SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549
                          -----------------------------

                                    FORM 10-Q

(MARK ONE)

     |X|      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
              EXCHANGE ACT OF 1934

              For the quarterly period ended September 30, 1997

                                    or

     |_|     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
             EXCHANGE ACT OF 1934

             For the transition period from            to            .


                        Commission File Number: 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
                                 (203) 381-7000
                    (Address of principal executive offices,
                        including zip code, and telephone
                          number, including area code)


                   -----------------------------------------
                     (Former name, former address and former
                   fiscal year, if changed since last report)

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.

         YES     X            NO  ____

Number of Shares of Common Stock, Par Value $.01, outstanding as of November 12,
1997: 9,452,000

The Common Stock of the registrant is not publicly traded.


<PAGE>
<TABLE>
<CAPTION>

                             DICTAPHONE CORPORATION
                             ----------------------

                                      INDEX
                                      -----



                                                                                     PAGE NO.

PART I.  FINANCIAL INFORMATION
------------------------------
<S>                                                                                  <C>    

ITEM 1.  Condensed Consolidated Financial Statements

           Unaudited Condensed Consolidated Statements of Operations for the
           Three Months Ended September 30, 1997 and September 30, 1996                 2

           Unaudited Condensed Consolidated Statements of Operations for the
           Nine Months Ended September 30, 1997 and September 30, 1996                  3

           Condensed Consolidated Balance Sheets as of  September 30, 1997
           (Unaudited) and December 31, 1996                                            4

           Unaudited Condensed Consolidated Statements of Cash Flow for the
           Nine Months Ended September 30, 1997 and September 30, 1996                  5

           Notes to Unaudited Consolidated Financial Statements                      6 - 17

ITEM 2.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations                                         18 - 23

ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk                     24

PART II.  OTHER INFORMATION
---------------------------

ITEM 1.  Legal Proceedings                                                              24

ITEM 6.  Exhibits and Reports on Form 8-K                                               24
</TABLE>


<PAGE>


                         PART I - FINANCIAL INFORMATION


ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
         -------------------------------------------
<TABLE>
<CAPTION>


                             DICTAPHONE CORPORATION

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


                                                  THREE MONTHS              THREE MONTHS      
                                                      ENDED                     ENDED         
                                               SEPTEMBER 30, 1997        SEPTEMBER 30, 1996 
                                               ------------------        ------------------
         <S>                                         <C>                      <C>
         Revenues:                                                                              
            Product sales and rentals                $52,416                   $49,488          
            Contract manufacturing sales              10,739                    10,813          
            Support services                          24,561                    23,146          
                                                     -------                   -------          
                                                                                                
               Total revenue                          87,716                    83,447          
                                                     -------                   -------          
                                                                                                
         Costs and expenses:                                                                    
                                                                                                
            Cost of sales and rentals                 32,881                    31,316          
                                                                                                
            Selling, service and administrative       40,201                    40,859          
                                                                                                
            Amortization of intangibles                8,772                    10,028          
                                                                                                
            Research and development                   3,813                     3,839          
                                                     -------                   -------          
                                                                                                
         Operating profit (loss)                       2,049                    (2,595)         
                                                                                                
         Interest expense                             10,497                    10,910          
                                                                                                
         Other expense (income) - net                    357                      (203)         
                                                     -------                   -------          
                                                                                                
         Loss before income taxes                     (8,805)                  (13,302)         
                                                                                                
         Income tax benefit                            2,782                     4,797          
                                                     -------                   -------          
                                                                                                
            Net loss                                  (6,023)                  (8,505)          
                                                                                                
            Stock dividends on PIK Preferred Stock       681                       593          
                                                     -------                   -------          
                                                                                                
            Net loss applicable to Common Stock      $(6,704)                  $(9,098)         
                                                     =======                   =======          
                                                                                                
            Net loss per share of Common Stock       $ (0.71)                  $ (0.96)         
                                                     =======                   =======          
                                                                            


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

                                       2
<PAGE>
<TABLE>
<CAPTION>


                             DICTAPHONE CORPORATION

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



                                                   NINE MONTHS                 NINE MONTHS    
                                                      ENDED                       ENDED          
                                               SEPTEMBER 30, 1997          SEPTEMBER 30, 1996
                                               ------------------          ------------------

         <S>                                        <C>                       <C>
         Revenues:                                                                              
            Product sales and rentals               $148,375                   $148,862        
            Contract manufacturing sales              30,364                     31,664         
            Support services                          70,085                     68,632         
                                                     -------                    -------         
                                                                                                
               Total revenue                         248,824                    249,158         
                                                     -------                    -------         
                                                                                                
         Costs and expenses:                                                                    
                                                                                                
            Cost of sales and rentals                104,280                     96,510         
                                                                                                
            Selling, service and administrative      125,013                    121,325         
                                                                                                
            Amortization of intangibles               27,320                     31,942         
                                                                                                
            Research and development                  11,146                     11,422         
                                                     -------                    -------         
                                                                                                
         Operating loss                              (18,935)                   (12,041)        
                                                                                                
         Interest expense                             31,174                     32,369         
                                                                                                
         Other expense (income) - net                    593                       (267)        
                                                     -------                    -------         
                                                                                                
         Loss before income taxes                    (50,702)                   (44,143)        
                                                                                                
         Income tax benefit                           17,765                     16,318         
                                                     -------                    -------         
                                                                                                
            Net loss                                 (32,937)                   (27,825)        
                                                                                                
            Stock dividends on PIK Preferred Stock     1,994                      1,725         
                                                     -------                    -------         
                                                                                                
            Net loss applicable to Common Stock      $(34,931)                 $(29,550)        
                                                     ========                   =======         
                                                                                                
            Net loss per share of Common Stock       $ (3.70)                  $  (3.12)        
                                                     =======                    =======         
                                                                               



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

                                       3
<PAGE>

<TABLE>
<CAPTION>

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

                                                                                  DECEMBER 31,   SEPTEMBER 30,
                                                                                     1996            1997
                                                                                  ------------   -------------
                                                                                                 (UNAUDITED)
ASSETS                                                                                                                       
<S>                                                                              <C>              <C>
Current assets:                                                                                                              
   Cash                                                                           $ 7,927         $  4,717                       
   Accounts receivable, less allowances of $1,339 and $1,035, respectively         53,701           68,432                   
   Inventories                                                                     56,840           44,223            
   Other current assets                                                             9,833           11,546                   
                                                                                  -------         --------                   
      Total current assets                                                        128,301          128,918                   
                                                                                                                             
Property, plant and equipment, net                                                 37,008           35,043                   
Deferred financing costs, net of accumulated amortization of $6,235
 and $8,806, respectively                                                          14,255           12,514                   
Intangibles, net of accumulated amortization of $58,177 and $85,497,                                                         
    respectively                                                                  271,022          242,840                   
Prepaid repurchases, leased equipment                                               5,163            3,936                   
Other assets                                                                       49,086           67,094            
                                                                                 --------         --------       
      Total assets                                                               $504,835         $490,345
                                                                                 ========         ========                         
                                                                                                                             
LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                         
                                                                                                                             
Current liabilities:                                                                                                         
   Accounts payable                                                              $  7,634         $ 11,343                   
   Interest payable                                                                10,342            4,485                   
   Accrued liabilities                                                             29,961           25,458                   
   Advance billings                                                                34,808           34,213                   
   Current portion of long-term debt                                               12,512           15,356                   
                                                                                 --------         --------                   
      Total current liabilities                                                    95,257           90,855                   
                                                                                                                             
