UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                    FORM 10-Q

   (MARK ONE)

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

             For the quarterly period ended September 30, 1998

                                    or

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

             For the transition period from            to            .


                        Commission File Number: 33-93464

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


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


                             3191 Broadbridge Avenue
                               Stratford, CT 06614
                                 (203) 381-7000
          (Address of principal executive offices, including zip code,
                   and telephone number, including area code)



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


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

             YES [X]   NO [_]

Number of shares of Common Stock,  par value $.01 per share,  outstanding  as of
November 11, 1998: 12,939,000

The Common Stock of the registrant is not publicly traded.

<PAGE>

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

                                      INDEX
                                      -----

                                                                        Page No.
                                                                        --------

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

ITEM 1.   Condensed Consolidated Financial Statements

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

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

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

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

               Notes  to  Unaudited  Consolidated  Financial
               Statements                                                    6

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

ITEM 3.   Quantitative and Qualitative Disclosures About Market Risk        26

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

ITEM 1.   Legal Proceedings                                                 27

ITEM 6.   Exhibits and Reports on Form 8-K                                  27


                                        1

<PAGE>

                  PART I - FINANCIAL INFORMATION


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


                             DICTAPHONE CORPORATION

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

<TABLE>
<CAPTION>
                                                 THREE MONTHS    THREE MONTHS
                                                     ENDED           ENDED
                                                 SEPTEMBER 30,   SEPTEMBER 30,
                                                     1997            1998
                                                   --------        --------
<S>                                                <C>             <C>     
Revenues:
     Product sales and rentals                     $ 52,416        $ 52,200
     Contract manufacturing sales                    10,739          11,575
     Support services                                24,561          22,101
                                                   --------        --------

         Total revenue                               87,716          85,876
                                                   --------        --------

Costs and expenses:

     Cost of sales, rentals and support services     46,129          45,131

     Selling and administrative                      26,953          26,776

     Amortization of intangibles                      8,772           4,679

     Research and development                         3,813           4,898
                                                   --------        --------

Operating profit                                      2,049           4,392

Interest expense                                     10,497           9,913

Other expense - net                                     357             450
                                                   --------        --------

Loss before income taxes                             (8,805)         (5,971)

Income tax benefit                                    2,782             587
                                                   --------        --------

     Net loss                                        (6,023)         (5,384)

     Stock dividends on PIK Preferred Stock             681             782
                                                   --------        --------

     Net loss applicable to Common Stock           $ (6,704)       $ (6,166)
                                                   ========        ========
</TABLE>



     See accompanying notes to condensed consolidated financial statements.


                                       2

<PAGE>

                             DICTAPHONE CORPORATION

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

<TABLE>
<CAPTION>
                                                 NINE MONTHS      NINE MONTHS
                                                     ENDED            ENDED
                                                 SEPTEMBER 30,    SEPTEMBER 30,
                                                     1997             1998
                                                  ---------        ---------
<S>                                               <C>              <C>
Revenues:
     Product sales and rentals                    $ 148,375        $ 153,419
     Contract manufacturing sales                    30,364           35,067
     Support services                                70,085           66,200
                                                  ---------        ---------

         Total revenue                              248,824          254,686
                                                  ---------        ---------

Costs and expenses:

     Cost of sales, rentals and support services    144,574          137,100

     Selling and administrative                      84,719           82,105

     Amortization of intangibles                     27,320           20,393

     Research and development                        11,146           12,854
                                                  ---------        ---------

Operating (loss) profit                             (18,935)           2,234

Interest expense                                     31,174           29,632

Other expense (income) - net                            593             (205)
                                                  ---------        ---------

Loss before income taxes                            (50,702)         (27,193)

Income tax benefit                                   17,765              253
                                                  ---------        ---------

     Net loss                                       (32,937)         (26,940)

     Stock dividends on PIK Preferred Stock           1,994            2,266
                                                  ---------        ---------

     Net loss applicable to Common Stock          $ (34,931)       $ (29,206)
                                                  =========        =========
</TABLE>


     See accompanying notes to condensed consolidated financial statements.


                                       3

<PAGE>


                             DICTAPHONE CORPORATION

                      CONDENSED CONSOLIDATED BALANCE SHEETS
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                         DECEMBER 31,     SEPTEMBER 30,
                                                                                             1997             1998
                                                                                          ---------         ---------
                                                                                                           (UNAUDITED)
<S>                                                                                       <C>               <C>      
ASSETS
Current assets:
    Cash                                                                                  $  10,277         $   4,230
    Accounts receivable, less allowances of $810 and $2,639, respectively                    71,939            82,981
    Inventories                                                                              48,779            54,373
    Other current assets                                                                     11,675            11,056
                                                                                          ---------         ---------
         Total current assets                                                               142,670           152,640
Property, plant and equipment, net                                                           35,331            31,077
Deferred financing costs, net of accumulated amortization of $12,517
 and $13,804, respectively                                                                   10,900             9,864
Intangibles, net of accumulated amortization of $99,439 and $119,832, respectively          229,322           204,623
Other assets                                                                                 51,837            55,253
                                                                                          ---------         ---------
         Total assets                                                                     $ 470,060         $ 453,457
                                                                                          =========         =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Accounts payable                                                                      $  10,940         $   9,539
    Interest payable                                                                         10,144             4,122
    Accrued liabilities                                                                      32,373            26,492
    Advance billings                                                                         37,184            42,085
    Current portion of long-term debt                                                           795               794
                                                                                          ---------         ---------
         Total current liabilities                                                           91,436            83,032

Long-term debt                                                                              342,816           357,901
Other liabilities                                                                            10,547            14,521
                                                                                          ---------         ---------
         Total liabilities                                                                  444,799           455,454
                                                                                          ---------         ---------

Contingencies (Note 5)

Stockholders' equity:
    Preferred stock ($.01 par value; 10,000,000 shares authorized; 1,500,000
      shares of 14% PIK perpetual preferred stock
      issued and outstanding, liquidation value at September 30, 1998, $23,107)              20,841            23,107
    Common stock ($.01 par value; 20,000,000 shares authorized;
      12,952,000 and 12,939,000 shares outstanding at December 31, 1997
      and September 30, 1998, respectively)                                                     130               130
    Notes receivable from stockholders                                                         (831)             (766)
    Additional paid-in capital                                                              129,870           129,870
    Treasury stock, at cost                                                                    (480)             (610)
    Accumulated deficit                                                                    (122,597)         (151,774)
    Accumulated translation adjustment                                                       (1,672)           (1,954)
                                                                                          ---------         ---------
         Total stockholders' equity (deficit)                                                25,261            (1,997)
                                                                                          ---------         ---------
         Total liabilities and stockholders' equity                                       $ 470,060         $ 453,457
                                                                                          =========         =========
</TABLE>

     See accompanying notes to condensed consolidated financial statements.


