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

                                   ----------

                                    FORM 10-Q

                  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

For the Quarter Ended                                    Commission File Number:
    June 30, 1999                                                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

                                  Common Stock
               (25,841,131 shares outstanding as of June 30, 1999)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such shorter  periods that the  registrant  was
required  file  such  reports),   and  (2)  has  been  subject  to  such  filing
requirements for the past 90 days. Yes [X] No [ ]
<PAGE>
                                      INDEX
                    INTER-TEL, INCORPORATED AND SUBSIDIARIES

                                                                            Page

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

     Condensed consolidated balance sheets--June 30,                           3
     1999 and December 31, 1998

     Condensed consolidated statements of operations--three                    4
     and six months ended June 30, 1999 and June 30, 1998

     Condensed consolidated statements of cash flows                           5
     --three and six months ended June 30, 1999 and
     June 30, 1998

     Notes to condensed consolidated financial                                 6
     statements--June 30, 1999

Item 2. Management's Discussion and Analysis of Financial                      7
        Condition and Results of Operations

PART II.  OTHER INFORMATION                                                   20

SIGNATURES                                                                    21

                                        2
<PAGE>
PART I. FINANCIAL INFORMATION

INTER-TEL, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands)                                         June 30,     December 31,
                                                        1999           1998
                                                      ---------      ---------
ASSETS
CURRENT ASSETS
  Cash and equivalents                                $  60,313      $  63,124
  Accounts receivable - net                              48,338         41,116
  Inventories                                            17,980         19,663
  Net investment in sales-leases                         13,512         13,979
  Prepaid expenses and other assets                       3,897          2,781
                                                      ---------      ---------
  TOTAL CURRENT ASSETS                                  144,040        140,663

PROPERTY & EQUIPMENT                                     26,059         22,198
EQUIPMENT HELD UNDER LEASE, NET                           6,477          6,771
OTHER ASSETS                                             30,272         27,398
                                                      ---------      ---------
                                                      $ 206,848      $ 197,030
                                                      =========      =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
  Accounts payable                                    $  16,819      $  14,956
  Other current liabilities                              29,806         29,390
                                                      ---------      ---------
  TOTAL CURRENT LIABILITIES                              46,625         44,346

DEFERRED TAXES                                            4,575          5,026
OTHER LIABILITIES                                         6,418          4,972

SHAREHOLDERS' EQUITY
  Common stock, no par value-authorized
  100,000,000 shares, issued and outstanding
  - 29,029,987 in 1998                                  104,539        104,539
  Less: shareholder loans                                  (871)            --
  Retained earnings                                      63,506         54,194
  Accumulated other comprehensive income                   (226)          (196)
                                                      ---------      ---------
                                                        166,948        158,537

  Less: Treasury stock at cost                          (17,718)       (15,851)

TOTAL SHAREHOLDERS' EQUITY                              149,230        142,686
                                                      ---------      ---------
                                                      $ 206,848      $ 197,030
                                                      =========      =========

                                        3
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
(In thousands, except                        Three Months              Six Months
per share amounts)                          Ended June 30,           Ended June 30,
                                        ----------------------    ----------------------
                                          1999          1998        1999         1998
                                        ---------    ---------    ---------    ---------
<S>                                     <C>          <C>          <C>          <C>
NET SALES                               $  77,788    $  68,088    $ 143,313    $ 131,846
Cost of sales                              38,269       35,453       72,122       68,070
                                        ---------    ---------    ---------    ---------
GROSS PROFIT                               39,519       32,635       71,191       63,776

  Research & development                    3,725        2,828        7,032        5,256
  Selling, general and administrative      24,625       22,003       45,204       42,540
  Purchased in-process research and
    development and acquisition
    related expenses                           --       22,755           --       22,755
                                        ---------    ---------    ---------    ---------
                                           28,350       47,586       52,236       70,551
                                        ---------    ---------    ---------    ---------
OPERATING INCOME (LOSS)                    11,169      (14,951)      18,955       (6,775)

  Interest and other income                   491          877          925        1,846
  Interest expense                            (13)         (30)         (25)         (39)
                                        ---------    ---------    ---------    ---------
INCOME (LOSS) BEFORE INCOME TAXES          11,647      (14,104)      19,855       (4,968)
     Income taxes                           4,426       (5,461)       7,542       (1,687)
                                        ---------    ---------    ---------    ---------
NET INCOME (LOSS)                       $   7,221    $  (8,643)   $  12,313    $  (3,281)
                                        =========    =========    =========    =========
NET INCOME (LOSS) PER SHARE
Basic                                   $    0.28    $   (0.32)   $    0.47    $   (0.12)
                                        =========    =========    =========    =========
Diluted                                 $    0.27    $   (0.32)   $    0.46    $   (0.12)
                                        =========    =========    =========    =========
Average common shares outstanding          25,826       26,877       25,961       26,810
                                        =========    =========    =========    =========
Average common shares outstanding
  assuming dilution                        26,711       26,877       26,994       26,810
                                        =========    =========    =========    =========
</TABLE>

                                        4
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

<TABLE>
<CAPTION>
(In thousands, except                                    Three Months             Six Months
per share amounts)                                      Ended June 30,          Ended June 30,
                                                     --------------------    --------------------
                                                       1999        1998        1999        1998
                                                     --------    --------    --------    --------
<S>                                                  <C>         <C>         <C>         <C>
OPERATING ACTIVITIES
  NET INCOME (LOSS)                                     7,221    $ (8,643)     12,313    $ (3,281)
  Adjustments to reflect operating activities:
    Purchased in-process research and development          --      22,755          --      22,755
    Depreciation and amortization                       2,201       1,481       4,324       2,733
    Changes in operating assets and liabilities        (5,704)     (3,218)    (12,511)     (6,746)
    Other                                               3,701      (5,317)      6,934      (3,596)
                                                     --------    --------    --------    --------
  NET CASH PROVIDED BY OPERATING ACTIVITIES             7,419       7,058      11,060      11,865

INVESTING ACTIVITIES
  Proceeds from disposal of property
    and equipment and operating leases                  1,999          --       1,999           7
  Cash used in acquisitions                              (500)    (25,308)       (720)    (25,308)
  Additions to property and equipment
    and operating leases                               (4,435)     (5,287)     (9,380)     (8,119)
                                                     --------    --------    --------    --------
  NET CASH USED IN INVESTING ACTIVITIES                (2,936)    (30,595)     (8,101)    (33,420)

