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, 1998                                  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
              (26,157,657 shares outstanding as of March 12, 1999)

         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 of the Company's
Common Stock reported on the Nasdaq National Market System on March 12, 1999 was
approximately  $340,486,509.  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>
Sections from the following  documents have been  incorporated by reference into
this Report where indicated below: (1) the Registrant's Proxy Statement relating
to its 1998 Annual Meeting of Shareholders  have been  incorporated by reference
into  Part  III and Part IV of this  report  and (2) 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,  333-12433 and 333-39221), Form
S-8 Registration  Statements (Nos. 2-94805,  33-40353,  33-73620,  333-41197 and
333-67261),  Annual  Reports on Form 10-K for the years ended December 31, 1984,
1988 and 1994,  and  Reports on Form 8-K dated July 17,  1987 and 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
                          1998 FORM 10-K ANNUAL REPORT

                                TABLE OF CONTENTS

                                     PART I
                                                                            Page

Item 1    Business                                                            3
Item 2    Properties                                                         26
Item 3    Legal Proceedings                                                  26
Item 4    Submission of Matters to a Vote of Security Holders                26

                                 PART II

Item 5    Market for the Registrant's Common Stock
          and Related Stockholder Matters                                    27
Item 6    Selected Financial Data                                            27
Item 7    Management's Discussion and Analysis of
          Financial Condition and Results of Operations                      27
Item 7A   Quantitative and Qualitative Disclosures About Market Risk         27
Item 8    Financial Statements and Supplementary Data                        28
Item 9    Changes in and Disagreements with Accountants
          on Accounting and Financial Disclosure                             28

                                PART III

Item 10   Directors and Executive Officers of the Registrant                 28
Item 11   Executive Compensation                                             28
Item 12   Security Ownership of Certain Beneficial Owners and Management     28
Item 13   Certain Relationships and Related Transactions                     28

                                 PART IV

Item 14   Exhibits, Financial Statement Schedules and Reports on Form 8-K    28

                                       2
<PAGE>
                                     PART I

ITEM 1.  BUSINESS

THE COMPANY

         THIS  ANNUAL  REPORT TO  SHAREHOLDERS  ON FORM 10-K  ("10-K")  CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES.  THE STATEMENTS
CONTAINED  IN THIS  10-K  THAT ARE NOT  PURELY  HISTORICAL  ARE  FORWARD-LOOKING
STATEMENTS  WITHIN THE MEANING OF SECTION 27A OF THE  SECURITIES ACT OF 1933, AS
AMENDED,  AND SECTION 21E OF THE  SECURITIES  EXCHANGE ACT OF 1934,  AS AMENDED,
INCLUDING WITHOUT LIMITATION  STATEMENTS  REGARDING THE COMPANY'S  EXPECTATIONS,
BELIEFS,  INTENTIONS OR STRATEGIES  REGARDING  THE FUTURE.  ALL  FORWARD-LOOKING
STATEMENTS  INCLUDED IN THIS DOCUMENT ARE BASED ON INFORMATION  AVAILABLE TO THE
COMPANY ON THE DATE HEREOF,  AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY
SUCH  FORWARD-LOOKING  STATEMENTS.  THE CAUTIONARY  STATEMENTS MADE IN THIS 10-K
SHOULD BE READ AS BEING  APPLICABLE  TO ALL RELATED  FORWARD-LOOKING  STATEMENTS
WHEREVER THEY APPEAR IN THIS DOCUMENT. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY  FROM THOSE  ANTICIPATED  IN THESE  FORWARD-LOOKING  STATEMENTS  AS A
RESULT OF CERTAIN  FACTORS,  INCLUDING  THOSE SET FORTH UNDER  "FACTORS THAT MAY
AFFECT RESULTS OF FUTURE  OPERATIONS"  BELOW AND ELSEWHERE IN THIS DOCUMENT.  IN
EVALUATING THE COMPANY'S BUSINESS, SHAREHOLDERS AND PROSPECTIVE INVESTORS SHOULD
CONSIDER  CAREFULLY THE FOLLOWING  FACTORS IN ADDITION TO THE OTHER  INFORMATION
SET FORTH IN THIS DOCUMENT.

         Inter-Tel,  incorporated  in  Arizona  in 1969,  is a  single  point of
contact,  full service  provider of digital  business  telephone  systems,  call
processing  software,  voice  processing  software,  call  accounting  software,
Internet  Protocol  (IP)  telephony  software,  computer  telephone  integration
("CTI")  applications and long distance calling services.  Inter-Tel's  products
and  services   include  the  AXXESS  and  Inter-Tel   Axxent  digital  business
communication software platforms,  the AXXESSORY TALK voice processing platform,
the Inter-Tel Vocal'Net IP telephony gateway,  InterPrise gateway, the Inter-Tel
Vocal'Net  Service  Provider  Software and Centralized  Accounting  Software and
Inter-Tel.net,  an IP telephony  packet  switched  long  distance  service.  The
Company  also  provides  maintenance,  leasing  and  support  services  for  its
products.  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 37 direct sales offices
in the United States, one in the United Kingdom,  one in Japan, one in Singapore
and a network of  hundreds  of dealers  and VARs  around the world who  purchase
directly from the Company.

INDUSTRY BACKGROUND

         In recent  years,  advances  in  telecommunications  technologies  have
enabled the  development of  increasingly  sophisticated  telephone  systems and
applications.  Users rely upon a variety of applications,  including  conference
calling,  speaker  phones,  automated  attendant,  voice  processing and unified
messaging (the  integration of voice mail,  facsimile and electronic  mail),  to
improve  communications  within  their  organizations  and  with  customers  and
vendors.  Digital  technology has  facilitated  the integration of computing and
telecommunications  technologies,  which  has  made  possible  a  number  of new
applications that further enhance  productivity.  Examples of these applications
include   automatic   call   distribution   (which   provides  for  queuing  and
prioritization of incoming calls), call accounting (which permits accounting for
telephone usage and toll calls), unified messaging,  electronic data interchange
between  customers  and vendors and the use of automatic  number  identification
coupled  with  database   look-up  (where  customer   information  is  retrieved
automatically from a computerized database when the customer calls).

                                       3
<PAGE>
         The  emergence  of  high-performance  computers  and the  growth of the
Internet  and  other   digital  IP  networks   have  enabled   real-time   voice
communications to be transmitted on digital packet switched networks rather than
over traditional circuit switched telephone networks.  This development of voice
applications  for  the  Internet  and  other  IP  networks  reflects  a  broader
convergence  of standard  voice  communications  and data  networks.  Because IP
network telephony  converts all transmissions to the same type of packets,  both
voice and data can use the same data circuits, thereby increasing efficiency and
maximizing the use of available  bandwidth.  The lowering of federal  regulatory
barriers  to  competition   across   traditionally   distinct   sectors  of  the
telecommunications industry has opened new markets for and increased competitive
pressures  on  telecommunications  companies.  In  response  to  these  factors,
telecommunications  companies have begun to establish a presence in Internet and
other IP network voice communications services.

         Following  the  breakup  of the  Bell  system  in 1984,  which  removed
restrictions on the ability of the regional Bell operating  companies  ("RBOCs")
to purchase  telecommunications  equipment  from  independent  suppliers  and to
resell such equipment to end users,  the market for  telecommunications  systems
and  applications  became  increasingly  fragmented.  The number of  independent
suppliers and distributors of telecommunications  equipment initially increased,
but increased  levels of competition  subsequently  led to  consolidation  among
suppliers and distributors.  In addition,  different  telecommunications systems
and  applications  were  often  available  from only one or a limited  number of
suppliers,  which required  businesses  seeking  complete systems to work with a
number of different suppliers. A business seeking a telephone system, voice mail
and long distance  services would most likely purchase the products and services
from three separate vendors.  As business  telecommunications  requirements have
become  more  advanced,   the  integration  of  different   systems  has  become
increasingly difficult.

STRATEGY

         Inter-Tel's  objective is to continue to  strengthen  its position as a
leading  single-source  provider  of  telecommunications   equipment,   software
applications  and network  services.  The Company's  strategy  incorporates  the
following key elements:

         OFFER TOTAL TELEPHONY SOLUTION

         The Company  intends to continue to offer a broad range of products and
services that incorporates  advanced  technologies and provides customers with a
single  source to fulfill  their  telecommunications  needs on a  cost-effective
basis. Inter-Tel combines this  solution-oriented  approach with a high level of
customer  service  and  support  and a  commitment  to  quality  throughout  the
Company's  operations.  The Company's  telephone systems are integrated with the
Company's long distance calling services, voice mail, automated attendant, Voice
Over   Internet   Protocol   (VoIP)   services   and  other   telecommunications
applications, and support for interactive voice response. Because of the modular
design of the  Company's  systems and the high level of software  content in its
products,  customers can readily  increase the size and  functionality  of their
systems as their needs change by adding  software and hardware  applications  or
services  or by  upgrading  to new  systems or  advanced  versions  of  existing
systems.   The  Company   believes  that  its   customers   prefer  to  purchase
telecommunications  equipment and services  from a single source  because of the
convenience,  consistency of service, ease of upgrade, availability of financing
alternatives  and  confidence  in the  performance  of  integrated  systems  and
services.

         ACCELERATE ADOPTION OF INTERNET PROTOCOL (IP) TELEPHONY TECHNOLOGY

         The Company markets its Inter-Tel Vocal'Net Server,  InterPrise gateway
and several IP  telephony  software  products to  telephone  companies,  service
providers  and  businesses  worldwide.  This  suite of  products  can be used by
telephone  companies to offer new services to their  customers and expand to new
markets.  The products can be used by service providers (ISPs,  cable television
companies, etc.) to quickly become telephone companies. The products can be used
by a business to reduce its  communications  costs through more effective use of
its data network and reduced use of

                                       4
<PAGE>
traditional long distance services.  The Company is focused on expanding current
relationships  and pursuing  new ones with major  telephone  companies,  service
providers and businesses worldwide.

