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, 1995                                       0-10211

                             INTER-TEL, INCORPORATED

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

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

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

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

                                  Common Stock
              (12,780,724 shares outstanding as of March 22, 1996)

         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes X  No
                                             ---    ---
         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of Regulation S-K (S 229.405 of this chapter) is not contained  herein,
and will not be contained,  to the best of registrant's knowledge, in definitive
proxy or information  statements  incorporated  by reference in Part III of this
Form 10-K or any amendment to this Form 10-K - [ ].

         The aggregate  market value of the voting stock held by  non-affiliates
of the  registrant,  based upon the last reported sales price in NASDAQ National
Market  System on March 22,  1996,  was  approximately  $167,000,000.  Shares of
Common Stock held by each  executive  officer and director have been excluded in
that such persons may be deemed to be affiliates.

<PAGE>
         Materials have been incorporated by reference into this Report from the
following  documents:  (1)  materials  from  the  registrant's  Proxy  Statement
relating to its 1995 Annual Meeting of  Shareholders  have been  incorporated by
reference into Part III and Part IV and (2) documents from the registrant's Form
S-1 Registration  Statements (Nos. 2-70437 and 33-70054),  Form S-3 Registration
Statements  (Nos.  33-58161,  33-61437  and  333-01735),  Form S-8  Registration
Statements (Nos.  2-94805,  33-40353 and 33-73620),  Annual Reports on Form 10-K
for the years December 31, 1984 and 1988, and current  reports on Form 8-K dated
July 17, 1987,  August 3, 1988 have been incorporated by reference into Part IV,
Item 14.  Portions  of the  Annual  Report to  Shareholders  for the year  ended
December 31, 1995 are incorporated by reference into Part II.
<PAGE>
                             INTER-TEL, INCORPORATED
                          1995 FORM 10-K ANNUAL REPORT

                                TABLE OF CONTENTS

                                     PART I

                                                                          Page

Item 1        Business                                                       4
Item 2        Properties                                                    19
Item 3        Legal Proceedings                                             19
Item 4        Submission of Matters to a Vote
              of Security Holders                                           19

                                     PART II

Item 5        Market for the Registrant's Common Stock
              and Related Stockholder Matters                               20
Item 6        Selected Financial Data                                       22
Item 7        Management's Discussion and Analysis of
              Financial Condition and Results of
              Operations                                                    23
Item 8        Financial Statements and Supplementary
              Data                                                          29
Item 9        Changes in and Disagreements with Accountants
              on Accounting and Financial Disclosure                        43

                                    PART III

Item 10       Directors and Executive Officers of the
              Registrant                                                    43
Item 11       Executive Compensation                                        43
Item 12       Security Ownership of Certain Beneficial
              Owners and Management                                         43
Item 13       Certain Relationships and Related
              Transactions                                                  43

                                     PART IV

Item 14       Exhibits, Financial Statement Schedule
              and Reports on Form 8-K                                       44
<PAGE>
                                     PART I

ITEM 1.  BUSINESS

The Company

         Inter-Tel  is a single  point of  contact,  full  service  provider  of
digital communication  platforms,  computer telephone integration (CTI), unified
messaging  software,  long  distance  and  network  services,  network  and data
products and leasing  services.  Because of the modular design and high level of
software content in the Company's  products,  including its AXXESS and Inter-Tel
Axxent systems,  customers can readily  increase the size and  functionality  of
their systems as their future telecommunications needs change.

         The Company has developed a broad 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 25 direct sales offices
in the  United  States,  one in the United  Kingdom,  one in Japan and a growing
network of hundreds of dealers and VARs who purchase  directly from the Company.
The  Company  is also in the  process  of  expanding  its  international  dealer
network.

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

Industry Background

          Recent  changes in  telecommunication  laws  should help to define the
focus of information services in the future. The  Telecommunication  Act of 1996
and AT&T's  announcement  that it will divide itself into three enterprises will
have an impact on the communication  industry. The Telecommunication Act of 1996
opens 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  events  injected an element of confusion  into the market.  This
should provide an  opportunity  for Inter-Tel to offer  additional  products and
services to its customers and to supply  solutions to a fragmented  marketplace.
Because of the complex communication offerings available today, customers should
benefit from a single source solution. Inter-Tel's philosophy is to provide this
total  communication  solution  through its  offering of advanced  products  and
services,  and to provide the technologies  that companies seek to eliminate the
confusion and expense of dealing with multiple vendors.

Products and Services

         The company's  broad  spectrum of products and services span six market
segments, including:

      Digital Communication Platforms
      Computer Telephone Integration
      Voice Processing and Unified Messaging Software
      Network Services and Long Distance
      Network and Data Products
      Flexible Financing

Digital Communication Platforms

         Inter-Tel offers an extensive line of digital  communication  platforms
and software to meet the requirements of  small-to-medium-sized  companies.  The
Inter-Tel  Axxent and AXXESS  incorporate  the power and flexibility of Computer
Telephone  Integration  (CTI) technology.  Using this technology,  companies can
tailor applications to enhance their operations.

         Because   Inter-Tel's  digital   communication   platforms  conform  to
established  computer  telephony industry standards such as MAPI, TAPI and TSAPI
and  interface  standards  such as MVIP and SCSA,  customers  can choose  from a
variety of either system level or desktop  applications.  In addition,  advanced
digital  services,   including  T-1  and  Integrated  Services  Digital  Network
("ISDN"),  are  used  with  Inter-Tel's  platforms,  providing  some of the best
combinations of services available.

         AXXESS

         The Company commenced  commercial shipments of the AXXESS system in the
fourth  quarter of 1993. In 1994,  the Company  released  AXXESS  version 2.0, a
system that  supports a total of 12 to 120  telephones  and trunk lines.  AXXESS
version  3.0,  released in the third  quarter  1995,  expanded the system to 256
ports and  enhanced the  AXXESSORY  Talk voice  processing  system by adding fax
applications.  AXXESS  version 4.0,  scheduled for release  second quarter 1996,
will  expand  the  system  to 512 ports and add such  advanced  capabilities  as
primary  rate ISDN  support,  integrated  call  recording  and voice  prompts in
multiple languages. The suggested retail price for the AXXESS system ranges from
approximately $10,000 to $400,000.

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

         AXXESS system telephones incorporate  user-friendly,  6 by 16 character
LCD displays  with menu keys that permit the user to select from  multiple  menu
choices or access additional menu screens.  AXXESSORY Talk, the integrated voice
processing  application,  permits  push-button  selection  of  voice  processing
commands  to appear on the LCD  display,  as well as  voice-prompted  selections
through  the  telephone  keypad.  Version  4.0 of the  system is  multi-lingual,
offering  English or Japanese  voice  prompts and LCD  displays and allowing the
user to switch from one language to the other. Additional languages can be added
in the future.

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

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

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

         Inter-Tel Axxent

         The Company  introduced its newest product line, the Inter-Tel  Axxent,
in the  third  quarter  of 1995.  The  system  supports  16 lines  and 8 trunks.
Software version 2.0, scheduled to be released third quarter 1996, will increase
the system  capacity to 24 lines and 12 trunks.  Small  businesses are demanding
advanced telephony  applications  formerly reserved only for large corporations.
The  Inter-Tel  Axxent is designed to bring many of the  advanced  features  and
functionality of the AXXESS system to smaller  installations on a cost-effective
basis  while   enabling   users  to  migrate  to  an  AXXESS   system  as  their
telecommunications  needs evolve.  The Inter-Tel  Axxent  provides  leading edge
capabilities such as computer telephone integration,  DSP technology,  real-time
ACD reporting,  and  integrated  voice  processing.  Housed in a compact PC type
mid-tower,  the  Inter-Tel  Axxent  platform  also offers the  convenience  of a
default database so the system is fully operational as soon as it is plugged in.
Basic database  programming can also be performed  through the digital telephone
terminals. The system is sold through direct sales offices and direct dealers to
professional businesses such as doctors, lawyers, and architects.  The suggested
retail price ranges from approximately $3,000 to $20,000.

