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:
September 30, 1996                                               0-10211


                             INTER-TEL, INCORPORATED


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


                              120 North 44th Street
                           Phoenix, Arizona 85034-1822

                                 (602) 302-8900

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


                                  Common Stock

            (12,949,431 shares outstanding as of September 30, 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  periods 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
                                      -----    -----
<PAGE>
                                      INDEX


INTER-TEL, INCORPORATED AND SUBSIDIARIES

                                                                            Page

PART I.       FINANCIAL INFORMATION

Item 1.       Financial Statements (Unaudited)

              Condensed consolidated balance sheets--September 30,            3
              1996 and December 31, 1995

              Condensed consolidated statements of income--three              4
              and nine months ended September 30, 1996 and
              September 30, 1995

              Condensed consolidated statements of cash flows                 5
              --three and nine months ended September 30, 1996 and
              September 30, 1995

              Notes to condensed consolidated financial                       6
              statements--September 30, 1996

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

PART II. OTHER INFORMATION                                                   18

SIGNATURES                                                                   19

EXHIBIT 11.1                                                                 20
                                       2
<PAGE>
PART I.   FINANCIAL INFORMATION

INTER-TEL, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS  (Unaudited) (1)
<TABLE>
<CAPTION>
(In thousands)                                  September 30,       December 31,
                                                    1996               1995
                                                    ----               ----
<S>                                               <C>                <C>     
ASSETS 
CURRENT ASSETS
     Cash and equivalents                          $34,950            $39,640
     Accounts receivable -- net                     34,876             29,789
     Inventories                                    24,373             20,580
     Net investment in sales-leases                  7,234              3,629
     Prepaid expenses and other assets               7,380              4,501
                                                  --------           --------
     TOTAL CURRENT ASSETS                          108,813             98,139

PROPERTY & EQUIPMENT                                13,573             11,813
OTHER ASSETS                                        11,942              8,815
                                                  --------           --------
                                                  $134,328           $118,767
                                                  ========           ========

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
     Accounts payable                              $11,870            $11,262
     Other current liabilities                      14,458             11,254
                                                  --------           --------
     TOTAL CURRENT LIABILITIES                      26,328             22,516

DEFERRED TAXES AND OTHER LIABILITIES                13,881             11,134
SHAREHOLDERS' EQUITY
     Common stock                                   59,557             58,966
     Retained earnings                              34,794             26,422
     Equity adjustment for foreign
         currency translation                         (158)              (112)
                                                  --------           --------
                                                    94,193             85,276
     Less receivable from Employee
         Stock Ownership Trust                         (74)              (159)
                                                  --------           --------
     TOTAL SHAREHOLDERS' EQUITY                     94,119             85,117
                                                  --------           --------
                                                  $134,328           $118,767
                                                  ========           ========
</TABLE>

(1) Financial data for all periods have been restated to reflect the acquisition
of Florida Telephone  Systems,  Inc. in May 1996,  accounted for as a pooling of
interests.
                                       3
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (1)
<TABLE>
<CAPTION>
                                                         Three Months                   Nine Months
(In thousands except                                  Ended September 30,            Ended September 30,
per share amounts)                                     1996         1995           1996             1995
                                                       ----         ----           ----             ----
<S>                                                 <C>           <C>           <C>              <C>      
NET SALES                                           $ 47,435      $ 38,343      $ 133,384        $ 110,400
Cost of sales                                         27,819        22,424         75,348           64,836
                                                    --------      --------      ---------        ---------
GROSS PROFIT                                          19,616        15,919         58,036           45,564
                                                    --------      --------      ---------        ---------

      Research & development                           1,568         1,488          4,933            4,368
      Selling, general and administrative             13,895        10,908         40,233           31,739
      Special charge                                      --            --             --            1,315 (2)
                                                    --------      --------      ---------        ---------
                                                      15,463        12,396         45,166           37,422
                                                    --------      --------      ---------        ---------

OPERATING INCOME                                       4,153         3,523         12,870            8,142 (2)

