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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, 1999

            [ ] 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                                        06-0992637
(State or other jurisdiction of            (I.R.S. Employer Identification No.)
 incorporation or organization)

3191 Broadbridge Avenue, Stratford, CT                  06614
(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, 2000 was $0.00.

As of March 24, 2000, there were 12,934,000 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..................................       7

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.................................      9

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.........................................     16

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

ITEM 9.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
              ACCOUNTING AND FINANCIAL DISCLOSURE.................     49

                                    PART III

ITEM 10.      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..     49

ITEM 11.      EXECUTIVE COMPENSATION..............................     52

ITEM 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
              MANAGEMENT..........................................     59

ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......     60

                                     PART IV

ITEM 14.      EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
              REPORTS ON FORM 8-K.................................     62


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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. Because the Company wishes to take advantage
of the "safe harbor" provisions of the Private Securities and Litigation Reform
Act of 1995, readers are cautioned to consider, among others, the risk factors
described in Item 7 "Management's Discussion and Analysis of Financial Condition
and Results of Operations".

                                     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, call
center monitoring systems and communications recording. The Company has two
operating segments, System Products and Services and Contract Manufacturing. The
System Products and Services segment consists of the sale and service of
system-related products to dictation and voice management and communications
recording system customers in selected vertical markets. The Contract
Manufacturing segment consists of the manufacturing operations of the Company
which provide outside electronics manufacturing services ("EMS") to original
equipment manufacturers ("OEMs") in the telecommunications, data management,
computer and electronics industries.

         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 36% of the Company's 1999 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 ("Communications Recording Systems" or
"C.R.S.") sales of which represented 19% of the Company's 1999 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


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products used primarily by call centers. Dictaphone's service business, revenue
from which represented 33% of the Company's 1999 total revenue, provides its
customers with service hardware and software support, expedited repairs and
remote diagnostics. Many Dictaphone customers, including those purchasing large
systems, purchase Company service contracts at the time of product purchase.

Recent Developments

         On March 7, 2000, the Company entered into a definitive agreement to be
acquired by Lernout & Hauspie Speech Products, N.V. ("Lernout & Hauspie").
Lernout & Hauspie is a global leader in advanced speech and language solutions
for vertical markets, computers, automobiles, telecommunications, embedded
products, consumer goods and the Internet.

         Under the terms of the merger agreement, each of the Company's common
shares will be exchanged for approximately .3 shares of Lernout & Hauspie common
stock. The transaction, which is expected to be completed during the second
quarter of 2000, is intended to be a tax-free exchange and is subject to closing
conditions, including the ability of Lernout & Hauspie to obtain financing for
approximately $425 million of the Company's debt and other obligations, and
other customary conditions. Stonington Capital Appreciation 1994 Fund, L.P., the
beneficial owner of approximately 96% of the Company's outstanding common stock,
has agreed to vote all its shares in favor of the transaction, thereby
guaranteeing Company shareholder approval.

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.
The Company has recently introduced digital recording products to store and
replay voice. In 1998, the Company introduced Walkabout(TM) Express, a portable
digital recording device designed specifically for mobile medical dictation, and
Boomerang 2.0(TM), a Windows(R) 95-based voice messaging and dictation system
that incorporates the IBM Via Voice Transcription(TM) speech recognition
software. Many portable products are designed to be compatible with Dictaphone
desktops in terms of features and appearance.

         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 the user to physically transport the data. Digital dictation systems
currently offer many advantages over their analog predecessors including higher
reliability, random


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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
NT(R) 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 1998, Dictaphone introduced the Enterprise 125(TM) Voice System, a
Windows NT(R) operating system platform intended for use by smaller single-site
healthcare providers, which offers productivity advantages comparable to the
Company's larger Enterprise Express(TM) System. The Enterprise 125(TM) Voice
System replaces the Digital Express(R) 4000 and Digital Express(R) 2500 voice
processing systems which were introduced in 1993 and have a worldwide installed
base of over 2,000 systems.

         In January 2000, the Company announced plans to use the Internet to
leverage its customer base, pursuant to which the Company would offer solutions
in web-based transcription, reimbursement coding services, speech
recognition/natural language processing and clinical data mining services.

         From time to time, the Company introduces products sourced from third
party developers. The Company has also contracted with third party developers of
continuous speech recognition software such as Philips and IBM, in order to
integrate 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 has increased as a percentage of
product sales revenue from all communications recording products from only 13%
in 1992 to 100% in 1999. 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
Symphony CTI(TM) system, ProLog(TM), Guardian(TM), Sentinel(TM), daVinci(TM) and
Freedom(TM) models. In the first quarter of 1999, the Company introduced


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daVinci(TM), the Company's next generation communications recording product.
Later in the year, the Company introduced daVinci QMS(TM), a quality monitoring
system based on industry-standard Windows NT(R) and Oracle(R) software which
provides call centers with customer-focused quality monitoring technology
combined with advanced customer service evaluation tools and training programs.
In the third quarter of 1999, the Company introduced Freedom(TM), an open
architecture communications recording system for public safety applications.

         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. Prolog(TM), which was
introduced in 1993, was the Company's most powerful C.R.S. product before the
introduction of Symphony CTI(TM). The Company's midsized Guardian(TM) model,
introduced in 1994, has been designed to provide many of the services provided
by 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.

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

         Dictaphone believes it has a number of significant opportunities in
marketing its products, including, for example, the continuing transition of the
user base 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 490 service representatives in over 150 locations in North
America. The United States service organization is supported by approximately
245 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 63 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" and "Software Maintenance Agreements",
which are long term warranties and support agreements 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 those purchasing large systems, purchase Dictaphone service
support 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 1999, additional products such
as MVP(TM) and Straight Talk(TM) were added to this repair program.

         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.


                                       4

<PAGE>

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 500 suppliers,
although 80% of the annual dollar volume is procured from 60 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 50% 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 1999, revenue from contract manufacturing was $44.3 million.

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.

Customers

         Although no single customer, other than Pitney Bowes and CNA Insurance,
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 90% 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 56%
of U.S. Communications Recording Systems revenue is derived from financial
services and insurance firms and governmental agencies.

         Although approximately 86% 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 service and
sales offices throughout the United States also provides a system for the rapid
distribution and service of the Company's 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, on-line internet stores and mass marketers for the distribution of
certain of its desktop and portable products.


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Outside of North America, the Company has shifted 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 90 day labor warranties. Upon purchase of a new
or previously owned Dictaphone product, a customer may purchase an "Assured
Performance Plan" and "Software Maintenance Agreements". See "-- Service". If a
Dictaphone customer decides not to purchase a service support agreement,
Dictaphone may 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 Fleetwood Financial ("Fleetwood"), Mellon First United Leasing
("First United"), Pitney Bowes Credit Corporation ("PBCC") 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,
test engineers and other engineers to develop software for its products as well
as to 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. As of December 31, 1999, the
Company's research and development staff consisted of 146 personnel (including
temporary employees).

Intellectual Property

         The Company has approximately 85 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 105
U.S. trademarks, including the well known "Dictaphone(R)" registered trademark,
in use throughout the world.

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 startup 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 systems product competition
from Lanier Corporation ("Lanier"), Digital Voice Inc. ("DVI"), Sudbury Systems,
Inc. ("Sudbury") and a number of smaller competitors. Philips Electronics N.V.
and Sony Corporation represent competitors for desktop and portable products.

         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, Eyretel, TEAC Corporation of America, Nice
Systems Ltd. (loggers and quality monitoring), Teknekron Infoswitch (quality
monitoring) Witness Systems, Inc.


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(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, especially
in the call center marketplace.

Employees

         As of December 31, 1999, the Company had 2,364 employees worldwide, of
which 2,105 were based in the United States. As of December 31, 1999, less than
1% of the Company's workers were unionized. Two union contracts, one in New
York, New York covering 8 employees and one in Toronto, Ontario, Canada covering
6 employees, expire on September 1, 2001, and January 15, 2001, respectively.
The Company believes its relations with employees are satisfactory.

ITEM 2.    PROPERTIES

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

Facility                  Purpose                             Square Footage
--------                  -------                             --------------

Melbourne, Florida        Manufacturing                           120,160
Melbourne, Florida        Customer Service/Distribution           118,000

         The Company operates a manufacturing and service/distribution center
facility in Melbourne, Florida, in addition to its numerous sales and service
offices. The Company leases its executive offices located in Stratford,
Connecticut (138,000 square feet). In addition, the Company leases sales,
service and distribution offices in certain countries in which it has
operations, including 149 offices in the United States, 15 offices in Canada, 5
offices in the United Kingdom and 2 offices in Germany. 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.

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.
Sudbury's patent expired in April 1998. As a result, injunctive relief is no
longer available to Sudbury. Pretrial proceedings, including claim construction
and dispositive motions, are continuing. A trial date in 2000 is likely.

         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. As these proceedings are at a
preliminary stage, 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


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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 $11 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 contained in the Stock and Asset
Purchase Agreement, originally executed on April 25, 1995 and amended August 11,
1995 between Dictaphone Acquisition Corporation and Pitney Bowes, subject to
certain limitations.

         In July, 1999, Bruce Hilt d/b/a Integrated Resources, Inc. filed a
complaint in the Middle District of Alabama against the Company and Pitney Bowes
Credit Corporation. Plaintiff commenced this action in Alabama State Court as a
purported class action for similarly situated persons within the State of
Alabama. Plaintiff alleges that the Company's recording system he leases from
Pitney Bowes Credit Corporation is not Y2K compliant and will not function after
December 31, 1999. The complaint seeks damages of less than $74,000 per class
member and alleges that there are hundreds of potential class members. In
August, 1999, the Company and Pitney Bowes removed the action to Federal Court,
in part based on the new Federal Y2K Act, 15 U.S.C. ss. 6601, et seq. (the "Y2K
Act"). Plaintiff has filed a motion to remand the case to State Court, which is
fully briefed and before the Court.

         Plaintiff to date has not moved to certify the case as a class action.
In October, 1999, the Company and Pitney Bowes filed a motion to dismiss the
action. Plaintiff has not yet responded to the motion to dismiss, and no hearing
date has been set by the Court.

         The Company intends to continue to vigorously defend this action.
Although the litigation is in its preliminary stages, the Company believes that
it has meritorious defenses to this case, especially in light of a remedy that
has been offered to plaintiff, and does not believe that a class should be
certified.

         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.

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 1999.


                                       8
<PAGE>


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,
2000 there were 9 holders of record of the Common Stock.

         Under the terms of the Company's Credit Agreement, dated August 7,
1995, as modified by five amendments to Credit Agreement, dated June 28, 1996,
June 27, 1997, July 21, 1997, November 14, 1997 and December 31, 1998
(collectively, the "Credit Agreement"), with a syndicate of financial
institutions for whom Bankers Trust Company is the Administrative Agent and
NationsBank, N.A. (Carolinas) is the Documentation Agent, the Company is
restricted from paying dividends on its capital stock. In addition, under the
terms of an Indenture (the "Note Indenture") between the Company and State
Street Bank and Trust, relating to the Company's $200.0 million of 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 outstanding preferred stock and under then-existing
indebtedness and other factors deemed relevant by the Company's Board of
Directors.

         In January 1999, the Company sold 2.0 million shares of its 12%
Convertible Pay-in-Kind Preferred Stock to Stonington Capital Appreciation 1994
Fund, L.P. ("Stonington"). This 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 this sale were used by the Company to repay
amounts outstanding under the Company's Revolving Credit Facility (as defined
below), and for the semi-annual interest payment on the Notes.

ITEM 6.    SELECTED FINANCIAL DATA

         Set forth below is the selected consolidated financial data of
Dictaphone Corporation at December 31, 1999, December 31, 1998, December 31,
1997 and December 31, 1996, and 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 Dictaphone Corporation (Predecessor Company) for the
thirty two week period ended August 11, 1995.

         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 for the years ended 1999, 1998, 1997 and 1996 and twenty week period
ended December 31, 1995, should not be compared to the prior period.


                                       9
<PAGE>

<TABLE>
<CAPTION>
                                          Predecessor
                                            Company                                    Successor Company
                                          -----------   ----------------------------------------------------------------------------
                                          32 Weeks        20 Weeks         Year             Year           Year            Year
                                            Ended          Ended           Ended            Ended          Ended           Ended
                                          August 11,    December 31,    December 31,     December 31,   December 31,    December 31,
                                            1995            1995            1996             1997           1998            1999
                                          -----------   ------------    ------------     ------------   ------------    ------------
Statement of Operations Data:                                      (Dollar amounts in millions)
<S>                                       <C>           <C>             <C>              <C>            <C>             <C>
Total revenue                            $202.1         $150.6          $332.5           $340.0         $332.3          $353.7
Cost of sales, rentals and support
 services                                 107.6           90.1(b)        181.1(b)         194.4(b)       188.7(b)        189.2(b)
Selling and administrative                 60.4           62.4(c)        149.2(c)         155.5(c)       139.9(c)        122.6(c)
Research and development (net of
 software capitalization)                   7.0            4.6            14.2             14.7           17.1             9.8
Operating profit (loss)                    27.1           (6.5)          (12.0)           (24.6)         (13.4)           32.1
Net interest (income) expense and
 other                                     (1.4)          16.1(d)         41.6(d)          44.7(d)        39.4(d)         40.0(d)
Net income (loss)                          17.1          (13.9)          (34.7)           (68.2)         (53.7)           (8.9)
Stock dividend on PIK Preferred
 Stock                                     ---              .8             2.3              2.7            3.1             5.8
Net loss applicable to Common
 Stock                                     ---           (14.7)          (37.0)           (70.9)         (56.8)          (14.7)

Other Data:
Adjusted EBITDA(a)                        $32.0         $ 32.3          $ 54.2           $ 48.2         $ 30.6          $ 60.3
Depreciation and amortization               4.9           39.1            65.8             62.2           38.2            28.2
Capital expenditures                        5.5             .8             6.3              6.9            8.9            12.3
Software capitalization                     2.5            1.7             4.7              6.2           10.3            10.1
Adjusted EBITDA margin (a)                 15.8%          21.5%           16.3%            14.2%           9.2%           17.0%

Balance Sheet Data
 (at end of period):
Working capital                                         $ 43.3          $ 33.0           $ 51.2         $ 50.8          $ 50.4
Total assets                                             550.7           504.8            470.0          454.3           461.1
Long term debt                                           350.0           352.6            343.6          370.5           354.2
Total liabilities                                        456.2           445.4            444.8          482.9           478.7
Stockholders' equity (deficit)                            94.5            59.4             25.2          (28.6)          (17.6)
--------------------
</TABLE>

(a)    Adjusted 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 which for the years
       ended December 31, 1996, 1997, 1998 and 1999 totalled $(0.9) million,
       $10.8 million, $5.5 million and ($0.1) million, respectively. 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.
       Adjusted EBITDA margin is defined as adjusted EBITDA as a percent of
       revenue.
(b)    Cost of sales, rentals and support services for the twenty weeks ended
       December 31, 1995 and years ended December 31, 1996, 1997, 1998 and 1999
       includes $14.7 million, $8.8 million, $2.4 million, $0.4 million and $0.3
       million, respectively, of charges related to the amortization of
       inventory write-up and depreciation associated with purchase accounting
       adjustments.
(c)    Selling and administrative for the twenty weeks ended December 31, 1995
       and years ended December 31, 1996, 1997, 1998 and 1999 includes $21.8
       million, $46.2 million, $41.5 million, $23.2 million and $11.4 million,
       respectively, of non-cash purchase accounting charges.
(d)    Includes $.9 million, $5.3 million, $6.3 million, $1.7 million and $1.9
       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, 1997, 1998 and 1999, respectively.

