004 and 2005,  notes  outstanding in default were zero and
     $0.6 million, respectively. Because we had defaulted on repayment of all of
     the notes as they matured during 2003, 2004 and 2005, an aggregate  default
     penalty   expense  of  $2.1   million,   $6.7  million  and  $9.5  million,
     respectively,  has been  reflected in our statements of operations in other
     (income) expense.

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

     The 8%  convertible  note  issued  January  10,  2002 for $0.6  million  is
     collateralized by substantially all of the assets of our subsidiary, Artera
     Group.  Beneficial  conversion  features were recorded as a discount to the
     note and are being  amortized over the term of the note. For the year ended
     December 31, 2004 and December 31, 2005,  approximately $11,000 and zero of
     amortization  related to these discounts is classified as interest  expense
     in our consolidated statements of operations.

     On July 23, 2004, we issued subordinated  collateralized  convertible notes
     for an  aggregate  principal  amount  of  $0.9  million.  These  notes  are
     collateralized by substantially  all of our assets. In addition,  we issued
     unsecured convertible notes to finders in the aggregate principal amount of
     $0.1 million.  The net proceeds of approximately $0.9 million were used for
     working  capital  requirements.  The notes mature on July 23, 2006 and bear
     interest at 8% per annum, payable at maturity.  Until the notes are paid in
     full,  the holders have the right to convert any  outstanding  principal of
     the notes and, at their  election,  the interest  accrued on the notes into
     shares of our common stock at a conversion price per share of the lesser of
     $0.0232 or 80% of the  average of the  closing  bid price for the five days
     immediately  preceding  conversion.  Discount features were recorded to the
     notes  representing  the fair value of warrants issued in conjunction  with
     the  issuance of debt and are being  amortized  over the term of the notes.
     For the year ended December 31, 2005, $0.1 million of amortization  related
     to these  discounts is classified as interest  expense in our  consolidated
     statements of operations.

     We are in default on convertible  notes  aggregating  $0.6 million due to a
     cross-default  provision and non-payment.  We are in default on convertible
     notes  aggregating  $1.0 million  dated July 23, 2004 due to our failure to
     register for resale the shares of our common stock issuable upon conversion
     of these notes.

(c)  The cash  consideration  for the 6%  convertible  notes  issued to multiple
     investors by Artera Group  aggregated $2.9 million,  net of $0.1 million in
     expenses,  of which $0.6 million was received in 2000.

                                      F-20
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


     Other  consideration  consisted  of Pro Tech  common  stock  valued at $0.5
     million and non-recourse  notes receivable of $1.0 million (see Note 8). No
     unamortized discounts have been reflected as a reduction to the convertible
     notes in our consolidated  balance sheets as of December 31, 2004 and 2005.
     On January 10, 2002,  substantially  all of the assets of Artera Group were
     made collateral for three holders of notes with principal  aggregating $3.1
     million. As a result of exchanges in 2003 for $1.8 million, at December 31,
     2005,  the principal for these three holders  aggregated  $1.3 million.  We
     have recorded  finance costs  associated  with  non-registration  of common
     shares  of  approximately  $2.0  million,  $0.8  million  and $0.8  million
     included in other  (income)  expense,  net for the years ended December 31,
     2003, 2004 and 2005, respectively (see Note 17). We settled $0.8 million of
     accrued  interest  payable  and  approximately   $4.6  million  of  accrued
     non-registration  fees  payable  on  convertible  notes  with four  holders
     through  April 7, 2003 by issuance of shares of our common  stock (see Note
     15).  The $1.3  million  notes  included  in the  settlement  are  accruing
     interest  from  April  7,  2003 at the  stated  rate of 6%.  The  remaining
     outstanding  principal amount of  approximately  $1.2 million is in default
     for non-payment and is accruing  interest at the default rate of 18%. These
     notes are senior debt of Artera Group.

12.  Deferred Revenue:

     On March 30,  2001,  NXT plc,  NXT,  NCT Audio and NCT entered into several
agreements  terminating  previous  agreements  from 1997 to 1999.  Under the new
agreements, we received 2.0 million ordinary NXT plc shares in consideration for
the  cancellation  of the 6% royalty  payable  by NXT to NCT Audio.  The NXT plc
shares issued had a value of approximately $9.2 million. Additionally, ownership
of  certain  intellectual  property,  the  rights to which  had been  previously
granted to NXT, was  transferred  to NXT. NXT has licensed to us certain NXT and
all NCT-developed intellectual property. A side letter with NXT was entered into
on or about  March 30,  2001,  whereby  we agreed to pay NXT $0.6  million  as a
non-refundable  design fee related to Gekko  loudspeakers.  The design fee was a
prepayment  of royalties due under the  four-year  term of this side letter.  We
offset the $9.2 million license fee due us with the $0.6 million design fee owed
to NXT  resulting in $8.6  million of deferred  revenue.  The  deferred  revenue
balance was recognized on a  straight-line  basis over the specific  performance
period of four years, $2.1 million of revenue was recognized in each of 2003 and
2004 and the remaining  balance of $0.5 million was  recognized in 2005. We have
fully  recognized  the license fee revenue  from the NXT license as of March 31,
2005. We did not realize any cash upon  recognition of deferred revenue in 2003,
2004 and 2005. As of December 31, 2005, we will not realize any additional  cash
from revenue that has been deferred.

                                  (In thousands of dollars)
                                         December 31,
                             ------------------------------------
                                   2004               2005
                             -----------------  -----------------
NXT                          $          535     $            -
Other                                   350                350
                             -----------------  -----------------
                             $          885     $          350
                             =================  =================

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

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

     For the years ended December 31, 2003,  2004 and 2005, we calculated the 4%
dividends  earned by holders of the Pro Tech series A and B  preferred  stock at
approximately $11,000, $21,000 and $19,000, respectively.  Following adoption of
SFAS No. 150 on July 1, 2003, this amount is included in interest expense.

     On March  31,  2005,  the  remaining  50  shares  of the Pro Tech  series A
preferred  stock and accrued  dividends were converted into 1,844,007  shares of
Pro Tech common stock pursuant to a mandatory conversion requirement.

                                      F-21
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


     The monetary  value of Pro Tech series B  convertible  preferred  stock was
approximately  $656,000 in our consolidated  balance sheet at December 31, 2005,
which is comprised of $575,000  aggregate  fair value of shares plus the accrued
dividends  of  approximately  $81,000.  We have the option to settle the accrued
dividends in cash or common  stock.  If the holders  elected to convert into NCT
common stock, we would have to issue  approximately  169.2 million shares of our
common stock if settlement of the stated value along with accrued  dividends had
occurred as of December 31,  2005.  There is no limit on the number of shares of
common  stock that we could be required  to issue upon  exchange of the Pro Tech
series B preferred stock.

     On March 23, 2006, Pro Tech amended its articles of incorporation to extend
the mandatory  conversion date of its series B convertible  preferred stock from
March 31, 2006 to March 31, 2008.

14.  Other Liabilities:

<TABLE>
<CAPTION>

                                                           (In thousands of dollars)
                                                                  December 31,
                                                         ------------------------------
                                                              2004            2005
                                                         --------------  --------------
<S>                                                      <C>             <C>
License reacquisition payable                            $     4,000     $    4,000
Royalty payable                                                1,679          1,679
Development fee payable                                          650            650
Due to selling shareholders of Theater Radio Network             557            557
Due to Lernout & Hauspie                                         100            100
Other                                                              4            112
                                                         --------------  --------------
    Other current liabilities                            $     6,990     $    7,098
                                                         ==============  ==============


Other long term and capital leases                       $        63     $       27
                                                         --------------  --------------
     Other liabilities (classified as long term)         $        63     $       27
                                                         ==============  ==============
</TABLE>

     License  reacquisition  payable at each of  December  31,  2004 and 2005 is
comprised of $4.0 million for the cost of  reacquiring  DMC licenses  from three
licensees.

     On August 29, 2000,  we acquired 100% of the  outstanding  capital stock of
Midcore Software, Inc. In connection therewith, we initially issued to Midcore's
selling stockholders 13,913,355 restricted shares of our common stock based upon
a ten-day  volume-weighted  average closing bid price of $0.34626 per share, for
an aggregate  value of $4.8  million.  In addition,  the purchase  consideration
included  $1.8 million to be paid by us in cash,  over 36 months,  the timing of
which was based upon  earned  royalties.  If after  August 29,  2003,  the total
royalty  had not  been  earned,  or if  earned  but not  fully  paid,  then  the
recipients could elect at their discretion either to continue to receive payment
of the royalties in accordance with the merger agreement,  or receive the unpaid
balance in the form of our common  stock.  On August 29,  2000,  we recorded the
entire $1.7 million  obligation  as a  liability.  On  September  23, 2003,  the
founding  stockholders  of Midcore  made an  election  to accept  payment of the
remaining  royalty  due  them  in our  common  stock.  Prior  to  the  election,
approximately  $46,000  of  the  liability  had  been  paid.  The  election  and
calculation  of the number of shares  was  provided  for in the August 29,  2000
agreement under which we acquired Midcore and is based upon the  volume-weighted
average  closing  bid price for the ten days  immediately  preceding  August 29,
2003, or $0.04914 per share.  We are  obligated to issue 34.2 million  shares of
our common stock to fulfill our remaining royalty obligation,  which is included
in other current liabilities as royalty payable at December 31, 2004 and 2005 on
our consolidated balance sheets.

     The merger  agreement  provided  that we had an obligation to register with
the SEC a specified amount of $2,467,639 in shares of our common stock issued to
the  Midcore   selling   stockholders   at  closing.   In  the  event  that  our
volume-weighted,  average  trailing ten-day closing bid price declined before we
requested effectiveness of our registration statement, we were required to issue
additional  shares to the selling  stockholders  to provide  them the  specified
amount. We refer to this price guaranty provision as the fill-up  provision.  Of
the shares  initially  issued,  7,126,548  shares of our common stock were to be
registered  based upon a  volume-weighted,  average trailing ten-

                                      F-22
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


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

     Midcore's  founding   stockholders  have  taken  legal  action  against  us
relating, in part, to the royalty and look back obligations (see Note 22).

     On  September  28,  2000,  NCT  Video  Displays,   Inc.,  our  wholly-owned
subsidiary,  entered  into a product  development  and  license  agreement  with
Advanced Display Technologies,  LLC ("ADT"). Under the agreement,  NCT Video was
granted by ADT exclusive right and license to make, have made, use, sell, lease,
license,  or  otherwise  commercially  dispose  of  all  licensed  products  and
components,  as defined in the agreement,  including certain  electronic outdoor
billboard displays that utilize a laser or light beam scanning  methodology.  On
May 4, 2001,  NCT Video and ADT (by then known as ViewBeam  Technology,  L.L.C.)
entered into a product and development agreement that modified the September 28,
2000  agreement.  Some of the  provisions  of the original  agreement  remain in
effect.  The agreement does not materially  modify or change the development fee
to be paid by NCT Video but does modify the specifications of the product design
and the field of use to which the  September  28,  2000  exclusive  license  was
granted.  Such license had a carrying  amount of $0.7 at both  December 31, 2004
and 2005. The amount  represents  our cost for ADT's  completion of this product
development  and  resultant  license  rights  and  subsequent  modification.  In
addition,  as part of this  agreement,  NCT Video and ADT entered into a product
development arrangement whereby work is to be performed by ADT in developing the
prototype and production design for the licensed products.  In return, NCT Video
agreed to pay a development fee of $1.0 million for performing such  development
work. At each of December 31, 2004 and 2005,  $0.7 million was included in other
current liabilities as development fee payable.

15.  Capital Stock:

Authorized Capital Stock:

Increase in Authorized Shares

     At our 2005 annual  meeting of  stockholders,  held on June 28,  2005,  our
stockholders  approved an  amendment  to our  certificate  of  incorporation  to
increase the number of our  authorized  shares of common stock to 5.622  billion
shares.  This increase,  however, is not sufficient for us to satisfy all of our
commitments  to  reserve,  issue and  register  for resale  shares of our common
stock.

     We have  authorized  5.622 billion shares of common stock,  $0.01 par value
per share, and 10 million shares of preferred stock, $0.10 par value per share.

Common shares available for future issuance

     At  December   31,  2005,   we  were   required  to  reserve  for  issuance
approximately  18.6 billion shares of our common stock based on the par value of
$.01 per  share,  the  current  par  value of our  common  stock.  Delaware  law
restricts  sales of unissued shares of common stock at a price less than the par
value of the common  stock.  The number of shares  issuable  upon  conversion or
exchange of many of our  outstanding  convertible  and  exchangeable  securities
varies as a function of the market  price of our common  stock.  At December 31,
2005,  the number of shares we are  required to reserve  exceeded  the number of
authorized but unissued shares of our common stock. The table below outlines the
greater of the shares of our common  stock that we are  required  to reserve for
issuance  or register  for resale as of  December  31, 2005 based on balances at
December 31, 2005 and accrued  dividends and interest,  if  applicable,  through
December 31, 2005.

                                      F-23
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


<TABLE>
<CAPTION>

<S>                                                                           <C>
 NCT Convertible Notes issued to Carole Salkind                        8,784,813,170
 Stock options and warrants                                            4,728,558,302
 NCT Preferred Stock                                                   2,881,169,014
 NCT Convertible Notes                                                   348,735,359
 ConnectClearly Common Stock exchange                                      7,245,000
 Pro Tech Preferred Stock exchange                                        64,969,644
 Artera Group Convertible Notes                                          582,623,625
 Artera Group Preferred Stock exchange                                   663,583,654
 Earnout for Theater Radio Network acquisition                             7,091,200
 Look back and royalty payable for Midcore Software acquisition           60,359,577
 Private Equity Credit Agreement                                         486,630,000
                                                                  -------------------
 Total (a)(b)                                                         18,615,778,545
                                                                  ===================
</TABLE>

Footnote:
--------
     (a)  A number of our commitments  require us to reserve and/or register for
          resale a number of shares of our common  stock in excess of the number
          of shares actually issuable (approximately 17.3 billion). In addition,
          the number of shares  issuable upon  conversion or exchange of many of
          our outstanding convertible and exchangeable securities (calculated as
          approximately  5.0  billion  shares  in the table  above)  varies as a
          function of the market price of our common stock.

