SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

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


                                    FORM 10-Q

(Mark One)

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

      For the quarterly period ended September 30, 1996

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

      For the transition period from        to               .


                        Commission File Number: 33-93464

                             DICTAPHONE CORPORATION
             (Exact Name of Registrant as Specified in Its Charter)


Delaware                                   13-3838908
(State or other jurisdiction of            (I.R.S. Employer Identification No.)
 incorporation or organization)


                             3191 Broadbridge Avenue
                               Stratford, CT 06497
                                 (203) 381-7000
                    (Address of principal executive offices,
                        including zip code, and telephone
                          number, including area code)


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

       Indicate by check mark whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.

             YES     X                      NO  ____

Number of Shares of Common Stock, Par Value $.01, outstanding as of 
November 8, 1996:  9,480,000

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

         DICTAPHONE CORPORATION (Successor Company)

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

          Condensed Consolidated Statement of Operations for
          the Seven Weeks Ended September 30, 1995 (Unaudited)             3

          Condensed Consolidated Balance Sheets as of September
          30, 1996 (Unaudited) and December 31, 1995                       4

          Condensed Consolidated Statement of Cash Flow for the
          Nine Months Ended September 30, 1996 (Unaudited)                 5

          Condensed Consolidated Statement of Cash Flow for the
          Seven Weeks Ended September 30, 1995 (Unaudited)                 6

          Notes to Consolidated Financial Statements (Unaudited)      7 - 17

         DICTAPHONE CORPORATION (Predecessor Company)

          Combined Statements of Income for the Six and Thirty-two
          Weeks Ended August 11, 1995 (Unaudited)                         18

          Combined Statement of Cash Flow for the Thirty-two Weeks
          Ended August 11, 1995 (Unaudited)                               19

          Notes to Combined Financial Statements (Unaudited)         20 - 22


ITEM 2.  Management's Discussion and Analysis of Financial
         Condition and Results of Operations                         23 - 28

PART II.  OTHER INFORMATION

ITEM 1.   Legal Proceedings                                               29

ITEM 6.   Exhibits and Reports on Form 8-K                                29


<PAGE>



                         PART I - FINANCIAL INFORMATION


ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>

                   DICTAPHONE CORPORATION (SUCCESSOR COMPANY)

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

<CAPTION>

                                                      THREE MONTHS   NINE MONTHS
                                                          ENDED         ENDED
                                                       SEPTEMBER      SEPTEMBER 
                                                        30, 1996       30, 1996
                                                      ------------   -----------
Revenues:
<S>                                                     <C>            <C>     
     Sales and rentals ........................         $ 60,301       $180,526
     Support services .........................           23,146         68,632
                                                        --------       --------

       Total revenue ..........................           83,447        249,158
                                                         --------      --------

Costs and expenses:

     Cost of sales and rentals ...................        31,316         96,510

     Selling, service and administrative .........        40,859        121,325

     Amortization of intangibles .................        10,028         31,942

     Research and development ....................         3,839         11,422
                                                       ---------      ---------

Operating loss ...................................        (2,595)       (12,041)

Interest expense .................................        10,910         32,369

Other (income) expense - net .....................          (203)          (267)
                                                       ---------      ---------

Loss before income taxes .........................       (13,302)       (44,143)

Income tax benefit ...............................         4,797         16,318
                                                       ---------      ---------

     Net loss ....................................        (8,505)       (27,825)

     Stock dividends on PIK Preferred Stock ......           593          1,725
                                                       ---------      ---------

     Net loss applicable to Common Stock .........     $  (9,098)     $ (29,550)
                                                       =========      =========

     Net loss per share of Common Stock ..........     $   (0.96)     $   (3.12)
                                                       =========      =========

</TABLE>


     See accompanying notes to condensed consolidated financial statements.

  
<PAGE>

<TABLE>


                   DICTAPHONE CORPORATION (SUCCESSOR COMPANY)

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


<CAPTION>

                                                                     SEVEN WEEKS
                                                                        ENDED
                                                                      SEPTEMBER
                                                                       30, 1995
                                                                     -----------
Revenues:
<S>                                                                     <C>    
     Sales and rentals .......................................          $39,103
     Support services ........................................           13,118
                                                                        -------

         Total revenue .......................................           52,221
                                                                        -------

Costs and expenses:

     Cost of sales and rentals ...............................           23,755

     Selling, service and administrative .....................           22,587

     Amortization of intangibles .............................            5,999

     Research and development ................................            1,133
                                                                         ------

Operating loss ...............................................           (1,253)

Interest expense .............................................            5,787
                                                                         ------

Loss before income taxes .....................................           (7,040)

Income tax benefit ...........................................            2,523
                                                                         ------

     Net loss ................................................           (4,517)

     Stock dividends on PIK Preferred Stock ..................              290
                                                                       --------

     Net loss applicable to Common Stock .....................         $ (4,807)
                                                                       ========

     Net loss per share of Common Stock ......................         $  (0.51)
                                                                       ========


</TABLE>





     See accompanying notes to condensed consolidated financial statements.

                                                

<PAGE>



                   DICTAPHONE CORPORATION (SUCCESSOR COMPANY)

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

<TABLE>

<CAPTION>
                                                                                                       DECEMBER 31,    SEPTEMBER 30,
                                                                                                          1995             1996
                                                                                                       ------------    -------------
                                                                                                                        (UNAUDITED)

ASSETS
Current assets:
<S>                                                                                                     <C>               <C>      
    Cash .......................................................................................        $  14,279         $   5,087
    Accounts receivable, less allowances of $1,462 and $1,508, respectively ....................           57,256            55,357
    Inventories ................................................................................           66,341            60,376
    Other current assets .......................................................................            9,152            10,898
                                                                                                        ---------         ---------
         Total current assets ..................................................................          147,028           131,718

Property, plant and equipment, net .............................................................           45,690            39,175
Deferred financing costs, net of accumulated amortization of $900
 and $5,124, respectively ......................................................................           18,799            15,308
Intangibles, net of accumulated amortization of $16,968 and $48,912, respectively ..............          307,964           279,616
Prepaid repurchases, leased equipment ..........................................................            7,279             5,596
Other assets ...................................................................................           23,930            44,833
                                                                                                        ---------         ---------
         Total assets ..........................................................................        $ 550,690         $ 516,246
                                                                                                        =========         =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable ...........................................................................        $   7,932         $   7,564
    Interest payable ...........................................................................           10,922             4,552
    Accrued liabilities ........................................................................           42,640            29,260
    Advance billings ...........................................................................           34,466            33,460
    Current portion of long-term debt ..........................................................            7,750            11,452
                                                                                                        ---------         ---------
         Total current liabilities .............................................................          103,710            86,288

Long-term debt .................................................................................          342,250           352,583
Other liabilities ..............................................................................           10,227            11,028
                                                                                                        ---------         ---------
         Total liabilities .....................................................................        $ 456,187         $ 449,899
                                                                                                        ---------         ---------

Commitments and contingencies (Note 6)

Stockholders' equity:
    Cumulative  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 $17,540) .......................................           15,815            17,540
    Common stock ($.01 par value; 20,000,000 shares authorized;
      9,480,000 shares outstanding) ............................................................               95                95
    Notes receivable from stockholders .........................................................           (1,160)           (1,077)
    Additional paid-in capital .................................................................           94,905            94,905
    Treasury stock, at cost ....................................................................             (100)             (170)
    Accumulated deficit ........................................................................          (14,689)          (44,239)
    Accumulated translation adjustment .........................................................             (363)             (707)
                                                                                                        ---------         ---------
         Total stockholders' equity ............................................................           94,503            66,347
                                                                                                        ---------         ---------
         Total liabilities and stockholders' equity ............................................        $ 550,690         $ 516,246
                                                                                                        =========         =========


     See accompanying notes to condensed consolidated financial statements.

