UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                         -------------------------------

                                    FORM 10-K
                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended                                Commission File Number:
     December 31, 1996                                           0-10211

                             INTER-TEL, INCORPORATED

Incorporated in the State of Arizona                     I.R.S. No. 86-0220994

                        120 North 44th Street, Suite 200
                           Phoenix, Arizona 85034-1822

                                 (602) 302-8900
                       ----------------------------------

          Securities registered pursuant to Section 12(g) of the Act:

                                  Common Stock
              (12,951,163 shares outstanding as of March 14, 1997)

         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

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K (S 229.405 of this chapter) is not contained  herein,
and will not be contained,  to the best of registrant's knowledge, in definitive
proxy or information  statements  incorporated  by reference in Part III of this
Form 10-K or any amendment to this Form 10-K - [ ].

         The aggregate  market value of the voting stock held by  non-affiliates
of the  registrant,  based upon the last reported sales price in NASDAQ National
Market System on March 14, 1997, was approximately $149,000,000 Shares of Common
Stock held by each  executive  officer and director  have been  excluded in that
such persons may be deemed to be affiliates.
<PAGE>
         Materials have been incorporated by reference into this Report from the
following  documents:  (1)  materials  from  the  registrant's  Proxy  Statement
relating to its 1997 Annual Meeting of  Shareholders  have been  incorporated by
reference into Part III and Part IV and (2) documents from the registrant's Form
S-1 Registration  Statements (Nos. 2-70437 and 33-70054),  Form S-3 Registration
Statements  (Nos.  33-58161,   33-61437,  333-01735  and  333-12433),  Form  S-8
Registration Statements (Nos. 2-94805, 33-40353 and 33-73620), Annual Reports on
Form 10-K for the years December 31, 1984, 1988 and 1994, and current reports on
Form 8-K dated July 17, 1987, August 3, 1988 have been incorporated by reference
into Part IV, Item 14.  Portions of the Annual  Report to  Shareholders  for the
year ended December 31, 1996 are incorporated by reference into Part II.

                             INTER-TEL, INCORPORATED
                          1996 FORM 10-K ANNUAL REPORT

                                TABLE OF CONTENTS

                                     PART I
                                                                            Page

Item 1     Business                                                            3
Item 2     Properties                                                         20
Item 3     Legal Proceedings                                                  21
Item 4     Submission of Matters to a Vote
           of Security Holders                                                21

                                     PART II

Item 5     Market for the Registrant's Common Stock
           and Related Stockholder Matters                                    21
Item 6     Selected Financial Data                                            21
Item 7     Management's Discussion and Analysis of
           Financial Condition and Results of Operations                      21
Item 8     Financial Statements and Supplementary Data                        21
Item 9     Changes in and Disagreements with Accountants
           on Accounting and Financial Disclosure                             21

                                    PART III

Item 10    Directors and Executive Officers of the Registrant                 21
Item 11    Executive Compensation                                             22
Item 12    Security Ownership of Certain Beneficial Owners and Management     22
Item 13    Certain Relationships and Related Transactions                     22

                                     PART IV

Item 14    Exhibits, Financial Statement Schedules and Reports on Form 8-K    22
                                       2
<PAGE>
                                     PART I

ITEM 1.  BUSINESS

The Company

         This report contains  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.  Readers  are  cautioned  that such  statements  are only
predictions  and involve risks and  uncertainties.  Actual  results could differ
materially from those projected in the forward-looking statements as a result of
the risk  factors set forth  under  "Factors  That May Affect  Results of Future
Operations" below and elsewhere in this report.

         Inter-Tel,  incorporated  in  Arizona  in 1969,  is a  single  point of
contact,  full service solutions  integrator providing AXXESS and Axxent digital
business  communication  platforms,  AXXESSORY Talk voice processing  platforms,
call  processing  and  voice  processing   software  along  with  various  other
productivity  enhancing software  applications,  computer telephone integration,
and network services and long distance calling services, as well as maintenance,
leasing and support services. The Company's Common Stock is quoted on the Nasdaq
National Market System under the symbol INTL.

         The  Company  has  developed  a  distribution  network of direct  sales
offices,  dealers  and value added  resellers  (VARs)  which sell the  Company's
products to  small-to-medium-size  organizations and to divisions or departments
of  larger  organizations,   including  Fortune  500  companies,  large  service
organizations and governmental agencies. The Company has 29 direct sales offices
in the United States,  one in the United Kingdom,  one in Japan and a network of
hundreds of dealers and VARs who purchase directly from the Company. The Company
is also in the process of expanding its international dealer network.

         The Company's  strategy is to offer to its  customers,  through a broad
distribution  network,  the total  solution  for their  communications  needs--a
single source for their full range of telephony requirements,  and to provide to
its market segment, on a cost-effective  basis,  advanced technologies that have
achieved acceptance in the market for larger systems.

Products and Services

         The  Company's  current  and planned  products  and  services  span the
following portions of its market segment:

o   Digital Communication Platforms
o   Computer Telephone Integration
o   Voice Processing Software
o   Internet Connectivity
o   Networking Technologies
o   Network and Long Distance Services
o   Flexible Financing

         The market for the Company's  products and services is characterized by
rapid technological change and continuing demand for new products,  features and
applications. See "Factors That May Affect Results of Future Operations -- Rapid
Technological Change and Dependence on New and Timely Product Introductions."

Digital Communication Platforms

         Inter-Tel  offers an extensive line of digital  communication  systems,
including  hardware  platforms  and C++  software  applications,  which meet the
requirements  of most  businesses.  Because these  platforms are based upon open
architecture and conform to established computer 
                                       3
<PAGE>
and telephone  industry standard  programming  interfaces and protocols (such as
TAPI,  TSAPI  and  TCP/IP),  customers  can  choose  from a  variety  of  either
system/server  level or desktop  applications.  In  addition,  advanced  digital
technology,  such as T-1 and ISDN services,  are used with Inter-Tel's platforms
to provide some of the best communication services available.

         Inter-Tel's  flagship  product,   the  AXXESS  platform,   incorporates
advanced technology for computer and telephone  integration providing businesses
with the ability to  customize  applications  to enhance  their  operations  and
increase productivity.

         Future  enhancements  to the  current  AXXESS  platform  will allow the
system to accommodate virtually any size requirement.  Through fully transparent
digital  networking,  two or more systems can operate as one, supporting several
thousand devices.

         Another product reflective of Inter-Tel's evolution toward server-based
technologies is the Call Server.  Designed as a Windows NT telephony  server, it
incorporates AXXESS call processing software,  with its powerful call processing
features  and  CTI  potential,  plus  selected  Internet  services  and  unified
messaging  software  all in one  computer  industry  standard  X86  server.  The
Vocal'Net will use both proprietary  Inter-Tel digital terminals and single line
telephones.  The Vocal'Net server is designed for medium to large businesses. It
allows for  better  management  of data and  telecommunications  networks  while
providing integrated TCP/IP intranet and Internet voice connectivity.

         AXXESS

         The Company  commenced  commercial  shipments of the AXXESS  system and
software in the fourth  quarter of 1993. In 1996,  the Company  released  AXXESS
version  4.1,  which  expanded  the system to 512 ports and added such  advanced
capabilities  as primary rate ISDN support,  integrated  call  recording,  voice
prompts in multiple languages, and a Windows 95-based Attendants Console.

         The system  incorporates  fully-digital  processing and transmission to
the  desktop  and open  architecture  interfaces  which  allow the  system to be
integrated   with  and  controlled  by  attached   computers  such  as  PCs  and
workstations.  The system  incorporates  over one million lines of  proprietary,
object-oriented  C++  software  developed  by  the  Company,  which  facilitates
upgrades and incorporation of additional features and functionality.

         AXXESS system telephones incorporate  user-friendly,  6 by 16 character
LCD displays  with menu keys that permit the user to select from  multiple  menu
choices or access additional menu screens.  AXXESSORY Talk, the integrated voice
processing  application,  permits  push-button  selection  of  voice  processing
commands to appear on the  telephone's  LCD display,  as well as  voice-prompted
selections  through the telephone  keypad.  The AXXESS system is  multi-lingual,
offering  English or Japanese  voice  prompts and LCD  displays and allowing the
user to switch from one language to the other. Additional languages can be added
in the future.

