UNITED STATES
                       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 June 30, 1998

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


                             3191 BROADBRIDGE AVENUE
                               STRATFORD, CT 06614
                                 (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 per share,  outstanding  as of
August 11, 1998:  12,949,000
The Common Stock of the registrant is not publicly traded.

<PAGE>

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

                                      INDEX
                                      -----



                                                                        PAGE NO.

PART I.  FINANCIAL INFORMATION
------------------------------

ITEM 1.  Condensed Consolidated Financial Statements

           Unaudited   Condensed   Consolidated    Statements   of
             Operations  for the Three  Months Ended June 30, 1998
             and June 30, 1997                                             2

           Unaudited   Condensed   Consolidated    Statements   of 
             Operations for the Six Months Ended June 30, 1998 and
             June 30, 1997                                                 3

           Condensed  Consolidated  Balance  Sheets as of June 30,
             1998 (Unaudited) and December 31, 1997                        4

           Unaudited  Condensed  Consolidated  Statements  of Cash 
             Flow for the Six Months  Ended June 30, 1998 and
             June 30, 1997                                                 5

           Notes to Unaudited Consolidated Financial Statements            6

ITEM 2.  Management's Discussion and Analysis of Financial
          Condition and Results of Operations                             19

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



                                       1
<PAGE>



                         PART I - FINANCIAL INFORMATION


ITEM 1.      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
             -------------------------------------------

<TABLE>

                                            DICTAPHONE CORPORATION

                          CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
                                            (Dollars in thousands)

<CAPTION>

                                                                            THREE MONTHS            THREE MONTHS
                                                                                ENDED                   ENDED
                                                                            JUNE 30, 1997           JUNE 30, 1998
                                                                            -------------           -------------
             <S>                                                            <C>                     <C>
             Revenues:                                                                     
                  Product sales and rentals                                  $   46,762              $   51,572
                  Contract manufacturing sales                                   10,574                  11,545
                  Support services                                               22,605                  21,868
                                                                             ----------              ----------
                                                                                          
                      Total revenue                                              79,941                  84,985
                                                                             ----------              ----------
                                                                                          
             Costs and expenses:                                                          
                                                                                          
                  Cost of sales, rentals and support services                    55,630                  46,957
                                                                                          
                  Selling and administrative                                     31,411                  28,219
                                                                                          
                  Amortization of intangibles                                     9,170                   7,833
                                                                                          
                  Research and development                                        3,599                   3,256
                                                                             ----------              ----------
                                                                                          
             Operating loss                                                     (19,869)                 (1,280)
                                                                                          
             Interest expense                                                    10,232                   9,922
                                                                                          
             Other (income) expense - net                                          (137)                    171
                                                                             ----------              ----------
                                                                                          
             Loss before income taxes                                           (29,964)                (11,373)
                                                                                          
             Income tax benefit                                                  10,884                     662
                                                                             ----------              ----------
                                                                                          
                  Net loss                                                      (19,080)                (10,711)
                                                                                          
                  Stock dividends on PIK Preferred Stock                            678                     755
                                                                             ----------              ----------
                                                                                          
                  Net loss applicable to Common Stock                        $  (19,758)             $  (11,466)
                                                                             ==========              ==========
                                                                            


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



                                       2
<PAGE>



<TABLE>

                             DICTAPHONE CORPORATION

           CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
                             (Dollars in thousands)

<CAPTION>

                                                                             SIX MONTHS              SIX MONTHS
                                                                                ENDED                   ENDED
                                                                            JUNE 30, 1997           JUNE 30, 1998
                                                                            -------------           -------------
             <S>                                                            <C>                     <C>
             Revenues:
                  Product sales and rentals                                  $   95,959              $  101,219
                  Contract manufacturing sales                                   19,625                  23,492
                  Support services                                               45,524                  44,099
                                                                             ----------              ----------

                      Total revenue                                             161,108                 168,810
                                                                             ----------              ----------

             Costs and expenses:

                  Cost of sales, rentals and support services                    98,445                  91,969

                  Selling and administrative                                     57,766                  55,329

                  Amortization of intangibles                                    18,548                  15,714

                  Research and development                                        7,333                   7,956
                                                                             ----------              ----------

             Operating loss                                                     (20,984)                 (2,158)

             Interest expense                                                    20,677                  19,719

             Other expense (income) - net                                           236                    (655)
                                                                             ----------              ----------

             Loss before income taxes                                           (41,897)                (21,222)

             Income tax benefit (expense)                                        14,983                    (334)
                                                                             ----------              ----------

                  Net loss                                                      (26,914)                (21,556)

                  Stock dividends on PIK Preferred Stock                          1,313                   1,484
                                                                             ----------              ----------

                  Net loss applicable to Common Stock                        $  (28,227)             $  (23,040)
                                                                             ==========              ==========

</TABLE>


     See accompanying notes to condensed consolidated financial statements.


                                       3
<PAGE>



<TABLE>

                                            DICTAPHONE CORPORATION

                                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                            (Dollars in thousands)

<CAPTION>

                                                                                          DECEMBER 31,         JUNE 30,
                                                                                             1997                1998
                                                                                         ------------         ----------
                                                                                                              (UNAUDITED)
<S>                                                                                      <C>                <C>
ASSETS
Current assets:
    Cash                                                                                 $   10,277         $    5,896
    Accounts receivable, less allowances of $810 and $2,421, respectively                    71,939             71,810
    Inventories                                                                              48,779             51,178
    Other current assets                                                                     11,675             12,311
                                                                                         ----------         ----------
         Total current assets                                                               142,670            141,195
Property, plant and equipment, net                                                           35,331             28,801
Deferred financing costs, net of accumulated amortization of $12,517
 and $13,368, respectively                                                                   10,900             10,048
Intangibles, net of accumulated amortization of $99,439 and $115,153, respectively          229,322            209,202
Other assets                                                                                 51,837             52,296
                                                                                         ----------         ----------
         Total assets                                                                    $  470,060         $  441,542
                                                                                         ==========         ==========

LIABILITIES AND STOCKHOLDERS' EQUITY
    Current liabilities:
    Accounts payable                                                                     $   10,940         $    7,667
    Interest payable                                                                         10,144              9,986
    Accrued liabilities                                                                      32,373             25,862
    Advance billings                                                                         37,184             37,396
    Current portion of long-term debt                                                           795                791
                                                                                         ----------         ----------
         Total current liabilities                                                           91,436             81,702

Long-term debt                                                                              342,816            342,933
Other liabilities                                                                            10,547             13,575
                                                                                         ----------         ----------
         Total liabilities                                                                  444,799            438,210
                                                                                         ----------         ----------

Contingencies (Note 5)

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 June 30, 1998, $22,325)                   20,841             22,325
    Common stock ($.01 par value; 20,000,000 shares authorized;
      12,952,000 and 12,949,000 shares outstanding at December 31, 1997
      and June 30, 1998, respectively)                                                          130                130
    Notes receivable from stockholders                                                         (831)              (816)
    Additional paid-in capital                                                              129,870            129,870
    Treasury stock, at cost                                                                    (480)              (510)
    Accumulated deficit                                                                    (122,597)          (145,637)
    Accumulated translation adjustment                                                       (1,672)            (2,030)
                                                                                         ----------         ----------
         Total stockholders' equity                                                          25,261              3,332
                                                                                         ----------         ----------
         Total liabilities and stockholders' equity                                      $  470,060         $  441,542
                                                                                         ==========         ==========

</TABLE>

     See accompanying notes to condensed consolidated financial statements.


