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

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

                                    FORM 10-Q

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

         For the quarter ended                       Commission File Number:

             June 30, 1997                                   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
               (12,995,478 shares outstanding as of June 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  file  such  reports),   and  (2)  has  been  subject  to  such  filing
requirements for the past 90 days. Yes X  No
                                      ---    ---  
<PAGE>
                                      INDEX

INTER-TEL, INCORPORATED AND SUBSIDIARIES


                                                                      Page

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements (Unaudited)

         Condensed consolidated balance sheets--June 30,                  3
         1997 and December 31, 1996

         Condensed consolidated statements of income--Three               4
         and six months ended June 30, 1997 and June 30, 1996

         Condensed consolidated statements of cash flows                  5
         --Three and six months ended June 30, 1997 and
         June 30, 1996

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

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

PART II.  OTHER INFORMATION                                              17

SIGNATURES                                                               17

EXHIBIT 11.1                                                             18
                                       2
<PAGE>
PART I.  FINANCIAL INFORMATION

INTER-TEL, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(In thousands)                                      June 30,      December 31,
                                                      1997            1996
                                                      ----            ----
ASSETS
CURRENT ASSETS
     Cash and equivalents                            $25,673          $38,936
     Accounts receivable - net                        29,035           29,998
     Inventories                                      23,001           21,280
     Net investment in sales-leases                    8,103            8,243
     Prepaid expenses and other assets                 5,005            7,008
                                                    --------         --------
     TOTAL CURRENT ASSETS                             90,817          105,465

PROPERTY & EQUIPMENT                                  15,660           11,189
OTHER ASSETS                                          17,071           15,957
                                                    --------         --------
                                                    $123,548         $132,611
                                                    ========         ========

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
     Accounts payable                                 10,814           $8,915
     Other current liabilities                        15,330           16,841
                                                    --------         --------
     TOTAL CURRENT LIABILITIES                        26,144           25,756

DEFERRED TAXES AND OTHER LIABILITIES                  13,637           11,921

SHAREHOLDERS' EQUITY
     Common stock                                     60,115           59,875
     Retained earnings                                39,630           35,464
     Equity adjustment for foreign
        currency translation                            (520)            (359)
                                                    --------         --------
                                                      99,225           94,980
     Less:
       Treasury stock at cost                        (15,458)              --
       Receivable from Employee
        Stock Ownership Trust                             --              (46)
                                                    --------         --------
     TOTAL SHAREHOLDERS' EQUITY                       83,767           94,934
                                                    --------         --------
                                                    $123,548         $132,611
                                                    ========         ========
                                       3
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)

<TABLE>
<CAPTION>
(In thousands, except                                   Three Months                  Six Months
per share amounts)                                      Ended June 30,              Ended June 30,
                                                       1997           1996         1997           1996
                                                       -------      -------      --------        -------
<S>                                                    <C>          <C>          <C>             <C>    
NET SALES                                              $54,823      $43,736      $105,145        $85,949
Cost of sales                                           30,422       24,628        58,574         47,529
                                                       -------      -------      --------        -------
GROSS PROFIT                                            24,401       19,108        46,571         38,420

     Research & development                              2,134        1,661         3,979          3,365
     Selling, general and administrative                17,139       13,138        33,191         26,338
                                                       -------      -------      --------        -------
                                                        19,273       14,799        37,170         29,703

OPERATING INCOME                                         5,128        4,309         9,401          8,717

     Interest and other income                             595          517           818            963
     Interest expense                                      (17)         (29)          (24)           (33)
                                                       -------      -------      --------        -------

INCOME BEFORE TAXES                                      5,706        4,797        10,195          9,647
     Income taxes                                        2,282        2,013         4,101          3,964
                                                       -------      -------      --------        -------

NET INCOME                                              $3,424       $2,784        $6,094         $5,683
                                                       =======      =======      ========        =======

NET INCOME PER SHARE                                      $.26        $ .21          $.46          $ .43
                                                       =======      =======      ========        =======

     Average number of shares
         outstanding                                    13,132       13,431        13,239         13,358
                                                       =======      =======      ========        =======
</TABLE>
                                       4
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