                                       10
<PAGE>


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

Overview

         The following discussion should be read in conjunction with the
financial statements and accompanying notes included in "Item 8. -- Financial
Statements and Supplementary Data." Certain amounts have been reclassified to
conform to current year presentation.

<TABLE>
<CAPTION>
                                                                                    Year Ended
                                                                                   December 31,
                                                                       -----------------------------------
                                                                       1997             1998          1999
                                                                       ----             ----          ----
                                                                                    (in millions)
<S>                                                                    <C>             <C>           <C>
Total revenue...................................................       $340.0          $332.3        $353.7

Cost of sales, rentals and support services.....................        194.4           188.7         189.2
Selling and administrative expense (1)..........................        155.5           139.9         122.6
Research and development........................................         14.7            17.1           9.8
                                                                       ------          ------        ------
       Operating (loss) profit..................................        (24.6)          (13.4)         32.1
                                                                       ------          ------        ------

Net interest expense and other..................................         44.7            39.4          40.0
Income tax (benefit) provision..................................         (1.1)            0.9           1.0
                                                                       ------          ------        ------
Net loss .......................................................       $(68.2)         $(53.7)       $ (8.9)
                                                                       ======          ======        ======

(1)    Includes amortization of intangibles.

                                                                                    Year Ended
                                                                                   December 31,
                                                                       -----------------------------------
                                                                       1997             1998          1999
                                                                       ----             ----          ----
                                                                                    (in millions)
Revenue:
     Sales:

     Integrated Voice Systems...................................       $ 45.7          $ 41.4        $ 32.5
     Integrated Health Systems..................................         37.4            44.8          71.7
                                                                       ------          ------        ------
         Total U.S. Voice Systems...............................         83.1            86.2         104.2
     Communications Recording Systems...........................         59.3            61.0          48.4
     Customer Service Parts.....................................         18.0            17.4          18.8
     International and Dealer Operations........................         40.7            31.3          40.9
     Rentals  ..................................................          1.8             1.4           1.4
                                                                       ------          ------        ------
         Product sales and rentals..............................        202.9           197.3         213.7
                                                                       ======          ======        ======

     Support service:

     Customer Service...........................................         81.3            77.2          80.6
     Application and Training Specialists.......................          2.6             3.1           6.0
     International and Dealer Operations........................         10.4             7.6           9.1
                                                                       ------          ------        ------
         Total support service..................................         94.3            87.9          95.7
                                                                       ------          ------        ------

     Total System Products and Services.........................        297.2           285.2         309.4

     Contract Manufacturing.....................................         42.8            47.1          44.3
                                                                       ------          ------        ------

Total revenue ..................................................       $340.0          $332.3        $353.7
                                                                       ======          ======        ======

</TABLE>

                                       11
<PAGE>

Results of Operations

    1999 Compared to 1998

         Total revenue increased 6.4% to $353.7 million in 1999 from $332.3
million in 1998. System Products and Services revenue increased 8.5% to $309.4
million in 1999 from $285.2 million in 1998. This increase is attributable to
increased product sales revenue from I.H.S., higher revenue from Customer
Service, Application and Training Specialists ("A.T.S.") and International and
Dealer Operations, offset in part by lower product sales revenue from I.V.S. and
C.R.S. Contract Manufacturing revenue declined 5.9% to $44.3 million in 1999
from $47.1 million in 1998.

         I.V.S. revenue declined 21.5% to $32.5 million in response to actions
taken by the Company in the fourth quarter of 1998 to reduce and consolidate its
sales force to focus on the more profitable systems business in commercial
markets. I.V.S. order backlog declined 37.8% during 1999 to $2.9 million. I.H.S.
revenue increased 60.0% to $71.7 million due to higher Enterprise Express(TM)
installations. I.H.S. order growth of 44.6% to $69.8 million is also
attributable to Enterprise Express(TM). I.H.S. order backlog declined 17.6%
during 1999 to $12.0 million. C.R.S. revenue declined 20.7% to $48.4 million due
to lower digital logger sales and the $2.1 million one-time sale of
Prolog(TM)/Guardian(TM) "Year 2000" related software upgrades recorded in 1998.
C.R.S. orders declined 9.4% to $53.2 million. C.R.S. order backlog, reflecting
the 1999 introductions of daVinci(TM) and Freedom(TM) communications recorders,
increased 93.8% in 1999 to $9.8 million. Customer Service revenue (including
sale of parts) increased 5.1% to $99.4 million due to increased installation and
warranty revenue. A.T.S. revenue increased 93.7% to $6.0 million due to
increased customer training provided in support of I.H.S. products. Sales and
service revenue from International and Dealer Operations increased 28.5% to
$50.0 million resulting primarily from increased system, desktop and portable
and CRS product sales, and higher service revenue in Canada, as well as from
increased system and C.R.S. revenue in Europe. Orders from International and
Dealer Operations increased 33.0% to $39.8 million. The decline in Contract
Manufacturing reflects lower turnkey manufacturing of electronic products from
existing customers.

         Cost of sales, rentals and support services increased to $189.2 million
(53.5% of revenue) versus $188.7 million (56.8% of revenue) for 1998. The
decline in cost of sales, rentals and support services expressed as a percentage
of revenue is attributable to lower C.R.S. and Customer Service costs and
improved margins from International and Dealer Operations and the $5.0 million
provision for excess Boomerang(TM), FTR(TM), Synergy(TM) and Insight(TM)
inventory recorded in 1998.

         Selling and administrative expenses (including amortization of
intangibles) declined 12.3% to $122.6 million (34.7% of revenue) from $139.9
million (42.1% of revenue) for 1998. Excluding additional depreciation and
amortization expense associated with purchase accounting adjustments related to
the Acquisition of $11.4 million and $23.2 million for 1999 and 1998,
respectively, selling and administrative expenses expressed as a percentage of
revenue would have declined by 3.6 percentage points. This decline is
attributable to $2.0 million of severance-related charges recorded in 1998 and
reduced I.V.S. and C.R.S. selling expenses, partially offset by increased I.H.S.
selling expenses and higher employee benefit costs.

         Research and development expenses of $9.8 million (4.6% of product
sales and rental revenue) declined from $17.1 million (8.7% of product sales and
rental revenue), reflecting reduced staffing and a more focused development
effort.

         The Company recorded an operating profit of $32.1 million (9.1% of
revenue) in 1999 compared to an operating loss of $13.4 million (4.0% of
revenue) for 1998. Excluding the impact of purchase accounting adjustments from
both 1999 and 1998 discussed above, operating profit would have increased by
$33.6 million due to higher revenue, lower costs and lower operating expenses.

         Interest expense of $40.1 million increased 0.9% from $39.7 million
reflecting higher outstanding loan balances.


                                       12
<PAGE>


    1998 Compared to 1997

         Total revenue declined 2.3% to $332.3 million in 1998 from $340.0
million in 1997. System Products and Services revenue declined 4.0% to $285.2
million in 1998 from $297.2 million in 1997. This decline is attributable to
lower product sales revenue from I.V.S. and lower revenue from Customer Service
and International and Dealer Operations, offset in part by increased product
sales revenue from I.H.S. and C.R.S., and increased revenue from Application and
Training Specialists ("A.T.S."). Contract Manufacturing revenue increased 9.8%
to $47.1 million in 1998 from $42.8 million in 1997.

         I.V.S. revenue declined 9.5% to $41.4 million due to lower sales of the
Company's Straight Talk(TM), Synergy(TM) and desktop and portable products.
I.V.S. orders declined 7.2% to $45.3 million. I.V.S. order backlog declined
27.2% during 1998 to $4.7 million. I.H.S. revenue increased 19.9% to $44.8
million due to higher Enterprise Express(TM) installations. I.H.S. order growth
of 18.5% to $48.3 million is also attributable to Enterprise Express(TM). I.H.S.
order backlog increased 22.8% during 1998 to $14.5 million. C.R.S. revenue
increased 3.0% to $61.0 million due to the one-time sale of
Prolog(TM)/Guardian(TM) software upgrades. C.R.S. orders declined slightly
(0.9%) to $58.7 million. C.R.S. order backlog declined 32.4% in 1998 to $5.1
million. Customer Service revenue (including sale of parts) declined 4.7% to
$94.6 million due to lower proprietary product service contract, installation,
integration and third party maintenance revenue. A.T.S. revenue increased 17.6%
to $3.1 million due to increased customer training provided in support of I.H.S.
products. Sales and service revenue from International and Dealer Operations
declined 23.7% to $38.9 million resulting primarily from lower desktop, portable
and CRS product sales revenue in Canada as well as from lower desktop, portable,
system and C.R.S. product sales and lower service revenue in Europe. Orders from
International and Dealer Operations declined 27.1% to $29.9 million. Order
backlog for International and Dealer Operations declined 16.3% during 1998 to
$1.7 million. Contract Manufacturing growth reflects turnkey manufacturing of
electronic products from existing customers as well as the addition of new
Contract Manufacturing accounts.

         Cost of sales, rentals and support services declined 2.9% to $188.7
million (56.8% of revenue) versus $194.4 million (57.2% of revenue) for 1997.
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
0.2 percentage points to 56.7% due primarily to increased Customer Service
costs, the provision for excess Boomerang(TM), FTR(TM), Synergy(TM) and
Insight(TM) inventory, a higher content of low margin Contract Manufacturing
revenue and unfavorable manufacturing cost adjustments, partially offset by 1997
charges for excess inventory associated with Digital Express(TM) and Records
Express(TM) products.

         Selling and administrative expenses (including amortization of
intangibles) declined 10.0% to $139.9 million (42.1% of revenue) from $155.5
million (45.7% of revenue) in 1997. Excluding additional depreciation and
amortization expense associated with purchase accounting adjustments related to
the Acquisition of $23.2 million and $41.5 million for 1998 and 1997,
respectively, selling and administrative expenses expressed as a percentage of
revenue would have increased by 1.6 percentage points. This increase is
attributable to $1.9 million of additional severance associated with continuing
efforts to reduce the Company's cost structure, increased C.R.S. selling
expenses, Year 2000 and information system implementation costs. Partially
offsetting these expense increases were lower I.V.S. and I.H.S. selling
expenses.

         Research and development expenses of $17.1 million (8.7% of product
sales and rental revenue) increased 16.5% from $14.7 million (7.2% of product
sales and rental revenue), reflecting increased staffing and compensation.

         The Company recorded an operating loss of $13.4 million (4.0% of
revenue) in 1998 compared to an operating loss of $24.6 million (7.2% of
revenue) for 1997. Excluding the impact of purchase accounting adjustments from
both 1998 and 1997 discussed above, operating profit would have declined by
47.1% to $10.2 million due to lower revenue, higher costs, the provision for
severance and increased operating expenses.

         Interest expense of $39.7 million declined 10.6% from $44.4 million
reflecting lower amortization of deferred financing fees.


                                       13
<PAGE>


Liquidity and Capital Resources

         The Company's liquidity requirements consist primarily of scheduled
payments of principal and interest on its indebtedness, working capital needs
and capital expenditures. At December 31, 1999, the Company had outstanding term
loans of $130.9 million (the "Term Loans") and loans of $23.0 million
outstanding under the $40.0 million revolving credit facility (the "Revolving
Credit Facility") and the Notes. Availability under the Revolving Credit
Facility at December 31, 1999 was $17.0 million ($14.9 million after deducting
outstanding letters of credit). Scheduled annual principal payments will be $0.6
million in 2000, $36.3 million in 2001 and $94.0 million in 2002. There are no
scheduled reductions in the Revolving Credit Facility over the next year.

         On December 31, 1998, the Company and the lenders executed a fifth
amendment to the Credit Agreement. Under the terms of this amendment, the
lenders agreed to waive compliance by the Company with the financial covenants
as of December 31, 1998 and for the four-Fiscal Quarter period then ended. Other
changes effected by the amendment were (i) modifications to the covenants and
related definitions in respect of certain asset sales and the utilization of the
proceeds from such asset sales, (ii) modifications to the required Maximum
Leverage, Minimum EBITDA and Minimum Interest Coverage Ratio covenants (as
defined in the Credit Agreement), (iii) a change in the maturity date of the
Tranche C Term Loans (the "Tranche C Loans") to be equal to that of the Tranche
B Term Loans (the "Tranche B Loans"), and (iv) an increase in the interest rate
on the Tranche B Loans to be equal to that of the Tranche C Loans.

         In January 1999, the Company sold 2.0 million shares of its 12%
Convertible Pay-in-Kind Preferred Stock to Stonington for $20 million. In
February 1999, $11.75 million was used for the semi-annual interest payment on
the Notes. Proceeds from the sale were also used to repay amounts outstanding
under 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 converted 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 9.55%.
Amounts due to or from the counterparties were reflected in interest expense in
the periods in which they accrued. On February 11, 1999, the Company entered
into interest rate cap agreements effective February 16, 1999, with an aggregate
notional principal amount equivalent to $66 million maturing on February 16,
2001. The cap limits that portion of the Company's Term Loans to a fixed rate
component of 5.5%; thus reducing the impact of increases in interest rates,
limiting the effective interest rate on fifty percent of the currently
outstanding Term Loans to 9.25%. The fair value of the interest rate caps as of
December 31, 1999 was favorable $0.7 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 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, 1999. The Notes are subordinated to the Credit
Agreement and other senior indebtedness, as defined in the Note Indenture. The
Notes contain similar types of covenants 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, 1999 was favorable $52
million, based upon dealer quotes.

         Capital expenditures for 1999 totaled $12.3 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 and annual 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


                                       14
<PAGE>


during any particular quarter or year. 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, the ability to attract and maintain qualified
technical personnel, significant damage to or prolonged delay in operations at
the Company's manufacturing facility, and interest rate and foreign exchange
fluctuations. The Company has introduced a number of new products in its target
markets in 1997, 1998 and 1999 which are expected to enhance future revenues and
liquidity of the Company. However, there can be no assurance that such products
will meet the expectations of the Company for either revenues or profitability.
Notwithstanding the introduction of its new products, the 1999 sale of 12%
Convertible Pay-in-Kind Preferred Stock to Stonington, and its availability
under the Revolving Credit Facility, the Company will continue to focus on cash
flows from operating activities. The Company has implemented new measures to
improve working capital in order to provide this improved cash flow, but there
can be no assurance, however, that the Company will be successful in such
efforts.

         As of December 31, 1999, the Company has recorded a gross deferred tax
asset of $102.5 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,
1999 is approximately $148.1 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, $40.0 million will expire in the year 2012, $37.0 million will expire
in the year 2018 and $24.2 million will expire in the year 2020. 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 carryforward. In
1997, the Company established a valuation allowance of $24.1 million against the
deferred tax assets. During 1998, the Company increased its valuation allowance
by $20.8 million. During 1999, the Company increased its valuation allowance by
$3.9 million, resulting in a net deferred tax asset of $53.8 million. Including
a deferred tax liability of $13.9 million, the net deferred tax asset at
December 31, 1999 totalled $39.9 million. Management believes, 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
than not be sufficient to fully utilize the net deferred tax asset of $53.8
million recorded at December 31, 1999, prior to expiration. 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.

         On March 7, 2000, the Company entered into a definitive agreement to be
acquired by Lernout & Hauspie. The transaction is subject to closing conditions
including the ability of Lernout & Hauspie to obtain financing for approximately
$425 million of the Company's debt and other obligations and other customary
conditions.