Long-term debt                                                                    340,086          363,211                   
Other liabilities                                                                  10,114           11,051
                                                                                 --------         --------
      Total liabilities                                                          $445,457         $465,117                   
                                                                                 --------         --------                  
                                                                                                                             
Commitments and contingencies (Note 6)                                                                                       
                                                                                                                             
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                                                                              
   September 30, 1997, $20,136)                                                    18,142           20,136                   
  Common stock ($.01 par value; 20,000,000 shares authorized;                                                                      
   9,452,000 shares outstanding)                                                       95               95                   
  Notes receivable from stockholders                                               (1,052)            (831)                  
  Additional paid-in capital                                                       94,905           94,905                   
  Treasury stock, at cost                                                            (200)            (480)                  
  Accumulated deficit                                                             (51,676)         (86,607)                  
  Accumulated translation adjustment                                                 (836)          (1,990)                  
                                                                                 --------         --------                   
      Total stockholders' equity                                                   59,378           25,228                   
                                                                                 --------         --------                   
      Total liabilities and stockholders' equity                                 $504,835         $490,345                   
                                                                                 =========        =========                  
                                                                                                  
     See accompanying notes to condensed consolidated financial statements.
</TABLE>

                                       4
<PAGE>
<TABLE>
<CAPTION>


                             DICTAPHONE CORPORATION

           CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
                             (Dollars in thousands)


                                                                                   NINE MONTHS               NINE MONTHS
                                                                                      ENDED                     ENDED
                                                                                SEPTEMBER 30, 1996        SEPTEMBER 30, 1997
                                                                                ------------------        ------------------
     <S>                                                                          <C>                        <C>
     Operating activities:
       Net loss                                                                     $(27,825)                 $ (32,937)
       Adjustments  to  reconcile  net loss to net cash
       provided  by (used  in) operating activities:
         Depreciation and amortization (including $5,079
         and $1,706, respectively, of nonrecurring charges)                           55,116                     42,903
         Provision for deferred income taxes                                         (17,018)                   (17,804)
         Non-cash provision for inventory obsolescence (Note 3)                          ---                     10,491
         Changes in assets and liabilities:
           Accounts receivable                                                         1,666                    (15,569)
           Inventories                                                                   816                        (13)
           Other current assets                                                       (1,723)                    (1,841)
           Accounts payable and accrued liabilities                                  (11,907)                    (6,064)
           Advance billings                                                           (1,010)                      (443)
           Other assets and other                                                     (8,004)                    (2,849)
                                                                                    ---------                 ----------
              Net cash used in operating activities                                   (9,889)                   (24,126)
                                                                                    ---------                 ----------

     Investing activities:
       Payment for acquisition                                                        (8,000)                       ---
       Net investment in fixed assets                                                 (4,526)                    (3,935)
                                                                                    ---------                 ----------
           Net cash used in investing activities                                     (12,526)                    (3,935)
                                                                                    ---------                 ----------

     Financing activities:
       Repayment under term loan facility                                             (5,250)                    (8,250)
       Borrowings under revolving credit facility                                     30,500                     71,300
       Repayment under revolving credit facility                                     (12,500)                   (36,800)
       Other                                                                             489                     (1,276)
                                                                                    ---------                  ---------
         Net cash provided by financing activities                                    13,239                     24,974
                                                                                    ---------                  ---------

     Effect of exchange rate changes on cash                                             (16)                      (123)
                                                                                    ---------                  ---------

     Decrease in cash                                                                 (9,192)                    (3,210)

     Cash, beginning of period                                                        14,279                      7,927
                                                                                    ---------                  ---------

     Cash, end of period                                                            $  5,087                   $  4,717
                                                                                    =========                  =========

     SUPPLEMENTAL CASH FLOW INFORMATION:

     Interest paid                                                                  $ 34,467                   $ 34,476
                                                                                    =========                  =========
     Income taxes paid                                                              $ 1,289                    $    357
                                                                                    =========                  ========


     See accompanying notes to condensed consolidated financial statements.
</TABLE>
 
                                      5
<PAGE>


                             DICTAPHONE CORPORATION

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


1.   THE ACQUISITION

         On April 25, 1995, Dictaphone  Corporation (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.  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 the final purchase adjustment. Total purchase
     adjustments  amounted to $12.2 million for an aggregate  purchase  price of
     $462.2 million.

2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         The  condensed  consolidated  financial  statements  of the Company are
     unaudited,  as of and for the three and nine month periods ended  September
     30, 1997 and September 30, 1996,  but in the opinion of management  contain
     all  adjustments  which are of a normal and recurring  nature  necessary to
     present  fairly the financial  position and results of operations  and cash
     flows for the periods presented.  These financial statements should be read
     in conjunction with the financial  statements and notes thereto included in
     the Company's  Annual  Report on Form 10-K for the year ended  December 31,
     1996.  Certain  amounts have been  reclassified  to conform to current year
     presentation.

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

         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.

         LOSS PER SHARE.  The weighted  average number of shares of common stock
     outstanding  used in the computation of loss per share for the three months
     and nine months  ended  September  30, 1997 was  9,452,000  and  9,455,000,
     respectively.

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


                                       6
<PAGE>


3.   INVENTORIES

         Inventories consist of the following:

                                                DECEMBER 31,     SEPTEMBER 30,
                                                   1996              1997
                                                ------------     -------------

         Raw materials and work in process        $14,881          $20,013
         Supplies and service parts                19,946           10,312
         Finished products                         22,013           13,898
                                                  -------          -------
         Total inventories                        $56,840          $44,223
                                                  =======          =======

         In June 1997, the Company  recorded a one time non-cash charge of $10.5
     million  associated  with the  provision for excess field service parts and
     inventory  related  to  the  Company's  Digital   Express(TM)  and  Records
     Express(TM) products. With the production of Enterprise Express(TM) in June
     1997,  the Company  provided  for excess  inventory  associated  with those
     products that the Enterprise  Express(TM) product would replace,  recording
     this charge as an inventory provision.

4.   INTANGIBLES

         The  following   summarizes   intangible  assets,  net  of  accumulated
     amortization  of $58,177 and $85,497 at December 31, 1996 and September 30,
     1997,  respectively.  Amortization  expense  for the three and nine  months
     ended September 30, 1997 was $8,772 and $27,320, respectively.

                                               DECEMBER 31,      SEPTEMBER 30,
                                                  1996               1997
                                               ------------      -------------

         Goodwill                                $139,687         $136,228
         Tradenames                                75,158           73,697
         Service contracts                         18,951           10,851
         Non-compete agreement                     30,057           16,383
         Patents                                    7,169            5,681
                                                 --------         --------
                                                 $271,022         $242,840
                                                 ========         ========

5.   INCOME TAXES

         The  benefit  for  income  taxes for the three  and nine  months  ended
     September 30, 1997 is $2,782 and $17,765, respectively.

         The  Company has  recorded a net  deferred  tax asset of $62.6  million
     included  in other  assets  reflecting  the benefit of net  operating  loss
     carryforwards and various book tax temporary differences. The net operating
     loss  carryforward as of September 30, 1997 is approximately  $66.6 million
     which will expire  beginning in the year 2010.  Realization is dependent on
     generating  sufficient  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.  Accordingly,  no  valuation  allowance  has been
     established as of September 30, 1997. This conclusion is based upon (i) the
     impact of purchase  accounting  adjustments which contribute 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  could be reduced  if  estimates  of future  taxable
     income during the net operating loss carryforward period are reduced.

