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, 1999                                             0-10211

                             INTER-TEL, INCORPORATED

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


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

                                 (602) 302-8900


                                  Common Stock
            (25,907,862 shares outstanding as of September 30, 1999)

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

                                                                            Page
                                                                            ----
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

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

     Condensed  consolidated  statements of operations - three and            4
     nine months ended September 30, 1999 and September 30, 1998

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

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

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

PART II. OTHER INFORMATION                                                   22

SIGNATURES                                                                   22

                                        2
<PAGE>
PART I. FINANCIAL INFORMATION

INTER-TEL, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands)                                       September 30,  December 31,
                                                         1999          1998
                                                       ---------     ---------
ASSETS
CURRENT ASSETS
  Cash and equivalents                                 $  63,564     $  63,124
  Accounts receivable - net                               47,729        41,116
  Inventories                                             18,589        19,663
  Net investment in sales-leases                          15,401        13,979
  Prepaid expenses and other assets                        4,753         2,781
                                                       ---------     ---------
    TOTAL CURRENT ASSETS                                 150,036       140,663

PROPERTY & EQUIPMENT                                      35,080        28,969
OTHER ASSETS                                              34,623        27,398
                                                       ---------     ---------
                                                       $ 219,739     $ 197,030
                                                       =========     =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
  Accounts payable                                     $  19,513     $  14,956
  Other current liabilities                               34,899        29,390
                                                       ---------     ---------
    TOTAL CURRENT LIABILITIES                             54,412        44,346

DEFERRED TAXES                                             2,597         5,026
OTHER LIABILITIES                                          6,273         4,972

SHAREHOLDERS' EQUITY
  Common stock, no par value-authorized
    100,000,000 shares, issued and outstanding
    - 29,029,987 in 1998                                 104,432       104,539
    Less: shareholder loans                               (1,096)           --
  Retained earnings                                       69,780        54,194
  Accumulated other comprehensive income                     (13)         (196)
                                                       ---------     ---------
                                                         173,103       158,537
  Less:  Treasury stock at cost                          (16,646)      (15,851)
                                                       ---------     ---------
TOTAL SHAREHOLDERS' EQUITY                               156,457       142,686
                                                       ---------     ---------
                                                       $ 219,739     $ 197,030
                                                       =========     =========

                                        3
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
(In thousands except                        Three Months               Nine Months
 per share amounts)                      Ended September 30,       Ended September 30,
                                        ----------------------    ----------------------
                                          1999         1998         1999         1998
                                        ---------    ---------    ---------    ---------
<S>                                     <C>          <C>          <C>          <C>
NET SALES                               $  81,800    $  70,389    $ 225,113    $ 202,235
Cost of sales                              41,811       35,543      113,933      103,613
                                        ---------    ---------    ---------    ---------
GROSS PROFIT                               39,989       34,846      111,180       98,622

  Research & development                    3,896        3,283       10,928        8,539
  Selling, general and administrative      25,511       22,437       70,715       64,977
  In-process research and
    development and acquisition
    related expenses                           --           --           --       22,755
                                        ---------    ---------    ---------    ---------
                                           29,407       25,720       81,643       96,271

OPERATING INCOME                           10,582        9,126       29,537        2,351

  Interest and other income                   863          722        1,788        2,568
  Interest expense                            (29)         (19)         (54)         (58)
                                        ---------    ---------    ---------    ---------
INCOME BEFORE INCOME TAXES                 11,416        9,829       31,271        4,861
  Income taxes                              4,347        4,038       11,889        2,351
                                        ---------    ---------    ---------    ---------
NET INCOME                              $   7,069    $   5,791    $  19,382    $   2,510
                                        =========    =========    =========    =========
NET INCOME PER SHARE:
  Basic                                 $    0.27    $    0.22    $    0.75    $    0.09
                                        =========    =========    =========    =========
  Diluted                               $    0.26    $    0.21    $    0.72    $    0.09
                                        =========    =========    =========    =========
Average common shares outstanding          25,880       26,754       25,934       26,791
                                        =========    =========    =========    =========
Average common shares outstanding
  assuming dilution                        27,040       27,489       27,009       27,941
                                        =========    =========    =========    =========
</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)                                      1999        1998        1999        1998
                                                  --------    --------    --------    --------
<S>                                               <C>         <C>         <C>         <C>
OPERATING ACTIVITIES
  NET INCOME                                      $  7,069    $  5,791    $ 19,382    $  2,510

  Adjustments to reflect operating activities:
  Depreciation and amortization                      2,250       1,887       6,574       4,615
  Purchased in process research and development         --          --          --      22,755
  Changes in operating assets and liabilities        1,165      (3,849)    (11,346)    (12,066)
  Other                                                (64)      1,189       6,870      (2,443)
                                                  --------    --------    --------    --------
NET CASH PROVIDED BY
  OPERATING ACTIVITIES                              10,420       5,018      21,480      15,371

INVESTING ACTIVITIES
  Proceeds from disposal of property and
    equipment and operating leases                       2         105       2,001         112
  Additions to property and equipment and
    operating leases                                (4,274)     (3,494)    (13,654)    (11,613)
  Cash used in acquisition                          (3,068)         --      (3,788)    (25,274)
                                                  --------    --------    --------    --------
  NET CASH USED IN INVESTING
    ACTIVITIES                                      (7,340)     (3,389)    (15,441)    (36,775)

