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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                ----------------
                                    FORM 10-K

                FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
         SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

    (MARK ONE)
         |X|   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
               SECURITIES EXCHANGE ACT OF 1934
                  For the fiscal year ended December 31, 1997

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

                        COMMISSION FILE NUMBER: 33-93464

                             DICTAPHONE CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

            DELAWARE                                       06-0996237
(STATE OR OTHER JURISDICTION OF             (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)

 3191 BROADBRIDGE AVENUE, STRATFORD, CT                       06497
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)                    (ZIP CODE)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 381-7000

           SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
                                      NONE

           SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
                                      NONE

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

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

The  aggregate  market value of the voting stock held by  non-affiliates  of the
registrant as of March 24, 1998 was $0.00.

As of March 24, 1998, there were 12,949,000  shares of the  registrant's  common
stock, $.01 par value (the "Common Stock") outstanding.  There is no established
trading market for the Common Stock.

                  DOCUMENTS INCORPORATED BY REFERENCE. None

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                                TABLE OF CONTENTS

                                                                   PAGE
                                                                REFERENCED
ITEM NUMBER                                                      FORM 10-K


                                     PART I

ITEM 1.  BUSINESS................................................    1

ITEM 2.  PROPERTIES..............................................    7

ITEM 3.  LEGAL PROCEEDINGS.......................................    8

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.....    8

                                     PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
         STOCKHOLDER MATTERS.....................................    8

ITEM 6.  SELECTED FINANCIAL DATA.................................    9

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
         CONDITION AND RESULTS OF OPERATIONS.....................   11

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
         MARKET RISK.............................................   17

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............   17

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
         ACCOUNTING AND FINANCIAL DISCLOSURE.....................   58

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......   58

ITEM 11. EXECUTIVE COMPENSATION..................................   61

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
         MANAGEMENT..............................................   68

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..........   69

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
         REPORTS ON FORM 8-K.....................................   72


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            CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

              CERTAIN  STATEMENTS   CONTAINED  HEREIN  WHICH  EXPRESS  "BELIEF,"
"ANTICIPATION," "EXPECTATION," OR "INTENTION" OR ANY OTHER PROJECTION, INCLUDING
STATEMENTS CONCERNING THE LAUNCH OF NEW PRODUCTS, FUTURE COMPANY PERFORMANCE AND
CAPITAL  EXPENDITURES,  INSOFAR  AS THEY  MAY  APPLY  PROSPECTIVELY  AND ARE NOT
HISTORICAL FACTS, ARE "FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934. BECAUSE SUCH STATEMENTS INCLUDE RISKS AND UNCERTAINTIES, ACTUAL RESULTS
MAY DIFFER  MATERIALLY FROM THOSE  EXPRESSED OR IMPLIED BY SUCH  FORWARD-LOOKING
STATEMENTS.  FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER  MATERIALLY  FROM
THOSE EXPRESSED OR IMPLIED BY SUCH  FORWARD-LOOKING  STATEMENTS INCLUDE, BUT ARE
NOT  LIMITED  TO,  THE RISK  FACTORS  IDENTIFIED  IN  DICTAPHONE'S  REGISTRATION
STATEMENT  ON FORM  S-1 AND IN OTHER  DOCUMENTS  FILED  BY  DICTAPHONE  WITH THE
SECURITIES AND EXCHANGE COMMISSION.

                                     PART I

ITEM 1.  BUSINESS

GENERAL

       On  April  25,  1995,  Dictaphone  Acquisition   Corporation  ("Successor
Company", also referred to herein as the "Company" or "Dictaphone") entered into
a  Stock  and  Asset  Purchase  Agreement,  as  amended  August  11,  1995  (the
"Acquisition Agreement") with Pitney Bowes Inc. ("Pitney Bowes") for the purpose
of acquiring  (the  "Acquisition")  Dictaphone  Corporation,  the United  States
Dictaphone  Subsidiary of Pitney Bowes,  and certain  foreign  affiliates as set
forth in the Acquisition Agreement (collectively, the "Predecessor Company"). On
August 11, 1995, the Acquisition  was  consummated and the Company  acquired the
Predecessor Company. Subsequent to the Acquisition, the Company changed its name
to "Dictaphone  Corporation",  and the  Predecessor  Company changed its name to
"Dictaphone  Corporation  (U.S.)". In January 1998,  Dictaphone  Corporation was
merged into Dictaphone  Corporation (U.S.),  whereupon the surviving corporation
changed its name to "Dictaphone Corporation".

      The Company is the successor to a business begun by Alexander  Graham Bell
in 1876.  Today,  the Company is a leader (in certain  vertical  markets) in the
development, manufacture, marketing, service and support of Integrated Voice and
Data  Management  ("IVDM"(TM))  systems and software,  which include  dictation,
voice processing,  voice response, unified messaging,  records management, court
recording, call center monitoring systems and communications recording.

      The Company's dictation and voice management  products  ("Integrated Voice
Systems",  or "I.V.S." and "Integrated Health Systems",  or "I.H.S."),  sales of
which  represented 31% of the Company's 1997 total revenue,  consist of portable
and  desktop  dictation  products,  and voice  management  and voice  processing
systems used  primarily  by  professionals  such as  physicians,  attorneys  and
business  executives,  and  by  enterprises  such  as  hospitals,   governmental
agencies,  financial  institutions,  courts,  insurance  agencies and law firms.
Voice processing systems are generally larger,  more  sophisticated  versions of
dictation  products  designed  to  accommodate  multiple  users.  The  Company's
communications  recording systems ("C.R.S."),  sales of which represented 23% of
the Company's 1997 total revenue,  consist primarily of multi-channel  archiving
recorders and emergency message repeaters used primarily by police  departments,
fire departments,  air traffic controllers and other public safety agencies,  as
well as by financial services firms and other businesses. These products perform
continuous,  reliable  recording of multiple  telephone or other  communications
lines, such as radio channels,  to protect customers who face potentially severe
financial   or  safety   risks  posed  by  lost  or   misinterpreted   telephone
conversations  or  voice  broadcasts.  The  Company's  communications  recording
systems  products also include  quality  monitoring,  productivity  and training
products used primarily by call centers.  Dictaphone's service business, revenue
from which  represented  33% of the Company's 1997 total  revenue,  provides its
customers  with service  hardware and software  support,  expedited  repairs and
remote diagnostics. Many Dictaphone customers, including a majority of customers
purchasing  large systems,  purchase  Company  service  contracts at the time of
product purchase.

                                       1

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DICTATION AND VOICE MANAGEMENT

      The  dictation  products  market  consists  of (i)  the  professional  and
commercial market and (ii) the consumer market. The voice management market also
consists primarily of the professional and commercial  market.  Customers in the
professional  and commercial  market include  professionals  such as physicians,
attorneys  and business  executives,  and  enterprises  that  require  swift and
efficient document creation such as hospitals,  governmental entities, insurance
agencies,  financial  institutions  and law  firms.  Customers  in  this  market
typically  purchase products through direct sales or dealer  representatives  of
established companies that can provide reliable, long-term service through their
service networks.  Dictation  products marketed to customers in the professional
and  commercial  segment are  generally  more  expensive  than those sold in the
consumer  segment  because they represent more durable  construction  for longer
product life and provide  special  features  geared to office and  transcription
use. The consumer  segment  consists of customers who typically  purchase  lower
priced  desktop and portable  machines  through  retail,  catalog and mail order
establishments.

      The Company believes that dictation  products in its markets are purchased
primarily by existing  industry  customers.  According to the  Company's  market
surveys, approximately 70% of the purchasing activity in the marketplace is from
existing customers who are expanding and upgrading their equipment,  15% is from
users changing brands, and 15% is from non-users making their first purchase.

      Dictation  products consist of desktop and portable products and dictation
systems (also  referred to as voice  processing  systems).  Desktop and portable
dictation  products,  the traditional  products of this industry,  typically use
analog magnetic tape recording  methods to store and replay voice.  All portable
products  are designed to be  compatible  with  Dictaphone  desktops in terms of
features and appearance.  In the United States, there is a base of approximately
260,000 Dictaphone portables eligible for future upgrade.

      Voice processing systems are generally larger, more sophisticated versions
of dictation  products designed to accommodate  multiple users. Voice processing
systems equipment  usually consists of one or more centralized  dictation units,
which include the equipment  which records and replays voice data,  and a series
of telephones  or similar  devices,  which  connect with the dictation  units to
record voice data and access  previously  recorded data. This equipment  permits
users to transmit voice data to  transcriptionists  without requiring such users
to  physically  transport  audio tapes  carrying  this data.  Digital  dictation
systems currently offer many advantages over their analog predecessors including
higher reliability, random and simultaneous accessibility to work, remote access
and playback over telephone lines,  and the ability to handle multiple  software
applications,  such  as  dictation,  voice  mail  and  voice  response.  Digital
dictation systems also permit feature customization and may interface with other
customer systems, such as local area network systems.

      In 1996, the Company acquired the rights to a dictation, transcription and
information management software system which utilizes a Microsoft(R) Windows(TM)
NT operating system  platform.  This system,  called the Enterprise  Express(TM)
System, which was  launched by the Company in the first half of 1997, represents
the Company's latest voice processing system. The Enterprise  Express(TM) System
went into  production in June 1997 and has seen  significant  growth since then.
The Enterprise  Express(TM)  System replaces the Digital  Express(TM) 7000 Voice
Processing  System which was  introduced  in 1988 and has a worldwide  installed
base of over 1,600  systems  as well as the  Records  Express(TM)  Transcription
System.

      In 1993,  Dictaphone  introduced digital voice processing systems,  called
the Digital Express(R) 4000 and Digital Express(R) 2500 products.  The Company's
Straight Talk(TM) product is its smallest digital desktop system.  Introduced in
mid-1990,  Straight  Talk(TM) is provided  as an upgrade  for  clustered  analog
desktop users.

      In 1996,  Dictaphone  introduced  Synergy(TM),  a multi-application  voice
processing  and  management  system  based on  OS/2(TM)  and  industry  standard
hardware.  Synergy(TM) provides multiple computer telephony features,  including
auto-attendant,  voice mail, fax mail,  unified messaging and E-mail integration
among  others.  Synergy(TM)  systems  may be  integrated  with the  majority  of
telephone  switches and can also be linked to both  mainframe and  client-server
data sources.  Synergy(TM) is an OEM (original equipment  manufacturer)  product
which is largely sourced from a third party.

                                       2

<PAGE>


      Also in late 1996,  Dictaphone  introduced  the For the  Record(TM)  Court
Recording  System, a digital  recording  product designed to provide for access,
management and archiving of court and other similar hearing proceedings. For the
Record(TM)  provides a centralized  source where  information can be managed for
transcription,  review and retrieval and utilizes a Microsoft(R)  Windows(TM) NT
operating  platform.  In late 1997, the Company introduced a portable version of
the For the  Record(TM)  product.  For the Record(TM) is an OEM product which is
sourced from a third party.

      The  Company  also  anticipates  working  with third party  developers  of
continuous speech recognition  software, in order to introduce continuous speech
recognition products into the Company's I.H.S. and I.V.S. marketplace.


COMMUNICATIONS RECORDING SYSTEMS

      The  safety  and/or  liability  communications  recording  systems  market
consists primarily of multi-channel continuous archiving recorders and emergency
message  repeaters.  Communications  recording  systems are  designed to perform
continuous,  reliable recording of multiple telephone or communications lines to
protect customers who face potentially severe financial or safety risks posed by
lost  or   misinterpreted   telephone   conversations   or   voice   broadcasts.
Multi-channel archiving recorders, also called "telephone loggers" or "loggers",
are  sophisticated  systems that capture large volumes of voice data transmitted
over multiple  telephone or other  communication  lines, such as radio channels,
and allow the user to retrieve and play back specific  conversations.  Emergency
message  repeaters,  sometimes  referred to as "Call  Checks",  are much smaller
machines  that  attach to  telephone  lines or other  communications  devices to
capture a smaller volume of voice data.

      Customers of safety and liability communications recording systems include
public safety  agencies,  such as police  departments,  fire departments and air
traffic  control  departments,  financial  services  firms,  such as traders and
brokers,  call centers and other  businesses.  Dictaphone  believes that many of
these  customers  rely  heavily on these  systems as an  integral  part of their
operations,  particularly  in the  case  of  governmental  safety  agencies  and
financial institutions.

      In the early 1990's, the communications  recording systems market began to
experience  technological  change as analog  reel-to-reel  recorders began to be
displaced by analog VHS-based  products and, more  frequently,  digital products
including those based on magnetic disk,  optical disk or digital audio tape. For
example,  in the  case of  Dictaphone,  revenue  from  sales  of  communications
recording  products  based on digital  technology  increased as a percentage  of
product sales revenue from all  communications  recording products from only 13%
in 1992 to over 97% in 1997. These  technological  changes both improved product
flexibility  and, in the case of digital  recording  platforms,  increased  data
capacity and network integration.

      The Company's  multi-channel  continuous  archive recorders consist of the
ProLog(TM),  Guardian(TM) and Sentinel(TM)  models.  In the second half of 1997,
the Company introduced the Symphony CTI(TM) system, a product designed to engage
the computer telephony  integration market. The Symphony CTI(TM) system provides
for an advanced call retrieval  capability,  enabling integration with telephone
switches and other systems and databases to capture more information  related to
each phone call.

      The Company's midsized  Guardian(TM)  model,  introduced in 1994, has been
designed to provide many of the services provided by the ProLog(TM) to customers
requiring  fewer  features  or to those who  prefer a single  unit that does not
include a stand-alone personal computer ("PC") workstation.

      The Company's Sentinel(TM) digital logger product is geared toward smaller
capacity  and price  sensitive  customers.  The Company  began  shipments of the
Sentinel(TM) in the third quarter of 1995. The Sentinel(TM)  logger replaced the
Model 9800,  Dictaphone's first digital logger, which was partially sourced from
an outside supplier.

                                       3


<PAGE>


      Dictaphone's  emergency message products include the Series 5700, 5900 and
6600.   The  vast  majority  of  these  units  is  installed  in  public  safety
organizations, where they are used extensively for replaying emergency telephone
calls.

      In the fourth quarter of 1996,  Dictaphone introduced its Insight(TM) call
center  product.  The Insight(TM)  product is a call center quality  monitoring,
productivity,  training and management  system which  provides  fully  automated
monitoring, recording and evaluation/reporting capabilities in a single package,
integratable  into existing network  environments.  The monitored record is both
voice and screen  data which is  synchronously  played  back to enable  accurate
training and evaluation of call center agents and the generation of a variety of
management reports.  Insight(TM) is an OEM product which is sourced from a third
party.

      Dictaphone  believes  it has a  number  of  significant  opportunities  in
marketing its products,  including,  for example, the continuing transition from
analog to digital technology, expansion of the Company's efforts in Europe, Asia
and Latin America and  leveraging  the  Company's  distribution  strengths  into
adjacent market opportunities.


SERVICE

      The  Company  has an  extensive  service  organization.  The  Company  has
approximately 545 service representatives  operating out of 173 offices in North
America.  The United States service  organization is supported by  approximately
200 employees in service support,  diagnostic  center and repair  services,  and
distribution.  In  addition,  Dictaphone  has  service  locations  in the United
Kingdom,  Ireland and  Continental  Europe and sales and service  representation
through dealers in approximately 40 other countries in Europe, South America and
Asia. See "-- Sales and Marketing".

      Dictaphone's service business provides its customers with service support,
expedited  repairs and remote  diagnostics.  Service  revenue  includes sales of
"Assured  Performance  Plans",  which are long term  warranties sold in one year
increments  and frequently  purchased by the Company's  systems  customers,  and
revenue from repair of systems  software and hardware not under warranty as well
as sales of parts. Dictaphone also receives revenue from service contracts which
provide  for higher  levels of  technical  support,  such as its "SOS Alert" and
"Response Network" services, for dispatching maintenance in advance of a product
shut down and for services providing 24-hour system protection.  Many Dictaphone
customers,  including a majority of customers purchasing large systems, purchase
Dictaphone  service  contracts  at  the  time  of  product  purchase.  In  1996,
Dictaphone  instituted  a mail-in  service  program for its desktop and portable
products.  Under  this  program,  desktop  and  portable  products  are  sent by
overnight  mail to a central  service  facility in Melbourne,  Florida for rapid
turnaround or replacement.  As a result of this program,  desktops and portables
are no longer required to be serviced in U.S. field offices.

      In addition to the repair of its own proprietary product, the Company also
provides  service  support,  expedited  repairs and remote  diagnostics to other
companies  through its third party contract  service  business.  As Dictaphone's
service   network   expands  its   expertise  in  digital  and  other   advanced
technologies,  the Company  believes there will be increasing  opportunities  to
obtain service  contracts from  companies in the  telecommunications,  cable and
other related  industries which utilize these complex  technologies.  Dictaphone
has  negotiated  a number of such  arrangements  and is actively  marketing  its
services to companies in such industries.


NEW PRODUCTS

      The Company is  continually  evaluating its product line both with respect
to feature content and  development.  The Company intends to continue to develop
and enhance its product line and introduce  new  products,  some of which may be
sourced through third parties.

                                       4


<PAGE>


CUSTOMERS

      Although no single customer, other than Pitney Bowes, represents more than
1% of the Company's sales, customers for each of Dictaphone's product categories
are concentrated in certain industries. Dictaphone receives approximately 75% of
its United States dictation products revenue from medical,  legal, insurance and
financial   firms,   educational   entities  and   government   agencies.   This
industry-oriented  user concentration enables Dictaphone to focus on customizing
solutions for specific user needs and applications.

      Communications recording systems customers are predominately public safety
agencies,  financial  services  entities and call centers.  Approximately 55% of
U.S. Communications Recording Systems revenue is derived from financial services
firms and governmental agencies.

      Although  approximately 85% of Dictaphone's  revenues are generated in the
United  States,  the Company has a significant  customer base outside the United
States.  Dictaphone's international customers are in many of the same industries
that the Company serves domestically, such as medical, legal and financial firms
and governmental agencies.


SALES AND MARKETING

      The wide geographic coverage of the Company's sales and service offices in
the United  States  permits  Dictaphone to sell its products to customers of all
sizes and in virtually all United States locations.  Consequently,  less than 1%
of all United States sales are through dealers. The placement of the service and
sales offices  throughout the United States also provides a system for the rapid
distribution  and service of its  products.  See "-- Service".  Distribution  of
Dictaphone  products  is  handled  mostly  through  the  Company's  distribution
facility in Melbourne,  Florida and branch and district  locations.  The Company
also  anticipates  the expanded use of alternative  channels,  such as catalogs,
web-stores and mass marketers for the distribution of certain of its desktop and
portable products.  Outside of North America the Company is shifting from direct
to  indirect  channels,  such as  dealers  and  distributors  for the  sale  and
distribution of products.

      WARRANTIES. Every product sold by Dictaphone, new or previously owned, has
a minimum limited warranty for parts and labor that is 90 days in duration; many
of the Company's more sophisticated products,  however, are currently being sold
with  one (1)  year  parts  and  labor  warranties.  Upon  purchase  of a new or
previously  owned  Dictaphone  product,  a customer  may  purchase  an  "Assured
Performance  Plan." See "-- Service".  If a Dictaphone  customer  decides not to
purchase the Assured Performance Plan, Dictaphone will repair its products at an
hourly service rate, in addition to parts.

      ADVERTISING.   The  focus  of   Dictaphone's   advertising  and  marketing
communications  over the past few years  reflects a shift away from broad  based
major   publication   advertising  to  an  approach   targeting   dictation  and
communications  recording  intensive  markets where product use and applications
are the greatest.  Dictaphone  currently uses nationwide  corporate  direct mail
programs, field generated programs, print advertising, product trade shows, user
group communications, telemarketing and other publicity to market, advertise and
promote its products.

      LEASED  SALES.  Dictaphone  provides its  customers  with  flexible  lease
programs through Pitney Bowes Credit Corporation  ("PBCC"),  Mellon First United
Leasing ("First United") and other finance  companies.  These companies  provide
customers of the Company with lease  financing and  Dictaphone  with a source of
used  equipment,  available  through  terminations  or  defaults,  that  may  be
repurchased and remarketed by the Company.


RESEARCH AND DEVELOPMENT

      During  the  last  few  years,  the  Company's  research  and  development
organization has evolved from one with a hardware engineering orientation to one
in which software engineering dominates. The Company employs software engineers,
digital signal  processing  engineers and test engineers to develop software for
its products as well as to

                                       5

<PAGE>


perform SMT printed  circuit  board designs and  mechanical  designs and to work
closely with its Melbourne,  Florida factory and service  operation to implement
these  designs.   The  research  and  development   organization   also  creates
application-specific integrated circuit designs.

      The  Company's  research  and  development  expenditures  (including  $6.9
million  and $6.2  million  of  capitalized  software  costs  in 1996 and  1997,
respectively) grew as a percentage of product sales and rental revenue from 7.1%
in 1996 to 7.2% in 1997.  As of December 31, 1997,  the  Company's  research and
development staff consisted of 148 personnel (including temporary employees).


INTELLECTUAL PROPERTY

      The Company has approximately 90 patents  protecting  features and methods
covering Integrated Voice Systems,  Integrated Health Systems and Communications
Recording  Systems product lines.  The Company  believes that there is no single
patent or group of  related  patents  the loss of which  would  have a  material
adverse  effect on its  business.  The Company also has  approximately  100 U.S.
trademarks,  including the well known "Dictaphone(R)"  registered trademark,  in
use throughout the world.


MANUFACTURING OPERATIONS

      Dictaphone's  vertically  integrated  manufacturing  process and non-union
manufacturing  workforce  enable it to respond quickly and  cost-effectively  to
changing markets and customer requirements. The Company's flexible manufacturing
enables it to offer its customers a variety of product models.

      The  Company's  primary  manufacturing  facility is located in  Melbourne,
Florida.  Manufacturing  currently  employs  approximately  600  personnel.  The
manufacturing team consists of four production  departments:  fabrication,  wire
and cable, printed circuit assembly and final assembly.

      Management  assures  manufacturing and raw material quality through formal
operator  certification  training classes,  roving quality auditors and a formal
"Supplier  Certification  System",  which  is used to  continually  monitor  the
supplier base. The manufacturing facility is currently ISO 9002 certified.

      The Company currently purchases from approximately 400 suppliers, although
80% of the annual dollar volume is procured from 90 suppliers.  Most  agreements
with major  suppliers  are  expressed  in letters of intent or blanket  purchase
orders covering one year or less. The Company is not materially dependent on any
single supplier.

      Approximately  60% of  all  items  processed  at  the  Melbourne,  Florida
facility  are  Dictaphone  products,  with the  remainder  comprised of contract
manufacturing. The Company's contract manufacturing program provides electronics
design  and  manufacturing  capabilities  for  customers  unaffiliated  with the
Company. In 1997, revenue from contract manufacturing was $42.8 million.


COMPETITION

      The  markets in which the Company  competes  are highly  competitive.  The
Company  competes  with  large  and  established   national  and   multinational
companies, as well as smaller start up companies,  in  all  of  its  operations.
Furthermore,  as products sold in the Company's  markets evolve toward  software
and  digital  technology,  new  competitors  with  expertise  in these areas are
entering the industry.  Some of these  competitors have, and new competitors may
have, greater resources than the Company.

      In the  dictation  market,  the Company faces two primary  systems product
competitors,  the Lanier division of Harris Corporation  ("Lanier"), and Sudbury
Systems,  Inc.  ("Sudbury").   Philips  Electronics  N.V.  and  Sony Corporation
represent competitors for desktop and portable products.


                                       6

<PAGE>


      Dictaphone  is a  leading  participant  in  the  communications  recording
product market in North America. Some of Dictaphone's North American competitors
include Racal Recorders Limited,  Seltronics, Inc., TEAC Corporation of America,
Nice  Systems  Ltd.   (loggers  and  quality   monitoring),   Magnasync  Moviola
Corporation,  Teknekron Infoswitch (quality monitoring) and Comverse Technology,
Inc.  (loggers).  Dictaphone  expects that,  with the  increasing  prevalence of
digital recording  technology in this market, a large number of product oriented
companies  will  attempt to enter this  marketplace  in both North  America  and
Europe.  The Company  believes that while these companies may have difficulty in
entering the communications recording systems market in the United States due to
the lack of customer base and the absence of a direct sales and service network,
their entry will increase  competitive  pressure.  The Company also  anticipates
that its existing and potential competitors will be introducing new and enhanced
products.


EMPLOYEES

      As of December 31, 1997,  the Company had 2,478  employees  worldwide,  of
which 2,167 were based in the United States.  As of December 31, 1997, less than
1% of the Company's  workers were  unionized.  Two union  contracts,  one in New
York,  New York  covering  13  employees  and one in  Toronto,  Ontario,  Canada
covering 6  employees,  expire on  September  1, 1998,  and  January  15,  1998,
respectively.  The Company is currently negotiating a new contract with Canadian
employees.  The Company  believes  that a new  contract  will be  obtained.  The
Company believes its relations with employees are satisfactory.


ITEM 2.    PROPERTIES

      The  Company  operates a  manufacturing  and  service/distribution  center
facility in Melbourne,  Florida,  in addition to its numerous  sales and service
offices. The Company's executive offices are located in Stratford,  Connecticut.
In general,  the Company  believes that its properties are in good condition and
are  adequate  to meet its  current and  anticipated  needs for the  foreseeable
future.

      The following is additional  information  concerning the major  facilities
owned by the Company:

FACILITY                      PURPOSE                       SQUARE FOOTAGE
----------------------        -----------------------       --------------
Stratford, Connecticut        Headquarters                      138,000
Melbourne, Florida            Manufacturing                     120,160
Melbourne, Florida            Customer Service                  118,000
Toronto, Ontario, Canada      Canadian Corporate Office          14,146
Killwangen, Switzerland       Switzerland Sales Office           90,000

      In addition, the Company leases sales, service and distribution offices in
certain  countries  in which it has  operations,  including  157  offices in the
United  States,  20 offices in Canada,  13 offices in the United  Kingdom and an
additional office in Germany.


                                       7

<PAGE>


ITEM 3.    LEGAL PROCEEDINGS

      On February 14, 1995,  Pitney Bowes filed a complaint  against  Sudbury in
the United  States  District  Court for the  District  of  Connecticut  alleging
intentional  and wrongful  interference  with Pitney  Bowes's  plans to sell the
Company.  The complaint seeks damages and a declaratory judgment relating to the
validity of a patent  owned by Sudbury  entitled  "Rapid  Simultaneous  Multiple
Access  Information  Storage and Retrieval System" and the alleged  infringement
thereof by the Company.  Sudbury responded by answering the complaint and filing
a third-party  complaint  against the Company  alleging patent  infringement and
seeking  preliminary and permanent  injunctive  relief and treble  damages.  The
third-party  complaint  filed by  Sudbury  did not  quantify  the  amount of the
damages sought.  The litigation is in the discovery stage and the Company cannot
currently  make a  reasonable  estimate  of the amount of  damages  that will be
sought by Sudbury. Management believes that the Company has meritorious defenses
to the claims  against it.  Consequently,  the Company has not  provided for any
loss exposure in connection with this complaint. Additionally, regardless of the
outcome of this litigation, Pitney Bowes has agreed to defend this action and to
indemnify Dictaphone for any liabilities arising from such litigation.

      The  Company is subject to federal,  state and local laws and  regulations
concerning the environment,  and is currently  participating  in  administrative
proceedings as a participant in a group of  potentially  responsible  parties in
connection  with two third party  disposal  sites.  These  proceedings  are at a
preliminary  stage,  for  which it is  impossible  to  reasonably  estimate  the
potential costs of remediation,  the timing and extent of remedial actions which
may be required by governmental authorities, and the amount of the liability, if
any,  of the  Company  alone or in  relation  to that of any  other  responsible
parties.  When it is possible  to make a  reasonable  estimate of the  Company's
liability  with  respect  to  such  a  matter,  a  provision  will  be  made  as
appropriate.  Additionally,  the Company has settled and paid its  liability  at
three other third party disposal  sites.  At a fourth site, the Company has paid
approximately  $10,000  for its  share of the  costs of the  first  phase of the
cleanup of the site and management  believes that it has no continuing  material
liability for any later phases of the cleanup. Consequently, management believes
that its future  liability,  if any,  for these four sites is not  material.  In
addition,  regardless of the outcome of such matters, Pitney Bowes has agreed to
indemnify the Company in connection with retained environmental  liabilities and
for  breaches  of  the  environmental  representations  and  warranties  in  the
Acquisition Agreement, subject to certain limitations.

      The  Company  is a  defendant  in a  number  of  additional  lawsuits  and
administrative  proceedings,  none of which will, in the opinion of  management,
have a material adverse effect on the Company's  consolidated financial position
of results of operations.

      The  Company  does  not  believe  that  the  ultimate  resolution  of  the
litigation, administrative proceedings and environmental matters described above
in  the  aggregate  will  have  a  material  adverse  effect  on  the  Company's
consolidated financial position of results of operations.


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

      No matters were submitted to a vote of security  holders during the fourth
quarter of 1997.


                                     PART II

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

      There is currently no established  trading market for the Company's common
stock,  $.01 par value per share (the  "Common  Stock").  As of March 15,  1998,
there were 12 holders of record of the Common Stock.

      Under the terms of the Company's Credit  Agreement,  dated August 7, 1995,
as modified by four  amendments to Credit  Agreement,  dated June 28, 1996, June
27,  1997,  July 21,  1997 and  November  14,  1997  (collectively,  the "Credit
Agreement"),  with a syndicate of financial  institutions for whom Bankers Trust
Company is


                                       8


<PAGE>

the Administrative Agent and NationsBank,  N.A. (Carolinas) is the Documentation
Agent,  the Company and Dictaphone U.S. are restricted from paying  dividends on
their capital  stock.  In addition,  under the terms of an Indenture  (the "Note
Indenture")  between the Company,  Dictaphone U.S. and Shawmut Bank Connecticut,
National  Association,  relating to the Company's  11-3/4%  Senior  Subordinated
Notes Due 2005 (the "Notes"),  the Company and certain of its  subsidiaries  are
restricted  from paying  dividends on their  capital  stock.  In addition,  as a
holding company,  the Company's  ability to pay cash dividends is also dependent
on the  earnings  and cash  flows of its  subsidiaries  and the  ability  of its
subsidiaries to make funds available to the Company for such purpose.

      The Company  presently  intends to retain earnings to fund working capital
and for general corporate purposes,  and, therefore,  does not intend to pay any
cash dividends on shares of Common Stock in the foreseeable  future. The payment
of  future  cash  dividends,  if any,  would be made only  from  assets  legally
available therefore, and would also depend on the Company's financial condition,
results  of   operations,   current  and   anticipated   capital   requirements,
restrictions under then-existing  indebtedness and other factors deemed relevant
by the Company's Board of Directors.

      On November 20, 1997, the Company sold 3.5 million shares  of  its  Common
Stock to Stonington  Capital  Appreciation 1994 Fund, L.P.  ("Stonington").  The
sale  was  effected  in  reliance  upon  the  exemption  from  the  registration
requirements provided by Section 4(2) of the Securities Act of 1933, as amended,
on the basis that such transaction did not involve a public offering. There were
no underwriters employed in connection with such sale. The proceeds derived from
such  sale were  used by the  Company  to repay  amounts  outstanding  under the
Company's Revolving Credit Facility as well as fees associated with the issuance
of the Tranche C Term Loan.

ITEM 6.    SELECTED FINANCIAL DATA

      Set forth below is the selected consolidated  financial data of Dictaphone
Corporation  (Successor Company) at December 31, 1997 and December 31, 1996, for
the years then ended,  and for the twenty week period  ended  December 31, 1995.
Also set forth below is the selected combined  financial data of the Predecessor
Company for the thirty two week period ended August 11, 1995 and for each of the
two years in the period  ended  December  31,  1994.  Certain  amounts have been
reclassified to conform to current year presentation.