                                       4

<PAGE>

                             DICTAPHONE CORPORATION

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

<TABLE>
<CAPTION>
                                                                    NINE MONTHS      NINE MONTHS
                                                                       ENDED            ENDED
                                                                    SEPTEMBER 30,    SEPTEMBER 30,
                                                                       1997             1998
                                                                     --------         --------
<S>                                                                  <C>              <C>      
Operating activities:
   Net loss                                                          $(32,937)        $(26,940)
   Adjustments to reconcile net loss to net cash
    used in operating activities:
      Depreciation and amortization (including $1,389
      and $17, respectively, of nonrecurring charges)                  42,903           31,308
      Provision for deferred income taxes                             (17,804)            (393)
      Non-cash provision for inventory obsolescence (Note 2)           10,491               --
      Changes in assets and liabilities:
          Accounts receivable                                         (15,569)         (11,354)
          Inventories                                                     (13)          (5,759)
          Other current assets                                         (1,841)             874
          Accounts payable and accrued liabilities                     (6,064)         (13,240)
          Advance billings                                               (443)           5,024
          Other assets and other                                       (2,849)          (7,867)
                                                                     --------         --------
             Net cash used in operating activities                    (24,126)         (28,347)
                                                                     --------         --------

Investing activities:
   Net investment in fixed assets                                      (3,935)          (5,314)
   Sale of building                                                        --           14,000
                                                                     --------         --------
          Net cash (used in) provided by investing activities          (3,935)           8,686
                                                                     --------         --------

Financing activities:
   Repayment under term loan facility                                  (8,250)          (1,800)
   Borrowings under revolving credit facility                          71,300           54,000
   Repayment under revolving credit facility                          (36,800)         (37,000)
   Other                                                               (1,276)          (1,536)
                                                                     --------         --------
      Net cash provided by financing activities                        24,974           13,664
                                                                     --------         --------

Effect of exchange rate changes on cash                                  (123)             (50)
                                                                     --------         --------

Decrease in cash                                                       (3,210)          (6,047)

Cash, beginning of period                                               7,927           10,277
                                                                     --------         --------
Cash, end of period                                                  $  4,717         $  4,230
                                                                     ========         ========

SUPPLEMENTAL CASH FLOW INFORMATION:

Interest paid                                                        $ 34,476         $ 34,369
                                                                     ========         ========
Income taxes paid                                                    $    357         $    335
                                                                     ========         ========
</TABLE>



     See accompanying notes to condensed consolidated financial statements.


                                       5

<PAGE>

                             DICTAPHONE CORPORATION

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


1.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

             The condensed  consolidated financial statements of the Company are
       unaudited, as of and for the three and nine month periods ended September
       30, 1998 and September 30, 1997, but in the opinion of management contain
       all adjustments  which are of a normal and recurring  nature necessary to
       present fairly the financial  position and results of operations and cash
       flows for the periods  presented.  These financial  statements  should be
       read in  conjunction  with the  financial  statements  and notes  thereto
       included in the  Company's  Annual Report on Form 10-K for the year ended
       December 31, 1997.  Certain amounts have been  reclassified to conform to
       current year presentation.

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

             COSTS AND EXPENSES.  Operating  expenses of field sales and service
       offices which represent the cost of support services revenue are included
       in cost of sales.

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

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

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


                                       6

<PAGE>

2.     INVENTORIES

             Inventories consist of the following:

<TABLE>
<CAPTION>
                                                    DECEMBER 31,   SEPTEMBER 30,
                                                        1997           1998
                                                     ----------     ----------
             <S>                                     <C>            <C>       
             Raw materials and work in process       $   18,481     $   18,642
             Supplies and service parts                  14,087         14,729
             Finished products                           16,211         21,002
                                                     ----------     ----------
             Total inventories                       $   48,779     $   54,373
                                                     ==========     ==========
</TABLE>

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

3.     INTANGIBLES

             The following  summarizes  intangible  assets,  net of  accumulated
       amortization  and writedowns of $99,439 and $119,832 at December 31, 1997
       and September 30, 1998, respectively.  Amortization expense for the three
       and nine months ended  September  30, 1997 and 1998 was $8,772,  $27,320,
       $4,679 and $20,393, respectively.

<TABLE>
<CAPTION>
                                                DECEMBER 31,     SEPTEMBER 30,
                                                    1997             1998
                                                 ----------       ----------
             <S>                                 <C>              <C>       
             Goodwill                            $  135,004       $  128,356
             Tradenames                              73,211           71,751
             Service contracts                        8,920            3,559
             Non-compete agreement                   11,696              604
             Patents                                    491              353
                                                 ----------       ----------
                                                 $  229,322       $  204,623
                                                 ==========       ==========
</TABLE>

4.     INCOME TAXES

             The  income  tax  benefit  for the  three  and nine  months  ended
       September 30, 1998 is $587 and $253, respectively.

             The  Company  has  recorded  a gross  deferred  tax  asset of $84.2
       million included in other assets  reflecting the benefit of net operating
       loss  carryforwards and various book tax temporary  differences.  The net
       operating  loss  carryforward  for  federal  income  tax  purposes  as of
       September  30, 1998 is $106.1  million of which $13.7  million of the net
       operating loss  carryforward  will expire in the year 2010, $33.2 million
       will expire in the year 2011, $39.3 million will expire in the year 2012,
       and $19.9 million will expire in the year 2018. In order to fully realize
       the deferred tax asset,  the Company will need to generate future taxable
       income prior to expiration of the net operating  loss  carryforwards.  In
       1997,  the Company  established  a valuation  allowance of $24.1  million
       against the  deferred  tax assets.  During the first nine months of 1998,
       the Company increased its valuation allowance by $9.7 million,  resulting
       in a net deferred tax asset of $50.4 million.  Management believes, based
       upon the  Company's  history  of prior  operating  results,  its  current
       circumstances,  and its expectations for the future,  that taxable income
       of the Company will more likely than not be  sufficient  to fully utilize
       the net deferred  tax asset of $50.4  million  recorded at September  30,
       1998,  prior  to  expiration.  The  amount  of  the  deferred  tax  asset
       considered  realizable,  however, could be reduced if estimates of future
       taxable  income during the net  operating  loss  carryforward  period are
       reduced.


                                       7

<PAGE>

5.     CONTINGENCIES

              On February 14, 1995,  Pitney Bowes, Inc. ("Pitney Bowes") filed a
       complaint against Sudbury Systems,  Inc. ("Sudbury") in the United States
       District court for the District of Connecticut  alleging  intentional and
       wrongful  interference with Pitney Bowes's plans to sell the Company. The
       complaint  seeks  damages  and a  declaratory  judgment  relating  to the
       validity  of a  patent  owned by  Sudbury  entitled  "Rapid  Simultaneous
       Multiple Access Information Storage and Retrieval System" and the alleged
       infringement  thereof by the Company.  Sudbury responded by answering the
       complaint and filing a third-party complaint against the Company alleging
       patent  infringement  and seeking  preliminary  and permanent  injunctive
       relief and treble damages. The third-party complaint filed by Sudbury did
       not quantify the amount of damages sought. The litigation is in the final
       stage of  discovery.  A trial  date is likely  to be set in 1999.  Pitney
       Bowes and the Company have not yet  received  Sudbury's  revised  damages
       report nor has  Sudbury's  damages  expert  given  deposition  testimony.
       Accordingly,  at this time, the Company cannot make a reasonable estimate
       of the amount of damages that will be sought by Sudbury.

              Management  believes the Company has  meritorious  defenses to the
       claims  against it.  Consequently,  the Company has not  provided for any
       loss exposure in connection with this complaint. Additionally, regardless
       of the outcome of this litigation, Pitney Bowes has agreed to defend this
       action and to indemnify the Company for any liabilities arising from such
       litigation.