         EXPAND  INTER-TEL.NET  NETWORK;  EXPAND GLOBAL ALLIANCE AND OTHER THIRD
         PARTY ALLIANCES

         The  Company  is  expanding  its  customer  base on its own  private IP
telephony network,  Inter-Tel.net,  which carries voice and facsimile traffic at
rates typically lower than those of standard  telephone  networks.  To date, the
Inter-Tel.net  network has  established  points of presence in the San Francisco
Bay Area, Washington, D.C., Chicago, Reno, New York, Phoenix and Los Angeles, as
well as a network operations center (NOC) in Reno. The Company intends to expand
the number of points of presence, both domestically and internationally, as well
as  increase   capacity  in  existing   cities.   Through  a  global   alliance,
Inter-Tel.net  is  participating  with  businesses  in Japan,  Europe  and South
America to provide international IP telephony service. Through other third party
arrangements,   the  network  is  expanding  points  of  presence  domestically.
Inter-Tel.net  is  designed  to carry  long  distance  traffic  originated  from
Inter-Tel's  customer  base,  to generate  sales of pre-paid  calling  cards and
provide other exchange carriers,  individuals,  and enterprises a cost-effective
alternative  to current  offerings of the  conventional  circuit  switched  long
distance carriers.

         CONTINUE TO DEVELOP ADVANCED COMMUNICATIONS PRODUCTS

         The Company commits substantial  research and development  resources to
provide  its  customers  with  advanced  telecommunications  technologies  on  a
cost-effective  basis.  The Company has  developed an extensive  C++ library and
significant  telecommunications  expertise.  In many cases, the Company develops
new  technologies  as software  upgrades or add-ons to  existing  products.  For
example,  the AXXESS 5.0 platform provides an extensive  enhancement to previous
versions  of  AXXESS,  the  Company's  primary  product.  Ongoing  research  and
development   efforts  are  directed  to  the   development   of  new  products,
applications and services for sale into the Company's existing customer base and
to new  customers.  Through CTI  applications  and  advanced  network  services,
Inter-Tel  provides  technology  that is  designed  to enable its  customers  to
enhance their efficiency and competitiveness.

         EXPAND DISTRIBUTION CHANNELS

         The Company  continues to expand its  distribution  channels  through a
growing  network  of  direct  dealers,  as well as the  Company's  direct  sales
presence,  and to hire  additional  direct sales  personnel for  expansion  into
international  markets.  The Company has established  sales  relationships  with
hundreds of direct dealers and continues to expand this network.  The Company is
in the process of establishing  dealer networks in Japan and other parts of Asia
and is  expanding  its dealer  network in the United  Kingdom  and  Europe.  The
Company  has  expanded  its direct  sales  activity  in recent  periods  through
strategic  acquisitions  of  resellers  of  telephony  products  and services in
strategic  markets,  and considers  additional  acquisition  opportunities on an
ongoing  basis.  The  Company  also is  expanding  its  distribution  into other
channels such as computer  equipment dealers,  resellers of data  communications
equipment and software resellers.

PRODUCTS AND SERVICES

         The Company  offers a broad range of products and services  designed to
support the needs of businesses and other organizations requiring voice and data
communications  systems.  The Company's principal products are digital telephone
systems which support  networked  installations  up to 5,000 ports, IP telephony
products and services,  CTI applications,  unified messaging  software and voice
processing  software.  The Company's  principal  system sales consist of systems
supporting 10 to 4,000 telephones with suggested retail prices of larger systems
in excess of $1,000,000 per system, depending on configuration. The Company also
offers  long  distance  calling  services,  network  design  and  implementation
services,   maintenance,   leasing  and  support  services,  and  resells  other
telecommunications products.

                                       5
<PAGE>
         DIGITAL COMMUNICATION PLATFORMS

         Inter-Tel  offers an extensive line of digital  communication  systems,
including  hardware  platforms  and C++  software  applications.  Because  these
platforms are based upon open  architecture and conform to established  computer
and telephone  industry standard  programming  interfaces and protocols (such as
TAPI,  TSAPI and TCP/IP),  customers  can choose from a variety of either server
level or desktop applications.

         AXXESS. Inter-Tel's primary product, the AXXESS platform,  incorporates
advanced technology for computer and telephone integration.  The AXXESS platform
is designed to provide businesses with the ability to customize  applications to
enhance their  operations and increase  productivity.  The current AXXESS system
release  supports up to 5,000 ports and includes such advanced  capabilities  as
primary  rate ISDN,  integrated  call  recording,  voice  prompts  in  different
languages,  transparent networking and a Windows-based  attendant's console. The
AXXESS 5.1  platform,  which is  currently  scheduled  for  release in the third
quarter of 1999, is being designed to allow,  through fully transparent  digital
networking,  two or more systems to operate as one, and to increase  capacity to
20,000 ports.  AXXESS 5.2, currently scheduled for release in the fourth quarter
of 1999, is being designed to add the support of ISDN basic rate interfaces.

         The   AXXESS   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 object-oriented C++ software developed
by the Company,  which facilitates  upgrades and the incorporation of additional
features and functionality.

         AXXESS system telephones feature  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 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  currently  offers English or Japanese voice prompts and LCD displays and
allows the user to switch from one  language  to the other.  Spanish has been in
controlled  product  introduction  since  the  fourth  quarter  of 1998,  and is
scheduled for  commercial  release in the first half of 1999.  The AXXESS system
can support the addition of other  languages that the Company  expects to add in
the future.

         The  AXXESS  system's  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  Microsoft
Windows-based graphical user interface on a PC.

         The AXXESS system utilizes  advanced  software to configure and utilize
real-time   digital   signal   processor   semiconductor   components   ("DSPs")
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 need to override one speaker's  voice to prevent  feedback
interference.

         The AXXESS software is written in an 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

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<PAGE>

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 is evolving the AXXESS to a server-based communication system
by  developing  a  Windows-NT  server-based  Central  Processing  Unit (CPU) for
Inter-Tel's AXXESS system. In its initial release planned for the second quarter
of 1999,  this CPU will be designed to handle call processing with greater speed
and  efficiency.  By combining  server-based  technology  and  Inter-Tel  AXXESS
technology,  Inter-Tel  leverages  the  benefits  of a  Win-Tel  server  and the
benefits  of a PBX-like  hot card  insertion  of  telephony  cards.  The Company
expects  that  future  upgrades  to the AXXESS  system  will  permit it to power
LAN-based  computer  telephone  integration   applications,   unified  messaging
applications,  and Internet  Protocol  (IP)  telephony  solutions.  Because this
server-based  CPU will integrate with the AXXESS system,  current  customers can
benefit  from  the new  functionality,  while  retaining  their  current  system
investment.

         INTER-TEL  AXXENT.  Small businesses are demanding  advanced  telephony
applications  formerly  within reach of only 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  supports  24 lines and 12 trunks  and  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 chassis,  the Inter-Tel Axxent platform also offers the convenience of
a default database, allowing the system to be fully operational as soon as it is
plugged in. Basic database programming can also be performed through the digital
telephone terminals.

         IP TELEPHONY PRODUCTS AND INTER-TEL.NET NETWORK

         IP TELEPHONY  GATEWAYS.  Gateways  are  transition  points  between two
different network types,  such as between the public circuit switched  telephone
network and a packet switched IP network such as the Internet.  Gateway products
convert regular voice and facsimile transmissions to or from the compressed data
packets that travel over packetized networks.

         The Company markets two gateway product lines - the Inter-Tel Vocal'Net
and InterPrise products.

         INTER-TEL VOCAL'NET 3200S. The Inter-Tel Vocal'Net 3200S, a Windows NT,
server-based  IP  telephony  solution  is  designed  for  carriers  and  service
providers to bridge the traditional  telephone network and an IP network.  Using
this  technology,  the  customers of carriers and service  providers can conduct
real-time,  two-way voice communications over the Internet and realize potential
savings compared to standard long distance telephone service.

         The Inter-Tel Vocal'Net 3200S allows phone to phone communication using
high speed DSP  technology  which  connects  the call from the circuit  switched
telephone  network,  converts it into the compressed or uncompressed,  digitized
data  packets  used by an IP network,  and routes the call via the IP network to
another Inter-Tel Vocal'Net 3200S gateway.  The second gateway connects with the
traditional telephone network and dials the final destination.

         Although  the  Inter-Tel  Vocal'Net  3200S  scales from eight analog to
thirty digital PSTN access ports per server, the Company's software architecture
allows multiple Inter-Tel Vocal'Net servers to be networked together,  resulting
in seamless  configurations  consisting of thousands of ports.  The interface to
the  Inter-Tel  Vocal'Net  3200S access ports are approved for  connection  to a
large number of foreign telephone  companies.  This allows the Company to market
and install Inter-Tel Vocal'Net 3200S gateways internationally.

         INTER-TEL  INTERPRISE  PRODUCT LINE.  This product line consists of the
InterPrise  400 (four analog PSTN access  ports),  the  InterPrise  2400S (up to
twenty-four analog PSTN access ports) and the

                                       7
<PAGE>
InterPrise  3200D (up to thirty-two  digital PSTN access ports).  These products
incorporate  high speed  embedded DSP  technology  and a  proprietary  Inter-Tel
operating  system,  and are used primarily by business  customers,  carriers and
service providers.  Like the Inter-Tel  Vocal'Net 3200S, the InterPrise gateways
enable phone-to-phone calling over IP networks.