     (b)  If the number of shares required to be reserved and/or  registered had
          been  computed at the  December  31, 2005 closing bid price of $0.004,
          28.5 billion shares would be required (representing approximately 24.3
          billion shares actually issuable).

Transactions with Crammer Road LLC:

Private Equity Credit Agreement

     In July 2005, we entered into a second amended and restated  private equity
credit  agreement  with Crammer Road LLC, a beneficial  owner of more than 5% of
our common stock,  that superseded and replaced our amended and restated private
equity credit agreement dated as of September 30, 2004, which in turn,  replaced
a similar agreement dated as of July 25, 2002. The new credit agreement gives us
the right to sell to Crammer Road shares of our common stock having an aggregate
value of up to $50.0 million pursuant to puts made by us. The agreement requires
us to sell to Crammer  Road at least an  aggregate of $5.0 million of our common
stock at a 7% discount  from the market value of our common stock  determined at
the time of a put.  During the year ended  December 31, 2005, we sold a total of
18,756,756  shares of our  common  stock to Crammer  Road under this  agreement,
resulting in gross proceeds of approximately $134,000.

Waiver of Conversion Request

     Effective  July 19,  2005,  Crammer  Road  rescinded  its February 17, 2004
notice to convert 189 shares of our series H convertible preferred stock into an
aggregate of 52,487,414  shares of our common stock.  In addition,  Crammer Road
released us from all damages  resulting from our failure to effect the requested
conversion, including liquidated damages incurred by us pursuant to the terms of
the series H preferred  stock.  As of August 1, 2005, we had  incurred,  but not
paid,  liquidated  damages of $6.3  million as a result of our failure to effect
the  conversion.  As a result of this  waiver,  we  reversed  the charge of $6.3
million, of which $3.9 million related to 2004 and is included in other (income)
expense on our consolidated statements of operations.

Settlement with Crammer Road

     In September 2002,  Crammer Road brought a legal action against us alleging
that we breached a series of  agreements  entered into by Crammer Road and us on
April 12, 2001, namely, a Private Equity Credit Agreement, a Registration Rights
Agreement relating thereto, an Exchange Rights Agreement, an Exchange Agreement,
a Registration  Rights Agreement  relating thereto,  two promissory notes and an
additional side letter  agreement.  On October 30, 2002, a settlement  agreement
was  executed  by the parties and  approved by the court on December  11,  2002.
Under the  settlement  agreement,  all claims in the suit by  Crammer  Road were
dismissed in  consideration of our issuance to Crammer Road of 68 million shares
of NCT  common  stock  (valued  at  $5.44  million  based on a price

                                      F-24
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


of $.08 per share).  On December 17, 2002, we issued  Crammer Road 40 million of
the 68 million  shares.  The  remaining 28 million  shares were issuable 65 days
after demand  therefore by Crammer  Road. On or about May 8, 2003, we issued the
remaining 28 million shares to Crammer Road.

Shares Issued for Acquisitions:

     In August 2000, our indirect subsidiary, DMC Cinema, Inc., acquired Theater
Radio Network,  Inc., a provider of entertainment audio programming in multiplex
cinemas nationwide.  Under certain earnout provisions, we were required to issue
additional  shares of our  common  stock to the former  stockholders  of Theater
Radio Network based upon  specified  revenues  achieved by Theater Radio Network
subsequent to the acquisition.  Based upon these provisions, we may be currently
obligated to issue approximately 7,091,200 additional shares of our common stock
for  potential  issuance  to the  former  Theater  Radio  Network  stockholders.
However,  we believe we have defense and counterclaims that would eliminate,  or
at least mitigate, any obligation to issue additional shares of our common stock
to these holders.

     Further, we are obligated to issue additional shares to satisfy a look back
provision for the Midcore Software  acquisition and royalty  payable.  (see Note
14)

Shares Issued upon Conversion or Exchange of Indebtedness:

     During the year ended December 31, 2003, $1.8 million of the 6% convertible
notes plus interest were exchanged for 42,092,786 shares of our common stock. At
December  31, 2005,  $2.5 million of 6%  convertible  notes  principal  could be
exchanged for shares of our common stock.

     On October 10, 2005, an investor converted $15,227 in principal and $48,548
in accrued  interest  due under our July 24,  2004 8%  convertible  note into an
aggregate of 13,370,000 shares of our common stock.

Shares Issued for Settlement of Legal Claims:

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

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

ConnectClearly.com, Inc. Initial Financing:

     On August 10,  2000,  we entered into an  agreement  with three  accredited
investors    for   the    financing    of   our    majority-owned    subsidiary,
ConnectClearly.com,  Inc.  ("ConnectClearly").  In  connection  with the initial
funding of ConnectClearly, we issued 1,000 shares of ConnectClearly common stock
to these investors in  consideration  for $0.5 million in cash and conversion of
promissory  notes payable,  due to two of the investors,  totaling $0.5 million.
During  the  years  ended  December  31,  2003,  2004 and  2005,  no  shares  of
ConnectClearly  were  exchanged for shares of our common stock.  At December 31,
2004  and  2005,  63  ConnectClearly  common  shares  subject  to  exchange  are
outstanding.  These ConnectClearly  common shares are exchangeable for shares of
our common stock at 80% of the five-day  closing bid average of our common stock
for the five-day period immediately  preceding the exchange. We have recorded an
option with respect to this exchange feature. Because of the conversion terms of
other  outstanding  convertible  instruments,  we  are  not  assured  of  having
sufficient  shares  available to honor all potential  exchange,  conversion  and
exercise  requests.  As a result,  this option has been recorded as a liability.
The fair value at  December  31,  2004 and 2005 was  approximately  $53,000  and
$8,000, respectively.

                                      F-25
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


NCT Audio Products, Inc.:

     To date, we issued an aggregate of 31,239,483 shares of our common stock in
exchange for 2,145 shares of NCT Audio  common  stock.  At December 31, 2004 and
2005, no shares of NCT Audio common stock subject to exchange were outstanding.

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

     At December 31, 2005, our wholly owned  subsidiary,  NCT Hearing  Products,
Inc.,  held  approximately  62.8  million  shares  of  Pro  Tech  common  stock,
comprising  approximately  83% of the issued and outstanding  shares of Pro Tech
common  stock.  There were no  issuances  of Pro Tech common  stock during 2003.
During  2004,  Pro Tech  issued  2.5  million  shares of its  common  stock upon
conversion of 40 shares of its series B preferred  stock plus accrued  dividends
and  issued an  aggregate  of 37.7  million  shares of its  common  stock to NCT
Hearing  from  which  NCT  Hearing  paid  2  million   shares  to  two  investor
communications  and  public  relations  consultants.  The  shares  issued to NCT
Hearing  were for payment of $640,466 of  outstanding  notes owed to NCT Hearing
and in  consideration  for an  expansion  of an  existing,  exclusive  worldwide
technology  license  conveyed by NCT Hearing to Pro Tech.  During 2005, Pro Tech
issued 1.8 million shares of its common stock upon  mandatory  conversion of the
outstanding shares of its series A preferred stock.

NCT Group, Inc. Preferred Stock:

     Our  Board  of  Directors  is  authorized  to issue 10  million  shares  of
preferred  stock,  par value $0.10 per share.  Through 2005, we designated  nine
series of convertible  preferred stock,  including series A, B, C, D, E, F, G, H
and I preferred  stock.  Series A and B were  eliminated  in 1992  without  ever
having been issued.  We have issued preferred stock under our series C, D, E, F,
G, H and I designations and have eliminated our series C, D, E and F. Our series
G convertible  preferred stock is designated but not outstanding at December 31,
2005.  As of December  31,  2005,  there were 1,656 shares of series H preferred
stock issued and  outstanding  and 510 shares of series I preferred stock issued
and outstanding.

     Series H
     --------

     Our series H  convertible  preferred  stock  consists  of 2,100  designated
shares, with a par value of $0.10 per share, a stated value of $10,000 per share
and a  cumulative  dividend  of 4% per annum on the stated  value  payable  upon
conversion  in either  cash or  common  stock,  at our  election.  The  series H
preferred  stock is senior  in rank to our  common  stock and has a  liquidation
value equal to the dividends  plus the stated value in the case of  liquidation,
dissolution or winding up of NCT. The holder of our series H preferred stock has
no voting  rights  (except as may be  required  by law).  Each share of series H
preferred  stock is  convertible  into shares of our common  stock at 75% of the
average  closing bid price of our common stock for the five-day  trading  period
immediately preceding conversion.  The holder of the series H preferred stock is
subject to a limitation on the percentage ownership of outstanding common shares
of the company, as defined.  The series H preferred stock is redeemable by us in
cash at any time at a  redemption  price that is a function of the time  between
the date  the  series H was  originally  issued  and the  redemption  date.  The
redemption  price  ranges  from 85% of  stated  value  (within  three  months of
issuance) to 120% of stated value (after nine months from issuance). On June 24,
2002,  we issued  1,800  shares  ($18  million  stated  value)  of our  series H
preferred  stock to Crammer Road for $120,000  cash and 12,000 shares of DMC New
York,  Inc. On May 11, 2004, we issued 27 shares of our Series H preferred stock
to Crammer Road. For each of the years ended  December 31, 2003,  2004 and 2005,
we have included $0.7 million  representing  preferred stock dividends (included
in internet  expense) and for the year ended  December  31,  2004,  $0.1 million
representing  amortization of beneficial  conversion features (includes in other
(income) expenses, net) on the consolidated statements of operations. Because of
the conversion terms of other outstanding  convertible  instruments,  we are not
assured of having sufficient  shares available to honor all potential  exchange,
conversion and exercise  requests.  As a result, our series H preferred stock is
classified as a liability on our  consolidated  balance sheets under the caption
"Preferred stock subject to conversion into a variable number of shares."

     During  2003,  75 shares of series H  preferred  stock  along with  accrued
dividends  totaling  approximately  $0.8 million were converted into  23,057,761
shares of our common stock. During 2005, Crammer Road converted approximately 97
shares of  series H  preferred  stock  along  with  accrued  dividends  totaling
approximately  $127,000 into 142,597,004 shares of our common stock (see Note 26
for transactions subsequent to December 31, 2005).

     We had received a request to convert 189 shares  ($1,890,000  stated value)
of series H preferred  stock plus accrued  dividends into 52.5 million shares of
our common stock that we could not fulfill because of an insufficient  number of
authorized  but  unissued  shares of common  stock.  Under  the  certificate  of
designations,  preferences and rights governing the series H preferred stock and
incorporated into the June 21, 2002 exchange  agreement  pursuant

                                      F-26
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


to which these shares were sold by us to Crammer Road, Crammer Road was entitled
to (i) compensation  for late delivery of conversion  shares of 1% of the stated
value of series H not converted  ($18,900)  per business day beginning  March 4,
2004, the 12th business day after the conversion date; or (ii) ordinary contract
breach  damages.  In  addition,  if Crammer Road elected to purchase on the open
market  the  number  of our  common  shares  it should  have  been  issued  upon
conversion of the series H shares,  Crammer Road was entitled to a payment equal
to the excess,  if any, of the open market price over the conversion  price.  On
July 19, 2005, Crammer Road irrevocably waived, rescinded and voided any and all
outstanding demands with respect to the conversion of the 189 shares of series H
preferred  stock into shares of our common stock.  As result of this waiver,  we
reversed   charges   accrued   through   July  11,  2005  of  $6.3  million  for
non-conversion of series H preferred stock into our common stock. As a result of
the  classification  of  our  series  H  preferred  stock  as a  liability,  the
non-conversion   charges  are  included  in  other   (income)   expense  in  our
consolidated statement of operations.

     Pursuant to the terms of a registration rights agreement with Crammer Road,
we were  obligated to file a registration  statement  covering the shares of our
common stock issuable upon conversion of the 27 shares of our series H preferred
stock  issued in 2004 no later than August 28,  2004.  Because we did not have a
sufficient  number of  authorized  shares  of NCT  common  stock to issue  these
shares, we were not able to file a registration  statement. As a result, Crammer
Road is entitled to liquidated damages at the rate of 2% per month of the stated
value of these 27 shares  of  series H  preferred  stock.  For the  years  ended
December 31, 2004 and 2005, we incurred a charge to other (income) expense,  net
in  our   consolidated   statement  of   operations   of  $22,140  and  $65,880,
respectively.

     Series I
     --------

     Our series I  convertible  preferred  stock  consists  of 1,000  designated
shares,  with a par value of $0.10 per  share and a stated  value of $1,000  per
share.  No dividends are payable on the series I preferred  stock.  The series I
preferred stock is junior in rank to our series H convertible  preferred  stock,
but senior in rank to our common stock and has preferences over the common stock
with respect to distributions and payments upon our liquidation,  dissolution or
winding  up. The  holders  of series I  preferred  stock  have no voting  rights
(except as may be  required by law).  Each share of series I preferred  stock is
convertible into approximately 47,619 shares of our common stock,  determined by
dividing  the $1,000  stated value by the fixed  conversion  price of $0.021 per
share.  This conversion price is higher than the fair market value of our common
stock on March 16, 2005 (the date the  purchase  agreements  were  executed)  of
$0.0185 per share.

     In March 2005, we issued  975.55767  shares of its series I preferred stock
to four  executive  officers and one non  executive  officer in exchange for the
forgiveness  of accrued but unpaid  incentive cash bonuses,  to Steven  Salkind,
Carole Salkind's son, in exchange for unpaid cash consulting fees (see Note 20),
and to a  consultant  in  exchange  for 271  shares  of  Artera  Group  series A
preferred stock.