                                       4
<PAGE>



<TABLE>

                                            DICTAPHONE CORPORATION

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

<CAPTION>


                                                                                 SIX MONTHS               SIX MONTHS
                                                                                    ENDED                    ENDED
                                                                                JUNE 30, 1997            JUNE 30, 1998
                                                                                -------------            -------------
       <S>                                                                       <C>                     <C>
       Operating activities:
          Net loss                                                                $  (26,914)             $  (21,556)
          Adjustments to reconcile net loss to net cash
           used in operating activities:
             Depreciation and amortization (including $1,389
             and $13, respectively, of nonrecurring charges)                          29,764                  24,104
             Provision for deferred income taxes                                     (14,770)                  1,186
             Non-cash provision for inventory obsolescence (Note 2)                   10,491                     ---
             Changes in assets and liabilities:
                 Accounts receivable                                                    (408)                   (178)
                 Inventories                                                           1,837                  (2,489)
                 Other current assets                                                 (2,878)                   (713)
                 Accounts payable and accrued liabilities                             (1,309)                 (9,649)
                 Advance billings                                                     (2,780)                    284
                 Other assets and other                                               (2,231)                 (5,785)
                                                                                  ----------              -----------
                    Net cash used in operating activities                             (9,198)                (14,796)
                                                                                  ----------              ----------

       Investing activities:
          Net investment in fixed assets                                              (3,023)                 (4,602)
          Sale of building                                                               ---                  14,000
                                                                                  ----------              ----------
                 Net cash (used in) provided by investing activities                  (3,023)                  9,398
                                                                                  ----------              ----------

       Financing activities:
          Repayment under term loan facility                                          (5,500)                 (1,800)
          Borrowings under revolving credit facility                                  37,500                  29,000
          Repayment under revolving credit facility                                  (20,500)                (27,000)
          Other                                                                       (1,299)                    858
                                                                                  ----------              ----------
             Net cash provided by financing activities                                10,201                   1,058
                                                                                  ----------              ----------

       Effect of exchange rate changes on cash                                           (86)                    (41)
                                                                                  ----------              ----------

       Decrease in cash                                                               (2,106)                 (4,381)

       Cash, beginning of period                                                       7,927                  10,277
                                                                                  ----------              ----------
       Cash, end of period                                                        $    5,821              $    5,896
                                                                                  ==========              ==========

       SUPPLEMENTAL CASH FLOW INFORMATION:

       Interest paid                                                              $   18,975              $   19,029
                                                                                  ==========              ==========
       Income taxes paid                                                          $      349              $       73
                                                                                  ==========              ==========


</TABLE>

     See accompanying notes to condensed consolidated financial statements.



                                       5
<PAGE>



                             DICTAPHONE CORPORATION

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
                (Dollars in thousands, or as otherwise indicated)


1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

             The condensed  consolidated financial statements of the Company are
       unaudited,  as of and for the three and six month  periods ended June 30,
       1998 and June 30,  1997,  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, 1997.  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 which represent the cost of support services revenue are included
       in cost of sales.

             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.

             In June,  1998, the Financial  Accounting  Standards Board ("FASB")
       issued Statement of Financial  Accounting  Standards No. 133, "Accounting
       for Derivative  Instruments  and Hedging  Activities"  ("SFAS 133").  The
       statement  requires  companies to  recognize  all  derivatives  as either
       assets or liabilities,  with the instruments  measured at fair value. The
       accounting  for  changes in fair value,  gains or losses,  depends on the
       intended  use  of the  derivative  and  its  resulting  designation.  The
       statement is effective for all fiscal  quarters of fiscal years beginning
       after June 15, 1999.  The Company will adopt SFAS 133 by January 1, 2000.
       Adoption of SFAS 133 is not currently  expected to have a material impact
       on the consolidated financial statements.

             In  March,   1998,  the  American  Institute  of  Certified  Public
       Accountants  issued Statement of Position 98-1 ("SOP 98-1"),  "Accounting
       for the Costs of Computer  Software  Developed  or Obtained  for Internal
       Use." The  statement  is  effective  for  fiscal  years  beginning  after
       December 15, 1998. The statement defines which costs of computer software
       developed  or obtained  for  internal use are capital and which costs are
       expensed.  The Company will adopt SOP 98-1 effective January 1, 1999. The
       Company is in the process of  evaluating  the effect the  adoption of SOP
       98-1 will have on its consolidated financial statements.




                                       6
<PAGE>



2.     INVENTORIES

             Inventories consist of the following:

                                                    DECEMBER 31,      JUNE 30,  
                                                       1997             1998    
                                                    ------------     -----------
                                                                                
             Raw materials and work in process      $   18,481       $   18,761 
             Supplies and service parts                 14,087           14,225 
             Finished products                          16,211           18,192 
                                                    ----------       ---------- 
             Total inventories                      $   48,779       $   51,178 
                                                    ==========       ========== 

             With the  commencement  of production of Enterprise  Express(TM) in
       June 1997,  the Company  provided for the excess  service parts and field
       stock inventory associated with the products that Enterprise  Express(TM)
       was replacing, recording a non-cash charge of $10.5 million.

3.     INTANGIBLES

             The following  summarizes  intangible  assets,  net of  accumulated
       amortization  and writedowns of $99,439 and $115,153 at December 31, 1997
       and June 30, 1998,  respectively.  Amortization expense for the three and
       six months ended June 30, 1997 and 1998 was $9,170,  $18,548,  $7,833 and
       $15,714, respectively.

                                                    DECEMBER 31,      JUNE 30,
                                                       1997             1998
                                                    ------------     ----------
             Goodwill                               $  135,004       $  128,847
             Tradenames                                 73,211           72,238
             Service contracts                           8,920            5,041
             Non-compete agreement                      11,696            2,678
             Patents                                       491              398
                                                    ----------       ----------
                                                    $  229,322       $  209,202
                                                    ==========       ==========
                                                                     
4.     INCOME TAXES

             The income tax benefit (expense) for the three and six months ended
       June 30, 1998 is $662 and $(334), respectively.

