PRO TECH COMMUNICATIONS INC
General       Pro Tech Communications,  Inc. engineers, designs and distributes audio and communications solutions and other products for business users, industrial users and consumers. Our 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.       We were  incorporated in Florida in 1994. Our principal  executive  offices are located at 4492 Okeechobee  Road, Fort Pierce,  Florida 34947, our telephone number    is    (772)     464-5100     and    our     Internet     address    is www.protechcommunications.com.  The  information on our Internet  website is not incorporated  into  this  Annual  Report.  We  are  a  majority-owned,  indirect subsidiary  of NCT Group,  Inc., a publicly  traded  company  that  develops and licenses technologies based upon its portfolio of patents and related rights and extensive technological know-how.  Operations       Currently, we operate our business through our products division. Formerly, we also operated a  telecommunications  systems  integration  business division. Please see Note 15 to the Notes to Financial  Statements  contained elsewhere in this Annual Report for additional  information regarding our business divisions. All of our operations are predominantly within North America.                                         3   Products       We develop,  manufacture and distribute audio and  communications  products into the contact center, quick service restaurant, industrial and consumer audio markets.  For the years ended  December  31, 2003,  2004 and 2005,  our sales of quick  service  restaurant  products  represented  75%,  69% and  54% of  sales, respectively.  For the year ended December 31, 2005, our sales of contact center products  represented  27% of sales.  For the year ended  December 31, 2005, our sales of audio products  represented 17% of sales. We also intend to continue to pursue  new  product  development.  Under a license  agreement  with our  parent company, NCT Hearing Products,  Inc., we have access to over 50 patents, patents pending and  innovations  relating to electronic  noise  canceling and noise and echo  cancellation.  We plan  to  address  additional  markets  of  opportunity, including spectator racing, two-way radio communications and aviation. We intend to enter many of these markets through the expansion of our NoiseBuster  line of electronic  noise canceling  products as well as passive  products  designed for higher noise settings.  Headsets       Our  headsets include the following products:       o    Apollo:  Advanced,  lightweight headsets designed for use by telephone           users in contact centers and other dynamic business environments;       o    Apollo  Freedom:  Headsets  designed to plug directly into phones with           built-in amplifiers;       o    Trinity:  Closed back headsets designed for use in loud  environments,           such as very noisy contact centers; and       o    ProCom:  Highly  durable,  lightweight  headsets  designed  for use in           drive-through quick service restaurants.  Amplifiers       Our  amplifiers include the following products:       o    Apollo:  Multimedia  amplifier  engineered for simultaneous use of the           telephone and multimedia  applications,  including  computer training,           Voice over Internet Protocol and voice recognition programs;       o    A-10:  Multi-line  amplifier designed for small office and home office           use that has been  engineered  to work with  over 90% of all  existing           phone systems in the world; and       o    A-27:  Amplifier designed for automatic control  distributors or phone           systems that use the standard PJ-237 2-prong plug as their interface.  Headphones       Our  headphone   product  is  the  NoiseBuster   personal  noise  canceling headphones  that  reduce  low  frequency   background   using  electronic  noise cancellation technology, while leaving speech and music clearly audible.  Hearing Protection       Our  hearing  protection  product  is  the  NoiseBuster   electronic  noise canceling  safety  earmuff  that  is  designed  to  provide  industrial  hearing protection  for use in high noise  environments  by  combining  passive  hearing protection  with  electronic  noise  cancellation  technology.  This  technology neutralizes  the low  frequency  noise of  motors,  compressors  and  fans  that penetrates  conventional hearing protection products and allows speech, warnings and other critical sounds to be heard more clearly.                                         4   Technology and Proprietary Information       Under a license  agreement with our parent  company,  NCT Hearing,  we have access  to  over  50  patents,  patents  pending  and  innovations  relating  to electronic noise canceling and noise and echo cancellation. Our licensed 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.  These technologies  are instrumental in canceling  irritating and potentially  harmful ambient  noise  before it  reaches  the ear and in  improving  the  clarity  and intelligibility of sent and received voice communications.       Electronic Noise Canceling. 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.  Reduction of this type of noise is especially important for intelligible communications.       Noise  and Echo  Cancellation.  Our  technology  license  from NCT  Hearing includes the ClearSpeech suite of algorithms designed to remove background noise and echo from a speech signal. This technology improves  communications  clarity and  intelligibility.  The ClearSpeech Adaptive Speech Filter noise cancellation algorithm  removes up to 95% of  stationary,  or  constant,  noise from a signal containing noise and speech.  The ClearSpeech  Acoustic Echo  Cancellation is an algorithm  designed to  continuously  and adaptively  remove  acoustic echo from speech.  Acoustic echoes are produced by the open-air  acoustic path between the loudspeaker and the microphone in hands-free full-duplex  communication systems. By  continuously  tracking  changes in this  acoustic  path,  the acoustic  echo cancellation  effectively  eliminates  the echo,  improving  the  clarity of the communication system.       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  information,   including information  licensed to us by NCT Hearing.  We also enter into  confidentiality and invention  assignment  agreements  with our  employees  and  confidentiality agreements with our consultants and other third parties.  Marketing and Sales       We market and sell our  products  primarily  through  direct  sales.  These efforts are  supplemented  through the use of electronic  commerce,  independent sales  representatives  and strategic  marketing  agreements.  We sell our audio headphones  and  hearing  protection   earmuffs  into  the  consumer  audio  and industrial safety markets.  We sell our  communications  headset products to the commercial  headset  market,  including quick service  restaurant  companies and franchisees,  contact  centers  and other  large  quantity  users of  commercial headset  systems.  For  example,  we  have  an  agreement  with  the  McDonald's Corporation  that  allows us to sell our  products on a  non-exclusive  basis to McDonald's franchisees and company-owned  restaurants.  Our net sales under this agreement  for the year ended  December  31, 2005  exceeded 10% of our total net sales. In addition,  net sales to Central Florida  Investments,  Inc.  /Westgate Resorts,  Ltd., a contact  center,  also exceeded 10% of our total net sales for the year ended  December 31, 2005.  As of December 31, 2005,  we had an internal sales  and  marketing  force  of  five  employees,  in  addition  to some of our executive  officers  and  directors  who also  participate  in our direct  sales efforts.  Competition       The industries in which we compete are highly  competitive and dominated by a few  manufacturers.  The primary  competitors  for our  lightweight  telephone headsets  are  Plantronics  and GN  Netcom.  In  addition,  in  the  lightweight telephone  headset  market,  we may face  indirect  competition  from  companies offering  interactive  voice response  systems that eliminate or reduce the need for human operators for certain applications,  such as account balance inquiries and airline flight  information.  The primary  competitors  for our  NoiseBuster headphones  are Bose and Sony and the primary  competitors  for our  NoiseBuster earmuffs are Aearo and Bacou.                                         5        Our  current  competitors  and  many  of  our  potential   competitors  are well-established companies that we believe have substantially greater financial, technical,  production,  sales and marketing,  and product development resources than we do. We believe  that the  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.  Manufacturing       Our  manufacturing  operations  currently  consist of limited  assembly and testing, all of which occurs at our Fort Pierce, Florida facilities. We purchase the majority of our contractually  manufactured  products and components for our products  from  several  suppliers  in Asia and North  America,  who build  each product  and  component  based  on  our  specifications.  The  majority  of  our components  and  subassemblies  used in our in-house and contract  manufacturing operations  are obtained,  or are reasonably  available from multiple  suppliers currently  under  contract.  We procure  materials to meet  forecasted  customer requirements.  We  maintain  minimum  levels of  finished  goods based on market demand  in  addition  to  inventories  of work in  progress,  subassemblies  and components.  For  example,  we  currently  use  suppliers  located  in  Asia  to manufacture our headphone,  hearing protection and manager headset products.  We also intended to discontinue the majority of our assembly and testing operations at our Fort Pierce,  Florida facilities during 2005. However, this did not occur due to cash limitations.  Environmental Matters       We are subject to various federal,  state and local  environmental laws and regulations,  including  those  governing  the use,  discharge  and  disposal of hazardous  substances in the ordinary course of our  manufacturing  process.  We believe  that  our  current  manufacturing  operations  comply  in all  material respects  with  applicable  environmental  laws  and  regulations  and  that our compliance  with these laws and  regulations  does not have a material effect on our capital expenditures, earnings or competitive position.  Backlog       Our backlog of unfilled  orders was  approximately  $51,000 on December 31, 2005 and approximately  $44,000 on December 31, 2004. We do not believe that our backlog as of any  particular  date is indicative of actual sales for any future period, and therefore should not be used as an indication of future revenue.  Employees       As of December 31, 2005, we had nine full-time and one part-time  employee, including  three  employees in  administration  and shipping,  five in sales and marketing and two in assembly and  production.  None of our employees is covered by a collective bargaining agreement.  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.protechcommunications.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.protechcommunications.com/ptcinvest  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.                                         6
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 have incurred  substantial  losses since our inception and we are unsure whether we will be able to generate  sufficient  funds to sustain our operations through the next nine months.       We have incurred  substantial losses since our inception,  including losses of  approximately  $974,000,  $1,390,000  and  $2,062,000  for the  years  ended December  31,  2003,  2004 and  2005,  respectively,  and we had an  accumulated deficit of  approximately  $21,425,000  at December 31, 2005.  We expect that we will continue at a loss until, at the earliest,  we generate  sufficient revenue to offset the cost of our  operations.  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 revenues  will grow more slowly than we anticipate or that operating expenses will exceed our expectations.       Our  management  believes  that  currently  available  funds  will  not  be sufficient  to sustain our  operations at current  levels  through the next nine months.  At December 31,  2005,  we had  approximately  $85,000 in cash and cash equivalents  and a working capital  deficiency of  approximately  $738,000.  Our ability to  continue  to operate at current  levels  depends  upon,  among other things, our ability to generate sufficient revenue from the sale of our products and the receipt of continued funding from NCT Hearing.       In the  long-term,  our ability to continue as a going concern is dependent on generating  sufficient  revenue from product  sales.  Our ability to generate significant  revenue  from  product  sales  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,  including funding from NCT Hearing,  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 planned  expansion,  take advantage of business opportunities,  develop or enhance products or services or 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 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 and customers.       We depend on the  development  of our  businesses in the consumer audio and industrial safety markets and we could be materially adversely affected if these businesses do not develop as we expect.       While  the  contact  center  and  quick-service  restaurant  markets  still represent  the majority of our  business,  we believe that our future  prospects will depend in large part on the growth in demand for our  NoiseBuster  consumer audio  headphones,  industrial  hearing  protection  earmuffs and related future products.  We do not have extensive  experience in selling products to customers in the  consumer  audio  and  industrial  safety  markets.  If we are                                         7   unable to  effectively  market our products to customers  in these  markets,  it would have a material  adverse effect on the potential demand for these products and on our business, financial condition, operating results and cash flows.       If we are  unable  to match  production  to  demand,  we will be at risk of losing business or our gross margins could be materially adversely affected.       The demand for our products is dependent on many factors and this demand is inherently difficult to forecast. We may experience sharp fluctuations in demand for our products.  Significant unanticipated  fluctuations in demand could cause the following operating problems, among others:       o    If forecasted demand does not develop,  we could have excess inventory           and excess  capacity.  Over  forecast of demand could result in higher           inventories of finished products, components and subassemblies.  If we           were unable to sell these inventories, we would have to write off some           or all of our inventories of excess  products and unusable  components           and subassemblies.  Excess manufacturing capacity could lead to higher           production costs and lower margins.      o    If demand increases  beyond that forecasted,  we would have to rapidly           increase  production.  We depend on  suppliers  to provide  additional           volumes  of   products,   components   and   subassemblies,   and  are           experiencing   greater   dependencies  on  single  source   suppliers.           Therefore,  we might not be able to increase production rapidly enough           to  meet  unexpected  demand.  This  could  cause  us to  fail to meet           customer expectations. There could be short-term losses of sales while           we are trying to increase production. If customers turn to competitive           sources  of supply to meet their  needs,  there  could be a  long-term           impact on our revenues.      o    Rapid  increases in  production  levels to meet  unanticipated  demand           could   result  in  higher   costs  for   products,   components   and           subassemblies, increased expenditures for freight to expedite delivery           of required  materials and higher  overtime costs and other  expenses.           These higher expenditures could lower our profit margins.  Further, if           production is increased rapidly, there may be decreased  manufacturing           yields, which may also lower our margins.       Any of  the  foregoing  problems  could  materially  adversely  affect  our business, financial condition and operating results.       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  subassemblies,  components 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  subassemblies,           components 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           subassemblies, components and products. Failure in the future to match           the timing of purchases of  subassemblies,  components and products to           demand could increase our  inventories  and/or  decrease our revenues,           consequently  materially  adversely affecting our business,  financial           condition and operating results.                                         8        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 markets in which we operate. Many of  these  companies  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 lightweight telephone headsets face substantial  competition from Plantronics and GN Netcom, our NoiseBuster  headphones  compete with products  offered by Bose and Sony and our NoiseBuster earmuffs compete with earmuffs offered by Aearo and Bacou. While we believe that the quality of our products and services equals or exceeds those of our  competitors,  we can give no assurance that our products will be able to compete effectively against our competitors' products.       Our success depends upon our ability to develop new products and to enhance our existing products.       The  markets  in  which  we   participate   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 we must also continue to introduce new products. If we are unable to develop new products or adapt our current  products to meet changes in the  marketplace, if we are unable to enhance and improve our  products  successfully  in a timely manner,  or if we fail to  position  and/or  price our  products  to meet market demand,  customers  may not buy our  products  and our  business  and  operating results will be adversely affected.  If our enhancements to existing products do not deliver the  functionality  that our  customers  demand,  our  business  and operating results will be adversely affected.  Accelerated product 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 we develop may not be  introduced  in a timely  manner and may not achieve the broad market acceptance necessary to generate significant revenues.       We may not be able to protect our intellectual property.       We  rely  on  a   combination   of  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  or  licensed  to  us  may  be  invalidated, circumvented  or challenged.  Any of our pending or future patent  applications, whether or not being currently  challenged,  may not be issued with the scope of the claims we seek, if at all. 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.       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.                                         9        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  control 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 the same 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.       Our current  principal  stockholder  has control  over us, and could delay, deter or prevent a change of control or other business  combination or otherwise cause us to take action with which you may disagree.       NCT Hearing owns 83.4% of our outstanding  common stock.  In addition,  the majority of our board of directors are also directors and executive  officers of NCT Group, of which NCT Hearing is a wholly owned subsidiary.  As a result,  NCT Group has control over our  decisions to enter into any  corporate  transactions and has the ability to prevent any transaction that requires the approval of our stockholders  regardless of whether or not other stockholders  believe that such transaction is in their own best interests.  Such  concentration of voting power could have the effect of delaying,  deterring or  preventing a change of control or  other  business  combination  that  might  otherwise  be  beneficial  to our stockholders.       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,  significant           contracts, commercial relationships or capital commitments;      o    our  ability to develop  and market  new and  enhanced  products  on a           timely basis;      o    concerns  about our  liquidity;  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.                                         10        Trading in our common stock is subject to the SEC's penny stock rules.       Trading in our common stock is currently 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:       o    deliver  to  purchasers,  prior  to any  penny  stock  transaction,  a           disclosure  schedule  explaining  the penny stock market and the risks           involved in investing in penny stocks;      o    disclose the broker's commissions and current quotations for the penny           stock;      o    disclose  whether  the broker is the sole  market  maker for the penny           stock and, if so, the broker's presumed control over the market; and      o    send monthly  statements  disclosing  recent price information for the           penny stocks held in the  customer's  account and  information  on the           limited market in 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.
Not applicable.
Our principal 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. These facilities provide us with adequate space for the near term consistent with our current business plans.
We are not a party to any legal proceeding.