<TABLE>
<CAPTION>
(In thousands, except                                     Three Months                 Six Months
per share amounts)                                        Ended June 30,              Ended June 30,
                                                       1997           1996         1997           1996
                                                       -------      -------      -------         -------
<S>                                                    <C>          <C>          <C>             <C>   
OPERATING ACTIVITIES
     NET INCOME                                         $3,424       $2,784       $6,094          $5,683
     Adjustments to reflect operating activities:
       Depreciation and amortization                     1,171          973        2,240           1,894
       Changes in operating assets and liabilities      (1,279)      (8,906)      (1,445)        (16,136)
       Other                                             2,439          565        4,234           2,695
                                                       -------      -------      -------         -------

     NET CASH PROVIDED BY/(USED IN)
       OPERATING ACTIVITIES                              5,755      (4,584)       11,123         (5,864)

INVESTING ACTIVITIES
     Proceeds from disposal of property
       and equipment                                         5          132            5             132
     Cash used in acquisition                               --           --         (825)             --
     Additions to property and equipment                (4,711)        (873)      (6,420)         (2,470)
                                                       -------      -------      -------         -------

     NET CASH USED IN INVESTING
       ACTIVITIES                                       (4,706)        (741)      (7,240)         (2,338)

FINANCING ACTIVITIES
     Payments for repurchase of common stock           (17,493)          --      (17,493)             --
     Proceeds from exercise of stock options               274          397          347             486
                                                       -------      -------      -------         -------

     NET CASH (USED IN)/PROVIDED BY
      FINANCING ACTIVITIES                             (17,219)         397      (17,146)            486

 DECREASE IN CASH AND EQUIVALENTS                      (16,170)      (4,928)     (13,263)         (7,716)

CASH AND EQUIVALENTS
 AT BEGINNING OF PERIOD                                 41,843       36,852       38,936          39,640
                                                       -------      -------      -------         -------

CASH AND EQUIVALENTS
  AT END OF PERIOD                                     $25,673      $31,924      $25,673         $31,924
                                                       =======      =======      =======         =======
</TABLE>
                                       5
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

June 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 six months  ended June 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 10-K for
the year ended December 31, 1996.

NOTE B--INCOME 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.

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 both the second  quarter and six months ended
June 30,  1997 and June 30, 1996 of $.01 and $.01 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--TREASURY STOCK

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  of  the  Company's   common  stock.   The  Company  expended
approximately $17.5 million for stock repurchases in the second quarter of 1997,
which was funded  primarily  by existing  cash  balances.  The Company  reissued
treasury  shares with a cost basis of  approximately  $2.0  million  relating to
stock option  exercises and  issuances.  The proceeds  received for the treasury
stock  reissued was less than its cost basis.  Accordingly,  the difference  has
been recorded as a reduction to retained earnings.
                                       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 solutions  integrator
providing AXXESS and Axxent digital communication platforms, AxxessoryTalk voice
processing  platforms,  call processing  software and voice processing  software
along  with  various  other  productivity   enhancing   software   applications,
computer-telephony  integration  ("CTI"),  network  services  and long  distance
calling  services,  as well as maintenance,  leasing and support  services.  The
Company's  Common Stock is quoted on the Nasdaq National Market under the symbol
INTL.

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

Results of Operations

         Net sales  for the  second  quarter  of 1997  increased  25.3% to $54.8
million from $43.7 million in the second  quarter of 1996.  Net sales  increased
22.3% to $105.1  million in the first six  months of 1997 from $85.9  million in
the first six months of 1996.  For the  quarter  and six  months  ended June 30,
1997, sales from wholesale  distribution and direct sales offices  accounted for
approximately $8.2 million and $13.4 million of the increases, respectively. The
remaining increases occurred in long distance sales and other operations.

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

                         Three Months Ended June 30,   Six Months Ended June 30,
                         ---------------------------   -------------------------
                               1997         1996           1997         1996
                               ----         ----           ----         ---- 

Net Sales                     100.0%       100.0%         100.0%        100.0%
Cost of Sales                  55.5         56.3           55.7          55.3
                               ----         ----           ----          ----
Gross profit                   44.5         43.7           44.3          44.7

Research and development        3.9          3.8            3.8           3.9
Selling, general and
     administrative            31.3         30.0           31.6          30.7
                               ----         ----           ----          ----
Operating income                9.3          9.9            8.9          10.1