                                       7
<PAGE>

6.   COMMITMENTS AND CONTINGENCIES

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

         The Company is subject to federal, state and local laws and regulations
     concerning   the   environment,   and   is   currently   participating   in
     administrative  proceedings  as a  participant  in a group  of  potentially
     responsible  parties in  connection  with two third party  disposal  sites.
     These proceedings are at a preliminary stage, for which it is impossible to
     reasonably  estimate the  potential  costs of  remediation,  the timing and
     extent  of  remedial   actions  which  may  be  required  by   governmental
     authorities,  and the amount of the liability, if any, of the Company alone
     or in  relation  to  that  of any  other  responsible  parties.  When it is
     possible to make a  reasonable  estimate of the  Company's  liability  with
     respect  to such a  matter,  a  provision  will  be  made  as  appropriate.
     Additionally, the Company has settled and paid its liability at three other
     third  party  disposal  sites.  At a  fourth  site,  the  Company  has paid
     approximately  $10,000 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.

                                       8
<PAGE>


7.   SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
     INFORMATION

         Dictaphone  U.S.  (Predecessor  Company) has fully and  unconditionally
     guaranteed  the  repayment  of $200,000 of senior  subordinated  notes (the
     "Notes")  issued to finance the  Acquisition.  The Notes are subordinate to
     financing of the Credit  Agreement,  dated  August 7, 1995,  as modified by
     amendments to Credit Agreement, dated June 28, 1996, June 27, 1997 and July
     21,  1997  (collectively,   the  "Credit  Agreement"),   and  other  senior
     indebtedness  as defined in the indenture  pursuant to which the Notes were
     issued (the "Note Indenture"). The Credit Agreement currently consists of a
     $75.0  million  Tranche  A Term Loan due March  31,  2001  (the  "Tranche A
     Loan"), a $75.0 million Tranche B Term Loan due June 20, 2002 (the "Tranche
     B Loan" and  together  with the  Tranche A Loan,  the "Term  Loans")  and a
     six-year  revolving  credit facility of up to $40.0 million (the "Revolving
     Credit  Facility").  Dictaphone  Non-U.S.  (Predecessor  Company)  is not a
     guarantor of the Notes.  Separate  financial  statements of Dictaphone U.S.
     (Predecessor  Company) are not presented because  management has determined
     that they would not be meaningful to investors in the Notes.

         The  following  are  the  supplemental   consolidating   statements  of
     operations  for the three and nine month periods  ended  September 30, 1997
     and 1996, the supplemental  consolidating  balance sheet  information as of
     December 31, 1996 and September 30, 1997, and cash flow information for the
     nine month periods ended September 30, 1996 and 1997.


<TABLE>
<CAPTION>
                             DICTAPHONE CORPORATION
         SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
                      THREE MONTHS ENDED SEPTEMBER 30, 1997

                                             Dictaphone     Dictaphone     Dictaphone     Consolidating
                                             Corporation       U.S.         Non-U.S.       Adjustments        Consolidated
                                             -----------    ----------     ----------     -------------       ------------
Revenue from:
<S>                                          <C>            <C>            <C>              <C>                  <C>    
  Product sales and rentals                  $  ---         $47,939        $ 7,495          $(3,018)             $52,416
  Contract manufacturing sales                  ---          10,739            ---              ---               10,739
  Support services                              ---          22,074          2,487              ---               24,561
                                             ------         -------        --------         --------             --------
     Total revenues                             ---          80,752          9,982           (3,018)              87,716
                                             ------         -------        --------         --------             --------

Costs and expenses:
  Cost of sales and rentals                     ---          32,045          4,047           (3,211)              32,881
  Selling, service and administrative            50          43,577          5,346              ---               48,973
  Research and development                      ---           3,813            ---              ---                3,813
  Interest expense - net and other              269           9,662            923              ---               10,854
                                             -------        --------       --------         --------             --------
     Total costs and expenses                   319          89,097         10,316           (3,211)              96,521
                                             -------        ---------      --------         --------             --------

     Equity earnings (loss)                     887             ---            ---             (887)                 ---
                                             ------         -------        --------         --------             --------

     Income (loss) before income taxes          568          (8,345)          (334)            (694)              (8,805)

     Income tax benefit (expense)                38           2,967           (146)             (77)               2,782
                                             ------         --------       --------       ----------             --------

     Net income (loss)                       $  606         $(5,378)       $  (480)       $    (771)             $(6,023)
                                             ======         ========       ========       ==========             ========

</TABLE>

                                       9
<PAGE>


7.   SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
     INFORMATION  (CONTINUED)

<TABLE>
<CAPTION>

                             DICTAPHONE CORPORATION
         SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
                      THREE MONTHS ENDED SEPTEMBER 30, 1996


                                             Dictaphone     Dictaphone     Dictaphone     Consolidating
                                             Corporation       U.S.         Non-U.S.       Adjustments        Consolidated
                                             -----------    ----------     ----------     -------------       ------------
Revenue from:
<S>                                          <C>            <C>            <C>              <C>                  <C>    
  Product sales and rentals                 $   ---         $43,786        $ 8,204          $(2,502)             $49,488
  Contract manufacturing sales                  ---          10,813            ---              ---               10,813
  Support services                              ---          20,259          2,887              ---               23,146
                                            --------        -------        --------         --------             --------
     Total revenues                             ---          74,858         11,091           (2,502)              83,447
                                            --------        -------        --------         --------             --------

Costs and expenses:
  Cost of sales and rentals                     ---          29,502          4,355           (2,541)              31,316
  Selling, service and administrative            44          42,448          8,395              ---               50,887
  Research and development                      ---           3,839            ---              ---                3,839
  Interest expense - net and other              644           9,677            386              ---               10,707
                                            --------        --------       --------         --------             --------
     Total costs and expenses                   688          85,466         13,136           (2,541)              96,749
                                            --------        --------       --------         --------             --------

     Equity (loss) earnings                  (1,614)            ---            ---            1,614                  ---
                                            --------        --------       --------         --------             --------

     (Loss) income before income taxes       (2,302)        (10,608)        (2,045)           1,653              (13,302)

     Income tax benefit (expense)               250           3,867            695              (15)               4,797
                                            --------        --------       --------       ----------             --------

     Net (loss) income                      $(2,052)        $(6,741)       $(1,350)       $   1,638              $(8,505)
                                            ========        ========       ========       ==========             ========

</TABLE>

                                       10

<PAGE>


7.   SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
     INFORMATION  (CONTINUED)

<TABLE>
<CAPTION>

                             DICTAPHONE CORPORATION
         SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
                      NINE MONTHS ENDED SEPTEMBER 30, 1997


                                             Dictaphone     Dictaphone     Dictaphone     Consolidating
                                             Corporation       U.S.         Non-U.S.       Adjustments        Consolidated
                                             -----------    ----------     ----------     -------------       ------------
Revenue from:
<S>                                          <C>            <C>            <C>              <C>                  <C>    
  Product sales and rentals                $    ---         $132,311       $ 24,706         $ (8,642)           $ 148,375
  Contract manufacturing sales                  ---           30,364            ---              ---               30,364 
  Support services                              ---           62,059          8,026              ---               70,085
                                           ---------        ---------      ---------        ---------            ---------
     Total revenues                             ---          224,734         32,732           (8,642)             248,824
                                           ---------        ---------      ---------        ---------            ---------