No  matter  was  submitted  to a vote  of  our  stockholders,  through  the solicitation of proxies or otherwise, during the fourth quarter of 2005.                                         11                                        PART II
Our common stock currently  trades on the NASD OTC Bulletin Board under the symbol "PCTU." 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          $0.030        $0.013       $0.070       $0.040      2nd Quarter          $0.130        $0.021       $0.040       $0.022      3rd Quarter          $0.045        $0.015       $0.025       $0.016      4th Quarter          $0.090        $0.025       $0.020       $0.007       As of February  28,  2006,  we had 66 holders of record of our common stock representing approximately 500 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.  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,  provisions  of our series B convertible  preferred  stock  restrict our ability to pay cash dividends on our common stock.                                         12
The  following  selected  financial  data is  derived  from our  historical financial  statements  and  should  be read in  conjunction  with our  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.                                                                                   For the Years Ended December 31,                                                            ------------------------------------------------------------------------                                                                2001           2002           2003           2004           2005                                                            ------------  -------------  -------------  -------------  -------------       STATEMENT OF OPERATIONS AND  LOSS PER SHARE DATA:  Net sales                                                  $ 2,075,968   $  1,517,571   $  1,068,402   $  1,075,633   $  1,260,978  Cost of goods sold                                             887,687        732,639        325,943        488,031        531,728 Selling, general and administrative (a)                      3,538,267      2,617,205      1,609,718      1,853,193      2,523,846 Impairment charge on intangible assets                             -       11,500,000            -              -              - Provision for doubtful accounts                                  9,958         29,800          6,591         14,621         15,794                                                            ------------  ------------   -------------  -------------  -------------     Loss from operations                                     (2,359,944)   (13,362,073)      (873,850)    (1,280,212)    (1,810,390) Other income (expense):   Interest expense, net                                        (20,262)       (51,290)       (90,966)      (115,356)      (214,402)   Miscellaneous income                                           4,305          5,004          3,352         10,396          4,816   Gain (loss) on disposal of fixed assets                       (2,945)           -              -              -            6,585                                                            ------------  -------------  -------------  -------------  -------------        Net loss from continuing operations                   (2,378,846)   (13,408,359)      (961,464)    (1,385,172)    (2,013,391)        Net income (loss) from discontinued operations           (50,546)         3,481        (12,982)        (4,983)       (48,596)                                                            ------------  -------------  -------------  -------------  -------------       Net loss                                              (2,429,392)   (13,404,878)      (974,446)    (1,390,155)    (2,061,987)  Less: Preferred stock beneficial conversion                           79,190         45,810            -             -              - Preferred stock embedded dividend                               62,661            -              -             -              - Dividend accretion on preferred stock                           24,085         22,000         10,911           -              -                                                            ------------  -------------  -------------  -------------  -------------        Net loss attributable to common            stockholders                                    $(2,595,328)  $(13,472,688)  $   (985,357)  $ (1,390,155)  $ (2,061,987)                                                            ============  =============  =============  =============  =============  Loss per share attributable to common stockholders   from continuing operations                               $     (0.08)  $      (0.41)  $      (0.03)  $      (0.02)  $      (0.03) Loss per share from discontinued operations                      (0.00)         (0.00)         (0.00)         (0.00)         (0.00)                                                            ------------  -------------  -------------  -------------  ------------- Basic and diluted net loss per share attributable   to common stockholders                                   $     (0.08)  $      (0.41)  $      (0.03)  $      (0.02)  $      (0.03)                                                            ============  =============  =============  =============  =============   Weighted average number        of common shares outstanding (b)                     32,281,034     33,200,311     33,200,311     62,377,398     74,779,453                                                            ============  =============  =============  =============  =============                                                                                          As of December 31,                                                            ------------------------------------------------------------------------                                                                2001           2002           2003           2004           2005                                                            ------------  -------------  -------------  -------------  -------------  BALANCE SHEET DATA:  Total assets                                              $17,184,920   $  4,163,492   $  3,673,036   $  3,499,047   $  3,203,516  Total current liabilities                                   1,541,386        866,537      1,334,879      1,212,614      1,301,491  Long-term debt                                                 44,632      1,102,931      1,849,949      2,218,526      3,824,597  Accumulated deficit                                        (3,593,336)   (16,998,214)   (17,972,660)   (19,362,815)   (21,424,802)  Stockholders' equity (capital deficit) (c)                 14,965,464      1,540,586        488,208         67,907     (1,922,572)  Working capital/(deficit)                                    (320,525)       (19,543)      (647,747)      (636,388)      (737,635)    - ---------- (a)  Includes the following line items from our statements of operations on page      F-3:  selling,  general  and  administrative  expenses,   depreciation  and      amortization and NCT Hearing and affiliates charges. (b)  Excludes  shares  issuable upon the exercise or  conversion of  outstanding      stock options, warrants and convertible preferred stock, since their effect      would be antidilutive. (c)  We have never declared nor paid cash dividends on our common stock.                                         13
Overview       We engineer,  design and distribute audio and communications  solutions and other products for business users, industrial users and consumers.  Our 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.        We intend to continue to pursue new  product  development.  Under a license agreement  with our  parent  company,  NCT  Hearing,  we have  access to over 50 patents,  patents pending and innovations relating to electronic noise canceling and noise and echo  cancellation.  Though an expansion of this license,  we have the ability to address  additional  markets of opportunity  including  spectator racing,  two-way radio  communications and aviation.  We intend to enter many of these markets through the expansion of our NoiseBuster  line of electronic noise canceling  products  as well as  passive  products  designed  for  higher  noise settings.  Going Concern Risks       Since inception,  we have experienced  recurring losses,  which amounted to approximately  $21,425,000  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  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. 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.       Our  management  believes  that  currently  available  funds  will  not  be sufficient  to sustain our  operations at current  levels  through the next nine months.  These funds consist of available cash and the funding  derived from our sales of products.  Cash and cash equivalents amounted to approximately  $85,000 at December 31, 2005 and our working capital deficit was approximately $738,000. We have been dependent upon funding from NCT Hearing. 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 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  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.                                         14   Critical Accounting Policies and Estimates       The preparation of our financial statements requires our management to make estimates  and  assumptions   that  affect  the  reported   amounts  of  assets, liabilities,  revenue and expenses and related  disclosure of contingent  assets and liabilities. 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 of making  judgments  about the  carrying values of assets  and  liabilities  that are not  readily  apparent  from  other sources.  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 may 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 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.  Allowance for Doubtful Accounts       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.  The allowance for doubtful  accounts is the best estimate of probable  credit losses in our existing  accounts  receivable.  We determine  the  allowance  based upon historical  write-off  experience  and review the adequacy of our allowance on a monthly basis.  Account balances are charged off against the allowance after all means of  collection  have been  exhausted  and the  potential  for  recovery is considered remote.  Impairment of Long-Lived Assets and Identifiable Intangible Assets       We  record   impairment   losses  on  long-lived  assets  and  identifiable intangible assets used in operations when events and circumstances  indicate the assets  might be  impaired  or the  remaining  useful  life has  changed and the undiscounted  cash flows estimated to be generated by those assets are less than their  carrying  amounts.  The amount of the impairment  loss  recognized is the amount by which the carrying  amounts of the assets  exceed the  estimated  fair values.  In order to evaluate  potential  impairment as required by Statement of Financial  Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal  of  Long-Lived  Assets,"  we estimate  future cash flows based upon assumptions for projected  future  operating  results,  projected future capital expenditures  and other  material  factors that may affect the continuity or the usefulness of the asset. The  determination of what constitutes an indication of possible  impairment,  the estimation of future cash flows and the determination of estimated fair value are all significant judgments.  There were no impairment losses for the years ended December 31, 2003, 2004 and 2005. The carrying amount of intangible assets at December 31, 2004 and 2005 was approximately  $2,610,000 and $2,410,000, respectively.  Inventory Reserves       We regularly review inventory  quantities on hand and record a provision to write down inventory to its estimated net realizable  value,  if less than cost. This estimate is based upon  management's  assumptions of future  material usage and obsolescence,  which are a result of future demand and market conditions. If actual  market   conditions  become  less  favorable  than  those  projected  by management,  additional  inventory  provisions may be required.  If inventory is written down to its net realizable value and subsequently  there is an increased demand for the inventory at a higher value, the increased value of the inventory is not  realized  until the  inventory  is sold,  which will  result in improved margins in the period in which the  product is sold.  The  inventory  reserve at December  31,  2004  and  2005  was   approximately   $119,000   and   $182,000, respectively.                                         15   Accrual for Product Warranties       Accruals for estimated  expenses related to warranties are made at the time products are sold. These accruals are established  using historical  information on the nature,  frequency  and average cost of warranty  claims and estimates of future costs.  Management believes the warranty accruals are adequate;  however, actual warranty expenses could differ from estimated amounts for any significant increase in material and workmanship  defects rates,  which in turn could have a material  adverse  impact on our  operating  results.  The  accrual  for product warranties at December 31, 2004 and 2005 was approximately  $28,000 and $31,000, respectively.       A summary of our significant  accounting  policies can be found in Notes to Financial  Statements:   Note  1  -  Organization  and  Summary  of  Significant Accounting Policies.  Recently Issued Accounting Pronouncements       We  have  not  yet  adopted  the  following   recently  issued   accounting pronouncements.       In November 2004, the Financial  Accounting Standards Board ("FASB") issued SFAS No. 151, "Inventory Costs--an amendment of ARB No. 43," which is the result of its  efforts to converge  U.S.  accounting  standards  for  inventories  with International  Accounting  Standards.   SFAS  No.  151  requires  idle  facility expenses,  freight,  handling cost and wasted  material  (spoilage)  costs to be recognized as current-period  charges. It also requires that allocation of fixed production  overhead to the costs of conversion be based on the normal  capacity of the  production  facilities.  SFAS No. 151 will be effective for us beginning January 1, 2006.  We do not  anticipate  that the  adoption of SFAS No. 151 will have a material impact on our financial position,  results of operations or cash flows.       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.  123R  addresses  all forms of  share-based payment  awards,  including  shares issued under employee stock purchase  plans, stock options,  restricted stock and stock  appreciation  rights.  SFAS No. 123R eliminates  the ability to account  for  share-based  compensation  transactions using APB Opinion No. 25,  "Accounting for Stock Issued to Employees,"  that was previously allowed under SFAS No. 123 as originally issued. Under SFAS No. 123R, companies  are  required  to record  compensation  expense  for all share  based payment award transactions measured at fair value. In April 2005, the Securities and Exchange  Commission  ("SEC")  delayed the effective  date of SFAS No. 123R. Accordingly, this statement is effective for us beginning January 1, 2006. We do not anticipate that the adoption of SFAS No. 123R will have a material impact on our  financial  position,  results of  operations  or cash flows as there are no outstanding unvested options at December 31, 2005. However,  future issuance, if any, of share-based  employee  payment awards may have a material  impact on our future 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.  The provisions of this statement are effective for us beginning  January 1, 2006. We do not  anticipate  that the adoption of SFAS No. 154 will have a material impact on our financial position, results of operations or cash flows.                                         16   Results of Operations  Year Ended December 31, 2005 Compared to Year Ended December 31, 2004       Net  loss.  Net  loss  for the  year  ended  December  31,  2005  increased approximately  $672,000,  or 48%,  compared to the year ended December 31, 2004. This increase was due to increases of approximately  $449,000 in NCT Hearing and affiliates   charges,   approximately   $234,000   in   selling,   general   and administrative  expenses,  approximately  $101,000  in  interest  expense  - NCT Hearing and approximately $44,000 in discontinued  operations,  partially offset by an increase of approximately $185,000 in net sales.       Net  sales.  Net sales  for the year  ended  December  31,  2005  increased approximately  $185,000,  or 17%,  compared to the year ended December 31, 2004. This increase was  primarily  due to an increase in sales to our consumer  audio and contact center markets, partially offset by reductions in sales to our quick service restaurant market.       Sales from our quick  service  restaurant  market  decreased  approximately $50,000  for the year ended  December  31,  2005  compared to 2004 due mainly to reduced headset sales.  This decrease was due to the continuing impact of market competition  from Far  East  headset  manufacturers  and the  implementation  of wireless  headsets  into this market,  which  reduces the  marketability  of our headset solutions. We expect that sales from our quick service restaurant market will continue to decline in future periods as a result of these factors.       Sales from our contact center market increased  approximately  $110,000 for the year ended  December  31,  2005  compared  to 2004 due  mainly to  increased purchases by one of our major customers. The increase was due to increased sales of our Apollo line of products.       Sales from our consumer  audio and safety markets  increased  approximately $129,000 for the year ended  December 31, 2005  compared to 2004. We entered the consumer  audio market during the three months ended  September 30, 2004 and the safety market during the three months ended December 31, 2005.       Cost of goods sold.  For the year ended  December 31,  2005,  cost of goods sold increased  approximately  $44,000,  or 9%,  compared to 2004. Cost of goods sold for the year ended December 31, 2005 included  adjustments to the inventory reserve and the write-down of obsolete inventory of approximately  $98,000. Cost of goods sold for the year ended  December 31, 2004 included  adjustments to the inventory  reserve  of  approximately  $114,000.  Excluding  the impact of these adjustments from both years, for the year ended December 31, 2005, cost of goods sold increased  approximately  $60,000,  or 16%, compared to 2004. This increase was due mainly to the increase in net sales.       Gross profit percentage.  Gross profit on net sales before depreciation and amortization,  as a  percentage  of net sales,  increased  to 57.8% for the year ended December 31, 2005 from 54.6% for the year ended  December 31, 2004.  Gross profit on net sales before depreciation and amortization, as a percentage of net sales,  excluding the inventory adjustments discussed above,  increased to 65.6% for the year ended  December 31, 2005 from 65.2% for the year ended December 31, 2004.       