         INTERPRISE 400. The InterPrise 400 is designed for corporate use over a
wide area network ("WAN"). The InterPrise 400 can be attached to an analog trunk
interface  on the PBX,  and the PBX's  Automatic  Route  Selection or Least Cost
Routing  features  will be  programmed  to  automatically  route calls for other
locations that also have InterPrise gateways through that trunk interface.  When
phone users wish to place a call, they simply dial the desired  telephone number
like any other call.  The PBX will route the call to the  InterPrise  400, which
converts it into the compressed or uncompressed,  digitized data packets used by
the  corporate  WAN,  and  routes  the  call via the WAN to  another  InterPrise
gateway.  The second gateway  connects with the far-end PBX and dials either the
extension number of the desired party or accesses a trunk on the PBX and makes a
call into the switched network.

         Because IP  telephony  converts all  transmissions  to the same type of
packets,  both voice and data information can be transmitted using the same data
circuits,  thereby  increasing  efficiency  and maximizing the use of bandwidth.
Bandwidth utilization can be maximized to a point that some users may be able to
reduce the overall number of circuits needed.

         INTERPRISE  2400S.  The  InterPrise  2400S is designed  for  corporate,
carrier and service  provider use and can be  configured  in eight,  sixteen and
twenty-four analog PSTN access ports.

         INTERPRISE  3200D. The InterPrise  3200D is designed for corporate,  as
well as medium- to high-density carrier and service provider use.

         INTERPRISE  128D.  The company is currently  developing  the InterPrise
128D for higher density carrier and service provider applications.

         INTERPRISE SOFTPHONE.  The InterPrise SoftPhone is a PC-client software
that acts as a single port IP telephony  gateway and allows  callers the ability
to make  real-time,  two-way voice  communications  over IP networks and realize
potential savings compared to standard long distance telephone service.

         Callers  connected  to an IP network  on their PC dial the  destination
phone number from a familiar Windows graphical user interface ("GUI"). Using the
PC's microprocessor and multimedia capabilities, the PC-client software converts
the caller's voice into  compressed,  digitized data packets and routes the call
via the IP network  to an  Inter-Tel  InterPrise  gateway.  The  second  gateway
connects with the traditional telephone network and dials the final destination.

         Possible  applications  for the InterPrise  SoftPhone are for potential
telecommunications savings for mobile employees and for use as on-ramps for long
distance minutes to Inter-Tel.net.

         The Company believes that the opportunity to leverage the potential for
reduced cost phone calls is only one of the many opportunities for IP telephony.
For this reason,  the Company continues to enhance its product line. The Company
is currently developing industry standard H.323 functionality,  which allows the
Company's IP telephony  gateways to integrate  with  non-Inter-Tel  IP telephony
gateways.

         The Company plans other  enhancements to its IP telephony product line,
such as "Touch-To-Talk"  telephony-enabled web pages, which is being designed to
allow users to press a link on a web page and to  automatically  connect over an
IP network to talk to customer service agents.

         INTER-TEL SERVICE PROVIDER PACKAGE AND CENTRALIZED  ACCOUNTING  SYSTEM.
This product  provides a turnkey  solution for IP long  distance  providers  for
pre-paid and post-paid  billing,  back office

                                       8
<PAGE>
support and customer care. Planned  enhancements to the Service Provider Package
and Centralized  Accounting  System include the integration of H.323  Gatekeeper
functionality,  which allows  traffic  control among  multiple IP telephony long
distance  networks and  compatibility  with IP telephony long distance  networks
using non-Inter-Tel gateways.

         INTER-TEL.NET.  Inter-Tel.net  is  an IP  long  distance  network  that
utilizes the Inter-Tel IP telephony  gateways and Service  Provider  Package and
Centralized  Accounting  System.  Inter-Tel.net's  points  of  presence  ("POP")
include the San Francisco Bay Area,  Washington D.C.,  Chicago,  Reno, New York,
Phoenix and Los Angeles.  Utilizing  Inter-Tel Vocal'Net  technology,  Inter-Tel
continues to develop and expand Inter-Tel.net,  a private IP network designed to
carry long distance  telephone traffic at rates typically lower than traditional
long distance  providers.  Commercial  traffic is being sold to Inter-Tel's base
customers in certain markets,  and pre-paid calling cards are being sold through
Inter-Tel's branches,  certain agents and resellers.  Where Inter-Tel.net or one
of it's network partners does not have a POP, Inter-Tel.net utilizes traditional
Long Distance Carriers to complete the call. See "Factors That May Affect Future
Operating  Results--Developing  Market  for  IP  Network  Telephony;   Uncertain
Regulatory   Environment,"   "--Risks   Associated  with  Inter-Tel   Vocal'Net;
Dependence upon IP Network  Infrastructures;  Risk of System  Failure;  Security
Risks" and "--Development and Maintenance of Inter-Tel.net Network."

         COMPUTER-TELEPHONE INTEGRATION

         Through  CTI,  the  computer  and the  telephone  are  linked  into one
environment.  Inter-Tel's  AXXESSORY  Connect  software  for the  AXXESS  system
enables  users to receive  phone calls  through  their  desktop PC. Using Caller
I.D., a caller's  information can be retrieved from the company's  database even
before the call is accepted.  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.

         Through  the  use of  Novell's  TSAPI  and  Microsoft's  TAPI  standard
interfaces,    Inter-Tel's   software   applications    integrate   with   other
"off-the-shelf" Windows applications such as personal information managers, call
routing or call management.  Inter-Tel has formed relationships 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 adequately meet the needs
of a  customer,  the open design of  Inter-Tel's  software  enables  independent
software developers to write custom applications  through Inter-Tel's  Developer
Program. Alternatively, Inter-Tel's CTI Solutions Group can provide professional
consulting services or can develop individual customer applications,  for either
desktop or local area network ("LAN")-based applications.

         UNIFIED MESSAGING AND VOICE PROCESSING SOFTWARE

         Inter-Tel's unified messaging software,  AXXESSORY Talk Central,  works
in conjunction  with a variety of messaging  platforms,  including the Microsoft
Exchange messaging application,  Lotus Notes, Lotus cc:Mail,  Novell's GroupWise
and Internet mail applications such as Qualcomm's Eudora. Visual Mail integrates
all types of messages into a single-user  interface on a PC, supports both voice
mail and  facsimile  mail and provides  another  means for  improving  workplace
productivity and retrieving messages from a PC connected to a modem.

         Inter-Tel's AXXESSORY Talk, Axxent Talk and IVX500 are 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.

                                       9
<PAGE>
         OTHER SERVICES AND PRODUCTS

         NETWORKING TECHNOLOGIES INTEGRATION.  To develop a solid foundation for
state-of-the-art  data  and  telecommunications  networking,  customers  require
strategic network expertise from their networking  provider.  Inter-Tel designs,
installs and supports the complete  integration of a customer's complex data and
telecommunications  network,  from land-based LANs to  geographically  dispersed
WANs.

         By forming  relationships  with major  manufacturers  of  hardware  and
software  technologies,  Inter-Tel  provides  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, InterPrise products,
and services.

         NETWORK AND LONG DISTANCE SERVICES. The Company,  through its Inter-Tel
NetSolutions,  Inc.  subsidiary,  resells a  variety  of long  distance  calling
services,  including  domestic and international  calling services,  800 calling
services,  dedicated services, voice and video conferencing,  customized billing
and a variety of other  telecommunication  services.  The Company  believes that
certain of its  customers  desire the  convenience  of acquiring  long  distance
calling  services through the same vendor that the customer uses to purchase its
other  telephony  equipment and  services.  The Company  currently  resells long
distance services pursuant to contracts with major U.S. long distance  carriers.
See "Factors That May Affect Future Operating  Results--Risks  of Providing Long
Distance and Network Services."

         Examples  of  the   applications   currently   supported  by  Inter-Tel
NetSolutions  include  call  centers  using T-1  access for  incoming  toll-free
traffic,  sales offices using NetSolutions' switched long distance and companies
linking multiple offices throughout the country on a frame relay network.

         LEASING SERVICES.  The Company offers its Totalease program through its
Inter-Tel Leasing,  Inc. subsidiary.  Totalease enables an end user to acquire a
full range of telephony systems, applications, maintenance and support services,
as well as  lease  financing,  from a  single  vendor.  The  Totalease  contract
provides a total  system  solution to the customer at a set monthly  cost,  with
system expansion available at predictable additional fees. The typical Totalease
contract  has a term of 60  months,  with the  customer  entitled  to renew  the
contract at a specified price for up to an additional 36 months.

         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.  Inter-Tel  can also  customize  financing  packages  to suit
customers with special  financial  needs.  By offering this type of financing to
acquire Inter-Tel products and services,  the customer is able to lease directly
from an  affiliate  of the  manufacturer,  thereby  allowing  Inter-Tel,  or the
Inter-Tel dealer, to maintain a direct relationship with customers.

         OTHER   PRODUCTS.    Inter-Tel   also    distributes    other   leading
telecommunications  products  from its Factored  Products  Division  through its
direct  sales  offices,   dealers  and  VARs.  The  Factored  Products  Division
represents  products  that  Inter-Tel  has  endorsed  as 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 Inter-Tel
telephone systems.  Inter-Tel's product selection consists of videoconferencing,
battery  backup,   headsets,  surge  protection,   paging  equipment,   wireless
communications and data multiplexers.

SALES AND DISTRIBUTION

         The  Company  has  developed  a  distribution  network of direct  sales
offices, dealers and VARs which market the Company's products to small to medium
size organizations and divisions or

                                       10
<PAGE>

departments of larger  organizations.  In the United States,  the Company has 37
direct sales  offices and a network of hundreds of dealers who purchase  systems
directly from the Company.  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 dealers in the United Kingdom and Europe. In
addition,  the  Company  maintains  a direct  sales  office  in both  Japan  and
Singapore.

