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, 1997                                              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

            (23,553,942 shares outstanding as of September 30, 1997)

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
         1997 and December 31, 1996
                                                                              
         Condensed consolidated statements of income--three                    4
         and nine months ended September 30, 1997 and
         September 30, 1996
                                                                              
         Condensed consolidated statements of cash flows                       5
         --three and nine months ended September 30, 1997 and
         September 30, 1996

         Notes to condensed consolidated financial                             6
         statements--September 30, 1997

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

PART II. OTHER INFORMATION                                                    22

SIGNATURES                                                                    22

EXHIBIT 11.1                                                                  23
                                       2
<PAGE>
PART I. FINANCIAL INFORMATION

INTER-TEL, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS  (Unaudited)

(In thousands)                                September 30,       December 31,
                                                  1997               1996
                                                  ----               ----
ASSETS                                                        
CURRENT ASSETS                                                
     Cash and equivalents                      $  22,188          $  38,936
     Accounts receivable -- net                   31,171             29,998
     Inventories                                  24,173             21,280
     Net investment in sales-leases                9,843              8,243
     Prepaid expenses and other assets             5,606              7,008
                                               ---------          ---------
     TOTAL CURRENT ASSETS                         92,981            105,465
                                                              
PROPERTY & EQUIPMENT                              16,134             11,189
OTHER ASSETS                                      16,167             15,957
                                               ---------          ---------
                                               $ 125,282          $ 132,611
                                               =========          =========
                                                              
LIABILITIES AND SHAREHOLDERS' EQUITY                          
CURRENT LIABILITIES                                           
     Accounts payable                          $  13,482          $   8,915
     Other current liabilities                    17,293             16,841
                                               ---------          ---------
     TOTAL CURRENT LIABILITIES                    30,775             25,756
                                                              
DEFERRED TAX LIABILITY                            10,710              8,635
OTHER LIABILITIES                                  4,254              3,286
                                                              
SHAREHOLDERS' EQUITY                                          
     Common stock                                 60,473             59,875
     Retained earnings                            42,441             35,464
     Equity adjustment for foreign                            
         currency translation                       (314)              (359)
                                               ---------          ---------
                                                 102,600             94,980
     Less:                                                    
        Treasury stock at cost                   (23,057)              --
        Receivable from Employee                              
         Stock Ownership Trust                      --                  (46)
                                               ---------          ---------
     TOTAL SHAREHOLDERS' EQUITY                   79,543             94,934
                                               ---------          ---------
                                               $ 125,282          $ 132,611
                                               =========          =========
                                       3
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

<TABLE>
<CAPTION>
                                                         Three Months                 Nine Months
(In thousands except                                  Ended September 30,         Ended September 30,
per share amounts)                                    1997           1996         1997           1996
                                                      ----           ----         ----           ----
                                                               
<S>                                                <C>            <C>            <C>          <C>      
NET SALES                                          $  56,915      $  47,435      162,061      $ 133,384
Cost of sales                                         30,617         27,819       89,191         75,348
                                                   ---------      ---------    ---------      ---------
GROSS PROFIT                                          26,298         19,616       72,870         58,036
                                                   ---------      ---------    ---------      ---------
                                                                                           
      Research & development                           1,873          1,568        5,852          4,933
      Selling, general and administrative             17,844         13,895       51,035         40,233
                                                   ---------      ---------    ---------      ---------
                                                      19,717         15,463       56,887         45,166
                                                   ---------      ---------    ---------      ---------
                                                                                           
OPERATING INCOME                                       6,581          4,153       15,983         12,870
                                                                                           
      Interest and other income                          106            393          924          1,356
      Interest expense                                   (12)           (10)         (37)           (43)
                                                   ---------      ---------    ---------      ---------
                                                                                           
INCOME BEFORE TAXES                                    6,675          4,536       16,870         14,183
      Income taxes                                     2,697          1,847        6,798          5,811
                                                   ---------      ---------    ---------      ---------
                                                                                           
NET INCOME                                         $   3,978      $   2,689    $  10,072      $   8,372
                                                   =========      =========    =========      =========
                                                                                           
NET INCOME PER SHARE (1):                                                                  
      Primary                                      $    0.16      $    0.10    $    0.39      $    0.31
                                                   =========      =========    =========      =========
      Fully diluted                                $    0.16      $    0.10    $    0.37      $    0.31
                                                   =========      =========    =========      =========
                                                                                           