Selling,  general and administrative  expenses. For the year ended December 31, 2005, selling,  general and administrative  expenses increased approximately $234,000,  or 25%,  compared to 2004.  This increase was due mainly to increases of: (1)  $114,000 in payroll and related  expenses  (2) $37,000 in  professional fees and (3) $77,000 in engineering of our Apollo amplifier,  NoiseBuster safety earmuff  and  anticipated  new  products.  The  increase  in payroll and related expenses for year ended  December 31, 2005  primarily  resulted  from  increased sales support of our products and the fact that for the year ended  December 31, 2004,  an officer  voluntarily  accepted a reduction in salary of  approximately $23,000.  The majority of the increase in  professional  fees was related to our conversion to the same  accounting  software  system as NCT, our ultimate parent company.       NCT Hearing and affiliates  charges.  For the year ended December 31, 2005, NCT Hearing and affiliates  charges increased  approximately  $449,000,  or 80%, compared to 2004.  This increase was due mainly to the additional work performed by their (1)  engineering  staff in connection  with the  re-engineering  of our Apollo amplifier and product  development of the NoiseBuster  safety earmuff and (2) marketing  staff in connection  with the  continued  support  related to our NoiseBuster line of products.                                         17        Interest  expense.  Interest  expense  - NCT  Hearing  for the  year  ended December 31, 2005 increased  approximately  $101,000  compared to 2004, or 131%. The increase was due to the increased amount of outstanding notes payable to NCT Hearing, which represent amounts owed to NCT Hearing for services provided to us by NCT  Hearing  and its  affiliated  companies,  and the  increase in the prime interest rate during this period.  As of December 31, 2005, the balance of these outstanding  notes  payable,  including  interest,  was  $3,812,229  compared to $2,207,255 as of December 31, 2004.       Discontinued  operations.  We  disposed of our  telecommunications  systems integration  business  division (TSI) during the fourth quarter of 2005 in order to focus on our core products.  This disposal meets the criteria established for recognition as discontinued  operations under SFAS No. 144,  "Accounting for the Impairment or Disposal of Long-Lived  Assets." TSI represents a component of our business   comprised  of   operations   and  cash  flows  that  can  be  clearly distinguished, operationally and for financial reporting purposes, from the rest of the  entity.  At  December  31,  2005,  TSI was  classified  as  discontinued operations and its results of operations are separately reported for all periods presented. Net loss from discontinued operations for the year ended December 31, 2005 increased approximately $49,000 compared to 2004, or 678%.  Year Ended December 31, 2004 Compared to Year Ended December 31, 2003       Net  loss.  Net  loss  for the  year  ended  December  31,  2004  increased approximately  $416,000,  or 43%,  compared to the year ended December 31, 2003. This increase was due to an increase of approximately  $162,000 in cost of goods sold and an increase  of  approximately  $245,000 in NCT Hearing and  affiliates charges.       Net  sales.  Net sales  for the year  ended  December  31,  2004  increased approximately  $7,000, or 1%, compared to the year ended December 31, 2003. This increase  was  primarily  due to an increase  related to our  entrance  into the consumer  audio  market,  partially  offset by  reductions in sales to our quick service restaurant and contact center markets.       Sales from our quick  service  restaurant  market  decreased  approximately $57,000  for the year ended  December  31,  2004  compared to 2003 due mainly to reduced purchases by one of our major  distributors of quick service  restaurant parts.  The  number  of  units  sold in the  quick  service  restaurant  market, including both headsets and parts,  decreased to approximately  29,000 units for the year ended  December 31, 2004 from  approximately  36,000 units during 2003. This  decrease was  primarily the result of continued  market  competition  from Far-East  headset   manufacturers  and  increased   industry  use  of  equipment maintenance   support  contractors  who  provide  a  wide  range  of  restaurant equipment,  thereby  eliminating the need for owners and franchisees to purchase headset products from individual manufacturers.       Sales from our contact center market  decreased  approximately  $21,000 for the year  ended  December  31,  2004  compared  to 2003 due  mainly  to  reduced purchases by one of our major distributors.  Telephone headset purchases by this distributor decreased approximately $27,000 for the year ended December 31, 2004 compared to 2003.       For the year ended December 31, 2004, we generated  sales of  approximately $87,000 from our entrance into the consumer audio market. We entered this market in September  2004 with the  introduction  of our  NoiseBuster  noise  canceling headphones.       Cost of goods sold.  For the year ended  December 31,  2004,  cost of goods sold increased  approximately  $162,000, or 50%, compared to 2003. This increase was due mainly to an increase of $114,000 in the inventory  reserve for the year ended December 31, 2004 as compared to 2003. We increased our inventory  reserve in December 2004 as part of the  implementation of our strategy to reduce future costs by using third parties to assemble our high volume products.       Gross profit percentage.  Gross profit on net sales before depreciation and amortization,  as a  percentage  of net sales,  decreased  to 54.6% for the year ended  December 31, 2004 from 69.5% for the year ended  December  31,  2003.  In December 2004, we increased our inventory  reserve by approximately  $114,000 as discussed  above.  Without this  increase,  the gross profit on net sales before depreciation and amortization,  as a percentage of net sales, for the year ended December  31, 2004 would have been  65.2%.  During the year ended  December  31, 2003, we received a $15,000 credit from a vendor. Without this credit, the gross profit margin for the year ended December 31, 2003 would have been 68.1%.                                         18        Selling,  general and administrative  expenses. For the year ended December 31, 2004, selling,  general and administrative  expenses decreased approximately $5,000,  or 1%,  compared to 2003.  This  decrease was due to: (1) a decrease of approximately  $104,000  in payroll  and  related  expenses,  (2) a decrease  of approximately  $36,000 in insurance  expenses and  miscellaneous  fees and (3) a decrease of approximately $32,000 in health insurance and claims expenses. These decreases   resulted  from  our  continued  costs  savings  through  work  force reductions  and tighter  controls over  expenditures.  Substantially  offsetting these  decreases  were: (1) an increase of  approximately  $52,000 in consulting expenses  related  to  investor  communications  and  public  relations;  (2) an increase of approximately  $47,000 in professional  services and (3) an increase of  approximately  $68,000  in  marketing  expenses  primarily  related  to  the introduction of our NoiseBuster headphones.       NCT Hearing and affiliates  charges.  For the year ended December 31, 2004, NCT Hearing and affiliates  charges increased  approximately  $245,000,  or 78%, compared to 2003.  This increase was due mainly to the additional work performed by their  engineering  staff in connection with our next generation  NoiseBuster headphones and our NoiseBuster safety earmuff.       Interest  expense.  Interest  expense for the year ended  December 31, 2004 increased approximately $22,000 compared to 2003. Interest expense - NCT Hearing comprised  $20,000  of  the  increase.   These  charges  were  incurred  on  the outstanding  notes payable to NCT Hearing,  which represent  amounts owed to NCT Hearing for services provided to us by NCT Hearing and its affiliated companies, as well as cash  advances.  As of  December  31,  2004,  the  balance  of  these outstanding  notes  payable,  including  interest,  was  $2,207,255  compared to $1,824,520 as of December 31, 2003.  Liquidity and Capital Resources       We have experienced net losses since our inception.  These losses have been funded primarily from product sales, the sale of convertible preferred stock and advances from NCT Hearing and its affiliates. During the year ended December 31, 2005,  we  funded  working  capital  requirements  with  continued  use  of  our short-term  factoring   arrangement  and  advances  from  NCT  Hearing  and  its affiliates.  In addition,  NCT Hearing and its  affiliates  paid expenses on our behalf,  which were allocated  and/or  transferred to us. We continue to closely monitor all our  expenditures.  Management  believes that  internally  generated funds are currently  insufficient to meet our short-term and long-term operating and  capital   requirements.   These  funds  include  available  cash  and  cash equivalents  and  revenues  derived from sales of our  products.  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.  The  failure to obtain any  needed  financing  could 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  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.       On June 1, 2005,  we  refinanced  our $23,396  outstanding  note payable to Westek Electronics, a stockholder,  into a note payable bearing interest at 8.5% and payable in monthly  installments  of $3,500 through  November 30, 2005, with the  remaining  balance  maturing on December  30, 2005.  On August 1, 2005,  we refinanced the remaining $16,704 principal amount  outstanding under the June 1, 2005 note into a note  payable  bearing  interest  at 12% and payable in monthly installments  of $1,500 from  November  2005 through  September  2006,  with the remaining balance maturing on October 15, 2006.       At December 31, 2005, cash and cash equivalents were $85,223.       The current ratio (current assets to current  liabilities) was 0.43 to 1.00 at December 31, 2005, as compared to 0.48 to 1.00 at December 31, 2004. We had a working capital deficit of approximately  $738,000 at December 31, 2005 compared to a deficit of  approximately  $636,000 at December  31,  2004.  This  $102,000 increase  in  working  capital  deficit  was due  mainly to an  increase  in our accounts payable and accrued expenses of approximately $128,000.                                         19        Cash flows used in operating  activities were approximately  $40,000 during the year ended December 31, 2005. This use of funds was driven  primarily by the 2005  generated  net  loss  of  approximately  $2,062,000  and the  increase  of approximately  $155,000 in accounts payable.  These uses of funds were offset by depreciation  and  amortization   expense  of  approximately   $330,000  and  an approximate  $1,420,000  increase in notes payable for services  received and an increase in provision for obsolete inventories of approximately $63,000.       The net cash provided by financing  activities  was  approximately  $84,000 during the year ended December 31, 2005, due mainly to approximately $127,000 in net cash received from NCT Hearing and its  affiliates,  offset by payments made on notes payable and capital lease obligations.       We have no lines of credit with banks or other lending institutions.  Capital Expenditures       There were no material  commitments for capital expenditures as of December 31, 2005, and no material  commitments  are  anticipated in the near future.  In connection with the introduction of our new NoiseBuster safety earmuff,  we have incurred  25% of the  approximate  $110,000  in  tooling  costs  and  anticipate incurring  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.  In the event that our working  capital is not  sufficient,  we will seek  additional  funding from NCT Hearing.  Contractual Obligations       The impact that our  contractual  obligations  as of December  31, 2005 are expected to have on our liquidity and cash flow in future periods is as follows:                                                                  Payments due by period                                   ------------------------------------------------------------------------------                                                                                                       More                                                      Less than                                       than 5 Contractual Obligations                Total          1 year         1-3 years      3-5 years         years                                   --------------  --------------  --------------  --------------  --------------       Long-Term Debt                      $    15,202     $     3,202     $    12,000     $       -       $       - Related Party Long-Term Debt          3,812,229             -         3,812,229             -               - Capital Leases                            9,841           9,473             368             -               - Operating Leases                        222,596          71,834          68,450          82,312             - Purchase Obligations                     83,000          83,000             -               -               -                                   --------------  --------------  --------------  --------------  --------------      Total                          $ 4,142,868     $   167,509     $ 3,893,047    $     82,312     $       -                                   ==============  ==============  ==============  ==============  ==============    Off-Balance Sheet Arrangements       As  of  December  31,  2005,  we  did  not  have  any   off-balance   sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Our primary market risk exposures  include  fluctuations in interest rates. We are exposed to short-term  interest rate risk on certain debt obligations and trade accounts receivable sales. 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 variable-rate  debt, the expected effect on net income related to our financial instruments would be immaterial.                                         20
The response to this item is submitted as a separate section of this Annual Report on Form 10-K. See Item 15.  ITEM  9.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING           AND FINANCIAL DISCLOSURE       Not applicable.
Evaluation of Disclosure Controls and Procedures       Our management, with the participation of our President 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 President 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.
Not applicable.                                         21                                       PART III
The  following  table sets forth  certain  information  about our executive officers and directors as of February 28, 2006.    Name                           Age    Position   ----                           ---    --------    Richard Hennessey               46    President, Chief Operating Officer                                         and Director   Mary Christian-Hein             44    Senior Vice President, Chief Financial                                         Officer and Treasurer   Irene Lebovics                  53    Chairman of the Board   Michael J. Parrella             58    Director   Cy E. Hammond                   51    Director   Michael J. Palmieri             39    Secretary       No family  relationships  exist  among  any of our  executive  officers  or directors.       Richard  Hennessey has served as our President and Chief Operating  Officer since  February 1999 and as a director  since August 1998. He also served as our Secretary from August 1998 to January 2002. Mr. Hennessey  previously  served as our Vice  President  of  Marketing  from June 1996 to  February  1999 and as our Director of Marketing from August 1995 to June 1996.       Mary  Christian-Hein  has  served  as  our  Senior  Vice  President,  Chief Financial  Officer and Treasurer  since  September  2004. She has also served as Assistant Controller of NCT Group, our ultimate parent company,  since May 2001. From 1991 to 2001,  Ms.  Christian-Hein  held  various  accounting  and  finance positions  with  Warrantech  Corporation,  an  independent  provider  of service contracts  and  after-market  warranties,  including  Director of Reporting  and Compliance, from 1996 to 2001.       Irene  Lebovics has served as our Chairman of the Board since November 2003 and as a director  since  September  2000.  She has also  served as NCT  Group's President since April 2000 and as a member of its board of directors since April 2001. Ms.  Lebovics  previously  served as NCT Group's  Executive Vice President from  February  1999 to April  2000,  its  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.       Michael J. Parrella has served as a director since  September  2000. He has also served as NCT Group's  Chief  Executive  Officer  since August 1995, as its Chairman of the Board since April 2000 and as a member of its board of directors since 1986. Mr. Parrella  previously served as NCT Group's President from August 1995 to April 2000, its Executive Vice President from November 1994 to July 1995 and as its President and Chief Operating  Officer from February 1988 to November 1994.       Cy E. Hammond has served as a director  since  September  2000. He has also served as NCT  Group's  Senior  Vice  President,  Chief  Financial  Officer  and Treasurer  since  January 1996 and as a member of its board of  directors  since March 2004. Mr. Hammond  previously served as a Vice President of NCT Group from February  1994 to January  1996 and as  Controller  from January 1990 to January 1994.       Michael J. Palmieri has served as our Secretary  since  September  2005. He has also served as Vice  President,  General  Counsel and Secretary of NCT Group since  September 2005 and served as Senior Counsel and Assistant  Secretary from July 2004 to August 2005.  Prior to joining NCT Group,  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.                                         22   Audit Committee Functions       Our board of directors  does not have a standing  audit  committee  and our board as a whole performs all audit committee functions,  including oversight of our independent registered public accountants and oversight of our management on matters  relating to accounting,  financial  reporting and disclosure,  internal controls and compliance with laws,  regulations and corporate policies.  None of the members of the board of  directors  is  "independent"  as defined  under the rules of the Nasdaq Stock Market. The board of directors has determined that Mr. Hammond  qualifies as an "audit  committee  financial  expert" as defined by the SEC.  Code of Ethics       We have  adopted  a Code of Ethics  that  applies  to our  Chief  Executive Officer (or persons  performing  similar functions) and all senior financial and accounting   officers,   including  our  Chief  Financial  Officer  (or  persons performing similar functions).  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 initial  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 year ended December 31, 2005.