              The  Company  is  subject  to  federal,  state and local  laws and
       regulations concerning the environment and is currently  participating in
       administrative  proceedings  as a participant  in a group of  potentially
       responsible  parties in connection  with two third party disposal  sites.
       These proceedings are at a preliminary  stage, for which it is impossible
       to reasonably estimate the potential costs of remediation, the timing and
       extent  of  remedial  actions  which  may  be  required  by  governmental
       authorities,  and the amount of the  liability,  if any,  of the  Company
       alone or in relation to that of any other responsible parties. When it is
       possible to make a reasonable  estimate of the Company's  liability  with
       respect  to such a  matter,  a  provision  will  be made as  appropriate.
       Additionally,  the Company has  settled and paid its  liability  at three
       other third party disposal  sites. At a fourth site, the Company has paid
       approximately  $11,000  for its share of the costs of the first  phase of
       the  clean  up of  the  site  and  management  believes  that  it  has no
       continuing  material  liability  for any  later  phases  of the  cleanup.
       Consequently,  management believes that its future liability, if any, for
       these four sites is not material. In addition,  regardless of the outcome
       of such  matters,  Pitney  Bowes has agreed to  indemnify  the Company in
       connection  with retained  environmental  liabilities and for breaches of
       the environmental  representations  and warranties in the Stock and Asset
       Purchase  Agreement,   as  amended  August  11,  1995  (the  "Acquisition
       Agreement"), subject to certain limitations.

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

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


                                       8

<PAGE>

6.     SUPPLEMENTAL CONSOLIDATING FINANCIAL STATEMENTS AND SEGMENT
       INFORMATION

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

             Dictaphone  U.S.  has  fully  and  unconditionally  guaranteed  the
       repayment of $200,000 of senior  subordinated  notes (the "Notes") issued
       to finance the  acquisition  of the Company from Pitney Bowes.  The Notes
       are  subordinate  to financing of the Credit  Agreement,  dated August 7,
       1995, as amended by four amendments to Credit  Agreement,  dated June 28,
       1996, June 27, 1997,  July 21, 1997 and November 14, 1997  (collectively,
       the "Credit Agreement"),  and other senior indebtedness as defined in the
       indenture pursuant to which the Notes were issued (the "Note Indenture").
       The Credit Agreement currently consists of a $75.0 million Tranche B Term
       Loan due June 30, 2002 (the "Tranche B Loan"), a $62.75 million Tranche C
       Term Loan due June 30, 2003 (the  "Tranche C Loan" and together  with the
       Tranche  B Loan,  the  "Term  Loans")  and a  six-year  revolving  credit
       facility  of up to  $40.0  million  (the  "Revolving  Credit  Facility").
       Dictaphone  Non-U.S.  is not a guarantor of the Notes.  In January  1998,
       Dictaphone  Corporation  was merged into Dictaphone  Corporation  (U.S.),
       whereupon  the  surviving  corporation  changed  its name to  "Dictaphone
       Corporation".


                                       9

<PAGE>

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

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


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

<TABLE>
<CAPTION>
                                                           DICTAPHONE       DICTAPHONE      CONSOLIDATING
                                                          CORPORATION        NON-U.S.        ADJUSTMENTS     CONSOLIDATED
                                                            --------         --------         --------         --------
       <S>                                                  <C>              <C>              <C>              <C>     
       Revenue from:
         Product sales and rentals                          $ 47,939         $  7,495         $ (3,018)        $ 52,416
         Contract manufacturing sales                         10,739               --               --           10,739
         Support services                                     22,074            2,487               --           24,561
                                                            --------         --------         --------         --------
             Total revenues                                   80,752            9,982           (3,018)          87,716
                                                            --------         --------         --------         --------

       Costs and expenses:
         Cost of sales, rentals and support services          44,152            5,188           (3,211)          46,129
         Selling and administrative                           31,520            4,205               --           35,725
         Research and development                              3,813               --               --            3,813
         Interest expense - net and other                      9,931              923               --           10,854
                                                            --------         --------         --------         --------
             Total costs and expenses                         89,416           10,316           (3,211)          96,521
                                                            --------         --------         --------         --------

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

       Loss before income taxes                               (7,777)            (334)            (694)          (8,805)

       Income tax benefit (expense)                            3,005             (146)             (77)           2,782
                                                            --------         --------         --------         --------

       Net loss                                             $ (4,772)        $   (480)        $   (771)        $ (6,023)
                                                            ========         ========         ========         ========
</TABLE>


                                       10

<PAGE>


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


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

<TABLE>
<CAPTION>
                                                          DICTAPHONE        DICTAPHONE     CONSOLIDATING
                                                          CORPORATION        NON-U.S.       ADJUSTMENTS      CONSOLIDATED
                                                            --------         --------         --------         --------
       <S>                                                  <C>              <C>              <C>              <C>     
       Revenue from:
         Product sales and rentals                          $ 50,780         $  3,593         $ (2,173)        $ 52,200
         Contract manufacturing sales                         11,575               --               --           11,575
         Support services                                     20,222            1,879               --           22,101
                                                            --------         --------         --------         --------
             Total revenues                                   82,577            5,472           (2,173)          85,876
                                                            --------         --------         --------         --------

       Costs and expenses:
         Cost of sales, rentals and support services          43,800            3,445           (2,114)          45,131
         Selling and administrative                           28,815            2,640               --           31,455
         Research and development                              4,898               --               --            4,898
         Interest expense - net and other                      9,337            1,026               --           10,363
                                                            --------         --------         --------         --------
             Total costs and expenses                         86,850            7,111           (2,114)          91,847
                                                            --------         --------         --------         --------

       Equity (loss) earnings                                   (702)              --              702               --
                                                            --------         --------         --------         --------

       (Loss) income before income taxes                      (4,975)          (1,639)             643           (5,971)

       Income tax (expense) benefit                              (23)             586               24              587
                                                            --------         --------         --------         --------

       Net (loss) income                                    $ (4,998)        $ (1,053)        $    667         $ (5,384)
                                                            ========         ========         ========         ========
</TABLE>


                                       11

<PAGE>

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


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

<TABLE>
<CAPTION>
                                                           DICTAPHONE        DICTAPHONE       CONSOLIDATING
                                                           CORPORATION         NON-U.S.        ADJUSTMENTS      CONSOLIDATED
                                                            ---------         ---------         ---------         ---------
       <S>                                                  <C>               <C>               <C>               <C>      
       Revenue from:
         Product sales and rentals                          $ 132,311         $  24,706         $  (8,642)        $ 148,375
         Contract manufacturing sales                          30,364                --                --            30,364
         Support services                                      62,059             8,026                --            70,085
                                                            ---------         ---------         ---------         ---------
             Total revenues                                   224,734            32,732            (8,642)          248,824
                                                            ---------         ---------         ---------         ---------

       Costs and expenses:
         Cost of sales, rentals and support services          133,153            20,385            (8,964)          144,574
         Selling and administrative                           100,270            11,769                --           112,039
         Research and development                              11,146                --                --            11,146
         Interest expense - net and other                      29,430             2,337                --            31,767
                                                            ---------         ---------         ---------         ---------
             Total costs and expenses                         273,999            34,491            (8,964)          299,526
                                                            ---------         ---------         ---------         ---------

