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

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


                                    FORM 10-Q
                  QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended                                    Commission File Number:
 March 31, 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

              (26,161,168 shares outstanding as of March 31, 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  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes  x  No
                                       ---    ---
<PAGE>
                                      INDEX


INTER-TEL, INCORPORATED AND SUBSIDIARIES

                                                                        PAGE

PART I.       FINANCIAL INFORMATION

Item 1.       Financial Statements (Unaudited)

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

              Condensed consolidated statements of income--three          4
              months ended March 31, 1999 and March 31, 1998

              Condensed consolidated statements of cash flows             5
              --three months ended March 31, 1999 and
               March 31, 1998

              Notes to condensed consolidated financial                   6
              statements--March 31, 1999

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

PART II. OTHER INFORMATION                                               20

SIGNATURES                                                               21

                                       2
<PAGE>
PART I.  FINANCIAL INFORMATION

INTER-TEL, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands)                                       March 31,      December 31,
                                                       1999           1998
                                                     ---------      ---------
ASSETS
CURRENT ASSETS
   Cash and equivalents                                $62,193        $63,124
   Accounts receivable -- net                           38,521         41,116
   Inventories                                          19,735         19,663
   Net investment in sales-leases                       14,226         13,979
   Prepaid expenses and other assets                     3,882          2,781
                                                         -----          -----
        TOTAL CURRENT ASSETS                           138,557        140,663

PROPERTY, PLANT & EQUIPMENT                             23,722         22,198
EQUIPMENT HELD UNDER LEASE, NET                          8,345          6,771
OTHER ASSETS                                            30,454         27,398
                                                        ------         ------
                                                      $201,078       $197,030
                                                      ========       ========

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
   Accounts payable                                    $17,799        $14,956
   Other current liabilities                            23,018         29,390
                                                        ------         ------
        TOTAL CURRENT LIABILITIES                       40,817         44,346

DEFERRED TAXES AND OTHER LIABILITIES                     6,292          5,026
OTHER LIABILITIES                                        5,810          4,972

SHAREHOLDERS' EQUITY
   Common stock, no par value - authorized
     100,000,000 shares, issued and outstanding
     - 29,029,987 in 1998                              104,539        104,539
   Retained earnings                                    58,025         54,194
   Accumulated other comprehensive
     income                                               (407)          (196)
                                                          ----           ----
                                                       162,157        158,537
   Less:  Treasury stock at cost                       (13,998)       (15,851)
                                                       -------        -------
      TOTAL SHAREHOLDERS' EQUITY                       148,159        142,686

                                                      $201,078       $197,030
                                                      ========       ========

See accompanying notes.

                                       3
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(In thousands, except                            Three Months Ended
per share amounts)                         March 31, 1999    March 31, 1998
                                           --------------    --------------

NET SALES                                      $65,525           $63,758
     Cost of sales                              33,853            32,617
                                                ------            ------
GROSS PROFIT                                    31,672            31,141

     Research & development                      3,307             2,428
     Selling, general, and administrative       20,579            20,537
                                                ------            ------
                                                23,886            22,965

OPERATING INCOME                                 7,786             8,176

     Interest and other income                     434               969
     Interest expense                              (12)               (9)
                                                   ---                --

INCOME BEFORE TAXES                              8,208             9,136
     Income taxes                                3,116             3,774
                                                 -----             -----

NET INCOME                                      $5,092            $5,362
                                                ======            ======


NET INCOME PER SHARE
     Basic                                        $.20              $.20
                                                  ====              ====
     Diluted                                      $.19              $.19
                                                  ====              ====

Average number of common shares
     Outstanding - Basic                        26,096            26,741
                                                ======            ======

Average number of common shares
     Outstanding - Diluted                      27,277            28,242
                                                ======            ======

See accompanying notes.

