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:
   March 31, 1998                                               0-10211


                             INTER-TEL, INCORPORATED


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


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

                                 (602) 302-8900

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


                                  Common Stock

              (26,815,383 shares outstanding as of March 31, 1998)

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--March 31,                3
              1998 and December 31, 1997
                                                                              
              Condensed consolidated statements of income--three              4
              months ended March 31, 1998 and March 31, 1997

              Condensed consolidated statements of cash flows                 5
              --three months ended March 31, 1998 and
              March 31, 1997

              Notes to condensed consolidated financial                       6
              statements--March 31, 1998

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

PART II. OTHER INFORMATION                                                   19

SIGNATURES                                                                   20
                                       2
<PAGE>
PART I.  FINANCIAL INFORMATION

INTER-TEL, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands)                              March 31,      December 31,
                                              1998             1997
                                              ----             ----
ASSETS
CURRENT ASSETS
     Cash and equivalents                   $  90,977       $  88,805
     Accounts receivable - net                 32,634          32,234
     Inventories                               20,428          21,539
     Net investment in sales-leases            10,764           9,196
     Prepaid expenses and other assets          5,312           5,625
                                            ---------       ---------
     TOTAL CURRENT ASSETS                     160,115         157,399

PROPERTY & EQUIPMENT                           21,196          19,559
OTHER ASSETS                                   19,810          18,030
                                            ---------       ---------
                                            $ 201,121       $ 194,988
                                            =========       =========

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
     Accounts payable                       $  12,702       $  14,864
     Other current liabilities                 20,877          18,721
                                            ---------       ---------
     TOTAL CURRENT LIABILITIES                 33,579          33,585

DEFERRED TAXES AND OTHER LIABILITIES           16,852          15,898
SHAREHOLDERS' EQUITY
     Common stock                              99,685          99,229
     Retained earnings                         51,374          46,547
     Equity adjustment for foreign
        currency translation                     (369)           (271)
                                            ---------       ---------
     TOTAL SHAREHOLDERS' EQUITY               150,690         145,505
                                            ---------       ---------

                                            $ 201,121       $ 194,988
                                            =========       =========
                                        3
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

(In thousands, except                              Three Months Ended
per share amounts)                          March 31, 1998    March 31, 1997
                                            --------------    --------------

NET SALES                                      $ 63,758          $ 50,322
     Cost of sales                               32,617            28,152
                                               --------          --------
GROSS PROFIT                                     31,141            22,170
                                                              
     Research & development                       2,428             1,845
     Selling, general, and administrative        20,537            16,052
                                               --------          --------
                                                 22,965            17,897
                                                              
OPERATING INCOME                                  8,176             4,273
                                                              
     Interest and other income                      969               223
     Interest expense                                (9)               (7)
                                               --------          --------
                                                              
INCOME BEFORE TAXES                               9,136             4,489
     Income taxes                                 3,774             1,819
                                               --------          --------
                                                              
NET INCOME                                     $  5,362          $  2,670
                                               ========          ========
                                                              
                                                              
NET INCOME PER SHARE                                          
     Basic                                     $    .20          $    .10
                                               ========          ========
     Diluted                                   $    .19          $    .10
                                               ========          ========
                                                              
Average number of common shares                               
     Outstanding - Basic                         26,741            25,901
                                               ========          ========
                                                              
Average number of common shares                               
     Outstanding - Diluted                       28,242            26,450
                                               ========          ========
                                        4                     
<PAGE>                                                     
INTER-TEL, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

<TABLE>
<CAPTION>
                                                               Three Months Ended
(In thousands)                                          March 31, 1998    March 31, 1997
                                                        --------------    --------------

<S>                                                        <C>               <C>
OPERATING ACTIVITIES                                                     
     NET INCOME                                            $  5,362          $  2,670
     Adjustments to reflect operating activities:                        
       Depreciation and amortization                          1,252             1,069
       Changes in operating assets and liabilities           (3,528)             (166)
       Other                                                  1,721             1,795
                                                           --------          --------
                                                                         
     NET CASH PROVIDED BY                                                
        OPERATING ACTIVITIES                                  4,807             5,368
                                                                         