         The open architecture  interface permits tight integration with a PC or
workstation  system bus, using several  industry-standard  interfaces to provide
efficient  access  to  voice  processing  and  other  applications  on the PC or
workstation.  Applications  include database  look-up (which utilizes  Caller-ID
information to retrieve customer  information  automatically from a computerized
database),  automated  attendant,  interactive  voice  response,  automatic call
distribution (which queues and prioritizes  incoming calls), and call accounting
(which  permits the  monitoring  of telephone  usage and toll cost).  The AXXESS
system is managed through a 
                                       4
<PAGE>
Microsoft   Windows-based  graphical  user  interface  on  a  PC  to  facilitate
installation, system configuration and programming.

         The AXXESS system utilizes  advanced  software to configure and utilize
real-time   digital   signal   processing   ("DSP")   semiconductor   components
incorporated  into the system  hardware.  The use of DSPs and  related  software
lowers  system  costs,   permits  higher   functionality  and  increases  system
flexibility.  For  example,  DSPs can be  configured  by the system  manager for
different  combinations  of  speakerphones,  conference  capabilities  and other
DSP-based  facilities.   The  system's  speakerphones   incorporate  full-duplex
technology,  which permits  speakerphones  to transmit in both directions at the
same time  without the  necessity  to override  one  speaker's  voice to prevent
feedback interference.

         The  AXXESS  software  is  written  in  a  high-level,  object-oriented
language which can operate on many commonly used  processors.  Accordingly,  the
software can be readily ported to other hardware platforms.  The Company intends
to port the AXXESS  software  to faster  microprocessors  which will  permit the
AXXESS to grow to a much larger size, in order to enhance the  functionality and
performance  of these  larger  systems and to permit a  migration  path from the
smaller AXXESS system as a customer's system requirements increase.

         Inter-Tel Axxent

         The Company  introduced its newest product line, the Inter-Tel  Axxent,
in the third  quarter of 1995.  The system  originally  supported 16 lines and 8
trunks.  Software  version 2.0,  released in third quarter  1996,  increased the
system  capacity  to 24 lines and 12  trunks.  Small  businesses  are  demanding
advanced telephony  applications  formerly reserved only for large corporations.
The  Inter-Tel  Axxent is designed to bring many of the  advanced  features  and
functionality of the AXXESS system to smaller  installations on a cost-effective
basis  while   enabling   users  to  migrate  to  an  AXXESS   system  as  their
telecommunications needs evolve. The Inter-Tel Axxent provides capabilities such
as computer telephone integration, DSP technology,  real-time ACD reporting, and
integrated  voice  processing.  Housed  in a  compact  PC  type  mid-tower,  the
Inter-Tel  Axxent platform also offers the convenience of a default  database so
the system is fully  operational  as soon as it is plugged  in.  Basic  database
programming can also be performed through the digital telephone  terminals.  The
system is sold through direct sales offices and direct  dealers to  professional
businesses such as doctors, lawyers, and architects.

         In addition to its line of digital communication platforms, the Company
continues to have success in its direct  sales  offices and dealer  distribution
channels  with its  traditional  IMX and  G-Series  family  of  products.  These
products  economically  bring advanced  communication  services to the Company's
customers, however, without the advantages of the open architecture capabilities
of the AXXESS and Inter-Tel Axxent. These products include:

o   GLX and GLX+
o   GMX-48
o   IMX 1224/2448/2460
o   IMX/GMX 256
o   IMX/GMX 416/832

         Inter-Tel also distributes  other leading  telecommunications  products
from its Factored  Products  Division through its direct sales offices,  dealers
and VARs.  Factored Products  represents products that Inter-Tel has endorsed as
the leading  communications  peripherals utilized in many day-to-day  functions.
Businesses   require   telecommunications    products   to   provide   increased
productivity,  ease  of  operations  and  reliability.  Many of  these  products
interface  with  
                                       5
<PAGE>
Inter-Tel   telephone  systems.   Inter-Tel's   product  selection  consists  of
videoconferencing, battery backup, headsets, surge protection, paging equipment,
wireless communications and data multiplexers.

Computer Telephone Integration (CTI)

         Through Computer Telephone Integration (CTI), two of the most important
business tools--the computer and the telephone--are  linked into one environment
to provide streamlined business processes and enhanced customer service.

         With CTI technology  and  Inter-Tel's  industry-standard  communication
platforms and C++,  object  oriented,  call  processing  software,  users can be
better prepared to answer incoming  telephone calls. With Inter-Tel's  AXXESSORY
Connect software for the AXXESS system and local Caller I.D. information,  users
can accept phone calls through their desktop PC. Caller  information  can appear
on the screen even before the call is answered.  On an  individual  desktop or a
company-wide  network  basis,  Inter-Tel  offers a variety of products,  such as
AXXESSORY ACD, that can manage automatic call distribution at peak efficiency or
route  incoming  telephone  calls,  based on various  parameters,  to a specific
person.  It can also  collect,  analyze  and report  real-time  call  processing
information for staff forecasting and analysis.

         Certain of Inter-Tel's  software  applications  can also integrate with
other   "off-the-shelf"   Windows  applications  such  as  personal  information
managers,  call routing or call  management  software  that can further  enhance
customer  service while  increasing call  efficiency and employee  productivity.
Inter-Tel  has  partnered  with a number of third party  software  developers to
integrate with their existing  applications to create a working  environment for
database, personal organizer, or terminal emulation programs.

         If these "off-the-shelf"  applications do not completely meet the needs
of a  customer,  the open  design of  Inter-Tel's  software  allows  independent
software developers to write custom applications through Inter-Tel's Developer's
Program. Or, Inter-Tel's CTI Solutions Group can provide professional consulting
services or development of individual customer applications,  for either desktop
or Local Area Network ("LAN")-based applications.

         Call  management  applications  that were once  reserved for large call
centers,  such as airline  reservation  centers or banking  operations,  are now
available and affordable from Inter-Tel for most businesses. The Company intends
to design future  enhancements to integrate  LAN-based solutions on a Windows NT
Server.

Voice Processing Software

         Inter-Tel's  AXXESSORY Talk,  Axxent Talk, and the IVX500 are all voice
processing  platforms that work with Inter-Tel's  communication  platforms.  All
three  applications use the Multi-Vendor  Interface Protocol (MVIP), an industry
standard for connecting  multi-vendor PC-based boards in voice processing,  data
switching and video systems.

         Future  enhancements to AXXESSORY Talk, the voice  processing  software
for the AXXESS  platform  are  planned,  including  the  ability to program  and
schedule  multiple voice mail  greetings,  cancel unheard  messages,  detect and
route  incoming faxes to a specific  extension and the ability to  automatically
return a call from voice mail by using Caller I.D.
                                       6
<PAGE>
         As the need to merge different  types of messages  continues to evolve,
Inter-Tel is developing unified messaging software, scheduled for release in the
third quarter of 1997. By using  standard  electronic  mail gateway  technology,
Inter-Tel's   unified  messaging   software  will  be  designed  to  enable  the
integration  of all types of  messages  into a single  user  interface  on a PC,
supporting   internet  e-mail  and  major  electronic  mail  packages  including
Microsoft Mail, Microsoft Exchange, Lotus Notes and cc:Mail. Integrating e-mail,
fax and voice mail through one message  management  interface at both the PC and
the phone could allow  users to easily see and  control all  different  types of
messages that have been received.

         Inter-Tel  is  developing   unified  messaging   software  to  work  in
conjunction with the Microsoft  Exchange  messaging  application,  included with
Windows 95 as well as  Microsoft's  new  Outlook  product.  Inter-Tel's  unified
messaging  software  will  conform  to  the  Messaging  Application  Programming
Interface  (MAPI)  standard  developed  by  Microsoft  and  will  work  with the
AXXESSORY Talk digital voice processing platform.

         Inter-Tel's unified messaging software should provide yet another means
for improving  workplace  productivity and retrieving  messages  anywhere from a
phone or a PC connected to a modem.

Internet Connectivity

         With the advent of Internet  telephony,  more  companies are relying on
the  Internet  for the  delivery of  streamlined  marketing,  sales and customer
support, as well as affordable alternatives to fax, express mail and other forms
of global communications. In 1996, Inter-Tel developed the Vocal'Net Server.

         The Vocal'Net Server, scheduled for commercial release in the summer of
1997, is a stand-alone  Internet  telephony  solution available for use with the
AXXESS  system or virtually  any business  telephone  system  equipped  with T-1
capability.  It provides a gateway for bridging the public telephone network and
a company's intranet or the Internet.  With the Vocal'Net Server,  users will be
able  to   conduct   real-time,   full-duplex,   high-quality,   two-way   voice
communications  over the Internet,  for potential  savings  compared to standard
long distance phone service. Designed to meet the needs of most businesses,  the
Vocal'Net Server will be available in multiple port sizes.

