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

         Inter-Tel  common stock is traded  over-the-counter  (symbol  INTL) and
since February 1983 has been included in the Nasdaq National  Market System.  As
of February 1, 1997 there were of record approximately 1,000 shareholders of the
Company's  common stock.  The Company  believes  there are  approximately  2,000
additional beneficial holders of the Company's common stock. The following table
sets forth high and low closing prices reported by Nasdaq.

         Inter-Tel  has  never  paid a cash  dividend  on its  common  stock and
presently  does not  intend to do so.  Future  dividend  policy  will  depend on
Company  earnings,  capital  requirements for growth,  financial  conditions and
other factors.

                1996                    High            Low
                First Quarter           18 1/2          11 3/8
                Second Quarter          28 3/8          17 1/2
                Third Quarter           26 5/8          16
                Fourth Quarter          24 1/2          12

                1995                    High            Low
                First Quarter           13               6 7/8
                Second Quarter          16 1/8          11 9/16
                Third Quarter           19 3/4          14 7/8
                Fourth Quarter          17 3/8          13 7/8
                                       29
<PAGE>
SELECTED FINANCIAL DATA
Financial Summary (1)
<TABLE>
<CAPTION>
(In thousands, except
per share amounts and ratios)                        For the years ended December 31,
                                            1996          1995         1994         1993         1992

<S>                                       <C>          <C>          <C>          <C>            <C>    
Net sales                                 $185,884     $150,533     $123,878     $103,373       $88,120

Cost of sales                              104,966       87,696       74,033       63,088        54,031
Research & development                       6,581        5,764        4,537        4,114         3,928
Selling, general and
   administrative                           56,386       43,578       36,502       29,682        25,040
Special charge                               4,542 (2)    1,315 (3)       --           --            --
----------------------------------------------------------------------------------------------------------
Operating income                            13,409 (2)   12,180 (3)    8,806        6,489         5,121
----------------------------------------------------------------------------------------------------------

Interest and other income                    1,974        1,674          904          282           680
Interest expense                               (77)        (106)        (122)        (449)         (736)
----------------------------------------------------------------------------------------------------------
Income before income taxes                  15,306 (2)   13,748 (3)    9,588        6,322         5,065
Income taxes                                 6,264        5,249        3,648        2,381         1,901
----------------------------------------------------------------------------------------------------------

Net income                                  $9,042 (2)   $8,499 (3)   $5,940       $3,941        $3,164
----------------------------------------------------------------------------------------------------------

Net income per share                         $0.68 (2)    $0.71 (3)    $0.54        $0.44         $0.37
----------------------------------------------------------------------------------------------------------
Average shares outstanding                  13,395       12,001       10,900        9,030         8,660
----------------------------------------------------------------------------------------------------------

BALANCE SHEET DATA
Total assets                              $132,611     $118,767      $67,748      $57,467       $37,838
Working capital                             79,709       75,623       37,220       34,244        12,484
Long-term debt                                  --           --           --          188         2,184
Shareholders' equity                        94,934       85,117       45,122       38,605        19,375

----------------------------------------------------------------------------------------------------------
KEY RATIOS
Current ratio                                 4.09         4.36         3.25         3.32          1.87
Term debt/equity                                --           --           --           --          0.11
Return on equity-continuing operations        0.11         0.19         0.15         0.20          0.19
----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Financial data for all periods have been restated to reflect the acquisition
of Florida  Telephone  Systems,  Inc. in May 1996  accounted for as a pooling of
interests.

(2) Operating  income  includes a special charge of $4.5 million,  which reduced
net income by $2.7 million or $.20 per share.  This special charge  reflects the
decision by the Company to replace its MIS system software. Without this special
charge, the Company would have reported operating income of approximately  $18.0
million and net income of approximately  $11.8 million, or $.88 per share in the
year ended December 31, 1996.

(3) Operating  income  includes a special charge of $1.3 million,  which reduced
net income by  $815,000,  or $.07 per share.  This special  charge  reflects the
costs  associated with  integrating  the operations of entities  acquired in May
1995.  Without this special  charge,  the Company would have reported  operating
income of  approximately  $13.5  million  and net income of  approximately  $9.3
million, or $.78 per share, in the year ended December 31, 1995.
                                       30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

General

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

         The Company has developed networks of direct sales offices, dealers and
value  added  resellers  (VARs)  which sell the  Company's  products.  In recent
periods,  the Company has focused on expanding its direct sales capabilities and
its dealer and VAR  network.  The Company has  acquired a number of resellers of
telephony  products and integrated  these  operations  with its existing  direct
sales operations in the same geographic areas and in other strategic markets.

         Sales of systems  through  the  Company's  dealers  and VARs  typically
generate  lower gross  margins  than sales  through the  Company's  direct sales
organization,  although direct sales typically require higher levels of selling,
general and administrative  expenses.  In addition,  the Company's long distance
and  network  services  typically  generate  lower gross  margins  than sales of
software and system products.  Accordingly,  the Company's margins may vary from
period to period  depending  upon  distribution  channel and product mix. In the
event that sales through dealers or sales of long distance  services increase as
a percentage of net sales, the Company's overall gross margin could decline.

         The  Company's  operating  results  depend  upon a variety of  factors,
including the volume and timing of orders received  during a period,  the mix of
products sold and 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
and the  availability  and cost of products and  components  from the  Company's
suppliers.  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 during the fourth and second quarters, respectively.