Average number of common                                                                   
  shares outstanding (1):                                                                  
      Primary                                         25,149         26,886       26,035         26,770
                                                   =========      =========    =========      =========
      Fully diluted                                   25,640         26,910       27,155         26,796
                                                   =========      =========    =========      =========
</TABLE>
                                       4
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

<TABLE>
<CAPTION>
                                                          Three Months                Nine Months
                                                       Ended September 30,        Ended September 30,
(In thousands)                                         1997           1996        1997           1996
                                                       ----           ----        ----           ----
                                                                                             
<S>                                                  <C>            <C>         <C>            <C>     
OPERATING ACTIVITIES                                                                         
     NET INCOME                                      $  3,978       $  2,689    $ 10,072       $  8,372
                                                                                             
     Adjustments to reflect operating activities:                                            
       Depreciation and amortization                    1,051          1,107       3,291          3,002
       Changes in operating assets and liabilities     (1,044)          (863)     (2,488)       (16,999)
       Other                                            2,492          2,209       6,726          4,903
                                                     --------       --------    --------       --------
                                                                                             
     NET CASH PROVIDED BY (USED IN)                                                          
       OPERATING ACTIVITIES                             6,477          5,142      17,600           (722)
                                                                                             
INVESTING ACTIVITIES                                                                         
     Proceeds from disposal of property                                                      
       and equipment                                       76             11          81            143
     Cash used in acquisition                            --             --          (825)          --
     Additions to property and equipment               (1,630)        (2,232)     (8,050)        (4,702)
                                                     --------       --------    --------       --------
                                                                                             
     NET CASH USED IN INVESTING                                                              
       ACTIVITIES                                      (1,554)        (2,221)     (8,794)        (4,559)
                                                                                             
FINANCING ACTIVITIES                                                                         
     Payments for repurchase of common stock           (7,598)          --       (25,091)          --
     Proceeds from exercise of stock options             (810)           105        (463)           591
                                                     --------       --------    --------       --------
                                                                                             
     NET CASH (USED IN) PROVIDED BY                                                          
       FINANCING ACTIVITIES                            (8,408)           105     (25,554)           591
                                                                                             
     INCREASE (DECREASE) IN CASH                                                             
       AND EQUIVALENTS                                 (3,485)         3,026     (16,748)        (4,690)
                                                                                             
CASH AND EQUIVALENTS                                                                         
     AT BEGINNING OF PERIOD                            25,673         31,924      38,936         39,640
                                                     --------       --------    --------       --------
                                                                                             
CASH AND EQUIVALENTS                                                                         
     AT END OF PERIOD                                $ 22,188       $ 34,950    $ 22,188       $ 34,950
                                                     ========       ========    ========       ========
</TABLE>
                                       5
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

September 30, 1997

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,  1997  are not
necessarily  indicative  of the results that may be expected for the year ending
December 31, 1997. 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, 1996.

NOTE B--INCOME PER SHARE

Primary earning 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.

In February 1997, the Financial  Accounting Standards Board issued Statement No.
128,  Earnings Per Share,  which is required to be adopted on December 31, 1997.
At that time,  the Company will be required to change the method  currently used
to compute  earnings per share and to restate all prior  periods.  Under the new
requirements for calculating  primary earnings per share, the dilutive effect of
stock options will be excluded.  The impact is expected to result in an increase
in primary earnings per share for the third quarter ended September 30, 1997 and
September  30,  1996 of $.01 and $.00 per  share  respectively.  The  impact  is
expected  to result in an increase  in primary  earnings  per share for the nine
months  ended  September  30, 1997 and  September  30, 1996 of $.01 and $.02 per
share  respectively.  The impact of Statement  128 on the  calculation  of fully
diluted earnings per share for these quarters is not expected to be material.

NOTE C--EQUITY TRANSACTIONS

All average share and earnings per share calculations have been adjusted for the
Company's  two for one stock  split  effected  in the form of a stock  dividend,
distributed on October 21, 1997 to outstanding shareholders of record on October
7, 1997.