Costs and expenses:
  Cost of sales and rentals                     ---           97,653         15,591           (8,964)             104,280
  Selling, service and administrative           339          135,431         16,563              ---              152,333
  Research and development                      ---           11,146            ---              ---               11,146
  Interest expense - net and other            1,509           27,921          2,337              ---               31,767
                                           ---------        ---------      ---------        ---------            ---------
     Total costs and expenses                 1,848          272,151         34,491           (8,964)             299,526
                                           ---------        ---------      ---------        ---------            ---------

     Equity (loss) earnings                 (12,430)             ---            ---           12,430                  ---
                                           ---------        ---------      ---------        ---------            ---------

     (Loss) income before income taxes      (14,278)         (47,417)        (1,759)          12,752              (50,702)

     Income tax benefit (expense)               155           17,521            219             (130)              17,765
                                           ---------        ---------      ---------      -----------            ---------

     Net (loss) income                     $(14,123)        $(29,896)      $ (1,540)      $   12,622             $(32,937)
                                           =========        =========      =========      ===========            =========

</TABLE>

                                       11
<PAGE>


7.   SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
     INFORMATION  (CONTINUED)

<TABLE>
<CAPTION>

                             DICTAPHONE CORPORATION
         SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
                      NINE MONTHS ENDED SEPTEMBER 30, 1996



                                             Dictaphone     Dictaphone     Dictaphone     Consolidating
                                             Corporation       U.S.         Non-U.S.       Adjustments        Consolidated
                                             -----------    ----------     ----------     -------------       ------------
Revenue from:
<S>                                          <C>            <C>            <C>              <C>                  <C>    
  Product sales and rentals                $    ---         $129,962       $ 28,004         $ (9,104)           $ 148,862
  Contract manufacturing sales                  ---           31,664            ---              ---               31,664 
  Support services                              ---           59,969          8,663              ---               68,632
                                           ---------        ---------      ---------        ---------            ---------
     Total revenues                             ---          221,595         36,667           (9,104)             249,158
                                           ---------        ---------      ---------        ---------            ---------

Costs and expenses:
  Cost of sales and rentals                     ---           89,859         15,437           (8,786)              96,510
  Selling, service and administrative           151          129,303         23,813              ---              153,267
  Research and development                      ---           11,422            ---              ---               11,422
  Interest expense - net and other            1,901           28,586          1,601               14               32,102
                                           ---------        ---------      ---------        ---------            ---------
     Total costs and expenses                 2,052          259,170         40,851           (8,772)             293,301
                                           ---------        ---------      ---------        ---------            ---------

     Equity (loss) earnings                  (7,339)             ---            ---            7,339                  ---
                                           ---------        ---------      ---------        ---------            ---------

     (Loss) income before income taxes       (9,391)         (37,575)        (4,184)           7,007              (44,143)

     Income tax benefit                         622           14,170          1,390              136               16,318
                                           ---------        ---------      ---------      -----------            ---------

     Net (loss) income                     $ (8,769)        $(23,405)      $ (2,794)      $    7,143             $(27,825)
                                           =========        =========      =========      ===========            =========

</TABLE>


                                       12
<PAGE>


7.   SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
     INFORMATION  (CONTINUED)

<TABLE>
<CAPTION>

                             DICTAPHONE CORPORATION
              SUPPLEMENTAL CONSOLIDATING BALANCE SHEET INFORMATION
                                DECEMBER 31, 1996

                                                            Dictaphone    Dictaphone      Dictaphone    Consolidating   
                                                            Corporation      U.S.          Non-U.S.      Adjustments    Consolidated
                                                            -----------   ----------      ----------    -------------   ------------
     ASSETS

<S>                                                        <C>           <C>              <C>            <C>               <C>    
     Current assets:                                                                                                               
      Cash                                                  $     ---     $   6,569       $  1,358        $     ---         $  7,927
      Accounts receivable                                       9,896        49,259          8,165          (13,619)          53,701
      Inventories                                                 ---        48,220          9,919           (1,299)          56,840
      Other current assets                                        517         5,445          3,871              ---            9,833
                                                            ---------     ---------       --------         ---------        --------
        Total current assets                                   10,413       109,493         23,313          (14,918)         128,301
                                                                                                                                   
     Note receivable                                              ---        17,491            ---          (17,491)             ---
     Investments in subsidiaries                              440,601           ---            ---         (440,601)             ---
     Fixed assets, net                                            ---        33,833          3,175              ---           37,008
     Intangibles, net                                           2,131       250,872         18,019              ---          271,022
     Deferred financing costs, net                             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, interest 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>

                                       13
<PAGE>


7.   SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
     INFORMATION  (CONTINUED)

<TABLE>
<CAPTION>

                             DICTAPHONE CORPORATION
              SUPPLEMENTAL CONSOLIDATING BALANCE SHEET INFORMATION
                               SEPTEMBER 30, 1997



                                                            Dictaphone    Dictaphone      Dictaphone    Consolidating   
                                                            Corporation      U.S.          Non-U.S.      Adjustments    Consolidated
                                                            -----------   ----------      ----------    -------------   ------------
     ASSETS

<S>                                                        <C>           <C>              <C>            <C>               <C>    
     Current assets:                                                                                                                
      Cash                                                  $     ---     $   3,518       $  1,199        $     ---         $  4,717
      Accounts receivable                                       4,326        60,524          8,546           (4,964)          68,432
      Inventories                                                 ---        41,232          3,968             (977)          44,223
      Other current assets                                        ---         7,008          4,538              ---           11,546
                                                            ---------     ---------       --------         ---------        --------
        Total current assets                                    4,326       112,282         18,251           (5,941)         128,918
                                                                                                                                    
     Note receivable                                              ---        17,562            ---          (17,562)             ---
     Investments in subsidiaries                              454,154           ---            ---         (454,154)             ---
     Fixed assets, net                                            ---        32,299          2,744              ---           35,043
     Intangibles, net                                           2,090       225,385         15,365              ---          242,840
     Deferred financing costs, net                             12,514           ---            ---              ---           12,514
     Other assets                                               3,549        65,139          1,959              383           71,030
                                                            ---------     ---------       --------         ---------       ---------
     Total assets                                           $ 476,633     $ 452,667        $38,319        $(477,274)       $ 490,345
                                                            =========     =========       ========        ==========       =========
                                                                                                                            
                                                                                                                            
     LIABILITIES AND STOCKHOLDERS'                                                            
     EQUITY                                                                                                                 
                                                                                                                            
     Current liabilities:                                                                                                   
      Accounts payable, interest payable                                                      
       and accrued liabilities                              $  4,508      $  35,259       $  6,483        $  (4,964)       $  41,286
     Advance billings                                            ---         31,315          2,898              ---           34,213
     Current portion of long-term debt                        14,750            ---            606              ---           15,356
                                                            --------      ---------       --------        ----------       ---------
         Total current liabilities                            19,258         66,574          9,987           (4,964)          90,855
     Long-term debt                                          380,326        359,995         17,952         (395,062)         363,211
     Other liabilities                                           ---         10,765            286              ---           11,051
     Stockholders' equity                                     77,049         15,333         10,094          (77,248)          25,228
                                                              ------      ---------       --------         ---------       ---------
     Total liabilities                                                                                                      
       and stockholders' equity                             $476,633      $ 452,667       $ 38,319        $(477,274)       $ 490,345
                                                            ==========    =========       ========        ==========       =========
                                                              