         The markets  served by the  Company  have been  characterized  by rapid
technological  changes and  increasing  customer  requirements.  The Company has
sought to  address  these  requirements  through  the  development  of  software
enhancements  and  improvements to existing  systems and the introduction of new
products and applications.  The Company's research and development  efforts over
the last several years have been focused  primarily on  developing  new products
such as the  Inter-Tel  Axxent  system,  enhancing the CTI  capabilities  of the
AXXESS digital communications platform, as well as expanding the capacity of the
Company's  AXXESS and  AXXESSORY  Talk systems.  Current  efforts are related to
support  of  industry   standard  CTI  interfaces,   development  of  additional
applications  and  features,   the  development  of  an  internet  voice  server
(Vocal'Net),   and  the  development  of  a  LAN-based   Communications   Server
incorporating the Company's Call Processing and Voice Processing  software.  New
applications under development include Basic Rate ISDN, 
                                       31
<PAGE>
networking, and unified messaging. The software-based architecture of the AXXESS
system  facilitates  maintenance and support,  upgrades,  and  incorporation  of
additional features and functionality.

         The Company  offers to its  customers a package of lease  financing and
other services under the name Totalease.  Totalease  provides to customers lease
financing,  maintenance  and support  services,  fixed price  upgrades and other
benefits. The Company finances this program through the periodic resale of lease
rental streams to financial institutions.

         Net sales of the Company have  increased  substantially  in each of the
past three years.  Such increases were 23.5%,  21.5% and 19.8% in 1996, 1995 and
1994,  respectively,  over the preceding year. All periods have been restated to
reflect the acquisition of Florida  Telephone  Systems,  Inc. in May 1996, which
was accounted for as a pooling of interests.

Results of Operations

         The following table sets forth certain  statement of operations data of
the Company expressed as a percentage of net sales for the periods indicated:

                                                    Year Ended December 31
                                                1996        1995         1994
                                                ----        ----         ----
    Net sales                                  100.0%       100.0%      100.0%
    Cost of sales                               56.5         58.3        59.8
                                               -----        -----       ----- 
    Gross margin                                43.5         41.7        40.2
    Research and development                     3.5          3.8         3.6
    Selling, general and administrative         30.3         28.9        29.5
    Special charge                               2.5          0.9         0.0
                                               -----        -----       ----- 
    Operating income                             7.2          8.1         7.1
    Other income                                 1.1          1.1         0.7
    Interest expense                             0.0          0.1         0.1
    Income taxes                                 3.4          3.5         2.9
                                               -----        -----       ----- 
    Net income                                   4.9%         5.6%        4.8%
                                               -----        -----       ----- 


Year Ended December 31, 1996 Versus Year Ended December 31, 1995

         Net sales increased 23.5% to $185.9 million in 1996 from $150.5 million
in 1995.  Sales from direct sales  offices  accounted  for  approximately  $14.7
million  of the  increase,  and  increased  sales  from  wholesale  distribution
accounted  for  approximately  $12.2  million  of the  increase.  The  remaining
increases occurred in long distance sales and other operations.

         Gross profit increased to $80.9 million,  or 43.5% of net sales in 1996
from $62.8 million, or 41.7% of net sales in 1995. This reflected the continuing
transition  to the dealer  network  and the  expansion  of AXXESS  software  and
systems sales.

         Research and development expenses increased to $6.6 million, or 3.5% of
net  sales in 1996 from  $5.8  million,  or 3.8% of net  sales,  in 1995.  These
expenses  in both  1996 and 1995  were  directed  principally  to the  continued
development  of the AXXESS and Inter-Tel  Axxent  software and systems,  unified
messaging and voice processing software, Vocal'Net 
                                       32
<PAGE>
and Vocal'Net server,  and CTI  applications.  The Company expects that research
and  development  expenses will continue to increase in absolute  dollars as the
Company  continues  to develop and enhance  existing  and new  technologies  and
products. These expenses may vary, however, as a percentage of net sales.

         Selling,   general  and  administrative  expenses  increased  to  $56.4
million,  or 30.3% of net sales in 1996,  from  $43.6  million,  or 28.9% of net
sales, in 1995. This reflected increased incentive and other compensation, costs
associated  with  the  implementation  of  the  Company's  information  systems,
additional  personnel to support the direct  dealer  network and  expanded  long
distance operations, and expenses associated with the expansion of international
operations.  The  Company  expects  that  selling,  general  and  administrative
expenses will increase in absolute dollars,  but may vary as a percentage of net
sales.

         During the fourth quarter of 1996,  the Company  decided to replace its
MIS system software with an integrated  solution from a more established  vendor
and accordingly wrote off the software license and implementation costs relating
to the system  software  being  replaced.  The  special  pre-tax  charge of $4.5
million  ($.20 per share  after tax),  reflects  the costs  associated  with the
Company's  decision to abandon its  current MIS  software in favor of  different
system software.

         Other income  increased in 1996  principally from the investment of the
funds received from the August 1995 public offering and funds generated  through
operating cash flow.

         Net income  increased 6.4% to $9.0 million,  or $.68 per share, in 1996
including the special charge recognized in the fourth quarter,  compared to $8.5
million,  or $.71 per share,  in 1995.  Excluding  the  special  charges in both
periods,  net income would have been $11.8 million,  or $.88 per share, for 1996
compared to $9.3 million,  or $.78 per share for 1995.  In addition,  net income
per  share  in 1996  is  based  on an  additional  2.0  million  average  shares
outstanding in 1996, reflecting the August 1995 public stock offering.

Year Ended December 31, 1995 Versus Year Ended December 31, 1994

         Net sales increased 21.5% to $150.5 million in 1995 from $123.9 million
in 1994.  Sales from direct  sales  offices  accounted  for  approximately  $9.5
million  of  the  increase,   with  wholesale   distribution   sales  increasing
approximately  $11.2 million.  The remaining increases occurred in long distance
sales and other operations.

         Gross profit increased to $62.8 million,  or 41.7% of net sales in 1995
from $49.8 million, or 40.2% of net sales in 1994. This reflected the transition
to the direct dealer  network and the  expansion of AXXESS  software and systems
sales.

         Research and development expenses increased to $5.8 million, or 3.8% of
net  sales in 1995 from  $4.5  million,  or 3.6% of net  sales,  in 1994.  These
expenses  in both  1995 and 1994  were  directed  principally  to the  continued
development  of the AXXESS and Inter-Tel  Axxent  software and systems,  unified
messaging and voice processing software applications and CTI applications.