During the second quarter of 1997, the Company also initiated a stock repurchase
program under which the Board of Directors  authorized  the  repurchase of up to
1,470,000  shares (on a pre-split stock basis) of its common stock.  The Company
repurchased the entire 1,470,000  shares.  As of September 30, 1997, the Company
held 1,247,399 shares in treasury. From time to time, the Company reissues these
shares in connection with the exercise of employee stock options.
                                       6
<PAGE>
PART I.

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

Overview

     This  Management's  Discussion  and  Analysis of  Financial  Condition  and
Results of Operations and other parts of this Form 10-Q contain  forward-looking
statements  that  involve  risks  and   uncertainties.   The  words   "expects,"
"anticipates,"  "believes,"  "intends," "will" and similar expressions  identify
forward-looking  statements  which 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  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 in "Factors  that affect
results of future operations" and elsewhere in this Form 10-Q.

     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.

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

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

     The Company's operating results depend upon a variety of factors, including
the volume and timing of orders  received  during a period,  the mix of products
sold and mix of distribution channels, general economic conditions,  patterns of
capital  spending  by  customers,  the timing of new product  announcements  and
releases by the Company and its  competitors,  pricing  pressures,  the cost and
effect of acquisitions  and the availability and cost of products and components
from  the  Company's  suppliers.  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.  In addition,  the Company is subject to  seasonality  in its operating
results,  as net sales for the first and third quarters are frequently less than
those experienced during the fourth and second quarters, respectively.
                                       7
<PAGE>
     The Company offers to its customers a package of lease  financing and other
services  under  the name  Totalease.  Totalease  provides  to  customers  lease
financing,  maintenance  and support  services,  fixed price  upgrades and other
benefits.  The Company  finances  this program  through the  periodic  resale of
monthly lease payments to financial institutions.

Results Of Operations

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

                                     Three Months               Nine months
                                  Ended September 30,       Ended September 30,
                                  1997           1996       1997           1996
                                  ----           ----       ----           ----
                                                                      
      Net Sales                   100.0%        100.0%      100.0%        100.0%
      Cost of sales                53.8          58.6        55.0          56.5
                                  -----         -----       -----         -----
      Gross profit                 46.2          41.4        45.0          43.5
      Research and                                                    
        development                 3.3           3.3         3.6           3.7
      Selling, general                                                
        and administrative         31.4          29.3        31.5          30.2
                                  -----         -----       -----         -----
      Operating Income             11.5           8.8         9.9           9.6
      Interest and other                                              
        income                      0.2           0.8         0.5           1.0
      Interest expense              0.0           0.0         0.0           0.0
      Income taxes                  4.7           3.9         4.2           4.3
                                  -----         -----       -----         -----
      Net income                    7.0           5.7         6.2           6.3
                                  -----         -----       -----         -----
                                                                    
     Net sales for the third  quarter of 1997  increased  20.0% to $57.0 million
from $47.4 million in the third quarter of 1996.  Net sales  increased  21.5% to
$162.1 million in the first nine months of 1997 from $133.4 million in the first
nine months of 1996.  For the quarter and nine months ended  September 30, 1997,
sales from  direct  sales  offices  and  wholesale  distribution  accounted  for
approximately  $6.2  million  and $19.6  million of the  increase  respectively,
compared to the corresponding  periods in 1996. The remaining increases occurred
in network and long distance sales and other operations.

     Gross  profit  for the  third  quarter  of 1997  increased  34.1%  to $26.3
million,  or 46.2% of net sales, from $19.6 million,  or 41.4% of net sales, for
the third quarter of 1996. Gross profit increased to $72.9 million,  or 45.0% of
net sales, in the first nine months of 1997 from $58.0 million,  or 43.5% of net
sales, in the first nine months of 1996. These increases were 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.
In addition,  gross margin  increased  during the third  quarter and nine months
ended  September  30, 1997 based on a percentage  increase in sales  through the
Company's direct sales offices compared to its dealer network.