      The selected financial data should be read in conjunction with "Item 7. --
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations"  and the financial  statements and notes included  elsewhere in this
Report.

      The capital  structure and accounting  basis of the assets and liabilities
of the  Company as of August 12,  1995 and  thereafter  differ from those of the
Predecessor  Company in prior periods as a result of the Acquisition.  Financial
data of the  Predecessor  Company  for  periods  prior to  August  12,  1995 are
presented on a historical cost basis. Financial data of the Company as of August
12, 1995 and thereafter  reflect the  Acquisition  under the purchase  method of
accounting,  under which the  purchase  price has been  allocated  to assets and
liabilities  based upon their  estimated  fair values.  Accordingly,  amounts at
December 31, 1997,  1996 and 1995, and for the years and twenty week period then
ended should not be compared to periods prior thereto.

                                      9
<PAGE>
<TABLE>
<CAPTION>
                                      PREDECESSOR COMPANY                  SUCCESSOR COMPANY
                                  -------------------------  --------------------------------------------
                                  YEARS ENDED    32 WEEKS     20 WEEKS         YEAR             YEAR
                                  DECEMBER 31,     ENDED        ENDED          ENDED            ENDED
                                  ------------   AUGUST 11,  DECEMBER 31,   DECEMBER 31,     DECEMBER 31,
                                  1993    1994     1995          1995          1996             1997
                                 ------  ------  ----------  ------------   ------------     ------------
<S>                              <C>     <C>        <C>       <C>             <C>              <C>
STATEMENT OF OPERATIONS DATA:                          (DOLLAR AMOUNTS IN MILLIONS)

Total revenue                    $343.2  $346.8     $202.1    $150.6          $332.5           $340.0
Cost of sales, rentals and
  support services                179.2   178.0      107.6      90.1(c)        181.1(c)         194.4(c)
Selling and administrative         96.3    96.0       60.4      62.4(d)        149.2(d)         155.5(d)
Research and development
  (net of software
  capitalization)                  10.6    12.3        7.0       4.6            14.2             14.7
Operating profit (loss)            57.1    60.5       27.1      (6.5)          (12.0)           (24.6)
Net interest (income)
  expense and other                (1.2)   (1.0)      (1.4)     16.1(e)         41.6(e)          44.7(e)
Income (loss) before
  effect of changes in
  accounting                       35.0    36.6       17.1     (13.9)          (34.7)           (68.2)
Net income (loss)                  35.0    33.8(b)    17.1     (13.9)          (34.7)           (68.2)
Stock dividend on PIK
  Preferred Stock                   ---     ---        ---        .8             2.3              2.7
Net loss applicable to
  Common Stock                      ---     ---        ---     (14.7)          (37.0)           (70.9)

OTHER DATA:
EBITDA(a)                        $ 65.3  $ 68.6     $ 32.0    $ 32.3          $ 54.2          $  48.2
Depreciation and
  amortization                      8.2     8.1        4.9      39.1            65.8             62.2
Capital expenditures                5.0     5.9        5.5        .8             6.3              6.9
Software capitalization             ---     ---        2.5       1.7             4.7              6.2
EBITDA margin                      19.0%   19.8%      15.8%     21.5%           16.3%            14.2%

BALANCE SHEET DATA
 (AT END OF PERIOD):
Working capital                  $ 59.2  $ 64.2               $ 43.3          $ 33.0          $  51.2
Total assets                      241.5   268.5                550.7           504.8            470.1
Long term debt                      ---     ---                350.0           352.6            343.6
Total liabilities                  66.7    70.4                456.2           445.4            444.8
Stockholders' equity              174.8   198.1                 94.5            59.4             25.3

--------------------
</TABLE>

(a)  EBITDA is defined as income  before  effect of changes in  accounting  plus
     interest,  income taxes,  depreciation,  amortization and other significant
     non-cash, non-recurring charges. EBITDA is presented because it is a widely
     accepted  financial  indicator of a company's  ability to incur and service
     debt.  However,  EBITDA  should  not be  considered  in  isolation  or as a
     substitute  for net income or cash flow data  prepared in  accordance  with
     generally  accepted  accounting  principles  or as a measure of a company's
     profitability or liquidity,  and is not necessarily comparable to similarly
     titled measures of other companies.
(b)  Effective  January 1, 1994,  the Company  adopted  Statement  of  Financial
     Accounting  Standards  ("SFAS")  No.  112,  which  resulted  in a  one-time
     non-cash,  after-tax  charge of $2.8  million  (net of  approximately  $1.9
     million of income taxes).
(c)  Cost of sales and rentals for the twenty weeks ended  December 31, 1995 and
     years ended December 31, 1996 and 1997 includes $14.7 million, $8.8 million
     and $2.4 million,  respectively,  of charges related to the amortization of
     inventory  write-up and  depreciation  associated with purchase  accounting
     adjustments.
(d)  Selling and administrative for the twenty weeks ended December 31, 1995 and
     years  ended  December  31, 1996 and 1997  includes  $21.8  million,  $46.2
     million and $41.5 million,  respectively,  of non-cash purchase  accounting
     charges.
(e)  Includes  $.9 million,  $5.3 million and $6.3 million of non-cash  interest
     expense from  amortization of deferred  financing fees for the twenty weeks
     ended  December  31,  1995 and  years  ended  December  31,  1996 and 1997,
     respectively.

                                       10

<PAGE>

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

OVERVIEW

     On April 25, 1995, the Company entered into the Acquisition  Agreement with
Pitney Bowes for the purpose of the Acquisition. On August 11, 1995, the Company
acquired  the  Predecessor  Company  for  $450.0  million,  subject  to  certain
post-closing  adjustments as set forth in the Acquisition Agreement. On March 6,
1996,  the Company  and Pitney  Bowes  reached  agreement  as to final  purchase
adjustments.  Total  purchase  adjustments  amounted  to  $12.2  million  for an
aggregate purchase price of $462.2 million.

     The following  discussion  should be read in conjunction with the financial
statements and accompanying  notes included in "Item 8. -- Financial  Statements
and Supplementary Data."

     The capital structure and accounting basis of the assets and liabilities of
the  Company  as of August  12,  1995 and  thereafter  differ  from those of the
Predecessor  Company in prior periods as a result of the Acquisition.  Financial
data of the  Predecessor  Company  for  periods  prior to  August  12,  1995 are
presented on a historical cost basis. Financial data of the Company as of August
12, 1995 and thereafter  reflect the  Acquisition  under the purchase  method of
accounting,  under which the  purchase  price has been  allocated  to assets and
liabilities  based upon their  estimated fair values.  Certain amounts have been
reclassified to conform to current year presentation.

     To  facilitate  the  discussion  below of the  twelve  month  period  ended
December 31, 1996 against the results of operations for the same period of 1995,
the historical  operations of the Successor Company and Predecessor Company have
been combined,  since the Acquisition  occurred thirty-two weeks into the twelve
month  period  ended  December  31,  1995.

                                                          TWELVE MONTHS ENDED
                                                             DECEMBER  31,
                                                      --------------------------
                                                        1995     1996     1997
                                                        ----     ----     ----
                                                             (IN MILLIONS)

Net revenue.................................          $ 352.7  $ 332.5  $ 340.0

Cost of sales, rentals and support services.            197.7    181.1    194.4
Selling and administrative expense..........            122.8    149.2    155.5
Research and development....................             11.6     14.2     14.7
                                                      -------  -------  -------
     Operating profit (loss)................             20.6    (12.0)   (24.6)
                                                      -------  -------  -------

Net interest expense and other..............             14.7     41.6     44.7
Income tax provision (benefit)..............              2.7    (18.9)    (1.1)
                                                      -------  -------  -------
Net income (loss)...........................             $3.2   $(34.7)  $(68.2)
                                                      =======  =======   ======


                                       11

<PAGE>


                                                          TWELVE MONTHS ENDED
                                                             DECEMBER  31,
                                                      --------------------------
                                                        1995     1996     1997
                                                        ----     ----     ----
                                                             (IN MILLIONS)

Revenue:
   Sales:
   Integrated Voice Systems.................          $  N/A   $ 49.1   $  45.7
   Integrated Health Systems................             N/A     31.4      37.4
                                                      ------   ------   -------
      Total U.S. Voice Systems..............            92.6     80.5      83.1
   Communications Recording Systems.........            60.8     57.7      59.3
   Customer Service Parts...................            19.6     18.4      18.0
   International and Dealer Operations......            43.5     40.4      40.7
   Rentals..................................             2.0      2.1       1.8
                                                      ------   ------   -------
      Product sales and rentals.............           218.5    199.1     202.9
                                                      ======   ======   =======

   Contract Manufacturing...................            44.5     40.6      42.8

   Support service:
   Customer Service.........................            74.7     80.0      81.3
   Application and Training Specialists.....             1.4      1.3       2.6
   International and Dealer Operations......            13.6     11.5      10.4
                                                      ------   ------   -------
      Total support service.................            89.7     92.8      94.3
                                                      ------   ------   -------

Total revenue...............................          $352.7   $332.5   $ 340.0
                                                      ======   ======   =======

RESULTS OF OPERATIONS

  1997 COMPARED TO 1996

     Total revenue  increased 2.3% to $340.0 million in 1997 from $332.5 million
in 1996.  This  increase  in revenue is  attributable  to higher  product  sales
revenue from I.H.S.,  Communications  Recording  Systems  ("C.R.S.")  and higher
revenue  from  Customer  Service  (including  sale of  parts),  Application  and
Training Specialists ("A.T.S."),  and Contract Manufacturing,  offset in part by
lower  revenue  from I.V.S.  and  International  and Dealer  Operations  support
services.

     I.V.S. revenue declined 6.9% to $45.7 million in 1997 due to lower billings
of desktops,  small digital systems and Straight Talk(TM).  I.V.S. order backlog
increased  51.6%  during  1997  to $6.5  million.  Installations  of  Enterprise
Express(TM)  which  was  launched  in the  first  half of 1997,  and  went  into
production in June 1997,  accounted for I.H.S.  revenue  growth which  increased
19.1% to $37.4 million.  I.H.S.  orders which  increased  18.7% to $40.8 million
also  reflect  the  impact  of  Enterprise  Express(TM).  I.H.S.  order  backlog
increased 24.4% to $11.8 million. C.R.S. revenue increased 2.8% to $59.3 million
due to increased  Guardian(TM)  installations.  C.R.S.  orders increased 5.1% to
$59.3  million.  C.R.S.  order  backlog  declined  5.5% in 1997 to $7.5 million.
Customer  Service  revenue  (including sale of parts) grew 0.9% to $99.3 million
due to increased  installation  and third party  maintenance  revenue  partially
offset by lower proprietary product service contract revenue and hourly revenue.
A.T.S.  revenue  increased  by $1.3  million to $2.6  million  due to  increased
customer  training  provided in support of I.V.S.,  I.H.S. and C.R.S.  products.
Sales and service revenue from  International and Dealer Operations  declined by
1.7% to $51.1 million due to lower  service and desktop and portable  revenue as
well as $1.3 million of unfavorable currency exchange. Orders from International
and Dealer Operations increased 4.9% to $41.0 million.  International and Dealer
backlog declined 28.8% in 1997 to $2.0 million.  Contract  Manufacturing revenue
increased  5.5% to $42.8  million.  The  Company  expects a  weakening  of total
backlog and sales activity in the first quarter of 1998 for I.V.S. and C.R.S. as
early trends in the first  quarter  indicate  lower  demand for these  products.
Early trends also indicate that I.H.S.  sales activity  remains strong as orders
for its Enterprise Express(TM) product continue to grow.


                                       12

<PAGE>

      Cost of sales,  rentals  and  support  services  increased  7.3% to $194.4
million (57.2% of total revenue)  versus $181.1 million (54.5% of total revenue)
for 1996. Excluding additional depreciation and amortization expenses associated
with purchase accounting adjustments related to the Acquisition,  cost of sales,
rentals and support  services as a percentage of revenue would have increased by
4.7 percentage  points to 56.5% due primarily to non-recurring  non-cash charges
of $14.9  million  associated  with the provision for excess field service parts
and stock related to the Company's Digital  Express(TM) and Records  Express(TM)
products.  In connection  with the launch of Enterprise  Express(TM)  which went
into production in June 1997, the Company  provided for excess service parts and
field  stock,  as well as the  prepayment  of  inventory  associated  with those
products  that  the  Enterprise   Express(TM)  product  replaces.   Lower  price
realization for C.R.S.  digital loggers,  I.H.S.  digital and records management
systems and I.V.S.  desktops and portables  also  contributed  to higher cost of
sales, rentals and support services as a percentage of revenue.

      Selling and administrative expenses (including amortization of intangibles
which  included a $5.4 million  non-cash  charge to write down patent assets and
associated goodwill to their fair value) increased 4.3% to $155.5 million (45.7%
of  revenue)  from  $149.2  million  (44.9%  of  revenue)  for  1996.  Excluding
additional  depreciation  and  amortization  expense  associated  with  purchase
accounting  adjustments  related to the  Acquisition  of $41.5 million and $46.2
million for 1997 and 1996,  respectively,  selling and  administrative  expenses
expressed  as a percent of  revenue,  would  have  increased  by 2.5  percentage
points.  This increase is  attributable  to a $2.3 million  severance  provision
associated with the Company's  efforts to reduce its cost structure  through the
elimination  of over 90  full-time  positions,  and a  non-cash  charge  of $1.0
million to write down capitalized software to its estimated realizable value. In
addition,  higher I.H.S. and C.R.S.  field selling and home office sales support
expenses,  increased A.T.S.  training costs, higher trade show,  advertising and
marketing   expenses,   and   increased   legal/settlement   costs,   management
compensation  and employee benefit costs  contributed to this expense  increase.
I.V.S. and International expense reductions partially offset the increase.

      Research and development  expenses of $14.7 million (7.2% of product sales
and rental revenue) increased 4.0% from $14.1 million (7.1% of product sales and
rental revenue), reflecting increased staffing and compensation.

      The Company  recorded an operating  loss of $24.6  million  (7.2% of total
revenue) for 1997 compared to an operating  loss of $12.0 million (3.6% of total
revenue) for 1996. Excluding the impact of purchase accounting  adjustments from
both 1997 and 1996  discussed  above,  operating  profit would have  declined by
55.2% due to higher costs associated with the charge for inventory obsolescence,
the provision for severance,  the charge to  capitalized  software and increased
operating expenses.

  1996 COMPARED TO 1995

      Total revenue decreased 5.7% to $332.5 million in 1996 from $352.7 million
in 1995. This decrease in revenue was  attributable to declines in sales revenue
from U.S. Voice Systems ("U.S.V.S."),  C.R.S., Contract Manufacturing, and lower
revenue  from  International  and  Dealer  Operations,  offset in part by higher
Customer Service revenue.

      U.S.V.S.  revenue  declined 13.0% to $80.5 million due to lower demand for
desktops  and  portable  products and lower  installations  of voice  processing
systems.  U.S.V.S.  order backlog increased by $3.1 million during 1996 to $13.8
million.  Sales revenue from C.R.S.  declined 5.1% to $57.7 million due to lower
Prolog(TM) installations,  and the presence, in the fourth quarter of 1995, of a
significant one-time  installation.  C.R.S. order backlog declined 14.2% to $7.9
million.  Sales revenue from Contract  Manufacturing  (including sales to Pitney
Bowes)  declined 8.9% to $40.6 million  principally due to lower sales to Pitney
Bowes.  Total revenue from  International  and Dealer  Operations  declined 8.9%
versus  1995.  Lower  sales and  service  revenue in the United  Kingdom  offset
improvement in C.R.S. sales revenue in Canada,  Switzerland and Germany. Revenue
from Customer Service (including sales of parts) increased 4.3% to $98.4 million
due to increased  proprietary  product service  contract revenue which increased
4.3% as well as higher third party maintenance revenue.


                                       13

<PAGE>


      Cost of  sales,  rentals  and  support  services  declined  8.4% to $181.1
million (54.5% of total revenue)  versus $197.7 million (56.1% of total revenue)
for 1995. Excluding additional  depreciation and amortization expense related to
purchase accounting  adjustments associated with the Acquisition of $8.8 million
and $14.7 million from 1996 and 1995,  respectively,  cost of sales, rentals and
support  services  would have declined as a percent of revenue to 51.8% in 1996.
This decline is attributable to lower inventory  adjustments and reduced content
of low margin Contract Manufacturing  revenue,  partially offset by lower C.R.S.
price realization.

      Selling and  administrative  expenses  increased  21.5% to $149.2  million
(44.9% of total  revenue) from $122.8 million (34.8% of total revenue) for 1995.
Excluding  additional  depreciation  and  amortization  expense  associated with
purchase accounting  adjustments related to the Acquisition of $46.2 million and
$21.8  million  for 1996 and  1995,  respectively,  selling  and  administrative
expenses would have increased by 2.0%.  This increase is  attributable to higher
sales  development,  marketing and advertising  expenses,  higher  international
expenses for sales office  expansion,  and a $1.1 million charge associated with
the  planned  reorganization  of  United  States  field  personnel  and  related
severance,  partially offset by reduced U.S.V.S.  compensation-related  expenses
and lower employee benefit costs.

      Research and development  expenses  increased 22.0% to $14.2 million (4.3%
of total revenue) from $11.6 million (3.3% of total revenue) in 1995, reflecting
the impact of increased staffing and compensation.

      The Company  recorded an operating loss of $12.0 million for 1996 compared
to an operating  profit of $20.6  million for 1995.  Excluding the impact of the
purchase  accounting  adjustments  from  both  1996  and 1995  discussed  above,
operating  profit  would have  declined by 24.9%.  This  reduction  reflects the
impact of lower revenue and higher expenses.

LIQUIDITY AND CAPITAL RESOURCES

      The  Company's  liquidity  requirements  consists  primarily  of scheduled
payments of principal and interest on its  indebtedness,  working  capital needs
and capital expenditures. At December 31, 1997, the Company had outstanding term
loans of $134.0 million (the "Term Loans") and loans of $9.0 million outstanding
under the  $40.0  million  revolving  credit  facility  (the  "Revolving  Credit
Facility"),  and $200.0  million  of senior  subordinated  notes (the  "Notes").
Availability  under the Revolving Credit Facility at December 31, 1997 was $31.0
million.  Scheduled annual principal payments will be $0.6 million in 1998, 1999
and 2000.  There are no scheduled  reductions in the Revolving  Credit  Facility
over the next five years.

      On November  14,  1997,  the  Company  and the  lenders  executed a fourth
amendment to the Credit Agreement.  The amendment permitted the Company to issue
a new Tranche C Term Loan (the "Tranche C Loan") in the amount of $62.8 million,
the  proceeds of which were used by the Company to  extinguish  the  outstanding
balance of the Tranche A Term Loan (the "Tranche A Loan") and to prepay  certain
required principal payments on the outstanding  amounts under the Tranche B Term
Loan (the "Tranche B Loan").  The Tranche C Loan requires  amortization equal to
1% of the total loan amount annually  through 2001, 30% in 2002 and 66% in 2003.
In addition,  certain of the financial  covenants in the Credit  Agreement  were
revised.  In the fourth quarter,  the Company recorded a pre-tax non-cash charge
of $2.1 million  associated with the write-off of the unamortized  debt issuance
costs resulting from the early  extinguishment of the outstanding  balance under
the Tranche A Loan.

      In connection  with the fourth  amendment,  the Company sold an additional
$35.0  million  shares of Common Stock to certain of its existing  stockholders,
the  proceeds  of which  were  used to repay  all  amounts  outstanding  under a
facility (the "New  Facility")  which was  established on August 1, 1997, and to
pay down the Revolving Credit Facility.

      In connection with the terms of the Credit Agreement,  the Company entered
into interest  rate swap  agreements in November  1995,  effective  February 16,
1996, with an aggregate  notional  principal amount  equivalent to $75.0 million
maturing on February 16, 1999. The swap effectively converts that portion of the
Company's  Term Loans to a fixed rate  component  of 5.8%;  thus,  reducing  the
impact of changes in interest  rates,  converting the total  effective  interest
rate on fifty  percent of the initial  outstanding  Term Loans to 9.3%. No funds
under the swap


                                       14


<PAGE>


agreements are actually borrowed or are to be repaid. Amounts due to or from the
counterparties  are  reflected in interest  expense in the periods in which they
accrue.  The fair value of the  interest  rate swaps as of December 31, 1997 was
unfavorable $0.1 million, based on dealer quotes.

      In addition,  the Credit Agreement  contains  covenants that significantly
limit or prohibit, among other things, the ability of the Company and Dictaphone
(U.S.) to incur  indebtedness,  make  prepayments of certain  indebtedness,  pay
dividends  on  Common  Stock,  make  investments,  engage in  transactions  with
stockholders and affiliates, create liens, sell assets and engage in mergers and
consolidations and requires that the Company maintain certain financial ratios.

      The  Company  had  $200.0  million  aggregate  principal  amount  of Notes
outstanding  as of December 31, 1997. The Notes are  subordinated  to the Credit
Agreement and other senior indebtedness,  as defined in the Note Indenture.  The
Notes  contain  covenants  similar to the Credit  Agreement and provide for each
noteholder to have the right to require that the Company repurchase the Notes at
101% of the  principal  amount  upon a change of control (as defined in the Note
Indenture).  The Notes bear interest of 11-3/4% per annum, payable semi-annually
on each  February 1 and August 1. The Notes  mature on August 1, 2005.  The fair
value of the Notes at December 31, 1997 was favorable  $6.0 million,  based upon
dealer quotes.

      Working  capital  increased by $18.2  million  primarily  due to increased
trade  receivables.  The  increase in  receivables  was due to improved  revenue
performance  and a higher mix of digital  systems and  communications  recording
revenue in the fourth  quarter of 1997,  coupled  with an increase in days sales
outstanding.

      Capital  expenditures for 1997 totaled $6.9 million.  The Company does not
expect  that the  limitation  on capital  expenditures  contained  in the Credit
Agreement will limit, in any material  respects,  the Company's  ability to fund
capital expenditures.

      The Company's quarterly revenues and other operating results have been and
will  continue  to be affected  by a wide  variety of factors  that could have a
material  adverse  effect on the  Company's  financial  performance  during  any
particular quarter.  Such factors include,  but are not limited to, the level of
orders that are  received and shipped by the Company in any given  quarter,  the
rescheduling and  cancellation of orders by customers,  availability and cost of
materials,  the  Company's  ability  to enhance  its  existing  products  and to
develop,  manufacture,  and successfully  introduce and market new products, new
product developments by the Company's competitors, market acceptance of products
of both the  Company  and its  competitors,  competitive  pressures  on  prices,
significant  damage to or prolonged  delay in operations  at the Company's  sole
manufacturing facility, and interest rate and foreign exchange fluctuations. The
Company has  introduced a number of new  products in its target  markets in 1997
and plans to introduce additional products in 1998 which are expected to enhance
future revenues and liquidity of the Company. However, there can be no assurance
that the Company will be able to implement its plans to introduce  such products
in a timely  fashion,  or that such products will meet the  expectations  of the
Company for either  revenues or  profitability.  The Company  believes that cash
flows  from  operating  activities,  the  successful  introduction  of  its  new
products,  refinancing  including  the  issuance  of a Tranche  C loan,  the New
Equity,  and provisions  under the fourth amendment for the sale or financing of
certain  assets,  as well as its ability to borrow  under the  Revolving  Credit
Facility,  will be  adequate to meet the  Company's  debt  service  obligations,
working  capital  needs and planned  capital  expenditures  for the  foreseeable
future.

      As  of  December  31,  1997,  the  Company  has  tax  net  operating  loss
carryforwards ("NOL's") of approximately $87.9 million, which begin to expire in
the year 2010. Statement of Accounting Standards No. 109, "Accounting for Income
Taxes"  ("SFAS 109")  requires that the tax benefit of such NOL's be recorded as
an asset to the extent that management assesses the utilization of such NOL's to
be "more likely than not". Management evaluates the realizability of its defined
tax  assets  on a  quarterly  basis and  considers  historical  trends,  current
circumstances and estimates of future taxable income. Management has determined,
based on the Company's history of prior operating results, current circumstances
and its  expectations  for the future,  that taxable  income of the Company will
more  likely not be  sufficient  to fully  utilize the net  deferred  tax assets
recorded as of December 31, 1997,  prior to the earliest  expiration in the year
2010 and has established a valuation  reserve of $24.1 million against the $33.3
million of deferred tax assets.


                                       15

<PAGE>
      A  reconciliation  of  the  Company's  loss  before  taxes  for  financial
statement  purposes to taxable  loss for the years ended  December  31, 1996 and
1997 is as follows (in thousands).
<TABLE>
<CAPTION>
                                                                YEAR ENDED          YEAR ENDED
                                                            DECEMBER 31, 1996    DECEMBER 31, 1997
                                                            -----------------    -----------------
<S>                                                               <C>                <C>
Loss before taxes for financial statement purposes                $(53,591)          $(69,282)

Differences between loss for financial statement
  purposes and taxable loss:
State income taxes - current portion.........                        1,701             2,692
Permanent differences:
   Goodwill..................................                        1,158             1,375
   All other permanent items.................                        2,043             4,235
Temporary differences:
   Intangible amortization...................                       20,959            21,309
   All other temporary differences (net).....                          618             6,333
                                                                  --------           -------
      Total differences......................                      $26,478           $35,944
                                                                  --------           -------
Taxable loss.................................                     $(27,113)         $(33,338)
                                                                  ========          ========
</TABLE>
      In June 1997, the Financial  Accounting  Standards  Board ("FASB")  issued
Statement of Financial  Accounting  Standards No. 130, "Reporting  Comprehensive
Income"  ("SFAS 130") which requires a statement of  comprehensive  income to be
included in the financial  statements for fiscal years  beginning after December
15,  1997.  The Company will include  such  statement  beginning  with the first
quarter of 1998.

      In  addition,  in June  1997,  the  FASB  issued  Statement  of  Financial
Accounting  Standards No. 131,  "Disclosures About Segments of an Enterprise and
Related  Information"  ("SFAS  131").  SFAS 131 requires  disclosure  of certain
information  about  operating  segments  and about  products and  services,  the
geographic areas in which a company  operates,  and their major  customers.  The
Company is  presently  in the process of  evaluating  the effect  which this new
standard will have on disclosures in the Company's financial  statements and the
required information will be reflected in the Company's financial statements for
the year ended December 31, 1998.

      The Company is actively  engaged in resolving  issues  associated with the
Year 2000  challenge.  In 1997,  the  Company  began a review of its  systems to
identify  Year 2000  issues  and is on  schedule  to  complete  its  assessment,
modifications  and testing of its strategic  business  systems in 1998 and 1999.
The Company is also  assessing  the scope of the Year 2000 issue in its physical
plant and  infrastructure and will begin corrective actions in 1998. The Company
is also in communication  with its major customers and suppliers to resolve Year
2000 interface issues. While the Company anticipates success in this cooperative
effort, it cannot guarantee the performance of third parties.

      Additionally,  the  Company  has  performed  assessments  of  its  current
products.  Certain  products  will require  engineering  changes which are being
developed. The Company believes most of its currently sold products will be Year
2000 compliant provided they have the appropriate engineering upgrades and is in
the process of  communicating  the Year 2000 status of such current  products to
customers.  The Company  does not  currently  plan to develop  modifications  to
certain of its older  products to ensure Year 2000  compliance and is evaluating
plans to notify affected maintenance customers of this plan.

      The Company  expects to utilize both  internal  and external  resources to
resolve  Year 2000  issues.  The total  cost to the  Company  of these Year 2000
compliance  activities has not been and is not anticipated to be material to its
financial  position or results of operations in any given year.  These costs and
the date on which the Company plans to complete the Year 2000  modification  and
testing processes are based on management's  best estimates,  which were derived
utilizing  numerous   assumptions  of  future  events  including  the  continued
availability  of certain  resources,  third party  modification  plans and other
factors.  However,  there  can be no  guarantee  that  these  estimates  will be
achieved and actual  results could differ from those plans.  The overall cost of
Year 2000 projects is not expected to be material based upon current estimates.

                                       16

<PAGE>


      Failure by the Company  and/or vendors and customers to complete Year 2000
compliance  work in a timely  manner  would  have a material  adverse  effect on
certain of the Company's operations.

      The  Company  may,  from  time to time,  provide  estimates  as to  future
performance.  Such estimates would be  "forward-looking"  statements  within the
meaning of Section  27A of the  Securities  Act of 1933 and  Section  21E of the
Securities  Exchange Act of 1934.  Because  such  statements  include  risks and
uncertainties,  actual  results  may  differ  materially  from  those  estimates
provided.  The  Company  undertakes  no  duty to  update  such  forward  looking
statements.  Factors that could cause actual results to differ from such forward
looking statements include,  but are not limited to, those previously  discussed
herein.


ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

      Not currently applicable to the Company.


ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

QUARTERLY RESULTS OF OPERATIONS  (UNAUDITED)

<TABLE>
<CAPTION>

                       QUARTER ENDED  QUARTER ENDED  QUARTER ENDED  QUARTER ENDED
                         MARCH 31,      JUNE 30,     SEPTEMBER 30,  DECEMBER 31,
                            1997          1997           1997           1997
                       -------------  -------------  -------------  -------------
<S>                       <C>          <C>              <C>           <C>
     1997
     ----
Net revenue.........      $81,167      $79,941          $87,716       $91,218
Cost of sales, rentals
  and support services     42,815       55,630           46,129        49,858
Net loss ...........      (7,834)      (19,080)(a)       (6,023)      (35,285)(b)
Net loss applicable to
 Common Stock.......      $(8,469)     $(19,758)        $(6,704)     $(35,990)


                       QUARTER ENDED  QUARTER ENDED  QUARTER ENDED  QUARTER ENDED
                         MARCH 31,      JUNE 30,     SEPTEMBER 30,  DECEMBER 31,
                           1996           1996           1996           1996
                       -------------  -------------  -------------  -------------
     1996
     ----
Net revenue.........      $80,459      $85,252          $83,447      $ 83,310
Cost of sales, rentals
 and support services      46,874       45,224           45,394        43,656
Net loss ...........      (11,430)      (7,890)          (8,505)       (6,835)
Net loss applicable to
 Common Stock.......     $(11,955)     $(8,497)         $(9,098)      $(7,437)
---------------------

</TABLE>

(a)   Net loss  includes  after tax charges of $6.7 million for digital  product
      obsolescence and $1.5 million for severance.

(b)   Net loss  includes  after tax charges of $3.8 million to write down patent
      assets,  associated goodwill,  and capitalized software,  $2.6 million for
      digital  product  obsolescence,  and $24.1 million to establish a deferred
      tax valuation reserve.


                                       17

<PAGE>



INDEPENDENT AUDITORS' REPORT



Board of Directors and Stockholders
Dictaphone Corporation

We have  audited the  accompanying  consolidated  balance  sheets of  Dictaphone
Corporation  and  Subsidiaries as of December 31, 1997 and 1996, and the related
consolidated  statements of operations,  stockholders' equity and cash flows for
the years  ended  December  31,  1997,  1996 and the twenty  week  period  ended
December 31, 1995. Our audits also included the financial  statement schedule as
of and for the years  ended  December  31, 1997 and 1996 and for the twenty week
period ended December 31, 1995,  listed in the Index at Item 14. These financial
statements  and  financial  statement  schedule  are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an  opinion  on the
consolidated  financial statements and financial statement schedule based on our
audits.

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

In our opinion,  such consolidated  financial  statements present fairly, in all
material  respects,   the  financial  position  of  Dictaphone  Corporation  and
Subsidiaries at December 31, 1997 and 1996, and the results of their  operations
and their cash flows for the years ended December 31, 1997,  1996 and the twenty
week period  ended  December  31, 1995 in  conformity  with  generally  accepted
accounting principles. Also, in our opinion, the financial statement schedule as
of and for the years ended  December 31, 1997 and 1996,  and for the twenty week
period  ended  December  31,  1995,  when  considered  in  relation to the basic
consolidated  financial  statements  taken as a whole,  presents  fairly  in all
material respects the information set forth therein.