FINANCING ACTIVITIES
  Payments for repurchase of common stock               --     (13,644)     (6,682)    (13,644)
  Cash dividends paid                                 (258)       (262)       (780)       (799)
  Net proceeds from stock issued under the
  Employee Stock Purchase Plan                          --          --         421         359
  Proceeds from exercise of stock options              429         428       1,442       1,525
                                                  --------    --------    --------    --------
NET CASH PROVIDED BY (USED IN)
  FINANCING ACTIVITIES                                 171     (13,478)     (5,599)    (12,559)

INCREASE (DECREASE) IN CASH
  AND EQUIVALENTS                                    3,251     (11,849)        440     (33,963)

CASH AND EQUIVALENTS
  AT BEGINNING OF PERIOD                            60,313      66,691      63,124      88,805
                                                  --------    --------    --------    --------
CASH AND EQUIVALENTS
  AT END OF PERIOD                                $ 63,564    $ 54,842    $ 63,564    $ 54,842
                                                  ========    ========    ========    ========
</TABLE>

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

NOTE A--BASIS OF PRESENTATION

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

NOTE B--EARNINGS PER SHARE

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

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

<TABLE>
<CAPTION>
(In thousands, except                           Three Months Ended                Nine Months Ended
per share amounts)                        -------------------------------   -------------------------------
                                          Sept. 30, 1999   Sept. 30, 1998   Sept. 30, 1999   Sept. 30, 1998
                                          --------------   --------------   --------------   --------------
<S>                                           <C>              <C>              <C>              <C>
Numerator:
  Net income                                  $ 7,069          $ 5,791          $19,382          $ 2,510
                                              =======          =======          =======          =======
Denominator:
  Denominator for basic earnings per
  share - weighted average shares              25,880           26,754           25,934           26,791

Effect of dilutive securities:
  Employee and director stock options           1,160              735            1,075            1,150
                                              -------          -------          -------          -------
Denominator for diluted earnings per
  share - adjusted weighted average
  shares and assumed conversions               27,040           27,489           27,009           27,941
                                              =======          =======          =======          =======
Basic earnings per share                      $  0.27          $  0.22          $  0.75          $  0.09
                                              =======          =======          =======          =======
Diluted earnings per share                    $  0.26          $  0.21          $  0.72          $  0.09
                                              =======          =======          =======          =======
</TABLE>

NOTE C--ACQUISITIONS

In July 1999, Inter-Tel purchased certain assets and assumed certain liabilities
of Matrix  Telecommunications,  Inc.  ("Matrix").  The  purchase  price was $3.7
million plus expenses. Matrix is based in Seattle, Washington and specializes in
database  design and systems  integration  for small- to medium-size  businesses
which utilize advanced telecommunications products and services. The transaction
was  accounted  for using the  purchase  method of  accounting.  The  operations
related to Matrix were not significant to the Company's consolidated operations.

                                        6
<PAGE>
NOTE D - SEGMENT INFORMATION

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

     The Company's  revenues are generated  predominantly  in the United States.
Total  revenues  generated from U.S.  customers  totaled $79.9 million and $68.8
million of total  revenues for the quarters  ended  September 30, 1999 and 1998,
respectively  and $220.0  million and $196.8  million of total  revenues for the
nine months  ended  September  30, 1999 and 1998,  respectively.  The  Company's
revenues from  international  sources were  primarily  generated  from customers
located in the United  Kingdom,  Europe,  Asia and South  America.  In the third
quarters  of 1999 and 1998,  revenues  from  customers  located  internationally
accounted for 2.3% and 2.7% of total revenues,  respectively. In the nine months
ended   September   30,  1999  and  1998,   revenues  from   customers   located
internationally accounted for 2.3% and 2.3% of total revenues, respectively.

NOTE E - SUBSEQUENT EVENTS

On October 18, 1999,  the Company  announced  an agreement to purchase  selected
assets  and assume  certain  liabilities  from  Executone  Business  Information
Systems, Inc.  ("Executone"),  which develops and markets  applications-oriented
telephony systems. The purchase price is $44.3 million plus expenses and assumed
liabilities.  If consummated,  the  transaction  will be accounted for using the
purchase method of accounting.  The proposed  purchase is subject to approval of
the Executone shareholders, antitrust clearance, SEC review of Executone's proxy
materials and other customary closing conditions.

PART I.

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

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

OVERVIEW

     Inter-Tel  is a single point of contact,  full service  provider of digital
business  telephone  systems,  IP telephony  products,  CTI applications,  voice
processing software and long distance calling services. Inter-

                                        7
<PAGE>
Tel's  award-winning  products  and  services  include the AXXESS and  Inter-Tel
Axxent  digital  business  communication  platforms,  the  AXXESSORY  TALK voice
processing platform, the InterPrise voice and data routers and the Inter-Tel.net
private IP long distance network. The Company also provides maintenance, leasing
and support services for its products.