</TABLE>
                                             

<PAGE>


<TABLE>

                   DICTAPHONE CORPORATION (SUCCESSOR COMPANY)

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

<CAPTION>

                                                                    NINE MONTHS
                                                                       ENDED
                                                                   SEPTEMBER 30,
                                                                       1996
                                                                   -------------
Operating activities:
<S>                                                                    <C>      
   Net loss .....................................................      $(27,825)
   Adjustments to reconcile net loss to net cash
    provided by (used in) operating activities:
      Depreciation and amortization (including $5,079
      of nonrecurring charge) ...................................        55,116
      Provision for deferred income taxes .......................       (17,018)
      Changes in assets and liabilities:
          Accounts receivable ...................................         1,666
          Inventories ...........................................           816
          Other current assets ..................................        (1,723)
          Accounts payable and accrued liabilities ..............       (11,907)
          Advance billings ......................................        (1,010)
          Other assets and other ................................        (8,004)
                                                                       --------
             Net cash used in operating activities ..............        (9,889)
                                                                       --------

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

Financing activities:
   Repayment under term loan facility ...........................        (5,250)
   Borrowings under revolving credit facility ...................        30,500
   Repayment under revolving credit facility ....................       (12,500)
   Other ........................................................           489
                                                                       --------
      Net cash provided by financing activities .................        13,239
                                                                       --------

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

Decrease in cash ................................................        (9,192)

Cash, beginning of period .......................................        14,279
                                                                       --------

Cash, end of period .............................................      $  5,087
                                                                       ========

SUPPLEMENTAL CASH FLOW INFORMATION:

Interest paid ...................................................      $ 34,467
                                                                       ========
Income taxes paid ...............................................      $  1,289
                                                                       ========

</TABLE>


     See accompanying notes to condensed consolidated financial statements.

                                  

<PAGE>



<TABLE>
                   DICTAPHONE CORPORATION (SUCCESSOR COMPANY)

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


<CAPTION>
                                                                    SEVEN WEEKS
                                                                      ENDED
                                                                   SEPTEMBER 30,
                                                                        1995
                                                                   -------------
Operating activities:
<S>                                                                   <C>       
   Net loss ....................................................      $  (4,517)
   Adjustments to reconcile net loss to net cash
    provided by (used in) operating activities:
      Depreciation and amortization (including $3,904
      of nonrecurring charge) ..................................         13,592
      Provision for deferred income taxes ......................         (2,886)
      Changes in assets and liabilities:
          Accounts receivable ..................................         (7,357)
          Inventories ..........................................          3,700
          Other current assets .................................            482
          Accounts payable and accrued liabilities .............         11,526
          Advance billings .....................................         (3,161)
          Other assets and other ...............................         (2,337)
                                                                      ---------
             Net cash used in operating activities .............          9,042
                                                                      ---------

Investing activities:
   Payment for acquisition .....................................       (450,000)
   Net investment in fixed assets ..............................           (545)
                                                                      ---------
      Net cash used in investing activities ....................       (450,545)
                                                                      ---------

Financing activities:
   Net proceeds from sale of senior subordinated notes .........        194,000
   Borrowings under term loan facility .........................        150,000
   Proceeds from sale of common stock ..........................         95,000
   Proceeds from sale of preferred stock .......................         15,000
   Borrowings under revolving credit facility ..................         15,000
   Payment of deferred financing costs .........................        (15,917)
   Repayment of management loans ...............................             53
                                                                      ---------
      Net cash provided by financing activities ................        453,136
                                                                      ---------

Effect of exchange rate changes on cash ........................            (56)
                                                                      ---------

Increase in cash ...............................................         11,577

Cash, beginning of period ......................................          2,463
                                                                      ---------

Cash, end of period ............................................      $  14,040
                                                                      =========

SUPPLEMENTAL CASH FLOW INFORMATION:

Interest paid ..................................................      $     268
                                                                      =========
Income taxes paid ..............................................      $    --
                                                                      =========

</TABLE>

     See accompanying notes to condensed consolidated financial statements.

                                        

<PAGE>



                   DICTAPHONE CORPORATION (SUCCESSOR COMPANY)

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



1.     THE ACQUISITION

             On April 25, 1995, Dictaphone  Corporation (Successor Company) (the
       "Company") entered into a Stock and Asset Purchase Agreement,  as amended
       August 11, 1995 (the  "Acquisition  Agreement")  with  Pitney  Bowes Inc.
       ("Pitney  Bowes")  for  the  purpose  of  acquiring  (the  "Acquisition")
       Dictaphone  Corporation,  the U.S. Dictaphone  Subsidiary of Pitney Bowes
       ("Dictaphone U.S. (Predecessor  Company)") and certain foreign affiliates
       ("Dictaphone  Non-U.S.  (Predecessor  Company)")  as  set  forth  in  the
       Acquisition Agreement (collectively, "Dictaphone Corporation (Predecessor
       Company)" or the "Predecessor  Company"). On August 11, 1995, the Company
       acquired the Predecessor  Company for $462.2 million,  including  certain
       post-closing adjustments as defined in the Acquisition Agreement.


2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

             BASIS OF PRESENTATION.  The capital  structure and accounting basis
       of the assets and  liabilities  of the  Company as of August 12, 1995 and
       thereafter differ from those of the Predecessor  Company in prior periods
       as a result of the  Acquisition.  The  Acquisition is being accounted for
       under the purchase  method of accounting in  accordance  with  Accounting
       Principles Board Opinion No. 16, "Accounting for Business  Combinations."
       The total  purchase  price has been  allocated to tangible and intangible
       assets  and  liabilities  of the  Company  based  on  estimates  of their
       respective  fair  values.  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.

             The condensed  consolidated financial statements of the Company are
       unaudited, as of and for the three and nine month periods ended September
       30,  1996,  and the seven  weeks ended  September  30,  1995,  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.

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

             LOSS PER SHARE.  The  weighted  average  number of shares of common
       stock outstanding used in the computation of loss per share for the three
       and nine month periods ended September 30, 1996 was 9,480,000.





<PAGE>



3.     INVENTORIES

             Inventories consist of the following:

  
<TABLE>

<CAPTION>
                                                 DECEMBER 31,    SEPTEMBER 30,
                                                      1995            1996
                                                   ------------    -------------

<S>                                                   <C>             <C>    
Raw materials and work in process ..............      $18,437         $18,530
Supplies and service parts .....................       19,249          18,674
Finished products ..............................       28,655          23,172
                                                      -------         -------
Total inventories ..............................      $66,341         $60,376
                                                      =======         =======
</TABLE>


4.     INTANGIBLES

             The following  summarizes  intangible  assets,  net of  accumulated
       amortization  of $16,968 and $48,912 at December  31, 1995 and  September
       30, 1996, respectively.


<TABLE>

<CAPTION>
                                                   DECEMBER 31,    SEPTEMBER 30,
                                                      1995             1996
                                                   ------------    -------------

<S>                                                  <C>             <C>     
Goodwill .................................           $140,006        $140,067
Tradenames ...............................             77,104          75,644
Service contracts ........................             34,499          21,742
Non-compete agreement ....................             47,202          34,498
Patents ..................................              9,153           7,665
                                                     --------        --------
                                                     $307,964        $279,616
                                                     ========        ========
</TABLE>


5.     INCOME TAXES

             The benefit for income  taxes for the three and nine month  periods
       ended September 30, 1996 is $4,797 and $16,318, respectively.

     The Company has recorded a deferred tax asset of $38.6 million  included in
     other assets reflecting the benefit of net operating loss carryforwards and
     various  book  tax   temporary   differences.   The  net   operating   loss
     carryforwards  for federal  income tax purposes as of September 30, 1996 is
     approximately  $35.3 million which will expire  beginning in the year 2010.
     Realization is dependent on generating  sufficient  taxable income prior to
     expiration of the net operating loss carryforwards. Although realization is
     not assured, management believes it is more likely than not that all of the
     deferred tax asset will be realized.  Accordingly,  no valuation  allowance
     has been  established  as of September 30, 1996. The amount of the deferred
     tax asset  considered  realizable  could be reduced if  estimates of future
     taxable  income  during  the net  operating  loss  carryforward  period are
     reduced.




                                                  

<PAGE>



6.     COMMITMENTS AND CONTINGENCIES

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

             On June 23,  1995,  a  complaint  was  filed in the  United  States
       District  Court for the  Northern  District of Illinois by Failsafe  Disk
       Company  ("Failsafe") against the Company. The complaint alleges that the
       Company  violated  Sections  1 and 2 of the  Sherman  Antitrust  Act (the
       "Sherman Act") by preventing  Failsafe from selling 10 through 60 channel
       recording tapes which,  according to the complaint,  are equal in quality
       to and  lower in price  than 10  through  60  channel  tapes  sold by the
       Company and others.  On July 5, 1995,  the  complaint was served upon the
       Company.  The complaint seeks damages of $19.2 million,  subject to being
       trebled in accordance  with the  provisions of the Sherman Act,  together
       with Failsafe's costs and expenses, including reasonable attorneys' fees.
       Certain  preliminary  discovery  activities  took  place in late 1995 and
       early  1996.  The  Company  does not  believe  that it has engaged in any
       violations  of the  Sherman Act and intends to  vigorously  contest  this
       litigation.  Although  it is not  possible  to predict the outcome of any
       litigation  with  any  assurance,  based  on  allegations  stated  in the
       complaint,  discovery  proceedings  to date  and  preliminary  settlement
       discussions,  the  Company  does not  believe  this  action  will  have a
       material adverse effect on the Company's consolidated financial condition
       or results of operations.