         The  Vocal'Net  Server does not require  customized  telephone  sets or
specialized  software  and  cards in each  desktop  computer.  Furthermore,  the
Vocal'Net  Server does not rely on the central  processing  unit of the computer
for the compression or packetization of information.  Therefore,  the server may
be able to handle additional functions as well.

         Because Internet  telephony converts all transmissions to the same type
of packets, both voice and data can use the same data circuits, thereby reducing
backlog on the data circuits and increasing  efficiency.  Bandwidth is maximized
to a point that some users may be able to reduce the overall  number of circuits
needed.

         The Vocal'Net  Server is designed to allow businesses to create virtual
offices,  enabling traveling or off-site employees to connect to the main office
from  anywhere  in the  country  or the 
                                        7
<PAGE>
world.  All  that is  needed  is a laptop  computer  and the  number  of a local
Internet Service Provider to receive multimedia messages and to place calls over
the Internet.  Another  application  is  "Touch-To-Talk"  telephony-enabled  web
pages, which allows  users to automatically connect over the Internet to talk to
customer service agents.

         In its initial commercial release scheduled for mid-1997, the Vocal'Net
Server will be designed to work with business telephone systems that support E&M
signaling  over T-1 lines and to handle up to 24  simultaneous  calls,  offering
advanced Internet telephony technology. Future planned enhancements will include
industry standard  compatibility  (H.323) for integration with PC-based software
applications and other types of gateways as well as a fax gateway to provide fax
and broadcast fax capabilities across the Internet.

Networking Technologies

         To  develop  a  solid   foundation   for   state-of-the-art   data  and
telecommunications  networking,  customers  require  strategic network expertise
from  their  networking  provider.  Designing,  installing  and  supporting  the
complete  integration  of  a  customer's  complex  data  and  telecommunications
network,  from  land-based LANs to  geographically  dispersed Wide Area Networks
(WANs), is a key goal of Inter-Tel.

         By forming alliances with major  manufacturers of hardware and software
technologies,  Inter-Tel  is working to provide the  routers,  ATM,  LAN and WAN
switches,  file servers,  intelligent hubs and any other device required for the
customer's  intranet  or for usage of the  Internet.  Pre-sale  design  support,
project coordination for implementation, and installation support are offered on
the full line of Inter-Tel server-based telephony products and services.


Network and Long Distance Services

         The enactment of the  Telecommunications  Act of 1996 greatly  impacted
both the telecommunications  industry and NetSolutions,  Inter-Tel's network and
long-distance services provider, by opening  telecommunications markets to local
and private carriers.

         Working   with   domestic   and   international   carriers,   Inter-Tel
NetSolutions  offers a wide  range of  voice,  data and  video  services.  Using
state-of-the-art  technology,  such as digital fiber optics, NetSolutions offers
services  that  include  domestic and  international  long  distance,  dedicated
services  such as frame  relay and  private  line  circuits,  and  pre-paid  and
traditional calling cards.

         Call centers  using T-1 access for incoming  toll-free  traffic,  sales
offices using NetSolutions' switched long distance or companies linking multiple
offices  throughout  the  country on a frame relay  network are  examples of the
applications  currently  supported  by  Inter-Tel  NetSolutions.  Whether  it is
toll-free service or WAN design, Inter-Tel NetSolutions is capable of handling a
broad spectrum of telecommunications needs.

         Inter-Tel NetSolutions intends to offer local service,  Internet access
and wireless products, thus continuing Inter-Tel's evolution as a total solution
provider.  However,  these services are not currently provided, and there can be
no  assurance  that the Company  will be able to provide  these  services in the
future.
                                       8
<PAGE>
Flexible Financing

         An integral  part of bringing the total  solution to the customer is to
provide a range of affordable  financing programs in one flexible and convenient
package.  With  Inter-Tel,  customers can acquire  their  telephony and computer
platforms, software applications and network services, as well as financing, all
from a single source.

         Inter-Tel's  Totalease program provides  qualified  customers with that
total solution for their telephony products. The Totalease program includes full
system maintenance and training,  fixed equipment add-on and upgrade provisions,
risk of loss,  guaranteed  renewal  options and other  services,  all at a fixed
monthly cost. With Totalease,  Inter-Tel manages the  responsibilities and risks
associated with ownership of communications equipment.

         Inter-Tel  also  offers a line of low cost  lease  purchase  financing.
Lease terms range from 24 to 84 months with $1.00,  fixed and fair market  value
purchase options.  In addition,  Inter-Tel will customize  financing packages to
suit customers with special  financial needs. By offering this type of financing
to acquire Inter-Tel products and services, Inter-Tel provides the customer with
the comfort of predictable monthly costs and the security of a direct, long term
relationship with Inter-Tel.

Sales and Distribution

         The Company has developed a broad distribution  network of direct sales
offices,  dealers and value added  resellers  (VARs) which market the  Company's
products to small to medium size  organizations  and divisions or departments of
larger  organizations.  In the United  States,  the Company has 29 direct  sales
offices and a network of hundreds of dealers who purchase  systems directly from
the Company.  Direct dealers are typically  located in geographic areas in which
the Company does not maintain direct sales offices.  The Company is additionally
pursuing  distribution  of its products  through value added  resellers  (VARs).
These resellers have traditionally sold complex data solutions to customers, and
the Company is seeking to leverage  this  distribution  network to capitalize on
the merging of the computer and telephony  industries.  The Company  maintains a
dealer  support  office and direct sales office in the United  Kingdom and has a
network  of  approximately  20  dealers in the United  Kingdom  and  Europe.  In
addition,  in 1993 the Company  opened a dealer  support office and direct sales
office in Japan and is in the process of establishing dealers in Asia.

         The Company believes that its success depends in part upon the strength
of its  distribution  channels and the ability of the Company to maintain  close
access to its end user customers.  In recent periods,  the Company has sought to
improve its access to end user customers by effecting strategic  acquisitions of
resellers of telephony products and services in markets in which the Company has
existing  direct sales offices and in other strategic  markets.  To this end, in
1996 the Company acquired Florida  Telephone  Systems,  Inc. and NTL Corporation
(dba ComNet of Ohio). The Company has expanded its direct sales office personnel
from a total of 332 persons at  December  31, 1992 to a total of 795 at December
31, 1996.

         The Company's sales through its direct sales offices as a percentage of
total sales have decreased from 62.1% of net sales in 1993 to 56.4% of net sales
in 1996. Sales to distributors,  dealers,  and VARs have increased from 29.6% of
net sales in 1993 to 31.5% of net sales in 1996.  Sales  through  the  Company's
long distance and network  services  operation  have  increased from 0.7% of net
sales in 1993 to 6.5% of net sales in 1996.
                                       9
<PAGE>
         Sales  of  systems  through  the  Company's  direct  dealers  typically
generate  lower gross  margins  than sales  through the  Company's  direct sales
organization,  although direct sales  typically  require higher levels of sales,
marketing,  general and  administrative  expenses.  Accordingly,  the  Company's
margins  may vary from  period to period  depending  upon the mix of dealer  and
direct  sales.  Direct  dealers  and VARs  typically  enter  into  non-exclusive
reseller  contracts  for a term  of one or more  years.  The  Company  generally
provides support and other services to the reseller pursuant to the terms of the
agreement.  The agreements often include  requirements that the reseller meet or
use its best efforts to meet  minimum  annual  purchase  quotas.  The  Company's
experience  is that dealers and VARs maintain low  inventories  of the Company's
products  and,  accordingly,  the Company has  experienced  insignificant  stock
rotation returns and price protection credits to date.

         International sales, which to date have been made through the Company's
United Kingdom and Japan subsidiaries,  accounted for approximately 1.5%, of net
sales in 1996.  In order to sell its products to  customers in other  countries,
the Company must comply with local  telecommunications  standards. The Company's
AXXESS system can be readily altered through software  modifications,  which the
Company believes will facilitate  compliance with these local  regulations.  The
Company had  previously  experienced  delays in the United  Kingdom in achieving
final  regulatory  approval of its products;  however,  approvals  were received
during 1996 to market and sell the Company's digital product lines. In addition,
the AXXESS system has been designed to support multi-lingual functionality,  and
currently supports English and Japanese.  The Company is presently  establishing
dealer networks in Japan and Asia and is working to expand its dealer network in
the United Kingdom and Europe.