                                       4
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

<TABLE>
<CAPTION>
                                                         Three Months Ended
(In thousands)                                     March 31, 1999    March 31, 1998
                                                   --------------    --------------
<S>                                                    <C>              <C>    
OPERATING ACTIVITIES
Net income                                             $5,092           $ 5,362
Adjustments to reflect operating activities:
   Depreciation and amortization                        2,123             1,252
   Changes in operating assets and liabilities         (6,807)           (3,528)
   Other                                                3,233             1,721
                                                        -----             -----

NET CASH PROVIDED BY
   OPERATING ACTIVITIES                                 3,641             4,807

INVESTING ACTIVITIES
   Additions to property and equipment                 (2,069)           (2,785)
   Additions to operating leases                       (2,876)              (47)
   Proceeds from disposal of property and equipment        --                 7
   Cash used in acquisition                              (220)               --
                                                         ----              ----

NET CASH USED IN INVESTING ACTIVITIES                  (5,165)           (2,825)

FINANCING ACTIVITIES
   Cash dividends paid                                   (260)             (267)
   Proceeds from exercise of stock options                853               457
                                                          ---               ---

NET CASH PROVIDED BY FINANCING
    ACTIVITIES                                            593               190

INCREASE (DECREASE) IN CASH
    AND EQUIVALENTS                                      (931)            2,172

CASH AND EQUIVALENTS AT
    BEGINNING OF PERIOD                                63,124            88,805
                                                       ------            ------

CASH AND EQUIVALENTS AT
    END OF PERIOD                                     $62,193           $90,977
                                                      =======           =======
</TABLE>

See accompanying notes.

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

March 31, 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 months ending March 31, 1999 are not
necessarily  indicative  of the results  that may be expected for the year ended
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.

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

(In thousands, except                            Three Months Ended
per share amounts)                        March 31, 1999     March 31, 1998
                                          --------------     --------------

Numerator:
  Net Income                                 $5,092               $5,362
                                              =====               ======

Denominator:
  Denominator for basic earnings per
    share - weighted average shares          26,096               26,741

  Effect of dilutive securities:
    Employee and director stock options       1,181                1,501
                                              -----                -----

  Denominator for diluted earnings per
    share - adjusted weighted average
    shares and assumed conversions           27,277               28,242
                                             ------               ------

Basic earnings per share                     $ 0.20               $ 0.20
                                             ------               ------

Diluted earnings per share                   $ 0.19               $ 0.19
                                             ------               ------

NOTE C - 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

                                       6
<PAGE>
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  materially  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 $64.1 million and
$61.7 million of total  revenues for the quarters ended March 31, 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 first quarters of 1999 and 1998, revenues from customers located
internationally accounted for 2.2% and 3.2% of total revenues, respectively.

PART I.

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

OVERVIEW

         Inter-Tel  is a single  point of  contact,  full  service  provider  of
digital business telephone  systems,  IP telephony  products,  CTI applications,
voice  processing  software  and long  distance  calling  services.  Inter-Tel's
award-winning  products and  services  include the AXXESS and  Inter-Tel  Axxent
digital business  communication  platforms,  the AXXESSORY TALK voice processing
platform,  the Inter-Tel Vocal'Net IP telephony gateway, the Inter-Tel Vocal'Net
Service Provider Software and Centralized Accounting Software, the InterPrise IP
telephone  gateway and the Inter-Tel.net  private IP long distance network.  The
Company  also  provides  maintenance,  leasing  and  support  services  for  its
products.

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

RESULTS OF OPERATIONS

         Net sales  increased 2.8% to $65.5 million in the first quarter of 1999
from $63.8 million in the first quarter of 1998. For the quarter ended March 31,
1999,  sales  from  the  Company's  direct  sales  offices  and  from  wholesale
distribution were comparable to 1998, increasing  approximately $200,000.  Sales
from long distance and IP sales increased $1.4 million.  The remaining increases
occurred in leasing and other operations.