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

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

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

Computer Telephone Integration (CTI)

         CTI technology  links two of the most  important  business tools -- the
computer  and  the   telephone  --  into  one  seamless   environment   for  the
communication  needs of a  company.  CTI  technology  allows  users  to  perform
multiple tasks, from data handling to answering  telephone calls, on the desktop
PC.  Inter-Tel is bringing CTI  technology  to many  diverse  companies  through
desktop and system  level  applications.  Its advanced  communication  platforms
enable users to process calls using their PC and Windows interface.

         AXXESSORY  Connect software provides a Windows interface for the AXXESS
platform, allowing users to answer phone calls from their desktop PCs. Using the
desktop  interface,  AXXESSORY Connect provides  industry standard  protocols to
integrate with other Windows applications such as personal information managers.
Incoming calls will trigger a "screen pop" containing  customer records or other
pertinent  information  to a user,  reducing wait times and  enhancing  customer
service.  Inter-Tel is working with a number of third party software  developers
to create a seamless working  environment for database,  personal  organizer and
terminal emulation programs with AXXESSORY Connect.

         In addition,  system level applications can help companies manage calls
at peak efficiency.  Automatic Call Distribution,  for example,  routes incoming
calls,  based on various  criteria,  to call center  agents.  It also  collects,
analyzes and reports real-time call-processing information.

         The market for CTI is rapidly expanding. As CTI technology becomes more
widespread, Inter-Tel will continue to work to create products and services that
are intended to help companies increase their productivity.

Voice Processing and Unified Messaging Software

         The  manner in which  companies  process  their  information  can be as
important as the  information  itself.  Inter-Tel  has  developed  its own voice
processing software that integrates tightly with communication platforms.

         Inter-Tel offers the following voice processing  platforms to work with
its communication  platforms:  AXXESSORY Talk, Axxent Talk, and the IVX500.  All
three  platforms  include  the open,  industry-standard  Multi-Vendor  Interface
Protocol  ("MVIP"),  a standard for connecting  multi-vendor  PC-based boards in
voice  processing,  data switching and video  applications.  AXXESSORY Talk also
offers a fax back feature,  which allows  customers to have  documents  faxed to
them, freeing employees from spending valuable time at the fax machine.

         As the need to merge different  types of messages  continues to evolve,
Inter-Tel is developing unified messaging  software.  Unified messaging software
integrates  e-mail,  fax and voice mail through one universal in-box at both the
PC and the phone. Using a Graphical User Interface (GUI) such as Windows,  users
are able to see and control  all of the  different  types of messages  they have
received.

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

         The first release,  scheduled for 1996,  will provide users with access
to voice  mail from  their PCs and will be used in  conjunction  with  Microsoft
Exchange and a GUI media player to play back messages.  The system will have the
ability to pull voice messages over to the PC as an object, allowing the user to
embed voice messages into e-mail or fax messages.

         Unified  messaging should provide the flexibility to retrieve  messages
anywhere from a phone or a PC connected to a modem.

Network Services and Long Distance

         Effective  communication begins with effective network services.  These
services include domestic and international  long distance,  dedicated  services
such as T-1 and ISDN, and videoconferencing, which can enhance the way a company
sends and  receives  information.  Inter-Tel  provides  these  services and more
through its NetSolutions division.

         Using  digital  fiber optic  technology  and high capacity T-1, 56K and
ISDN facilities,  NetSolutions  provides advanced  telecommunication  solutions.
Also,  as part of its long distance  service,  Inter-Tel  NetSolutions  offers a
feature-rich  calling  card  that  can be used  worldwide.  Offering  both  cost
efficiency  and  reliability,   the  NetSolutions   calling  card  provides  the
convenience  and features of its long  distance  services.  One  telephone  call
accesses the network,  and  individual  account  codes help track calls for easy
account management.

         In addition,  Inter-Tel  NetSolutions  offers call accounting  services
which feature detailed  invoices and customized  reports that can help customers
identify individual costs,  potential needs and specific calling patterns.  Each
month, customers can receive three reports--area code summary,  traffic summary,
and  frequently  called   numbers--in   addition  to  their  billing  statement.
Specialized  management  reports are also  available  that  address many diverse
business needs.

         As company travel budgets continue to shrink, videoconferencing is also
becoming  more  accepted  in  today's  business  environment.  Videoconferencing
services can help companies save time and money by reducing  business travel and
allowing  for fast,  efficient  decision-making.  Along with  group and  desktop
platforms  offered  by  Inter-Tel's  Factored  Products  division,  NetSolutions
provides videoconferencing network services including ISDN, Switched 56, and T-1
to businesses of any size.

Network And Data Products

         Inter-Tel's networking solutions connect computers within a building or
across the country. Local Area Networks (LANs) and Wide Area Networks (WANs) are
the means by which data and communication are relayed throughout organizations.

         Inter-Tel designs,  installs and services total  communication and data
packages,  including  LANs and  WANs,  that  help  companies  effectively  relay
information.  Inter-Tel has the resources and technology to get different  types
of equipment  "talking" to each other.  As the  importance  and quantity of data
traffic has steadily increased,  the successful transmission of data traffic has
become the primary reason for companies to create strong,  efficient LANs and/or
WANs.

Flexible Financing

         Inter-Tel  combines all of its products and services  with a full range
of affordable  financing programs.  With Inter-Tel,  customers can acquire their
telephony and computer platforms, software applications and services, as well as
financing, all from a single source.

         Inter-Tel's Totalease program provides the customer with a total system
solution at a fixed monthly cost. The Totalease includes full system maintenance
and  training,  fixed  equipment  add-on and upgrade  provisions,  risk of loss,
guaranteed renewal options and other services. With Totalease, Inter-Tel manages
the  responsibilities  and risks  associated  with  ownership of  communications
equipment. Customers can then focus their time on their business.

         Inter-Tel  also offers a full line of lease purchase  financing.  Lease
terms  range  from 24 to 84  months  with  $1.00,  fixed and fair  market  value
purchase options.  In addition,  Inter-Tel offers customized  financing packages
and new business leases for customers with special  financial needs. By offering
this type of financing to acquire Inter-Tel products and services,  the customer
can maintain a direct, long term relationship with Inter-Tel.

         Leasing is a viable option for businesses that want technology  without
paying up front acquisition costs.  Inter-Tel's leasing programs provide a total
solution at a set monthly cost, making advanced technology affordable.

Sales and Distribution

         The Company has developed a broad distribution  network of direct sales
offices,  dealers and value added  resellers  (VARs) which market the  Company's
products to small to medium size  organizations  and divisions or departments of
larger  organizations.  In the United  States,  the Company has 25 direct  sales
offices  and a growing  network of  hundreds  of dealers  who  purchase  systems
directly from the Company.  Direct  dealers are typically  located in geographic
areas in which the Company does not maintain  direct sales offices.  The Company
is  additionally  pursuing  distribution  of its  products  through  value added
resellers (VARs). These resellers have traditionally sold complex data solutions
to  customers,  and the  Company is seeking to  leverage  this  distribution  to
capitalize on the merging of the computer and telephony industries.  The Company
maintains a dealer  support office and direct sales office in the United Kingdom
and has a network of  approximately 20 dealers in the United Kingdom and Europe.
In addition, in 1993 the Company opened a dealer support office and direct sales
office in Japan and is in the process of establishing dealers in Asia.