     Research and  development  expenses for the third quarter of 1997 increased
to $1.9 million,  or 3.3% of net sales, from $1.6 million, or 3.3% of net sales,
for the third quarter of 1996.  Research and development  expenses  increased to
$5.9 million, or 3.6% of net sales, in
                                       8
<PAGE>
the first nine months of 1997 from $4.9 million,  or 3.7% of net sales,  for the
first nine months of 1996.  This dollar  increase was primarily  attributable to
expenses  relating  to the  continued  development  of the AXXESS  software  and
systems, unified messaging and voice processing software, the Vocal'NET, 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 for the third quarter of 1997
increased 28.4% to $17.8 million,  or 31.4% of net sales, from $13.9 million, or
29.3% of net  sales,  for the  third  quarter  of  1996.  Selling,  general  and
administrative  expenses increased to $51.0 million,  or 31.5% of net sales, for
the first nine months of 1997 from $40.2 million, or 30.2% of net sales, for the
first nine months of 1996.  The  increases for the quarter and first nine months
reflected  increased selling,  incentive,  training and other compensation costs
attributable to the increased sales through the Company's  direct sales offices,
additional  personnel to support the direct dealer  network and the expansion of
long distance operations,  development of the Inter-Tel.net Network and expenses
associated  with the expansion of  international  operations.  In addition,  the
Company  increased its sales and technical  training staff,  expanded its credit
management  group and made  increases in reserves for accounts  receivable.  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.   Interest   and  other   income   decreased
approximately  $400,000 in 1997  principally as a result of lower levels of cash
available for investment.

     Net income for the third quarter  increased 47.9% to $4.0 million,  or $.16
per share,  compared to net income of $2.7 million,  or $.10 per share,  for the
third quarter of 1996. Net income increased 20.3% to $10.1 million,  or $.39 per
share, for the first nine months of 1997 compared to net income of $8.4 million,
or $.31 per share, for the first nine months of 1996.

Inflation/Currency Fluctuation

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

Liquidity and Capital Resources

     At  September  30,  1997,  the  Company  had  $22.2  million  in  cash  and
equivalents,  which  represents a decrease of  approximately  $16.7 million from
December 31, 1996. 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.
                                       9
<PAGE>
     Net cash  provided by operating  activities  totaled  $17.6 million for the
nine months ended  September  30,  1997,  compared to net cash used by operating
activities  of  $722,000  for the same  period  in 1996.  The  increase  in cash
generated in 1997 was  primarily the result of  profitable  operations  plus non
cash depreciation  charges and a slightly improved net working capital position.
Net working  capital  improved  principally  due to a $5.0  million  increase in
current  liabilities,  which was  largely  offset  by  accounts  receivable  and
inventory  increases of $4.1 million due to higher revenues and operations.  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.

     Net cash used in  investing  activities,  primarily  in the form of capital
expenditures,  was $8.8  million  and $4.6  million  for the nine  months  ended
September 30, 1997 and 1996, respectively. Capital expenditures and cash used in
an acquisition totaled approximately $8.1 million and $825,000, respectively, in
the first nine months of 1997. The Company anticipates making additional capital
expenditures during the remainder of 1997, which will relate to the expansion of
facilities, equipment and management information systems used in operations.

     Net cash used in financing  activities  totaled  $25.6 million for the nine
months ended  September 30, 1997 compared to net cash  generated of $591,000 for
the same  period  in 1996.  During  the  second  quarter  of 1997,  the  Company
initiated  a stock  repurchase  program  under  which  the  Board  of  Directors
authorized the repurchase of up to 1,470,000 shares (on a pre-Stock Split basis)
of the Common Stock. The Company expended  approximately  $7.6 million and $25.1
million for stock  repurchases  in the third  quarter and the nine months  ended
September 30, 1997,  respectively,  which were funded primarily through existing
cash balances.  The Company  reissued shares with a cost basis of  approximately
$2.1  million  and $4.1  million  in the third  quarter  and nine  months  ended
September  30,  1997,  respectively,  relating  to stock  option  exercises  and
issuances.  The proceeds  received for the stock reissued was less than its cost
basis. Accordingly,  the difference has been recorded as a reduction to retained
earnings.

     The Company  offers to its customers  lease  financing and other  services,
including  its  Totalease  program.  The Company  funds  these  programs in part
through the sale to financial  institutions  of rental income  streams under the
leases.  Resold lease rentals  totaling  $92.0 million and $66.0 million  remain
unbilled at September 30, 1997 and December 31, 1996, 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  its  lease  programs  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 realize losses thereon in
amounts  exceeding  its  reserves,  its  operating  results  will  be  adversely
affected.