     During 2005, all but one holder of our series I preferred  stock  converted
an aggregate of 465.55767 shares (including  executive  officers'  conversion of
212.33253  shares) of our series I preferred stock into 22,169,412 shares of our
common stock.

Artera Group, Inc. Preferred Stock:

     On  February  21,  2001,  the  Board of  Directors  of Artera  Group,  Inc.
designated  a series A  convertible  preferred  stock  which  consists of 30,000
designated  shares,  par value of $0.10 per share,  and stated  value $1,000 per
share with a  cumulative  dividend of 4% per annum on the stated  value  payable
upon conversion in either cash or common stock of Artera. We issued 8,299 shares
of  series A  preferred  stock  in 2001.  Each  share  of  series A  convertible
preferred  stock is convertible  into shares of Artera Group common stock on and
after the earlier of two years after  issuance  or ten days after  Artera  Group
becomes  publicly  traded,  at a conversion  price equal to the average  closing
price for the five trading days prior to the  conversion  date.  At December 31,
2004 and 2005, we have  included  $8.6 million and $8.7  million,  respectively,
representing  the carrying  value of the  preferred  stock  included in minority
interest on the consolidated  balance sheets. We amended these rights as to $4.3
million stated value of the preferred stock as described  below. For each of the
years ended December 31, 2003,  2004 and 2005, the dividends were  approximately
$0.3  million.  These amounts are included in preferred  stock  dividends in the
calculation of net loss attributable to common  stockholders on the consolidated
statements of operations for the years then ended.

     We entered into an exchange  rights  agreement in 2001 with ten  accredited
investors who hold $4.3 million in aggregate stated value of Artera Group series
A

                                      F-27
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


preferred  stock.  Each of the ten  holders of Artera  Group  series A preferred
stock is entitled  to exchange  the Artera  Group  series A preferred  stock for
shares of NCT common stock at an exchange price per share of 100% of the average
closing  bid price of NCT common  stock for the five  trading  days prior to the
exchange  date and may not  convert  into Artera  Group  common  stock.  We have
recorded  an option  with  respect  to this  exchange  feature.  Because  of the
conversion  terms  of  other  outstanding  convertible  instruments,  we are not
assured of having sufficient  shares available to honor all potential  exchange,
conversion or exercise requests. As a result, this option has been recorded as a
liability.  The fair value at  December  31,  2004 and 2005 was  $3,220,449  and
$863,021,  respectively. NCT is obligated to register shares of its common stock
for the exchange of Artera Group series A preferred  stock.  For the years ended
December 31, 2003,  2004 and 2005,  we incurred  charges of $1.9  million,  $0.6
million and $0.6 million,  respectively,  for non-registration of the underlying
shares of NCT  common  stock.  These  amounts  are  included  in other  (income)
expense,  net on the  consolidated  statements of operations  for the years then
ended. Pursuant to the exchange rights agreement, NCT has the option at any time
to redeem any  outstanding  Artera Group series A preferred  stock by paying the
holders  cash equal to the  aggregate  stated value of the Artera Group series A
preferred stock being redeemed (together with accrued and unpaid dividends).  As
a result of a  settlement  of a legal  action,  which  included  $3.3 million of
accrued  non-registration fees payable relating to our inability to register the
shares,  we recorded a gain of $2.0 million in 2003  included in other  (income)
expense,  and we are no longer  accruing  these fees for three holders of Artera
Group  series A preferred  stock.  Pursuant  to an  exchange  rights and release
agreement dated April 10, 2003, three holders of an aggregate of 3,154 shares of
Artera Group series A preferred  stock received an additional  right to exchange
their shares into a  to-be-designated  series of NCT preferred stock upon thirty
days prior  written  notice.  As of December 31, 2004 and 2005,  8,299 shares of
Artera Group series A preferred stock are issued and outstanding,  and no shares
have been converted or exchanged  under the exchange  rights  agreement.  During
2005,  NCT  acquired  271 shares  with a stated  value of  $271,000,  along with
accrued dividends of $44,000, as consideration for the issuance of 160 shares of
NCT series I preferred stock. The balance of approximately $155,000 was recorded
as additional  paid in capital.  The 271 shares are held by NCT Group and, along
with the related dividends, are eliminated in consolidation.

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

     Pro Tech has designated two series of preferred stock,  series A and B. Its
series A convertible  preferred stock consists of 1,500 designated  shares,  par
value $0.01 per share,  and a stated value of $1,000 per share with a cumulative
dividend  rate of 4% per  annum  on the  stated  value.  The Pro  Tech  series B
convertible  preferred stock consists of 500 designated  shares, par value $0.01
per share,  and a stated  value of $1,000 per share with a  cumulative  dividend
rate of 4% per annum on the stated value. The series A and B preferred stock has
conversion  rights into shares of Pro Tech common  stock at a discount  from the
quoted  market  value.  In  addition,  each  share  of Pro  Tech  series A and B
preferred stock has exchange rights for shares of NCT common stock at 80% of the
lowest average of the average  closing bid price for a share of NCT common stock
for any consecutive five-day period out of 15 trading days preceding the date of
exchange.  As outlined in Note 13,  dividends  on Pro Tech  preferred  stock are
included in interest expense on the consolidated statements of operations.

     During the year ended  December  31,  2004,  40 shares of Pro Tech series B
preferred  stock were converted into 2,522,042  shares of Pro Tech common stock.
On March 31, 2005,  due to a mandatory  conversion  requirement,  the  remaining
outstanding  50  shares  of Pro  Tech  series A  preferred  stock  plus  accrued
dividends  were converted  into  1,844,007  shares of Pro Tech common stock.  At
December  31,  2005,  there were no shares of Pro Tech series A preferred  stock
outstanding and 460 shares of Pro Tech series B preferred stock outstanding.

16.  Common Stock Options and Warrants:

     We value options and warrants using the Black-Scholes  option pricing model
and account for options and warrants  issued to those that are not our employees
or members  of our Board of  Directors  as  outlined  herein.  The fair value of
options  and  warrants  issued to  general  consultants  or as  settlements  are
recorded as consulting  expense or settlement expense over the vesting period of
the  related  options  or  warrants  and  classified  as  selling,  general  and
administrative  expenses.  The fair  value of  options  and  warrants  issued in
connection with  indebtedness are amortized as interest expense over the term of
the related  indebtedness.  The  allocated  fair value of options  and  warrants
issued  in  conjunction  with  subsidiary  preferred  stock are  accreted  as an
increase in loss  attributable to common  stockholders in the net loss per share
computation  over the vesting  period of the related  options or warrants or, if
the preferred  stock is required to be  classified  as a liability,  as interest
expense.  The fair value of  options  and  warrants  issued in  connection  with
acquisitions  are  recorded  as  additional   purchase  price.  Under  specified
conditions,  certain  of  these  warrants  and  options  may be  required  to be
reclassified as liabilities (see Note 2, "Derivative Instruments").

                                      F-28
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


Stock Options:

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

     As of December 31, 2005, there were no options  outstanding  under the 1987
Plan or the Directors Plan. The following summarizes information about our stock
options outstanding and exercisable at December 31, 2005:

<TABLE>
<CAPTION>

                                           Options Outstanding                    Options Exercisable
                                   -------------------------------------     ----------------------------
                                                 Weighted
                                                  Average
                                                 Remaining     Weighted                          Weighted
                                                Contractual     Average                           Average
                   Range of           Number       Life        Exercise         Number           Exercise
      Plan      Exercise Prices    Outstanding  (In Years)      Price        Exercisable           Price
  -----------   ---------------    -----------   --------       ------       -----------           -----
<S>             <C>       <C>       <C>            <C>         <C>            <C>                 <C>
   1992 Plan    $0.103 to $1.00     38,164,531     2.18        $0.3917        38,164,531          $0.3917
                                   ===========                               ===========

   2001 Plan    $0.006 to $0.13    399,359,850     6.23        $0.0204       399,359,850          $0.0204
                                   ===========                               ===========

   Non-plan     $0.006 to $0.13    423,864,000     3.01        $0.0402       423,864,000          $0.0402
                                   ===========                               ===========
</TABLE>

1987 Plan

     Our 1987 Plan  provided  for the grant of up to 4.0  million  shares of our
common stock as either incentive stock options or nonstatutory stock options. In
2000, the Board of Directors determined that no future grants of options for the
purchase of shares would be made under the 1987 Plan.  Thus,  no options for the
purchase  of shares are  available  for  future  grant  under the 1987 Plan.  At
December 31, 2004 and 2005,  there were no  outstanding,  options under the 1987
Plan.  During  2004,  there were options to acquire  1,350,000  shares of common
stock at a weighted  average  exercise price of $0.5093 per share.  All of these
options expired in 2004.

1992 Plan

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

     From time to time, the Board of Directors accelerated the vesting schedules
of previously  granted stock options so that all options  granted under the 1992
plan are 100% vested.

                                      F-29
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


     1992 Plan activity is summarized as follows:

<TABLE>
<CAPTION>

                                                                            Years Ended December 31,
                                            ------------------------------------------------------------------------------------
                                                       2003                        2004                         2005
                                            ---------------------------  --------------------------  ---------------------------
                                                             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              44,022,537    $   0.420     42,459,337   $    0.404      38,921,799     $   0.390
Options granted                                  -          $     -           -        $   -               -          $       -
Options exercised                                -          $     -           -        $   -               -          $       -
Options canceled, expired or forfeited        (1,563,200)   $   0.672     (3,537,538)  $    0.557        (757,268)    $   0.292
                                            --------------               ------------                 ------------
Outstanding at end of year                    42,459,337    $   0.404     38,921,799   $    0.390      38,164,531     $   0.392
                                            ==============               ============                 ============

Options exercisable at year-end               42,459,337    $   0.404     38,921,799   $    0.390      38,164,531     $   0.392
                                            ==============               ============                 ============

Options available for grant at year-end          -                            -                            -
                                            ==============               ============                 ============
</TABLE>


2001 Plan

     On April 25,  2001,  our Board of  Directors  adopted the 2001 Plan for the
grant of shares and options to purchase up to 18,000,000  shares of common stock
to directors, officers, employees and consultants. The 2001 Plan was approved by
our  stockholders in July 2001. The exercise price of all 2001 Plan options must
be at least  equal to the fair market  value of our common  stock on the date of
grant, and the term and vesting schedules of 2001 Plan options are determined by
the Board of Directors. On June 28, 2005, our stockholders approved an amendment
to our 2001 Plan to increase the number of shares of common stock issuable under
the 2001 Plan from 18 million shares to 618 million shares.

     On September 10, 2003, our Board of Directors granted seven-year options to
purchase shares of our common stock to directors,  officers and employees in the
aggregate amount of 26,290,000 shares, at an exercise price of $0.054 per share,
the fair market value of shares of our common stock on the date of grant

     During 2004, our Board of Directors  granted options and stock awards under
the 2001 Plan for an  aggregate  of  29,380,000  shares of our  common  stock at
exercise prices  reflecting the market prices on the dates of grant,  subject to
stockholder  approval  of  sufficient  increases  in the number of shares of our
common stock (i) authorized and (ii) available for issuance under the 2001 Plan.
At the time of such  stockholder  approval,  if the  market  value of our common
stock exceeded the exercise price of the subject options, we would have incurred
a non-cash  charge to earnings equal to the spread between the exercise price of
the option and the market price, times the number of options involved. No charge
resulted upon approval of these  increases by our  stockholders in June 2005. Of
these  grants,  27,380,000  options  were  granted to  officers,  directors  and
employees and 2,000,000  were granted as partial  consideration  for  consulting
services.  We estimated  the fair value of these  consulting  options  using the
following  assumptions  in applying  the  Black-Scholes  option  pricing  model:
dividend yield of 0%; risk-free interest rate of 1.94%;  volatility of 100%; and
an expected  life of three and  one-half  years.  We also  recorded  charges for
consulting  services  of  approximately  $0.2  million,  classified  as selling,
general and administrative expenses.

     On October 19, 2005, we granted an aggregate of 308,105,000  options to our
employees and  non-employee  directors  under the 2001 Plan.  Of these  options,
262,103,000  options  were  granted  to  officers  and  other  employees  by the
compensation  committee of our Board of Directors  and  46,002,000  options were
granted to our four non-employee  directors by the full Board of Directors.  All
of the options  granted have a seven-year  term and an exercise  price of $0.006
per share,  the fair market value of our common  stock on the date of grant.  We
estimated  the fair  value of  these  consulting  options  using  the  following
assumptions in applying the Black-Scholes  option pricing model:  dividend yield
of 0%;  risk-free  interest rate of 4.34%;  volatility of 100%;  and an expected
life of 6.3 years.

     On October 25, 2002, the Board of Directors  deemed all options  granted to
directors,  officers, consultants and employees before that date as fully vested
(pending the stockholder approvals discussed above) to acknowledge its gratitude
for the ongoing  dedication of these individuals  during the 2002  restructuring
and cost-saving measures,

                                      F-30
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


including  suspension of employee salary  increases.  On September 10, 2003, the
Board  of  Directors  (pending  the  stockholder   approvals   discussed  above)
accelerated the vesting schedules of options granted to directors,  officers and
employees  dated  October 25, 2002 to 100% vested to  acknowledge  its continued
gratitude for the dedication of these individuals.  On March 17, 2004, the Board
of Directors  (pending the  stockholder  approvals  discussed  above) deemed all
options  granted to  directors,  officers and employees on September 10, 2003 as
fully vested to acknowledge  its continued  gratitude to these  individuals.  On
December 31, 2004,  the Board of Directors  (pending the  stockholder  approvals
discussed  above)  accelerated  the  vesting  schedules  of  options  granted to
directors, officers and employees in 2003 and 2004 to 100% vested to acknowledge
its  continued  gratitude to these  individuals  during a period of  cost-saving
measures, including the suspension of employee salary increases. On the December
16, 2005, the Board of Directors  accelerated  the vesting  schedules of options
granted  to  directors,   officers  and  employees  in  2005.   Although   these
accelerations  of vesting  schedules were a modification of the original grants,
there was no accounting  consequence because the market price on the date of the
modification was lower than the original exercise price of the grants.