RESULTS OF OPERATIONS

     Net sales for the third quarter of 1999  increased  16.2% to $81.8 million,
compared  to $70.4  million in the third  quarter of 1998.  Net sales  increased
11.3% to $225.1  million in the first nine  months of 1999,  compared  to $202.2
million in the first nine months of 1998.  For the quarter and nine months ended
September 30, 1999,  sales from wholesale  distribution and direct sales offices
accounted for approximately $7.5 million and $15.6 million, respectively, of the
increase  in net  sales.  The  increase  in net sales was also  attributable  to
increases in sales through the Company's network services 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:
<TABLE>
<CAPTION>
                                            Three Months Ended                 Nine Months Ended
                                      -------------------------------   -------------------------------
                                      Sept. 30, 1999   Sept. 30, 1998   Sept. 30, 1999   Sept. 30, 1998
                                      --------------   --------------   --------------   --------------
<S>                                       <C>              <C>              <C>              <C>
Net Sales                                  100.0%           100.0%           100.0%          100.00%
Cost of Sales                               51.1             50.5             50.6             51.2
                                          ------           ------           ------           ------
Gross profit                                48.9             49.5             49.4             48.8
Research and development                     4.8              4.6              4.9              4.2
Selling, general and administrative         31.2             31.9             31.4             32.1
In-process research and development
and related acquisition expenses              --              0.0              0.0             11.3
                                          ------           ------           ------           ------
Operating income                            12.9             13.0             13.1              1.2
Interest and other income                    1.0              1.0              0.8              1.2
Interest expense                             0.0              0.0              0.0              0.0
Income taxes                                 5.3              5.8              5.3              1.2
                                          ------           ------           ------           ------
Net income                                   8.6%             8.2%             8.6%             1.2%
                                          ======           ======           ======           ======
</TABLE>

     Gross  profit  for the  third  quarter  of 1999  increased  14.8%  to $40.0
million,  or 48.9% of net  sales,  compared  to $34.8  million,  or 49.5% of net
sales,  for the third quarter of 1998.  Gross profit  increased  12.7% to $111.2
million,  or 49.4% of net sales,  in the first nine  months of 1999  compared to
$98.6 million,  or 48.8% of net sales,  in the first nine months of 1998.  Gross
margin  decreased  in the third  quarter of 1999  primarily as a result of sales
discounting,  and sales  channel and product  mix. The Company  offered  pricing
discounts on sales of smaller  business  systems  during the third  quarter.  In
addition,  a larger  portion of the Company's  sales  increases were through the
network  services  group,  which  contributed  to lower  overall  gross  margin.
Although the gross margin decreased for the quarter, gross margin was higher for
the nine months ended  September 30, 1999 compared to 1998  primarily due to the
higher  percentage  of sales  through  direct sales  offices in 1999 compared to
dealer channel sales which typically generate lower gross margins.

     Research and  development  expenses for the third quarter of 1999 increased
to $3.9 million, or 4.8% of net sales,  compared to $3.3 million, or 4.6% of net
sales,  for the  third  quarter  of  1998.  Research  and  development  expenses
increased to $10.9  million,  or 4.9% of net sales,  in the first nine months of
1999 compared to $8.5 million, or 4.2% of net sales, in the first nine months of
1998. The increases in absolute dollars and as a percentage of net sales in both
periods were primarily  attributable to expenses relating to the development and
introduction  of  new  products,   including  the  continuing   development  and
improvement of the Company's AXXESS digital communication  networking platforms,
call processing and voice processing software, CTI products,  unified messaging,
and TCP/IP  intranet  and  internet  voice  solutions  (which are branded as the
Company's Vocal'Net, InterPrise and Inter-Tel.net products). The Company

                                        8
<PAGE>
expects that  research and  development  expenses  will  continue to increase in
absolute dollars as the Company continues to develop new software and to enhance
existing  technologies  and  products.  These  expenses  may vary in the future,
however, as a percentage of net sales.

     Selling,  general and administrative expenses for the third quarter of 1999
increased in absolute dollars to $25.5 million compared to $22.4 million for the
third quarter of 1998. Selling, general and administrative expenses increased to
$70.7  million in the first nine months of 1999 compared to $65.0 million in the
first nine months of 1998. The increases in absolute dollars for the quarter and
nine months ended  September 30, 1999,  were  attributable  in part to continued
efforts to hire and train  additional  sales  personnel  throughout  Inter-Tel's
direct sales  offices;  higher sales  commissions  paid to the  Company's  sales
force;  increased  provisions for bad debts; and providing  additional marketing
resources  for new IP  product  introductions  and  network  and  long  distance
services. Selling, general and administrative expenses decreased as a percentage
of net sales for the quarter to 31.2% from 31.9% for the third  quarter of 1998,
and also decreased as a percentage of net sales to 31.4% from 32.1% for the nine
months ended September 30, 1999.  These  decreases were largely  attributable to
increased net sales and cost-cutting measures. The Company expects that selling,
general  and  administrative  expenses  will  continue  to  increase in absolute
dollars, but may vary in the future as a percentage of net sales.

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

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

     Net income  for the third  quarter  was $7.1  million  ($0.26  per  diluted
share),  an increase of 22.1%  compared to net income of $5.8 million ($0.21 per
diluted  share) for the third  quarter of 1998.  Net income for the nine  months
ended  September  30, 1999 was $19.4  million,  or $0.72 per diluted  share,  an
increase of 672%  compared to net income of $2.5  million,  or $0.09 per diluted
share,  in the first  nine  months of 1998,  which  included  the  write-off  of
in-process research and development costs noted above. Excluding such write-off,
net income for the nine months ended September 30, 1999 increased 19.9% compared
to 1998.

INFLATION/CURRENCY FLUCTUATION

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

                                        9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES

     At  September  30,  1999,  the  Company  had  $63.6  million  in  cash  and
equivalents,  which  represented  an increase  of  approximately  $440,000  from
December 31, 1998.  The Company  maintains a $7.0 million,  unsecured  revolving
line of credit with Bank One,  Arizona,  NA. The credit  facility  is  renewable
annually and is available through June 1, 2000. Under this credit facility,  the
Company  has the option to borrow at a prime  rate or  adjusted  LIBOR  interest
rate.  Historically,  the credit  facility  has been used  primarily  to support
international letters of credit to suppliers. The remaining cash balances may be
used to further develop and expand  Inter-Tel.net,  for potential  acquisitions,
strategic alliances, and for working capital and general corporate purposes.