         Selling,   general  and  administrative  expenses  increased  to  $43.6
million,  or 28.9% of net sales in 1995,  from  $36.5  million,  or 29.5% of net
sales, in 1994. This reflected 
                                       33
<PAGE>
increased   incentive  and  other   compensation,   costs  associated  with  the
implementation of new information  systems,  additional personnel to support the
direct  dealer  network and  expanded  long  distance  operations,  and expenses
associated with expansion of operations of the Company's Asian subsidiary.

         The special  pre-tax charge of $1.3 million ($.07 per share after tax),
reflects the costs associated with integrating the operations of American Telcom
Corp.  of Georgia,  Inc. and Access West,  Inc. The special  charge  principally
includes costs associated with redundancy in inventories, equipment abandonment,
the combination and relocation of business  operations,  employee reductions and
the write-off of intangible assets.

         Other income  increased in 1995  principally from the investment of the
funds received from the August 1995 public offering and funds generated  through
operating cash flow.

         Net income increased 43.1% to $8.5 million,  or $.71 per share, in 1995
after a special charge recognized in the second quarter,  from $5.9 million,  or
$.54 per share, in 1994.  Without the special charge, net income would have been
$9.3 million, or $.78 per share, for the year. In addition, net income per share
in 1995 is based on an additional 2 million average shares outstanding in August
1995, reflecting the 1995 public stock offering.

Inflation/Currency Fluctuation

         Inflation and currency  fluctuations have not previously had a material
impact on Inter-Tel's  operations.  International  procurement  agreements  have
traditionally been denominated in U.S. currency.  Moreover, a significant amount
of  contract  manufacturing  has been or is  expected  to be  moved to  domestic
sources.  The expansion of  international  operations in the United  Kingdom and
Europe and  anticipated  increased  sales in Japan and Asia and elsewhere  could
result in higher  international  sales as a percentage  of total  revenues,  but
international revenues are currently not significant.

Liquidity and Capital Resources

         The Company  continues to expand its dealer and direct  sales  network,
which has  required  and is expected to require  working  capital for  increased
accounts  receivable and inventories.  During 1996,  receivables and inventories
increased  approximately  $909,000. This increase was principally funded by cash
flow from  operations  and existing  cash  balances.  The Company also  expended
approximately  $7.0 million  during 1996 for property and  equipment,  which was
principally funded by operating cash flow. At December 31, 1996, the Company had
$38.9  million  in  cash  and  equivalents,   which  represents  a  decrease  of
approximately $704,000 from December 31, 1995.

         The  Company  has a loan  agreement  with Bank One,  Arizona,  NA which
provides for a $5.0  million,  unsecured  revolving  line of credit.  The credit
facility is annually  renewable and is available  through April 30, 1997.  Under
the credit  facility,  the  Company  has the option to borrow at a prime rate or
adjusted  LIBOR  interest  rate.  During the year ended  December 31, 1996,  the
credit facility was used primarily to support international letters of credit to
suppliers. In August 1995, the Company received approximately $30.7 million from
a public offering.  The proceeds were used to finance acquisitions,  for working
capital, capital expenditures and other general corporate purposes.
                                       34
<PAGE>
         The Company offers to its customers lease financing and other services,
including its Totalease program,  through its Inter-Tel Leasing subsidiary.  The
Company  funds its  Totalease  program  in part  through  the sale to  financial
institutions of rental income streams under the leases. Resold Totalease rentals
totaling  $66.0  million  remain  unbilled at December 31, 1996.  The Company is
obligated to  repurchase  such income  streams in the event of defaults by lease
customers and, accordingly, maintains reserves based on loss experience and past
due  accounts.  Although  the Company to date has been able to resell the rental
streams  from  leases  under  the  Totalease   program   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.  If the  Company is  required  to
repurchase  rental streams and realizes losses thereon in amounts  exceeding its
reserves, its operating results will be adversely affected.

         The Company  believes that its working  capital and credit  facilities,
together  with  cash  generated  from  operations,  will be  sufficient  to fund
purchases of capital equipment,  finance cash acquisitions which the Company may
consider  and  provide  adequate  working  capital for the  foreseeable  future.
However,  to the extent  that  additional  funds are  required  in the future to
address working  capital needs and to provide funding for capital  expenditures,
expansion  of the  business or  additional  acquisitions,  the Company will seek
additional  financing.  There can be no assurance that additional financing will
be available when required or on acceptable terms.
                                       35
<PAGE>
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Report of Ernst & Young LLP,  Independent Auditors

Shareholders and Board of Directors
Inter-Tel, Incorporated

We have  audited the  accompanying  consolidated  balance  sheets of  Inter-Tel,
Incorporated  and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three  years in the period  ended  December  31,  1996.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all  material  respects,  the  consolidated  financial  position  of  Inter-Tel,
Incorporated   and   subsidiaries  at  December  31,  1996  and  1995,  and  the
consolidated  results of their  operations  and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity  with generally
accepted accounting principles.