             The  Company  has  recorded  a gross  deferred  tax  asset of $80.0
       million included in other assets  reflecting the benefit of net operating
       loss  carryforwards and various book tax temporary  differences.  The net
       operating  loss  carryforward  for federal income tax purposes as of June
       30, 1998 is $100.3  million of which $13.7  million of the net  operating
       loss carryforward will expire in the year 2010, $33.2 million will expire
       in the year 2011,  $39.3 million will expire in the year 2012,  and $14.1
       million  will  expire in the year  2018.  In order to fully  realize  the
       deferred  tax asset,  the Company  will need to generate  future  taxable
       income prior to expiration of the net operating  loss  carryforwards.  In
       December  1997,  the Company  established a valuation  allowance of $24.1
       million against the deferred tax assets. In the first and second quarters
       of 1998,  the Company  increased its valuation  allowance by $4.7 million
       and $3.5 million, respectively,  resulting in a net deferred tax asset of
       $47.7 million.  Management believes,  based upon the Company's history of
       prior operating results, its current circumstances,  and its expectations
       for the future,  that taxable income of the Company will more likely than
       not be  sufficient  to fully  utilize the net deferred tax asset of $47.7
       million recorded at June 30, 1998, prior to expiration. The amount of the
       deferred tax asset considered  realizable,  however,  could be reduced if
       estimates  of  future  taxable  income  during  the  net  operating  loss
       carryforward period are reduced.


                                       7
<PAGE>



5.     CONTINGENCIES

              On February 14, 1995,  Pitney Bowes, Inc. ("Pitney Bowes") filed a
       complaint against Sudbury Systems,  Inc. ("Sudbury") in the United States
       District court for the District of Connecticut  alleging  intentional and
       wrongful  interference with Pitney Bowes's plans to sell the Company. The
       complaint  seeks  damages  and a  declaratory  judgment  relating  to the
       validity  of a  patent  owned by  Sudbury  entitled  "Rapid  Simultaneous
       Multiple Access Information Storage and Retrieval System" and the alleged
       infringement  thereof by the Company.  Sudbury responded by answering the
       complaint and filing a third-party complaint against the Company alleging
       patent  infringement  and seeking  preliminary  and permanent  injunctive
       relief and treble damages. 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 Stock and Asset
       Purchase  Agreement,   as  amended  August  11,  1995  (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>


6.     SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
       INFORMATION

             The consolidated  financial  statements include the Company and all
       majority-owned  subsidiaries  as  follows:  Dictaphone  Corporation  U.S.
       ("Dictaphone  U.S."), and Dictaphone Canada Ltd/Ltee,  Dictaphone Company
       Ltd.,  Dictaphone   Deutschland  GmbH,  Dictaphone   Netherlands  BV  and
       Dictaphone International A.G. (together "Dictaphone Non-U.S.").

             Dictaphone  U.S.  has  fully  and  unconditionally  guaranteed  the
       repayment of $200,000 of senior  subordinated  notes (the "Notes") issued
       to finance the  acquisition  of the Company from Pitney Bowes.  The Notes
       are  subordinate  to financing of the Credit  Agreement,  dated August 7,
       1995, as amended by four amendments to Credit  Agreement,  dated June 28,
       1996, June 27, 1997,  July 21, 1997 and November 14, 1997  (collectively,
       the "Credit Agreement"),  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 B Term
       Loan due June 30, 2002 (the "Tranche B Loan"), a $62.75 million Tranche C
       Term Loan due June 30, 2003 (the  "Tranche C Loan" and together  with the
       Tranche  B 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.  is not a guarantor of the Notes.  In January  1998,
       Dictaphone  Corporation  was merged into Dictaphone  Corporation  (U.S.),
       whereupon  the  surviving  corporation  changed  its name to  "Dictaphone
       Corporation".



                                       9
<PAGE>




6.     SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
       INFORMATION (continued)

             The  following  are the  supplemental  consolidating  statements of
       operations  for the three and six month  periods  ended June 30, 1997 and
       1998,  the  supplemental  consolidating  balance sheet  information as of
       December 31, 1997 and June 30, 1998,  and cash flow  information  for the
       six month periods ended June 30, 1997 and 1998.

<TABLE>

                                                 DICTAPHONE CORPORATION
                             SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
                                            THREE MONTHS ENDED JUNE 30, 1997

<CAPTION>

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

       <S>                                           <C>             <C>               <C>               <C>       
       Revenue from:
         Product sales and rentals                   $   41,381       $    8,337        $   (2,956)       $   46,762
         Contract manufacturing sales                    10,574              ---               ---            10,574
         Support services                                19,750            2,855               ---            22,605
                                                     ----------       ----------        ----------        ----------
             Total revenues                              71,705           11,192            (2,956)           79,941
                                                     ----------       ----------        ----------        ----------

       Costs and expenses:
         Cost of sales, rentals and support services     50,504            8,158            (3,032)           55,630
         Selling and administrative                      37,254            3,327               ---            40,581
         Research and development                         3,599              ---               ---             3,599
         Interest expense - net and other                 9,650              445               ---            10,095
                                                     ----------       ----------        ----------        ----------
             Total costs and expenses                   101,007           11,930            (3,032)          109,905
                                                     ----------       ----------        ----------        ----------

       Equity (loss) earnings                              (117)             ---               117               ---
                                                     ----------       ----------        ----------        ----------

       (Loss) income before income taxes                (29,419)            (738)              193           (29,964)

       Income tax benefit (expense)                      10,611              304               (31)           10,884
                                                     ----------       ----------        ----------        ----------

       Net (loss) income                             $  (18,808)      $     (434)       $      162        $  (19,080)
                                                     ==========       ==========        ==========        ==========


</TABLE>



                                       10
<PAGE>




6.     SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
       INFORMATION (continued)

<TABLE>

                                                 DICTAPHONE CORPORATION
                             SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
                                            THREE MONTHS ENDED JUNE 30, 1998

<CAPTION>

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

       <S>                                          <C>              <C>               <C>               <C>       
       Revenue from:
         Product sales and rentals                   $   49,435       $    4,004        $   (1,867)       $   51,572
         Contract manufacturing sales                    11,545              ---               ---            11,545
         Support services                                20,006            1,862               ---            21,868
                                                     ----------       ----------        ----------        ----------
             Total revenues                              80,986            5,866            (1,867)           84,985
                                                     ----------       ----------        ----------        ----------

       Costs and expenses:
         Cost of sales, rentals and support services     45,405            3,746            (2,194)           46,957
         Selling and administrative                      33,174            2,878               ---            36,052
         Research and development                         3,256              ---               ---             3,256
         Interest expense - net and other                 9,323              770               ---            10,093
                                                     ----------       ----------        ----------        ----------
             Total costs and expenses                    91,158            7,394            (2,194)           96,358
                                                     ----------       ----------        ----------        ----------

       Equity (loss) earnings                              (346)             ---               346               ---
                                                     -----------      ----------        ----------        ----------

       (Loss) income before income taxes                (10,518)          (1,528)              673           (11,373)

       Income tax (expense) benefit                        (187)             982              (133)              662
                                                     ----------       ----------        ----------        ----------