/s/ Deloitte & Touche LLP

Stamford, Connecticut
March 2, 1998


                                       18

<PAGE>

                   DICTAPHONE CORPORATION (SUCCESSOR COMPANY)

                           CONSOLIDATED BALANCE SHEETS
                  (Dollars in thousands, except share amounts)

<TABLE>
<CAPTION>

                                                  DECEMBER 31, 1996   DECEMBER 31, 1997
                                                  -----------------   -----------------
<S>                                                      <C>                <C>
ASSETS
Current assets:
   Cash                                                  $ 7,927            $ 10,277
   Accounts receivable, less allowance of
    $1,339 and $810, respectively                         53,701              71,939
   Inventories                                            56,840              48,779
   Other current assets                                    9,833              11,675
                                                         -------            --------
      Total current assets                               128,301             142,670
Property, plant and equipment, net                        37,008              35,331
Deferred financing costs, net of accumulated
 amortization of $6,235 and $12,517, respectively         14,255              10,900
Intangibles, net of accumulated amortization of
  $58,177 and $99,439, respectively                      271,022             229,322
Prepaid repurchases, leased equipment                      5,163                 776
Other assets                                              49,086              51,061
                                                        --------            --------
      Total assets                                      $504,835            $470,060
                                                        ========            ========


LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                                     $  7,634            $ 10,940
   Interest payable                                       10,342              10,144
   Accrued liabilities                                    29,961              32,373
   Advance billings                                       34,808              37,184
   Current portion of long-term debt                      12,512                 795
                                                        --------            --------
      Total current liabilities                           95,257              91,436
Long-term debt                                           340,086             342,816
Other liabilities                                         10,114              10,547
                                                        --------            --------
      Total liabilities                                  445,457             444,799
                                                        --------            --------

Commitments, contingencies and concentration of
  risks (Note 12)

Stockholders' equity:
   Preferred  stock ($.01 par value;  10,000,000
     shares  authorized;  1,500,000 shares of 14%
     PIK  perpetual preferred stock issued and
     outstanding, liquidation value at
     December 31, 1997, $20,841)                          18,142              20,841
   Common stock ($.01 par value; 20,000,000 shares
     authorized; 9,480,000 and 12,952,000 shares
     outstanding at December 31, 1996 and 1997,
     respectively)                                            95                 130
   Notes receivable from stockholders                     (1,052)               (831)
   Additional paid-in capital                             94,905             129,870
   Treasury stock, at cost                                  (200)               (480)
   Accumulated deficit                                   (51,676)           (122,597)
   Accumulated translation adjustment                       (836)             (1,672)
                                                        --------            --------
      Total stockholders' equity                          59,378              25,261
                                                        --------            --------
      Total liabilities and stockholders' equity        $504,835            $470,060
                                                        ========            ========
</TABLE>
              See accompanying notes to consolidated financial statements.

                                       19

<PAGE>



                   DICTAPHONE CORPORATION (SUCCESSOR COMPANY)


                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 (Dollars in thousands, except per share amount)

<TABLE>
<CAPTION>


                                           TWENTY WEEKS ENDED      YEAR ENDED            YEAR ENDED
                                           DECEMBER 31, 1995    DECEMBER 31, 1996    DECEMBER 31, 1997
                                           ------------------   -----------------    -----------------
<S>                                             <C>                 <C>                  <C>
   Revenues:
      Product sales and rentals                 $ 96,014            $199,024             $202,894
      Contract manufacturing sales                18,892              40,614               42,864
      Support services                            35,686              92,830               94,284
                                                --------            --------             --------
         Total revenue                           150,592             332,468              340,042
                                                --------            --------             --------

   Costs and expenses:

      Cost of sales, rentals and support
         services                                 90,126             181,148              194,432

      Selling and administrative                  45,409             108,008              114,263

      Amortization of intangibles                 16,968              41,209               41,262

      Research and development                     4,587              14,135               14,705
                                                --------            --------             --------

   Operating loss                                 (6,498)            (12,032)             (24,620)

   Interest expense                               15,850              42,897               44,438

   Other expense (income) - net                      232              (1,338)                 224
                                                --------            --------             --------

   Loss before income taxes                      (22,580)            (53,591)             (69,282)

   Income tax benefit                              8,706              18,931                1,060
                                                --------            --------             --------

   Net loss                                      (13,874)            (34,660)             (68,222)

      Stock dividends on PIK Preferred Stock         815               2,327                2,699
                                                --------            --------             --------

      Net loss applicable to Common Stock       $(14,689)           $(36,987)            $(70,921)
                                                ========            ========             ========

</TABLE>



          See accompanying notes to consolidated financial statements.


                                       20
<PAGE>
                       DICTAPHONE CORPORATION (SUCCESSOR COMPANY)

                          CONSOLIDATED STATEMENTS OF CASH FLOW
                                 (Dollars in thousands)

<TABLE>
<CAPTION>
                                                    TWENTY WEEKS ENDED       YEAR ENDED          YEAR ENDED
                                                     DECEMBER 31, 1995   DECEMBER 31, 1996    DECEMBER 31, 1997
                                                    ------------------   -----------------    -----------------
<S>                                                     <C>                 <C>                  <C>
Operating activities:
   Net loss                                             $  (13,874)         $  (34,660)          $  (68,222)
   Adjustments to reconcile net loss
     to net cash provided by (used in)
     operating activities:
      Depreciation and amortization (including
       $11,691, $5,775 and $8,114, respectively,
       of nonrecurring charges)                             39,972              71,135               68,515
      Provision for deferred income taxes                   (9,035)            (18,876)              (1,767)
      Non-recurring charge for digital product
         obsolescence (Note 4)                                 ---                 ---               14,902
      Changes in assets and liabilities:
         Accounts receivable                               (12,684)              3,320              (18,869)
         Inventories                                        16,786               3,833               (4,528)
         Other current assets                                5,358                (513)              (1,876)
         Accounts payable and accrued liabilities           20,020              (5,672)               5,896
         Advance billings                                   (1,134)                167                2,502
         Other assets and other                            (18,837)            (12,416)             (10,996)
                                                           -------             -------             --------
            Net cash provided by (used in) operating
              activities                                    26,572               6,318              (14,443)
                                                           -------             -------             --------
Investing activities:
   Payments for acquisition                               (454,239)             (8,000)                ---
   Net investment in fixed assets                             (805)             (6,225)              (5,899)
                                                           -------             -------            ---------
         Net cash used in investing activities            (455,044)            (14,225)              (5,899)
                                                           -------             -------            ---------
Financing activities:
   Net proceeds from sale of senior subordinated notes     194,000                 ---                 ---
   Borrowings under term loan facility                     150,000                 ---              62,750
   Repayment under term loan facility                          ---              (7,750)            (71,000)
   Proceeds from sale of common stock                       95,000                 ---              35,000
   Proceeds from sale of preferred stock                    15,000                 ---                 ---
   Borrowings under revolving credit facility               15,000              32,000              88,600
   Repayment under revolving credit facility               (15,000)            (23,000)            (88,600)
   International borrowing, net                                ---               1,277                (717)
   Payment of deferred financing costs                     (13,699)               (791)             (2,927)
   Capital lease obligations                                   ---                (198)               (266)
   Repayment of management loans                               113                 108                 221
   Payments to acquire treasury stock                         (100)               (100)               (280)
                                                           -------             -------            --------

      Net cash provided by financing activities            440,314               1,546              22,781
                                                           -------             -------            --------

Effect of exchange rate changes on cash                        (26)                  9                 (89)
                                                           -------             -------            --------
Increase (decrease) in cash                                 11,816              (6,352)              2,350
Cash, beginning of period                                    2,463              14,279               7,927
                                                           -------             -------            --------
Cash, end of period                                        $14,279             $ 7,927            $ 10,277
                                                           =======             =======            ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid                                              $ 4,060             $38,142            $ 38,372
                                                           =======             =======            ========
Income taxes paid                                          $   ---             $ 1,960            $  1,039
                                                           =======             =======            ========
</TABLE>
          See accompanying notes to consolidated financial statements.

                                       21

<PAGE>

                       DICTAPHONE CORPORATION (SUCCESSOR COMPANY)

                     CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                      FOR THE TWENTY WEEKS ENDED DECEMBER 31, 1995
                       AND YEARS ENDED DECEMBER 31, 1996 AND 1997
                         (In millions, except per share amounts)
<TABLE>
<CAPTION>

                                               NOTES
                                            RECEIVABLE              ACCUMULATED                 ACCUMULATED
                        PREFERRED  COMMON      FROM      TREASURY     PAID-IN     ACCUMULATED   TRANSLATION      TOTAL
                          STOCK    STOCK   STOCKHOLDERS    STOCK      CAPITAL       DEFICIT     ADJUSTMENTS      EQUITY
                        ---------  ------  ------------  --------   -----------   -----------   -----------      ------
<S>                     <C>        <C>      <C>           <C>         <C>         <C>              <C>         <C>
Initial capitalization
at August 12, 1995      $ 15,000   $  95    $ (1,273)     $  ---      $ 94,905    $    ---         $  ---      $ 108,727

Net loss                     ---     ---         ---         ---           ---     (13,874)           ---        (13,874)

Stock Dividends              815     ---         ---         ---           ---        (815)           ---            ---

Repayment of
 management  loans           ---     ---         113         ---           ---         ---            ---            113

Treasury stock               ---     ---         ---        (100)          ---         ---            ---           (100)

Translation
 adjustments                 ---     ---         ---         ---           ---         ---           (363)          (363)
                        --------   -----    --------      ------      --------    --------         ------      ---------
Balance at
 December 31, 1995        15,815      95      (1,160)       (100)       94,905     (14,689)          (363)        94,503

Net loss                     ---     ---         ---         ---           ---     (34,660)           ---        (34,660)

Stock Dividends            2,327     ---         ---         ---           ---      (2,327)           ---            ---

Repayment of
 management loans            ---     ---         108         ---           ---         ---            ---            108

Treasury stock               ---     ---         ---        (100)          ---         ---            ---           (100)

Translation
 adjustments                 ---     ---         ---         ---           ---         ---           (473)          (473)
                        --------   -----    --------      ------      --------    --------         ------      ---------

Balance at
December 31, 1996         18,142      95      (1,052)       (200)       94,905     (51,676)          (836)        59,378

Net Loss                     ---     ---         ---         ---           ---     (68,222)           ---        (68,222)

Stock Dividends            2,699     ---         ---         ---           ---      (2,699)           ---            ---

Sale of common stock         ---      35         ---         ---        34,965         ---            ---         35,000

Repayment of
 management loans            ---     ---         221         ---           ---         ---            ---            221

Treasury stock               ---     ---         ---        (280)          ---         ---            ---           (280)

Translation
 adjustments                 ---     ---         ---         ---           ---         ---           (836)          (836)
                        --------   -----    --------      ------      --------    --------         ------      ---------

Balance at
 December 31, 1997      $ 20,841   $ 130    $   (831)     $ (480)     $129,870   $(122,597)       $(1,672)     $  25,261
                        ========   =====    ========      ======      ========   =========        ========     =========

</TABLE>


              See accompanying notes to consolidated financial statements.

                                       22

<PAGE>


                       DICTAPHONE CORPORATION (SUCCESSOR COMPANY)

                       NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                      (Dollars in thousands, except share amounts)


1.   THE ACQUISITION

          On April 25, 1995,  Dictaphone  Corporation  (Successor  Company) (the
     "Company")  entered into a Stock and Asset Purchase  Agreement,  as amended
     August  11,  1995 (the  Acquisition  Agreement"),  with  Pitney  Bowes Inc.
     ("Pitney   Bowes")  for  the  purpose  of  acquiring  (the   "Acquisition")
     Dictaphone  Corporation,  the United States Dictaphone Subsidiary of Pitney
     Bowes  ("Dictaphone  U.S.  (Predecessor   Company)")  and  certain  foreign
     affiliates  ("Dictaphone Non-U.S.  (Predecessor  Company)") as set forth in
     the Acquisition Agreement  (collectively,  the "Predecessor  Company").  On
     August 11, 1995, the Company  acquired the  Predecessor  Company for $450.0
     million,  which was subject to certain post-closing  adjustments as defined
     in the  Acquisition  Agreement.  On March 6, 1996,  the  Company and Pitney
     Bowes reached  agreement as to final  purchase  adjustment.  Total purchase
     adjustments  amounted to $12.2 million for an aggregate  purchase  price of
     $462.2 million.

          The   Acquisition,   including   approximately   $22,178   of  related
     transaction  and  financing  fees,  was  financed  with  the  borrowing  of
     approximately  $165,000 under a credit  agreement,  which  consisted of two
     term loans and a revolving credit facility, the sale of senior subordinated
     notes  with  an   aggregate   principal   amount  of  $200,000  and  equity
     contributions of $110,000.

2.   NATURE OF OPERATIONS

          The  Company  is  engaged  principally  in  the  design,  manufacture,
     marketing and service of integrated  voice and data management  systems and
     software,  which  include  dictation,  voice  processing,  voice  response,
     unified  messaging,   records  management,  court  recording,  call  center
     monitoring systems and communications  recording.  Dictaphone markets these
     products worldwide with most of its revenue generated from the U.S. market.

3.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

          BASIS OF PRESENTATION.  The capital  structure and accounting basis of
     the  assets  and  liabilities  of the  Company  as of August  12,  1995 and
     thereafter differ from those of the Predecessor Company in prior periods as
     a result of the  Acquisition.  The  Acquisition was accounted for under the
     purchase  method of  accounting in accordance  with  Accounting  Principles
     Board  Opinion No. 16,  "Accounting  for  Business  Combinations".  Certain
     amounts have been reclassified to conform to current year presentation.

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

          CONSOLIDATION.  The  consolidated  financial  statements  include  the
     Company  and  all  majority-owned   subsidiaries  as  follows:   Dictaphone
     Corporation   U.S.   ("Dictaphone   U.S."),   Dictaphone   Canada  Ltd/Ltee
     ("Dictaphone   Canada"),   Dictaphone  Company  Ltd.  ("Dictaphone  U.K."),
     Dictaphone Deutschland GmbH ("Dictaphone Germany"),  Dictaphone Netherlands
     BV   ("Dictaphone   Netherlands")   and   Dictaphone   International   A.G.
     ("Dictaphone  Switzerland").  All  significant  intercompany  accounts  and
     transactions have been eliminated.


                                       23

<PAGE>


3.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

          CASH AND CASH EQUIVALENTS. Cash equivalents include short-term, highly
     liquid investments with a maturity of three months or less from the date of
     acquisition.

          INVENTORY  VALUATION.  Inventories  are valued at the lower of cost or
     market. Cost is determined on the first-in, first-out (FIFO) method.

          COMPUTER SOFTWARE  DEVELOPMENT COSTS. The Company  capitalizes certain
     software costs (approximately $4,171, $6,945 and $6,225 for the years ended
     December 31, 1995,  1996 and 1997,  respectively)  in  accordance  with the
     provisions of Statement of Financial  Accounting  Standard ("SFAS") No. 86,
     "Accounting  for the  Costs of  Computer  Software  to be Sold,  Leased  or
     Otherwise Marketed." Such amounts are amortized as the related products are
     sold. In 1997, the Company wrote down $1.0 million of capitalized  software
     to its estimated  realizable value.  Amortization expense in 1995, 1996 and
     1997  related  to the  capitalized  amounts  was  $0,  $1,418  and  $5,821,
     respectively.

          FIXED  ASSETS AND  DEPRECIATION.  Property,  plant and  equipment  are
     stated at cost and  depreciated  using the  straight  line  method over the
     useful  lives of the various  assets  ranging  from one to twelve years for
     machinery  and  equipment  and  up  to  35  years  for   buildings.   Major
     improvements  which add to  productive  capacity  or extend  the life of an
     asset are capitalized  while repairs and maintenance are charged to expense
     as incurred.  Rental equipment and other depreciable assets are depreciated
     using the straight line method over the related useful lives.

          INTANGIBLES.  Patents and  non-compete  agreement  are  amortized on a
     straight  line  basis  over five and  three  years,  respectively.  Service
     contracts are amortized using a systematic method based on expected rate of
     nonrenewals over four years. All other intangibles are being amortized on a
     straight line basis over 40 years. The Company  periodically  evaluates the
     recoverability of goodwill and other intangible assets by assessing whether
     the unamortized intangible asset can be recovered over its remaining useful
     life through future operating cash flows on an undiscounted basis.

          DEFERRED FINANCING COSTS.  Deferred financing costs are amortized over
     the expected terms of the related debt using the effective interest method.

          RENTAL ARRANGEMENTS AND ADVANCE BILLINGS.  The Company rents equipment
     to its customers under short-term rental agreements,  generally for periods
     of three to five years. Maintenance contracts (support services) are billed
     in advance;  the related revenue is included in advance  billings and taken
     into income as earned.

          REVENUE. For large dictation and communication  recording systems that
     have technical  installation  requirements,  the Company recognizes revenue
     upon  installation,  which is when all of its contractual  obligations have
     been  satisfied.  Technical  installations  are  installations  of  product
     estimated to exceed 30 days.  Revenue for all other  products is recognized
     upon shipment, net of estimated returns.

          COSTS AND  EXPENSES.  Operating  expenses  of field  sales and service
     offices which represent the cost of support  services  revenue are included
     in cost of sales.

          INCOME  TAXES.  Income tax benefit is based upon  reported  results of
     operations  and reflects the impact of  temporary  differences  between the
     amount  of  assets  and  liabilities  recognized  for  financial  reporting
     purposes and such amounts recognized for tax purposes. All U.S. Federal and
     State taxes are provided currently on the undistributed earnings of foreign
     subsidiaries giving recognition to current tax rates and applicable foreign
     tax credits.

                                       24

<PAGE>


3.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

          DERIVATIVE  FINANCIAL  INSTRUMENTS.   The  Company  has  only  limited
     involvement with derivative financial instruments and does not use them for
     trading purposes.  The Company enters into interest rate swap agreements to
     reduce its  exposure to interest  rate  fluctuations.  The net gain or loss
     from exchange of interest  payments is included in interest  expense in the
     consolidated  financial  statements  and  interest  paid  in the  condensed
     consolidated statements of cash flow.

          TRANSLATION  OF  FOREIGN   CURRENCIES.   Assets  and   liabilities  of
     subsidiaries  are  translated  at the rate of  exchange  in  effect  on the
     balance sheet date; income and expenses are translated at the average rates
     of  exchange   prevailing  during  the  period.  The  related   translation
     adjustments are reflected in the accumulated  translation adjustment within
     the stockholders' equity section of the consolidated balance sheet. Foreign
     currency  gains and losses  resulting  from  transactions  are  included in
     results of operations.

4.   INVENTORIES

            Inventories consist of the following:
                                                  DECEMBER 31,      DECEMBER 31,
                                                      1996              1997
                                                  ------------      ------------

            Raw materials and work in process      $  14,881           $ 18,481
            Supplies and service parts                19,946             14,087
            Finished products                         22,013             16,211
                                                   ---------           --------
            Total inventories                      $  56,840           $ 48,779
                                                   =========           ========

            With the  production of  Enterprise  Express(TM)  in June 1997,  the
      Company  provided for excess  service parts and field stock,  inclusive of
      prepaid  amounts,  associated  with  those  products  that the  Enterprise
      Express(TM)  product would replace.  During 1997,  these non-cash  charges
      totalled $14.9 million.

            As a result of the  Acquisition,  inventories were recorded at their
      fair value at August 12, 1995. Such fair value  represented  selling price
      less  estimated  costs of completion for work in process and selling costs
      and a reasonable  profit  allowance for the selling and completion  effort
      for finished  goods.  Raw materials were valued at  replacement  cost. The
      fair value of inventories was $19,197 in excess of their  historical cost.
      Of such  excess,  $11,691,  $5,775 and $1,713 was charged to cost of sales
      and rentals  during the  twenty-week  period  ended  December 31, 1995 and
      years ended December 31, 1996 and 1997, respectively.

5.    PROPERTY, PLANT AND EQUIPMENT

            Property, plant and equipment consists of the following:

                                                  DECEMBER 31,      DECEMBER 31,
                                                      1996              1997
                                                  ------------      ------------

            Land                                    $  1,781          $  1,766
            Buildings                                 16,958            17,228
            Machinery and equipment                   43,034            47,497
                                                    --------          --------
               Subtotal                               61,773            66,491
            Accumulated depreciation                 (24,765)          (31,160)
                                                    --------          --------
            Property, plant and equipment, net      $ 37,008          $ 35,331
                                                    ========          ========

            Depreciation  expense for the twenty-week  period ended December 31,
      1995 and years ended  December 31, 1996 and 1997 was $10,413,  $15,130 and
      $7,739, respectively.


                                       25

<PAGE>


6.    IMPAIRMENT OF LONG-LIVED ASSETS

            In  accordance   with  the  provisions  of  Statement  of  Financial
      Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
      Assets to Be Disposed  Of" ("SFAS No.  121"),  the Company has  recorded a
      non-cash  pretax charge of $5.4 million to write down certain  patents and
      associated  goodwill to their fair value. The Company assessed  impairment
      based  upon an  analysis  of  anticipated  future  revenue  of  applicable
      products and the resulting  undiscounted  cash flows. Fair value was based
      upon a royalty saved  valuation  technique.  The charge is reported in the
      Consolidated Statement of Operations as amortization of intangibles.

7.    INTANGIBLES

            The  following  summarizes  intangible  assets,  net of  accumulated
      amortization  and  writedowns  of $58,177  and $99,439 for the years ended
      December  31, 1996 and 1997,  respectively.  Amortization  expense for the
      years  ended  December  31,  1996 and  December  31,  1997 was $41,209 and
      $41,262, respectively.

                                                  DECEMBER 31,      DECEMBER 31,
                                                     1996              1997
                                                  ------------      ------------

            Goodwill                               $139,687           $135,004
            Tradenames                               75,158             73,211
            Service contracts                        18,951              8,920
            Non-compete agreement                    30,057             11,696
            Patents                                   7,169                491
                                                   --------           --------
                                                   $271,022           $229,322
                                                   ========           ========
8.    DEBT

            The following summarizes the debt structure of the Company:

                                                  DECEMBER 31,      DECEMBER 31,
                                                     1996              1997
                                                  ------------      ------------

            Current portion of long-term debt      $  12,512         $     795
                                                   ---------         ---------
            Long-term debt:
               Senior debt:
                  Term loans:
                     Tranche A                        57,000               ---
                     Tranche B                        73,500            71,250
                     Tranche C                           ---            62,122
                  Revolving credit loans               9,000             9,000
               International debt                        586               444
               Subordinated notes                    200,000           200,000
                                                    --------         ---------
            Total long-term debt                     340,086           342,816
                                                    --------         ---------
            Total debt                              $352,598         $ 343,611
                                                   =========         =========

            In  connection  with the financing of the  Acquisition,  the Company
      entered into a Credit Agreement,  dated August 7, 1995, as amended by four
      amendments to Credit  Agreement,  dated June 28, 1996, June 27, 1997, July
      21, 1997 and November 14, 1997 (collectively, the "Credit Agreement") with
      a syndicate  of financial  institutions  for whom  Bankers  Trust  Company
      ("Bankers  Trust")  is the  Administrative  Agent  and  NationsBank,  N.A.
      (Carolinas) ("Nations") is the Documentation Agent.


                                       26

<PAGE>


8.    DEBT (CONTINUED)

            The  fourth  amendment  to the  Credit  Agreement  provided  for the
      issuance of a new Tranche C Loan in the amount of $62,750, the proceeds of
      which were utilized by the Company to extinguish the  outstanding  balance
      of the Tranche A Loan and to prepay certain required principal payments on
      the outstanding  borrowings under the Tranche B Loan. The Credit Agreement
      consists of a $75,000 Tranche B Term Loan due June 30, 2002, and a $62,750
      Tranche C Term Loan due June 30,  2003,  and a six-year  Revolving  Credit
      Facility of up to $40,000,  collectively,  the "Facilities".  A portion of
      the  Revolving  Credit  Facility is  available  to provide for the working
      capital  requirements and general corporate purposes of the Company and to
      issue commercial and standby letters of credit.

            In connection  with the fourth  amendment,  the Company also sold an
      additional $35,000 of equity, the proceeds of which were used to repay all
      amounts  outstanding on a facility which was  established  August 1, 1997,
      and to pay down the Revolving Credit Facility.

            At December  31,  1997,  the Company had Term Loans of $134,000  and
      loans of $9,000  outstanding  under the  Revolving  Credit  Facility.  The
      maturity schedule relating to the $134,000 of outstanding Term Loans is as
      follows:

            1998                    $    628
            1999                         628
            2000                         628
            2001                      38,128
            2002                      52,575
            Thereafter                41,413
                                    --------
                                    $134,000
                                    ========

            The Company will be required to make certain prepayments, subject to
      certain  exceptions,  on the  Facilities  with 75% of Excess Cash Flow (as
      defined in the Credit  Agreement) and with the proceeds from certain asset
      sales,  issuances  of debt and  equity  securities  and any  pension  plan
      reversion.  Such prepayments  will be applied first to required  principal
      payments of the Tranche B Term Loan and thereafter to amounts  outstanding
      under the Revolving Credit Facility.

            There are no scheduled  reductions in the Revolving  Credit Facility
      over the next five years. Availability under the Revolving Credit Facility
      at December 31, 1997 was $31,000.  The Company had outstanding  letters of
      credit of $2,210 as of December 31, 1997.

            Borrowings  under the Revolving  Credit  Facility bear interest at a
      rate per annum  equal  to,  at the  Company's  option,  the  higher of (1)
      Bankers Trust's Prime Rate or (2) the rate which is 1/2 of 1% in excess of
      the Federal Funds effective rate, (together the "Base Rate") plus 1.75% or
      the  reserve  Eurodollar  Rate (as defined in the Credit  Agreement)  plus
      2.75%.  The Tranche B Loan bears interest at a rate per annum equal to, at
      the Company's option,  the Base Rate plus 2.25% or the reserve  Eurodollar
      Rate plus  3.25%.  The  Tranche C Loan bears  interest at a rate per annum
      equal to, at the Company's option, the Base Rate plus 2.75% or the reserve
      Eurodollar  Rate plus 3.75%.  In addition,  the Company is required to pay
      Bankers  Trust a quarterly  commitment  fee of .50% per annum on the daily
      average  unused  portion of the Revolving  Credit  Facility.  The carrying
      amount of the  Facilities  approximates  fair value as the  interest  rate
      reprices quarterly and is reflective of currently  available market rates.
      The Company  entered into an interest rate swap contract in November 1995,
      effective  February 16, 1996, with an aggregate  notional principal amount
      equivalent to $75,000  maturing on February 16, 1999. The swap effectively
      converts  that  portion  of the  Company's  Term  Loans  to a  fixed  rate
      component of 5.8%;  thus reducing the impact of changes in interest rates,
      converting  the total  effective  interest  rate on fifty  percent  of the
      initial outstanding Term Loans to 9.3%. No funds under the swap agreements
      are actually borrowed or are to be repaid. The amounts due to or


                                       27

<PAGE>

8.    DEBT (CONTINUED)

      from the  counterparties  are reflected in interest expense in the periods
      in which  they  accrue.  The fair value of the  interest  rate swaps as of
      December 31, 1997 was unfavorable $0.1 million,  based upon dealer quotes.
      Dictaphone   is  exposed  to   credit-related   losses  in  the  event  of
      non-performance  by the  counterparties  to these swaps,  although no such
      losses are expected as the  counterparties  are commercial banks having an
      investment grade credit rating.  The effective  interest rate for the year
      ended December 31, 1997 was 8.45%,  8.95% and 8.40% on the Tranche B Loan,
      Tranche C Loan and the Revolving Credit Facility, respectively.

            Dictaphone  U.S.,  the  Company's   wholly-owned  U.S.   Subsidiary,
      guarantees the Company's  obligations under the Facilities.  The Company's
      obligations and the guarantees of its domestic subsidiaries are secured by
      substantially  all existing and acquired  personal property of the Company
      and its domestic subsidiaries,  including a pledge of 100% of the stock of
      each of the Company's  domestic  subsidiaries and 66% of the stock of each
      of  the  Company's   first-tier   foreign   subsidiaries.   The  Company's
      obligations  are also  secured by liens on certain  real  property  of the
      Company and its domestic subsidiaries.

            In  addition,   the  Credit   Agreement   contains   covenants  that
      significantly  limit or prohibit,  among other things,  the ability of the
      Company and Dictaphone  U.S. to incur  indebtedness,  make  prepayments of
      certain  indebtedness,  pay  dividends  on Common  Stock  (as  hereinafter
      defined),  make investments,  engage in transactions with stockholders and
      affiliates,   create  liens,   sell  assets  and  engage  in  mergers  and
      consolidations  and requires that the Company maintain  certain  financial
      ratios.

            The Acquisition  was also financed  through the issuance of $200,000
      senior subordinated notes (the "Notes"). The Notes are subordinated to the
      Credit Agreement financing and other senior indebtedness as defined in the
      indenture  pursuant to which the Notes were issued (the "Note Indenture").
      The Notes bear interest of 11-3/4% per annum, payable semiannually on each
      February  1 and  August 1. The Notes  mature on August 1,  2005.  The fair
      value of the Notes at December 31, 1997 was favorable $6.0 million,  based
      on dealer quotes.  The Notes are fully and  unconditionally  guaranteed by
      Dictaphone U.S. The Notes contain  covenants similar to the Facilities and
      provides for each noteholder to have the right to require that the Company
      repurchase  the  Notes at 101% of the  principal  amount  upon a change of
      control as defined in the Note Indenture.

9.    EQUITY AND STOCK OPTIONS

      COMMON STOCK

            On December  31, 1997,  the Company had 20 million  shares of common
      stock,  $.01 par value  ("Common  Stock")  authorized of which  12,952,000
      shares  were  issued,   outstanding   and  owned  by  Stonington   Capital
      Appreciation  1994 Fund,  L.P.  ("Stonington"),  an affiliate of a limited
      partner of Stonington, and by management of the Company. (See Note 11).

            At  December  31, 1996  and 1997,  the Company had 20,000 and 48,000
      shares of treasury stock, respectively.

      PREFERRED STOCK AND WARRANT

            The  Company  is  authorized  to issue up to 10  million  shares  of
      preferred  stock,  $.01 par value,  in one or more series as authorized by
      the Board of  Directors  and to fix the terms,  rights,  restrictions  and
      qualifications   of  shares  of  each  series.   In  connection  with  the
      acquisition,  the  Company  issued 1.5 million  shares of 14%  Pay-In-Kind
      Perpetual Preferred Stock ("PIK Preferred Stock"). The PIK Preferred Stock
      is nonvoting and has a stated value and liquidation  preference of $10 per
      share  and  carries  a  cumulative  pay-in-kind  dividend  of 14% per year
      payable  quarterly in arrears from September 30, 1995 until July 31, 2006,
      and thereafter the annual  dividend rate will increase by 200 basis points
      every twelve  months (but in no event will exceed 24%).  The PIK Preferred
      Stock ranks senior to all classes and series of stock of the Company with


                                       28
<PAGE>

9.    EQUITY AND STOCK OPTIONS (CONTINUED)

      respect  to  dividend  rights and  rights on  liquidation,  winding up and
      dissolution of the Company.  It is redeemable at the option of the Company
      or in certain limited  circumstances  at the option of the holder upon the
      occurrence  of certain  events.  The Company  accrued the 14%  pay-in-kind
      dividend and charged  accumulated  deficit $815, $2,327 and $2,699 for the
      twenty weeks ended December 31, 1995 and years ended December 31, 1996 and
      1997,  respectively,  as a result of the required  dividends  representing
      81,500,   232,700  and  269,900   shares  of  the  PIK  Preferred   Stock,
      respectively.  Such shares of PIK Preferred Stock were declared and issued
      in respect of the period up to December 31, 1997.