Year 2000 Impact

         The entire computer industry faced a challenge at the turn of the
century due to a common industry practice employed since the 1960's of
representing a year with just two digits rather than four digits. The potential
problems associated with this industry practice, commonly referred to as Year
2000 issues, were not restricted to system hardware components, but could have
been manifested within many operating systems, firmware, application software
and equipment used throughout an organization.

         In 1998, the Company initiated a program to address its Year 2000
exposure. The Company established a Year 2000 Project Office which adopted a
five phase program to address the Company's Year 2000 issues consisting of Phase
I - review and inventory of existing systems, products, equipment and suppliers
that may be affected by the Year 2000 issue; Phase II - assessment of the impact
of the Year 2000 issue on systems, products, equipment and suppliers; Phase III
- remediation or replacement of non-compliant systems, products and equipment
and determination and implementation of solutions to address non-compliant
suppliers and vendors; Phase IV - testing of systems, products and equipment
following remediation; and Phase V - contingency planning. The program was
substantially completed on schedule in 1999.


                                       15
<PAGE>


         The Company experienced no material adverse effects related to the
arrival of 2000. However, there remains the possibility of latent Year 2000
problems that could still occur and cause failures in the Company's systems or
products. The Company's Year 2000 Project Office continues to monitor its
products, systems, suppliers and customers in an effort to minimize any
potential impact of this possible but unlikely scenario.

         Costs of the Year 2000 program approximated $13.0 million, of which
$9.0 million represented new software and hardware purchased for internal
Company systems which were accelerated in connection with the Year 2000 issue.
These costs were funded from normal operating cash flows of the business.
Estimated future costs related to the Year 2000 program are insignificant.

         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. Because the Company wishes to take advantage of the "safe harbor"
provision of the Private Securities and Litigation Reform Act of 1995, readers
are cautioned to consider, among others, those risks previously discussed
herein.

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

         Market risk represents the risk of loss that may impact the
consolidated financial position, results of operations or cash flows of the
Company. The Company is exposed to market risk associated with change in
interest rates and foreign currency exchange rates.

Interest Rates

         The Company's exposure to market risk for changes in interest rates
relates primarily to the Company's debt obligations. The Company has no cash
flow exposure on the $200.0 million of 11.75% fixed interest rate Notes;
however, the Company does have cash flow exposure on the Term Loans and loans
outstanding under the Revolving Credit Facility associated with variable
interest rates, as adjusted by the impact of the interest rate cap agreements.
Accordingly, a 1 percent point change in variable interest rates would result in
interest expense fluctuation of approximately $1.5 million.

Foreign Exchange Risk

         The Company is exposed to foreign exchange risk to the extent of
adverse fluctuations in the Canadian dollar, the British pound, the German mark
and Japanese yen. The company does not believe that reasonably possible near
term change in those currencies will result in a material effect on future
earnings, financial position or cash flows of the Company.


                                       16
<PAGE>


ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Quarterly Results of Operations  (Unaudited)   (In thousands)
<TABLE>
<CAPTION>

                                    Quarter Ended       Quarter Ended       Quarter Ended        Quarter Ended
                                      March 31,           June 30,          September 30,        December 31,
                                        1999                1999                1999                 1999
                                    -------------       -------------       -------------        -------------
<S>                                  <C>                 <C>                 <C>                   <C>
       1999
       -----

Total revenue................        $  82,611           $  85,660           $  95,861             $  89,602
Cost of sales, rentals and support
 services....................           43,450              46,302              51,505                47,938
Net loss ....................           (4,166)             (1,398)                883                (4,262)
Net loss applicable to
 Common Stock................        $  (5,397)          $  (2,877)          $    (644)            $  (5,840)


                                    Quarter Ended       Quarter Ended       Quarter Ended        Quarter Ended
                                      March 31,           June 30,          September 30,        December 31,
                                        1998                1998                1998                 1998
                                    -------------       -------------       -------------        -------------
       1998
       ----

Total revenue................        $  83,825           $  84,985           $  85,876             $  77,632
Cost of sales, rentals and support
 services....................           45,012              46,957              45,131                51,588
Net loss ....................          (10,845)            (10,711)             (5,384)              (26,750) (a)
Net loss applicable to
 Common Stock................        $ (11,574)          $ (11,466)          $  (6,166)            $ (27,558)

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

</TABLE>

(a)      Net loss includes after tax charges of $3.1 million for product
         obsolescence, $2.7 million for severance and restructuring charges and
         a $11.1 million increase to the deferred tax valuation allowance.


                                       17


<PAGE>


INDEPENDENT AUDITORS' REPORT

Board of Directors and Stockholders
Dictaphone Corporation
Stratford, Connecticut

We have audited the accompanying consolidated balance sheets of Dictaphone
Corporation and Subsidiaries (the "Company") as of December 31, 1999 and 1998,
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 1999. Our audits also included the financial statement schedule as
of and for each of the three years in the period ended December 31, 1999 listed
in the Index as Item 14. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 the Company at December 31, 1999
and 1998, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the financial statement schedule as of and for each of the three years
in the period ended December 31, 1999, 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

Hartford, Connecticut
February 11, 2000
(March 7, 2000 as to Note 14)


                                       18


<PAGE>


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


<TABLE>
<CAPTION>

ASSETS                                                                          December 31, 1998            December 31, 1999
                                                                                -----------------            -----------------
<S>                                                                              <C>                         <C>
Current assets:
    Cash and cash equivalents                                                      $    11,727                   $     6,190
    Accounts receivable, less allowance of
     $968 and $1,801, respectively                                                      77,432                       100,834
    Inventories                                                                         53,362                        49,759
    Other current assets                                                                 7,259                         6,152
                                                                                   -----------                   -----------
         Total current assets                                                          149,780                       162,935
Property, plant and equipment, net                                                      32,425                        37,489
Deferred financing costs, net of accumulated
 amortization of $14,246 and $16,145, respectively                                       9,920                         8,141
Intangibles, net of accumulated amortization of $122,595
 and $133,964, respectively                                                            206,122                       194,865
Deferred tax asset                                                                      39,765                        39,934
Other assets                                                                            16,315                        17,774
                                                                                   -----------                   -----------
         Total assets                                                              $   454,327                   $   461,138
                                                                                   ===========                   ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable                                                               $     8,778                   $    11,755
    Interest payable                                                                    10,067                         9,965
    Accrued liabilities                                                                 31,433                        30,928
    Advance billings                                                                    39,586                        49,100
    Current portion of long-term debt                                                      795                           790
                                                                                   -----------                   -----------
         Total current liabilities                                                      90,659                       102,538
Long-term debt                                                                         369,737                       353,443
Accrued pension liability                                                                8,352                         9,953
Other liabilities                                                                       14,141                        12,806
                                                                                   -----------                   -----------
         Total liabilities                                                             482,889                       478,740
                                                                                   -----------                   -----------
Commitments, contingencies and concentration of risks (Note 10)
Stockholders' equity:
    Preferred stock ($.01 par value; 7,500,000 shares authorized; 2,391,500 and
      2,742,400 shares of 14% PIK perpetual preferred stock issued and
      outstanding, liquidation values of $23,915 and $27,424 at December 31,
      1998 and 1999, respectively)                                                      23,915                        27,424
    Preferred stock ($.01 par value, 10,000,000 shares authorized;
      none and 2,000,000 shares of 12% Convertible PIK preferred
      stock issued and outstanding, liquidation value of $22,306 at
      December 31, 1999)                                                                   ---                        22,306
    Common stock ($.01 par value; 30,000,000 shares
      authorized; 12,934,000 shares issued
      at December 31, 1998 and 1999, respectively)                                         130                           130
    Notes receivable from stockholders                                                    (741)                         (741)
    Additional paid-in capital                                                         120,955                       115,140
    Treasury stock, at cost (66,000 shares at
      December 31, 1998 and 1999, respectively)                                           (660)                         (660)
    Accumulated deficit                                                               (170,417)                     (179,360)
    Accumulated other comprehensive loss                                                (1,744)                       (1,841)
                                                                                   -----------                   -----------
         Total stockholders' equity (deficit)                                          (28,562)                      (17,602)
                                                                                   -----------                   -----------
         Total liabilities and stockholders' equity                                $   454,327                   $   461,138
                                                                                   ===========                   ===========

</TABLE>

          See accompanying notes to consolidated financial statements.


                                       19


<PAGE>

<TABLE>
<CAPTION>

                                              DICTAPHONE CORPORATION

                                       CONSOLIDATED STATEMENTS OF OPERATIONS
                                              (Dollars in thousands)


                                                     Year Ended                Year Ended              Year Ended
                                                  December 31, 1997         December 31, 1998       December 31, 1999
                                                  -----------------         -----------------       -----------------
<S>                                                  <C>                     <C>                     <C>
    Revenues:

         Product sales and rentals                   $   202,894             $   197,330             $   213,773
         Contract manufacturing sales                     42,864                  47,063                  44,288
         Support services                                 94,284                  87,925                  95,673
                                                     -----------             -----------             -----------
             Total revenue                               340,042                 332,318                 353,734
                                                     -----------             -----------             -----------

    Costs and expenses:

         Cost of sales, rentals and support
         services                                        194,432                 188,688                 189,195

         Selling and administrative                      114,263                 116,716                 111,308

         Amortization of intangibles                      41,262                  23,156                  11,369

         Research and development                         14,705                  17,128                   9,761
                                                     -----------             -----------             -----------

    Operating (loss) profit                              (24,620)                (13,370)                 32,101

    Interest expense                                      44,438                  39,715                  40,062

    Other expense (income) - net                             224                    (273)                    (55)
                                                     -----------             -----------             -----------

    Loss before income taxes                             (69,282)                (52,812)                 (7,906)

    Income tax benefit (expense)                           1,060                    (878)                 (1,037)
                                                     -----------             -----------             -----------

    Net loss                                             (68,222)                (53,690)                 (8,943)

         Stock dividends on PIK Preferred Stock            2,699                   3,074                   5,815
                                                     -----------             -----------             -----------

         Net loss applicable to Common Stock         $   (70,921)            $   (56,764)            $   (14,758)
                                                     ===========             ===========             ===========

</TABLE>


          See accompanying notes to consolidated financial statements.


                                       20


<PAGE>

<TABLE>
<CAPTION>

                                              DICTAPHONE CORPORATION
                                       CONSOLIDATED STATEMENTS OF CASH FLOWS

                                              (Dollars in thousands)


                                                                            Year Ended          Year Ended           Year Ended
                                                                         December 31, 1997  December 31, 1998      December 31, 1999
                                                                         -----------------  -----------------      -----------------
<S>                                                                         <C>                <C>                    <C>
Operating activities:
    Net loss                                                                $  (68,222)        $  (53,690)            $   (8,943)
    Adjustments to reconcile net loss to net cash
     provided by (used in) operating activities:
         Depreciation and amortization                                          68,515             39,895                 30,115
         Provision for deferred income taxes                                    (1,767)              (227)                  (160)
         Non-cash charge for product obsolescence                               14,902              4,999                    ---
         Changes in assets and liabilities:
             Accounts receivable                                               (18,869)            (5,749)               (23,285)
             Inventories                                                        (4,528)            (9,735)                 3,605
             Other current assets                                               (1,876)             4,690                  1,010
             Accounts payable and accrued liabilities                            5,896              4,922                  4,130
             Advance billings                                                    2,502              2,523                  9,464
             Other assets and other                                            (10,996)           (16,051)               (11,503)
                                                                            -----------         ----------            -----------
                  Net cash (used in) provided by operating activities          (14,443)           (28,423)                 4,433
                                                                            -----------        -----------            -----------

Investing activities:
    Net investment in fixed assets                                              (5,899)            (8,851)               (12,333)
    Proceeds from sale of building                                                 ---             14,000                    ---
                                                                            ----------          ---------             ----------
             Net cash (used in) provided by investing activities                (5,899)             5,149                (12,333)
                                                                            ----------          ---------             ----------

Financing activities:
    Borrowings under term loan facility                                         62,750                ---                    ---
    Repayment under term loan facility                                         (71,000)            (2,427)                  (628)
    Proceeds from sale of common stock                                          35,000                ---                    ---
    Proceeds from sale of preferred stock                                          ---                ---                 20,000
    Borrowings under revolving credit facility                                  88,600             79,000                 42,500
    Repayments under revolving credit facility                                 (88,600)           (49,500)               (58,000)
    International borrowing, net                                                  (717)              (150)                  (159)
    Payment of deferred financing costs                                         (2,927)              (749)                  (120)
    Repayment under capital lease obligations                                     (266)            (1,355)                (1,120)
    Repayment of management loans                                                  221                 90                    ---
    Payments to acquire treasury stock                                            (280)              (180)                   ---
    Other                                                                          ---                 29                    (83)
                                                                            ----------          ---------             ----------
         Net cash provided by financing activities                              22,781             24,758                  2,390
                                                                            ----------          ---------             ----------

Effect of exchange rate changes on cash                                            (89)               (34)                   (27)
                                                                            ----------          ---------             ----------
(Decrease) increase in cash                                                      2,350              1,450                 (5,537)
Cash and cash equivalents, beginning of period                                   7,927             10,277                 11,727
                                                                            ----------          ---------             ----------
Cash and cash equivalents, end of period                                    $   10,277         $   11,727             $    6,190
                                                                            ==========         ==========             ==========

SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid                                                               $   38,372         $   38,001             $   38,326
                                                                            ==========         ==========             ==========
Income taxes paid                                                           $    1,039         $      432             $      209
                                                                            ==========         ==========             ==========



</TABLE>
          See accompanying notes to consolidated financial statements.


                                       21


<PAGE>

<TABLE>
<CAPTION>

                                              DICTAPHONE CORPORATION
                             CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
                               For the Years Ended December 31, 1997, 1998 and 1999
                                              (Dollars in thousands)


                                             Notes                                           Accumulated
                                          Receivable              Additional                    Other      Comprehensive    Total
                    Preferred   Common       from      Treasury     Paid-in    Accumulated  Comprehensive     Earnings     Equity
                      Stock      Stock   Stockholders    Stock      Capital      Deficit    Income (Loss)     (Loss)     (Deficit)
                    ---------   -------  ------------- ---------  ----------   -----------  -------------- ------------  ----------
<S>                  <C>         <C>        <C>            <C>       <C>         <C>               <C>        <C>          <C>
Balance at
 December 31, 1996   18,142        95       (1,052)        (200)     91,763      (48,534)          (836)                   59,378

Net loss                ---       ---          ---          ---         ---      (68,222)           ---       (68,222)    (68,222)

Preferred stock
 dividends            2,699       ---          ---          ---      (2,699)         ---            ---           ---         ---

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

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

Stock repurchase        ---       ---          ---         (280)        ---          ---            ---           ---        (280)

Translation loss        ---       ---          ---          ---         ---          ---           (836)         (836)       (836)
                    -------     -----     --------     --------    --------    ---------      ---------      --------    --------
Comprehensive loss                                                                                           $(69,058)
                                                                                                             ========
Balance at
December 31, 1997    20,841       130         (831)        (480)    124,029     (116,756)        (1,672)                   25,261

Net loss                ---       ---          ---          ---         ---      (53,690)           ---       (53,690)    (53,690)

Preferred stock
 dividends            3,074       ---          ---          ---      (3,074)         ---            ---           ---         ---

Repayment of
 management loans       ---       ---           90          ---         ---          ---            ---           ---          90

Stock repurchase        ---       ---          ---         (180)        ---          ---            ---           ---        (180)

Translation loss        ---       ---          ---          ---         ---          ---            (72)          (72)        (72)

Disposal of Dictaphone
 Netherlands BV         ---       ---          ---          ---         ---           29            ---            29          29
                    -------     -----     --------     --------    --------    ---------      ---------      --------    --------
Comprehensive loss                                                                                           $(53,733)
                                                                                                             ========
Balance at
 December 31, 1998   23,915       130         (741)        (660)    120,955     (170,417)        (1,744)                  (28,562)

Net loss                ---       ---          ---          ---         ---       (8,943)           ---        (8,943)     (8,943)

Sale of preferred
 stock               20,000       ---          ---          ---         ---          ---            ---           ---      20,000

Preferred stock
 dividends            5,815       ---          ---          ---      (5,815)         ---            ---           ---         ---

Translation loss        ---       ---          ---          ---         ---          ---            (97)          (97)        (97)
                    -------     -----     --------     --------    --------    ---------      ---------      --------    --------
Comprehensive loss                                                                                           $ (9,040)
                                                                                                             ========

Balance at
 December 31, 1999  $49,730     $ 130     $   (741)     $  (660)   $115,140    $(179,360)     $  (1,841)                 $(17,602)
                    =======     =====     ========      =======    ========    =========      =========                  ========

</TABLE>

          See accompanying notes to consolidated financial statements.