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

       (Loss) income before income taxes                      (61,695)           (1,759)           12,752           (50,702)

       Income tax benefit (expense)                            17,676               219              (130)           17,765
                                                            ---------         ---------         ---------         ---------

       Net (loss) income                                    $ (44,019)        $  (1,540)        $  12,622         $ (32,937)
                                                            =========         =========         =========         =========
</TABLE>


                                       12

<PAGE>

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


                             DICTAPHONE CORPORATION
         SUPPLEMENTAL CONSOLIDATING STATEMENT OF OPERATIONS INFORMATION
                      NINE MONTHS ENDED SEPTEMBER 30, 1998

<TABLE>
<CAPTION>
                                                           DICTAPHONE        DICTAPHONE       CONSOLIDATING
                                                           CORPORATION        NON-U.S.         ADJUSTMENTS       CONSOLIDATED
                                                            ---------         ---------         ---------         ---------
       <S>                                                  <C>               <C>               <C>               <C>      
       Revenue from:
         Product sales and rentals                          $ 147,103         $  13,514         $  (7,198)        $ 153,419
         Contract manufacturing sales                          35,067                --                --            35,067
         Support services                                      60,488             5,712                --            66,200
                                                            ---------         ---------         ---------         ---------
             Total revenues                                   242,658            19,226            (7,198)          254,686
                                                            ---------         ---------         ---------         ---------

       Costs and expenses:
         Cost of sales, rentals and support services          132,359            12,260            (7,519)          137,100
         Selling and administrative                            93,420             9,078                --           102,498
         Research and development                              12,854                --                --            12,854
         Interest expense - net and other                      26,978             2,449                --            29,427
                                                            ---------         ---------         ---------         ---------
             Total costs and expenses                         265,611            23,787            (7,519)          281,879
                                                            ---------         ---------         ---------         ---------

       Equity (loss) earnings                                  (1,800)               --             1,800                --
                                                            ---------         ---------         ---------         ---------

       (Loss) income before income taxes                      (24,753)           (4,561)            2,121           (27,193)

       Income tax (expense) benefit                            (1,383)            1,754              (118)              253
                                                            ---------         ---------         ---------         ---------

       Net (loss) income                                    $ (26,136)        $  (2,807)        $   2,003         $ (26,940)
                                                            =========         =========         =========         =========
</TABLE>


                                       13

<PAGE>

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


                             DICTAPHONE CORPORATION
              SUPPLEMENTAL CONSOLIDATING BALANCE SHEET INFORMATION
                                DECEMBER 31, 1997

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

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

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


                                       14

<PAGE>

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


                             DICTAPHONE CORPORATION
              SUPPLEMENTAL CONSOLIDATING BALANCE SHEET INFORMATION
                               SEPTEMBER 30, 1998

<TABLE>
<CAPTION>
                                                        DICTAPHONE        DICTAPHONE     CONSOLIDATING
                                                        CORPORATION        NON-U.S.       ADJUSTMENTS       CONSOLIDATED
                                                         ---------        ---------        ---------         ---------
       <S>                                               <C>              <C>              <C>               <C>      
       ASSETS
       Current assets:
         Cash                                            $   3,363        $     867        $      --         $   4,230
         Accounts receivable                                80,706            5,749           (3,474)           82,981
         Inventories                                        51,342            3,538             (507)           54,373
         Other current assets                                6,984            3,867              205            11,056
                                                         ---------        ---------        ---------         ---------
           Total current assets                            142,395           14,021           (3,776)          152,640

       Investments in subsidiaries                          30,763               --          (30,763)               --
       Property, plant and equipment, net                   27,762            3,315               --            31,077
       Intangibles, net                                    190,868           13,755               --           204,623
       Deferred financing costs, net                         9,864               --               --             9,864
       Other assets                                         51,459            3,794               --            55,253
                                                         ---------        ---------        ---------         ---------
       Total assets                                      $ 453,111        $  34,885        $ (34,539)        $ 453,457
                                                         =========        =========        =========         =========

       LIABILITIES AND STOCKHOLDERS'
       EQUITY
       Current liabilities:
         Accounts payable, interest payable
          and accrued liabilities                        $  37,029        $   6,929        $  (3,805)        $  40,153
       Advance billings                                     39,442            2,643               --            42,085
       Current portion of long-term debt                       628              166               --               794
                                                         ---------        ---------        ---------         ---------
           Total current liabilities                        77,099            9,738           (3,805)           83,032
       Long-term debt                                      357,572           17,820          (17,491)          357,901
       Deferred gain                                         1,771               --               --             1,771
       Other liabilities                                    11,945              805               --            12,750
       Stockholders' equity                                  4,724            6,522          (13,243)           (1,997)
                                                         ---------        ---------        ---------         ---------
       Total liabilities and stockholders' equity        $ 453,111        $  34,885        $ (34,539)        $ 453,457
                                                         =========        =========        =========         =========
</TABLE>



                                       15

<PAGE>

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


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

<TABLE>
<CAPTION>
                                                         DICTAPHONE       DICTAPHONE     CONSOLIDATING
                                                         CORPORATION       NON-U.S.       ADJUSTMENTS      CONSOLIDATED
                                                          --------         --------         --------         --------
       <S>                                                <C>              <C>              <C>              <C>      
       Operating activities:
         Net loss                                         $(31,727)        $ (1,540)        $    330         $(32,937)
         Adjustments to reconcile net loss
          to net cash provided by (used in)
          operating activities:
           Depreciation and amortization                    40,335            2,568               --           42,903
           Provision for deferred income taxes             (17,821)            (113)             130          (17,804)
           Non-cash provision for inventory
            obsolescence                                     9,535              956               --           10,491
           Change in assets and liabilities:
             Accounts receivable                           (10,735)          (1,219)          (3,615)         (15,569)
             Inventories                                    (4,232)           4,541             (322)             (13)
             Other current assets                           (1,046)            (795)              --           (1,841)
             Accounts payable and accrued
              liabilities                                   (6,101)          (3,723)           3,760           (6,064)
             Advance billings                                   69             (512)              --             (443)
             Other assets and other                         (3,040)             594             (403)          (2,849)
                                                          --------         --------         --------         --------
       Cash (used in) provided by operating
        activities                                         (24,763)             757             (120)         (24,126)
                                                          --------         --------         --------         --------

       Investing activities:
         Net investment in fixed assets                     (3,649)            (286)              --           (3,935)
                                                          --------         --------         --------         --------
       Cash used in investing activities                    (3,649)            (286)              --           (3,935)
                                                          --------         --------         --------         --------

       Financing activities:
         Repayment under term loan facility                 (8,250)              --               --           (8,250)
         Borrowing from revolving credit facility           71,300               --               --           71,300
         Repayment under revolving credit facility         (36,800)              --               --          (36,800)
         Other                                                (889)            (507)             120           (1,276)
                                                          --------         --------         --------         --------
       Cash provided by (used in) financing
        activities                                          25,361             (507)             120           24,974
                                                          --------         --------         --------         --------