Research and Development

         The Company's  research and  development  efforts over the last several
years have been focused  primarily on developing new products like the Inter-Tel
Axxent system,  enhancing the CTI capabilities of the AXXESS product, as well as
expanding  the capacity of the  Company's  AXXESS and  AXXESSORY  Talk  systems.
Current  efforts  are related to support of industry  standard  CTI  interfaces,
development  of additional  applications  and features,  the  development  of an
Internet voice server  (Vocal'Net  server),  and the  development of a LAN-based
Communications  Server  incorporating  the Company's  Call  Processing and Voice
Processing software.  New applications under development also include Basic Rate
ISDN,  telecommunications   networking,  and  unified  messaging  software.  The
software-based  architecture  of the AXXESS system  facilitates  maintenance and
support, upgrades, and incorporation of additional features and functionality.

         The  Company  had a total  of 95  personnel  engaged  in  research  and
development  as of December 31, 1996.  Research and  development  expenses  were
$6,581,711, $5,763,517 and $4,536,882 for 1996, 1995 and 1994, respectively.

Manufacturing

         The Company manufactures substantially all of its systems through third
party  subcontractors  located in the United States,  China and the Philippines.
These  subcontractors use both standard and proprietary  integrated circuits and
other  electronic   devices  and  components  to  produce  telephone   switches,
telephones   and   printed   circuit   boards  to  the   Company's   engineering
specifications  and designs.  The suppliers  also inspect and test the equipment
before delivering them to the Company, which in some cases then performs systems
integration, software loading, final testing and shipment. The Company maintains
written 
                                       10
<PAGE>
agreements  with its  principal  suppliers.  The  Company  provides  a  forecast
schedule to its suppliers and revises the forecast on a periodic basis.

         Foreign manufacturing facilities are subject to changes in governmental
policies,  imposition  of tariffs  and import  restrictions,  and other  factors
beyond  the  Company's  control.  Certain  of  the  microprocessors,  integrated
circuits and voice processing  interface cards used in the Company's systems are
currently  available  from a single or limited  sources of supply.  From time to
time,  the Company  experiences  delays in the supply of components and finished
goods. Delay or lack of supply from existing sources or the inability to develop
alternative  sources if and when  required in the future  could  materially  and
adversely affect operating results. 

Customer Service and Support

         The Company  believes that  customer  service and support is a critical
component of customer  satisfaction  and the success of the Company's  business.
The  Company  operates  a  Technical  Support  "hotline"  to  provide a range of
telephone support to its distributors,  dealers and end user customers through a
toll-free  number.  The Company  also  provides  on-site  customer  support and,
through  remote  diagnostic  procedures,  has the  ability to detect and correct
system problems from its Technical Support facilities.

         Information  taken from  customer  call records  allows  feedback  into
Inter-Tel's Quality First continuous  improvement process, thus providing a road
map for continuous product and service enhancements. Each direct sales office is
given  a  periodic  service   activity  report   summarizing  the  reasons  that
technicians  are  asking for  assistance  and  common  issues  that give rise to
technical  inquiries.  This  allows  them to  analyze  trends  in their  service
operations and provide better customer service.

Quality

         The Company believes that the quality of its systems,  customer service
and support,  and other  aspects of its  organization  is a critical  element of
meeting  the  needs of its  customers.  Through  its  Quality  First  continuous
improvement  process initiated in 1991,  Inter-Tel  implements quality processes
throughout  its  business   operations.   The  Company  has  established  formal
procedures to ensure  responsiveness to customer  requests,  to monitor response
times and to measure  customer  satisfaction.  The Company has also  established
means by which all end users,  including  customers of the Company's  resellers,
can make  product  enhancement  requests  directly to the  Company.  The Company
supports  its  dealers and VARs  through an  extensive  training  program at the
Company's  facility and at dealer sites, a toll-free  telephone number for sales
and technical support,  and the provision of end user marketing  materials.  The
Company  typically  provides a one year warranty on its systems to end users. In
manufacturing,  the Company  continuously  monitors  the quality of the products
produced on its behalf by the  Company's  manufacturing  subcontractors,  and is
extending the  Company's  Quality First  continuous  improvement  process to its
suppliers.

Competition

         The market for the  Company's  products  is highly  competitive  and in
recent  periods  has  been  characterized  by  pricing  pressures  and  business
consolidations.  The Company's competitors include Lucent Technologies (formerly
AT&T) and NorTel (formerly  Northern  Telecom),  as well as Comdial,  Executone,
Iwatsu, Mitel, NEC, Nitsuko,  Panasonic, ROLM, Toshiba and others. Many of these
competitors  have  significantly  greater  financial,  marketing  and  technical
resources than the Company.  The Company also competes against the 
                                       11
<PAGE>
regional Bell operating  companies (RBOCs),  which offer systems produced by one
or more of the  aforementioned  competitors  and also offer  Centrex  systems in
which automatic calling facilities are provided through equipment located in the
telephone company's central office.

         The  Telecommunication  Act of 1996 and AT&T's  announcement  to divide
itself  into  three  enterprises  has  had  an  impact  on  competition  in  the
communication  industry. The Telecommunication Act of 1996 opened the market for
telephone and cable television  services,  forcing  telephone  companies to open
their  networks  to  competitors  and giving  consumers  a choice of local phone
carriers.  Conversely, local phone companies are now able to offer long distance
services. In addition, cable companies can offer telephone services and Internet
access.  These changes will increase  competition in the communication  industry
and will create  additional  competition and  opportunities  in customer premise
equipment as these new services and interfaces  become  available. 

         In the market for voice processing applications,  including voice mail,
the  Company  competes  against  Centigram  Communications  Corporation,   Octel
Corporation,  AVT and other  competitors,  certain of which  have  significantly
greater  resources than the Company.  In the market for long distance  services,
the Company competes against AT&T, MCI, US Sprint and other competitors, many of
which have  significantly  greater  resources than the Company.  With the recent
Telecommunications  Act,  the  Company  will also  compete  with RBOCs and cable
companies for long distance  business.  Key  competitive  factors in the sale of
telephone  systems  and  related  applications  include  performance,  features,
reliability, service and support, name recognition,  distribution capability and
price.  The Company  believes  that it competes  favorably  in its markets  with
respect to the  performance,  features and price of its systems,  as well as the
level of service and support that the Company provides to its customers. Certain
of the Company's  competitors  have  significantly  greater name recognition and
distribution  capabilities than the Company,  although the Company believes that
it has  developed  a  competitive  distribution  presence  in  certain  markets,
particularly  those  where the  Company has direct  sales  offices.  The Company
expects that competition will continue to be intense in the markets addressed by
the  Company,  and there can be no  assurance  that the Company  will be able to
continue to compete successfully.

         As the  Company  enters the  markets  for local  telephone  service and
Internet  access,  it will  face  additional  competition  from  RBOCs and other
providers,  which have larger marketing and sales  organizations,  significantly
greater  financial  and technical  resources  and a larger and more  established
customer  base than the Company.  In addition,  RBOCs and other  providers  have
greater  name  recognition,  more  established  positions in the market and long
standing relationships with customers. Therefore, there can be no assurance that
the Company will compete successfully in these markets.

         To   the   extent   that   Inter-Tel    develops   more    server-based
telecommunications products,  Inter-Tel's competition will be the large computer
software  companies,  such as IBM  (Lotus),  and  Microsoft.  In  addition,  the
server-based  telephony  market  has shown  increasing  competition  from  small
software start-up companies.

Intellectual Property Rights

         In addition to the factors  discussed above,  the Company's  ability to
compete   successfully  depends  on  its  ability  to  protect  the  proprietary
technology  contained in its products.  The Company  relies  principally  upon a
combination  of copyright  and trade secret laws and  contractual  provisions to
establish  and  protect  its  proprietary  rights in its  systems.  The  Company
generally  enters  into  confidentiality   agreements  with  its  employees  and
suppliers,  and limits access to its  proprietary  information.  There can be no
assurance that these protections will be adequate to deter  misappropriation  of
the Company's  technologies  or independent  third party  development of similar
technologies or product features.
                                       12
<PAGE>
         From time to time,  the  Company  is  subject  to  assertions  that the
Company's  products infringe the intellectual  property rights of third parties.
Such claims could require the Company to expend  significant sums in litigation,
could  require  the  Company to pay  damages,  and could  require the Company to
develop non-infringing technology or to acquire licenses to the technology which
is the subject of the claimed infringement.

Employees

         As of December 31, 1996, the Company had a total of 1,193 employees, of
whom 972 were engaged in sales,  marketing and customer support,  58 in quality,
manufacturing and related operations, 95 in research and development,  and 68 in
finance and  administration.  The Company's  future success will depend upon its
ability to attract,  retain and motivate highly qualified employees,  who are in
great demand. The Company believes that its employee relations are excellent.

Factors That May Affect Results of Future Operations

        In  evaluating  the Company's  business,  prospective  investors  should
carefully  consider the following  factors in addition to the other  information
presented in this Form 10-K.