INVESTING ACTIVITIES                                                     
     Proceeds from disposal of property and equipment             7              --
     Additions to property and equipment                     (2,832)           (1,709)
     Cash used in acquisition                                  --                (825)
                                                           --------          --------
                                                                         
     NET CASH USED IN INVESTING ACTIVITIES                   (2,825)           (2,534)
                                                                         
FINANCING ACTIVITIES                                                     
     Cash dividends paid                                       (267)             --
     Proceeds from exercise of stock options                    457                73
                                                           --------          --------
                                                                         
     NET CASH PROVIDED BY FINANCING                                      
       ACTIVITIES                                               190                73
                                                                         
     INCREASE IN CASH                                                    
        AND EQUIVALENTS                                       2,172             2,907
                                                                         
CASH AND EQUIVALENTS AT                                                  
     BEGINNING OF PERIOD                                     88,805            38,936
                                                           --------          --------
                                                                         
CASH AND EQUIVALENTS AT                                                  
     END OF PERIOD                                         $ 90,977          $ 41,843
                                                           ========          ========
</TABLE>
                                       5
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

March 31, 1998
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  months  ending  March  31,  1998  are  not  necessarily
indicative  of the results that may be expected for the year ended  December 31,
1998. 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, 1997.

NOTE B--EARNINGS PER SHARE

Primary 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.

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

(In thousands, except                                   Three Months Ended
per share amounts)                               March 31, 1998   March 31, 1997
                                                 --------------   --------------

Numerator:
  Net Income                                         $ 5,362          $ 2,670
                                                     =======          =======
                                                                   
Denominator:                                                       
  Denominator for basic earnings per                               
    share - weighted average shares                   26,741           25,901
                                                                   
  Effect of dilutive securities:                                   
    Employee and director stock options                1,501              549
                                                     -------          -------
                                                                   
  Denominator for diluted earnings per                             
    share - adjusted weighted average                              
    shares and assumed conversions                    28,242           26,450
                                                     -------          -------
                                                                   
Basic earnings per share                             $  0.20          $  0.10
                                                     -------          -------
                                                                   
Diluted earnings per share                           $  0.19          $  0.10
                                                     -------          -------

NOTE C--SUBSEQUENT EVENT

On May 11,  1998,  the  Company  agreed to  purchase  certain  assets of Telecom
Multimedia Systems, inc. ("TMSI") for approximately $25 million in cash plus the
assumption of certain  liabilities  and  acquisition  costs.  The acquisition is
subject  to  customary  closing  conditions,   including  obtaining   regulatory
approvals and other consents.

This acquisition will be accounted for as a purchase  transaction.  In addition,
Inter-Tel  anticipates that a substantial  portion of the purchase price will be
written off as in-process  research and  development in the quarter in which the
transaction closes.
                                       6                       
<PAGE>
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  provider  of
digital business telephone  systems,  IP telephony  products,  CTI applications,
voice  processing  software  and long  distance  calling  services.  Inter-Tel's
products and services  include the AXXESS and Inter-Tel  Axxent digital business
communication  platforms,  the AXXESSORY  Talk voice  processing  platform,  the
Vocal'Net  IP  telephony  gateway  and the  Inter-Tel.net  private IP  telephony
network. The Company also provides maintenance, leasing and support services for
its products.

         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 increased 26.7% to $63.8 million in the first quarter of 1998
from $50.3 million in the first quarter of 1997. Sales from direct sales offices
accounted  for  approximately  $6.2  million of the  increase,  while  wholesale
distribution sales decreased  approximately  $500,000.  The remaining  increases
occurred in long distance sales and other operations.