         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.  The Company has
expanded  its  direct  sales  office  personnel  from a total of 473  persons at
December 31, 1994 to a total of 921 at December 31, 1998.

         The Company's sales through its direct sales offices as a percentage of
total sales have decreased from 60.4% of net sales in 1994 to 54.7% of net sales
in 1998. Sales to distributors,  dealers,  and VARs have increased from 46.6% of
net sales in 1995 to 47.8% of net sales in 1998.  Sales  through  the  Company's
long distance,  IP and network  services  operations have increased from 5.0% of
net sales in 1995 to 9.9% of net sales in 1998.

         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 faces
intense  competition  from other telephone  system and voice  processing  system
manufacturers for its dealers' attention, as most of the Company's dealers carry
products which compete with the Company's products. See "Factors That May Affect
Future Operating Results--Reliance on Dealer Network."

         International  sales, which includes digital  communications  platforms
and IP telephony  products,  accounted for  approximately  2.7%, of net sales in
1998  compared to 2.3% in 1997.  In order to sell its  products to  customers in
other  countries,   the  Company  must  comply  with  local   telecommunications
standards.  The Company's AXXESS system and IP telephony products can be readily
altered  through  software  modifications,   which  the  Company  believes  will
facilitate  compliance  with these local  regulations.  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,  other  parts of Asia and Latin  America  and is  working to
expand its dealer network in the United Kingdom and Europe.  International sales
are  subject  to a number of risks,  including  changes  in  foreign  government
regulations  and  telecommunications  standards,  export  license  requirements,
tariffs and taxes, other trade barriers, difficulties in protecting intellectual
property,  fluctuations  in currency  exchange  rates,  difficulty in collecting
accounts receivable,  difficulty in staffing and managing foreign operations and
political and economic  instability.  Fluctuations  in currency  exchange  rates
could  cause the  Company's  products to become  relatively  more  expensive  to
customers  in  a  particular  country,  leading  to  a  reduction  in  sales  or
profitability in that country. In addition, the costs associated with developing
international  sales may not be offset by increased  sales in the short term, or
at all.

CUSTOMER SERVICE AND SUPPORT

         The Company  believes  that  customer  service and support are critical
components 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,

                                       11
<PAGE>
through  remote  diagnostic  procedures,  has the  ability to detect and correct
system problems from its technical support facilities.

         Information  taken from customer  service call records allows  feedback
into Inter-Tel's Quality First continuous  improvement  process,  thus providing
direction  for 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.

RESEARCH AND DEVELOPMENT

         The Company believes that its ability to enhance its current  products,
develop and  introduce new products on a timely  basis,  maintain  technological
competitiveness  and meet customer  requirements  are essential to the Company's
success.  The Company's  research and development  efforts over the last several
years have been focused  primarily on  development  of and  enhancements  to the
existing  AXXESS  and  AXXESSORY  TALK  systems  with  additional  applications,
capacity and features;  development of a unified messaging software application,
a telecommunications  networking package, and new products such as the Inter-Tel
Vocal'Net  Server.  Over the last several  years,  the research and  development
efforts of the acquired TMSI organization have focused on the development of the
InterPrise  IP product line and the  InterPrise  software  phone.  The Company's
current  efforts are focused on the  development and enhancement of IP telephony
products such as the Inter-Tel  Vocal'Net Gateway Server, the InterPrise product
line, the Inter-Tel Vocal'Net Service Provider Package,  the support of H.323 on
both the gateway and service  provider  products,  the development of additional
applications  and  features  of the AXXESS  and  AXXESSORY  Talk  communications
products,  and the development of a server-based PBX product. 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 120  personnel  engaged  in  research  and
development  as of December 31, 1998.  Research and  development  expenses  were
$11,373,000; $7,998,000 and $6,581,000 for 1998, 1997, and 1996, respectively.

MANUFACTURING

         The Company manufactures substantially all of its systems through third
party subcontractors located in the United States, the Philippines, the People's
Republic  of China  and  Mexico.  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.
Varian  Associates,   Inc.  ("Varian"),   a  multinational  electronic  company,
currently  manufacturers  a  significant  portion  of  the  Company's  products,
including substantially all of the printed circuit boards used in the AXXESS and
Inter-Tel  Axxent systems,  at Varian's  Tempe,  Arizona  facility.  The Company
maintains written agreements with its principal suppliers.  The Company provides
a forecast  schedule to its  suppliers  and  revises the  forecast on a periodic
basis.  See "Factors That May Effect  Future  Operating  Results--Dependence  on
Contract Manufacturers and Component Suppliers."

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, monitor response times
and measure customer  satisfaction.

                                       12
<PAGE>
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 PABX and key systems products competitors include
Lucent Technologies, Inc. ("Lucent") and Northern Telecom Limited ("NorTel"), as
well as Comdial Corporation  ("Comdial"),  EXECUTONE  Information Systems,  Inc.
("Executone"), Iwatsu America, Inc. ("Iwatsu"), Mitel Corporation ("Mitel"), NEC
Corporation  ("NEC"),  Nitsuko  Corporation  ("Nitsuko"),   Matsushita  Electric
Industrial  Co.,  Ltd.   ("Panasonic"),   Siemens  Rolm   Communications,   Inc.
("Siemens"),  Toshiba  America,  Inc.  ("Toshiba")  and  others.  Many of  these
competitors  have  significantly  greater  financial,  marketing  and  technical
resources than the Company.  The Company also competes against the 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 Telecommunications Act of 1996 (the  "Telecommunications  Act") and
the division of AT&T  Corporation  ("AT&T")  into three  enterprises  has had an
impact on competition in the communications industry. The Telecommunications Act
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  television  companies  can offer
telephone services and Internet access. These changes have increased competition
in the  communications  industry and have  created  additional  competition  and
opportunities  in  customer  premise  equipment,   as  these  new  services  and
interfaces have become available.

         In the market for voice processing applications,  including voice mail,
the Company  competes against Applied Voice  Technology,  Inc.  ("AVT"),  Active
Voice  Corporation  ("Active  Voice"),   Centigram  Communications   Corporation
("Centigram"), Lucent 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  WorldCom,   Inc.  ("MCI"),   Sprint
Corporation,  Qwest Communications  Corporation ("Qwest") and other competitors,
many of which have significantly greater resources than the Company. The Company
also expects to compete with RBOCs,  cable television  companies,  satellite and
other wireless broadband service providers and others for long distance business
as  those  companies  gradually  respond  to  the  Telecommunications  Act.  Key
competitive  factors in the sale of telephone  systems and related  applications
include price,  performance,  features,  reliability,  service and support, name
recognition and distribution  capability.  The Company believes that it competes
favorably in its markets with respect to the price,  performance and features 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.

         In the market for IP telephony  products,  the Company competes against
existing  IP  telephony  gateway  providers  such as  Lucent,  NorTel,  NetSpeak
Corporation,  VocalTec  Communications  Ltd., Nokia IP Products (formerly Vienna
Systems Corporation),  CISCO Systems, Bay Networks,  3Com, Motorola,  Ascend and
others. The Company competes against existing IP long distance service providers
such as IDT, Delta Three,  ITCX, AT&T and others.  Several of these  competitors
have been active in  developing  and  marketing IP  telephony  products and have

                                       13
<PAGE>
established  relationships with customers within their market. Should the market
for IP telephony  products  become  fully  developed or develop at a rapid rate,
large  computer  companies  such  as  IBM  Corporation   ("IBM")  and  Microsoft
Corporation  ("Microsoft"),  or large  telephone  companies  such as AT&T,  MCI,
Sprint  Corporation  or Qwest,  could  choose to  develop  proprietary  software
designed to facilitate voice communication over an IP network.

         As the Company  competes for local  telephone  service,  Long  Distance
Service and IP network access, it faces additional  competition from established
foreign and domestic Long Distance  Carriers,  RBOCs and other  providers.  Many
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.

         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.

INTELLECTUAL PROPERTY RIGHTS

         The Company's  future success will depend in part upon its  proprietary
technology.  The Company currently hold patents for six  telecommunications  and
unified messaging products. The remaining life of these patents ranges from 5 to
14 years in  duration.  The  Company  has also  applied  to the U.S.  Patent and
Trademark  Office  for a patent  related to  certain  aspects  of the  Inter-Tel
Vocal'Net technology.  The Company also relies on copyright and trade secret law
and contractual  provisions to protect its intellectual  property.  See "Factors
That May Effect Future Operating Results--Product Protection and Infringement."

EMPLOYEES

         As of December 31, 1998, the Company had a total of 1,386 employees, of
whom 1,146 were engaged in sales, marketing and customer support, 46 in quality,
manufacturing and related operations, 120 in research and development, and 74 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 good.

FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON RECENTLY INTRODUCED PRODUCTS

         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 key factors in the  Company's  future
success.

         During the past  twenty-four  months,  the Company  introduced  unified
messaging on its AXXESSORY TALK platform,  developed a number of enhancements to
its existing  AXXESS and  AXXESSORY  Talk  platforms  and  introduced  Inter-Tel
Vocal'Net  Gateway Server and the Inter-Tel  Vocal'Net Service Provider Package.
In July 1998,  the Company  also  released the AXXESS 5.0  platform,  which is a
significant  software  upgrade and  enhancement to its AXXESS and AXXESSORY TALK
platforms.  The Company's  future success will depend,  in large part,  upon the
commercial acceptance of the AXXESS 5.0 platform, as well as future upgrades and
enhancements to this networking platform. The Company's future success will also
depend  upon  market   acceptance  of  the  Company's   other  new  products  or
enhancements,   including  Inter-Tel  Vocal'Net  and  the  Inter-Tel

                                       14
<PAGE>
InterPrise  products.  There can be no  assurance  that any of these  introduced
products and enhancements will be successful. 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.  Further,  if the markets for IP network  products or CTI  applications
fail to develop,  or grow more slowly  than the Company  anticipates,  or if the
Company is unable for any reason to capitalize on any of these  emerging  market
opportunities,  the  Company's  business,  financial  condition  and  results of
operations could be materially adversely affected.