     Net cash provided by operating activities totaled $21.5 for the nine months
ended September 30, 1999, compared to net cash provided by operating  activities
of $15.4  million for the same period in 1998.  The  operating  cash flow in the
first nine  months of 1999 was  primarily  the result of  profitable  operations
including non-cash depreciation and amortization charges.  During the first nine
months of 1999, accounts receivable  increased  approximately $6.6 million ($2.7
million  of  which  was  attributable  to  an  acquisition),  while  inventories
decreased  approximately  $1.1  million.  During the first nine  months of 1999,
increases  in accounts  receivable,  net  investment  in  sales-leases,  prepaid
expenses and other assets were offset in part by reductions in inventories.  The
Company  seeks to expand  sales  through  its  direct  sales  office  and dealer
networks,  which is  expected  to  require  working  capital  for any  increased
accounts receivable and inventories.

     Net cash used in investing  activities,  primarily in the form of cash used
in acquisitions,  capital expenditures and additions to operating leases offered
to customers,  less proceeds from the disposal of some operating leases, totaled
$15.4  million in the nine months ended  September  30, 1999,  compared to $36.8
million for the same period of 1998. The net cash used in 1998 was primarily the
result of the  purchase  of  certain  assets of TMSI and  related  write-off  of
in-process  research and development  costs.  Cash used in acquisitions  totaled
$3.8 million in 1999 compared to $25.3 million in the first nine months of 1998.
Capital   expenditures,   including  additions  to  operating  leases,   totaled
approximately  $13.7  million in 1999 and $11.6  million  for 1998.  The Company
anticipates additional capital expenditures during 1999, principally relating to
acquisition  expenditures,  including the prospective  acquisition of assets and
assumption  of  liabilities  of  Executone  and  Tri-Com  Communications,  Inc.,
expenditures for equipment used in operations, facilities expansion, and funding
of a joint  venture  with  Hypercom  Corporation  (see  Factors  That May Affect
Results of Future Operations below).

     Net cash used in  financing  activities  totaled  $5.6  million in the nine
months ended September 30, 1999 compared to $12.6 million for the same period in
1998. Cash used in 1999 was related  primarily to payments for the repurchase of
the Company's common stock of $6.7 million, offset by proceeds from the exercise
of stock options and stock issued under the Company's  Employee  Stock  Purchase
Plan ("ESPP"),  less cash dividends paid. During the second quarter of 1999, the
Company initiated a stock repurchase  program under which the Board of Directors
authorized  the  repurchase of up to 2,500,000  shares of the  Company's  common
stock.  The Company stock  repurchases in the second quarter of 1999 were funded
primarily by existing cash balances. The Company reissued treasury shares with a
cost basis of  approximately  $5.9 million in  connection  with stock option and
ESPP  exercises  and  issuances.  The proceeds  received for the treasury  stock
reissued was less than its cost basis. Accordingly,  the difference was recorded
as a reduction to retained earnings.

     The Company  offers to its customers  lease  financing and other  services,
including its Totalease program,  through its Inter-Tel Leasing subsidiary.  The
Company  funds its  Totalease  program  in part  through  the sale to  financial
institutions of rental income streams under the leases. Resold Totalease rentals
totaling $154.8 million and $131.3  remained  unbilled at September 30, 1999 and
December 31, 1998,  respectively.  The Company is obligated to  repurchase  such
income  streams in the event of defaults by lease  customers,  and  accordingly,
maintains reserves based on loss experience and past due accounts.  Although the
Company to date has been able to resell the rental streams from leases under the
Totalease  program  profitably and on a substantially  current basis, the timing
and  profitability  of lease  resales  could impact the  Company's  business and
operating results, particularly in an environment of fluctuating interest

                                       10
<PAGE>
rates and economic uncertainty.  If the Company is required to repurchase rental
streams and realizes  losses  thereon in amounts  exceeding  its  reserves,  its
operating results will be adversely affected.

     The Company believes that its cash balances,  working capital and available
credit  facilities,  together  with  anticipated  ongoing  cash  generated  from
operations,  will be sufficient to develop and expand its Inter-Tel.net network,
to provide initial cash contributions to fund the Cirilium venture with Hypercom
Corporation (see also "Factors That May Affect Results of Future Operations), to
finance  acquisitions  of additional  resellers of telephony  products and other
strategic  acquisitions or corporate alliances,  and to provide adequate working
capital  through  the date of the  closing  of the  Executone  acquisition.  The
Company is  currently  engaged in  negotiations  to  provide  additional  credit
facilities as needed.  However, to the extent that additional funds are required
in the future to  address  working  capital  needs and to  provide  funding  for
capital expenditures,  expansion of the business or the Inter-Tel.net network or
additional acquisitions, the Company will seek, if at all, additional financing.
There can be no assurance  that  additional  financing  will be  available  when
required or on acceptable terms.