                                       7
<PAGE>
The  following  table  sets  forth  selected  statements  of  income  data  as a
percentage of net sales:

                                               Three months and year
                                                  Ended March 31,
                                                1999           1998
                                                ----           ----

       Net sales                               100.0%         100.0%
       Cost of sales                            51.7           51.2
                                                ----           ----
       Gross Profit                             48.3           48.8
       Research and development                  5.0            3.8
       Selling, general and administrative      31.4           32.2
                                                ----           ----
       Operating Income                         11.9           12.8
       Interest and Other income                 0.6            1.5
       Interest expense                          0.0            0.0
                                                 ---            ---
       Income before income taxes               12.5           14.3
       Income Taxes                              4.7            5.9
                                                 ---            ---
       Net Income                                7.8%           8.4%
                                                 ===            ===

         Gross  profit  for the first  quarter of 1999  increased  1.7% to $31.7
million,  or 48.3% of net sales,  from $31.1 million,  or 48.8% of net sales, in
the first quarter of 1998. The decline in gross profit as a percent of sales was
due to a  different  sales mix of  products  and  services,  and  sales  through
different  distribution  channels.  In  particular,  increases  in sales of long
distance  services as a percentage of total sales led to a lower gross profit as
a percentage of sales.  In addition,  competitive  pricing  pressures on smaller
Axxent telephone systems negatively impacted gross margins.

         Research  and  development  expenses  for  the  first  quarter  of 1999
increased  36.2% to $3.3 million,  or 5.0% of net sales,  from $2.4 million,  or
3.8% of net sales,  for the first  quarter of 1998.  This increase was primarily
attributable  to expenses  relating to the continued  development  of the AXXESS
networking  software and systems,  the Inter-Tel Vocal'Net IP telephony gateway,
the Inter-Tel  Vocal'Net  Service Provider  Software and Centralized  Accounting
Software,  the InterPrise IP telephone gateway and the Inter-Tel.net  private IP
long distance network,  and CTI applications.  The Company expects that research
and  development  expenses will continue to increase in absolute  dollars as the
Company  continues  to develop and enhance  existing  and new  technologies  and
products. These expenses may vary, however, as a percentage of net sales.

         Selling,  general and  administrative  expenses in the first quarter of
1999 increased to $20.6 million,  or 31.4% of net sales, from $20.5 million,  or
32.2% of net sales,  in the first  quarter of 1998.  The  increase  in  absolute
dollars  was  due  to  additional   selling,   incentive,   training  and  other
compensation  costs  attributable  to the increased  sales through the Company's
direct sales offices, additional personnel and marketing expenses to support the
operations of  Inter-Tel.net,  the expanded  direct dealer  network and expanded
long distance operations.  Although selling, general and administrative expenses
as a  percentage  of sales  decreased  compared  to the first  quarter  of 1998,
expenses  increased  relative  to the  fourth  quarter of 1998 due to lower than
anticipated  sales  volume.  The  Company  expects  that  selling,  general  and
administrative  expenses  will increase in absolute  dollars,  but may vary as a
percentage of net sales.

         Interest  and  other  income in both  periods  consisted  primarily  of
interest income and foreign exchange rate gains and losses, and decreased in the
first  quarter of 1999  primarily due to lower  investment  income on lower cash
balances, reflecting the Company's purchase of its common stock in the third and
fourth quarters of 1998, the cash purchase of TMSI in the second quarter of 1998
and exchange rate losses compared to gains in 1998.

                                       8
<PAGE>
         Net income for the first quarter of 1999 was $5.1 million,  or $.19 per
diluted share ($.20 per share-basic), compared to net income of $5.4 million, or
$.19 per diluted share ($.20 per  share-basic)  for the first quarter of 1998, a
decrease of 5.0%.

INFLATION/CURRENCY FLUCTUATION

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


LIQUIDITY AND CAPITAL RESOURCES

         At  March  31,  1999,  the  Company  had  $62.2  million  in  cash  and
equivalents,  which  represented  a  decrease  of  approximately  $931,000  from
December 31, 1998. The Company maintains a $7.0 million unsecured revolving line
of credit with Bank One, Arizona, NA. This credit facility is annually renewable
and is available  through June 1, 2000. 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. The remaining cash balances may be
used to further develop and expand Inter-Tel.net and for potential acquisitions,
strategic alliances, working capital and general corporate purposes.