FINANCING ACTIVITIES
  Payments for repurchase of common stock              (6,682)         --      (6,682)         --
  Cash dividends paid                                    (262)       (270)       (522)       (537)
  Proceeds from Stock issued under the ESPP               421         359         421         359
  Proceeds from exercise of stock options                 160         640       1,013       1,097
                                                     --------    --------    --------    --------
  NET CASH PROVIDED BY/(USED IN)
   FINANCING ACTIVITIES                                (6,363)        729      (5,770)        919

DECREASE IN CASH AND EQUIVALENTS                       (1,880)    (22,808)     (2,811)    (20,636)

CASH AND EQUIVALENTS AT BEGINNING OF PERIOD            62,193      90,977      63,124      88,805
                                                     --------    --------    --------    --------
CASH AND EQUIVALENTS AT END OF PERIOD                $ 60,313    $ 68,169    $ 60,313    $ 68,169
                                                     ========    ========    ========    ========
</TABLE>

                                        5
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1999

NOTE A--BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial  information and with the  instructions to Form 10-Q and Rule 10-01 of
Regulation  S-X.  Accordingly,  they do not include all of the  information  and
footnotes  required by generally  accepted  accounting  principles  for complete
financial statements. In the opinion of management,  all adjustments (consisting
of normal recurring  accruals)  considered  necessary for a fair presentation of
the results for the interim  periods  presented  have been  included.  Operating
results  for the three and six months  ended June 30,  1999 are not  necessarily
indicative of the results that may be expected for the year ending  December 31,
1999. For further  information,  refer to the consolidated  financial statements
and footnotes  thereto  included in the Company's annual report on Form 10-K for
the year ended December 31, 1998.

NOTE B--EARNINGS PER SHARE

Diluted earnings per share assume that outstanding  common shares were increased
by shares issuable upon the exercise of all  outstanding  stock options to which
market price exceeds  exercise price less shares which could have been purchased
with related proceeds, if the effect would not be antidilutive.

The following table sets forth the computation of basic and diluted earnings per
share:

(In thousands, except                  Three Months Ended     Six Months Ended
per share amounts)                     -------------------   ------------------
                                       June 30,  June 30,    June 30,  June 30,
                                         1999      1998        1999      1998
                                       --------  ---------   --------  --------
Numerator:
  Net income (loss)                    $  7,221  $  (8,643)  $ 12,313  $ (3,281)
                                       ========  =========   ========  ========
Denominator:
  Denominator for basic earnings per
    share - weighted average shares      25,826     26,877     25,961    26,810

Effect of dilutive securities:
  Employee and director stock options       885         --      1,033        --
                                       --------  ---------   --------  --------
Denominator for diluted earnings per
  share - adjusted weighted average
  shares and assumed conversions         26,711     26,877     26,994    26,810
                                       ========  =========   ========  ========
Basic earnings (loss) per share        $   0.28  $   (0.32)  $   0.47  $  (0.12)
                                       ========  =========   ========  ========
Diluted earnings (loss) per share      $   0.27  $   (0.32)  $   0.46  $  (0.12)
                                       ========  =========   ========  ========

NOTE C--ACQUISITIONS

Effective  June 1998,  Inter-Tel  acquired  certain  assets and assumed  certain
liabilities  of Telecom  Multimedia  Systems,  Inc.  ("TMSI") for cash. The TMSI
acquisition  was  accounted  for using the purchase  method of  accounting.  The
aggregate  purchase price of approximately $25 million plus related  acquisition
costs was allocated to the acquired assets and liabilities  based on fair values
at  acquisition,  of  which  $22.8  million  ($13.7  million  after  taxes)  was
written-off as purchased in-process research and development.

                                        6
<PAGE>
NOTE D - SEGMENT INFORMATION

     The Company adopted  Statement of Financial  Accounting  Standards No. 131,
"Disclosures  about  Segments of an Enterprise and Related  Information"  ("SFAS
131") in the fiscal year ended December 31, 1998. SFAS 131 establishes standards
for  reporting  information  regarding  operating  segments in annual  financial
statements and requires selected  information for those segments to be presented
in interim financial  reports issued to stockholders.  SFAS 131 also establishes
standards for related  disclosures  about  products and services and  geographic
areas.  Operating  segments are identified as components of an enterprise  about
which separate discrete financial information is available for evaluation by the
chief operating  decision  maker, or decision making group, in making  decisions
how to allocate resources and assess  performance.  The Company's chief decision
maker, as defined under SFAS 131, is the Chief Executive  Officer.  To date, the
Company has viewed its operations as principally one segment: telephone systems,
telecommunications  software and  hardware,  and related long  distance  calling
services. These services are provided through the Company's direct sales offices
and dealer network to business customers  throughout the United States,  Europe,
Asia and South America. As a result, the financial  information disclosed herein
materially  represents all of the financial information related to the Company's
principal operating segment.

     The Company's  revenues are generated  predominantly  in the United States.
Total  revenues  generated from U.S.  customers  totaled $76.1 million and $66.3
million  of total  revenues  for the  quarters  ended  June 30,  1999 and  1998,
respectively and $140.1 million and $128.0 million of total revenues for the six
months ended June 30, 1999 and 1998,  respectively.  The Company's revenues from
international  sources were primarily  generated  from customers  located in the
United Kingdom,  Europe,  Asia and South America. In the second quarters of 1999
and 1998, revenues from customers located internationally accounted for 2.2% and
2.6% of total revenues,  respectively. In the six months ended June 30, 1999 and
1998,  revenues from customers  located  internationally  accounted for 2.2% and
2.9% of total revenues, respectively.

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

     This  interim  report  on Form  10-Q  contains  trend  analysis  and  other
forward-looking  statements  within the meaning of Section 27A of the Securities
Act of 1933  and  Section  21E of the  Securities  Exchange  Act of  1934.  Such
statements include  expectations,  beliefs,  intentions or strategies  regarding
future operating results,  future  expenditures,  future cash requirements,  and
future industry  conditions and involve risks and  uncertainties.  The Company's
actual   results  could  differ   materially   from  those   projected  in  such
forward-looking  statements as a result of many risk factors,  including without
limitation  those set forth  under  this  section,  under the  section  entitled
"Factors That May Affect Future  Results Of  Operations"  below and elsewhere in
this report on Form 10-Q.

OVERVIEW

     Inter-Tel  is a single point of contact,  full service  provider of digital
business  telephone  systems,  IP telephony  products,  CTI applications,  voice
processing  software  and long  distance  calling  services.  Inter-Tel's  award
-winning  products and services  include the AXXESS and Inter-Tel Axxent digital
business communication  platforms, the AXXESSORY TALK voice processing platform,
the Inter-Tel  Vocal'Net IP telephony gateway,  the Inter-Tel  Vocal'Net Service
Provider Software and Centralized  Accounting Software, the InterPrise voice and
data routers and the Inter-Tel.net private IP long distance network. The Company
also provides maintenance, leasing and support services for its products.