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

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

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

       Cash, end of period                                $  3,518         $  1,199         $     --         $  4,717
                                                          ========         ========         ========         ========
</TABLE>



                                       16

<PAGE>

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


                             DICTAPHONE CORPORATION
         SUPPLEMENTAL CONSOLIDATING STATEMENT OF CASH FLOWS INFORMATION
                      NINE MONTHS ENDED SEPTEMBER 30, 1998

<TABLE>
<CAPTION>
                                                        DICTAPHONE        DICTAPHONE      CONSOLIDATING
                                                        CORPORATION        NON-U.S.        ADJUSTMENTS     CONSOLIDATED
                                                          --------         --------         --------         --------
       <S>                                                <C>              <C>              <C>              <C>      
       Operating activities:
         Net loss                                         $(26,136)        $ (2,807)        $  2,003         $(26,940)
         Adjustments to reconcile net loss
          to net cash provided by (used in)
          operating activities:
           Depreciation and amortization                    29,253            2,055               --           31,308
           Provision for deferred income taxes               1,150           (1,543)              --             (393)
           Change in assets and liabilities:
              Accounts receivable                          (15,822)           2,638            1,830          (11,354)
              Inventories                                   (5,380)             (58)            (321)          (5,759)
              Other current assets                             885             (129)             118              874
              Accounts payable and accrued
               liabilities                                 (11,909)             680           (2,011)         (13,240)
              Advance billings                               5,190             (166)              --            5,024
              Other assets and other                        (4,976)             516           (3,407)          (7,867)
                                                          --------         --------         --------         --------
       Cash (used in) provided by operating
        activities                                         (27,745)           1,186           (1,788)         (28,347)
                                                          --------         --------         --------         --------

       Investing activities:
         Net investment in fixed assets                     (4,895)            (419)              --           (5,314)
         Sale of building                                   14,000               --               --           14,000
                                                          --------         --------         --------         --------
         Cash provided by (used in) investing
          activities                                         9,105             (419)              --            8,686
                                                          --------         --------         --------         --------

       Financing activities:
         Repayment under term loan facility                 (1,800)              --               --           (1,800)
         Borrowing from revolving credit facility           54,000               --               --           54,000
         Repayment under revolving credit facility         (37,000)              --               --          (37,000)
         Other                                              (1,473)          (1,851)           1,788           (1,536)
                                                          --------         --------         --------         --------
       Cash provided by (used in) financing
        activities                                          13,727           (1,851)           1,788           13,664
                                                          --------         --------         --------         --------

       Effect of exchange rate changes on cash                  --              (50)              --              (50)
                                                          --------         --------         --------         --------

       Decrease in cash                                     (4,913)          (1,134)              --           (6,047)

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

       Cash, end of period                                $  3,363         $    867         $     --         $  4,230
                                                          ========         ========         ========         ========
</TABLE>


                                       17

<PAGE>

7.     COMPREHENSIVE INCOME

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

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

<TABLE>
<CAPTION>
                                               THREE MONTHS ENDED                NINE MONTHS ENDED
                                                  SEPTEMBER 30,                    SEPTEMBER 30,
                                           -------------------------         -------------------------
                                             1997             1998             1997             1998
                                           --------         --------         --------         --------
       <S>                                 <C>              <C>              <C>              <C>      
       Net loss                            $ (6,023)        $ (5,384)        $(32,937)        $(26,940)

       Foreign currency translation
        adjustments                            (405)              76           (1,154)            (282)
                                           --------         --------         --------         --------

       Total comprehensive income          $ (6,428)        $ (5,308)        $(34,091)        $(27,222)
                                           ========         ========         ========         ========
</TABLE>

8.     SALE/LEASEBACK AGREEMENT

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

             Future minimum lease payments are as follows:

             YEARS ENDED DECEMBER 31,

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


                                       18

<PAGE>


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

       OVERVIEW

<TABLE>
<CAPTION>
                                                       THREE MONTHS ENDED      NINE MONTHS ENDED
                                                          SEPTEMBER 30,          SEPTEMBER 30,
                                                       ------------------    --------------------
                                                         1997       1998       1997        1998
                                                       -------    -------    --------    --------
                                                                     (IN MILLIONS)
                                                                      (UNAUDITED)
       <S>                                             <C>        <C>        <C>         <C>     
       Total revenue                                   $  87.7    $  85.9    $  248.8    $  254.7

       Cost of sales, rentals and support services        46.1       45.1       144.6       137.1
       Selling and administrative (1)                     35.8       31.5       112.0       102.5
       Research and development                            3.8        4.9        11.1        12.9
                                                       -------    -------    --------    --------
           Operating profit (loss)                         2.0        4.4       (18.9)        2.2
                                                       -------    -------    --------    --------

       Net interest expense and other                     10.8       10.4        31.8        29.4
       Income tax benefit                                  2.8        0.6        17.8         0.3
                                                       -------    -------    --------    --------

       Net loss                                        $  (6.0)   $  (5.4)   $  (32.9)   $  (26.9)
                                                       =======    =======    ========    ========

       EBITDA (2)                                      $  14.4    $  10.9    $   31.9    $   33.0
                                                       =======    =======    ========    ========
</TABLE>

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

       (1)    Includes amortization of intangibles.

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


                                       19

<PAGE>

<TABLE>
<CAPTION>
                                                       THREE MONTHS ENDED    NINE MONTHS ENDED
                                                          SEPTEMBER 30,        SEPTEMBER 30,
                                                        -----------------   -------------------
                                                          1997      1998      1997       1998
                                                        -------   -------   --------   --------
                                                                    (IN MILLIONS)
                                                                     (UNAUDITED)
       <S>                                              <C>       <C>       <C>        <C>     
       Revenue from:
           Sales:
                Integrated Voice Systems                $  10.4   $   9.1   $   33.0   $   33.1
                Integrated Health Systems                   9.4      12.3       26.1       32.4
                Communication Recording Systems            17.9      19.4       43.5       48.8
                Customer Service Parts                      4.7       4.2       13.7       13.3
                International and Dealer Operations         9.6       6.8       30.7       24.8
           Rentals                                          0.4       0.4        1.4        1.0
                                                        -------   -------   --------   --------
                    Product sales and rentals              52.4      52.2      148.4      153.4
           Contract Manufacturing                          10.7      11.6       30.3       35.1
           Support service:
                Customer Service                           21.3      19.3       60.3       58.5
                Application & Training Specialists          0.8       0.9        1.8        2.0
                International and Dealer Operations         2.5       1.9        8.0        5.7
                                                        -------   -------   --------   --------
                    Total support service                  24.6      22.1       70.1       66.2

       Total revenue                                    $  87.7   $  85.9   $  248.8   $  254.7
                                                        =======   =======   ========   ========
</TABLE>


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

       Total  revenue  decreased  2.1% to $85.9  million in the third quarter of
1998 from $87.7 million for the third  quarter of 1997.  This decline in revenue
is  attributable  to lower product sales revenue from  Integrated  Voice Systems
("I.V.S.") and lower sales and support  service revenue from  International  and
Dealer  Operations and Customer  Service,  partially  offset by increased  sales
revenue from  Integrated  Health Systems  ("I.H.S."),  Communications  Recording
Systems ("C.R.S.") and Contract Manufacturing.