       Net (loss) income                             $  (10,705)      $     (546)       $      540        $  (10,711)
                                                     ==========       ==========        ==========        ==========

</TABLE>



                                       11
<PAGE>



6.     SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
       INFORMATION (continued)

<TABLE>

                                                 DICTAPHONE CORPORATION
                             SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
                                             SIX MONTHS ENDED JUNE 30, 1997

<CAPTION>

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

       <S>                                          <C>              <C>               <C>               <C>       
       Revenue from:
         Product sales and rentals                   $   84,372       $   17,211        $   (5,624)       $   95,959
         Contract manufacturing sales                    19,625              ---               ---            19,625
         Support services                                39,985            5,539               ---            45,524
                                                     ----------       ----------        ----------        ----------
             Total revenues                             143,982           22,750            (5,624)          161,108
                                                     ----------       ----------        ----------        ----------

       Costs and expenses:
         Cost of sales, rentals and support services     89,249           14,949            (5,753)           98,445
         Selling and administrative                      68,502            7,812               ---            76,314
         Research and development                         7,333              ---               ---             7,333
         Interest expense - net and other                19,499            1,414               ---            20,913
                                                     ----------       ----------        ----------        ----------
             Total costs and expenses                   184,583           24,175            (5,753)          203,005
                                                     ----------       ----------        ----------        ----------

       Equity (loss) earnings                              (257)             ---               257               ---
                                                     ----------       ----------        ----------        ----------

       (Loss) income before income taxes                (40,858)          (1,425)              386           (41,897)

       Income tax benefit (expense)                      14,671              365               (53)           14,983
                                                     ----------       ----------        ----------        ----------

       Net (loss) income                             $  (26,187)      $   (1,060)       $      333        $  (26,914)
                                                     ==========       ==========        ==========        ==========

</TABLE>


                                       12
<PAGE>


6.     SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
       INFORMATION (continued)

<TABLE>

                                                 DICTAPHONE CORPORATION
                             SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
                                             SIX MONTHS ENDED JUNE 30, 1998

<CAPTION>

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

       <S>                                          <C>              <C>               <C>               <C>       
       Revenue from:
         Product sales and rentals                   $   96,323       $    9,921        $   (5,025)       $  101,219
         Contract manufacturing sales                    23,492              ---               ---            23,492
         Support services                                40,266            3,833               ---            44,099
                                                     ----------       ----------        ----------        ----------
             Total revenues                             160,081           13,754            (5,025)          168,810
                                                     ----------       ----------        ----------        ----------

       Costs and expenses:
         Cost of sales, rentals and support services     88,559            8,815            (5,405)           91,969
         Selling and administrative                      64,605            6,438               ---            71,043
         Research and development                         7,956              ---               ---             7,956
         Interest expense - net and other                17,641            1,423               ---            19,064
                                                     ----------       ----------        ----------        ----------
             Total costs and expenses                   178,761           16,676            (5,405)          190,032
                                                     ----------       ----------        ----------        ----------

       Equity (loss) earnings                            (1,098)             ---             1,098               ---
                                                     ----------       ----------        ----------        ----------

       (Loss) income before income taxes                (19,778)          (2,922)            1,478           (21,222)

       Income tax (expense) benefit                      (1,360)           1,168              (142)             (334)
                                                     ----------       ----------        ----------        ----------

       Net (loss) income                             $  (21,138)      $   (1,754)       $    1,336        $  (21,556)
                                                     ==========       ==========        ==========        ==========

</TABLE>



                                       13
<PAGE>


6.     SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
       INFORMATION (continued)

<TABLE>

                                                 DICTAPHONE CORPORATION
                                  SUPPLEMENTAL CONSOLIDATING BALANCE SHEET INFORMATION
                                                    DECEMBER 31, 1997

<CAPTION>

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

       <S>                                          <C>              <C>               <C>               <C>       
       ASSETS
       Current assets:
         Cash                                        $    8,276       $    2,001        $      ---        $   10,277
         Accounts receivable                             64,884            8,699            (1,644)           71,939
         Inventories                                     45,962            3,645              (828)           48,779
         Other current assets                             7,869            3,806               ---            11,675
                                                     ----------       ----------        ----------        ----------
           Total current assets                         126,991           18,151            (2,472)          142,670

       Investments in subsidiaries                       34,170              ---           (34,170)              ---
       Fixed assets, net                                 32,041            3,290               ---            35,331
       Intangibles, net                                 214,070           15,252               ---           229,322
       Deferred financing costs                          10,900              ---               ---            10,900
       Other assets                                      49,131            2,383               323            51,837
                                                     ----------       ----------        ----------        ----------
       Total assets                                  $  467,303       $   39,076        $  (36,319)       $  470,060
                                                     ==========       ==========        ===========       ==========

       LIABILITIES AND STOCKHOLDERS'
       EQUITY
       Current liabilities:
         Accounts payable, interest payable
          and accrued liabilities                    $   48,649       $    6,602        $   (1,794)       $   53,457
         Advance billings                                34,252            2,932               ---            37,184
         Current portion of long-term debt                  628              167               ---               795
                                                     ----------       ----------        ----------        ----------
           Total current liabilities                     83,529            9,701            (1,794)           91,436
       Long-term debt                                   342,372           17,935           (17,491)          342,816
       Other liabilities                                 10,477               70               ---            10,547
       Stockholders' equity                              30,925           11,370           (17,034)           25,261
                                                     ----------       ----------        ----------        ----------
       Total liabilities and stockholders' equity    $  467,303       $   39,076        $  (36,319)       $  470,060
                                                     ==========       ==========        ==========        ==========

</TABLE>



                                       14
<PAGE>



6.     SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
       INFORMATION (continued)

<TABLE>

                                                 DICTAPHONE CORPORATION
                                  SUPPLEMENTAL CONSOLIDATING BALANCE SHEET INFORMATION
                                                      JUNE 30, 1998

<CAPTION>

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

       <S>                                          <C>              <C>               <C>               <C>       
       ASSETS
       Current assets:
         Cash                                        $    4,658       $    1,238        $      ---        $    5,896
         Accounts receivable                             68,359            5,560            (2,109)           71,810
         Inventories                                     48,115            3,511              (448)           51,178
         Other current assets                             6,920            5,391               ---            12,311
                                                     ----------       ----------        ----------        ----------
           Total current assets                         128,052           15,700            (2,557)          141,195

       Investments in subsidiaries                       31,134              ---           (31,134)              ---
       Fixed assets, net                                 25,407            3,394               ---            28,801
       Intangibles, net                                 195,165           14,037               ---           209,202
       Deferred financing costs, net                     10,048              ---               ---            10,048
       Other assets                                      49,683            2,432               181            52,296
                                                     ----------       ----------        ----------        ----------
       Total assets                                  $  439,489       $   35,563        $  (33,510)       $  441,542
                                                     ==========       ==========        ==========        ==========

