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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, 1996

    |_|  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                                    13-3838908
(STATE OR OTHER JURISDICTION OF             (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)


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


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

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

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

INDICATE  BY CHECK  MARK  WHETHER  THE  REGISTRANT:  (1) HAS FILED  ALL  REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE  SECURITIES  EXCHANGE  ACT OF
1934  DURING  THE  PRECEDING  12 MONTHS  (OR FOR SUCH  SHORTER  PERIOD  THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS),  AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. [X] YES [ ] NO

INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT  FILERS  PURSUANT TO ITEM 405
OF REGULATION  S-K IS NOT CONTAINED  HEREIN,  AND WILL NOT BE CONTAINED,  TO THE
BEST OF REGISTRANT'S  KNOWLEDGE,  IN DEFINITIVE PROXY OR INFORMATION  STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K [X].

THE  AGGREGATE  MARKET VALUE OF THE VOTING STOCK HELD BY  NON-AFFILIATES  OF THE
REGISTRANT AS OF MARCH 24, 1997 WAS $0.00.

AS OF MARCH 24, 1997,  THERE WERE 9,462,000  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

================================================================================
<PAGE>

                               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............................................ 8

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

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

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

   ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
            ACCOUNTING AND FINANCIAL DISCLOSURE........................... 66

                                   PART III

   ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............ 66

   ITEM 11. EXECUTIVE COMPENSATION........................................ 69

   ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
            MANAGEMENT.................................................... 75

   ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ............... 77

                                    PART IV

   ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
            REPORTS ON FORM 8-K............................................ 79




<PAGE>


           CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

                                    PART I

ITEM 1.     BUSINESS


GENERAL

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

      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
business  of  integrated  voice  and  data  management  ("IVDM"TM),   consisting
primarily of design,  manufacture,  marketing,  service and support of dictation
and voice management products and communications recording systems.

      The Company's dictation and voice management  products  ("Integrated Voice
Systems" or "IVS"), sales of which represented 31.5% of the Company's 1996 total
revenue,  consist of portable and desktop dictation  products,  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, 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,  sales  of  which  represented  23.0% of the
Company's  1996 total  revenue,  consist  primarily of  multi-channel  archiving
recorders and emergency message repeaters used primarily by police  departments,
fire departments,  air traffic controllers and other public safety agencies,  as
well as by financial services firms and other businesses. These products perform
continuous,  reliable  recording of multiple  telephone or other  communications
lines, such as radio channels,  to protect customers who face potentially severe
financial   or  safety   risks  posed  by  lost  or   misinterpreted   telephone
conversations  or  voice  broadcasts.  The  Company's  communications  recording
systems  products also include  quality  monitoring,  productivity  and training
products used primarily by call centers.  Dictaphone's service business, revenue
from which represented  33.3% of the Company's 1996 total revenue,  provides its
customers with service support,  expedited repairs and remote diagnostics.  Many
Dictaphone customers,  including over 70% of customers purchasing large systems,
purchase Company service contracts at the time of product purchase.

IVS PRODUCTS

      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

<PAGE>

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 large 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
have a more durable  construction  for longer product life and special  features
geared to office and transcription use (such as cue tones, which enable users to
prioritize and index recorded voice data, and conference  record  capability and
telephone  adapters,  which  enable  users  to  record  meetings  and  telephone
conversations).  The  consumer  segment  consists  of  customers  who  typically
purchase   lower  priced   desktop  and   portable   machines   through   retail
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 industry
has begun to apply  digital  technology  to desktop and portable  products,  but
analog technology currently retains a cost advantage for most of these products.
All portable products are designed to be compatible with Dictaphone  desktops in
terms of  features  and  appearance.  In the United  States,  there is a base of
approximately 200,000 Dictaphone portables eligible for future upgrade.

      Voice processing systems are generally larger, more sophisticated versions
of dictation  products designed to accommodate  multiple users. Voice processing
systems equipment  usually consists of one or more centralized  dictation units,
which include the equipment  which records and replays voice data,  and a series
of telephones  or similar  devices,  which  connect with the dictation  units to
record voice data and access  previously  recorded data. This equipment  permits
users to transmit voice data to  transcriptionists  without requiring such users
to physically transport audio tapes carrying this data. Analog versions of these
systems,  which have been  available  for some  time,  have been  superseded  by
digital  versions,  which typically  utilize a computer disk to capture recorded
voice and a computer controller to keep track of the data related to the voice's
creation and  transcription.  Digital  dictation  systems  currently  offer many
advantages over their analog predecessors  including higher reliability,  random
and  simultaneous  accessibility  to  work,  remote  access  and  playback  over
telephone lines, and the ability to handle multiple software applications,  such
as dictation,  voice mail and voice  response.  Digital  dictation  systems also
permit  greater  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)  WindowsTM
NT operating  system  platform.  This system,  called the  Enterprise  ExpressTM
System, is designed to be the Company's next generation voice processing system.
Enterprise  ExpressTM is configured to support centralized as well as multi-site
networks  and  provide  for   enterprise-wide   dictation,   transcription   and
information  management solutions.  The Enterprise ExpressTM system is currently
installed  at  several  customer  beta  sites,  and is  anticipated  to be fully
launched in the second half of 1997.

      The Company's Digital Express(R) 7000 voice processing  system,  which was
introduced  in 1988,  currently  has a  worldwide  installed  base of over 1,600
systems.  The system can be configured to provide  remote access to thousands of
users  who have  touchtone  telephones,  and  features  a broad  array of design
reliability  and other  features.  Although the Company  believes the system has
proven to be capable of serving a broad  variety of its  customers,  such as its
legal and insurance  clients,  the Digital Express(R) 7000's design and software
features are focused toward the information  management  needs of the healthcare
market.

      In 1993,  Dictaphone  introduced digital voice processing systems,  called
the Digital Express(R) 4000 and Digital Express(R) 2500, to address the needs of
smaller customers who require fewer functions than those offered

<PAGE>

in the Digital  Express(R)  7000. The Company's  Straight  TalkTM product is its
smallest  digital  desktop  system.  Introduced in mid-1990,  Straight TalkTM is
intended to be an upgrade for clustered analog desktop users.

      In 1991,  the  Company  acquired  rights  to market  transcription  system
software designed expressly for medical records departments. This system, called
the Record  ExpressTM  system,  utilizes  third party software  packages  linked
together  through  customized  programming.  The  system  has  been  sold  to  a
significant number of hospital medical records departments.

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

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


COMMUNICATIONS RECORDING SYSTEMS

      The safety and 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, 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 1990s, the  communications  recording systems market began to
experience  technological  change.  Analog  reel-to-reel  recorders  began to be
displaced by analog VHS-based  products and, more  frequently,  digital products
including those based on magnetic disk,  optical disk or digital audio tape. For
example,  in the  case of  Dictaphone,  revenue  from  sales  of  communications
recording  products  based on digital  technology  increased as a percentage  of
product sales revenue from all  communications  recording products from only 13%
in 1992 to approximately 91% in 1996. 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
ProLogTM,  GuardianTM and SentinelTM models.  ProLogTM,  which was introduced in
1993, is the most powerful and technologically advanced of these products.

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

<PAGE>

      The Company's  SentinelTM  digital logger product is geared toward smaller
capacity  and price  sensitive  customers.  The Company  began  shipments of the
SentinelTM in the third quarter of 1995.  The  SentinelTM  model was intended to
replace the Model 9800,  Dictaphone's first digital logger,  which was partially
sourced from an outside supplier.

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

      In the fourth  quarter of 1996,  Dictaphone  introduced its InsightTM call
center product. InsightTM is a call center productivity, training and management
system which is used to monitor live and recorded data. The monitored  record is
both voice and screen data which is synchronously played back to enable accurate
training and evaluation of call center agents and the generation of a variety of
management  reports.  InsightTM is an OEM product  which is sourced from a third
party.

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


SERVICE

      The  Company  has an  extensive  service  organization.  The  Company  has
approximately 585 service  representatives  operating out of over 175 offices in
North  America.   The  United  States  service   organization  is  supported  by
approximately  210 employees in service  support,  diagnostic  center and repair
services, and distribution.  In addition,  Dictaphone has 8 service locations in
the United  Kingdom,  Switzerland,  Germany,  Belgium  and Ireland and sales and
service  representation  through dealers in  approximately 60 other countries in
Europe, South America and Asia. See "-- Sales and Marketing".

      Dictaphone's service business provides its customers with service support,
expedited  repairs and remote  diagnostics.  Service  revenue  includes sales of
"Assured  Performance  Plans",  which are long term  warranties sold in one year
increments  and frequently  purchased by the Company's  systems  customers,  and
revenue from repair of systems  software and hardware not under warranty as well
as sales of parts. Dictaphone also receives revenue from service contracts which
provide  for higher  levels of  technical  support,  such as its "SOS Alert" and
"Response Network" services, for dispatching maintenance in advance of a product
shut down and for services providing 24- hour system protection. Many Dictaphone
customers,  including over 70% of customers  purchasing large systems,  purchase
Dictaphone  service  contracts  at  the  time  of  product  purchase.  In  1996,
Dictaphone  instituted  a mail-in  service  program for its desktop and portable
products.  Under  this  program,  desktop  and  portable  products  are  sent by
overnight  mail to a central  service  facility in Melbourne,  Florida for rapid
turnaround or replacement.  As a result of this program,  desktops and portables
are no longer required to be serviced in U.S. field offices.

      The  Company's  strategy to achieve  growth in service  includes a plan to
expand its third  party  contract  service  business.  As  Dictaphone's  service
network  furthers  its  expertise  in digital and other  advanced  technologies,
Dictaphone  believes  there will be increasing  opportunities  to obtain service
contracts  from  companies in the  telecommunications,  cable and other  related
industries  that use these complex  technologies.  Dictaphone  has  negotiated a
number  of such  arrangements  and has  recently  been  actively  marketing  its
services to companies in such industries.


NEW PRODUCTS

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

<PAGE>


CUSTOMERS

      Although no single customer, other than Pitney Bowes and the New York City
Police Department, 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 83% 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 54% of
U.S. Communications Recording Systems revenue is derived from financial services
firms and governmental agencies.

      Although  over 84% of  Dictaphone's  revenues are  generated in the United
States,  the Company has a significant  customer base outside the United States.
Dictaphone's international customers are in many of the same industries that the
Company  serves  domestically,  such as medical,  legal and financial  firms and
governmental agencies.


SALES AND MARKETING

      The wide geographic coverage of the Company's sales and service offices in
the United  States  permits  Dictaphone to sell its products to customers of all
sizes and in virtually all United States locations.  Consequently,  less than 1%
of all United States sales are through dealers. The placement of the service and
sales offices  throughout the United States also provides a system for the rapid
distribution  and service of its  products.  See "-- Service".  Distribution  of
Dictaphone  products  is  handled  mostly  through  the  Company's  distribution
facility in Melbourne, Florida and branch and district locations.

      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. Upon
purchase  of a new or  previously  owned  Dictaphone  product,  a  customer  may
purchase an  "Assured  Performance  Plan." See " --  Service".  If a  Dictaphone
customer  opts not to purchase the Assured  Performance  Plan,  Dictaphone  will
repair its products at an hourly service rate, in addition to parts.

      ADVERTISING.   The  focus  of   Dictaphone's   advertising  and  marketing
communications  over the past few years  reflects a shift away from broad  based
major  publication  advertising  to an approach  targeting  dictation  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 and
other publicity to market, advertise and promote it products.

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


RESEARCH AND DEVELOPMENT

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


<PAGE>

      The  Company's  research  and  development  expenditures  (including  $4.2
million  and $6.9  million  of  capitalized  software  costs  in 1995 and  1996,
respectively) grew as a percentage of product sales revenue from 6.0% in 1995 to
7.9% in 1996. As of December 31, 1996,  the Company's  research and  development
staff consisted of 182 personnel (including temporary employees).


INTELLECTUAL PROPERTY

      The Company has in excess of 100 patents  protecting  features and methods
that are important to both dictation and communications recording product lines.
For  example,  Dictaphone  has a number of patents  associated  with the Digital
Express(R)  7000 and many of its closely  related  enhancements  such as Digital
ConnexionsTM,  DXIS,  MegaCenter and Optic Mics. 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 has a number of trademarks,
including the well known "Dictaphone(R)" trademark, in use throughout the world.


MANUFACTURING OPERATIONS

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

      The  Company's  primary  manufacturing  facility is located in  Melbourne,
Florida.  Manufacturing  currently  employs  approximately  560  personnel.  The
manufacturing team consists of four production  departments:  fabrication,  wire
and cable, printed circuit assembly and final assembly.

      Management assures  manufacturing and raw materials 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 350 suppliers, although
80% of the annual dollar volume is procured from 55 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 two-thirds 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 1996, revenue from contract manufacturing was $40.6 million.


COMPETITION

      The  markets in which the Company  competes  are highly  competitive.  The
Company  competes  with  large  and  established   national  and   multinational
companies,  as well as  smaller  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 two primary  systems  product
competitors,  the Lanier division of Harris Corporation ("Lanier"),  and Sudbury
Systems, Inc. ("Sudbury"). Two other Dictaphone competitors, Philips Electronics
N.V. and Sony Corporation, focus on 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, Seltronics, Inc., TEAC

<PAGE>

Corporation  of America,  Nice  Systems Ltd.  (loggers and quality  monitoring),
Magnasync Moviola  Corporation and Teknekron  Infoswitch  (quality  monitoring).
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.


EMPLOYEES

      As of December 31, 1996,  the Company had 2,664  employees  worldwide,  of
which 2,315 were based in the United States.  As of December 31, 1996, less than
2% of the Company's  workers were  unionized.  Two union  contracts,  one in New
York,  New York  covering  11  employees  and one in  Toronto,  Ontario,  Canada
covering  11  employees,  expire on  September  1, 1998 and  January  15,  1998,
respectively.   The  Company   believes  its   relations   with   employees  are
satisfactory.


ITEM 2.     PROPERTIES

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

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


FACILITY                     PURPOSE                            SQUARE FOOTAGE
========                     ========                           ==============

Stratford, Connecticut       Headquarters                           138,000

Melbourne, Florida           Manufacturing                          120,160

Melbourne, Florida           Customer Service                       118,000

Toronto, Ontario, Canada     Canadian Corporate Office              14,146

Killwangen, Switzerland      Switzerland Sales Office               90,000


      In addition, the Company leases sales, service and distribution offices in
certain  countries  in which it has  operations,  including  157  offices in the
United  States,  18  offices in Canada,  4 offices  in the  United  Kingdom  and
additional offices in Belgium, Germany and Ireland.


ITEM 3.     LEGAL PROCEEDINGS

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

<PAGE>

complaint.  Additionally,  regardless of the outcome of this litigation,  Pitney
Bowes has agreed to defend  this  action  and to  indemnify  Dictaphone  for any
liabilities arising from such litigation.

      On June 23,  1995,  a complaint  was filed in the United  States  District
Court  for  the  Northern   District  of  Illinois  by  Failsafe   Disk  Company
("Failsafe") against Dictaphone.  The complaint alleged that Dictaphone violated
Sections 1 and 2 of the Sherman  Antitrust Act (the "Sherman Act") by preventing
Failsafe from selling 10 through 60 channel recording tapes which,  according to
the  complaint,  are equal in  quality  to and lower in price than 10 through 60
channel tapes sold by Dictaphone and others.  On July 5, 1995, the complaint was
served upon Dictaphone.  The complaint sought damages of $19.2 million,  subject
to being trebled in accordance with the provisions of the Sherman Act,  together
with  Failsafe's  costs and  expenses,  including  reasonable  attorneys'  fees.
Dictaphone  vigorously contested this litigation,  which was recently settled by
Dictaphone for an immaterial amount.

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

      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 1996.


                                    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,  1997,
there were 14 holders of record of the Common Stock.

      Under the terms of the Company's Credit  Agreement,  dated August 7, 1995,
as amended by the First Amendment to Credit Agreement, dated as of June 28, 1996
(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 and
Dictaphone U.S. are restricted from paying  dividends on their capital stock. In
addition,  under the terms of an Indenture  (the "Note  Indenture")  between the
Company,

<PAGE>

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

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


ITEM 6.     SELECTED FINANCIAL DATA

      Set forth below is the selected consolidated  financial data of Dictaphone
Corporation  (Successor Company) at December 31, 1996 and December 31, 1995, and
for the year and twenty  week  period  then  ended.  Also set forth below is the
selected combined  financial data of the Predecessor  Company for the thirty two
week period  ended August 11, 1995 and for each of the three years in the period
ended December 31, 1994.