         The following table sets forth selected  statements of income data as a
percentage of net sales:

                                                 Three months and year
                                                    Ended March 31,
                                                    1998     1997
                                                    ----     ----

             Net sales                             100.0%   100.0%
             Cost of sales                          51.2     55.9
                                                   -----    -----
             Gross profit                           48.8     44.1
             Research and development                3.8      3.7
             Selling, general and administrative    32.2     31.9
                                                   -----    -----
             Operating income                       12.8      8.5
             Interest and other income               1.5      0.4
             Interest expense                        0.0      0.0
             Income taxes                            5.9      3.6
                                                   -----    -----
             Net income                              8.4%     5.3%
                                                   -----    -----

         Gross  profit for the first  quarter of 1998  increased  40.5% to $31.1
million,  or 48.8% of net sales,  from $22.2 million,  or 44.1% of net sales, in
the first quarter of 1997. The increase in gross margin was  attributable to the
different  sales mix of  products  and  services,  and sales  through  different
distribution  channels. In particular,  the Company received higher margins from
sales of AXXESS digital  communication  platforms,  and related call  processing
software and voice  processing  software,  offset,  in part, by lower margins on
sales through dealer channels and sales of long distance calling services.
                                       7
<PAGE>
         Research  and  development  expenses  for  the  first  quarter  of 1998
increased  31.6% to $2.4 million,  or 3.8% of net sales,  from $1.8 million,  or
3.7% of net sales,  for the first  quarter of 1997.  This increase was primarily
attributable to expenses relating to the continued development of the AXXESS and
Inter-Tel  Axxent software and systems,  unified  messaging and voice processing
software,  Inter-Tel.Net and Vocal'Net server, and CTI applications. The Company
expects that  research and  development  expenses  will  continue to increase in
absolute  dollars as the Company  continues to develop and enhance  existing and
new technologies and products. These expenses may vary, however, as a percentage
of net sales.

         Selling,  general and  administrative  expenses in the first quarter of
1998 increased to $20.5 million,  or 32.2% of net sales, from $16.1 million,  or
31.9% of net sales,  in the first  quarter  of 1997.  This  reflected  increased
selling,  incentive,  training and other  compensation costs attributable to the
increased sales through the Company's direct sales offices, additional personnel
and marketing expenses to support the operations of Inter-Tel.net,  the expanded
direct  dealer  network and  expanded  long  distance  operations,  and expenses
associated  with the expansion of  international  operations.  In addition,  the
Company increased its sales and technical training staff and incurred additional
consulting   expenses  during  the  transition  to  and  implementation  of  the
management  information systems.  The Company expects that selling,  general and
administrative  expenses  will increase in absolute  dollars,  but may vary as a
percentage of net sales.

         Interest  and  other  income in both  periods  consisted  primarily  of
interest income and foreign  exchange rate gains and losses and increased in the
first quarter of 1998  primarily due to the investment of proceeds from the 1997
follow-on public offering of the Company's Common Stock.

         Net income for the first quarter of 1998 was $5.4 million,  or $.19 per
diluted share ($.20 per share-basic), compared to net income of $2.7 million, or
$.10 per diluted share ($.10 per  share-basic) for the first quarter of 1997, an
increase of 100.8%.

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  anticipated
increased  sales  in Japan  and  Asia  and  elsewhere  could  result  in  higher
international  sales  as a  percentage  of  total  revenues,  but  international
revenues are currently not significant.

Liquidity and Capital Resources

         At  March  31,  1998,  the  Company  had  $91.0  million  in  cash  and
equivalents,  which  represents  a increase of  approximately  $2.2 million from
December 31, 1997. The Company maintains a $7.0 million unsecured revolving line
of credit with Bank One, Arizona, NA. This credit facility is annually renewable
and is available  through July 31, 1998. Under the 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.  In December  1997,  the Company
received  net  proceeds  of  approximately  $59.2  million  from a public  stock
offering of  3,000,000  shares.  The  proceeds may be used to develop and expand
Inter-Tel.net  and for  potential  acquisitions,  strategic  alliances,  working
capital and general corporate purposes.

         Net cash provided by operating  activities totaled $4.8 million for the
three months ended March 31, 1998,  compared to $5.4 million for the same period
in 1997.  The operating cash flow in the first quarter of 1998 was primarily the
result of profitable  operations including non-cash  depreciation  charges. Cash
used in  operating  assets and  liabilities  increased in the three month period
                                       8
<PAGE>
ended March 31, 1998 to $3.5  million,  compared to cash used of $166,000 in the
same period of 1997.  During the first  quarter of 1998,  increases  in accounts
receivable  and  investment in  sales-leases  were  partially  offset by reduced
inventories.  The Company continues to expand sales to its dealer network, which
has  required  and is  expected  to  continue  to require  working  capital  for
increased accounts receivable and inventories.