         Net cash provided by operating  activities totaled $3.6 million for the
three months ended March 31, 1999,  compared to $4.8 million for the same period
in 1998.  The operating cash flow in the first quarter of 1999 was primarily the
result of profitable operations including non-cash depreciation and amortization
charges. Cash used in operating assets and liabilities in the three month period
ended March 31, 1999 was $6.8 million,  compared to cash used of $3.5 million in
the same  period of 1998.  During  the first  quarter  of 1999,  lower  accounts
receivable  were  offset in part by  increases  in  inventories,  investment  in
sales-leases,  prepaid expenses and other assets.  The Company expects to expand
sales through its direct sales office and dealer networks,  which is expected to
require working capital for increased accounts receivable and inventories.

         Net cash used in investing activities, primarily in the form of capital
expenditures  and additions to operating  leases  offered to customers,  totaled
$5.2 million in the three months ended March 31, 1999,  compared to $2.8 million
for the  same  period  of  1998.  The  Company  anticipates  additional  capital
expenditures during 1999, principally relating to expenditures for equipment and
management  information  systems used in  operations,  facilities  expansion and
anticipated  increased volumes of operating leases offered by the Company to its
customers, which must be capitalized as fixed assets by the Company.

         Net cash provided by financing activities totaled $593,000 in the three
months  ended March 31, 1999  compared to $190,000  for the same period in 1998,
related  primarily  to proceeds  from the exercise of stock  options,  less cash
dividends paid.

         The Company offers to its customers lease financing and other services,
including its Totalease program,  through its Inter-Tel Leasing subsidiary.  The
Company  funds its  Totalease  program  in part  through  the sale to  financial
institutions of rental income streams under the leases. Resold Totalease rentals
totaling  $136.1  million  remained  unbilled at March 31, 1999.  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

                                       9
<PAGE>
a substantially  current basis,  the timing and  profitability  of lease resales
could impact the Company's  business and operating  results,  particularly in an
environment  of  fluctuating  interest  rates and economic  uncertainty.  If the
Company is required to repurchase  rental streams and realizes losses thereon in
amounts  exceeding  its  reserves,  its  operating  results  will  be  adversely
affected.

         The Company  believes that its working  capital and credit  facilities,
together with cash generated from operations,  will be sufficient to develop and
expand  its  Inter-Tel.net   network,  to  finance  acquisitions  of  additional
resellers of telephony  products and other  strategic  acquisitions or corporate
alliances,  and to provide adequate working capital for at least the next twelve
months.  However, to the extent that additional funds are required in the future
to  address   working   capital  needs  and  to  provide   funding  for  capital
expenditures,  expansion of the business or the Inter-Tel.net network or through
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

         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 July 1998, the
Company also released the AXXESS 5.0 platform,  which is a significant  software
upgrade  and  enhancement  to its  AXXESS  and  AXXESSORY  TALK  platforms.  The
Company's  future  success  will  depend,  in large  part,  upon the  commercial
acceptance  of  the  AXXESS  5.0  platform,  as  well  as  future  upgrades  and
enhancements to this networking platform. The Company's future success will also
depend  upon  market   acceptance  of  the  Company's   other  new  products  or
enhancements,   including  Inter-Tel  Vocal'Net  and  the  Inter-Tel  InterPrise
products.  There can be no assurance that any of these  introduced  products and
enhancements  will be successful.  In the event that the Company were to fail to
successfully  introduce  new  software,  products or services or upgrades to its
existing  systems or  products  on a regular  and timely  basis,  demand for the
Company's  existing software,  products and services could decline,  which could
have a material adverse effect on the Company's  business and operating results.
Further, if the markets for IP