Interest and other income       1.1          1.2            0.8           1.1
Interest expense                0.0          0.1            0.0            --
Income taxes                    4.2          4.6            3.9           4.6
                                ----         ----           ----         ----
Net income                      6.2%         6.4%           5.8%          6.6%
                                ====         ====           ====         ====
                                       7
<PAGE>
         Gross profit for the second  quarter of 1997  increased  27.7% to $24.4
million,  or 44.5% of net sales, from $19.1 million,  or 43.7% of net sales, for
the second quarter of 1996. Gross profit increased to $46.6 million, or 44.3% of
net sales,  in the first six months of 1997 from $38.4 million,  or 44.7% of net
sales,  in the first six months of 1996.  Gross  margin  increased in the second
quarter  of 1997  primarily  as a  result  of  higher  sales of  AXXESS  digital
communication platforms,  call processing software and voice processing software
as a percentage of net sales, which was offset in part by a higher percentage of
sales through dealers and increased sales of the Company's  network services and
long distance calling  services,  which generally have a lower gross margin than
sales of the Company's other products.

         Research  and  development  expenses  for the  second  quarter  of 1997
increased to $2.1 million,  or 3.9% of net sales, from $1.7 million,  or 3.8% of
net sales,  for the second quarter of 1996.  Research and  development  expenses
increased to $4.0 million, or 3.8% of net sales, in the first six months of 1997
from $3.4 million,  or 3.9% of net sales,  in the first six months of 1996.  The
increases in absolute  dollars in both periods were  primarily  attributable  to
expenses relating to the development and introduction of new products, including
continuing   development  and   improvement  of  AXXESS  digital   communication
platforms, call processing and voice processing software, CTI products,  unified
messaging,  and TCP/IP  intranet and internet  voice  solutions  (Vocal'Net  and
Inter-Tel.net).  The Company expects that research and development expenses will
continue to increase in absolute dollars as the Company continues to develop new
software and to enhance existing  technologies and products.  These expenses may
vary, however, as a percentage of net sales.

         Selling,  general and administrative expenses for the second quarter of
1997 increased to $17.1 million,  or 31.3% of net sales, from $13.1 million,  or
30.0% of net  sales,  for the  second  quarter  of 1996.  Selling,  general  and
administrative  expenses  increased to $33.2 million,  or 31.6% of net sales, in
the first six months of 1997 from $26.3 million,  or 30.6% of net sales,  in the
first six months of 1996. The increases,  both in dollars and as a percentage of
sales, for the quarter and six months ended June 30, 1997, were  attributable in
part to cost  associated  with increases in sales from the direct sales offices,
which typically  generate higher selling,  general and  administrative  expenses
compared to sales  through  dealer  channels.  The Company also has expanded its
technical training staff,  increased its receivables reserves,  and continues to
hire and train additional sales personnel  throughout  Inter-Tel's  direct sales
offices and to provide  additional  marketing  resources and sales personnel for
the expanded dealer network and for network services and long distance services.
Higher  sales  commissions  were also paid  based upon  increased  levels of net
sales.  The Company expects that selling,  general and  administrative  expenses
will continue to increase in absolute  dollars,  but may vary as a percentage of
net sales.

         Other income in both periods consisted primarily of interest income and
foreign exchange rate gains and losses.  Income from interest decreased slightly
in both comparable  periods of 1997 based on lower invested funds. Other changes
are primarily due to differences in net foreign exchange rate gains and losses.

         Net income for the second quarter increased 23.0% to $3.4 million ($.26
per  share)  compared  to net  income of $2.8  million  ($.21 per share) for the
second quarter of 1996. Net income  increased 7.2% to $6.1 million,  or $.46 per
share, in the first six months of 1997 from $5.7 million,  or $.43 per share, in
the first six months of 1996.
                                       8
<PAGE>
Inflation/Currency Fluctuation

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

Liquidity and Capital Resources

         At  June  30,  1997,   the  Company  had  $25.7  million  in  cash  and
equivalents,  which  represents a decrease of  approximately  $13.3 million from
December 31, 1996.  The Company  maintains a $7.0 million,  unsecured  revolving
line of credit  with Bank One,  Arizona,  NA. The credit  facility  is  annually
renewable and is available through 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.