         The Company believes that its success depends in part upon the strength
of its  distribution  channels and the ability of the Company to maintain  close
access to its end user customers.  In recent periods,  the Company has sought to
improve its access to end user customers by effecting strategic  acquisitions of
resellers of telephony products and services in markets in which the Company has
existing  direct sales offices and in other strategic  markets.  To this end, in
1995 the Company  acquired  American  Telcom Corp.  of Georgia,  Inc. and Access
West,  Inc..  The Company has expanded its direct sales office  personnel from a
total of 367  persons at December  31,  1991 to a total of 473 at  December  31,
1995.

         The Company's sales through its direct sales offices as a percentage of
total sales have increased  slightly from 58.7% of net sales in 1992 to 59.1% of
net sales in 1995. Sales to distributors,  dealers, and VARs have decreased from
34.0% of net  sales in 1992 to 31.5% of net  sales in 1995.  Sales  through  the
Company's long distance and network services  operation have increased from 3.9%
of net sales in 1992 to 4.4% of net sales in 1995.

         Sales  of  systems  through  the  Company's  direct  dealers  typically
generate  lower gross  margins  than sales  through the  Company's  direct sales
organization,  although direct sales  typically  require higher levels of sales,
marketing,  general and  administrative  expenses.  Accordingly,  the  Company's
margins  may vary from  period to period  depending  upon the mix of dealer  and
direct  sales.  Direct  dealers  and VARs  typically  enter  into  non-exclusive
reseller  contracts  for a term  of one or more  years.  The  Company  generally
provides support and other services to the reseller pursuant to the terms of the
agreement.  The agreements often include  requirements that the reseller meet or
use its best efforts to meet  minimum  annual  purchase  quotas.  The  Company's
experience  is that dealers and VARs maintain low  inventories  of the Company's
products  and,  accordingly,  the Company has  experienced  insignificant  stock
rotation returns and price protection credits to date.

         International sales, which to date have been made through the Company's
United Kingdom and Japan subsidiaries,  accounted for approximately 1.7%, of net
sales in 1995.  In order to sell its products to  customers in other  countries,
the Company must comply with local  telecommunications  standards. The Company's
new AXXESS system can be readily altered through software  modifications,  which
the Company  believes will facilitate  compliance with these local  regulations.
However,  the Company has experienced  delays in the United Kingdom in achieving
final regulatory  approval of its products.  In addition,  the AXXESS system has
been designed to support  multi-lingual  functionality,  and currently  supports
English and Japanese.  The Company is presently  establishing dealer networks in
Japan and Asia and is  expanding  its dealer  network in the United  Kingdom and
Europe.

Research and Development

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

         The  Company  had a total  of 73  personnel  engaged  in  research  and
development  as of December 31, 1995.  Research and  development  expenses  were
$5,763,517; $4,536,882 and $4,114,385 for 1995, 1994 and 1993, respectively.

Manufacturing

         The Company manufactures substantially all of its systems through third
party subcontractors  located in the United States,  China, and the Philippines.
These  subcontractors use both standard and proprietary  integrated circuits and
other  electronic   devices  and  components  to  produce  telephone   switches,
telephones   and   printed   circuit   boards  to  the   Company's   engineering
specifications  and designs.  The suppliers  also inspect and test the equipment
before  delivering  them to the Company,  which  performs  systems  integration,
software  loading,  final testing and shipment.  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.

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

Customer Service and Support

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

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

Quality

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

Competition

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

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

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

Intellectual Property Rights

         In addition to the factors  discussed above,  the Company's  ability to
compete   successfully  depends  on  its  ability  to  protect  the  proprietary
technology  contained in its products.  The Company  relies  principally  upon a
combination  of copyright  and trade secret laws and  contractual  provisions to
establish  and  protect  its  proprietary  rights in its  systems.  The  Company
generally  enters  into  confidentiality   agreements  with  its  employees  and
suppliers,  and limits access to its  proprietary  information.  There can be no
assurance that these protections will be adequate to deter  misappropriation  of
the Company's  technologies  or independent  third party  development of similar
technologies or product features.

         From time to time,  the  Company  is  subject  to  assertions  that the
Company's  products infringe the intellectual  property rights of third parties.
Such claims could require the Company to expend  significant sums in litigation,
could  require  the  Company to pay  damages,  and could  require the Company to
develop non-infringing technology or to acquire licenses to the technology which
is the subject of the claimed infringement.

Employees

         As of December 31, 1995, the Company had a total of 928  employees,  of
whom 739 were engaged in sales,  marketing and customer support,  72 in quality,
manufacturing and related operations, 73 in research and development,  and 44 in
finance and  administration.  The Company's  future success will depend upon its
ability to attract,  retain and motivate highly qualified employees,  who are in
great demand. The Company believes that its employee relations are excellent.


              DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

Steven G. Mihaylo                   52                 Chairman of the Board of
                                                       Directors and Chief
                                                       Executive Officer
Thomas C. Parise                    41                 President and Chief
                                                       Operating Officer
Craig W. Rauchle                    40                 Executive Vice President
W. Kris Brown                       42                 Vice President
Michael J. Sargent                  46                 Vice President
Hiroshige Sugihara                  36                 Vice President
Ross McAlpine                       44                 President of Inter-Tel
                                                       Leasing, Inc.
Kurt R. Kneip                       33                 Vice President, Chief
                                                       Financial Officer, and
                                                       Secretary/Treasurer
Gary Edens                          54                 Director
Maurice H. Esperseth                70                 Director
C. Roland Haden                     55                 Director
Norman Stout                        38                 Director
Kathleen R. Wade                    42                 Director

         MR. MIHAYLO,  the founder of the Company, has served as Chairman of the
Board of Directors of the Company since  September 1983, as President from March
1984 until December 1994,  and as Chief  Executive  Officer of the Company since
its formation in July 1969.  Mr. Mihaylo also served as President of the Company
from July 1969 until  September  1983 and as Chairman of the Board of  Directors
from July 1969 to October 1982. Mr. Mihaylo also is a director of MicroAge, Inc.
and Microtest, Inc.

         MR.  PARISE was elected  President of the Company in December  1994. He
has been Senior Vice  President of the Company since 1986. He is also  President
of Inter-Tel Integrated Services, Inc., a wholly owned research and development,
manufacturing and distribution  subsidiary of the Company. Mr. Parise joined the
Company in 1981 and became Branch  General  Manager of the Phoenix  Direct Sales
Office in 1982. In 1983, he became the Mountain Regional Vice President,  and in
January 1985 he was appointed  Vice  President of Operations  and Sales Support.
Mr. Parise also is a director of Globe Business Resources, Inc.

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

         MR. BROWN became a Vice  President of the Company in December 1994 when
he was promoted to President  of Inter-Tel  Communications,  which is one of the
Company's  Regional  Direct  Sales  Subsidiaries.  In 1987,  he was  promoted to
Regional Vice President of the Southeast Region. Mr. Brown joined the Company in
1985 as the General  Manager of the Tampa  office,  the first  direct  office in
Florida, and has expanded the Florida direct offices to include Tallahassee, Ft.
Lauderdale  and,  most  recently,  North  Miami.  Mr.  Brown  obtained a B.A. in
Marketing in 1980 from the University of South Florida at Tampa.