                                                /s/Ernst & Young LLP

Phoenix, Arizona
February 28, 1997
                                       36
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
<TABLE>
<CAPTION>
(In thousands)
------------------------------------------------------------------------------------------------------

                                                                     1996                   1995
<S>                                                             <C>                    <C>     
ASSETS
CURRENT ASSETS
Cash and equivalents                                               $ 38,936               $ 39,640
Accounts receivable, less allowances of
   $3,096  in 1996 and $1,822 in 1995                                29,998                 29,789
Inventories, less allowances of $2,979 in
   1996 and $2,499 in 1995                                           21,280                 20,580
Net investment in sales-leases                                        8,243                  3,629
Prepaid expenses and other assets                                     7,008                  4,501

------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS                                                105,465                 98,139
PROPERTY, PLANT & EQUIPMENT                                          11,189                 11,813
OTHER ASSETS` 15,957                                                  8,815

------------------------------------------------------------------------------------------------------
                                                                  $ 132,611              $ 118,767

------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable                                                    $ 8,915               $ 11,262
Other current liabilities                                            16,841                 11,254

------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES                                            25,756                 22,516

DEFERRED TAX LIABILITY                                                8,635                  7,228
OTHER LIABILITIES                                                     3,286                  3,906

SHAREHOLDERS' EQUITY
Common stock, no par value - authorized 30,000,000 
   shares, issued and outstanding -- 12,944,286 shares
   in 1996 and 12,812,874 shares in 1995                             59,875                 58,966
Retained earnings                                                    35,464                 26,422
Currency translation adjustment                                        (359)                  (112)

------------------------------------------------------------------------------------------------------
                                                                     94,980                 85,276
Less receivable from Employee Stock Ownership Trust                     (46)                  (159)

------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY                                           94,934                 85,117

------------------------------------------------------------------------------------------------------
                                                                  $ 132,611              $ 118,767

------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
                                       37
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES 
CONSOLIDATED STATEMENTS OF INCOME 
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
(In thousands, except per share data)
------------------------------------------------------------------------------------------------------

                                                         1996              1995             1994
                                                         ----              ----             ----
<S>                                                    <C>               <C>              <C>     
NET SALES                                              $185,884          $150,533         $123,878
Cost of sales                                           104,966            87,696           74,033
------------------------------------------------------------------------------------------------------
GROSS PROFIT                                             80,918            62,837           49,845
Research and development                                  6,581             5,764            4,537
Selling, general and administrative                      56,386            43,578           36,502
Special charge                                            4,542             1,315               --
------------------------------------------------------------------------------------------------------

OPERATING INCOME                                         13,409            12,180            8,806
------------------------------------------------------------------------------------------------------

   Other income                                           1,974             1,674              904
   Interest expense                                         (77)             (106)            (122)
------------------------------------------------------------------------------------------------------

INCOME BEFORE INCOME TAXES                               15,306            13,748            9,588

INCOME TAXES
   Current                                                3,480             1,007            2,929
   Deferred                                               2,784             4,242              719
------------------------------------------------------------------------------------------------------
                                                          6,264             5,249            3,648

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

NET INCOME                                               $9,042            $8,499           $5,940
------------------------------------------------------------------------------------------------------

NET INCOME PER SHARE                                     $ 0.68            $ 0.71           $ 0.54

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

Average number of common
   shares outstanding                                    13,395            12,001           10,900
------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
                                       38
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES 
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
(In thousands)
----------------------------------------------------------------------------------------------------------------------

                                                                           Currency         Receivable
                                          Common         Retained         Translation          From
                                           Stock         Earnings          Adjustment          ESOP         Total
                                           -----         --------          ----------          ----         -----
----------------------------------------------------------------------------------------------------------------------
<S>                                      <C>             <C>                 <C>           <C>           <C>     
Balance at December 31, 1993             $ 27,254        $ 11,983            $ (293)       $  (369)      $ 38,575

Exercise of stock options                     187                                                             187
Tax benefit from stock options                103                                                             103
Stock issued in acquisition                    41                                                              41
Net income                                                  5,940                                           5,940
Gain on currency translation                                                    171                           171
Collection from ESOP                                                                           105            105

----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994               27,585          17,923              (122)          (264)        45,122

Issuance of 2,000,000 shares
   of common stock                         30,670                                                          30,670
Exercise of stock options                     503                                                             503
Tax benefit from stock options                208                                                             208
Net income                                                  8,499                                           8,499
Gain on currency translation                                                     10                            10
Collection from ESOP                                                                           105            105

----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995               58,966          26,422              (112)          (159)        85,117
----------------------------------------------------------------------------------------------------------------------

Exercise of stock options                     611                                                             611
Tax benefit from stock options                417                                                             417
Escrow share cancellation from  
   prior stock acquisition                   (119)                                                           (119)
Net income                                                  9,042                                           9,042
Loss on currency translation                                                   (247)                         (247)
Collection from ESOP                                                                           113            113

----------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996             $ 59,875        $ 35,464            $ (359)       $   (46)      $ 94,934

----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
                                       39
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
(In thousands)
-----------------------------------------------------------------------------------------------------------

                                                              1996              1995              1994
                                                              ----              ----              ----
<S>                                                        <C>               <C>               <C>     
OPERATING ACTIVITIES:
Net income                                                 $  9,042          $  8,499          $  5,940
Adjustments to reconcile net income
    to net cash provided by operating activities:
      Depreciation and amortization                           4,097             2,267             1,663
      Provision for losses on receivables                     3,746             1,594               957
      Provision for inventory valuation                         609             1,109               561
      Net contribution to ESOP                                  113               105               105
      (Decrease)/increase in other liabilities                 (604)            1,111               603
      Loss/(Gain) on sale of property and equipment           3,421                16               (18)
      Deferred income taxes                                   2,784             4,242               719
      Effect of exchange rate changes                          (247)               10               171
      Changes in operating assets and liabilities           (15,704)          (18,141)           (5,911)

-----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY
    OPERATING ACTIVITIES                                      7,257               812             4,790

-----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Additions to property and equipment                          (6,951)           (7,921)           (3,882)
Proceeds from sale of property and equipment                    159                 9                63
Cash used in acquisitions                                    (1,780)                --             (131)

-----------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING
    ACTIVITIES                                               (8,572)           (7,912)           (3,950)

-----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Payments on long-term debt                                       --                --              (172)
Net proceeds from stock offering                                 --            30,670                --
Proceeds from exercise of stock options                         611               503               187

-----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY
FINANCING ACTIVITIES                                            611            31,173                15

-----------------------------------------------------------------------------------------------------------
INCREASE (DECREASE)
IN CASH AND EQUIVALENTS                                        (704)           24,073               855

CASH AND EQUIVALENTS AT BEGINNING 
    OF YEAR                                                  39,640            15,567            14,712

-----------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS AT END OF YEAR                        $ 38,936          $ 39,640          $ 15,567
-----------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
                                       40
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
--------------------------------------------------------------------------------

NOTE A -- SIGNIFICANT ACCOUNTING POLICIES

         Description  of Business:  The Company is in the business of developing
and providing  telephone  systems,  voice  processing  CTI, and network and long
distance  calling  services  to  businesses  principally  throughout  the United
States, as well as providing leasing, support and maintenance services through a
direct sales and reseller network.