     2001 Plan activity is summarized as follows:

<TABLE>
<CAPTION>

                                                                Years Ended December 31,
                                           ----------------------------------------------------------------------------------
                                                     2003                       2004                         2005
                                           -------------------------  ------------------------  -----------------------------
                                                           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             41,485,358    $  0.100   67,054,945    $  0.0780    95,776,753       $ 0.0687
Options granted                              26,290,000    $  0.054   29,260,000    $  0.0477   308,105,000       $ 0.0060
Options exercised                               -          $  -           -         $    -                        $      -
Options canceled, expired or forfeited         (720,413)   $  0.096     (548,192)   $  0.0915    (4,511,903)      $ 0.0587
                                           -------------              -----------               ------------
Outstanding at end of year                   67,054,945    $  0.078   95,766,753    $  0.0687   399,359,850       $ 0.0204
                                           =============              ===========               ============

Options exercisable at year-end              52,476,945    $  0.085   95,766,753    $  0.0687   399,359,850       $ 0.0204
                                           =============              ===========               ============
Available for grant at year-end                 -                         -                     218,520,150
                                           =============              ===========               ============
Stock awards granted                            -                       120,000     $  0.0200        -
                                           =============              ===========               ============
</TABLE>

Non-Plan

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

     On October 19, 2005, 55,589,000 options were granted to our Chief Executive
Officer by our Board of Directors.  These options granted have a seven-year term
and an exercise  price of $0.006 per share,  the fair market value of our common
stock on the date of grant.

     Non-plan stock option activity is summarized as follows:

<TABLE>
<CAPTION>

                                                                         Years Ended December 31,
                                           ------------------------------------------------------------------------------------
                                                    2003                      2004                           2005
                                           ------------------------  ------------------------  --------------------------------
                                                         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            84,825,000   $ 0.0700    368,375,000   $ 0.0455    368,275,000       $ 0.0454
Options granted                            283,550,000   $ 0.0393         -        $   -        55,589,000       $ 0.0060
Options exercised                               -        $    - -         -        $   -            -            $     -
Options canceled, expired or forfeited          -        $    - -     (100,000)    $ 0.2656         -            $     -
                                           ------------              ------------              -----------
Outstanding at end of year                 368,375,000   $ 0.0455    368,275,000   $ 0.0454    423,864,000       $ 0.0402
                                           ============              ============              ===========

Options exercisable at year-end            368,375,000   $ 0.0455    368,275,000   $ 0.0454    423,864,000       $ 0.0402
                                           ============              ============              ===========
</TABLE>

                                      F-31
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


Warrants:

     As noted previously,  we determine the fair value of our warrants using the
Black-Scholes  option  pricing  model.  If  issued  with  convertible  notes  or
preferred  stock,  we allocate  proceeds from the note or preferred stock to the
warrants based on the warrant's fair value.

     During 2003, in  conjunction  with the issuance of  convertible  notes,  we
issued Carole Salkind five-year  warrants to acquire an aggregate of 175,175,579
shares of our common stock at exercise  prices ranging from $0.029 to $0.055 per
share, a weighted  average  exercise price of $0.04078.  The fair value of these
warrants  was $5.5  million.  Based  upon the  allocation  of a  portion  of the
proceeds  to the fair value of the  warrants,  we  recorded  a discount  of $5.5
million to the  convertible  notes issued to Carole  Salkind.  During  2003,  we
issued warrants to outside  consultants for the right to acquire an aggregate of
3,000,000  shares of our common stock at exercise prices ranging from $0.0312 to
$0.048 per share,  a weighted  average  exercise price of $0.0438 and recorded a
charge for consulting services of $0.1 million.

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

     During 2005, in  conjunction  with the issuance of  convertible  notes,  we
issued   Carole   Salkind   five-year   warrants  to  acquire  an  aggregate  of
2,022,250,000 shares of our common stock at exercise prices ranging from $0.0041
to $0.0195 per share, a weighted  average  exercise  price of $0.0122.  The fair
value of these  warrants  was $23.8  million.  Based  upon the  allocation  of a
portion  of the  proceeds  to the fair  values of the  warrants,  we  recorded a
discount of $23.8  million to the  convertible  notes issued to Carole  Salkind.
During 2005, we issued warrants to outside  consultants for the right to acquire
an  aggregate of  3,000,000  shares of our common stock at an exercise  price of
$0.0095 per share,  and recorded a charge for  consulting  services of less than
$0.1 million.

     Warrant activity is summarized as follows:

<TABLE>
<CAPTION>

                                                                          Years Ended December 31,
                                           ----------------------------------------------------------------------------------------
                                                       2003                         2004                          2005
                                           -----------------------------  --------------------------  -----------------------------
                                                              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              169,667,922     $ 0.0910      344,005,337    $  0.0601    1,843,337,421     $ 0.0316
Warrants granted                              178,175,579     $ 0.0408    1,528,250,001    $  0.0267    2,025,250,000     $ 0.0122
Warrants exercised                              -             $   -             -          $       -          -           $     -
Warrants canceled, expired or forfeited        (3,838,164)    $ 0.2512      (28,917,917)   $  0.1146     (1,417,500)      $ 0.1796
                                           ----------------               --------------               -------------
Outstanding at end of year                    344,005,337     $ 0.0601    1,843,337,421    $  0.0316    3,867,169,921     $ 0.0214
                                           ================               ==============               =============

Warrants exercisable at year-end              343,639,714     $ 0.0597    1,843,185,342    $  0.0316    3,867,043,886     $ 0.0214
                                           ================               ==============               =============
</TABLE>

                                      F-32
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


     The following table summarizes  information  about warrants  outstanding at
December 31, 2005:

<TABLE>
<CAPTION>

                              Warrants Outstanding                  Warrants Exercisable
                      ---------------------------------------   ---------------------------
                                                  Weighted
                                                  Average
                                     Weighted    Remaining                      Weighted
                                      Average   Contractual                      Average
      Range of           Number      Exercise       Life           Number       Exercise
  Exercise Prices      Outstanding     Price     (In Years)      Exercisable      Price
  ---------------      -----------     -----     ----------      -----------      -----
<S>          <C>      <C>              <C>              <C>     <C>                <C>
  $0.0010 to $0.0190  2,557,000,000    $0.0132          4.37    2,557,000,000      $0.0132
  $0.0200 to $0.0296    673,650,001    $0.0271          3.52      673,650,001      $0.0271
  $0.0310 to $0.0490    503,381,952    $0.0401          3.07      503,381,952      $0.0401
  $0.0500 to $0.0990    126,433,801    $0.0680          1.85      126,433,801      $0.0680
  $0.1000 to $0.7500      6,704,167    $0.2862          1.22        6,578,132      $0.2849
                      --------------                            --------------
                      3,867,169,921    $0.0214          3.96    3,867,043,886      $0.0214
                      ==============                            ==============
</TABLE>

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

     Pro Tech's  1998 Stock  Option  Plan is for the  benefit of its  directors,
officers,  employees and  consultants  and  authorizes  the issuance of up to 30
million  options to purchase shares of Pro Tech common stock. As of December 31,
2005,  Pro Tech's  outstanding  stock options have exercise  prices ranging from
$0.008  to  $0.4375  and  a  weighted  average  remaining  contractual  life  of
approximately  4.2 years. The following table summarizes Pro Tech's stock option
activity:

<TABLE>
<CAPTION>

                                                                   Years Ended December 31,
                                       -------------------------------------------------------------------------------------
                                                  2003                        2004                           2005
                                       --------------------------- ----------------------------- ---------------------------
                                                      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         1,372,500    $  0.253      1,285,000      $   0.242       1,495,000      $  0.158
Options granted                                -      $    -          635,000      $   0.030         527,000      $  0.008
Options exercised                              -      $    -              -        $     -               -        $    -
Options expired                            (87,500)   $  0.402       (425,000)     $   0.221             -        $    -
                                       ------------                -----------                   -------------

Outstanding at end of year               1,285,000    $  0.242      1,495,000      $   0.158       2,022,000      $  0.119
                                       ============                ===========                   =============

Options exercisable at year-end          1,285,000    $  0.242      1,495,000      $   0.158       2,022,000      $  0.119
                                       ============                ===========                   =============
</TABLE>

     In  connection  with  issuance of Pro Tech's  series A preferred  stock and
series B preferred  stock,  Pro Tech issued  warrants to purchase  shares of its
common stock.  At December 31, 2005, no Pro Tech  warrants were  outstanding  as
indicated in the following table:

<TABLE>
<CAPTION>

                                                                   Years Ended December 31,
                                       -------------------------------------------------------------------------------------
                                                  2003                        2004                           2005
                                       --------------------------- ----------------------------- ---------------------------
                                                      Weighted                     Weighted                      Weighted
                                                       Average                      Average                       Average
                                                      Exercise                     Exercise                      Exercise
                                         Shares         Price         Shares         Price          Shares         Price
                                       ------------ -------------- -------------  -------------- -------------  ------------
<S>                                      <C>          <C>           <C>             <C>                           <C>
Outstanding at beginning of year         5,500,000    $  0.433      1,000,000       $  0.130             -        $   -
Warrants granted                               -      $    -              -         $    -               -        $   -
Warrants expired                        (4,500,000)   $  0.500     (1,000,000)      $  0.130             -        $   -
                                       ------------                -------------                 -------------
Outstanding at end of year               1,000,000    $  0.433            -         $    -               -        $   -
                                       ============                =============                 =============
</TABLE>

                                      F-33
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


17.  Other (Income) Expense:

     Other (income)/expense, net consisted of the following:

<TABLE>
<CAPTION>

                                                                  (In thousands of dollars)
                                                               For the Years Ended December 31,
                                                        -------------------------------------------
                                                            2003          2004            2005
                                                        -------------  -------------  -------------
<S>                                                     <C>            <C>            <C>
  Finance costs associated with non-registration
     of common shares                                   $      4,104   $      1,338   $      1,404
  Litigation settlements (Notes 11 and 15)                    (5,317)         3,625              -
  Stockholder default penalties on debt (Note 11)              2,103          6,752          9,522
  Dissolution of Artera International                              -         (4,567)             -
  Conversion damages                                               -          3,931         (3,931)
  Change in fair value of derivative liabilities              (1,593)       (23,615)       (42,460)
  Series H preferred stock monetary value                        (25)           322           (133)
  Other                                                         (181)           205              3
                                                        ------------- -------------   -------------
     Other (income) expense, net                        $       (909)  $    (12,009)  $    (35,595)
                                                        ============= =============   =============
</TABLE>

     Other (income) expense, net included a $4.6 million gain on the dissolution
and  liquidation  of  Artera  Group  International  Limited  for the year  ended
December 31, 2004,  and the year ended  December 31, 2003 included  gains on the
settlement of lawsuits in the amount of $4.9  million.  During 2004, we recorded
an expense of $3.6 million for  settlement  of certain  legal claims  assumed by
Carole Salkind (see Note 11).

18.  Costs of Exiting Activities:

     On March 21, 2002,  the Board of  Directors  of Artera Group  International
Limited, a U.K.-based subsidiary,  decided that the corporation should cease all
operations and be liquidated. On April 5, 2002 Artera Group International ceased
its  Internet   service   provider   operations  and  entered  into  liquidation
proceedings,  resulting  in a charge  of $0.4  million.  On July 22,  2004,  the
liquidator  concluded  the  liquidation  of Artera Group  International  and the
notification  was  registered at Companies  House in the UK on July 27, 2004. On
October 27, 2004, the Registrar of Companies removed Artera Group  International
from its register.  Other (income) expense,  net included a $4.6 million gain on
the dissolution and  liquidation of Artera Group  International  Limited for the
year ended December 31, 2004.

                                      F-34
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


19.  Supplemental Cash Flow Disclosures:

<TABLE>
<CAPTION>

                                                                                                 (In thousands of dollars)
                                                                                             For the Years Ended December 31,
                                                                                    ------------------------------------------------
                                                                                         2003             2004             2005
                                                                                    ---------------  --------------   --------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
<S>                                                                                 <C>              <C>              <C>
  Interest                                                                          $         35     $        30      $         19
                                                                                    ===============  ==============   ==============
Supplemental disclosures of non-cash investing and financing activities:
  Unrealized holding loss on available-for-sale securities                          $        (53)    $         -      $          -
                                                                                    ===============  ==============   ==============
  Receipt of common stock of subsidiary for payment of note receivable              $          -     $       640      $          -
                                                                                    ===============  ==============   ==============
  Issuance of common stock upon exchange of principal portion
     of convertible notes of subsidiary                                             $      1,754     $         -      $          -
                                                                                    ===============  ==============   ==============
  Property and equipment financed through capitalized leases and notes payable      $          -     $         -      $         18
                                                                                    ===============  ==============   ==============
  Issuance of common stock to fulfill common stock payable obligation               $      2,296     $         -      $          -
                                                                                    ===============  ==============   ==============
  Issuance of common stock upon conversion of preferred stock and dividends         $        785     $         -      $          -
                                                                                    ===============  ==============   ==============
  Issuance of common stock to settle litigation                                     $      4,125     $         -      $          -
                                                                                    ===============  ==============   ==============
  Receipt of common stock of subsidiary as consideration for license amendment      $          -     $       275      $          -
                                                                                    ===============  ==============   ==============
  Issuance of preferred stock for advance by investor in prior years                $          -     $       230      $          -
                                                                                    ===============  ==============   ==============
  Issuance of series I preferred stock                                              $          -     $         -      $        976
                                                                                    ===============  ==============   ==============
  Issuance of common stock upon conversion of debt                                  $          -     $         -      $         64
                                                                                    ===============  ==============   ==============
  Finance costs associated with non-registration of common shares
    on preferred stock of subsidiary                                                $      1,896     $     2,023      $      4,860
                                                                                    ===============  ==============   ==============
  Principal on convertible notes and notes payable rolled into new notes            $     25,932     $    67,517      $      90,218
                                                                                    ===============  ==============   ==============
  Interest on convertible notes and notes payable rolled into new notes             $      1,933     $     3,433      $      4,372
                                                                                    ===============  ==============   ==============
  Issuance of common stock upon conversion of series I preferred stock              $          -     $         -      $        466
                                                                                    ===============  ==============   ==============
</TABLE>

20.  Related Parties:

Convertible Notes and Warrants Issued to Carole Salkind:

     Beginning in 1999, we have issued  convertible  notes to Carole Salkind,  a
stockholder  and the spouse of a former  director of NCT.  During the year ended
December 31, 2005, we issued $114.8 million of 8% convertible  notes and one 12%
convertible  note in the  amount  of $1.0  million  (see  Note  11)  along  with
five-year warrants to acquire an aggregate of 2,022,250,000 shares of our common
stock (see Note 16). Of these notes,  $115.4  million mature six months from the
date of  issuance  and $0.4  million  are due upon the  earlier of demand or six
months from the date of issuance.  Consideration  paid for these notes  included
approximately  $7.6  million in cash and the  refinancing  of notes  aggregating
approximately $90.2 million were issued to refinance matured notes,  premiums on
equipment loans and original issue discounts of $4.1 million, along with default
penalties and accrued interest.  Carole Salkind demanded, and we agreed, that to
the extent  required in connection with her  collateralized  interests under our
collateralized  notes to her, we would pay the legal fees she incurs as a result
of legal matters (see Note 11 and 22).