</TABLE>


                                       14
<PAGE>


7.   SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
     INFORMATION  (CONTINUED)


                             DICTAPHONE CORPORATION
         SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
                      NINE MONTHS ENDED SEPTEMBER 30, 1996


<TABLE>
<CAPTION>


                                                  Dictaphone     Dictaphone     Dictaphone     Consolidating       
                                                  Corporation       U.S.         Non-U.S.      Adjustment          Consolidated
                                                  -----------    ----------     ----------     -------------       ------------

   Operating activities:
<S>                                               <C>            <C>            <C>             <C>                  <C>        
     Net loss                                     $(8,769)       $(23,405)      $ (2,794)       $  7,143             $  (27,825)
     Adjustments to reconcile net
      loss to net cash provided by
      (used in) operating activities:
      Depreciation and amortization                 4,263          47,542          3,311             ---                 55,116
      Provision for deferred income taxes            (725)        (15,327)          (508)           (458)               (17,018)
      Change in assets and liabilities:
        Accounts receivable                        (7,718)          1,110           (923)          9,197                  1,666
        Inventories                                   ---            (410)           894             332                    816
        Other current assets                         (215)          1,083         (2,531)            (60)                (1,723)
        Accounts payable and
         accrued liabilities                       (6,354)          1,803          1,459          (8,815)               (11,907)
        Advance billings                              ---            (503)          (507)            ---                 (1,010)
        Other assets and other                      7,610          (7,628)          (647)         (7,339)                (8,004)
                                                  -------        ---------      ---------       ---------            -----------
   Cash used in operating activities              (11,908)          4,265         (2,246)            ---                 (9,889)
                                                  --------       ---------      ---------       ---------            -----------

   Investing activities:
     Payment for acquisition                       (8,000)            ---            ---             ---                 (8,000)
     Net investment in fixed assets                   ---          (3,652)          (874)            ---                 (4,526)    
                                                  --------       ---------      ---------       ---------            -----------
   Cash used in investing activities               (8,000)         (3,652)          (874)            ---                (12,526)
                                                  --------       ---------      ---------       ---------            -----------

   Financing activities:
     Repayment under term loan facility            (5,250)            ---            ---             ---                 (5,250)
     Borrowing from promissory notes              (12,866)         12,750            116             ---                    ---
     Borrowing from subsidiary                     20,744         (20,744)           ---             ---                    ---
     Borrowing from revolving credit facility      30,500             ---            ---             ---                 30,500
     Repayment under revolving credit facility    (12,500)            ---            ---             ---                (12,500)
     Other                                           (720)            ---          1,209             ---                    489
                                                  --------       ---------      ---------        --------             ----------
   Cash provided by (used in) financing
    activities                                     19,908          (7,994)         1,325             ---                 13,239
                                                  --------       ---------      ---------        --------             ----------

   Effect of exchange rate changes on cash            ---            ---             (16)            ---                    (16)
                                                  --------       ---------      ---------        --------             ----------

   Decrease in cash                                   ---         (7,381)         (1,811)            ---                 (9,192)

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

   Cash, end of period                            $   ---        $  4,210       $    877         $   ---             $    5,087
                                                  ========       =========      =========        ========             ==========
</TABLE>

                                       15
<PAGE>


7.   SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
     INFORMATION  (CONTINUED)

<TABLE>
<CAPTION>

                             DICTAPHONE CORPORATION
         SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
                      NINE MONTHS ENDED SEPTEMBER 30, 1997


                                                  Dictaphone     Dictaphone     Dictaphone     Consolidating       
                                                  Corporation       U.S.         Non-U.S.      Adjustment          Consolidated
                                                  -----------    ----------     ----------     -------------       ------------

   Operating activities:
<S>                                               <C>            <C>            <C>             <C>                  <C>        
     Net loss                                     $(14,123)      $(29,896)      $ (1,540)       $ 12,622             $  (32,937)
     Adjustments to reconcile net
      loss to net cash provided by
      (used in) operating activities:
      Depreciation and amortization                   2,612        37,723          2,568             ---                 42,903
      Provision for deferred income taxes              (303)      (17,518)          (113)            130                (17,804)
      Non-cash provision for inventory 
       obsolescence                                     ---         9,535            956             ---                 10,491
      Change in assets and liabilities:
        Accounts receivable                           5,570       (11,265)        (1,219)         (8,655)               (15,569)
        Inventories                                     ---        (4,232)         4,541            (322)                  (13)
        Other current assets                            517        (1,563)          (795)            ---                 (1,841)
        Accounts payable and
         accrued liabilities                         (6,152)       (4,991)        (3,723)          8,802                 (6,064)
        Advance billings                                ---            69           (512)            ---                   (443)
        Other assets and other                       12,697        (3,443)           594         (12,697)                (2,849)
                                                  ----------     ---------      ---------       ---------            -----------
   Cash used in operating activities                    818       (25,581)           757            (120)               (24,126)
                                                  ----------     ---------      ---------       ---------            -----------

   Investing activities:
     Net investment in fixed assets                                (3,649)          (286)            ---                 (3,935)
                                                  ----------     ---------      ---------       ---------            -----------
   Cash used in investing activities                    ---        (3,649)          (286)            ---                 (3,935)    
                                                  ----------     ---------      ---------       ---------            -----------
      
   Financing activities:
     Repayment under term loan facility              (8,250)          ---            ---             ---                 (8,250)
     Borrowing from promissory notes                (26,250)       26,250            ---             ---                    ---
     Borrowing from subsidiary                           71           (71)           ---             ---                    ---
     Borrowing from revolving credit facility        71,300           ---            ---             ---                 71,300 
     Repayment under revolving credit facility      (36,800)          ---            ---             ---                (36,800)
     Other                                             (889)          ---           (507)            120                 (1,276)
                                                  ----------     ---------      ---------        --------             ----------
   Cash provided by (used in) financing
    activities                                         (818)       26,179           (507)            120                 24,974
                                                  ----------     ---------      ---------        --------             ----------

   Effect of exchange rate changes on cash              ---           ---           (123)            ---                   (123)
                                                  ----------     ---------      ---------        --------             ----------

   Decrease in cash                                     ---       (3,051)           (159)            ---                 (3,210)

   Cash, beginning of period                            ---         6,569          1,358             ---                  7,927
                                                  ----------     ---------      ---------        --------            -----------

   Cash, end of period                            $     ---      $  3,518       $  1,199         $   ---             $    4,717
                                                  ==========     =========      =========        ========             ==========

</TABLE>

                                       16
<PAGE>


8.   SUBSEQUENT EVENTS

         The Company is currently  negotiating a fourth  amendment to the Credit
     Agreement.  The proposed  amendment would permit the Company to issue a new
     Tranche C Loan in the amount of $62.8  million,  the proceeds of which will
     extinguish the outstanding balance of the Tranche A Loan and prepay certain
     required principal payments on the outstanding  amounts under the Tranche B
     Loan. The planned Tranche C Loan would require  amortization equal to 1% of
     the total loan amount  annually  through 2001, 30% in 2002 and 66% in 2003.
     In addition,  certain of the  financial  covenants in the Credit  Agreement
     would be revised. As a result, in the fourth quarter the Company expects to
     record a pre-tax  extraordinary  non-cash charge of $2.1 million associated
     with the write-off of the  unamortized  debt issuance costs  resulting from
     the early  extinguishment  of the outstanding  balances under the Tranche A
     Loan and the  Tranche B Loan.  There can be no  assurance  that the  fourth
     amendment or the Tranche C facility will be executed or, if executed,  that
     it will not contain provisions which differ from those described above.