         MR.  SARGENT was promoted to Vice  President,  Marketing  and Strategic
Programs in January  1995.  In this  position,  he is  responsible  for business
development  and  strategic  analysis  of  current  practices  with  the goal of
attaining  substantial corporate growth. Mr. Sargent joined Inter-Tel in 1984 as
a software  design engineer and progressed  through sales  engineering and sales
management,  serving as the  Director of Sales and  Marketing  for the past four
years.  Mr.  Sargent  holds a Bachelor  of Science  Degree in  Computer  Systems
Engineering.

         MR.  SUGIHARA has been Vice  President of the Company and  President of
Inter-Tel  Japan,  Inc. since June 1993. Born in Osaka,  Japan, Mr. Sugihara was
employed by Forval Corporation, a publicly traded Japanese company, from 1984 to
1992 and in 1989  established  Forval  America,  Inc.,  where he  served as Vice
President/Secretary/Treasurer and member of the Board of Directors.

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

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

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

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

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

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

         MS. WADE was elected a director of the Company in April 1994.  Ms. Wade
is a former director and Co-Chief Executive Officer of Continental Homes Holding
Corporation,  having been employed by this multi-market  production  homebuilder
and mortgage  company and its  predecessor  from 1978 to 1995. In September 1995
Ms. Wade resigned from Continental Homes and is currently acting as a consultant
to Continental  Homes.  Prior thereto,  Ms. Wade, a Certified Public Accountant,
was employed by Ernst & Ernst, an international accounting firm.

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

ITEM 2.  PROPERTIES

         The Company  maintains  its  corporate  headquarters  at 120 North 44th
Street, Suite 200, Phoenix, Arizona pursuant to a lease that expires in 2000. It
also maintains its distribution and support  operations in an 85,000 square foot
building located in Chandler,  Arizona pursuant to a lease that expires in 2008.
In  addition,  the Company  leases  sales and  support  offices in a total of 25
locations  in the  United  States  and two  locations  overseas.  The  Company's
aggregate  monthly  payments  under these  leases are  currently  $192,000.  The
Company  believes that its existing  facilities are adequate to meet its current
needs and that additional or alternative space will be available as necessary in
the future on commercially reasonable terms.

ITEM 3.  LEGAL PROCEEDINGS

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

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

         The following  matters are  submitted to a vote of security  holders in
addition to the proposal to elect the  directors of Inter-Tel,  Incorporated  to
serve  for the  ensuing  year.  Please  refer to the 1995  Proxy  Statement  for
detailed information regarding each of these proposals:

                               FIRST AMENDMENT TO
                      THE 1990 DIRECTORS STOCK OPTION PLAN
                                (Proposal No. 2)

Amend Section 4(b)(iii) of the Plan to read in full as follows:

"Each Eligible  Director shall  automatically  receive,  five (5) days after the
date of his or her election or  reelection  in 1996 only,  an Option to purchase
2,500 additional  shares of the Company's  Common Stock.  Beginning in 1996, and
continuing  annually  thereafter,  each Eligible  Director  shall  automatically
receive,  five (5) days  after the  meeting  of the Board of  Directors  for the
Company's  third  quarter of each year, an Option to purchase  2,500  additional
shares of the Company's Common Stock."


                           Approval of the Adoption of
                   an Amendment to Article IX, Paragraph 1 of
                the Company's Restated Articles of Incorporation
                                (Proposal No. 3)

1.       Paragraph 1 of Article IX of the Restated  Articles of Incorporation is
amended in its entirety to reads as follows:

         "The corporation shall indemnify any and all of its existing and former
directors and officers to the fullest extent permitted by Arizona law; provided,
however, that the corporation shall have the right to refuse  indemnification in
any instance in which the person to whom  indemnification  would  otherwise have
been applicable shall have  unreasonably  refused to permit the corporation,  at
its own expense and through counsel of its own choosing, to defend him or her in
the action."

                           Approval of the Adoption of
                   an Amendment to Article IX, Paragraph 2 of
                the Company's Restated Articles of Incorporation
                                (Proposal No. 4)

2.       Paragraph  2 of  Article  IX is  amended  in its  entirety  to  read as
follows:

         "Director Liability:  The liability of a director or former director to
the  corporation or its  shareholders  shall be eliminated to the fullest extent
permitted by Section 10-202.B.1 of the Arizona Revised Statutes.  If the Arizona
Business  Corporation  Act is  amended to  authorize  corporate  action  further
eliminating or limiting the liability of directors,  the liability of a director
of the  corporation  shall  be  eliminated  or  limited  to the  fullest  extent
permitted by the Arizona  Business  Corporation  Act, as amended.  Any repeal or
modification  of this  Article IX,  Paragraph 2 shall not  adversely  affect any
right or protection of a director of the  corporation  existing  hereunder  with
respect  to any  act or  omission  occurring  prior  to or at the  time  of such
repeal."

                                     PART II

ITEM 5.       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, 1996 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.
                 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

                 1994                      High              Low

                 First Quarter             12 1/8            8 5/8
                 Second Quarter            11                8 1/2
                 Third Quarter             10 1/8            7
                 Fourth Quarter            9 3/4             6

         Statements  contained in this Form 10-K which are not historical  facts
are forward-looking statements as that term is defined in the Private Securities
Litigation  Reform Act of 1995. Such  forward-looking  statements are subject to
risks and  uncertainties  which could cause actual results to differ  materially
from those  projected.  Such risks and  uncertainties  include  fluctuations  in
customer  demand,  and timing and  acceptance of new product  introductions  and
general  economic  conditions,  as well as other risks detailed in the Company's
filings with the Securities and Exchange  Commission,  including its most recent
Form S-3, annual report and Proxy Statement filings.

<PAGE>
--------------------------------------------------------------------------------
ITEM 6.   SELECTED FINANCIAL DATA
<TABLE>
Financial Summary (1)
<CAPTION>
(In thousands, except
per share amounts and ratios)                        For the years ended December 31,


                                            1995          1994         1993         1992         1991

<S>                                       <C>          <C>          <C>           <C>           <C>    
Net sales                                 $148,846     $122,617     $102,377      $87,211       $71,509

Cost of sales                               87,031       73,482       62,791       53,585        44,229
Research & development                       5,764        4,537        4,114        3,928         3,638
Selling, general and
   administrative                           42,609       35,785       29,032       24,545        21,521
Special charge                               1,315 (2)       --           --           --            --
-------------------------------------------------------------------------------------------------------
Operating income                            12,127 (2)    8,813        6,440        5,153         2,121
-------------------------------------------------------------------------------------------------------
Interest and other income                    1,674          904          282          664           515
Interest expense                              (101)        (120)        (445)        (727)         (944)
-------------------------------------------------------------------------------------------------------
Income before income taxes and
   discontinued operations,                 13,700 (2)    9,597        6,277        5,090         1,692
Income taxes                                 5,249        3,648        2,381        1,901           676
-------------------------------------------------------------------------------------------------------
Income from continuing
   operations                                8,451 (2)    5,949        3,896        3,189         1,016
Loss from discontinued
     operations                                 --           --           --           --        (5,148)
-------------------------------------------------------------------------------------------------------
Net income (loss)                           $8,451 (2)   $5,949       $3,896       $3,189      $ (4,132)
-------------------------------------------------------------------------------------------------------
Net Income (loss) per share:
Continuing operations                        $0.71 (2)    $0.55        $0.43        $0.37         $0.12
Discontinued operations                         --           --           --           --          (.61)
-------------------------------------------------------------------------------------------------------
Net income (loss)                            $0.71 (2)    $0.55        $0.43        $0.37        $ (.49)
-------------------------------------------------------------------------------------------------------
Average shares outstanding                  11,953       10,852        8,982        8,612         8,405
-------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Total assets                              $118,402      $67,418      $57,270      $37,568       $41,118
Working capital                             75,511       37,245       34,198       12,514         8,228
Long-term debt                                  --           --          188        2,184         6,007
Shareholders' equity                        85,045       45,098       38,542       19,382        16,806

-------------------------------------------------------------------------------------------------------
KEY RATIOS
Current ratio                                 4.39         3.25         3.32         1.87          1.49
Term debt/equity                                --           --           --         0.11          0.36
Return on equity-continuing operations        0.19         0.15         0.20         0.19          0.05
-------------------------------------------------------------------------------------------------------
</TABLE>
(1)  Financial   data  for  all  periods  have  been  restated  to  reflect  the
acquisitions of American Telcom Corp. of Georgia,  Inc. and Access West, Inc. in
May 1995, each accounted for as a pooling of interests.