                                       22


<PAGE>


                             DICTAPHONE CORPORATION

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

1.       NATURE OF OPERATIONS

                  Dictaphone Corporation (the "Company") is engaged principally
         in the design, manufacture, marketing and service of integrated voice
         and data management systems and software. The Company has two operating
         segments, System Products and Services and Contract Manufacturing. The
         System Products and Services segment consists of the sale and service
         of system-related products to dictation and voice management and
         communications recording system customers in selected vertical markets.
         Dictaphone markets these products worldwide with 86% of its revenue
         generated from the U.S. market. The Contract Manufacturing segment
         consists of manufacturing operations which provide outside electronic
         manufacturing services to original equipment manufacturers in the
         telecommunications, data management, computer and electronics
         industries.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

                  Basis of 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. Certain prior period amounts
         have been reclassified to conform to the current year presentation.

                  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") and Dictaphone
         International A.G. ("Dictaphone Switzerland"). All intercompany
         accounts and transactions have been eliminated.

                  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 ($6,225, $10,249 and $10,086 for the years ended
         December 31, 1997, 1998 and 1999, 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. Amortization expense in 1997, 1998 and 1999 related
         to the capitalized amounts was $5,821, $5,542 and $8,720, 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 three 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.


                                       23

<PAGE>


2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

                  Intangibles. Patents and non-compete agreement are amortized
         on a straight line basis over five and three years, respectively.
         Service contracts were 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 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 amortized ratably into income as
         earned.

                  Revenue. Revenue is recognized when earned. In accordance with
         American Institute of Certified Public Accountants Statements of
         Position 97-2 "Software Revenue Recognition" and related amendments,
         for products with a significant software element, the Company records
         revenue attributable to the hardware and software elements upon
         shipment and defers revenue attributable to undelivered elements
         (principally installation and training) to the periods in which the
         related obligations are performed. Revenue for all other products is
         recognized upon shipment or when service is performed.

                  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 taxes are 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. The Company does
         not currently provide for U.S. Federal taxes on the undistributed
         earnings of foreign subsidiaries.

                  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 and
         cap 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 consolidated statements of cash flows. The Company is
         required to implement the Statement of Financial Accounting Standards
         No. 133 "Accounting for Derivative Financial Instruments and Hedging
         Activities" in the first quarter of 2001. The Company believes the
         impact of the new pronouncement on the financial statements will be
         immaterial.

                  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 other comprehensive income
         (loss) within the stockholders' equity section of the consolidated
         balance sheet. Foreign currency gains and losses resulting from
         transactions are included in results of operations.

                  Stock-Based Compensation. 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


                                       24

<PAGE>


2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         market price of the stock at grant date over the exercise price of the
         option. Typically, grants of stock options pursuant to the Company's
         stock option plans have no intrinsic value at grant date, and
         accordingly, no compensation cost has been recognized by Dictaphone.

3.       INVENTORIES

                  Inventories consist of the following:
<TABLE>
<CAPTION>

                                                                December 31,               December 31,
                                                                    1998                       1999
                                                                ------------               ------------
                  <S>                                            <C>                        <C>
                  Raw materials and work in process              $    15,799                $    23,376
                  Supplies and service parts                          15,376                     11,083
                  Finished products                                   22,187                     15,300
                                                                 -----------                -----------
                  Total inventories                              $    53,362                $    49,759
                                                                 ===========                ===========
</TABLE>

4.       PROPERTY, PLANT AND EQUIPMENT

                  Property, plant and equipment consists of the following:

<TABLE>
<CAPTION>

                                                                December 31,               December 31,
                                                                    1998                       1999
                                                                ------------               ------------
                  <S>                                            <C>                        <C>
                  Land                                           $     1,058                $     1,076
                  Buildings                                           10,030                     10,197
                  Machinery and equipment                             56,100                     66,611
                                                                 -----------                -----------
                     Subtotal                                         67,188                     77,884
                  Accumulated depreciation                           (34,763)                   (40,395)
                                                                 -----------                -----------
                  Property, plant and equipment, net             $    32,425                $    37,489
                                                                 ===========                ===========
</TABLE>

                  Depreciation expense for the years ended December 31, 1997,
         1998 and 1999 was $7,739, $7,898 and $8,098, respectively.

                  In May 1998, the Company entered into a sale/leaseback
         agreement for the sale of its Stratford, CT land and headquarters
         facility for total proceeds of $14 million. The Company realized a gain
         on the sale of $1.8 million. The gain has been deferred and is being
         recognized over the term of the operating lease of 20 years.

5.       INTANGIBLES

                  The following summarizes intangible assets, net of accumulated
         amortization and writedowns of $122,595 and $133,964, for the years
         ended December 31, 1998 and 1999, respectively. Amortization expense
         for the years ended December 31, 1997, December 31, 1998 and December
         31, 1999 was $41,262, $23,156 and $11,369, respectively.

<TABLE>
<CAPTION>

                                                                December 31,               December 31,
                                                                    1998                       1999
                                                                ------------               ------------
                  <S>                                            <C>                        <C>

                  Goodwill                                       $   127,611               $    123,737
                  Tradenames                                          71,265                     69,318
                  Service contracts                                    2,530                        ---
                  Non-compete agreement                                2,463                      1,041
                  Patents                                              2,253                        769
                                                                 -----------                -----------
                                                                 $   206,122                $   194,865
                                                                 ===========                ===========

</TABLE>


                                       25


<PAGE>


6.       DEBT

                  The following summarizes the debt structure of the Company:
<TABLE>
<CAPTION>

                                                                December 31,                December 31
                                                                    1998                       1999
                                                                ------------               ------------
                  <S>                                            <C>                        <C>
                  Current portion of long-term debt              $       795                $       790
                                                                 -----------                -----------
                  Long-term debt:
                      Senior debt:
                          Term loans:
                               Tranche B                              69,450                     69,450
                               Tranche C                              61,495                     60,867
                          Revolving credit loans                      38,500                     23,000
                      International debt                                 292                        126
                      Subordinated notes                             200,000                    200,000
                                                                 -----------                -----------
                  Total long-term debt                               369,737                    353,443
                                                                 -----------                -----------
                  Total debt                                     $   370,532                $   354,233
                                                                 ===========                ===========
</TABLE>

                  In connection with the financing of the Acquisition, the
         Company entered into a Credit Agreement, dated August 7, 1995, as
         amended by five amendments to Credit Agreement, dated June 28, 1996,
         June 27, 1997, July 21, 1997, November 14, 1997 and December 31, 1998
         (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.

                  At December 31, 1999, the Company had Term Loans of $130,945
         and loans of $23,000 outstanding under the Revolving Credit Facility.
         The maturity schedule relating to the $130,945 of outstanding Term
         Loans is as follows:

                  2000                               $      628
                  2001                                   36,328
                  2002                                   93,989
                                                     ----------
                                                     $  130,945
                                                     ==========

                  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 its term. The Revolving Credit Facility terminates March
         31, 2001. Availability under the Revolving Credit Facility at December
         31, 1999 was $17,000. The Company had outstanding letters of credit of
         $2,070 as of December 31, 1999, which reduced availability to $14,930.

                  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 2.75% or
         the reserve Eurodollar Rate plus 3.75%. 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


                                       26


<PAGE>


6.       DEBT (Continued)

         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 which matured on February 16, 1999. The swap
         effectively converted 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 9.55%. Amounts due to
         or from the counterparties were reflected in interest expense in the
         periods in which they accrued. On February 11, 1999, the Company
         entered into interest rate cap agreements effective February 16, 1999,
         with an aggregate notional principal amount equivalent to $66 million
         maturing on February 16, 2001. The cap limits that portion of the
         Company's Term Loans to a fixed rate component of 5.5%; thus reducing
         the impact of increases in interest rates, limiting the effective
         interest rate on fifty percent of the currently outstanding Term Loans
         to 9.25%. The fair value of the interest rate cap agreements as of
         December 31, 1999 was favorable $0.7 million, based upon dealer quotes.
         The effective interest rate for the year ended December 31, 1999 was
         9.12%, 9.10% and 8.05% on the Tranche B Loan, Tranche C Loan and the
         Revolving Credit Facility, respectively.

                  Dictaphone Non-U.S. is not a guarantor of 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 to incur additional 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, 1999 was favorable $52 million, based on dealer quotes. The Notes
         are fully and unconditionally guaranteed by Dictaphone U.S. The Notes
         contain similar types of covenants 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.

7.       EQUITY AND STOCK OPTIONS

         Common Stock

                  On December 31, 1999, the Company had 30 million shares of
         common stock, $.01 par value ("Common Stock") authorized of which
         12,934,000 shares were issued to Stonington Capital Appreciation 1994
         Fund, L.P. ("Stonington"), an affiliate of a limited partner of
         Stonington, and by management of the Company. (See Note 9).

                  At December 31, 1998 and 1999, the Company had 66,000 shares
         of treasury stock, respectively.


                                       27


<PAGE>


7.       EQUITY AND STOCK OPTIONS (Continued)

         Preferred Stock and Warrant

                  The Company is authorized to issue up to 17,500,000 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 pari passu with the Convertible PIK Preferred
         (as hereinafter defined) and ranks senior to all other classes and
         series of stock of the Company with respect to dividend rights and
         rights on liquidation, winding up and dissolution of the Company. The
         PIK Preferred Stock 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 additional paid-in capital $2,699, $3,074 and
         $3,509 for the years ended December 31, 1997, 1998 and 1999,
         respectively, as a result of the required dividends representing
         269,900, 307,400 and 350,900 shares of the PIK Preferred Stock,
         respectively. Such shares of PIK Preferred Stock were declared and
         issued as of December 31, 1999.

                  In connection with a January 1999 equity infusion of $20.0
         million from Stonington, the Company issued 2,000,000 shares of newly
         issued 12% Convertible Pay-In-Kind Preferred Stock ("Convertible PIK
         Preferred"). The Convertible PIK Preferred is non-voting and has a
         stated value and liquidation preference of $10 per share and carries a
         cumulative pay-in-kind dividend of 12% per year payable quarterly in
         arrears from January 28, 1999 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 percent). The Convertible PIK
         Preferred has the same redemption rights as the PIK Preferred. The
         Convertible PIK Preferred is convertible into Common Stock on a one to
         one basis, subject to adjustments as described in the certificate of
         designation for the Company's Convertible PIK Preferred. The Company
         accrued the 12% pay-in-kind dividend and charged additional
         paid-in-capital $2,306 for the year ended December 31, 1999, as a
         result of the required dividends representing 230,600 shares of
         Convertible PIK Preferred Stock.

                  Together with the issuance of the PIK Preferred Stock, the
         Company issued a warrant to purchase 350,000 shares of 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 an exercise price of $10.00 per share
         (estimated fair value of the Common Stock at date of grant) to
         officers, key employees and non-employee directors of the Company. The
         Plan provides that one-half of the options (service-based options)
         granted under the Plan will vest automatically over a five year period
         and the other one-half (performance-based options) became eligible for
         vesting as to 10% on April 15, 1996, as to 20% on April 15, 1997, as to
         20% on April 15, 1998, as to 20%


                                       28


<PAGE>


7.       EQUITY AND STOCK OPTIONS (Continued)

         Management Stock Option Plan (cont.)

         on April 15, 1999, and the remaining options become eligible for
         vesting as to an additional 20% on April 15, 2000, with the remaining
         10% becoming eligible for vesting 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 performance in 1995, 1996, 1997, 1998 and 1999, the
         Company's Board of Directors determined that the following eligible
         performance-based options would vest: 60% on April 15, 1996, 0% on
         April 15, 1997, 0% on April 15, 1998, 0% on April 15, 1999 and 0% on
         April 15, 2000. 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, all outstanding unvested
         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. Effective July 28, 1999, the
         number of shares reserved for issuances under the Plan was increased by
         300,000. A summary of options outstanding is as follows:

<TABLE>
<CAPTION>

                                                                December 31,      December 31,       December 31,
                                                                    1997              1998               1999
                                                                ------------      ------------       -------------
         <S>                                                       <C>                <C>                <C>
         Outstanding, beginning of year                            650,000          1,096,500          1,067,000
         Granted                                                   551,500            141,500            440,000
         Cancelled                                                (105,000)          (171,000)           (44,250)
                                                                -----------        -----------        -----------
         Outstanding, end of year                                1,096,500          1,067,000          1,462,750
                                                                ===========        ===========        ===========

             Exercisable, end of year                              161,470            295,473            469,117
                                                                ===========        ===========        ===========
</TABLE>

                  The exercise price for all options was $10.00

                  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 the Company's 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 loss would have been increased to the pro forma amounts indicated
         below:

<TABLE>
<CAPTION>

                                                                           1997            1998              1999
                                                                           ----            ----              ----
              <S>                           <C>                        <C>              <C>               <C>
              Net loss                      As reported                $(70,921)        $(56,764)         $(14,758)
                                            Pro Forma                  $(71,503)        $(57,051)         $(15,406)

</TABLE>

                                       29


<PAGE>


7.       EQUITY AND STOCK OPTIONS (Continued)

         Management Stock Option Plan (cont.)