Rapid Technological Change and Dependence on New and Timely Product
Introductions

         The  market  for the  Company's  software,  products  and  services  is
characterized  by rapid  technological  change  and  continuing  demand  for new
products, features and applications.  Current competitors or new market entrants
may develop new products or product  features  that could  adversely  affect the
competitive  position  of  the  Company's  products.   Accordingly,  the  timely
introduction   of  new   products   and  product   features,   as  well  as  new
telecommunications  applications,  will be a key factor in the Company's  future
success.  Occasionally,  new products contain  undetected  errors or "bugs" when
released.  Such bugs may result from  defects  contained  in  software  products
offered by the  Company's  suppliers or other third parties that are intended to
be compatible with the Company's products,  over which the Company has little or
no control.  Although  the Company  seeks to minimize  the number of bugs in its
products by its test  procedures  and strict  quality  control,  there can be no
assurance  that  its new  products  will be  error  free  when  introduced.  Any
significant delay in the commercial  introduction of the Company's  products due
to bugs, any design modifications  required to correct bugs or any impairment of
customer  satisfaction as a result of bugs could have a material  adverse effect
on the Company's business and operating results. In addition, new products often
take  several  months  before their  manufacturing  costs  stabilize,  which may
adversely affect operating results for a period of time following  introduction.
During the past twelve months, the Company introduced ISDN on its AXXESS digital
communication  platform,  expanded the size of the AXXESS and  Inter-Tel  Axxent
platforms,  introduced a number of upgrades to its existing  AXXESSORY  Talk and
IVX-500  voice  processing  platforms  and  announced  the  introduction  of the
Vocal'Net  Server  product.  In the  event  that  the  Company  were  to fail to
successfully  introduce  new  software,  products or services or upgrades to its
existing  systems or  products  on a regular  and timely  basis,  demand for the
Company's  existing software,  products and services could decline,  which could
have a material adverse effect on the Company's  business and operating results.
Additionally, there can be no guaranty that future costs of accessibility,  lack
of capacity or voice  transmission  quality of the Internet  will not  adversely
affect the ability of the Company to deliver all Internet  products and services
on a cost  effective  basis.  There can be no assurance that the Company will be
able to successfully develop new software, products, services,  technologies and
applications  on a timely basis as required by changing market needs or that new
software or products or enhancements  
                                       13
<PAGE>
thereto, including its recently announced products and upgrades, when introduced
by the Company, will achieve market acceptance.

         The Company has recently  developed and  continues to develop  products
designed to address the emerging  market for the  convergence  of voice and data
applications,  or computer  telephony  integration.  If the  computer  telephony
integration  ("CTI")  market  fails to  develop or grows  more  slowly  than the
Company anticipates, or if the Company is unable for any reason to capitalize on
this emerging market  opportunity,  the Company's business and operating results
could be materially adversely affected.

Dependence Upon Contract Manufacturers and Component Suppliers

         Certain   components  used  in  the  Company's  digital   communication
platforms,   including  certain  microprocessors,   integrated  circuits,  power
supplies and voice processing  interface  cards, are currently  available from a
single source or limited sources of supply,  and product  availability  could be
limited. In addition,  the Company currently manufactures its products through a
limited  number of  contract  manufacturers  located in the United  States,  the
Philippines and the People's Republic of China. Foreign manufacturing facilities
are  subject to changes in  governmental  policies,  imposition  of tariffs  and
import  restrictions  and other  factors  beyond the Company's  control.  Varian
Associates,  Inc. ("Varian") currently manufactures a significant portion of the
Company's products at Varian's Tempe, Arizona facility,  including substantially
all of the  printed  circuit  boards  used in the  AXXESS and  Inter-Tel  Axxent
digital communications platforms. From time to time, the Company has experienced
delays in the  supply of  components  and  finished  goods,  and there can be no
assurance  that the Company will not experience  such delays in the future.  The
Company's reliance on third party manufacturers  involves a number of additional
risks, including reduced control over delivery schedules,  quality assurance and
costs.  Any delay in delivery or  shortage of supply of  components  or finished
goods from Varian or any other supplier,  or the Company's  inability to develop
in a timely manner alternative or additional sources if and when required, could
damage the Company's  relationships  with current and prospective  customers and
could  materially  and  adversely  affect the  Company's  business and operating
results. The Company has no long term agreements with its suppliers that require
the suppliers to provide fixed quantities of components or finished goods at set
prices.  There can be no assurance  that the Company will be able to continue to
obtain  components or finished  goods in sufficient  quantities or quality or on
favorable pricing and delivery terms in the future.

Competition

         The market for the Company's digital communications platforms is highly
competitive and in recent periods has been  characterized  by pricing  pressures
and  business   consolidations.   The  Company's   competitors   include  Lucent
Technologies  and  Northern  Telecom  Limited  ("NorTel"),  as well  as  Comdial
Corporation  ("Comdial"),  EXECUTONE  Information Systems,  Inc.  ("Executone"),
Mitel  Corporation  ("Mitel"),   Panasonic,  Siemens  ROLM  Communications  Inc.
("ROLM"),  Toshiba and others.  The Company also  competes  against the regional
Bell operating companies ("RBOCS"),  which offer systems produced by one or more
of the  aforementioned  competitors and also offer Centrex systems in which call
processing  facilities are provided through  equipment  located in the telephone
company's central office. Competition by the RBOCs may increase significantly in
the future,  as the RBOCs have been granted the right to  manufacture  telephone
systems and  equipment  themselves  and/or to bundle the sale of equipment  with
telephone calling services.

         The  Telecommunication  Act of 1996 and AT&T's  announcement  to divide
itself  into  three  enterprises  has  had  an  impact  on  competition  in  the
communication  industry. The 
                                       14
<PAGE>
Telecommunication  Act of  1996  opened  the  market  for  telephone  and  cable
television  services,  forcing  telephone  companies  to open their  networks to
competitors and giving  consumers a choice of local phone carriers.  Conversely,
local phone companies are now able to offer long distance services. In addition,
cable companies can offer telephone services and Internet access.  These changes
will  increase  competition  in  the  communication  industry  and  will  create
additional  competition and opportunities in customer premise equipment as these
new services and interfaces become available.  As the Company enters the markets
for local  telephone  service  and  Internet  access,  it will  face  additional
competition  from RBOCs and other  providers,  which have larger  marketing  and
sales organizations, significantly greater financial and technical resources and
a larger and more established customer base than the Company. In addition, RBOCs
and other providers have greater name recognition, more established positions in
the market and long standing relationships with customers.  Therefore, there can
be no assurance that the Company will compete successfully in these markets.

         In the market for voice processing applications,  including voice mail,
the Company competes against Centigram Communications Corporation ("Centigram"),
Octel Communications  Corporation  ("Octel"),  Active Voice Corporation ("Active
Voice"), Applied Voice Technology, Inc. ("AVT") and other competitors, including
telephone systems  manufacturers such as Lucent  Technologies,  NorTel and ROLM,
which offer integrated voice processing systems under their own label as well as
through  various OEM  arrangements.  Certain of the  Company's  competitors  may
achieve marketing  advantages by bundling their voice processing  equipment with
sales of telephone systems, or by designing their telephone systems so that they
do not readily  integrate with independent voice processing  systems.  Inter-Tel
expects that the  development  of industry  standards and the acceptance of open
systems  architectures  in the voice  processing  market will  reduce  technical
barriers to market entry and lead to increased competition.

         In the market for long distance services,  the Company competes against
AT&T Corp., MCI  Telecommunications  Corporation,  Sprint  Corporation and other
suppliers,  certain of which also supply the long  distance  calling and network
services that the Company  resells.  Although the Company  acquires a variety of
long  distance  calling  services in bulk from certain long  distance  carriers,
there  can be no  assurance  that  the  Company  will be able to  purchase  long
distance  calling services on favorable terms from one or more of such providers
in the future.  In addition,  a  substantial  majority of  prospective  new long
distance  customers for the Company  currently  purchase  long distance  calling
services from the Company's competitors.  The Company believes that it is likely
to face increased  competition in the long distance calling services market as a
result of  telecommunications  deregulation,  which enables RBOCs to supply long
distance  calling and network  services,  and enables RBOCs and others to bundle
long distance,  local  telephone and wireless  services.  Moreover,  the Company
expects to face  increased  competition  in the  future  because  low  technical
barriers to entry will allow new market entrants.