(2) Operating income includes a special charge of $1,315,000,  which reduced net
income by $815,000,  or $.07 per share.  This special charge  reflects the costs
associated  with  integrating  the  operations  of the two  acquired  companies.
Without this special charge, the Company would have reported operating income of
approximately  $13.4 million and net income of  approximately  $9.3 million,  or
$.78 per share, in the year ended December 31, 1995.
<PAGE>
ITEM 7.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
              CONDITION AND RESULTS OF OPERATIONS
General

         Inter-Tel  provides  single  point  of  contact,   total  communication
solutions  to small  and  medium  sized  businesses.  Inter-Tel's  products  and
services  include  digital  communication   platforms  and  software,   computer
telephone  integration  (CTI),  unified  messaging  software,  network services,
network and data products, and flexible financing. The Company's Common Stock is
quoted on the NASDAQ National Market System under the symbol INTL.

         The Company has  developed a network of direct sales  offices,  dealers
and value added  resellers  (VARs) which sells the  Company's  products,  and in
recent   periods  the  Company  has  focused  on  expanding   its  direct  sales
capabilities  and its dealer and VAR network.  The Company has effected a number
of strategic  acquisitions  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.
This is possible,  because other high margins  products,  like  software,  could
offset lower margin products.

         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
like 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  AxxessoryTalk  systems.  Current  efforts  are related to
support  of  industry   standard  CTI  interfaces,   development  of  additional
applications  and features,  and the  development of a LAN-based  Communications
Server   incorporating  the  Company's  Call  Processing  and  Voice  Processing
software.  New  applications  under  development  include Primary and Basic Rate
ISDN, 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 unique package of lease financing
and other services  under the name  Totalease.  Totalease  provides to customers
lease financing, maintenance and support services, long distance services, fixed
price upgrades and other benefits. The Company finances this program through the
resale of lease rental streams to financial  institutions,  and formerly through
its bank credit facility.

         Net sales of the Company have  increased  substantially  in each of the
past three years.  Such increases were 21%, 20% and 17% in 1995,  1994 and 1993,
respectively, over the preceding year. All periods have been restated to reflect
the acquisitions of American Telcom Corp. of Georgia, Inc. and Access West, Inc.
in May 1995. Each transaction 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
                                               1995        1994         1993

      Net sales                               100.0%      100.0%       100.0%
      Cost of sales                            58.5        59.9         61.3
                                               ----        ----         ----
      Gross margin                             41.5        40.1         38.7
      Research and development                  3.9         3.7          4.0
      Selling, general and administrative      28.6        29.2         28.5
      Special charge                            0.9         0.0          0.0
                                                ---         ---          ---
      Operating income                          8.1         7.2          6.2
      Interest and other income                 1.1         0.7          0.3
      Interest expense                          0.1         0.1          0.4
      Income taxes                              3.4         3.0          2.3
                                                ---         ---          ---
      Net income                                5.7%        4.8%         3.8%
                                                ---         ---          ---

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

         Net sales increased 21.4% to $148.8 million in 1995 from $122.6 million
in 1994.  Sales from direct  sales  offices  accounted  for  approximately  $9.7
million  of  the  increase,   with  wholesale   distribution   sales  increasing
approximately  $10.7 million.  The remaining increases occurred in long distance
sales and other operations.

         Gross profit increased to $61.8 million,  or 41.5% of net sales in 1995
from $49.1 million, or 40.1% 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 3.9% of
net  sales in 1995 from  $4.5  million,  or 3.7% 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  $42.6
million,  or 28.6% of net sales in 1995,  from  $35.8  million,  or 29.2% of net
sales, in 1994. This reflected 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.

         Interest  and  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 42.1% to $8.5 million,  or $.71 per share, in 1995
after a special charge recognized in the second quarter,  from $5.9 million,  or
$.55 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.

         The special charge 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.

Year Ended December 31, 1994 Versus Year Ended December 31, 1993

         Net sales increased 19.8% to $122.6 million in 1994 from $102.4 million
in 1993. The increase in net sales was primarily attributable to increased sales
of telephone  systems through the Company's  direct sales offices and its dealer
network.  The  remaining  increases  occurred in long  distance  sales and other
operations.  Wholesale shipments to the expanded direct dealer network more than
offset decreased shipments to Premier Telecom.  Shipments to this former private
label distributor are no longer significant.

         Gross profit increased to $49.1 million, or 40.1% of net sales, in 1994
from $39.6  million,  or 38.7% of net sales,  in 1993.  This  increase  in gross
margins  reflected the  transition  from Premier and other  distributors  to the
direct dealer network and the expansion of AXXESS software and systems sales.

         Research and development expenses increased to $4.5 million, or 3.7% of
net  sales in 1994 from  $4.1  million,  or 4.0% of net  sales,  in 1993.  These
expenses  in both  1994 and 1993  were  directed  principally  to the  continued
development  of the AXXESS  software and systems and voice  processing  software
applications.

         Selling,   general  and  administrative  expenses  increased  to  $35.8
million,  or 29.2% of net sales in 1994,  from  $29.0  million,  or 28.5% of net
sales,  in 1993.  This  reflected  increased  incentive and other  compensation,
additional  personnel  to  support  the  direct  dealer  network,  and  expenses
associated with the start up of the Company's Asian subsidiary.

         Interest  and  other  income  increased  in 1994  principally  from the
investment for a full year of the funds received in the 1993 public offering and
funds generated through operating cash flow.

         Net income increased 52.7% to $5.9 million,  or $.55 per share, in 1994
from $3.9 million,  or $.43 per share,  in 1993. Net income per share in 1994 is
based  on  an  additional  1.8  million  average  shares  outstanding  in  1994,
reflecting the 1993 public stock offering.

Discontinued Operations

         In 1993, the Company sold a facility related to previously discontinued
operations subject to remediation related to fuel tank leakage.  The Company had
reserved for such remediation  approximately $400,000, which management believes
is adequate to cover such possible costs.

 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 network,  which has required
and is expected to require working capital for increased accounts receivable and
inventories.  During 1995,  receivables and inventories increased  approximately
$17.7 million.  This increase was principally  funded by operating cash flow and
existing cash  balances.  The Company also expended  approximately  $7.9 million
during  1995  for  property   and   equipment,   principally   relating  to  the
implementation  of the  Company's  new MIS systems.  At December  31, 1995,  the
Company had $39.6 million in cash and equivalents,  which represents an increase
of approximately $24.0 million from December 31, 1994.