         The Company also  anticipates  receiving an additional $35 million from
     the  purchase  of  additional  shares of  common  stock by  certain  of its
     shareholders.  The  proposed  fourth  amendment  will permit the Company to
     issue $35  million of new  equity,  the  proceeds  of which will be used to
     repay all amounts  outstanding on the new facility ("New Facility") and pay
     down the Revolving Credit Facility.

9.   RECENTLY ISSUED ACCOUNTING STANDARDS

         In June 1997, the Financial  Accounting Standards Board ("FASB") issued
     Statement   of  Financial   Accounting   Standards   No.  130,   "Reporting
     Comprehensive   Income"   ("SFAS  130")  which   requires  a  statement  of
     comprehensive  income to be included in the financial statements for fiscal
     years  beginning  after  December 15,  1997.  The Company will include such
     statement beginning with the first quarter of 1998.

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



                                       17
<PAGE>


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS

<TABLE>
<CAPTION>
OVERVIEW
                                                                  Three Months Ended                Nine Months Ended
                                                                    September 30,                     September 30,
                                                              -----------------------               -------------------
                                                                 1997            1996               1997           1996
                                                                 ----            ----               ----           ----
                                                                                     (IN MILLIONS)
                                                                                      (unaudited)


<S>                                                           <C>              <C>              <C>              <C>        
Total revenue                                                 $   87.7         $   83.4         $  248.8         $  249.2   
                                                                                                                            
Cost of sales and rentals (1)                                     32.9             31.3            104.3             96.5           
Selling, service and administrative expense                       49.0             50.9            152.3            153.3           
Research and development                                           3.8              3.8             11.1             11.4           
                                                              --------         ---------        ---------        ---------          
   Operating income (loss)                                         2.0             (2.6)           (18.9)           (12.0)          
                                                              --------         ---------        ---------        ---------          
                                                                                                                            
Interest expense and other expense, net                           10.8             10.7             31.8             32.1           
Income tax benefit                                                (2.8)            (4.8)           (17.8)           (16.3)          
                                                              ---------        ---------        ---------        --------- 
                                                                                                                            
Net loss                                                      $   (6.0)        $   (8.5)        $  (32.9)        $  (27.8)          
                                                              =========        =========        =========        =========

EBITDA (2)                                                    $   14.4         $   13.0         $   31.9         $   39.0
                                                              =========        =========        =========        =========

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

     (1)Cost of sales and  rentals do 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.

     (2)EBITDA is defined as income before effect of changes in accounting  plus
        interest, income taxes, depreciation and amortization and other non-cash
        charges.  EBITDA is presented because it is a widely accepted  financial
        indicator  of a company's  ability to incur and service  debt.  However,
        EBITDA should not be considered in isolation or as a substitute  for net
        income or cash flow data prepared in accordance with generally  accepted
        accounting  principles or as a measure of a company's  profitability  or
        liquidity.

</TABLE>

                                       18
<PAGE>
<TABLE>
<CAPTION>

                                                                  Three Months Ended                Nine Months Ended
                                                                    September 30,                     September 30,
                                                              -----------------------               -------------------
                                                                 1997            1996               1997           1996
                                                                 ----            ----               ----           ----
                                                                                     (IN MILLIONS)
                                                                                      (unaudited)


Revenue from:
   Sales:
<S>                                                           <C>              <C>              <C>              <C>     
     Integrated Voice Systems                                 $   10.4         $   11.4         $   33.0         $   36.5
     Integrated Health Systems                                     9.4              7.2             26.1             22.5
     Communication Recording Systems                              17.9             16.6             43.5             43.4
     Customer Service Parts                                        4.7              4.7             13.7             13.8
     International and Dealer Operations                           9.6              9.2             30.7             31.1
     Rentals                                                       0.4              0.4              1.4              1.6
                                                              --------         --------         --------         --------
       Product sales and rentals                                  52.4             49.5            148.4            148.9
                                                              --------         --------         --------         --------

     Contract Manufacturing                                       10.7             10.8             30.3             31.7
     Support service:
     Customer Service                                             21.3             19.9             60.3             59.4
     Application & Training Specialists                            0.8              0.3              1.8              0.5
     International and Dealer Operations                           2.5              2.9              8.0              8.7
                                                              --------         --------          -------         --------
       Total support service                                      24.6             23.1             70.1             68.6
                                                              --------         --------          -------         --------
Total revenue                                                 $   87.7         $   83.4         $  248.8         $  249.2
                                                              ========         ========         ========         ========
                                                                                                                              
</TABLE>


RESULTS OF OPERATIONS - THIRD QUARTER 1997 VS. THIRD QUARTER 1996

     Total revenue for the third quarter of 1997 increased 5.1% to $87.7 million
from $83.4 million during the third quarter of 1996. This increase in revenue is
attributable  to higher  product sales revenue from  Integrated  Health  Systems
("I.H.S."), Communications Recording Systems ("C.R.S."), and higher revenue from
Customer  Service  (including  sale  of  parts)  and  Application  and  Training
Specialists  ("A.T.S."),  offset in part by lower revenue from Integrated  Voice
Systems ("I.V.S.") and Contract Manufacturing.

     I.V.S.  revenue  declined 8.8% to $10.4  million from $11.4  million due to
lower  portable  and  Straight  Talk(TM)  billings.  I.V.S.  orders in the third
quarter of 1997 declined  12.1% to $11.0 million from $12.5 million in the third
quarter  of 1996.  I.H.S.  revenue  increased  30.6% to $9.4  million  from $7.2
million on the  strength  of  Enterprise  Express(TM)  billings.  I.H.S.  orders
increased  21.6% to $11.1  million  during  the third  quarter of 1997 from $9.2
million in the third quarter of 1996.  C.R.S.  revenue  increased  7.8% to $17.9
million from $16.6 million due to significant  growth in Guardian(TM)  billings.
C.R.S. orders increased 21.8% to $16.8 million in the third quarter of 1997 from
$13.8 million in the third quarter of 1996.  Customer Service revenue (including
sale of parts)  increased 5.7% to $26.0 million from $24.6 million due to higher
proprietary product service contract revenue,  installation  revenue,  and third
party maintenance  revenue.  A.T.S. revenue for the third quarter 1997 increased
by $0.5 million to $0.8 million due to increased  customer  training provided in
support  of  I.V.S.  and  I.H.S.  products.   Sales  and  service  revenue  from
International  and Dealer Operations was comparable to the prior year period, as
increased system and Communications Recording System revenue was offset by lower
desktop,  portable and service  revenue as well as $0.4  million of  unfavorable
currency  exchange.  Total  orders  from  International  and  Dealer  Operations
increased  20.0% to $10.7 million in the third quarter of 1997 from $8.9 million
in the third quarter of 1996. The increase in accounts  receivable from December
31, 1996 was  associated  with the increased  percentage of system related sales
from I.H.S. and C.R.S. generated during the latter part of the third quarter.


  
                                     19

<PAGE>

     Cost of sales and rentals  increased  5.0% to $32.9 million (37.5% of total
revenue)  during the three months ended  September  30, 1997 from $31.3  million
(37.5%  of total  revenue)  for the  three  months  ended  September  30,  1996.
Excluding  additional  depreciation  and  amortization  expense  associated with
purchase accounting  adjustments related to the Acquisition,  cost of sales as a
percentage of revenue  increased by 1.3 percentage  points to 37.0% due to lower
price  realization  for  C.R.S.   Guardian(TM)  digital  loggers,   lower  price
realization  from  International  and Dealer  Operations  and  higher  inventory
adjustments.