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

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

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

                                       

<PAGE>



7.     PRO FORMA COMBINED STATEMENTS OF OPERATIONS DATA

     The  following  pro forma  combined  statement of  operations of Dictaphone
     Corporation for the nine months ended September 30, 1995 has been presented
     to  give  effect  to the  Acquisition,  described  in  Note 1, as if it had
     occurred on January 1, 1995. The pro forma  operating  results  include the
     historical results of the Company and Dictaphone  Corporation  (Predecessor
     Company) shown herein  adjusted for interest costs on borrowings to finance
     the Acquisition and purchase accounting adjustments.

<TABLE>


<CAPTION>
                                                     SEPTEMBER 30, 1995
                                            ------------------------------------
                                                                     
                                                         PRO FORMA   
                                            HISTORICAL   ADJUSTMENTS  PRO FORMA
                                            -----------  ----------- -----------

<S>                                          <C>         <C>          <C>      
Total revenue ............................   $ 254,324   $    --      $ 254,324
                                             ---------   ---------    ---------

Net (loss) income ........................   $  12,542   $ (42,200)   $ (29,658)
                                             ---------   ---------    ---------

Net loss applicable to common stock ......   $  12,252   $ (43,635)   $ (31,383)
                                             ---------   ---------    ---------

Earnings per share .......................   $    1.29   $   (4.60)   $   (3.31)
                                             ---------   ---------    ---------
</TABLE>


8.       SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
         INFORMATION

               Dictaphone U.S. has fully and unconditionally guaranteed the
          repayment  of  $200,000  of senior  subordinated  notes (the  "Notes")
          issued to  finance  the  Acquisition.  The Notes  are  subordinate  to
          financing of the Credit Agreement, dated August 7, 1995 and as amended
          on  July  17,  1996  (the  "Credit   Agreement"),   and  other  senior
          indebtedness  as defined in the indenture  pursuant to which the Notes
          were  issued  (the "Note  Indenture").  Dictaphone  Non-U.S.  is not a
          guarantor of the Notes.  Separate  financial  statements of Dictaphone
          U.S. are not presented  because  management has  determined  that they
          would not be meaningful to investors in the Notes.



                                                      

<PAGE>


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

             The  following  are the  supplemental  consolidating  statements of
       operations for the three and nine month periods ended  September 30, 1996
       and the seven weeks ended  September 30, 1995 and cash flows for the nine
       month  period  ended  September  30,  1996,  and the  seven  weeks  ended
       September 30, 1995 and the supplemental  consolidating  balance sheets as
       of December 31, 1995 and September 30, 1996.

<TABLE>
                   DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
               SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
                      THREE MONTHS ENDED SEPTEMBER 30, 1996

<CAPTION>

                                          DICTAPHONE   DICTAPHONE  DICTAPHONE
                                          CORPORATION      U.S.     NON-U.S.      
                                          -----------  ----------  ----------

Revenue from:
<S>                                       <C>         <C>         <C>     
 Sales and rentals ...................    $   --      $ 54,599    $  8,204
 Support services ....................        --        20,259       2,887
                                           --------    --------    --------
     Total revenues ..................        --        74,858      11,091
                                           --------    --------    --------

Costs and expenses:
 Cost of sales and rentals ...........        --        29,502       4,355
 Selling, service and 
   administrative ....................          44      42,448       8,395
 Research and development ............        --         3,839        --   
 Interest expense - net and other ....         644       9,677         386
                                           --------    --------    --------
     Total costs and expenses ........         688      85,466      13,136
                                           --------    --------    --------

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

(Loss) income before income taxes ...        (2,302)    (10,608)     (2,045)

Income tax benefit ..................           250       3,867         695
                                           --------    --------    --------

Net (loss) income ...................      $ (2,052)   $ (6,741)   $ (1,350)
                                           ========    ========    ========


                                         CONSOLIDATING              
                                          ADJUSTMENTS  CONSOLIDATED
                                         ------------- ------------

Revenue from:
 Sales and rentals .................      $ (2,502)   $ 60,301
 Support services ..................          --        23,146
                                          --------    --------
     Total revenues ................        (2,502)     83,447
                                          --------    --------

Costs and expenses:
 Cost of sales and rentals .........        (2,541)     31,316
 Selling, service and 
   administrative ..................          --        50,887
 Research and development ..........          --         3,839
 Interest expense - net and other ..          --        10,707
                                          --------    --------
     Total costs and expenses ......        (2,541)     96,749
                                          --------    --------

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

(Loss) income before income taxes ...        1,653     (13,302)

Income tax benefit ..................          (15)      4,797
                                          --------    --------

Net (loss) income ...................     $  1,638    $ (8,505)
                                          ========    ======== 
</TABLE>

<PAGE>



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


<TABLE>
                   DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
               SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
                      NINE MONTHS ENDED SEPTEMBER 30, 1996


<CAPTION>
                                          DICTAPHONE    DICTAPHONE   DICTAPHONE     
                                          CORPORATION      U.S.       NON-U.S.
                                          -----------   ----------   -----------

Revenue from:
<S>                                        <C>          <C>          <C>      
  Sales and rentals .................      $    --      $ 161,626    $  28,004
  Support services ..................           --         59,969        8,663
                                           ---------    ---------    ---------
      Total revenues ................           --        221,595       36,667
                                           ---------    ---------    ---------

Costs and expenses:
  Cost of sales and rentals .........           --         89,859       15,437
  Selling, service and 
    administrative ..................            151      129,303       23,813
  Research and development ..........           --         11,422         --   
  Interest expense - net and other ..          1,901       28,586        1,601
                                           ---------    ---------    ---------
      Total costs and expenses ......          2,052      259,170       40,851
                                           ---------    ---------    ---------

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

(Loss) income before income taxes ...         (9,391)     (37,575)      (4,184)

Income tax benefit ..................            622       14,170        1,390
                                           ---------    ---------    ---------

Net (loss) income ...................      $  (8,769)   $ (23,405)   $  (2,794)
                                           =========    =========    =========


                                          CONSOLIDATING              
                                           ADJUSTMENTS  CONSOLIDATED
                                          ------------- ------------


Revenue from:
  Sales and rentals .................      $  (9,104)   $ 180,526
  Support services ..................           --         68,632
                                           ---------    ---------
      Total revenues ................         (9,104)     249,158
                                           ---------    ---------

Costs and expenses:
  Cost of sales and rentals .........         (8,786)      96,510
  Selling, service and 
    administrative ..................           --        153,267
  Research and development ..........           --         11,422
  Interest expense - net and other ..             14       32,102
                                           ---------    ---------
      Total costs and expenses ......         (8,772)     293,301
                                           ---------    ---------

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

(Loss) income before income taxes ...          7,007      (44,143)

Income tax benefit ..................            136       16,318
                                           ---------    ---------

Net (loss) income ...................      $   7,143    $ (27,825)
                                           =========    =========
</TABLE>
                                        

<PAGE>



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

<TABLE>

                   DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
               SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS
                      SEVEN WEEKS ENDED SEPTEMBER 30, 1995

<CAPTION>

                                           DICTAPHONE   DICTAPHONE  DICTAPHONE     
                                           CORPORATION     U.S.      NON-U.S.
                                           -----------  ----------  ----------

Revenue from:
<S>                                         <C>         <C>         <C>     
  Sales and rentals .................       $   --      $ 34,512    $  6,055
  Support services ..................           --        11,472       1,646
                                            --------    --------    --------
      Total revenues ................           --        45,984       7,701
                                            --------    --------    --------

Costs and expenses:
  Cost of sales and rentals .........           --        22,077       3,177
  Selling, service and 
    administrative ..................             21      24,792       3,773
  Research and development ..........           --         1,133        --   
  Interest expense - net and other ..          5,524         (28)        291
                                            --------    --------    --------
      Total costs and expenses ......          5,545      47,974       7,241
                                            --------    --------    --------

Equity (loss) earnings ..............         (1,366)       --          --   
                                            --------    --------    --------

(Loss) income before income taxes ...         (6,911)     (1,990)        460

Income tax benefit ..................          2,385         547        (304)
                                            --------    --------    --------

Net (loss) income ...................       $ (4,526)   $ (1,443)   $    156
                                            ========    ========    ========