         Occasionally,  new products contain undetected program 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 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,  design
modifications required to correct bugs or 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, and, accordingly,  operating results
would be adversely affected for a period of time following introduction.

DEVELOPING MARKET FOR IP NETWORK TELEPHONY; UNCERTAIN REGULATORY ENVIRONMENT

         The  market  for IP  network  voice  communications  products  has only
recently  begun to  develop,  is rapidly  evolving  and is  characterized  by an
increasing  number of market entrants who have introduced or developed  products
and  services  for  Internet  or other IP network  voice  communications.  As is
typical in the case of a new and rapidly evolving  industry,  the demand for and
market  acceptance of recently  introduced  IP network  products and services is
highly uncertain.  There can be no assurance that voice  communications  over IP
networks will become widespread.  Further,  even if voice communications over IP
networks achieve broad market acceptance,  in light of the competitive pressures
developing  in  this  market,  there  can be no  assurance  that  the  Company's
products,  and  particularly  Inter-Tel  Vocal'Net and the Inter-Tel  InterPrise
products, will achieve market acceptance.

         The  adoption  of  voice  communications  over  IP  networks  generally
requires the acceptance of a new way of exchanging  information.  In particular,
enterprises that have already invested  substantial  resources in other means of
communicating  information  may be  reluctant or slow to adopt a new approach to
communications.  The lack of  control  over IP network  infrastructure  and each
user's system  configuration may cause users of IP network voice  communications
delays in the  transmission of speech,  loss of voice packets and inferior sound
quality  relative to standard  telephony  networks.  If these  factors cause the
market for IP network voice communications to fail to develop or to develop more
slowly than the Company anticipates, the Company's IP network telephony products
could fail to  achieve  market  acceptance,  which in turn could have a material
adverse  effect on the Company's  business,  financial  condition and results of
operations.

         The  regulatory  environment  for IP  network  telephony  is subject to
substantial  uncertainty.  There can be no assurance that the sale and use of IP
network  telephony  products  such as  Inter-Tel  Vocal'Net  and  the  Inter-Tel
InterPrise   products  will  comply  with   telecommunications   laws  or  other
regulations  in any of the  countries  in  which  such  products  are or will be
marketed and used.  In the United  States,  the Company  believes that there are
currently few laws or regulations  directly  applicable to voice  communications
over IP  networks  or to access  to, or  commerce  on,  IP  networks  generally.
However,  changes in the  regulatory  environment,  particularly  in regulations
relating  to the  telecommunications  industry,  could have a  material  adverse
effect on the Company's business.  The increased commercial  acceptance of voice
communications  over IP  networks,  as well as other  factors,  could  result in
intervention  by  governmental  regulatory  agencies  in the  United  States  or

                                       15
<PAGE>
elsewhere in the world under  existing or newly enacted  legislation  and in the
imposition  of fees,  charges or taxes on users and  providers  of products  and
services  in this area.  There can be no  assurance  that such  intervention  or
imposition of fees,  charges or taxes would not have a material  adverse  effect
upon the  acceptance  and  attractiveness  of IP network  voice  communications.
Moreover, legislative proposals from international, federal and state government
bodies could impose additional  regulations and obligations upon on-line service
providers.  The growing  popularity and use of the Internet has increased public
focus and could  lead to  increased  pressure  on  legislatures  to impose  such
regulations.   The  Company  cannot  predict  the  likelihood  that  any  future
legislation or regulation will be enacted,  nor the financial impact, if any, of
such resulting  legislation or regulation.  In the future,  the Company may also
develop and introduce  other products with new or additional  telecommunications
capabilities or services,  which could be subject to existing federal government
regulations or result in the imposition of new government regulations, either in
the United States or elsewhere.

RISKS ASSOCIATED WITH INTER-TEL VOCAL'NET AND INTER-TEL  INTERPRISE;  DEPENDENCE
UPON IP NETWORK INFRASTRUCTURES; RISK OF SYSTEM FAILURE; SECURITY RISKS

         Over the past 24 months,  the  Company  has  introduced  the  Inter-Tel
Vocal'Net  Server,  the Inter-Tel  Service Provider  Package,  and the Inter-Tel
InterPrise  products.  The Company  has also  introduced  several  new  software
releases to provide new features and  enhancements  to the  Inter-Tel  Vocal'Net
product line.  There can be no assurance  the  functionality,  scalability,  and
reliability of the Inter-Tel  Vocal'Net,  Inter-Tel Service Provider Package and
Inter-Tel  InterPrise product lines will be accepted in the market. In addition,
there can be no assurance that these  products and  technology  will comply with
industry  standards  or that  industry  standards  will not  change  and  render
Inter-Tel  Vocal'Net or the Company's other IP telephony products  obsolete.  In
the event that these products fail to achieve market  acceptance,  the Company's
business,  financial condition and results of operations could be materially and
adversely affected.

         The success of Inter-Tel Vocal'Net and other IP telephony products that
the Company  acquired  through its  purchase of assets from  Telecom  Multimedia
Systems,  Inc.  ("TMSI") in June 1998 will also depend upon, among other things,
the continued  expansion of the Internet and other IP networks and their network
infrastructures.   There  can  be  no  assurance  that  the   infrastructure  or
complementary  products  necessary  to make the  Internet  a  viable  commercial
network will  continue to be developed.  In addition,  there can be no assurance
that  IP   networks   will   retain   their   current   volume,   distance   and
time-of-day-independent  pricing  structure,  or that the  costs of access to IP
networks,  lack of  capacity or poor voice  transmission  quality of IP networks
will not  adversely  affect the market for IP  network  products  and  services.
Moreover,  critical  issues  concerning  the  commercial  use  of  the  Internet
(including  security,  reliability,  cost, ease of use and access and quality of
service)  remain  unresolved  and may affect the growth of IP network use. There
can be no assurance that the Internet will be able to meet additional  demand or
its users' changing requirements on a timely basis, at a commercially reasonable
cost, or at all.

         The  Inter-Tel  Vocal'Net  gateway,  the  Inter-Tel  Vocal'Net  Service
Provider  Package and the  Inter-Tel  InterPrise  products can be  vulnerable to
computer viruses or similar  disruptive  problems.  Computer viruses or problems
caused by third  parties  could lead to  interruptions,  delays or  cessation of
service.  Further,  inappropriate  use of the  Internet  or other IP networks by
third  parties  could  potentially   jeopardize  the  security  of  confidential
information,  such as credit card or bank account  information or the content of
conversations over the IP network, which may deter certain persons from ordering
and using the Company's products. Until more comprehensive security technologies
are developed, the security and privacy concerns of existing and potential users
may  inhibit  the  growth of IP  networks  in  general  and the  market  for the
Company's IP network products in particular.

DEVELOPMENT AND MAINTENANCE OF INTER-TEL.NET NETWORK

         The Company is currently utilizing its Inter-Tel  Vocal'Net  technology
and  Inter-Tel  InterPrise  products  to develop  and expand its own IP network,
Inter-Tel.net,  to carry  voice  traffic.  The  Inter-

                                       16
<PAGE>
Tel.net  network is in its initial  stages of deployment  and,  accordingly,  is
subject  to a high  degree  of risk.  To date,  the  Inter-Tel.net  network  has
established points of presence in the San Francisco Bay Area, Washington,  D.C.,
Chicago,  New York,  Phoenix,  Reno and Los Angeles.  Certain  products that the
Company purchased from TMSI are also in the process of being tested and deployed
in this network. If the domestic or international market for IP network products
fails to develop or develops more slowly than the Company anticipates, or should
the business  experience  difficulty in the integration of the TMSI  technology,
the  Company's  Inter-Tel.net  network  could become  financially  burdensome to
maintain or obsolete,  which could materially and adversely affect the Company's
business, financial condition and results of operations.

         The Company is dependent on third-party suppliers of telecommunications
and Internet network  transmission  services for implementation of Inter-Tel.net
and does not  currently  have  long-term  contracts  with  such  suppliers.  The
Company's  ability to expand  Inter-Tel.net  is  dependent  upon its  ability to
obtain services from such suppliers.  Certain of these third party suppliers are
or may become competitors of the Company,  and such suppliers  generally are not
subject to restrictions  upon their ability to compete with the Company.  To the
extent that any of these  suppliers  raise their rates or change  their  pricing
structure,  the Company may be materially adversely affected.  Also, the Company
faces the risk that there will be a disruption in the service  provided by these
suppliers,  and can give no  assurance  that  there  will  not be a  significant
disruption  in such service in the future,  thereby  causing a disruption in the
services provided by the Company to its customers.

         Moreover,  although the Company has devoted, and intends to continue to
devote,  substantial resources to improve the quality of telephone conversations
using Inter-Tel  Vocal'Net,  certain products and Inter-Tel InterPrise products,
and the  Inter-Tel.net  network,  there can be no assurance that the problems of
voice communications over the Inter-Tel.net network that exist today,  including
delays in the  transmission  of speech,  loss of voice packets and sound quality
inferior to that of standard telephony networks,  will be eliminated or reduced.
In the event that the  Company is unable to improve  upon the sound  quality and
other limitations of voice communications over the Inter-Tel.net  network and to
offer  such  improvements  to  its  customers  on a  cost-effective  basis,  the
Inter-Tel.net network could fail to achieve market acceptance, and the Company's
business,  financial condition and results of operations could be materially and
adversely affected.