      Interest and other income                          393           499          1,356            1,064
      Interest expense                                   (10)          (14)           (43)             (91)
                                                    --------      --------      ---------        ---------

INCOME BEFORE TAXES                                    4,536         4,008         14,183            9,115 (2)
      Income taxes                                     1,847         1,508          5,811            3,414
                                                    --------      --------      ---------        ---------

NET INCOME                                          $  2,689      $  2,500      $   8,372        $   5,701 (2)
                                                    ========      ========      =========        =========

NET INCOME PER SHARE                                $   0.20      $   0.20      $    0.63        $    0.49 (2)
                                                    ========      ========      =========        =========

Average number of common
      shares outstanding                              13,443        12,343         13,385           11,566
                                                    ========      ========      =========        =========
</TABLE>

(1) Financial data for all periods have been restated to reflect the acquisition
of Florida Telephone  Systems,  Inc. in May 1996,  accounted for as a pooling of
interests.

(2) Operating  income in 1995  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  $9.5 million and net income of approximately
$6.5 million, or $.56 per share, in the nine months ended September 30, 1995.
                                       4
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (1)
<TABLE>
<CAPTION>
                                                         Three Months                     Nine Months
                                                      Ended September 30,              Ended September 30,
(In thousands)                                        1996          1995               1996          1995
                                                      ----          ----               ----          ----
<S>                                                  <C>           <C>                 <C>          <C>   
OPERATING ACTIVITIES
     NET INCOME                                      $2,689        $2,500              $8,372       $5,701

     Adjustments to reflect operating activities:
       Depreciation and amortization                  1,107           587               3,002        1,703
       Changes in operating assets and liabilities     (863)       (5,441)            (16,999)     (13,236)
       Other                                          2,209         1.561               4,903        3,562
                                                     ------        ------              ------       ------

     NET CASH PROVIDED BY (USED IN)
       OPERATING ACTIVITIES                           5,142          (793)               (722)      (2,270)

INVESTING ACTIVITIES
     Proceeds from disposal of property
       and equipment                                     11             5                 143            6
     Additions to property and equipment             (2,232)       (1,892)             (4,702)      (5,894)
                                                     ------        ------              ------       ------

     NET CASH USED IN INVESTING
       ACTIVITIES                                    (2,221)       (1,887)             (4,559)      (5,888)

FINANCING ACTIVITIES
     Net proceeds from sale of common stock              --        30,664                  --       30,664
     Payments on long-term debt                          --            (1)                 --           (7)
     Proceeds from exercise of stock options            105           163                 591          468
                                                     ------        ------              ------       ------

     NET CASH PROVIDED BY
       FINANCING ACTIVITIES                             105        30,826                 591       31,125

     INCREASE (DECREASE) IN CASH
       AND EQUIVALENTS                                3,026        28,146              (4,690)      22,967

CASH AND EQUIVALENTS
     AT BEGINNING OF PERIOD                          31,924        10,388              39,640       15,567
                                                     ------        ------              ------       ------

CASH AND EQUIVALENTS
     AT END OF PERIOD                               $34,950       $38,534             $34,950      $38,534
                                                    =======       =======             =======      =======
</TABLE>
(1) Financial data for all periods have been restated to reflect the acquisition
of Florida Telephone  Systems,  Inc. in May 1996,  accounted for as a pooling of
interests.
                                       5
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

September 30, 1996

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  nine  months  ended  September  30,  1996  are not
necessarily  indicative  of the results that may be expected for the year ending
December 31, 1996. For further information,  refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
l0-K for the year ended December 31, 1995.

NOTE B--INCOME PER SHARE

Primary  income  per  share is based on the  weighted  average  number of common
shares outstanding during each year and common stock equivalents.