                                          CONSOLIDATING              
                                           ADJUSTMENTS  CONSOLIDATED
                                          ------------- ------------

Revenue from:
  Sales and rentals .................       $ (1,464)   $ 39,103
  Support services ..................           --        13,118
                                            --------    --------
      Total revenues ................         (1,464)     52,221
                                            --------    --------

Costs and expenses:
  Cost of sales and rentals .........         (1,499)     23,755
  Selling, service and 
    administrative ..................           --        28,586
  Research and development ..........           --         1,133
  Interest expense - net and other ..           --         5,787
                                            --------    --------
      Total costs and expenses ......         (1,499)     59,261
                                            --------    --------

Equity (loss) earnings ..............          1,366        --
                                            --------    --------

(Loss) income before income taxes ...          1,401      (7,040)

Income tax benefit ..................           (105)      2,523
                                            --------    --------

Net (loss) income ...................       $  1,296    $ (4,517)
                                            ========    ========
</TABLE>
                                      

<PAGE>



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

<TABLE>

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

<CAPTION>

                                           DICTAPHONE    DICTAPHONE  DICTAPHONE     
                                           CORPORATION      U.S.       NON-U.S.
                                           -----------   ----------  ----------
ASSETS
<S>                                        <C>          <C>         <C>
Current assets:
  Cash ............................        $    --       $  11,591   $   2,688
  Accounts receivable .............           7,509         50,623       8,567
  Inventories .....................             --          56,139      11,035
  Other current assets ............             --           5,718       3,499
                                           ---------     ---------   ---------
    Total current assets ..........            7,509       124,071      25,789
Note receivable ...................             --           6,821        --   
Investments in subsidiaries .......          446,228          --          --   
Property, plant and equipment, 
  net .............................             --          42,907       2,783
Deferred financing costs, net .....           18,799          --          --   
Intangibles, net ..................            2,455       286,043      19,466
Other assets ......................            1,936        27,633       1,640
                                           ---------     ---------   ---------
Total assets ......................        $ 476,927     $ 487,475   $  49,678
                                           =========     =========   =========


LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
  Accounts payable, interest
   payable and accrued liabilities         $  18,996     $  42,375   $   9,953
  Advance billings ................             --          30,531       3,935
  Current portion of long-term 
    debt ..........................            7,750           --          --   
                                          ---------      ---------   ---------
      Total current liabilities ...          26,746         72,906      13,888
Long-term debt ....................         349,086        332,494      17,491
Other liabilities .................            --            9,748         479
Stockholders' equity ..............         101,095         72,327      17,820
                                          ---------      ---------   ---------
Total liabilities
  and stockholders' equity ........       $ 476,927      $ 487,475   $  49,678
                                          =========      =========   =========


                                          CONSOLIDATING                                                     
                                           ADJUSTMENTS   CONSOLIDATED
                                          -------------  ------------

Current assets:                       
  Cash ............................       $    --        $  14,279
  Accounts receivable .............          (9,443)        57,256
  Inventories .....................            (833)        66,341
  Other current assets ............             (65)         9,152
                                          ---------      ---------
    Total current assets ..........         (10,341)       147,028
Note receivable ...................          (6,821)          --
Investments in subsidiaries .......        (446,228)          --
Property, plant and equipment, 
  net .............................            --           45,690
Deferred financing costs, net .....            --           18,799
Intangibles, net ..................            --          307,964
Other assets ......................            --           31,209
                                          ---------      ---------
Total assets ......................       $(463,390)     $ 550,690
                                          =========      =========

LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
  Accounts payable, interest
   payable and accrued 
     liabilities ..................       $  (9,830)     $  61,494
  Advance billings ................            --           34,466
  Current portion of long-term 
    debt ..........................            --            7,750
                                          ---------      ---------
      Total current liabilities ...          (9,830)       103,710
Long-term debt ....................        (356,821)       342,250
Other liabilities .................            --           10,227
Stockholders' equity ..............         (96,739)        94,503
                                          ---------      ---------
Total liabilities
  and stockholders' equity ........       $(463,390)     $ 550,690
                                          =========      =========

</TABLE>




                                                       

<PAGE>



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

<TABLE>

                   DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
                    SUPPLEMENTAL CONSOLIDATING BALANCE SHEET
                               SEPTEMBER 30, 1996

<CAPTION>

                                            DICTAPHONE   DICTAPHONE  DICTAPHONE     
                                            CORPORATION     U.S.       NON-U.S.
                                            -----------  ----------  ----------

ASSETS
Current assets:
<S>                                         <C>         <C>         <C>      
  Cash ............................         $    --     $   4,210   $     877
  Accounts receivable .............            15,227      49,512       9,257
  Inventories .....................              --        51,664       9,877
  Other current assets ............               215       4,635       6,053
                                            ---------   ---------   ---------
    Total current assets ..........            15,442     110,021      26,064
Note receivable ...................              --        27,567        --   
Investments in subsidiaries .......           451,755        --          --   
Property, plant and equipment, 
  net .............................              --        36,334       2,841
Deferred financing costs, net .....            15,308        --          --   
Intangibles, net ..................             2,145     259,504      17,967
Other assets ......................             2,661      45,516       1,794
                                            ---------   ---------   ---------
Total assets ......................         $ 487,311   $ 478,942   $  48,666
                                            =========   =========   =========


LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
  Accounts payable, interest
   payable and accrued 
     liabilities ..................         $   4,642   $  44,178   $  11,317
  Advance billings ................              --        30,028       3,432
  Current portion of long-term 
    debt ..........................            10,750        --           702
                                            ---------   ---------   ---------
      Total current liabilities ...            15,392      74,206      15,451
Long-term debt ....................           379,580     345,245      18,074
Other liabilities .................              --        10,569         459
Stockholders' equity ..............            92,339      48,922      14,682
                                            ---------   ---------   ---------
Total liabilities
  and stockholders' equity ........         $ 487,311   $ 478,942   $  48,666
                                            =========   =========   =========

                                        CONSOLIDATING               
                                         ADJUSTMENTS    CONSOLIDATED
                                        -------------   ------------

Current assets:                                      
  Cash ............................        $    --      $   5,087
  Accounts receivable .............          (18,639)      55,357
  Inventories .....................           (1,165)      60,376
  Other current assets ............               (5)      10,898
                                           ---------    ---------
    Total current assets ..........          (19,809)     131,718
Note receivable ...................          (27,567)        --
Investments in subsidiaries .......         (451,755)        --
Property, plant and equipment, 
  net .............................             --         39,175
Deferred financing costs, net .....             --         15,308
Intangibles, net ..................             --        279,616
Other assets ......................              458       50,429
                                           ---------    ---------
Total assets ......................        $(498,673)   $ 516,246
                                           =========    =========

LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
  Accounts payable, interest
   payable and accrued 
     liabilities ..................   $ (18,761)   $  41,376
  Advance billings ................        --         33,460
  Current portion of long-term 
    debt ..........................        --         11,452
                                      ---------    ---------
      Total current liabilities ...     (18,761)      86,288
Long-term debt ....................    (390,316)     352,583
Other liabilities .................        --         11,028
Stockholders' equity ..............     (89,596)      66,347
                                      ---------    ---------
Total liabilities
  and stockholders' equity ........   $(498,673)   $ 516,246
                                      =========    =========
</TABLE>

                                                   

<PAGE>



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

<TABLE>

                   DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
               SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
                      NINE MONTHS ENDED SEPTEMBER 30, 1996


<CAPTION>
                                          DICTAPHONE    DICTAPHONE   DICTAPHONE     
                                          CORPORATION      U.S.       NON-U.S. 
                                          -----------   ----------   ----------

Operating activities:
<S>                                       <C>          <C>          <C>       
  Net loss ........................       $  (8,769)   $ (23,405)   $  (2,794)
  Adjustments to reconcile net
    loss to net cash provided by
    (used in) operating activities:
    Depreciation and 
      amortization ................           4,263       47,542        3,311
    Provision for deferred income
      taxes .......................            (725)     (15,327)        (508)
    Change in assets and liabilities:
       Accounts receivable ........          (7,718)       1,110         (923)
       Inventories ................            --           (410)         894
       Other current assets .......            (215)       1,083       (2,531)
       Accounts payable and
         accrued liabilities ......          (6,354)       1,803        1,459
       Advance billings ...........            --           (503)        (507)
       Other assets and other .....           7,610       (7,628)        (647)
                                          ---------    ---------    ---------
Net cash used in operating
  activities ......................         (11,908)       4,265       (2,246)
                                          ---------    ---------    ---------