Financial Advisors:

     In July 2005,  we engaged  Bear,  Stearns & Co.,  Inc.,  to serve as Artera
Group's exclusive financial advisor with respect to its strategic  alternatives.
Robert N. Rose, a member of our Board of Directors since October 2005, currently
serves as a Senior Managing Director of Bear, Stearns & Co., where he is engaged
in institutional  sales and marketing for a wide range of financial products and
services.

                                      F-35
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


Consulting Agreements with Affiliates of Carole Salkind:

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

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

     As compensation for these consulting  services,  we generally agreed to pay
cash fees to the  consulting  entities  and to provide  health  insurance to Mr.
Salkind.  Through  December 31,  2005,  we had not paid any cash fees and do not
have an accrual for any such fees as of December 31, 2005.  We settled  $510,000
of  accrued  consulting  fees  through  the  issuance  of shares of our series I
preferred stock (see below).  In addition,  we granted  five-year,  fully vested
stock options to the  consultants  that are exercisable at the then market price
of our common  stock on the date of grant.  As of  December  31,  2004 and 2005,
options to purchase an aggregate of 368,275,000  shares of our common stock at a
weighted  exercise  price  per  share  of  $0.0454  had  been  granted  to these
consultants.  In  conjunction  with the issuance of these  options,  we recorded
charges aggregating $8.3 million, zero and zero for the years ended December 31,
2003, 2004 and 2005, respectively.  Because we had insufficient shares available
to honor all potential requests under outstanding convertible instruments, under
EITF No. 00-19,  we are required to classify  these options as  liabilities  and
mark-to-market  at each reporting  date.  The amount  recorded as liabilities at
December 31, 2004 and 2005 was $3.7 million and $0.2 million,  respectively, and
is  included in  derivative  liabilities  on our  consolidated  balance  sheets.
Finally,  we  paid  health  insurance  premiums  on  behalf  of Mr.  Salkind  of
approximately $2,200, $4,100 and $6,400 in 2003, 2004 and 2005, respectively. We
did not pay any cash or  non-cash  consulting  compensation  directly  to Carole
Salkind or Morton Salkind or to any members of their family except the issuances
of series I preferred stock to Stephen Salkind.  The consulting  engagements and
compensation of entities  represented by Mr. Salkind were not dependent upon the
ongoing funding provided by Ms. Salkind.

     On January 7, 2005, we entered into a three-year  consulting agreement with
Morton Salkind,  Carole Salkind's  spouse,  to provide us ongoing  financial and
consulting  advisory services as we may reasonably request from time to time. As
compensation for these consulting services, we have agreed to pay to Mr. Salkind
a monthly $5,000 cash fee payable at the end of the term of the agreement and to
provide  Mr.  Salkind  with  the use of an  automobile  owned or  leased  by us,
together with auto insurance  coverage,  through the term of the agreement.  The
total  accrual at December 31, 2005  included in expense for the year then ended
was $60,000. Our annual costs to provide this automobile are $10,800 per year.

Series I Preferred Stock:

     In March 2005,  we issued an aggregate of 212.33253  shares of our series I
convertible  preferred stock to four executive  officers in exchange for accrued
but unpaid incentive cash bonuses of $343,000  (before income tax  withholding).
The specific terms of each of these issuances are as follows:

                                      F-36
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


<TABLE>
<CAPTION>

                                                                                           Net Bonus Amount
                                                                              Gross            After Tax
                             Name                                          Bonus Amount       Withholding       Shares Issued (a)
                             ----                                          ------------       -----------       -----------------
<S>                                                                         <C>                 <C>                    <C>
Michael J. Parrella, Chief Executive Officer and Chairman of the Board      $125,000            $81,000                81
Irene Lebovics, President                                                     46,000             27,000                27
Cy E. Hammond, Senior Vice President and Chief Financial Officer              72,000             41,000                41
R. Wayne Darville, Chief Operating Officer, Artera Group, Inc.               100,000             63,333             63.33253
</TABLE>

Note:
----
(a)  We did not receive cash proceeds for these issuances.

     Also in March  2005,  we  issued  510  shares of our  series I  convertible
preferred  stock to Steven  Salkind,  Carole  Salkind's  son, in exchange for an
aggregate of unpaid cash  consulting  fees of $510,000  accrued through June 12,
2005,  representing  all  cash  consulting  fees  payable  to  various  entities
affiliated  with  Carole  Salkind  pursuant  to expired or  expiring  consulting
agreements (but not payable to Morton Salkind personally pursuant to his January
2005  agreement).  These  consulting fees had previously been assigned to Steven
Salkind by these entities.

SpringerRun, Inc.:

     In July 2003, we entered into a consulting agreement with SpringerRun, Inc.
John McCloy II, a director of NCT, is Chairman of the Board of Directors,  Chief
Executive  Officer and a 40% stockholder of  SpringerRun.  John McCloy II's son,
John  McCloy III,  is  President,  Treasurer,  Secretary,  a Director  and a 25%
stockholder  of  SpringerRun.  John  McCloy  II's  son,  Rush  McCloy,  is a 25%
stockholder  of  SpringerRun.  Under  this  consulting  agreement,   SpringerRun
provides consulting services to us, consisting  primarily of raising capital and
debt  financing,  identifying  potential  joint  ventures  and  other  strategic
transactions and finding distributors,  licensees and end users for our products
and  technologies.  The initial term of the SpringerRun  agreement was one year,
but it was  extended  by the  parties  for a second  year  and is  automatically
extended for additional  one-year terms unless  terminated prior to the start of
any one-year term by either party.  Under the  agreement,  we have agreed to pay
SpringerRun the following compensation: 6% of the amount of any equity financing
arranged by  SpringerRun  plus 5% of this amount payable in warrants to purchase
shares of our common stock;  1% of the amount of any debt financing  arranged by
SpringerRun;  and 7% of our  net  revenues  resulting  from  joint  ventures  or
distribution,  license or end user  agreements  arranged by SpringerRun  for the
first three years of these  agreements  and 5% of net  revenues  resulting  from
these agreements thereafter. In lieu of cash, some of the compensation described
above may, at SpringerRun's request and if agreed to by us, be paid in shares of
our common stock or in the shares of any joint  venture  entity  entered into by
us.  The  material  terms  and  conditions  of  this  agreement,  including  the
compensation  formulas,  are  comparable  to  those  used by us  with  similarly
situated, unrelated consultants. We have paid expenses aggregating approximately
$7,000 on behalf of  SpringerRun  through  December 31, 2005.  The  compensation
earned by SpringerRun  under the agreement  through December 31, 2005 was $1,033
and has been offset against the expenses paid by us on behalf of SpringerRun.

Spyder Technologies Group, LLC:

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

                                      F-37
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


new royalty  amounts  payable are  comparable  with those  currently  payable to
similarly situated, unrelated finders and master distributors, respectively.

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

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

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

     Prior to December  16,  2005,  from time to time on an "as  needed"  basis,
Spyder Technologies Group, LLC provided technical  consulting services to Artera
Group pertaining to Artera Turbo. On May 1, 2005, we amended this arrangement to
change the cash compensation payable to Spyder from $20 per hour to $365 per day
(or $45.63 per hour for a pro rata portion thereof based on an eight-hour  day).
No  additional  compensation  is paid for hours in  excess of eight per day.  In
addition,  Spyder received a one-time  payment of approximately  $11,900,  which
effectively made the rate increase retroactive to January 1, 2005.

     On December 16, 2005, we, Artera Group and Spyder entered into a Consulting
Agreement, pursuant to which, among other things:

     o    Spyder  serves as a consultant  to Artera  Group and performs  certain
          computer and data processing services for which Spyder receives a cash
          consulting fee of $365.00 per day;
     o    Spyder  assigned  to Artera  Group any and all of  Spyder's  rights in
          certain intellectual property developed by Spyder prior to the date of
          the consulting agreement, for which Spyder will receive a fee of 2% of
          the net  revenues  received  by  Artera  Group  from its "Rev the Web"
          service; and
     o    Spyder  assigned  to Artera  Group any and all of  Spyder's  rights in
          certain  intellectual  property developed by Spyder from and after the
          date of the consulting agreement;

Spyder  earned  aggregate  technical  consulting  fees of $86,840,  $115,206 and
$82,707 for the years ended December 31, 2003, 2004 and 2005, respectively.

Incentive Compensation of Management:

     Our Chairman of the Board of Directors and Chief Executive Officer, who, at
December 31, 2005,  held options to purchase an aggregate of 235,918,634  shares
of our common stock, participated in an incentive bonus arrangement,  consisting
of 1% of the value, in cash or otherwise, of transactions consummated by us with
third parties.  Effective  September 30, 2005, this incentive bonus  arrangement
was modified to calculate  bonuses based only on a percentage of product  sales,
licenses,  royalties  and similar  revenues.  Under this bonus  arrangement,  we
included in selling,  general and administrative  costs approximately  $433,000,
$902,000  and $84,000  for the years ended  December  31,  2003,  2004 and 2005,
respectively. At December 31, 2004 and 2005, $879,000 and $444,000, respectively
was due this officer under this arrangement.

                                      F-38
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


     Our  President  and  director,  who, at December 31, 2005,  held options to
purchase an aggregate of 56,368,073 shares of our common stock,  participated in
an  incentive  bonus  arrangement  consisting  of 1/3% of the value,  in cash or
otherwise,  of  transactions  consummated  by us with third  parties.  Effective
September 30, 2005, this incentive  bonus  arrangement was modified to calculate
bonuses based only on a percentage  of product  sales,  licenses,  royalties and
similar revenues. Under this bonus arrangement,  we included in selling, general
and administrative  costs approximately  $144,000,  $300,000 and $28,000 for the
years ended December 31, 2003, 2004 and 2005, respectively. At December 31, 2004
and 2005,  $372,000 and $140,000,  respectively  was due this officer under this
arrangement.

     Our Senior Vice President,  Chief Financial  Officer and director,  who, at
December 31, 2005 held options to purchase an aggregate of 43,756,024  shares of
our common stock,  participated in an incentive bonus arrangement  consisting of
1/2% of the value, in cash or otherwise, of transactions  consummated by us with
third parties.  Effective  September 30, 2005, this incentive bonus  arrangement
was modified to calculate  bonuses based only on a percentage of product  sales,
licenses,  royalties  and similar  revenues.  Under this bonus  arrangement,  we
included in selling,  general and administrative  costs approximately  $217,000,
$451,000  and $42,000  for the years ended  December  31,  2003,  2004 and 2005,
respectively.   At  December  31,  2004  and  2005,   $558,000   and   $209,000,
respectively, was due this officer under this arrangement.

     On March 31, 2005, the three executives  agreed to waive a portion of their
incentive  bonus earned in 2004. The amounts waived were $326,000,  $107,000 and
$158,000 for the Chief Executive Officer, President and Chief Financial Officer,
respectively. Further, the payment of a portion of their remaining bonus amounts
is subject to certain limitations. In addition,  effective January 1, 2005, this
bonus  arrangement  was revised to calculate and bonuses based on certain actual
cash inflows. Bonuses based on equity or financing cash inflows ceased effective
September 30, 2005.

     As noted in the series I preferred  stock  discussion,  in March  2005,  we
issued an aggregate of 212.33253  shares of our series I  convertible  preferred
stock to four  executive  officers in exchange for accrued but unpaid  incentive
cash bonuses of $343,000 (before income tax withholding).  During the year ended
December 31, 2005, these executive officers converted all of their shares of our
series I preferred stock into 10,111,072 shares of our common stock.

Indebtedness of Management:

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

     Effective April 30, 2004,  Jonathan Charry, an executive officer,  resigned
from his employment with us as our Senior Vice President, Corporate Development.
On various  dates in 2000 and 2001,  Dr.  Charry  had  entered  into  short-term
promissory  notes to borrow  funds from us in  anticipation  of payments due him
under his incentive  compensation  arrangement.  As of May 1, 2002, the borrowed
funds  had  not  been  repaid  but  were  consolidated  with  interest  into  an
outstanding  promissory  note due January 15,  2003 in the  principal  amount of
$108,000.  The note bore interest at an annual rate of 6.0% through its due date
of January 15,  2003,  and at prime plus 5%  thereafter.  This note has not been
paid.  We  continue  to seek  collection  on the May 1, 2002 note.  In 2004,  we
recorded a reserve for uncollectible  accounts of approximately $0.1 million for
the portion of the May 1, 2002 note  receivable  from Dr.  Charry (plus  accrued
interest)  in excess of the amount we owed to Dr.  Charry.  At December 31, 2004
and 2005, the total amount  outstanding  under this note,  including accrued but
unpaid  interest  through  the date a reserve  was  recorded  was  $127,000  and
$98,000, respectively.