NOTE C--RESTATEMENT FOR POOLING OF INTERESTS

The financial statements for all prior periods have been restated to include the
accounts of Florida Telephone Systems,  Inc. ("FTS"),  which was acquired by the
Company in a pooling  of  interests  transaction  in May 1996,  in which  48,193
shares  of  Inter-Tel  Common  Stock  were  issued.  FTS  did not  constitute  a
significant  subsidiary as defined under the  regulations.  In the statements of
income for the nine months ended  September 30, 1995 net sales increased by $1.5
million and net income increased by $124,000 as a result of the restatement. The
restatement  increased  earnings per share by  approximately  $.01, from $.48 to
$.49 per share,  for the nine months ended September 30, 1995. In the statements
of income for the three  months  ended  March 31,  1996 net sales and net income
increased by $472,000 and $23,000, respectively, as a result of the restatement.
The restatement did not affect earnings per share for the first quarter, but was
dilutive by approximately $.01 per share for the six months ended June 30, 1996.
                                       6
<PAGE>
NOTE D - SPECIAL CHARGE

Net income in the three months and nine months ended September 30, 1995 included
a special charge reflecting the costs associated with integrating the operations
of American Telcom Corp. of Georgia, Inc. and Access West, Inc. during May 1995.
The special charge  principally  included costs  associated  with  redundancy in
inventories,  equipment abandonment,  the combination and relocation of business
operations, employee reductions, and the write-off of intangible assets. Without
this special charge, the Company would have reported net income of approximately
$6.5 million, or $.56 per share, in the nine months ended September 30, 1995.

PART I.

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

Overview

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

     This Report on Form 10-Q  contains  forward-looking  statements  within the
meaning of Section  27A of the  Securities  Act of 1933 and  Section  21E of the
Securities  Exchange Act of 1934.  Actual results could differ  materially  from
those  projected  in the  forward-looking  statements  as a result  of many risk
factors, including,  without limitation, those set forth under "Factors That May
Affect Future Results Of Operations" below.

Results Of Operations

         Net sales for the third quarter of 1996  increased 24% to $47.4 million
from $38.3  million in the third  quarter of 1995.  Net sales  increased  21% to
$133.4 million in the first nine months of 1996 from $110.4 million in the first
nine months of 1995.  For the nine months ended  September 30, 1996,  sales from
direct sales offices accounted for  approximately  $9.4 million of the increase,
with wholesale distribution increasing approximately $7.6 million. The remaining
increases occurred in network and long distance sales and other operations.

         The following  table sets forth selected  statement of operations  data
expressed as a percentage of net sales for the periods indicated:
                                       7
<PAGE>
                                      Three Months              Nine months
                                  Ended September 30,       Ended September 30,
                                  1996          1995        1996          1995
                                  ----          ----        ----          ----

       Net Sales                 100.0%        100.0%      100.0%       100.0%
       Cost of sales              58.6          58.5        56.5         58.7
                                 -----         -----       -----        ----- 
       Gross profit               41.4          41.5        43.5         41.3
       Research and
         development               3.3           3.9         3.7          4.0
       Selling, general
         and administrative       29.3          28.4        30.2         28.7
       Special charge              --            --          --           1.2
                                 -----         -----       -----        ----- 
       Operating Income            8.8           9.2         9.6          7.4
       Interest and other
         income                    0.8           1.3         1.0          1.0
       Interest expense            0.0           0.0         0.0          0.1
       Income taxes                3.9           4.0         4.3          3.1
                                 -----         -----       -----        ----- 
       Net income                  5.7           6.5         6.3          5.2
                                 -----         -----       -----        ----- 

         Gross  profit  for the third  quarter  of 1996  increased  23% to $19.6
million,  or 41.4% of net sales, from $15.9 million,  or 41.5% of net sales, for
the third quarter of 1995. Gross profit increased to $58.0 million,  or 43.5% of
net sales, in the first nine months of 1996 from $45.6 million,  or 41.3% of net
sales, in the first nine months of 1995. Gross margin decreased  slightly during
the third  quarter based on the different mix of sales of products and services,
and customer  concessions  caused by problems  incurred  with the  Company's new
management information systems since the implementation of and conversion to the
new  systems in late 1995.  Gross  margin was higher for the nine  months  ended
September  30,  1996  compared to the same period for 1995.  This  increase  was
primarily  a result of higher  sales,  as a  percentage  of total net sales,  of
AXXESS  digital  communication  platforms,  call  processing  software and voice
processing  software,  which was offset in part by a higher  percentage of sales
through dealers and increased sales of the company's  network  services and long
distance calling services,  in addition to the factors discussed above regarding
the third quarter.