         Principles of  Consolidation:  The  consolidated  financial  statements
include the accounts of Inter-Tel, Incorporated and all significant subsidiaries
(the Company).  Intercompany  accounts and transactions  have been eliminated in
consolidation.

         Cash and  Equivalents:  Cash and equivalents  include all highly liquid
investments  with a  remaining  maturity  of  three  months  or  less at date of
acquisition.  Excess cash and equivalents are primarily invested in mutual funds
comprised of foreign and domestic high quality dollar  denominated  money market
instruments rated A-1 by Standard & Poor's Ratings Group, or equivalent.

         Inventories:  Inventories, consisting principally of telephone systems,
computer  equipment  and  related  components,  are  stated at the lower of cost
(first-in, first-out method) or market.

         Property, Plant and Equipment:  Property, plant and equipment is stated
at cost.  Depreciation  is  computed  using the  straight-line  method  over the
estimated  useful  life of the  related  property.  Leasehold  improvements  are
depreciated  over the shorter of the related lease terms or the estimated useful
lives of the improvements.

         Excess of Purchase Price Over Net Assets  Acquired:  Purchase prices of
acquired  businesses  that are accounted for as purchases have been allocated to
the assets and  liabilities  acquired  based on the estimated fair values on the
respective  acquisition dates. Based on these values, the excess purchase prices
over the fair value of the net assets  acquired are being amortized over 3 to 40
years. Accumulated amortization through December 31, 1996 was $571,390.

         Sales-Leases:  The discounted present values of minimum rental payments
under sales-type  leases are recorded as sales, net of provisions for continuing
administration  and other  expenses over the lease period.  The costs of systems
installed  under these  sales-leases,  net of residual  values at the end of the
lease periods,  are recorded as costs of sales.  Gains or losses  resulting from
the sale of rental  income from such leases are recorded as  adjustments  to the
original sales amounts.

         Income Taxes:  Deferred income taxes result from temporary  differences
in the  recognition of revenues and expenses for financial  reporting and income
tax purposes.

         Advertising:  The cost of  advertising  is  expensed as  incurred.  The
Company incurred  $437,000;  $318,000;  and $431,000 in advertising costs during
1996, 1995 and 1994, respectively.
                                       41
<PAGE>
         Stock Based Compensation:  The Company grants stock options for a fixed
number of shares to  employees  with an exercise  price equal to the fair market
value of the shares at the date of grant.  The company accounts for stock option
grants  in  accordance  with  Accounting   Principles   Board  Opinion  No.  25,
"Accounting  for  Stock  Issued  to  Employees,"  ("APB  25")  and  accordingly,
recognizes no compensation expense for these stock option grants.

              In 1996 the Company adopted Financial  Accounting  Standards Board
("FASB") Statement No. 121,  "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" ("Statement  121"),  which requires
impairment  losses to be recorded on long-lived  assets used in operations  when
indicators of impairment are present and the  undiscounted  cash flows estimated
to be  generated  by those  assets are less than the  assets'  carrying  amount.
Statement  121 also  addresses the  accounting  for  long-lived  assets that are
expected  to be  disposed  of. The Company  adopted  Statement  121 in the first
quarter  of 1996  and  the  adoption  did  not  have a  material  impact  to the
operations  of the  Company.  During the fourth  quarter  of 1996,  the  Company
decided to replace its MIS system  software with an  integrated  solution from a
more  established  vendor and  accordingly  wrote off the  software  license and
implementation costs relating to the system software being replaced. The special
pre-tax charge of $4.5 million  reflects the costs associated with the Company's
decision  to abandon  its current  MIS  software  in favor of  different  system
software.

         Use of  Estimates:  The  preparation  of the  financial  statements  in
conformity with generally accepted accounting  principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements  and  accompanying  notes.  Actual  results  could  differ from those
estimates.

         Net  Income Per  Share:  Net income per share is based on the  weighted
average  number of common shares  outstanding  during each year and common stock
equivalents.

         Reclassifications: Certain reclassifications have been made to the 1995
and 1994 financial statements to conform to the 1996 presentation.

NOTE B --  ACQUISITIONS

         Pooling of  Interests:  The financial  statements  for periods prior to
1996 have been  restated to include the accounts of Florida  Telephone  Systems,
Inc.  ("Florida  Telephone").  This corporation was acquired by the Company in a
pooling  of  interests  transaction  in May  1996,  in which  48,193  shares  of
Inter-Tel  common  stock were issued.  Florida  Telephone  did not  constitute a
significant subsidiary as defined by the Securities and Exchange Commission.  In
the   consolidated   statements   of   income,   net   sales   and  net   income
increased/(decreased) as a result of the restatement as follows:
                                       42
<PAGE>
(In thousands, except per share amounts)              Year Ended December 31
                                                       1995            1994

          Net sales                                  $ 1,687          $ 1,261
          Net income                                 $    48          $    (9)
          Net income per share                       $  0.00          $  0.00

         Total  shareholders'  equity was  increased by $63,000 as of January 1,
1994 as a result of the restatement.