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

<PAGE>

<TABLE>
<CAPTION>
                                   PREDECESSOR COMPANY              SUCCESSOR COMPANY
                         -------------------------------------  --------------------------
                                                    32 WEEKS     20 WEEKS         YEAR
                          YEAR ENDED DECEMBER 31,     ENDED        ENDED         ENDED
                         -------------------------- AUGUST 11,  DECEMBER 31,  DECEMBER 31,
                           1992     1993     1994     1995          1995          1996
                         -------- -------- -------- ----------  ------------  ------------
                                   (DOLLAR AMOUNTS IN MILLIONS EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS
  DATA:

<S>                       <C>      <C>     <C>       <C>           <C>           <C>
Total revenue..........   $331.9   $343.2  $346.8    $202.1        $150.6        $332.5
Cost of sales and
 rentals(a) ...........    112.5    119.3   118.5      74.3          69.6(e)      126.7(e)
Selling, service and
 administrative .......    160.0    156.2   155.5      93.7          82.9(f)      203.6(f)
Research and development     9.9     10.6    12.3       7.0           4.6          14.2
Operating profit (loss)     49.5     57.1    60.5      27.1          (6.5)        (12.0)
Net interest (income)
 expense and other.....     (2.8)    (1.2)   (1.0)     (1.4)         16.1(g)       41.6(g)
Income (loss) before
 effect of changes in
 accounting............     31.7     35.0    36.6      17.1         (13.9)        (34.7)
Net income (loss)......     21.5(b)  35.0    33.8(c)   17.1         (13.9)        (34.7)
Stock dividend on PIK
 Preferred Stock.......      ---      ---     ---       ---            .8           2.3
Net loss applicable to
 Common Stock..........      ---      ---     ---       ---         (14.7)        (37.0)
Net loss per share.....      ---      ---     ---       ---         (1.55)        (3.90)

OTHER DATA:
EBITDA(d)..............   $ 58.0   $ 65.3  $ 68.6    $ 32.0        $ 32.3        $ 54.2
Depreciation and
  amortization ........      8.5      8.2     8.1       4.9          39.1          65.8
Capital expenditures...      5.1      5.0     5.9       5.5            .8           6.3
EBITDA margin..........     17.5%    19.0%   19.8%     15.8%         21.5%         16.3%

BALANCE SHEET DATA
 (AT END OF PERIOD):
Working capital........   $ 44.5   $ 59.2  $ 64.2                  $ 43.3        $ 33.0
Total assets...........    218.7    241.5   268.5                   550.7         504.8
Long term debt.........      ---      ---     ---                   350.0         352.6
Total liabilities......     68.9     66.7    70.4                   456.2         445.4
Stockholders' equity...    149.8    174.8   198.1                    94.5          59.4

</TABLE>

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

(a)  Cost of sales and  rentals  does not  include  operating  expenses of field
     sales and service offices because no meaningful allocation of such expenses
     to this line item is practicable.  Accordingly,  such expenses are included
     in selling, service and administrative expenses.
(b)  Effective  January 1, 1992,  the Company  adopted  Statement  of  Financial
     Accounting  Standards  ("SFAS")  No.  106,  which  resulted  in a  one-time
     non-cash,  after-tax  charge of $10.3  million (net of  approximately  $6.7
     million of taxes).
(c)  Effective January 1, 1994, the Company adopted SFAS No. 112, which resulted
     in  a  one-time  non-cash,   after-tax  charge  of  $2.8  million  (net  of
     approximately  $1.9 million of income taxes). See Note 6 to the Predecessor
     Company's combined financial statements appearing elsewhere in this Report.
(d)  EBITDA is defined as income  before  effect of changes in  accounting  plus
     interest, income taxes, depreciation and amortization.  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.
(e)  Cost of sales and rentals for the twenty weeks ended  December 31, 1995 and
     year ended  December  31, 1996  includes  $14.7  million and $8.8  million,
     respectively,  of charges related to the amortization of inventory write-up
     and depreciation associated with purchase accounting adjustments.
(f)  Selling, service and administrative for the twenty weeks ended December 31,
     1995 and year ended  December  31, 1996  includes  $21.8  million and $46.2
     million, respectively, of non-cash purchase accounting charges.
(g)  Includes  $.9 million and $5.3  million of non-cash  interest  expense from
     amortization of deferred financing fees for the twenty weeks ended December
     31, 1995 and year ended December 31, 1996, respectively.

<PAGE>


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

OVERVIEW

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

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

      The capital  structure and accounting  bases 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.

      To  facilitate  the  discussion  below of the twelve  month  period  ended
December 31, 1996 against the results of operations for the same period of 1995,
and for the twelve month  period ended  December 31, 1995 against the results of
operations  for the  same  period  of 1994,  the  historical  operations  of the
Successor  Company  and  Predecessor  Company  have  been  combined,  since  the
Acquisition  occurred  thirty-two  weeks  into the  twelve  month  period  ended
December 31, 1995.

                                                      TWELVE MONTHS ENDED
                                                         DECEMBER 31,
                                               --------------------------------
                                                1994         1995        1996
                                                ----         ----        ----
                                                        (IN MILLIONS)

Net revenue..................................  $  346.8    $  352.7    $  332.5

Cost of sales and rentals (*)................     118.5       143.9       126.7
Selling, service and administrative expense..     155.5       176.6       203.6
Research and development.....................      12.3        11.6        14.2
                                               --------    --------    --------
     Operating profit (loss).................      60.5        20.6       (12.0)
                                               --------    --------    --------

Net interest (income) expense and other......     (1.0)        14.7        41.6
Income tax provision (benefit)..............      24.9         2.7       (18.9)
                                               --------    --------    --------
Income (loss) before effect of change
  in accounting .............................  $   36.6    $    3.2    $  (34.7)
                                               ========    ========    ========


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

*     Cost of sales and  rentals  does not include  operating  expenses of field
      sales  and  service  offices  because  no  meaningful  allocation  of such
      expenses to this line item is practicable.  Accordingly, such expenses are
      included in selling, service and administrative expenses.


<PAGE>

                                                      TWELVE MONTHS ENDED
                                                         DECEMBER 31,
                                                 -----------------------------
                                                 1994         1995        1996
                                                 ----         ----        ----
                                                          (IN MILLIONS)
Revenue from:
   Sales:
   U.S. Integrated Voice Systems..............  $  96.6     $  94.0     $  81.8
   U.S. Communication Recording Systems.......     56.9        66.2        62.1
   U.S. Customer Service Parts................     17.8        18.2        17.1
   Contract Manufacturing
      (including sales to Pitney Bowes Inc.)..     40.9        44.5        40.6
   International Operations...................     37.5        38.1        36.0
                                                -------     -------     -------
      Total sales.............................    249.7       261.0       237.6
                                                -------     -------     -------

   Rentals....................................      1.9         2.0         2.1
                                               --------    --------    --------
      Total sales and rentals.................    251.6       263.0       239.7
                                                -------     -------     -------

   Service:
   U.S. Customer Service......................     83.0        76.1        81.3
   International Operations...................     12.2        13.6        11.5
                                                -------     -------     -------
      Total support service...................     95.2        89.7        92.8
                                                -------     -------     -------

Total revenue.................................   $346.8      $352.7      $332.5
                                                 ======      ======      ======


RESULTS OF OPERATIONS

  1996 COMPARED TO 1995

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

      U.S.I.V.S. revenue declined 13.0% to $81.8 million due to lower demand for
desktops  and  portable  products and lower  installations  of voice  processing
systems. U.S.I.V.S. order backlog increased by $3.1 million during 1996 to $13.8
million.  Sales  revenue from  U.S.C.R.S.  declined 6.2% to $62.1 million due to
lower Prolog installations.  In addition,  the fourth quarter of 1995 included a
significant one-time  installation.  U.S.C.R.S.  order backlog declined 19.1% to
$8.2 million in 1996. Sales revenue from Contract Manufacturing (including sales
to Pitney Bowes)  declined 8.9% to $40.6 million  principally due to lower sales
to Pitney  Bowes.  Total  revenue from  International  Operations  declined 8.0%
versus  1995.  Lower  sales and  service  revenue in the United  Kingdom  offset
improvement  in  Communications   Recording  System  sales  revenue  in  Canada,
Switzerland, and Germany. Revenue from U.S. Customer Service (including sales of
parts)  increased  4.3% to $98.4  million due to increased  proprietary  product
service  contract  revenue  which  increased  4.3% as well as higher third party
maintenance revenue.

      Cost of sales and rentals declined 11.9% to $126.7 million (38.1% of total
revenue)  versus $143.9  million  (40.8% of total  revenue) for 1995.  Excluding
additional  depreciation and amortization expense related to purchase accounting
adjustments  associated  with the  Acquisition of $8.8 million and $14.7 million
from 1996 and 1995, respectively,  cost of sales and rentals would have declined
as a percent of revenue  to 35.5% in 1996 from  36.6% in 1995.  This  decline is
attributable to lower inventory adjustments, an increased content of high margin
U.S.  Customer  Service  revenue,  and  reduced  content of low margin  Contract
Manufacturing revenue, partially offset by lower U.S.C.R.S. price realization.

      Selling,  service and  administrative  expenses  increased 15.3% to $203.6
million  (61.2% of total  revenue) from $176.6  million (50.1% of total revenue)
for 1995. Excluding additional  depreciation and amortization expense associated
with purchase accounting adjustments related to the Acquisition of $46.2 million
and $21.8 million for 1996

<PAGE>

and 1995, respectively,  selling, service and administrative expenses would have
increased  by 1.7% from 1995.  This  increase is  attributable  to higher  sales
development,  marketing and advertising expenses,  higher international expenses
for sales office  expansion,  and a one time $1.1 million charge associated with
the  planned  reorganization  of  United  States  field  personnel  and  related
severance, partially offset by reduced U.S.I.V.S.  compensation-related expenses
and lower employee benefit costs.

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

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

  1995 COMPARED TO 1994

      Total revenue increased 1.7% to $352.7 million in 1995 from $346.8 million
in 1994.  The  increase  in revenue  was  attributable  to an  increase in sales
revenue from U.S.C.R.S.,  Contract  Manufacturing and International  Operations,
offset in part by a decline  in sales  revenue  from  U.S.I.V.S.  and lower U.S.
Customer Service revenue.

      U.S.  Integrated  Voice Systems revenue declined 2.7% to $94.0 million due
to lower demand for desktop and portable  products  and lower  installations  of
voice  processing  systems  despite  significant  increase in the order rate for
large systems during the second half of the year.  Sales revenue from U.S.C.R.S.
increased 16.4% to $66.2 million,  attributable  to the continued  transition by
existing customers from analog to digital products and the introduction, late in
1995  of  a  new  digital  recording   product.   Sales  revenue  from  Contract
Manufacturing  (including sales to Pitney Bowes) increased 8.9% to $44.5 million
due to the addition of several new accounts.  Total  revenue from  International
Operations  increased  3.7% versus 1994.  Exclusive of $2.5 million of favorable
exchange rate changes,  revenue declined 1.3%. Lower sales revenue in the United
Kingdom and Switzerland  were partially  offset by improvements in sales revenue
in Canada and  Germany  coupled  with  increased  service  revenue in the United
Kingdom.  Revenue from U.S. Customer Service (including sales of parts) declined
6.4% to  $94.3  million,  as a  result  of the  loss of one  major  third  party
maintenance  contract  in the third  quarter  of 1994 which  accounted  for $9.5
million in revenue during 1994.  Excluding the loss from that contract,  revenue
from U.S. Customer Service (including sales of parts) grew 3.3%.

      Cost of sales and  rentals  increased  21.3% to $143.9  million  (40.8% of
total  revenue)  versus  $118.5  million  (34.2%  of total  revenue)  for  1994.
Excluding  additional  depreciation and amortization expense related to purchase
accounting adjustments associated with the Acquisition of $14.7 million, cost of
sales and rentals for 1995 represented 36.6% of total revenue. Cost of sales and
rentals as a percentage of total revenue increased due to unfavorable  inventory
and manufacturing underabsorption adjustments in 1995 versus favorable inventory
adjustments in 1994 relating to revised inventory  reserve levels,  and a higher
mix of low margin contract manufacturing revenue in 1995.

      Selling,  service and  administrative  expenses  increased 13.6% to $176.6
million  (50.1% of total  revenue) from $155.5  million (44.8% of total revenue)
for the  comparable  period  in  1994.  Excluding  additional  depreciation  and
amortization expense associated with purchase accounting  adjustments related to
the  Acquisition  in  the  amount  of  $21.8  million,   selling,   service  and
administrative expenses decreased slightly (43.9% of total revenue) versus 1994.
This decrease is  attributable to lower  compensation-related  expenses for U.S.
Integrated Voice systems and U.S.  Customer  Service  partially offset by higher
employee benefit and  Communications  Recording  Systems selling and advertising
costs.

      Research and development expenses decreased 5.5% to $11.6 million (3.3% of
total revenue)  versus $12.3 million (3.5% of total revenue) in 1994.  Increased
manpower  costs were more than offset by an increase in software  capitalization
in the amount of $4.2 million.

      Operating  profit  declined 66.0% to $20.6 million (5.8% of total revenue)
in 1995 from $60.5  million  (17.4% of total  revenue)  in 1994.  Excluding  the
impact of purchase  accounting  adjustments  associated  with the Acquisition of
$36.5  million,  operating  profit  declined  5.6% versus 1994.  This  reduction
reflects the impact of an unfavorable mix

<PAGE>

shift from high margin third party  maintenance  revenue to increased low margin
contract manufacturing revenue and unfavorable inventory adjustments,  partially
offset by increased revenue.

LIQUIDITY AND CAPITAL RESOURCES

      The  Company's  liquidity  requirements  consists  primarily  of scheduled
payments of principal and interest on its  indebtedness,  working  capital needs
and capital expenditures.  In addition,  Dictaphone made its final required cash
payment  ($8.0  million)  to Pitney  Bowes in the first  quarter  of 1996  which
related  to  certain  post-closing  adjustments  to the  purchase  price for the
Company.

      At December 31,  1996,  the Company had  outstanding  term loans of $142.3
million (the "Term Loans") and loans of $9.0 million outstanding under the $40.0
million   revolving   credit   facility  (the  "Revolving   Credit   Facility").
Availability  under the Revolving Credit Facility at December 31, 1996 was $31.0
million.  Scheduled  annual  principal  payments will be $11.75 million in 1997,
$15.75  million  in 1998 and 1999,  and  $19.75  million  in 2000.  There are no
scheduled  reductions in the Revolving Credit Facility over the next five years;
however the Company is required to reduce loans  outstanding under the Revolving
Credit  Facility to $15.0  million for a period of not less than 30  consecutive
days during each consecutive 12-month period.

      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 million
maturing on February 16, 1999. The swap will effectively convert 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 8.8%. No funds
under the swap agreements are actually borrowed or are to be repaid. Amounts due
to or from the  counterparties  will be  reflected  in  interest  expense in the
periods in which they accrue.  The fair value of the  interest  rate swaps as of
December 31, 1996 was favorable $0.2 million based on dealer quotes.

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

      On July 17, 1996, the Company and the lenders executed an amendment to the
Credit  Agreement  modifying  certain of the covenants  contained  therein.  The
amendment  lowered  restrictions on investments and joint ventures,  and revised
the financial covenants for maximum leverage ratio, minimum consolidated EBITDA,
and minimum interest coverage ratio.

      The Company had $200.0 aggregate principal amount of the Notes outstanding
as of December  31, 1996.  The Notes are  subordinated  to the Credit  Agreement
financings and other senior indebtedness,  as defined in the Note Indenture. The
Notes  contain  covenants  similar to the Credit  Agreement and provide for each
noteholder to have the right to require that the Company repurchase the Notes at
101% of the  principal  amount  upon a change of  control as defined in the Note
Indenture.  The Notes bear interest of 11-3/4% per annum, payable  semi-annually
on each  February 1 and August 1. The Notes  mature on August 1, 2005.  The fair
value of the Notes at December 31, 1996 was favorable $26.0 million,  based upon
dealer quotes.

      Capital  expenditures for 1996 totaled $6.3 million.  The Company does not
expect  the  limitation  on capital  expenditures  in the  Credit  Agreement  to
restrict capital expenditures in a material manner.

      The Company  believes that cash flows from  operating  activities  and its
ability to borrow under the Revolving  Credit  Facility will be adequate to meet
the  Company's  debt  service  obligations,  working  capital  needs and planned
capital expenditures for the foreseeable future.

      The  Company's  revenues  and other  operating  results have been and will
continue to be affected by a wide  variety of factors that could have a material
adverse  effect on the Company's  financial  performance  during any  particular
period,  including  the level of orders  that are  received  and  shipped by the
Company, the rescheduling and cancellation of orders by customers,  availability
and cost of materials, the Company's ability to enhance its existing

<PAGE>

products  and to  develop,  manufacture  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,  and
significant  damage to or prolonged  delay in operations  at the Company's  sole
manufacturing facility.

      As  of  December  31,  1996,  the  Company  has  tax  net  operating  loss
carryforwards ("NOL's") of approximately $39.1 million, which begin to expire in
the year 2010.  SFAS 109 requires that the tax benefit of such NOL's be recorded
as an asset to the extent that management assesses the utilization of such NOL's
to be "more likely than not". Management has determined,  based on the Company's
history of prior operating  earnings 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 assets recorded as of December 31, 1996,  including
$39.1 million of NOL's, prior to the earliest expiration in the year 2010.