         Research  and  development  expenses  for  the  third  quarter  of 1996
increased to $1.6 million,  or 3.3% of net sales, from $1.5 million,  or 3.9% of
net sales,  for the third  quarter of 1995.  Research and  development  expenses
increased  to $4.9  million,  or 3.7% of net sales,  in the first nine months of
1996 from $4.4 million,  or 4.0% of net sales, in the first nine months of 1995.
The increases in both periods were primarily  attributable to expenses  relating
to the development and introduction of new products,  including the introduction
of ISDN to the AXXESS digital  communication  platform,  expansion of the AXXESS
digital  communication  platform to 512 ports and the  addition of ISDN  primary
rate  capability,  expansion  of  the  Inter-Tel  Axxent  digital  communication
platform  to 36 ports,  AxxessoryTalk  version  4.0 voice  processing  software,
continuing  development of other call processing and voice processing  software,
CTI products and a line of call processing, voice processing, unified messaging,
and internet  software  which is designed to run under  Microsoft  Windows
                                       8
<PAGE>
NT on standard IBM compatible X86 servers. The Company expects that research and
development expenses will continue to increase in the future in absolute dollars
as the Company  continues to develop new call  processing  and voice  processing
software and enhance  existing  technologies  and products.  These  expenses may
vary, however, as a percentage of net sales.

         Selling,  general and administrative  expenses for the third quarter of
1996 increased 27% to $13.9 million,  or 29.3% of net sales, from $10.9 million,
or 28.4% of net sales,  for the third  quarter  of 1995.  Selling,  general  and
administrative  expenses  increased to $40.2 million,  or 30.2% of net sales, in
the first nine months of 1996 from $31.7 million,  or 28.7% of net sales, in the
first  nine  months  of 1995.  The  increases,  both in total  dollars  and as a
percentage of sales,  for the quarter and nine months ended  September 30, 1996,
were primarily  attributable to the costs associated with the  implementation of
the Company's  management  information  systems,  including higher depreciation,
maintenance, consulting fees, personnel costs and related expenses. In addition,
the Company  increased  its sales and  technical  training  staff,  expanded its
credit management group and made increases in receivables reserves.  The Company
continues to hire and train  additional sales personnel  throughout  Inter-Tel's
direct sales  offices and to provide  additional  marketing  resources and sales
personnel  for the  expanded  dealer  network and for network  services and long
distance services.  Higher sales commissions were also paid based upon increased
levels  of  net  sales.   The  Company   expects  that   selling,   general  and
administrative  expenses  will  continue  to  increase in the future in absolute
dollars, but may vary as a percentage of net sales.

         Interest  and  other  income in both  periods  consisted  primarily  of
interest income.

         Interest  expense  during the first nine  months of 1996 was  virtually
eliminated and other income  increased  principally as a result of the temporary
investment  of the net  proceeds  from public  offerings of common stock in late
1993 and during August, 1995.

         Net income for the third quarter increased 8% to $2.7 million ($.20 per
share)  compared  to net income of $2.5  million  ($.20 per share) for the third
quarter of 1995. Net income increased 47% to $8.4 million,  or $.63 per share in
the first nine  months of 1996,  from $5.7  million,  or $.49 per share,  in the
first  nine  months  of 1995.  The 1996  earnings  per share  calculations  were
affected by the issuance of an additional  2,000,000 shares of stock as a result
of the Company's public offering of common stock that closed in August 1995. Net
income in the second quarter of 1995 included a special charge of  approximately
$815,000,  or $.07 per share,  reflecting the costs  associated with integrating
the  operations of the American  Telcom Corp. of Georgia,  Inc. and Access West,
Inc. in May 1995. The special charge principally  included costs associated with
redundancy in inventories, equipment abandonment, the combination and relocation
of business operations,  employee terminations,  and the write-off of intangible
assets.
                                       9
<PAGE>
Inflation/Currency Fluctuation