         Net cash used in investing activities, primarily in the form of capital
expenditures,  totaled  $2.8  million in the three  months ended March 31, 1998,
compared to $2.5 million for the same period of 1997. Capital  expenditures were
related  primarily to the  expansion of  facilities,  equipment  and  management
information systems used in operations.

         Net cash provided by financing activities totaled $190,000 in the three
months  ended  March 31,  1998  compared to $73,000 for the same period in 1997,
related  primarily  to proceeds  from the exercise of stock  options,  less cash
dividends paid.

         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  $104.5  million  remain  unbilled  at March 31,  1998.  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.

         On May 11,  1998,  the  Company  agreed to purchase  certain  assets of
Telecom Multimedia Systems,  Inc. ("TMSI") for approximately $25 million in cash
plus  the  assumption  of  certain   liabilities  and  acquisition   costs.  The
acquisition  is subject to customary  closing  conditions,  including  obtaining
regulatory approvals and other consents.

         The Company believes that the net proceeds from the Company's  offering
of  3,000,000  shares of Common  Stock  completed  on  December  1, 1997 and its
working  capital  and  credit  facilities,  together  with 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 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.

Impact of Recently Issued Accounting Standards

         In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an  Enterprise  and  Related  Information"  ("SFAS  No.  131").  SFAS No. 131
establishes  standards  for the way  that  public  business  enterprises  report
information about operating segments in annual financial statements and requires
that those enterprises  report selected  information about operating segments in
interim financial reports issued to shareholders.  It also establishes standards
for related disclosures about products and services, geographic areas, and major
customers.  SFAS No. 131 is effective for financial  statements for fiscal years
beginning  after  December 15, 1997. The adoption of SFAS 131 is not expected to
have an impact on the Company's  consolidated  results of operations,  financial
position or cash flows.

         As of January 1, 1998,  the Company  adopted  SFAS No. 130,  "Reporting
Comprehensive  Income" ("SFAS No. 130").  SFAS No. 130 establishes new rules for
the reporting and display of  comprehensive  income and its components;  however
the  adoption of this  Statement  had no impact on the  Company's  net income or
shareholders' equity. SFAS No. 130 requires unrealized gains or losses
                                       9
<PAGE>
on the  Company's  foreign  currency  translation  adjustments,  which  prior to
adoption were  reported  separately  in  shareholders'  equity to be included in
other  comprehensive  income.  During the first  quarter  of 1998 and 1997,  the
amounts were not material.

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 eighteen to twenty-four  months, the Company introduced
unified  messaging  on its  AXXESSORY  Talk  platform,  developed  a  number  of
enhancements  to its existing AXXESS and AXXESSORY Talk platforms and introduced
Inter-Tel  Vocal'Net.  The  Company  is also  currently  in the later  stages of
developing the AXXESS 5.0 platform,  which is a significant software upgrade and
enhancement to its AXXESS and AXXESSORY  Talk  platforms.  The Company's  future
success will depend, in large part, upon the timely and successful  introduction
of the AXXESS 5.0 platform.  The Company's  future success will also depend upon
market acceptance of the Company's other new products or enhancements, including
Inter-Tel Vocal'Net and certain products that the Company has agreed to purchase
from  TMSI.  There  can be no  assurance  that  these  introduced  products  and
enhancements  will be successful.  In the event that the Company were to fail to
successfully  introduce  new  software,  products or services or upgrades to its
existing  systems or  products  on a regular  and timely  basis,  demand for the
Company's  existing software,  products and services could decline,  which could
have a material adverse effect on the Company's  business and operating results.
Further,  if the markets for IP network  products  or CTI  applications  fail to
develop or grow more slowly than the Company  anticipates,  or if the Company is
unable  for  any  reason  to  capitalize  on  any  of  these   emerging   market
opportunities,  the  Company's  business,  financial  condition  and  results of
operations could be materially adversely affected.

         Occasionally,  new products contain undetected program errors or "bugs"
when released.  Such bugs may result from defects contained in software products
offered by the  Company's  suppliers or other third parties that are intended to
be compatible with the Company's products,  over which the Company has little or
no control.  Although  the Company  seeks to minimize  the number of bugs in its
products by its test procedures and quality  control,  there can be no assurance
that its new products will be error free when introduced.  Any significant delay
in the commercial introduction of the Company's products due to bugs, any design
modifications required to correct bugs or any impairment
                                       10
<PAGE>
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.