         As Inter-Tel  develops  more  server-based  and CTI  telecommunications
products, Inter-Tel's competition will be the large computer software companies,
such as IBM (Lotus), and Microsoft.  In addition, the server-based telephony and
CTI markets  have shown  increasing  competition  from small  software  start-up
companies.

         Many of the Company's  competitors are substantially  larger,  and have
significantly  greater financial and technical  resources,  name recognition and
marketing and distribution  capabilities,  than the Company. The Company expects
that  competition  will  continue to be intense in the markets  addressed by its
products and  services,  and there can be no assurance  that the Company will be
able to compete successfully in the future.

Management of Growth; Implementation of New Management Information Systems

         The growth in the  Company's  business  has placed,  and is expected to
continue to place, a significant strain on the Company's  personnel,  management
and  other  resources.  The  
                                       15
<PAGE>
Company's  ability to manage any future  growth  effectively  will require it to
attract, train, motivate and manage new employees successfully, to integrate new
employees   into  its  overall   operations  and  to  continue  to  improve  its
operational, financial and management information systems.

         The Company  implemented a new MIS system late in 1995.  The MIS system
significantly  affected  many aspects of the Company's  business,  including its
accounting,  operations,  purchasing,  sales and marketing functions.  Since the
date of implementation,  the Company has experienced difficulty with the new MIS
system  software,  which increased the Company's costs, had an adverse effect on
the  Company's  ability to provide  products and services to its  customers on a
timely basis and caused delays in coordinating accounting and financial results.
During the fourth quarter of 1996, the Company  determined  that the limitations
of the existing  system  software would prevent  Inter-Tel from  establishing an
integrated and centralized dispatch and telemarketing center.

         During the fourth quarter of 1996,  the Company  decided to replace its
MIS system software with an integrated  solution from a more established  vendor
and accordingly has written off the software  license and  implementation  costs
relating  to the  system  software  being  replaced.  Inter-Tel  has  signed  an
agreement with a large,  established  software and database vendor to implement,
maintain and support alternate MIS system software to be utilized throughout the
Company.  Inter-Tel  believes  that such action was  necessary  to allow for the
stability and growth of Inter-Tel.

    The actions to replace the MIS system  software  could result in  additional
costs and probable delays in obtaining a fully functional MIS system,  including
but not limited to additional or alternate hardware and software  required,  but
not available in the current system  configuration,  and  additional  personnel,
which  could  have a  material  adverse  effect on the  company's  business  and
operating results.  In addition,  implementation of this system software and the
transition  from the  current  system  software  to the new  information  system
software will require substantial financial resources and personnel.

         The Company has made strategic  acquisitions in the past and expects to
continue to do so in the future.  Acquisitions  require a significant  amount of
the Company's management attention and financial and operational resources,  all
of which are limited.  The  integration of acquired  entities may also result in
unexpected  costs and disruptions,  and significant  fluctuations in, or reduced
predictability  of,  operating  results  from period to period.  There can be no
assurance   that  an  acquisition   will  not  adversely   affect  the  business
relationships  of the  Company or the  acquired  entity  with  their  respective
suppliers or customers. Further, there can be no assurance that the Company will
successfully  integrate  the acquired  operations or achieve any of the intended
benefits  of  an  acquisition.  The  Company's  failure  to  manage  its  growth
effectively  could have a material  adverse effect on its business and operating
results.

Product Protection and Infringement

         The Company's  future success is dependent in part upon its proprietary
technology.  The Company has no patents and relies  principally on copyright and
trade  secret  law  and  contractual  provisions  to  protect  its  intellectual
property. There can be no assurance that any copyright owned by the Company will
not be  invalidated,  circumvented  or  challenged  or that the  rights  granted
thereunder will provide competitive  advantages to the Company.  Further,  there
can be no assurance that others will not develop  technologies  that are similar
or  superior  to the  Company's  technology  or  that  duplicate  the  Company's
technology.
                                       16
<PAGE>
         As  the  Company  expands  its  international   operations,   effective
intellectual  property  protection  may be  unavailable  or  limited  in certain
foreign countries. There can be no assurance that the steps taken by the Company
will prevent misappropriation of its technology.  Litigation may be necessary in
the future to enforce the Company's intellectual property rights, to protect the
Company's trade secrets,  to determine the validity and scope of the proprietary
rights of others,  or to defend  against claims of  infringement  or invalidity.
Such litigation or delays in product  introductions  or decisions to discontinue
development,  manufacture or sale of such products,  could result in substantial
costs and diversion of resources and could have a material adverse effect on the
Company's business and operating results.

Reliance on Dealer Network

         A  substantial  portion of the Company's net sales are made through its
network of independent dealers. The company faces intense competition from other
telephone system and voice  processing  system  manufacturers  for such dealers'
business, as most of the Company's dealers carry products which compete with the
Company's  products.  The Company has no  exclusive  agreements  with any of its
dealers. The loss of any significant dealer or group of dealers, or any event or
condition  adversely  affecting  the  Company's  dealer  network,  could  have a
material adverse effect on the Company's business and operating results.

Risks of Providing Long Distance and Network Services

         Inter-Tel depends on a reliable supply of  telecommunications  services
and  information  from several long distance  carriers.  Because it does not own
transmission  facilities,  the Company relies on long distance  carriers for the
provision  of  network  services  to the  Company's  customers  and for  billing
information.  Long  distance  services  are subject to extensive  and  uncertain
governmental  regulation  on both the federal and state  level.  There can be no
assurance that the promulgation of certain regulations will not adversely affect
the Company's business and operating  results.  Contracts with the long distance
carriers from which the Company  currently  resells  services  typically  have a
multi-year  term in which the  Company's  prices are  relatively  fixed and have
minimum use  requirements.  There can be no assurance that the Company will meet
minimum use commitments,  will be able to negotiate lower rates with carriers in
the  event of any  decrease  in end user  rates  or will be able to  extend  its
contracts with long distance  carriers at prices  favorable to the Company.  The
Company's  ability to continue to expand its long  distance  service  operations
will depend on its ability to continue to secure reliable long distance services
from a number of long distance  carriers and the willingness of such carriers to
continue to make  telecommunications  services and billing information available
to the Company on favorable terms.

Dependence on Key Personnel

         The Company is dependent on the  continued  service of, and its ability
to attract and retain,  qualified  technical,  marketing,  sales and  managerial
personnel. The competition for such personnel is intense, and the loss of any of
such  persons,  as well as the failure to recruit  additional  key technical and
sales personnel in a timely manner,  would have a material adverse effect on the
Company's  business and operating  results.  There can be no assurance  that the
Company will be able to continue to attract and retain the  qualified  personnel
necessary for the development of its business.

Possible Volatility of Stock Price

             The  Company   believes  that  factors  such  as  announcements  of
developments  relating to the Company's business,  fluctuations in the Company's
operating results, general conditions in
                                       17
<PAGE>
the telecommunications industry or the worldwide economy, changes in legislation
or  regulation  affecting  the  telecommunications   industry,  an  outbreak  of
hostilities,  a  shortfall  in revenue or  earnings  from  securities  analysts'
expectations,  announcements  of  technological  innovations  or new products or
enhancements  by the Company or its  competitors,  developments  in intellectual
property  rights  and  developments  in the  Company's  relationships  with  its
customers and suppliers  could cause the price of the Company's  Common Stock to
fluctuate, perhaps substantially.  Many of such factors are beyond the Company's
control.  In  addition,  in recent  years the stock  market in general,  and the
market for shares of technology stocks in particular,  have experienced  extreme
price fluctuations, which have often been unrelated to the operating performance
of affected  companies.  There can be no assurance  that the market price of the
Company's  Common  Stock will not  experience  significant  fluctuations  in the
future, including fluctuations that are unrelated to the Company's performance.

Concentration of Ownership

As of December 31, 1996,  the  Company's  Chairman of the Board of Directors and
Chief Executive Officer  beneficially owned approximately 21% of the outstanding
shares  of the  Common  Stock.  As a  result,  he has the  ability  to  exercise
significant  influence  over all  matters  requiring  shareholder  approval.  In
addition,  the  concentration  of ownership could have the effect of delaying or
preventing a change in control of the Company.