                                       10
<PAGE>
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

                                       11
<PAGE>
assurance that such  intervention or imposition of fees,  charges or taxes would
not have a material adverse effect upon the acceptance and  attractiveness of IP
network   voice   communications.    Moreover,    legislative   proposals   from
international,  federal and state  government  bodies  could  impose  additional
regulations  and  obligations  upon  on-line  service  providers.   The  growing
popularity and use of the Internet has increased  public focus and could lead to
increased  pressure  on  legislatures  to impose such  regulations.  The Company
cannot predict the likelihood that any future  legislation or regulation will be
enacted,  nor the financial  impact,  if any, of such  resulting  legislation or
regulation.  In the future,  the Company may also  develop and  introduce  other
products with new or  additional  telecommunications  capabilities  or services,
which could be subject to existing federal  government  regulations or result in
the  imposition of new  government  regulations,  either in the United States or
elsewhere.

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.

         The success of Inter-Tel Vocal'Net and other IP telephony products that
the Company  acquired  through its  purchase of assets from  Telecom  Multimedia
Systems,  Inc.  ("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 and 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.

                                       12
<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 in its early
stages 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
and Los Angeles. 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 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  raise  rates or change  pricing  structures,  the
Company may be materially  adversely affected.  Also, 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.

         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,  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 router companies,  like Cisco Systems and 3Com, which
have acquired telecommunications technology during 1997 through 1999.

         The  Telecommunications  Act of 1996 and  AT&T's  division  into  three
enterprises  have  impacted  competition  in the  communications  industry.  The
Telecommunications  Act opened the market  for  telephone  and cable  television
services, forcing telephone companies to open their

                                       13
<PAGE>
networks to competitors  and giving  consumers a choice of local phone carriers.
Conversely,  local phone companies are now able to offer long distance services.
In addition,  cable companies can offer telephone  services and Internet access.
These changes have increased competition in the communications industry and have
created additional  competition and opportunities in customer premise equipment,
as these new services and interfaces have become available.

         In the market for voice processing applications,  including voice mail,
the Company  competes against AVT, Active Voice,  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,   many  of  which  have
significantly greater resources than the Company. The Company also 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 Lucent,  NetSpeak  Corporation,
VocalTec  Communications  Ltd.,  Nokia  IP  Products  (formerly  Vienna  Systems
Corporation) and several others.  Several of these  competitors have been active
in developing  and marketing IP telephony  products for a greater period of time
than the Company  and have  already  established  relationships  with  customers
within  their  market.  In  addition,   the  Company  likely  faces  significant
competition from vendors such as Cisco Systems,  Inc., Nortel, 3Com Corporation,
Motorola, Inc. and MICOM Communications Corp., as these established data vendors
choose to enter the market for IP telephony  products.  Such companies currently
produce products that, 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 IDC,  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

                                       14
<PAGE>
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.

MANAGEMENT OF GROWTH; IMPLEMENTATION OF NEW MANAGEMENT INFORMATION SYSTEMS


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

         During the fourth  quarter of 1996,  the  Company  determined  that the
limitations  of the  existing  system  software  would  prevent  Inter-Tel  from
establishing an integrated and centralized dispatch and telemarketing center. As
a result, the Company signed an agreement with a large, established software and
database vendor to replace its existing MIS software and implement, maintain and
support  the  alternate  MIS  software to be utilized  throughout  the  Company.
Accordingly,  during  the  fourth  quarter of 1996,  the  Company  wrote off the
software license and implementation  costs relating to the system software being
replaced.  The Company  implemented  various  components of the new MIS software
during 1998 and plan to roll out  additional  components of the software  during
1999.

         The  actions to replace the MIS  software  could  result in  additional
costs and delays  associated  with  obtaining  a fully  functional  MIS  system,
including  but not limited to the costs of  procuring  additional  or  alternate
hardware  and  software  required  but  not  available  in  the  current  system
configuration,  and  additional  personnel.  Any such cost or delay could have a
material  adverse  effect on the  Company's  business,  financial  condition and
operating results.  In addition,  implementation of this system software and the
transition  from the  current  system  software  to the new  information  system
software  has  required  and will  continue  to  require  substantial  financial
resources, time and personnel.