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 are
subject to a high degree of  uncertainty.  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, there can be no
assurance that the Company's  products,  and particularly  Inter-Tel  Vocal'Net,
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 certain products that
the Company has agreed to purchase from TMSI will not violate telecommunications
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 existing federal government
regulations or result in the imposition of new government regulations, either in
the United States or elsewhere.
                                       11
<PAGE>
Risks   Associated  with  Inter-Tel   Vocal'Net;   Dependence  Upon  IP  Network
Infrastructures; Risk of System Failure; Security Risks

         In September 1997, the Company began  commercial  shipment of Inter-Tel
Vocal'Net,  its stand-alone IP telephony gateway product and, to date,  revenues
from the sale of this  product  have not been  significant.  To  achieve  market
acceptance, Inter-Tel Vocal'Net and certain products that the Company has agreed
to  purchase  from TMSI will be  required to  demonstrate  their  functionality,
scalability and  reliability,  of which there can be no assurance.  In addition,
there  can be no  assurance  that  these  products  will  comply  with  industry
standards  or that  industry  standards  will not change  and  render  Inter-Tel
Vocal'Net or TMSI 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  certain  products  that the
Company has agreed to  purchase  from TMSI 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 Vocal'Net  Centralized  Accounting
Software  ("CAS") and certain  products  that the Company has agreed to purchase
from TMSI 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
to develop and expand its own IP network, Inter-Tel.net, to carry voice traffic.
The  Inter-Tel.net   network  is  in  its  initial  stages  of  deployment  and,
accordingly,  is subject to a high degree of risk.  To date,  the  Inter-Tel.net
network  has  established  points of  presence  in the San  Francisco  Bay Area,
Washington,  D.C.,  Chicago,  New York, Phoenix,  Reno and Los Angeles.  Certain
products that the Company has agreed to purchase from TMSI may also subsequently
be  deployed in this  network.  If the market for IP network  products  fails to
develop or develops  more slowly than the  Company  anticipates,  the  Company's
Inter-Tel.net  network  could  become  financially  burdensome  to  maintain  or
obsolete,  either of which could  materially and adversely  affect the Company's
business, financial condition and results of operations.

         The Company is dependent on third-party suppliers of telecommunications
and Internet network  transmission  services for implementation of Inter-Tel.net
and does not  currently  have  long-term  contracts  with  such  suppliers.  The
Company's  ability to expand  Inter-Tel.net  is  dependent  upon its  ability to
obtain services from such suppliers.  Certain of these third party suppliers are
or may become competitors of the Company,  and such suppliers  generally are not
subject to restrictions  upon their ability to compete with the Company.  To the
extent that any of these  suppliers  raise their rates or change  their  pricing
structure,  the Company may be materially adversely affected.  Also, the Company
faces the risk that there will be a disruption in the service  provided by these
suppliers, and can give
                                       12
<PAGE>
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  that the  Company has agreed to
purchase from TMSI,  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  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  Telecommunications  Act and AT&T's  decision to divide itself 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,  Centigram,  Lucent and other
competitors,  certain of which have  significantly  greater  resources  than the
Company. In the market for long distance services,  the Company competes against
AT&T,  MCI,  Sprint  Corporation,  Qwest  Communications  Corporation  and other
competitors,  many of  which  have  significantly  greater  resources  than  the
Company.  The Company will also compete with RBOCs, cable television  companies,
satellite and other wireless  broadband service  providers,  and others for long
distance business as those companies gradually respond to the Telecommunications
Act.  Key  competitive  factors in the sale of  telephone  systems  and  related
applications  include price,  performance,  features,  reliability,  service and
support, name recognition and distribution capability. The Company believes that
it competes favorably in its markets with respect to the price,  performance and
features of its  systems,  as well as the level of service and support  that the
Company  provides to its customers.  Certain of the Company's  competitors  have
significantly  greater name recognition and distribution  capabilities  than the
Company,  although  the Company  believes  that it has  developed a  competitive
distribution  presence in certain markets,  particularly those where the Company
has direct sales offices.  The Company expects that competition will continue to
be  intense  in the  markets  addressed  by the  Company,  and  there  can be no
assurance that the Company will be able to continue to compete successfully.
                                       13
<PAGE>
         In the market for IP telephony  products,  the Company competes against
existing IP telephony  gateway providers such as Lucent,  NetSpeak  Corporation,
VocalTec  Communications  Ltd.,  Vienna Systems  Corporation and several others.
Several of these  competitors  have been active in  developing  and marketing IP
telephony  products  for a  greater  period of time  than the  Company  and have
already  established  relationships  with  customers  within  their  market.  In
addition,  the Company will face  significant  competition  from vendors such as
Cisco Systems, Inc., Bay Networks,  Inc., 3Com Corporation,  Motorola,  Inc. and
MICOM  Communications  Corp., as these  established data vendors choose to enter
the market for IP telephony products.  Such companies currently produce products
that, if equipped with voice capabilities, could represent a considerable threat
to the Company within that market. Moreover,  should the market for IP telephony
products become fully developed or develop at a rapid rate, large companies such
as IBM and Microsoft 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,  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.  A number  also have  greater  name
recognition  and  a  larger   installed  base  of  products  than  the  Company.
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.