            Together with the issuance of the PIK Preferred  Stock,  the Company
      issued a warrant to purchase  350,000 shares of the Company's Common Stock
      at a price of $10 per share (the "Warrant") representing the fair value of
      Common Stock on the date of issuance.  The Warrant may not be  transferred
      or exchanged, in whole or in part, separately from, but may be transferred
      or exchanged  only together  with,  an  equivalent  proportion of such PIK
      Preferred Stock.

            The Warrant expires on August 11, 2005 and is currently exercisable.
      The Company has reserved  350,000  shares of its Common Stock for issuance
      upon exercise of the Warrant.  As set forth in the related  agreement (the
      "Warrant  Agreement"),  the  Warrant is  subject  to certain  antidilution
      provisions  related to the future  adjustments  to the  Company's  capital
      stock or the issuance of its Common  Stock or rights,  options or warrants
      to purchase such Common Stock at a price below the current market price as
      defined in the Warrant Agreement.

      MANAGEMENT STOCK OPTION PLAN

            At the date of Acquisition,  the Company adopted a Management  Stock
      Option Plan (the "Plan") and issued options to purchase  713,000 shares of
      Common  Stock at $10.00 per share (fair  market  value) to  officers,  key
      employees  and  non-employee  directors of the Company.  The Plan provides
      that   one-half  of  the  options   granted   under  the  Plan  will  vest
      automatically  over a five  year  period  and the  other  one-half  became
      eligible for vesting as to 10% on April 15,  1996,  as to 20% on April 15,
      1997,  and the  remaining  options  become  eligible  for vesting as to an
      additional  20% on each of April 15, 1998,  1999,  and 2000, and as to the
      remaining  10%  on  April  15,  2001,  if  the  Company   attains  certain
      predetermined  financial  performance  goals, or in any case no later than
      the tenth  anniversary of the  Acquisition.  Based upon the Company's 1995
      performance,  the Company's Board of Directors  determined that 60% of the
      Performance  Options  eligible  for  vesting on April 15, 1996 would vest.
      Based  upon  the  Company's  1996  performance,  the  Company's  Board  of
      Directors  determined  that 0% of the  Performance  Options  eligible  for
      vesting on April 15,  1997 would vest.  The options  expire ten years from
      the date of grant or earlier in certain  circumstances.  In the event of a
      Sale or an IPO (as defined in the Plan) of the Company prior to August 11,
      2000, all outstanding  service-based options and performance-based options
      will become immediately vested and exercisable prior to the effective date
      of such Sale or IPO. At the date of the Acquisition,  the Company reserved
      850,000 shares of its Common Stock for issuances under the Plan. Effective
      August 1, 1997, the number of shares reserved for issuances under the Plan
      was  increased  to  1,200,000.  A summary  of  options  outstanding  is as
      follows:

                                         DECEMBER 31, DECEMBER 31,  DECEMBER 31,
                                            1995         1996          1997
                                         ------------ ------------  ------------

         Outstanding, beginning of year        ---       683,000        650,000
         Granted                           713,000        89,000        551,500
         Cancelled                         (30,000)     (122,000)      (105,000)
                                           -------      --------      ---------
         Outstanding, end of year          683,000       650,000      1,096,500
                                           =======      ========      =========

         Exercisable, end of year                0        82,680        161,470
                                           =======      ========      =========

            The estimated fair value of the stock was $10.00 for all periods.

                                       29

<PAGE>


9.    EQUITY AND STOCK OPTIONS (CONTINUED)

            Statement of Financial  Accounting Standards Number 123, "Accounting
      For  Stock-Based  Compensation"  ("SFAS  123")  encourages,  but  does not
      require,   companies  to  record  at  fair  value   compensation  cost  of
      stock-based  employee  compensation  plans.   Dictaphone  has  elected  to
      continue to account for stock-based compensation using the intrinsic value
      method   prescribed  in  Accounting   Principles  Board  Opinion  No.  25,
      "Accounting  For Stock  Issued to  Employees"  ("APB No.  25") and related
      interpretations. Under the intrinsic value based method, compensation cost
      is the excess,  if any, of the quoted  market  price of the stock at grant
      date over the  exercise  price of the option.  Typically,  grants of stock
      options  pursuant to stock option  plans have no intrinsic  value at grant
      date,  and  accordingly,  no  compensation  cost  has been  recognized  by
      Dictaphone.  Had  compensation  cost for the stock option been  determined
      based on the fair value of the option at a date of grant  consistent  with
      the requirements of SFAS No. 123, Dictaphone's net income and earnings per
      share would have been reduced to the pro forma amounts indicated below:

                                               1995        1996        1997
                                               ----        ----        ----

         Net loss           As reported     $(14,689)   $(36,987)   $(70,921)

                            Pro Forma       $(14,770)   $(37,182)   $(71,503)

            The fair value of each stock  option has been  estimated at the date
      of grant using the  Black-Scholes  option pricing model with the following
      weighted average assumptions:

                                              1995          1996         1997
                                              ----          ----         ----

         Risk free interest rate              5.44%         6.21%        5.72%

         Expected life                        5 years       5 years      5 years

         Expected volatility                    ---           ---          ---

         Expected dividend yield                ---           ---          ---

10.   INCOME TAXES

            The provision  (benefit) for income taxes for the twenty weeks ended
      December 31, 1995 and years ended  December 31, 1996 and 1997  consists of
      the following:

                        TWENTY WEEKS ENDED     YEAR ENDED         YEAR ENDED
                        DECEMBER 31, 1995   DECEMBER 31, 1996  DECEMBER 31, 1997
                        -----------------   -----------------  -----------------
         Current:
           Federal         $      ---         $      ---          $     ---
           State                  ---                ---                ---
           Foreign                329                (55)               707
                           ----------         ----------          ---------
              Total        $      329         $      (55)         $     707
                           ----------         ----------          ---------
         Deferred:
           Federal         $   (7,228)        $  (14,686)         $   1,059
           State               (1,216)            (3,139)            (2,203)
           Foreign               (591)            (1,051)              (623)
                           ----------         ----------          ---------
              Total            (9,035)           (18,876)            (1,767)
                           ----------         ----------          ---------
                 Total     $   (8,706)        $  (18,931)         $  (1,060)
                           ==========         ==========          =========

                                      30

<PAGE>

10.   INCOME TAXES (CONTINUED)

            The difference  between the Company's  effective income tax rate and
      the United States statutory rate for the twenty-week period ended December
      31, 1995 and years ended December 31, 1996 and 1997 is reconciled below:
<TABLE>
<CAPTION>
                                                          TWENTY WEEKS ENDED          YEAR ENDED               YEAR ENDED
                                                           DECEMBER 31, 1995       DECEMBER 31, 1996        DECEMBER 31, 1997
                                                           -----------------       -----------------        -----------------
        <S>                                                <C>                     <C>                      <C>

      United States statutory rate                               35.00%                 35.00%                    35.00%
         State income taxes, net of Federal
          income tax benefit                                      3.50%                  3.81%                     4.32%
         Effect of foreign operations                             1.09%                 (1.39%)                   (0.17%)
         Miscellaneous                                           (1.03%)                (2.09%)                   (2.83%)
         Net operating loss carryforwards
          with no anticipated benefit                               ---                    ---                   (34.79%)
                                                                 -------                -------                  --------
            Total                                                38.56%                 35.33%                     1.53%
                                                                 =======                =======                   =======
</TABLE>
            See  Footnote 13 for  disaggregated  information  as to domestic and
      foreign income before taxes.

            Deferred  tax  assets  and  liabilities  arise  from the  impact  of
      temporary  differences  between  the  amount  of  assets  and  liabilities
      recognized for financial  reporting  purposes and such amounts  recognized
      for tax purposes and resulted from the following:

                                              DECEMBER 31,          DECEMBER 31,
                                                 1996                  1997
                                              ------------          ------------
Deferred tax assets:
  Net operating loss carryforwards              $15,702                 $33,321
  Amortization - identifiable intangibles        12,951                  22,694
  Postretirement and pension benefits             4,107                   5,010
  Depreciation                                    5,570                   3,683
  Other                                           4,779                   6,357
                                                --------                -------
  Total gross deferred tax assets                43,109                  71,065
                                                --------                -------
Less: valuation allowance                             0                 (24,100)
                                                --------                -------
Net deferred tax assets                         $43,109                 $46,965
                                                ========                =======

Deferred tax liabilities:
  Amortization - goodwill                       $(2,363)                $(3,735)
  Capitalized software costs                     (2,084)                 (2,240)
  Other                                            (893)                 (1,451)
                                                --------                --------
  Total deferred tax liabilities                $(5,340)                $(7,426)
                                                ========                =======

            The Company has recorded a gross deferred tax asset of $71.1 million
      included in other  assets  reflecting  the benefit of net  operating  loss
      carryforwards  and  various  book  tax  temporary  differences.   The  net
      operating loss carryforward for federal income tax purposes as of December
      31, 1997 is approximately $86.2 million, of which $13.7 million of the net
      operating loss  carryforward  will expire in the year 2010,  $33.2 million
      will  expire in the year 2011 and $39.3  million  will  expire in the year
      2012. In order to fully  realize the deferred tax asset,  the Company will
      need to generate  future  taxable  income prior to  expiration  of the net
      operating loss  carryforwards.  Management has determined,  based upon the
      Company's history of prior operating results,  its current  circumstances,
      and its  expectations  for the future,  that taxable income of the Company
      will more likely not be  sufficient  to fully utilize the net deferred tax
      asset recorded for December 31, 1997, prior to the earliest  expiration in
      the year 2010, and has established a valuation reserve

                                       31

<PAGE>

10.   INCOME TAXES (CONTINUED)

      of $24.1  million  against the $33.3  million of deferred tax assets.  The
      valuation allowance did not change in 1996. The amount of the deferred tax
      asset  considered  realizable,  however,  could be reduced if estimates of
      future taxable income during the net operating  loss  carryforward  period
      are reduced.

11.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      TRANSACTIONS WITH STONINGTON CAPITAL APPRECIATION 1994 FUND, L.P.

            In the fourth  quarter of 1997,  the Company  received an additional
      $35.0 million from the purchase of 3.5 million additional shares of Common
      Stock by Stonington.

            Stonington,  together  with an  affiliate  of a limited  partner  of
      Stonington,  own 98.8% of the outstanding Common Stock of the Company, has
      the power to determine  the  composition  of the Board of Directors of the
      Company and  otherwise  control the  business  and affairs of the Company.
      Four of the eight  members of the Board of  Directors  of the  Company are
      employees of an affiliate of Stonington  and serve as  representatives  of
      Stonington.

      TRANSACTIONS WITH MANAGEMENT

            In connection with the Acquisition,  the Company sold 197,000 shares
      of Common  Stock to  certain  members  of the  Company's  management  (the
      "Management  Investors") for $1,970, the fair value of the Common Stock at
      the date of sale (the "Management Placement"). The Company financed $1,273
      of the Management  Placement with non-recourse loans bearing interest at a
      rate equal to the  Adjusted  Eurodollar  Rate in effect for the  Revolving
      Credit  Facility under the Credit  Agreement  plus 2.75%.  Interest is due
      annually starting in August 1998. Unless prepaid,  all principal,  accrued
      and unpaid  interest is due and payable on August 7, 2005. The obligations
      under the  management  notes are secured by a pledge of the  proportionate
      number of shares of Common Stock pursuant to a Stockholder's Agreement.

            Under  the  terms  of the  Stockholders  Agreement  relating  to the
      Management  Placement,  for a period of five years from  August 11,  1995,
      unless the Company has completed an initial  public  offering,  Management
      Investors will not be permitted to sell,  transfer or otherwise dispose of
      their shares of Common Stock,  except to (i) a "Permitted  Transferee"  or
      (ii) to the  Company  pursuant to certain  put and call  arrangements  set
      forth in the Stockholders'  Agreement (the "Puts and Calls"). A "Permitted
      Transferee" includes certain beneficiaries, trusts and family members. The
      Puts and Calls  provide  for the sale of  shares  of  Common  Stock to the
      Company upon the termination of employment.  The purchase price for shares
      purchased  pursuant  to the  Stockholders  Agreement  is  based  upon  the
      original per share  purchase  price Adjusted Book Value (as defined in the
      Stockholders Agreement), cost, or Fair Market Value (as defined).

            The  Stockholders  Agreement  provides that in the event that, after
      August 11, 2000, an initial public  offering has not occurred,  Management
      Investors  will be permitted to sell Common Stock to third  parties  after
      first giving the Company and other  Management  Investors a right of first
      refusal for the same number of shares of Common Stock at the same price.

12.   COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF RISK

      CONCENTRATIONS OF RISKS

            A substantial portion of the Company's revenues are derived from the
      sale of products manufactured at the Company's sole manufacturing facility
      which is located in Melbourne,  Florida.  This  manufacturing  facility is
      subject to the normal  hazards of any such  facility  that could result in
      damage to the  facility.  Any such damage to this  facility  or  prolonged
      delay in the operations of this facility for repairs or other reason would
      have a materially  adverse effect on the Company's  financial position and
      results of operations.

                                       32
<PAGE>

12.   COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF RISK (CONTINUED)

      COMMITMENTS

            The Company leases certain factory and office facilities under lease
      agreements extending from one to twenty-five years. In addition to factory
      and office facilities  leased, the Company leases computer and information
      processing  equipment under lease agreements  extending from three to five
      years.

            Future  minimum lease  payments for operating  leases as of December
      31, 1997 are as follows:

            YEARS ENDING DECEMBER 31,
              1998                         $ 3,643
              1999                           2,878
              2000                           2,352
              2001                           1,310
              2002                             937
              Later years                    2,438
                                           -------
            Total minimum lease payments   $13,558
                                           =======

            Rental expense under operating leases was $2,255,  $5,168 and $5,073
      for the  twenty-week  period  ended  December  31,  1995 and  years  ended
      December 31, 1996 and 1997, respectively.

      CONTINGENCIES

            On February 14, 1995, Pitney Bowes filed a complaint against Sudbury
      Systems,  Inc.  ("Sudbury")  in the United States  District  court for the
      District of Connecticut  alleging  intentional  and wrongful  interference
      with Pitney Bowes's plans to sell the Company. The complaint seeks damages
      and a declaratory  judgment  relating to the validity of a patent owned by
      Sudbury entitled "Rapid  Simultaneous  Multiple Access Information Storage
      and Retrieval System" and the alleged infringement thereof by the Company.
      Sudbury  responded by answering  the  complaint  and filing a  third-party
      complaint  against the Company  alleging patent  infringement  and seeking
      preliminary  and  permanent  injunctive  relief  and treble  damages.  The
      third-party  complaint  filed by Sudbury  did not  quantify  the amount of
      damages  sought.  The litigation is in the discovery stage and the Company
      cannot currently make a reasonable  estimate of the amount of damages that
      will be sought by Sudbury. Management believes the Company has meritorious
      defenses  to the claims  against  it.  Consequently,  the  Company has not
      provided  for  any  loss  exposure  in  connection  with  this  complaint.
      Additionally,  regardless of the outcome of this litigation,  Pitney Bowes
      has agreed to defend  this  action and to  indemnify  the  Company for any
      liabilities arising from such litigation.

            The  Company  is  subject  to  federal,  state  and  local  laws and
      regulations concerning the environment,  and is currently participating in
      administrative  proceedings  as a  participant  in a group of  potentially
      responsible  parties in connection  with two third party  disposal  sites.
      These  proceedings are at a preliminary  stage, for which it is impossible
      to reasonably estimate the potential costs of remediation,  the timing and
      extent  of  remedial   actions  which  may  be  required  by  governmental
      authorities, and the amount of the liability, if any, of the Company alone
      or in  relation  to  that of any  other  responsible  parties.  When it is
      possible to make a reasonable  estimate of the  Company's  liability  with
      respect  to such a  matter,  a  provision  will  be  made as  appropriate.
      Additionally,  the Company has  settled  and paid its  liability  at three
      other third party disposal  sites.  At a fourth site, the Company has paid
      approximately  $10  thousand for its share of the costs of the first phase
      of the  clean  up of the  site  and  management  believes  that  it has no
      continuing  material  liability  for  any  later  phases  of the  cleanup.
      Consequently,  management believes that its future liability,  if any, for
      these four sites is not material.  In addition,  regardless of the outcome
      of such  matters,  Pitney  Bowes has agreed to  indemnify  the  Company in
      connection with retained environmental liabilities and for breaches of the
      environmental representations and warranties in the Acquisition Agreement,
      subject to certain limitations.

                                       33
<PAGE>

12.   COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF RISK (CONTINUED)

      CONTINGENCIES (CONTINUED)

            The Company is a defendant  in a number of  additional  lawsuits and
      administrative  proceedings,  none  of  which  will,  in  the  opinion  of
      management,  have a material adverse effect on the Company's  consolidated
      financial position or results of operations.

            The Company  does not believe that the  ultimate  resolution  of the
      litigation, administrative proceedings and environmental matters described
      above  in  the  aggregate  will  have a  material  adverse  effect  on the
      Company's consolidated financial position or results of operations.

13.   SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENT AND SEGMENT
      INFORMATION

            Dictaphone U.S. has fully  and unconditionally  guaranteed the Notes
     (See Note 8). Dictaphone Non-U.S. is not a guarantor of the Notes. Separate
     financial   statements  of  Dictaphone  U.S.  are  not  presented   because
     management has determined that they would not be meaningful to investors in
     the Notes.  Subsequent to December 31, 1997, the Company merged  Dictaphone
     Corporation and Dictaphone Corporation (U.S.).

            The  following  are  the  supplemental  consolidating  statement  of
      operations  and cash flow  information  for the  twenty-week  period ended
      December  31, 1995 and years  ended  December  31, 1996 and 1997,  and the
      supplemental  consolidating  balance sheet  information as of December 31,
      1996 and 1997.

                       DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
             SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
                          TWENTY WEEKS ENDED DECEMBER 31, 1995

<TABLE>
<CAPTION>

                                                  DICTAPHONE        DICTAPHONE        DICTAPHONE      CONSOLIDATING
                                                 CORPORATION            U.S.            NON-U.S.       ADJUSTMENTS      CONSOLIDATED
                                                 -----------        ----------        ----------      --------------    ------------

<S>                                              <C>                  <C>                 <C>           <C>               <C>

     Revenue from:
      Product sales and rentals                   $  ---              $85,633            $15,212         $(4,831)         $ 96,014
      Contract manufacturing sales                   ---               18,892                ---             ---            18,892
      Support services                               ---               31,031              4,655             ---            35,686
                                                  -------             --------            -------         -------          --------
         Total revenues                              ---              135,556             19,867          (4,831)          150,592
                                                  -------             --------            -------         -------          --------

     Costs and expenses:
      Cost of sales, rentals and support
       services                                      ----              83,029             11,499          (4,402)           90,126
      Selling and administrative                      83               54,728              7,563               3            62,377
      Research and development                       ----               4,587                ---             ---             4,587
      Interest expense - net and other             5,472                9,455              1,155             ---            16,082
                                                 --------             --------           --------         -------          --------
         Total costs and expenses                  5,555              151,799             20,217          (4,399)          173,172
                                                 --------             --------           --------         -------          --------
     Equity (loss) earnings                       (4,035)                 ---                ---           4,035              ---
                                                 --------             --------           --------         -------          --------

     (Loss) income before income taxes            (9,590)             (16,243)              (350)          3,603           (22,580)

     Benefit for income taxes                      1,945                6,316                262             183             8,706
                                                 --------              -------           --------          ------          --------

     Net (loss) income                           $(7,645)             $(9,927)           $   (88)         $3,786          $(13,874)
                                                 ========             ========           ========         =======         =========

</TABLE>

                                       34
<PAGE>

13.   SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENT AND SEGMENT
      INFORMATION (CONTINUED)


                   DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
         SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
                          YEAR ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>

                                               DICTAPHONE        DICTAPHONE            DICTAPHONE      CONSOLIDATING
                                              CORPORATION           U.S.                 NON-U.S.        ADJUSTMENTS    CONSOLIDATED
                                              -----------        ----------            ----------      --------------   -----------
<S>                                           <C>                <C>                   <C>              <C>               <C>


     Revenue from:
      Product sales and rentals                $  ---             $174,952                $36,229       $(12,157)        $199,024
      Contract manufacturing sales                ---               40,614                    ---            ---           40,614
      Support services                            ---               81,311                 11,519            ---           92,830
                                               -------            --------                --------      ---------        --------
         Total revenues                           ---              296,877                 47,748        (12,157)         332,468
                                               -------            --------                --------      ---------        --------

     Costs and expenses:
      Cost of sales, rentals and support
       services                                   ---              163,752                 29,101        (11,705)         181,148
      Selling and administrative                  203              125,854                 23,160            ---          149,217
      Research and development                    ---               14,135                    ---            ---           14,135
      Interest expense - net and other          3,830               36,557                  1,158             14           41,559
                                              --------            ---------                -------      --------         --------
         Total costs and expenses               4,033              340,298                 53,419        (11,691)         386,059
                                              --------            ---------                -------      --------         --------

     Equity (loss) earnings                    (7,024)                 ---                    ---          7,024              ---
                                              --------            ---------                -------      --------         --------

     (Loss) income before income taxes        (11,057)             (43,421)                (5,671)         6,558          (53,591)

     Benefit for income taxes                   1,185               16,323                  1,232            191           18,931
                                              --------            ---------                -------      --------         ---------

     Net (loss) income                        $(9,872)            $(27,098)               $(4,439)      $  6,749         $(34,660)
                                              ========            =========               ========      ========         =========

</TABLE>


                                       35

<PAGE>


13.   SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENT AND SEGMENT
      INFORMATION  (CONTINUED)


                   DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
         SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
                          YEAR ENDED DECEMBER 31, 1997

<TABLE>
<CAPTION>

                                             DICTAPHONE         DICTAPHONE       DICTAPHONE     CONSOLIDATING
                                            CORPORATION           U.S.            NON-U.S.        ADJUSTMENTS          CONSOLIDATED
                                            -----------         ----------       ----------      ------------          ------------
<S>                                         <C>                   <C>              <C>              <C>                    <C>

     Revenue from:
      Product sales and rentals              $    ---            $183,200          $32,356         $(12,662)           $ 202,894
      Contract manufacturing sales                ---              42,864              ---              ---               42,864
      Support services                            ---              83,918           10,366              ---               94,284
                                               ------            ---------         --------         --------            ---------
         Total revenues                           ---             309,982           42,722          (12,662)             340,042
                                               ------            ---------         --------         --------            ---------

     Costs and expenses:
      Cost of sales, rentals and support
       services                                   ---             180,501           27,064          (13,133)             194,432
      Selling and administrative                  400             141,349           13,776              ---              155,525
      Research and development                    ---              14,705             ---               ---               14,705
      Interest expense - net and other          4,878              37,233            2,551              ---               44,662
                                              --------           ---------         --------         --------            ---------
         Total costs and expenses               5,278             373,788           43,391          (13,133)             409,324
                                              --------           ---------         --------         --------            ---------
     Equity (loss) earnings                   (11,382)                ---              ---           11,382                  ---
                                              --------           ---------         --------         --------            ---------
     (Loss) income before income taxes        (16,660)            (63,806)            (669)          11,853              (69,282)

     Income tax benefit (expense)               1,319                (156)              87             (190)               1,060
                                              --------            --------         --------         --------            ---------

     Net (loss) income                       $(15,341)           $(63,962)         $  (582)        $ 11,663            $ (68,222)
                                              ========           =========         ========        =========            =========

</TABLE>


                                       36





<PAGE>


13.   SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENT AND SEGMENT
      INFORMATION  (CONTINUED)

<TABLE>
<CAPTION>


                   DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
              SUPPLEMENTAL CONSOLIDATING BALANCE SHEET INFORMATION
                                DECEMBER 31, 1996


                                                 DICTAPHONE          DICTAPHONE      DICTAPHONE      CONSOLIDATING
                                                CORPORATION              U.S.          NON-U.S.      ADJUSTMENTS      CONSOLIDATED
                                                -----------          ----------      ----------      -------------    ------------
<S>                                             <C>                     <C>            <C>              <C>             <C>

     ASSETS
     Current assets:
      Cash                                     $    ---              $  6,569         $ 1,358        $     ---         $  7,927
      Accounts receivable                         9,896                49,259           8,165          (13,619)          53,701
      Inventories                                   ---                48,220           9,919           (1,299)          56,840
      Other current assets                          517                 5,445           3,871              ---            9,833
                                                  ------              -------         -------        ----------         -------
        Total current assets                     10,413               109,493          23,313          (14,918)         128,301

     Note receivable                                ---                17,491             ---          (17,491)             ---
     Investments in subsidiaries                440,601                   ---             ---         (440,601)             ---
     Fixed assets, net                              ---                33,833           3,175              ---           37,008
     Intangibles, net                             2,131               250,872          18,019              ---          271,022
     Deferred financing costs                    14,255                   ---             ---              ---           14,255
     Other assets                                 3,246                48,571           1,919              513           54,249
                                               --------              --------         -------        ----------         -------
     Total assets                              $470,646              $460,260         $46,426        $(472,497)        $504,835
                                               ========              ========         =======        ==========        ========


     LIABILITIES AND STOCKHOLDERS'
     EQUITY
     Current liabilities:
      Accounts payable and
        accrued liabilities                    $ 10,660              $ 40,250         $10,793        $ (13,766)        $ 47,937
      Advance billings                              ---                31,246           3,562              ---           34,808
      Current portion of long-term debt          11,750                   ---             762              ---           12,512
                                               ---------             --------         --------       ----------        --------
        Total current liabilities                22,410                71,496          15,117          (13,766)          95,257
     Long-term debt                             357,005               333,745          18,077         (368,741)         340,086
     Other liabilities                              ---                 9,790             324              ---           10,114
     Stockholders' equity                        91,231                45,229          12,908          (89,990)          59,378
                                               ---------             --------         --------       ----------        --------
     Total liabilities
       and stockholders' equity                $470,646              $460,260         $46,426        $(472,497)        $504,835
                                               =========             =========        ========       ==========        ========

</TABLE>


                                       37

<PAGE>


13.   SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENT AND SEGMENT
      INFORMATION  (CONTINUED)
<TABLE>
<CAPTION>


                   DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
              SUPPLEMENTAL CONSOLIDATING BALANCE SHEET INFORMATION
                                DECEMBER 31, 1997

                                         DICTAPHONE          DICTAPHONE          DICTAPHONE        CONSOLIDATING
                                        CORPORATION             U.S.              NON-U.S.          ADJUSTMENTS        CONSOLIDATED
                                        -----------          ----------          ----------         -------------      ------------
<S>                                         <C>                <C>                 <C>                <C>                <C>

ASSETS

     Current assets:
      Cash                             $    ---             $  8,276                 $ 2,001           $     ---        $  10,277
      Accounts receivable                10,644               64,711                   8,699             (12,115)          71,939
      Inventories                           ---               45,962                   3,645                (828)          48,779
      Other current assets                  ---                7,869                   3,806                 ---           11,675
                                         ------              -------                  -------          ----------       ---------
        Total current assets             10,644              126,818                  18,151             (12,943)         142,670

     Note receivable                        ---               16,942                     ---             (16,942)             ---
     Investments in subsidiaries        464,234                  ---                     ---            (464,234)             ---
     Fixed assets, net                      ---               32,041                   3,290                 ---           35,331
     Intangibles, net                     2,076              211,994                  15,252                 ---          229,322
     Deferred financing costs            10,900                  ---                     ---                 ---           10,900
     Other assets                         4,736               44,395                   2,383                 323           51,837
                                        -------              -------                 -------           ----------       ----------
     Total assets                      $492,590             $432,190                 $39,076           $(493,796)       $ 470,060
                                       ========             ========                 =======           ==========       ==========


     LIABILITIES AND STOCKHOLDERS'
     EQUITY
     Current liabilities:
      Accounts payable and
        accrued liabilities             $10,421              $48,699                 $ 6,602           $ (12,265)       $  53,457
      Advance billings                      ---               34,252                   2,932                 ---           37,184
      Current portion of long-term debt     628                  ---                     167                 ---              795
                                        -------              -------                 -------           ----------       ----------
        Total current liabilities        11,049               82,951                   9,701             (12,265)          91,436
     Long-term debt                     359,328              322,495                  17,935            (356,942)         342,816
     Other liabilities                      ---               10,477                      70                 ---           10,547
     Stockholders' equity               122,213               16,267                  11,370            (124,589)          25,261
                                        -------               -------                -------           ----------       ----------
     Total liabilities
       and stockholders' equity        $492,590             $432,190                 $39,076           $(493,796)       $ 470,060
                                        ========             ========                =======           ==========       ==========


</TABLE>


                                       38
<PAGE>

13.   SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENT AND SEGMENT
      INFORMATION  (CONTINUED)

<TABLE>
<CAPTION>

                   DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
         SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
                      TWENTY WEEKS ENDED DECEMBER 31, 1995

                                                  DICTAPHONE     DICTAPHONE    DICTAPHONE           CONSOLIDATING
                                                  CORPORATION       U.S.         NON-U.S.            ADJUSTMENTS        CONSOLIDATED
                                                  -----------    ----------    ----------           -------------       -----------
<S>                                               <C>               <C>          <C>                <C>                 <C>
Operating activities:
      Net loss                                    $(7,645)       $ (9,927)      $     (88)           $   3,786          $   (13,874)
      Adjustments to reconcile net
        loss to cash provided by (used in)
        operating activities:
      Depreciation and amortization                   924          37,086           1,962                  ---               39,972
      Provision for deferred income taxes          (1,936)         (6,508)           (591)                 ---               (9,035)
      Change in assets and liabilities:
         Accounts receivable                      (10,609)         (9,881)           (246)               8,052              (12,684)
         Inventories                                  ---          16,179             178                  429               16,786
         Other current assets                         ---           5,631            (242)                 (31)               5,358
         Accounts payable and
           accrued liabilities                     10,829          13,305           4,084               (8,198)              20,020
         Advance billings                             ---            (951)           (183)                 ---               (1,134)
         Other assets and other                       541         (18,617)         (3,544)               2,783              (18,837)
                                                  --------        --------      ----------           ----------          -----------
     Cash (used in) provided by
       operating activities                        (7,896)         26,317           1,330                6,821               26,572
                                                  --------        --------      ----------           ----------          -----------

     Investing activities:
      Payment to acquire net assets of
        Dictaphone Corporation                   (454,239)       (429,763)        (35,500)             465,263             (454,239)
      Net investment in fixed assets                  ---            (695)           (110)                 ---                 (805)
                                                 ---------      ----------      ----------           ----------          -----------
     Cash used for investing activities          (454,239)       (430,458)        (35,610)             465,263             (455,044)
                                                 ---------      ----------      ----------           ----------          -----------
     Financing activities:
      Net proceeds from sale of senior
        subordinated notes                        194,000             ---             ---                  ---              194,000
      Borrowings under term loan facility         150,000             ---             ---                  ---              150,000
      Borrowing from promissory notes                 ---         347,509          17,491             (365,000)                 ---
      Borrowings from subsidiary                    6,821             ---             ---               (6,821)                 ---
      Proceeds from sale of common stock           95,000          82,254          18,009             (100,263)              95,000
      Proceeds from sale of preferred stock        15,000             ---             ---                  ---               15,000
      Borrowings from revolving credit
        facility                                   15,000             ---             ---                  ---               15,000
      Repayment under revolving credit
        facility                                      ---         (15,000)            ---                  ---              (15,000)
      Payment of deferred financing costs         (13,699)            ---             ---                  ---              (13,699)
      Repayment of management loans                   113             ---             ---                  ---                  113
      Payment to acquire treasury stock              (100)            ---             ---                  ---                 (100)
                                                  --------      ----------      ----------           ----------          -----------
     Cash provided by (used in) financing
       activities                                 462,135         414,763          35,500             (472,084)             440,314
                                                  --------      ----------      ----------           ----------          ----------