                                        7
<PAGE>
RESULTS OF OPERATIONS

     Net sales for the second quarter of 1999 increased  14.2% to $77.8 million,
compared to $68.1  million in the second  quarter of 1998.  Net sales  increased
8.7% to  $143.3  million  in the first six  months of 1999,  compared  to $131.8
million in the first six months of 1998.  For the quarter  and six months  ended
June 30,  1999,  sales from  wholesale  distribution  and direct  sales  offices
accounted for approximately $7.9 million and $8.1 million,  respectively, of the
increase  in net  sales.  The  increase  in net sales was also  attributable  to
increases in long distance sales and sales from leasing 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:

                                  Three Months                Six Months
                                 Ended June 30,             Ended June 30,
                                 --------------             --------------
                                 1999     1998              1999     1998
                                 -----    -----             -----    -----
Net Sales                        100.0%   100.0%            100.0%   100.0%
Cost of Sales                     49.2     52.1              50.3     51.6
                                 -----    -----             -----    -----
Gross profit                      50.8     47.9              49.7     48.4

Research and development           4.8      4.2               4.9      4.0
Selling, general and
  administrative                  31.6     32.3              31.5     32.3
In-process research and
  development and related
  acquisition expenses              --     33.4                --     17.3
                                 -----    -----             -----    -----
Operating income                  14.4    (22.0)             13.3     (5.2)

Interest and other income          0.6      1.3               0.6      1.4
Interest expense                   0.0      0.0               0.0      0.0
Income taxes                       5.7     (8.0)              5.3     (1.3)
                                 -----    -----             -----    -----
Net income (loss)                  9.3%   (12.7)%             8.6%    (2.5)%
                                 =====    =====             =====    =====

     Gross  profit  for the  second  quarter  of 1999  increased  21.1% to $39.5
million,  or 50.8% of net  sales,  compared  to $32.6  million,  or 47.9% of net
sales,  for the second quarter of 1998.  Gross profit  increased  11.6% to $71.2
million,  or 49.7% of net  sales,  in the first six months of 1999  compared  to
$63.8  million,  or 48.4% of net sales,  in the first six months of 1998.  Gross
margin  increased in the second  quarter of 1999  primarily as a result of sales
channel and product mix. A larger portion of the Company's  sales increases were
through direct  channels,  as compared to sales through the dealer  channel.  In
addition,  the Company experienced increased sales of its higher margin products
such as its AXXESS digital communication platforms, call processing software and
voice processing software as a percentage of net sales.

     Research and development  expenses for the second quarter of 1999 increased
to $3.7 million, or 4.8% of net sales,  compared to $2.8 million, or 4.2% of net
sales,  for the  second  quarter  of 1998.  Research  and  development  expenses
increased to $7.0 million, or 4.9% of net sales, in the first six months of 1999
compared to $5.3 million, or 4.0% of net sales, in the first six months of 1998.
The  increases  in  absolute  dollars and as a  percentage  of net sales in both
periods were primarily  attributable to expenses relating to the development and
introduction  of  new  products,   including  the  continuing   development  and
improvement  of the  Company's  AXXESS  digital  communication  platforms,  call
processing and voice processing software, CTI products,  unified messaging,  and
TCP/IP intranet and internet voice solutions (which are branded as the Company's
Vocal'Net,  InterPrise and  Inter-Tel.net  products).  The Company  expects that
research and development  expenses will continue to increase in absolute dollars
as the  Company  continues  to develop  new  software  and to  enhance  existing
technologies and products.  These expenses may vary in the future, however, as a
percentage of net sales.

                                        8
<PAGE>
     Selling, general and administrative expenses for the second quarter of 1999
increased in absolute dollars to $24.6 million compared to $22.0 million for the
second quarter of 1998. Selling,  general and administrative  expenses increased
to $45.2  million in the first six months of 1999  compared to $42.5  million in
the first six months of 1998. The increases in absolute  dollars for the quarter
and six months  ended June 30,  1999,  were  attributable  in part to  continued
efforts to hire and train  additional  sales  personnel  throughout  Inter-Tel's
direct sales  offices;  higher sales  commissions  paid to the  Company's  sales
force; increased write-offs of accounts receivable as a percentage of sales; and
providing  additional  marketing resources for new IP product  introductions and
network and long distance services. Selling, general and administrative expenses
decreased as a  percentage  of net sales for the quarter to 31.6% from 32.3% for
the second  quarter of 1998,  and also decreased as a percentage of net sales to
31.5% from 32.3% for the six months ended June 30, 1999.  These  decreases  were
largely  attributable  to increased  net sales and  cost-cutting  measures.  The
Company expects that selling,  general and administrative expenses will continue
to increase in absolute  dollars,  but may vary in the future as a percentage of
net sales.

     In June 1998,  the Company  purchased  certain  assets and  liabilities  of
Telecom  Multimedia  Systems,  Inc.  ("TMSI") for approximately $25 million plus
related  acquisition  costs.  The aggregate  purchase price was allocated to the
fair value of the assets and liabilities  acquired,  of which $22.8 million,  or
$13.7 million after taxes, was written-off as purchased  in-process research and
development.

     Other income in both  periods  consisted  primarily of interest  income and
foreign exchange rate gains and losses.  Income from interest  decreased in both
comparable periods of 1999 based on a lower level of invested funds, principally
relating to the  repurchase of shares of the  Company's  common stock during the
second half of 1998 and in the second  quarter of 1999.  Other  changes in other
income  primarily  reflected  differences in net foreign exchange rate gains and
losses.

     Net income for the  second  quarter  was $7.2  million  ($0.27 per  diluted
share), compared to a net loss of $8.6 million ($0.32 per diluted share) for the
second quarter of 1998,  reflecting the write-off of those  in-process  research
and development  costs noted above. Net income for the six months ended June 30,
1999 was $12.3 million,  or $0.46 per diluted  share,  compared to a net loss of
$3.3  million,  or $0.12 per  diluted  share,  in the first six  months of 1998,
reflecting  the write-off of such  in-process  research and  development  costs.
Without  such  write-off,  net income for the quarter  ended June 30, 1999 would
have increased 44.1% compared to 1998.  Moreover,  without such  write-off,  net
income  for the six  months  ended June 30,  1999  would  have  increased  18.7%
compared to 1998.