       I.V.S.  revenue  declined 11.8% to $9.1 million from $10.4 million due to
lower  sales  of  the  Company's  desktop,  Synergy(TM)  and  Straight  Talk(TM)
products.  I.V.S.  orders in the third  quarter of 1998  declined  10.0% to $9.9
million  from  $11.0  million  in the  third  quarter  of 1997.  I.H.S.  revenue
increased  31.2% to $12.3 million from $9.4 million due to increased  Enterprise
Express(TM) sales. I.H.S. orders in the third quarter of 1998 increased 62.5% to
$18.1 million from $11.1 million in the third  quarter of 1997.  C.R.S.  revenue
increased  8.5%  to  $19.4  million  from  $17.9  million  due  to the  sale  of
Prolog(TM)/Guardian(TM) software upgrades. C.R.S. orders in the third quarter of
1998  declined  1.5% to $16.5 million from $16.8 million in the third quarter of
1997.  Customer Service revenue (including sale of parts) declined 9.6% to $23.5
million from $26.0  million due to lower proprietary  product  service  contract
revenue  associated with the significant,  one-time billing in the third quarter
of 1997 of a backlog of  proprietary  product  service  contract  renewals,  and
reduced third party maintenance  revenue partially offset by increased  warranty
revenue.  Sales and service  revenue from  International  and Dealer  Operations
declined  28.8% to $8.7 million from $12.1 million due to lower sales of system,
desktop/portable  and C.R.S.  products and lower service revenue as well as $0.2
million of unfavorable  currency exchange.  Orders from International and Dealer
Operations  declined  35.4% to $6.9  million  in the third  quarter of 1998 from
$10.7  million in


                                       20

<PAGE>

the third quarter of 1997.  Contract  Manufacturing  revenue  increased  7.8% to
$11.6  million  in the third  quarter  of 1998 from  $10.7  million in the third
quarter of 1997 due to additional printed circuit assembly revenue from existing
customers  as  well  as  additional  revenue  from  new  Contract  Manufacturing
customers.

       Cost of  sales,  rentals  and  support  services  declined  2.2% to $45.1
million  (52.6% of revenue)  during the third quarter of 1998 from $46.1 million
(52.6%  of  revenue)  in  the  third  quarter  of  1997.   Excluding  additional
depreciation  and  amortization  expense  associated  with  purchase  accounting
adjustments  related to the  Acquisition,  cost of sales,  rentals  and  support
services would have increased by 0.4 percentage  points to 52.5%.  This increase
is attributable to higher Customer Service field, technical and support services
costs.

       Selling  and   administrative   expenses   (including   amortization   of
intangibles) declined 12.0% to $31.5 million (36.6% of revenue) during the third
quarter of 1998 from $35.8  million  (40.7% of revenue) in the third  quarter of
1997. Excluding additional depreciation and amortization expense associated with
purchase  accounting  adjustments related to the Acquisition of $4.7 million and
$8.7 million for the third quarter of 1998 and 1997,  respectively,  selling and
administrative  expenses  would have  declined  by $0.2  million  from the third
quarter of 1997 to the third quarter of 1998.  This decline is  attributable  to
lower  I.V.S.  and I.H.S.  selling  expenses  and lower  operating  expenses for
International  and  Dealer  Operations,  partially  offset by  increased  C.R.S.
selling  expense and  increased  telecommunications  support  costs,  management
compensation and project costs associated with the Company's  efforts to upgrade
its information systems.

       Research and development  expenses of $4.9 million (9.4% of product sales
and rental revenue) increased 28.5% from $3.8 million (7.3% of product sales and
rental revenue), reflecting increased staffing and compensation.

       The Company recorded an operating profit of $4.4 million during the third
quarter of 1998  compared to an  operating  profit of $2.0 million for the third
quarter  of 1997.  Excluding  the  impact  of  purchase  accounting  adjustments
associated  with the  Acquisition of $4.8 million and $9.2 million for the third
quarter of 1998 and 1997, respectively,  operating profit would have declined by
$2.1 million due to lower revenue and higher operating expenses.

       The  Company has  recorded a gross  deferred  tax asset of $84.2  million
included  in  other  assets   reflecting  the  benefit  of  net  operating  loss
carryforwards and various book tax temporary differences. The net operating loss
carryforward  for federal income tax purposes as of September 30, 1998 is $106.1
million of which  $13.7  million of the net  operating  loss  carryforward  will
expire in the year 2010,  $33.2  million  will  expire in the year  2011,  $39.3
million will expire in the year 2012,  and $19.9 million will expire in the year
2018. In order to fully realize the deferred tax asset, the Company will need to
generate  future  taxable  income prior to expiration of the net operating  loss
carryforwards.  In 1997, the Company  established a valuation allowance of $24.1
million  against the deferred tax assets.  During the first nine months of 1998,
the Company increased its valuation allowance by $9.7 million resulting in a net
deferred  tax  asset of  $50.4  million.  Management  believes,  based  upon the
Company's history of prior operating results, its current circumstances, and its
expectations for the future, that taxable income of the Company will more likely
than not be  sufficient  to fully  utilize the net  deferred  tax asset of $50.4
million recorded at September 30, 1998,  prior to expiration.  The amount of the
deferred tax asset considered realizable, however, could be reduced if estimates
of future taxable income during the net operating loss  carryforward  period are
reduced.


                                       21

<PAGE>

RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 1998 VS. NINE MONTHS 
ENDED SEPTEMBER 30, 1997

       Total revenue  increased 2.4% to $254.7 million for the first nine months
of 1998 from $248.8 million for the first nine months of 1997.  This increase in
revenue is attributable to increased product sales revenue from I.V.S.,  I.H.S.,
and C.R.S.,  and higher revenue from Contract  Manufacturing and Application and
Training Specialists  ("A.T.S."),  offset in part by lower revenue from Customer
Service (including sale of parts) and International and Dealer Operations.

       I.V.S. revenue increased  0.5% to $33.1 million from $33.0 million due to
higher Enterprise  Express(TM) sales.  I.V.S. orders in the first nine months of
1998 declined 10.8% to $33.7 million from $37.8 million in the first nine months
of 1997.  I.V.S.  order  backlog at September  30, 1998  declined  26.3% to $4.8
million  versus order  backlog at December 31, 1997.  I.H.S.  revenue  increased
24.4%  to  $32.4  million  from  $26.1  million  due  to  increased   Enterprise
Express(TM)  sales.  I.H.S.  orders for the first nine months of 1998  increased
36.8% to $38.1  million  from $27.9  million  in the first nine  months of 1997.
I.H.S.  order  backlog at September  30, 1998  increased  45.2% to $17.2 million
versus order backlog at December 31, 1997.  C.R.S.  revenue  increased  12.2% to
$48.8  million from $43.5 million due to increased  Prolog(TM)/Guardian(TM)  and
Insight(TM) installations as well as Prolog(TM)/Guardian(TM)  software upgrades.
C.R.S.  orders for the first nine months of 1998 increased 0.8% to $45.1 million
from $44.7  million in the first nine months of 1997.  C.R.S.  order  backlog at
September  30, 1998  declined  47.7% to $3.9  million  versus  order  backlog at
December 31, 1997.  Customer Service revenue  (including sale of parts) declined
2.9% to $71.8  million  from $74.0  million  due to  reductions  in  proprietary
product and third party maintenance  revenue.  A.T.S. revenue increased 14.7% to
$2.0 million from $1.8 million due to increased  customer training in support of
I.V.S., I.H.S. and C.R.S. products. Sales and service revenue from International
and Dealer Operations  declined 21.4% to $30.5 million from $38.7 million due to
lower sales of systems,  C.R.S. and desktop/portable  products and lower service
revenue as well as $0.5 million of unfavorable  currency  exchange.  Orders from
International  and Dealer  Operations for the first nine months of 1998 declined
26.9% to $22.7  million  from $31.1  million  in the first nine  months of 1997.
International and Dealer Operations order backlog at September 30, 1998 declined
38.0% to $1.3  million  versus  order  backlog at December  31,  1997.  Contract
Manufacturing revenue increased 15.5% to $35.1 million from $30.3 million due to
both growth from existing Contract  Manufacturing  customers and the addition of
new Contract Manufacturing accounts.