Investing activities:
  Payment for acquisition .........          (8,000)        --           --   
  Net investment in fixed assets ..            --         (3,652)        (874)
                                          ---------    ---------    ---------
Net cash used in investing 
  activities ......................          (8,000)      (3,652)        (874)
                                          ---------    ---------    ---------

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

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

Decrease in cash ..................           --         (7,381)      (1,811)

Cash, beginning of period .........           --         11,591        2,688
                                         ---------    ---------    ---------

Cash, end of period ...............      $    --      $   4,210    $     877
                                         =========    =========    =========


                                        CONSOLIDATING              
                                         ADJUSTMENTS  CONSOLIDATED
                                        ------------- ------------

Operating activities:
  Net loss ........................      $   7,143    $ (27,825)
  Adjustments to reconcile net
    loss to net cash provided by
    (used in) operating activities:
    Depreciation and amortization .           --         55,116
    Provision for deferred income
      taxes .......................           (458)     (17,018)
    Change in assets and liabilities:
       Accounts receivable ........          9,197        1,666
       Inventories ................            332          816
       Other current assets .......            (60)      (1,723)
       Accounts payable and
         accrued liabilities ......         (8,815)     (11,907)
       Advance billings ...........           --         (1,010)
       Other assets and other .....         (7,339)      (8,004)
                                         ---------    ---------
Net cash used in operating 
  activities .....................            --         (9,889)
                                         ---------    ---------

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

Financing activities:
  Repayment under term loan 
    facility ......................           --         (5,250)
  Borrowing from promissory notes .           --           --
  Borrowing from subsidiary .......           --           --
  Borrowing under revolving
    credit facility ...............           --         30,500
  Repayment under revolving 
    credit facility ...............           --        (12,500)
  Other ...........................           --            489
                                         ---------    ---------
Net cash provided by (used in) 
  financing activities ............           --         13,239
                                         ---------    ---------

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

Decrease in cash ..................           --         (9,192)

Cash, beginning of period .........           --         14,279
                                         ---------    ---------

Cash, end of period ...............      $    --      $   5,087
                                         =========    =========
</TABLE>
                               

<PAGE>



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

<TABLE>

                   DICTAPHONE CORPORATION (SUCCESSOR COMPANY)
               SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS
                      SEVEN WEEKS ENDED SEPTEMBER 30, 1995

<CAPTION>

                                      DICTAPHONE   DICTAPHONE   DICTAPHONE     
                                      CORPORATION     U.S.       NON-U.S. 
                                      -----------  ----------   ----------

Operating activities:
<S>                                   <C>          <C>          <C>      
  Net loss ........................   $  (4,526)   $  (1,443)   $     156
  Adjustments to reconcile net
    loss to net cash provided by
    (used in) operating activities:
    Depreciation and 
      amortization .................        364       12,596          632
    Provision for deferred income
      taxes ........................     (2,363)        (464)         (59)
    Change in assets and liabilities:
       Accounts receivable .........     (3,406)      (3,661)        (623)
       Inventories .................       --          3,226          509
       Other current assets ........       --            585          (91)
       Accounts payable and
         accrued liabilities .......      4,708        6,613          418
       Advance billings ............       --         (2,821)        (340)
       Other assets and other ......      2,087       (2,748)        (307)
                                      ---------    ---------    ---------
Net cash used in operating 
  activities .......................     (3,136)      11,883          295
                                      ---------    ---------    ---------

Investing activities:
  Payment for acquisition .........    (450,000)        --           --   
  Net investment in fixed assets ..        --           (391)        (154)
                                      ---------    ---------    ---------
Net cash used in investing 
  activities ......................    (450,000)        (391)        (154)
                                      ---------    ---------    ---------

Financing activities:
  Net proceeds from sale of senior
    subordinated notes ............     194,000         --           --   
  Borrowings under term loan 
    facility ......................     150,000         --           --   
  Proceeds from sale of common 
    stock .........................      95,000         --           --   
  Proceeds from sale of preferred 
    stock .........................      15,000         --           --   
  Borrowings from revolving credit 
    facility ......................      15,000         --           --   
  Payment of deferred financing 
    costs .........................     (15,917)        --           --   
  Repayment of management loans ...          53         --           --   
                                      ---------    ---------    ---------
Net cash provided by (used in) 
  financing activities ............     453,136         --           --   
                                      ---------    ---------    ---------

Effect of exchange rate changes 
  on cash .........................        --           --            (56)
                                      ---------    ---------    ---------

Increase in cash ..................        --         11,492           85

Cash, beginning of period .........        --            969        1,494
                                      ---------    ---------    ---------

Cash, end of period ...............   $    --      $  12,461    $   1,579
                                      =========    =========    =========


                                     CONSOLIDATING              
                                      ADJUSTMENTS  CONSOLIDATED
                                     ------------- ------------

Operating activities:
  Net loss ........................   $   1,296    $  (4,517)
  Adjustments to reconcile net
    loss to net cash provided by
    (used in) operating activities:
    Depreciation and 
      amortization .................       --         13,592
    Provision for deferred income
      taxes ........................       --         (2,886)
    Change in assets and 
      liabilities:
       Accounts receivable ........         333       (7,357)
       Inventories ................         (35)       3,700
       Other current assets .......         (12)         482
       Accounts payable and
         accrued liabilities ......        (213)      11,526
       Advance billings ...........        --         (3,161)
       Other assets and other .....      (1,369)      (2,337)
                                      ---------    ---------
Net cash used in operating 
  activities ......................        --          9,042
                                      ---------    ---------

Investing activities:
  Payment for acquisition .........        --       (450,000)
  Net investment in fixed assets ..        --           (545)
                                      ---------    ---------
Net cash used in investing 
  activities ......................        --       (450,545)
                                      ---------    ---------

Financing activities:
  Net proceeds from sale of senior
    subordinated notes ............        --        194,000
  Borrowings under term loan 
    facility ......................        --        150,000
  Proceeds from sale of common 
    stock .........................        --         95,000
  Proceeds from sale of preferred
    stock .........................        --         15,000
  Borrowings from revolving 
    credit facility ...............        --         15,000
  Payment of deferred financing 
    costs .........................        --        (15,917)
  Repayment of management loans ...        --             53
                                      ---------    ---------
Net cash provided by (used in) 
   financing activities ...........        --        453,136
                                      ---------    ---------

Effect of exchange rate changes on
   cash ...........................        --            (56)
                                      ---------    ---------

Increase in cash ..................        --         11,577

Cash, beginning of period .........        --          2,463
                                      ---------    ---------

Cash, end of period ...............   $    --      $  14,040
                                      =========    =========
</TABLE>
                                                 

<PAGE>


<TABLE>

                  DICTAPHONE CORPORATION (PREDECESSOR COMPANY)

                    COMBINED STATEMENTS OF INCOME (UNAUDITED)
                             (Dollars in thousands)


<CAPTION>

                                                                     THIRTY-TWO
                                                      SIX WEEKS        WEEKS
                                                        ENDED          ENDED
                                                      AUGUST 11,     AUGUST 11,
                                                        1995            1995
                                                      ----------     ----------
 Revenues:
<S>                                                    <C>            <C>      
     Sales and rentals ...........................     $  21,521      $ 148,092
     Support services ............................         9,439         54,011
                                                       ---------      ---------

         Total revenue ...........................        30,960        202,103
                                                       ---------      ---------

Cost and expenses:

     Cost of sales and rentals ...................        10,927         74,268

     Selling, service and administrative .........        19,224         93,774

     Research and development ....................         1,436          7,004
                                                       ---------      ---------

Operating profit .................................          (627)        27,057

Interest (income) expense - net ..................          (377)        (1,400)
                                                       ---------      ---------

(Loss)/income before income taxes ................          (250)        28,457

(Benefit)/provision for income taxes .............           (39)        11,398
                                                       ---------      ---------

     Net (loss)/income ...........................     $    (211)     $  17,059
                                                       =========      =========

</TABLE>















            See accompanying notes to combined financial statements.

                                                        

<PAGE>


<TABLE>

                  DICTAPHONE CORPORATION (PREDECESSOR COMPANY)

                   COMBINED STATEMENT OF CASH FLOW (UNAUDITED)
                             (Dollars in thousands)


<CAPTION>



                                                                THIRTY-TWO WEEKS
                                                                     ENDED
                                                                AUGUST 11, 1995
                                                                ----------------

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

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

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

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


SUPPLEMENTAL CASH FLOW INFORMATION:

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

</TABLE>








            See accompanying notes to combined financial statements.