     Effect of exchange rate changes on cash          ---             ---             (26)                 ---                  (26)
                                                  --------      ----------      ----------           ----------          -----------

     Increase in cash                                 ---          10,622           1,194                  ---               11,816

     Cash, beginning of period                        ---             969           1,494                  ---                2,463
                                                  --------      ----------      ----------           ----------          -----------
     Cash, end of period                          $   ---       $  11,591       $   2,688            $     ---           $   14,279
                                                  ========      ==========      ==========           ==========          ===========

</TABLE>
                                       39
<PAGE>

<TABLE>
<CAPTION>



13.   SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENT AND SEGMENT

                   DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
         SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
                          YEAR ENDED DECEMBER 31, 1996



                                                  DICTAPHONE      DICTAPHONE         DICTAPHONE     CONSOLIDATING
                                                  CORPORATION        U.S.             NON-U.S.       ADJUSTMENTS      CONSOLIDATED
                                                  -----------     ----------         ----------     --------------    ------------
<S>                                               <C>              <C>                <C>             <C>                <C>

     Operating activities:
      Net loss                                    $(9,872)         $(27,098)          $ (4,439)       $ 6,749            $ (34,660)
      Adjustments to reconcile net
        loss to cash provided by (used in)
        operating activities:
        Depreciation and amortization               5,388            61,501              4,246            ---               71,135
        Provision for deferred income taxes        (1,310)          (16,323)            (1,052)          (191)             (18,876)
        Change in assets and liabilities:
         Accounts receivable                       (2,387)            1,363                167          4,177                3,320
         Inventories                                  ---             2,346              1,021            466                3,833
         Other current assets                        (517)              273               (204)           (65)                (513)
         Accounts payable and
           accrued liabilities                       (336)           (2,124)               900         (4,112)              (5,672)
         Advance billings                             ---               715               (548)           ---                  167
         Other assets and other                     7,295           (11,249)            (1,438)        (7,024)             (12,416)
                                                   -------          --------          ---------       -------            ---------
     Cash (used in) provided by
       operating activities                        (1,739)            9,404             (1,347)           ---                6,318
                                                   -------          --------          ---------       -------            ---------

     Investing activities:
      Payment for acquisition                      (8,000)              ---                ---            ---               (8,000)
      Net investment in fixed assets                  ---            (5,007)            (1,218)           ---               (6,225)
                                                   -------          --------          ---------       -------            ---------
     Cash used for investing activities            (8,000)           (5,007)            (1,218)           ---              (14,225)
                                                   -------          --------          ---------       -------            ---------

     Financing activities:
      Repayment under term loan facility           (7,750)              ---               ---             ---               (7,750)
      Borrowing from promissory notes              (1,397)            1,250               147             ---                  ---
      Borrowings from subsidiary                   10,669           (10,669)              ---             ---                  ---
      Borrowings from revolving credit
        facility                                   32,000               ---               ---             ---               32,000
      Repayment under revolving credit
        facility                                  (23,000)              ---               ---             ---              (23,000)
      Other                                          (783)              ---             1,079             ---                  296
                                                  --------          --------          --------        -------            ---------
     Cash provided by (used in) financing
       activities                                   9,739            (9,419)            1,226             ---                1,546
                                                  -------           --------          --------        -------            ---------

     Effect of exchange rate changes on cash          ---               ---                 9             ---                    9
                                                  -------           --------          --------        -------            ---------

     Decrease in cash                                 ---            (5,022)           (1,330)            ---               (6,352)

     Cash, beginning of period                        ---            11,591             2,688             ---               14,279
                                                  -------           --------          --------        -------            ---------

     Cash, end of period                          $   ---           $ 6,569           $ 1,358         $   ---            $   7,927
                                                  =======           ========          ========        =======            =========

</TABLE>

                                       40
<PAGE>


13.   SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENT AND SEGMENT
      INFORMATION  (CONTINUED)

<TABLE>
<CAPTION>
                   DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
         SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
                          YEAR ENDED DECEMBER 31, 1997

                                             DICTAPHONE         DICTAPHONE          DICTAPHONE        CONSOLIDATING
                                             CORPORATION            U.S.               NON-U.S.        ADJUSTMENTS      CONSOLIDATED
                                             -----------         ----------          ---------        -------------     -----------
<S>                                          <C>                <C>                 <C>                 <C>                 <C>


Operating activities:
     Net loss                                $(15,341)          $(63,962)            $  (582)             $  11,663        $(68,222)
     Adjustments to reconcile net
      loss to cash provided by (used in)
      operating activities:
      Depreciation and amortization             6,337             58,778               3,400                    ---          68,515
      Provision for deferred income taxes      (1,490)               156                (623)                   190          (1,767)
      Non-recurring charge for digital
        product obsolescence                      ---             13,426               1,476                    ---          14,902
      Change in assets and liabilities:
         Accounts receivable                     (748)           (15,452)             (1,165)                (1,504)        (18,869)
         Inventories                              ---             (8,442)              4,385                   (471)         (4,528)
         Other current assets                     517             (2,424)                 31                    ---          (1,876)
         Accounts payable and
           accrued liabilities                   (239)             8,449              (3,815)                 1,501           5,896
         Advance billings                         ---              3,006                (504)                  ---            2,502
         Other assets and other                11,499            (11,165)                169                (11,499)        (10,996)
                                               -------           --------            --------             ----------       ---------
     Cash provided by (used in)
       operating activities                       535            (17,630)              2,772                   (120)        (14,443)
                                              --------           --------            --------             ----------       ---------

     Investing activities:
      Investment in subsidiary                (35,000)               ---                 ---                 35,000             ---
      Net investment in fixed assets              ---             (4,962)               (937)                   ---          (5,899)
                                              --------           --------            --------             ----------       ---------
     Cash used for investing activity         (35,000)            (4,962)               (937)                35,000          (5,899)
                                              --------           --------            --------             ----------       ---------

     Financing activities:
      Borrowing under term loan facility       62,750                ---                 ---                    ---          62,750
      Repayment under term loan facility      (71,000)               ---                 ---                    ---         (71,000)
      Borrowing from promissory notes          11,250            (11,250)                ---                    ---             ---
      Borrowings from subsidiary                 (549)               549                 ---                    ---             ---
      Proceeds from sale of common stock       35,000             35,000                 ---                (35,000)         35,000
      Borrowings from revolving credit
        facility                               88,600                ---                 ---                    ---          88,600
      Repayment under revolving credit
        facility                              (88,600)               ---                 ---                    ---         (88,600)
      Other                                    (2,986)               ---              (1,103)                   120          (3,969)
                                              --------           ---------           --------             ----------       ---------
     Cash provided by (used in) financing
       activities                              34,465              24,299             (1,103)               (34,880)         22,781
                                              -------            ---------           --------             ----------       ---------
     Effect of exchange rate changes on cash      ---                 ---                (89)                   ---             (89)
                                              -------            ---------           --------             ----------       ---------
     Increase in cash                             ---               1,707                643                    ---           2,350
     Cash, beginning of period                    ---               6,569              1,358                    ---           7,927
                                              -------            ---------           --------             ----------       ---------
     Cash, end of period                     $    ---            $  8,276            $ 2,001              $     ---        $ 10,277
                                             =========           =========           ========             ==========       =========

</TABLE>
                                       41
<PAGE>



14.   RETIREMENT PLANS


            Effective  with the  Acquisition  on August 11,  1995,  the  Company
      established a defined benefit pension plan for all active U.S.  employees.
      Responsibility  for retired U.S.  employees  was retained by Pitney Bowes.
      Certain  employees in other countries are covered under  contributory  and
      non-contributory  defined benefit  pension plans.  The new Dictaphone Plan
      ("Dictaphone Plan") provides for benefits based on employees' compensation
      and years of service.  Company  contributions  are determined based on the
      funding  requirements  of the Employee  Retirement  Income Security Act of
      1974 and other governmental laws and regulations.

            The Company sponsors a defined contribution plan (401K) for domestic
      employees.  In 1997, the Company matched 50% of employee  contributions up
      to 3% of  eligible  compensation,  subject to certain  limitations.  Total
      Company  contributions were $151, $345 and $840 for the twenty-week period
      ended  December  31,  1995 and years  ended  December  31,  1996 and 1997,
      respectively.

            Net  pension  expense for defined benefit plans for the  twenty-week
       period ended December 31, 1995 and years ended December 31, 1996 and 1997
       included the following components:

<TABLE>
<CAPTION>

                                                                                           UNITED STATES
                                                            -----------------------------------------------------------------------
                                                            TWENTY WEEKS ENDED              YEAR ENDED                YEAR ENDED
                                                             DECEMBER 31, 1995           DECEMBER 31, 1996        DECEMBER 31, 1997
                                                            ------------------           -----------------        -----------------
<S>                                                          <C>                          <C>                        <C>

      Service cost -- benefits earned during period              $  995                     $2,157                 $  2,022
      Interest cost on projected benefit obligations                885                      2,127                    2,301
      Actual return on assets                                    (1,014)                    (3,965)                  (2,980)
      Net (deferral) and amortization                              ---                       1,342                     (231)
                                                                  ------                     ------                  -------
      Net periodic defined benefit pension expense               $  866                     $1,661                  $ 1,112
                                                                  ======                     ======                  =======



                                                                                          FOREIGN
                                                                -------------------------------------------------------------------
                                                              TWENTY WEEKS ENDED               YEAR ENDED             YEAR ENDED
                                                               DECEMBER 31, 1995           DECEMBER 31, 1996       DECEMBER 31, 1997
                                                               -----------------           -----------------       -----------------

      Service cost -- benefits earned during period                 $   48                       $  311               $  163
      Interest cost on projected benefit obligations                   274                          831                  896
      Actual return on assets                                         (756)                        (927)              (2,323)
      Net (deferral) and amortization                                  289                         (333)               1,065
                                                                     ------                       ------               ------
      Net periodic defined benefit pension income                   $ (145)                      $ (118)              $ (199)
                                                                     ======                       ======               ======

</TABLE>
                                       42
<PAGE>

14.   RETIREMENT PLANS (CONTINUED)

            The  following   summarizes   amounts   included  in  the  Company's
      consolidated balance sheet and the funded status of the Company's U.S. and
      foreign defined benefit plans at December 31, 1996 and 1997:

                                                       UNITED STATES
                                                  -----------------------------
                                                        DECEMBER 31,

                                                    1996          1997
                                                    ----          ----
      Actuarial present value of:
         Vested benefits..................         $22,099       $27,496
                                                   -------       -------
         Accumulated benefit obligations..         $25,461       $31,527
                                                   -------       -------
      Projected benefit obligations.......         $31,968       $38,323
                                                   -------       -------
      Plan assets at fair value, primarily stocks
        and bonds, adjusted by:...........         $31,517       $37,037
         Unrecognized net loss (gain).....          (5,393)      (5,671)
         Unrecognized net asset...........             ---          ---
         Unamortized prior service costs from
           plan amendments................             ---          ---
                                                   -------       ------
      Net pension liability ..............         $ 5,844       $6,957
                                                   =======       ======

      The assumptions used in determining
        pension  costs and funded status for
        defined benefit plans is as follows:
      Discount rate.......................            7.50%        7.00%
      Rate of increase in future
        compensation levels...............            4.75%        4.75%
      Expected long-term rate of return
         on plan assets...................            9.50%        9.50%

                                                           FOREIGN
                                                     -------------------
                                                         DECEMBER 31,

                                                    1996          1997
                                                    ----          ----
      Actuarial present value of:
         Vested benefits..................         $10,938       $10,953
                                                   -------       -------
         Accumulated benefit obligations..         $10,938       $10,953
                                                   -------       -------
      Projected benefit obligations.......         $12,161       $11,859
                                                   -------       -------
      Plan assets at fair value, primarily
         stocks and bonds,adjusted by:....         $13,041       $14,917
         Unrecognized net loss............           1,551          667
         Unrecognized net asset...........            (707)        (989)
         Unamortized prior service costs
            from plan amendments..........             664          ---
                                                   -------       ------
      Net pension liability (asset).......         $(2,388)      $(2,736)
                                                   =======       =======

      The assumptions used in determining
          pension costs and funded status for
          defined benefit plans is as follows:
      Discount rate.......................         7.75 - 8.25%    7.00 - 7.25%
      Rate of increase in future
          compensation levels.............         5.50 - 6.00%    5.00 - 6.00%
      Expected long-term rate of return
          on plan assets.................          9.00 - 9.50%    9.00 %

                                       43
<PAGE>

  15.   POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS

            The Company  provides  certain  postretirement  health care and life
      insurance  benefits  for  qualifying  employees  in the United  States and
      Canada.  Substantially  all of these  employees  may become  eligible  for
      coverage.  Most retirees  outside the United States and Canada are covered
      by government sponsored and administered programs.

            This  obligation  was  determined by application of the terms of the
      postretirement  health care and life insurance plan together with relevant
      actuarial  assumptions.  These  assumptions  as of  December  31, 1996 and
      December 31, 1997 for years then ended were as follows:

                                                            1996          1997
                                                            ----          ----
            Discount rate                                   7.50%         7.00%
            Initial health care cost trend rate            10.75%         9.75%
            Ultimate health care cost trend rate            5.75%         5.75%
            Year in which ultimate trend rate achieved     2001           2001

            An  increase  in assumed  health care trend rates of 1% in each year
      would  increase  aggregate  service and  interest  costs by $167 and would
      increase  the  December  31,  1997  accumulated   postretirement   benefit
      obligation by $1,177.

            The  Company's  total  net  postretirement  benefit  costs  for  the
      twenty-week  period ended  December 31, 1995 and years ended  December 31,
      1996 and 1997 consisted of the following components:

<TABLE>
<CAPTION>

                                                           TWENTY WEEKS
                                                              ENDED                  YEAR ENDED             YEAR ENDED
                                                           DECEMBER 31, 1995      DECEMBER 31, 1996      DECEMBER 31, 1997
                                                           -----------------      -----------------      ------------------
<S>                                                          <C>                       <C>                  <C>

      Service cost-benefits earned during the period       $  340                     $  664                $  630
      Interest cost on accumulated postretirement
       benefit obligations                                    206                        630                   685
      Net deferral                                             (2)                        26                    (3)
                                                            ------                    ------                ------
      Net periodic postretirement benefit costs            $  544                     $1,320                $1,312
                                                            ======                    ======                ======

</TABLE>

            Postretirement  benefits  are paid by the Company as  incurred.  The
      following summarizes the status of these benefits at December 31, 1996 and
      1997:

                                                               DECEMBER 31,
                                                            -----------------
                                                           1996         1997
      Accumulated postretirement benefit obligations:
         Retirees and dependents                          $   71       $  632
         Fully eligible active plan participants           1,232        1,380
         Other active plan participants                    8,216        8,976
         Unrecognized net (loss) gain                       (929)      (1,272)
         Unrecognized prior service credit                   ---            6
                                                           ------      -------
      Accrued postretirement benefits                     $8,590       $9,722
                                                          ======       ======


                                       44

<PAGE>










INDEPENDENT AUDITORS' REPORT



Board of Directors and Stockholders
Dictaphone Corporation

We have audited the accompanying combined statements of income and cash flows of
Dictaphone   Corporation  and  its  related  affiliated   Dictaphone   companies
(Predecessor  Company) for the 32 week period  ended August 11, 1995.  Our audit
also included the financial  statement schedule as of and for the 32 week period
ended August 11, 1995 listed in the Index at Item 14. These financial statements
and the financial  statement  schedule are the  responsibility  of the Company's
management.  Our  responsibility  is to  express  an  opinion  on  the  combined
financial statements and financial statement schedule based on our audit.

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

In our opinion,  such  combined  financial  statements  present  fairly,  in all
material  respects,  the  combined  results  of  operations  and  cash  flows of
Dictaphone   Corporation  and  its  related  affiliated   Dictaphone   companies
(Predecessor Company) for the 32 week period ended August 11, 1995 in conformity
with  generally  accepted  accounting  principles.  Also,  in our opinion,  such
financial  statement  schedule as of and for the 32 week period ended August 11,
1995,  when  considered in relation to the basic combined  financial  statements
taken as a whole,  presents fairly in all material  respects the information set
forth therein.

As  described  in Note 1,  Dictaphone  Corporation  and its  related  affiliated
Dictaphone companies  (Predecessor Company) were sold to Dictaphone  Corporation
(Successor Company).



/s/ Deloitte & Touche LLP

Stamford, Connecticut
February 22, 1996

                                       45
<PAGE>






                   DICTAPHONE CORPORATION (PREDECESSOR COMPANY)

                           COMBINED STATEMENT OF INCOME
                              (Dollars in thousands)



                                                    32 WEEKS ENDED
                                                    AUGUST 11, 1995
                                                    ---------------
   Revenue from:
      Sales                                            $128,264
      Sales to Pitney Bowes Inc.                         18,575
      Rentals                                             1,253
      Support services                                   54,011
                                                       ---------
         Total revenue                                  202,103
                                                       ---------

   Cost and expenses:

      Cost of sales and support services                 90,237

      Cost of sales to Pitney Bowes Inc.                 17,119

      Cost of rentals                                       282

      Selling and administrative                         60,404

      Research and development                            7,004
                                                        --------
   Total cost and expenses                              175,046
                                                        --------

   Operating profit                                      27,057

   Interest income                                       (1,400)

   Income before income taxes and
     effect of changes in accounting                     28,457

   Provision for income taxes                            11,398
                                                        ---------
   Net income                                           $17,059
                                                        =========




             See accompanying notes to combined financial statements.

                                       46
<PAGE>


                  DICTAPHONE CORPORATION (PREDECESSOR COMPANY)

                         COMBINED STATEMENT OF CASH FLOW
                             (Dollars in thousands)




                                                             32 WEEKS ENDED
                                                             AUGUST 11, 1995
                                                             ---------------
Cash flows from operating activities:
   Net income                                                 $  17,059
   Adjustments to reconcile net income to net cash
     provided by (used in) operating activities:
      Depreciation and amortization                               4,931
      Increase (decrease) in deferred income taxes                  ---
      Changes in assets and liabilities:
         Accounts receivable                                     (1,304)
         Inventories                                             (7,190)
         Other current assets and prepayments                    (9,945)
         Accounts payable and accrued liabilities                 2,056
         Advance billings                                         2,719
         Other assets and other                                  (4,318)
                                                                 -------
         Net cash provided by operating activities                4,008
                                                                 -------

Cash flows from investing activities:
   Net investment in fixed assets                               (5,538)

Cash flows from financing activities                               ---

Effect of exchange rate changes on cash                             77
                                                                -------

Net cash flow financed by Pitney Bowes Inc.                    $(1,453)
                                                               ========

SUPPLEMENTAL CASH FLOW INFORMATION:

Interest paid                                                  $    8
                                                               =======
Income taxes paid                                              $13,454
                                                               =======






             See accompanying notes to combined financial statements.


                                       47
<PAGE>


                  DICTAPHONE CORPORATION (PREDECESSOR COMPANY)

                     NOTES TO COMBINED FINANCIAL STATEMENTS
                (Dollars in thousands or as otherwise indicated)



1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         BASIS  OF  PRESENTATION.  On April  25,  1995,  Dictaphone  Corporation
     (Successor Company) (the "Company") entered into a Stock and Asset Purchase
     Agreement, as amended August 11, 1995 (the "Acquisition  Agreement"),  with
     Pitney  Bowes Inc.  ("Pitney  Bowes")  for the  purpose of  acquiring  (the
     "Acquisition")  Dictaphone  Corporation,  the U.S. Dictaphone subsidiary of
     Pitney Bowes ("Dictaphone U.S. (Predecessor  Company)") and certain foreign
     affiliates  ("Dictaphone Non-U.S.  (Predecessor  Company)") as set forth in
     the  Acquisition  Agreement.  Dictaphone  U.S.  (Predecessor  Company)  and
     Dictaphone Non-U.S.  (Predecessor  Company) are collectively referred to as
     the  "Predecessor  Company".  Effective  August 11, 1995,  the  Predecessor
     Company was sold to the Company.

         COMBINATION. The combined financial statements  include the combination
     of the  following  entities:  Dictaphone  U.S.  (Predecessor  Company)  and
     Dictaphone Non-U.S.  (Predecessor Company) (the latter of which consists of
     Dictaphone Canada Ltd/Ltee ("Dictaphone  Canada"),  Dictaphone Company Ltd.
     ("Dictaphone U.K."),  Dictaphone  Deutschland GmbH ("Dictaphone  Germany"),
     Dictaphone   Netherlands  BV  ("Dictaphone   Netherlands")  and  Dictaphone
     International A.G.  ("Dictaphone  Switzerland")).  All Predecessor  Company
     intercompany transactions have been eliminated.  See Note 5 to the combined
     financial statements.

         CASH AND CASH EQUIVALENTS.  Cash equivalents include short-term, highly
     liquid  investments  with a maturity  of three  months or less from date of
     acquisition.   The  Company   places  its  temporary  cash  and  short-term
     investments  with  financial  institutions  and limits the amount of credit
     exposure  with any one  financial  institution.  Dividends of $12.3 million
     were paid to Pitney  Bowes during the  thirty-two  week period ended August
     11, 1995 out of the net cash flow available to Pitney Bowes in the combined
     statement of cash flows.

         COMPUTER SOFTWARE  DEVELOPMENT COSTS. The Company  capitalizes  certain
     software costs in accordance  with the provisions of Statement of Financial
     Accounting Standards No. 86, "Accounting for the Costs of Computer Software
     to be  Sold,  Leased  or  Otherwise  Marketed".  No  amortization  of  such
     capitalized  costs,  approximately  $2.6 million as of August 11, 1995, has
     been recorded as the related  products have not yet been made available for
     sale.

         RENTAL  ARRANGEMENTS AND ADVANCE BILLINGS.  The Company rents equipment
     to its customers under short-term rental agreements,  generally for periods
     of  three  to  five  years.  Charges  for  maintenance  contracts  (support
     services) are billed in advance; the related revenue is included in advance
     billings and taken into income as earned.

         REVENUE.  For dictation systems and communications  recording equipment
     that have  technical  installation  requirements,  the  Company  recognizes
     revenue upon installation which is when all of its contractual  obligations
     have been  satisfied.  Revenue for all other  products is  recognized  upon
     shipment.

         COSTS AND  EXPENSES.  Operating  expenses  of field  sales and  service
     offices which represent the cost of support  services  revenue are included
     in cost of sales.



                                       48
<PAGE>


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         INCOME TAXES.  The  Company's  U.S.  taxable  income is included in the
     consolidated  federal and certain state income tax returns of Pitney Bowes.
     The Company computes its provision for taxes on a separate company basis.

         The deferred tax  provision is determined  under the liability  method.
     Deferred tax assets and  liabilities  are  recognized  based on differences
     between the book and tax bases of assets and  liabilities  using  presently
     enacted tax rates.  The provision for income taxes is the sum of the amount
     of income tax paid or payable to Pitney Bowes for the year as determined by
     applying the  provisions of enacted tax laws to the taxable income for that
     year and the net  change  during  the year in the  Company's  deferred  tax
     assets and liabilities.

         Deferred taxes on income result principally from expenses not currently
     recognized for tax purposes and the excess of tax over book depreciation.

         It has not been  necessary to provide for income taxes on $41.5 million
     of cumulative undistributed earnings of subsidiaries outside the U.S. These
     earnings will be either indefinitely  reinvested or remitted  substantially
     free of additional tax. Determination of the liability that would result in
     the  event  all  of  these  earnings  were  remitted  to  the  U.S.  is not
     practicable.  It is  estimated  however,  that  withholding  taxes  on such
     remittance would approximate $3.4 million.

         FOREIGN  CURRENCY  TRANSLATION.  Assets and liabilities of subsidiaries
     operating  outside the U.S. are translated at rates in effect at the end of
     the period,  and  revenues and expenses  are  translated  at average  rates
     during the period.  The functional  currency for each foreign subsidiary is
     its  local  currency.   Net  deferred  translation  gains  and  losses  are
     accumulated in stockholders' equity.

         The Company enters into foreign  exchange  contracts for purposes other
     than trading  primarily to minimize its risk of loss from  fluctuations  in
     exchange  rates  on  the  settlement  of  firm  and  budgeted  intercompany
     receivables  and payables  arising in connection with transfers of finished
     goods inventories between affiliates as well as certain intercompany loans.
     Gains and losses on foreign exchange  contracts  entered into as hedges are
     deferred and recognized as part of the cost of the underlying  transaction.
     Gains and losses related to changes in the value of  speculative  contracts
     are recognized in income  currently.  At December 31, 1994, the Company had
     approximately  $2.4  million of  foreign  exchange  contracts  outstanding,
     maturing through 1995, to buy or sell various currencies.  Risks arise from
     the  possible  non-performance  by  counterparties  in meeting the terms of
     their  contracts and from  movements in securities  values and interest and
     exchange rates. However, the Company does not anticipate non-performance by
     the  counterparties as they are composed of major  international  financial
     institutions.  Maximum  risk of loss on these  contracts  is limited to the
     amount of the difference  between the spot rate at the date of the contract
     delivery and the contracted rate.

         Foreign  currency  transaction  gains and (losses) were not significant
     for the thirty-two week period ended August 11, 1995.

2.   RELATED PARTY TRANSACTIONS

         The Company  arranges  financing for certain of its products  primarily
     through Pitney Bowes Credit  Corporation  ("PBCC") in the U.S., and leasing
     subsidiaries  in Canada and the U.K.,  all  wholly  owned  subsidiaries  of
     Pitney  Bowes.  Sales to finance  subsidiaries  were $13.2  million for the
     thirty-two weeks ended August 11, 1995. The Company  recognizes  revenue on
     sales to PBCC  consistent  with its revenue  recognition  policy in Note 1.
     Historically,  Dictaphone purchased and sourced second-hand/used  equipment
     from PBCC.  The inventory  purchased was in turn  profitably  remarketed by
     Dictaphone.  In January  1995,  the Company paid $11.2  million to PBCC for
     equipment  that will become  available to Dictaphone,  principally  through
     1998.  This amount is reflected  in other  assets on the  combined  balance
     sheet and will be  reclassified  to inventory  as the related  equipment is
     received by the Company.  On a quarterly  basis the Company  evaluates  the
     future recoverability of the remaining asset.

                                       49
<PAGE>

2.   RELATED PARTY TRANSACTIONS (CONTINUED)

         The Company  manufactures  selected  printed  circuit boards for Pitney
     Bowes at its Melbourne,  Florida facility.  All printed circuit boards sold
     to Pitney Bowes are sold at prices substantially  equivalent to those which
     have been or would have been realized by third  parties.  Although there is
     no  obligation  on behalf of Pitney  Bowes for  minimum  order  quantities,
     prices are  guaranteed  at specified  levels not exceeding  current  prices
     through 1998.

         The Company earns  interest  income from its investment in and loans to
     affiliates of Pitney Bowes. Interest rates charged are reflective of market
     rates  which would have been  realized  by  unrelated  third  parties.  The
     interest earned from these  affiliates of Pitney Bowes was $1.1 million for
     the thirty-two week period ended August 11, 1995.

         Certain of the  Company's  expenses  are  allocated  to and from Pitney
     Bowes.  Expenses  allocated  to  Pitney  Bowes for  administrative  support
     services  relate to corporate  officers'  salary,  rent,  usage of computer
     systems,  invoice processing and certain product refurbishment performed at
     the Company's Melbourne facility.  Rent is allocated based on actual square
     footage used;  computer and invoice processing is allocated based on actual
     computer  usage;  and officers'  salaries are allocated  based on estimated
     time  dedicated to other  divisions.  Expenses  allocated from Pitney Bowes
     consist primarily of insurance program costs,  which are allocated based on
     loss experience and exposure.  Management  believes that the allocations to
     and from Pitney Bowes are  reasonable and reflect the actual costs incurred
     to provide  these  services.  Expenses of the Company  allocated  to Pitney
     Bowes totaled $.8 million for the thirty  two-week  period ended August 11,
     1995.  Expenses  charged to the Company  from  Pitney  Bowes  totaled  $1.2
     million for the thirty-two weeks ended August 11, 1995. Management believes
     that, if the Company were to operate as an independent  entity, the Company
     would  expect to  initially  incur  approximately  $0.5 million per year of
     additional  operating  expenses.  However,  as  a  result  of  the  planned
     transaction,   Dictaphone  will  no  longer  provide  the  above  mentioned
     administrative support services to Pitney Bowes.  Accordingly,  the related
     credits ($.8 million for the thirty-two  week period ended August 11, 1995)
     which  were  previously  offset  against  operating  expenses  will  not be
     generated in the future.

         The Company  leases  space to Pitney  Bowes at its  Melbourne,  Florida
     facility. The rental rates charged to Pitney Bowes are reflective of market
     rates which would have been realized by unrelated third parties. The rental
     income  associated with this arrangement is approximately  $0.1 million per
     year pursuant to a lease expiring in the year 2000.

3.   TAXES ON INCOME

         The provision for income taxes consists of the following:

                                      32 WEEKS ENDED
                                      AUGUST 11, 1995
                                      ---------------
         Current:
            Federal                   $ 7,388
            State                       1,992
            Foreign                       548
                                      --------
               Total                    9,928
                                      ========

         Deferred:                      1,470
                                      --------
            Total                     $11,398
                                      ========


                                       50

<PAGE>

3.   TAXES ON INCOME (CONTINUED)

         The  reconciliation  between  the  provision  for income  taxes and the
     provision  for  income  taxes  at the  U.S.  federal  statutory  rate is as
     follows:

                                                32 WEEKS ENDED
                                                AUGUST 11, 1995
                                               ----------------
     PERCENT OF PRETAX INCOME
         U.S. federal statutory rate                35.00%
         State and local income taxes                4.55%
         Other                                       0.50%
                                                    ------
         Effective income tax rate                  40.05%
                                                    ======

4.   NET STOCKHOLDERS' EQUITY

         The changes in net stockholders' equity were as follows:

<TABLE>
<CAPTION>

                                                                           CAPITAL IN                       CUMULATIVE
                                             PREFERENCE       COMMON        EXCESS OF        RETAINED       TRANSLATION
                                               STOCK          STOCK         PAR VALUE        EARNINGS       ADJUSTMENTS
                                             ----------       ------        ---------        --------       -----------
<S>                                             <C>            <C>             <C>           <C>            <C>

     Balance, December 31, 1994               $   600         $  270        $113,777          $79,170          $4,284
     Net income                                   ---            ---             ---           17,059             ---
     Dividends paid to Pitney Bowes Inc.          ---            ---             ---          (12,255)            ---
     Stock transfer of Dictaphone Canada          ---             68             130              ---             ---
     Translation adjustments                      ---            ---             ---              ---           1,825
                                               -------         ------       --------          -------          ------
     Balance, August 11, 1995                 $   600         $  338        $113,907          $83,974          $6,109
                                               =======         ======       ========          =======          ======

</TABLE>

5.   RETIREMENT PLANS

         The  Company  has several  defined  benefit  and  defined  contribution
     pension plans covering substantially all employees worldwide.  Benefits are
     primarily based on employees'  compensation  and years of service.  Company
     contributions  are  determined  based on the funding  requirements  of U.S.
     federal and other governmental laws and regulations.