      The NOL's available for future  utilization were generated  principally by
purchase  accounting  acquisition  adjustments  in  accordance  with  Accounting
Principles  Board Opinion No. 16,  "Accounting  for Business  Combinations".  In
assessing the likelihood of utilization of existing NOL's, management considered
the historical results of the Company, and the current operating environment.

      A  reconciliation  of  the  Company's  loss  before  taxes  for  financial
statement  purposes to taxable loss for the 20 weeks ended December 31, 1995 and
full year ended December 31, 1996 is as follows (in thousands).

                                                YEAR ENDED      20 WEEKS ENDED
                                            DECEMBER 31, 1996  DECEMBER 31, 1995
                                            -----------------  -----------------

Loss before taxes for financial
  statement purposes ........................     $(53,591)         $(22,580)

Differences between loss for financial
  statement purposes and taxable loss:
State income taxes - current portion.........        1,701               669
Permanent differences:
   Goodwill..................................        1,158               288
   All other permanent items.................        2,043               378
Temporary differences:
   Intangible amortization...................       20,959             8,952
   All other temporary differences (net).....          618              (372)
                                                  --------          --------
      Total differences......................     $ 26,478          $  9,915
                                                  --------          --------
Taxable loss.................................     $(27,113)         $(12,665)
                                                  ========          ========

      Realization  of the future tax  benefits  is  dependent  on the  Company's
ability to generate taxable income within the carryforward period. For 1996, the
loss before income taxes of $53.6 million  includes  $60.3 million of additional
depreciation and amortization expense related to purchase accounting adjustments
associated with the  Acquisition.  On an annual basis commencing in 1997 through
the year  2001,  these  purchase  accounting  adjustments  will  decline  by the
following approximate amounts: $17.4 million, $12.6 million, $15.0 million, $3.4
million,  and $1.2 million.  Excluding  these purchase  accounting  adjustments,
operating income in 1996 would have been $43.0 million. Using this $43.0 million
as a base, if operating  income were to grow at an average annual  compound rate
of 5%, the Company would generate sufficient taxable income to fully utilize all
of the  NOL's by  2003.  This  growth  rate is  consistent  with  that  achieved
historically by the Company prior to the Acquisition.

      Management  anticipates  that  increases  in  taxable  income  during  the
carryforward  period  will  be  realized  as the  result  of  increased  revenue
associated with planned new product introductions scheduled to commence in 1997,
and the realization of efficiencies from certain  restructuring and productivity
improvement initiatives.

      In 1996, the Company adopted Statement of Financial  Accounting  Standards
No. 121,  "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" ("SFAS 121"). In accordance with SFAS 121, the Company
evaluates  the  carrying  value  of  its  long  lived  assets  and  identifiable
intangibles,  including  goodwill,  when  events  or  changes  in  circumstances
indicate  that the carrying  amount of such assets may not be  recoverable.  The
effect of the adoption of SFAS 121 was not material.

<PAGE>

      In 1996, the Company  adopted the disclosure  only provisions of Statement
of  Financial   Accounting   Standards  No.  123,  "Accounting  for  Stock-Based
Compensation" ("SFAS 123"). SFAS 123 encourages,  but does not require companies
to record at fair value compensation cost for stock-based employee  compensation
plans.   The  Company  has  chosen  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" and
related  interpretations.  Accordingly,  compensation  cost for stock options is
measured as the  excess,  if any, of the quoted  market  price of the  Company's
stock at the date of the grant over the amount an  employee  must pay to acquire
the stock.

<PAGE>


ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

QUARTERLY RESULTS OF OPERATIONS  (UNAUDITED)

<TABLE>
<CAPTION>

                                                 SUCCESSOR COMPANY
                           -------------------------------------------------------------
                           QUARTER ENDED   QUARTER ENDED   QUARTER ENDED   QUARTER ENDED
                             MARCH 31,       JUNE 30,      SEPTEMBER 30,   DECEMBER 31,
                               1996             1996            1996            1996
                              ------           ------          ------          -----
          1996
          ----
<S>                          <C>             <C>             <C>             <C>
Net revenue.............     $  80,459       $  85,252       $  83,447       $  83,310
Cost of sales and
  rentals (a)                   33,482          31,712          31,316          30,224
Net loss................       (11,430)         (7,890)         (8,505)         (6,835)
Net loss applicable to
   Common Stock.........       (11,955)         (8,497)         (9,098)         (7,437)
Net loss per share of
   Common Stock.........     $   (1.26)      $   (0.90)      $   (0.96)      $   (0.78)



                                      PREDECESSOR COMPANY               SUCCESSOR COMPANY
                             -------------------------------------  --------------------------
                                QUARTER ENDED                       SEVEN WEEKS     QUARTER
                             -------------------      SIX WEEKS        ENDED         ENDED
                             MARCH 31,  JUNE 30,        ENDED       SEPTEMBER 30  DECEMBER 31,
                               1995       1995     AUGUST 11, 1995      1995         1995
                             -------    --------   ---------------  ------------  ------------

      1995
      ----
Net revenue.............     $ 88,427   $ 82,716       $ 30,960       $ 52,221      $ 98,371
Cost of sales and
   rentals(a) ..........       32,470     30,871         10,927         23,755        45,847
Net income (loss).......        9,275      7,995           (211)        (4,517)       (9,357)
Net loss applicable to
   Common Stock.........          ---        ---            ---         (4,807)       (9,882)
Net loss per share of
   Common Stock.........     $    ---   $    ---       $    ---       $  (0.51)     $  (1.04)

</TABLE>

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

(a)   Cost of sales and  rentals  does not include  operating  expenses of field
      sales  and  service  offices  because  no  meaningful  allocation  of such
      expenses to this line item is practicable.  Accordingly, such expenses are
      included in selling, service and administrative expenses.

      The capital  structure and accounting  bases 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
subsequent to August 11, 1995 are not comparable to periods prior thereto.

<PAGE>


INDEPENDENT AUDITORS' REPORT



Board of Directors and Stockholders
Dictaphone Corporation

We have audited the accompanying  consolidated balance sheets of Dictaphone Cor-
poration and Subsidiaries  (Successor Company) as of December 31, 1996 and 1995,
and the related consolidated statements of operations,  stockholders' equity and
cash flows for the year ended  December 31,  1996,  and the 20 week period ended
December 31, 1995. Our audits also included the financial  statement schedule as
of and for the year ended December 31, 1996 and as of and for the 20 week period
ended  December  31,  1995  listed  in the  Index  at Item 14.  These  financial
statements  and  financial  statement  schedule  are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an  opinion  on the
consolidated  financial statements and financial statement schedule based on our
audits.

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

In our opinion,  such consolidated  financial  statements present fairly, in all
material  respects,   the  financial  position  of  Dictaphone  Corporation  and
Subsidiaries  (Successor Company) at December 31, 1996 and 1995, and the results
of their  operations  and their cash flows for the year ended  December 31, 1996
and 20 week period ended December 31, 1995 in conformity with generally accepted
accounting principles. Also, in our opinion, the financial statement schedule as
of and for the year ended December 31, 1996 and as of and for the 20 week period
ended December 31, 1995, when  considered in relation to the basic  consolidated
financial statements taken as a whole,  presents fairly in all material respects
the information set forth therein.



Deloitte & Touche LLP

Stamford, Connecticut
February 24, 1997

<PAGE>



                   DICTAPHONE CORPORATION (SUCCESSOR COMPANY)

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

                                           DECEMBER 31, 1995   DECEMBER 31, 1996
                                           -----------------   -----------------
ASSETS
Current assets:
   Cash                                         $ 14,279            $  7,927
   Accounts receivable, less allowance of
    $1,462 and $1,339, respectively               57,256              53,701
   Inventories                                    66,341              56,840
   Other current assets                            9,152               9,833
                                                --------            --------
      Total current assets                       147,028             128,301
Property, plant and equipment, net                45,690              37,008
Deferred financing costs, net of accumulated
 amortization of $900 and $6,235, respectively    18,799              14,255
Intangibles, net of accumulated amortization
 of $16,968 and $58,177, respectively            307,964             271,022
Prepaid repurchases, leased equipment              7,279               5,163
Other assets                                      23,930              49,086
                                                --------            --------
      Total assets                              $550,690            $504,835
                                                ========            ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable                              $ 7,932              $7,634
   Interest payable                               10,922              10,342
   Accrued liabilities                            42,640              29,961
   Advance billings                               34,466              34,808
   Current portion of long-term debt               7,750              12,512
                                                --------            --------
      Total current liabilities                  103,710              95,257
Long-term debt                                   342,250             340,086
Other liabilities                                 10,227              10,114
                                                --------            --------
      Total liabilities                          456,187             445,457
                                                --------            --------

Commitments and contingencies (Note 11)

Stockholders' equity:
   Preferred  stock ($.01 par value;
     10,000,000  shares  authorized;
     1,500,000 shares  of 14%  PIK
     perpetual  preferred  stock  issued
     and  outstanding, liquidation
     value at December 31, 1996, $18,142)         15,815              18,142
   Common stock ($.01 par value; 20,000,000
     shares authorized; 9,480,000 shares
     outstanding)                                     95                  95
   Notes receivable from stockholders             (1,160)             (1,052)
   Additional paid-in capital                     94,905              94,905
   Treasury stock, at cost                          (100)               (200)
   Accumulated deficit                           (14,689)            (51,676)
   Accumulated translation adjustment               (363)               (836)
                                                --------            --------
      Total stockholders' equity                  94,503              59,378
                                                --------            --------
      Total liabilities and stockholders'
         Equity                                 $550,690            $504,835
                                                ========            ========




          See accompanying notes to consolidated financial statements.


<PAGE>


                   DICTAPHONE CORPORATION (SUCCESSOR COMPANY)

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



                                        TWENTY WEEKS ENDED      YEAR ENDED
                                         DECEMBER 31, 1995   DECEMBER 31, 1996
                                        ------------------   -----------------
   Revenues:
      Sales and rentals                      $114,906            $239,638
      Support services                         35,686             92,830
                                             --------            -------
         Total revenue                        150,592            332,468
                                             --------            -------

   Costs and expenses:

      Cost of sales and rentals                69,602            126,734

      Selling, service and administrative      65,933            162,422

      Amortization of intangibles              16,968             41,209

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

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

   Interest expense                            15,850             42,897

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

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

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

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

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

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

      Net loss per share of Common Stock     $  (1.55)          $  (3.90)
                                             ========           ========











          See accompanying notes to consolidated financial statements.

<PAGE>


                   DICTAPHONE CORPORATION (SUCCESSOR COMPANY)

                      CONSOLIDATED STATEMENTS OF CASH FLOW
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                       TWENTY WEEKS ENDED      YEAR ENDED
                                                        DECEMBER 31, 1995   DECEMBER 31, 1996
                                                       ------------------   -----------------
<S>                                                         <C>                 <C>
   Operating activities:
      Net loss                                              $(13,874)           $(34,660)
      Adjustments to reconcile net loss to net cash
       provided by (used in) operating activities:
         Depreciation and amortization (including
          $11,691 and $5,775, respectively, of
          nonrecurring charges)                               39,972              71,135
         Provision for deferred income taxes                  (9,035)            (18,876)
         Changes in assets and liabilities:
            Accounts receivable                              (12,684)              3,320
            Inventories                                       16,786               3,833
            Other current assets                               5,358                (513)
            Accounts payable and accrued liabilities          20,020              (5,672)
            Advance billings                                  (1,134)                167
            Other assets and other                           (18,837)            (12,416)
                                                            --------            --------
               Net cash provided by operating activities      26,572               6,318
                                                            --------            --------

   Investing activities:
      Payments for acquisition                              (454,239)             (8,000)
      Net investment in fixed assets                            (805)             (6,225)
                                                            --------            --------
            Net cash used in investing activities           (455,044)            (14,225)
                                                            --------            --------

   Financing activities:
      Net proceeds from sale of senior
         subordinated notes                                  194,000                 ---
      Borrowings under term loan facility                    150,000                 ---
      Repayment under term loan facility                         ---              (7,750)
      Proceeds from sale of common stock                      95,000                 ---
      Proceeds from sale of preferred stock                   15,000                 ---
      Borrowings under revolving credit facility              15,000              32,000
      Repayment under revolving credit facility              (15,000)            (23,000)
      International borrowing                                    ---               1,277
      Payment of deferred financing costs                    (13,699)               (791)
      Capital lease obligations                                  ---                (198)
      Repayment of management loans                              113                 108
      Payments to acquire treasury stock                        (100)               (100)
                                                            --------            --------
         Net cash provided by financing activities           440,314               1,546
                                                            --------            --------

   Effect of exchange rate changes on cash                       (26)                 (9)
                                                            --------            --------

   Increase (decrease) in cash                                11,816              (6,352)

   Cash, beginning of period                                   2,463              14,279
                                                            --------            --------

   Cash, end of period                                      $ 14,279            $  7,927
                                                            ========            ========

   SUPPLEMENTAL CASH FLOW INFORMATION:

   Interest paid                                            $  4,060            $ 38,142
                                                            ========            ========
   Income taxes paid                                        $    ---            $  1,960
                                                            ========            ========
</TABLE>

          See accompanying notes to consolidated financial statements.

<PAGE>

                   DICTAPHONE CORPORATION (SUCCESSOR COMPANY)

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

                  FOR THE TWENTY WEEKS ENDED DECEMBER 31, 1995
                        AND YEAR ENDED DECEMBER 31, 1996
                     (In millions, except per share amounts)


<TABLE>
<CAPTION>

                                                    NOTES
                                                  RECEIVABLE             ACCUMULATED               ACCUMULATED
                             PREFERRED   COMMON      FROM      TREASURY    PAID-IN    ACCUMULATED  TRANSLATION    TOTAL
                               STOCK     STOCK   STOCKHOLDERS    STOCK     CAPITAL      DEFICIT    ADJUSTMENTS    EQUITY
                             ---------   ------  ------------  --------  ----------   -----------  -----------  ----------

      <S>                    <C>         <C>       <C>         <C>        <C>          <C>         <C>          <C>
      Initial capitalization
       at August 12, 1995    $  15,000   $   95    $(1,273)    $  ---     $  94,905    $    ---    $     ---    $ 108,727

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

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

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

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

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

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

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

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

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

      Translation
       adjustments                 ---      ---        ---        ---           ---         ---      (473)           (473)
                             ---------   ------     ------     ------     ---------    --------    ------       ---------
      Balance at
      December 31, 1996      $  18,142   $   95    $(1,052)    $ (200)    $  94,905    $(51,676)  $     (836)   $  59,378
                             =========   ======    =======     ======     =========    ====---=    ========     =========

</TABLE>

          See accompanying notes to consolidated financial statements.

<PAGE>

                   DICTAPHONE CORPORATION (SUCCESSOR COMPANY)

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


1.    THE ACQUISITION

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

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

2.    NATURE OF OPERATIONS

            The  Company  is engaged  principally  in the  design,  manufacture,
      marketing   and   service  of   integrated   voice  and  data   management
      technologies.  The  Company  is known  for its  sales of its  desktop  and
      portable dictation products, however in recent years, it has obtained more
      than two-thirds of its worldwide product revenue from sophisticated  voice
      processing systems and  communications  recording systems that incorporate
      digital  technology and complex software design.  Dictaphone markets these
      products  worldwide  with  most of its  revenue  generated  from  the U.S.
      market.

3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

            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.

<PAGE>


3.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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

            COMPUTER SOFTWARE DEVELOPMENT COSTS. The Company capitalizes certain
      software  costs  (approximately  $4,171  and  $6,945  for the years  ended
      December  31,  1995  and  1996,   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. During 1996,  amortization  expense related to these capitalized
      amounts was $1,418.

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

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

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

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

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

            COSTS AND  EXPENSES.  Operating  expenses of field sales and service
      offices  are  included in selling,  service  and  administrative  expenses
      because no  meaningful  allocation  of such  expenses  to cost of sales or
      support services is practicable.

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

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

<PAGE>

            LOSS PER  SHARE.  The  weighted  average  number of shares of common
      stock  outstanding  used in the  computation  of loss  per  share  for the
      twenty-week  period ended  December  31, 1995 and year ended  December 31,
      1996 was 9,490,000 and 9,485,750, respectively.

4.    INVENTORIES

            Inventories consist of the following:

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

            Raw materials and work in process        $ 18,437        $   14,881
            Supplies and service parts                 19,249            19,946
            Finished products                          28,655            22,013
                                                     --------          --------
            Total inventories                        $ 66,341          $ 56,840
                                                     ========          ========

            As a result of the  Acquisition,  inventories were recorded at their
      fair value at August 12, 1995. Such fair value  represented  selling price
      less  estimated  costs of completion for work in process and selling costs
      and a reasonable  profit  allowance for the selling and completion  effort
      for finished  goods.  Raw materials were valued at  replacement  cost. The
      fair value of inventories was $18,000 in excess of their  historical cost.
      $11,691 and $5,775 of such excess was charged to cost of sales and rentals
      during the twenty-week period ended December 31, 1995 and year ended
      December 31, 1996, respectively.