FACTORS THAT MAY AFFECT RESULTS OF FUTURE OPERATIONS

     THIS  QUARTERLY  REPORT  TO  SHAREHOLDERS  ON FORM 10-Q  ("10-Q")  CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES.  THE STATEMENTS
CONTAINED  IN THIS  10-Q  THAT ARE NOT  PURELY  HISTORICAL  ARE  FORWARD-LOOKING
STATEMENTS  WITHIN THE MEANING OF SECTION 27A OF THE  SECURITIES ACT OF 1933, AS
AMENDED,  AND SECTION 21E OF THE  SECURITIES  EXCHANGE ACT OF 1934,  AS AMENDED,
INCLUDING WITHOUT LIMITATION  STATEMENTS  REGARDING THE COMPANY'S  EXPECTATIONS,
BELIEFS,  INTENTIONS OR STRATEGIES  REGARDING  THE FUTURE.  ALL  FORWARD-LOOKING
STATEMENTS  INCLUDED IN THIS DOCUMENT ARE BASED ON INFORMATION  AVAILABLE TO THE
COMPANY ON THE DATE HEREOF,  AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY
SUCH  FORWARD-LOOKING  STATEMENTS.  THE CAUTIONARY  STATEMENTS MADE IN THIS 10-Q
SHOULD BE READ AS BEING  APPLICABLE  TO ALL RELATED  FORWARD-LOOKING  STATEMENTS
WHEREVER THEY APPEAR IN THIS DOCUMENT. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY  FROM THOSE  ANTICIPATED  IN THESE  FORWARD-LOOKING  STATEMENTS  AS A
RESULT OF CERTAIN  FACTORS,  INCLUDING  THOSE SET FORTH UNDER  "FACTORS THAT MAY
AFFECT RESULTS OF FUTURE  OPERATIONS"  BELOW AND ELSEWHERE IN THIS DOCUMENT.  IN
EVALUATING THE COMPANY'S BUSINESS, SHAREHOLDERS AND PROSPECTIVE INVESTORS SHOULD
CONSIDER  CAREFULLY THE FOLLOWING  FACTORS IN ADDITION TO THE OTHER  INFORMATION
SET FORTH IN THIS DOCUMENT.

RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON RECENTLY INTRODUCED PRODUCTS

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

     During the past few years, the Company  introduced unified messaging on its
AXXESSORY  TALK  platform,  developed a number of  enhancements  to its existing
AXXESS and AXXESSORY Talk platforms and introduced  Inter-Tel  Vocal'Net Gateway
Server and the Inter-Tel  Vocal'Net Service Provider Package. In April 1999, the
Company released the InterPrise 400 voice and data router, the first of a family
of voice and data convergence products that will be released over the next year.
Also,  during October 1999, the Company  released  AXXESS 5.1 and AXXESSORY TALK
5.1 software into production.  During the past 12 months, sales of the Company's
AXXESS digital  communications  platforms and related  software have comprised a
substantial  portion of the  Company's net sales.  The Company  expects that its
future  success  will  continue to depend,  in large part,  upon the  increasing
commercial  acceptance of the InterPrise  products and the AXXESS  platform,  as
well as future  upgrades  and  enhancements  to these  products  and  networking
platforms.  The  Company's  future  success  will also  depend  upon the  market
acceptance  of its other new products and  enhancements,  including the products
that the  Company  has  agreed  to  purchase  from  Executone,  pursuant  to its
announcement  on October 18, 1999.  There can be no assurance  that any of these
introduced  products and enhancements will be successful.  Due to the complexity
of the Company's products, the Company has in the past and expects in the future
to experience  delays in the  development and release of new products or product
enhancements.  In the  event  that  the  Company  were to  fail to  successfully
introduce new software, products or services or upgrades to its existing systems
or products on a regular and timely  basis,  demand for the  Company's  existing
software, products

                                       11
<PAGE>
and services  could decline,  which could have a material  adverse effect on the
Company's business and operating results. Further, if the markets for IP network
products  or CTI  applications  fail to  develop,  or grow more  slowly than the
Company anticipates, or if the Company is unable for any reason to capitalize on
any of these emerging market  opportunities,  the Company's business,  financial
condition and results of operations could be materially adversely affected.

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

DEVELOPING MARKET FOR IP NETWORK TELEPHONY; UNCERTAIN REGULATORY ENVIRONMENT

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

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

     The  regulatory   environment  for  IP  network  telephony  is  subject  to
substantial  uncertainty.  There can be no assurance that the sale and use of IP
network  telephony  products  such as  Inter-Tel  Vocal'Net  and  the  Inter-Tel
InterPrise   products  will  comply  with   telecommunications   laws  or  other
regulations  in any of the  countries  in  which  such  products  are or will be
marketed and used.  In the United  States,  the Company  believes that there are
currently few laws or regulations  directly  applicable to voice  communications
over IP  networks  or to access  to, or  commerce  on,  IP  networks  generally.
However,  changes in the  regulatory  environment,  particularly  in regulations
relating  to the  telecommunications  industry,  could have a  material  adverse
effect on the Company's business.  The increased commercial  acceptance of voice
communications  over IP  networks,  as well as other  factors,  could  result in
intervention  by  governmental  regulatory  agencies  in the  United  States  or
elsewhere in the world under  existing or newly enacted  legislation  and in the
imposition  of fees,  charges or taxes on users and  providers  of products  and
services  in this area.  There can be no  assurance  that such  intervention  or
imposition of fees,  charges or taxes would not have a material  adverse  effect
upon the  acceptance  and  attractiveness  of IP network  voice  communications.
Moreover, legislative proposals from international, federal and state government
bodies could impose additional  regulations and obligations upon on-line service
providers.  The growing  popularity and use of the Internet has increased public
focus and could lead to

                                       12
<PAGE>
increased  pressure  on  legislatures  to impose such  regulations.  The Company
cannot predict the likelihood that any future  legislation or regulation will be
enacted,  nor the financial  impact,  if any, of such  resulting  legislation or
regulation.  In the future,  the Company may also  develop and  introduce  other
products with new or  additional  telecommunications  capabilities  or services,
which could be subject to existing federal  government  regulations or result in
the  imposition of new  government  regulations,  either in the United States or
elsewhere.