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Name                                Age            Position
----                                ---            --------

Steven G. Mihaylo                   53             Chairman of the Board of
                                                   Directors and Chief
                                                   Executive Officer
Thomas C. Parise                    42             President and Chief
                                                   Operating Officer
Craig W. Rauchle                    41             Executive Vice President
Ross McAlpine                       45             President of Inter-Tel
                                                   Leasing, Inc.
Kurt R. Kneip                       34             Vice President, Chief
                                                   Financial Officer, Secretary
                                                   and Assistant Treasurer
J. Robert Anderson                  60             Director
Gary Edens                          55             Director
Maurice H. Esperseth                71             Director
C. Roland Haden                     56             Director
Norman Stout                        39             Director

         MR. MIHAYLO,  the founder of the Company, has served as Chairman of the
Board of Directors of the Company since  September 1983, as President from March
1984 until December 1994,  and as Chief  Executive  Officer of the Company since
its formation in July 1969.  Mr. Mihaylo also served as President of the Company
from July 1969 until  September  1983 and as Chairman of the Board of  Directors
from July 1969 to October 1982. Mr. Mihaylo also is a director of MicroAge, Inc.
and Microtest, Inc.
                                       18
<PAGE>
         MR.  PARISE was elected  President of the Company in December  1994. He
has been Senior Vice  President of the Company since 1986. He is also  President
of Inter-Tel Integrated Services, Inc., a wholly owned research and development,
manufacturing and distribution  subsidiary of the Company. Mr. Parise joined the
Company in 1981 and became Branch  General  Manager of the Phoenix  Direct Sales
Office in 1982. In 1983, he became the Mountain Regional Vice President,  and in
January 1985 he was appointed  Vice  President of Operations  and Sales Support.
Mr. Parise also is a director of Globe Business Resources, Inc.

         MR.  RAUCHLE was elected  Executive Vice President in December 1994. He
had been Senior Vice  President  of the Company and  continues  as  President of
Inter-Tel  DataCom,  Inc., a wholly owned sales  subsidiary  of the Company.  In
addition,  he  currently  serves the Company and all  subsidiaries  in corporate
strategic planning and mergers and acquisitions  activities.  Mr. Rauchle joined
the Company in 1979 as Branch General  Manager of the Denver Direct Sales Office
and in 1983 was appointed the Central Region Vice President and subsequently the
Western  Regional  Vice  President.  From 1990 to 1992,  Mr.  Rauchle  served as
President of Inter-Tel Communications, Inc.

         MR.  MCALPINE has served as President  of  Inter-Tel  Leasing,  Inc., a
wholly-owned subsidiary of the Company, since April 1993. He also served as Vice
President of Inter-Tel  Communications,  Inc.  from April 1991 to April 1992 and
Treasurer  since April 1992.  He joined the Company in July 1991 when  Inter-Tel
acquired  Telecommunications  Specialists,  Inc. Prior to joining Inter-Tel, Mr.
McAlpine  worked 17 years in the leasing and financial  services  industry.  Mr.
McAlpine holds an undergraduate  degree in Accounting from Southwest Texas State
University.

         MR. KNEIP has served as Vice President and Chief  Financial  Officer of
the Company  since  September  1993.  He was elected  Secretary and Treasurer in
October 1994. In May 1996 he was elected Assistant Treasurer, as John Abbott was
elected  Treasurer.  He joined the Company in May 1992 as Director of  Corporate
Tax, after seven years with the accounting firm of Ernst & Young. Mr. Kneip is a
Certified Public  Accountant,  and holds an  undergraduate  degree in Commercial
Economics   from  South  Dakota  State   University  and  a  Masters  Degree  in
Professional Accountancy from the University of South Dakota.

         MR. ANDERSON was elected as a director of the Company in February 1997.
Mr. Anderson worked for Ford Motor Company from 1963 to 1983,  serving from 1978
to 1983 as President of the Ford Motor Land Development  Corporation.  He served
as Senior  Vice  President, 
                                       19
<PAGE>
CFO and a member of the Board of  Directors  of The  Firestone  Tire and  Rubber
Company from 1983 to 1989, and as Vice Chairman of  Bridgestone/Firestone,  Inc.
from 1989 through  1991.  He most recently  served as Vice  Chairman,  CFO and a
member of the Board of Directors of the Grumman  Corporation  from 1991 to 1994.
Mr.  Anderson is currently  semi-retired,  and he is an active leader in various
business, civic and philanthropic organizations.

         MR. EDENS was elected as a director of the Company in October  1994. He
has been a broadcasting  media executive from 1970 to 1994,  serving as Chairman
and Chief Executive Officer of Edens  Broadcasting,  Inc. from 1984 to 1994 when
that  corporation's  nine radio stations were sold. He presently is President of
The Hanover  Companies,  Inc.,  an  investment  firm.  He is an active leader in
various business, civic and philanthropic organizations.

         MR.  ESPERSETH  has been a director of the Company  since October 1986.
Mr.   Esperseth   joined   the   Company  in   January   1983  as  Senior   Vice
President-Research and Development,  after a 32-year career with GTE, and served
as  Executive  Vice  President  of Inter-Tel  from 1986 to 1988.  Mr.  Esperseth
retired as an officer of the Company on December 31, 1989.

         DR. HADEN has been a director of the Company since 1983.  Dr. Haden has
been Vice Chancellor and Dean of Engineering of Texas A&M University since 1993.
Previously, he served as Vice Chancellor of Louisiana State University from 1991
to 1993,  Dean of the College of  Engineering  and  Applied  Sciences at Arizona
State  University  from 1989 to 1991,  Vice  President  for Academic  Affairs at
Arizona  State  University  from  1987  to  1988,  and  Dean of the  College  of
Engineering  and Applied  Sciences from 1978 to 1987. Dr. Haden holds a doctoral
degree in Electrical  Engineering from the University of Texas and has served on
the faculties of the University of Oklahoma and Texas A & M University.

         MR.  STOUT was elected a director of the Company in October  1994.  Mr.
Stout has been President of Superlite  Block,  a manufacturer  of concrete block
since February  1993.  Prior thereto he was employed by  Bouhem-Fields,  Inc. of
Dallas,  Texas, a manufacturer of crushed stone, as Chief Executive Officer from
1990 to 1993 and as Chief Financial Officer from 1986 to 1990.  Previously,  Mr.
Stout was a Certified Public Accountant with Coopers & Lybrand.

         The  Board of  Directors  has an  Audit  Committee  and a  Compensation
Committee.  The Audit  Committee,  consisting of Directors  Anderson,  Stout and
Esperseth,  is charged with reviewing the Company's  annual audit and meets with
the Company's independent auditors to review the Company's internal controls and
financial  management  practices.  The  Compensation  Committee,  consisting  of
Messrs.  Esperseth,  Edens  and  Stout,  recommends  to the  Board of  Directors
compensation for the Company's key employees and administers the Company's stock
option plans.

ITEM 2.  PROPERTIES

         The Company  maintains  its  corporate  headquarters  at 120 North 44th
Street, Suite 200, Phoenix, Arizona pursuant to a lease that expires in 2000. It
also maintains its distribution and support  operations in an 85,000 square foot
building located in Chandler,  Arizona pursuant to a lease that expires in 2008.
In  addition,  the Company  leases  sales and  support  offices in a total of 29
direct  sales  offices in the  United  States and two  locations  overseas.  The
Company's  aggregate monthly payments under these leases are currently $239,092.
The Company  believes  that its  existing  facilities  are  adequate to meet its
current  needs and that  additional  or  alternative  space will be available as
necessary in the future on commercially reasonable terms.
                                       20
<PAGE>
ITEM 3.  LEGAL PROCEEDINGS

         The Company has no legal proceedings in process or pending for which it
believes an  unfavorable  outcome  would have a material  adverse  impact on the
financial position of the Company.

ITEM 4.       SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

              None.

                                     PART II

ITEM 5.       MARKET FOR THE REGISTRANT'S COMMON STOCK AND
              RELATED STOCKHOLDER MATTERS

              The information required by this Item is incorporated by reference
              to Exhibit 13.0 and Page 38 of the Company's 1996 Annual Report to
              Shareholders.

ITEM 6.       SELECTED FINANCIAL DATA

              The information required by this Item is incorporated by reference
              to Exhibit 13.0 and Page 18 of the Company's 1996 Annual Report to
              Shareholders.

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

              The information required by this Item is incorporated by reference
              to  Exhibit  13.0 and Pages 30 through  37 of the  Company's  1996
              Annual Report to Shareholders.

ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

              The information required by this Item is incorporated by reference
              to  Exhibit  13.0 and Pages 19 through  29 of the  Company's  1996
              Annual Report to Shareholders.

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

              Not applicable.

                                    PART III

         Certain information required by Part III is omitted from this report in
that  the  Registrant  will  file  a  definitive  proxy  statement  pursuant  to
Regulation 14A (the "Proxy  Statement") not later than 120 days after the end of
the fiscal year covered by this Report, and the information  included therein is
incorporated herein by reference.