       LIABILITIES AND STOCKHOLDERS'
       EQUITY
       Current liabilities:
         Accounts payable, interest payable
          and accrued liabilities                    $   39,175       $    6,449        $   (2,109)       $   43,515
       Advance billings                                  34,473            2,923               ---            37,396
       Current portion of long-term debt                    628              163               ---               791
                                                     ----------       ----------        ----------        ----------
           Total current liabilities                     74,276            9,535            (2,109)           81,702
       Long-term debt                                   342,572           17,852           (17,491)          342,933
       Deferred gain                                      1,767              ---               ---             1,767
       Other liabilities                                 11,102              706               ---            11,808
       Stockholders' equity                               9,772            7,470           (13,910)            3,332
                                                     ----------       ----------        ----------        ----------
       Total liabilities and stockholders' equity    $  439,489       $   35,563        $  (33,510)       $  441,542
                                                     ==========       ==========        ==========        ==========


</TABLE>


                                       15
<PAGE>


6.     SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
       INFORMATION (continued)

<TABLE>

                                                 DICTAPHONE CORPORATION
                             SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
                                             SIX MONTHS ENDED JUNE 30, 1997

<CAPTION>

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

       <S>                                          <C>              <C>               <C>               <C>        
       Operating activities:
         Net loss                                    $  (26,187)      $   (1,060)       $      333        $  (26,914)
         Adjustments to reconcile net loss
          to net cash provided by (used in)
          operating activities:
           Depreciation and amortization                 28,010            1,754               ---            29,764
           Provision for deferred income taxes          (14,797)             (26)               53           (14,770)
           Non-cash provision for inventory
            obsolescence                                  8,875            1,616               ---            10,491
           Change in assets and liabilities:
             Accounts receivable                          3,098           (1,147)           (2,359)             (408)
             Inventories                                 (1,144)           3,110              (129)            1,837
             Other current assets                        (1,065)          (1,813)              ---            (2,878)
             Accounts payable and accrued
              liabilities                                (1,196)          (2,619)            2,506            (1,309)
             Advance billings                            (2,886)             106               ---            (2,780)
             Other assets and other                      (1,963)             256              (524)           (2,231)
                                                     ----------       ----------        ----------        ----------
       Cash (used in) provided by operating
        activities                                       (9,255)             177              (120)           (9,198)
                                                     ----------       ----------        ----------        ----------

       Investing activities:
         Net investment in fixed assets                  (2,895)            (128)              ---            (3,023)
                                                     ----------       ----------        ----------        ----------
       Cash used in investing activities                 (2,895)            (128)              ---            (3,023)
                                                     ----------       ----------        ----------        ----------

       Financing activities:
         Repayment under term loan facility              (5,500)             ---               ---            (5,500)
         Borrowing from revolving credit facility        37,500              ---               ---            37,500
         Repayment under revolving credit facility      (20,500)             ---               ---           (20,500)
         Other                                             (612)            (807)              120            (1,299)
                                                     ----------       ----------        ----------        ----------
       Cash provided by (used in) financing
        activities                                       10,888             (807)              120            10,201
                                                     ----------       ----------        ----------        ----------

       Effect of exchange rate changes on cash              ---              (86)              ---               (86)
                                                     ----------       ----------        ----------         ---------

       Decrease in cash                                  (1,262)            (844)              ---            (2,106)

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

       Cash, end of period                           $    5,307       $      514        $      ---        $    5,821
                                                     ==========       ==========        ==========        ==========

</TABLE>


                                       16
<PAGE>


6.     SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
       INFORMATION (continued)

<TABLE>

                                                 DICTAPHONE CORPORATION
                             SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
                                             SIX MONTHS ENDED JUNE 30, 1998

<CAPTION>

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

       <S>                                          <C>              <C>               <C>               <C>        
       Operating activities:
         Net loss                                    $  (21,138)      $   (1,754)       $    1,336        $  (21,556)
         Adjustments to reconcile net loss
          to net cash provided by (used in)
          operating activities:
           Depreciation and amortization                 22,699            1,405               ---            24,104
           Provision for deferred income taxes            1,150             (106)              142             1,186
           Change in assets and liabilities:
              Accounts receivable                        (3,475)           2,832               465              (178)
              Inventories                                (2,153)              44              (380)           (2,489)
              Other current assets                          949           (1,662)              ---              (713)
              Accounts payable and accrued
               liabilities                               (9,673)             339              (315)           (9,649)
              Advance billings                              221               63               ---               284
              Other assets and other                     (3,050)             301            (3,036)           (5,785)
                                                     ----------       ----------        ----------        ----------
       Cash (used in) provided by operating
        activities                                      (14,470)           1,462            (1,788)          (14,796)
                                                     ----------       ----------        -----------       ----------

       Investing activities:
         Net investment in fixed assets                  (4,263)            (339)              ---            (4,602)
         Sale of building                                14,000              ---               ---            14,000
                                                     ----------       ----------        ----------        ----------
         Cash provided by (used in) investing
          activities                                      9,737             (339)              ---             9,398

       Financing activities:
         Repayment under term loan facility              (1,800)             ---               ---            (1,800)
         Borrowing from revolving credit facility        29,000              ---               ---            29,000
         Repayment under revolving credit facility      (27,000)             ---               ---           (27,000)
         Other                                              915           (1,845)            1,788               858
                                                     ----------       ----------        ----------        ----------
       Cash provided by (used in) financing
        activities                                        1,115           (1,845)            1,788             1,058
                                                     ----------       -----------       ----------        ----------

       Effect of exchange rate changes on cash              ---              (41)              ---               (41)

       Decrease in cash                                  (3,618)            (763)              ---            (4,381)

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

       Cash, end of period                           $    4,658       $    1,238        $      ---        $    5,896
                                                     ==========       ==========        ==========        ==========
</TABLE>


                                       17
<PAGE>


7.     COMPREHENSIVE INCOME

             The Company adopted Statement of Financial Accounting Standards No.
       130, "Reporting Comprehensive Income" ("SFAS 130") as of January 1, 1998.
       SFAS 130 establishes standards for reporting and display of comprehensive
       income and its components.

             Total comprehensive income for the three and six months ending June
       30, 1997 and 1998 consists of the following:

<TABLE>
<CAPTION>

                                                      THREE MONTHS ENDED                    SIX MONTHS ENDED
                                                           JUNE 30,                             JUNE 30,
                                                      ------------------                    ----------------

                                                     1997             1998                 1997              1998
                                                     ----             ----                 ----              ----

       <S>                                     <C>              <C>                  <C>               <C>         
       Net loss                                 $   (19,080)     $   (10,711)         $   (26,914)      $   (21,556)

       Foreign currency translation
        adjustments                                     201             (111)                (749)             (358)
                                                -----------      -----------          -----------       -----------

       Total comprehensive income               $   (18,879)     $   (10,822)         $   (27,663)      $   (21,914)
                                                ===========      ===========          ===========       ===========
</TABLE>

8.     SALE/LEASEBACK AGREEMENT

             In May 1998, the Company  entered into a  sale/leaseback  agreement
       for the sale of its Stratford, Connecticut land and headquarters facility
       (which is  included  in  "property,  plant  and  equipment,  net").  Cash
       proceeds from the sale totalled $14.0 million. The net proceeds were used
       by the Company to reduce amounts outstanding under the Term Loans and the
       Revolving Credit Facility. The Company realized a gain of $1.8 million on
       the sale,  net of a $4.1 million  writedown of associated  goodwill.  The
       gain on the sale  will be  recognized  over the  term of the  lease.  The
       lease, which was recorded as an operating lease, has a term of 20 years.