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 moved to domestic sources.  The expansion of
international  operations in the United Kingdom and Europe and increased  sales,
if any, in Japan and Asia and  elsewhere  could  result in higher  international
sales as a percentage of total  revenues;  however,  international  revenues are
currently not a significant component of the Company's consolidated operations.

LIQUIDITY AND CAPITAL RESOURCES

     At June 30, 1999,  the Company had $60.3  million in cash and  equivalents,
which  represents a decrease of  approximately  $2.8  million from  December 31,
1998. The Company maintains a $7.0 million,  unsecured  revolving line of credit
with Bank One,  Arizona,  NA. The credit  facility is annually  renewable and is
available through June 1, 2000. Under this credit facility,  the Company has the
option to borrow at a prime rate or adjusted LIBOR interest rate.  Historically,
the credit facility has been used primarily to support  international letters of
credit to suppliers.  The remaining cash balances may be used to further develop
and

                                        9
<PAGE>
expand  Inter-Tel.net  and  for  potential  acquisitions,  strategic  alliances,
working capital and general corporate purposes.

     Net cash provided by operating  activities totaled $11.1 for the six months
ended June 30, 1999,  compared to net cash  provided by operating  activities of
$11.9 million for the same period in 1998.  The operating cash flow in the first
six months of 1999 was primarily the result of profitable  operations  including
non-cash depreciation and amortization  charges.  During the first six months of
1999, accounts receivable increased  approximately $7.2 million ($2.7 million of
which  was  attributable  to  an  acquisition),   while  inventories   decreased
approximately  $1.7 million.  During the first six months of 1999,  increases in
accounts receivable and prepaid expenses and other assets were offset in part by
reductions in inventories and investment in sales-leases. The Company expects to
expand  sales  through its direct  sales  office and dealer  networks,  which is
expected  to require  working  capital for  increased  accounts  receivable  and
inventories.

     Net cash used in  investing  activities,  primarily  in the form of capital
expenditures  and  additions  to operating  leases  offered to  customers,  less
proceeds from the disposal of some operating leases, totaled $8.1 million in the
six months ended June 30, 1999, compared to $33.4 million for the same period of
1998.  The net cash used in 1998 was  primarily  the result of the  purchase  of
certain  assets  of TMSI  and  related  write-off  of  in-process  research  and
development costs. Cash used in acquisitions totaled approximately $25.3 million
in the first six months of 1998. Capital expenditures totaled approximately $9.4
million in 1999 and $8.1 million for 1998.  The Company  anticipates  additional
capital expenditures during 1999,  principally relating to potential acquisition
expenditures and other expenditures for equipment used in operations, facilities
expansion and anticipated  increased  volumes of operating leases offered by the
Company to its  customers,  which  must be  capitalized  as fixed  assets by the
Company.

     Net cash used in  financing  activities  totaled  $5.8  million  in the six
months ended June 30, 1999  compared to cash  provided by  financing  activities
totaling  $919,000  for the same  period in 1998.  Cash used in 1999 was related
primarily to payments for the  repurchase of the Company's  common stock of $6.7
million,  offset by proceeds from the exercise of stock options and stock issued
under the Company's  Employee Stock Purchase Plan ("ESPP"),  less cash dividends
paid.  During  the  second  quarter  of  1999,  the  Company  initiated  a stock
repurchase program under which the Board of Directors  authorized the repurchase
of up to 2,500,000  shares of the  Company's  common  stock.  The Company  stock
repurchases in the second quarter of 1999 were funded primarily by existing cash
balances.   The  Company   reissued   treasury  shares  with  a  cost  basis  of
approximately  $4.9 million in connection  with stock option and ESPP  exercises
and  issuances.  The proceeds  received for the treasury stock reissued was less
than its cost basis. Accordingly,  the difference was recorded as a reduction to
retained earnings.

     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  $150.1  million  and $131.3  remained  unbilled  at June 30,  1999 and
December 31, 1998,  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
and  economic  uncertainty.  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 cash balances,  working capital and available
credit  facilities,  together  with  anticipated  ongoing  cash  generated  from
operations,  will be sufficient to develop and expand its Inter-Tel.net network,
to finance  acquisitions of additional resellers of telephony products and other
strategic  acquisitions or corporate alliances,  and to provide adequate working
capital  for at least  the next  twelve  months.  However,  to the  extent  that
additional funds are required in the future to address

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<PAGE>
working capital needs and to provide funding for capital expenditures, expansion
of the business or the  Inter-Tel.net  network or additional  acquisitions,  the
Company will seek, if at all,  additional  financing.  There can be no assurance
that  additional  financing  will be available  when  required or on  acceptable
terms.

FACTORS THAT MAY AFFECT RESULTS OF FUTURE OPERATIONS

     This  Quarterly  Report  to  Shareholders  on Form 10-Q  ("10-Q")  contains
forward-looking statements that involve risks and uncertainties.  The statements
contained  in this  10-Q  that are not  purely  historical  are  forward-looking
statements  within the meaning of Section 27A of the  Securities Act of 1933, as
amended,  and Section 21E of the  Securities  Exchange Act of 1934,  as amended,
including without limitation  statements  regarding the Company's  expectations,
beliefs,  intentions or strategies  regarding  the future.  All  forward-looking
statements  included in this document are based on information  available to the
Company on the date hereof,  and the Company assumes no obligation to update any
such  forward-looking  statements.  The cautionary  statements made in this 10-Q
should be read as being  applicable  to all related  forward-looking  statements
wherever they appear in this document. The Company's actual results could differ
materially  from those  anticipated  in these  forward-looking  statements  as a
result of certain  factors,  including  those set forth under  "Factors That May
Affect Results of Future  Operations"  below and elsewhere in this document.  In
evaluating the Company's business, shareholders and prospective investors should
consider  carefully the following  factors in addition to the other  information
set forth in this document.

RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON RECENTLY INTRODUCED PRODUCTS

     The  market  for  the   Company's   software,   products  and  services  is
characterized  by rapid  technological  change  and  continuing  demand  for new
products, features and applications.  Current competitors or new market entrants
may develop new products or product  features  that could  adversely  affect the
competitive  position  of  the  Company's  products.   Accordingly,  the  timely
introduction   of  new   products   and  product   features,   as  well  as  new
telecommunications  applications,  will be key factors in the  Company's  future
success.