5.    PROPERTY, PLANT AND EQUIPMENT

            Property, plant and equipment consists of the following:

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

            Land                            $  1,777           $  1,781
            Buildings                         20,479             16,958
            Machinery and equipment           33,847             43,034
                                            --------           --------
               Subtotal                       56,103             61,773
            Accumulated depreciation         (10,413)           (24,765)
                                            --------           --------
            Property, plant and
               equipment, net               $ 45,690           $ 37,008
                                            ========           ========

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

6.    INTANGIBLES

            The  following  summarizes  intangible  assets,  net of  accumulated
      amortization  of $16,968 and $58,177 for the twenty  weeks ended  December
      31, 1995 and year ended December 31, 1996, respectively.
      Amortization expense for the year ended December 31, 1996 was $41,209.

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

            Goodwill                        $140,006           $139,687
            Tradenames                        77,104             75,158
            Service contracts                 34,499             18,951
            Non-compete agreement             47,202             30,057
            Patents                            9,153              7,169
                                            --------           --------
                                            $307,964           $271,022
                                            ========           ========

<PAGE>


7.    DEBT

            The following summarizes the debt structure of the Company:

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

            Current portion of
               long-term debt               $  7,750           $ 12,512
                                            --------           --------
            Long-term debt:
               Senior debt:
                  Term loans:
                     Tranche A                68,000             57,000
                     Tranche B                74,250             73,500
                  Revolving credit loans         ---              9,000
               International debt                ---                586
               Subordinated notes            200,000            200,000
                                            --------           --------
            Total long-term debt             342,250            340,086
                                            --------           --------
            Total debt                      $350,000           $352,598
                                            ========           ========

            In  connection  with the financing of the  Acquisition,  the Company
      entered into a Credit  Agreement  dated August 7, 1995,  as amended by the
      First Amendment to Credit Agreement,  dated June 28, 1996 on July 17, 1996
      (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.

            The Credit  Agreement  consists of a $75,000 Tranche A Term Loan due
      March 31, 2001 (the "Tranche A Loan"),  a $75,000  Tranche B Term Loan due
      June 30, 2002 (the "Tranche B Loan") together with the Tranche A Loan, the
      "Term  Loans" and a six-year  revolving  credit  facility of up to $40,000
      (the "Revolving Credit Facility"),  and, together with the Term Loans, the
      "Facilities." A portion of the Revolving Credit Facility will be available
      to provide  for the working  capital  requirements  and general  corporate
      purposes  of the Company and to issue  commercial  and standby  letters of
      credit.

            At December 31, 1996,   the  Company  had Term Loans of $142,250 and
      loans of  $9,000  outstanding  under  the  Revolving Credit Facility.  The
      Tranche  A  and  Tranche  B  Loans are  repayable  in  installments  which
      commenced  on March 31,  1996 and December  31,  1996,  respectively.  The
      maturity schedule relating to the $142,250 of outstanding Term Loans is as
      follows:

            1997                    $ 11,750
            1998                      15,750
            1999                      15,750
            2000                      19,750
            Thereafter                79,250
                                    --------
                                    $142,250
                                    ========

            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 Term Loans and thereafter to amounts outstanding under the
      Revolving  Credit  Facility.  All mandatory  prepayments  shall be applied
      ratably  between  the  Tranche A Term Loan and the Tranche B Term Loan and
      shall be applied to scheduled installments thereof in the inverse order of
      maturity.

<PAGE>


7.    DEBT (CONTINUED)

            There are no scheduled  reductions in the Revolving  Credit Facility
      over the next five years; however, the Company is required to reduce loans
      outstanding under the Revolving Credit Facility to $15,000 for a period of
      not less than 30 consecutive days during each consecutive 12-month period.
      Availability  under the Revolving Credit Facility at December 31, 1996 was
      $31,000.  The  Company had  outstanding  letters of credit of $1,333 as of
      December 31, 1996.

            Borrowings  under  the  Tranche  A Loan  and  the  Revolving  Credit
      Facility  bear  interest  at a rate per annum  equal to, at the  Company's
      option, the higher of (1) Bankers Trust's Prime Rate or (2) the rate which
      is 1/2 of 1% in excess of the Federal Funds effective rate,  (together the
      "Base Rate") plus 1.75% or the reserve  Eurodollar Rate (as defined in the
      Credit  Agreement) plus 2.75%. The Tranche B Loan bears interest at a rate
      per annum equal to, at the Company's  option,  the Base Rate plus 2.25% or
      the  reserve  Eurodollar  Rate plus  3.25%.  In  addition,  the Company is
      required to pay Bankers Trust a quarterly commitment fee of .50% per annum
      on the daily average unused portion of the Revolving Credit Facility.  The
      carrying amount of the Facilities  approximates fair value as the interest
      rate reprices  quarterly and is reflective of currently  available  market
      rates. The Company entered into an interest rate swap contract on November
      7, 1995, effective February 16, 1996, with an aggregate notional principal
      amount  equivalent to $75,000 maturing on February 16, 1999. The swap will
      effectively  convert 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 8.8%.  No funds  under  the swap
      agreements  are actually  borrowed or are to be repaid.  The fair value of
      the interest rate swaps as of December 31, 1996 was favorable $244,  based
      upon dealer quotes. The amounts due to or from the counterparties  will be
      reflected  in  interest  expense  in the  periods  in which  they  accrue.
      Dictaphone   is  exposed  to   credit-related   losses  in  the  event  of
      non-performance  by the  counterparties  to these swaps,  although no such
      losses are expected as the  counterparties  are commercial banks having an
      investment grade credit rating.  The effective  interest rate for the year
      ended  December  31, 1996 was 8.374%,  8.8639% and 8.226% on the Tranche A
      Loan, Tranche B Loan and the Revolving Credit Facility, respectively.

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

            In  addition,   the  Credit   Agreement   contains   covenants  that
      significantly  limit or prohibit,  among other things,  the ability of the
      Company and Dictaphone  U.S. to incur  indebtedness,  make  prepayments of
      certain  indebtedness,  pay dividends on Common Stock,  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.

            On July 17, 1996, the Company and the lenders  executed an amendment
      to the  Credit  Agreement  modifying  certain of the  covenants  contained
      therein.  The amendment  lowered  restrictions  on  investments  and joint
      ventures,  and revised the financial covenants for maximum leverage ratio,
      minimum consolidated EBITDA, and minimum interest coverage ratio.

<PAGE>


7.    DEBT (CONTINUED)

            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, 1996 was favorable  $26.0 million based
      on dealer quotes.  The Notes are fully and  unconditionally  guaranteed by
      Dictaphone U.S. The Notes contain  covenants similar to the Facilities and
      provides for each noteholder to have the right to require that the Company
      repurchase  the  Notes at 101% of the  principal  amount  upon a change of
      control as defined in the Note Indenture.

8.    EQUITY AND STOCK OPTIONS

      COMMON STOCK

            On December  31, 1996,  the Company had 20 million  shares of common
      stock,  $.01 par value ("Common  Stock")  authorized of which 9.48 million
      shares  were  issued,   outstanding   and  owned  by  Stonington   Capital
      Appreciation  1994 Fund,  L.P.  ("Stonington"),  an affiliate of a limited
      partner of Stonington, and by management of the Company.

      PREFERRED STOCK AND WARRANT

            The  Company  is  authorized  to issue up to 10  million  shares  of
      preferred  stock,  $.01 par value,  in one or more series as authorized by
      the Board of  Directors  and to fix the terms,  rights,  restrictions  and
      qualifications   of  shares  of  each  series.   In  connection  with  the
      acquisition,  the  Company  issued 1.5 million  shares of 14%  Pay-In-Kind
      Perpetual Preferred Stock ("PIK Preferred Stock"). The PIK Preferred Stock
      is nonvoting and has a stated value and liquidation  preference of $10 per
      share and  carries a  cumulative  pay-in-  kind  dividend  of 14% per year
      payable  quarterly in arrears from September 30, 1995 until July 31, 2006,
      and thereafter the annual  dividend rate will increase by 200 basis points
      every twelve  months (but in no event will exceed 24%).  The PIK Preferred
      Stock ranks  senior to all classes and series of stock of the Company with
      respect  to  dividend  rights and  rights on  liquidation,  winding up and
      dissolution of the Company.  It is redeemable at the option of the Company
      or in certain limited  circumstances  at the option of the holder upon the
      occurrence  of certain  events.  The Company  accrued the 14%  pay-in-kind
      dividend  and charged  accumulated  deficit $815 and $2,327 for the twenty
      weeks  ended   December  31,  1995  and  year  ended  December  31,  1996,
      respectively, as  a result of the  required  dividends representing 81,500
      and 232,700 shares of the PIK Preferred  Stock, respectively.  Such shares
      of PIK Preferred Stock were declared  and issued in respect of the  period
      up to December 31, 1996.

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

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

<PAGE>


8.    EQUITY AND STOCK OPTIONS (CONTINUED)

      MANAGEMENT STOCK OPTION PLAN

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

                                            DECEMBER 31,    DECEMBER 31,
                                                1995            1996
                                             -----------     -----------
         Outstanding, beginning of year             ---        683,000
         Granted                                713,000         89,000
         Cancelled                              (30,000)      (122,000)
                                                -------        -------
         Outstanding, end of year               683,000        650,000
                                                =======        =======

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

                                                       1995             1996
                                                       ----             ----
            Net loss                As reported    $(14,689)         $(36,987)
                                    Pro Forma      $(14,770)         $(37,182)
            Net loss per share      As reported    $  (1.55)         $  (3.90)
                                    Pro Forma      $  (1.56)         $  (3.92)


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

                                            1995                      1996
                                            ----                      ----
            Risk free interest rate        5.44%                      6.21%
            Expected life                 5 years                    5 years
            Expected volatility              --                         --
            Expected dividend yield          --                         --


<PAGE>


9.    INCOME TAXES

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

                                TWENTY WEEKS ENDED      YEAR ENDED
                                 DECEMBER 31, 1995   DECEMBER 31, 1996
                                ------------------   -----------------
         Current:
           Federal                   $    ---            $    ---
           State                          ---                 ---
           Foreign                        329                 (55)
                                     --------            --------
              Total                  $    329            $    (55)
                                     --------            --------

         Deferred:
           Federal                   $ (7,228)           $(14,686)
           State                       (1,216)             (3,139)
           Foreign                       (591)             (1,051)
                                     --------            --------
              Total                  $ (9,035)           $(18,876)
                                     --------            --------
                 Total               $ (8,706)           $(18,931)
                                     ========            ========

            The difference  between the Company's  effective income tax rate and
      the United States statutory rate for the twenty-week period ended December
      31, 1995 and year ended December 31, 1996 is reconciled below:

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

         United States statutory rate          35.00%               35.00%
         State income taxes, net of
           Federal income tax benefit           3.50%                3.81%
         Effect of foreign operations           1.09%               (1.39%)
         Miscellaneous                         (1.03%)              (2.09%)
                                               -----                -----
            Total                              38.56%               35.33%
                                               =====                =====

         See  Footnote  13 for  disaggregated  information  as to  domestic  and
foreign income before taxes.


<PAGE>

9.    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:

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

         Deferred tax assets:
            Net operating loss carry forwards        $    5,598      $   15,702
            Amortization - identifiable intangibles       3,981          12,951
            Postretirement and pension benefits           3,084           4,107
            Depreciation                                  2,828           5,570
            Other                                         4,871           4,779
                                                     ----------      ----------
            Total deferred tax assets                $   20,362      $   43,109
                                                     ==========      ==========

         Deferred tax liabilities:
            Amortization - identifiable intangibles  $   (1,143)     $      ---
            Amortization - goodwill                        (710)         (2,363)
            Capitalized software costs                     (631)         (2,084)
            Other                                          (280)           (893)
                                                     ----------      ----------
            Total deferred tax liabilities           $   (2,764)     $   (5,340)
                                                     ==========      ==========

            The  Company  has  recorded  a deferred  tax asset of $43.1  million
      included in other  assets  reflecting  the benefit of net  operating  loss
      carryforwards  and  various  book  tax  temporary  differences.   The  net
      operating loss carryforward for federal income tax purposes as of December
      31, 1996 is approximately $37.7 million, of which $13.6 million of the net
      operating  loss  carryforward  will  expire  in  the  year  2010 and $24.1
      million will expire in the year  2011.   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.  Although
      realization  is not assured,  management  believes it is "more likely than
      not" that all of the deferred tax asset will be realized, and  accordingly
      has not established a valuation allowance for the deferred tax asset as of
      December 31, 1996.This conclusion is based upon (i) the impact of purchase
      accounting  adjustments which  contributed to the current taxable loss and
      will be substantially amortized by 1998, thereby returning the Company to
      a taxable position, (ii) the long carryforward  period  available  for net
      operating  loss  utilization,  and  (iii) the  Company's  expected  future
      profitability. 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.

10.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

            Stonington,  together  with an  affiliate  of a limited  partner  of
      Stonington,  own 98% of the outstanding  Common Stock of the Company,  has
      the power to determine  the  composition  of the Board of Directors of the
      Company and  otherwise  control the  business  and affairs of the Company.
      Four of the eight  members of the Board of  Directors  of the  Company are
      employees of an affiliate of Stonington  and serve as  representatives  of
      Stonington.


<PAGE>


10.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (CONTINUED)

      TRANSACTIONS WITH MANAGEMENT

            In connection with the Acquisition,  the Company sold 197,000 shares
      of the  Company's  Common  Stock  to  certain  members  of  the  Company's
      management (the "Management  Investors") for $1,970, the fair value of the
      Common Stock at the date of sale (the "Management Placement"). The Company
      financed  $1,273 of  the  Management  Placement  with  non-recourse  loans
      bearing interest at a rate equal to the Adjusted Eurodollar Rate in effect
      for the  Revolving  Credit Facility under the credit Agreement plus 2.75%.
      Interest  is   due  annually  starting  in   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.

11.   COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF RISK

      CONCENTRATIONS OF RISKS

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

      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.


<PAGE>


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

      COMMITMENTS (CONTINUED)

            Future  minimum lease  payments for operating  leases as of December
31, 1996 are as follows:

            YEARS ENDING DECEMBER 31,
              1997                                $ 4,438
              1998                                  3,144
              1999                                  2,337
              2000                                  1,733
              2001                                    950
              Later years                           3,173
                                                  -------
            Total minimum lease payments          $15,775
                                                  =======

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

      CONTINGENCIES

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

            On June  23,  1995,  a  complaint  was  filed in the  United  States
      District  Court for the  Northern  District of  Illinois by Failsafe  Disk
      Company  ("Failsafe")  against the Company. The complaint alleged that the
      Company  violated  Sections  1 and 2 of the  Sherman  Antitrust  Act  (the
      "Sherman  Act") by preventing  Failsafe from selling 10 through 60 channel
      recording tapes which, according to the complaint, are equal in quality to
      and lower in price than 10 through  60 channel  tapes sold by the  Company
      and others.  On July 5, 1995,  the  complaint was served upon the Company.
      The complaint sought damages of $19.2 million, subject to being trebled in
      accordance  with  the  provisions  of  the  Sherman  Act,   together  with
      Failsafe's  costs and  expenses,  including  reasonable  attorneys'  fees.
      Dictaphone  vigorously  contested  this  litigation,  which  was  recently
      settled by Dictaphone for an immaterial amount.


<PAGE>


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

      CONTINGENCIES (CONTINUED)

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

            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.

<PAGE>

12.   PRO FORMA COMBINED STATEMENTS OF OPERATIONS DATA

            The  following  pro  forma  combined   statement  of  operations  of
      Dictaphone  Corporation  for the twelve months ended December 31, 1995 has
      been presented to give effect to the Acquisition,  described in Note 1, as
      if it had  occurred on January 1, 1995.  The pro forma  operating  results
      include the  historical  results of  Dictaphone  Corporation  (Predecessor
      Company) shown herein adjusted for interest costs on borrowings to finance
      the Acquisition and purchase accounting adjustments.