                                      F-39
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


Kambrium, AB:

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

Manatt Jones Global Strategies, LLC:

     On July 1, 2004, we entered into a sixteen-month  consulting agreement with
Manatt Jones Global  Strategies,  LLC, a consulting  firm,  which  agreement was
later extended  through  December 31, 2005.  Under this agreement,  Manatt Jones
assisted us in establishing  distribution  relationships,  large end user sales,
resellers,   capital  funding,   joint  venture  partners  and  private  network
opportunities  for our Artera Group business and our Artera Turbo product lines,
primarily  in Mexico,  Latin  America  and Asia  through  the  firm's  extensive
contacts in those regions, but also in the U.S. and elsewhere through the firm's
extensive  contacts in the Washington,  D.C. area. Manatt Jones also provided us
with  use of their  Washington,  D.C.  and New York  City  offices.  Under  this
agreement,  we paid a monthly fee of $16,250 to Manatt Jones for these services.
Manatt Jones recruited our former Senior Vice President,  Corporate  Development
to serve as a Managing  Director in which capacity he was able to support Manatt
Jones's efforts on our behalf as a result of his availability and his experience
with our  Artera  Group  business.  The total  paid in 2004 and 2005  under this
agreement was $98,000 and $130,000, respectively.

LightSpeed Networks, Inc.:

     On July 30, 2004,  we entered  into a two-year  consulting  agreement  with
LightSpeed Networks,  Inc., a consulting firm. Under this agreement,  LightSpeed
assists  us,  in  particular   Artera  Group,   in   establishing   distribution
relationships  and securing capital,  funding and joint ventures.  Our agreement
with LightSpeed provides for future  pay-for-performance  consideration (after a
threshold  is met) that is generally  based on a percentage  of the value of the
revenue or  funding  received  by us as a result of  LightSpeed's  efforts.  Our
former Senior Vice  President,  Corporate  Development is the President and sole
stockholder of LightSpeed.  In addition, under the agreement with LightSpeed, we
agreed to waive the  expiration  of options  that  otherwise  would have expired
three months after his resignation from employment with us and to accelerate the
vesting of any  unvested  options then held by the former  officer,  in order to
provide him additional  incentive to further our business objectives through his
efforts with LightSpeed, resulting in a charge in 2004 of $0.1 million. To date,
we have made no payments under this arrangement.

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

     In April 2003,  we issued a  convertible  note in the  aggregate  principal
amount of $235,000 to Alpha Capital  Aktiengesellschaft,  a beneficial  owner of
more than 5% of our common  stock.  The note  matured on April 22, 2005 and bore
interest at 8% per annum until  maturity and bears  interest at an 18% per annum
default rate thereafter. The note is convertible into shares of our common stock
at a conversion  price per share of $0.04.  We would be required to make certain
liquidating  damages  payments if we fail to effect a requested  conversion in a
timely  manner.  We also have an obligation to register for resale the shares of
our common stock issuable upon conversion of the note.

     In September 2003, we issued a convertible note in the aggregate  principal
amount of $400,000 to Alpha  Capital and an additional  convertible  note in the
aggregate  principal  amount of $40,000 to Libra  Finance,  S.A.,  a third party
finder and a  beneficial  owner of more than 5% of our common  stock.  The notes
matured on  September 4, 2005 and bore  interest at 8% per annum until  maturity
and bears  interest at an 18% per annum default rate  thereafter.  The notes are
convertible  into shares of our common stock at a conversion  price per share of
80% of the average  closing bid price of our common  stock for the five  trading
days prior to  conversion.  We would be  required

                                      F-40
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


to make certain  liquidating  damages  payments if we fail to effect a requested
conversion in a timely manner. We also have an obligation to register for resale
the shares of our common stock issuable upon conversion of the note.

     In July 2004, we issued a subordinated  collateralized  convertible note in
the  aggregate  principal  amount of $400,000 to Alpha  Capital and an unsecured
convertible note in the aggregate  principal amount of $40,000 to Libra Finance,
as third party finder. The notes mature on July 23, 2006 and bear interest at 8%
per annum until  maturity  and bear  interest at an 18% per annum  default  rate
thereafter.  The notes are  convertible  into  shares of our  common  stock at a
conversion  price per share equal to the lesser of $0.0232 or 80% of the average
closing  bid  price of our  common  stock  for the five  trading  days  prior to
conversion. We would be required to make certain payments if we fail to effect a
requested  conversion in a timely manner. In connection with the issuance of the
note to Alpha  Capital,  we issued Alpha Capital a five-year  warrant to acquire
5,555,556 shares of our common stock at an exercise price per share equal to the
conversion  price of the note. We also have an obligation to register for resale
the  shares  of our  common  stock  issuable  upon  conversion  of the notes and
exercise of the warrant.

Crammer Road LLC:

     We have executed a number of transactions  with Crammer Road (see Note 15),
a beneficial  owner of more than 5% of our common stock.  In May 2004, we issued
27 shares  ($270,000  stated  value) of our series H preferred  stock to Crammer
Road for cash  advanced in prior years of $230,000 less related fees of $24,500.
In connection with the issuance, a beneficial conversion feature of $0.1 million
was recorded as a reduction to the  outstanding  balance of the preferred  stock
and an increase to additional paid-in capital. The beneficial conversion feature
was  immediately  amortized  because the series H preferred  was  eligible to be
converted on the date of issuance.

     In July 2005, we entered into a second amended and restated  private equity
credit agreement with Crammer Road, that supersedes and replaces our amended and
restated  private equity credit  agreement dated as of September 30, 2004, which
in turn replaced a similar  agreement  dated as of July 25, 2002. The new credit
agreement  gives us the right to sell to Crammer Road shares of our common stock
having an aggregate  value of up to $50.0  million  pursuant to puts made by us.
The agreement  requires us to sell to Crammer Road at least an aggregate of $5.0
million of our common stock at a 7% discount from the market value of our common
stock  determined at the time of a put. During the year ended December 31, 2005,
we sold a total of  18,756,756  shares of our common stock to Crammer Road under
this agreement, resulting in gross proceeds of $133,700.

21.  Income Taxes:

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

     We file consolidated  federal and state tax returns.  At December 31, 2005,
we had available  estimated net operating loss  carryforwards  of  approximately
$258.3  million,  estimated  capital  loss  carryforwards  of $3.6  million  and
estimated  research and development  credit  carryforwards of approximately $2.4
million for federal income tax purposes,  of which  approximately  $47.9 million
will expire within the five years ending  December 31, 2010 ($1.8 million expire
in 2006) and  approximately  $210.4 million of net operating loss  carryforwards
and all capital loss  carryforwards and research and development  credits expire
at various dates from December 31, 2011 through  December 31, 2025. In addition,
the  net  operating  losses  of  acquired   companies  prior  to  their  related
acquisitions by us have not been included above.  Our ability to utilize our net
operating  loss and capital loss  carryforwards  and  research  and  development
credits  may be  severely  limited  and  subject to an annual  limitation  under
Section 382 of the Internal Revenue Code.

     The difference  between the statutory tax rate of 34% and our effective tax
rate of 0% is primarily due to the increase in the valuation  allowance of $18.0
million and $7.8 million in 2004 and 2005,  respectively.  The  difference is as
follows:

                                      F-41
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


<TABLE>

                                                                        Years Ended December 31,
                                                        -----------------------------------------------------
                                                              2003               2004               2005
                                                            Restated           Restated
                                                        ----------------   ----------------  ----------------
<S>                                                          <C>                <C>               <C>
Statutory rate                                               (34.0)%            (34.0)%           (34.0)%
State tax net of federal effect                               (5.6)              (5.6)             (5.6)
Permanent differences:
    Beneficial Conversion                                      5.9               13.0              23.2
    Other                                                      0.1               (3.9)              0.2
Effect of expirations of and adjustments to prior year
     net operating loss carryforwards                        (23.5)              (1.0)              8.2
Other                                                            -                1.0              (4.1)
Increase in valuation allowance                               57.1               30.5              12.1
                                                        ----------------   ----------------  ----------------
     Effective tax rate                                          - %                - %               - %
                                                        ================   ================  ================
</TABLE>

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

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


<TABLE>
<CAPTION>

                                                          (In thousands of dollars)
                                                                  December 31,
                                                     --------------------------------------
                                                            2004               2005
                                                         Restated
                                                     ------------------  ------------------
<S>                                                  <C>                 <C>
Accounts receivable                                  $             140   $             139
Inventory                                                          135                  80
Investments                                                      4,525               4,525
Property, equipment and intangibles                              2,105               2,105
Accrued expenses                                                   437                 628
Stock compensation                                               9,422               9,429
Derivative liabilities                                          (1,253)            (16,245)
                                                     ------------------  ------------------
     Total temporary differences                     $          15,511   $             661
Net operating and capital loss carryforwards                    78,949             101,718
Federal research and development credits                         2,597               2,456
                                                     ------------------  ------------------
                                                     $          97,057   $         104,835
Less:  Valuation allowance                                     (97,057)          (104,835)
                                                     ------------------  ------------------
     Deferred taxes                                  $               -   $               -
                                                     ==================  ==================
</TABLE>

22.  Litigation:

Founding Midcore Shareholder Litigation:

     In April 2004,  Jerrold Metcoff and David Wilson filed a complaint  against
us  and  Michael  Parrella,   our  Chairman  and  Chief  Executive  Officer,  in
Connecticut state court, which complaint was subsequently  amended to add Carole
Salkind and her spouse,  Morton Salkind,  as defendants.  The plaintiffs  allege
that we and Mr. Parrella  breached a number of  representations,  warranties and
obligations  under or  relating  to the August 29,  2000  Agreement  and Plan of
Merger by which  Metcoff,  Wilson and others sold to us 100% of the  outstanding
shares of a

                                      F-42
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


corporation  that became our  subsidiary,  Midcore  Software,  Inc.  Among those
obligations  was the  obligation  for us to  issue  to  Metcoff  and  Wilson  an
aggregate of 60,359,576 shares of our common stock,  which we have not done. The
plaintiffs  also allege that we and Mr. Parrella  engaged in intentional  and/or
negligent misrepresentations,  fraudulent transfers of intellectual property and
other company assets, unfair trade practices and breaches of an implied covenant
of good faith and fair  dealing.  The  complaint,  as  amended,  seeks  damages,
punitive damages, interest and attorneys' fees, and seeks a declaration that the
intellectual  property  acquired  from the  plaintiffs by the  corporation  that
became Midcore Software,  Inc. (which intellectual property is currently used in
our Artera  Turbo  service  offerings)  is held in trust for the  benefit of the
plaintiffs.  The damages,  punitive damages, interest and attorneys' fees sought
in the substitute  complaint are all for unspecified amounts, but in other court
filings in the case, the plaintiffs have alleged that the total cash amount they
are owed exceeds $4.2 million.  Mr. Parrella has told us that he intends to deny
the material allegations against him.

     On October 3, 2005, at our request,  the court  required the  plaintiffs to
revise their second amended  complaint with respect to, among other things,  the
removal of certain  references  to members of our Board of Directors  other than
Mr. Parrella. On October 19, 2005, Metcoff and Wilson filed a revised complaint.
On November 2, 2005, we filed a request to further revise the revised complaint.
On December 20, 2005,  the court  required the  plaintiffs to further revise the
revised  complaint.  On January 4, 2006, the  plaintiffs  filed a second revised
complaint.  On January 27, 2006, we filed a motion to strike  certain counts set
forth in the plaintiffs' second revised  complaint,  including certain claims of
breach of  contract  and breach of  contractual  representation  and  warranties
against  various  corporate  defendants  and claims of breach of fiduciary  duty
against  Mr.  Parrella.  This  motion is  currently  pending  before  the court.
Discovery in the case is ongoing.

     In November  2005,  Messrs.  Metcoff and Wilson filed a separate  complaint
against John McCloy,  Sam Oolie,  Irene Lebovics and Cy Hammond  (members of our
Board of Directors) in Connecticut state court asserting claims against them for
breaches of fiduciary  duty and unfair trade  practices in  connection  with the
transactions  relating to the August 29, 2000 Agreement and Plan of Merger.  The
damages,  punitive damages, interest and attorneys' fees sought in the complaint
are for unspecified amounts.  Messrs. McCloy, Oolie and Hammond and Ms. Lebovics
have indicated to us that they intend to deny the  allegations  against them. On
December 5, 2005, Metcoff and Wilson filed an amended complaint.  On January 12,
2006,  the four  defendants in this action filed a request to revise the amended
complaint,  and, on February 10, 2006, the plaintiffs  filed their objections to
the request to revise. This motion is currently pending before the court.

     We have agreed to indemnify Messrs. Parrella, McCloy, Oolie and Hammond and
Ms. Lebovics,  to the extent  permitted by our certificate of incorporation  and
applicable law, for any liabilities  (including  legal fees) they may incur as a
result of the claims  against them in these  actions.  We  submitted  the claims
against  Messrs.  Parrella,  McCloy,  Oolie and Hammond and Ms.  Lebovics in the
cases to our director and officer  indemnification  insurance carrier, which has
denied coverage of all of the claims against Messrs. Parrella, McCloy, Oolie and
Hammond and Ms. Lebovics.