         The Company has a loan  agreement  with Bank One,  Arizona,  N.A.  This
agreement provides for a $5 million, unsecured,  revolving line of credit, which
is being used primarily to support international letters of credit to suppliers.
Outstanding balances bear interest at the bank's prime rate. In August 1995, The
Company  received  approximately  $30.7  million  from a  public  offering.  The
proceeds were used in 1995 for working capital,  capital  expenditures and other
general corporate purposes. A portion of the net proceeds may be used to finance
acquisitions of resellers of telephony products, other strategic acquisitions or
corporate alliances.  In the fourth quarter of 1993, the Company repaid all long
and short term debt from a portion of the net  proceeds  received  from its 1993
public offering. The remaining proceeds were added to working capital.

         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 $37.3 million and $19.9 remain  unbilled at December 31, 1995 and 1994,
respectively.  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 any cash acquisitions which the Company
may consider and provide  adequate  working capital for the foreseeable  future.
However,  to the extent that  additional  funds may be 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 consider
additional  financing.  There can be no assurance that additional financing will
be available when required or on acceptable terms.

Impact of Recently Issued Accounting Standards

         In  March  1995,  the  Financial   Accounting  Standards  Board  issued
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 will adopt  Statement  121 in the first
quarter of 1996 and, based on current circumstances, does not believe the effect
of the adoption will be material.


ITEM 8.       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, 1995 and 1994, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three  years in the period  ended  December  31,  1995.  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,  1995  and  1994,  and  the
consolidated  results of their  operations  and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity  with generally
accepted accounting principles.

                                                 /s/Ernst & Young LLP

Phoenix, Arizona
March 20, 1996
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994

(In thousands)
--------------------------------------------------------------------------------

                                                         1995           1994

ASSETS
CURRENT ASSETS
Cash and equivalents                                   $ 39,577       $ 15,530
Accounts receivable, less allowances of
   $1,811  in 1995 and $1,172 in 1994                    29,635         16,895
Inventories, less allowances of $1,975 in
   1995 and $1,785 in 1994                               20,505         15,567
Net investment in sales-leases                            3,629          1,613
Prepaid expenses and other assets                         4,467          4,176

--------------------------------------------------------------------------------
TOTAL CURRENT ASSETS                                     97,813         53,781
PROPERTY, PLANT & EQUIPMENT                              11,773          6,008
OTHER ASSETS                                              8,816          7,629

--------------------------------------------------------------------------------
                                                      $ 118,402       $ 67,418

--------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable                                       $ 11,167       $  5,534
Other current liabilities                                11,135         11,002

--------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES                                22,302         16,536

DEFERRED TAX LIABILITY                                    7,228          3,057
OTHER LIABILITIES                                         3,827          2,727

SHAREHOLDERS' EQUITY
Common  stock,  no  par  value  -  authorized
   30,000,000  shares,  issued  and
   outstanding -- 12,764,681 shares
   in 1995 and 10,658,025 shares in 1994                 58,816         27,435
Retained earnings                                        26,500         18,049
Currency translation adjustment                           (112)          (122)

--------------------------------------------------------------------------------
                                                         85,204         45,362
Less receivable from Employee Stock Ownership Trust       (159)          (264)

--------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY                               85,045         45,098
--------------------------------------------------------------------------------

                                                      $ 118,402       $ 67,418


See accompanying notes.
<PAGE>


INTER-TEL, INCORPORATED AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Years
Ended December 31, 1995, 1994 and 1993
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
(In thousands, except per share data)
--------------------------------------------------------------------------------

                                         1995         1994        1993
                                         ----         ----        ----

NET SALES                             $ 148,846    $ 122,617    $ 102,377
Cost of sales                            87,031       73,482       62,791
--------------------------------------------------------------------------------
GROSS PROFIT                             61,815       49,135       39,586
Research and development                  5,764        4,537        4,114
Selling, general and administrative      42,609       35,785       29,032
Special charge                            1,315         --           --
--------------------------------------------------------------------------------

OPERATING INCOME                         12,127        8,813        6,440
--------------------------------------------------------------------------------

   Other income                           1,674          904          282
   Interest expense                        (101)        (120)        (445)
--------------------------------------------------------------------------------

INCOME BEFORE INCOME TAXES               13,700        9,597        6,277

INCOME TAXES
   Current                                1,007        2,929        1,279
   Deferred                               4,242          719        1,102
--------------------------------------------------------------------------------
                                          5,249        3,648        2,381

NET INCOME                            $   8,451    $   5,949    $   3,896
--------------------------------------------------------------------------------

NET INCOME PER SHARE                  $    0.71    $    0.55    $    0.43
--------------------------------------------------------------------------------

Average number of common
   shares outstanding                    11,953       10,852        8,982
--------------------------------------------------------------------------------

See accompanying notes.
<PAGE>
<TABLE>
INTER-TEL,    INCORPORATED   AND   SUBSIDIARIES   CONSOLIDATED   STATEMENTS   OF
SHAREHOLDERS' EQUITY Years Ended December 31, 1995, 1994 and 1993

(In thousands)
-------------------------------------------------------------------------------------------
<CAPTION>
                                                          Currency    Receivable
                                 Common      Retained    Translation     From
                                  Stock      Earnings     Adjustment     ESOP        Total
                                  -----      --------     ----------     ----        -----

<S>                              <C>           <C>           <C>        <C>         <C>    
Balance at December 31, 1992     $11,863       $8,204        $(181)     $(456)      $19,430

Issuance of 1,800,000 shares
   of common stock                14,766                                             14,766
Exercise of stock options            283                                                283
Tax benefit from stock options       110                                                110
Stock issued in acquisition           82                                                 82
Net income                                      3,896                                 3,896
Loss on currency translation                                  (112)                    (112)
Collection from ESOP                                                       87            87

--------------------------------------------------------------------------------------------
Balance at December 31, 1993      27,104       12,100         (293)      (369)       38,542

Exercise of stock options            187                                                187
Tax benefit from stock options       103                                                103
Stock issued in acquisition           41                                                 41
Net income                                      5,949                                  5,949
Gain on currency translation                                   171                       171
Collection from ESOP                                                      105            105

--------------------------------------------------------------------------------------------
Balance at December 31, 1994      27,435       18,049         (122)      (264)       45,098

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                                      8,451                                  8,451
Gain on currency translation                                    10                        10
Collection from ESOP                                                      105            105
[GRAPHIC OMITTED]
--------------------------------------------------------------------------------------------
Balance at December 31, 1995     $58,816      $26,500        $(112)     $(159)       $85,045

--------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
<PAGE>

INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1994 and 1993

(In thousands)
-------------------------------------------------------------------------------

                                                      1995      1994      1993
                                                      ----      ----      ----
OPERATING ACTIVITIES:
Net income                                         $  8,451  $  5,949  $  3,896
Adjustments to reconcile net income
  to net cash provided by operating activities:
   Depreciation and amortization                      2,244     1,647     1,499
   Provision for losses on receivables                1,570       936       781
   Provision for inventory valuation                    595       551       264
   Net contribution to ESOP                             105       105        87
   Increase in other liabilities                      1,111       603      1242
   (Gain) loss on sale of property and equipment         16       (18)      (14)
   Deferred income taxes                              4,242       719     1,102
   Effect of exchange rate changes                       10       171      (112)
   Changes in operating assets and liabilities      (17,575)   (5,929)   (3,464)

-------------------------------------------------------------------------------
NET CASH PROVIDED BY
    OPERATING ACTIVITIES                                769     4,734     5,281

-------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Additions to property and equipment                  (7,904)   (3,834)   (1,080)
Proceeds from sale of property and equipment              9        63       254
Cash used in acquisitions                              --        (131)     (812)