             Future minimum lease payments are as follows:

             YEARS ENDED DECEMBER 31,

                    1998                                             $     919
                    1999                                                 1,452
                    2000                                                 1,452
                    2001                                                 1,452
                    2002                                                 1,452
                    Later years                                         24,796
                                                                     ---------
                           Total minimum lease payments              $  31,523
                                                                     =========



                                       18
<PAGE>



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


       OVERVIEW
<TABLE>
<CAPTION>
                                                                THREE MONTHS ENDED              SIX MONTHS ENDED
                                                                     JUNE 30,                       JUNE 30,
                                                             ------------------------          -------------------
                                                               1997            1998            1997           1998
                                                               ----            ----            ----           ----
                                                                                  (IN MILLIONS)
                                                                                   (UNAUDITED)
       <S>                                                 <C>            <C>            <C>            <C>     
       Total revenue                                        $    79.9      $  85.0        $  161.1       $  168.8

       Cost of sales, rentals and support services               55.6         47.0            98.5           92.0
       Selling and administrative expense (1)                    40.6         36.0            76.3           71.0
       Research and development                                   3.6          3.3             7.3            8.0
                                                             --------       ---------        --------      ---------
           Operating loss                                       (19.9)        (1.3)          (21.0)          (2.2)
                                                             --------       ---------        --------      ---------

       Net interest expense and other                            10.1         10.1            20.9           19.0
       Income tax (benefit) expense                             (10.9)        (0.7)          (15.0)           0.4
                                                             --------       ---------        --------      ---------

       Net loss                                             $   (19.1)     $ (10.7)       $  (26.9)      $  (21.6)
                                                            ==========     ==========     ===========    ===========

       EBITDA (2)                                           $     4.3      $  11.8        $   17.4       $   22.2
                                                            ==========     ==========     ===========    ===========
</TABLE>

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


       (1)    Includes amortization of intangibles.

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



                                       19
<PAGE>


<TABLE>
<CAPTION>

                                                                THREE MONTHS ENDED              SIX MONTHS ENDED
                                                                     JUNE 30,                       JUNE 30,
                                                               --------------------            -------------------
                                                               1997            1998            1997           1998
                                                               ----            ----            ----           ----
                                                                                  (IN MILLIONS)
                                                                                   (UNAUDITED)
       <S>                                                  <C>            <C>              <C>           <C> 
       Revenue from:
           Sales:
                Integrated Voice Systems                     $   11.0       $    11.5        $   22.6      $    24.0
                Integrated Health Systems                         7.3            10.7            16.7           20.1
                Communication Recording Systems                  13.7            16.4            25.6           29.4
                Customer Service Parts                            4.4             4.7             9.0            9.1
                International and Dealer Operations               9.9             7.9            21.1           18.0
           Rentals                                                0.5             0.3             1.0            0.6
                                                             --------       ---------        --------      ---------
                    Product sales and rentals                    46.8            51.5            96.0          101.2

           Contract Manufacturing                                10.5            11.6            19.6           23.5

           Support service:
                Customer Service                                 19.3            19.9            39.0           39.2
                Application & Training Specialists                0.5             0.2             1.0            1.1
                International and Dealer Operations               2.8             1.8             5.5            3.8
                                                             --------       ---------        --------      ---------
                    Total support service                        22.6            21.9            45.5           44.1

       Total revenue                                         $   79.9       $    85.0        $  161.1      $   168.8
                                                             ========       =========        ========      =========
</TABLE>


RESULTS OF OPERATIONS - SECOND QUARTER 1998 VS. SECOND QUARTER 1997

       Total revenue  increased  6.3% to $85.0 million in the second  quarter of
1998 from $79.9 million for the second quarter of 1997. This increase in revenue
is attributable  to higher product sales revenue from  Integrated  Voice Systems
("I.V.S."),  Integrated  Health  Systems  ("I.H.S."),  Communications  Recording
Systems  ("C.R.S.") and higher revenue from Contract  Manufacturing and Customer
Service  (including  sale  of  parts),  offset  in part by  lower  revenue  from
International  and Dealer  Operations and Application  and Training  Specialists
("A.T.S.").

       I.V.S.  revenue increased 4.2% to $11.5 million from $11.0 million due to
higher sales of the  Company's  Enterprise  Express(TM)  and For the  Record(TM)
Court Recording  System  products.  I.V.S.  orders in the second quarter of 1998
declined  24.6% to $11.2  million  from $14.8  million in the second  quarter of
1997.  I.H.S.  revenue increased 46.4% to $10.7 million from $7.3 million due to
increased  Enterprise  Express(TM) sales. I.H.S. orders in the second quarter of
1998 increased 55.0% to $13.4 million from $8.7 million in the second quarter of
1997. C.R.S.  revenue increased 20.2% to $16.4 million from $13.7 million due to
increased  Prolog(TM)/Guardian(TM) and Insight(TM) installations.  C.R.S. orders
in the  second  quarter  of 1998  increased  14.8% to $16.3  million  from $14.2
million in the second quarter of 1997.  Customer Service revenue (including sale
of parts)  increased  3.9% to $24.6  million  from $23.7  million  due to higher
proprietary  product service contract and warranty revenue,  partially offset by
lower  installation  revenue.  Sales and service revenue from  International and
Dealer Operations declined 23.2% to $9.7 million from $12.7 million due to lower
sales of system,  desktop/portable and C.R.S. products and lower service revenue
as  well  as  $0.1  million  of  unfavorable  currency  exchange.   Orders  from
International and Dealer Operations declined 31.2% to $6.6 million in the second
quarter  of 1998 from $9.6  million  in the  second  quarter  of 1997.  Contract
Manufacturing  revenue increased 9.4% to $11.6 million from $10.5 million due to
growth in new Contract Manufacturing customers.


                                       20
<PAGE>


       Cost of sales,  rentals  and  support  services  declined  15.6% to $47.0
million  (55.3% of  revenue)  during the  second  quarter of 1998 from the $55.6
million (69.6% of revenue) in the second quarter of 1997.  Excluding  additional
depreciation  and  amortization  expense  associated  with  purchase  accounting
adjustments  related to the  Acquisition,  cost of sales,  rentals  and  support
services would have declined by 13.4 percentage points to 55.1%. This decline is
attributable  to a $10.5 million charge in the second quarter of 1997 for excess
service parts and field stock  inventory  associated  with products  replaced by
Enterprise  Express(TM).  Higher realized prices for C.R.S. and I.H.S.  products
and lower Customer Service parts cost also accounted for the decline.