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

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

     In September  1999,  the Company  announced  the signing of a memorandum of
understanding  with  Hypercom  Corporation  to  form a  jointly  owned  company,
Cirilium,  which will  comprise  parts of the Company's  and  Hypercom's  packet
telephony  experience,  products and services,  including  Inter-Tel's Vocal'Net
products and  technology.  The Company and Hypercom are currently in the process
of  structuring   the  jointly  owned  company  and  its  strategy.   The  voice
communications over IP networks market, as well as the market for data telephony
products,  services  and  applications  in general,  is  intensely  competitive.
Accordingly,  the Company can offer no assurance that its  expectations  for the
Cirilium venture with Hypercom will be attained.

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

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

                                       13
<PAGE>
DEVELOPMENT AND MAINTENANCE OF INTER-TEL.NET NETWORK

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

     The  Company  is  dependent  on  third-party  or  affiliate   suppliers  of
telecommunications and Internet network transmission services for implementation
of  Inter-Tel.net  and does not currently  have  long-term  contracts  with such
suppliers.  The Company's ability to expand  Inter-Tel.net is dependent upon its
ability to obtain  services  from such  suppliers.  Certain of these third party
suppliers  are or may become  competitors  of the  Company,  and such  suppliers
generally are not subject to restrictions upon their ability to compete with the
Company.  To the extent that these suppliers or affiliates  raise rates,  change
pricing  structures,  experience  power  or  bandwidth  outages,  or  delays  in
provision of local circuits,  the Company may be materially  adversely affected.
The  Company  faces the risk that there  could be a  disruption  in the  service
provided by these suppliers,  and can give no assurance that there will not be a
significant  disruption  in  such  service  in the  future,  thereby  causing  a
disruption in the services provided by the Company to its customers. The Company
may also  experience  speed and  scalability  issues from products  developed by
suppliers  or  affiliates,  which  could  materially  and  adversely  affect the
Company's business.

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

HIGHLY COMPETITIVE INDUSTRY

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

     In the market for voice processing applications,  including voice mail, the
Company  competes  against  AVT,  Active  Voice,  Lucent and other  competitors,
certain of which have significantly  greater resources than the Company.  In the
market for long distance  services,  the Company  competes  against  AT&T,  MCI,
Sprint   Corporation,   Qwest  and  other  competitors.   These  companies  have
significantly  greater resources than the Company and are consolidating  rapidly
with other long distance  companies and RBOCs,  providing them with  potentially
even greater resources and advantages. The Company also

                                       14
<PAGE>
competes with RBOCs,  cable television  companies,  satellite and other wireless
broadband  service  providers,  and others for long  distance  business as those
companies respond to the Telecommunications  Act. Key competitive factors in the
sale of telephone systems and related applications  include price,  performance,
features,  reliability,  service and support,  name recognition and distribution
capability.  The Company believes that it competes favorably in its markets with
respect to the price,  performance  and features of its systems,  as well as the
level of service and support that the Company provides to its customers. Certain
of the Company's  competitors  have  significantly  greater name recognition and
distribution  capabilities than the Company,  although the Company believes that
it has  developed  a  competitive  distribution  presence  in  certain  markets,
particularly those where the Company has direct sales offices.

     In the market for IP  telephony  products,  the  Company  competes  against
existing  IP  telephony  gateway  providers  such as Clarent,  Lucent,  NetSpeak
Corporation,  VocalTec  Communications Ltd., Nokia IP Products,  Net2Phone,  and
several others.  Several of these competitors have been active in developing and
marketing  IP telephony  products for a greater  period of time than the Company
and have already  established  relationships with customers within their market.
In addition,  the Company  faces  significant  competition  from vendors such as
Cisco  Systems,  Inc.,  Nortel,  3Com  Corporation,  Motorola,  Inc.  and  MICOM
Communications  Corp., as these established data vendors have entered the market
for IP telephony products.  Such companies currently produce products that, when
equipped with voice  capabilities,  could represent a considerable threat to the
Company within that market.  In addition,  most of the above data router vendors
have greater name  recognition,  more established  positions in the market,  and
long-standing  relationships with data network customers.  Moreover,  should the
market for IP telephony  products  become fully  developed or develop at a rapid
rate,  large computer  companies such as IBM and Microsoft,  or large  telephone
companies  such as AT&T,  MCI,  Sprint  Corporation,  or Qwest,  could choose to
develop proprietary  software designed to facilitate voice communication over an
IP network.