         Total pension  expense was $.5 million for the  thirty-two  week period
     ended August 11, 1995.  Net pension  expense for defined  benefit plans for
     the  thirty-two  week period  ending August 11, 1995 included the following
     components:

                                                            32 WEEKS ENDED
                                                            AUGUST 11, 1995
                                                       -------------------------
                                                       UNITED STATES     FOREIGN
                                                       -------------     -------

      Service cost -- benefits earned during period     $1,005          $  80
      Interest cost on projected benefit obligations     2,423            417
      Actual return on assets                           (6,168)          (553)
      Net amortization (deferral)                        3,219           (154)
                                                        -------         ------
      Net periodic defined benefit pension
          expense (income)                              $  479          $(210)
                                                        =======         ======


                                       51
<PAGE>


5.   RETIREMENT PLANS (CONTINUED)

         The funded status at August 11, 1995 for the Company's  defined benefit
     plans was:

                                                        32 WEEKS ENDED
                                                       AUGUST 11, 1995
                                                 ------------------------------
                                                UNITED STATES      FOREIGN
                                                -------------      ---------
      Actuarial present value of:
         Vested benefits                           $42,212         $ 8,203
                                                    ------         -------
         Accumulated benefit obligations           $45,623         $ 8,203
                                                   -------         -------
      Projected benefit obligations                $51,467         $ 9,297
                                                   -------         -------
      Plan assets at fair value, primarily stocks
        and bonds, adjusted by:                    $55,615         $11,473
         Unrecognized net loss (gain)              (2,835)           1,691
         Unrecognized net asset                    (1,832)          (1,353)
         Unamortized prior service costs from
           plan amendments                          1,080              ---
                                                   ------          -------
                                                   52,028           11,811
                                                   ------          -------
      Net pension asset                            $ (561)         $(2,514)
                                                   ======          =======

      Assumptions for defined benefit plans*:
      Discount rate                                 8.75%        7.75%-8.25%
      Rate of increase in future
          compensation levels                       5.75%        5.5%-6.0%
      Expected long-term rate of return
           on plan assets                           9.50%        9.0%-9.5%
----------

      *  Pension costs are determined  using  assumptions as of the beginning of
         the year  while the  funded  status of the  plans is  determined  using
         assumptions as of the end of the year.

6.   NONPENSION POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS

         The Company provides certain  postretirement  health and life insurance
     benefits for employees.  Full-time  employees electing  retirement who have
     attained  age 60 and  have at least  ten  years  service  are  entitled  to
     postretirement  healthcare  as provided to active  employees on the date of
     retirement.  Life insurance  coverage upon retirement for employees  having
     attained age 60 with at least 10 years of service is provided at 25% of the
     Company  provided amount in effect on the date of retirement,  to a maximum
     of  $10,000  and a minimum  of $2,500.  In the first  quarter of 1993,  the
     Company announced certain changes to its health care plans,  including plan
     cost maximums,  which should  significantly  reduce the ongoing incremental
     impact of FAS 106 on future earnings.

         The Company's total net nonpension postretirement benefit costs for the
     thirty-two  week period  ended August 11, 1995  consisted of the  following
     components:

                                                               AUGUST 11, 1995
                                                               ----------------
     Service cost-benefits earned during the period                  $  334
     Interest cost on accumulated postretirement
        benefit obligations                                             529
     Net deferral                                                      (729)
                                                                     ------
     Net periodic postretirement benefit costs                       $  134
                                                                     ======

                                       52


<PAGE>


6.   NONPENSION POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS (CONTINUED)

         The Company's nonpension  postretirement  benefit plans are not funded.
     The status of the plans was as follows:

                                                         AUGUST 11, 1995
                                                         ---------------
     Accumulated postretirement benefit obligations:
         Retirees and dependents                           $ 7,924
         Fully eligible active plan participants               929
         Other active plan participants                      2,285
         Unrecognized net (loss) gain                        3,684
         Unrecognized prior service credit                   2,881
                                                           -------
     Net periodic postretirement benefit costs             $17,703
                                                           =======

         The  assumed  health  care  cost  trend  rate  used  in  measuring  the
     accumulated postretirement benefit obligations was 11.75% in 1994. This was
     assumed to  gradually  decline to 5.75% by the year 2000 and  remaining  at
     that level  thereafter.  A  one-percentage-point  increase  in the  assumed
     health care cost trend rate would increase the net periodic  postretirement
     health care cost by $0.1  million  for the  thirty-two  week  period  ended
     August 11, 1995.

         The assumed  weighted  average  discount rate used in  determining  the
     accumulated postretirement benefit obligations was 8.75% for the thirty-two
     week period ended August 11, 1995.

7.   COMMITMENTS AND CONTINGENCIES

         On February  14,  1995,  Pitney  Bowes Inc.  filed a complaint  against
     Sudbury Systems,  Inc. in the United States District court for the District
     of Connecticut alleging  intentional and wrongful  interference with Pitney
     Bowes Inc.'s plans to sell  Dictaphone.  The complaint  seeks damages and a
     declaratory  judgment  relating to the validity of Sudbury  Systems  Inc.'s
     claim and the alleged  infringement  by  Dictaphone.  On February 14, 1995,
     Sudbury Systems,  Inc. filed a complaint  against  Dictaphone in the United
     States  District Court for the District of  Massachusetts  alleging  patent
     infringement and seeking  preliminary and permanent  injunctive  relief and
     treble damages.  The complaint filed by Sudbury did not quantify the amount
     of damages  sought.  The litigation is still in preliminary  stages and the
     Company  cannot  currently  make a  reasonable  estimate  of the  amount of
     damages  that  will  be  sought  by  Sudbury.  Management  believes  it has
     meritorious defenses to the complaint against Dictaphone. Consequently, the
     Company has not  provided  for any loss  exposure in  connection  with this
     complaint.  Additionally,  regardless  of the  outcome of this  litigation,
     Pitney  Bowes  Inc.  has  agreed to defend  this  action  and to  indemnify
     Dictaphone  for any  liabilities  arising from such  litigation.  Moreover,
     Pitney Bowes Inc.  believes it will prevail in its actions  against Sudbury
     Systems, Inc.

         On June 23, 1995, a complaint was filed in the United  States  District
     Court for the  Northern  District  of Illinois  by  Failsafe  Disk  Company
     ("Failsafe")  against the Company.  The complaint  alleged that the Company
     violated  Sections 1 and 2 of the Sherman Antitrust Act (the "Sherman Act")
     by preventing  Failsafe from selling 10 through 60 channel  recording tapes
     which,  according  to the  complaint,  are equal in quality to and lower in
     price than 10 through 60 channel  tapes sold by the Company and others.  On
     July 5, 1995,  the  complaint  was served upon the Company.  The  complaint
     sought  damages of $19.2  million,  subject to being  trebled in accordance
     with the provisions of the Sherman Act,  together with Failsafe's costs and
     expenses,  including  reasonable  attorneys' fees.  Discovery only recently
     commenced and the Company is not in a position to fully assess the expected
     outcome of this litigation,  but management of the Company does not believe
     that it has  engaged in any  violations  of the  Sherman Act and intends to
     vigorously contest this litigation.  Although it is not possible to predict
     the outcome of any  litigation  with any  assurance,  the Company  does not
     believe this  complaint is likely to have a material  adverse effect on the
     Company's financial condition and results of operations.


                                       53

<PAGE>

7.   COMMITMENTS AND CONTINGENCIES (CONTINUED)

         The Company is subject to federal, state and local laws and regulations
     concerning   the   environment,   and   is   currently   participating   in
     administrative  proceedings  as a  participant  in a group  of  potentially
     responsible  parties in  connection  with two third party  disposal  sites.
     These proceedings are at a preliminary stage, for which it is impossible to
     reasonably  estimate  the  potential  cost of  remediation,  the timing and
     extent  of  remedial   actions  which  may  be  required  by   governmental
     authorities,  and the amount of liability,  if any, of the Company alone or
     in relation to that of any other responsible  parties.  When it is possible
     to make a reasonable  estimate of the Company's  liability  with respect to
     such a matter, a provision will be made as appropriate.  Additionally,  the
     Company  has  settled  and paid its  liability  at three  other third party
     disposal  sites.  At a fourth  site,  the  Company  has paid  approximately
     $10,000 for its share of the costs of the first phase of the cleanup of the
     site and the Company believes that it has no continuing  material liability
     for any later phases of the  cleanup.  Consequently,  the Company  believes
     that its future liability, if any, for these four sites is not material. In
     addition,  regardless  of the  outcome of such  matters,  Pitney  Bowes has
     agreed to indemnify  Dictaphone in connection  with retained  environmental
     liabilities  and for  breaches  of the  environmental  representations  and
     warranties, subject to certain limitations.

         The  Company is a  defendant  in a number of  additional  lawsuits  and
     administrative  proceedings,   none  of  which  will,  in  the  opinion  of
     management,  have a  material  adverse  effect  on the  Company's  combined
     financial position or results of operations.

         Dictaphone  does not believe that the Sudbury and Failsafe  litigations
     and the environmental  matters  described above in the aggregate,  create a
     material loss exposure to the Company's  financial  position and results of
     operations.

8.   LEASES

         The Company leases certain  factory and office  facilities  under lease
     agreements  extending  from three to  twenty-five  years.  In  addition  to
     factory and office  facilities  leased,  the Company  leases  computer  and
     information  processing  equipment  under lease  agreements  extending from
     three to five years.

         Future minimum lease  payments for operating  leases as of December 31,
     1994 are as follows:

                                                  OPERATING
                                                    LEASES
                                                  ---------
         Years ending December 31:
            1995                                    $ 5,018
            1996                                      2,696
            1997                                      1,639
            1998                                        763
            1999                                        534
            Later years                               3,729
                                                    --------
                 Total minimum lease payments       $14,379
                                                    ========

         Rental  expense  under  operating  leases  was  $3.6  million  for  the
     thirty-two week period ended August 11, 1995.

9.   FAIR VALUE OF FINANCIAL INSTRUMENTS

         The following  methods and  assumptions  were used to estimate the fair
     value of each class of financial instruments:

         CASH, CASH EQUIVALENTS,  ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE.  The
     carrying  amounts  approximate  fair value because of the short maturity of
     these instruments.

                                       54
<PAGE>

9.   FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

         FOREIGN CURRENCY EXCHANGE CONTRACTS. The fair value of foreign currency
     exchange  contracts is obtained from dealer quotes.  These values represent
     the  estimated  amount  the  Company  would  receive  or pay  to  terminate
     agreements  taking into  consideration  current  interest rates, the credit
     worthiness of the  counterparties  and current  foreign  currency  exchange
     rates. The fair value of such contracts was not significant at December 31,
     1994.

10.  SUPPLEMENTAL COMBINING FINANCIAL STATEMENTS AND SEGMENT INFORMATION

         The following are the supplemental  combining  statements of income and
     combining  statements  of cash flows for the  thirty-two  week period ended
     August 11, 1995.


                  DICTAPHONE CORPORATION (PREDECESSOR COMPANY)
                   SUPPLEMENTAL COMBINING STATEMENT OF INCOME
                                 32 WEEKS ENDED
                                 AUGUST 11, 1995


                                  DICTAPHONE  DICTAPHONE   COMBINING
                                     U.S.      NON-U.S.   ADJUSTMENTS  COMBINED
                                  ---------   ----------  -----------  ---------
    Revenue from:
       Sales and rentals           $130,013    $ 23,275    $ (5,196)   $148,092
       Support services              45,074       8,937         ---      54,011
                                   --------    --------    --------    --------
         Total revenue              175,087      32,212      (5,196)    202,103
                                   --------    --------    --------    --------
    Costs and expenses:
       Cost of sales, rentals
         and support services        94,895      17,907      (5,164)    107,638
       Selling and administrative    49,301      11,103         ---      60,404
       Research and development       7,004         ---         ---       7,004
       Interest (income) net            (24)     (1,376)        ---      (1,400)
                                   --------    --------    --------    --------
         Total costs and expenses   151,176      27,634      (5,164)    173,646
                                   --------    --------    --------    --------

    Income before income taxes       23,911       4,578         (32)     28,457
    Provision (benefit)for
        income taxes                  9,921       1,514         (37)     11,398
                                   ---------   ---------   ---------    -------
    Net income                     $ 13,990    $  3,064    $      5     $17,059
                                   =========   =========   =========    =======




                                       55

<PAGE>


10. SUPPLEMENTAL COMBINING FINANCIAL STATEMENTS AND SEGMENT INFORMATION
    (CONTINUED)
<TABLE>
<CAPTION>


                  DICTAPHONE CORPORATION (PREDECESSOR COMPANY)
                  SUPPLEMENTAL COMBINING STATEMENT OF CASH FLOW
                                 32 WEEKS ENDED
                                 AUGUST 11, 1995


                                                      DICTAPHONE       DICTAPHONE      COMBINING
                                                          U.S.           NON-U.S.      ADJUSTMENTS      COMBINED
                                                      ----------       ----------      -----------      --------
<S>                                                      <C>               <C>             <C>         <C>

   Cash flows from operating activities:
      Net income                                     $ 13,990          $ 3,064            $    5         $17,059
      Adjustments to reconcile net
        income to cash provided by
        operating activities:
        Depreciation and amortization                   4,069              862               ---           4,931
        Decrease in deferred income taxes                 ---              ---               ---             ---
        Change in assets and liabilities:
           Accounts receivable                         (1,750)             303               143          (1,304)
           Inventories                                 (8,767)           1,545                32          (7,190)
           Other current assets                        (9,431)            (457)              (57)         (9,945)
           Accounts payable and
             accrued liabilities                        1,531              648              (123)          2,056
           Advance billings                             2,577              142               ---           2,719
           Other assets and other                      (4,016)            (302)              ---          (4,318)
                                                       -------         --------          --------        --------
    Cash provided by operating activities              (1,797)           5,805               ---           4,008
                                                       -------         --------          --------        --------

    Cash flows from investing activities:
      Net investment in fixed assets                   (4,740)            (798)               ---         (5,538)
                                                       --------         -------           -------        --------

    Effect of exchange rate changes on cash                ---              77               ---              77
                                                       --------          -------          --------       --------
    Cash flow available to (financed by)
      Pitney Bowes Inc.                                $(6,537)         $ 5,084           $  ---         $(1,453)
                                                       =======          ========          ========       ========
</TABLE>



                                       56

<PAGE>


                                                                   SCHEDULE II


                             DICTAPHONE CORPORATION

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS



                                  BALANCE AT   CHARGED TO              BALANCE
                                   BEGINNING   COSTS AND              AT END OF
      DESCRIPTION                  OF PERIOD   EXPENSES  DEDUCTIONS    PERIOD
      -----------                  ---------   --------- ----------   ---------


YEAR ENDED DECEMBER 31, 1997
----------------------------
Allowance for doubtful accounts    $1,339      $   72     $  601     $  810

YEAR ENDED DECEMBER 31, 1996
----------------------------
Allowance for doubtful accounts     1,462       1,599      1,722      1,339

20 WEEKS ENDED DECEMBER 31, 1995
--------------------------------
Allowance for doubtful accounts     1,095         785        418      1,462

32 WEEKS ENDED AUGUST 11, 1995
------------------------------
Allowance for doubtful accounts     1,049         618        572      1,095











                                       57
<PAGE>



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

      None.


                                    PART III

ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

      The  following  table sets forth certain  information  with respect to the
persons who are members of the Board of Directors or were executive  officers of
the Company as of March 15, 1998.

NAME                            AGE    POSITION
----                            ---    --------

John H. Duerden.........        57    Chairman,  Chief  Executive  Officer and
                                      President
Albert J. Fitzgibbons, III      52    Director
Emil F. Jachmann........        51    Director
Stephen M. McLean.......        40    Director
Alexis P. Michas........        40    Director
Scott M. Shaw...........        35    Director
Peter P. Tong...........        56    Director
Tim Butler .............        43    Senior      Vice   President  and  General
                                      Manager, Integrated Voice Systems
Joseph Delaney..........        52    Senior   Vice  President, Customer Service
                                      Operations
Ronald A. Elwell........        37    Senior    Vice   President   and   General
                                      Manager,  Communications Recording Systems
Daniel P. Hart..........        39    Senior  Vice   President,   General
                                      Counsel and Secretary
Thomas C. Hodge.........        52    Senior Vice  President, Manufacturing and
                                      Logistics
Robert G. Schwager......        44    Senior Vice President and General Manager,
                                      Integrated Health Systems
Joseph D. Skrzypczak....        42    Senior  Vice  President,   Chief Financial
                                      Officer and Director
Robert E. Trimper.......        59    Senior  Vice  President, International
                                      Operations

      The business  experience of each of the  directors and executive  officers
during the past five years is as follows:

      JOHN H.  DUERDEN  has served as  Chairman,  Chief  Executive  Officer  and
President  of the  Company  since  August  1995.  Mr.  Duerden  served  as Joint
President and Chief  Operations  Officer of the Reebok Brands division of Reebok
International Limited, with responsibility for global sales, finance, operations
and  production  from October 1994 to February 1995. He was a Director of Reebok
International  Limited  from  June  1991  until  April  1995.  Mr.  Duerden  was
previously  President of Worldwide  Operations for Reebok,  from January 1994 to
September  1994  and,  before  that,   President  of  the  Reebok  International
Operations  group of the Reebok Brands  division from October 1992 until January
1994.  Prior to that, Mr. Duerden was President and Chief  Executive  Officer of
the Reebok Brands division from February 1990 to September 1992 and President of
Reebok  International  Operations  from October 1988 to February 1990.  Prior to
joining Reebok,  Mr. Duerden was employed by Xerox Corporation for 20 years in a
variety of corporate and international  management positions.  In February 1997,
Mr. Duerden became a limited partner of Stonington Partners, L.P. ("SPLP"). Mr.
Duerden is a director of Sunglass Hut International, Inc.


                                       58
<PAGE>


      ALBERT J.  FITZGIBBONS,  III has served as a Director of the Company since
August 1995. Mr. Fitzgibbons is a Partner and a Director of Stonington Partners,
Inc.  ("Stonington  Partners"),  a  position  that he has held  since 1993 and a
Partner and a Director of  Stonington  Partners,  Inc. II  ("Stonington  II"), a
position he has held since  1994.  Mr.  Fitzgibbons  has also been a Director of
Merrill  Lynch  Capital  Partners,  Inc.  ("MLCP"),  a private  investment  firm
associated  with Merrill Lynch & Co.,  since 1988. He was a Partner of MLCP from
1993 to 1994 and  Executive  Vice  President  of MLCP  from  1988 to  1993.  Mr.
Fitzgibbons was also a Managing  Director of the Investment  Banking Division of
Merrill Lynch & Co. from 1978 to July 1994.  Mr.  Fitzgibbons is also a Director
of Borg-Warner  Security  Corporation,  Merisel,  Inc.,  United Artists  Theater
Circuit, Inc., U.S. Foodservice, Inc. and a privately held company.

     EMIL F. JACHMANN has served as a Director of the Company since August 1995.
Mr.  Jachmann is President  and Chief  Executive  Officer of Zen Research  Inc.,
which  develops and markets  high  performance  optical  disc drive  technology,
primarily  advanced  detection optics and chip sets. He has held these positions
since January 1995. Mr.  Jachmann was President of EFJ Associates from June 1994
to  January  1995.  From June 1991  until June  1994,  he was  President  of the
Shipping and Weighing  Systems  Division of Pitney Bowes.  Mr. Jachmann was also
President of Dictaphone Canada Ltd. from June 1990 to June  1991.  Mr.  Jachmann
is a director of Paradyne, Inc. and several privately held companies.

     STEPHEN M. MCLEAN has served as a Director of the  Company  since May 1996.
Mr. McLean is a Partner and a Director of Stonington  Partners,  a position that
he has  held  since  1993.  Mr.  McLean  is also a  Partner  and a  Director  of
Stonington  II, a position  he has held since 1994.  Mr.  McLean has also been a
member of the Board of  Directors  of MLCP since 1987.  He was a Partner of MLCP
from 1993 to July 1994 and a Senior  Vice  President  of MLCP from 1987 to 1993.
Mr. McLean was also a Managing  Director of the Investment  Banking  Division of
Merrill Lynch, Pierce, Fenner & Smith Incorporated from 1987 to 1994. Mr. McLean
is a  Director  of CMI  Industries,  Inc.,  Merisel,  Inc.,  Packard  BioScience
Company, Pathmark Stores, Inc. and Supermarkets General Holdings Corporation and
several privately held companies.

      ALEXIS P. MICHAS has served as Director of the Company since August  1995.
Mr.  Michas is the Managing  Partner and a Director of  Stonington  Partners,  a
position that he has held since 1993.  Mr.  Michas is also the Managing  Partner
and a Director of Stonington  II, a position he has held since 1994.  Mr. Michas
has also been a Director of MLCP since 1989.  he was a Partner of MLCP from 1993
to 1994 and Senior Vice President of MLCP from 1989 to 1993. Mr. Michas was also
a Managing  Director of the Investment  Banking  Division of Merrill Lynch & Co.
from 1991 to July 1994 and a Director  in the  Investment  Banking  Division  of
Merrill  Lynch & Co.  from 1990 to 1991.  Mr.  Michas is also a Director of Blue
Bird   Corporation,   Borg-Warner   Automotive,   Inc.,   Borg-Warner   Security
Corporation, Goss Graphics Systems, Inc., Packard BioScience Company and several
privately held companies.

      SCOTT M. SHAW has served as a Director of the Company since  August  1995.
Mr. Shaw is a Principal  of  Stonington  Partners,  a position  that he has held
since  1993.  Mr.  Shaw was an  Associate  of MLCP from 1991 to July 1994 and an
Analyst of MLCP from 1986 to 1989.  Mr.  Shaw was also a Vice  President  of the
Investment Banking Division of Merrill Lynch & Co. from January to July 1994, an
Associate of the Investment Banking Division of Merrill Lynch & Co. from 1991 to
1994, and an Analyst of the Investment  Banking  Division of Merrill Lynch & Co.
from  1986 to 1989.  Mr.  Shaw is also a  Director  of  United  Artists  Theater
Circuit, Inc.

      PETER P. TONG has served as a Director of the Company since February 1997.
Mr. Tong is a Private  Investor.  From January 1996 to May 1996, Mr. Tong served
as the  Co-President of Marquette  Electronics,  Inc., a manufacturer of medical
equipment.  From  1991 to 1996,  he  served  as  President,  Chairman  and Chief
Executive  Officer  of E for M  Corporation.  Mr.  Tong  is also a  Director  of
Marquette  Electronics,  Inc.  and is also on the Boards of Directors of several
privately held companies.

      TIM  BUTLER has  served as Senior  Vice  President  and  General  Manager,
Integrated  Voice Systems since July 1997.  From 1986 to 1997, Mr. Butler served
as Managing Partner of the Merit Group, a private consulting firm.

                                       59

<PAGE>

      JOSEPH  DELANEY  has served as Senior  Vice  President,  Customer  Service
Operations  since  October  1997,  and  as  Vice  President,   Customer  Service
Operations  from June to October 1997.  From January to June 1997,  Mr.  Delaney
served as acting Vice  President of Customer  Service  Operations.  Mr.  Delaney
joined  Dictaphone  Corporation in December 1968 as a service  representative in
Detroit,   Michigan.   Since  that  time  he  has  held  various   positions  of
responsibility  with Dictaphone.  Mr. Delaney served as District Service Manager
in  Detroit,  Michigan  from June 1976 to October  1990 and  served as  Regional
Service Director, Southern Region from November 1990 to January 1997.

      RONALD A. ELWELL has served as Senior Vice President and General  Manager,
Communications  Recording  Systems since October 1997 and as Vice  President and
General Manager,  Communications  Recording Systems from August to October 1997.
From April  1996 to August  1997,  he served as Vice  President,  Marketing  and
Product  Development  for the  Company  and  served as Vice  President,  Product
Development  and Engineering for Dictaphone from January 1996 to April 1996. Mr.
Elwell joined  Dictaphone  Corporation in December 1983.  Since that time he has
held various positions of responsibility  with Dictaphone.  Mr. Elwell served as
District  Manager in  Harrisburg,  Pennsylvania  from 1988 to 1992 and served as
General  Manager of Dictaphone  Canada from 1992 to November 1995. From November
1995  to  January  1996,  he was a Vice  president  in the  Company's  Marketing
department.

      DANIEL P. HART has served as Senior Vice President and General  Counsel of
the Company since October 1997 and Vice President, General Counsel from November
1995 to October  1997.  Mr.  Hart is also  responsible  for the human  resources
department and business development activities. Mr. Hart has served as Secretary
of the  Company  since  November  1995.  From 1993 to 1994,  Mr.  Hart served as
General Counsel of Brooke Group Ltd. and certain of its affiliates and from 1988
to 1993 served as  Associate  General  Counsel of such  companies.  Mr. Hart was
consultant and private investor from 1994 to 1995.

      THOMAS C. HODGE has served as Senior  Vice  President,  Manufacturing  and
Logistics  since October 1997, and as Vice President,  Operations  Manufacturing
for the Company's facility in Melbourne, Florida from June 1989 to October 1997.
Prior to June 1989,  he held  various  positions  throughout  the  manufacturing
facility.  Mr. Hodge  joined  Dictaphone  Corporation  in October  1978,  as the
Production Control Manager.

      ROBERT G.  SCHWAGER  has  served  as Senior  Vice  President  and  General
Manager, Integrated Health Systems since October 1997, and as Vice President and
General  Manager,  Integrated  Health Systems from August to October 1997.  From
October  1995 to August  1997,  Mr.  Schwager  served as Vice  President,  Sales
Operations,   North   America,   and  served  as  Vice   President,   Sales  for
Communications  Recording  Systems  from  February  1994 to  October  1995.  Mr.
Schwager joined Dictaphone  Corporation in 1978 as a Sales Representative in the
Milwaukee  District  Office.  He progressed  through  various  sales  management
positions  to that of  Regional  Sales  Vice  President  in 1988.  In 1989,  Mr.
Schwager  joined  the  Company's  headquarters  staff  as  the  Vice  President,
Marketing.  Mr. Schwager was also  responsible  for the Company's  international
operations from September 1992 to March 1996.

      JOSEPH D. SKRZYPCZAK has been a Director of the Company since August 1995.
Mr.  Skrzypczak has served as Senior Vice President and Chief Financial  Officer
for Dictaphone  Corporation  since October 1997 and served as Vice President and
Chief  Financial  Officer from May 1994 to October  1997.  While serving in such
capacity at Pitney  Bowes,  his  responsibilities  covered  Pitney  Bowes Office
Systems,  which included the Company,  Copier Systems, and Facsimile Systems, in
which capacity he was directly  responsible for all financial and administrative
activities  of the Company.  In May 1989,  Mr.  Skrzypczak  was  appointed  Vice
President,  Finance,  Facsimile  Systems,  from which time his role  expanded to
include  finance  responsibilities  for  Copier  Systems  and  Dictaphone.   Mr.
Skrzypczak  joined Pitney Bowes in 1981 and held various  management  positions.
Prior to joining Pitney Bowes, Mr. Skrzypczak worked for Price Waterhouse. He is
a certified public accountant.

      ROBERT  E.  TRIMPER  has  been  the  Company's   Senior  Vice   President,
International  Operations  since  October  1997,  and served as Vice  President,
International Operations from March 1996 to October 1997. From 1991 to 1996, Mr.
Trimper  served as  President  of Middle  East and Africa  operations  for Xerox
Corporation.  Mr. Trimper served in various other management  capacities  within
Xerox Corporation prior to 1991.

                                       60
<PAGE>

      Messrs. Fitzgibbons, Michas  and  Shaw  serve  as  members  of  the  Audit
Committee and the Compensation Committee (the "Compensation Committee"). Each of
Messrs.  Fitzgibbons,  McLean,  Michas  and Shaw is an  employee  of  Stonington
Partners and serves on the Board of Directors of the Company as a representative
of Stonington.

      The Company's  directors are elected to serve until their  successors have
been elected and  qualified.  Other than Mr.  Jachmann and Mr. Tong who earned a
$25,000  fee in 1997,  no member of the Board  received  any annual  retainer or
meeting  fees.  All  members  of the  Board  of  Directors  are  reimbursed  for
out-of-pocket  expenses  incurred in connection  with meeting  attendance.  Each
officer of the Company serves at the pleasure of the Board of Directors, subject
the terms of any existing employment agreement.

      There are no family  relationships among any of the directors or executive
officers of the Company.

ITEM 11.   EXECUTIVE COMPENSATION

EXECUTIVE COMPENSATION

      The following table sets forth  information  concerning  compensation  for
services  in all  capacities  awarded  to,  earned by or paid to each person who
served as the Company's  President and Chief  Executive  Officer during 1997 and
the four other most highly compensated executive officers of the Company,  whose
aggregate cash and cash equivalent  compensation  exceeded  $100,000 (the "named
executives") during 1997.

<TABLE>
<CAPTION>

                           SUMMARY COMPENSATION TABLE
                                                                                    LONG-TERM COMPENSATION
                                                                                    ----------------------
                                                     ANNUAL COMPENSATION             AWARDS           PAYOUTS
                                        ------------------------------------------  --------          ---------
                                                                     OTHER           SECURITIES       LONG-TERM
  NAME AND                                                           ANNUAL          UNDERLYING     INCENTIVE PLAN    ALL OTHER
PRINCIPAL POSITION              YEAR     SALARY($)    BONUS($)   COMPENSATION(1)($)  OPTIONS(#)       PAYOUTS($)    COMPENSATION($)
------------------              ----     ---------    -------    -----------------   -----------     -------------  ---------------
<S>                             <C>       <C>          <C>        <C>                <C>                <C>            <C>

John H. Duerden                 1997    $985,981     $497,500     $ 95,713              325,000             ---         $172,540(4)
 Chairman, President            1996     660,000      660,000      108,407                  ---             ---          142,024
 and Chief Executive            1995     373,154      327,250(3)   100,390              210,000             ---               33
 Officer(2)

Robert Trimper                  1997      251,102     126,500          ---                5,000             ---            2,902(4)
 Senior VP, International       1996      188,666     141,918(6)       ---               30,000             ---              334
 Operations(5)

Joseph D. Skrzypczak,           1997      239,171     137,500       12,455                  ---             ---           17,047(4)
 Senior VP, Chief               1996      167,607     140,791       11,828                  ---             ---           15,365
 Financial Officer              1995      149,317     118,864(3)    20,873               45,000(7)          ---           26,080

Robert G. Schwager,             1997      199,796      77,500          ---                  ---             ---              837(4)
 Senior VP & General            1996      184,377     106,933          ---                  ---             ---              100
 Manager, Integrated            1995      168,486     106,811(3)     1,940                45,000(7)          ---             100
 Health Systems

Ronald A. Elwell,               1997       191,333     77,500          ---                15,000             ---           2,970(4)
 Senior VP & General            1996       151,389     77,760       88,501                   ---             ---           1,229
 Manager, Communica-            1995        80,225     55,281(3)    34,573                30,000             ---              94
 tions Recording Systems


</TABLE>

                                                    61
<PAGE>


---------------------------
      (1)  The  amounts  reported  in this  column for 1997 and 1996 for each of
           Messrs.  Duerden and Skrzypczak and for 1995 for Messrs.  Skrzypczak,
           Schwager and Elwell  reflect tax gross ups made by the  Company.  The
           amounts  reported  in this  column  for Mr.  Elwell in 1996  includes
           $22,916 in  relocation  expenses  and  $65,585 of tax  gross-up.  The
           amounts  reported  in this  column for Mr.  Duerden in 1995  includes
           $80,084 in  relocation  expenses  and  $20,306 of tax gross ups.  The
           aggregate  value  of the  perquisites  and  other  personal  benefits
           received by each of Messrs. Duerden, Trimper, Skrzypczak and Schwager
           in 1997 and  1996, for  Mr. Elwell  in  1997,  and  each  of  Messrs.
           Skrzypczak,  Schwager  and  Elwell  in 1995  have not been  reflected
           because the amount was below the Securities and Exchange Commission's
           (the  "Commission")  threshold for  disclosure  (i.e.,  the lesser of
           $50,000  or 10% of the  total of  annual  salary  and  bonus for such
           officer).