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.

         During the fourth  quarter of 1996,  the  Company  determined  that the
limitations  of the  existing  system  software  would  prevent  Inter-Tel  from
establishing an integrated and centralized dispatch and telemarketing center. As
a result, the Company signed an agreement with a large, established software and
database vendor to replace its existing MIS software and implement, maintain and
support   alternate  MIS  software  to  be  utilized   throughout  the  Company.
Accordingly,  during  the  fourth  quarter of 1996,  the  Company  wrote off the
software license and implementation  costs relating to the system software being
replaced. The Company plans to broadly utilize the new MIS software beginning in
the second quarter of 1998.

         The  actions to replace the MIS  software  could  result in  additional
costs and delays  associated  with  obtaining  a fully  functional  MIS  system,
including  but not limited to the costs of  procuring  additional  or  alternate
hardware  and  software  required  but  not  available  in  the  current  system
configuration,  and  additional  personnel.  Any such cost or delay could have a
material  adverse  effect on the  Company's  business,  financial  condition and
operating results.  In addition,  implementation of this system software and the
transition  from the  current  system  software  to the new  information  system
software will require substantial financial resources, time and personnel.
                                       14
<PAGE>
         The Company has made strategic  acquisitions in the past and expects to
continue to do so in the future. On May 11, 1998, the Company agreed to purchase
certain assets of TMSI for cash of approximately $25 million plus the assumption
of certain liabilities and acquisition costs. Acquisitions require a significant
amount of the Company's  management  attention  and  financial  and  operational
resources,  all of which  are  limited.  The  integration  of TMSI or any  other
acquired  entities  may also  result in  unexpected  costs and  disruptions  and
significant  fluctuations in, or reduced  predictability  of, operating  results
from period to period.  There can be no assurance that an  acquisition  will not
adversely  affect the  business  relationships  of the  Company or the  acquired
entity with its  respective  suppliers or  customers.  Further,  there can be no
assurance  that the Company will be able to  successfully  integrate TMSI or any
other  acquired  operations  or  achieve  any of  the  intended  benefits  of an
acquisition. The Company's failure to manage its growth effectively could have a
material  adverse  effect on its  business,  financial  condition  and operating
results.

Dependence Upon Contract Manufacturers and Component Suppliers

         The Company currently  procures certain  components used in its digital
communication platforms, including certain microprocessors, integrated circuits,
power supplies,  voice processing  interface cards and IP telephony cards from a
single  source  or  limited   sources  of  supply  and,   accordingly,   product
availability could be limited.  As the Company deploys its IP telephony products
and the Inter-Tel.net  network,  the Company expects that it will be required to
increasingly rely upon third party software and hardware suppliers.  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  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 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,  financial condition and
operating  results.  The Company has no long term  agreements with its suppliers
that require  such  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.