     Carole Salkind has demanded that we indemnify  her, in connection  with her
security  interests under our promissory notes to her, for legal fees she incurs
in the action against her.  During the year ended December 31, 2005, Ms. Salkind
incurred   approximately   $16,600  in  such  legal  fees,   of  which  we  paid
approximately $5,400 during that period.

Artera Trademark Oppositions:

     In December 2002,  Altera  Corporation filed oppositions to the granting of
all of our pending U.S. trademark  registration  applications for "Artera Turbo"
and  of  some  of our  pending  U.S.  trademark  registration  applications  for
"Artera." In February  2006, we entered into a settlement  agreement with Altera
Corporation  pursuant to which,  among other  things,  we agreed to withdraw our
U.S.  trademark  registration  and  applications for "Artera" and not to use the
term  "Artera"  alone  as a  corporate  name,  business  name or  trademark.  In
addition,  we agreed to amend our U.S. trademark  registration  applications for
"Artera  Turbo"  to  apply  to,  among  other  things,  "computer  software  for
optimizing Internet and Intranet network bandwidth  utilization and accelerating
data transmission over communication lines." In return, Altera agreed to dismiss
its pending oppositions against the applications for "Artera Turbo."

                                      F-43
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


     Based upon information  currently available to us, we believe that adequate
provisions  have been  estimated  and  included  in our  consolidated  financial
statements for these matters.

                                      F-44
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


23.  Commitments and Contingencies:

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

Leases:


Year ending                              (In thousands of dollars)
December 31,                                      Amount
-------------------------------             -------------------
     2006                                   $            675
     2007                                                677
     2008                                                587
     2009                                                415
     2010                                                 92
     Thereafter                                            -
                                            -------------------
Total minimum lease payments                $          2,446
                                            ===================

     Rent expense was $0.7 million,  $0.8 million and $0.8 million for the years
ended December 31, 2003, 2004 and 2005, respectively.

Benefit Plan Liability:

     In April  1996,  we  established  the NCT  Group,  Inc.  Benefit  Plan (the
"Benefit  Plan"),  which  provides,  among other  coverage,  various health care
benefits to employees and directors of our U.S.  operations.  We administer this
modified   self-insured   Benefit   Plan   through  a   commercial   third-party
administrative  health care provider.  Our maximum aggregate benefit exposure in
each  Benefit  Plan fiscal  year is limited to $0.6  million,  while  individual
benefit exposure in each Benefit Plan fiscal year is limited to $45,000. Benefit
claims in excess of these  individual or maximum  aggregate stop loss limits are
covered by a commercial insurance provider to which we pay a nominal premium for
such stop loss coverage.  We record benefit claim expense in the period in which
the benefit claim is incurred.  We believe we have  sufficient  accruals to meet
our obligation at December 31, 2005.

Contingencies:

     In July 2005, we entered into a second amended and restated  private equity
credit  agreement with Crammer Road requires us to sell to Crammer Road at least
an  aggregate  of $5.0  million of our common  stock at a 7%  discount  from the
market value of our common  stock  determined  at the time of a put.  During the
year ended December 31, 2005, we sold a total of 18,756,756 shares of our common
stock to Crammer Road pursuant to our private equity credit  agreement for gross
proceeds  of  approximately  $134,000  at  prices  determined  pursuant  to  the
provisions of the  agreement,  which prices were less than $0.01 per share,  the
current par value of our common stock.

     Delaware law restricts  sales of unissued shares of common stock at a price
less  than the par  value of the  common  stock.  We have put  shares  under the
private equity credit agreement that were sold below par value. We are currently
engaged in discussions with Crammer Road regarding this shortfall. Since October
12, 2005, we have not and in the future we do not intend to sell shares pursuant
to the private  equity credit  agreement  when the purchase price of such shares
would be less  than par  value.  We also have not and do not  intend to  fulfill
conversion  requests  for  preferred  stock or  convertible  notes  or  exercise
requests for warrants or options if to do so would require us to issue shares of
our common  stock at a conversion  or exercise  price less than the par value of
our common stock.

                                      F-45
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


24.  Segment Information:

     Management  views NCT as being  organized into three  reportable  operating
segments:  communications,  media and technology.  Reportable segment data as of
December  31,  2003,  2004 and 2005 and for the years then ended are provided in
the table below.  Revenue  from our  discontinued  operations  (Note 3) has been
reclassified  and is  therefore  not included in the revenue  amounts  presented
below.  Information  about our operating  segments is found following the table.
Information about the goodwill and related  impairment of our operating segments
is found in Note 2.

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

<TABLE>
<CAPTION>

                                                                             (In thousands of dollars)
                                                                                        Total
                                            Communi-                  Tech-     Reportable   ------------ Other ---------   Grand
                                            cations        Media      nology     Segments      Corporate   Consolidating    Total
                                          ----------    ----------   --------   -----------  ------------ --------------- ----------
<S>                                        <C>           <C>         <C>        <C>          <C>             <C>           <C>
    2005:
   License Fees and Royalties - External   $  1,555      $    535    $   111    $   2,201    $      712      $   (712)     $  2,201
   Other Revenue - External                   2,020            11          -        2,031             -            (2)        2,029
   Revenue - Other Operating Segments         1,017             1          -        1,018            67        (1,085)            -
   Interest (Income) Expense, net             5,106         4,420       (554)       8,972        58,944            (1)       67,915
   Depreciation/Amortization                  1,104         1,644          -        2,748            46        (2,386)          408
   Net Loss                                 (13,197)       (6,336)       481      (19,052)      (39,938)       18,252       (40,738)
   Segment Assets                            13,279        20,995        683       34,957         2,826       (33,063)        4,720
   Capital Expenditures                         887             -          -          887             -             -           887


    2004 Restated:
   License Fees and Royalties - External   $  1,116      $  2,140    $   166    $   3,422    $      566      $   (566)     $  3,422
   Other Revenue - External                   1,882            24          -        1,906             -             -         1,906
   Revenue - Other Operating Segments         1,094             5          -        1,099            (3)       (1,096)            -
   Interest (Income) Expense, net             3,265         3,030       (385)       5,910        49,766             -        55,676
   Depreciation/Amortization                  1,019         1,643          2        2,664           111        (2,392)          383
   Net Loss                                 (13,530)       (7,483)       196      (20,817)      (40,625)        2,391       (59,051)
   Segment Assets                            14,754        22,731        756       38,241         2,377       (35,164)        5,454
   Capital Expenditures                          79             -          -           79             -             -            79


    2003 Restated:
   License Fees and Royalties - External   $    843      $  2,140    $    14    $   2,997    $       16      $      -      $  3,013
   Other Revenue - External                   1,722            35          -        1,757             -             -         1,757
   Revenue - Other Operating Segments         1,116             9          -        1,125           173        (1,298)            -
   Interest (Income) Expense, net             2,593         2,796       (353)       5,036        11,384             -        16,420
   Depreciation/Amortization                  1,003         1,826        115        2,944           166        (2,386)          724
   Net Loss                                 (14,398)       (4,038)       (37)     (18,473)     (132,933)      118,696       (32,710)
   Segment Assets                            21,279        24,548      2,017       47,844         2,486       (37,555)       12,775
   Capital Expenditures                         150             -          -          150             -             -           150

</TABLE>

Communications:

Artera Group, Inc.:

     Artera Group develops and markets our Artera Turbo software that we believe
improves the effective  performance of  communication  lines for  Internet-based
applications  such as web  browsing,  e-mail  and file  transfers.  The  service
accomplishes  these  improvements  by  employing  a  number  of  patent-pending,
performance   enhancement   techniques  that  decrease  the  size  and  increase
efficiencies in the movement, storage and delivery of electronic data.

                                      F-46
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


Pro Tech Communications, Inc.:

     Pro Tech  engineers,  designs  and  distributes  audio  and  communications
solutions and other products for consumers, business users and industrial users.
Pro Tech's products include:

     o    NoiseBuster noise canceling consumer audio headphones;
     o    NoiseBuster  noise  canceling  safety  earmuffs  for use in high noise
          industrial environments;
     o    Apollo headsets and amplifiers for use in contact centers; and
     o    ProCom headsets for use in quick-service restaurants.

Noise Cancellation Technologies (Europe) Ltd.:

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

ConnectClearly.com, Inc.:

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

Media:

     Our media segment, through our Hospital Radio Network business, distributes
a micro broadcasting  system that delivers  place-based  broadcast and billboard
advertising.  We use our proprietary  digital technology to deliver  advertising
messages  interspersed  with CD-quality music programming to hospitals and other
health care  facilities.  In September  2005,  we decided to modify the business
model for our Hospital Radio Network business. Instead of continuing to directly
operate this business,  under our modified  business model, we are licensing our
proprietary  technology used in this business to third parties. In exchange,  we
will receive a percentage of the advertising  revenues  generated by these third
parties through  existing and new  installations of our Sight & Sound systems in
health care  facilities.  Our initial licensee is a company whose president is a
former sales manager of HRN.

Technology:

Advancel Logic Corporation:

     Our Advancel Logic Corporation  subsidiary  participates in the native Java
embedded  microprocessor  market.  We have licensed  certain  Advancel-developed
technology to STMicroelectronics SA for smart card applications, and since 2003,
STMicroelectronics  has been  shipping  orders of its smart cards  incorporating
this technology.

                                      F-47
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


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


                                          (In thousands of dollars)
                                           As of December 31, and
                                          For the Years then Ended
                          --------------------------------------------------
                                2003              2004             2005
                          ---------------   ---------------  ---------------
Revenue
   United States          $        2,202    $        1,998   $        1,998
   Europe                          2,179             2,230              693
   Far East                          389             1,100            1,521
   Other                               -                 -               18
                          ---------------   ---------------  ---------------
     Total                $        4,770    $        5,328   $        4,230
                          ===============   ===============  ===============

Identifiable Assets
   United States                            $        5,353   $        4,618
   Europe                                              101              102
                                            ---------------  ---------------
     Total                                  $        5,454   $        4,720
                                            ===============  ===============

26.  Subsequent Events:

Transactions with Carole Salkind:

     From January 11, 2006 through March 24, 2006, we issued six 8%  convertible
notes  (the  "New  Financing  Notes")  in the  cumulative  principal  amount  of
$3,075,000 for which we were paid  $1,950,000 in cash.  The New Financing  Notes
are due upon  demand,  but in no event  later than six  months  from the date of
issuance.  From  January  12, 2006  through  March 10,  2006,  we issued four 8%
convertible notes (the "Refinancing  Notes") in the cumulative  principal amount
of $75,791,130 to replace notes in default.  The cumulative  principal amount of
the   Refinancing   Notes   represent  the  aggregate   principal   rolled  over
($66,366,030),  default  penalty  (10% of the  principal in default) and accrued
interest.  The  Refinancing  Notes  mature six months from the date of issuance.
Also on February 13, 2006,  we issued a 12%  convertible  note in the  principal
amount of $652,655 to effect payment of the quarterly  interest  installment due
under the $5,000,000 note dated December 22, 2004. The principal  amount of this
note represents the interest installment due January 1, 2006 ($149,589), default
interest  thereon and  interest  default  penalty  (10% of the then  outstanding
principal).  This note matures six months from the date of issuance.  All of the
notes are secured by substantially all of our assets. The notes bear interest at
the stated  rate until the due date of the  notes,  or until  demand is made for
repayment  of the notes,  as  appropriate,  and bear  interest at a default rate
equal to the  stated  rate of  interest  plus 5% on any amount of  principal  or
interest  that is not paid when due or upon  demand.  Interest  is payable  upon
maturity of the notes or upon demand for repayment as determined by the terms of
the note. At the election of Ms. Salkind, the notes may be converted into shares
of our common stock at a conversion  price per share equal to the greater of (i)
the amount  indicated  in the  tables  below or (ii) the par value of NCT common
stock on the date of conversion.  At the election of Ms. Salkind,  the notes may
be exchanged for shares of common stock of any of our  subsidiaries  (except Pro
Tech Communications,  Inc.) that makes a public offering of its common stock (at
the public offering  price).  The value of this option is de minimis.  The notes
contain  events of default,  any one of which (if not cured)  triggers a default
penalty of 10% of the then  outstanding  principal.  If  triggered,  the default
penalty,  along with the  outstanding  principal and accrued  interest,  becomes
immediately  due and  payable.  Events of  default  include  the  failure to pay
principal  and interest when due and the failure to issue shares of common stock
upon exercise of conversion rights.

     In  conjunction  with the  issuance  of  certain  of the  notes,  we issued
1,319,000,000  five-year warrants to acquire shares of our common at an exercise
price per share  equal to the greater of (i) the amount  indicated  in the table
below or (ii) the par value of NCT  common  stock on the date of  exercise.  The
issuance of these warrants will result in a debt discount upon the allocation of
a portion of the proceeds to the warrant based on the warrant's  fair value.  In
addition,  there may be a beneficial conversion feature if the fair value of the
stock issuable upon conversion  exceeds the remainder of the proceeds  allocable
to the notes.