     The Company  believes  that the net proceeds  from the  Company's  proposed
follow-on   offering  of  3,000,000  shares  of  Common  Stock  (pursuant  to  a
registration  statement  filed with the  Securities  and Exchange  Commission on
October 31, 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  
                                       10
<PAGE>
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  additional  financing.  There  can be no  assurance  that  additional
financing will be available when required or on acceptable terms. 10

Impact of Recently Issued Accounting Standards

     In February 1997,  the Financial  Accounting  Standards  Board (the "FASB")
issued SFAS No. 128, "Earnings Per Share" ("SFAS No. 128"), which is required to
be adopted on December 31, 1997.  At that time,  the Company will be required to
change the method  currently  used to compute  earnings per share and to restate
all prior periods.  Under the new requirements for calculating  primary earnings
per share, the dilutive effect of stock options will be excluded.  The impact is
expected to result in an increase  in primary  earnings  per share for the third
quarter  ended  September 30, 1997 and September 30, 1996 of $0.01 and $0.00 per
share  respectively.  The impact is expected to result in an increase in primary
earnings per share for the nine months ended  September  30, 1997 and  September
30, 1996 of $0.01 and $0.02 per share  respectively.  The impact of SFAS No. 128
on the calculation of fully diluted earnings per share for these quarters is not
expected to be material.

     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 will have no impact
on the Company's consolidated results of operations,  financial position or cash
flows.

Factors That May Affect Results of Future Operations

This  Form 10-Q  contains  forward-looking  statements  that  involve  risks and
uncertainties.  The  statements  contained in this Form 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,  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 Form 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 in the  following  risk  factors 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.
                                       11
<PAGE>
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 twelve 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  Vocal'Net.  The Company is
also  currently in the later stages of  developing  the AXXESS 5.0  platform,  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  Vocal'Net.  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 either
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.  For example,  in the third quarter of 1996, the Company's operating
results were  adversely  impacted by a recall of the  Inter-Tel  Axxent  digital
communication  platform.  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 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  
                                       12
<PAGE>
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, in particular
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 Vocal'Net 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 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. While the Company
is not aware of any other proposed  legislation or regulation directly affecting
its  business,  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.

Risks  Associated  with  Vocal'Net;  Dependence upon IP Network Infrastructures;
Risk of System Failure; Security Risks

     In September 1997, the Company began commercial shipment of 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,  Vocal'Net
will be required to 
                                       13
<PAGE>
demonstrate its functionality,  scalability and reliability,  of which there can
be no assurance.  In addition,  there can be no assurance  that  Vocal'Net  will
comply with industry  standards or that industry  standards  will not change and
render Vocal'Net  obsolete.  In the event that Vocal'Net fails to achieve market
acceptance,   the  Company's  business,   financial  condition  and  results  of
operations could be materially and adversely affected.

     The success of Vocal'Net  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  Vocal'Net  gateway 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 Vocal'Net  technology to develop and
expand  its own IP  network,  Inter-Tel.net,  to carry  telephone  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  and Los  Angeles.  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 no assurance  
                                       14
<PAGE>
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 Vocal'Net 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  Technologies,  Inc.  ("Lucent") and
Northern Telecom Limited ("NorTel"), as well as Comdial Corporation ("Comdial"),
EXECUTONE  Information  Systems,  Inc.   ("Executone"),   Iwatsu  America,  Inc.
("Iwatsu"),  Mitel  Corporation  ("Mitel"),  NEC  Corporation  ("NEC"),  Nitsuko
Corporation ("Nitsuko"), Matsushita Electric Industrial Co., Ltd. ("Panasonic"),
Siemens Rolm Communications, Inc. ("Siemens"), Toshiba America, Inc. ("Toshiba")
and others.  Many of these  competitors have  significantly  greater  financial,
marketing and technical  resources  than the Company.  The Company also competes
against the regional Bell  operating  companies  ("RBOCs"),  which offer systems
produced by one or more of the aforementioned competitors and also offer Centrex
systems in which automatic  calling  facilities are provided  through  equipment
located in the telephone company's central office.

     The Telecommunications Act of 1996 (the "Telecommunications  Act") and AT&T
Corporation's  ("AT&T") announcement to divide itself into three enterprises has
had  an   impact   on   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
television  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 Applied Voice Technology,  Inc.  ("AVT"),  Active Voice
Corporation    ("Active   Voice"),    Centigram    Communications    Corporation
("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  Communication  Corporation,  Sprint
Corporation  and other  competitors,  many of which have  significantly  greater
resources  than the  Company.  The Company  also  expects to compete with RBOCs,
cable  television  companies,  satellite and other  wireless  broadband  service
providers and others for long  distance  business as those  companies  
                                       15
<PAGE>
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. 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.