Product Protection and Infringement

         The Company's  future success will depend in part upon its  proprietary
technology.  Although the Company has 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 currently has no issued 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 patent,  trademark or
copyright owned by or applied for by the Company,  or any intellectual  property
of TMSI  that the  Company  has  agreed  to  purchase, will not be  invalidated,
circumvented  or challenged or that the rights granted  thereunder  will provide
meaningful  protection or any commercial  competitive  advantage to the Company.
Further,  there can be no  assurance  that others will not develop  technologies
that are similar or superior to the Company's  technology or that  duplicate the
Company's  technology.  As the  Company  expands its  international  operations,
effective  intellectual  property  protection  may be  unavailable or limited in
certain foreign countries. There can be no assurance that the steps taken by the
Company will  prevent  misappropriation  of its  technology.  Litigation  may be
necessary in the future to
                                       15
<PAGE>
enforce the Company's  intellectual  property  rights,  to protect the Company's
trade secrets,  to determine the validity and scope of the proprietary rights of
others,  or to  defend  against  claims  of  infringement  or  invalidity.  Such
litigation  could result in  substantial  costs and  diversion of resources  and
could  have a  material  adverse  effect on the  Company's  business,  financial
condition and operating results.

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

Reliance on Dealer Network

         A  substantial  portion of the Company's net sales are made through its
network of independent dealers. The Company faces intense competition from other
telephone system and voice  processing  system  manufacturers  for such dealers'
business, as most of the Company's dealers carry products which compete with the
Company's  products.  The Company has no  exclusive  agreements  with any of its
dealers. 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,  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.

Risks of Providing Long Distance and Network Services

         Inter-Tel  depends on its  supply of  telecommunications  services  and
information  from  several  long  distance  carriers.  Because  it does  not own
transmission facilities, the Company relies on long distance carriers to provide
network services to the Company's  customers and for billing  information.  Long
distance services are subject to extensive and uncertain governmental regulation
on both  the  federal  and  state  level.  There  can be no  assurance  that the
promulgation of certain regulations will not materially and adversely affect the
Company's business,  financial  condition and operating results.  Contracts with
the long distance  carriers from which the Company  currently  resells  services
typically  have  multi-year  terms in which the Company's  prices are relatively
fixed and have minimum use  requirements.  The market for long distance services
is  currently   experiencing  and  is  expected  to  experience  in  the  future
significant price competition, resulting in decreasing end-user rates. There can
be no assurance that the Company will meet minimum use commitments, will be able
                                       16
<PAGE>
to negotiate  lower rates with carriers in the event of any decrease in end user
rates or will be able to extend its  contracts  with long  distance  carriers at
prices favorable to the Company. The Company's ability to continue to expand its
long distance  services  depends upon its ability to continue to secure reliable
long  distance  services  from a  number  of  long  distance  carriers  and  the
willingness of such carriers to continue to provide telecommunications  services
and billing information to the Company on favorable terms.

Potential Fluctuations In Quarterly Results; Limited Backlog

         The  Company's  quarterly  operating  results  depend upon a variety of
factors,  including the volume and timing of orders received during the quarter,
the  mix of  products  sold,  mix of  distribution  channels,  general  economic
conditions, patterns of capital spending by customers, the timing of new product
announcements  and  releases  by  the  Company  and  its  competitors,   pricing
pressures, the cost and effect of acquisitions, and the availability and cost of
products and components from the Company's  suppliers.  The Company's  customers
typically require immediate shipment and installation of platforms and software.
As a result,  the Company has  historically  operated  with a  relatively  small
backlog,  and  sales  and  operating  results  in any  quarter  are  principally
dependent  on  orders  booked  and  shipped  in that  quarter.  Historically,  a
substantial  portion of the  Company's  net sales in a given  quarter  have been
recorded in the third month of the  quarter,  with a  concentration  of such net
sales in the last two weeks of the  quarter.  Market  demand for  investment  in
capital  equipment such as digital  communication  platforms and associated call
processing and voice processing  software  applications is largely  dependent on
general economic conditions,  and can vary significantly as a result of changing
conditions in the economy as a whole. The Company's  expense levels are based in
part  on  expectations  of  future  sales  and,  if  sales  levels  do not  meet
expectations,  operating results could be adversely  affected.  Because sales of
digital  communication  platforms  through the Company's  dealers  produce lower
gross  margins  than sales  through the  Company's  direct  sales  organization,
operating  results have varied,  and will continue to vary based upon the mix of
sales  through  direct and indirect  channels.  Although the Company to date has
been able to resell the rental  streams from leases under its Totalease  program
profitably and on a substantially current basis, the timing and profitability of
lease  resales  from  quarter  to  quarter  could  impact   operating   results,
particularly  in an  environment of fluctuating  interest  rates.  Long distance
sales,  which have lower gross margins than the Company's  core  business,  have
grown in recent  periods at a faster rate than the Company's  overall net sales.
As a result,  gross margins  could be adversely  affected in the event that long
distance calling services  continue to increase as a percentage of net sales. In
addition, the Company is subject to seasonality in its operating results, as net
sales  for  the  first  and  third  quarters  are  frequently  less  than  those
experienced,  in the fourth and second  quarters,  respectively.  As a result of
these and other factors,  the Company has in the past experienced,  and could in
the  future  experience,  fluctuations  in  sales  and  operating  results  on a
quarterly  basis.  See  "Management's   Discussion  and  Analysis  of  Financial
Condition and Results of Operations."