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 President.  None of our other  executive  officers'  total  annual  salary and bonus for the fiscal year ended December 31, 2005 exceeded $100,000.                                                                                           Long-Term Compensation                                                  Annual Compensation                          Awards                                       ----------------------------------------------  -----------------------                                                                                             Securities     Name and Principal                                               Other Annual           Underlying          Position             Year      Salary ($)     Bonus ($)    Compensation ($)        Options/SARs (#) - ---------------------------- ------   -------------  -------------  ----------------  -----------------------       Richard Hennessey             2005    $ 150,000            -              -                   200,000         President and Chief    2004      127,083 (a)        -              -                   200,000         Operating Officer      2003      149,000 (b)        -              -                      -   - ---------- (a)  Mr. Hennessey  voluntarily  accepted a reduction in salary of approximately      $23,000 to lessen our cash flow requirements during the first half of 2004. (b)  Includes  $87,500  accrued  salary,  of which $75,500  remains  accrued and      unpaid as of December 31, 2005.                                           23   Option Grants in 2005       The following  table  summarizes  options  granted to our President  during 2005.                                               Individual Grants                       ----------------------------------------------------------                                                                                     Potential Realized Value                       Number of         Percent of                                      at Assumed Annual                       Securities      Total Options                                   Rates of Stock Price                       Underlying        Granted to      Exercise                  Appreciation for Option Term (a)       Name             Options          Employees        Price      Expiration    --------------------------------                        Granted           in 2005       Per Share       Date               5%             10% - -------------------   -----------     ---------------  -----------  ------------  ----------------- --------------         Richard Hennessey      200,000            38.0%          $0.008      12/28/2012         $ 651         $ 1,518    - ---------- (a)  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 applicable expiration dates. 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 our  President as of December 31, 2005.                                                                   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 - --------------------     -------------   -----------  ---------------   -------------------  -------------  -------------    Richard Hennessey             -               -           650,000                 -            $ 1,600            -    Compensation of Directors       No  current   member  of  our  board  of  directors   receives   additional compensation for serving as a director.  Compensation Committee Interlocks and Insider Participation       Our board of directors does not have a standing compensation  committee and our board as a whole performs all compensation committee functions. During 2005, no  executive  officer  served  on the  compensation  committee  or the board of directors  of another  entity  whose  executive  officer  served on our board of directors.                                         24
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 directors, including our President; 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.                                                    Shares of Common                                                       Stock                                                    Beneficially             Percent of               Beneficial Owner                        Owned                    Class   ------------------------------------------    ------------------          ------------        Executive Officers and Directors:   Richard Hennessey                                   650,000       (a)           *   Mary Christian-Hein                                 100,000       (a)           *   Irene Lebovics                                         -          (b)           -   Michael J. Parrella                                    -          (b)           -   Cy E. Hammond                                          -          (b)           -   All Current Executive Officers and   Directors as a Group (six persons)                  750,000       (a)           *    5% or Greater Stockholders:   NCT Hearing Products, Inc.                       62,769,954       (c)         83.4%   Alpha Capital Aktiengesellschaft                 64,384,427       (d)         47.0%  * Less than one percent.    - ---------- (a)  Consists  entirely  of shares  issuable  pursuant  to  options  that may be      exercised within 60 days of February 28, 2006.  (b)  Ms.  Lebovics and Messrs.  Parrella and Hammond are executive  officers and      directors  of NCT Group.  NCT Hearing is a wholly owned  subsidiary  of NCT      Group. Ms. Lebovics and Mr. Parrella are also directors of NCT Hearing. Ms.      Lebovics and Messrs.  Parrella and Hammond disclaim beneficial ownership of      the shares of our common stock held by NCT Hearing.  (c)  The address of NCT Hearing Products,  Inc. is 20 Ketchum Street,  Westport,      Connecticut 06880.  (d)  Alpha Capital  Aktiengesellschaft's  business  address is Pradafant 7, 9490      Furstentums,  Vaduz, Lichtenstein.  Konrad Ackermann,  Director, has voting      and  dispositive  control  of these  shares  on  behalf  of Alpha  Capital.      Includes  61,862,385  shares  issuable upon conversion of 460 shares of our      series B convertible  preferred stock, along with accretion.  Pursuant to a      contractual  restriction  between  Alpha  Capital and us, Alpha  Capital is      prohibited from beneficially  owning more than 4.99% of our common stock at      any given time, subject to certain  exceptions.  Alpha Capital also has the      option to exchange their shares of our series B convertible preferred stock      into NCT Group's common stock.                                         25   Equity Compensation Plan Information       The following  table  summarizes  certain  information  with respect to our equity compensation plans as of December 31, 2005.                                      Number of securities         Weighted-average                                  to be issued upon           exercise price of         Number of securities               Plan             exercise of outstanding          outstanding           remaining available for             Category             options and rights          options and rights          future issuance       ---------------------    -----------------------    ------------------------    -----------------------           Equity compensation       plans approved by       stockholders                   2,022,000                    $0.119                    27,966,000        Equity compensation       plans not approved       by stockholders                     -                           -                           -                                   ---------------                                        ---------------            Total                      2,022,000                    $0.119                    27,966,000                                   ===============                                        ===============
On February 25, 2005, we issued a $30,000  secured  promissory  note to NCT Hearing,  bearing  interest  at the  prime  rate and due on April  1,  2007,  in exchange for cash advanced to us by NCT Hearing.       On March  16,  2005,  we issued a $35,000  secured  promissory  note to NCT Hearing,  bearing  interest  at the  prime  rate and due on April  1,  2007,  in exchange for cash advanced to us by NCT Hearing.       On March  22,  2005,  we issued a $50,000  secured  promissory  note to NCT Hearing,  bearing  interest  at the  prime  rate and due on April  1,  2007,  in exchange for cash advanced to us by NCT Hearing.       On March 31,  2005,  we issued a $263,215  secured  promissory  note to NCT Hearing,  bearing  interest  at the  prime  rate and due on April  1,  2007,  in exchange for services provided to us by NCT Hearing and its affiliates.       On June 30,  2005,  we  issued  secured  promissory  notes  to NCT  Hearing totaling  $2,083,704,  bearing  interest at the prime rate and due on October 1, 2007, in exchange for services valued at $287,074  provided to us by NCT Hearing and its affiliates and the  consolidation of $1,796,630  outstanding  (including accrued interest) on our notes dated June 30, 2004 and September 17, 2004.       On September 22, 2005, we issued a $70,272  secured  promissory note to NCT Hearing,  bearing  interest  at the prime rate and due on  October  1, 2007,  in exchange for cash advanced to us by NCT Hearing.       On September 30, 2005, we issued a $848,167 secured  promissory note to NCT Hearing,  bearing  interest  at the  prime  rate and due on April  1,  2008,  in exchange for services  valued at $367,228  provided to us by NCT Hearing and its affiliates   during  the  three  months  ended   September   30,  2005  and  the consolidation of $480,939 outstanding  (including accrued interest) on our notes dated September 30, 2004 and December 31, 2004.       On December 31, 2005, we issued a $325,146  secured  promissory note to NCT Hearing,  bearing  interest  at the  prime  rate and due on April  1,  2008,  in exchange for services  provided to us by NCT Hearing and its  affiliates  during the three months ended December 31, 2005.       During the year ended December 31, 2005, NCT Hearing advanced cash to us in anticipation of the receipt of funds from outstanding accounts receivable. These advances are non-interest bearing and are payable within 35 days. As of December 31,  2005,  outstanding  cash  advances  to  us  from  NCT  Hearing  under  this arrangement  were zero.  NCT Hearing is not obligated to provide any  additional cash advances to us.       As of  December  31,  2005,  we owed  $3,812,229,  to NCT  Hearing for cash advances,  research,  administrative  and  accounting  services  provided  to us classified as notes  payable due to  affiliates,  bearing  interest at the prime rate (7.25% at December 31, 2005), on our balance sheet.                                         26
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)                   $ 65,000         $ 76,264      Audit-Related Fees                   -                -      Tax Fees (b)                        3,250            3,250      All Other Fees                       -                -                                     --------------   -------------           Total                       $ 68,250         $ 79,514                                     ==============   ============= - ---------- (a)  Represents fees billed and accrued for  professional  services  rendered in      connection  with the annual  audit and  quarterly  review of our  financial      statements  included  in our  annual  reports  on Form  10-K and  quarterly      reports on Form 10-Q. (b)  Represents fees billed for  professional  services  rendered in conjunction      with federal and state tax return preparation and other tax matters.  Board Policy on  Pre-Approval  of Audit and  Permissible  Non-Audit  Services of Independent Registered Public Accountants       Our board of directors 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  board  has also determined not to adopt any blanket  pre-approval  policy but instead to require that the board  pre-approve  the  compensation  and terms of  service  for audit services  provided by our  independent  registered  public  accountants  and any changes in terms and compensation resulting from changes in audit scope, company structure  or  other  matters.   The  board  has  also   determined  to  require pre-approval  by the  board of the  compensation  and terms of  service  for any permitted  non-audit  services  provided by our  independent  registered  public accountants.  Any proposed non-audit  services in excess of pre-approved  levels require further  pre-approval by the board. Our Chief Financial  Officer reports regularly  to the  board on the  services  performed  and fees  incurred  by our independent  registered  public  accountants  for audit and permitted  non-audit services during the prior quarter.                                         27                                        PART IV
(a)(1)    Financial Statements  The following financial statements are filed as part of this Annual Report:                                                                                                            Page                                                                                                         ----         Report of Independent Registered Public Accounting Firm                                            F-1       Balance Sheets as of December 31, 2004 and December 31, 2005                                       F-2       Statements of Operations for the years ended December 31, 2003, 2004 and 2005                      F-3       Statements of Changes in Stockholders' Equity (Capital Deficit) for the years ended            December 31, 2003, 2004 and 2005                                                              F-4       Statements of Cash Flows for the years ended December 31, 2003, 2004 and 2005                      F-5       Notes to the 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-21       Schedule II.  Valuation and Qualifying Accounts                                                   F-22    All  other  financial  statement  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)    Amended  and   Restated   Articles  of   Incorporation   of  Pro  Tech           Communications,  Inc.,  dated as of August 14, 2000  (incorporated  by           reference to Exhibit 3(a) of the registrant's Quarterly Report on Form           10-QSB for the quarter ended July 31, 2000 (File No. 0-28602)).  3.1(b)    Articles  of  Amendment  to  Articles  of  Incorporation  of Pro  Tech           Communications,  Inc., dated as of September 29, 2000 (incorporated by           reference to Exhibit 3(b) of the registrant's  Registration  Statement           on Form S-1 (Registration No. 333-49318) filed on November 3, 2000).  3.1(c)    Articles  of  Amendment  to  Articles  of  Incorporation  of Pro  Tech           Communications,  Inc.,  dated as of July  30,  2001  (incorporated  by           reference to Exhibit 3(a) of the registrant's Quarterly Report on Form           10-Q for the quarter ended June 30, 2001 (File No. 0-28602)).  3.1(d)    Articles  of  Amendment  to  Articles  of  Incorporation  of Pro  Tech           Communications,  Inc.,  dated as of August 2,  2002  (incorporated  by           reference to Exhibit 3(a) of the  registrant's  Annual  Report on Form           10-K for the year ended December 31, 2003 (File No. 0-28602)).  3.1(e)    Articles  of  Amendment  to  Articles  of  Incorporation  of Pro  Tech           Communications, Inc., dated as of March 23, 2006.  3.2       Bylaws of Pro Tech Communications,  Inc. (incorporated by reference to           Exhibit 3(c) of the  registrant's  Registration  Statement on Form S-1           (Registration No. 333-49318) filed on November 3, 2000).                                         28   *10.1     Pro Tech  Communications,  Inc. Amended and Restated Stock Option Plan           (incorporated  by  reference  to  Exhibit  4(c)  of  the  registrant's           Registration  Statement on Form S-8 (Registration No. 333-49488) filed           on November 7, 2000).  10.2(a)   License Agreement,  dated as of September 12, 2000, by and between Pro           Tech Communications, Inc. and NCT Hearing Products, Inc. (incorporated           by reference to Exhibit 10.2(a) of the  registrant's  Annual Report on           Form 10-K for the year ended December 31, 2004 (File No. 0-28602)).  10.2(b)   Amendment to License  Agreement,  dated as of April 21,  2004,  by and           between Pro Tech Communications,  Inc. and NCT Hearing Products,  Inc.           (incorporated  by  reference  to Exhibit  10.2(b) of the  registrant's           Annual Report on Form 10-K for the year ended  December 31, 2004 (File           No. 0-28602).  14        Pro Tech  Communications,  Inc.  Code of Ethics for the CEO and Senior           Financial Officers  (incorporated herein by reference to Exhibit 14 to           the  registrant's  Annual  Report  on Form  10-K  for the  year  ended           December 31, 2003 (File No. 0-28602)).  23.1      Consent of Eisner LLP.  31.1      Certification  of  President  pursuant  to Rule  13a-14(a)  under  the           Securities Act of 1934.  31.2      Certification  of Chief Financial  Officer  pursuant to Rule 13a-14(a)           under the Securities Act of 1934.  32.1      Certification  of President and Chief  Financial  Officer  pursuant to           Rule 13a-14(b) under the Securities Act of 1934 and 18 U.S.C.  Section           1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of           2002. - ----------------------- * Pertains to a management contract or compensation plan or arrangement.                                         29   REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM   Board of Directors and Stockholders Pro Tech Communications, Inc.  We have audited the accompanying balance sheets of Pro Tech Communications, Inc. as of  December  31,  2004 and 2005 and the related  statements  of  operations, changes in stockholders' equity (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  standards  of the Public  Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis,  evidence  supporting  the amounts and  disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant  estimates  made by  management,  as well as evaluating  the overall financial  statement  presentation.   We  believe  that  our  audits  provide  a reasonable basis for our opinion.  In our opinion, the financial statements enumerated above present fairly, in all material respects, the financial position of Pro Tech Communications, Inc. as of December 31, 2004 and 2005 and the results of its  operations and its cash flows for each of the years ended December 31, 2003,  2004 and 2005 in conformity with accounting principles generally accepted in the United States of America.  The  accompanying  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 incurred net losses since inception, has a working capital deficit and capital deficit, and has been dependent on financing and support from its principal stockholder,  NCT Group, Inc. These factors raise substantial  doubt about the Company's  ability to continue as a going  concern. Management's  plans in regard to these matters are also described in Note 1. The financial  statements do not include any adjustments  that might result from the outcome of this uncertainty.     /s/  Eisner LLP - --------------- Eisner LLP  New York, New York March 3, 2006  With respect to Note 18 March 23, 2006                                         F-1     PRO TECH COMMUNICATIONS, INC. BALANCE SHEETS (Notes 7 and 10)                                                                                               December 31,                                                                                 ------------------------------------                                                                                      2004                 2005                                                                                 ---------------      ---------------    ASSETS Current assets:      Cash and cash equivalents                                                   $     59,097         $     85,223      Accounts receivable, less allowance for doubtful accounts         of $28,277 and $28,245, respectively                                          137,396              200,883      Inventories, net of reserves                                                     343,847              239,214      Other current assets                                                              35,886               38,536                                                                                 ---------------      ---------------                      Total current assets                                             576,226              563,856  Property and equipment, net                                                           306,398              219,987  Intangible assets, net of accumulated amortization of $375,331      and $576,052, respectively                                                     2,610,484            2,409,763  Other assets                                                                            5,939                9,910                                                                                 ---------------      ---------------                                                                                  $  3,499,047         $  3,203,516                                                                                 ===============      =============== LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIT) Current liabilities:      Accounts payable                                                            $    158,698         $    313,950      Accrued expenses                                                                 229,145              201,560      Current portion of capital lease obligations                                      11,492                9,473      Due to factor and other liabilities                                               61,864              102,444      Current portion of note payable                                                    2,646                3,202      Note payable to stockholder                                                       39,728               14,447      Preferred stock, subject to mandatory conversion into         a variable number of shares of common stock (Note 9)                          709,041              656,415                                                                                 ---------------      ---------------                      Total current liabilities                                      1,212,614            1,301,491  Note payable                                                                            1,430               12,000 Notes payable due to affiliates                                                     2,207,255            3,812,229 Capital lease obligations                                                               9,841                  368                                                                                 ---------------      ---------------                       Total liabilities                                              3,431,140            5,126,088                                                                                 ---------------      ---------------  Commitments  Stockholders' equity (capital deficit):      Preferred stock, $.01 par value, 1,000,000 shares authorized           Series A convertible preferred, 4% cumulative dividend,             stated value $1,000 per share, issued and outstanding,             50 shares and zero shares, respectively (Note 9)           Series B convertible preferred, 4% cumulative dividend,             stated value $1,000 per share, issued and outstanding,             460 shares (Note 9)                                                           -                    -      Common stock, $.001 par value, authorized 300,000,000 shares,           issued and outstanding 73,390,133 and 75,234,140 shares, respectively        73,390               75,234      Additional paid-in capital                                                    19,357,332           19,426,996      Accumulated deficit                                                          (19,362,815)         (21,424,802)                                                                                 ---------------      ---------------                      Total stockholders' equity (capital deficit)                      67,907           (1,922,572)                                                                                 ---------------      ---------------                                                                                  $  3,499,047          $ 3,203,516                                                                                 ===============      ===============  The accompanying notes are an integral part of the financial statements.                                           