     During the past few years, the Company  introduced unified messaging on its
AXXESSORY  TALK  platform,  developed a number of  enhancements  to its existing
AXXESS and AXXESSORY Talk platforms and introduced  Inter-Tel  Vocal'Net Gateway
Server and the Inter-Tel  Vocal'Net Service Provider Package. In April 1999, the
Company released the InterPrise 400 voice and data router, the first of a family
of voice and data convergence products that will be released over the next year.
Also,  during the second  quarter of 1999,  the  Company  introduced  AXXESS and
AXXESSORY TALK 5.1 software into  controlled  product  introduction.  During the
past 12 months, sales of the Company's AXXESS digital  communications  platforms
and related  software have comprised a substantial  portion of the Company's net
sales.  The Company expects that its future success will continue to depend,  in
large part, upon the increasing commercial acceptance of the InterPrise products
and the AXXESS  platform,  as well as future upgrades and  enhancements to these
products and networking  platforms.  There can be no assurance that any of these
introduced  products and enhancements will be successful.  Due to the complexity
of the Company's products, the Company has in the past and expects in the future
to experience  delays in the  development and release of new products or product
enhancements.  In the  event  that  the  Company  were to  fail to  successfully
introduce new software, products or services or upgrades to its existing systems
or products on a regular and timely  basis,  demand for the  Company's  existing
software,  products  and  services  could  decline,  which could have a material
adverse effect on the Company's business and operating results.  Further, if the
markets for IP network  products or CTI  applications  fail to develop,  or grow
more slowly than the  Company  anticipates,  or if the Company is unable for any
reason  to  capitalize  on any  of  these  emerging  market  opportunities,  the
Company's  business,  financial  condition  and results of  operations  could be
materially adversely affected.

     Occasionally, new products contain undetected program errors or "bugs" when
released.  Such bugs may result from  defects  contained  in  software  products
offered by the Company's suppliers or other

                                       11
<PAGE>
third  parties that are intended to be compatible  with the Company's  products,
over which the Company has little or no control.  Although the Company  seeks to
minimize the number of bugs in its products by its test  procedures  and quality
control, there can be no assurance that its new products will be error-free when
introduced.  Any  significant  delay  in  the  commercial  introduction  of  the
Company's products due to bugs, design modifications required to correct bugs or
impairment  of customer  satisfaction  as a result of bugs could have a material
adverse effect on the Company's business and operating results. In addition, new
products often take several months before their  manufacturing  costs stabilize,
and, accordingly,  operating results would be adversely affected for a period of
time following introduction.

DEVELOPING MARKET FOR IP NETWORK TELEPHONY; UNCERTAIN REGULATORY ENVIRONMENT

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

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

     The  regulatory   environment  for  IP  network  telephony  is  subject  to
substantial  uncertainty.  There can be no assurance that the sale and use of IP
network  telephony  products  such as  Inter-Tel  Vocal'Net  and  the  Inter-Tel
InterPrise   products  will  comply  with   telecommunications   laws  or  other
regulations  in any of the  countries  in  which  such  products  are or will be
marketed and used.  In the United  States,  the Company  believes that there are
currently few laws or regulations  directly  applicable to voice  communications
over IP  networks  or to access  to, or  commerce  on,  IP  networks  generally.
However,  changes in the  regulatory  environment,  particularly  in regulations
relating  to the  telecommunications  industry,  could have a  material  adverse
effect on the Company's business.  The increased commercial  acceptance of voice
communications  over IP  networks,  as well as other  factors,  could  result in
intervention  by  governmental  regulatory  agencies  in the  United  States  or
elsewhere in the world under  existing or newly enacted  legislation  and in the
imposition  of fees,  charges or taxes on users and  providers  of products  and
services  in this area.  There can be no  assurance  that such  intervention  or
imposition of fees,  charges or taxes would not have a material  adverse  effect
upon the  acceptance  and  attractiveness  of IP network  voice  communications.
Moreover, legislative proposals from international, federal and state government
bodies could impose additional  regulations and obligations upon on-line service
providers.  The growing  popularity and use of the Internet has increased public
focus and could  lead to  increased  pressure  on  legislatures  to impose  such
regulations.   The  Company  cannot  predict  the  likelihood  that  any  future
legislation or regulation will be enacted,  nor the financial impact, if any, of
such resulting  legislation or regulation.  In the future,  the Company may also
develop and introduce  other products with new or additional  telecommunications
capabilities or services, which could be subject to

                                       12
<PAGE>
existing  federal  government  regulations  or result in the  imposition  of new
government regulations, either in the United States or elsewhere.

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

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

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

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

DEVELOPMENT AND MAINTENANCE OF INTER-TEL.NET NETWORK

     The Company is currently utilizing its Inter-Tel  Vocal'Net  technology and
Inter-Tel  InterPrise  products  to  develop  and  expand  its  own IP  network,
Inter-Tel.net, to carry voice traffic. The Inter-Tel.net network is in its early
stages of  deployment  and,  accordingly,  is  subject  to risks.  To date,  the
Inter-Tel.net  network has  established  points of presence in the San Francisco
Bay Area, Washington,  D.C., Chicago, New York, Phoenix, Reno, Atlanta, Houston,
Los Angeles, Dallas, Ft. Lauderdale and Miami. Certain products that the Company
purchased from TMSI have been or are in the process of being tested and deployed
in this network. If the domestic or international market for IP network products
fails to develop or develops more slowly than the Company anticipates, or should
the business  experience  difficulty in the integration of the TMSI  technology,
the  Company's  Inter-Tel.net  network  could become  financially  burdensome to
maintain or obsolete,  which could materially and adversely affect the Company's
business, financial condition and results of operations.

                                       13
<PAGE>
     The Company is dependent on third-party suppliers of telecommunications and
Internet network  transmission  services for implementation of Inter-Tel.net and
does not currently have long-term  contracts with such suppliers.  The Company's
ability to expand Inter-Tel.net is dependent upon its ability to obtain services
from such  suppliers.  Certain of these third party  suppliers are or may become
competitors  of the Company,  and such  suppliers  generally  are not subject to
restrictions upon their ability to compete with the Company.  To the extent that
these  suppliers  raise rates or change pricing  structures,  the Company may be
materially adversely affected. Also, the Company faces the risk that there could
be a  disruption  in the service  provided by these  suppliers,  and can give no
assurance that there will not be a significant disruption in such service in the
future,  thereby causing a disruption in the services provided by the Company to
its customers.