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

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

PRODUCT PROTECTION AND INFRINGEMENT

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

                                       15
<PAGE>
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,  including patents,
trademarks, copyrights, or other intellectual property rights of others. In this
regard,  the  Company  recently  received  a  letter  from  one of  its  primary
competitors alleging that the Company's AXXESS digital  communications  platform
utilizes inventions covered by certain of such competitor's patents. The Company
is currently in the process of investigating  this matter.  When any such claims
are  asserted  against the  Company,  the Company may seek to purchase a license
under the third party's intellectual  property rights.  Purchasing such licenses
can be expensive, and there can be no assurance that a license will be available
on  prices  or  other  terms  acceptable  to  the  Company  or at  all.  In  the
alternative, the Company could resort to litigation to challenge any such claim.
Any such litigation could require the Company to expend significant sums, divert
management's  attention  and  require the  Company to pay  significant  damages,
develop non-infringing technology or acquire licenses to the technology which is
the  subject of the  asserted  infringement,  any of which could have a material
adverse  effect on the  Company's  business,  financial  condition and operating
results.  In the event that the Company is unable or chooses not to license such
technology or decides not to challenge  such third party's  rights,  the Company
could  encounter  substantial and costly delays in product  introductions  while
attempting  to design  around  such third party  rights,  or could find that the
development,  manufacture  or sale of products  requiring such licenses could be
foreclosed.

MANAGEMENT OF GROWTH; IMPLEMENTATION OF NEW MANAGEMENT INFORMATION SYSTEMS

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

     The  Company  has made  strategic  acquisitions  in the past and expects to
continue to do so in the future.  In this regard,  in October 1999,  the Company
agreed  to  purchase  certain  assets  and  to  assume  certain  liabilities  of
Executone, which develops and markets  applications-oriented  telephony systems.
Acquisitions  such as  these  require  a  significant  amount  of the  Company's
management attention and financial and operational  resources,  all of which are
limited.  The  integration  of any acquired  assets or entities,  or prospective
acquisition  candidates may also result in unexpected  costs and disruptions and
significant  fluctuations in, or reduced  predictability  of, operating  results
from period to period. There can be no assurance that the Executone acquisition,
or any  potential  future  acquisitions,  will  have a  positive  impact  on the
business relationships of the Company or the acquired entity with its respective
suppliers or customers. In addition,  there can be no assurance that the Company
will be able to successfully  integrate acquired assets or operations or achieve
any of the  intended  benefits of the  Executone  acquisition  or any  potential
future  acquisition.  Finally,  there can be no assurance that the management or
technical,  marketing or other  personnel that join Inter-Tel from the Executone
acquisition  or any future  acquisition  will  remain  employed  with  Inter-Tel
following such  acquisition.  If the Company is unable to retain such personnel,
many of the assets and resources  that made the target  attractive  may be lost.
Failure to  successfully  address  these risks in the context of an  acquisition
could cause the business and results of operations to suffer.

     Moreover,  the Company has substantially  implemented various components of
MIS systems and software  beginning in 1998 and completed the deployment of this
software in June 1999. Full

                                       16
<PAGE>
implementation  of this system  software and the transition  from the old system
software  has  required  and will  continue  to  require  substantial  financial
resources, time and personnel.

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

                                       17
<PAGE>
RELIANCE ON DEALER NETWORK

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

DEPENDENCE ON KEY PERSONNEL

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

RISKS OF PROVIDING LONG DISTANCE AND NETWORK SERVICES

     Inter-Tel  depends  on  its  supply  of  telecommunications   services  and
information  from  several  long  distance  carriers,  Regional  Bell  Operating
Companies  ("RBOCs"),  Local Exchange  Carriers  ("LECs") and Competitive  Local
Exchange Carriers ("CLECs"). The Company relies principally on these carriers to
provide network services to the Company's customers and for billing information.
Long  distance  services are subject to  extensive  and  uncertain  governmental
regulation on both the federal and state level.  There can be no assurance  that
the promulgation of certain regulations will not materially and adversely affect
the Company's  business,  financial  condition and operating results.  Contracts
with the long  distance  carriers  from  which  the  Company  currently  resells
services  typically  have  multi-year  terms in which the  Company's  prices are
relatively fixed and have minimum use requirements. The market for long distance
services is currently  experiencing  and is expected to experience in the future
significant price competition, resulting in decreasing end-user rates. There can
be no assurance that the Company will meet minimum use commitments, will be able
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 carriers at prices  favorable
to the Company.  The  Company's  ability to continue to expand its long distance
and network  services  depends  upon its ability to continue to secure  reliable
long  distance and network  services  from a number of long  distance  carriers,
RBOCs,  LECs and CLECs and the  willingness  of such  carriers  to  continue  to
provide  telecommunications  services and billing  information to the Company on
favorable terms.

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

     The Company's quarterly operating results depend upon a variety of factors,
including the volume and timing of orders received  during the quarter,  the mix
of products sold, mix of distribution  channels,  general  economic  conditions,
patterns  of  capital   spending  by  customers,   the  timing  of  new  product
announcements  and  releases  by  the  Company  and  its  competitors,   pricing
pressures,  the cost and effect of  acquisitions,  in  particular  the Executone
acquisition,  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

                                       18
<PAGE>
processing  software  applications  is largely  dependent  on  general  economic
conditions, and can vary significantly as a result of changing conditions in the
economy as a whole.