HIGHLY COMPETITIVE INDUSTRY

         The market for the  Company's  core PABX and key  systems  products  is
highly  competitive  and in recent  periods  has been  characterized  by pricing
pressures and business consolidations.  The Company's competitors include Lucent
and  NorTel,  as  well as  Comdial,  Executone,  Iwatsu,  Mitel,  NEC,  Nitsuko,
Panasonic,   Siemens,  Toshiba  and  others.  Many  of  these  competitors  have
significantly  greater  financial,  marketing and technical  resources  than the
Company.  The  Company  also  competes  against the 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 Company also expects to
compete against large data router companies,  like Cisco Systems and 3Com, which
have acquired telecommunications technology during 1997 and 1998.

         The  Telecommunications  Act of 1996 and  AT&T's  division  into  three
enterprises  have  impacted  competition  in the  communications  industry.  The
Telecommunications  Act 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 have
increased competition in the communications industry and have created additional
competition  and  opportunities  in  customer  premise  equipment,  as these new
services and interfaces have become available.

         In the market for voice processing applications,  including voice mail,
the Company  competes against AVT, Active Voice,  Lucent and other  competitors,
certain of which have significantly

                                       17
<PAGE>
greater  resources than the Company.  In the market for long distance  services,
the Company  competes  against AT&T,  MCI, Sprint  Corporation,  Qwest and other
competitors,  many of  which  have  significantly  greater  resources  than  the
Company.  The Company also  competes  with RBOCs,  cable  television  companies,
satellite and other wireless  broadband service  providers,  and others for long
distance business as those companies respond to the Telecommunications  Act. Key
competitive  factors in the sale of telephone  systems and related  applications
include price,  performance,  features,  reliability,  service and support, name
recognition and distribution  capability.  The Company believes that it competes
favorably in its markets with respect to the price,  performance and features 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.

         In the market for IP telephony  products,  the Company competes against
existing IP telephony  gateway providers such as Lucent,  NetSpeak  Corporation,
VocalTec  Communications  Ltd.,  Nokia  IP  Products  (formerly  Vienna  Systems
Corporation) and several others.  Several of these  competitors have been active
in developing  and marketing IP telephony  products for a greater period of time
than the Company  and have  already  established  relationships  with  customers
within  their  market.  In  addition,   the  Company  likely  faces  significant
competition from vendors such as Cisco Systems,  Inc., Nortel, 3Com Corporation,
Motorola, Inc. and MICOM Communications Corp., as these established data vendors
choose to enter the market for IP telephony  products.  Such companies currently
produce products that, when equipped with voice capabilities,  could represent a
considerable threat to the Company within that market. In addition,  most of the
above data router  vendors  have  greater  name  recognition,  more  established
positions  in the market,  and  long-standing  relationships  with data  network
customers.  Moreover,  should the market for IP telephony  products become fully
developed or develop at a rapid rate,  large computer  companies such as IBM and
Microsoft,  or large telephone  companies such as AT&T, MCI, Sprint Corporation,
or Qwest,  could choose to develop  proprietary  software designed to facilitate
voice communication over an IP network.

         As the Company  enters the markets for local  telephone  service and IP
network access, it will face additional  competition from RBOCs, cable companies
and other  providers  and  existing  IP  carriers  like IDC,  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,  cable  companies  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.  Many of the  Company's
current  and  potential   competitors  have  longer  operating  histories,   are
substantially  larger,  and have greater  financial,  manufacturing,  marketing,
technical and other resources.  Competition in the Company's  markets may result
in significant price reductions.  As a result of their greater  resources,  many
current  and  potential  competitors  may be  better  able than the  Company  to
initiate  and  withstand  significant  price  competition  or  downturns  in the
economy.  There can be no assurance that the Company will be able to continue to
compete  effectively,  and any  failure to do so would  have a material  adverse
effect on the Company's business, financial condition and operating results.

         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.

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  Company's  ability  to  manage  any  future  growth
effectively will require it to attract, train, motivate and

                                       18
<PAGE>
manage new employees  successfully,  to integrate new employees into its overall
operations and to continue to improve its operational,  financial and management
information systems.

         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. As
a result, the Company signed an agreement with a large, established software and
database vendor to replace its existing MIS software and implement, maintain and
support  the  alternate  MIS  software to be utilized  throughout  the  Company.
Accordingly,  during  the  fourth  quarter of 1996,  the  Company  wrote off the
software license and implementation  costs relating to the system software being
replaced.  The Company  implemented  various  components of the new MIS software
during 1998 and plan to roll out  additional  components of the software  during
1999.

         The  actions to replace the MIS  software  could  result in  additional
costs and delays  associated  with  obtaining  a fully  functional  MIS  system,
including  but not limited to the costs of  procuring  additional  or  alternate
hardware  and  software  required  but  not  available  in  the  current  system
configuration,  and  additional  personnel.  Any such cost or delay could have a
material  adverse  effect on the  Company's  business,  financial  condition and
operating results.  In addition,  implementation of this system software and the
transition  from the  current  system  software  to the new  information  system
software  has  required  and will  continue  to  require  substantial  financial
resources, time and personnel.

         The Company has made strategic  acquisitions in the past and expects to
continue to do so in the future.  In June 1998,  the Company  purchased  certain
assets of TMSI for cash of  approximately  $25 million  plus the  assumption  of
certain  liabilities and  acquisition  costs. In the second quarter of 1998, the
Company also acquired Integrated Telecom Services Corporation ("ITS"),  pursuant
to which the  Company  issued  approximately  140,000  shares  of common  stock,
accounted for as a purchase  transaction.  In addition,  in December  1998,  the
Company  acquired  certain  assets  of  Central  Florida  Communications,   Inc.
("Southcom")  for  approximately  $2.3  million.   This  asset  acquisition  was
accounted for using  purchase  accounting.  In November  1998,  the Company also
acquired certain assets of Telesystems,  Inc.  ("Telesystems") for approximately
$300,000.  This asset  acquisition  was also  accounted  for using the  purchase
method of accounting. Acquisitions require a significant amount of the Company's
management attention and financial and operational  resources,  all of which are
limited.  The integration of TMSI, ITS,  Southcom or any other 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 have a  positive  impact on the
business relationships of the Company or the acquired entity with its respective
suppliers or customers. Further, there can be no assurance that the Company will
be able to successfully  integrate TMSI,  ITS,  Southcom,  or any other 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, financial condition and operating results.

DEPENDENCE UPON CONTRACT MANUFACTURERS AND COMPONENT SUPPLIERS

         The Company currently  procures certain  components used in its digital
communication platforms, including certain microprocessors, integrated circuits,
power supplies,  voice processing interface cards and IP telephony cards, from a
relatively small number of suppliers and manufacturers and, accordingly, product
availability  could be limited.  However,  the Company  believes that  alternate
sources  of supply are  available  for  virtually  every  component.  All of the
Company's proprietary products are manufactured  according to specifications and
conditions  set by the  Company.  Each  manufacturer  must  meet  the  Company's
specifications  relating to the  manufacturing  process  and  quality  assurance
before  such  manufacturer  is selected by the  Company.  The Company  currently
manufactures  its products through  manufacturers  located in the United States,
the   Philippines,   the  People's   Republic  of  China  and  Mexico.   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 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

                                       19
<PAGE>
AXXESS and Inter-Tel Axxent digital communication 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 any  supplier,  or the  Company's
inability to develop in a timely manner alternative or additional sources if and
when  required,  could  adversely  affect  the  Company's  business,   financial
condition and operating  results.  Although the Company does not have  long-term
supply  contracts  with any of its contract  manufacturers,  to date it has been
able to obtain supplies of components and products in a timely manner. 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.

PRODUCT PROTECTION AND INFRINGEMENT

         The Company's  future success will depend in part upon its  proprietary
technology.  The Company currently holds patents for six  telecommunication  and
unified messaging products.  The Company has also applied to the U.S. Patent and
Trademark  Office  for a patent  related to  certain  aspects  of the  Inter-Tel
Vocal'Net technology.  The Company also relies on copyright and trade secret law
and contractual provisions to protect its intellectual property. There can be no
assurance that any patent, trademark or copyright owned by or applied for by the
Company,  or  intellectual  property  of TMSI  that the  Company  has  agreed to
purchase, will not be invalidated, circumvented or challenged or that the rights
granted  thereunder  will  provide  meaningful   protection  or  any  commercial
competitive  advantage 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.  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  could
result in substantial costs and diversion of resources and could have a material
adverse  effect on the  Company's  business,  financial  condition and operating
results.

         From time to time,  the  Company  is subject  to  proceedings  alleging
infringement by the Company of intellectual property rights,  including patents,
trademarks,  copyrights, or other intellectual property rights of others. If any
such claim is  asserted  against the  Company,  the Company may seek to obtain a
license under the third party's  intellectual  property rights.  There can be no
assurance that a license will be available on terms acceptable to the Company or
at all. In the alternative,  the Company could resort to litigation to challenge
any such  claim.  Any such  litigation  could  require  the  Company  to  expend
significant sums, divert  management's  attention and require the Company to pay
significant damages,  develop  non-infringing  technology or acquire licenses to
the technology which is the subject of the asserted  infringement,  any of which
could  have a  material  adverse  effect on the  Company's  business,  financial
condition  and  operating  results.  In the event that the  Company is unable or
chooses not to license such  technology  or decides not to challenge  such third
party's  rights,  the Company could  encounter  substantial and costly delays in
product introductions while attempting to design around such third party rights,
or could find that the  development,  manufacture or sale of products  requiring
such licenses could be foreclosed.

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.  There can be no  assurance  that any such  dealer will not
promote the  products  of the  Company's  competitors  to the  detriment  of

                                       20
<PAGE>
the Company's products.  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,  financial
condition and operating results.

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,  could 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.