         Inflation and currency  fluctuations have not previously had a material
impact on Inter-Tel's operations. International sales and 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  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 continue to require  working  capital for increased  accounts
receivable  and  inventories.  During  the first nine  months of 1996,  accounts
receivable and inventories  increased  approximately $8.9 million. This increase
was  principally  funded by operating cash flow and existing cash balances.  The
Company also expended approximately $4.7 million during the first nine months of
1996 for property and  equipment.  At September 30, 1996,  the Company had $35.0
million in cash and  equivalents,  which represents an increase of approximately
$3.0 million from June 30, 1996,  but a decrease of  approximately  $4.7 million
from December 31, 1995.

         The  Company  has a loan  agreement  with Bank One,  Arizona,  NA which
provides for a $5.0  million,  unsecured  revolving  line of credit.  The credit
facility is annually  renewable and is available  through April 30, 1997.  Under
the credit  facility,  the  Company  has the option to borrow at a prime rate or
adjusted LIBOR interest rate.  During the nine months ended  September 30, 1996,
the credit  facility  was used  primarily  to support  international  letters of
credit to suppliers.

         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 $57.3 million and $37.3 million  remain  unbilled at September 30, 1996
and December 31, 1995, respectively. The Company is obligated to repurchase such
income  streams in the event of defaults by lease  customers  and,  accordingly,
maintains  reserves based upon 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 realize
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 
                                       10
<PAGE>
provide adequate  working capital for the foreseeable  future.  However,  to the
extent  that  additional  funds are  required  in the future to address  working
capital needs and to provide funding for capital expenditures,  expansion of the
business or additional acquisitions, the Company will seek additional financing.
There can be no assurance  that  additional  financing  will be  available  when
required or on acceptable terms.

Factors That May Affect Results of Future Operations

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

Rapid Technological Change and Dependence on New and Timely Product
Introductions

         The  market  for the  Company's  software,  products  and  services  is
characterized  by rapid  technological  change  and  continuing  demand  for new
products, features and applications.  Current competitors or new market entrants
may develop new products or product  features  that could  adversely  affect the
competitive  position  of  the  Company's  products.   Accordingly,  the  timely
introduction   of  new   products   and  product   features,   as  well  as  new
telecommunications  applications,  will be a key factor in the Company's  future
success.  Occasionally,  new products contain  undetected  errors or "bugs" when
released.  Such bugs may result from  defects  contained  in  software  products
offered by the  Company's  suppliers or other third parties that are intended to
be compatible with the Company's products,  over which the Company has little or
no control.  Although  the Company  seeks to minimize  the number of bugs in its
products by its test  procedures  and strict  quality  control,  there can be no
assurance  that  its new  products  will be  error  free  when  introduced.  Any
significant delay in the commercial  introduction of the Company's  products due
to bugs, any design modifications  required to correct bugs or any impairment of
customer  satisfaction as a result of bugs could have a material  adverse effect
on the Company's business and operating results. In addition, new products often
take  several  months  before their  manufacturing  costs  stabilize,  which may
adversely affect operating results for a period of time following  introduction.
During the past twelve months, the Company introduced ISDN on its AXXESS digital
communication  platform,  expanded the size of the AXXESS and  Inter-Tel  Axxent
platforms, and introduced a number of upgrades to its existing AxxessoryTalk and
IVX-500 voice processing  platforms.  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.
There can be no assurance that the Company will be able to successfully  develop
new software,  products,  services,  technologies  and  applications on a timely
basis as required by changing  market  needs or that new software or products or
enhancements  thereto,  including its recently  announced products and upgrades,
when introduced by the Company will achieve market acceptance.
                                       11
<PAGE>
         The Company has recently  developed and  continues to develop  products
designed to address the emerging  market for the  convergence  of voice and data
applications,  or computer  telephony  integration.  If the  computer  telephony
integration  ("CTI")  market  fails to  develop or grows  more  slowly  than the
Company anticipates, or if the Company is unable for any reason to capitalize on
this emerging market  opportunity,  the Company's business and operating results
could be materially adversely affected.