       Cost of sales,  rentals  and  support  services  declined  5.2% to $137.1
million  (53.8% of  revenue)  during the first nine  months of 1998 from  $144.6
million  (58.1%  of  revenue)  for the  first  nine  months  of 1997.  Excluding
additional  depreciation  and  amortization  expense  associated  with  purchase
accounting  adjustments related to the Acquisition,  cost of sales,  rentals and
support  services  would have declined by 3.5 percentage  points to 53.7%.  This
decline is  attributable to a $10.5 million charge in the second quarter of 1997
for inventory  obsolescence,  offset in part by higher  Customer  Service field,
technical  and  support  costs  and a  higher  content  of low  margin  Contract
Manufacturing revenue.

       Selling  and   administrative   expenses   (including   amortization   of
intangibles) declined 8.5% to $102.5 million (40.2% of revenue) during the first
nine months of 1998 from $112.0  million  (45.0% of revenue)  for the first nine
months of 1997.  Excluding  additional  depreciation  and  amortization  expense
associated with purchase  accounting  adjustments  related to the Acquisition of
$20.4  million  and $27.7  million  for the first nine  months of 1998 and 1997,
respectively,  selling and  administrative  expenses would have declined by $2.3
million  from the first nine  months of 1997 to the first  nine  months of 1998.
This decline is attributable to a $2.3 million severance provision in the second
quarter of 1997, and lower I.V.S. and I.H.S. selling expenses,  partially offset
by increased C.R.S. selling costs,  start-up costs associated with the Company's
Milford  assembly  facility,  and project  costs  associated  with the Company's
efforts to upgrade its information systems.


                                       22

<PAGE>

       Research and development expenses of $12.9 million (8.9% of product sales
and rental  revenue)  increased  15.3% from $11.1 million (7.5% of product sales
and rental revenue), reflecting increased staffing and compensation.

       The Company recorded an operating profit of $2.2 million during the first
nine months of 1998 compared to an operating loss of $18.9 million for the first
nine months of 1997.  Excluding  the impact of purchase  accounting  adjustments
associated with the Acquisition of $20.7 million and $29.9 million for the first
nine  months  of 1998  and  1997,  respectively,  operating  profit  would  have
increased by $12.0  million due to 1997 charges for inventory  obsolescence  and
severance, and higher revenue.

LIQUIDITY AND CAPITAL RESOURCES

       The  Company's  liquidity  requirements  consists  primarily of scheduled
payments of principal and interest on its  indebtedness,  working  capital needs
and capital  expenditures.  At September 30, 1998,  the Company had  outstanding
Term Loans of $132.2 million,  a $26.0 million loan outstanding  under the $40.0
million  Revolving  Credit  Facility and $200.0  million of Notes.  Availability
under the Revolving  Credit  Facility at September  30, 1998 was $14.0  million.
Scheduled annual principal  payments on the Term Loans are $0.6 million in 1998,
1999 and  2000.  There  are no  scheduled  reductions  in the  Revolving  Credit
Facility over the next three years.

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

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

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

       The Company had $200.0  million of Notes  outstanding as of September 30,
1998. The Notes are  subordinated to the Credit  Agreement  financings and other
senior  indebtedness,  as  defined  in the Note  Indenture.  The  Notes  contain
covenants  similar to the Credit  Agreement  and provide for each  noteholder to
have the right to require that the Company  repurchase  the Notes at 101% of the
principal amount upon a change of control as defined in the Note Indenture.  The
Notes bear interest of 11-3/4% per annum, payable semi-annually on each February
1 and August 1. The Notes mature on August 1, 2005. At September  30, 1998,  the
fair value of the Notes was favorable $18.0 million based on dealer quotes.


                                       23

<PAGE>

       Capital  expenditures  for the first  nine  months of 1998  totaled  $8.9
million. The Company does not expect that the limitation on capital expenditures
contained in the Credit  Agreement  will limit,  in any material  respects,  the
Company's ability to fund capital expenditures.

       The Company's  quarterly  revenues and other operating  results have been
and will  continue to be affected by a wide variety of factors that could have a
material  adverse  effect on the  Company's  financial  performance  during  any
particular quarter.  Such factors include,  but are not limited to, the level of
orders that are  received and shipped by the Company in any given  quarter,  the
rescheduling and  cancellation of orders by customers,  availability and cost of
materials,  the  Company's  ability  to enhance  its  existing  products  and to
develop,  manufacture and  successfully  introduce and market new products,  new
product developments by the Company's competitors, market acceptance of products
of both the  Company  and its  competitors,  competitive  pressures  on  prices,
significant  damage to or prolonged  delay in operations  at the Company's  sole
manufacturing facility, and interest rate and foreign exchange fluctuations. The
Company  introduced a number of new  products in its target  markets in 1997 and
1998 and plans to introduce  additional  new products in 1999 which are expected
to enhance future revenues and liquidity of the Company.  However,  there can be
no assurance  that the Company will be able to implement  its plans to introduce
such  products  in a  timely  fashion,  or that  such  products  will  meet  the
expectations of the Company for either revenues or profitability. Primarily as a
result  of  the  timing  of  new  product   delivery  and  lower   international
performance,  the Company,  at this time is uncertain as to whether, in the near
term, it will be able to meet certain existing financial  covenants contained in
the Credit Agreement.  Although the Company is in compliance with all aspects of
the  Credit  Agreement,  it  anticipates  that it may need to obtain  waivers or
amendments  in  respect  of the  Credit  Agreement.  There can be no  assurance,
however,  that such waivers or amendments,  if necessary,  can be obtained.  The
Company is actively exploring strategic alternatives regarding its manufacturing
facility  in  Melbourne,  Florida,  including a  potential  divestiture  of such
facility,  for  the  purpose  of  re-allocating  capital  resources,   improving
liquidity,  and  achieving  greater focus on its core  business.  Subject to the
foregoing,  the Company believes that cash flows from operating activities,  the
successful  introduction  of its new products,  and provisions  under the Credit
Agreement for the sale or financing of certain assets, as well as its ability to
borrow  under  the  Revolving  Credit  Facility,  will be  adequate  to meet the
Company's debt service  obligations,  working  capital needs and planned capital
expenditures for the foreseeable future.