F-2     PRO TECH COMMUNICATIONS, INC. STATEMENTS OF OPERATIONS                                                                                              For the Year Ended December 31,                                                                                 ---------------------------------------------------                                                                                      2003              2004              2005                                                                                 ---------------   ---------------   ---------------     Net sales                                                                         $  1,068,402      $  1,075,633      $  1,260,978  Costs and expenses:      Cost of goods sold, exclusive of depreciation            and amortization below                                                      325,943           488,031           531,728      Selling, general and administrative expenses                                      957,440           952,073         1,185,594      Depreciation and amortization                                                     338,071           341,650           329,861      NCT Hearing and affiliates charges (Note 16)                                      314,207           559,470         1,008,391      Provision for doubtful accounts                                                     6,591            14,621            15,794                                                                                 ---------------   ---------------   ---------------       Loss before other income (expense)                                               (873,850)       (1,280,212)       (1,810,390)  Other income (expense):      Interest income                                                                     2,931               734               -      Interest expense                                                                  (26,353)          (18,586)          (18,480)      Interest expense - NCT Hearing                                                    (56,455)          (76,535)         (177,040)      Interest expense - convertible preferred stock                                    (11,089)          (20,969)          (18,882)      Miscellaneous income, net                                                           3,352            10,396            11,401                                                                                 ---------------   ---------------   ---------------  Net loss from continuing operations                                                   (961,464)       (1,385,172)       (2,013,391)  Net loss from discontinued operations (Note 15)                                        (12,982)           (4,983)          (48,596)                                                                                 ---------------   ---------------   --------------- Net loss                                                                              (974,446)       (1,390,155)       (2,061,987)  Adjustments attributable to preferred stock:    Preferred stock dividend                                                             10,911               -                 -                                                                                 ---------------   ---------------   ---------------  Net loss attributable to common stockholders                                     $    (985,357)     $ (1,390,155)     $  2,061,987)                                                                                 ===============   ===============   ===============  Loss per share attributable to common stockholders: Loss per share attributable to common stockholders    from continuing operations                                                    $       (0.03)     $      (0.02)     $      (0.03) Loss per share from discontinued operations                                              (0.00)            (0.00)            (0.00)                                                                                 ---------------   ---------------   --------------- Basic and diluted                                                                $       (0.03)     $      (0.02)     $      (0.03)                                                                                 ===============   ===============   ===============  Weighted average common shares outstanding - basic and diluted                      33,200,311        62,377,398        74,779,453                                                                                 ===============   ===============   ===============  The accompanying notes are an integral part of the financial statements.                                           F-3     PRO TECH COMMUNICATIONS, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)                                                    Series A                                              Preferred Stock         Common Stock        Additional                                           -------------------  -----------------------    Paid-in       Accumulated                                            Shares     Amount      Shares      Amount      Capital         Deficit         Total                                           --------  ---------  ------------  ---------  -------------  --------------  -------------           Balance at December 31, 2002                   50   $ 54,521    33,200,311   $ 33,200   $ 18,451,079   $ (16,998,214)  $  1,540,586  Dividend on preferred stock                   -          991           -          -          (10,911)            -           (9,920)  Waiver of registration rights on    series B preferred stock                   -          -             -          -          125,000             -          125,000  Accounting change for adoption of      SFAS No. 150:        series A            (50)   (55,512)          -          -          (12,500)            -          (68,012)                           series B            -          -             -          -         (125,000)            -         (125,000)  Net loss                                      -          -             -          -               -         (974,446)      (974,446)                                            --------  ---------  ------------  ---------  -------------   -------------  ------------- Balance at December 31, 2003                  -     $    -      33,200,311   $ 33,200   $ 18,427,668   $ (17,972,660)  $    488,208  Issuance of common stock:    Conversion of notes payable                -          -      27,846,351     27,846        612,620             -          640,466    License agreement amendment                -          -       9,821,429      9,822        265,178             -          275,000    Conversion of preferred stock              -          -       2,522,042      2,522         41,866             -           44,388  Adjustment of monetary value on      series B preferred stock converted       -          -             -          -           10,000             -           10,000  Net loss                                      -          -             -          -              -        (1,390,155)    (1,390,155)                                            --------  ---------  ------------  ---------  -------------  --------------  ------------- Balance at December 31, 2004                  -     $    -      73,390,133   $ 73,390   $ 19,357,332   $ (19,362,815)  $     67,907  Issuance of common stock:    Conversion of preferred stock              -          -       1,844,007      1,844         57,164             -           59,008  Adjustment of monetary value on      series A preferred stock converted       -          -             -          -           12,500             -           12,500  Net loss                                      -          -             -          -              -        (2,061,987)    (2,061,987)                                            --------  ---------  ------------  ---------  -------------  --------------  ------------- Balance at December 31, 2005                  -     $    -      75,234,140   $ 75,234   $ 19,426,996   $ (21,424,802)  $ (1,922,572)                                           ========  =========  ============  =========  =============  ==============  =============   The accompanying notes are an integral part of the financial statements.                                           F-4     PRO TECH COMMUNICATIONS, INC. STATEMENTS OF CASH FLOWS                                                                                            For the Year Ended December 31,                                                                            --------------------------------------------------------                                                                                  2003              2004                   2005                                                                            ----------------    ----------------    ----------------     Cash flows from operating activities:      Net loss                                                               $    (974,446)      $  (1,390,155)      $  (2,061,987)      Adjustments to reconcile net loss to net            cash used in operating activities:         Notes payable issued to NCT Hearing for services received                 454,104             813,678           1,419,702         Depreciation and amortization                                             338,071             341,650             329,861         Gain on disposal of fixed assets                                              -                   -                (6,585)         Provision for doubtful accounts                                             4,128              (3,160)                (32)         Provision for obsolete inventory                                           (5,000)            113,531              63,262         Preferred stock dividends as interest                                      11,089              20,969              18,882         Changes in operating assets and liabilities:            Decrease (increase) in accounts receivable                              68,064             (45,467)            (63,455)            Decrease in inventories                                                103,981              36,177              41,371            Increase in other assets                                                (6,845)            (18,847)             (6,621)            (Decrease) increase in accounts payable                               (195,694)            (72,584)            155,252            (Decrease) increase in accrued expenses                                (26,779)             34,332             (27,585)            (Decrease) increase in other liabilities                               (23,048)             (7,100)             98,427                                                                            ----------------    ----------------    ----------------               Net cash used in operating activities                         $    (252,375)      $    (176,976)      $     (39,508)                                                                            ----------------    ----------------    ---------------- Cash flows from investing activities:      Capital expenditures                                                          (4,375)             (3,766)            (38,311)      Proceeds from sale of assets                                                     -                   -                19,768                                                                            ----------------    ----------------    ----------------               Net cash used in investing activities                         $      (4,375)      $      (3,766)      $     (18,543)                                                                            ----------------    ----------------    ---------------- Cash flows from financing activities:      Proceeds from:         Notes payable - NCT Hearing (Note 16)                                     341,114             766,013             492,178      Payment made on:         Notes payable                                                             (31,752)            (38,270)            (31,756)         Notes payable - NCT Hearing (Note 16)                                     (35,381)           (498,663)           (364,753)         Capital lease obligations                                                  (9,662)            (10,434)            (11,492)                                                                            ----------------    ----------------    ----------------               Net cash provided by financing activities                     $     264,319       $     218,646       $      84,177                                                                            ----------------    ----------------    ---------------- Net increase in cash and cash equivalents                                   $       7,569       $      37,904       $      26,126 Cash and cash equivalents - beginning of period                                    13,624              21,193              59,097                                                                            ----------------    ----------------    ---------------- Cash and cash equivalents - end of period                                   $      21,193       $      59,097       $      85,223                                                                            ================    ================    ================   Supplemental disclosures of cash flow information:    Cash paid during the period for interest                                 $      25,353       $      18,198       $      19,497                                                                            ================    ================    ================  Supplemental disclosures of non-cash investing and financing activities:    Asset acquired with note payable                                         $         -         $         -         $      17,601                                                                            ================    ================   =================    Issuance of common stock upon conversion of series A and B       preferred stock and dividends                                         $         -         $      44,388       $      59,008                                                                            ================    ================   =================    Issuance of common stock for payment of notes payable                    $         -         $     640,466       $         -                                                                            ================    ================   =================    Issuance of common stock for intangible assets                           $         -         $     275,000       $         -                                                                            ================    ================   =================    Adjustment of monetary value on series A and B preferred stock      upon adoption of SFAS No. 150 and conversion                           $     137,500       $      10,000       $      12,500                                                                            ================    ================   =================    Principal on notes payable refinanced                                    $   1,345,810       $   1,489,641       $   2,274,590                                                                            ================    ================   =================    Interest on notes payable refinanced                                     $      35,900       $      61,611       $     113,352                                                                            ================    ================   =================    Dividends accrued on series A and series B preferred stock               $      10,911       $         -         $         -                                                                            ================    ================   =================    Reversal of redemption penalty on series B preferred stock               $     125,000       $         -         $         -                                                                            ================    ================   =================    Note receivable from director offset with note payable from stockholder  $         -         $      66,775       $         -                                                                            ================    ================   =================  The accompanying notes are an integral part of the financial statements.                                           F-5                             PRO TECH COMMUNICATIONS, INC.                         NOTES TO THE FINANCIAL STATEMENTS  1.   Organization and Summary of Significant Accounting Policies       Organization            Pro Tech  Communications,  Inc.,  herein  referred  to as "we,"  "us,"           "our," or "Pro Tech," is  incorporated  under the laws of the State of           Florida.  We engineer,  design and distribute audio and communications           solutions and other products for business users,  industrial users and           consumers. Our current products include Apollo headsets and amplifiers           for use in contact  centers,  ProCom headsets for use in quick-service           restaurants,  Noisebuster  noise canceling  safety earmuffs for use in           high noise  industrial  environments  and NoiseBuster  noise canceling           consumer audio headphones.            In September  2000,  we became a subsidiary  of NCT Hearing  Products,           Inc.,  herein referred to as "NCT Hearing," a wholly-owned  subsidiary           of NCT Group,  Inc.,  herein  referred to as "NCT." As of December 31,           2005, NCT Hearing owned  approximately 83.4% of our outstanding common           stock.            We have experienced recurring net losses ($21,424,802 through December           31, 2005) since our  inception.  These losses,  which include the cost           for development of products and an impairment charge of $11,500,000 on           our intangible  asset,  have been funded primarily from product sales,           the sale of common stock and convertible preferred stock, and advances           directly and indirectly from NCT (our ultimate parent company) and its           affiliates.            In  addition,  we had a working  capital  deficit  of  $737,635  and a           capital  deficit of  $1,922,572  at  December  31,  2005.  We received           approximately  $40,000  in  advances  from  January  1,  2006  through           February 28, 2006 from NCT Hearing to assist us in funding our working           capital needs during 2006.  Our  management  believes that  internally           generated funds are currently  insufficient to meet our short-term and           long-term  operating  and capital  requirements.  These funds  include           available  cash and cash  equivalents  and sales of our products.  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.  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 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 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           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.                                         F-6        Cash and Cash Equivalents            Cash and cash equivalents  include all highly liquid  investments with           original maturities at acquisition of three months or less.       Inventory            We value inventory at the lower of cost (first-in,  first-out  method)           or market. We regularly review inventory quantities on hand and record           a provision to write down  inventory to its estimated  net  realizable           value,  if less than cost.  This  estimate is based upon  management's           assumptions  of future  material usage and  obsolescence,  which are a           result of future demand and market conditions.       Revenue and Cost Recognition            We recognize net sales from product sales upon shipment provided title           and risk of loss have been  transferred  to the  customer,  persuasive           evidence of an arrangement  exists, fees are fixed or determinable and           collection is reasonably  assured. We generally have no obligations to           customers  after the date  that  product  is  shipped  other  than for           warranty obligations.  Returns and customer credits are infrequent and           recorded  as a  reduction  to sales.  Discounts  from list  prices are           recorded as a reduction to sales at the time of sale. Generally,  each           product,  depending on the model, is sold with a warranty ranging from           90 days to two  years.  Accruals  for  estimated  expenses  related to           warranties are made at the time products are sold.  These accruals are           established using historical information on the nature,  frequency and           average cost of warranty  claims and  estimates of future  costs.  The           accrued  liability for warranty costs is included in accrued  expenses           in the  balance  sheet (see Note 6).  Freight  charges  are charged to           expense  when  incurred.  Not all  customers  are billed for  shipping           costs;  however, the amount of shipping costs collected from customers           is netted against our incurred freight charges. The amount of shipping           costs netted against our incurred  freight charges for the years ended           December 31, 2003, 2004 and 2005 was  approximately  $26,000,  $32,000           and  $47,000,  respectively.  The net  amount of  freight  charges  is           included  in  selling,  general  and  administrative  expenses  on our           statements of operations.       Property and Equipment            Property and  equipment is carried at cost.  Depreciation  is computed           using the straight-line  method over the estimated useful lives of the           assets  (including  assets  held  under  capital  leases).   Leasehold           improvements are amortized over the shorter of the useful life or term           of the lease.  Asset lives are 3-10 years for  machinery and equipment           and 5 years for leasehold  improvements.  Repair and maintenance costs           are charged to expense when incurred.       Long-Lived Assets and Certain Identifiable Intangibles            Long-lived  assets and certain  identifiable  intangibles are reviewed           for impairment  whenever events or changes in  circumstances  indicate           that  the  carrying  amount  of  an  asset  may  not  be  recoverable.           Recoverability  of  assets  to be  held  and  used  is  measured  by a           comparison of the carrying amount of an asset to  undiscounted  future           net cash flows expected to be generated by the asset.  If these assets           are  considered  to be impaired,  the  impairment  to be recognized is           measured  by the  amount by which the  carrying  amount of the  assets           exceeds  the fair value of the  assets.  Assets to be  disposed of are           reported at the lower of the carrying  amount or fair value less costs           to sell. Our identifiable intangible assets consist of licensed rights           to certain technologies acquired from NCT Hearing through the issuance           of common  stock  (see Note 5).  Amortization  is  computed  using the           straight-line method over the estimated useful lives of the assets.       Income Taxes            Income taxes are accounted  for under the asset and liability  method.           Deferred tax assets and  liabilities are recognized for the future tax           consequences   attributable  to  differences   between  the  financial           statement  carrying  amounts of existing  assets and  liabilities  and           their  respective tax bases.  Deferred tax assets and  liabilities are           measured  using enacted tax rates  expected to apply to taxable income           (loss) in the years in                                         F-7             which those  temporary  differences  are  expected to be  recovered or           settled.  The effect on deferred tax assets or liabilities of a change           in tax  rates is  recognized  in  income  (loss)  in the  period  that           includes the enactment date (see Note 14).       Advertising            The costs of advertising, promotion and marketing programs are charged           to  operations  in the year  incurred  and are  included  in  selling,           general and administrative  expenses in the accompanying statements of           operations.  