RISKS OF PROVIDING LONG DISTANCE AND NETWORK SERVICES

         Inter-Tel  depends on its  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 to provide
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 materially and adversely affect the
Company's business,  financial  condition and operating results.  Contracts with
the long distance  carriers from which the Company  currently  resells  services
typically  have  multi-year  terms in which the Company's  prices are relatively
fixed and have minimum use  requirements.  The market for long distance services
is  currently   experiencing  and  is  expected  to  experience  in  the  future
significant price competition, resulting in decreasing end-user rates. 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  services  depends upon 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 provide telecommunications  services
and billing information to the Company on favorable terms.

POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS; LIMITED BACKLOG

         The  Company's  quarterly  operating  results  depend upon a variety of
factors,  including the volume and timing of orders received during the quarter,
the  mix of  products  sold,  mix of  distribution  channels,  general  economic
conditions, patterns of capital spending by customers, the timing of new product
announcements  and  releases  by  the  Company  and  its  competitors,   pricing
pressures, the cost and effect of acquisitions, and the availability and cost of
products and components from the Company's  suppliers.  The Company's  customers
typically require immediate shipment and installation of platforms and software.
As a result,  the Company has  historically  operated  with a  relatively  small
backlog,  and  sales  and  operating  results  in any  quarter  are  principally
dependent  on  orders  booked  and  shipped  in that  quarter.  Historically,  a
substantial  portion of the  Company's  net sales in a given  quarter  have been
recorded in the third month of the  quarter,  with a  concentration  of such net
sales in the last two weeks of the  quarter.  Market  demand for  investment  in
capital  equipment such as digital  communication  platforms and associated call
processing and voice processing  software  applications is largely  dependent on
general economic conditions,  and can vary significantly as a result of changing
conditions in the economy as a whole. The Company's  expense levels are based in
part  on  expectations  of  future  sales  and,  if  sales  levels  do not  meet
expectations,  operating results could be adversely  affected.  Because sales of
digital  communication  platforms  through the Company's  dealers  produce lower
gross  margins  than sales  through the  Company's  direct  sales  organization,
operating  results have varied,  and will continue to vary based upon the mix of
sales  through  direct and indirect  channels.  Although the Company to date has
been able to resell the rental  streams from leases under its Totalease  program
profitably and on a substantially current basis, the timing and profitability of
lease  resales  from  quarter  to  quarter  could

                                       21
<PAGE>
impact operating results, particularly in an environment of fluctuating interest
rates.  Long distance  sales,  which have lower gross margins than the Company's
core business,  have grown in recent periods at a faster rate than the Company's
overall net sales. As a result, gross margins could be adversely affected in the
event that long distance calling  services  continue to increase as a percentage
of net  sales.  In  addition,  the  Company is  subject  to  seasonality  in its
operating results,  as net sales for the first and third quarters are frequently
less than those experienced, in the fourth and second quarters, respectively. As
a result of these and other  factors,  the Company has in the past  experienced,
and could in the future experience,  fluctuations in sales and operating results
on a quarterly  basis.  See  "Management's  Discussion and Analysis of Financial
Condition and Results of Operations."

VOLATILITY OF STOCK PRICE

         The  market  price  for the  Company's  Common  Stock  has been  highly
volatile.   The  Company   believes  that  factors  such  as   announcements  of
developments  relating to the Company's business,  fluctuations in the Company's
operating  results,  shortfalls  in revenue or earnings  relative to  securities
analysts'  expectations,  announcements  of  technological  innovations  or  new
products or enhancements by the Company or its competitors,  general  conditions
in the telecommunications industry, the market for Internet-related products and
services  or the  national  or  worldwide  economy,  changes in  legislation  or
regulation   affecting   the   telecommunications   industry,   an  outbreak  of
hostilities,  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.

YEAR 2000 READINESS

         Many currently  installed  computer  systems and software  products are
coded to accept only two digit entries in the date code field.  Beginning in the
year 2000,  these date code  fields  will need to accept  four digit  entries to
distinguish  21st century dates from 20th century dates.  As a result,  computer
systems and/or software used by many companies may need to be upgraded to comply
with  such  "Year  2000"  requirements.  Significant  uncertainty  exists in the
software  industry   concerning  the  potential  effects  associated  with  such
readiness.

         The Company has  evaluated its level of exposure to the risks and costs
associated  with Year 2000  problems and is currently in the process of updating
its  information  systems  with systems that are designed to be Year 2000 ready.
This  decision  was  made in the  ordinary  course  of  managing  the  Company's
information  resources  and not  specifically  implemented  to address Year 2000
readiness  issues.  The Company is in the process of upgrading its long distance
billing  system,  which is  designed  to be Year 2000 ready.  In  addition,  the
Company is reviewing its lease billing and  collections  system,  which has been
warranted  to be Year 2000  ready.  Currently,  the total cost of each system is
being  capitalized,  and the Company does not  currently  anticipate  additional
costs of becoming Year 2000 ready.  The Company expects its information  systems
to be Year 2000 ready by the end of fiscal  1999,  and  anticipates  no material
disruptions  in the  services it provides to its  customers  as a result of Year
2000 problems. If any of the above systems are not Year 2000 ready, however, the
Company's  business,  financial  condition  and results of  operations  could be
materially adversely affected.

         No  assurance  can be  given  that  the  Company's  software  products,
including  components  manufactured and or developed by the Company's  suppliers
and vendors,  will contain all necessary date code changes  necessary to prevent
processing  errors  potentially  arising from  calculations  using the Year 2000
date,  or that such updates will be fully  completed in a timely  manner or that
such disruptions will not occur.  Products  currently  manufactured by Inter-Tel
are  designed to be Year 2000 ready and

                                       22
<PAGE>
recent  testing of such  products  by our  engineers  have  indicated  that such
products are Year 2000 ready, in accordance with our test  procedures.  Costs to
develop and update the Company's products for Year 2000 readiness have been part
of the research and development  efforts on an ongoing basis.  Any disruption in
manufacturing  services  provided  by the  Company  as a  result  of  Year  2000
noncompliance   would  materially   adversely  affect  the  Company's  business,
financial condition and results of operations.  If any of the Company's products
are not Year 2000 ready,  or if certain  non-ready  products are not replaced or
upgraded, the Company's business,  financial condition and results of operations
could be  materially  adversely  affected.  Moreover,  the Company could also be
materially  adversely impacted by Year 2000 issues faced by major  distributors,
suppliers, customers, vendors and financial service organizations with which the
Company interacts.

         The Company  believes  that the  purchasing  patterns of customers  and
potential  customers  may be  affected by Year 2000 issues in a variety of ways.
Many  companies  are expending  significant  resources to correct or patch their
current software systems for Year 2000 readiness.  These expenditures may result
in reduced funds available to purchase  software  products such as those offered
by the Company.  Many of the Company's  customers  and  potential  customers are
requesting  information  about Year 2000  readiness of the  Company's  products.
These customers and potential customers may also choose to defer purchasing Year
2000  ready  products  until  they  believe  it is  absolutely  necessary,  thus
resulting in potentially  stalled market sales within the industry.  Conversely,
Year 2000 issues may cause other  customers to  accelerate  purchases  with Year
2000 readiness warranties,  thereby causing an increase in short-term demand and
a consequent  decrease in long-term demand for software products.  Additionally,
Year 2000  issues  could  cause a  significant  number of  companies,  including
existing  customers of the Company,  to reevaluate their current  communications
platform,  IP network  telephony or voice  processing  software needs,  and as a
result consider switching to other systems or suppliers.  Any of the above items
for  which  the  Company  is unable to  provide  Year  2000  readiness  to these
customers could materially  adversely affect the Company's  business,  financial
condition and results of operations.

         Inter-Tel is completing programs and has developed evolution strategies
for  customers  who own non-Year 2000 ready  Inter-Tel  products.  Inter-Tel has
begun  extensive  efforts to alert  customers  who have such non-Year 2000 ready
products,  including direct mailings,  phone contacts and  participation in user
and industry groups.  Inter-Tel also has a Year 2000 web site that provides Year
2000  product  information.  Inter-Tel  is  continuing  contingency  planning to
address  potential  increases in demand for customer support  resulting from the
Year 2000 date change.

CONCENTRATION OF OWNERSHIP

As of March 12, 1999, Steven G. Mihaylo,  the Company's Chairman of the Board of
Directors,   Chief   Executive   Officer  and   President   beneficially   owned
approximately  20.4% 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.

ANY OF THE FOREGOING COULD RESULT IN A MATERIAL  ADVERSE EFFECT ON THE COMPANY'S
BUSINESS, FINANCIAL CONDITION AND OPERATING RESULTS.

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

NAME                        AGE                        POSITION
----                        ---                        --------
Steven G. Mihaylo           55                Chairman of the Board of
                                              Directors, Chief Executive Officer
                                              and President
Norman Stout                41                Executive Vice President/Chief
                                              Administrative Officer
Craig W. Rauchle            43                Executive Vice President

                                       23
<PAGE>
Ross McAlpine               47                Sr. Vice President
Jeffrey T. Ford             37                Senior Vice President/Chief
                                              Technology Officer
Kurt R. Kneip               36                Chief Financial Officer,
                                              Vice President and Secretary
J. Robert Anderson          62                Director
Gary Edens                  57                Director
Maurice H. Esperseth        73                Director
C. Roland Haden             58                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 since May
1998 and as Chief  Executive  Officer of the Company since its formation in July
1969.  Mr. Mihaylo served as President of the Company from 1969 to 1983 and from
1984 to December  1994, and as Chairman of the Board of Directors from July 1969
to October 1982. Mr. Mihaylo is also a director of MicroAge, Inc. and Microtest,
Inc.