                                      F-48
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


     The  following  tables  set forth  certain  information  regarding  the New
Financing Notes, The Refinancing Notes and the warrants issued to Carole Salkind
Between January 1, 2006 and March 24, 2006:

New Financing Notes:

        Issue           Due                            Cash          Conversion
        Date            Date       Principal         Received           Price
    -------------   -----------  ------------    ---------------  -------------
      1/11/2006      7/11/2006     $375,000      $    300,000          $0.0034
      1/24/2006      7/24/2006      375,000           300,000           0.0033
      2/13/2006      8/13/2006      375,000           300,000           0.0030
      2/27/2006      8/27/2006      850,000           450,000           0.0029
      3/10/2006      9/10/2006      550,000           300,000           0.0029
      3/24/2006      9/24/2006      550,000           300,000           0.0025
                                -------------    --------------
                                 $3,075,000       $ 1,950,000
                                =============    ==============

Refinancing Notes:
<TABLE>
<CAPTION>

                                                                                  Principal
                                                                                     of
       Issue           Due                      Conversion   Date of Original     Original        Default       Accrued
       Date            Date       Principal       Price           Notes             Notes         Penalty      Interest
   --------------   ----------  -------------  ------------ -----------------   -------------   -----------   --------------
<S>   <C>  <C>       <C>  <C>   <C>              <C>        <C>  <C>  <C> <C>   <C>             <C>           <C>
      1/12/2006      7/12/2006  $ 31,637,249     $0.0037    6/24/05 & 7/8/05    $  27,705,267   $ 2,770,527   $  1,161,455
       2/7/2006       8/7/2006    15,653,600     $0.0021    7/26/05 & 8/1/05       13,699,878     1,369,988        583,734
      2/13/2006      8/13/2006    27,034,868      0.0030     8/8/05 & 8/10/05      23,681,625     2,368,163        985,080
      3/10/2006      9/10/2006     1,465,413      0.0029        8/24/2005           1,279,260       127,926         58,227
                                -------------                                   -------------   -----------   --------------
                                $ 75,791,130                                    $  66,366,030   $ 6,636,604   $  2,788,496
                                =============                                   ==-==========   ===========   ==============
</TABLE>

Warrants:
                   Issue         Warrants
                   Date           Issued      Exercise Price
              -----------------------------------------------
                 1/11/2002       20,000,000       $0.0034
                 1/12/2006      521,000,000        0.0037
                 1/24/2006       20,000,000        0.0033
                  2/7/2006      257,750,000        0.0021
                 2/13/2006      476,000,000        0.0030
                 3/10/2006       24,250,000        0.0029
                              --------------
                              1,319,000,000
                              ==============

                                      F-49
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


27.  Selected Quarterly Financial Data (Unaudited):

     The following  tables contain  selected  quarterly  financial data for each
quarter of 2005 and 2004. We believe that the following information reflects all
normal  recurring   adjustments   necessary  for  a  fair  presentation  of  the
information for the periods presented. The operating results for any quarter are
not necessarily indicative of results for any future periods.

     We restated loss  attributable to common  stockholders and loss per share -
basic and  diluted for the first,  second and third  quarters of 2005 to correct
the accounting for certain of our embedded derivative securities.

<TABLE>
<CAPTION>

                                                                             For the three months ended
                                                           --------------------------------------------------------------
Net loss                                                   March 31, 2005    June 30, 2005     September 30, 2005
---------                                                  ---------------   ----------------  ------------------
<S>                                                             <C>                <C>                  <C>
As previously reported                                          $ (16,951)         $ (16,732)           $ (26,190)

   Penalties with respect to preferred stock
    subject to conversion into a variable number of shares         (1,428)            (1,332)               6,165
   Change in fair value of derivative liabilities                   3,461             (1,715)              35,037
   Additional debt discount and beneficial conversion              (4,737)            (1,285)                  14
   Preferred dividends                                               (173)              (175)                (174)
                                                           ---------------   ----------------  ------------------
As restated                                                     $ (19,828)         $ (21,239)           $  14,852
                                                           ===============   ================  ==================

     As a result of the above detailed adjustments,  other (income) expense, net
(decreased) increased $(2,033), $3,047 and $(41,202) from the amounts previously
reported during the three months ended March 31, June 30 and September 30, 2005,
respectively and interest expense, net increased $4,910,  $1,460 and $2,999 from
the amounts previously  reported during the three months ended March 31, June 30
and September 30, 2005, respectively.

                                                                                   For the three months ended
                                                           -------------------------------------------------------------------------
Net loss                                                   March 31, 2004    June 30, 2004     September 30, 2004  December 31, 2004
---------                                                  ---------------   ----------------  ------------------  -----------------
As previously reported                                          $ (15,740)         $ (10,047)           $ (10,415)        $ (28,424)

   Penalties with respect to preferred stock
    subject to conversion into a variable number of shares           (203)            (1,994)              (1,422)           (1,412)
   Additional debt discount and beneficial conversion              (3,601)            (4,541)              (4,006)             (165)
   Change in fair value of derivative liabilities                  (7,715)            15,709               15,003               617
   Preferred dividends                                               (172)              (173)                (177)             (175)
                                                           ---------------   ----------------  ------------------  -----------------
As restated                                                     $ (27,431)          $ (1,046)            $ (1,017)        $ (29,559)
                                                           ===============   ================  ==================  =================

     As a result of the above detailed adjustments,  other (income) expense, net
increased  (decreased)  $7,918,  $(13,715),  $(13,581) and $795 from the amounts
previously  reported during the three months ended March 31, June 30,  September
30 and December 31, 2004,  respectively  and  interest  expense,  net  increased
$3,773, $4,714, $4,183 and $340 during the three months ended March 31, June 30,
September 30 and December 31, 2004, respectively.

                                                                             For the three months ended
                                                           --------------------------------------------------------------
Net loss attributable to common stockholders               March 31, 2005    June 30, 2005     September 30, 2005
--------------------------------------------               ---------------   ----------------  ------------------
As previously reported                                     $      (19,612)   $       (19,332)  $          (26,190)

   Penalties with respect to preferred stock
    subject to conversion into a variable number of shares            977              1,011                5,913
   Change in fair value of derivative liabilities                   3,461             (1,715)              35,037
   Additional debt discount and beneficial conversion              (4,737)            (1,285)                  14
                                                           ---------------   ----------------  ------------------
As restated                                                $      (19,911)   $       (21,321)  $           14,774
                                                           ===============   ================  ==================

                                                           ---------------   ----------------  ------------------
Loss per common share as previously reported               $        (0.03)   $         (0.03)  $            (0.03)
                                                           ===============   ================  ==================

                                                           ---------------   ----------------  ------------------
Loss per common share as restated                          $        (0.03)   $         (0.03)  $            (0.02)
                                                           ===============   ================  ==================

     As a result of the above detailed  adjustments,  preferred  stock dividends
(decreased)  increased  $(2,578),  $(2,518) and $78 from the amounts  previously
reported during the three months ended March 31, June 30 and September 30, 2005,
respectively.

                                                                                   For the three months ended
                                                           -------------------------------------------------------------------------
Net loss attributable to common stockholders               March 31, 2004    June 30, 2004     September 30, 2004  December 31, 2004
--------------------------------------------               ---------------   ----------------- ------------------  -----------------
As previously reported                                          $ (16,141)          $ (12,255)          $ (12,246)        $ (31,072)

   Dividends and penalties with respect to preferred stock
    subject to conversion into a variable number of shares            (57)                (42)                149               977
   Additional debt discount and beneficial conversion              (3,601)             (4,541)             (4,006)             (165)
   Change in fair value of derivative liabilities                  (7,715)             15,709              15,003               617
                                                           ---------------   -----------------  -----------------   ----------------
As restated                                                     $ (27,514)           $ (1,129)          $  (1,100)        $ (29,643)
                                                           ===============   =================  =================   ================

                                                           ---------------   -----------------  -----------------   ----------------
Loss per common share as previously reported                      $ (0.03)            $ (0.02)            $ (0.02)          $ (0.05)
                                                           ===============   =================  =================   ================

                                                           ---------------   -----------------  -----------------   ----------------
Loss per common share as restated                                 $ (0.05)            $ (0.00)            $ (0.00)          $ (0.05)
                                                           ===============   =================  =================   ================

     As a result of the above detailed  adjustments,  preferred  stock dividends
decreased $318, $2,125,  $1,748 and $2,564 from the amounts previously  reported
during the three months  ended March 31, June 30,  September 30 and December 31,
2004, respectively.

</TABLE>

                                      F-50
<PAGE>

                        NCT GROUP, INC. AND SUBSIDIARIES
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                DECEMBER 31, 2005


<TABLE>
<CAPTION>

                                                         (Unaudited; in thousands of dollars, except per share data)
                                                                             Year Ended December 31, 2005
                                            ------------------------------------------------------------------------------------
                                              1st Quarter       2nd Quarter      3rd Quarter       4th Quarter       Full Year   (1)
                                               Restated          Restated         Restated
                                            --------------    --------------    --------------   ---------------  --------------
<S>                                         <C>               <C>               <C>              <C>              <C>
Net revenue                                 $       1,637     $         843     $       1,017    $          733   $       4,230
Gross profit                                        1,500               596               752               322           3,170
Loss attributable to common stockholders          (19,828)          (21,239)           14,852           (14,848)        (41,063)
Loss per share - basic and diluted *        $       (0.03)    $       (0.03)    $        0.02    $        (0.02)  $       (0.06) *

                                                                             Year Ended December 31, 2004
                                            ------------------------------------------------------------------------------------
                                              1st Quarter       2nd Quarter      3rd Quarter       4th Quarter       Full Year   (1)
                                               Restated          Restated         Restated          Restated          Restated
                                            --------------    --------------    --------------   ---------------  --------------
Net revenue                                 $       1,162     $       1,403     $       1,405    $        1,358   $       5,328
Gross profit                                          932             1,191             1,175               938           4,236
Loss attributable to common stockholders          (27,431)           (1,046)           (1,017)          (29,889)        (59,383)
Loss per share - basic and diluted *        $       (0.05)    $       (0.00)    $       (0.00)   $        (0.05)  $       (0.09) *
</TABLE>

Footnotes:
---------
     (1)  Does  not  include  net  revenue  or  gross  profit  for  discontinued
          operations

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

3rd Quarter 2005:
----------------
Includes a reversal of charges  accrued of $6.3  million for  non-conversion  of
series H preferred stock into our common stock.
4th Quarter 2004:
----------------
Includes  $3.6 million for  settlement  of PRG claims and $5.9 million  goodwill
impairment.
3rd Quarter 2004:
----------------
Includes a $4.6 million gain on the  dissolution and liquidation of Artera Group
International Limited.

                                      F-51
<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON SCHEDULE II


Board of Directors and Stockholders of
NCT Group, Inc.

Our audits  were  conducted  for the  purpose of forming an opinion on the basic
consolidated  financial  statements of NCT Group,  Inc. and  subsidiaries  as of
December  31, 2004 and 2005 and for each of the years ended  December  31, 2003,
2004 and 2005 taken as a whole. The 2003, 2004 and 2005 information  included on
Schedule II is  presented  for  purposes  of  additional  analysis  and is not a
required part of the basic consolidated  financial statements.  Such information
has been subjected to the auditing procedures applied in the audits of the basic
consolidated  financial  statements and, in our opinion, is fairly stated in all
material  respects in relation to the basic  consolidated  financial  statements
taken as a whole.


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


New York, New York
March 3, 2006

                                      F-52
<PAGE>

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

<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
             Column A                                     Column B               Column C                  Column D      Column E
------------------------------------------------------------------------------------------------------------------------------------
                                                                        Charged          Charged to
                                                         Balance at     to costs            other                         Balance at
                                                         beginning        and             accounts -       Deductions -     end of
           Description                                     of year      expenses          Describe          Describe         year
------------------------------------                     ----------    ---------         -----------       ------------   ----------
<S>                        <C> <C>                       <C>           <C>               <C>               <C>            <C>
Allowance for doubtful accounts:
       Year ended December 31, 2003                      $    340      $      8          $       (7) (a)   $       -      $     341
       Year ended December 31, 2004                           341            42                 (30) (a)           -            353
       Year ended December 31, 2005                           353            61                 (63) (a)           -            351

Reserve for uncollectible amounts:
       Year ended December 31, 2003                         1,000             -                   -                -          1,000
       Year ended December 31, 2004                         1,000           102                   -                -          1,102
       Year ended December 31, 2005                         1,102            (4)                  -                -          1,098

Allowance for inventory obsolescence:
       Year ended December 31, 2003                           404             -                   -             (122) (b)       282
       Year ended December 31, 2004                           282           114                   -              (54) (b)       342
       Year ended December 31, 2005                           342            85                (192) (c)         (34) (b)       201

Accumulated depreciation:
       Year ended December 31, 2003                         3,796           429                  25  (d)      (1,606) (b)     2,644
       Year ended December 31, 2004                         2,644           249                  20  (d)        (193) (b)     2,720
       Year ended December 31, 2005                         2,720           340                 (56) (d)      (1,289) (b)     1,715

Accumulated goodwill amortization:
       Year ended December 31, 2003                         1,124             -                   -                -          1,124
       Year ended December 31, 2004                         1,124             -                   -             (424) (e)       700
       Year ended December 31, 2005                           700             -                   -                -            700

Accumulated patent and other intangibles amortization:
       Year ended December 31, 2003                         3,960           296                   -                -          4,256
       Year ended December 31, 2004                         4,256           140                   -               (4) (f)     4,392
       Year ended December 31, 2005                         4,392            68                   -               (4) (f)     4,456
</TABLE>

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

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

                                      F-53
<PAGE>


                                   SIGNATURES

Pursuant to the  requirement of Section 13 or 15(d) of the  Securities  Exchange
Act of 1934,  the  registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on April 17, 2006.

                                         NCT GROUP, INC.

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


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


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


/s/ MICHAEL J. PARRELLA         Chief Executive Officer and       April 17, 2006
-------------------------   Chairman of the Board of Directors
   Michael J. Parrella         (Principal Executive Officer)


/s/ IRENE LEBOVICS                President and Director          April 17, 2006
-------------------------
   Irene Lebovics

/s/ CY E. HAMMOND              Senior Vice President, Chief       April 17, 2006
-------------------------     Financial Officer and Director
   Cy E. Hammond               (Principal Financial Officer)


/s/ JOHN J. MCCLOY                       Director                 April 17, 2006
-------------------------
   John J. McCloy II


/s/ SAMUEL A. OOLIE                      Director                 April 17, 2006
-------------------------
   Samuel A. Oolie



/s/ STEPHAN CARLQUIST                    Director                 April 17, 2006
-------------------------
   Stephan Carlquist



/s/ ROBERT N. ROSE                       Director                 April 17, 2006
-------------------------
   Robert N. Rose


                                       S-1