     In the past 18 months, the Company introduced AXXESS networking systems and
software,  which are  typically  sold to larger  customers  at a higher  average
selling price. Our AXXESS networking products have a relatively high sales price
per unit,  and often  represent  a  significant  and  strategic  decision  by an
enterprise  regarding  its  communications   infrastructure.   Accordingly,  the
purchase of our products  typically  involves  significant  internal  procedures
associated with the evaluation,  testing,  implementation  and acceptance of new
technologies.  This  evaluation  process  frequently  results in a lengthy sales
process,  typically  ranging  from three  months to more than nine  months,  and
subjects  the sales cycle  associated  with the  purchase  of our  products to a
number of  significant  risks,  including  budgetary  constraints  and  internal
acceptance  reviews.  The length of our sales cycle also may vary  substantially
from customer to customer.  While our customers are  evaluating our products and
before  placing an order with us, we may incur  substantial  sales and marketing
expenses  and  expend  significant  management  effort.  Consequently,  if sales
forecasted from a specific customer for a particular quarter are not realized in
that quarter,  the  Company's  operating  results could be materially  adversely
affected.

     The Company's  expense levels are based in part on  expectations  of future
sales and, if sales levels do not meet expectations,  operating results could be
adversely affected. Because sales of digital communication platforms through the
Company's  dealers  produce lower gross margins than sales through the Company's
direct sales  organization,  operating results have varied, and will continue to
vary based upon the mix of sales through direct and indirect channels.  Although
the Company to date has been able to resell the rental streams from leases under
its Totalease  program  profitably and on a  substantially  current  basis,  the
timing and  profitability  of lease resales from quarter to quarter could impact
operating results, particularly in an environment of fluctuating interest rates.
Long distance  sales,  which have lower gross  margins than the  Company's  core
business,  have  grown in recent  periods  at a faster  rate than the  Company's
overall net sales. As a result, gross margins could be adversely affected in the
event that long distance calling  services  continue to increase as a percentage
of net  sales.  In  addition,  the  Company is  subject  to  seasonality  in its
operating results,  as net sales for the first and third quarters are frequently
less than those experienced, in the fourth and second quarters, respectively. As
a result of 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,  investors'  reactions to the  acquisitions the
Company makes, general conditions in the telecommunications industry, the market
for Internet-related products and services or the national or worldwide economy,
changes in legislation or regulation affecting the telecommunications  industry,
an outbreak of hostilities,  developments  in  intellectual  property rights and
developments  in the  Company's  relationships  with its customers and suppliers
could  cause the  price of the  Company's  Common  Stock to  fluctuate,  perhaps
substantially.  Many of such  factors  are  beyond  the  Company's  control.  In
addition,  in recent years the stock prices of technology  companies in general,
and for  Internet-based  voice and data  communications  companies 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.

                                       19
<PAGE>
YEAR 2000 READINESS

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

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

     No assurance can be given that the Company's software  products,  including
components manufactured and or developed by the Company's suppliers and vendors,
will contain all  necessary  date code changes  necessary to prevent  processing
errors  potentially  arising from calculations using the Year 2000 date, or that
such updates will be fully completed in a timely manner or that such disruptions
will not occur.  In  particular,  although the Company  undertakes due diligence
investigation  of potential  acquisition  target companies with respect to their
level  of Year  2000  readiness,  the  Company  can give no  assurance  that the
products and internal systems of the companies that it acquires, including those
of Executone,  are Year 2000 ready. Products currently manufactured by Inter-Tel
are  designed to be Year 2000 ready and recent  testing of such  products by our
engineers  have  indicated  that such products are Year 2000 ready in accordance
with our test procedures. Costs to develop and update the Company's products for
Year 2000  readiness  have  been  part of the  Company's  ongoing  research  and
development  efforts.  Any disruption in manufacturing  services provided by the
Company as a result of Year 2000 noncompliance could materially adversely affect
the Company's business, financial condition and results of operations. If any of
the Company's products or systems  (including  products and internal systems the
Company  obtains  through  acquisitions  of other  companies)  are not Year 2000
ready,  or if  certain  non-ready  products  and  systems  are not  replaced  or
upgraded, the Company's business,  financial condition and results of operations
could be  materially  adversely  affected.  Moreover,  the Company could also be
materially  adversely impacted by Year 2000 issues faced by major  distributors,
suppliers, customers, vendors and financial service organizations with which the
Company interacts.

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

                                       20
<PAGE>
voice  processing  software needs,  and as a result consider  switching to other
systems or suppliers.  Any of the above items for which the Company is unable to
provide Year 2000 readiness to these customers could materially adversely affect
the Company's business, financial condition and results of operations.

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

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

CONCENTRATION OF OWNERSHIP

As of September 30, 1999, Steven G. Mihaylo, the Company's Chairman of the Board
of  Directors,   Chief  Executive  Officer  and  President   beneficially  owned
approximately 21% of the outstanding shares of the Common Stock. As a result, he
has the ability to exercise  significant  influence  over all matters  requiring
shareholder approval. In addition, the concentration of ownership could have the
effect of delaying or preventing a change in control of the Company.

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

                                       21
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES

PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS--NOT APPLICABLE

ITEM 2.  CHANGES IN SECURITIES--NOT APPLICABLE

ITEM 3.  DEFAULTS ON SENIOR SECURITIES--NOT APPLICABLE

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS--NOT APPLICABLE

ITEM 5.  OTHER INFORMATION

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

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

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

         Reports on Form 8-K -- None

                                   SIGNATURES

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

                                       INTER-TEL, INCORPORATED


Date November 12, 1999                  /s/ Steven G. Mihaylo
                                        ----------------------------------------
                                        Steven G. Mihaylo,
                                        Chairman of the Board,
                                        Chief Executive Officer and President


Date November 12, 1999                  /s/ Kurt R. Kneip
                                        ----------------------------------------
                                        Kurt R. Kneip,
                                        Vice President
                                        and Chief Financial Officer

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