Advertising costs were approximately $13,000, $43,000 and           $26,000  for the  years  ended  December  31,  2003,  2004  and  2005,           respectively.       Research and Development            Research  and  development  costs are expensed  when  incurred and are           included in selling,  general and administrative expenses. The amounts           charged to expense were approximately  $28,000,  $276,000 and $742,000           for the years ended December 31, 2003, 2004 and 2005, respectively.       Fair Value of Financial Instruments            The  estimated  fair  value  of our  notes  payable  approximates  the           carrying amount.  The fair values of loans to or from stockholders and           affiliates  are not  readily  determinable  due to the  related  party           nature of those instruments.       Use of Estimates            The  preparation  of  our  financial  statements  in  conformity  with           accounting  principles  generally  accepted  in the  United  States of           America  requires  management to make estimates and  assumptions  that           affect the reported and/or disclosed  amounts of assets,  liabilities,           revenues  and  expenses  and  contingent  assets and  liabilities.  In           particular,  judgment  is  used  in  areas  such  as  determining  the           allowance for doubtful accounts,  adjustments to inventory valuations,           asset  impairments  and the accrual for warranty  expense.  Management           periodically  assesses and evaluates those estimates and  assumptions.           Actual results could differ from those estimates.       Loss Per Common Share            We report  loss per  common  share in  accordance  with  Statement  of           Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share."           The  effect  of  potential   common   shares,   such  as   convertible           instruments, options and warrants, has not been included as the effect           would be antidilutive. The potential common shares are as follows:                                                          December 31,                                   --------------------------------------------------                                        2003              2004              2005                                   --------------    --------------    --------------          Convertible preferred stock     58,169,135        10,384,654        84,596,053      Options                          1,285,000         1,495,000         2,022,000      Warrants                         1,000,000               -                 -                                   --------------    --------------    --------------                                      60,454,135        11,879,654        86,618,053                                   ==============    ==============    ==============         Stock Based Compensation            We have elected to apply 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,  an amendment to FASB  Statement No. 123," and continue to           apply  Accounting  Principles Board ("APB") Opinion No. 25 and related           interpretations  in accounting for our stock-based  compensation plans           through December 31, 2005. 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 grant date using the           Black-Scholes option pricing model                                         F-8             and compensation costs are recognized ratably over the vesting period.           No stock-based employee compensation cost is reflected in our net loss           attributable  to common  stockholders,  as options  granted  under our           plans have an exercise price equal to or greater than the market value           of the underlying  common stock on the date of grant. Had compensation           costs been  determined  as  prescribed  by SFAS No. 123,  our net loss           attributable to common  stockholders and net loss per share would have           been the pro forma amounts indicated below:                                                     For the year ended December 31,                                         --------------------------------------------------                                              2003             2004              2005                                         --------------    --------------    --------------               Net loss attributable to             common stockholders,             as reported                  $   (985,357)    $  (1,390,155)     $ (2,061,987)           Stock-based employee costs             based on fair value method         (5,022)          (11,334)           (3,545)                                         --------------    --------------    --------------           Net loss attributable to             common stockholders,             pro forma                    $   (990,379)    $  (1,401,489)     $ (2,065,532)                                         ==============    ==============    ==============           Loss per common share:                As reported               $      (0.03)    $       (0.02)     $      (0.03)                                         ==============    ==============    ==============                Pro forma                 $      (0.03)    $       (0.02)     $      (0.03)                                         ==============    ==============    ==============              The fair value of each option grant on the date of grant was estimated           using the Black-Scholes option-pricing model reflecting the following:                                                  For the year ended December 31,                                             ------------------------------------                                                   2004               2005                                             -----------------  -----------------           Volatility                                  100%               100%           Expected life of options            4 to 7 years            7 years           Risk free interest rate                    2.16%              4.33%           Dividend yield                                0%                 0%              There were no options  granted  during the fiscal year ended  December           31, 2003.  The weighted  average fair value of options  granted during           the years  ended  December  31,  2004 and 2005 was  $0.02 and  $0.007,           respectively.       Concentrations of Credit Risk            Cash and cash equivalents and trade receivables potentially subject us           to concentration of credit risk. We maintain cash and cash equivalents           in accounts with one financial institution in amounts which, at times,           may be in excess of the FDIC insurance limit. We do not believe we are           exposed  to any  significant  risk  with  respect  to  cash  and  cash           equivalents.            We sell  our  products  to  distributors  and  end  users  in  various           industries.   We  regularly  assess  the   realizability  of  accounts           receivable  and  take  into   consideration  the  value  of  past  due           receivables  and the  collectibility  of such  receivables,  based  on           credit  worthiness.  We do not require collateral or other security to           support customer receivables.            We  are  currently  outsourcing  the  majority  of  our  products  and           components  from  several Far East and North  American  suppliers  who           build each product or component to our specifications. An interruption           in the  supply of a product  or  component  for which we are unable to           readily procure a substitute source of supply could temporarily result           in our inability to deliver products on a timely basis,  which in turn           could  adversely  affect our  operations.  We have not experienced any           such shortages.                                         F-9        Significant Customers            In each of the years ended December 31, 2003, 2004 and 2005, net sales           derived  from  certain  customers  comprised  more than 10% of our net           sales.  Two  customers  accounted for  approximately  29% of net sales           generated  during the year  ended  December  31,  2003.  One  customer           accounted  for  11% of net  sales  generated  during  the  year  ended           December 31, 2004. Two customers  accounted for  approximately  26% of           net sales  generated  during  the year  ended  December  31,  2005 and           represented  approximately  48% of the gross  accounts  receivable  at           December 31, 2005.       Recent Accounting Pronouncements            In November 2004, the Financial  Accounting  Standards  Board ("FASB")           issued SFAS No. 151,  "Inventory  Costs--an  amendment of ARB No. 43,"           which  is the  result  of its  efforts  to  converge  U.S.  accounting           standards for inventories  with  International  Accounting  Standards.           SFAS No. 151 requires idle facility expenses,  freight,  handling cost           and   wasted   material   (spoilage)   costs  to  be   recognized   as           current-period  charges.  It also  requires  that  allocation of fixed           production  overhead to the costs of conversion be based on the normal           capacity of the production facilities.  SFAS No. 151 will be effective           for us  beginning  January  1,  2006.  We do not  anticipate  that the           adoption of SFAS No. 151 will have a material  impact on our financial           position, results of operations or cash flows.            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.  123R  addresses  all forms of  share-based  payment  awards,           including  shares issued under employee stock  purchase  plans,  stock           options, restricted stock and stock appreciation rights. SFAS No. 123R           eliminates  the  ability  to  account  for  share-based   compensation           transactions using APB Opinion No. 25, "Accounting for Stock Issued to           Employees,"  that  was  previously  allowed  under  SFAS  No.  123  as           originally  issued.  Under SFAS No.  123R,  companies  are required to           record  compensation   expense  for  all  share  based  payment  award           transactions measured at fair value. In April 2005, the Securities and           Exchange  Commission  ("SEC")  delayed the effective  date of SFAS No.           123R.  Accordingly,  this  statement  is  effective  for us  beginning           January 1, 2006.  We do not  anticipate  that the adoption of SFAS No.           123R will have a material impact on our financial position, results of           operations or cash flows as there are no outstanding  unvested options           at December 31, 2005. However, future issuance, if any, of share-based           employee  payment  awards  may have a  material  impact on our  future           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. The provisions of this           statement are  effective  for us beginning  January 1, 2006. We do not           anticipate  that the  adoption  of SFAS No.  154 will have a  material           impact on our financial position, results of operations or cash flows.                                         F-10   2.   Inventory  Inventory consisted of the following:                                                           December 31,                                                ---------------------------------                                                     2004               2005                                                --------------     --------------      Finished goods                             $    268,012       $    220,039      Components                                      174,726            169,769      Work in progress                                 19,640             31,199                                                --------------     --------------        Gross inventory                               462,378            421,007      Less:  reserve for obsolete inventory           118,531            181,793                                                --------------     --------------      Total inventory                            $    343,847       $    239,214                                                ==============     ==============  3.   Other Current Assets  Other Current Assets consisted of the following:                                                           December 31,                                                ---------------------------------                                                     2004               2005                                                --------------     --------------      Prepaid insurance                          $     15,922       $     16,487      Prepaid inventory purchases                       4,843              5,010      Other                                            15,121             17,039                                                --------------     --------------        Total other current assets               $     35,886       $     38,536                                                ==============     ==============  4.   Property and Equipment  The following is a summary of property and equipment:                                                           December 31,                                                ---------------------------------                                                     2004               2005                                                --------------     --------------      Production molds                           $    454,303       $    490,934      Office equipment                                171,582            112,659      Production equipment                             39,140             30,940      Leasehold improvements                          315,050            315,050      Vehicles                                         12,414                -      Marketing displays                               18,116             18,116                                                --------------     --------------                                                    1,010,605            967,699      Less accumulated depreciation        and amortization                              708,946            749,116                                                --------------     --------------                                                      301,659            218,583                                                --------------     --------------      Assets under capital lease:      Cost                                             61,893             61,893      Less accumulated amortization                    57,154             60,489                                                --------------    ---------------                                                        4,739              1,404                                                --------------     --------------      Total property and equipment, net          $    306,398       $    219,987                                                ==============     ==============  Total  depreciation  and  amortization  expense,  with  respect to property  and equipment, was approximately $156,000, $147,000 and $129,000 for the years ended December  31,  2003,  2004 and 2005,  respectively.  Included in these totals is amortization expense on assets under capital leases for the years ended December 31,  2003,  2004  and  2005  of  approximately  $19,000,   $17,000  and  $3,000, respectively.                                         F-11   5.   Intangible Assets  On September  12,  2000,  we obtained a license for rights to  electronic  noise canceling  and noise and echo  cancellation  technologies  from NCT  Hearing  in consideration  of the issuance of  23,982,438  shares of our common  stock.  The intangible  assets received in the exchange were valued at the fair value of the shares we issued, or $16,307,492. On April 21, 2004, we obtained an expansion of our existing  technology  license from NCT  Hearing,  in exchange for  9,821,429 shares of our common stock. The license covers over 50 patents,  patents pending and  innovations  relating  to  electronic  noise  canceling  and noise and echo cancellation,  and with this  expansion,  encompasses all styles of headsets (an expansion from  lightweight,  portable styles) including  headphones,  earmuffs, earbuds  and  earplugs,  as well as all  markets (an  expansion  from  cellular, multimedia and telephony) including consumer audio, industrial safety, spectator racing,  two-way radio  communications and aviation.  In addition,  the expanded license  permits  us  to  use  NCT  Hearing's  existing  brand  names  including NoiseBuster,  ProActive and ClearSpeech products. The intangible assets received in the license  expansion were valued at the fair value of the shares we issued, or $275,000 and added to the cost basis of the intangible assets included in our balance sheet.  Intangible assets are periodically  reviewed for impairment where the fair value is  less  than  the  carrying  value.  Amortization  expense  was  approximately $181,000,  $195,000 and $201,000 for the years ended December 31, 2003, 2004 and 2005,  respectively.  Estimated  amortization  expense for each of the next five years is approximately $201,000.  6.   Accrued Expenses  Accrued Expenses consisted of the following:                                                           December, 31                                                ---------------------------------                                                     2004               2005                                                --------------     --------------      Accrued payroll and vacation               $    111,292       $     99,769      Accrued professional services                    70,434             60,000      Accrued warranty                                 28,044             31,161      Other                                            19,375             10,630                                                --------------     --------------      Total accrued expenses                     $    229,145       $    201,560                                                ==============     ==============  7.   Due to Factor and Other Liabilities  On March 26, 2001, we entered into a factoring  agreement.  Under this agreement we are  required  to  factor  substantially  all of our trade  receivables  on a non-recourse  basis in return for  immediate  cash credit  equal to 85% of these factored  receivables,  less a factoring  fee. The  factoring fee is 1.9% of the invoice  amount and 3.5% over the prime rate on the  amount  advanced  under the factoring agreement. The prime rate was 7.25% at December 31, 2005. In addition, at  December  31,  2005 we had  approximately  $18,000 in holdback at the factor representing  15%  of the  aggregate  unpaid  gross  amount  of all  outstanding accounts factored under this factoring agreement.  If the net amount of accounts submitted for any one month does not exceed  $100,000,  the factor may charge an additional  commitment  fee. As of December 31, 2005, no such fees were imposed. Such factored  receivables  are subject to acceptance by the factor.  The factor also has the  option to  accept  factored  receivables  with  recourse.  If such recourse  receivables  are not paid  within 46 days,  we must buy back the total outstanding  receivable.  Obligations  due to the  factor  under  the  factoring agreement are  collateralized  by a continuing  security  interest in all of our accounts receivable, notes receivable, chattel paper, documents, instruments and general  intangibles  now existing or acquired of every kind  wherever  located, together with merchandise  returns and goods, and all proceeds of every kind and nature.  At December 31, 2005,  accounts  receivable  factored  under this  agreement and still outstanding were approximately $120,000, of which,  approximately $102,000 had been received under the factoring  agreement under the recourse  provisions. Total fees incurred under this  arrangement  amounted to  approximately  $4,000, $2,000 and $6,000  during the years  ended  December  31,  2003,  2004 and 2005, respectively.  Interest  expense  incurred  under this  arrangement  amounted to approximately  $2,000,  $1,000 and $3,000  during the years ended  December  31, 2003, 2004 and 2005, respectively.                                         F-12   During the years ended December 31, 2004 and 2005, NCT Hearing  advanced cash to us in anticipation of the receipt of funds from outstanding accounts receivable. These advances were non-interest bearing and were payable within 35 days. During 2004 and 2005,  advances under these  short-term notes payable were $499,013 and $377,178,  respectively  and payments were $441,166 and $364,753,  respectively, with  $70,272  being  consolidated  into a  long-term  note  payable  due to NCT Hearing. As of December 31, 2004 and 2005,  outstanding short-term notes payable from NCT Hearing under this  arrangement  were  approximately  $58,000 and zero, respectively (see Note 16).  8.   Notes Payable and Note Payable to Stockholder  On January 20, 2005, we obtained a bank loan of $17,601.  The loan, secured by a vehicle,  provides for equal monthly payments of approximately  $358,  including interest at 8.0%,  maturing on February 10, 2010.  As of December 31, 2005,  the balance  outstanding was $15,202; of which $3,202 is included in current portion of note payable and $12,000 is included in note payable on our balance sheet.  On June 1, 2005,  we  refinanced  $23,396 in principal  from a note payable to a stockholder,  which was due to mature on June 27, 2005, into a new note. The new note bore interest at 8.5% and provided for monthly payments  including interest of $3,500 through November 30, 2005, with the remaining  balance due on December 30, 2005. On August 1, 2005, we  refinanced  the remaining  principal of $16,704 from the June 1, 2005 note with a modification  of terms.  The debt  instruments were deemed not to be substantially different in accordance with Emerging Issues Task Force Issue No. 96-19  "Debtor's  Accounting for a Modification or Exchange of Debt  Instruments."  The new note  bears  interest  at 12% and  provides  for monthly  payments  including  interest  of $1,500  from  November  2005  through September  2006,  with the  remaining  balance  due on October 15,  2006.  As of December  31,  2005,  the balance  outstanding  was $14,447 and included in note payable to stockholder on our balance sheet.  9.   Preferred  Stock Subject to Mandatory  Conversion into a Variable Number of      Shares  Series A Convertible Preferred Stock  As of December 31, 2005, we had 1,500 shares  designated  and zero shares issued and outstanding of our series A convertible  preferred  stock.  Each share has a par value of $0.01,  and a stated value of $1,000.  Our series A preferred stock had a  cumulative  dividend of 4% per annum on the stated  value,  payable  upon conversion or exchange in either cash or common stock at our option.  The shares of series A preferred stock were  convertible into shares of our common stock or exchangeable for shares of NCT common stock at the holder's  option.  Each share of series A preferred  stock was  convertible  into our common  stock based on a conversion price that was the lower of: the lowest average closing bid price for a five-day  consecutive period out of fifteen trading days preceding the date of conversion, less a discount of 20%; or a fixed price of $0.50. The exchange rate into NCT common  stock was the lowest  average of the average  closing bid price for a share of NCT common stock for any consecutive five trading days out of the fifteen trading days preceding the date of conversion, less a discount of 20%.  Our series A  preferred  stock was covered  under the  adoption of SFAS No. 150, "Accounting  for Certain  Financial  Instruments  with  Characteristics  of both Liabilities  and Equity"  effective  July 1, 2003.  SFAS No. 150  required us to reclassify the series A preferred stock from the stockholders' equity section to the current  liability  section on our balance  sheet.  In connection  with this reclassification,  we were  required  to  increase  the  value  of the  series A preferred  stock to reflect  the  monetary  value of the shares  required  to be issued upon conversion.  The series A preferred stock was increased $12,500 with a corresponding decrease to additional paid-in capital.  SFAS No. 150 also  required us to record any payments or accruals of payments to holders of such  instruments  as interest  costs.  