         Purchase Transaction: Effective November 29, 1996, the Company acquired
100% of the stock of NTL Corporation  ("ComNet") for cash and a short-term note.
The  transaction  has  been  accounted  for  as  a  purchase  transaction,   and
accordingly the results of its operations have been included in the consolidated
results of operations  since the  transaction  date. The purchase price has been
allocated to the assets and liabilities based on fair values at acquisition. The
purchase price over net assets acquired  (goodwill) is being amortized over 5 to
10 years,  based on the lives of the underlying  assets. The acquisition did not
include certain components of ComNet's business. Accordingly, separate operating
results for ComNet's  telecommunications  business are not  available.  ComNet's
telecom  revenues  for 1996 and 1995 were  approximately  $9.0  million and $7.5
million, respectively.

NOTE C -- NET INVESTMENT IN SALES-LEASES

         Net investment in  sales-leases  represents  the value of  sales-leases
presently  held under the Company's  Totalease  program.  The Company  currently
sells the rental  income from some of the  sales-leases.  The Company  maintains
reserves  against  potential  recourse  following  the  resales  based upon loss
experience and past due accounts. Activity during the years was as follows:

     (In thousands)                               Year Ended December 31
                                              1996          1995          1994

     Sales of rental income                 $ 42,985      $ 25,106      $ 12,423
     Sold income remaining
         unbilled at end of year            $ 65,970      $ 37,256      $ 19,894
     Allowance for uncollectible
         minimum lease payments
         and recourse liability at
         end of year                        $  2,706      $  1,513      $  1,198

         The Company  does not expect any  significant  losses from the recourse
provisions  related to the sale of rental income. The Company is compensated for
administration and servicing of rental income sold.
                                       43
<PAGE>
NOTE D -- PROPERTY, PLANT & EQUIPMENT
                                                             December 31
         (In thousands)                              1996                 1995

         Computer systems and equipment            $20,236              $19,261
         Transportation equipment                    1,737                1,910
         Furniture and fixtures                      3,301                2,722
         Leasehold improvements                      1,037                  724
         Land                                          321                  130
                                                   -------              -------
                                                    26,632               24,747
         Less:  Accumulated depreciation
              and amortization                      15,443               12,934
                                                   -------              -------
                                                   $11,189              $11,813
                                                   =======              =======

NOTE E -- OTHER ASSETS
                                                             December 31
         (In thousands)                              1996                 1995

         Net investment in sales-leases            $11,497               $6,108
         Excess of purchase price over net
              assets acquired, net                   4,334                1,217
         Other assets                                  126                1,490
                                                   -------               ------
                                                   $15,957               $8,815
                                                   =======               ======

NOTE F-- OTHER CURRENT LIABILITIES
                                                             December 31
         (In thousands)                              1996                 1995

         Compensation and employee benefits        $ 6,176              $ 5,528
         Deferred revenues                           2,889                2,136
         Other accrued expenses                      7,776                3,590
                                                   -------              -------
                                                   $16,841              $11,254
                                                   =======              =======

NOTE G -- CREDIT LINE

         The Company maintains a $5,000,000  unsecured bank credit line at prime
rate to cover international letters of credit and for other purposes. The credit
agreement matures April 30, 1997 and contains certain restrictions and financial
covenants.  At December 31, 1996,  $2,528,131  of the credit line was  committed
under letter of credit arrangements.

NOTE H -- LEASES

         Rental expense  amounted to $3,538,221;  $2,994,895;  and $2,555,298 in
1996, 1995 and 1994, respectively. Noncancellable operating leases are primarily
for buildings.  Certain of the leases contain provisions for renewal options and
scheduled rent increases. At December 31, 1996, future minimum commitments under
noncancellable leases, including a five year lease for its headquarters facility
and a 15 year lease for its  distribution  and support  facility,  are:  1997 --
$2,823,397;  1998 -- $2,420,669; 1999 -- $1,923,048; 2000 -- $1,447,318; 2001 --
$845,154; thereafter -- $2,248,287.
                                       44
<PAGE>
NOTE I -- INCOME TAXES

         The  Company  accounts  for income  taxes  under  Financial  Accounting
Standards  Board Statement No. 109,  "Accounting  for Income Taxes"  ("Statement
109").  Under  Statement  109, the liability  method is used in  accounting  for
income  taxes.  Under this  method,  deferred  tax assets  and  liabilities  are
determined (and classified as current or long-term) based on differences between
financial  reporting  and tax bases of assets and  liabilities  and are measured
using the enacted tax rates and laws that will be in effect when the differences
are expected to reverse.

         Deferred  income  taxes  reflect  the  net  tax  effects  of  temporary
differences between the carrying amounts of assets and liabilities for financial
reporting  purposes  and the amounts used for income tax  purposes.  Significant
components of the Company's  deferred tax  liabilities and assets as of December
31, are as follows:

         (In thousands)                              1996              1995

         Deferred tax liabilities:
              Lease--sales and reserves            $ 12,502          $ 8,927
              Accelerated depreciation                  179              161
                                                   --------          -------
         Total deferred tax liabilities              12,681            9,088
                                                   --------          -------
         Deferred tax assets:
              Inventory basis differences             1,553            1,614
              Accounts receivable reserves            1,135              611
              Maintenance reserve                       317              316
              Accrued vacation pay                      557              424
              Foreign loss carryforwards                794              546
              Other -- net                            1,223            1,011
                                                   --------          -------
         Deferred tax assets                          5,579            4,522
              Less valuation reserve                    794              546
                                                   --------          -------
         Net deferred tax assets                      4,785            3,976
                                                   --------          -------
         Net deferred tax liabilities              $  7,896          $ 5,112
                                                   --------          -------

         During 1996 and 1995,  the  Company  incurred  losses of  $730,000  and
$857,000 with respect to foreign  operations.  At December 31, 1996, the Company
had foreign loss  carryforwards of approximately  $2,400,000 which will begin to
expire in 1999.  The  valuation  allowance  increased  by  $248,000  in 1996 and
$191,000 in 1995 due to increases in foreign loss carryforward benefits.