         MR. STOUT was elected Executive Vice President and Chief Administrative
Officer in June 1998. From October 1994 to June 1998, he served as a director of
the Company.  Mr. Stout had been President of Superlite Block, a manufacturer of
concrete  block,  since February  1993.  Since 1996 Mr. Stout also had served as
President of Oldcastle Architectural West, the parent company of Superlite Block
and ten other  concrete  products  plants.  Prior  thereto  he was  employed  by
Boorhem-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.  Mr. Stout holds an  undergraduate  degree in Accounting from Texas A&M
and an MBA from the University of Texas.

         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 Technologies, Inc., a wholly owned sales subsidiary of the Company. In
addition,  he  currently  serves the Company and all  subsidiaries  in corporate
strategic  planning  and in mergers and  acquisitions.  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. Rauchle holds a Bachelor of Arts
degree in Communications from the University of Denver.

         MR.  MCALPINE was elected Senior Vice  President in September  1997. He
also has  served  as  President  of  Inter-Tel  Leasing,  Inc.,  a  wholly-owned
subsidiary   of  the  Company,   since  April  1993,   and   President  of  both
Inter-Tel.net,  Inc. and Inter-Tel NetSolutions, Inc. since 1997. 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. FORD was elected  Senior Vice  President in May 1998 and has served
as the Company's Chief Technology  Officer since 1997. He was elected  President
of Inter-Tel  Integrated  Systems,  Inc.  ("IIS") in May 1998,  after serving as
Senior  Vice  President  of IIS for one  year  and Vice  President  of  Software
Engineering  from 1993 to 1997. He joined Inter-Tel in 1983 as a software design
engineer.  Mr.  Ford holds a  bachelor  of science  degree in  computer  systems
engineering from Arizona 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.

                                       24
<PAGE>
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 has been a director of the Company since  February  1997.
Mr.  Anderson  held various  positions at 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,  Chief Financial Officer 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,  Chief Financial Officer
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 has been a director of the Company since October 1994. He was
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 is currently  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 also
served on the faculty of the University of Oklahoma.

         The  Board of  Directors  has an  Audit  Committee  and a  Compensation
Committee. The Audit Committee, consisting of Directors Anderson and Haden as of
December 31, 1998,  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 Audit Committee met two times
during the last fiscal year. The Compensation  Committee,  consisting of Messrs.
Esperseth  and  Edens  as of  December  31,  1998,  recommends  to the  Board of
Directors  compensation  for the Company's key  employees  and  administers  the
Company's stock option plans. The Compensation  Committee met three times during
the last fiscal year.

ITEM 2. PROPERTIES

The Company  maintains  its  corporate  headquarters  in 23,000 square feet of a
building  located in Phoenix,  Arizona pursuant to a lease that expires in 2000,
and its  principal  manufacturing  operations  in an 96,000 square foot building
located in  Chandler,  Arizona  pursuant  to a lease that  expires in 2008.  The
Company also leases sales and support  offices in a total of 37 locations in the
United States and three  locations  overseas.  The Company's  aggregate  monthly
payments under these leases are currently  approximately  $380,000.  The Company
believes that its facilities will be adequate to meet its current needs and that
additional or alternative  space will be available as necessary in the future on
commercially  reasonable  terms.  See "Factors That May Effect Future  Operating
Results--Management  of Growth;  Implementation  of New  Management  Information
Systems."

                                       25
<PAGE>
ITEM 3.  LEGAL PROCEEDINGS

The  Company  is  involved  from time to time in  litigation  incidental  to its
business.  The Company believes that the outcome of current  litigation will not
have a material adverse effect upon its business, financial condition or results
of operations and will not disrupt the normal operations 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 30 of the  Company's  1998  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 8 of  the  Company's  1998  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 20  through  29 of the  Company's  1998  Annual
         Report to Shareholders.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         The following  discussion  about the Company's  market risk disclosures
         involves  forward-looking  statements.   Actual  results  could  differ
         materially from those projected in the forward-looking  statements. The
         Company is exposed to market risk related to changes in interest  rates
         and  foreign  currency   exchange  rates.  The  Company  does  not  use
         derivative financial instruments.

         INVESTMENT  PORTFOLIO.  The Company does not use  derivative  financial
         instruments  in  its  non-trading   investment   portfolio.   Inter-Tel
         maintains  a portfolio  of highly  liquid  cash  equivalents  typically
         maturing in three months or less as of the date of purchase.  Inter-Tel
         places its  investments  in  instruments  that meet high credit quality
         standards,  as specified in the Company's investment policy guidelines.
         Given the short-term nature of these investments,  and that the Company
         has no borrowings  outstanding other than short-term letters of credit,
         the Company is not subject to significant interest rate risk.

         LEASE  PORTFOLIO.  The Company offers to its customers  lease financing
         and other  services,  including  its  Totalease  program,  through  its
         Inter-Tel Leasing subsidiary.  The Company funds these programs in part
         through the sale to financial  institutions  of rental  income  streams
         under the leases.  Although the Company to date has been able to resell
         the rental streams from leases under its lease programs  profitably and
         on a substantially current basis, the timing and profitability of lease
         resales  could impact the  Company's  business and  operating  results,
         particularly  in an  environment  of  fluctuating  interest  rates  and
         economic uncertainty. If the Company were required to repurchase rental
         streams and realize losses  thereon in amounts  exceeding its reserves,
         its  operating  results  could be materially  adversely  affected.  See
         "Liquidity  and  Capital  Resources"  in  Management's  Discussion  and
         Analysis for more  information  regarding the Company's lease portfolio
         and financing.

                                       26
<PAGE>
         IMPACT  OF  FOREIGN  CURRENCY  RATE  CHANGES.  Inter-Tel  invoices  the
         customers  of its  international  subsidiaries  primarily  in the local
         currencies  of its  subsidiaries  for  product  and  service  revenues.
         Inter-Tel  is exposed  to foreign  exchange  rate  fluctuations  as the
         financial  results of foreign  subsidiaries  are  translated  into U.S.
         dollars in  consolidation.  The impact of foreign currency rate changes
         have historically been insignificant.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

         The  information  required by this Item is incorporated by reference to
         Exhibit 13.0 and Pages 9 through 19 of the Company's 1998 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 to the extent stated below.

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 24 to 26 of this report
         under the caption "Directors and Executive Officers of the Registrant."

ITEM 11. EXECUTIVE COMPENSATION

         The  information  required by this Item is incorporated by reference to
         Pages 5 to 9 of the Company's Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The  information  required by this Item is incorporated by reference to
         Pages 3 and 4 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:

                                       27
<PAGE>
1. FINANCIAL STATEMENTS

     The following consolidated financial statements of Inter-Tel, Incorporated,
     and subsidiaries, are incorporated by reference to Exhibit 13.0 and Pages 9
     to 19 of the Company's Annual Report:

     Report of Ernst & Young LLP, Independent Auditors

     Consolidated balance sheets--December 31, 1998 and 1997

     Consolidated statements of income--years ended December 31, 1998, 1997
     and 1996

     Consolidated statements of shareholders' equity--years ended December 31,
     1998, 1997 and 1996

     Consolidated statements of cash flows--years ended December 31, 1998, 1997
     and 1996

     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.

     Schedule for the three years ended December 31, 1998:
                                                                  Page No.
                                                                  --------
         Schedule II--Valuation and Qualifying Accounts              31

         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.

                                       28
<PAGE>
     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 March 4, 1997 between Bank One,
               Arizona,  N.A. and Registrant  and  Modification  Agreement dated
               July 25, 1997.

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

----------
(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) Filed herewith.

(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, except as noted.

         (b)   Reports on Form 8-K.

         None.

         (c)   Exhibits.

               13.0 Excerpts  from  Annual  Report  to  Security  Holders.  (not
                    attached  herewith;  a copy of the excerpts of the Company's
                    Annual  Report  to  Security  Holders  was  filed  with  the
                    Securities  and Exchange  Commission  and a complete copy of
                    the Annual  Report is  available  upon request by writing to
                    Shareholder Relations, Inter-Tel,  Incorporated, 120 N. 44th
                    Street, Suite 200, Phoenix, Arizona 85034)

                                       29
<PAGE>
                                  EXHIBIT 22.1
                     
               22.1 Subsidiaries of Inter-Tel, Incorporated (Page 53)

               23.0 Consent of Ernst & Young LLP,  Independent  Auditors.
                    (Page 54)

               24.1 Power of Attorney. (Page 55)

               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.

                                   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 12, 1999

                                       30
<PAGE>
<TABLE>
<CAPTION>
                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                                 (in thousands)

             COL. A             COL. B            COL. C           COL. D      COL. E
             ------             ------            ------           ------      ------
                                                ADDITIONS
                                           Charged    Charged
                               Balance at    to       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, 1998
Deducted from asset accounts:
   Allowance for doubtful
      accounts                  $3,722     $2,963       $137(6)    $2,218(1)    $4,604
                                ------     ------       ----       ------       ------
   Allowance for lease
      accounts                  $3,969     $2,688       $ --       $  941(1)    $5,716
                                ------     ------       ----       ------       ------
   Inventory allowance          $5,740     $1,828       $ --       $2,115(2)    $5,453
                                ------     ------       ----       ------       ------
YEAR ENDED DECEMBER 31, 1997
Deducted from asset accounts:
   Allowance for doubtful
      accounts                  $3,096     $2,194       $ 17       $1,585(1)    $3,722
                                ------     ------       ----       ------       ------
   Allowance for lease
      accounts                  $2,706     $1,910       $ --       $  647(1)    $3,969
                                ------     ------       ----       ------       ------
   Inventory allowance          $2,979     $4,021       $ --       $1,260(2)    $5,740
                                ------     ------       ----       ------       ------
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
                                ------     ------       ----       ------       ------
</TABLE>
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(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).
(6)  Acquired in purchase of TMSI and Integrated Telecom Services Corporation.

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