                                                         

<PAGE>



                  DICTAPHONE CORPORATION (PREDECESSOR COMPANY)

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



1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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


2.     SUPPLEMENTAL COMBINING FINANCIAL STATEMENTS AND SEGMENT
       INFORMATION

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

<TABLE>

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


<CAPTION>
                                         DICTAPHONE  DICTAPHONE     
                                            U.S.      NON-U.S.      
                                         ----------  ----------

Revenue from:
<S>                                      <C>         <C>     
   Sales and rentals .................   $ 18,957    $  3,333
   Support services ..................      8,067       1,372
                                         --------    --------
      Total revenue ..................     27,024       4,705
                                         --------    --------

Costs and expenses:
   Cost of sales and rentals .........      9,909       1,782
   Selling, service and 
     administrative ..................     16,097       3,127
   Research and development ..........      1,436        --   
   Interest (income) expense, net ....       --          (377)
                                         --------    --------
      Total costs and expenses .......     27,442       4,532
                                         --------    --------

Income before income taxes ...........       (418)        173
Provision (benefit) for income taxes .       (110)         74
                                         --------    --------
Net income (loss) ....................   $   (308)   $     99
                                         ========    ========

                                          COMBINING              
                                        ADJUSTMENTS  COMBINED
                                        -----------  --------
Revenue from:
   Sales and rentals .................   $   (769)   $ 21,521
   Support services ..................       --         9,439
                                         --------    --------
      Total revenue ..................       (769)     30,960
                                         --------    --------

Costs and expenses:
   Cost of sales and rentals .........       (764)     10,927
   Selling, service and 
     administrative ..................       --        19,224
   Research and development ..........       --         1,436
   Interest (income) expense, net ....       --          (377)
                                         --------    --------
      Total costs and expenses .......       (764)     31,210
                                         --------    --------

Income before income taxes ...........         (5)       (250)
Provision (benefit) for income taxes .         (3)        (39)
                                         --------    --------
Net income (loss) ....................   $     (2)   $   (211)
                                         ========    ========

</TABLE>

                                                    

<PAGE>



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

<TABLE>

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


<CAPTION>
                                         DICTAPHONE   DICTAPHONE      
                                            U.S.       NON-U.S. 
                                         ----------   ----------      

Revenue from:
<S>                                      <C>          <C>      
   Sales and rentals .................   $ 130,013    $  23,275
   Support services ..................      45,074        8,937
                                         ---------    ---------
      Total revenue ..................     175,087       32,212
                                         ---------    ---------

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

Income before income taxes ...........      23,911        4,578
Provision (benefit) for income taxes .       9,921        1,514
                                         ---------    ---------
Net income ...........................   $  13,990    $   3,064
                                         =========    =========

                                          COMBINING              
                                         ADJUSTMENTS  COMBINED
                                         -----------  --------

Revenue from:
   Sales and rentals .................   $  (5,196)   $ 148,092
   Support services ..................        --         54,011
                                         ---------    ---------
      Total revenue ..................      (5,196)     202,103
                                         ---------    ---------

Costs and expenses:
   Cost of sales and rentals .........      (5,164)      74,268
   Selling, service and 
     administrative ..................        --         93,774
   Research and development ..........        --          7,004
   Interest (income) expense, net ....        --         (1,400)
                                         ---------    ---------
      Total costs and expenses .......      (5,164)     173,646
                                         ---------    ---------

Income before income taxes ...........         (32)      28,457
Provision (benefit) for income taxes .         (37)      11,398
                                         ---------    ---------
Net income ...........................   $       5    $  17,059
                                         =========    =========


</TABLE>


                                                      

<PAGE>



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

<TABLE>

                  DICTAPHONE CORPORATION (PREDECESSOR COMPANY)
                 SUPPLEMENTAL COMBINING STATEMENT OF CASH FLOWS
                     THIRTY-TWO WEEKS ENDED AUGUST 11, 1995


<CAPTION>
                                                  DICTAPHONE  DICTAPHONE     
                                                     U.S.      NON-U.S.  
                                                  ----------  ----------    

Cash flows from operating activities:
<S>                                               <C>         <C>     
   Net income .................................   $ 13,990    $  3,064
   Adjustments to reconcile net income to
     net cash provided by operating activities:
      Depreciation and amortization ...........      4,069         862
      Increase (decrease) in deferred income
        taxes .................................       --          --   
      Change in assets and liabilities:
          Accounts receivable .................     (1,750)        303
          Inventories .........................     (8,767)      1,545
          Other current assets ................     (9,431)       (457)
          Accounts payable and accrued
            liabilities .......................      1,531         648
          Advance billings ....................      2,577         142
          Other assets and other ..............     (4,016)       (302)
                                                  --------    --------

Net cash (used in) provided by operating
 activities ...................................     (1,797)      5,805
                                                  --------    --------

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

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

Net cash flow available to Pitney Bowes
  Inc. ........................................   $ (6,537)   $  5,084
                                                  ========    ========


                                                  COMBINING                                                                
                                                 ADJUSTMENTS  COMBINED
                                                 -----------  --------

Cash flows from operating activities:
   Net income .................................   $      5    $ 17,059
   Adjustments to reconcile net income to
     net cash provided by operating activities:
      Depreciation and amortization ...........       --         4,931
      Increase (decrease) in deferred income
        taxes .................................       --          --
      Change in assets and liabilities:
          Accounts receivable .................        143      (1,304)
          Inventories .........................         32      (7,190)
          Other current assets ................        (57)     (9,945)
          Accounts payable and accrued
            liabilities .......................       (123)      2,056
          Advance billings ....................       --         2,719
          Other assets and other ..............       --        (4,318)
                                                  --------    --------

Net cash (used in) provided by operating
 activities ...................................       --         4,008
                                                  --------    --------

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

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

Net cash flow available to Pitney Bowes
  Inc. ........................................   $   --      $ (1,453)
                                                  ========    ========

</TABLE>
                                                         

<PAGE>



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

OVERVIEW

       On April 25, 1995,  the Company  entered into the  Acquisition  Agreement
with Pitney Bowes Inc. for the purpose of the  Acquisition.  On August 11, 1995,
the Company  acquired  the  Predecessor  Company for $462.2  million,  including
certain post-closing adjustments as defined in the Acquisition Agreement.

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

       To  facilitate  the  discussion of the three and nine month periods ended
September  30, 1996  against the results of  operations  for the same periods of
1995, the historical operations of the Successor Company and Predecessor Company
have been combined, since the Acquisition occurred six and thirty-two weeks into
the three and nine month periods ended September 30, 1995, respectively.

<TABLE>

<CAPTION>

                                             THREE MONTHS ENDED        
                                               SEPTEMBER 30,           
                                             ------------------
                                               1996      1995 
                                              ------    ------
                                               (IN MILLIONS)
<S>                                           <C>      <C>    
Total revenue .............................   $  83.4  $  83.2

Cost of sales and rentals (1) .............      31.3     34.7
Selling, service and administrative
  (including amortization 
  of intangibles) .........................      50.9     47.8
Research and development ..................       3.8      2.6
                                                -----    -----
  Operating profit (loss) .................      (2.6)    (1.9)
                                                -----    -----

Net interest expense (income) and other ...      10.7      5.4
(Benefit) provision for income tax ........      (4.8)    (2.6)
                                                -----    -----

Net (loss) income .........................   $  (8.5) $  (4.7)
                                                =====    =====

EBITDA (2) ................................   $  13.0  $  12.2
                                                =====    =====


                                              NINE MONTHS ENDED 
                                                 SEPTEMBER 30,  
                                             -------------------
                                                1996      1995                                                 
                                               ------    ------  
                                                (IN MILLIONS)   

Total revenue .............................   $  249.2  $  254.3

Cost of sales and rentals (1) .............       96.5      98.0
Selling, service and administrative .......      153.3     122.4
Research and development ..................       11.4       8.1
                                                ------    ------
  Operating profit (loss) .................      (12.0)     25.8
                                                ------    ------

Net interest expense (income) and other ...       32.1       4.4
(Benefit) provision for income tax ........      (16.3)      8.9
                                                ------    ------

Net (loss) income .........................   $  (27.8) $   12.5
                                                ======    ======
<PAGE>

EBITDA (2) ................................   $   39.0  $   44.0
                                                ======    ======
</TABLE>


----------------
(1)   Cost of sales and  rentals do not  include  operating  expenses  of
      field sales and service offices because no meaningful allocation of
      such expenses to this line item is practicable.