       Selling  and   administrative   expenses   (including   amortization   of
intangibles)  declined  11.2% to $36.0  million  (42.4% of  revenue)  during the
second  quarter  of 1998 from $40.6  million  (50.8% of  revenue)  in the second
quarter of 1997.  Excluding  additional  depreciation and  amortization  expense
associated with purchase  accounting  adjustments  related to the Acquisition of
$7.8  million  and  $9.3  million  for the  second  quarter  of 1998  and  1997,
respectively,  selling and  administrative  expenses would have declined by $3.1
million  from the second  quarter of 1997 to the  second  quarter of 1998.  This
decline is attributable to a $2.3 million  severance  provision  recorded in the
second quarter of 1997 in addition to lower I.V.S. and I.H.S.  selling expenses,
as  well  as  lower  employee  benefit  and  property  tax  expenses.  Partially
offsetting  these expense  reductions  were higher C.R.S.  selling  expenses and
increased manufacturing expenses associated with the Company's assembly facility
start-up.

       Research and development expenses of $3.3 million declined 9.5% from $3.6
million as increased software development expenses qualified for capitalization.

       The Company  recorded an operating loss of $1.3 million during the second
quarter of 1998  compared to an operating  loss of $19.9  million for the second
quarter  of 1997.  Excluding  the  impact  of  purchase  accounting  adjustments
associated with the Acquisition of $8.0 million and $10.2 million for the second
quarter of 1998 and 1997, respectively, operating profit would have increased by
$16.4 million due to second quarter 1997 charges for inventory  obsolescence and
severance  as well  as  higher  revenue,  higher  price  realization  and  lower
operating  expenses.  Operations were also impacted by favorable  adjustments to
estimated  sales  and  warranty  reserves  offset  by an  increase  in  accounts
receivable reserves in the second quarter.

       The  Company has  recorded a gross  deferred  tax asset of $80.0  million
included  in  other  assets   reflecting  the  benefit  of  net  operating  loss
carryforwards and various book tax temporary differences. The net operating loss
carryforward  for  federal  income tax  purposes  as of June 30,  1998 is $100.3
million of which  $13.7  million of the net  operating  loss  carryforward  will
expire in the year 2010,  $33.2  million  will  expire in the year  2011,  $39.3
million will expire in the year 2012,  and $14.1 million will expire in the year
2018. In order to fully realize the deferred tax asset, the Company will need to
generate  future  taxable  income prior to expiration of the net operating  loss
carryforwards.  In December 1997, the Company  established a valuation allowance
of $24.1  million  against  the  deferred  tax  assets.  In the first and second
quarters of 1998, the Company increased its valuation  allowance by $4.7 million
and $3.5 million,  respectively,  resulting in a net deferred tax asset of $47.7
million.  Management  believes,  based  upon  the  Company's  history  of  prior
operating  results,  its current  circumstances,  and its  expectations  for the
future,  that  taxable  income  of the  Company  will  more  likely  than not be
sufficient to fully utilize the net deferred tax asset of $47.7 million recorded
at June 30,  1998,  prior to  expiration.  The amount of the  deferred tax asset
considered realizable,  however, could be reduced if estimates of future taxable
income during the net operating loss carryforward period are reduced.


                                       21
<PAGE>



RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1998 VS. SIX MONTHS 
  ENDED JUNE 30, 1997

       Total revenue  increased  4.8% to $168.8 million for the first six months
of 1998 from $161.1  million for the first six months of 1997.  This increase in
revenue is  attributable  to higher  product sales revenue from I.V.S.,  I.H.S.,
C.R.S.,  and higher revenue from Contract  Manufacturing,  A.T.S.,  and Customer
Service  (including  sale  of  parts),  offset  in part by  lower  revenue  from
International and Dealer Operations.

       I.V.S.  revenue increased 6.0% to $24.0 million from $22.6 million due to
higher Enterprise  Express(TM) sales.  I.V.S.  orders in the first six months of
1998 declined  11.1% to $23.8 million from $26.8 million in the first six months
of 1997.  I.V.S.  order  backlog at June 30, 1998  declined 3.3% to $6.2 million
versus order backlog at December 31, 1997.  I.H.S.  revenue  increased  20.6% to
$20.1 million from $16.7 million due to increased Enterprise  Express(TM) sales.
I.H.S.  orders for the first six months of 1998 increased 19.7% to $20.0 million
from $16.7 million in the first six months of 1997. I.H.S. order backlog at June
30, 1998  declined  2.0% to $11.6  million  versus order backlog at December 31,
1997. C.R.S.  revenue increased 14.9% to $29.4 million from $25.6 million due to
increased  Prolog(TM)/Guardian(TM) and Insight(TM) installations.  C.R.S. orders
for the first six  months of 1998  increased  2.2% to $28.6  million  from $28.0
million in the first six months of 1997.  C.R.S.  order backlog at June 30, 1998
declined  8.7% to $6.8  million  versus  order  backlog at  December  31,  1997.
Customer  service  revenue  (including  sale of parts)  increased  0.7% to $48.3
million from $48.0 million as increased  warranty  revenue offset  reductions in
proprietary  product  contract,  hourly,  installation and integration  revenue.
A.T.S. revenue increased 8.6% to $1.1 million from $1.0 million due to increased
customer training in support of I.V.S.,  I.H.S. and C.R.S.  products.  Sales and
service revenue from International and Dealer Operations declined 18.1% to $21.8
million  from  $26.6  million  due  to  lower  sales  of  systems,   C.R.S.  and
desktop/portable  products and lower service  revenue as well as $0.3 million of
unfavorable  currency exchange.  Orders from International and Dealer Operations
for the first six  months of 1998  declined  22.4% to $15.8  million  from $20.4
million in the first six  months of 1997.  International  and Dealer  Operations
order  backlog at June 30, 1998  declined  51.4% to $1.0  million  versus  order
backlog at December 31, 1997. Contract  Manufacturing revenue increased 19.7% to
$23.5 million from $19.6 million due primarily to growth from existing  Contract
Manufacturing customers.

       Cost of  sales,  rentals  and  support  services  declined  6.6% to $92.0
million  (54.5% of  revenue)  during  the first  six  months of 1998 from  $98.5
million  (61.1%  of  revenue)  for the  first  six  months  of  1997.  Excluding
additional  depreciation  and  amortization  expense  associated  with  purchase
accounting  adjustments related to the Acquisition,  cost of sales,  rentals and
support  services  would have declined by 5.7 percentage  points to 54.3%.  This
decline is  attributable to a $10.5 million charge in the second quarter of 1997
for inventory  obsolescence,  offset in part by lower C.R.S.  price realization,
higher Customer  Service field and technical  support costs and a higher content
of low margin Contract Manufacturing revenue.