                  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:

<TABLE>
<CAPTION>

                                                              1997                1998               1999
                                                              ----                ----               ----
              <S>                                            <C>                <C>                 <C>
              Risk free interest rate                        5.72%              4.56%               6.36%

              Expected life                                  5 years            5 years             5 years

              Expected volatility                              ---                 ---               ---

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

</TABLE>


8.       INCOME TAXES

                  The (benefit) provision for income taxes for the years ended
         December 31, 1997, 1998 and 1999 consists of the following:


<TABLE>
<CAPTION>

                                            Year Ended                Year Ended               Year Ended
                                         December 31, 1997         December 31, 1998        December 31, 1999
                                         -----------------         -----------------        -----------------
             <S>                         <C>                        <C>                     <C>
             Current:
                 Federal                    $      ---                 $      ---              $      ---
                 State                             ---                        ---                     ---
                 Foreign                           707                      1,105                   1,206
                                            ----------                 ----------              ----------
                    Total                   $      707                      1,105                   1,206
                                            ----------                 ----------              ----------

             Deferred:
                 Federal                    $    1,059                 $      929              $      ---
                 State                          (2,203)                       221                     ---
                 Foreign                          (623)                    (1,377)                   (169)
                                            ----------                 ----------              ----------
                    Total                       (1,767)                      (227)                   (169)
                                            ----------                 ----------              ----------
                         Total              $   (1,060)                $      878              $    1,037
                                            ==========                 ==========              ==========

</TABLE>

                  The difference between the Company's effective income tax rate
         and the United States statutory rate for the years ended December 31,
         1997, 1998 and 1999 is reconciled below:

<TABLE>
<CAPTION>

                                                          Year Ended              Year Ended              Year Ended
                                                       December 31, 1997       December 31, 1998       December 31, 1999
                                                       -----------------       -----------------       -----------------
         <S>                                            <C>                    <C>                     <C>
         United States statutory rate                        35.00%                  35.00%                  35.00%
             State income taxes, net of Federal
              income tax benefit                              4.32%                   4.17%                   5.44%
             Effect of foreign operations                    (0.17%)                 (3.55%)                 (8.02%)
             Miscellaneous                                   (2.83%)                 (1.73%)                 (2.00%)
             Net operating loss carryforwards
              with no anticipated benefit                   (34.79%)                (35.54%)                 (43.53%)
                                                            --------                --------                --------
                  Total                                       1.53%                  (1.65%)                 (13.11%)
                                                            =======                 =======                 ========
</TABLE>

                  See Footnote 11 for disaggregated information as to domestic
         and foreign income before taxes.


                                       30

<PAGE>


8.       INCOME TAXES (Continued)

                  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:
<TABLE>
<CAPTION>

                                                                  December 31,             December 31,
                                                                      1998                     1999
                                                                  ------------             ------------
             <S>                                                     <C>                   <C>
             Deferred tax assets:
                  Net operating loss carryforwards                   $  48,725             $   60,030
                  Amortization - identifiable intangibles               25,646                 22,578
                  Postretirement and pension benefits                    5,185                  5,502
                  Inventory                                              5,130                  2,598
                  Depreciation                                           4,809                  5,075
                  Other                                                  5,824                  6,764
                                                                     ---------             ----------
                  Total gross deferred tax assets                       95,319                102,547
                                                                     ---------             ----------
             Less: valuation allowance                                 (44,868)               (48,779)
                                                                     ---------             ----------
             Net deferred tax assets                                 $  50,451             $   53,768
                                                                     =========             ==========
             Deferred tax liabilities:
                  Amortization - goodwill                            $  (5,481)            $   (7,080)
                  Capitalized software costs                            (4,209)                (5,135)
                  Other                                                   (996)                (1,619)
                                                                     ---------             ----------
                  Total deferred tax liabilities                     $ (10,686)            $  (13,834)
                                                                     =========             ==========
</TABLE>

                  As of December 31, 1999, the Company has recorded a gross
         deferred tax asset of $102.5 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, 1999 is approximately
         $148.1 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, $40.0 million will expire in the year 2012, $37.0
         million will expire in the year 2018 and $24.2 million will expire in
         the year 2020. 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. In 1997, the Company
         established a valuation allowance of $24.1 million against the deferred
         tax assets. During 1998, the Company increased its valuation allowance
         by $20.8 million. During 1999, the Company increased its valuation
         allowance by $3.9 million resulting in a net deferred tax asset of
         $53.8 million. Including a deferred tax liability of $13.9 million, the
         net deferred tax asset at December 31, 1999 totalled $39.9 million.
         Management believes, 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 than
         not be sufficient to fully utilize the net deferred tax asset of $53.8
         million recorded for December 31, 1999, prior to expiration. 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.

9.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         Transactions with Stonington Capital Appreciation 1994 Fund, L.P.

                  In the first quarter of 1999, the Company received an
         additional $20.0 million from the sale of 2,000,000 shares of
         Convertible PIK Preferred Stock to Stonington.


                                       31


<PAGE>


9.       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS  (Continued)

         Transactions with Stonington Capital Appreciation 1994 Fund, L.P.
         (cont.)

                  Stonington, together with an affiliate of a limited partner of
         Stonington, owns 99.0% 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 seven 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 was 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.

10.      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 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.

         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.


                                       32


<PAGE>


10.      COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF RISK  (Continued)

         Commitments (cont.)

                  Future minimum lease payments for operating leases as of
         December 31, 1999 are as follows:

                  Years ending December 31,
                    2000                                         $     5,430
                    2001                                               4,066
                    2002                                               2,883
                    2003                                               2,550
                    2004                                               2,125
                    Later years                                       23,307
                                                                 -----------
                  Total minimum lease payments                   $    40,361
                                                                 ===========

                  Rental expense under operating leases was $5,073, $4,952 and
         $6,285 for the years ended December 31, 1997, 1998 and 1999,
         respectively.

         Contingencies

                  On February 14, 1995, Pitney Bowes, Inc. ("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. Sudbury's patent
         expired in April 1998. As a result, injunctive relief is no longer
         available to Sudbury. Pretrial proceedings, including claim
         construction and dispositive motions, are continuing. A trial date in
         2000 is likely.

                  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. As these proceedings are at a preliminary stage, 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 $11 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 Stock and Asset Purchase
         Agreement, originally executed on April 25, 1995 and amended August 11,
         1995 between Dictaphone acquisition Corporation and Pitney Bowes,
         subject to certain limitations.


                                       33


<PAGE>


10.      COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF RISK  (Continued)

         Contingencies (cont.)

                  In July, 1999, Bruce Hilt d/b/a Integrated Resources, Inc.
         filed a complaint in the Middle District of Alabama against the Company
         and Pitney Bowes Credit Corporation. Plaintiff commenced this action in
         Alabama State Court as a purported class action for similarly situated
         persons within the State of Alabama. Plaintiff alleges that the
         Company's recording system he leases from Pitney Bowes Credit
         Corporation is not Y2K compliant and will not function after December
         31, 1999. The complaint seeks damages of less than $74,000 per class
         member and alleges that there are hundreds of potential class members.
         In August, 1999, the Company and Pitney Bowes removed the action to
         Federal Court, in part based on the new Federal Y2K Act, 15 U.S.C. ss.
         6601, et seq. (the "Y2K Act"). Plaintiff has filed a motion to remand
         the case to State Court, which is fully briefed and before the Court.

                  Plaintiff to date has not moved to certify the case as a class
         action. In October, 1999, the Company and Pitney Bowes filed a motion
         to dismiss the action. Plaintiff has not yet responded to the motion to
         dismiss, and no hearing date has been set by the Court.

                  The Company intends to continue to vigorously defend this
         action. Although the litigation is in its preliminary stages, the
         Company believes that it has meritorious defenses to this case,
         especially in light of a remedy that has been offered to plaintiff, and
         does not believe that a class should be certified.

                  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.

11.      SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT

         INFORMATION

                  Dictaphone Corporation has fully and unconditionally
         guaranteed the repayment of the Notes. 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.


                                       34


<PAGE>


11.      SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT

         INFORMATION  (Continued)

                  The following are the supplemental consolidating statement of
         operations and cash flow information for the years ended December 31,
         1997, 1998 and 1999, and the supplemental consolidating balance sheet
         information as of December 31, 1998 and 1999.

<TABLE>
<CAPTION>

                                              Dictaphone Corporation
                     Supplemental Condensed Consolidating Statement of Operations Information
                                           Year Ended December 31, 1997

                                                       Dictaphone      Dictaphone       Consolidating
                                                      Corporation       Non-U.S.         Adjustments      Consolidated
                                                      ------------    ------------      --------------    ------------
       <S>                                             <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                       141,749            13,776              ---           155,525
         Research and development                          14,705               ---              ---            14,705
         Interest expense - net and other                  42,111             2,551              ---            44,662
                                                       ----------        ----------       ----------        ----------
             Total costs and expenses                     379,066            43,391          (13,133)          409,324
                                                       ----------        ----------       ----------        ----------

       Equity (loss) earnings                             (11,382)              ---           11,382               ---
                                                       ----------        ----------       ----------        ----------

       (Loss) income before income taxes                  (80,466)             (669)          11,853           (69,282)

       Income tax benefit (expense)                         1,163                87             (190)            1,060
                                                       ----------        ----------       ----------        ----------

       Net (loss) income                               $  (79,303)       $     (582)      $   11,663        $  (68,222)
                                                       ==========        ==========       ==========        ==========
</TABLE>


                                       35


<PAGE>


11.      SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
         INFORMATION  (Continued)

<TABLE>
<CAPTION>
                                              Dictaphone Corporation
                     Supplemental Condensed Consolidating Statement of Operations Information
                                           Year Ended December 31, 1998

                                                      Dictaphone      Dictaphone       Consolidating
                                                      Corporation      Non-U.S.         Adjustments      Consolidated
                                                      ------------   ------------      --------------    ------------
       <S>                                           <C>              <C>               <C>               <C>
       Revenue from:
         Product sales and rentals                   $  189,818        $   17,355       $   (9,843)       $  197,330
         Contract manufacturing sales                    47,063               ---              ---            47,063
         Support services                                80,330             7,595              ---            87,925
                                                     ----------        ----------       ----------        ----------
             Total revenues                             317,211            24,950           (9,843)          332,318
                                                     ----------        ----------       ----------        ----------

       Costs and expenses:
         Cost of sales, rentals and support
          services                                      183,066            16,002          (10,380)          188,688
         Selling and administrative                     126,691            13,174                7           139,872
         Research and development                        17,128               ---              ---            17,128
         Interest expense - net and other                36,482             2,960              ---            39,442
                                                     ----------        ----------       ----------        ----------
             Total costs and expenses                   363,367            32,136          (10,373)          385,130
                                                     ----------        ----------       ----------        ----------

       Equity (loss) earnings                            (4,496)              ---            4,496               ---
                                                     ----------        ----------       ----------        ----------

       (Loss) income before income taxes                (50,652)           (7,186)           5,026           (52,812)

       Income tax (expense) benefit                      (1,405)              732             (205)             (878)
                                                     ----------        ----------       ----------        ----------

       Net (loss) income                             $  (52,057)       $   (6,454)      $    4,821        $  (53,690)
                                                     ==========        ==========       ==========        ==========
</TABLE>


                                       36


<PAGE>


11.      SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
         INFORMATION  (Continued)

<TABLE>
<CAPTION>


                                              Dictaphone Corporation
                     Supplemental Condensed Consolidating Statement of Operations Information
                                           Year Ended December 31, 1999

                                                      Dictaphone      Dictaphone       Consolidating
                                                      Corporation      Non-U.S.         Adjustments      Consolidated
                                                      ------------    -----------      -------------     ------------
       <S>                                           <C>              <C>               <C>               <C>
       Revenue from:
         Product sales and rentals                   $  201,798        $   26,888       $  (14,913)       $  213,773
         Contract manufacturing sales                    44,288               ---              ---            44,288
         Support services                                86,575             9,098              ---            95,673
                                                     ----------        ----------       ----------        ----------
             Total revenues                             332,661            35,986          (14,913)          353,734
                                                     ----------        ----------       ----------        ----------

       Costs and expenses:
         Cost of sales, rentals and support
          services                                      182,520            21,674          (14,999)          189,195
         Selling and administrative                     112,269            10,408              ---           122,677
         Research and development                         9,761               ---              ---             9,761
         Interest expense - net and other                37,675             2,332              ---            40,007
                                                     ----------        ----------       ----------        ----------
             Total costs and expenses                   342,225            34,414          (14,999)          361,640
                                                     ----------        ----------       ----------        ----------

       Equity earnings (loss)                             1,580               ---           (1,580)              ---
                                                     ----------        ----------       ----------        ----------

       (Loss) income before income taxes                 (7,984)            1,572           (1,494)           (7,906)

       Income tax (expense) benefit                         (87)             (915)             (35)           (1,037)
                                                     ----------        ----------       ----------        ----------

       Net (loss) income                             $   (8,071)       $      657       $   (1,529)       $   (8,943)
                                                     ==========        ==========       ==========        ==========

</TABLE>


                                       37


<PAGE>


11.      SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
         INFORMATION  (Continued)

<TABLE>
<CAPTION>


                                              Dictaphone Corporation
                          Supplemental Condensed Consolidating Balance Sheet Information
                                                 December 31, 1998

                                                      Dictaphone      Dictaphone       Consolidating
                                                      Corporation      Non-U.S.         Adjustments      Consolidated
                                                      ------------    -----------      -------------     ------------
       <S>                                           <C>              <C>               <C>               <C>
      ASSETS
       Current assets:
         Cash and cash equivalents                   $   10,114       $    1,613        $      ---        $   11,727
         Accounts receivable, less allowances            75,447            6,782            (4,797)           77,432
         Inventories                                     50,666            2,987              (291)           53,362
         Other current assets                             4,062            3,079               118             7,259
                                                     ----------       ----------        ----------        ----------
           Total current assets                         140,289           14,461            (4,970)          149,780

       Investments in subsidiaries                       28,520              ---           (28,520)              ---
       Property, plant and equipment, net                29,320            3,105               ---            32,425
       Deferred financing costs                           9,920              ---               ---             9,920
       Intangibles, net                                 192,492           13,630               ---           206,122
       Other assets                                      52,028            4,052               ---            56,080
                                                     ----------       ----------        ----------        ----------
       Total assets                                  $  452,569       $   35,248        $  (33,490)       $  454,327
                                                     ==========       ==========        ===========       ==========

       LIABILITIES AND STOCKHOLDERS'
       EQUITY

       Current liabilities:
         Accounts payable, interest payable
          and accrued liabilities                    $   44,748       $   11,111        $   (5,581)       $   50,278
         Advance billings                                37,294            2,292               ---            39,586
         Current portion of long-term debt                  628              167               ---               795
                                                     ----------       ----------        ----------        ----------
           Total current liabilities                     82,670           13,570            (5,581)           90,659
       Long-term debt                                   369,445           17,783           (17,491)          369,737
       Accrued pension liability                          8,352              ---               ---             8,352
       Other liabilities                                 13,324              817               ---            14,141
       Stockholders' equity (deficit)                   (21,222)           3,078           (10,418)          (28,562)
                                                     ----------       ----------        ----------        ----------
       Total liabilities and stockholders' equity    $  452,569       $   35,248        $  (33,490)       $  454,327
                                                     ==========       ==========        ==========        ==========

</TABLE>


                                       38


<PAGE>


11.      SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
         INFORMATION  (Continued)

<TABLE>
<CAPTION>

                                              Dictaphone Corporation
                          Supplemental Condensed Consolidating Balance Sheet Information
                                                 December 31, 1999

                                                      Dictaphone      Dictaphone       Consolidating
                                                      Corporation      Non-U.S.         Adjustments      Consolidated
                                                      ------------    -----------      -------------     ------------
       <S>                                           <C>              <C>               <C>               <C>
       ASSETS

       Current assets:
         Cash and cash equivalents                   $    4,595       $    1,595        $      ---        $    6,190
         Accounts receivable, less allowances            92,608           10,822            (2,596)          100,834
         Inventories                                     47,765            2,199              (205)           49,759
         Other current assets                             3,351            2,718                83             6,152
                                                     ----------       ----------        ----------        ----------
           Total current assets                         148,319           17,334            (2,718)          162,935