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

                                                         

<PAGE>



OVERVIEW  (CONTINUED)

<TABLE>

<CAPTION>
                                                 THREE MONTHS ENDED      
                                                   SEPTEMBER 30,         
                                                 ------------------
                                                   1996    1995     
                                                  ------  ------    
                                                   (IN MILLIONS)
Revenue from:
Sales:
<S>                                              <C>     <C>    
  U.S. Integrated Voice Systems ..............   $  18.9 $  22.6
  U.S. Communication Recording Systems .......      17.6    12.5
  U.S. Customer Service parts ................       4.4     4.7
  Contract Manufacturing
    (including sales to Pitney Bowes Inc.) ...      10.8    11.1
  International Operations ...................       8.2     9.2
                                                   -----   -----
      Total sales ............................      59.9    60.1
                                                   -----   -----

  Rentals ....................................       0.4     0.5
                                                   -----   -----
      Total sales and rentals ................      60.3    60.6
                                                   -----   -----

  Service:
  U.S. Customer Service ......................      20.2    19.5
  International Operations ...................       2.9     3.1
                                                   -----   -----
      Total support service ..................      23.1    22.6
                                                   -----   -----

Total revenue ................................   $  83.4 $  83.2
                                                   =====   =====


                                                  NINE MONTHS ENDED  
                                                    SEPTEMBER 30,
                                                 ------------------
                                                   1996      1995 
                                                  ------    ------
                                                    (IN MILLIONS)   

Revenue from:
Sales:
  U.S. Integrated Voice Systems ..............   $   59.4 $   66.6
  U.S. Communication Recording Systems .......       46.7     43.3
  U.S. Customer Service parts ................       13.2     13.7
  Contract Manufacturing
    (including sales to Pitney Bowes Inc.) ...       31.7     33.1
  International Operations ...................       27.9     29.0
                                                   ------   ------
      Total sales ............................      178.9    185.7
                                                   ------   ------

  Rentals ....................................        1.6      1.5
                                                   ------   ------
      Total sales and rentals ................      180.5    187.2
                                                   ------   ------

  Service:
  U.S. Customer Service ......................       60.0     56.5
  International Operations ...................        8.7     10.6
                                                   ------   ------
      Total support service ..................       68.7     67.1
                                                   ------   ------

Total revenue ................................   $  249.2 $  254.3
                                                   ======   ======
</TABLE>


RESULTS OF OPERATIONS - THIRD QUARTER 1996 VS. THIRD QUARTER 1995

       Total  revenue  for the third  quarter  of 1996  increased  0.3% to $83.4
million from $83.2  million  during the third  quarter of 1995.  The increase in
revenue  is  attributable  to higher  sales  revenue  from  U.S.  Communications
Recording  Systems  ("U.S.C.R.S."),  and an  increase in U.S.  Customer  Service
revenue  partially  offset by lower revenue from U.S.  Integrated  Voice Systems
("U.S.I.V.S."), Contract Manufacturing, and International Operations.

       U.S.I.V.S.  revenue declined 16.1% to $18.9 million from $22.6 million on
lower  systems  billings  (down  21.2%) and desktop and portable  revenue  (down
8.7%). U.S.I.V.S.  orders declined 15.7% during the quarter due to lower systems
orders.  U.S. Customer Service revenue  (including sale of parts) increased 1.6%
to $24.6 million from $24.2 million due to increased proprietary product service
contract revenue (up 1.4%) as well as higher third party maintenance revenue (up
$0.4 million).  U.S.C.R.S.  revenue  increased 40.9% from $12.5 million to $17.6
million on higher Guardian and Sentinel installations and backlog closure in the
quarter. Revenue from International Operations declined 10.2% from $12.3 million
to $11.1 milion due to lower revenue in Germany,  Canada, the United Kingdom and
Switzerland,  as well as $0.2 million of unfavorable  currency exchange.  During
the third quarter of 1996, the Company announced a reorganization  and change in
the low end product distribution strategy (from direct sales to distributors and
dealers)  in  Europe.  The  Company  believes  that near term  results  from the
European  operations  could  be  negatively  impacted  during  this  transition.
Contract  Manufacturing  revenue was 2.6% lower than the corresponding period of
1995.

     Cost of sales and rentals  decreased  9.7% to $31.3 million (37.5% of total
revenue)  during the three months ended  September  30, 1996 from $34.7  million
(41.7%  of total  revenue)  for the  three  months  ended  September  30,  1995.
Excluding  additional  depreciation and amortization expense related to purchase
accounting  adjustments associated with the Acquisition of $1.5 million and $4.6
million,  respectively,  for the three months ended September 30, 1996 and 1995,
cost of sales and rentals would have represented  35.7% of total revenue for the
three months ended September 30, 1996 versus 36.2% for the three months ended


                                                         

<PAGE>



September  30, 1995.  Cost of sales and rentals as a percentage of total revenue
decreased  during the three  months ended  September  30, 1996 due to lower U.S.
Customer  Service costs, a reduced content of low margin Contract  Manufacturing
revenue, and improvement in Contract Manufacturing pricing.

     Selling,  service and administrative  expenses  (including  amortization of
intangibles)  for the third  quarter  of 1996  increased  6.4% to $50.9  million
(61.0% of total  revenue)  from $47.8 million  (57.5% of total  revenue) for the
comparable period in 1995.  Excluding  additional  depreciation and amortization
expense of $11.4 million associated with purchase accounting adjustments related
to the  Acquisition,  selling,  service and  administrative  expenses would have
represented 47.3% of total revenue for the three months ended September 30, 1996
versus 48.4% on a comparable  basis for the third quarter 1995.  This decline is
attributable  to lower  U.S.I.V.S.  selling  expenses (down $2.3 million) due to
lower  sales  revenue,  reduced  manpower  and lower  legal  expenses,  and U.S.
Headquarters  expenses  for employee  benefits  (down $0.9  million)  which were
partially  offset by increased U.S.  Customer  Service  expense for training and
repair,  U.S.C.R.S.   sales  compensation,   higher  marketing  and  advertising
expenses, and increased international expenses associated with the establishment
of an office for International Operations in the United Kingdom.

       Research  and  development  expenses of $3.8 million for the three months
ended  September 30, 1996 were 49.4% higher than the  comparable  period in 1995
due to headcount increases.

     The Company  recorded an operating  loss of $2.6  million  during the third
quarter of 1996  compared  to an  operating  loss of $1.9  million for the third
quarter of 1995. Excluding purchase accounting  adjustments  associated with the
Acquisition of $12.9 million and $12.1 million for the third quarter of 1996 and
1995, respectively,  operating profit would have been flat versus the prior year
as the  impact of higher  revenue  and  improved  margins  was  offset by higher
operating expenses.

       The  Company  has  recorded  a  deferred  tax  asset  of  $38.6  million,
reflecting the benefit of net operating loss  carryforwards and various book tax
temporary  differences.  The net operating loss carryforwards for federal income
tax purposes as of September 30, 1996 is approximately  $35.3 million which will
expire  beginning  in the  year  2010.  Realization  of the net  operating  loss
carryforwards  is dependent on  generating  sufficient  taxable  income prior to
expiration of the net operating loss carryforwards. Although no assurance can be
given  that the  Company  will be able to  realize  the full  benefit of the net
operating loss  carryforwards,  management  currently believes it is more likely
than not that all of the deferred tax asset will be  realized.  Accordingly,  no
valuation allowance has been established as of September 30, 1996. The amount of
the deferred tax asset considered  realizable,  however, could be reduced in the
near term if estimates of future  taxable  income during the net operating  loss
carryforward period are reduced.

RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1996 VS.
NINE MONTHS ENDED SEPTEMBER 30, 1995

       Total revenue for the first nine months of 1996  decreased 2.0% to $249.2
million from $254.3  million for the  comparable  period in 1995. The decline in
revenue is  attributable  to lower sales  revenue from  U.S.I.V.S.  and Contract
Manufacturing and lower revenue from International  Operations  partially offset
by an  increase in sales  revenue  from  U.S.C.R.S.  and U.S.  Customer  Service
revenue.