Therefore,  effective July 1, 2003,  the  dividends  accrued to holders  of the series A  preferred  stock are recorded as interest expense in the statement of operations; whereas, previously they were  recorded as a  reduction  to  additional  paid-in  capital.  Interest expense  recorded for the series A preferred  stock for the years ended December 31, 2003, 2004 and 2005 was $1,009, $2,006 and $482, respectively. The reduction to additional  paid-in capital for the series A preferred stock,  calculated for purposes of determining net loss attributable to common  stockholders,  was $991 for the year ended December 31, 2003.  No shares of series A preferred  stock were  converted or  exchanged  during the years  ended  December  31,  2003 and 2004.  On March 31,  2005,  the  remaining outstanding  50 shares of our series A preferred  stock plus  accrued  dividends were automatically converted into 1,844,007 shares of our common stock.                                         F-13   Series B Convertible Preferred Stock  As of December 31, 2005, we had 500 shares  designated and 460 shares issued and outstanding of our series B convertible  preferred  stock.  Each share has a par value of $0.01 and a stated value of $1,000.  Our series B preferred stock has a cumulative dividend of 4% per annum on the stated value, payable upon conversion or exchange in either cash or common stock at our option. The shares of series B preferred  stock may be  converted  into shares of our common stock or exchanged for shares of NCT common  stock.  Each  share of stock is  convertible  into our common  stock  based on a  conversion  price  that is the lower of:  the  lowest average  closing  bid price for a  five-day  consecutive  period  out of fifteen trading  days  preceding  the date of  conversion,  less a discount of 20%; or a fixed  price of $0.25.  The  exchange  rate into NCT common  stock is the lowest average of the average closing bid price for a share of NCT common stock for any consecutive five trading days out of the fifteen trading days preceding the date of  exchange,   less  a  discount  of  20%.  Any  outstanding   shares  will  be automatically converted on March 31, 2006 (see Note 18).  Prior to April  10,  2003,  the  series B  preferred  stock  was  classified  as temporary equity rather than stockholders' equity because under the terms of the agreements  entered  into in  connection  with  the  issuance  of the  series  B preferred  stock,  the holder of those shares may have had a right to require us to redeem the shares at 125% of the stated  value,  or an  increase  of $125,000 over the  stated  value.  This type of  redemption  would not be within our sole control,  and accordingly,  we treated the shares as temporary  equity. On April 10, 2003,  we entered  into an  agreement  with the holder of series B preferred stock whereby the holder agreed to waive certain registration rights relating to series B preferred stock.  This cancelled the triggering  event,  which may have placed the redemption of series B preferred stock at the holder's  option.  With the signing of this  agreement,  such  redemption was solely within our control. The  increase  of $125,000  over the stated  value was  reversed  by  increasing additional  paid-in  capital and decreasing our series B preferred stock and our series B preferred stock was classified within the stockholders' equity (capital deficit) section of our balance sheet.  Our series B  preferred  stock was  covered  under the  adoption of SFAS No. 150 effective  July 1, 2003.  SFAS No. 150  required us to  reclassify  our series B preferred stock from the  stockholders'  equity section to the current liability section on our balance sheet. In connection with this reclassification,  we were required  to increase  the value of the series B preferred  stock to reflect the monetary value of the shares required to be issued upon conversion. The series B preferred  stock  was  increased  $125,000  with  a  corresponding  decrease  to additional paid-in capital.  SFAS No. 150  required  us to record any  payments  or  accruals  of payments to holders of such  instruments  as interest  costs.  Therefore,  effective July 1, 2003,  the dividends  accrued to the holder of the series B preferred  stock are recorded as interest expense in the statement of operations; whereas, previously they were  recorded as a  reduction  to  additional  paid-in  capital.  Interest expense  recorded for the series B preferred  stock for the years ended December 31, 2003,  2004 and 2005 was $10,080,  $18,963 and  $18,400,  respectively.  The reduction  to  additional  paid-in  capital  for the series B  preferred  stock, calculated  for  purposes  of  determining  net  loss   attributable  to  common stockholders, was $9,920 for the year ended December 31, 2003.  The series B preferred  stock is carried on our balance sheet as of December 31, 2005 at its monetary value of $656,415,  which is comprised of the fair value of the shares of $575,000 plus the cash value of the accrued  dividends of $81,415. We would have to issue  approximately 71.9 million shares of our common stock if settlement  of the stated value of the series B preferred  stock had occurred as of December 31, 2005. We have the option to settle the accrued dividends in cash or common  stock.  As of December 31, 2005,  settlement  in common stock for the accrued  dividends  on the series B preferred  stock would  require  issuance of approximately  12.7  million  shares.  There is no limit on the number of shares that we could be  required  to issue upon  conversion  of the series B preferred stock. No shares of series B preferred stock were converted or exchanged  during the years ended  December 31, 2003 and 2005.  During the year ended December 31, 2004, 40 shares of series B preferred stock and accrued dividends were converted into 2,522,042 shares of our common stock.                                         F-14   10.  Notes Payable Due to Affiliates  As of December 31, 2004,  we owed  $2,207,255 to NCT Hearing under the following secured promissory notes,  bearing interest at the prime rate (5.25% at December 31, 2004).     Original issue date of note:    Maturing:               Principal       Interest           Total - ----------------------------    ---------            --------------   ------------   ---------------          June 30, 2004                   April 1, 2006       $  1,671,843     $   39,808     $   1,711,651   September 17, 2004              April 1, 2006             35,000            497            35,497   September 30, 2004              October 1, 2006          218,617          2,732           221,349   December 31, 2004               October 1, 2006          238,758            -             238,758                                                      --------------   ------------   ---------------                                                       $  2,164,218     $   43,037     $   2,207,255                                                      ==============   ============   ===============    During 2005, we issued an aggregate of $3,705,504 of secured promissory notes to NCT Hearing as  consideration  for  $115,000  of cash  advanced,  $1,242,662  of services provided and the refinancing of $2,234,490 of principal and $113,352 of interest for notes consolidated in advance of maturity. The notes are secured by a continuing security interest in all of our assets and all proceeds.  As of December 31, 2005,  we owed  $3,812,229 to NCT Hearing under the following secured promissory notes,  bearing interest at the prime rate (7.25% at December 31, 2005).     Original issue date of note:    Maturing:               Principal       Interest           Total - ----------------------------    ---------            --------------   ------------   ---------------          February 25, 2005             April 1, 2007         $     30,000     $   1,650      $      31,650   March 16, 2005                April 1, 2007               35,000         1,820             36,820   March 22, 2005                April 1, 2007               50,000         2,552             52,552   March 31, 2005                April 1, 2007              263,215        13,044            276,259   June 30, 2005                 October 1, 2007          2,083,704        71,329          2,155,033   September 22, 2005            October 1, 2007             70,272         1,347             71,619   September 30, 2005            April 1, 2008              848,167        14,983            863,150   December 31, 2005             April 1, 2008              325,146           -              325,146                                                      --------------   ------------   ---------------                                                       $  3,705,504     $ 106,725      $   3,812,229                                                      ==============   ============   ===============    11.  Capital Stock  Common Stock  For the year ended  December  31,  2003,  there were no  issuances of our common stock.  On April 5, 2004, NCT Hearing  converted an aggregate of $640,466 of our secured promissory notes and interest into 27,846,351 shares of our common stock.  On April 21, 2004, we obtained an expansion of our existing  technology  license from NCT Hearing in exchange for 9,821,429  shares of our common stock (see Note 5).  On April 27,  2004,  40  shares  of our  series B  preferred  stock and  accrued dividends were converted into 2,522,042 shares of our common stock (see Note 9).  On March 31, 2005, we issued 1,844,007 shares of our common stock upon automatic conversion of 50 shares of our series A convertible  preferred stock and accrued dividends (see Note 9).  The number of shares of our common  stock  required to be reserved  for issuance was  approximately  120.5  million based on the market price of $0.008 per share (or the discount from market as provided  under the  applicable  agreements)  at December 31, 2005. This reserve includes amounts for the conversion of preferred stock and for the  exercise of  options.  The number of shares to be issued upon conversion of our outstanding preferred stock varies as a function of the market price of our common stock.                                         F-15   Warrants  The following table summarizes  warrants to purchase our common stock during the years  ended  December  31, 2003 and 2004.  There were no  warrants  outstanding during the year ended December 31, 2005.                                                              Years Ended December 31,                                        --------------------------------------------------------------                                                    2003                            2004                                        -----------------------------   ------------------------------                                                         Weighted                        Weighted                                                          Average                         Average                                            Shares     Exercise Price      Shares       Exercise Price                                        --------------  --------------  --------------  --------------      Outstanding at beginning of year           5,500,000   $      0.433        1,000,000    $      0.130 Warrants granted                                 -              -                -               - Warrants canceled or expired              (4,500,000)        (0.500)      (1,000,000)         (0.130)                                        --------------                  -------------- Outstanding at end of year                 1,000,000   $      0.130              -      $        -                                        ==============                  ==============    12.  Stock Option Plans  In 1998,  our Board of  Directors  adopted  the 1998 Stock  Option  Plan for the benefit of our directors,  officers,  employees and  consultants.  This plan, as amended, authorizes the issuance of up to 30 million shares of our common stock.  On March 9, 2004, we issued  options to officers and employees to purchase up to 635,000 shares of our common stock at an exercise price of $0.03 per share under the 1998  Stock  Option  Plan,  to vest as  follows:  158,750  immediately  upon issuance;  158,750  on March 9, 2005;  158,750  on March 9, 2006 and  158,750 on March 9, 2007 and expire on March 9, 2011.  The exercise  price of these options was equal to the fair market  value of our common  stock on the grant  date.  On November 23, 2004, the Board of Directors  accelerated the vesting  schedules of options granted to directors, officers and employees dated March 9, 2004 to 100% vested to acknowledge its continued gratitude for employee dedication.  Although the acceleration of vesting schedules was a modification of the original grants, there was no accounting  consequence because the market price on the date of the modification was equal to the original exercise price of the grants. As a result of this  acceleration,  we will not be required to  recognize an expense for the fair  value of  unvested  options  after  adoption  of SFAS No.  123R.  Of these options, 440,000 remain outstanding and exercisable as of December 31, 2005.  On December 28, 2005, we issued options to officers and employees to purchase up to 527,000  shares of our common stock at an exercise  price of $0.008 per share under the 1998 Stock Option Plan, which options vested immediately upon issuance and expire on December 28, 2012.  The exercise  price of these options was equal to the  fair  market  value of our  common  stock on the  grant  date.  Of these options, all remain outstanding and exercisable as of December 31, 2005.  The following  summarizes stock option activity for the years ended December 31, 2003, 2004 and 2005:                                                                            Years Ended December 31,                                        ----------------------------------------------------------------------------------------                                                   2003                          2004                          2005                                        ----------------------------  ---------------------------   ----------------------------                                                        Weighted                      Weighted                      Weighted                                                         Average                       Average                       Average                                           Shares     Exercise Price    Shares      Exercise Price    Shares      Exercise Price                                        ------------  --------------  ------------  --------------  ------------  --------------        Outstanding at beginning of the 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 end of year       1,285,000    $      0.242     1,495,000    $      0.158     2,022,000    $      0.119                                        ============                  ============                  ============                                           F-16   As of December 31, 2005,  our  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. As of December 31, 2005,  27,966,000  options were available for future grants under the 1998 Stock Option Plan.  13.  Commitments  Future minimum lease payments under  noncancelable  operating leases expiring in 2009 for buildings and equipment and the present value of future minimum capital lease payments as of December 31, 2005 are as follows:          Year ending December 31                                            Capital Leases          Operating Leases      -----------------------                                           -----------------        -----------------               2006                                                          $         9,992          $        71,834           2007                                                                      373                   68,450           2008                                                                      -                     70,504           2009                                                                      -                     11,808                                                                        -----------------        -----------------      Total minimum lease payments                                                10,365          $       222,596                                                                                                 =================      Less amount representing interest                                              524                                                                        -----------------      Present value of net minimum capital lease payments                          9,841      Less current installments                                                    9,473                                                                        -----------------      Obligations under capital leases, excluding current installments   $           368                                                                        =================    Rent  expense was  approximately  $119,000,  $122,000 and $125,000 for the years ended December 31, 2003, 2004 and 2005, respectively.  14.  Income Taxes  There was no provision  for income taxes for the years ended  December 31, 2003, 2004 and 2005 due to operating losses incurred.  We had net  deferred  tax  assets of  approximately  $7,341,400  and  $8,109,300 attributable to intangible  assets and net operating  losses available to offset future federal income tax at December 31, 2004 and 2005,  respectively.  Our net deferred tax assets have been fully reserved by a valuation  allowance since the realization of its benefit is uncertain.  The  difference  between the statutory federal income tax rate of 34% and our effective tax rate is due to increases in the valuation  allowance of $364,000,  $454,400 and $767,900 for the years ended December 31, 2003, 2004 and 2005, respectively.  At December 31, 2005, we had net operating  loss  carryforwards  for federal and state  income  tax   purposes   amounting  to   $13,084,000   and   $13,134,000, respectively,  which expire  through the year 2025. In accordance  with Internal Revenue Code Section 382, our net operating  loss  carryforwards  are subject to certain  limitations  resulting from the issuance of common stock to NCT Hearing (see Note 5).  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.                                         F-17   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:                                                            December 31,                                                ---------------------------------                                                     2004             2005                                                ---------------  ---------------- Allowance for doubtful accounts                 $      11,000    $       11,000 Inventory reserve                                      44,800            68,500 Accrued warranty expense                               10,500            11,700 Property and equipment                                 18,000            54,000 Intangible assets                                   3,422,000         3,039,000 Net operating loss carryforwards                    3,834,000         4,924,000 Other carryforwards                                     1,100             1,100                                                ---------------  ---------------- Total deferred tax assets                           7,341,400         8,109,300  Less valuation allowance                            7,341,400         8,109,300                                                ---------------  ---------------- Net deferred tax asset                          $         -      $          -                                                ===============  ================   15.  Discontinued Operations and Business Division Information  Our  business  divisions  during  2005  were:  (1)  Products  Business  and  (2) Telecommunications  Systems Integration.  Our operations have been predominately based in the Products  Business  division.  At December 31, 2003,  2004 and 2005 these divisions were not separately  reportable segments in accordance with SFAS No. 131,  "Disclosures about Segments of an Enterprise and Related Information." We  evaluate  division  performance  based on net  sales and  operating  income. Management  does not track  division data or evaluate  division  performance  on additional financial information.  As such, there are no separately identifiable division assets or separately identifiable statements of income (below operating income).  We do not track or assign  assets to  individual  business  divisions. Likewise,  depreciation  expense and capital  additions  are also not tracked by business division.  We disposed of our Telecommunications  Systems Integration division (TSI) during the fourth  quarter of 2005.  This disposal meets the criteria  established  for recognition as discontinued  operations under SFAS No. 144,  "Accounting for the Impairment or Disposal of Long-Lived  Assets." TSI represents a component of our business   comprised  of   operations   and  cash  flows  that  can  be  clearly distinguished, operationally and for financial reporting purposes, from the rest of the  entity.  At  December  31,  2005,  TSI was  classified  as  discontinued operation and its results of operations are separately  reported for all periods presented.  Summarized financial information for discontinued  operations is set forth below. There are no assets held for sale at December 31, 2005.                                                            Telecom Systems Integration Division                                                ------------------------------------------------------                                                      2003              2004                2005                                                ----------------   ----------------   ----------------     Net Sales                                       $      110,133     $      119,123     $       77,022  Cost of goods sold                                      38,470             30,309             35,155 Selling, general and administrative expenses            84,645             93,797             90,463                                                ----------------   ----------------   ----------------                                                        123,115            124,106            125,618                                                 ----------------   ----------------   ---------------- Loss from discontinued operations               $      (12,982)    $       (4,983)    $      (48,596)                                                ================   ================   ================    Products  Business:  Our Products  Business  engineers,  designs and distributes audio and  communications  solutions  and other  products  for  business  users, industrial users and consumers. Our current products include Apollo headsets and amplifiers for use in contact centers,  ProCom headsets for use in quick-service restaurants,  NoiseBuster  noise canceling safety earmuffs for use in high noise industrial   environments  and  NoiseBuster   noise  canceling   consumer  audio headphones.                                         F-18   Telecommunications  Systems Integration Business: Our Telecommunications Systems Integration Business sold and installed simple to sophisticated analog,  digital and  Internet  Protocol  phone  systems and provided  telecommunications  system integration  support to the small  office and the large  corporate  call  center clients.  We  discontinued  the operations of this business  division during the fourth quarter of 2005.  16.  Related Party Transactions  As of December 31,  2004,  we owed  $2,265,102  to NCT  Hearing,  consisting  of $2,207,255 in notes  payable due to affiliates  and $57,847 in due to factor and other  liabilities  on our balance  sheet.  As of  December  31,  2005,  we owed $3,812,229  to NCT Hearing  included in notes  payable due to  affiliates on our balance  sheet (see Notes 7 and 10).  NCT  Hearing and its  affiliates  provided approximately  $267,000 and $127,000 in net cash advances to us during the years ended December 31, 2004 and 2005, respectively.  NCT  Hearing  and its  affiliates  charge us for labor  and  overhead  which are included in NCT Hearing and affiliates  charges on our statements of operations. These charges were allocated to us based on specific  identification and, to the extent that such identification was not practical,  on the basis of employees or other methods  which  management  believes to be a reasonable  reflection of the utilization  of services  provided or the benefit  received by us. The following table  summarizes  the  approximate  charges by NCT Hearing  and its  affiliates during the years ended December 31, 2003, 2004 and 2005.                                         