       Investments in subsidiaries                       30,883              ---           (30,883)              ---
       Property, plant and equipment, net                34,444            3,045               ---            37,489
       Deferred financing costs                           8,141              ---               ---             8,141
       Intangibles, net                                 182,241           12,624               ---           194,865
       Other assets                                      53,333            4,375               ---            57,708
                                                     ----------       ----------        ----------        ----------
       Total assets                                  $  457,361       $   37,378        $  (33,601)       $  461,138
                                                     ==========       ==========        ===========       ==========

       LIABILITIES AND STOCKHOLDERS'
       EQUITY

       Current liabilities:
         Accounts payable, interest payable
          and accrued liabilities                    $   43,915       $   11,329        $   (2,596)       $   52,648
         Advance billings                                46,571            2,529               ---            49,100
         Current portion of long-term debt                  628              162               ---               790
                                                     ----------       ----------        ----------        ----------
           Total current liabilities                     91,114           14,020            (2,596)          102,538
       Long-term debt                                   353,317           17,117           (16,991)          353,443
       Accrued pension expense                            9,953              ---               ---             9,953
       Other liabilities                                 12,270              536               ---            12,806
       Stockholders' equity (deficit)                    (9,293)           5,705           (14,014)          (17,602)
                                                     ----------       ----------        ----------        ----------
       Total liabilities and stockholders' equity    $  457,361       $   37,378        $  (33,601)       $  461,138
                                                     ==========       ==========        ==========        ==========


</TABLE>


                                       39


<PAGE>


11.      SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
         INFORMATION  (Continued)

<TABLE>
<CAPTION>

                                              Dictaphone Corporation
                          Supplemental Consolidating Statement of Cash Flows Information
                                           Year Ended December 31, 1997

                                                        Dictaphone       Dictaphone      Consolidating
                                                        Corporation       Non-U.S.        Adjustments     Consolidated
                                                        ------------    -----------      -------------     ------------
       <S>                                             <C>               <C>               <C>              <C>
       Operating activities:
         Net loss                                      $  (66,646)       $     (582)      $     (994)       $  (68,222)
         Adjustments to reconcile net
           loss to net cash provided by (used in)
           operating activities:
           Depreciation and amortization                   65,115             3,400              ---            68,515
           Provision for deferred income taxes             (1,334)             (623)             190            (1,767)
           Non-recurring charge for digital
            product obsolescence                           13,426             1,476              ---            14,902
           Change in assets and liabilities:
              Accounts receivable                         (14,811)           (1,165)          (2,893)          (18,869)
              Inventories                                  (8,442)            4,385             (471)           (4,528)
              Other current assets                         (1,907)               31              ---            (1,876)
              Accounts payable and
                accrued liabilities                         6,821            (3,815)           2,890             5,896
              Advance billings                              3,006              (504)             ---             2,502
              Other assets and other                      (12,323)              169            1,158           (10,996)
                                                       ----------        ----------       ----------        ----------
       Net cash (used in) provided by
         operating activities                             (17,095)            2,772             (120)          (14,443)
                                                       -----------       ----------       -----------       ----------

       Investing activities:
         Net investment in fixed assets                    (4,962)             (937)             ---            (5,899)
                                                       ----------        ----------       ----------        ----------
       Net cash used for investing activities              (4,962)             (937)             ---            (5,899)
                                                       ----------        ----------       ----------        ----------

       Financing activities:
         Borrowing under term loan facility                62,750               ---              ---            62,750
         Repayment under term loan facility               (71,000)              ---              ---           (71,000)
         Proceeds from sale of common stock                35,000               ---              ---            35,000
         Borrowings under revolving credit
           facility                                        88,600               ---              ---            88,600
         Repayments under revolving credit
           facility                                       (88,600)              ---              ---           (88,600)
         Other                                             (2,986)           (1,103)             120            (3,969)
                                                       -----------       ----------       ----------        ----------
       Net cash provided by (used in) financing
         activities                                        23,764            (1,103)             120            22,781
                                                       ----------        ----------       ----------        ----------
       Effect of exchange rate changes on cash                ---               (89)             ---               (89)
                                                       ----------        ----------       ----------        ----------
       Increase in cash                                     1,707               643              ---             2,350
       Cash and cash equivalents,
        beginning of period                                 6,569             1,358              ---             7,927
                                                       ----------        ----------       ----------        ----------
       Cash and cash equivalents,
          end of period                                $    8,276        $    2,001       $      ---        $   10,277
                                                       ==========        ==========       ==========        ==========

</TABLE>


                                       40

<PAGE>


11.      SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
         INFORMATION  (Continued)

<TABLE>
<CAPTION>

                                              Dictaphone Corporation
                          Supplemental Consolidating Statement of Cash Flows Information
                                           Year Ended December 31, 1998

                                                        Dictaphone       Dictaphone      Consolidating
                                                        Corporation       Non-U.S.        Adjustments     Consolidated
                                                        ------------    -----------      -------------     ------------
       <S>                                             <C>               <C>               <C>              <C>
       Operating activities:
         Net loss                                      $  (52,057)       $   (6,461)      $    4,828        $  (53,690)
         Adjustments to reconcile net
           loss to net cash provided by (used in)
           operating activities:
           Depreciation and amortization                   36,987             2,908              ---            39,895
           Provision for deferred income taxes              1,150            (1,377)             ---              (227)
           Non-recurring charge for product
            obsolescence                                    4,999               ---              ---             4,999
           Change in assets and liabilities:
              Accounts receivable                         (10,563)            1,661            3,153            (5,749)
              Inventories                                  (9,703)              505             (537)           (9,735)
              Other current assets                          3,807               678              205             4,690
              Accounts payable and
                accrued liabilities                         3,978             4,731           (3,787)            4,922
              Advance billings                              3,042              (519)             ---             2,523
              Other assets and other                      (10,488)               87           (5,650)          (16,051)
                                                       ----------        ----------       ----------        ----------
       Net cash (used in) provided by
         operating activities                             (28,848)            2,213           (1,788)          (28,423)
                                                       -----------       ----------       -----------       ----------

       Investing activities:
         Net investment in fixed assets                    (8,224)             (627)             ---            (8,851)
         Proceeds from sale of building                    14,000               ---              ---            14,000
                                                       ----------        ----------       ----------        ----------
       Net cash provided by (used in) investing
        activities                                          5,776              (627)             ---             5,149
                                                       ----------        ----------       ----------        ----------
       Financing activities:
         Repayment under term loan facility                (2,427)              ---              ---            (2,427)
         Borrowings under revolving credit
           facility                                        79,000               ---              ---            79,000
         Repayments under revolving credit
           facility                                       (49,500)              ---              ---           (49,500)
         Other                                             (2,163)           (1,940)           1,788            (2,315)
                                                       -----------       ----------       ----------        ----------
       Net cash provided by (used in) financing
        activities                                         24,910            (1,940)           1,788            24,758
                                                       ----------        ----------       ----------        ----------
       Effect of exchange rate changes on cash                ---               (34)             ---               (34)
                                                       ----------        ----------       ----------        ----------
       Increase (decrease) in cash                          1,838              (388)             ---             1,450

       Cash and cash equivalents,
        beginning of period                                 8,276             2,001              ---            10,277
                                                       ----------        ----------       ----------        ----------

       Cash and cash equivalents,
        end of period                                  $   10,114        $    1,613       $      ---        $   11,727
                                                       ==========        ==========       ==========        ==========

</TABLE>


                                       41


<PAGE>


11.      SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL STATEMENT
         INFORMATION  (Continued)

<TABLE>
<CAPTION>

                                              Dictaphone Corporation
                          Supplemental Consolidating Statement of Cash Flows Information
                                           Year Ended December 31, 1999

                                                        Dictaphone       Dictaphone      Consolidating
                                                        Corporation       Non-U.S.        Adjustments     Consolidated
                                                        ------------    -----------      -------------     ------------
       <S>                                             <C>               <C>               <C>              <C>
       Operating activities:
         Net loss                                      $   (8,071)       $      657       $   (1,529)       $   (8,943)
         Adjustments to reconcile net
           loss to net cash provided by (used in)
           operating activities:
           Depreciation and amortization                   28,444             1,671              ---            30,115
           Provision for deferred income taxes                ---              (483)             323              (160)
           Non-recurring charge for product
            obsolescence                                      ---               ---              ---               ---
           Change in assets and liabilities:
              Accounts receivable                         (17,161)           (3,923)          (2,201)          (23,285)
              Inventories                                   2,901               790              (86)            3,605
              Other current assets                            711               587             (288)            1,010
              Accounts payable and
                accrued liabilities                           519               626            2,985             4,130
              Advance billings                              9,277               187              ---             9,464
              Other assets and other                      (13,613)             (753)           2,863           (11,503)
                                                       ----------        ----------       ----------        ----------
       Net cash provided by (used in)
         operating activities                               3,007              (641)           2,067             4,433
                                                       ----------        ----------       ----------        ----------

       Investing activities:
         Net investment in fixed assets                   (11,457)             (876)             ---           (12,333)
                                                       ----------        ----------       ----------        ----------
       Net cash used for investing
        activities                                        (11,457)             (876)             ---           (12,333)
                                                       ----------        ----------       ----------        ----------

       Financing activities:
         Repayment under term loan facility                  (628)              ---              ---              (628)
         Proceeds from sale of preferred stock             20,000               ---              ---            20,000
         Borrowings under revolving credit
           facility                                        42,500               ---              ---            42,500
         Repayments under revolving credit
           facility                                       (58,000)              ---              ---           (58,000)
         Other                                               (941)            1,526           (2,067)           (1,482)
                                                       ----------        ----------       -----------       -----------
       Net cash provided by (used in) financing
        activities                                          2,931             1,526           (2,067)            2,390
                                                       ----------        ----------       ----------        ----------

       Effect of exchange rate changes on cash                ---               (27)             ---               (27)
                                                       ----------        ----------       ----------        ----------

       Decrease in cash                                    (5,519)              (18)             ---            (5,537)

       Cash and cash equivalents,
        beginning of period                                10,114             1,613              ---            11,727
                                                       ----------        ----------       ----------        ----------

       Cash and cash equivalents,
        end of period                                  $    4,595        $    1,595       $      ---        $    6,190
                                                       ==========        ==========       ==========        ==========

</TABLE>


                                       42


<PAGE>

12.      DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
         INFORMATION

                  Dictaphone has two reportable segments: System Products and
         Services, and Contract Manufacturing. The System Products and Services
         segment consists of the sale and service of system-related products to
         dictation and voice management and communications recording system
         customers in selected vertical markets. The Contract Manufacturing
         segment consists of the manufacturing operations of Dictaphone which
         provides outside electronics manufacturing services to original
         equipment manufacturers in the telecommunications, data management,
         computer and electronics industries.

                  The accounting policies of the segments are the same as those
         described in the summary of significant accounting policies. Dictaphone
         evaluates performance based on profit or loss from operations before
         income taxes, including nonrecurring gains and losses and foreign
         exchange gains and losses.

<TABLE>
<CAPTION>

                                              Dictaphone Corporation
                                                Segment Information

                                                                     System
                                                                   Products &        Contract
                                                                    Services       Manufacturing         Total
                                                                  ------------     -------------     -----------
       <S>                                          <C>           <C>               <C>              <C>
         Revenue from external customers            1999          $  309,446        $   44,288       $  353,734
                                                    1998             285,255            47,063          332,318
                                                    1997             297,178            42,864          340,042
         Intersegment revenues                      1999                 ---            37,664           37,664
                                                    1998                 ---            54,411           54,411
                                                    1997                 ---            55,919           55,919
         Interest expense, net                      1999              39,882               ---           39,882
                                                    1998              39,570               ---           39,570
                                                    1997              44,241               ---           44,241
         Depreciation and amortization              1999              28,675             1,440           30,115
                                                    1998              38,240             1,655           39,895
                                                    1997              66,534             1,981           68,515
         Segment profit (loss)                      1999             (13,335)            5,429           (7,906)
                                                    1998             (57,424)            4,612          (52,812)
                                                    1997             (76,036)            6,754          (69,282)
         Segment assets                             1999             456,938            44,615          501,553
                                                    1998             444,979            43,805          488,784
                                                    1997             459,607            51,050          510,657
         Expenditures for segment assets            1999             (10,985)           (1,348)         (12,333)
                                                    1998              (8,503)             (348)          (8,851)
                                                    1997              (5,754)             (145)          (5,899)

</TABLE>


                                       43


<PAGE>


12.      DISCLOSURES ABOUT SEGMENTS ON AN ENTERPRISE AND RELATED
         INFORMATION (Continued)

         Geographic Information
<TABLE>
<CAPTION>

                                                                                      Long-lived
                                                                     Revenues          Assets
                                                                  -------------     -------------
       <S>                                          <C>           <C>              <C>
         United States                              1999          $  303,682        $  309,042
                                                    1998             293,321           312,280
                                                    1997             288,906           340,312

         Canada                                     1999              20,596             4,909
                                                    1998              11,641             5,320
                                                    1997              16,659             5,439

         Europe                                     1999              20,508            15,135
                                                    1998              19,492            15,467
                                                    1997              25,156            15,468

         Latin America                              1999               4,057               ---
                                                    1998               3,625               ---
                                                    1997               3,674               ---

         Far East                                   1999               4,891               ---
                                                    1998               4,239               ---
                                                    1997               5,647               ---

         Adjustments                                1999                 ---           (30,883)
                                                    1998                 ---           (28,520)
                                                    1997                 ---           (33,847)

           Total                                    1999             353,734           298,203
                                                    1998             332,318           304,547
                                                    1997             340,042           327,372


         Revenue Reconciliation

         Total revenue for reportable segments                       1999           $  391,398
                                                                     1998              386,729
                                                                     1997              395,961

         Elimination of intersegment revenues                        1999              (37,664)
                                                                     1998              (54,411)
                                                                     1997              (55,919)

           Total consolidated revenues                               1999              353,734
                                                                     1998              332,318
                                                                     1997              340,042

</TABLE>


                                       44


<PAGE>


12.      DISCLOSURES ABOUT SEGMENTS ON AN ENTERPRISE AND RELATED
         INFORMATION (Continued)

         Asset Reconciliation
<TABLE>
<CAPTION>

         <S>                                                         <C>            <C>
         Total assets for reportable segments                        1999           $  501,553
                                                                     1998              488,784
                                                                     1997              510,657

         Adjustments                                                 1999              (40,415)
                                                                     1998              (34,457)
                                                                     1997              (40,615)

           Consolidated total                                        1999              461,138
                                                                     1998              454,327
                                                                     1997              470,042

</TABLE>


13.      PENSION AND OTHER POSTRETIREMENT BENEFITS

                  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
         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 Plan's investments consist primarily of listed common
         stocks, bonds and government obligations.

                  The Company sponsors a defined contribution plan (401K) for
         domestic employees. In 1999, the Company matched 50% of employee
         contributions up to 4% of eligible compensation, subject to certain
         limitations. Total Company contributions were $840, $1,181 and $1,179
         for the years ended December 31, 1997, 1998 and 1999, respectively.

                  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.

                  The following table sets forth the amounts recognized in the
         Company's balance sheet at December 31, 1998 and 1999 for Company
         sponsored defined benefit pension plans and postretirement benefit
         plans.