Dependence Upon Contract Manufacturers and Component Suppliers

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

Competition

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

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

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

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

Management of Growth; Implementation of New Management Information Systems

         The growth in the  Company's  business  has placed,  and is expected to
continue to place, a significant strain on the Company's  personnel,  management
and  other  resources.  The  Company's  ability  to  manage  any  future  growth
effectively will require it to attract, train, motivate and manage new employees
successfully,  to integrate new  
                                       13
<PAGE>
employees   into  its  overall   operations  and  to  continue  to  improve  its
operational, financial and management information systems.

         In  particular,  the Company  implemented  new  management  information
systems  (MIS)  late in 1995.  The new MIS  systems  significantly  affect  many
aspects  of  the  Company's  business,  including  its  accounting,  operations,
purchasing,  sales and marketing  functions.  The Company has  experienced  some
difficulty  in the  implementation  of these MIS systems.  This  difficulty  has
increased  the  Company's  costs,  has had an  adverse  effect on the  Company's
ability to provide  products  and services to its  customers on a timely  basis,
and, in addition, has caused some delay in coordinating accounting and financial
results.  There can be no assurance that the Company will successfully  complete
the  total  automation  and  integration  of the MIS  systems  in their  current
configuration.  In addition,  one of the Company's  primary MIS systems software
vendors has filed for protection  under Chapter 11 of the Bankruptcy Code in the
U.S. District Court, District of Arizona, which may further complicate the steps
necessary for a full integration.  The Company is currently  reviewing  remedial
steps and alternatives, including (1) methods to improve reliability of data and
performance in the current MIS systems and configuration;  (2) variations to the
current  configuration;  and (3) the possibility of the selection of alternative
providers. Any of such actions could result in additional costs and could result
in further delays in obtaining  fully-functional MIS systems, which could have a
material adverse effect on the Company's business and operating results.

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

Product Protection and Infringement

         The Company's  future success is dependent in part upon its proprietary
technology.  The Company has no patents and relies  principally on copyright and
trade  secret  law  and  contractual  provisions  to  protect  its  intellectual
property. There can be no assurance that any copyright owned by the Company will
not be  invalidated,  circumvented  or  challenged  or that the  rights  granted
thereunder will provide competitive  advantages to the Company.  Further,  there
can be no assurance that others will not develop  technologies  that are similar
or  superior  to the  Company's  technology  or  that  duplicate  the  Company's
technology.  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 
                                       14
<PAGE>
taken by the Company will prevent misappropriation of its technology. Litigation
may be necessary in the future to enforce the  Company's  intellectual  property
rights,  to protect the Company's  trade secrets,  to determine the validity and
scope of the  proprietary  rights  of  others,  or to defend  against  claims of
infringement or invalidity.  Such litigation  could result in substantial  costs
and  diversion  of  resources  and could have a material  adverse  effect on the
Company's business and operating results.

         From time to time,  the  Company  is subject  to  proceedings  alleging
infringement  by the Company of intellectual  property rights of others.  If any
such claim is  asserted  against the  Company,  the Company may seek to obtain a
license under the third party's  intellectual  property rights.  There can be no
assurance that a license will be available on terms acceptable to the Company or
at all. In the alternative,  the Company could resort to litigation to challenge
any such claim,  which could require the Company to expend  significant sums and
could  require the Company to pay  significant  damages,  develop  noninfringing
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  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 materially inhibited.

Reliance on Dealer Network

         A  substantial  portion of the Company's net sales are made through its
network of independent dealers. The company faces intense competition from other
telephone system and voice  processing  system  manufacturers  for such dealers'
business, as most of the Company's dealers carry products which compete with the
Company's  products.  The  Company has no long term  agreements  with any of its
dealers, and 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 and operating  results.  In
recent  years 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.  There can be no assurance that one or more of the Company's
dealers  will  not be  acquired  by a  competitor  and that the loss of any such
dealer  so  acquired  will not  adversely  affect  the  Company's  business  and
operating results.