       U.S.I.V.S.  revenue  declined  10.7% from $66.6  million  during the nine
months ended  September 30, 1995 to $59.4  million  during the nine months ended
September  30, 1996 on lower  system  sales (down 9.2%) and desktop and portable
equipment  sales (down  12.0%).  The decline in desktop and  portable  equipment
sales is associated with the  reorganization of the field sales  organization in
the first quarter of 1996.  U.S.  Customer  Service  revenue  (including sale of
parts)  increased  4.2% to $73.2  million  from $70.2  million due to  increased
proprietary  product service  contract revenue (up 4.4%) as well as higher third
party maintenance  revenue (up $1.3 million).  U.S.C.R.S.  revenue for the first
nine months of 1996 increased 7.7% from $43.3 million to $46.7 million on higher
Guardian  and Sentinel  installations.  Revenue  from  International  Operations
declined 7.7% from $39.6 million for the nine months ended September 30, 1995 to
$36.6 million for the nine months ended  September 30, 1996 as revenue growth in
Germany  and Canada due  primarily  to higher  Communications  Recording  System
revenue was offset by a decline in the United

                                                         

<PAGE>



Kingdom due to lower  Communications  Recording System and dictation revenue and
the expiration of a significant  one-time third party maintenance contract which
was in place during the first half of 1995.  Lower revenue in Switzerland  (down
3.7%), as well as $0.6 million of unfavorable currency exchange also contributed
to  the  decline.  Contract  Manufacturing  revenue  was  4.2%  lower  than  the
corresponding period of 1995.

       Order backlog at September 30, 1996 totalled  $27.3 million  representing
an increase of $3.5 million  versus  December 31,  1995.  U.S.I.V.S.  backlog of
$15.6  million  increased by $5.0  million  primarily  due to  increased  system
orders.  Partially  offsetting  this increase in order  backlog were  U.S.C.R.S.
which declined by $0.7 million to $9.4 million, and international  backlog which
declined to $2.3 million from $3.1 million at year end 1995.

     Cost of sales and rentals  during the nine months ended  September 30, 1996
decreased 1.5% to $96.5 million  (38.7% of total  revenue)  versus $98.0 million
(38.5% of total revenue) for the nine months ended September 30, 1995. Excluding
additional  depreciation and amortization expense related to purchase accounting
adjustments  associated  with the  Acquisition  of $7.3 million and $4.6 million
from the first  nine  months of 1996 and 1995,  respectively,  cost of sales and
rentals  would have  declined as a percent of revenue from 36.8% to 35.8%.  This
decline is  attributable  to an increased  content of high margin U.S.  Customer
Service  revenue,  and lower  inventory  adjustments  partially  offset by lower
U.S.C.R.S. price realization.

     Selling,  service and administrative  expenses  (including  amortization of
intangibles) for the first nine months of 1996 increased 25.3% to $153.3 million
(61.5% of total  revenue) from $122.4  million  (48.1% of total revenue) for the
comparable period in 1995.  Excluding  additional  depreciation and amortization
expense  associated  with  purchase   accounting   adjustments  related  to  the
Acquisition of $35.7 million in 1996 and $7.6 million in 1995, selling,  service
and  administrative  expenses would have  increased by 2.1 percentage  points to
47.2% versus the first nine months of 1995.  This  increase is  attributable  to
higher U.S. Customer service expenses (up $1.1 million), U.S.C.R.S. expenses (up
$0.9  million),  and U.S.  Headquarters  expenses for taxes not based on income,
marketing and advertising,  management compensation, and increases in consulting
fees.  Increased  operating  expenses for  International  Operations  was due to
branch sales office  expansion in France and Italy as well as the  establishment
of  an  office  for  International  Operations  in  the  United  Kingdom.  Lower
U.S.I.V.S.  selling  expenses  (down  $4.7  million),  primarily  due to reduced
manpower, partially offset these increases.

       Research and  development  expenses of $11.4  million for the nine months
ended  September 30, 1996 were 40.4% higher than the  comparable  period in 1995
due to increased staffing and compensation.

       The Company  recorded an operating loss of $12.0 million during the first
nine months of 1996  compared to an  operating  profit of $25.8  million for the
first nine months of 1995.  Excluding purchase  accounting  adjustments from the
first nine  months of both 1996 and 1995,  operating  profit  declined by 18.3%.
This  reduction  reflects  the  impact  of lower  revenue  and  higher  expenses
partially offset by improved margins.

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. The Company made its final required cash payment ($8.0
million)  to Pitney  Bowes Inc.  in the first  quarter of 1996 which  related to
certain post-closing adjustments to the purchase price for the Company.

       At September 30, 1996, the Company had  outstanding  term loans of $144.8
million (the "Term Loans") and an $18.0 million loan outstanding under the $40.0
million revolving credit facility (the "Revolving Credit  Facility").  Borrowing
under the Revolving  Credit  Facility  increased by $11 million during the third
quarter of 1996 due to the scheduled August 1 interest  payment  associated with
the Notes.  Availability  under the Revolving  Credit  Facility at September 30,
1996 was $22 million. Scheduled annual principal payments on the term loans will
be $7.75 million in 1996,

                                                         

<PAGE>



$11.75  million in 1997,  $15.75 million in 1998 and 1999, and $19.75 million in
2000.  There are no scheduled  reductions in the $40.0 million  Revolving Credit
Facility  over the next five years;  however,  the Company is required to reduce
loans  outstanding  under the Revolving  Credit  Facility to $15.0 million for a
period of not less than 30  consecutive  days during each  consecutive  12-month
period.

       In connection with the terms of the Credit Agreement, the Company entered
into interest  rate swap  agreements in November  1995,  effective  February 16,
1996,  with an aggregate  notional  principal  amount  equivalent to $75 million
maturing on February 16, 1999. The swap will effectively convert that portion of
the Company's Term Loans to a fixed rate component of 5.8%;  thus,  reducing the
impact of changes in interest  rates,  converting the total  effective  interest
rate on fifty  percent of the initial  outstanding  Term Loans to 8.8%. No funds
under the swap agreements are actually borrowed or are to be repaid. Amounts due
to or from the  counterparties  will be  reflected  in  interest  expense in the
periods in which they accrue.

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

       On July 17,  1996,  the  Company  and the  lenders  under its Credit
Agreement,  dated as of August 7, 1995,  executed  an  amendment  to such credit
agreement,  dated  as of June  28,  1996,  modifying  certain  of the  covenants
contained therein.  The amendment lowered  restrictions on investments and joint
ventures,  and revised the  financial  covenants  for  maximum  leverage  ratio,
minimum consolidated EBITDA, and minimum interest coverage ratio.

     The Company had $200.0  million of Notes  outstanding  as of September  30,
1996. The Notes are  subordinated to the Credit  Agreement  financings and other
senior  indebtedness,  as  defined  in the Note  Indenture.  The  Notes  contain
covenants  similar to the Credit  Agreement  and provide for each  noteholder to
have the right to require that the Company  repurchase  the Notes at 101% of the
principal amount upon a change of control as defined in the Note Indenture.  The
Notes bear interest of 11-3/4% per annum, payable semi-annually on each February
1 and August 1. The Notes mature on August 1, 2005. At September  30, 1996,  the
fair value of the Notes was favorable $16.0 million.

       Capital  expenditures  for the first  nine  months of 1996  totaled  $4.5
million.  The Company  does not expect the  limitation  on capital  expenditures
contained in the Credit Agreement to restrict capital expenditures in a material
manner.

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

       The Company's  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  period,  including 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  market new
products,  new  product  developments  by  the  Company's  competitors,   market
acceptance  of products of both the  Company  and its  competitors,  competitive
pressures on prices,  and significant damage to or prolonged delay in operations
at the Company's sole manufacturing facility.

                                                       

<PAGE>



       The  Company  may,  from  time to time,  provide  estimates  as to future
performance.  These forward looking statements will be estimates, and may or may
not be realized by the Company.  The Company  undertakes  no duty to update such
forward  looking  statements.  Many factors could cause actual results to differ
from these forward looking  statements,  including,  but not limited to, loss of
market share through  competition,  introduction of competing  products by other
firms,  pressure on prices  from  competition  or  purchasers  of the  Company's
products, and interest rate and foreign exchange fluctuations.




                                                         

<PAGE>



                           PART II - OTHER INFORMATION


ITEM 1.      LEGAL PROCEEDINGS
             -----------------

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


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

       (a)   Exhibits
             --------

             27 - Financial Data Schedule

       (b)   Reports on Form 8-K
             -------------------

                    On July 18, 1996, the Company filed a Current Report on Form
             8-K,  dated July 17,  1996,  reporting,  under Item 5 thereof,  the
             amendment of certain of the  covenants  contained in the  Company's
             senior Bank Credit Agreement, dated as of August 7, 1995.

   No other reports on Form 8-K were filed by the Company during the quarter.

                                                         

<PAGE>



                                   SIGNATURES


       Pursuant to the requirements of the Securities  Exchange Act of 1934, the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.




Dated: November 13, 1996               Dictaphone Corporation
                                 -----------------------------------------  
                                         (Registrant)



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


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



                                                         

<PAGE>



                                  EXHIBIT INDEX


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

    *27.     --    Financial Data Schedule

----------------------
* Filed herewith.