                                       45


<PAGE>


13.      PENSION AND OTHER POSTRETIREMENT BENEFITS (Continued)

<TABLE>
<CAPTION>

                                                                                                          Postretirement
                                                                           Pension Benefits                   Benefits
                                                                      ------------------------       -------------------------
                                                                          1998           1999           1998             1999

   <S>                                                                  <C>             <C>           <C>           <C>
   Reconciliation of Projected Benefit Obligation
   ----------------------------------------------
     Projected benefit obligation at beginning of year                  $  50,182       $  57,969     $  10,946      $   6,057
       Service cost                                                         2,393           2,820           668            301
       Interest cost                                                        3,499           3,723           353            202
       Benefits paid                                                       (1,778)         (1,330)         (289)          (470)
       Plan change                                                            ---             ---           ---         (2,710)
       Actuarial (gain) or loss                                             3,683          (8,396)       (5,621)          (493)
       Foreign exchange                                                       (10)             28           ---            ---
                                                                        ---------       ---------     ---------      ---------
     Projected benefit obligation at end of year                           57,969          54,814         6,057          2,887
                                                                        ---------       ---------     ---------      ---------

   Reconciliation of Assets
   ------------------------
     Assets at beginning of year                                           51,954          57,775           ---            ---
       Actual return on plan assets                                         7,632           2,629           ---            ---
       Employer contributions                                                 372             212           289            470
       Employee contributions                                                 ---             135           ---            ---
       Benefits paid                                                       (1,778)         (1,330)         (289)          (470)
       Foreign exchange                                                      (405)            (57)          ---            ---
                                                                        ---------       ---------     ---------      ---------
     Fair value of plan assets at end of year                              57,775          59,364           ---            ---
                                                                        ---------       ---------     ---------      ---------

   Actuarial Present Value of Benefit Obligations
   ----------------------------------------------
   Vested benefit obligation                                               45,652          43,957           ---            ---
   Accumulated benefit obligation                                          49,525          47,382         6,057          2,887
   Projected benefit obligation                                            57,969          54,814           ---            ---
   Plan assets at fair value                                               57,775          59,364           ---            ---
   Projected benefit obligation (in excess of) or less than plan assets      (194)          4,550        (6,057)        (2,887)
   Unrecognized net (gain) or loss                                         (4,072)        (10,070)       (3,692)        (5,834)
   Unrecognized net obligation (asset) existing at year end                  (769)           (557)          ---            ---
                                                                        ---------       ---------     ---------      ---------
   Prepaid benefit cost (liability) recognized in the
    statement of financial position                                        (5,035)         (6,077)       (9,749)        (8,721)
                                                                        ---------       ---------     ---------      ---------
   Net periodic benefit cost included in the following components:
   Service cost - benefits earned during the year                           2,393           2,820           668            301
   Interest on projected benefit obligation                                 3,499           3,723           353            202
   Expected return on assets                                               (4,682)         (4,582)          ---            ---
   Amortization of transitional assets at beginning of year                  (204)           (201)          ---            ---
   Amortization of prior service cost at beginning of year                    ---             ---           ---           (455)
   Amortization of (gain)/loss at beginning of year                           (80)           (578)         (656)          (605)
                                                                        ---------       ---------     ---------      ---------
   Net periodic benefit cost                                            $     926       $   1,182     $     365      $    (557)
                                                                        ---------       ---------     ---------      ---------

   Discount rate for net periodic benefit cost                               6.78%           6.45%         7.00%          6.75%
   Discount rate for disclosure information                                  6.73%           7.27%         6.75%          7.75%
   Salary increase assumption                                                4.56%           4.53%         4.75%          4.75%
   Long term rate of return on assets                                        8.87%           8.90%          ---            ---



                                                                         1 Percentage     1 Percentage
                                                                         Point Increase   Point Decrease
                                                                         --------------   --------------
   Effect on total of service and interest cost components   --  1999          N/A             N/A
                                                             --  1998      $    61          $  (54)
   Effect on postretirement benefit obligation               --  1999          N/A             N/A
                                                             --  1998          252            (244)


</TABLE>


                                       46


<PAGE>


14.      SUBSEQUENT EVENT

                  On March 7, 2000, the Company entered into a definitive
         agreement to be acquired by Lernout & Hauspie. The transaction is
         subject to closing conditions, including the ability of Lernout &
         Hauspie to obtain financing for approximately $425 million of the
         Company's debt and other obligations, and other customary conditions.



                                       47
<PAGE>



SCHEDULE II

<TABLE>
<CAPTION>

                                              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
            -----------                             ---------        --------        ----------         ------
<S>                                                 <C>              <C>             <C>              <C>
Year ended December 31, 1999

Allowance for doubtful accounts                     $    968         $   2,461       $  1,628        $   1,801

Year ended December 31, 1998

Allowance for doubtful accounts                          810             1,872          1,714              968

Year ended December 31, 1997

Allowance for doubtful accounts                        1,339                72            601              810

</TABLE>



                                       48
<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, 2000.

<TABLE>
<CAPTION>

Name                                    Age    Position
<S>                                     <C>    <C>
John H. Duerden ....................    59     Chairman, Chief Executive Officer and President

Joseph D. Skrzypczak................    44     Chief Operating Officer and Director

Albert J. Fitzgibbons, III..........    54     Director

Emil F. Jachmann....................    53     Director

Alexis P. Michas....................    42     Director

Scott M. Shaw   ....................    37     Director

Peter P. Tong   ....................    58     Director

Joseph Delaney  ....................    54     Senior Vice President, Customer Support

Ronald A. Elwell....................    39     Senior Vice President and General Manager, Communications
                                               Recording Systems and International Operations

Daniel P. Hart  ....................    41     Senior Vice President, General Counsel and Secretary

Thomas C. Hodge ....................    54     Senior Vice President, Manufacturing and Logistics

Robert G. Schwager..................    46     Senior Vice President and General Manager, Voice Systems
</TABLE>

         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. and is on the Board of
Advisors of Outward Bound U.S.A.


                                       49
<PAGE>


         Joseph D. Skrzypczak has been a Director of the Company since August
1995. Mr. Skrzypczak has served as Chief Operating Officer and Chief Financial
Officer since October 1998. Prior to being elected Chief Operating Officer, Mr.
Skrzypczak served as Senior Vice President and Chief Financial Officer from
October 1997 to October 1998 and served as Vice President and Chief Financial
Officer from May 1994 to October 1997. While serving in such capacity prior to
the Acquisition, Mr. Skrzypczak's 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.

         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 Burns International Services Corporation, Merisel, Inc. and United Artists
Theater Circuit, Inc.

         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 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
Borg-Warner Automotive, Inc., Burns International Services 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 Partner of Stonington Partners, a position that he has held
since February 1999. Prior to being elected Partner, Mr. Shaw had been a
Principal of Stonington Partners 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. and a privately held company.

         Peter P. Tong has served as a Director of the Company since February
1997. Mr. Tong is a Management Partner of Stonington Partners and is the
President of Mandarin Partner LLC, an investment partnership. Mr. Tong was a
private investor from 1996 to 1997. From January 1996 to May 1996, Mr. Tong
served as 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 a Director of Packard
BioScience Company, Obagi Medical Products, Inc., United States Manufacturing
Company, University of Wisconsin Industrials Council, University of Wisconsin
Foundation and several privately held, start-up technology companies.

         Joseph Delaney has served as Senior Vice President, Customer Support
since October 1998. From October 1997 to October 1998, Mr. Delaney served as
Senior Vice President, Customer Service Operations and from June 1997 to October
1997 served as Vice President, Customer Service Operations. From January to June
1997, Mr. Delaney


                                       50
<PAGE>


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 and International Operations since
October 1998. From October 1997 to October 1998, Mr. Elwell served as Senior
Vice President and General Manager, Communications Recording Systems, and from
August 1997 to October 1997 as Vice President and General Manager,
Communications Recording Systems. 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 Company's
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 a consultant and private investor from 1994 to 1995.

         Thomas C. Hodge has served as Senior Vice President, Manufacturing and
Logistics since October 1997. From June 1989 to October 1997, Mr. Hodge served
as Vice President, Operations Manufacturing for the Company's facility in
Melbourne, Florida. Prior to June 1989, Mr. Hodge 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, Voice Systems since October 1998. Mr. Schwager served as Senior Vice
President and General Manager, Integrated Health Systems from October 1997 to
October 1998, and from August 1997 to October 1997 as Vice President and General
Manager, Integrated Health Systems. 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.

         Messrs. Fitzgibbons, Michas and Shaw serve as members of the Audit
Committee and the Compensation Committee (the "Compensation Committee"). Each of
Messrs. Fitzgibbons, 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 1999, 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.


                                       51
<PAGE>


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 1999 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 1999.

<TABLE>
<CAPTION>

                                            SUMMARY COMPENSATION TABLE

                                     Annual Compensation                      Long-Term 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          1999  $  995,000   $995,000       $  97,096            ---          ---           $156,034(3)
 Chairman, President     1998   1,033,269    497,500         199,844            ---          ---            285,893
 and Chief Executive     1997     985,981    497,500          95,713        325,000          ---            172,540
 Officer

Joseph D. Skrzypczak,    1999     347,756    385,250          90,398         87,500          ---             94,913(3)
 Chief Operating         1998     298,269    395,000(2)       41,863         20,000          ---             45,067
 Officer                 1997     239,171    137,500          12,455            ---          ---             17,047

Robert G. Schwager,      1999     279,616    327,750             ---         62,500          ---              5,101(3)
 Senior VP & General     1998     259,616    277,787             ---            ---          ---              3,579
 Manager, Voice          1997     199,796     77,500             ---            ---          ---                837
 Systems

Daniel P. Hart,          1999     256,087    287,500             ---         67,500          ---              4,302(3)
 Senior VP and           1998     228,462     65,000             ---          3,000          ---              4,188
 General Counsel         1997     172,669     77,000             ---          7,000          ---              2,690

Joseph Delaney,          1999     202,308    230,000             ---         15,000          ---              2,662(3)
 Senior VP, Customer     1998     181,731        ---             ---          1,000          ---              3,340
 Support                 1997     162,747     54,250             ---         35,000          ---              1,906

</TABLE>

--------------------------------
(1)      The amounts reported in this column for 1999, 1998 and 1997 for each of
         Messrs. Duerden and Skrzypczak reflect tax gross ups made by the
         Company. The aggregate value of the perquisites and other personal
         benefits received by each of Messrs. Duerden, Skrzypczak, Schwager,
         Hart and Delaney in 1999, 1998 and 1997, 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)      Includes a one time payment in the amount of $250,000 paid in
         connection with the termination of prior employment agreements. See
         "Employment and Consulting Agreements".

(3)      The compensation reflected in this column for 1999 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 1999 were $0, $105,694 and $50,340 for Mr. Duerden; $2,511,
         $92,302 and $100 for Mr. Skrzypczak; $5,001, $0 and $100 for Mr.
         Schwager; $4,202, $0 and $100 for Mr. Hart; and $2,072, $0 and $100 for
         Mr. Delaney.

Stock Option Grants

         The following table sets forth information regarding grants of options
to purchase Common Stock during the fiscal year ended December 31, 1999 to each
of the named executives. No stock appreciation rights were granted during 1999.


                                       52
<PAGE>

<TABLE>
<CAPTION>

                                               Option Grants in 1999
                                                 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(#)           1999(1)         Share)(2)          Date            (5%)           (10%)
                        ------------     ---------------    ------------     -------------    ------------   -----------
<S>                        <C>                  <C>              <C>             <C>            <C>            <C>
Name
----
John Duerden.........            ---            ---                 ---              ---              ---           ---
Joseph D. Skrzypczak.      87,500(4)             8%              $10.00          7/28/09       $1,425,283    $2,269,525
Robert G. Schwager...      62,500(4)             6%               10.00          7/28/09        1,018,059     1,621,089
Daniel P. Hart.......      67,500(4)             6%               10.00          7/28/09        1,099,504     1,750,776
Joseph Delaney.......      15,000(4)             1%               10.00          7/28/09          244,334       389,061

</TABLE>

--------------------------------
(1)      The Company granted options to purchase a total of 440,000 shares of
         Common Stock in 1999.

(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, 1999 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)      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 vested on April 15, 1997, 1998 and 1999, 0% will be
         vested on April 15, 2000 and the remaining will become eligible for
         vesting on April 15, 2001 if the Company attains certain predetermined
         financial performance goals.


                                       53
<PAGE>


Option Exercises and Year-End Value Table

         The following table sets forth information regarding the exercise of
stock options during fiscal 1999 and the number and year end value of
unexercised options held at December 31, 1999 by each of the named executives.
No stock appreciation rights were exercised by the named executives during
fiscal 1999.

<TABLE>
<CAPTION>
                                     Aggregate Option Exercises in Fiscal 1999
                                           and Fiscal 1999 Option Values

                                                                                                      Value of Unexercised
                                                                    Number of Securities                 In-the-Money(1)
                                Shares                             Underlying Unexercised                   (Options)
                              Acquired on         Value        Options at Fiscal Year-End (#)        at Fiscal Year-End ($)
                             Exercise (#)     Realized ($)        Exercisable/Unexercisable         Exercisable/Unexercisable
                             ------------    -------------     ------------------------------       -------------------------
<S>                              <C>          <C>                  <C>                                    <C>
Name
----

John H. Duerden...........         ---             ---             306,967 / 228,033 (2)                  $0/$0 (4)

Joseph D. Skrzypczak......         ---             ---              21,350 / 131,150 (2)                    0/0 (4)

Robert G. Schwager........         ---             ---               19,425 / 88,075 (2)                    0/0 (4)
                                 4,000        $197,690                           0/0 (3)                    0/0

Daniel P. Hart............         ---             ---               16,100 / 91,400 (2)                    0/0 (4)

Joseph Delaney............         ---             ---                8,920 / 46,080 (2)                    0/0 (4)
</TABLE>

-----------------------------
(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, 1999 (as determined by the Board of
         Directors), and the exercise price of the 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, 1999, 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


                                       54
<PAGE>


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 - $20,327; Mr.
Skrzypczak - $53,757; Mr. Schwager - $73,152; Mr. Hart - $56,854; and Mr.
Delaney - $48,928. 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 - $21,840; Mr. Skrzypczak - $72,655;
Mr. Schwager - $88,329; Mr. Hart - $82,000; and Mr. Delaney - $54,777.

         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.

<TABLE>
<CAPTION>

                                               RETIREMENT PLAN TABLE

                                                                        Years of Service
                                                 --------------------------------------------------------------
Average Annual Compensation                        15            20             25          30            35
---------------------------                      -------       -------       -------      -------      --------
<S>                                              <C>           <C>           <C>          <C>          <C>
$   130,000..................................    $23,805       $31,740       $39,675      $47,610      $55,545
    160,000..................................     30,555        40,740        50,925       61,110       71,295

</TABLE>


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 United States.


                                       55
<PAGE>


         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)
during the term of the agreement, 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.

         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 the "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
vest in one-third increments on the first three anniversaries of the date of
grant. These options, which have an exercise price of $10.00 per share, are
subject to the Plan.

         The Company has entered into employment agreements (the "Executive
Employment Agreements") with each of Messrs. Skrzypczak, Schwager and Hart. The
Executive Employment Agreements are for two year terms ending June 1, 2001, and
provide for automatic renewal unless a termination of employment event has
occurred. In the event of an involuntary termination by the Company without
cause (as defined) or a termination by executive for good reason (as defined),
the executive is entitled to salary continuation for twenty-four months, plus
thirty percent. In such circumstances, the executive would also be entitled to
receive any earned and unpaid annual bonus amounts, including a pro-rated amount
in respect of the year in which termination of employment occurs. In the event
of a change of control (as defined), the amounts payable to executives under the
Executive Employment Agreements in the event of a termination without cause or a
termination by executive for good reason would be an amount equal to three times
(a) executive's base salary and (b) an amount of executive's base salary equal
to the highest percentage bonus payment made to executive in the three years
prior to such termination. The Executive Employment Agreements also provide that
one year after the occurrence of a change of control, executive may terminate
his employment for good reason. Salary continuation benefits under the Executive
Employment Agreements are not subject to reduction in the event that executive
secures other employment.