Risks of Providing Long Distance and Network Services

         Inter-Tel depends on a reliable supply of  telecommunications  services
and  information  from several long distance  carriers.  Because it does not own
transmission  facilities,  the Company relies on long distance  carriers for the
provision  of  network  services  to the  Company's  customers  and for  billing
information.  Long
                                       15
<PAGE>
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, such as regulations requiring the reduction
of direct-dial  billing rates, will not adversely affect the Company's  business
and operating  results.  The Company  currently  resells long distance  services
pursuant to contracts  with four of the six largest long distance  carriers with
U.S.  networks.  These  contracts  typically have a multi-year term in which the
Company's prices are relatively fixed and have minimum use  requirements.  There
can be no assurance that the Company will meet minimum use commitments,  will be
able to negotiate  lower rates with carriers in the event of any decrease in end
user rates or will be able to extend its contracts  with long distance  carriers
at prices favorable to the Company.  The Company's ability to continue to expand
its long distance  service  operations will depend on its ability to continue to
secure reliable long distance  services from a number of long distance  carriers
and the  willingness  of such  carriers to  continue to make  telecommunications
services and billing information available to the Company on favorable terms.

Potential Fluctuations in Quarterly Results; Limited Backlog

The  Company's  quarterly  operating  results  depend upon a variety of factors,
including the volume and timing of orders received  during the quarter,  the mix
of products sold 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,  the level of the Company's  operating  expenses and the availability
and cost of products and components from the company's suppliers.  The Company's
customers  typically require the immediate shipment and installation of systems.
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.  Moreover, market demand
for investment in capital  equipment such as telephone  systems and applications
is largely dependent on general economic conditions,  and can vary significantly
as a result of  changing  conditions  in the economy as a whole.  The  Company's
expense  levels are based in part on  expectations  as to future  sales and,  if
sales  levels do not meet  expectations,  operating  results  could be adversely
affected.  Because sales of systems through the Company's  dealers produce lower
gross  margins  than sales  through the  Company's  direct  sales  organization,
operating  results  will 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 have, in recent
periods,  grown at a faster rate than the  Company's  overall net sales and such
sales have lower gross margins than the Company's  core  business.  As a result,
gross  margins  could be  adversely  affected  in the event  that long  distance
calling services continue to increase as a percentage of net sales. In addition,
the Company is subject to seasonality in its operating results, as net sales for
the first and third quarters are frequently  less than those  experienced in the
fourth  and  second  quarters,  respectively.  As a result  of these  and  other
factors,  the  Company  has in the
                                       16
<PAGE>
past and could in the  future  experience  fluctuations  in sales and  operating
results on a quarterly basis.

Dependence on Key Personnel

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

Possible Volatility of Stock Price

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

Concentration of Ownership

         As of  October  31,  1996,  the  Company's  Chairman  of the  Board  of
Directors and Chief Executive Officer  beneficially  owned  approximately 21% of
the outstanding  shares of the Common Stock. As a result,  he has the ability to
exercise significant  influence over all matters requiring shareholder approval.
In addition, the concentration of ownership could have the effect of delaying or
preventing a change in control of the Company.
                                       17
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES

PART II. OTHER INFORMATION


ITEM 1.  LEGAL PROCEEDINGS--Not Applicable

ITEM 2.  CHANGES IN SECURITIES--Not Applicable

ITEM 3.  DEFAULTS ON SENIOR SECURITIES--Not Applicable

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITIES
                  HOLDERS--Not Applicable

ITEM 5.  OTHER INFORMATION--Not Applicable

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

         Exhibits:

                 11.1 -- Computation of Per Share Earnings

                 Exhibit 27.1 - Financial Data Schedule for September 30, 1995


         Reports on Form 8-K -- None

                                       18
<PAGE>
                                   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 11-13-96                               /s/ Steven G. Mihaylo
     --------------                         ------------------------------------
                                            Steven G. Mihaylo, Chairman of the
                                            Board and Chief Executive Officer


Date 11-13-96                               /s/ Kurt R. Kneip
     --------------                         ------------------------------------
                                            Kurt R. Kneip, Vice President and
                                            Chief Financial Officer

                                       19