         Federal and state income taxes consisted of the following:

         (In thousands)            1996             1995           1994

              Federal            $ 5,414          $ 4,789        $ 3,045
              State                  850              460            603
                                 -------          -------        -------
                                 $ 6,264          $ 5,249        $ 3,648
                                 -------          -------        -------

         The  principal  reasons for the  difference  between  total  income tax
expense and the amount  computed by applying the  statutory  federal  income tax
rate to income before taxes are as follows:
                                       45
<PAGE>
                                                    1996         1995      1994
         Federal tax at statutory rates
              applied to pre-tax income              34%         34%        34%
         State tax net of federal benefit             4           2          3
         Valuation reserve increase
              for foreign losses                      2           2          3
         Other - net                                  1          --         (2)
                                                    ---       -----       ----
                                                     41%         38%        38%
                                                    ---       -----       ----

NOTE J -- EQUITY TRANSACTIONS

         In a public offering in August 1995, the Company sold 2,000,000  shares
of previously unissued common stock.

         Under the Company's Long-Term Incentive Plan, selected officers and key
employees  are granted  options to purchase  common  stock of the Company at not
less than fair market value at date of grant. The options are exercisable at the
end of their ten year term, but may become exercisable in annual installments if
predetermined performance goals and share market value increases are met. During
1994,  previously  granted options to purchase 420,000 shares at prices of $7.50
to $9.25 per share were  canceled  and options to purchase  605,000  shares were
granted to an expanded group of optionees at the then fair market value of $6.00
per share.

         Under other  previous stock option plans,  directors,  officers and key
employees may purchase  common stock of the Company at amounts not less than the
fair market value at the date of grant.  These options  generally have a term of
five to ten years and are  exercisable  over four to five years  commencing  one
year from the date of grant, except for director stock option grants,  which are
exercisable commencing six months from the date of grant.

         On November 19, 1993, the Board of Directors  authorized the Inter-Tel,
Incorporated  Long-Term  Incentive  Plan  ("the  Long  Term  Plan").  A total of
1,000,000  shares of common stock has been reserved for issuance  under the Long
Term Plan.  Options  must be  granted  at not less than 100% of the fair  market
value of the Company's stock at the dates of grant.  Options generally vest over
four years and expire five to ten years from the date of grant.

         On July 26, 1990,  the Company  adopted the Director  Stock Option Plan
("the Director Plan") and reserved a total of 250,000 shares of common stock for
issuance  thereunder.  Commencing  with the adoption of the Plan,  each Eligible
Director  received a one-time  automatic  grant of an option to  purchase  2,500
shares of the Company's common stock. In addition,  each Eligible Director shall
be granted an option to purchase  2,500 shares upon the date five (5) days after
such person became Director,  and an additional  option to purchase 2,500 shares
five (5) days  after the date of annual  reelection  as  Director.  All  options
granted  have a five year term and fully vest at the end of six months  from the
grant  date.  Option  activity  for the past three  years  under all plans is as
follows:
                                       46
<PAGE>
<TABLE>
<CAPTION>
                                                                Number of Shares
                                                      1996            1995          1994
<S>                                            <C>             <C>             <C>    
      Outstanding at beginning of year              847,500         824,500        720,250
      Granted                                       394,000         160,512        627,000
      Exercised                                    (102,500)       (108,887)       (98,750)
      Expired or canceled                           (42,850)        (28,625)      (424,000)
                                                   --------        --------       --------
      Outstanding at end of year                  1,096,150         847,500        824,500
                                                  ---------         -------        -------
      Exercise price range                     $5.75-$20.44    $2.25-$14.50    $1.12-$9.63
      Exercisable at end of year                    289,350         167,083         75,000
      Weighted-average fair value of
      options granted during 1996 and 1995            $4.71           $3.43            N/A
</TABLE>

         At December 31,  1996,  the Company has  reserved  1,257,238  shares of
Common Stock for issuance in connection with the stock option plans.

         For the stock option plans discussed above, the Company has adopted the
disclosure  only provisions of Statement of Financial  Accounting  Standards No.
123 ("SFAS 123"),  "Accounting for Stock-Based  Compensation."  Accordingly,  no
compensation cost has been recognized in the accompanying  financial  statements
for the stock option plans.

The following table summarizes  information  about stock options  outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
                                   Options Outstanding                          Options Exercisable

                        Number                                                   Number
                    Outstanding at    Weighted-Average      Weighted        Exercisable at       Weighted
     Range of        December 31,        Remaining      Average Exercise      December 31,    Average Exercise
  Exercise Price        1996          Contractual Life        Price              1996              Price
<S>                    <C>                <C>                <C>               <C>                <C>   
   $5.75 - $8.63       589,200            4 years             $5.97            247,900             $5.99
  $9.63 - $14.13       209,450            6 years            $12.72             24,950            $12.17
 $14.50 - $20.44       297,500            5 years            $16.91             16,500            $17.35
</TABLE>

         During 1996, the weighted  average  exercise price of options  granted,
exercised, and expired or canceled was $16.27, $7.63 and $11.33, respectively.

         Had  compensation  cost  for the  Company's  stock  option  plans  been
determined based on the fair value at the grant date for awards in 1995 and 1996
consistent  with the  provisions  of SFAS 123, the  estimated  fair value of the
options would be amortized to expense over the option's  vesting  period and the
Company's  net income and net income per share would have been  decreased to the
pro forma amounts indicated below for the year ended December 31:

                                                   1996              1995

Net income as reported                            $9,042            $8,499

Pro forma net income                              $8,815            $8,420

Pro forma earnings per share                       $0.66             $0.70

         Pro forma  results  disclosed  are based on the  provisions of SFAS 123
using  the  Black-Scholes  option  valuation  model  and  are not  likely  to be
representative  of the  effects on pro forma net income  for  future  years.  In
addition,  The  Black-Sholes  option  valuation  model 
                                       47
<PAGE>
was developed for use in estimating  the fair value of traded options which have
no  vesting  restrictions  and  are  fully  transferable.  In  addition,  option
valuation models require the input of highly  subjective  assumptions  including
the  expected  stock price  volatility.  Because the  company's  employee  stock
options  have  characteristics  significantly  different  from  those of  traded
options,  and because changes in the subjective input assumptions can materially
affect the fair value estimate,  in management's  opinion, the estimating models
do not  necessarily  provide a reliable  single measure of the fair value of its
employee stock options.