<TABLE>
<CAPTION>

                                                              DECEMBER 31, 1995
                                        -------------------------------------------------------
                                        PREDECESSOR  DICTAPHONE
                                          COMPANY    CORPORATION
                                         32 WEEKS     20 WEEKS
                                           ENDED       ENDED                        DICTAPHONE
                                         AUGUST 11,  DECEMBER 31,     PRO FORMA     CORPORATION
                                           1995         1995         ADJUSTMENTS    PRO FORMA
                                        -----------  ------------  ---------------  -----------

      <S>                                 <C>          <C>          <C>               <C>
      Total revenue...................    $202,103     $150,592     $     ---         $352,695
                                          --------     --------     ---------         --------

      Cost and expenses:

      Cost of sales and rentals.......      74,268       69,602         4,106(a)(b)    147,976

      Selling, service and
        administrative................      93,774       82,901        22,465(b)       199,140
      Research and development........       7,004        4,587           ---           11,591
                                          --------     --------     ---------         --------

      Operating profit (loss).........      27,057       (6,498)      (26,571)          (6,012)

      Interest (income) expense
        and other.....................      (1,400)      16,082        27,992(c)        42,674
                                          --------     --------     ---------         --------

      Income (loss) before
        income taxes .................      28,457      (22,580)      (54,563)         (48,686)

      Provision for income tax
        expense (benefit).............      11,398        (8,706)     (22,098)(d)      (19,406)
                                          --------     ---------    ---------         --------

      Net income (loss)...............    $ 17,059     $ (13,874)   $ (32,465)        $(29,280)

      Stock dividend on PIK
        Preferred Stock...............         ---           815        1,285            2,100
                                          --------     ---------    ---------         --------

      Net loss applicable
        to Common Stock...............    $ 17,059     $ (14,689)   $ (33,750)        $(31,380)
                                          ========     =========    =========         ========
</TABLE>

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

      (a) Reflects the charge to cost of sales related to the inventory write-up
          as a result of the  Acquisition  of $6,309 for the twelve month period
          ended December 31, 1995.

      (b) Reflects depreciation  adjustment and additional amortization from the
          preliminary  allocation of the excess  purchase price over  historical
          costs of the net assets of $20,262 for the twelve  month  period ended
          December 31, 1995.


<PAGE>



12.   PRO FORMA COMBINED STATEMENT OF OPERATIONS DATA  (CONTINUED)

     (c)  Reflects the net adjustments to interest  (income) expense as a result
          of the transaction as follows:

                                                             TWELVE MONTHS
                                                         ENDED DECEMBER 31, 1995
                                                         -----------------------

         Interest expense:
           Revolving Credit Facility -  $20,775 average
             balance                                            $   1,849
           Tranche A Term Loan - $74,125 average balance            6,597
           Tranche B Term Loan - $75,000 average balance            7,050
           Senior Subordinated Notes - $200,000........            23,500
           Commitment fees on unused Revolving Credit
            Facility - $19,225 average unused balance..                96
           Other bank charges..........................               300
           Amortization of debt issuance costs.........             2,936
         Elimination of historical interest expense....           (15,850)
                                                                ---------
                                                                   26,478
         Elimination of  historical interest income....             1,514
                                                                ---------
              Total interest adjustments...............         $  27,992
                                                                =========

     (d) Reflects the tax effects of the pro forma  adjustments to income (loss)
         before  income taxes based on the  estimated  applicable  statutory tax
         rates.

13.   SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENT AND SEGMENT
      INFORMATION

          Dictaphone  U.S. has fully and  unconditionally  guaranteed  the Notes
     (See  Note 7).  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.


<PAGE>



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

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

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

<TABLE>
<CAPTION>

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

      <S>                       <C>        <C>           <C>        <C>             <C>
     Revenue from:
      Sales and rentals         $    ---   $104,525      $15,212    $(4,831)        $114,906
      Support services               ---     31,031        4,655        ---           35,686
                                --------   --------      -------    -------         --------
         Total revenues              ---    135,556       19,867     (4,831)         150,592
                                --------   --------      -------    -------         --------

     Costs and expenses:
      Cost of sales and rentals      ---     65,692        8,312     (4,402)          69,602
      Selling, service and
        administrative                83     72,065       10,750          3           82,901
      Research and development       ---      4,587          ---        ---            4,587
      Interest expense - net
        and other                  5,472      9,455        1,155        ---           16,082
                                --------   --------      -------    -------         --------
         Total costs and
           expenses                5,555    151,799       20,217     (4,399)         173,172
                                --------   --------      -------    -------         --------

     Equity (loss) earnings       (4,035)       ---          ---      4,035              ---
                                --------   --------      -------    -------         --------

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

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

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

</TABLE>


<PAGE>



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


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

<TABLE>
<CAPTION>

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

     Revenue from:
      <S>                      <C>          <C>         <C>         <C>            <C>
      Sales and rentals        $    ---     $215,566    $ 36,229    $(12,157)      $ 239,638
      Support services              ---       81,311      11,519         ---          92,830
                               --------     --------    --------    --------       ---------
         Total revenues             ---      296,877      47,748     (12,157)        332,468
                               --------     --------    --------    --------       ---------

     Costs and expenses:
      Cost of sales and rentals     ---      117,986      20,453     (11,705)       126,734
      Selling, service and
        administrative              203      171,620      31,801           7        203,631
      Research and development      ---       14,135         ---         ---         14,135
      Interest expense - net
        and other                 3,830       36,557       1,158          14         41,559
                               --------     --------    --------    --------       --------
         Total costs and
           expenses               4,033      340,298      53,412     (11,684)       386,059
                               --------     --------    --------    --------       --------

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

     (Loss) income before
       income taxes             (11,057)     (43,421)     (5,664)      6,551        (53,591)

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

     Net (loss) income         $ (9,872)    $(27,098)   $ (4,432)   $  6,742       $(34,660)
                               ========     ========    ========    ========       ========

</TABLE>


<PAGE>



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


                   DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
              SUPPLEMENTAL CONSOLIDATING BALANCE SHEET INFORMATION
                                DECEMBER 31, 1995

<TABLE>
<CAPTION>

                              DICTAPHONE   DICTAPHONE  DICTAPHONE  CONSOLIDATING
                              CORPORATION      U.S.      NON-U.S.  ADJUSTMENTS    CONSOLIDATED
                              -----------  ----------  ----------  -------------  ------------
     ASSETS
     Current assets:
      <S>                        <C>        <C>         <C>         <C>             <C>
      Cash                       $    ---   $ 11,591    $ 2,688     $    ---        $ 14,279
      Accounts receivable           7,509     50,623      8,567       (9,443)         57,256
      Inventories                     ---     56,139     11,035         (833)         66,341
      Other current assets            ---      5,718      3,499          (65)          9,152
                                 --------   --------    -------     --------        --------
        Total current assets        7,509    124,071     25,789      (10,341)        147,028

     Note receivable                  ---      6,821        ---       (6,821)            ---
     Investments in subsidiaries  446,228        ---        ---     (446,228)            ---
     Fixed assets, net                ---     42,907      2,783          ---          45,690
     Intangibles, net               2,455    286,043     19,466          ---         307,964
     Deferred financing costs      18,799        ---        ---          ---          18,799
     Other assets                   1,936     27,633      1,640          ---          31,209
                                 --------   --------    -------     ---------       --------
     Total assets                $476,927   $487,475    $49,678     $(463,390)      $550,690
                                 ========   ========    =======     =========       ========


     LIABILITIES AND
     STOCKHOLDERS' EQUITY
     Current liabilities:
      Accounts payable and
        accrued liabilities      $ 18,996   $ 42,375    $ 9,953     $  (9,830)      $ 61,494
     Advance billings                 ---     30,531      3,935           ---         34,466
     Current portion of
       long-term debt               7,750        ---        ---           ---          7,750
                                 --------   --------    -------     ---------       --------
         Total current
           liabilities             26,746     72,906     13,888        (9,830)       103,710
     Long-term debt               349,086    332,494     17,491      (356,821)       342,250
     Other liabilities                ---      9,748        479           ---         10,227
     Stockholders' equity         101,095     72,327     17,820       (96,739)        94,503
                                 --------   --------    -------     ---------       --------
     Total liabilities
       and stockholders' equity  $476,927   $487,475    $49,678     $(463,390)      $550,690
                                 ========   ========    =======     =========       ========
</TABLE>

<PAGE>



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


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

<TABLE>
<CAPTION>

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

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


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

<PAGE>


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

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

<TABLE>
<CAPTION>

                                              DICTAPHONE   DICTAPHONE  DICTAPHONE  CONSOLIDATING
                                              CORPORATION     U.S.      NON-U.S.   ADJUSTMENTS    CONSOLIDATED
                                              -----------  ----------  ----------  -----------    ------------
     Operating activities:

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

     Investing activities:
      Payment to acquire net assets of
        Dictaphone Corporation                 (454,239)    (429,763)    (35,500)     465,263       (454,239)
      Net investment in fixed assets                ---         (695)       (110)         ---           (805)
                                              ---------    ---------    --------    ---------      ---------
     Cash used for investing activities        (454,239)    (430,458)    (35,610)     465,263       (455,044)
                                              ---------    ---------    --------    ---------      ---------

     Financing activities:
      Net proceeds from sale of senior
        subordinated notes                      194,000          ---         ---          ---        194,000
      Borrowings under term loan facility       150,000          ---         ---          ---        150,000
      Borrowing from promissory notes               ---      347,509      17,491     (365,000)           ---
      Borrowings from subsidiary                  6,821          ---         ---       (6,821)           ---
      Proceeds from sale of common stock         95,000       82,254      18,009     (100,263)        95,000
      Proceeds from sale of preferred stock      15,000          ---         ---          ---         15,000
      Borrowings from revolving credit
        facility                                 15,000          ---         ---          ---         15,000
      Repayment under revolving credit
        facility                                    ---      (15,000)        ---          ---        (15,000)
      Payment of deferred financing costs       (13,699)         ---         ---          ---        (13,699)
      Repayment of management loans                 113          ---         ---          ---            113
      Payment to acquire treasury stock            (100)         ---         ---          ---           (100)
                                              ---------    ---------    --------    ---------      ---------
     Cash provided by (used in) financing
       activities                               462,135      414,763      35,500     (472,084)       440,314
                                              ---------    ---------    --------    ---------      ---------

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

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

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

</TABLE>

<PAGE>



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

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

<TABLE>
<CAPTION>

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

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

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

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

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

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

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

</TABLE>

<PAGE>


14.   RETIREMENT PLANS

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

            The Company sponsors a defined contribution plan (401K) for domestic
      employees.  The Company matches 25% of employee  contributions up to 3% of
      eligible  compensation,  subject to  certain  limitations.  Total  Company
      contributions were $151 for the twenty-week period ended December 31, 1995
      and $345 for the year ended December 31, 1996.

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

                                                      UNITED STATES
                                        ----------------------------------------
                                          TWENTY WEEKS ENDED      YEAR ENDED
                                           DECEMBER 31, 1995   DECEMBER 31, 1996
                                          ------------------   ----------------

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


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

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


<PAGE>



14.   RETIREMENT PLANS (CONTINUED)

            The  following   summarizes   amounts   included  in  the  Company's
      consolidated balance sheet and the funded status of the Company's U.S. and
      foreign defined benefit plans at December 31, 1995 and 1996:

                                                       UNITED STATES
                                                ---------------------------
                                                       DECEMBER 31,
                                                    1995          1996
                                                  --------      --------
      Actuarial present value of:
         Vested benefits..................         $22,044       $22,099
                                                   -------       -------
         Accumulated benefit obligations..         $24,561       $25,461
                                                   -------       -------
      Projected benefit obligations.......         $32,280       $31,968
                                                   -------       -------
      Plan assets at fair value, primarily stocks
        and bonds, adjusted by:...........         $27,343       $31,517
         Unrecognized net loss (gain).....             ---        (5,393)
         Unrecognized net asset...........             ---           ---
         Unamortized prior service costs from
           plan amendments................             ---           ---
                                                   -------       -------
      Net pension liability ..............         $ 4,937       $ 5,844
                                                   =======       =======

      The assumptions used in determining pension
         costs and funded status for defined
         benefit plans is as follows:
      Discount rate.......................           7.25%        7.50%
      Rate of increase in future
        compensation levels ..............           4.75%        4.75%
      Expected long-term rate of return on
        plan assets ......................           9.50%        9.50%


                                                          FOREIGN
                                                ---------------------------
                                                       DECEMBER 31,
                                                    1995          1996
                                                  --------      --------
      Actuarial present value of:
         Vested benefits..................         $ 8,203       $10,938
                                                   -------       -------
         Accumulated benefit obligations..         $ 8,203       $10,938
                                                   -------       -------
      Projected benefit obligations.......         $ 9,297       $12,161
                                                   -------       -------
      Plan assets at fair value, primarily stocks
        and bonds, adjusted by:...........         $11,473       $13,041
         Unrecognized net loss............           1,691         1,551
         Unrecognized net asset...........          (1,353)         (707)
         Unamortized prior service costs from
           plan amendments................             ---           664
                                                   -------       -------
      Net pension liability (asset).......         $(2,514)      $(2,388)
                                                   =======       =======

      The assumptions used in determining pension
          costs and funded status for defined
          benefit plans is as follows:
      Discount rate.......................       8.25 - 8.50%   7.75 - 8.25%
      Rate of increase in future compensation
        levels                                          6.00%   5.50 - 6.00%
      Expected long-term rate of return on
        plan assets                             9.00 - 10.00%   9.00 - 9.50%


<PAGE>


15.   POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS

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

            This  obligation  was  determined by application of the terms of the
      postretirement  health care and life insurance plan together with relevant
      actuarial  assumptions.  These  assumptions  as of  December  31, 1995 and
      December 31, 1996, and for the twenty-week period and year then ended were
      as follows:

                                                           1995          1996
                                                           ----          ----
            Discount rate                                  7.25%         7.50%
            Initial health care cost trend rate           11.75%        10.75%
            Ultimate health care cost trend rate           5.75%         5.75%
            Year in which ultimate trend rate achieved     2001          2001

            An  increase  in assumed  health care trend rates of 1% in each year
      would  increase  aggregate  service and  interest  costs by $157 and would
      increase  the  December  31,  1996  accumulated   postretirement   benefit
      obligation by $1,065.

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

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

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


            Postretirement  benefits  are paid by the Company as  incurred.  The
      following summarizes the status of these benefits at December 31, 1995 and
      1996:

                                                                 DECEMBER 31,
                                                           ---------------------
                                                             1995         1996
                                                           --------     --------
      Accumulated postretirement benefit obligations:
         Retirees and dependents                           $     9      $   71
         Fully eligible active plan participants             3,897       1,232
         Other active plan participants                      3,570       8,216
         Unrecognized net (loss) gain                           14        (929)
         Unrecognized prior service credit                      --         ---
                                                           -------      ------
      Accrued postretirement benefits                      $ 7,490      $8,590
                                                           =======      ======


<PAGE>



INDEPENDENT AUDITORS' REPORT



Board of Directors and Stockholders
Dictaphone Corporation

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

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

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

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



Deloitte & Touche LLP

Stamford, Connecticut
February 22, 1996


<PAGE>



                        REPORT OF INDEPENDENT ACCOUNTANTS



To the Board of Directors and
Stockholders of Dictaphone Corporation

In our opinion, the accompanying combined statements of income and of cash flows
for the year ended December 31, 1994 present fairly,  in all material  respects,
the  results of  operations  and cash flows of  Dictaphone  Corporation  and its
affiliated  Dictaphone  companies  for the year  ended  December  31,  1994,  in
conformity  with  generally  accepted  accounting  principles.  These  financial
statements   are  the   responsibility   of  the   Company's   management;   our
responsibility  is to express an opinion on these financial  statements based on
our  audit.  We  conducted  our audit of these  statements  in  accordance  with
generally accepted auditing standards which 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,
assessing the  accounting  principles  used and  significant  estimates  made by
management,  and evaluating the overall  financial  statement  presentation.  We
believe  that our audit  provides a reasonable  basis for the opinion  expressed
above.  We have not audited the  combined  financial  statements  of  Dictaphone
Corporation and its affiliated Dictaphone companies for any period subsequent to
December 31, 1994.

As discussed in Note 1, Pitney Bowes Inc. has  announced its intent to divest of
Dictaphone Corporation and its affiliated Dictaphone companies.

As  described  in Note 6, the  Company  adopted a new  accounting  standard  for
postemployment benefits in 1994.



Price Waterhouse LLP

Stamford, CT
May 16, 1995


<PAGE>




                  DICTAPHONE CORPORATION (PREDECESSOR COMPANY)

                          COMBINED STATEMENTS OF INCOME
                             (Dollars in thousands)



                                                YEAR ENDED       32 WEEKS ENDED
                                             DECEMBER 31, 1994   AUGUST 11, 1995
                                            ------------------   --------------
   Revenue from:
      Sales                                      $216,234           $128,264
      Sales to Pitney Bowes Inc.                   33,469             18,575
      Rentals                                       1,888              1,253
      Support services                             95,231             54,011
                                                 --------           --------
         Total revenue                            346,822            202,103
                                                 --------           --------

   Cost and expenses:

      Cost of sales                                87,152             56,867

      Cost of sales to Pitney Bowes Inc.           30,904             17,119

      Cost of rentals                                 505                282

      Selling, service and administrative         155,535             93,774

      Research and development                     12,272              7,004
                                                 --------           --------

   Total cost and expenses                        286,368            175,046
                                                 --------           --------

   Operating profit                                60,454             27,057

   Interest income                                 (1,049)            (1,400)

   Income before income taxes and
     effect of changes in accounting               61,503             28,457

   Provision for income taxes                      24,936             11,398
                                                 --------           --------

   Income before effect of
     changes in accounting                         36,567             17,059

   Effect of changes in accounting                 (2,811)               ---
                                                 --------           --------

      Net income                                 $ 33,756           $ 17,059
                                                 ========           ========





            See accompanying notes to combined financial statements.