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

HIGHLY COMPETITIVE INDUSTRY

     The market for the Company's  core PABX and key systems  products is highly
competitive and in recent periods has been  characterized  by pricing  pressures
and  business  consolidations.  The  Company's  competitors  include  Lucent and
NorTel, as well as Comdial,  Executone,  Iwatsu, Mitel, NEC, Nitsuko, Panasonic,
Siemens,  Toshiba  and  others.  Many of these  competitors  have  significantly
greater  financial,  marketing and  technical  resources  than the Company.  The
Company also competes against the RBOCs,  which offer systems produced by one or
more of the  aforementioned  competitors and also offer Centrex systems in which
automatic  calling  facilities  are provided  through  equipment  located in the
telephone  company's central office. The Company also expects to compete against
large data router  companies,  like Cisco Systems and 3Com,  which have acquired
telecommunications technology during 1997 through 1999.

     The   Telecommunications  Act  of  1996  and  AT&T's  division  into  three
enterprises  have  impacted  competition  in the  communications  industry.  The
Telecommunications  Act opened the market  for  telephone  and cable  television
services,  forcing telephone companies to open their networks to competitors and
giving  consumers  a choice of local  phone  carriers.  Conversely,  local phone
companies  are now able to offer long  distance  services.  In  addition,  cable
companies can offer telephone  services and Internet access.  These changes have
increased competition in the communications industry and have created additional
competition  and  opportunities  in  customer  premise  equipment,  as these new
services and interfaces have become available.

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

                                       14
<PAGE>
and support that the Company provides to its customers. Certain of the Company's
competitors  have  significantly   greater  name  recognition  and  distribution
capabilities  than  the  Company,  although  the  Company  believes  that it has
developed a competitive  distribution presence in certain markets,  particularly
those where the Company has direct sales offices.

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

     As the  Company  enters the  markets  for local  telephone  service  and IP
network access, it will face additional  competition from RBOCs, cable companies
and other providers and existing IP carriers like  Net2Phone,  which have larger
marketing and sales organizations, significantly greater financial and technical
resources and a larger and more established  customer base than the Company.  In
addition,   RBOCs,  cable  companies  and  other  providers  have  greater  name
recognition,  more  established  positions  in  the  market  and  long  standing
relationships  with  customers.  Therefore,  there can be no assurance  that the
Company  will  compete  successfully  in these  markets.  Many of the  Company's
current  and  potential   competitors  have  longer  operating  histories,   are
substantially  larger,  and have greater  financial,  manufacturing,  marketing,
technical and other resources.  Competition in the Company's  markets may result
in significant price reductions.  As a result of their greater  resources,  many
current  and  potential  competitors  may be  better  able than the  Company  to
initiate  and  withstand  significant  price  competition  or  downturns  in the
economy.  There can be no assurance that the Company will be able to continue to
compete  effectively,  and any  failure to do so would  have a material  adverse
effect on the Company's business, financial condition and operating results.

     The Company  expects that  competition  will  continue to be intense in the
markets addressed by the Company, and there can be no assurance that the Company
will be able to continue to compete successfully.

PRODUCT PROTECTION AND INFRINGEMENT

     The  Company's  future  success  will  depend in part upon its  proprietary
technology.  The Company currently holds patents for six  telecommunication  and
unified messaging products.  The Company has also applied to the U.S. Patent and
Trademark  Office  for a patent  related to  certain  aspects  of the  Inter-Tel
Vocal'Net technology.  The Company also relies on copyright and trade secret law
and contractual provisions to protect its intellectual property. There can be no
assurance that any patent, trademark or copyright owned by or applied for by the
Company, will not be invalidated,  circumvented or challenged or that the rights
granted  thereunder  will  provide  meaningful   protection  or  any  commercial
competitive  advantage to the Company.  Further,  there can be no assurance that
others  will not  develop  technologies  that are  similar  or  superior  to the
Company's technology or that duplicate the Company's technology.  As the Company
expands its international operations, effective intellectual property protection
may be  unavailable  or limited in certain  foreign  countries.  There can be no
assurance that the steps taken by the Company will prevent  misappropriation  of
its technology. Litigation may be necessary in

                                       15
<PAGE>
the future to enforce the Company's intellectual property rights, to protect the
Company's trade secrets,  to determine the validity and scope of the proprietary
rights of others,  or to defend  against claims of  infringement  or invalidity.
Such litigation could result in substantial costs and diversion of resources and
could  have a  material  adverse  effect on the  Company's  business,  financial
condition and operating results.

     From  time  to  time,  the  Company  is  subject  to  proceedings  alleging
infringement by the Company of intellectual property rights,  including patents,
trademarks, copyrights, or other intellectual property rights of others. In this
regard,  the  Company  recently  received  a  letter  from  one of  its  primary
competitors alleging that the Company's AXXESS digital  communications  platform
utilizes inventions covered by certain of such competitor's patents. The Company
is currently in the process of investigating  this matter.  When any such claims
are  asserted  against the  Company,  the Company may seek to purchase a license
under the third party's intellectual  property rights.  Purchasing such licenses
can be expensive, and there can be no assurance that a license will be available
on  prices  or  other  terms  acceptable  to  the  Company  or at  all.  In  the
alternative, the Company could resort to litigation to challenge any such claim.
Any such litigation could require the Company to expend significant sums, divert
management's  attention  and  require the  Company to pay  significant  damages,
develop non-infringing technology or acquire licenses to the technology which is
the  subject of the  asserted  infringement,  any of which could have a material
adverse  effect on the  Company's  business,  financial  condition and operating
results.  In the event that the Company is unable or chooses not to license such
technology or decides not to challenge  such third party's  rights,  the Company
could  encounter  substantial and costly delays in product  introductions  while
attempting  to design  around  such third party  rights,  or could find that the
development,  manufacture  or sale of products  requiring such licenses could be
foreclosed.

MANAGEMENT OF GROWTH; IMPLEMENTATION OF NEW MANAGEMENT INFORMATION SYSTEMS

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

     The Company has substantially implemented various components of the new MIS
software beginning in 1998 and completed the deployment of this software in June
1999.  Full  implementation  of this system software and the transition from the
old system  software  has  required  and will  continue  to require  substantial
financial resources, time and personnel.

     The  Company  has made  strategic  acquisitions  in the past and expects to
continue to do so in the future.  Acquisitions  require a significant  amount of
the Company's management attention and financial and operational resources,  all
of which are limited.  The  integration of any acquired  assets or entities,  or
prospective  acquisition  candidates  may also  result in  unexpected  costs and
disruptions  and  significant  fluctuations  in, or reduced  predictability  of,
operating  results  from  period to period.  There can be no  assurance  that an
acquisition  will have a positive  impact on the business  relationships  of the
Company or the  acquired  entity with its  respective  suppliers  or  customers.
Further, there can be no assurance that the Company will be able to successfully
integrate  acquired assets or operations or achieve any of the intended benefits
of an acquisition.  The Company's failure to manage its growth effectively could
have  a  material  adverse  effect  on its  business,  financial  condition  and
operating results.