         The fair value for these  options  was  estimated  at the date of grant
using a  Black-Scholes  option  pricing  model  using the low end of  reasonable
assumptions for input variables  rather than attempting to identify a best-point
estimate.  The option  pricing  model  utilized the following  weighted  average
assumptions for 1996 and 1995, respectively: risk free interest rates of 5.0% in
each  year;  dividend  yields  of 0% in each  year;  volatility  factors  of the
expected market price of the Company's stock varied among the individual  option
grants  under the plan due to the date of the  grant and the stock and  exercise
price at the time of the grant and  ranged  from  .367 to .449;  and a  weighted
average  expected  life of the option of 2.5 years for  employee  stock  options
which vest over a four year period with a weighted average vesting period of 2.5
years,  and 1.5 years for Company  director options which vest at the end of six
months from the grant date.

NOTE K -- RETIREMENT PLANS

         The  Company  has two  retirement  plans for the  benefit of all of its
employees.  Under its 401(k)  Retirement  Plan,  participants  may contribute an
amount not exceeding 15 percent of compensation received during participation in
the Plan. The Company makes voluntary annual  contributions to the Plan based on
a percentage of contributions  made by Plan  participants of up to 10 percent of
compensation.  Contributions to the Plan totaled $394,000; $328,000 and $248,000
in 1996, 1995 and 1994, respectively.

         In 1992, the Company initiated an Employee Stock Ownership Plan (ESOP),
advancing  $500,000 to the ESOP Trust for the purpose of purchasing common stock
of the Company. The Trust purchased 153,500 shares of the Company's common stock
in July 1992. The loan is to be repaid over 5 years with 7.5%  interest.  As the
principal  amount of the loan is repaid to the Company  through  Company  annual
contributions,  the  equivalent  number  of shares  released  are  allocated  to
employees' accounts to be held until retirement.  Total shares so allocated were
34,712; 32,290; and 30,037; in 1996, 1995 and 1994, respectively.  Contributions
to the ESOP totaled  $125,000 each in 1996, 1995 and 1994 and are based upon the
historic cost of the shares purchased by the ESOP.

NOTE L -- FINANCIAL INSTRUMENTS

         Concentration  of Credit Risk:  Financial  instruments that potentially
subject  the  Company  to  significant  concentrations  of credit  risk  consist
principally of cash investments,  trade accounts receivable,  and net investment
in  sales-leases.  The Company  maintains cash and  equivalents  not invested in
money market funds with a major bank in its  marketplace.  The Company  performs
periodic   evaluations  of  the  relative   credit  standing  of  the  financial
institution.  Concentrations  of credit  risk  with  respect  to trade  accounts
receivable  and net  investment  in  sales-leases  are  limited due to the large
number of entities comprising the Company's customer base.
                                       48
<PAGE>
         Fair Value of Financial  Instruments:  The carrying  amount of cash and
equivalents,  accounts receivable, net investment in sales-leases,  and accounts
payable  reported in the  consolidated  balance  sheets  approximate  their fair
value.

NOTE M -- SUPPLEMENTAL CASH FLOW

<TABLE>
<CAPTION>
(In thousands)
                                                               1996             1995              1994
<S>                                                          <C>              <C>               <C>     
     Cash paid for:
        Interest                                             $     77         $    106          $    122
        Income taxes                                         $  4,213         $  1,885          $  1,673
                                                             --------         --------           ------- 
     Changes in operating assets and liabilities:
        Increase in receivables                              $ (8,569)        $(16,368)         $ (4,258)
        Increase in inventories                                (1,309)          (5,997)           (1,984)
        (Increase) decrease in prepaid
           expenses and other assets                           (6,268)            (500)            1,131
        Increase in long-term
            other assets                                       (4,024)          (1,676)           (2,402)
        Increase in accounts
           payable and other current
           liabilities                                          4,466            6,400             1,602
                                                             --------         --------           ------- 
                                                             $(15,704)        $(18,141)          $(5,911)
                                                             ========         ========           ======= 
</TABLE>
                                       49
<PAGE>
NOTE N -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

         A summary of the quarterly  results of  operations  for the years ended
December 31, 1996 and 1995 follows:

(In thousands, except per share amounts)

         1996                          1st Qtr    2nd Qtr   3rd Qtr    4th Qtr

         Net sales                     $42,213    $43,736   $47,435    $52,500
         Gross margin                   19,312     19,108    19,616     22,882
         Net income                      2,899      2,784     2,689        670
         Net income per share             $.22       $.21      $.20       $.05
         Average number of
            shares outstanding          13,293     13,431    13,443     13,429

         1995                          1st Qtr    2nd Qtr   3rd Qtr    4th Qtr

         Net sales                     $35,018    $36,924   $38,132    $40,459
         Gross margin                   14,274     15,259    15,919     17,385
         Net income                      1,834      1,342     2,500      2,823
         Net income per share             $.17       $.12      $.20       $.21
         Average number of
            shares outstanding          11,116     11,239    12,343     13,306

         The 1995 quarterly results for net income per share,  when totaled,  do
not equal the net income per share for the year ended  December  31,  1995.  The
1995 sum of quarterly results for net income per share total $.70,  although the
total net income  per share was  actually  $.71 per  share.  See note A for more
information regarding the 1996 fourth quarter special charge.
                                       50