     Selling,  service and administrative  expenses  (including  amortization of
intangibles)  for the third  quarter  of 1997  decreased  3.8% to $49.0  million
(55.8% of total  revenue)  from $50.9 million  (61.0% of total  revenue) for the
comparable period in 1996.  Excluding  additional  depreciation and amortization
expense  associated  with  purchase   accounting   adjustments  related  to  the
Acquisition  of $8.8  million and $11.4  million,  respectively,  from the three
months ended September 30, 1997 and 1996,  selling,  service and  administrative
expenses  (including  amortization of intangibles) would have been $40.2 million
(45.8% of total  revenue) for the three months ended  September  30, 1997 versus
$39.5 million (47.3% of total revenue) for the comparable period of 1996. I.V.S.
and Customer Service expense reductions associated with lower field compensation
and   employee-related   expenses  related  to  reduced   staffing,   and  lower
international  selling and service  expenses  were offset by increased  expenses
associated with trade shows, advertising and marketing,  higher employee benefit
and legal expenses as well as increased I.H.S. and C.R.S. selling expenses

     Research and development  expenses for the three months ended September 30,
1997  totalled  $3.8  million  and  represented  a  decrease  of 0.1%  from  the
comparable period of 1996.

     The Company  recorded an operating  profit of $2.0 million during the third
quarter of 1997  compared  to an  operating  loss of $2.6  million for the third
quarter of 1996. Excluding purchase accounting  adjustments  associated with the
Acquisition of $9.2 million and $12.9 million from the third quarter of 1997 and
1996,  respectively,  operating profit would have increased by $0.9 million as a
result of higher revenue.

     The Company has recorded a net deferred tax asset of $62.6 million included
in other assets  reflecting the benefit of net operating loss  carryforwards and
various book tax temporary  differences.  The net operating loss carryforward as
of September 30, 1997 is approximately $66.6 million which will expire beginning
in the year 2010.  Realization  is dependent on  generating  sufficient  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.  Accordingly,  no  valuation
allowance  has been  established  as of September 30, 1997.  This  conclusion is
based upon (i) the impact of purchase accounting adjustments which contribute 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
could be reduced if estimates of future  taxable income during the net operating
loss carryfoward period are reduced.

RESULTS OF  OPERATIONS  - NINE MONTHS  ENDED SEPTEMBER  30, 1997 VS. NINE MONTHS
ENDED SEPTEMBER 30, 1996

     Total  revenue for the first nine months of 1997  decreased  0.1% to $248.8
million from $249.2  million for the first nine months of 1996.  This decline is
attributable  to  lower  revenue  from  I.V.S.,   Contract   Manufacturing   and
International  and Dealer  Operations  partially  offset by increased I.H.S. and
C.R.S. sales revenue,  as well as increased A.T.S. and Customer Service revenue.
I.V.S.  revenue  declined  9.6% to $33.0 million from $36.5 million due to lower
billings for  desktops,  small  digital  systems and Straight  Talk(TM).  I.H.S.
revenue  increased  16.0% to $26.1  million  from  $22.5  million  due to higher
systems  billings  associated  with  Enterprise   Express(TM).   C.R.S.  revenue
increased  only 0.2% to $43.5 million from $43.4 million as weak first


                                       20
<PAGE>

half 1997  performance was offset by increased third quarter 1997 order rate and
installations of Guardian(TM) digital loggers.  C.R.S. orders for the first nine
months of 1997  increased 4.4% to $44.7 million from $42.9 million for the first
nine  months  of  1996.  Customer  Service  revenue  (including  sale of  parts)
increased  by  1.1%  to  $74.0   million  from  $73.2   million  due  to  higher
installation,  integration and third party maintenance revenue, partially offset
by lower proprietary  product service contract revenue.  A.T.S.  revenue for the
first nine months of 1997  increased  to $1.8  million from $0.5 million for the
first nine months of 1996. This increase is  attributable to increased  customer
training in support of I.V.S. and I.H.S.  products.  Revenue from  International
and Dealer  Operations  declined 2.8% to $38.7 million from $39.8 million due to
lower  desktop,  portable  and  service  revenue  as  well as  $0.9  million  of
unfavorable currency exchange. Contract Manufacturing revenue for the first nine
months of 1997 was 4.1% lower than the corresponding period in 1996.

     Order backlog at September 30, 1997 totalled $30.8 million  representing an
increase of $6.2  million,  or 25.3%,  over order  backlog at December 31, 1996.
Order backlog at September 30, 1996 totalled $27.3 million.

     Cost of sales and rentals  increased 8.1% to $104.3 million (41.9% of total
revenue)  during the nine months  ended  September  30, 1997 from $96.5  million
(38.7% of total revenue) for the nine months ended September 30, 1996. Excluding
additional  depreciation and amortization expense related to purchase accounting
adjustments associated with the Acquisition of $2.2 million and $7.3 million for
the nine months ended September 30, 1997 and 1996,  respectively,  cost of sales
and rentals  would have  increased as a percent of revenue to 41.0% for the nine
months ended  September 30, 1997 from 35.8% for the nine months ended  September
30, 1996.  Cost of sales and rentals as a percent of revenue  increased due to a
one time  non-cash  charge of $10.5  million  associated  with the provision for
excess field service parts and stock related to Digital  Express(TM) and Records
Express(TM) products as well as lower price realization for C.R.S.  Guardian(TM)
digital loggers and I.H.S. digital systems.

     Selling,  service and administrative  expenses  (including  amortization of
intangibles)  for the  first  nine  months  of 1997  declined  by 0.6% to $152.3
million  (61.2% of total  revenue) from $153.3  million (61.5% of total revenue)
for the  first  nine  months  of 1996.  Excluding  additional  depreciation  and
amortization expense associated with purchase accounting  adjustments related to
the Acquisition of $27.7 million and $35.6 million, respectively,  from the nine
months ended September 30, 1997 and 1996,  selling,  service and  administrative
expenses (including amortization of intangibles) would have represented 50.1% of
total revenue for the nine months ended September 30, 1997 versus 47.2% of total
revenue for the comparable period in 1996. This increase in selling, service and
administrative  expenses  is  attributable  to  a  $2.3  million  provision  for
severance as well as higher I.H.S. and C.R.S. selling expenses, increased A.T.S.
training costs,  higher trade show and marketing  expenses,  and increased legal
and  management  compensation  expenses.   Partially  offsetting  these  expense
increases  were  lower  I.V.S.  and  Customer  Service  field  compensation  and
employee-related   expenses   associated   with   reduced   staffing  and  lower
international operating expenses.

     Research and  development  expenses for the nine months ended September 30,
1997 totalled  $11.1 million and  represented a 2.4% decrease from $11.4 million
for the comparable  period in 1996.  Expressed as a percent of product sales and
rentals  revenue,  research and development  expense was 7.5% for the first nine
months ended September 30, 1997 versus 7.7% for the first nine months of 1996.

     The Company  recorded an operating  loss of $18.9 million  during the first
nine months of 1997 compared to an operating loss of $12.0 million for the first
nine months of 1996. Excluding purchase accounting  adjustments  associated with
the  Acquisition of $29.9 million and $42.9 million for the first nine months of
1997 and 1996,  respectively,  operating  profit  would have  declined  by $20.0
million  due to lower  revenue,

                                       21
<PAGE>

higher  costs  associated  with  the  charge  for  inventory  obsolescence,  the
provision for severance and increased operating expenses.