         Net cash  provided by operating  activities  totaled  $11.1 for the six
months ended June 30, 1997, compared to net cash used by operating activities of
$5.9  million for the same period in 1996.  The increase in cash  generated  was
primarily the result of profitable  operations and reduced accounts  receivable,
which were partially  offset by higher  inventory  levels.  During the first six
months of 1997,  accounts receivable  decreased  approximately  $963,000,  while
inventories increased approximately $1.7 million.  Inventories increased in part
due to higher  revenues and related  requirements  to support  additional  sales
locations.  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 $7.2  million and $2.3  million for the six months ended June
30,  1997 and  1996,  respectively.  Capital  expenditures  and cash  used in an
acquisition totaled  approximately $6.4 million and $825,000,  respectively,  in
the first  six  months  of 1997.  The  Company  anticipates  additional  capital
expenditures  during 1997,  principally  relating to  expansion  of  facilities,
equipment and management information systems used in operations.

         Net cash used in financing activities totaled $17.1 million compared to
net cash  generated of $486,000  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 of
the Company's common stock. The Company expended approximately $17.5 million for
stock  repurchases in the second quarter of 1997,  which was funded primarily by
existing cash balances.  The Company reissued  treasury shares with a cost basis
of approximately  $2.0 million relating to stock option exercises and issuances.
The proceeds  received for the  treasury  stock  reissued was less than its cost
basis. Accordingly, the difference has  been recorded as a reduction to retained
earnings.
                                       9
<PAGE>
         The Company offers to its customers lease financing and other services,
including its Totalease program,  through its Inter-Tel Leasing subsidiary.  The
Company funds these programs in part through the sale to financial  institutions
of rental income streams under the leases.  Resold lease rentals  totaling $84.7
million and $66.0  million  remain  unbilled at June 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 its existing  working  capital,  anticipated
cash flows from  operations  and credit  facilities  will be  sufficient to fund
purchases of capital equipment, finance cash acquisitions,  repurchase shares of
the Company's  common stock which the Company may consider and provide  adequate
working  capital  for  the  foreseeable  future.  However,  to the  extent  that
additional funds are required in the future to address working capital needs and
to provide funding for capital expenditures, stock repurchases, expansion of the
business or additional acquisitions, the Company will seek additional financing.
There can be no assurance  that  additional  financing  will be  available  when
required or on acceptable terms.

Factors That May Affect Results of Future Operations

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

Rapid   Technological   Change  And   Dependence  On  New  And  Timely   Product
Introductions

         The  market  for the  Company's  software,  products  and  services  is
characterized  by rapid  technological  change  and  continuing  demand  for new
products, features and applications.  Current competitors or new market entrants
may develop new products or product  features  that could  adversely  affect the
competitive  position  of  the  Company's  products.   Accordingly,  the  timely
introduction   of  new   products   and  product   features,   as  well  as  new
telecommunications  applications,  will be a key factor in the Company's  future
success.  Occasionally,  new products contain  undetected  errors or "bugs" when
released.  Such bugs may result from  defects  contained  in  software  products
offered by the  Company's  suppliers or other third parties that are intended to
be compatible with the Company's products,  over which the Company has little or
no control.  Although  the Company  seeks to minimize  the number of bugs in its
products by its test  procedures  and strict  quality  control,  there can be no
assurance  that  its new  products  will be  error  free  when  introduced.  Any
significant delay in the commercial  introduction of the Company's  products due
to bugs, any design modifications  required to correct bugs or any impairment of
customer  satisfaction as a result of bugs could have a material  adverse effect
on the Company's business and operating results. In addition, new products often
take  several  months  before their  manufacturing  costs  stabilize,  which may
adversely affect operating results for a period of time following introduction.
                                       10
<PAGE>
         During the past  twelve  months,  the  Company  introduced  ISDN on its
AXXESS digital communication platform, expanded the size of the Inter-Tel Axxent
platform,  introduced  a number of upgrades to its existing  AXXESSORY  Talk and
IVX-500  voice  processing  platforms  and  announced  the  introduction  of the
Vocal'Net  Server  product.  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.
Additionally, there can be no guaranty that future costs of accessibility,  lack
of capacity or voice  transmission  quality of the Internet  will not  adversely
affect the ability of the Company to deliver all Internet  products and services
on a cost  effective  basis.  There can be no assurance that the Company will be
able to successfully develop new software, products, services,  technologies and
applications  on a timely basis as required by changing market needs or that new
software or products or enhancements  thereto,  including its recently announced
products and  upgrades,  when  introduced  by the Company,  will achieve  market
acceptance.