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

               Information  with respect to directors and executive  officers is
               included  at the end of Part I,  Item 1 on Pages 18 to 20 of this
               report under the caption "Directors and Executive Officers of the
               Registrant."
                                       21
<PAGE>
ITEM 11.      EXECUTIVE COMPENSATION

              The information required by this Item is incorporated by reference
              to Pages 8 to 11 of the Company's Proxy Statement  relating to its
              1997 Annual Meeting of Shareholders.


ITEM 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
              MANAGEMENT

              The information required by this Item is incorporated by reference
              to Pages 5 and 6 of the Company's Proxy Statement.

ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

              Not applicable.

                                     PART IV

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

              (a)  The following documents are filed as part of this Report:

1.   Financial Statements

         The   following   consolidated   financial   statements  of  Inter-Tel,
         Incorporated,  and  subsidiaries,  are  incorporated  by  reference  to
         Exhibit 13.0 and Pages 19 to 29 of the Company's Annual Report:

         Report of Ernst & Young LLP, Independent Auditors

         Consolidated balance sheets--December 31, 1996 and 1995

         Consolidated  statements  of income--years ended December 31, 1996,
         1995 and 1994

         Consolidated  statements of shareholders' equity--years ended December
         31, 1996, 1995 and 1994

         Consolidated  statements  of cash flows--years ended December 31,
         1996, 1995 and 1994

         Notes to consolidated financial statements

2.   Financial Statement Schedules

         The following  consolidated  financial statement schedule of Inter-Tel,
         Incorporated,  and  subsidiaries  is filed as part of this  Report  and
         should  be  read  in  conjunction  with  the   Consolidated   Financial
         Statements of Inter-Tel,  Incorporated and subsidiaries,  and the notes
         thereto.
                                       22
<PAGE>
         Schedule for the three years ended December 31, 1996:
                                                                        Page No.
                                                                        --------

              Schedule II--Valuation and Qualifying Accounts              25

         Schedules  not listed  above  have been  omitted  because  they are not
applicable  or are not  required  or the  information  required  to be set forth
therein is included in the Consolidated Financial Statements or notes thereto.

3.  Exhibits

         3.1(10)         Articles of Incorporation, as amended.

         3.2(16)         By-Laws, as amended.

         10.15(1)        Registrant's form of standard Distributor Agreement.

         10.16(1)        Registrant's form of standard Service Agreement.

         10.34(2)        1984  Incentive  Stock  Option  Plan and forms of Stock
                         Option Agreement.

         10.35(3)        Agreement between Registrant and Samsung Semiconductor
                         and Telecommunications Company, Ltd. dated October 17,
                         1984.

         10.37(3)        Tax Deferred Savings Plan.

         10.51(11)       1990  Directors'  Stock  Option  Plan and form of Stock
                         Option Agreement.

         10.52(15)       Inter-Tel,  Incorporated  Long-Term  Incentive Plan and
                         forms of Stock Option Agreements.

         10.53(12)       Agreement  between  Registrant and Maxon Systems,  Inc.
                         dated February 27, 1990.

         10.54(12)       Agreement   between   Registrant   and   Varian   Tempe
                         Electronics Center dated February 26, 1991.

         10.55(12)       Agreement  between  Registrant and Jetcrown  Industrial
                         Ltd. dated February 18, 1993.

         10.56(13)       Employee Stock Ownership Plan.

         10.57(14)       Loan and  Security  Agreement  dated  December 16, 1994
                         between Bank One, Arizona, N.A. and Registrant.

         10.58(16)       Development,   Supply  and  License  Agreement  between
                         Registrant and QUALCOMM dated January 17, 1996.

---------------------
                                       23
<PAGE>

(1)  Previously filed with Registrant's Registration Statement on Form S-1 (File
     No. 2-70437).

(2)  Previously filed with Registrant's Registration Statement on Form S-8 (File
     No. 2-94805).

(3)  Previously filed with Registrant's  Annual Report on Form 10-K for the year
     ended November 30, 1984 (File No. 0-10211).

(10) Previously filed with  Registrant's Annual Report on Form 10-K for the year
     ended December 31, 1988 (File No. 0-10211).

(11) Previously filed with Registrant's Registration Statement on Form S-8 (File
     No. 33-40353).

(12) Previously filed with Registrant's Registration Statement on Form S-1 (File
     No. 33-70054).

(13) Previously filed with Registrant's Registration Statement on Form S-8 (File
     No. 33-73620).

(14) Previously filed with Registrant's  Annual Report on Form 10-K for the year
     ended December 31, 1994 (File No. 0-10211).

(15) Previously filed with Registrant's Proxy Statement dated March 23, 1994.

(16) Previously filed with Registrant's  Annual Report on Form 10-K for the year
     ended December 31, 1995 (File No. 0-10211).

(17) Filed herewith.

         (b)  Reports on Form 8-K.
              None
         (c)  Exhibits.

              11.1  Statement re:  Computation of Per Share Earnings.

              13.0  Excerpts from Annual Report to Security Holders.

              22.1  List of Subsidiaries. 

              23.0  Consent of Independent Auditors.

              24.1  Power of Attorney. 

              27  Financial Data Schedule 

              See Item 14(a) (3) also.

         (d)  Financial Statement Schedules

              The response to this portion of Item 14 is submitted as a separate
              section of this report.  See Item 8.
                                       24
<PAGE>
                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                                 (in thousands)
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
         COL. A                    COL. B                COL. C                    COL. D         COL. E
-----------------------------------------------------------------------------------------------------------
                                               ADDITIONS
-----------------------------------------------------------------------------------------------------------
                                                Charged        Charged to
                                 Balance at        to            Other           Charged to      Balance
                                 Beginning      Costs &         Accounts         Deductions     at End of
      DESCRIPTION                of Period      Expenses        Describe          Describe       Period
-----------------------------------------------------------------------------------------------------------
<S>                                <C>           <C>           <C>               <C>              <C>   
Year ended December 31, 1996

Deducted from asset accounts:
   Allowance for doubtful
      accounts (4)                 $1,822        $1,801        $   87(3)         $  614(1)        $3,096
                                   ------        ------        --------          --------         ------
   Allowance for lease
      accounts                     $1,513        $1,945        $  (87)(3)        $  665(1)        $2,706
                                   ------        ------        --------          --------         ------
   Inventory allowance (4)         $2,499        $  609        $  175(5)         $  304(2)        $2,979
                                   ------        ------        --------          --------         ------

Year ended December 31, 1995

Deducted from asset accounts:
   Allowance for doubtful
      accounts (4)                 $1,181        $  814        $   71(3)         $  244(1)        $1,822
                                   ------        ------        --------          --------         ------
   Allowance for lease
      accounts                     $1,198        $  780        $  (71)(3)        $  394(1)        $1,513
                                   ------        ------        --------          --------         ------
   Inventory allowance (4)         $1,795        $1,109          --              $  405(2)        $2,499
                                   ------        ------        --------          --------         ------

Year ended December 31, 1994

Deducted from asset accounts:
   Allowance for doubtful
      accounts (4)                 $  708        $  721        $ (105)(3)        $  143(1)        $1,181
                                   ------        ------        --------          --------         ------
   Allowance for lease
      accounts                     $  911        $  236        $  105(3)         $   54(1)        $1,198
                                   ------        ------        --------          --------         ------

   Inventory allowance (4)         $1,237        $  561          --              $    3(2)        $1,795
                                   ------        ------        --------          --------         ------
</TABLE>
(1)  Uncollectible accounts written off, net of recoveries.
(2)  Inventory written off.
(3)  Reclassed between appropriate valuation and qualifying accounts.
(4)  Adjusted for pooling of Florida Telephone Systems, Inc.
(5)  Acquired in purchase of NTL Corporation (dba ComNet of Ohio).
                                       25
<PAGE>
                                   SIGNATURES



         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant,  Inter-Tel,  Incorporated, has duly caused
this  Report to be  signed on its  behalf  by the  undersigned,  thereunto  duly
authorized.


                                      INTER-TEL, INCORPORATED



                                      BY:  /S/  Steven G. Mihaylo
                                           ------------------------------------
                                           Steven G. Mihaylo
                                           Chairman and Chief Executive Officer



Dated:  March 21, 1997
                                       26
<PAGE>
                           INDEX OF ATTACHED EXHIBITS

11.1     Statement re:  Computation of Per Share Earnings (included on Page 28)

13.0     Excerpts from Annual Report to Security Holders (pages 29 to 50)

22.1     List of Subsidiaries (included on Page 51)

23.0     Consent of Independent Auditors (included on Page 52)

24.1     Power of Attorney (included on Page 53)

27       Financial Data Schedule (Page 54)
                                       27