LIQUIDITY AND CAPITAL RESOURCES

     The  Company's  liquidity  requirements  consists  primarily  of  scheduled
payments of principal and interest on its  indebtedness,  working  capital needs
and capital  expenditures.  At September 30, 1997,  the Company had  outstanding
Term Loans of $134.0  million and a $38.0  million  loan  outstanding  under the
$40.0 million Revolving Credit Facility. Availability under the Revolving Credit
Facility at September  30, 1997 was $2.0  million.  Scheduled  annual  principal
payments  on the Term Loans 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,  effective
January 1, 1999, 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.

     As a result of the need for  additional  liquidity  during the remainder of
1997,  the Company  entered into an agreement on August 1, 1997 with a lender to
provide a facility (the "New Facility") with a $10 million line of credit, under
which the  Company  drew $1.5  million on that date.  Loans  incurred  under the
facility mature, and the facility terminates, on January 30, 1998 and such loans
bear  interest  at the  election of the Company at either (i) 2.5% over the base
rate set forth in the Bank Credit  Agreement or (ii) 3.5% over a rate related to
the Eurodollar rate quoted by the lender under the facility.  Under the terms of
the New Facility,  various entities related to Stonington  Capital  Appreciation
1994 Fund,  (L.P.), the Company's  principal  stockholder  ("Stonington"),  have
agreed to assume  loans under the  facility  if  the  Company  defaults  on  its
obligations  under such facility.  The New Facility  provides that if Stonington
assumes  the loans  pursuant  to such  provisions,  it will  have the  option to
convert all of the  principal  and  interest  due under the  assumed  loans into
shares of Common Stock of the Company at a conversion  rate of $10.00 per share,
which is equal to the price paid by management investors upon the closing of the
acquisition of the Company. The Company had outstanding borrowings under the New
Facility on September 30, 1997 of $5.5 million.

     The  Company is  currently  negotiating  a fourth  amendment  to the Credit
Agreement.  The  proposed  amendment  would  permit  the  Company to issue a new
Tranche C Loan in the  amount  of $62.8  million,  the  proceeds  of which  will
extinguish  the  outstanding  balance of the  Tranche A Loan and prepay  certain
required principal payments on the outstanding amounts under the Tranche B Loan.
The planned Tranche C Loan would require  amortization  equal to 1% of the total
loan amount  annually  through  2001,  30% in 2002 and 66% in 2003. In addition,
certain of the financial  covenants in the Credit Agreement would be revised. As
a  result,  in the  fourth  quarter  the  Company  expects  to  record a pre-tax
extraordinary  non-cash charge of $2.1 million  associated with the write-off of
the unamortized debt issuance costs resulting from the early  extinguishment  of
the outstanding  balances under the Tranche A Loan and the Tranche B Loan. There
can be no assurance that the fourth  amendment or the Tranche C facility will be
executed or, if executed,  that it will not contain provisions which differ from
those described above.

     The Company also  anticipates  receiving an additional $35 million from the
purchase of  additional  shares of common stock by certain of its  stockholders.
The proposed  fourth  amendment would permit the Company to issue $35 million of
new equity, the proceeds of which would be used to repay all amounts outstanding
on the New Facility and pay down the Revolving Credit Facility.

     In connection with the terms of the Credit  Agreement,  the Company entered
into interest  rate swap  agreements in November  1995,  effective  February 16,
1996,  with an aggregate  notional  principal  amount  equivalent to $75 million
maturing on February 16, 1999. The swap effectively converts that portion of the
Term Loans to a fixed  rate  component  of 5.8%;  thus,  reducing  the impact of
changes in interest rates, 

                                       22
<PAGE>

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.

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

     The Company had $200.0  million of Notes  outstanding  as of September  30,
1997. 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. At September  30, 1997,  the
fair value of the Notes was favorable $40 million based on dealer quotes.

     Capital  expenditures  for the  first  nine  months  of 1997  totaled  $3.9
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's  quarterly revenues and other operating results have been and
will  continue  to be affected  by a wide  variety of factors  that could have a
material  adverse  effect on the  Company's  financial  performance  during  any
particular quarter.  Such factors include,  but are not limited to, the level of
orders that are  received and shipped by the Company in any given  quarter,  the
rescheduling and  cancellation of orders by customers,  availability and cost of
materials,  the  Company's  ability  to enhance  its  existing  products  and to
develop,  manufacture,  and successfully  introduce and market new products, new
product developments by the Company's competitors, market acceptance of products
of both the  Company  and its  competitors,  competitive  pressures  on  prices,
significant  damage to or prolonged  delay in operations  at the Company's  sole
manufacturing facility, and interest rate and foreign exchange fluctuations. The
Company is  currently  planning  to  introduce  a number of new  products in its
target  markets in 1997 and 1998 which are expected to enhance  future  revenues
and  liquidity  of the  Company.  However,  there can be no  assurance  that the
Company will be able to  implement  its plans to  introduce  such  products in a
timely fashion,  or that such products will meet the expectations of the Company
for either revenues or profitability.  The Company believes that cash flows from
operating  activities,  the  successful  introduction  of its new products,  the
consummation of the fourth  amendment to the Credit Facility and the anticipated
refinancing  including  the issuance of a Tranche C loan and the planned  equity
infusion,  as well as its ability to borrow under the Revolving Credit Facility,
will be adequate to meet the Company's debt service  obligations,  including the
repayment  of the New  Facility,  working  capital  needs  and  planned  capital
expenditures for the foreseeable future.

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


                                       23
<PAGE>


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
         RISK

     Not currently applicable to the Company.

                           PART II - OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS

     See  Note  6  to  the  Condensed  Consolidated   Statements  of  Operations
(Unaudited) of Dictaphone Corporation which is incorporated herein by reference.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

     (a) EXHIBITS

         27   -  Financial Data Schedule

UNDERTAKING:

     The undersigned,  Dictaphone  Corporation,  hereby undertakes,  pursuant to
Regulation  S-K, Item 601(b),  paragraph (4) (iii), to furnish to the Securities
and Exchange  Commission upon request all constituent  instruments  defining the
rights  of  holders  of  long-term  debt  of  Dictaphone   Corporation  and  its
consolidated  subsidiaries  not filed  herewith  for the  reason  that the total
amount of securities authorized under any of such instruments does not exceed 10
percent  of the total  consolidated  assets of  Dictaphone  Corporation  and its
consolidated subsidiaries.

     (b) REPORTS ON FORM 8-K

              On July 8, 1997,  the Company filed a Current  Report on Form 8-K,
         reporting,  under Item 5 thereof,  the  amendment of certain  covenants
         contained in the  Company's  senior Bank Credit  Agreement  dated as of
         August 7, 1995,  as  amended.  There were no other  reports on Form 8-K
         filed by the Company during the three months ended September 30, 1997.


                                       24
<PAGE>


                                   SIGNATURES


     Pursuant to the  requirements  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.




Dated:  November 14, 1997                 DICTAPHONE CORPORATION
                                   ---------------------------------------
                                               (Registrant)




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




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



<PAGE>


                                  EXHIBIT INDEX


                                                                   SEQUENTIALLY
EXHIBITS                        DESCRIPTION                        NUMBERED PAGE
--------                        -----------                        -------------
                                                                   

   *27   --  Financial Data Schedule.