<PAGE>



                  DICTAPHONE CORPORATION (PREDECESSOR COMPANY)

                        COMBINED STATEMENTS OF CASH FLOW
                             (Dollars in thousands)




                                                YEAR ENDED       32 WEEKS ENDED
                                             DECEMBER 31, 1994   AUGUST 11, 1995
                                            ------------------   --------------

Cash flows from operating activities:
   Net income                                   $ 33,756             $ 17,059
   Effect of changes in accounting                 2,811                  ---
   Adjustments  to  reconcile  net  income
     to net cash  provided  by (used  in)
     operating activities:
      Depreciation and amortization                8,102                4,931
      Increase (decrease) in deferred income
        taxes                                      2,135                  ---
      Changes in assets and liabilities:
         Accounts receivable                       3,418               (1,304)
         Inventories                             (11,410)              (7,190)
         Other current assets and prepayments       (402)              (9,945)
         Accounts payable and accrued
           liabilities                               234                2,056
         Advance billings                          1,669                2,719
         Other assets and other                      966               (4,318)
                                                --------              -------
         Net cash provided by operating
           activities                             41,279                4,008
                                                --------              -------

Cash flows from investing activities:
   Net investment in fixed assets                 (5,944)              (5,538)

Cash flows from financing activities:
   Principal payment on capital lease
     obligations                                  (3,500)                 ---

Effect of exchange rate changes on cash              298                   77
                                                --------              -------

Net cash flow available to (financed by)
  Pitney Bowes Inc.                             $ 32,133              $(1,453)
                                                ========              =======


SUPPLEMENTAL CASH FLOW INFORMATION:

Interest paid                                   $    318              $     8
                                                ========              =======
Income taxes paid                               $ 22,647              $13,454
                                                 =======              =======



            See accompanying notes to combined financial statements.

<PAGE>



                  DICTAPHONE CORPORATION (PREDECESSOR COMPANY)

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



1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

         CASH AND CASH EQUIVALENTS.  Cash equivalents include short-term, highly
     liquid  investments  with a maturity  of three  months or less from date of
     acquisition.   The  Company   places  its  temporary  cash  and  short-term
     investments  with  financial  institutions  and limits the amount of credit
     exposure with any one financial institution. Dividends of $11.5 million and
     $12.3 million were paid to Pitney Bowes during 1994 and the thirty-two week
     period  ended  August  11,  1995,  respectively,  out of the net cash  flow
     available to Pitney Bowes in the combined statement of cash flows.

         ACCOUNTS RECEIVABLE. It is the Company's policy to review its allowance
     for  doubtful  accounts  at least  quarterly.  As a result of such a review
     during  1994,  the Company  revised its  allowance  for  doubtful  accounts
     reserve to reflect an improvement in over 90 day account  collections.  The
     effect  of this  change in  estimate  was to reduce  selling,  service  and
     administrative expenses by approximately $1.2 million and increase 1994 net
     income by $.7  million.  Concentrations  of credit  risk  with  respect  to
     accounts  receivable  are limited due to the large number of customers  and
     relatively  small  account  balances  within the majority of the  Company's
     customer base, and their dispersion across different geographic areas.

         INVENTORY  VALUATION.  Inventories  are  valued at the lower of cost or
     market.  Cost is  primarily  determined  on the last-in,  first-out  (LIFO)
     method.  It is the Company's policy to review inventory for obsolescence at
     least   quarterly.   During  1994  the  Company   continued  a  program  of
     consolidating  field service parts  inventories and disposing of identified
     obsolete  parts.  The effect of this  program and ongoing  reevaluation  of
     inventory  reserve levels was to reduce 1994 cost of sales by approximately
     $2.0 million and increase 1994 net income by $1.2 million.


<PAGE>



1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

         COMPUTER SOFTWARE  DEVELOPMENT COSTS. The Company  capitalizes  certain
     software costs in accordance  with the provisions of Statement of Financial
     Accounting Standards No. 86, "Accounting for the Costs of Computer Software
     to be  Sold,  Leased  or  Otherwise  Marketed".  No  amortization  of  such
     capitalized  costs,  approximately  $2.6 million as of August 11, 1995, has
     been recorded as the related  products have not yet been made available for
     sale. Software development costs in fiscal 1994 and earlier which qualified
     for capitalization were not significant.

         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 3-12 years for  machinery  and
     equipment  and 35 years  for  buildings.  Major  improvements  which add to
     productive  capacity of  extended  life of an asset are  capitalized  while
     repairs  and  maintenance  are  charged  to  expense  as  incurred.  Rental
     equipment is depreciated on the  straight-line  method.  Properties  leased
     under  capital  leases  are  amortized  on a  straight-line  basis over the
     primary lease terms. At December 31, 1994,  property  formerly  included in
     capital leases was reclassified to property, plant and equipment due to the
     1994  pre-payment  in  full  of  the  underlying  lease  obligation.  Other
     depreciable assets are depreciated using the straight-line 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.  Charges  for  maintenance  contracts  (support
     services) are billed in advance; the related revenue is included in advance
     billings and taken into income as earned.

         GOODWILL.  Goodwill represents the excess of cost over the value of net
     assets  acquired  in  business  combinations  and is  amortized  using  the
     straight-line method, principally over 40 years.

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

         COSTS AND  EXPENSES.  Operating  expenses  of field  sales and  service
     offices  are  included  in selling,  service  and  administrative  expenses
     because no meaningful allocation of such expenses to cost of sales, cost of
     rentals or support services is currently  practicable,  although management
     intends to refine its information  system to accumulate  such  information.
     Accordingly,  cost of sales and cost of rentals exclude operating  expenses
     of field sales and service offices.

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

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

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

<PAGE>



1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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

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

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

         Foreign  currency  transaction  gains and (losses) were not significant
     for the  thirty-two  week  period  ended  August 11, 1995 or the year ended
     December 31, 1994.

2.   RELATED PARTY TRANSACTIONS

         The Company  arranges  financing for certain of its products  primarily
     through Pitney Bowes Credit  Corporation  ("PBCC") in the U.S., and leasing
     subsidiaries  in Canada and the U.K.,  all  wholly  owned  subsidiaries  of
     Pitney  Bowes.  Sales to finance  subsidiaries  were $13.2  million for the
     thirty-two weeks ended August 11, 1995 and $31.1 million for the year ended
     December  31,  1994.  The  Company  recognizes  revenue  on  sales  to PBCC
     consistent  with its revenue  recognition  policy in Note 1.  Historically,
     Dictaphone purchased and sourced second-hand/used  equipment from PBCC. The
     inventory  purchased was in turn  profitably  remarketed by Dictaphone.  In
     January 1995,  the Company paid $11.2  million to PBCC for  equipment  that
     will become available to Dictaphone,  principally through 1998. This amount
     is  reflected in other  assets on the  combined  balance  sheet and will be
     reclassified  to  inventory  as the  related  equipment  is received by the
     Company.   On  a  quarterly   basis  the  Company   evaluates   the  future
     recoverability of the remaining asset.

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



<PAGE>



2.   RELATED PARTY TRANSACTIONS (CONTINUED)

         The Company earns  interest  income from its investment in and loans to
     affiliates of Pitney Bowes. Interest rates charged are reflective of market
     rates  which would have been  realized  by  unrelated  third  parties.  The
     interest earned from these  affiliates of Pitney Bowes was $1.1 million for
     the  thirty-two  week  period  ended  August  11,  1995 and the year  ended
     December 31, 1994.

         Certain of the  Company's  expenses  are  allocated  to and from Pitney
     Bowes.  Expenses  allocated  to  Pitney  Bowes for  administrative  support
     services  relate to corporate  officers'  salary,  rent,  usage of computer
     systems,  invoice processing and certain product refurbishment performed at
     the Company's Melbourne facility.  Rent is allocated based on actual square
     footage used;  computer and invoice processing is allocated based on actual
     computer  usage;  and officers'  salaries are allocated  based on estimated
     time  dedicated to other  divisions.  Expenses  allocated from Pitney Bowes
     consist primarily of insurance program costs,  which are allocated based on
     loss experience and exposure.  Management  believes that the allocations to
     and from Pitney Bowes are  reasonable and reflect the actual costs incurred
     to provide  these  services.  Expenses of the Company  allocated  to Pitney
     Bowes totaled $.8 million for the thirty  two-week  period ended August 11,
     1995 and $2.5  million  for the year  ended  December  31,  1994.  Expenses
     charged to the  Company  from Pitney  Bowes  totaled  $1.2  million for the
     thirty-two  weeks ended August 11, 1995 and $1.8 million for the year ended
     December 31, 1994. Management believes that, if the Company were to operate
     as an  independent  entity,  the Company  would expect to  initially  incur
     approximately  $0.5  million  per year of  additional  operating  expenses.
     However, as a result of the planned transaction,  Dictaphone will no longer
     provide  the above  mentioned  administrative  support  services  to Pitney
     Bowes.  Accordingly,  the related  credits ($.8 million for the  thirty-two
     week period ended August 11, 1995 and  approximately  $2.5 million for year
     1994) which were previously offset against  operating  expenses will not be
     generated in the future.

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

3.   TAXES ON INCOME

         The provision for income taxes consists of the following:

                                        YEAR ENDED      32 WEEKS ENDED
                                     DECEMBER 31, 1994  AUGUST 11, 1995
                                     -----------------  ---------------
         Current:
            Federal                       $16,164           $ 7,388
            State                           4,357             1,992
            Foreign                         1,199               548
                                          -------           -------
               Total                       21,720             9,928
                                          =======           =======

         Deferred:                          3,216             1,470
                                          -------           -------
            Total                         $24,936           $11,398
                                          =======           =======


<PAGE>



3.   TAXES ON INCOME (CONTINUED)

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

                                        YEAR ENDED      32 WEEKS ENDED
                                     DECEMBER 31, 1994  AUGUST 11, 1995
                                     -----------------  ---------------
     PERCENT OF PRETAX INCOME
         U.S. federal statutory rate      35.0%             35.00%
         State and local income taxes      4.7%              4.55%
         Other                              .8%              0.50%
                                         ------            -------
         Effective income tax rate        40.5%             40.05%
                                         ======            =======

4.   NET STOCKHOLDERS' EQUITY

     The changes in net stockholders' equity were as follows:

<TABLE>
<CAPTION>

                                                                    CAPITAL IN            CUMULATIVE
                                              PREFERENCE   COMMON   EXCESS OF   RETAINED  TRANSLATION
                                                STOCK      STOCK    PAR VALUE   EARNINGS  ADJUSTMENTS
                                              ---------   --------  ----------  --------  -----------

     <S>                                       <C>        <C>        <C>        <C>          <C>
     Balance, January 1, 1994                  $   600    $  270     $113,777   $ 56,874     $3,317
     Net income                                    ---       ---         ---      33,756        ---
     Dividends paid to Pitney Bowes Inc.           ---       ---         ---     (11,460)       ---
     Translation adjustments                       ---       ---         ---         ---        967
                                               -------    ------     -------    --------     ------
     Balance, December 31, 1994                    600       270     113,777      79,170      4,284
     Net income                                    ---       ---         ---      17,059        ---
     Dividends paid to Pitney Bowes Inc.           ---       ---         ---     (12,255)       ---
     Stock transfer of Dictaphone Canada           ---       68          130         ---        ---
     Translation adjustments                       ---       ---         ---         ---      1,825
                                               -------    ------     -------    --------     ------
     Balance, August 11, 1995                  $   600    $  338     $113,907   $ 83,974     $6,109
                                               =======    ======     ========   ========     ======
</TABLE>


5.   RETIREMENT PLANS

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

<PAGE>


5.   RETIREMENT PLANS (CONTINUED)

         Total pension  expense was $1.3 million for the year ended December 31,
     1994 and $.5 million for the thirty-two  week period ended August 11, 1995.
     Net pension  expense for defined  benefit plans for the year ended December
     31, 1994 and  thirty-two  week period  ending  August 11, 1995 included the
     following components:

                                                           UNITED STATES
                                                     ---------------------------
                                                                 32 WEEKS ENDED
                                                       1994      AUGUST 11, 1995
                                                     ---------   ---------------

      Service cost -- benefits earned during period   $ 2,019      $  1,005
      Interest cost on projected benefit obligations    4,071         2,423
      Actual return on assets                             504        (6,168)
      Net (deferral) and amortization                  (5,385)        3,219
                                                      -------      --------
      Net periodic defined benefit pension expense    $ 1,209      $    479
                                                      =======      ========



                                                               FOREIGN
                                                     ---------------------------
                                                                 32 WEEKS ENDED
                                                       1994      AUGUST 11, 1995
                                                     ---------   ---------------

      Service cost -- benefits earned during period    $  119        $   80
      Interest cost on projected benefit obligations      659           417
      Actual return on assets                             608          (553)
      Net (deferral) and amortization                  (1,699)         (154)
                                                       ------        ------
      Net periodic defined benefit pension (income)    $ (313)       $ (210)
                                                       =======       ======


<PAGE>



5.   RETIREMENT PLANS (CONTINUED)

         The funded  status at  December  31,  1994 and August 11,  1995 for the
     Company's defined benefit plans was:

                                                          UNITED STATES
                                                    ---------------------------
                                                                32 WEEKS ENDED
                                                      1994      AUGUST 11, 1995
                                                    ---------   ---------------

      Actuarial present value of:
         Vested benefits                             $40,891        $42,212
         Accumulated benefit obligations             $43,271        $45,623
      Projected benefit obligations                  $49,178        $51,467
      Plan assets at fair value, primarily stocks
        and bonds, adjusted by:                      $50,089        $55,615
         Unrecognized net loss (gain)                    (21)        (2,835)
         Unrecognized net asset                       (2,028)        (1,832)
         Unamortized prior service costs from
           plan amendments                             1,155          1,080
                                                     -------        -------
                                                      49,195         52,028
                                                     -------        -------
      Net pension asset                              $   (17)       $  (561)
                                                     =======        =======

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



                                                             FOREIGN
                                                    ---------------------------
                                                                32 WEEKS ENDED
                                                      1994      AUGUST 11, 1995
                                                    ---------   ---------------

      Actuarial present value of:
         Vested benefits                             $ 7,064        $ 8,203
                                                     -------        -------
         Accumulated benefit obligations             $ 7,064        $ 8,203
                                                     -------        -------
      Projected benefit obligations                  $ 8,125        $ 9,297
                                                     -------        -------
      Plan assets at fair value, primarily stocks
        and bonds, adjusted by:                      $10,200        $11,473
         Unrecognized net loss (gain)                  1,364          1,691
         Unrecognized net asset                       (1,537)        (1,353)
         Unamortized prior service costs from
           plan amendments                               ---            ---
                                                     -------        -------
                                                      10,027         11,811
                                                     -------        -------
      Net pension asset                              $(1,902)       $(2,514)
                                                     =======        =======

      Assumptions for defined benefit plans*:
      Discount rate                                  8.5%-9.0%     7.75%-8.25%
      Rate of increase in future compensation
         levels                                           6.0%      5.5%-6.0%
      Expected long-term rate of return
         on plan assets                              9.0-10.0%      9.0%-9.5%

----------

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


<PAGE>



6.   NONPENSION POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS

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

         The Company's total net nonpension postretirement benefit costs for the
     year ended  December 31, 1994 and  thirty-two  week period ended August 11,
     1995 consisted of the following components:

                                                   DECEMBER 31,    AUGUST 11
                                                       1994          1995
                                                   ------------   -----------

     Service cost-benefits earned during the
       period                                        $  600         $  334
     Interest cost on accumulated postretirement
       benefit obligations                            1,045            529
     Net deferral                                      (905)          (729)
                                                     ------         ------
     Net periodic postretirement benefit costs       $  740         $  134
                                                     ======         ======


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

                                                   DECEMBER 31,    AUGUST 11
                                                       1994          1995
                                                   ------------   -----------

     Accumulated postretirement benefit obligations:
         Retirees and dependents                     $ 8,425        $ 7,924
         Fully eligible active plan participants       2,533            929
         Other active plan participants                2,214          2,285
         Unrecognized net (loss) gain                  1,655          3,684
         Unrecognized prior service credit             3,407          2,881
                                                     -------        -------
     Net periodic postretirement benefit costs       $18,234        $17,703
                                                     =======        =======


         The  assumed  health  care  cost  trend  rate  used  in  measuring  the
     accumulated postretirement benefit obligations was 11.75% in 1994. This was
     assumed to  gradually  decline to 5.75% by the year 2000 and  remaining  at
     that level  thereafter.  A  one-percentage-point  increase  in the  assumed
     health  care cost  trend  rate  would  increase  the  year-end  accumulated
     postretirement  benefit  obligation by $1.5 million as of December 31, 1994
     and the net  periodic  postretirement  health care cost by $0.2  million in
     1994 and $0.1 million for the thirty-two week period ended August 11, 1995.