-------------------------------------------------------------------------------
NET CASH USED IN INVESTING
    ACTIVITIES                                       (7,895)   (3,902)   (1,638)

-------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from credit line                              --        --      81,857
Payments on credit line                                --        --     (85,681)
Proceeds from new term notes                           --        --         110
Payments on long-term debt                             --        (188)   (2,637)
Net proceeds from stock offering                     30,670      --      14,766
Proceeds from exercise of stock options                 503       187       283

-------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES                                 31,173        (1)    8,698

-------------------------------------------------------------------------------
INCREASE IN CASH AND EQUIVALENTS                     24,047       831    12,341

CASH AND EQUIVALENTS AT BEGINNING
    OF YEAR                                          15,530    14,699     2,358

-------------------------------------------------------------------------------
CASH AND EQUIVALENTS AT END OF YEAR                $ 39,577  $ 15,530  $ 14,699
-------------------------------------------------------------------------------

See accompanying notes.
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995, 1994 and 1993
--------------------------------------------------------------------------------

NOTE A -- SIGNIFICANT ACCOUNTING POLICIES

         Description  of Business:  The Company is in the business of developing
and providing  telephone  systems,  voice  processing 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 market values on
the  respective  acquisition  dates.  Based on these values the excess  purchase
prices over the fair market value of the net assets acquired are being amortized
over 5 to 40 years.  Accumulated  amortization  through  December  31,  1995 was
$485,056.

         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  $318,000;  $431,000;  and $424,000 in advertising costs during
1995, 1994 and 1993, respectively.

         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,"  and  accordingly,  recognizes  no
compensation expense for these stock option grants.

         Impact of Recently  Issued  Accounting  Standards:  In March 1995,  the
Financial  Accounting  Standards Board issued 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 will adopt
Statement 121 in the first quarter of 1996 and, based on current  circumstances,
does not believe the effect of the adoption will be material.

         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.

         Poolings of Interests:  The financial  statements  for periods prior to
1995 have been  restated to include the  accounts of American  Telcom  Corp.  of
Georgia,  Inc.  ("American  Telcom") and Access West, Inc. ("Access West"). Each
corporation was acquired by the Company in pooling of interests  transactions in
May 1995,  in which  279,081  shares of  Inter-Tel  common  stock  were  issued.
American Telcom and Access West did not constitute  significant  subsidiaries as
defined  by  the  Securities  and  Exchange  Commission.   In  the  consolidated
statements of income, net sales and net income were  increased/(decreased)  as a
result of the restatement as follows:

(In thousands, except per share amounts)         Year ended December 31,
                                                   1994                1993

              Net sales                          $10,452              $9,853
              Net income                            (136)                (28)
              Net income per share                 $(.03)              $(.02)

         Total  shareholders'  equity was  decreased by $53,000 as of January 1,
1993 as a result of the restatement.  The Company also recorded a special charge
of $1,315,000  in 1995  principally  associated  with  integrating  the acquired
companies.

         Net Income Per Common  Share:  Net income per common  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 1994
and 1993 financial statements to conform to the 1995 presentation.

NOTE B -- 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,
                                              1995          1994         1993

     Sales of rental income                  $25,106      $12,423       $9,586
     Sold income remaining
         unbilled at end of year              37,256       19,894       11,908
     Allowance for uncollectible
         minimum lease payments
         and recourse liability at
         end of year                           1,513        1,198          911

         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.

NOTE C -- PROPERTY, PLANT & EQUIPMENT
                                                          December 31
         (In thousands)                            1995                 1994

         Computer systems and equipment         $19,189              $11,919
         Transportation equipment                 1,879                1,932
         Furniture and fixtures                   2,717                2,393
         Leasehold improvements                     722                  661
         Land                                       130                  130
                                                -------               ------
                                                 24,637               17,035
         Less:  Accumulated depreciation
              and amortization                   12,864               11,027
                                                -------               ------
                                                $11,773               $6,008
                                                =======               ======

NOTE D -- OTHER ASSETS
                                                          December 31
         (In thousands)                            1995                 1994

         Long-term 8% note receivable
            due in 2003                          $1,324               $1,351
         Net investment in sales-leases           6,108                4,158
         Excess of purchase price over net
            assets acquired, net                  1,217                1,480
         Other assets                               167                  640
                                                 ------               ------
                                                 $8,816               $7,629
                                                 ======               ======

NOTE E-- OTHER CURRENT LIABILITIES
                                                            December 31
         (In thousands)                            1995                 1994

         Compensation and employee benefits      $5,396               $4,119
         Other accrued expenses                   3,638                4,726
         Deferred revenues                        2,101                2,157
                                                 ------              -------
                                                $11,135              $11,002
                                                =======              =======

NOTE F -- 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 in May 1996 and contains  certain  restrictions and financial
covenants.  At December 31, 1995, $58,433 of the credit line was committed under
letter of credit arrangements.

NOTE G -- LEASES

         Rental  expense  amounted to  $2,881,592;  $2,532,504 and $2,208,639 in
1995, 1994 and 1993 respectively.

         Noncancellable operating leases are primarily for buildings. Certain of
the leases contain  provisions for renewal options and scheduled rent increases.
At December 31, 1995, 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: 1996 -- $2,486,605;  1997 --
$2,174,431;  1998  --  $1,925,415;  1999  --  $1,660,867;  2000  --  $1,152,295;
thereafter -- $2,917,836.

NOTE H -- INCOME TAXES

         Effective  January 1, 1993, the Company  adopted  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)                                  1995            1994

 Deferred tax liabilities:
      Lease--sales and reserves                 $8,927          $4,466
      Accelerated depreciation                     161              29
                                                   ---            ----
 Total deferred tax liabilities                  9,088           4,495
                                                 -----           -----
 Deferred tax assets:
      Inventory basis differences                1,614             944
      Accounts receivable reserves                 611             409
      Maintenance reserve                          316             355
      Accrued vacation pay                         424             426
      Foreign loss carryforwards                   546             355
      Other -- net                               1,011           1,491
                                                 -----           -----
      Deferred tax assets                        4,522           3,980
      Less valuation reserve                       546             355
                                                   ---             ---
 Net deferred tax assets                         3,976           3,625
                                                 -----           -----
 Net deferred tax liabilities                   $5,112            $870
                                                 -----             ---

         During 1995 and 1994,  the  Company  incurred  losses of  $857,000  and
$834,000 with respect to foreign  operations.  At December 31, 1995, the Company
had foreign loss  carryforwards of approximately  $1,600,000 which will begin to
expire in 1999.  The  valuation  allowance  increased  by  $191,000  in 1995 and
$355,000 in 1994 due to increases in foreign loss carryforward benefits.

         Federal and state income taxes consisted of the following:

         (In thousands)         1995            1994            1993

              Federal         $4,789          $3,045          $2,164
              State              460             603             217
                                 ---             ---             ---
                              $5,249          $3,648          $2,381
                               -----           -----           -----

         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:

                                                 1995        1994      1993
         Federal tax at statutory rates
              applied to pre-tax income           34%         34%        34%
         State tax net of federal benefit          2           3          4
         Valuation reserve increase
              for foreign losses                   2           3          -
         Other - net                               -          (2)         -
                                                  --          --        ---
                                                  38%         38%        38%
                                                  --          --         --

During 1993, the Company disposed of an investment in a hotel and office complex
which made  available  related  deferred  tax  benefits  of  approximately  $2.6
million.