DEPENDENCE UPON CONTRACT MANUFACTURERS AND COMPONENT SUPPLIERS

     The  Company  currently  procures  certain  components  used in its digital
communication platforms, including certain microprocessors, integrated circuits,
power supplies, voice processing

                                       16
<PAGE>
interface  cards and IP  telephony  cards,  from a  relatively  small  number of
suppliers and manufacturers  and,  accordingly,  product  availability  could be
limited.  However,  the Company  believes that  alternate  sources of supply are
available  for  virtually  every  component.  All of the  Company's  proprietary
products are manufactured  according to specifications and conditions set by the
Company.  Each manufacturer must meet the Company's  specifications  relating to
the  manufacturing  process and quality  assurance  before such  manufacturer is
selected by the Company. The Company currently manufactures its products through
manufacturers  located in the  United  States,  the  Philippines,  the  People's
Republic of China and Mexico.  Foreign  manufacturing  facilities are subject to
changes in governmental policies,  imposition of tariffs and import restrictions
and other factors beyond the Company's control.  Varian currently manufactures a
significant  portion  of the  Company's  products  at  Varian's  Tempe,  Arizona
facility,  including substantially all of the printed circuit boards used in the
AXXESS and Inter-Tel Axxent digital communication platforms.  From time to time,
the Company has  experienced  delays in the supply of  components  and  finished
goods,  and there can be no assurance that the Company will not experience  such
delays in the  future.  The  Company's  reliance  on third  party  manufacturers
involves a number of additional  risks,  including reduced control over delivery
schedules,  quality  assurance  and costs.  Any delay in delivery or shortage of
supply of  components  or finished  goods from any  supplier,  or the  Company's
inability to develop in a timely manner alternative or additional sources if and
when  required,  could  adversely  affect  the  Company's  business,   financial
condition and operating  results.  Although the Company does not have  long-term
supply  contracts  with any of its contract  manufacturers,  to date it has been
able to obtain supplies of components and products in a timely manner. There can
be no assurance  that the Company will be able to continue to obtain  components
or finished  goods in sufficient  quantities or quality or on favorable  pricing
and delivery terms in the future.

RELIANCE ON DEALER NETWORK

     A  substantial  portion of the  Company's  net sales are made  through  its
network of independent dealers. The Company faces intense competition from other
telephone system and voice  processing  system  manufacturers  for such dealers'
business, as most of the Company's dealers carry products which compete with the
Company's  products.  There can be no  assurance  that any such  dealer will not
promote the  products  of the  Company's  competitors  to the  detriment  of the
Company's  products.  The loss of any significant dealer or group of dealers, or
any event or condition adversely  affecting the Company's dealer network,  could
have a material adverse effect on the Company's  business,  financial  condition
and operating results.

DEPENDENCE ON KEY PERSONNEL

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

RISKS OF PROVIDING LONG DISTANCE AND NETWORK SERVICES

     Inter-Tel  depends  on  its  supply  of  telecommunications   services  and
information from several long distance carriers.  The Company relies principally
on long distance carriers to provide network services to the Company's customers
and for billing information. Long distance services are subject to extensive and
uncertain governmental regulation on both the federal and state level. There can
be no assurance that the promulgation of certain regulations will not materially
and adversely affect the Company's  business,  financial condition and operating
results.  Contracts  with the long  distance  carriers  from  which the  Company
currently  resells  services  typically  have  multi-year  terms  in  which  the
Company's  prices are relatively  fixed and have minimum use  requirements.  The
market for long distance

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<PAGE>
services is currently  experiencing  and is expected to experience in the future
significant price competition, resulting in decreasing end-user rates. There can
be no assurance that the Company will meet minimum use commitments, will be able
to negotiate  lower rates with carriers in the event of any decrease in end user
rates or will be able to extend its  contracts  with long  distance  carriers at
prices favorable to the Company. The Company's ability to continue to expand its
long distance  services  depends upon its ability to continue to secure reliable
long  distance  services  from a  number  of  long  distance  carriers  and  the
willingness of such carriers to continue to provide telecommunications  services
and billing information to the Company on favorable terms.

POTENTIAL  FLUCTUATIONS  IN QUARTERLY  RESULTS;  EXTENDED  SALES CYCLE;  LIMITED
BACKLOG

     The Company's quarterly operating results depend upon a variety of factors,
including the volume and timing of orders received  during the quarter,  the mix
of products sold, mix of distribution  channels,  general  economic  conditions,
patterns  of  capital   spending  by  customers,   the  timing  of  new  product
announcements  and  releases  by  the  Company  and  its  competitors,   pricing
pressures, the cost and effect of acquisitions, and the availability and cost of
products and components from the Company's  suppliers.  The Company's  customers
typically require immediate shipment and installation of platforms and software.
As a result,  the Company has  historically  operated  with a  relatively  small
backlog,  and  sales  and  operating  results  in any  quarter  are  principally
dependent  on  orders  booked  and  shipped  in that  quarter.  Historically,  a
substantial  portion of the  Company's  net sales in a given  quarter  have been
recorded in the third month of the  quarter,  with a  concentration  of such net
sales in the last two weeks of the  quarter.  Market  demand for  investment  in
capital  equipment such as digital  communication  platforms and associated call
processing and voice processing  software  applications is largely  dependent on
general economic conditions,  and can vary significantly as a result of changing
conditions in the economy as a whole.

     In the past 15 months, the Company introduced AXXESS networking systems and
software,  which are  typically  sold to larger  customers  at a higher  average
selling price. Our AXXESS networking products have a relatively high sales price
per unit,  and often  represent  a  significant  and  strategic  decision  by an
enterprise  regarding  its  communications   infrastructure.   Accordingly,  the
purchase of our products  typically  involves  significant  internal  procedures
associated with the evaluation,  testing,  implementation  and acceptance of new
technologies.  This  evaluation  process  frequently  results in a lengthy sales
process,  typically  ranging  from three  months to more than nine  months,  and
subjects  the sales cycle  associated  with the  purchase  of our  products to a
number of  significant  risks,  including  budgetary  constraints  and  internal
acceptance  reviews.  The length of our sales cycle also may vary  substantially
from customer to customer.  While our customers are  evaluating our products and
before  placing an order with us, we may incur  substantial  sales and marketing
expenses  and  expend  significant  management  effort.  Consequently,  if sales
forecasted from a specific customer for a particular quarter are not realized in
that quarter,  the  Company's  operating  results could be materially  adversely
affected.