         The assumed  weighted  average  discount rate used in  determining  the
     accumulated postretirement benefit obligations was 8.75% for the year ended
     December 31, 1994 and for the thirty-two week period ended August 11, 1995.

<PAGE>

6.   NONPENSION POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS (CONTINUED)

         The Company  adopted  Statement of Financial  Accounting  Standards No.
     112, "Employers' Accounting for Postemployment Benefits" ("SFAS 112") as of
     January  1,  1994.  SFAS  112  required  that  postemployment  benefits  be
     recognized  on the accrual  basis of  accounting.  Postemployment  benefits
     include primarily  company provided medical benefits to disabled  employees
     and company provided life insurance

         The  effect of  adopting  SFAS 112 was a one-time  non-cash,  after-tax
     charge of $2.8 million (net of approximately $1.9 million of income taxes).
     Application of this new standard had no significant effect on the Company's
     expense for 1994 and the thirty-two week period ended August 11, 1995.

7.   COMMITMENTS AND CONTINGENCIES

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

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

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

<PAGE>

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

7.   COMMITMENTS AND CONTINGENCIES (CONTINUED)

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

8.   LEASES

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

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

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

         Rental  expense  under  operating  leases was $6.3 million for the year
     ended  December  31, 1994 and $3.6 million for the  thirty-two  week period
     ended August 11, 1995.

9.   FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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


<PAGE>



10.  SUPPLEMENTAL COMBINING FINANCIAL STATEMENTS AND SEGMENT INFORMATION

         The following are the supplemental  combining  statements of income and
     combining statements of cash flows for the year ended December 31, 1994 and
     thirty-two week period ended August 11, 1995.

                  DICTAPHONE CORPORATION (PREDECESSOR COMPANY)
                   SUPPLEMENTAL COMBINING STATEMENT OF INCOME
                          YEAR ENDED DECEMBER 31, 1994


                                     DICTAPHONE DICTAPHONE COMBINING
                                         U.S.     NON-U.S. ADJUSTMENTS COMBINED
                                     ---------- ---------- ----------- --------

   Revenue from:
     Sales and rentals               $224,324     $37,956   $(10,689)  $251,591
     Support services                  82,956      12,275        ---     95,231
                                     --------     -------   --------   --------
       Total revenue                  307,280      50,231    (10,689)   346,822
                                     --------     -------   --------   --------

   Cost and expenses:
     Cost of sales and rentals        109,677      19,681    (10,797)   118,561
     Selling, service and
       administrative                 130,684      24,851        ---    155,535
     Research and development          12,272         ---        ---     12,272
     Interest (income) expense, net       289      (1,338)       ---     (1,049)
                                     --------     -------   --------   --------
       Total costs and expenses       252,922      43,194    (10,797)   285,319
                                     --------     -------   --------   --------

   Income before income taxes
     and effect of a change
     in accounting                     54,358       7,037        108     61,503
   Provision for income taxes          22,344       2,533         59     24,936
                                     --------     -------   --------   --------
   Income before effect of a change
     in accounting                     32,014       4,504         49     36,567
   Effect of a change in accounting    (2,811)        ---        ---     (2,811)
                                     --------     -------   --------   --------
   Net income                        $ 29,203     $ 4,504   $     49   $ 33,756
                                     ========     =======   ========   ========


<PAGE>



10.  SUPPLEMENTAL COMBINING FINANCIAL STATEMENTS AND SEGMENT INFORMATION
     (CONTINUED)


                  DICTAPHONE CORPORATION (PREDECESSOR COMPANY)
                 SUPPLEMENTAL COMBINING STATEMENT OF CASH FLOWS
                          YEAR ENDED DECEMBER 31, 1994

<TABLE>
<CAPTION>

                                                     DICTAPHONE  DICTAPHONE  COMBINING
                                                       U.S.       NON-U.S.   ADJUSTMENTS  COMBINED
                                                     ----------  ----------  -----------  --------
      <S>                                           <C>           <C>           <C>       <C>
    Cash flows from operating activities:
      Net income                                    $   29,203    $ 4,504       $  49     $ 33,756
      Effect of a change in accounting                   2,811        ---         ---        2,811
      Adjustments to reconcile net income to
        net cash provided by operating activities:
        Depreciation and amortization                    6,868      1,234         ---        8,102
        Increase (decrease) in deferred income
          taxes                                          2,216        (81)        ---        2,135
        Change in assets and liabilities:
           Accounts receivable                           3,997       (177)       (402)       3,418
           Inventories                                  (8,799)    (2,503)       (108)     (11,410)
           Other current assets                           (913)       603         (92)        (402)
           Accounts payable and accrued
             liabilities                                  (471)       153         552          234
           Advance billings                              1,656         13         ---        1,669
           Other assets and other                        1,067       (102)          1          966
                                                    ----------    -------       -----     --------
    Net cash provided by operating activities       $   37,635    $ 3,644       $ ---     $ 41,279
                                                    ----------    -------       -----     --------

    Cash flows from investing activities:
      Net investment in fixed assets                    (4,499)    (1,445)        ---       (5,944)
                                                    ----------    -------       -----     --------

    Cash flows from financing activities:
      Principal payment on capital lease
       obligations                                      (3,500)       ---         ---       (3,500)
                                                    ----------    -------       -----     --------
    Effect of exchange rate changes on cash                ---        298         ---          298
                                                    ----------    -------       -----     --------

    Net cash flow available to Pitney Bowes
      Inc.                                          $   29,636    $ 2,497         ---     $ 32,133
                                                    ==========    =======       =====     ========

</TABLE>

<PAGE>



10. SUPPLEMENTAL COMBINING FINANCIAL STATEMENTS AND SEGMENT INFORMATION
    (CONTINUED)


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


                                    DICTAPHONE DICTAPHONE  COMBINING
                                       U.S.     NON-U.S.  ADJUSTMENTS  COMBINED
                                    ---------- ---------- ----------- ----------

    Revenue from:
       Sales and rentals             $130,013   $ 23,275   $ (5,196)   $148,092
       Support services                45,074      8,937        ---      54,011
                                     --------   --------   --------    --------
         Total revenue                175,087     32,212     (5,196)    202,103
                                     --------   --------   --------    --------

    Costs and expenses:
       Cost of sales and rentals       67,150     12,282     (5,164)     74,268
       Selling, service and
          administrative               77,046     16,728        ---      93,774
       Research and development         7,004        ---        ---       7,004
       Interest (income) expense-net      (24)    (1,376)       ---      (1,400)
                                     --------   --------   --------    --------
         Total costs and expenses     151,176     27,634     (5,164)    173,646
                                     --------   --------   --------    --------

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

<PAGE>



10. SUPPLEMENTAL COMBINING FINANCIAL STATEMENTS AND SEGMENT INFORMATION
    (CONTINUED)


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


<TABLE>
<CAPTION>

                                            DICTAPHONE  DICTAPHONE  COMBINING
                                                U.S.      NON-U.S.  ADJUSTMENTS  COMBINED
                                            ----------  ----------  -----------  --------

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

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

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

    Cash flow available to (financed by)
      Pitney Bowes Inc.                      $(6,537)     $ 5,084      $  ---    $ (1,453)
                                             =======      =======      ======    ========
</TABLE>


<PAGE>




                      REPORT OF INDEPENDENT ACCOUNTANTS ON
                        THE FINANCIAL STATEMENT SCHEDULE



To the Board of Directors
of Dictaphone Corporation

Our audit of the combined financial statements of Dictaphone Corporation and its
affiliated  Dictaphone  companies  referred to in our report  dated May 16, 1995
appearing on page 47 of this Annual  Report on Form 10-K also  included an audit
of the Financial Statement Schedule of Dictaphone Corporation and its affiliated
Dictaphone  companies for the year ended  December 31, 1994 listed in Item 14(A)
of  this  Form  10-K.  In our  opinion,  the  Financial  Statement  Schedule  of
Dictaphone  Corporation and its affiliated Dictaphone companies presents fairly,
in all  material  respects,  the  information  set  forth  therein  when read in
conjunction with the related combined financial statements.



Price Waterhouse LLP

Stamford, CT
May 16, 1995


<PAGE>



                                                                    SCHEDULE II


                             DICTAPHONE CORPORATION

                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS



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


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


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

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


YEAR ENDED DECEMBER 31, 1994
Allowance for doubtful accounts     2,436         (60)      1,327      1,049



<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, 1997.



NAME                                   AGE    POSITION

John H. Duerden.....................    56    Chairman, Chief Executive Officer
                                                 and President

Albert J. Fitzgibbons, III..........    51    Director

Emil F. Jachmann....................    50    Director

Stephen M. McLean...................    39    Director

Alexis P. Michas....................    39    Director

Scott M. Shaw.......................    34    Director

Peter P. Tong.......................    55    Director

Kim H. Carpenter....................    39    Vice President, Human Resources

Ronald A. Elwell....................    36    Vice President, Marketing and
                                                 Product Development

Daniel P. Hart......................    38    Vice President, General Counsel
                                                 & Secretary

Thomas C. Hodge.....................    51    Vice President, Operations
                                                 Manufacturing

Robert G. Schwager..................    43    Vice President, Sales Operations,
                                                 North America

Joseph D. Skrzypczak................    41    Vice President, Chief Financial
                                                 Officer and Director

Robert E. Trimper...................    58    Vice President, International
                                                 Operations


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

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


<PAGE>




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

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

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

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

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

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

      KIM H.  CARPENTER has served as the Vice  President,  Human  Resources for
Dictaphone  Corporation since October 1991. Ms. Carpenter joined Pitney Bowes in
March 1984, where she held positions of increasing  responsibility  in the Human
Resources  function within Pitney Bowes Mailing  Systems in employee  relations,
Pitney Bowes  Corporate in Human  Resources  Planning and  Development,  and the
Copier Systems Division with full human resources support accountability,  first
as the Director of Human  Resources  in July 1989 and then as Vice  President of
Human Resources in January 1991.


<PAGE>



      RONALD A.  ELWELL  has served as Vice  President,  Marketing  and  Product
Development  for the  Company  since  April 1996 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 Vice President,  General Counsel and 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 Vice President,  Operations Manufacturing for
the  Company's  facility in Melbourne,  Florida  since June 1989.  Prior to June
1989, he held various positions throughout the manufacturing facility. Mr. Hodge
joined  Dictaphone  Corporation  in  October  1978,  as the  Production  Control
Manager.

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

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

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

     Messrs.  Fitzgibbons,  Michas  and  Shaw  serve  as  members  of the  Audit
Committee and the Compensation Committee (the "Compensation Committee"). Each of
Messrs.  Fitzgibbons,  Michas,  McLean  and Shaw is an  employee  of  Stonington
Partners and serves on the Board of Directors of the Company as a representative
of Stonington Capital Appreciation 1994 Fund, L.P. ("Stonington").

     The Company's  directors are elected to serve until their  successors  have
been elected and qualified.  Other than Mr. Jachmann who received a $25,000 fee,
in 1996 no member of the Board  received  any  retainder  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.


<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 1996 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 1996.

                                SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>

                                               ANNUAL COMPENSATION             LONG-TERM COMPENSATION
                                   ----------------------------------------  ----------------------------
                                                                               AWARDS         PAYOUTS
                                                                             -----------   --------------
                                                                             SECURITIES      LONG-TERM
    NAME A                                                   OTHER ANNUAL    UNDERLYING    INCENTIVE PLAN     ALL OTHER
PRINCIPAL POSITION            YEAR SALARY($)   BONUS ($)    COMPENSATION($)  OPTIONS (#)     PAYOUTS ($)   COMPENSATION ($)
------------------            ---- ---------   ---------    ---------------  -----------   --------------  ----------------

<S>                           <C>  <C>         <C>            <C>              <C>               <C>         <C>
John H. Duerden,              1996 $660,000    $660,00        $108,407(3)           --           --          $142,024(4)
 Chairman, President          1995  373,154     327,250(2)     100,390(3)      210,000           --                33
 and Chief Executive
 Officer(1)

Robert G. Schwager,           1996  184,377     106,933             --(3)           --          --                100(4)
 VP Sales Operations North    1995  168,486     106,811(2)       1,940(3)       45,000(5)       --                100
 America                      1994  154,700      82,500             --           1,000(6)       --                100

Robert Trimper, (7)           1996  188,666     141,918(8)          --(3)       30,000          --                334(4)
 VP International Operations

Joseph D. Skrzypczak,         1996  167,607     140,791         11,828(3)           --          --             15,365(4)
  VP, Chief Financia1         1995  149,317     118,864(2)      20,873(3)       45,000(5)       --             26,080
  Officer                     1994  135,553      82,600             --           1,200(6)       --              1,699

Karen M. Garrison,(9)         1996  157,154     100,116         15,292(3)           --          --             19,305(4)
  VP Customer Service         1995  124,592      87,570(2)      22,645(3)       45,000(5)       --             99,734
                              1994  103,769      56,100             --           1,000(6)       --                878

</TABLE>



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

(2)  Includes bonus amounts paid by Pitney Bowes in the following  amounts:  Mr.
     Duerden -- $0; Mr. Schwager -- $85,300;  Mr. Skrzypczak -- $49,500; and Ms.
     Garrison -- $58,400.

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

(4)  The compensation  reflected in this column for 1996 is comprised of Company
     contributions to the Company's  Savings with Extra Earning  Potential Plan,
     supplemental contributions under supplemental


<PAGE>



     benefits   arrangements   and  Company   paid  life   insurance   premiums.
     Specifically,  these amounts for fiscal 1996 were $0,  $121,226 and $20,798
     for Mr. Duerden; $0, $0 and $100 for Mr. Schwager;  $0, $0 and $334 for Mr.
     Trimper; $1,209, $14,056 and $100 for Mr. Skrzypczak; and $925, $18,280 and
     $100 for Ms. Garrison.

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

(6)  These options were granted in fiscal 1994 to the named executives  pursuant
     to the Pitney Bowes Stock Option Plan.  Options vest  automatically  over a
     three-year period in one-third increments and are subject to forfeiture. No
     options  were  granted by the  Company  in 1994 with  respect to its Common
     Stock.

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

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

(9)  Ms. Garrison resigned from the Company on January 31, 1997.


STOCK OPTION GRANTS

       The following table sets forth information regarding grants of options to
purchase  Common Stock during the fiscal year ended December 31, 1996 to each of
the named executives. No stock appreciation rights were granted during 1996.

                                 OPTION GRANTS IN 1996

                                   INDIVIDUAL GRANTS

<TABLE>
<CAPTION>

                                                                        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   --------------------------
NAME                  GRANTED(#)      1996(1)   HARE)(2)     DATE         (5%)              (10%)
----                  ----------  ------------  ---------  ---------    --------          --------
<S>                     <C>           <C>        <C>        <C>         <C>               <C>
John H. Duerden....         --         --          --          --             --                --
Robert G. Schwager.         --         --          --          --             --                --
Robert Trimper.....     30,000        34%        $10.00     03/01/05    $488,688          $778,123
Joseph D. Skrzypczak        --         --          --          --             --                --
Karen Garrison.....         --         --          --          --             --                --

</TABLE>


(1)  The Company  granted options to purchase a total of 89,000 shares of Common
     Stock in 1996.

(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, 1996 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


<PAGE>



     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, 10% vested on April 15, 1996 and the remaining will
     become  eligible for vesting as to an  additional  20% on each of April 15,
     1997,  1998, 1999 and 2000, if the Company  attains  certain  predetermined
     financial performance goals.


OPTION EXERCISES AND YEAR-END VALUE TABLE

       The  following  table sets forth  information  regarding  the exercise of
stock  options  during  fiscal  1996  and the  number  and  year  end  value  of
unexercised  options held at December 31, 1996 by each of the named  executives.
No stock  appreciation  rights were  exercised  by the named  executives  during
fiscal 1996.

                   AGGREGATE OPTION EXERCISES IN FISCAL 1996
                         AND FISCAL 1996 OPTION VALUES

<TABLE>
<CAPTION>
                                                                             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 ($)
NAME                   EXERCISE (#) REALIZED ($) EXERCISABLE/UNEXERCISABLE  EXERCISABLE/UNEXERCISABLE
----                   ------------ ------------ -------------------------- -------------------------
<S>                       <C>         <C>             <C>                     <C>
John H. Duerden.......       --            --         27,300/182,700(2)           $0/$0(5)
Robert G. Schwager....       --            --           3,616/344(3)          70,175/5,031(6)
                                                     5,850/39,150(2)             0/0(5)
Robert E. Trimper.....       --            --          2,400/27,600(2)             0/0(5)
Joseph D. Skrzypczak..    2,150       $32,759            1,600/400(3)          21,950/6,025(6)
                                                      5,850/39,150(2)             0/0(5)
Karen M. Garrison.....       --            --             3,066/334(3)         59,591/5,031(6)
                                                     5,850/39,150(2)(4)           0/0(5)

</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 and 1992 two-for-one stock splits of Pitney Bowes stock.