     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 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 could face  significant  competition from vendors such as Cisco Systems,
Inc.,  Bay  Networks,   Inc.,  3Com  Corporation,   Motorola,   Inc.  and  MICOM
Communications  Corp.,  should such 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 Corporation ("IBM") and Microsoft Corporation  ("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  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 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 
                                       16
<PAGE>
its overall operations and to continue to improve its operational, financial and
management information systems.

     The  Company  implemented  a new MIS  system  late in 1995.  The MIS system
significantly  affected  many aspects of the Company's  business,  including its
accounting, operations, purchasing, sales and marketing functions. Following the
date of  implementation,  the Company  experienced  difficulty  with the new MIS
software,  which  increased the Company's  costs,  had an adverse  effect on the
Company's  ability to provide products and services to its customers on a timely
basis and caused delays in coordinating accounting and financial results. 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 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.

     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  its  respective
suppliers or customers. Further, there can be no assurance that the Company will
be able to successfully  integrate any 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.  
                                       17
<PAGE>
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 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 the Company will not be invalidated, circumvented or challenged or that
the  rights  granted  thereunder  will  provide  meaningful  protection  or  any
commercial  competitive  advantage  to the  Company.  Further,  there  can be no
assurance that others will not develop technologies that are similar or superior
to the Company's technology or that duplicate the Company's  technology.  As the
Company expands its international  operations,  effective  intellectual property
protection may be unavailable or limited in certain foreign countries. There can
be  no   assurance   that  the  steps   taken  by  the  Company   will   prevent
misappropriation of its technology. Litigation may be necessary in the future to
enforce the Company's  intellectual  property  rights,  to protect the Company's
trade secrets,  to determine the validity and scope of the proprietary rights of
others,  or to  defend  against  claims  of  infringement  or  invalidity.  Such
litigation  could result in  substantial  costs and  diversion of resources  and
could  have a  material  adverse  effect on the  Company's  business,  financial
condition and operating results.

     From  time  to  time,  the  Company  is  subject  to  proceedings  alleging
infringement  by the Company of intellectual  property rights 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  
                                       18
<PAGE>
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 a one year term 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
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 
                                       19
<PAGE>
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  worldwide  economy,  changes  in  legislation  or  regulation
affecting  the   telecommunications   industry,   an  outbreak  of  hostilities,
developments in intellectual  property rights and  developments in the Company's
relationships  with its  customers  and  suppliers  could cause the price of the
Company's Common Stock to fluctuate, perhaps substantially. Many of such factors
are beyond the Company's control. In addition,  in recent years the stock market
in general,  and the market for shares of technology stocks in particular,  have
experienced extreme price  fluctuations,  which have often been unrelated to the
operating performance of affected companies.  There can be no assurance that the
market  price of the  Company's  Common  Stock will not  experience  significant
fluctuations  in the future,  including  fluctuations  that are unrelated to the
Company's performance.
                                       20
<PAGE>
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 three 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.  Although the Company currently offers software
products that are designed to be Year 2000 compliant,  there can be no assurance
that the Company's software products contain all necessary date code changes.

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

Concentration of Ownership

     As of September 30, 1997, Steven G. Mihaylo,  the Company's Chairman of the
Board of Directors and Chief Executive Officer  beneficially owned approximately
23.4% 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.
                                       21
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES

PART II.  OTHER INFORMATION

ITEM l.   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:

          Exhibit 11.1 - Computation of Earnings Per Share

          Exhibit 27.1 - Financial Data Schedule for September 30, 1997

          Reports on Form 8-K -- None

                                   SIGNATURES

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


                                   INTER-TEL, INCORPORATED


Date  11-7-97                      /s/ Steven G. Mihaylo
     ---------                     ------------------------------------
                                   Steven G. Mihaylo, Chairman of the
                                   Board and Chief Executive Officer


Date  11-7-97                      /s/ Kurt R. Kneip
     ---------                     ------------------------------------
                                   Kurt R. Kneip, Vice President and
                                   Chief Financial Officer
                                       22