         Mr. Delaney is a party to a letter employment agreement with the
Company. This agreement has no fixed term of employment. Upon an involuntary
termination of employment by the Company for any reason other than for cause or
substantial underperformance, Mr. Delaney would be entitled to receive salary
continuation for a minimum of one year after such termination of employment. At
the conclusion of the first year of salary continuation, if Mr. Delaney has not
secured other employment, the Company has agreed to extend, for a maximum of
twelve additional months, such salary continuation on a month by month basis, as
long as Mr. Delaney, using reasonable efforts, has not secured other employment.
In addition, the Company's practice and policy is that, if a Senior Vice
President such as Mr. Delaney's


                                       56
<PAGE>


employment is terminated without cause, such officer would also be entitled to
receive any earned and unpaid annual bonus amounts, including a pro-rated amount
in respect of the year in which termination occurs.

         Each of Messrs. Skrzypczak, Schwager, Hart and Delaney are also
entitled to receive senior executive outplacement services from a nationally
recognized outplacement firm and are entitled to continue 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
new employment or the twelve month anniversary of the date of termination of
employment. Messrs. Skrzypczak, Schwager, Hart and Delaney are entitled to elect
to receive a cash amount equal to the cost of the above mentioned outplacement
services in lieu thereof. Each of Messrs. Skrzypczak, Schwager, Hart and Delaney
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 arrangement
with Mr. Skrzypczak. The arrangement 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 1999, Mr.
Jachmann received $15,000 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 1999, Mr. Tong received no income for
consulting services. Mr. Tong is also entitled to receive $25,000 for services
as a Director.

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 granted prior to 1996, 10% were eligible for vesting on April 15, 1996,
20% were eligible for vesting on each of April 15, 1997, April 15, 1998 and
April 15, 1999 and the remaining options become eligible for vesting as to an
additional 20% on April 15, 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 performance in 1995, 1996, 1997, 1998 and 1999,
the Company's Board of Directors determined that the following eligible
Performance Options would vest: 60% on April 15, 1996, 0% on April 15, 1997, 0%
on April 15, 1998 and 0% on April 15, 1999. In addition, the Board has
determined that 0% of eligible Performance Options will vest on April 15, 2000.
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, all outstanding unvested 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


                                       57
<PAGE>

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.

         The maximum number of shares of Common Stock that are available for
options under the Plan is currently 1,500,000 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.


                                       58
<PAGE>


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, 2000, 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)................         14,803,000              96.4%
   767 Fifth Avenue
   New York, New York  10153
John H. Duerden(3)................................................            376,967               2.5%
Joseph D. Skrzypczak(3)...........................................             36,350               *
Robert G. Schwager(3).............................................             34,425               *
Daniel P. Hart(3).................................................             24,100               *
Joseph Delaney(3).................................................              8,920               *
Albert J. Fitzgibbons, III(4).....................................         14,803,000              96.4%
Emil F. Jachmann..................................................             10,000               *
Alexis P. Michas(4)...............................................         14,803,000              96.4%
Peter P. Tong.....................................................             10,000               *
Scott M. Shaw(4)..................................................         14,803,000              96.4%
Directors and executive officers as a group ((12) persons)(4)(5)..         15,355,562             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, warrants or
         convertible securities held by that person that are currently
         exercisable or convertible, or exercisable or convertible within 60
         days of March 15, 2000 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.

(2)      Stonington is the record holder of 14,653,000 shares, or 95.4%, 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 1% 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.


                                       59
<PAGE>


         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, 2000, as follows: Mr. Duerden - 306,967
         shares; Mr. Skrzypczak - 21,350 shares; Mr. Schwager - 19,425 shares;
         Mr. Hart - 16,100 shares; and Mr. Delaney - 8,920 shares.  Mr. Duerden
         is a 3.1% limited partner of SPLP.

(4)      The shares indicated as owned beneficially by Messrs. Fitzgibbons,
         Michas and Shaw 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
         Shaw disclaim beneficial ownership of such shares.

(5)      Includes 424,562 shares of Common Stock subject to options granted
         under the Plan which are currently exercisable or vest within 60 days
         of March 15, 2000 and 2,000,000 shares of Common Stock issuable upon
         conversion of Convertible Preferred Stock which are currently
         convertible or are convertible within 60 days of March 15, 2000.

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 was 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.

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 Common Stock (the
"Equity Private Placement"), and each of Messrs. Duerden, Skrzypczak, Schwager
and Hart (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 seven 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


                                       60
<PAGE>

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 not 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). 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.


                                       61
<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.

         1.     On January 8, 1999, 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 waive compliance by the Company of the
                financial covenants as of December 31, 1998 and for the four
                Fiscal Quarter period then ended, to modify the covenants and
                related definitions in respect of certain asset sales and the
                utilization of the proceeds from such asset sales, to modify
                the required Maximum Leverage, Minimum EBITDA and Minimum
                Interest Coverage Ratio Covenants, to change the maturity date
                of the Tranche C Loans to be equal to that of the Tranche B
                Loans, and to increase the interest rate on the Tranche B
                Loans to be equal to that of the Tranche C Loans.

                In addition, with the fifth amendment, the Company's principal
                shareholder (the "Shareholders") agreed to provide the Company
                with $20,000,000 in new cash equity (the "New Equity")
                contributions on or before January 28, 1999 to fund working
                capital and for general corporate purposes.

         2.     On March 10, 2000, the Company filed a Current Report on Form
                8-K, reporting under Item 5 thereof, in respect of its
                announcement that it had agreed to be acquired by Lernout &
                Hauspie Speech Products, N.V.

(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).


                                       62
<PAGE>
Exhibits                          Description
---------                         -----------

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 (filed as Exhibit
         2.10 to the Company's Form 10-K for the fiscal year ended December 31,
         1997, filed on March 30, 1998).

2.11     Certificate of Ownership and Merger merging Dictaphone Corporation with
         and into Dictaphone (U.S.) (filed as Exhibit 2.11 to the Company's Form
         10-K for the fiscal year ended December 31, 1997, filed on March 30,
         1998).

3(i)     Restated 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 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      Limited Waiver and Fifth Amendment to Credit Agreement, dated December
         31, 1998, by and among Dictaphone Corporation (U.S.) and the Lenders
         party thereto.

4.8      Limited Waiver and First Amendment to Credit Agreement, dated as of
         December 31, 1998, among Dictaphone Corporation (U.S.) and the Lenders
         party thereto.

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). +

                                       63
<PAGE>
Exhibits                          Description
---------                         -----------

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 fiscal
         year ended December 31, 1996, filed on March 31, 1997). +

10.6     Letter Agreement, dated October 21, 1998, between Dictaphone
         Corporation and Joseph D. Skrzypczak. +

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    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). +

10.13    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). +

10.14    Stock Option Agreement, dated August 1, 1997, between the Company and
         John H. Duerden (filed as Exhibit 10.15 to the Company's Form 10-K for
         the fiscal year ended December 31, 1997, filed on March 31, 1998). +

10.15    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). +

10.16    Letter Agreement between the Company and Ronald A. Elwell, dated
         November 8, 1996 (filed as Exhibit 10.18 to the Company's Form 10-K for
         the fiscal year ended December 31, 1997, filed on March 31, 1998). +

10.17    Stock Option Agreement, dated August 1, 1997, between the Company and
         Peter P. Tong (filed as Exhibit 10.19 to the Company's Form 10-Q for
         the fiscal quarter ended March 31, 1998, filed on May 14, 1998). +

10.18    Agreement of Purchase and Sale of Stratford, CT property between
         Dictaphone Corporation and Stratford, CT Business Trust, dated May 14,
         1998 (filed as Exhibit 10.20 to the Company's Form 10-Q for the fiscal
         quarter ended June 30, 1998, filed August 14, 1998).

10.19    Lease Agreement of Stratford, CT property between Dictaphone
         Corporation and Stratford, CT Business Trust, dated May 14, 1998 (filed
         as Exhibit 10.21 to the Company's Form 10-Q for the fiscal quarter
         ended June 30, 1998, filed August 14, 1998).

10.20    Letter Agreement, dated May 28, 1997, between Dictaphone Corporation
         and Mr. Daniel P. Hart. +

10.21    Executive Severance Agreement, dated November 11, 1996, between
         Dictaphone Corporation and Mr. Daniel Hart.

10.22    Employment Agreement dated June 1, 1999, between Dictaphone Corporation
         and Mr. Daniel P. Hart (filed as Exhibit 10.22 to the Company's Form
         10-Q for the fiscal quarter ended September 30, 1999, filed on November
         15, 1999). +

10.23    Employment Agreement dated June 1, 1999, between Dictaphone Corporation
         and Mr. Joseph D. Skrzypczak (filed as Exhibit 10.23 to the Company's
         Form 10-Q for the fiscal quarter ended September 30, 1999, filed on
         November 15, 1999). +

                                       64
<PAGE>

Exhibits                          Description
---------                         -----------

10.24    Employment Agreement dated June 1, 1999, between Dictaphone Corporation
         and Mr. Ronald A. Elwell (filed as Exhibit 10.24 to the Company's Form
         10-Q for the fiscal quarter ended September 30, 1999, filed on November
         15, 1999). +

10.25    Employment Agreement dated June 1, 1999, between Dictaphone Corporation
         and Mr. Robert G. Schwager (filed as Exhibit 10.25 to the Company's
         Form 10-Q for the fiscal quarter ended September 30, 1999, filed on
         November 15, 1999). +

10.26    Amendment No. 3 to the Management Stock Option Plan, dated as of July
         28, 1999 (filed as Exhibit 10.26 to the Company's Form 10-Q for the
         fiscal quarter ended September 30, 1999, filed on November 15, 1999). +

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.




                                       65
<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 25th day of March, 2000.

                                     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 25th day of March, 2000.

               Signature                              Title(s)
               ---------                              --------

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


  /s/  Joseph D. Skrzypczak           Chief Operating Officer, Chief Financial
-----------------------------------   Officer and Director (Principal Financial
       Joseph D. Skrzypczak           and Accounting Officer)


  /s/  Albert J. Fitzgibbons, III     Director
-----------------------------------
       Albert J. Fitzgibbons, III


-----------------------------------
       Emil F. Jachman                Director


  /s/  Alexis P. Michas               Director
-----------------------------------
       Alexis P. Michas


  /s/  Scott M. Shaw                  Director
-----------------------------------
       Scott M. Shaw


  /s/  Peter P. Tong                  Director
-----------------------------------
       Peter P. Tong



                                       66
<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 (filed as Exhibit
         2.10 to the Company's Form 10-K for the fiscal year ended December 31,
         1997, filed on March 30, 1998).

2.11     Certificate of Ownership and Merger merging Dictaphone Corporation with
         and into Dictaphone (U.S.) (filed as Exhibit 2.11 to the Company's Form
         10-K for the fiscal year ended December 31, 1997, filed on March 30,
         1998).

3(i)     Restated 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).

</TABLE>


                                       67
<PAGE>

<TABLE>
<CAPTION>


                                                                                       Sequentially
Exhibits                                    Description                               Numbered Page
--------                                    -----------                               -------------
<S>      <C>                                                                          <C>
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 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      Limited Waiver and Fifth Amendment to Credit agreement, dated December
         31, 1998, by and among Dictaphone Corporation (U.S.) and the Lenders
         party thereto.

4.8      Limited Waiver and First Amendment to Credit Agreement, dated as of
         December 31, 1998, among Dictaphone Corporation (U.S.) and the Lender's
         party thereto.

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 fiscal
         year ended December 31, 1996, filed on March 31, 1997). +

10.6     Letter Agreement, dated October 21, 1998, between Dictaphone
         Corporation and Joseph D. Skrzypczak. +

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.) +

</TABLE>


                                       68
<PAGE>

<TABLE>
<CAPTION>


                                                                                       Sequentially
Exhibits                                    Description                               Numbered Page
--------                                    -----------                               -------------
<S>      <C>                                                                          <C>
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    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). +

10.13    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). +

10.14    Stock Option Agreement, dated August 1, 1997, between the Company and
         John H. Duerden (filed as Exhibit 10.15 to the Company's Form 10-K for
         the fiscal year ended December 31, 1997, filed on March 31, 1998). +

10.15    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). +

10.16    Letter Agreement between the Company and Ronald A. Elwell, dated
         November 8, 1996 (filed as Exhibit 10.18 to the Company's Form 10-K for
         the fiscal year ended December 31, 1997, filed on March 31, 1998). +

10.17    Stock Option Agreement, dated August 1, 1997, between the Company and
         Peter P. Tong (filed as Exhibit 10.19 to the Company's Form 10-Q for
         the fiscal quarter ended March 31, 1998, filed on May 14, 1998). +

10.18    Agreement of Purchase and Sale of Stratford, CT property between
         Dictaphone Corporation and Stratford, CT Business Trust, dated May 14,
         1998 (filed as Exhibit 10.20 to the Company's Form 10-Q for the fiscal
         quarter ended June 30, 1998, filed August 14, 1998).

10.19    Lease Agreement of Stratford, CT property between Dictaphone
         Corporation and Stratford, CT Business Trust, dated May 14, 1998 (filed
         as Exhibit 10.21 to the Company's Form 10-Q for the fiscal quarter
         ended June 30, 1998, filed August 14, 1998).

10.20    Letter Agreement, dated May 28, 1997, between Dictaphone Corporation
         and Mr. Daniel P. Hart. +

10.21    Executive Severance Agreement, dated November 11, 1996, between
         Dictaphone Corporation and Mr. Daniel Hart.

10.22    Employment Agreement dated June 1, 1999, between Dictaphone Corporation
         and Mr. Daniel P. Hart (filed as Exhibit 10.22 to the Company's Form
         10-Q for the fiscal quarter ended September 30, 1999, filed on November
         15, 1999). +

10.23    Employment Agreement dated June 1, 1999, between Dictaphone Corporation
         and Mr. Joseph D. Skrzypczak (filed as Exhibit 10.23 to the Company's
         Form 10-Q for the fiscal quarter ended September 30, 1999, filed on
         November 15, 1999). +
</TABLE>


                                       69
<PAGE>

<TABLE>
<CAPTION>

                                                                                       Sequentially
Exhibits                                    Description                               Numbered Page
--------                                    -----------                               -------------
<S>      <C>                                                                          <C>
10.24    Employment Agreement dated June 1, 1999, between Dictaphone Corporation
         and Mr. Ronald A. Elwell (filed as Exhibit 10.24 to the Company's Form
         10-Q for the fiscal quarter ended September 30, 1999, filed on November
         15, 1999). +

10.25    Employment Agreement dated June 1, 1999, between Dictaphone Corporation
         and Mr. Robert G. Schwager (filed as Exhibit 10.25 to the Company's
         Form 10-Q for the fiscal quarter ended September 30, 1999, filed on
         November 15, 1999). +

10.26    Amendment No. 3 to the Management Stock Option Plan, dated as of July
         28, 1999 (filed as Exhibit 10.26 to the Company's Form 10-Q for the
         fiscal quarter ended September 30, 1999, filed on November 15, 1999). +

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.

</TABLE>
--------------------------
*    Filed herewith.
+    Management contract of compensatory arrangement.


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