         The Company has recently  developed and  continues to develop  products
designed to address the emerging  market for the  convergence  of voice and data
applications,  or computer  telephony  integration.  If the  computer  telephony
integration  ("CTI")  market  fails to  develop or grows  more  slowly  than the
Company anticipates, or if the Company is unable for any reason to capitalize on
this emerging market  opportunity,  the Company's business and operating results
could be materially adversely affected.

Dependence Upon Contract Manufacturers and Component Suppliers

         Certain   components  used  in  the  Company's  digital   communication
platforms,   including  certain  microprocessors,   integrated  circuits,  power
supplies and voice processing  interface  cards, are currently  available from a
single source or limited sources of supply,  and product  availability  could be
limited. In addition,  the Company currently manufactures its products through a
limited  number of  contract  manufacturers  located in the United  States,  the
Philippines and the People's Republic of China. Foreign manufacturing facilities
are  subject to changes in  governmental  policies,  imposition  of tariffs  and
import  restrictions  and other  factors  beyond the Company's  control.  Varian
Associates,  Inc. ("Varian") currently manufactures a significant portion of the
Company's products at Varian's Tempe, Arizona facility,  including substantially
all of the  printed  circuit  boards  used in the  AXXESS and  Inter-Tel  Axxent
digital communications platforms. From time to time, the Company has experienced
delays in the  supply of  components  and  finished  goods,  and there can be no
assurance  that the Company will not experience  such delays in the future.  The
Company's reliance on third party manufacturers  involves a number of additional
risks, including reduced control over delivery schedules,  quality assurance and
costs.  Any delay in delivery or  shortage of supply of  components  or finished
goods from Varian or any other supplier,  or the Company's  inability to develop
in a timely manner alternative or additional sources if and when required, could
damage the Company's  relationships  with current and prospective  customers and
could  materially  and  adversely  affect the  Company's  business and operating
results. The Company has no long term agreements with its suppliers that require
the suppliers to provide fixed quantities of components or finished goods at set
prices.  There can be no assurance  that the Company will be able to continue to
obtain  components or finished  goods in sufficient  quantities or quality or on
favorable pricing and delivery terms in the future.
                                       11
<PAGE>
Competition

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

         The Telecommunication Act of 1996 and the division of AT&T's operations
into three  enterprises  has had an impact on competition  in the  communication
industry.  The Telecommunication Act of 1996 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 operators can now offer telephone services and Internet access.
These changes will increase  competition in the communication  industry and will
create additional competition and opportunities in customer premise equipment as
these new services and interfaces  become  available.  As the Company enters the
markets for local telephone service and Internet 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.

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

         In the market for long distance services,  the Company competes against
AT&T Corp., MCI  Telecommunications  Corporation,  Sprint  Corporation and other
suppliers,  certain of which also supply the long  distance  calling and network
services that the Company  resells.  Although the Company  acquires a variety of
long  distance  calling  services in bulk from certain 
                                       12
<PAGE>
long distance carriers,  there can be no assurance that the Company will be able
to purchase long distance  calling  services on favorable terms from one or more
of such  providers  in the  future.  In  addition,  a  substantial  majority  of
prospective new long distance  customers for the Company currently purchase long
distance calling services from the Company's  competitors.  The Company believes
that it is likely to face  increased  competition  in the long distance  calling
services market as a result of  telecommunications  deregulation,  which enables
RBOCs to supply long distance  calling and network  services,  and enables RBOCs
and others to bundle long  distance,  local  telephone  and  wireless  services.
Moreover,  the  Company  expects  to face  increased  competition  in the future
because low technical barriers to entry will allow new market entrants.

         As Inter-Tel  develops  more  server-based  and CTI  telecommunications
products,   Inter-Tel  will  face  competition  from  large  computer   software
companies,  including IBM (Lotus), and Microsoft.  In addition, the server-based
telephony,  internet telephony and CTI markets have shown increasing competition
from small start-up software companies.