      (2)  Mr. Duerden became  Chairman,  Chief Executive  Officer and President
           of the Company on August 11, 1995.

      (3)  Includes bonus amounts paid by Pitney Bowes in the following  amount:
           Mr.  Duerden  --  $0;  Mr. Skrzypczak  --  $49,500;  Mr.  Schwager --
           $85,300; and  Mr. Elwell --  $0.

      (4)  The  compensation  reflected  in this column for 1997 is comprised of
           Company   contributions  to  the  Company's  Deferred  Savings  Plan,
           supplemental  contributions under supplemental  benefits arrangements
           and Company paid life insurance premiums. Specifically, these amounts
           for fiscal 1997 were $0, $121,226 and $51,314 for Mr. Duerden;  $858,
           $1,267 and $777 for Mr.  Trimper;  $3,588,  $13,359  and $100 for Mr.
           Skrzypczak;  $737, $0 and $100 for Mr. Schwager;  and $2,870,  $0 and
           $100 for Mr. Elwell.

      (5)  Mr. Trimper became an executive officer of the Company in March 1996.

      (6)  Includes a special one-time sign on bonus in the amount of $50,000.

      (7)  The  number  of  options  granted  in 1995  varies  from the  numbers
           presented in the  Company's  Annual Report on Form 10-K for 1995 as a
           result of the  forfeiture  after  March 31,  1996 of  certain  of the
           options  which  had been  granted  to the name  executives  under the
           Pitney Bowes Stock Option Plan.

STOCK OPTION GRANTS

      The following table sets forth information  regarding grants of options to
purchase  Common Stock during the fiscal year ended December 31, 1997 to each of
the named executives. No stock appreciation rights were granted during 1997.

<TABLE>
<CAPTION>

                              OPTION GRANTS IN 1997

                                INDIVIDUAL GRANTS
                                -----------------
                                                                                                        POTENTIAL REALIZABLE VALUE
                                                                                                             AT ASSUMED ANNUAL
                                     NUMBER OF           PERCENT OF                                        RATES OF STOCK PRICE
                                    SECURITIES          TOTAL OPTIONS                                        APPRECIATION FOR
                                    UNDERLYING           GRANTED TO          EXERCISE                         OPTION TERM (3)
                                     OPTIONS            EMPLOYEES IN         PRICE ($/     EXPIRATION    ---------------------------
                                    GRANTED(#)             1997(1)           SHARE)(2)       DATE           (5%)             (10%)
                                   -----------          ------------         ---------     ----------    --------           --------

NAME
-----
<S>                                 <C>                  <C>                  <C>              <C>          <C>               <C>

John Duerden..................     325,000(4)                59%              $10.00         08/01/07       $5,293,908    $8,429,663
Robert Trimper................       5,000(4)                 1                10.00         08/11/05           81,445       129,687
Joseph D. Skrzypczak..........           ---                ---                  ---              ---              ---           ---
Robert G. Schwager............           ---                ---                  ---              ---              ---           ---
Ronald A. Elwell..............      15,000(4)                 3                10.00         08/11/05          244,334       389,061

</TABLE>

                                       62
<PAGE>

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

(1)   The Company granted options to  purchase  a  total  of  551,500  shares of
      Common Stock in 1997.

(2)   Each of the Company's  stock options were granted at the fair market value
      on the  date of  grant.  The fair  market  value  of the  Common  Stock on
      December  31, 1997 was $10.00 (as  determined  by the  Company's  Board of
      Directors).

(3)   Amounts reported in these columns  represent  amounts that may be realized
      upon exercise of options immediately prior to the expiration of their term
      assuming the specified  compounded  rates of appreciation  (5% and 10%) on
      the Common Stock over the term of the options. These assumptions are based
      on rules  promulgated  by the  Commission and do not reflect the Company's
      estimate of future stock price appreciation.  Actual gains, if any, on the
      stock  option  exercises  and common stock  holdings are  dependent on the
      timing of such  exercise  and the  future  performance  of the  underlying
      common  stock.  There can be no assurance  that the rates of  appreciation
      assumed in this table can be achieved or that the amounts  reflected  will
      be received by the option holder.

(4)   For Mr.  Duerden,  the options granted will vest as to one-third on August
      1, 1998 and as to an additional one-third on each anniversary  thereafter;
      and for Messrs.  Trimper and Elwell,  one-half of the options granted vest
      automatically  over a five year period  and,  of the other  half,  6% were
      retroactively  vested on April 15, 1996, 0% were  retroactively  vested on
      April 15, 1997, and the remaining  will become  eligible for vesting as to
      an  additional  20% on each of April 15,  1998,  1999 and  2000,  with the
      remaining  10%  on  April  15,  2001,  if  the  Company   attains  certain
      predetermined financial performance goals.

OPTION EXERCISES AND YEAR-END VALUE TABLE

      The following table sets forth information regarding the exercise of stock
options  during  fiscal  1997 and the number  and year end value of  unexercised
options  held at  December  31, 1997 by each of the named  executives.  No stock
appreciation rights were exercised by the named executives during fiscal 1997.

                    AGGREGATE OPTION EXERCISES IN FISCAL 1997
                          AND FISCAL 1997 OPTION VALUES

<TABLE>
<CAPTION>

                                                                                                            VALUE OF UNEXERCISED
                                                                           NUMBER OF SECURITIES                IN-THE-MONEY(1)
                                                                           UNDERLYING UNEXERCISED                (OPTIONS)
                                 ACQUIRED ON         VALUE              OPTIONS AT FISCAL YEAR-END (#)        AT FISCAL YEAR-END ($)
                                  EXERCISE (#)      REALIZED ($)         EXERCISABLE/UNEXERCISABLE        EXERCISABLE/UNEXERCISABLE
                                 -------------      ------------        ------------------------------    -------------------------

NAME
----
<S>                               <C>                <C>                    <C>                              <C>

John H. Duerden.........           ---                   ---                    48,300/486,700(2)               $0/$0(4)
Robert E. Trimper.......           ---                   ---                     8,050/26,950(2)                 0/0(4)
Joseph D. Skrzypczak....           ---                   ---                    10,350/34,650(2)                 0/0(4)
                                  4,000                $66,600                       0/0(3)                      0/0(5)
Robert G. Schwager......            ---                  ---                    10,350/34,650(2)                 0/0(4)
                                    ---                  ---                    7,900/0(3)                       214,197/0(5)
Ronald A. Elwell........            ---                  ---                   10,350/34,650(2)                  0/0(4)
                                  1,832                 22,320                       468/0(3)                    11,759/0(5)

</TABLE>

                                       63
<PAGE>

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

(1)   Options  are  "in-the-money"  if the fair market  value of the  underlying
      securities exceeds the exercise price of the options.

(2)   Represents  options  granted  under  the Company's Management Stock Option
      Plan.

(3)   Represents options granted under the Pitney Bowes Stock Option Plan during
      the period  1985  through  1996.  The numbers  have been  adjusted to give
      effect to the 1986, 1992 and 1998 two-for-one stock splits of Pitney Bowes
      stock.

(4)   The amounts set forth  represent the difference  between $10.00 per share,
      the fair  market  value of the Common  Stock  issuable  upon  exercise  of
      options at December 31, 1997 (as  determined  by the Board of  Directors),
      and the exercise price of the option,  multiplied by the applicable number
      of options.

(5)   The amounts set forth  represent the difference  between $44.97 per share,
      the fair market value of Pitney Bowes common stock  issuable upon exercise
      of options at December 31, 1997 and the exercise price of the Pitney Bowes
      option, multiplied by the applicable number of options.


PENSION PLANS

      The Company currently  maintains a  non-contributory  pension plan for all
employees (the "Pension Plan").  As of December 31, 1997, the estimated  pension
benefits  payable to the named  executives  are as set forth below.  The Pension
Plan  provides  monthly  benefits  at age 65 equal to the sum of (i) for service
before January 1, 1988, 0.75% of the participant's  average annual earnings from
1983 through 1987 up to $18,000 plus 1.25% of the  participant's  average annual
earnings from 1983 to 1987 above $18,000  multiplied by the participant's  years
of  credited  service  before  January 1, 1988 and (ii) for each year of service
after January 1, 1988, 1% of the participant's  annual earnings for each year up
to the Social  Security Wage Base (as defined) for that year plus 1.5% of annual
earnings  above the Social  Security  Wage Base for that year.  Annual  earnings
includes overtime pay, incentive pay and bonuses, but excludes reimbursements of
other expense allowances, fringe benefits or moving expenses. Employees' pension
rights vest after five years of service.  Benefits are also available  under the
Pension Plan upon early or deferred  retirement.  The projected  annual  benefit
under the qualified  pension plan at age 65 assuming no future increases in pay,
the social  security  wage base and Internal  Revenue Code (the "Code")  Section
401(a)(17)  limits  and  with  no  provision  for  the  Supplemental   Executive
Retirement Plan ("SERP") for the named  executives is as follows:  Mr. Duerden -
$19,225; Mr. Trimper - $0; Mr. Skrzypczak - $54,544; Mr. Schwager - $73,001; and
Mr. Elwell - $71,495.  The projected annual benefit under the qualified  pension
plan at age 65 assuming a 3% future  increase in pay, the Social  Security  Wage
Base and Code Section  401(a)(17)  limits and with no provision for the SERP for
the named executives is as follows: Mr. Duerden - $23,585; Mr. Trimper - $0; Mr.
Skrzypczak - $78,210; Mr. Schwager - $91,998; and Mr. Elwell - $105,450.

      The following table sets forth the estimated annual benefits, based on the
indicated credited years of service and the indicated average  compensation used
in  calculating  benefits,  assuming  a normal  retirement  at age 65, no future
increases in pay,  the Social  Security  Wage Base and Code  Section  401(a)(17)
limits and with no provision for the SERP implemented by the Company.

                              RETIREMENT PLAN TABLE

                                                YEARS OF SERVICE
                                   ---------------------------------------------
AVERAGE ANNUAL COMPENSATION        15      20        25      30        35
---------------------------       ------  ------  ------   ------    ------


$130,000....................... $24,345  $32,460  $40,575  $48,690  $56,805
 160,000.......................  31,095   41,460   51,825   62,190   72,555



                                       64
<PAGE>


SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

      The Company  adopted the SERP for certain  executive  officers  during the
first  quarter of 1997 with benefits  determined  on a  retroactive  basis as of
January 1, 1996.  Benefits  under the SERP accrue  without regard to limitations
imposed  by Code  Sections  401(a)(17)  and 415 and are  offset  by any  benefit
accrued  under the Pension  Plan.  Participants  rights vest after five years of
service.

EMPLOYMENT AND CONSULTING AGREEMENTS

      On August 9, 1995, the Company  entered into an employment  agreement with
John  Duerden  pursuant  to which  Mr.  Duerden  agreed  to  serve as  Chairman,
President and Chief Executive  Officer of the Company for an initial  employment
term of two years (which term is automatically  extended for additional two-year
terms unless  affirmatively  terminated  by either the Company or Mr.  Duerden).
Pursuant to an amendment to Mr. Duerden's employment agreement, dated January 1,
1997 (as amended,  the  "Employment  Agreement"),  effective as of such date his
annual base salary was  increased  to  $995,000.  In  addition,  Mr.  Duerden is
eligible to receive an annual cash bonus ranging from $497,500 to $995,000 based
upon the attainment of certain personal and budgeted performance  objectives for
the Company as determined by the Board of Directors.

      Mr. Duerden's Employment Agreement also provides that if he terminates his
employment  without  Good Cause (as defined  therein) he will not, for two years
either (i) directly or indirectly, in any capacity, engage or participate in, or
become  employed  by or  under  advisory  or  consulting  or other  services  in
connection with any Prohibited  Business (as  hereinafter  defined) or (ii) make
any  financial  investment,  whether  in the form of equity or debt,  or own any
interest,  directly or indirectly,  in any Prohibited Business.  Notwithstanding
the foregoing,  Mr. Duerden is not restricted  from making any investment in any
company  whose  stock is listed on an American  securities  exchange or actively
traded in the  over-the-counter  market and has sales in excess of $500 million;
provided that (i) such investment does not give Mr. Duerden the right or ability
to control or influence the policy  decisions of any  Prohibited  Business,  and
(ii)  such  investment  does not  create a  conflict  of  interest  between  Mr.
Duerden's  duties  under  the  Employment  Agreement  and his  interest  in such
investment. For purposes of the Employment Agreement "Prohibited Business" means
any dictation  product or  communications  recording  systems  business  located
within,  or  providing  service to any area located  within,  any state or other
jurisdiction  to  which  the  Company  (or  any  of its  subsidiaries)  provides
dictation  products or communications  recording  systems  services,  or located
within, or providing  service to any area located within,  any other area within
the Untied States.

      Pursuant to the Employment Agreement,  if Mr. Duerden is terminated by the
Company without Cause or if he resigns for Good Reason (as defined therein), Mr.
Duerden is entitled  to receive a lump sum  payment  equal to two times his base
salary.  Mr. Duerden is not entitled to receive  severance in connection  with a
termination  for  Cause or  resignation  for  other  than  Good  Reason.  Upon a
termination of employment due to death or Disability (as defined  therein),  the
Company is  required to pay Mr.  Duerden or his  estate,  as the case may be, an
amount  equal to the sum of the  accrued  annual  base  salary as of the date of
death or Disability and the accrued unpaid annual bonus,  if any, for the fiscal
year  prior to the date of death or  Disability  and a  pro-rata  portion of the
annual bonus accrued to the date of such death or Disability.

      Mr. Duerden's Employment Agreement also includes a provision requiring the
Company to establish an annual deferred annuity bonus arrangement (the "Deferred
Annuity Bonus  Arrangement") on his behalf.  The Company  finalized the Deferred
Annuity Bonus  Arrangement in February 1997. The intended  annual benefit to Mr.
Duerden under the terms of the Deferred  Annuity Bonus  Arrangement is an amount
which is estimated to be equal to two-thirds of his average base salary over the
final three years of his employment  (reduced by amounts  receivable by him from
certain other pensions,  profit sharing accounts and Social Security).  Benefits
under the Deferred Annuity Bonus Arrangement are payable to Mr. Duerden annually
and are to be utilized by him for the purchase of an annuity contract chosen and
owned by him. As the owner of the  annuity  contract,  Mr.  Duerden has the sole
power to direct the investment funds held. The actual benefits under the annuity
contract are dependent upon Mr.  Duerden's  investment  decision.  Mr. Duerden's
entitlement to benefits  under the Deferred  Annuity Bonus  Arrangement  vest in
increments  of  one-twelfth  for each full year of  employment  from his date of
hire.

                                       65
<PAGE>

      As part of his  employment  arrangement,  Mr.  Duerden  agreed to purchase
70,000 shares of the Company's Common Stock.  Mr. Duerden  purchased such shares
on  August  11,  1995  with  funds  provided  by  the  Company  pursuant  to  an
interest-bearing  non-recourse loan in the amount of $350,000.  Mr. Duerden also
received  210,000  options  under  the  Plan  (as  hereinafter   defined).   See
"Management  Stock Option Plan".  The 1995 options  granted to, and Common Stock
purchased by, Mr.  Duerden are subject to the same  conditions as apply to other
Management  Investors (as hereinafter  defined),  as described in  "Stockholders
Agreement" (as hereinafter  defined).  Pursuant to the January 1, 1997 amendment
to the  Employment  Agreement,  the Company  granted Mr.  Duerden an  additional
325,000 stock options which options were granted on August 1, 1997 and which are
to vest in one-third  increments on the first three anniversaries of the date of
grant. These new options,  which have an exercise price of $10.00 per share, are
subject to the Plan.

      The Company has entered into a letter  employment  agreement  with each of
Messrs.  Skrzypczak,  Trimper, Schwager and Elwell. The agreements have no fixed
term of employment.  In the event of a termination (including in the case of Mr.
Skrzypczak,  a  voluntary  resignation  any time after  January 1, 1998) for any
reason other than for Cause (as defined),  Mr. Skrzypczak is entitled to receive
severance in an amount  equal to two years' base salary,  payable in a lump sum,
and Mr. Trimper is entitled to receive severance in an amount equal to up to two
years' base salary,  payable in accordance with the Company's  existing  payroll
practices  except in the event that it is  determined  that  severance  will not
continue  beyond twelve months in which event  severance  will be paid in a lump
sum. In addition,  the  Company's  past  practice and policy has been that, if a
Senior Vice President's  employment is terminated without Cause, such officer is
also entitled to receive any earned and unpaid  annual bonus  amounts.  Upon  an
involuntary  termination  of employment by the Company for any reason other than
for Cause or for Substantial Underperformance (as defined), Mr. Schwager and Mr.
Elwell are  entitled to receive  salary  continuation  for a minimum of one year
after such termination of employment.  After the conclusion of the first year of
salary  continuation,  if Messrs.  Schwager  or Elwell  have not  secured  other
employment,  the  Company has agreed to extend,  for a maximum of 12  additional
months,  such  salary  continuation  on a  month-by-month  basis  as long as the
respective officer, using reasonable efforts,  has not secured other employment.
In addition,  Mr. Skrzypczak's bonus for 1998 has been guaranteed to be not less
than fifty percent (50%) of his base salary.

      Each of Messrs. Skrzypczak, Trimper, Schwager and Elwell are also entitled
to receive  outplacement  services and are entitled to  participate  in medical,
dental and life  insurance  plans,  under the same terms and  conditions as when
they were  employed by the  Company,  until the earlier of the  commencement  of
employment  with a subsequent  employer or the twelve month  anniversary  of the
date of termination of employment. Each of Messrs. Skrzypczak, Trimper, Schwager
and  Elwell  are also  entitled  to an  additional  six-month  period of medical
insurance coverage as required under Section 498B of the Code.

      The Company has entered into a  supplemental  compensation  agreement with
Mr. Skrzypczak.  The agreement provides benefits under a supplemental  executive
retirement  arrangement  without regard to any  limitations  under Code Sections
401(a)(17) and 415 and will be reduced by amounts  receivable by Mr.  Skrzypczak
from certain other pensions. Mr. Skrzypczak is 100% vested in his benefits under
this arrangement.

      In November 1995, the Company entered into a consulting agreement with Mr.
Jachmann, a director of the Company. Pursuant to the terms of the agreement, Mr.
Jachmann  agreed to act as a consultant  to the Company for an original  term of
one year,  August 11, 1995 through  August 11, 1996.  Although a new  consulting
agreement  has not been  executed,  the  Company  has  continued  to utilize Mr.
Jachmann's  services  on  a  month-by-month  basis.  In  consideration  for  his
consulting  services,  Mr.  Jachmann  receives  $3,000 per day. During 1997, Mr.
Jachmann  received  no income for  consulting  services.  Mr.  Jachmann  is also
entitled to receive $25,000 for services as a Director.

      In April 1997, the Company entered into a  consulting  agreement  with Mr.
Tong, a Director of the Company.  In consideration for his consulting  services,
Mr. Tong receives $1,500  per  day.  During 1997, Mr. Tong was paid  $6,524  for
consulting services. Mr. Tong is also entitled to receive  $25,000 for  services
as a Director.


                                       66

<PAGE>

MANAGEMENT STOCK OPTION PLAN

      On August 11, 1995, the Company adopted the Management  Stock Option Plan,
which was  amended on April 27,  1996 and on August 1, 1997  (collectively,  the
"Plan"), pursuant to which officers, key employees and non-employee directors of
the Company (the  "Participants")  may be granted  options to purchase shares of
Common  Stock.  The  Compensation  Committee  of the Board of  Directors  of the
Company (the "Committee") has the discretion to select those to whom options are
granted (from among those  eligible) and to determine  the exercise  price,  the
duration and other terms and conditions of the options. The Plan also allows the
Committee to determine  whether options granted are to be "Service  Options" (as
hereinafter defined).  The Committee has the authority to interpret and construe
the Plan and any interpretation or construction of the provisions of the Plan or
of any options granted under the Plan by the Committee are final and conclusive.

      The Plan  provides  that Service  Options will vest  automatically  over a
five-year  period (20% of the  options  vesting  each year) and the  Performance
Options will vest as to specified  percentages  over a five-year period based on
predetermined  financial  performance  goals. As to all outstanding  Performance
Options,  10% were eligible for vesting on April 15, 1996, 20% were eligible for
vesting on April 15, 1997 and the remaining  options become eligible for vesting
as to an  additional  20% on each of April 15,  1998,  1999 and  2000,  with the
remaining  10%  becoming  eligible  for  vesting  on  April  15,  2001.  For all
subsequent Performance Option grants, 20% are eligible for vesting on each April
15, based on the Company's  prior year  performance,  in any case, no later than
August 11,  2005,  provided  that the  applicable  Participant  continues  to be
employed or  continues  as a member of the Board.  Based on the  Company's  1995
performance,  the  Company's  Board  of  Directors  determined  that  60% of the
Performance  Options eligible for vesting on April 15, 1996 would vest. Based on
the Company's 1996 performance, the Company's Board of Directors determined that
0% of the Performance Options eligible for vesting on April 15, 1997 would vest.
Performance  options  which are not vested on each of the April 15 vesting dates
remain  eligible for future vesting by the Board if the Company  reaches certain
enterprise  values. In the event of a Sale or an IPO (as defined therein) of the
Company  prior to August 11,  2000,  all  outstanding  Service  and  Performance
Options will become  immediately  vested and exercisable  prior to the effective
date of such Sale or IPO and appropriate  provisions will be required to be made
by the  Company to permit the  holders of options to realize the value of his or
her options in  connection  with such Sale or IPO to the same extent as if he or
she had exercised such options in full  immediately  prior to the effective date
of such Sale or IPO and participated therein.

      The terms  and  conditions  of an option  grant are set forth in a related
option agreement (the "Option  Agreement").  Options granted under the Plan will
terminate upon the earliest to occur of (a) the tenth anniversary of the date of
the Option  Agreement;  (b) the date on which the Company acquires any shares of
Common Stock or options held by the  Participant in connection with the exercise
of a Put or Call  Right (as  defined  in the  Stockholders  Agreement);  (c) the
six-month  anniversary  of the  date of  death of the  Participant;  (d)  unless
otherwise provided in an agreement between the Participant and the Company,  the
thirty-day anniversary of the date of the Participant's Retirement or Disability
(as defined  therein);  and (e) immediately upon a Participant's  termination of
employment or  directorship  other than due to death,  Retirement or Disability;
provided  that  the  term  of the  option  may be  extended  in the  event  of a
termination  of an  option  under  (c),  (d) or  (e)  above  if the  Participant
exercises a Put Right  prior to the time the option  would  otherwise  terminate
under (c), (d) or (e) above and a  Restriction  (as defined in the  Stockholders
Agreement)  prevents the Company from purchasing the options pursuant to the Put
Right.  Payment of the option exercise price may be made in cash or Common Stock
which has been held by the  Participant  for more than six months.  The Board or
Compensation  Committee  may also,  in its sole  discretion,  cancel  the vested
portion  of an option or  options  held by a  Participant  whose  employment  or
directorship  has  terminated in exchange for a cash payment equal to the excess
of the Fair Value  Price (as  defined in the Plan) of the option over the option
exercise  price,  multiplied  by the number of shares of Common Stock subject to
such cancelled options,  or may cancel any outstanding options in exchange for a
cash  payment to a  Participant  equal to the excess of the Fair Value Price (as
defined in the Plan) of the option over the option exercise price, multiplied by
the number of shares of Common Stock subject to such cancelled  options,  or may
cancel any  outstanding  options in exchange for a cash payment to a Participant
equal to the excess of the fair market value of the  consideration  received for
Stonington   Shares  by  the  Stonington   Investor  (each  as  defined  in  the
Stockholders  Agreement)  in any sale of all of the then issued and  outstanding
Stonington Shares over the exercise price of the option multiplied by the number
of shares of Common Stock subject to such cancelled options.

                                       67
<PAGE>

      The  maximum  number  of shares of Common  Stock  that are  available  for
options under the Plan is currently  1,200,000  shares. If options granted under
the Plan expire or terminate  without having been exercised in full or cancelled
in exchange for a cash or other payment,  the shares covered by such option will
again be available for grant under the Plan. In the event of the  declaration of
a stock  dividend,  or a  reorganization,  merger,  consolidation,  acquisition,
disposition,  separation,  recapitalization,  stock split,  split-up,  spin-off,
combination or exchange of any shares of Common Stock or like event,  the number
or  character of the shares  subject to the option or the exercise  price of any
option may be appropriately  adjusted as deemed  appropriate  by  the Committee.

      The Plan terminates upon, and no options may be granted after,  August 11,
2005,  unless the Plan has sooner  terminated  due to grant and full exercise or
cancellation  of options  covering all the shares  available for grant under the
Plan.  The  Board  may at any time  amend,  suspend  or  discontinue  the  Plan;
provided, however, that the Board may not alter, amend, discontinue or revoke or
otherwise impair any outstanding options granted under the Plan and which remain
unexercised  in a manner  adverse to the holders of the  options,  except if the
written consent of such holder is obtained.

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
           MANAGEMENT

      The following  sets forth  certain  information  regarding the  beneficial
ownership of the Common Stock as of March 15, 1998,  by (i) each person known to
the Company to own beneficially more than 5% of the outstanding shares of Common
Stock, (ii) each director of the Company,  (iii) each named executive,  and (iv)
all executive officers and directors of the Company, as a group.

<TABLE>
<CAPTION>

                                                                               AMOUNT AND NATURE
NAME AND ADDRESS                                                                  OF BENEFICIAL          PERCENTAGE
OF BENEFICIAL OWNER                                                                OWNERSHIP(1)           OF CLASS
-------------------                                                             -----------------        ----------
<S>                                                                              <C>                      <C>

Stonington Capital Appreciation 1994 Fund, L.P.(2).................                  12,803,000             97.7%
   767 Fifth Avenue
   New York, New York  10153
John H. Duerden(3).................................................                     118,300                *
Robert E. Trimper(3)...............................................                      18,050                *
Joseph D. Skrzypczak(3)............................................                      25,350                *
Robert G. Schwager(3)..............................................                      25,350                *
Ronald A. Elwell(3)................................................                      20,350                *
Albert J. Fitzgibbons, III(4)......................................                  12,803,000             97.7%
Emil F. Jachmann(3)................................................                      10,000                *
Alexis P. Michas(4)................................................                  12,803,000             97.7%
Stephen M. McLean(4)...............................................                  12,803,000             97.7%
Peter P. Tong(3)...................................................                      10,000                *
Scott M. Shaw......................................................                        ---                ---
Directors and executive officers as a group ((15) persons)(4)(5)...                  13,110,470            100.0%

</TABLE>

----------------------------
*     Represents beneficial ownership of less than 1% of the outstanding  shares
      of Common Stock.

(1)   Beneficial  ownership  is  determined  in  accordance  with the  rules and
      regulations  of  the  Commission.   In  computing  the  number  of  shares
      beneficially  owned  by a  person  and the  percentage  ownership  of that
      person,  shares of Common Stock  subject to options and  warrants  held by
      that person that are currently  exercisable or exercisable  within 60 days
      of March 15, 1998 are deemed outstanding.  Such shares,  however,  are not
      deemed  outstanding  for the purposes of computing  the  percentage of any
      other  person.  Except as  indicated in the  footnotes to this table,  the
      stockholders named in the table have sole voting and investment power with
      respect to the shares set forth opposite such stockholder's name.

                                       68
<PAGE>

(2)   Stonington is the record holder of 12,653,000  shares, or 97.7%, of Common
      Stock. Stonington also controls, but disclaims beneficial ownership of, an
      additional 150,000 shares purchased by an institutional investor, pursuant
      to the Stockholder Agreement. Stonington is a Delaware limited partnership
      whose limited partners consist of certain institutional investors,  formed
      to invest in  corporate  acquisitions  organized by  Stonington  Partners.
      SPLP, a Delaware limited partnership, is the general partner of Stonington
      with a 1%  economic  interest  in  Stonington.  Except  for such  economic
      interest,  SPLP  disclaims  beneficial  ownership  of the shares set forth
      above.  Stonington II, a Delaware  corporation,  is the general partner of
      SPLP  with a 1%  economic  interest  in SPLP.  Except  for  such  economic
      interest,  Stonington II disclaims  beneficial ownership of the shares set
      forth  above.   Stonington  Partners,  a  Delaware  corporation,   is  the
      management company for Stonington with a 7.4% interest in SPLP. Except for
      such economic interest, Stonington Partners disclaims beneficial ownership
      of the shares set forth  above.  The limited  partners of SPLP are certain
      current and former employees of Stonington  Partners,  entities controlled
      by  certain   employees  of  Stonington  and   individuals   with  special
      relationships to portfolio companies of Stonington.

      Pursuant to a management  agreement with Stonington,  Stonington  Partners
      has full  discretionary  authority  with  respect  to the  investments  of
      Stonington,   including   the  authority  to  make  and  dispose  of  such
      investments.  Stonington  Partners disclaims  beneficial  ownership of the
      shares  set  forth  above.  The  address  of  each  of  the  entities  and
      individuals listed in this footnote is c/o Stonington Partners,  Inc., 757
      Fifth Avenue, New York, New York 10153.

(3)   Includes shares of Common Stock which the directors and executive officers
      have the right to acquire through the  exercise  of options within 60 days
      of March 15, 1998, as follows: Mr. Duerden - 48,300 shares; Mr. Trimper  -
      8,050  shares;  Mr.  Skrzypczak -  10,350  shares;  Mr.  Schwager - 10,350
      shares; Mr. Elwell - 10,350  shares;  Mr.  Jachmann - 10,000  shares;  and
      Mr. Tong - 10,000 shares.  Mr. Duerden is a 3.1% limited partner of SPLP.

(4)   The shares indicated as owned beneficially by Messrs. Fitzgibbons,  Michas
      and McLean are owned or controlled by Stonington and are included  because
      of their ownership of stock as status as directors of Stonington  Partners
      and  Stonington  II.  Messrs.  Fitzgibbons,  Michas  and  McLean  disclaim
      beneficial ownership of such shares.

(5)   Includes  161,470 shares of Common Stock subject to options  granted under
      the Plan which are currently  exercisable  or vest within 60 days of March
      15, 1998.


ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

MANAGEMENT INVESTMENT AND MANAGEMENT LOANS

      In connection  with the  Acquisition,  the Company sold 197,000  shares of
Common  Stock to certain  key  members of the  Company's  Management,  including
Messrs.  Duerden,  Skrzypczak,  and Schwager  for  $1,970,000  (the  "Management
Placement").  The Company financed  $1,273,000 of the Management  Placement with
non-recourse  loans bearing interest at a rate equal to the Adjusted  Eurodollar
Rate (as defined) plus 2.75% in effect for the Revolving  Credit  Facility under
the Credit  Agreement.  Interest is due annually starting in August 1998. Unless
prepaid, all principal, accrued and unpaid interest is due and payable on August
7, 2005. The obligations  under the management  notes are secured by a pledge of
the proportionate  number of shares of Common Stock pursuant to the Stockholders
Agreement. The name of each executive officer of the Company who participated in
the Management  Placement  whose  indebtedness to the Company exceeds $60,000 is
listed below: Mr. Duerden -- $350,000; Mr. Skrzypczak -- $95,600; and Mr.
Schwager -- $140,000.

      In connection with Mr. Trimper's employment arrangement,  the Company sold
Mr. Trimper 10,000 shares of Common Stock pursuant to the Management Placement.