     The Company's  expense levels are based in part on  expectations  of future
sales and, if sales levels do not meet expectations,  operating results could be
adversely affected. Because sales of digital communication platforms through the
Company's  dealers  produce lower gross margins than sales through the Company's
direct sales  organization,  operating results have varied, and will continue to
vary based upon the mix of sales through direct and indirect channels.  Although
the Company to date has been able to resell the rental streams from leases under
its Totalease  program  profitably and on a  substantially  current  basis,  the
timing and  profitability  of lease resales from quarter to quarter could impact
operating results, particularly in an environment of fluctuating interest rates.
Long distance  sales,  which have lower gross  margins than the  Company's  core
business,  have  grown in recent  periods  at a faster  rate than the  Company's
overall net sales. As a result, gross margins could be adversely affected in the
event that long distance calling  services  continue to increase as a percentage
of net  sales.  In  addition,  the  Company is  subject  to  seasonality  in its
operating results,  as net sales for the first and third quarters are frequently
less than those experienced, in the fourth and second quarters, respectively. As
a result of

                                       18
<PAGE>
these and other factors,  the Company has in the past experienced,  and could in
the  future  experience,  fluctuations  in  sales  and  operating  results  on a
quarterly  basis.  See  "Management's   Discussion  and  Analysis  of  Financial
Condition and Results of Operations."

VOLATILITY OF STOCK PRICE

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

YEAR 2000 READINESS

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

     The  Company  has  evaluated  its level of  exposure to the risks and costs
associated with Year 2000 problems and has substantially updated its information
systems with  systems  that are designed to be Year 2000 ready.  The Company has
upgraded  its  long  distance   billing  system,   which  is  warranted  by  the
manufacturer  to be Year 2000 ready.  In addition,  the Company has reviewed and
tested its lease billing and collections  system,  which is Year 2000 ready. The
Company  has  contracted  outside  vendors  to perform  detailed  reviews of the
readiness of other information systems devices in use in the Company's business.
This  assessment  has  been  completed.   Anticipated  upgrades  or  remediation
performed for devices that are not Year 2000 ready are included in the Company's
capital  expenditure  budget for 1999,  and are expected to be either  completed
before  year-end  or  deemed  unnecessary  to the  continuing  operation  of the
business.  The total  cost of each  system is being or will be  capitalized  and
depreciated in the normal course of business. The Company's critical information
systems are believed to be substantially  Year 2000 ready and secondary  systems
and devices deemed necessary for the operation of the business will be completed
by the end of the fourth quarter. The Company currently  anticipates no material
disruptions  in the  services it provides to its  customers  as a result of Year
2000 problems. If any of the above systems are not Year 2000 ready, however, the
Company's  business,  financial  condition  and results of  operations  could be
materially adversely affected.

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

                                       19
<PAGE>
with our test procedures. Costs to develop and update the Company's products for
Year 2000  readiness  have  been  part of the  Company's  ongoing  research  and
development  efforts.  Any disruption in manufacturing  services provided by the
Company as a result of Year 2000 noncompliance could materially adversely affect
the Company's business, financial condition and results of operations. If any of
the Company's products are not Year 2000 ready, or if certain non-ready products
are not replaced or upgraded,  the Company's  business,  financial condition and
results of operations  could be materially  adversely  affected.  Moreover,  the
Company could also be materially adversely impacted by Year 2000 issues faced by
major  distributors,   suppliers,   customers,  vendors  and  financial  service
organizations with which the Company interacts.

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

     Inter-Tel is completing programs and has developed evolution strategies for
customers who own non-Year 2000 ready  Inter-Tel  products.  Inter-Tel has begun
extensive efforts to alert customers who have such non-Year 2000 ready products,
including direct mailings, phone contacts and participation in user and industry
groups.  Inter-Tel also has a Year 2000 web site that provides Year 2000 product
information.

     Inter-Tel is continuing contingency planning to address potential increases
in demand for customer  support  resulting  from the Year 2000 date change.  The
Plan includes  organizing a team of employees dedicated to the specific problems
of the Year 2000 change  including  monitoring  key  internal  systems to insure
continuation of operations, and ongoing customer service in the beginning of the
new year.

CONCENTRATION OF OWNERSHIP

As of June 30, 1999, Steven G. Mihaylo,  the Company's  Chairman of the Board of
Directors,   Chief   Executive   Officer  and   President   beneficially   owned
approximately  21.1% of the outstanding shares of the Common Stock. As a result,
he has the ability to exercise significant  influence over all matters requiring
shareholder approval. In addition, the concentration of ownership could have the
effect of delaying or preventing a change in control of the Company.

Any of the foregoing could result in a material  adverse effect on the Company's
business, financial condition and operating results.

INTER-TEL, INCORPORATED AND SUBSIDIARIES

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS--NOT APPLICABLE

ITEM 2. CHANGES IN SECURITIES--NOT APPLICABLE

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<PAGE>
ITEM 3. DEFAULTS ON SENIOR SECURITIES--NOT APPLICABLE

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

     1. On April 26, 1999, at the Company's annual meeting of shareholders,  the
     shareholders of the Company elected the following  directors,  each of whom
     was a nominee of the Company:

     Name                                  Votes For              Votes Withheld
     ----                                  ---------              --------------
     Steven G. Mihaylo                     21,352,160                156,725
     J. Robert Anderson                    21,351,477                157,408
     Gary D. Edens                         31,352,007                156,878
     Maurice H. Esperseth                  21,352,007                156,878
     C. Roland Haden                       21,352,007                156,878

ITEM 5. OTHER INFORMATION

     Pursuant to Rule 14a-4(c)(1) under the Securities  Exchange Act of 1934, in
     connection  with  the  Company's  annual  meeting  of  shareholders,  if  a
     stockholder of the Company fails to notify the Company by February 6, 2000,
     then the proxies of management would be allowed to use their  discretionary
     voting  authority when any such proposal is raised at the Company's  annual
     meeting of stockholders,  without any discussion of the matter in the proxy
     statement.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     Exhibits:
     Exhibit 27.1 - Financial Data Schedule for June 30, 1999

     Reports on Form 8-K -- None

                                   SIGNATURES

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.

                                        INTER-TEL, INCORPORATED


Date 8-13-99                            /s/ Steven G. Mihaylo
                                        ----------------------------------------
                                        Steven G. Mihaylo,
                                        Chairman of the Board,
                                        Chief Executive Officer and President


Date 8-13-99                            /s/ Kurt R. Kneip
                                        ----------------------------------------
                                        Kurt R. Kneip,
                                        Vice President
                                        and Chief Financial Officer

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