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

Management of Growth; Implementation of New Management Information Systems

         The growth in the  Company's  business  has placed,  and is expected to
continue to place, a significant strain on the Company's  personnel,  management
and  other  resources.  The  Company's  ability  to  manage  any  future  growth
effectively will require it to attract, train, motivate and manage new employees
successfully,  to integrate new  employees  into 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
system  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,  during the fourth quarter of 1996, the Company decided to
replace  its  MIS  system  software  with  an  integrated  solution  from a more
established   vendor  and  accordingly   wrote  off  the  software  license  and
implementation  costs relating to the system software being replaced.  Inter-Tel
signed an agreement with a large,  established  software and database  vendor to
implement,  maintain and support  alternate  MIS system  software to be utilized
throughout the Company.
                                       13
<PAGE>
         The  actions  to  replace  the MIS  system  software  could  result  in
additional  costs  and  delays  in  obtaining  a fully  functional  MIS  system,
including  but not limited to  additional  or  alternate  hardware  and software
required, but not available in the current system configuration,  and additional
personnel,  which could have a material adverse effect on the company's business
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 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  their  respective
suppliers or customers. Further, there can be no assurance that the Company will
successfully  integrate  the acquired  operations or achieve any of the intended
benefits  of  an  acquisition.  The  Company's  failure  to  manage  its  growth
effectively  could have a material  adverse effect on its business and operating
results.

Product Protection and Infringement

         The Company's  future success is dependent in part upon its proprietary
technology. The Company relies principally on copyright and trade secret law and
contractual  provisions to protect its  intellectual  property.  There can be no
assurance  that any  copyright  owned by the  Company  will not be  invalidated,
circumvented  or challenged or that the rights granted  thereunder  will provide
competitive  advantages to the Company.  Further, there can be no assurance that
others  will not  develop  technologies  that are  similar  or  superior  to the
Company's technology or that duplicate the Company's technology.

         As  the  Company  expands  its  international   operations,   effective
intellectual  property  protection  may be  unavailable  or  limited  in certain
foreign countries. There can be no assurance that the steps 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 or delays in product  introductions  or decisions to discontinue
development,  manufacture or sale of such products,  could result in substantial
costs and diversion of resources and could have a material adverse effect on the
Company's business and operating results.

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  
                                       14
<PAGE>
network,  could have a material  adverse  effect on the  Company's  business and
operating results.

Risks of Providing Long Distance and Network Services

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

Dependence on Key Personnel

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

Possible Volatility of Stock Price

             The  Company   believes  that  factors  such  as  announcements  of
developments  relating to the Company's business,  fluctuations in the Company's
operating results, general conditions in the telecommunications  industry or the
worldwide   economy,   changes  in  legislation  or  regulation   affecting  the
telecommunications  industry, an outbreak of hostilities, a shortfall in revenue
or  earnings  from   securities   analysts'   expectations,   announcements   of
technological  innovations or new products or enhancements by the Company or its
competitors,  developments in intellectual  property rights and  developments in
the Company's  relationships  with its  customers and suppliers  could cause the
price of the Company's common stock to fluctuate, perhaps substantially. Many of
such factors are beyond the Company's control. In addition,  in recent years the
stock  market in  general,  and the market for  shares of  technology  stocks in
particular,  have experienced extreme price fluctuations,  which have often been
unrelated to the operating  performance of affected  companies.  There can be no
assurance  that  the  market  price  of the  Company's  common  stock  will  not
experience significant  fluctuations in the future,  including fluctuations that
are unrelated to the Company's performance.
                                       15
<PAGE>
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
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.  Moreover,  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 have, in
recent periods,  grown at a faster rate than the Company's overall net sales and
such sales have lower gross  margins  than the  Company's  core  business.  As a
result,  gross  margins  could be  adversely  affected  in the  event  that long
distance calling services  continue to increase as a percentage of net sales. In
addition, the Company is subject to seasonality in its operating results, as net
sales  for  the  first  and  third  quarters  are  frequently  less  than  those
experienced  in the  fourth and second  quarters,  respectively.  As a result of
these and other  factors,  the  Company  has in the past 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."

Concentration of Ownership

As of June 30, 1997, the Company's  Chairman of the Board of Directors and Chief
Executive Officer beneficially owned approximately 23% of the outstanding shares
of the Common  Stock.  As a result,  he has the ability to exercise  significant
influence over all matters  requiring  shareholder  approval.  In addition,  the
concentration  of  ownership  could have the effect of delaying or  preventing a
change in control of the Company.
                                       16
<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 June 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 8/14/97                 /s/ Steven G. Mihaylo,
    ---------              ----------------------------
                                 Steven G. Mihaylo,
                                 Chairman of the Board
                                 and Chief Executive Officer


Date 8/14/97                 /s/ Kurt R. Kneip,
    ---------              ----------------------------
                                 Kurt R. Kneip,
                                 Vice President
                                 and Chief Financial Officer
                                       17