YEAR 2000 READINESS

General
-------

       Most  businesses are facing a challenge at the turn of the century due to
a common  computer-related  practice employed since the 1960's of representing a
year with just two digits rather than four digits. The problem is not restricted
to system  hardware  components  but will be  manifested  within many  operating
systems,  firmware,  application  software  and  equipment  used  throughout  an
organization.  Dictaphone  has been and  continues  to be  actively  engaged  in
resolving its Year 2000 issues.  The Company has established a Year 2000 Project
Office charged with  evaluating  the Company's Year 2000 issues and  identifying
and  developing  appropriate  remedies  and  action  plans  with  respect to the
Company's  internal  systems  and the  Company's  products  to  ensure  a smooth
transition into the new millennium.

       The Year 2000 Project  Office has adopted a five phase program to address
the Company's  Year 2000 issues  consisting of Phase I - review and inventory of
existing systems, products,  equipment and suppliers that may be affected by the
Year 2000 issue;  Phase II - assessment  of the impact of the Year 2000 issue on
systems,  products,   equipment  and  suppliers;  Phase  III  -  remediation  or
replacement of non-compliant  systems,  products and equipment and determination
and implementation of solutions to address non-compliant  suppliers and vendors;
Phase IV - testing of systems, product and equipment following remediation;  and
Phase V - contingency planning.

       The  Company's  Year 2000 efforts have been  concentrated  into two major
areas:  1) internal use systems,  equipment and third party products used in the
Company's operations and 2) products sold by the Company to its customers.


                                       24

<PAGE>

State of Readiness
------------------

       The Company is utilizing both internal and external  resources to perform
Year 2000  testing on its  internal  systems  and  equipment.  The  Company  has
completed Phase I of the program and has made substantial progress on Phases II,
III  and IV  for  all  of  its  critical  systems  and  equipment.  The  Company
anticipates  completion  of the  work  required  on the  remaining  systems  and
equipment by mid 1999.  In  connection  with the  Company's  efforts to make its
internal   systems  Year  2000  compliant,   the  Company  has  accelerated  the
implementation  of a new  enterprise-wide  computer system in certain areas. The
implementation  timetable  for the  components of the new system is currently on
schedule and will be completed by mid 1999.

       With respect to third party  suppliers,  in early 1998 the Company  began
the process of identifying and prioritizing  critical  suppliers and vendors and
initiated  communication  concerning their plans to address the Year 2000 issue.
This process is continuing  and the Company  believes  efforts in this area will
continue  throughout 1999 as more information becomes available from these third
parties.

       With respect to products sold to the Company's customers, the Company has
completed  Phase I of the program and is actively  engaged in Phases II, III and
IV. The Company has identified certain products which require remediation and is
actively  involved in the development and  communication of such remediations to
the Company's  customers.  Based on current estimates,  the Company  anticipates
completion of these phases by mid 1999.

       Many of the Company's products rely on third party hardware, software and
firmware. The Company has been diligently working with all such third parties to
ascertain their readiness and the affect, if any, of their products'  compliance
status  on the  efficient  and  effective  operation  and  use of the  Company's
products.  Generally,  all  software,  hardware and firmware are supplied to the
Company by leading software companies that have Year 2000 programs of their own.
A majority of these vendors have provided information to the Company as to their
products' Year 2000 compliance status.  However,  there can be no guarantee that
the  software,  hardware or firmware  certified by third  parties,  on which the
Company's products may rely, will operate effectively and efficiently during and
after the  millennium.  The Company has,  however,  conducted  its own Year 2000
testing on integrated  products and believes that the risk of material operating
failures  associated  with the  components  provided by these  third  parties is
consistent with their product representations concerning Year 2000 compliance.

Costs
-----

       The Company  estimates that the aggregate  costs of its Year 2000 program
will be  approximately  $12.0  million,  including $8.0 million of costs already
incurred. Of the total program costs,  approximately $9.0 million represents new
software and hardware  purchases  for internal  Company  systems which have been
accelerated in connection with the Year 2000 issue. A significant portion of the
remaining  $3.0  million  in  costs  have not  been  and  will  not  consist  of
incremental  costs,  but rather  will  represent  the  redeployment  of existing
Company  resources.  This  redeployment  of  resources is not expected to have a
significant impact on the day-to-day operations of the Company. Based on current
estimates  and  information,  the Company does not  anticipate  that these costs
associated  with Year 2000  issues  will have a material  adverse  effect on the
Company's consolidated  financial position,  results of operations or cash flows
in  future  periods.  However,  these  cost  estimates,  as well as the  project
timetables  previously  mentioned are based on management's best estimates,  and
there can be no guarantee  that these  estimates will be achieved or that actual
results will not materially differ from these estimates.




                                       25

<PAGE>

Risks
-----

     With respect to the Company's internal systems,  the most reasonably likely
worst case  scenario for the  Company's  failure to identify or remediate a Year
2000 problem could be an interruption in, or failure of, certain normal business
activities or operations.  Such failures could  materially and adversely  affect
the Company's  results of  operations,  liquidity and  financial  condition.  In
addition, due to the uncertainty of the Year 2000 readiness of third parties and
suppliers and customers, the Company is unable to determine at this time whether
the consequences of the Year 2000 failures by these parties will have a material
impact on the Company's consolidated  financial position,  results of operations
or cash  flows. 

     The Company's  Year 2000  program,  however,  is expected to  significantly
reduce the Company's  exposure to these types of failures.  The Company believes
that the  implementation  of new systems and the timely  completion  of the Year
2000  program  should  reduce the risk of  internal  business  interruption  and
adverse financial impact.

       With respect to products sold to customers,  the most  reasonably  likely
worst case  scenario for Year 2000 related  product  failures  could include the
suspension of use of such product,  or continued use of the product with reduced
functionality  or  operating  ability.  If this were to occur,  customers  could
attempt to assert  liability  claims against the Company.  However,  the Company
believes  that,  based on the level of Year 2000 testing  performed to date, the
product  remedies  expected  to be made  available  to its  customers,  the time
remaining to implement  such remedies,  and the legal defenses  available to the
Company,  the  likelihood  of the  occurrence  of such  worst case  scenario  is
minimized.

Contingency Plans
-----------------

       Contingency plans are being prepared so that critical business  functions
will  continue to  operate.  These plans will  address  the  Company's  internal
systems and equipment, products sold by the Company to customers and third party
supplier  relationships.  The contingency plans will include manual alternatives
to  electronic  processes,  repair or  replacement  of products  and systems and
changes in  suppliers.  The  Company  expects  that  contingency  planning  will
continue  into  mid  1999,  and  will  further  evolve  as the  Company  obtains
additional information on the state of its Year 2000 readiness.

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


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
         ----------------------------------------------------------

       Not currently applicable to the Company.



                                       26

<PAGE>

                           PART II - OTHER INFORMATION

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

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


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

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

                   27     --    Financial Data Schedule.


UNDERTAKING:

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

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

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


                                       27

<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 12, 1998           Dictaphone Corporation
                                    ---------------------------------
                                    (Registrant)



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


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


                                       28

<PAGE>

                                                    EXHIBIT INDEX


                                                           Sequentially
Exhibits                    Description                    Numbered Page
--------                    -----------                    -------------


   27                       Financial Data Schedule





                                       29