Volatility of Stock Price

         The  market  price  for the  Company's  Common  Stock  has been  highly
volatile.   The  Company   believes  that  factors  such  as   announcements  of
developments  relating to the Company's business,  fluctuations in the Company's
operating  results,  shortfalls  in revenue or earnings  relative to  securities
analysts'  expectations,  announcements  of  technological  innovations  or  new
products or enhancements by the Company or its competitors,  general  conditions
in the telecommunications industry 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
                                       17
<PAGE>
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 Compliance

         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,  in less
than two years, 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  compliance.  

         The Company has  evaluated its level of exposure to the risks and costs
associated  with Year 2000  problems and is currently in the process of updating
its information  systems to be Year 2000  compliant.  The total costs of the new
information systems software implementation are currently being capitalized; and
the Company does not currently  anticipate  that the costs of becoming Year 2000
compliant will be material.  The Company expects its  information  systems to be
Year 2000 compliant by the end of fiscal 1999, and anticipates no disruptions in
the  services it provides to its  customers  as a result of Year 2000  problems.
However,  no assurance  can be given that the Company's  software  products 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.  Any  disruption  in services  provided by the Company as a result of
Year  2000  noncompliance  would  materially   adversely  affect  the  Company's
business,  financial condition and results of operations.  Moreover, the Company
could be  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 compliance. These expenditures may result
in reduced funds available to purchase  software  products such as those offered
by the Company.  Many  potential  customers may also choose to defer  purchasing
Year 2000 compliant 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  companies  to  accelerate  purchases,  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.
                                       18
<PAGE>
Concentration of Ownership

         As of March 31, 1998, Steven G. Mihaylo,  the Company's Chairman of the
Board of Directors and Chief Executive Officer  beneficially owned approximately
20% of the  outstanding  shares of the  Common  Stock.  As a result,  he has the
ability to exercise  significant  influence over 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

ITEM 3.  DEFAULTS ON SENIOR SECURITIES--Not Applicable

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

              1.  On  April  23,  1998,  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             22,705,275           27,550
              J. Robert Anderson            22,696,653           36,172
              Gary D. Edens                 22,699,953           32,872
              Maurice H. Esperseth          22,702,322           30,503
              C. Roland Haden               22,705,497           27,328
              Norman Stout                  22,701,953           30,872

ITEM 5.  OTHER INFORMATION--Not Applicable

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K:

              Exhibits:
                  11.1     Computation of Earnings per Share
                  27       Financial Data Schedule


              Reports on Form 8-K:
                  No reports filed during quarter
                                       19
<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



May 14, 1998                                    /s/  Steven G. Mihaylo
---------------                               --------------------------
                                                     Steven G. Mihaylo
                                                     Chairman of the Board and
                                                     Chief Executive Officer



May 14, 1998                                    /s/  Kurt R. Kneip
---------------                               --------------------------
                                                     Kurt  R. Kneip
                                                     Vice President and
                                                     Chief Financial Officer
                                       20