                                       69
<PAGE>

STOCKHOLDERS AGREEMENT

      The Company, Stonington, each of the institutional investors who purchased
$15  million  of  the  Company's  14%  Pay-in-Kind   Perpetual  Preferred  Stock
("Pay-in-Kind  Preferred  Stock"),  together with  warrants to purchase  350,000
shares of Common Stock (the  "Warrants") or $1.5 million of the Company's Common
Stock (the "Equity Private Placement"), and each of Messrs. Duerden, Skrzypczak,
Trimper,  Schwager and Elwell (each a "Stockholder")  entered into a stockholder
agreement (the "Stockholders  Agreement"),  which contains among other terms and
conditions,  provisions  relating to voting rights,  certain  restrictions  with
respect  to the  transfer  of  Common  Stock,  Pay-in-Kind  Preferred  Stock and
Warrants by certain parties thereunder, certain rights related to puts and calls
and certain registration rights granted by the Company with respect to shares of
Common Stock.

      Pursuant to the terms of the Stockholders  Agreement,  Stonington controls
the votes of the Common Stock purchased in the Equity Private Placements.  Under
the  Stockholders  Agreement,  Stonington also has the right to designate at any
time and from time to time at least three  Directors  of the Company and has the
right to remove such designees at any time and from time to time and each of the
Stockholders have agreed to vote in favor of such designation or removal of such
Directors. The Company currently has eight Board members.

      Pursuant  to the terms of the  Stockholders  Agreement,  in the event that
Stonington proposes to sell securities which, in the aggregate, represent 30% or
more of the Common Stock on a fully diluted basis to a third party which is not,
and  following  such  sale  will  not  be,  an  affiliate  of  Stonington,   the
Institutional  Investors  (as  defined in the  Stockholders  Agreement)  and the
Management  Investors (as defined in the  Stockholders  Agreement) will have the
right to elect to  participate  in such sale with respect to a certain number of
shares of Common Stock. In the event that Stonington proposes to sell securities
which,  in the  aggregate,  represent 30% or more of the Common Stock on a fully
diluted  basis to a third party which is not, and  following  such sale will not
be,  an  affiliate  of  Stonington,  Stonington  has the right to  require  each
Management Investor, Institutional Investor and such other stockholders who have
agreed to be bound to the  Stockholders  Agreement to  participate  in such sale
with respect to a certain number of shares of Common Stock.

      Management  Investors are not permitted to sell or transfer  Common Stock,
other than to Permitted  Transferees (as defined in the Stockholders  Agreement)
(i.e.,  family members and, upon the death of a Management  Investor,  to his or
her estate or  executors),  prior to the occurrence of the earlier of August 11,
2000 and an IPO (as defined in the Stockholders Agreement).  Following an IPO, a
Management  Investor  may  transfer  shares in  accordance  with Rule 144 of the
Securities Act of 1933, as amended (the "Securities Act"), or pledge shares to a
financial institution,  subject to applicable Securities Act restrictions. On or
after August 11, 2000,  if an IPO has not  occurred,  Management  Investors  are
permitted to sell Common Stock to third  parties  after first giving the Company
and the other Management Investors right of first refusal for the same number of
shares of Common Stock at the same price.

      Institutional  Investors are  permitted to sell or transfer  Common Stock,
other than to an Affiliate (as defined in the Stockholders Agreement),  prior to
the occurrence of an IPO.  Following an IPO, the  Institutional  Investors will,
with  certain  limited  exceptions,  generally  be permitted to sell or transfer
Common Stock subject to applicable Securities Act restrictions.  The Pay-in-Kind
Preferred  Stock and Warrants are subject to transfer  restrictions as set forth
in the Stockholders Agreement.

      Prior to an IPO,  the Company  will have the right to require a Management
Investor  to  sell  his or  her  shares  of  Common  Stock  and  Options  upon a
termination of employment for any reason.  Such right will be exercisable within
a period of one year after the date of  termination  of employment  (or within a
period of six months in the event of a termination  of employment  due to death)
at a price per share  equal to the higher of Fair Value Price (as defined in the
Stockholders  Agreement) or the original per share  purchase price of a share of
Common Stock and at a price per Option equal to the difference  between the Fair
Value Price or the  original  per share  purchase  price of the shares of Common
Stock  covered  by such  Option and the  exercise  price of the shares of Common
Stock covered by such Option, multiplied by the number of shares of Common Stock
covered by the Option.  Prior to an IPO, the  Management  Investor will have the
right to require the Company to  purchase  his or her shares of Common  Stock or
Options upon termination of employment due to death,  Disability,  Retirement or
Involuntary  Termination (as defined therein).

                                       70
<PAGE>

Such a right will be  exercisable  within a period of 180 days after the date of
termination  of employment due to death,  Disability,  Retirement or Involuntary
Termination  (a) at a price per share of Common  Stock  equal to the Fair  Value
Price of a share of Common Stock; provided,  however, that upon a termination of
employment due to death, Disability or Retirement,  the purchase price per share
will be equal to the  greater of (x) the Fair Value  Price and (y) the  original
purchase price plus interest at the Adjusted  Eurodollar Rate plus 2.75%,  minus
the Applicable  Pricing Discount (as defined in the Credit  Agreement) as of the
date of such death, Disability or Retirement) (in either case, the "Put Price");
and (b) at a price per Option equal to the  difference  between the Put Price of
the shares of Common Stock covered by such Option and the exercise  price of the
shares of Common  Stock  covered  by such  Option,  multiplied  by the number of
shares of Common Stock covered by the Option.

      Stockholders  are,  subject to certain  limitations,  entitled to register
shares of Common Stock in connection with a registration  statement  prepared by
the Company to register  Common Stock.  Stonington  has the right to require the
Company to take such steps as  necessary  to register  all or part of the Common
Stock held by Stonington  under the Securities Act pursuant to the provisions of
the Stockholders Agreement.  The Stockholders Agreement contains customary terms
and provisions with respect to, among other things,  registration procedures and
certain rights to  indemnification  granted by parties  thereunder in connection
with the registration of Common Stock subject to such agreement.

                                       71

<PAGE>


                                     PART IV


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

(A)   1.   FINANCIAL STATEMENTS

           The  financial  statements  are  included  in Part II, Item 8 of this
           Report.

      2.   FINANCIAL  STATEMENT SCHEDULES AND SUPPLEMENTARY INFORMATION REQUIRED
           TO BE SUBMITTED

           Schedule II "Valuation and  Qualifying  Accounts" is included in Part
           II, Item 8 of this Report.

(B) Reports on Form 8-K.

           On November 21, 1997, the Company filed a Current Report on Form 8-K,
      reporting under Item 5 thereof, the amendment of the Company's senior Bank
      Credit  Agreement,  dated as of August 7, 1995, as amended,  to permit the
      Company to issue a new  Tranche C Term Loan,  the  proceeds  of which were
      used to extinguish  outstanding  amounts under the Tranche A Term Loan and
      to prepay certain required principal  payments on the outstanding  amounts
      under the Tranche B Term  Loan;  and  to revise  certain of the  financial
      covenants.  In addition,  the Company sold   additional  shares of  Common
      Stock to certain of its existing stockholders.  The proceeds from the sale
      of the shares were used to repay amounts  outstanding  under the Company's
      Revolving  Credit Facility as well as fees associated with the issuance of
      the Tranche C Term Loan.

(C)   Index to Exhibits.

           The following is a list of all Exhibits filed as part of this Report:

   EXHIBITS                                  DESCRIPTION
-----------                                  ------------
2.1  --       Stock   and  Asset Purchase Agreement, dated as of April 25, 1995,
              between  Pitney Bowes Inc.  and Dictaphone Acquisition Inc. (filed
              as Exhibit  2.1 to  the  Company's  Registration Statement on Form
              S-1, File No. 33-93464, filed on June 14, 1995).
2.2  --       Amendment to  Stock and Asset Purchase Agreement, dated August 11,
              1995, between  Pitney Bowes Inc.  and  Dictaphone Acquisition Inc.
              (filed as  Exhibit 2.2 to  the  Company's Form 10-Q for the fiscal
              quarter ended June 30, 1995, filed on September 21, 1995).
2.3  --       Asset   Purchase   Agreement,   dated  August  11,  1995,  between
              Dictaphone Canada Ltd./Ltee and Dictaphone Canada Acquisition Inc.
              (filed as Exhibit 2.3  to the  Company's  Form 10-Q for the fiscal
              quarter ended June 30, 1995, filed on September 21, 1995).
2.4  --       Stock  Purchase  Agreement,  dated August 11, 1995, between Pitney
              Bowes  Deutschland GmbH and Dictaphone  Acquisition Inc. (filed as
              Exhibit  2.4 to the  Company's  Form 10-Q for the  fiscal  quarter
              ended June 30, 1995, filed on September 21, 1995).
2.5  --       Stock Purchase Agreement, dated August 11,  1995,  between  Walnut
              Street Corp. and Dictaphone Acquisition Inc. (filed as Exhibit 2.5
              to the Company's Form 10-Q for the fiscal  quarter  ended June 30,
              1995, filed on September 21, 1995).
2.6  --       Stock  Purchase  Agreement,  dated August 11, 1995, between Pitney
              Bowes Holdings Ltd. and Dictaphone U.K. Acquisition Limited (filed
              as Exhibit 2.6 to the Company's  Form 10-Q for the fiscal  quarter
              ended June 30, 1995, filed on September 21, 1995).
2.7  --       General  Conveyance   Agreement,  dated  August 11, 1995,  between
              Dictaphone Canada Ltd./Ltee and Dictaphone Canada Acquisition Inc.
              (filed as Exhibit  2.7 to the  Company's  Form 10-Q for the fiscal
              quarter ended June 30, 1995, filed on September 21, 1995).
2.8  --       Assumption   of   Liabilities  Agreement,  dated  August 11, 1995,
              between   Dictaphone   Canada  Ltd./Ltee  and  Dictaphone   Canada
              Acquisition  Inc. (filed as Exhibit 2.8 to the Company's Form 10-Q
              for the fiscal quarter ended June 30, 1995, filed on September 21,
              1995).

                                       72
<PAGE>

   EXHIBITS                                  DESCRIPTION
   --------                                  -----------

2.9     --   Merger  Agreement  between  Dictaphone  U.S.  Acquisition  Inc. and
             Dictaphone Corporation, dated August 11, 1995 (filed as Exhibit 2.9
             to the  Company's  Form  10-Q for the fiscal quarter ended June 30,
             1995, filed on September 21, 1995).
*2.10   --   Agreement and Plan of Merger  between  Dictaphone  Corporation  and
             Dictaphone Corporation (U.S.), dated January 28, 1998.
*2.11   --   Certificate of Ownership and Merger Merging Dictaphone  Corporation
             with and into Dictaphone Corporation (U.S.).
*3(i)   --   Certificate  of Incorporation of Dictaphone  Corporation.
3(ii)   --   By-Laws  of  the Company, adopted  April 20, 1995 (filed as Exhibit
             3.3 to the Company's  Form 10-Q  for  the fiscal quarter ended June
             30, 1995, filed on September 21, 1995).
4.1     --   Indenture,  dated  as  of  August  11,  1995,  among  the  Company,
             Dictaphone   Corporation   (U.S.)  and  Shawmut  Bank  Connecticut,
             National  Association,  Trustee,  relating  to the  11-3/4%  Senior
             Subordinated Notes Due 2005 of the Company (filed as Exhibit 4.1 to
             the Company's Form 10-Q for the fiscal quarter ended June 30, 1995,
             filed on September 21, 1995).
4.2     --   Bank   Credit   Agreement,  dated as of August  7,  1995  among the
             Company,  Dictaphone  Corporation  (U.S.)  and  the  Lenders  party
             thereto  (filed as Exhibit 4.2 to the  Company's  Form 10-Q for the
             fiscal quarter ended June 30, 1995, filed on September 21, 1995).
4.3     --   First  Amendment  to Credit  Agreement,  dated as of June 28, 1996,
             among the Company,  Dictaphone  Corporation  (U.S.) and the Lenders
             party  thereto  (filed as Exhibit  10.13 to the  Company's  Current
             Report on Form 8-K, filed on July 18, 1996).
4.4     --   Second  Amendment to Credit Agreement,  dated as of  June 27, 1997,
             among the Company,  Dictaphone  Corporation  (U.S.) and the Lenders
             party  thereto  (filed as Exhibit  10.15 to the  Company's  Current
             Report on Form 8-K, filed on July 8, 1997).
4.5     --   Third  Amendment  (Technical Correction) to Credit Agreement, dated
             as of July 21, 1997, by and among  Dictaphone Corporation U.S.  and
             the  Lenders  party   thereto   (filed  as  Exhibit  10.19  to  the
             Company's  Form  10-Q for  the fiscal  quarter ended June 30, 1997,
             filed on August 14, 1997).
4.6     --   Fourth   Amendment   to  Credit Agreement, dated as of November 14,
             1997, by  and among  Dictaphone  Corporation (U.S.) and the Lenders
             party  thereto  (filed as  Exhibit 10.20 to  the  Company's Current
             Report on Form 8-K, filed on November 21, 1997).
4.7     --   Credit  Agreement,  dated  as  of  November  14, 1997, by and among
             Dictaphone Corporation and the Lenders a   party thereto (including
             exhibits  and  schedules) (filed  as Exhibit 10.21 to the Company's
             Current Report on Form 8-K, filed on November 21, 1997).
10.1    --   Subscription  Agreements   for  the  Equity   Private   Placements,
             dated as of August 7, 1995 (filed as Exhibit 10.1 to the  Company's
             Form 10-Q for the  fiscal  quarter  ended June 30,  1995,  filed on
             September 21, 1995).
10.2    --   Subscription  Agreement  for  Management  Private Placement,  dated
             as of August 7, 1995 (filed as Exhibit 10.2 to the  Company's  Form
             10-Q for the fiscal quarter ended June 30, 1995, filed on September
             21, 1995).
10.3    --   Stockholders   Agreement,   dated  as  of August 11, 1995 (filed as
             Exhibit  10.3 to the  Company's  Form 10-Q for the  fiscal  quarter
             ended June 30, 1995, filed on September 21, 1995).
10.4    --   Employment  contract of John H. Duerden, dated as of August 9, 1995
             (filed as Exhibit 10.4 to the Company's  Form  10-Q  for the fiscal
             quarter ended June 30, 1995, filed on September 21, 1995). +
10.5    --   Amendment  to  employment  contract  of  John  H.  Duerden,   dated
             January 1, 1997 (filed as Exhibit 10.5 to the Company's  Form  10-K
             for the year ended December 31, 1996, filed on March 31, 1997). +
10.6    --   Employment  contract  of Joseph D. Skrzypczak, dated July 21, 1995,
             (filed as Exhibit 10.6  to  the  Company's Form 10-Q for the fiscal
             quarter ended June 30, 1995, filed on September 21, 1995). +
10.7    --   Employment  contract  of  Robert  G. Schwager,  dated June 19, 1995
             (filed as Exhibit 10.7 to the Company's  Registration  Statement on
             Form S-1, File No. 33-93464, filed on June 14, 1995). +

                                       73

<PAGE>


   EXHIBITS                                  DESCRIPTION
   --------                                  ------------

10.8    --   Management Stock Option Plan of the  Company (filed as Exhibit 10.9
             to the Company's  Form 10-Q for the fiscal  quarter  ended June 30,
             1995,   filed   on  September  21, 1995) and Amendment No. 1 to the
             Management  Stock Option Plan, dated as of April 27, 1996 (filed as
             Exhibit  10.13 to the  Company's  Form 10-Q for the fiscal  quarter
             ended March 31, 1996, filed on May 15, 1996.) +
10.9    --   Supply  Agreement,  dated August 11, 1995,  between the Company and
             Pitney  Bowes  Inc.  (filed  as   Exhibit   10.10 to the  Company's
             Annual  Report on Form 10-K for the fiscal year ended  December 31,
             1995, File No. 33-93464, filed on March 29, 1996).
10.10   --   Leasing   Agreement,   dated   August  10, 1995, between Dictaphone
             Corporation  (U.S.) and Pitney Bowes Credit  Corporation  (filed as
             Exhibit 10.11 to the  Company's  Annual Report on Form 10-K for the
             fiscal year ended December 31, 1995,  File No.  33-93464,  filed on
             March 29, 1996).
10.11   --   Consulting  Agreement, dated November 17, 1995, between the Company
             and  Emil  F.  Jachmann  (filed  as  Exhibit 10.12 to the Company's
             Annual  Report  on Form 10-K for the fiscal year ended December 31,
             1995, File No. 33-93464, filed on March 29, 1996). +
10.12   --   Employment contract  of  Robert  Trimper,  dated  January  24, 1996
             (filed as Exhibit 10.13  to  the Company's Form 10-K for the fiscal
             year ended December 31, 1996, filed on March 31, 1997). +
10.13   --   Form of Letter Agreement  amending the Subscription  Agreement
             for the Management Private  Placement,  dated as of August 7, 1995,
             and the Stockholders Agreement,  dated as of August 11, 1995 (filed
             as Exhibit 10.14 to the Company's  Form 10-Q for the fiscal quarter
             ended March 31, 1996, filed on May 15, 1996). +
10.14   --   Letter  Agreement,  dated  April 11, 1997,  between the Company and
             Peter Tong (filed as Exhibit 10.16 to the  Company's  Form 10-Q for
             the fiscal  quarter  ended June 30,   1997,   filed  on  August 14,
             1997).+
*10.15  --   Stock   Option   Agreement,  dated  August  1, 1997,  between   the
             Company  and  John  H.  Duerden.+
10.16   --   Letter   Agreement,  dated   July   9,   1997,  between  Dictaphone
             Corporation and Mr. Joseph D. Skrzypczak (filed as Exhibit 10.17 to
             the Company's Form 10-Q for the fiscal quarter ended June 30, 1997,
             filed on August 14, 1997).+
10.17   --   Amendment  No.  2  to the Dictaphone  Management  Stock Option Plan
             (filed as Exhibit 10.18 to the  Company's  Form 10-Q for the fiscal
             quarter ended June 30, 1997, filed on August 14, 1997).+
*10.18  --   Letter  Agreement  between  the  Company  and  Ronald Elwell, dated
             November 8, 1996.+
21.1    --   List of subsidiaries of the Company  (filed  as  Exhibit  21 to the
             Company's  Registration  Statement on Form  S-1, File No. 33-93464,
             filed on June 14, 1995).
24      --   Powers of Attorney (included on the signature page hereof).
*27     --   Financial Data Schedule.
------------------------------
*  Filed herewith.
+  Management contract of compensatory arrangement.

                                       74
<PAGE>


                                   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,  in the  City of
Stratford, State of Connecticut, on this 26th day of March, 1998.

                                                  DICTAPHONE CORPORATION

                                         By:     /S/ JOHN H. DUERDEN
                                            ------------------------------------
                                                 John H. Duerden
                                            Chairman, Chief  Executive Officer
                                               and President


      KNOWN BY ALL MEN BY THESE  PRESENTS,  that  each  person  whose  signature
appears below  constitutes  and appoints Scott M. Shaw and Joseph D.  Skrzypczak
his true and lawful  attorney-in-fact and agent, with full power of substitution
and  resubstitution,  for him and in his name,  place and stead,  in any and all
capacities,  to sign any and all  amendments to this Annual Report on Form 10-K,
and to file  the  same,  with  all  exhibits  thereto  and  other  documents  in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent, full power and authority to do and perform each
and every  act and thing  requisite  and  necessary  to be done in and about the
premises,  as fully as he might or  could do in  person,  hereby  ratifying  and
confirming all that said  attorney-in-fact and agent or their or his substitutes
or substitute, may lawfully do or cause to be done by virtue hereof.

      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 indicated on the 26th day of March, 1998.

              SIGNATURE                               TITLE(S)
              ---------                               ---------

      /S/  JOHN H. DUERDEN                Chairman, Chief Executive Officer  and
--------------------------------------    President(Principal Executive Officer)
       John H. Duerden

                                          Senior Vice President, Chief Financial
    /S/  JOSEPH D. SKRZYPCZAK             Officer and Director (Principal
---------------------------------------   Financial and Accounting Officer)
        Joseph D. Skrzypczak


      /S/  ALBERT J. FITZGIBBONS, III                 Director
---------------------------------------
      Albert J. Fitzgibbons, III


      /S/  EMIL F. JACHMANN                           Director
---------------------------------------
          Emil F. Jachmann


      /S/  STEPHEN M. MCLEAN                          Director
---------------------------------------
          Stephen M. McLean


      /S/  ALEXIS P. MICHAS                           Director
---------------------------------------
          Alexis P. Michas


      /S/  SCOTT M. SHAW                              Director
---------------------------------------
            Scott M. Shaw


                                                      Director
---------------------------------------
           Peter P. Tong

                                       75
<PAGE>
<TABLE>
<CAPTION>


                                   EXHIBIT INDEX


                                                                                               SEQUENTIALLY
EXHIBITS                              DESCRIPTION                                              NUMBERED PAGE
--------                              -----------                                              -------------
<S>                                   <C>                                                         <C>

2.1  --       Stock   and  Asset Purchase Agreement, dated as of April 25, 1995,
              between  Pitney Bowes Inc.  and Dictaphone Acquisition Inc. (filed
              as Exhibit  2.1 to  the  Company's  Registration Statement on Form
              S-1, File No. 33-93464, filed on June 14, 1995).
2.2  --       Amendment to  Stock and Asset Purchase Agreement, dated August 11,
              1995, between  Pitney Bowes Inc.  and  Dictaphone Acquisition Inc.
              (filed as  Exhibit 2.2 to  the  Company's Form 10-Q for the fiscal
              quarter ended June 30, 1995, filed on September 21, 1995).
2.3  --       Asset   Purchase   Agreement,   dated  August  11,  1995,  between
              Dictaphone Canada Ltd./Ltee and Dictaphone Canada Acquisition Inc.
              (filed as Exhibit 2.3  to the  Company's  Form 10-Q for the fiscal
              quarter ended June 30, 1995, filed on September 21, 1995).
2.4  --       Stock  Purchase  Agreement,  dated August 11, 1995, between Pitney
              Bowes  Deutschland GmbH and Dictaphone  Acquisition Inc. (filed as
              Exhibit  2.4 to the  Company's  Form 10-Q for the  fiscal  quarter
              ended June 30, 1995, filed on September 21, 1995).
2.5  --       Stock Purchase Agreement, dated August 11,  1995,  between  Walnut
              Street Corp. and Dictaphone Acquisition Inc. (filed as Exhibit 2.5
              to the Company's Form 10-Q for the fiscal  quarter  ended June 30,
              1995, filed on September 21, 1995).
2.6  --       Stock  Purchase  Agreement,  dated August 11, 1995, between Pitney
              Bowes Holdings Ltd. and Dictaphone U.K. Acquisition Limited (filed
              as Exhibit 2.6 to the Company's  Form 10-Q for the fiscal  quarter
              ended June 30, 1995, filed on September 21, 1995).
2.7  --       General  Conveyance   Agreement,  dated  August 11, 1995,  between
              Dictaphone Canada Ltd./Ltee and Dictaphone Canada Acquisition Inc.
              (filed as Exhibit  2.7 to the  Company's  Form 10-Q for the fiscal
              quarter ended June 30, 1995, filed on September 21, 1995).
2.8  --       Assumption   of   Liabilities  Agreement,  dated  August 11, 1995,
              between   Dictaphone   Canada  Ltd./Ltee  and  Dictaphone   Canada
              Acquisition  Inc. (filed as Exhibit 2.8 to the Company's Form 10-Q
              for the fiscal quarter ended June 30, 1995, filed on September 21,
              1995).

2.9     --   Merger  Agreement  between  Dictaphone  U.S.  Acquisition  Inc. and
             Dictaphone Corporation, dated August 11, 1995 (filed as Exhibit 2.9
             to the  Company's  Form  10-Q for the fiscal quarter ended June 30,
             1995, filed on September 21, 1995).
*2.10   --   Agreement and Plan of Merger  between  Dictaphone  Corporation  and
             Dictaphone Corporation (U.S.), dated January 28, 1998.
*2.11   --   Certificate of Ownership and Merger Merging Dictaphone  Corporation
             with and into Dictaphone Corporation (U.S.).
*3(i)   --   Certificate  of Incorporation of Dictaphone  Corporation.
3(ii)   --   By-Laws  of  the Company, adopted  April 20, 1995 (filed as Exhibit
             3.3 to the Company's  Form 10-Q  for  the fiscal quarter ended June
             30, 1995, filed on September 21, 1995).
4.1     --   Indenture,  dated  as  of  August  11,  1995,  among  the  Company,
             Dictaphone   Corporation   (U.S.)  and  Shawmut  Bank  Connecticut,
             National  Association,  Trustee,  relating  to the  11-3/4%  Senior
             Subordinated Notes Due 2005 of the Company (filed as Exhibit 4.1 to
             the Company's Form 10-Q for the fiscal quarter ended June 30, 1995,
             filed on September 21, 1995).
4.2     --   Bank   Credit   Agreement,  dated as of August  7,  1995  among the
             Company,  Dictaphone  Corporation  (U.S.)  and  the  Lenders  party
             thereto  (filed as Exhibit 4.2 to the  Company's  Form 10-Q for the
             fiscal quarter ended June 30, 1995, filed on September 21, 1995).
4.3     --   First  Amendment  to Credit  Agreement,  dated as of June 28, 1996,
             among the Company,  Dictaphone  Corporation  (U.S.) and the Lenders
             party  thereto  (filed as Exhibit  10.13 to the  Company's  Current
             Report on Form 8-K, filed on July 18, 1996).
4.4     --   Second  Amendment to Credit Agreement,  dated as of  June 27, 1997,
             among the Company,  Dictaphone  Corporation  (U.S.) and the Lenders
             party  thereto  (filed as Exhibit  10.15 to the  Company's  Current
             Report on Form 8-K, filed on July 8, 1997).
4.5     --   Third  Amendment  (Technical Correction) to Credit Agreement, dated
             as of July 21, 1997, by and among  Dictaphone Corporation U.S.  and
             the  Lenders  party   thereto   (filed  as  Exhibit  10.19  to  the
             Company's  Form  10-Q for  the fiscal  quarter ended June 30, 1997,
             filed on August 14, 1997).
4.6     --   Fourth   Amendment   to  Credit Agreement, dated as of November 14,
             1997, by  and among  Dictaphone  Corporation (U.S.) and the Lenders
             party  thereto  (filed as  Exhibit 10.20 to  the  Company's Current
             Report on Form 8-K, filed on November 21, 1997).
4.7     --   Credit  Agreement,  dated  as  of  November  14, 1997, by and among
             Dictaphone Corporation and the Lenders a   party thereto (including
             exhibits  and  schedules) (filed  as Exhibit 10.21 to the Company's
             Current Report on Form 8-K, filed on November 21, 1997).
10.1    --   Subscription  Agreements   for  the  Equity   Private   Placements,
             dated as of August 7, 1995 (filed as Exhibit 10.1 to the  Company's
             Form 10-Q for the  fiscal  quarter  ended June 30,  1995,  filed on
             September 21, 1995).
10.2    --   Subscription  Agreement  for  Management  Private Placement,  dated
             as of August 7, 1995 (filed as Exhibit 10.2 to the  Company's  Form
             10-Q for the fiscal quarter ended June 30, 1995, filed on September
             21, 1995).
10.3    --   Stockholders   Agreement,   dated  as  of August 11, 1995 (filed as
             Exhibit  10.3 to the  Company's  Form 10-Q for the  fiscal  quarter
             ended June 30, 1995, filed on September 21, 1995).
10.4    --   Employment  contract of John H. Duerden, dated as of August 9, 1995
             (filed as Exhibit 10.4 to the Company's  Form  10-Q  for the fiscal
             quarter ended June 30, 1995, filed on September 21, 1995). +

                                       76

<PAGE>


EXHIBITS                              DESCRIPTION                                              NUMBERED PAGE
--------                              -----------                                              -------------
<S>                                   <C>                                                         <C>
10.5    --   Amendment  to  employment  contract  of  John  H.  Duerden,   dated
             January 1, 1997 (filed as Exhibit 10.5 to the Company's  Form  10-K
             for the year ended December 31, 1996, filed on March 31, 1997). +
10.6    --   Employment  contract  of Joseph D. Skrzypczak, dated July 21, 1995,
             (filed as Exhibit 10.6  to  the  Company's Form 10-Q for the fiscal
             quarter ended June 30, 1995, filed on September 21, 1995). +
10.7    --   Employment  contract  of  Robert  G. Schwager,  dated June 19, 1995
             (filed as Exhibit 10.7 to the Company's  Registration  Statement on
             Form S-1, File No. 33-93464, filed on June 14, 1995). +
10.8    --   Management Stock Option Plan of the  Company (filed as Exhibit 10.9
             to the Company's  Form 10-Q for the fiscal  quarter  ended June 30,
             1995,   filed   on  September  21, 1995) and Amendment No. 1 to the
             Management  Stock Option Plan, dated as of April 27, 1996 (filed as
             Exhibit  10.13 to the  Company's  Form 10-Q for the fiscal  quarter
             ended March 31, 1996, filed on May 15, 1996.) +
10.9    --   Supply  Agreement,  dated August 11, 1995,  between the Company and
             Pitney  Bowes  Inc.  (filed  as   Exhibit   10.10 to the  Company's
             Annual  Report on Form 10-K for the fiscal year ended  December 31,
             1995, File No. 33-93464, filed on March 29, 1996).
10.10   --   Leasing   Agreement,   dated   August  10, 1995, between Dictaphone
             Corporation  (U.S.) and Pitney Bowes Credit  Corporation  (filed as
             Exhibit 10.11 to the  Company's  Annual Report on Form 10-K for the
             fiscal year ended December 31, 1995,  File No.  33-93464,  filed on
             March 29, 1996).
10.11   --   Consulting  Agreement, dated November 17, 1995, between the Company
             and  Emil  F.  Jachmann  (filed  as  Exhibit 10.12 to the Company's
             Annual  Report  on Form 10-K for the fiscal year ended December 31,
             1995, File No. 33-93464, filed on March 29, 1996). +
10.12   --   Employment contract  of  Robert  Trimper,  dated  January  24, 1996
             (filed as Exhibit 10.13  to  the Company's Form 10-K for the fiscal
             year ended December 31, 1996, filed on March 31, 1997). +
10.13   --   Form of Letter Agreement  amending the Subscription  Agreement
             for the Management Private  Placement,  dated as of August 7, 1995,
             and the Stockholders Agreement,  dated as of August 11, 1995 (filed
             as Exhibit 10.14 to the Company's  Form 10-Q for the fiscal quarter
             ended March 31, 1996, filed on May 15, 1996). +
10.14   --   Letter  Agreement,  dated  April 11, 1997,  between the Company and
             Peter Tong (filed as Exhibit 10.16 to the  Company's  Form 10-Q for
             the fiscal  quarter  ended June 30,   1997,   filed  on  August 14,
             1997).+
*10.15  --   Stock   Option   Agreement,  dated  August  1, 1997,  between   the
             Company  and  John  H.  Duerden.+
10.16   --   Letter   Agreement,  dated   July   9,   1997,  between  Dictaphone
             Corporation and Mr. Joseph D. Skrzypczak (filed as Exhibit 10.17 to
             the Company's Form 10-Q for the fiscal quarter ended June 30, 1997,
             filed on August 14, 1997).+
10.17   --   Amendment  No.  2  to the Dictaphone  Management  Stock Option Plan
             (filed as Exhibit 10.18 to the  Company's  Form 10-Q for the fiscal
             quarter ended June 30, 1997, filed on August 14, 1997).+
*10.18  --   Letter  Agreement,  between  the  Company  and Ronald Elwell, dated
             November 8, 1996.+
21.1    --   List of subsidiaries of the Company  (filed  as  Exhibit  21 to the
             Company's  Registration  Statement on Form  S-1, File No. 33-93464,
             filed on June 14, 1995).
24      --   Powers of Attorney (included on the signature page hereof).
*27     --   Financial Data Schedule.
------------------------------
*  Filed herewith.
+  Management contract of compensatory arrangement.

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