       Selling  and   administrative   expenses   (including   amortization   of
intangibles)  declined 6.9% to $71.0 million (42.1% of revenue) during the first
six  months of 1998 from  $76.3  million  (47.4% of  revenue)  for the first six
months of 1997.  Excluding  additional  depreciation  and  amortization  expense
associated with purchase  accounting  adjustments  related to the acquisition of
$15.7  million  and $18.9  million  for the  first six  months of 1998 and 1997,
respectively,  selling and  administrative  expenses would have declined by $2.1
million from the first six months of 1997 to the first six months of 1998.  This
decline is  attributable  to a $2.3  million  severance  provision in the second
quarter of 1997, lower I.V.S.  and I.H.S.  selling expenses and lower management
compensation  and property tax expenses,  partially  offset by increased  C.R.S.
selling costs and start-up costs associated with the Company's  Milford assembly
facility.

       Research and development  expenses of $8.0 million (7.9% of product sales
and rental revenue)  increased 8.5% from $7.3 million (7.6% of product sales and
rental revenue), reflecting increased staffing and compensation.


                                       22
<PAGE>

       The Company  recorded an operating  loss of $2.2 million during the first
six months of 1998 compared to an operating  loss of $21.0 million for the first
six months of 1997.  Excluding  the impact of  purchase  accounting  adjustments
associated with the Acquisition of $16.0 million and $20.7 million for the first
six months of 1998 and 1997, respectively, operating profit would have increased
by $14.1 million due to 1997 charges for inventory  obsolescence  and severance,
and higher revenue.

LIQUIDITY AND CAPITAL RESOURCES

       The  Company's  liquidity  requirements  consists  primarily of scheduled
payments of principal and interest on its  indebtedness,  working  capital needs
and capital  expenditures.  At June 30, 1998, the Company had  outstanding  Term
Loans of  $132.2  million,  a $11.0  million  loan  outstanding  under the $40.0
million  Revolving  Credit  Facility and $200.0  million of Notes.  Availability
under  the  Revolving  Credit  Facility  at June  30,  1998 was  $29.0  million.
Scheduled annual principal  payments on the Term Loans are $0.6 million in 1998,
1999 and  2000.  There  are no  scheduled  reductions  in the  Revolving  Credit
Facility over the next three years.

       In May 1998, the Company entered into a sale/leaseback  agreement for the
sale of its Stratford, Connecticut land and headquarters facility. Cash proceeds
from the sale totalled $14.0 million.  The net proceeds were used by the Company
to reduce  amounts  outstanding  under the Term Loans and the  Revolving  Credit
Facility.  A gain of $1.8  million  was  recorded  on the  sale,  which is being
amortized over the lease term of 20 years.

       In connection with the terms of the Credit Agreement, the Company entered
into interest  rate swap  agreements in November  1995,  effective  February 16,
1996, with an aggregate  notional  principal amount  equivalent to $75.0 million
maturing on February 16, 1999. The swap effectively converts that portion of the
Term Loans to a fixed  rate  component  of 5.8%;  thus,  reducing  the impact of
changes in interest rates, converting the total effective interest rate on fifty
percent of the initial  outstanding  Term Loans to 9.3%. No funds under the swap
agreements are actually borrowed or are to be repaid. Amounts due to or from the
counterparties  are  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 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 June 30, 1998.
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 June 30, 1998,  the fair value
of the Notes was favorable $4.0 million based on dealer quotes.

     Capital expenditures for the first six months of 1998 totaled $5.1 million.
The  Company  does  not  expect  that the  limitation  on  capital  expenditures
contained in the Credit  Agreement  will limit,  in any material  respects,  the
Company's ability to fund capital expenditures.

                                       23

<PAGE>

       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  introduced a number of new  products in its target  markets in 1997 and
plans to introduce additional new products in 1998 which are expected to enhance
future revenues and liquidity of the Company. However, there can be no assurance
that the Company will be able to implement its plans to introduce  such products
in a timely  fashion,  or that such products will meet the  expectations  of the
Company for either  revenues or  profitability.  The Company  believes that cash
flows  from  operating  activities,  the  successful  introduction  of  its  new
products, and provisions under the Credit Agreement for the sale or financing of
certain  assets,  as well as its ability to borrow  under the  Revolving  Credit
Facility,  will be  adequate to meet the  Company's  debt  service  obligations,
working  capital  needs and planned  capital  expenditures  for the  foreseeable
future.

     On August  4,  1998,  the  Securities  and  Exchange  Commission  issued an
interpretation,  "Disclosure  of Year 2000  Issues  and  Consequences  by Public
Companies,  Investment Advisers,  Investment Companies, and Municipal Securities
Issuers", which provides guidance on disclosure about Year 2000 issues in public
filings.   The  Company  is  aware  of  this  interpretation  and  is  currently
accumulating  the necessary  information  to comply with the  provisions of this
release in subsequent filings. The Company remains actively engaged in resolving
issues associated with the Year 2000 challenge and is performing  assessments of
its internal systems, products, physical plant and infrastructure, and is making
inquiries  with respect to Year 2000  compliance of certain of its customers and
suppliers. The Company is also making necessary modifications to resolve related
Year 2000  issues  and  anticipates  completion  of  modifications  and  testing
programs by mid 1999.

     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 previously  discussed
herein.

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  5  to  the  Company's  Condensed  Consolidated  Statements  of
Operations (Unaudited) which is incorporated herein by reference.

ITEM 6.      EXHIBITS AND REPORTS ON FORM 8-K
             --------------------------------

       (a)   EXHIBITS

                10.20     --   Agreement of Purchase and Sale of  Stratford,
                               CT property between  Dictaphone  Corporation and
                               Stratford, CT Business Trust, dated May 14, 1998.

                10.21     --   Lease  Agreement  of  Stratford,  CT property
                               between Dictaphone Corporation and Stratford, CT
                               Business Trust, dated May 14, 1998.

                   27     --   Financial Data Schedule.

                                       24

<PAGE>

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

                    There  were no  Reports  on Form 8-K  filed  by the  Company
              during the three months ended June 30, 1998.



                                       25
<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:  August 14, 1998                         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:    Senior Vice President,
                                                  Chief Financial Officer and 
                                                  Director (Principal Financial
                                                     and Accounting Officer)


                                       26
<PAGE>



                                  EXHIBIT INDEX


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

   10.20  --   Agreement   of  Purchase   and  Sale  of 
               Stratford,  CT  property  between  Dictaphone
               Corporation  and Stratford CT Business Trust, 
               dated May 14, 1998.
      
   10.21  --   Lease Agreement of Stratford,  CT property  
               between Dictaphone  Corporation and Stratford,   
               CT Business Trust, dated May 14, 1998.  
   
      27  --   Financial Data Schedule.




                                       27