For the Year Ended December 31,                                -------------------------------------------------                                    2003              2004             2005                                --------------   --------------   ---------------       Labor                      $    137,000     $    442,000     $     898,000      Overhead                        177,000          117,000           110,000                                -------------   ---------------  ----------------                                 $    314,000     $    559,000     $   1,008,000                                =============   ===============  ================  We participate in the NCT Group, Inc. Employee Benefits Plan, referred to as the Benefit Plan. The Benefit Plan provides,  among other  coverage,  certain health benefits to  employees  and  directors of NCT's United  States  operations.  NCT administers  this  modified  self-insured  Benefit  Plan  through  a  commercial third-party administrative health care provider. NCT's maximum aggregate benefit exposure  in each  Benefit  Plan  fiscal  year is  limited  to  $634,000,  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 NCT pays a nominal  premium for such stop loss coverage.  NCT records benefit claim expense in the  period  in which the  benefit  claim is  incurred.  Any  benefit  claims incurred  by us are  submitted  to NCT for  payments  and such  claims  are then charged  to us. At  December  31,  2004 and 2005,  the  balance  owed to NCT for benefit  claims was  approximately  $471,000 and $510,000,  respectively  and is included in the amount due to NCT Hearing  discussed  above. For the years ended December  31,  2003,  2004 and 2005,  health  benefits  and claims  included  in selling,  general and  administrative  expenses on our  statements of operations were approximately $69,000, $32,000 and $43,000, respectively.  We participate in NCT's 401(k) Plan,  referred to as the 401(k) Plan. The 401(k) Plan is qualified  under  Section  401(k) of the Internal  Revenue Code of 1986. Each  eligible  employee  may elect to  contribute  up to 15% of the  employee's annual  compensation  to the 401(k) Plan. NCT, at the discretion of its Board of Directors,  may match employee  contributions  to the 401(k) Plan. There were no matching contributions for the years ended December 31, 2003, 2004 and 2005.                                         F-19   17.  Selected Quarterly Financial Data (Unaudited)  The following tables contain selected quarterly  financial data for each quarter of 2004 and 2005.  We believe  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.  (Unaudited)                                                                         Year Ended December 31, 2004                                             ----------------------------------------------------------------------------                                              1st Quarter     2nd Quarter     3rd Quarter     4th Quarter     Full Year                                             -------------  --------------  --------------  --------------  -------------       Net sales                                    $   232,320    $    241,673    $    285,951    $    315,689    $ 1,075,633 Gross profit                                     162,425         166,334         185,740          73,103        587,602 Loss attributable to common stockholders        (247,645)       (304,650)       (326,291)       (511,569)    (1,390,155) Loss per share - basic and diluted *               (0.01)            -               -             (0.01)         (0.02)                                                                      Year Ended December 31, 2005                                             ----------------------------------------------------------------------------                                              1st Quarter     2nd Quarter     3rd Quarter     4th Quarter     Full Year                                             -------------  --------------  --------------  --------------  -------------  Net sales                                    $   298,191    $    288,082    $    295,201    $    379,504    $ 1,260,978 Gross profit                                     201,339         197,867         197,713         132,331        729,250 Loss attributable to common stockholders        (452,316)       (431,849)       (554,174)       (623,648)    (2,061,987) Loss per share - basic and diluted *               (0.01)          (0.01)          (0.01)          (0.01)         (0.03)    * 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 necessarily equal the full-year loss per share.  4th Quarter 2004: - ---------------- Includes increase in inventory reserve of $114,000.   18.  Subsequent Events  On March 23,  2006,  we amended  our  articles  of  incorporation  to extend the mandatory conversion date on our series B convertible preferred stock from March 31, 2006 to March 31, 2008.                                         F-20   REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON SCHEDULE II   Board of Directors and Stockholders Pro Tech Communications, Inc.  Our audits  were  conducted  for the  purpose of forming an opinion on the basic financial  statements of Pro Tech  Communications,  Inc. 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 financial statements.  Such information has been subjected to the auditing procedures  applied in the audits of the basic financial  statements and, in our opinion,  is fairly  stated in all  material  respects  in relation to the basic financial statements taken as a whole.   /s/ Eisner LLP - --------------     Eisner LLP   New York, New York March 3, 2006                                          F-21                                                                 SCHEDULE II  PRO TECH COMMUNICATIONS, INC. VALUATION AND QUALIFYING ACCOUNTS - ------------------------------------------------------------------------------------------------------------------------------------               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 period      expenses      Describe        Describe        period - -------------------------------------------                 -----------    ----------    ------------   -------------  ------------         Allowance for doubtful accounts:      Year ended December 31, 2003                            $  27,309      $   6,591     $     -       $   2,463 (a)   $  31,437      Year ended December 31, 2004                               31,437         14,621           -          17,781 (a)      28,277      Year ended December 31, 2005                               28,277         15,794           -          15,826 (a)      28,245  Allowance for inventory obsolescence:      Year ended December 31, 2003                               10,000            -             -           5,000 (b)       5,000      Year ended December 31, 2004                                5,000        113,531           -             -           118,531      Year ended December 31, 2005                              118,531         63,262           -             -           181,793  Accumulated depreciation:      Year ended December 31, 2003                              465,775        155,887           -             -           621,662      Year ended December 31, 2004                              621,662        147,040           -           2,602 (c)     766,100      Year ended December 31, 2005                              766,100        129,140           -          85,635 (c)     809,605  Accumulated other intangibles and other assets amortization:      Year ended December 31, 2003                                2,048        182,184           -           3,511 (d)     180,721      Year ended December 31, 2004                              180,721        194,610           -             -           375,331      Year ended December 31, 2005                              375,331        200,721           -             -           576,052   Attention is directed to the foregoing report of independent registered accounting firm and the notes to our financial statements.    - ------ (a) Accounts written off, net of recoveries. (b) Accounts previously reserved for, written off in current year. (c) Write off fixed asset dispositions against reserve. (d) Write down intangibles to estimated fair value.                                         F-22                                      SIGNATURES       Pursuant  to the  requirements  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 March 23, 2006.                                                  PRO TECH COMMUNICATIONS, INC.                                                  By:      /s/ RICHARD HENNESSEY                                                          ---------------------                                                          Richard Hennessey                                                          President and                                                          Chief Operating Officer       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.              Name                         Title                         Date             ----                         -----                         ----    /s/ RICHARD HENNESSEY        President, Chief Operating         March 23, 2006   -----------------------         Officer and Director       Richard Hennessey       (principal executive officer)     /s/ MARY CHRISTIAN-HEIN      Senior Vice President, Chief       March 23, 2006   -----------------------     Financial Officer and Treasurer       Mary Christian-Hein        (principal finance and                                    accounting officer)    /s/ IRENE LEBOVICS               Chairman of the Board          March 23, 2006   -----------------------       Irene Lebovics     /s/ MICHAEL J. PARRELLA                Director                 March 23, 2006   -----------------------       Michael J. Parrella     /s/ CY E. HAMMOND                      Director                 March 23, 2006   -----------------------       Cy E. Hammond                                         S-1    EX-3.1(E) 2 exh-3_1e.txt ARTICLES OF AMENDMENT TO ARTICLES OF INCORP.                                                                    Exhibit 3.1(e)                                 Articles of Amendment                                        to                             Articles of Incorporation                                        of                            Pro Tech Communications, Inc.                           -----------------------------     (Name of corporation as currently filed with the Florida Dept. of State)                                    P94000073077                                   ------------                    (Document number of corporation (if known)  Pursuant to the provisions of section 607.1006,  Florida Statutes,  this Florida Profit  Corporation  adopts  the  following  amendment(s)  to  its  Articles  of Incorporation:  NEW CORPORATE NAME (if changing): - ---------------------------------                                           N/A - -------------------------------------------------------------------------------- (Must  contain  the word  "corporation,"  "company,"  or  "incorporated"  or the abbreviation "Corp.," "Inc.," or "Co.") (A professional  corporation  must contain the word  "chartered",  "professional association," or the abbreviation "P.A.")  AMENDMENTS  ADOPTED- (OTHER THAN NAME CHANGE) Indicate Article  Number(s) and/or Article Title(s) being amended, added or deleted: (BE SPECIFIC)  Section 5(f) of the Articles of  Amendment to Articles of  Incorporation  of Pro Tech  Communications,  Inc.  filed with the  Department of State of the State of Florida on July 30, 2001 and creating a Series B Convertible  Preferred Stock is herby deleted in its entirety and replaced with the following:       "(f) Mandatory  Conversion.  If (i) the  Registrable  Securities  have been registered for resale in the Registration  Statement (as defined in Section 8(a) below),  and such  Registration  Statement was or has been effective for no less than two years in the aggregate  following the Required  Effective  Date, or the Registrable  Securities may be sold pursuant to Rule 144(k) or another available exemption under the Securities Act of 1933, as amended,  without volume or other restrictions  or  limits,   and  (ii)  any  Series  B  Preferred  Shares  remain outstanding on March 31, 2008, then all such Series B Preferred  Shares shall be converted as of such date in accordance with this Section 5 as if the holders of such  Series B  Preferred  Shares had given the  Conversion  Notice on March 31, 2008,  and the  Conversion  Date had been  fixed as of March 31,  2008,  for all purposes of this  Section 5, and all holders of Series B Preferred  shares shall thereupon  and within two (2) business days  thereafter  surrender all Preferred Stock  Certificates,  duly endorsed or accompanied by a duly executed assignment for  cancellation,  to the  Corporation or the Transfer  Agent.  No person shall thereafter have any rights in respect of Series B Preferred  Shares,  except the right to receive  shares of Common  Stock on  conversion  thereof as provided in this Section 5."                       (Attach additional pages if necessary)  If an amendment  provides for exchange,  reclassification,  or  cancellation  of issued shares, provisions for implementing the amendment if not contained in the amendment itself: (if not applicable, indicate N/A)                                         N/A                                         1   The date of each amendment(s) adoption:  March 20, 2006                                          --------------  Effective date if applicable:  March 23, 2006                -------------   --------------                 (no more than 90 days after amendment file date)  Adoption of Amendment(s)            (CHECK ONE)  /X/  The amendment(s) was/were approved by the shareholders. The number of votes      cast for the  amendment(s)  by the  shareholders  was/were  sufficient  for      approval.  / /  The amendment(s)  was/were  approved by the  shareholders  through voting      groups. The following statement must be separately provided for each voting      group entitled to vote separately on the amendment(s):       "The  number of votes cast for the  amendment(s)  was/were  sufficient  for      approval by                                        ."                            (voting group)  / /  The  amendment(s)  was/were  adopted  by the board of  directors  without      shareholder action and shareholder action was not required.  / /  The  amendment(s)   was/were  adopted  by  the   incorporators   without      shareholder action and shareholder action was not required.          Signature             /s/ Mary Christian-Hein                             (By a director, president or other officer - if                            directors or officers have not been selected, by an                            incorporator - if in the hands of a receiver,                            trustee, or other court appointed fiduciary by that                            fiduciary)                                 Mary Christian-Hein                                -------------------                     (Typed or printed name of person signing)                    Sr. Vice President & Chief Financial Officer                   --------------------------------------------                             (Title of person signing)                                         2    EX-23.1 3 exh-23_1.txt CONSENT OF ACCOUNTING FIRM                                                                      Exhibit 23.1  CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM   We consent to the  incorporation by reference in the Registration  Statement No. 333-49488 on Form S-8 of Pro Tech Communications, Inc. of our report dated March 3, 2006 (with respect to Note 18, March 23,  2006)on our audits of the financial statements  and schedule II as of December 31, 2004 and 2005 and for each of the years ended December 31, 2003, 2004 and 2005,  included in this Annual Report on Form 10-K     Eisner LLP  New York, New York March 23, 2006     EX-31.1 4 exh-31_1.txt SECTION 302 CERTIFICATION                                                                      Exhibit 31.1                                    CERTIFICATION  I, Richard Hennessey, certify that:  1.   I have reviewed this annual report on Form 10-K of Pro Tech Communications,      Inc.;  2.   Based on my knowledge, this report does not contain any untrue statement of      a material  fact or omit to state a  material  fact  necessary  to make the      statements made, in light of the circumstances  under which such statements      were made,  not  misleading  with  respect  to the  period  covered by this      report;  3.   Based on my  knowledge,  the  financial  statements,  and  other  financial      information  included  in  this  report,  fairly  present  in all  material      respects the financial  condition,  results of operations and cash flows of      the registrant as of, and for, the periods presented in this report;  4.   The  registrant's  other  certifying  officer  and  I are  responsible  for      establishing and maintaining disclosure controls and procedures (as defined      in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:       a)   designed  such  disclosure  controls  and  procedures,  or caused such           disclosure   controls  and   procedures  to  be  designed   under  our           supervision,  to ensure  that  material  information  relating  to the           registrant,  including its consolidated subsidiaries, is made known to           us by others within those entities,  particularly during the period in           which this report is being prepared;       b)   evaluated the  effectiveness of the registrant's  disclosure  controls           and procedures and presented in this report our conclusions  about the           effectiveness of the disclosure controls and procedures, as of the end           of the period covered by this report based on such evaluation; and       c)   disclosed  in this  report  any  change in the  registrant's  internal           control over financial reporting that occurred during the registrant's           most recent fiscal quarter (the registrant's  fourth fiscal quarter in           the case of an  annual  report)  that has  materially  affected  or is           reasonably  likely to materially  affect,  the  registrant's  internal           control over financial reporting; and  5.   The registrant's  other certifying  officer and I have disclosed,  based on      our most recent evaluation of internal control over financial reporting, to      the registrant's  auditors and the audit committee of registrant's board of      directors (or persons performing the equivalent function):       a)   all significant  deficiencies and material weaknesses in the design or           operation  of internal  control  over  financial  reporting  which are           reasonable  likely to  adversely  affect the  registrant's  ability to           record, process, summarize and report financial information; and       b)   any fraud, whether or not material,  that involves management or other           employees who have a  significant  role in the  registrant's  internal           control over financial reporting.  Date:  March 23, 2006                                                    /s/ RICHARD HENNESSEY                                                    -----------------------------                                                    Richard Hennessey                                                    President                                                    (Principal Executive Officer)     EX-31.2 5 exh-31_2.txt SECTION 302 CERTIFICATION                                                                      Exhibit 31.2                                    CERTIFICATION  I, Mary Christian-Hein, certify that:  1.   I have reviewed this annual report on Form 10-K of Pro Tech Communications,      Inc.;  2.   Based on my knowledge, this report does not contain any untrue statement of      a material  fact or omit to state a  material  fact  necessary  to make the      statements made, in light of the circumstances  under which such statements      were made,  not  misleading  with  respect  to the  period  covered by this      report;  3.   Based on my  knowledge,  the  financial  statements,  and  other  financial      information  included  in  this  report,  fairly  present  in all  material      respects the financial  condition,  results of operations and cash flows of      the registrant as of, and for, the periods presented in this report;  4.   The  registrant's  other  certifying  officer  and  I are  responsible  for      establishing and maintaining disclosure controls and procedures (as defined      in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:       a)   designed  such  disclosure  controls  and  procedures,  or caused such           disclosure   controls  and   procedures  to  be  designed   under  our           supervision,  to ensure  that  material  information  relating  to the           registrant,  including its consolidated subsidiaries, is made known to           us by others within those entities,  particularly during the period in           which this report is being prepared;       b)   evaluated the  effectiveness of the registrant's  disclosure  controls           and procedures and presented in this report our conclusions  about the           effectiveness of the disclosure controls and procedures, as of the end           of the period covered by this report based on such evaluation; and       c)   disclosed  in this  report  any  change in the  registrant's  internal           control over financial reporting that occurred during the registrant's           most recent fiscal quarter (the registrant's  fourth fiscal quarter in           the case of an  annual  report)  that has  materially  affected  or is           reasonably  likely to materially  affect,  the  registrant's  internal           control over financial reporting; and  5.   The registrant's  other certifying  officer and I have disclosed,  based on      our most recent evaluation of internal control over financial reporting, to      the registrant's  auditors and the audit committee of registrant's board of      directors (or persons performing the equivalent function):       a)   all significant  deficiencies and material weaknesses in the design or           operation  of internal  control  over  financial  reporting  which are           reasonable  likely to  adversely  affect the  registrant's  ability to           record, process, summarize and report financial information; and       b)   any fraud, whether or not material,  that involves management or other           employees who have a  significant  role in the  registrant's  internal           control over financial reporting.  Date:  March 23, 2006                                                          /s/ MARY CHRISTIAN-HEIN                                                          -----------------------                                                          Mary Christian-Hein                                                          Chief Financial Officer      EX-32.1 6 exh-32_1.txt SECTION 906 CERTIFICATION                                                                      Exhibit 32.1                   Certification pursuant to 18 U.S.C. Section 1350,                     as adopted pursuant to Section 906 of the                            Sarbanes-Oxley Act of 2002  In connection  with the Annual  Report of Pro Tech  Communications,  Inc.  ("Pro Tech") on Form 10-K for the period  ending  December  31, 2005 as filed with the Securities  and  Exchange  Commission  on the date  hereof (the  "Report"),  we, Richard Hennessey,  President, and Mary Christian-Hein,  Chief Financial Officer of Pro Tech,  each  certify,  pursuant  to 18 U.S.C.  Section  1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:       (1)  The Report fully  complies with the  requirements  of section 13(a) or           15(d) of the Securities Exchange Act of 1934; and       (2)  The  information  contained  in the  Report  fairly  presents,  in all           material respects,  the financial  condition and results of operations           of Pro Tech.    /s/ RICHARD HENNESSEY - ----------------------- Richard Hennessey President March 23, 2006   /s/ MARY CHRISTIAN-HEIN - ----------------------- Mary Christian-Hein Chief Financial Officer March 23, 2006      -----END PRIVACY-ENHANCED MESSAGE-----