NOTE I -- EQUITY TRANSACTIONS

         In a public offering in August 1995, the Company sold 2,000,000  shares
of previously  unissued  common stock.  During  November and December  1993, the
Company also sold 1,800,000 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.

         Option activity for the past three years under all plans is as follows

                                                     Number of Shares
                                          1995           1994           1993

  Outstanding at beginning of year       824,500        720,250        322,150
  Granted                                160,512        627,000        598,000
  Exercised                            (108,887)       (98,750)      (193,400)
  Expired or canceled                   (28,625)      (424,000)        (6,500)
                                        --------       --------        -------
  Outstanding at end of year             847,500        824,500        720,250
                                         -------        -------        -------
  Exercise price range              $1.12-$14.50    $1.12-$9.63    $1.12-$9.25
  Exercisable at end of year             167,083         75,000         78,750

         At December 31, 1995, the Company has reserved 524,488 shares of Common
Stock for issuance in connection with the stock option plans. In addition, there
is an  outstanding  warrant for the purchase of 50,000 shares of common stock at
an exercise price of $4.25 per share, which expires September 25, 1997.

NOTE J -- 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 $328,000; $248,000 and $196,000
in 1995, 1994 and 1993, 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
32,290; 30,037; and 27,942 in 1995, 1994 and 1993,  respectively.  Contributions
to the ESOP totaled  $125,000 each in 1995, 1994 and 1993 and are based upon the
historic cost of the shares purchased by the ESOP.

NOTE K -- 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.

         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 L -- SUPPLEMENTAL CASH FLOW

(In thousands)
                                           1995         1994         1993
Cash paid for:
   Interest                                 $ 101          $120       $445
   Income taxes                             1,885         1,673        511
                                            -----        ------        ---
Changes in operating assets 
  and liabilities:
   Increase in receivables              $ (16,325)     $ (4,239)   $(3,143)
   Increase in inventories                 (5,533)       (1,895)    (4,172)
   (Increase) decrease in prepaid
      expenses and other assets              (493)        1,131       (909)
   (Increase) decrease in long-term
       other assets                       ( 1,676)       (2,402)       914
   Increase in accounts
      payable and other current
      liabilities                           6,452         1,476      3,846
                                          -------         -----      -----
                                        $ (17,575)     $ (5,929)   $(3,464)
                                         --------       -------    -------

NOTE M -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

         A summary of the quarterly  results of  operations  for the years ended
December 31, 1995 and 1994 follows:

(In thousands, except per share amounts)

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

Net sales                 $34,559   $36,335   $37,760   $40,192
Gross margin               13,953    15,111    15,654    17,097
Net income                  1,785     1,324     2,468     2,874

Net income per share      $   .16   $   .12   $   .20   $   .22

Average number of
     shares outstanding    11,068    11,191    12,295    13,258


        1994              1st Qtr   2nd Qtr   3rd Qtr   4th Qtr

Net sales                 $28,086   $30,379   $30,237   $33,915
Gross margin               10,693    12,265    11,757    14,420
Net income                  1,133     1,517     1,317     1,982

Net income per share      $   .10   $   .14   $   .12   $   .18

Average number of
     shares outstanding    10,845    10,851    10,820    10,892

1995 and 1994 quarterly results for net income per share,  when totaled,  do not
equal the net income per share for the years ended  December  31, 1995 and 1994,
respectively.  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.
Similarly,  the 1994 sum of  quarterly  results  for net income per share  total
$.54, although the total net income per share was actually $.55 per share.

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

              Not applicable.

                                    PART III

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

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

               Information  with respect to directors and executive  officers is
               included  at the end of Part I, Item 1 on Page 16 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 7 to 11 of the Company's Proxy Statement  relating to its
              1996 Annual Meeting of Shareholders.


ITEM 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
              MANAGEMENT

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

ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

              Not applicable.


                                     PART IV

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

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

1.   Financial Statements

         The   following   consolidated   financial   statements  of  Inter-Tel,
Incorporated,  and subsidiaries, are incorporated by reference to Pages 29 to 42
of this Form 10-K:
         Report of Ernst & Young LLP, Independent Auditors

         Consolidated balance sheets--December 31, 1995 and 1994

         Consolidated  statements  of income--years ended December 31, 1995,
         1994 and 1993

         Consolidated  statements of shareholders' equity--years ended December
         31, 1995, 1994 and 1993

         Consolidated  statements  of cash flows--years ended December 31,
         1995, 1994 and 1993

         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, 1995:

                                                                    Page No.
                                                                    --------

              Schedule II--Valuation and Qualifying Accounts              50

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


3.  Exhibits

         3.1(10)         Articles of Incorporation, as amended.

         3.2(16)         By-Laws, as amended.

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

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

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

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

         10.37(3)        Tax Deferred Savings Plan.

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

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

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

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

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

         10.56(13)       Employee Stock Ownership Plan.

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

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

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

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

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

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

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

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

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

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

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

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

(16)  Filed herewith.

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

              3.2  Amended By-Laws

              11.1  Statement re:  Computation of Per Share Earnings. (Page 53)

              13.0  Annual Report to Security Holders.

              22.1  List of Subsidiaries. (Page 52)

              23.0  Consent of Independent Auditors. (Page 49)

              24.1  Power of Attorney.  (Page 48)

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

              27  Financial Data Schedule (Page 80)

              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 29, 1996
<PAGE>
<TABLE>
<CAPTION>
                                       SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                                                        (in thousands)
---------------------------------------------------------------------------------------
                            COL. A       COL. B      COL. C         COL. D     COL. E
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
                                               ADDITIONS
---------------------------------------------------------------------------------------
                                         Charged    Charged to
                           Balance at       to         Other      Charged to    Balance
                           Beginning      Costs &     Accounts    Deductions    at End of
          DESCRIPTION      of Period     Expenses    Describe      Describe      Period
---------------------------------------------------------------------------------------
<S>                           <C>         <C>        <C>            <C>         <C>   
Year ended December 31, 1995

Deducted from asset accounts:
   Allowance for doubtful
      accounts (4)            $1,172      $797       $71 (3)        $229(1)     $1,811
                               -----       ---        ------         ------      -----
   Allowance for lease
      accounts                $1,198      $780      $(71)(3)        $394(1)     $1,513
                               -----       ---        ------         ------      -----
   Inventory allowance (4)    $1,785      $595          --          $405(2)     $1,975
                               -----       ---                       ------      -----

Year ended December 31, 1994

Deducted from asset accounts:
   Allowance for doubtful
      accounts (4)              $704      $704     $(105)(3)        $131(1)     $1,172
                                 ---       ---      --------         ------      -----
   Allowance for lease
      accounts                  $911      $236      $105 (3)         $54(1)     $1,198
                                 ---       ---       -------          -----      -----
   Inventory allowance (4)    $1,237      $551         --             $3(2)     $1,785
                               -----       ---                         ----      -----

Year ended December 31, 1993

Deducted from asset accounts:
   Allowance for doubtful
      accounts (4)              $583      $489     $(125)(3)        $243(1)       $704
                                 ---       ---      --------         ------        ---
   Allowance for lease
      accounts                  $677      $296      $125 (3)        $187(1)       $911
                                 ---       ---       -------         ------        ---
   Inventory allowance (4)      $980      $264         --             $7(2)     $1,237
                                 ---       ---                         ----      -----

---------------------------------------------------------------------------------------
</TABLE>
(1) Uncollectible accounts written off, net of recoveries.
(2) Inventory written off.
(3) Reclassed between appropriate valuation and qualifying accounts.
(4) Adjusted for poolings of American  Telcom Corp. of Georgia,  Inc. and Access
West, Inc.