(4)  In  connection  with  her  resignation  on  January  31,  1997,  all of Ms.
     Garrison's options to purchase Common Stock were forfeited and cancelled.

(5)  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, 1996 (as  determined  by the Board of  Directors),  and the
     exercise  price of the  option,  multiplied  by the  applicable  number  of
     options.


<PAGE>



(6)  The amounts set forth  represent the  difference  between $54.75 per share,
     the fair market value of Pitney Bowes common stock  issuable  upon exercise
     of options at December 31, 1996 and the exercise  price of the Pitney Bowes
     option, multiplied by the applicable number of options.

PENSION PLANS

       The Company currently  maintains a non-contributory  pension plan for all
employees (the "Pension Plan").  As of December 31, 1996, 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 or
other expense allowances, fringe benefits or moving expenses. Employees' pension
rights vest after five years of service.  Benefits are also available  under the
Pension Plan upon early or deferred  retirement.  The projected  annual  benefit
under the qualified  pension plan at age 65 assuming no future increases in pay,
the social  security  wage base and Internal  Revenue Code (the "Code")  Section
401(a)(17)  limits  and  with  no  provision  for  the  Supplemental   Executive
Retirement Plan ("SERP") for the named  executives is as follows:  Mr. Duerden -
$21,302;  Mr.  Schwager  - $70,884;  Mr.  Trimper - $15,492;  Mr.  Skrzypczak  -
$51,288;  and Ms.  Garrison - $47,876.  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
-$24,485;  Mr.  Schwager - $88,920;  Mr.  Trimper - $17,012;  Mr.  Skrzypczak  -
$73,346; and Ms. Garrison - $58,028.

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

                              RETIREMENT PLAN TABLE

                                               YEARS OF SERVICE
                               -------------------------------------------------

AVERAGE ANNUAL  COMPENSATION     15        20        25        30         35
----------------------------    ----      ----      ----      ----       ----
$   125,000.................   $23,422   $31,230   $39,038   $46,846    $54,654
    150,000.................    29,047    38,730    48,413    58,096     67,779



SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

       The Company  adopted the SERP for certain  executive  officers during the
first quarter of 1997 with benefits being  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


<PAGE>



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.

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

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

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

       The Company has entered into a letter  employment  agreement with each of
Messrs.  Schwager,  Skrzypczak and Trimper. The agreements have no fixed term of
employment. Upon an involuntary termination of employment by the Company for any
reason   other  than  for  Cause  (as  defined   therein)  or  for   Substantial
Underperformance  (as  defined  therein),  Mr.  Schwager  is entitled to receive
salary  continuation  for a  minimum  of one  year  after  such  termination  of
employment.  After the conclusion of the first year of salary  continuation,  if
Mr. Schwager has not secured other employment, the Company has agreed to extend,
for a maximum of 12 additional months, such salary

<PAGE>



continuation on a month-by-month basis as long as Mr. Schwager, using reasonable
efforts,  has not secured other  employment.  In lieu of the  foregoing,  in the
event of a termination  for any reason other than for Cause,  Mr.  Skrzypczak is
entitled to receive  severance  in an amount  equal to two years'  base  salary,
payable in a lump sum,  and Mr.  Trimper is entitled to receive  severance in an
amount equal to up to two years' base  salary,  payable in  accordance  with the
Company's  existing payroll  practices except in the event that it is determined
that severance will not continue  beyond twelve months in which event  severance
will be  paid  in a lump  sum.  In  addition,  if Mr.  Trimper's  employment  is
terminated  without cause,  he is also entitled to receive any earned and unpaid
annual bonus amounts.

       Each of Messrs.  Schwager,  Trimper and  Skrzypczak  are also entitled to
receive outplacement services and are entitled to participate in medical, dental
and life insurance plans,  under the same terms and conditions as when they were
employed by the Company,  until the earlier of the  commencement  of  employment
with a  subsequent  employer  or the  twelve  month  anniversary  of the date of
termination of employment.  Each of Messrs. Schwager, Trimper and Skrzypczak are
also entitled to an additional six-month period of medical insurance coverage as
required under Section 4980B of the Code.

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

       In November  1995, the Company  entered into a consulting  agreement with
Mr. Jachmann, a director of the Company. Pursuant to the terms of the agreement,
Mr.  Jachmann  agreed to act as a consultant to the Company for an original term
of one year, August 11, 1995 through August 11, 1996.  Although a new consulting
agreement  has not been  executed,  the  Company  has  continued  to utilize Mr.
Jachmann's  services  on  a  month-by-month  basis.  In  consideration  for  his
consulting  services,  Mr.  Jachmann  receives  $3,000 per day. During 1996, Mr.
Jachmann was paid $64,250 for consulting services.   Mr. Jachmann also received
$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  (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
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  Compensation  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 one-half of the options  granted in any one option
grant  will vest  automatically  over a  five-year  period  (20% of the  options
vesting each year) (the "Service  Options") and the remaining  options will vest
as to  specified  percentages  over a five-year  period  based on  predetermined
financial performance goals (the "Performance  Options").  As to all outstanding
Performance  Options,  10% were eligible for vesting on April 15, 1996,  and the
remaining options become eligible for vesting as to an additional 20% on each of
April 15, 1997,  1998, 1999 and 2000,  with the remaining 10% becoming  eligible
for vesting on April 15, 2001,  or, in any case,  no later than August 11, 2005,
provided that the applicable  Participant  continues to be employed or continues
as a member of the Board. Based on the Company's 1995 performance, the Company's
Board of Directors  determined that 60% of the Performance  Options eligible for
vesting on April 15, 1996 would vest.  Performance  options which are not vested
on each of the April 15 vesting dates remain  eligible for future vesting by the
Board if the Company reaches certain  enterprise  values. In the event of a Sale
or an IPO (as  defined  therein) of the Company  prior to August 11,  2000,  all
outstanding  Service and Performance  Options will become immediately vested and
exercisable  prior to the  effective  date of such  Sale or IPO and  appropriate
provisions  will be  required to be made by the Company to permit the holders of
options to realize the value of his or her options in connection  with such Sale
or


<PAGE>



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 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  850,000  shares;  the  Company  intends,
however,  to amend the Plan to accommodate the additional options granted to Mr.
Duerden  pursuant  to the terms of his  amended  Employment  Agreement.  See "--
Employment and Consulting Agreements".  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 Compensation Committee.

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


ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
            MANAGEMENT

       The following  sets forth certain  information  regarding the  beneficial
ownership of the Common Stock as of March 15, 1997,  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.


<PAGE>


                                                   AMOUNT AND NATURE
NAME AND ADDRESS                                     OF BENEFICIAL    PERCENTAGE
OF BENEFICIAL OWNER                                  OWNERSHIP (1)     OF CLASS
-------------------                                -----------------  ----------

Stonington Capital Appreciation 1994 Fund, L.P.(2)     9,303,000        98.3%
   767 Fifth Avenue
   New York, New York 10153
John H. Duerden(3)............................            97,300         1.0
Robert G. Schwager(3).........................            20,850          *
Joseph D. Skrzypczak(3).......................            20,850          *
Robert E. Trimper(3)..........................            14,550          *
Albert J. Fitzgibbons(4)......................         9,303,000         98.3
Emil F. Jachmann(3)...........................            10,000          *
Alexis P. Michas(4)...........................         9,303,000         98.3
Stephen M. McLean(4)..........................         9,303,000         98.3
Peter P. Tong.................................                --          --
Scott M. Shaw.................................                --          --
Karen M. Garrison.............................                --          --
  Directors and executive officers as a
     group ((15) persons)(4)(5)                        9,524,310        100.0%


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

(1)  Beneficial  ownership  is  determined  in  accordance  with the  rules  and
     regulations  of  the   Commission.   In  computing  the  number  of  shares
     beneficially owned by a person and the percentage ownership of that person,
     shares of Common Stock  subject to options and warrants held by that person
     that are currently  exercisable or exercisable  within 60 days of March 15,
     1997  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 9,153,000  shares,  or 96.4%,  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. The limited
     partners of SPLP are certain  current and former  employees  of  Stonington
     Partners,  entities  controlled  by certain  employees  of  Stonington  and
     individuals   with  special   relationships   to  portfolio   companies  of
     Stonington.

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

(3)  Includes shares of Common Stock which the directors and executive  officers
     have the right to acquire through the exercise of options within 60 days of
     March 15, 1997, as follows:  Mr.  Duerden - 27,300 shares;  Mr.  Schwager -
     5,850 shares;  Mr. Trimper - 4,550 shares;  Mr.  Skrzypczak - 5,850 shares;
     and Mr. Jachmann - 10,000 shares.  Mr. Duerden is a 3.1% limited partner of
     SPLP.

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


<PAGE>




(5)  Includes 73,610 shares of Common Stock subject to options granted under the
     Plan which are  currently  exercisable  or vest within 60 days of March 15,
     1997.


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,  Schwager and Skrzypczak and Ms.  Garrison for $1,970,000 (the
"Management  Placement").  The Company  financed  $1,273,000  of the  Management
Placement  with  non-recourse  loans  bearing  interest  at a rate  equal to the
Adjusted  Eurodollar  Rate (as defined)  plus 2.75% in effect for the  Revolving
Credit  Facility under the Credit  Agreement.  Interest is due annually starting
in 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. Schwager -- $140,000; Mr. Skrzypczak -- $95,600; Ms. Garrison  --  $123,154;
and  Ms. Carpenter  --  $68,211.   In connection with Ms. Garrison's resignation
from  the  Company  on  January 31, 1997, the  Company  repurchased  all of  her
shares  of  Common  Stock  and  all  amounts  borrowed  by  Ms. Garrison  in the
Management Placement were repaid.

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


STOCKHOLDERS AGREEMENT

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

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

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


<PAGE>



       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 a right of first refusal for the same number
of shares of Common Stock at the same price.

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

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


<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.

       The  Company  did not file any  reports  on Form 8-K  during  the  fiscal
quarter ended December 31, 1996.

(C)    Index to Exhibits.

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

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

  2.1  -- Stock  and  Asset  Purchase  Agreement,  dated as of April  25,  1995,
          between  Pitney Bowes Inc. and  Dictaphone  Acquisition  Inc. filed as
          Exhibit 2.1 to the Company's  Registration Statement on Form S-1, File
          No. 33-93464, filed on June 14, 1995).

  2.2  -- Amendment  to Stock and Asset  Purchase  Agreement,  dated  August 11,
          1995, between Pitney Bowes Inc. and Dictaphone Acquisition Inc. (filed
          as Exhibit 2.2 to the Company's Form 10-Q for the fiscal quarter ended
          June 30, 1995, filed on September 21, 1995).

  2.3  -- Asset Purchase  Agreement,  dated August 11, 1995,  between Dictaphone
          Canada  Ltd./Ltee and Dictaphone  Canada  Acquisition  Inc.  (filed as
          Exhibit 2.3 to the  Company's  Form 10-Q for the fiscal  quarter ended
          June 30, 1995, filed on September 21, 1995).

  2.4  -- Stock Purchase Agreement,  dated August 11, 1995, between Pitney Bowes
          Deutschland GmbH and Dictaphone Acquisition Inc. (filed as Exhibit 2.4
          to the Company's Form 10-Q for the fiscal quarter ended June 30, 1995,
          filed on September 21, 1995).

  2.5  -- Stock Purchase Agreement, dated August 11, 1995, between Walnut Street
          Corp. and  Dictaphone  Acquisition  Inc.  (filed as Exhibit 2.5 to the
          Company's Form 10-Q for the fiscal quarter ended June 30, 1995,  filed
          on September 21, 1995).

  2.6  -- Stock Purchase Agreement,  dated August 11, 1995, between Pitney Bowes
          Holdings  Ltd.  and  Dictaphone  U.K.  Acquisition  Limited  (filed as
          Exhibit 2.6 to the  Company's  Form 10-Q for the fiscal  quarter ended
          June 30, 1995, filed on September 21, 1995).

  2.7  -- General   Conveyance   Agreement,   dated  August  11,  1995,  between
          Dictaphone  Canada  Ltd./Ltee and Dictaphone  Canada  Acquisition Inc.
          (filed  as  Exhibit  2.7 to the  Company's  Form  10-Q for the  fiscal
          quarter  ended June 30, 1995,  filed on September  21,  1995).  2.8 --
          Assumption of Liabilities  Agreement,  dated August 11, 1995,  between
          Dictaphone  Canada  Ltd./Ltee and Dictaphone  Canada  Acquisition Inc.
          (filed  as  Exhibit  2.8 to the  Company's  Form  10-Q for the  fiscal
          quarter ended June 30, 1995, filed on September 21, 1995).

  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).



<PAGE>




  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).

  3.1  -- Restated  Certificate of Incorporation of the Company,  adopted by the
          Company on August 11, 1995 (filed as Exhibit 3.2 to the Company's Form
          10-Q for the fiscal  quarter  ended June 30, 1995,  filed on September
          21, 1995).

  3.2  -- 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).

  3.3  -- Restated Certificate of Incorporation of Dictaphone Corporation (U.S),
          adopted by Dictaphone  Corporation (U.S.) on August 11, 1995 (filed as
          Exhibit 3.5 to the  Company's  Form 10-Q for the fiscal  quarter ended
          June 30, 1995, filed on September 21, 1995).

  3.4  -- By-Laws of Dictaphone  Corporation (U.S.) (filed as Exhibit 3.6 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).

 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.+

 10.6  -- Employment  contract  of Joseph D.  Skrzypczak,  dated  July 21,  1995
          (filed as  Exhibit  10.6 to the  Company's  Form  10-Q for the  fiscal
          quarter ended June 30, 1995, filed on September 21, 1995).+

 10.7  -- Employment contract of Robert G. Schwager,  dated June 19, 1995 (filed
          as Exhibit 10.7 to the Company's  Registration  Statement on Form S-1,
          File No. 33-93464, filed on June 14, 1995).+

 10.8  -- Employment  contract of Karen M. Garrison,  dated July 21, 1995 (filed
          as Exhibit 10.8 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.+


<PAGE>


 10.9  -- 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).+

 10.10 -- 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).

 10.11 -- 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).

 10.12 -- 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).+

*10.13 -- Employment contract of Robert Trimper, dated January 24, 1996.+

 10.14 -- 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).+

 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 or compensatory arrangement.



<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 27th day of March, 1997.

                                  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 27th day of March, 1997.


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

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


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


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


                                                        Director
------------------------------------
           Emil F. Jachmann


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


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


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

           /S/ PETER P. TONG                            Director
------------------------------------
            Peter P. Tong



<PAGE>


                                 EXHIBIT INDEX


<TABLE>
<CAPTION>
                                                                                 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).

  3.1  --      Restated Certificate of Incorporation of the Company,  adopted by
               the  Company on August  11,  1995  (filed as  Exhibit  3.2 to the
               Company's  Form 10-Q for the fiscal  quarter ended June 30, 1995,
               filed on September 21, 1995).

  3.2  --      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).

  3.3  --      Restated  Certificate of Incorporation of Dictaphone  Corporation
               (U.S),  adopted by  Dictaphone  Corporation  (U.S.) on August 11,
               1995  (filed as Exhibit  3.5 to the  Company's  Form 10-Q for the
               fiscal quarter ended June 30, 1995, filed on September 21, 1995).

  3.4  --      By-Laws of Dictaphone Corporation (U.S.) (filed as Exhibit 3.6 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).


<PAGE>


  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).

 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.+

 10.6  --      Employment contract of Joseph D. Skrzypczak,  dated July 21, 1995
               (filed as Exhibit 10.6 to the Company's  Form 10-Q for the fiscal
               quarter ended June 30, 1995, filed on September 21, 1995).+

 10.7  --      Employment  contract of Robert G.  Schwager,  dated June 19, 1995
               (filed as Exhibit 10.7 to the Company's Registration Statement on
               Form S-1, File No. 33-93464, filed on June 14, 1995).+

 10.8  --      Employment  contract  of Karen M.  Garrison,  dated July 21, 1995
               (filed as Exhibit  10.8 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).+

 10.9  --      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).+

 10.10 --      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).

 10.11 --      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).

 10.12 --      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).+

*10.13 --      Employment contract of Robert Trimper, dated January 24, 1996.+

 10.14 --      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).


<PAGE>



 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 hereto).

*27    --      Financial Data Schedule.
</TABLE>

______________

 *  Filed herewith.
 +  Management contract or compensatory plan or arrangement.