         The Company has made strategic  acquisitions in the past and expects to
continue to do so in the future.  In June 1998,  the Company  purchased  certain
assets of TMSI for cash of  approximately  $25 million  plus the  assumption  of
certain  liabilities and  acquisition  costs. In the second quarter of 1998, the
Company also acquired Integrated Telecom Services Corporation ("ITS"),  pursuant
to which the  Company  issued  approximately  140,000  shares  of common  stock,
accounted for as a purchase  transaction.  In addition,  in December  1998,  the
Company  acquired  certain  assets  of  Central  Florida  Communications,   Inc.
("Southcom")  for  approximately  $2.3  million.   This  asset  acquisition  was
accounted for using  purchase  accounting.  In November  1998,  the Company also
acquired certain assets of Telesystems,  Inc.  ("Telesystems") for approximately
$300,000.  This asset  acquisition  was also  accounted  for using the  purchase
method of accounting. Acquisitions require a significant amount of the Company's
management attention and financial and operational  resources,  all of which are
limited.  The integration of TMSI, ITS,  Southcom or any other acquired entities
may also result in unexpected costs and disruptions and significant fluctuations
in, or reduced predictability of, operating results from period to period. There
can be no  assurance  that an  acquisition  will have a  positive  impact on the
business relationships of the Company or the acquired entity with its respective
suppliers or customers. Further, there can be no assurance that the Company will
be able to successfully  integrate TMSI,  ITS,  Southcom,  or any other acquired
operations  or achieve  any of the  intended  benefits  of an  acquisition.  The
Company's failure to manage its growth effectively could have a material adverse
effect on its business, financial condition and operating results.

                                       15
<PAGE>
DEPENDENCE UPON CONTRACT MANUFACTURERS AND COMPONENT SUPPLIERS


         The Company currently  procures certain  components used in its digital
communication platforms, including certain microprocessors, integrated circuits,
power supplies,  voice processing interface cards and IP telephony cards, from a
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.

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

         From time to time,  the  Company  is subject  to  proceedings  alleging
infringement by the Company of intellectual property rights,  including patents,
trademarks,  copyrights, or other intellectual property rights of others. If any
such claim is  asserted  against the  Company,  the Company may seek to obtain a
license under the third party's  intellectual  property rights.  There can be no
assurance that

                                       16
<PAGE>
a license will be available on terms acceptable to the Company or at all. In the
alternative, the Company could resort to litigation to challenge any such claim.
Any such litigation could require the Company to expend significant sums, divert
management's  attention  and  require the  Company to pay  significant  damages,
develop non-infringing technology or acquire licenses to the technology which is
the  subject of the  asserted  infringement,  any of which could have a material
adverse  effect on the  Company's  business,  financial  condition and operating
results.  In the event that the Company is unable or chooses not to license such
technology or decides not to challenge  such third party's  rights,  the Company
could  encounter  substantial and costly delays in product  introductions  while
attempting  to design  around  such third party  rights,  or could find that the
development,  manufacture  or sale of products  requiring such licenses could be
foreclosed.

RELIANCE ON DEALER NETWORK


         A  substantial  portion of the Company's net sales are made through its
network of independent dealers. The Company faces intense competition from other
telephone system and voice  processing  system  manufacturers  for such dealers'
business, as most of the Company's dealers carry products which compete with the
Company's  products.  There can be no  assurance  that any such  dealer will not
promote the  products  of the  Company's  competitors  to the  detriment  of the
Company's  products.  The loss of any significant dealer or group of dealers, or
any event or condition adversely  affecting the Company's dealer network,  could
have a material adverse effect on the Company's  business,  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.  Because  it does  not own
transmission facilities, the Company relies on long distance carriers to provide
network services to the Company's  customers and for billing  information.  Long
distance services are subject to extensive and uncertain governmental regulation
on both  the  federal  and  state  level.  There  can be no  assurance  that the
promulgation of certain regulations will not materially and adversely affect the
Company's business,  financial  condition and operating results.  Contracts with
the long distance  carriers from which the Company  currently  resells  services
typically  have  multi-year  terms in which the Company's  prices are relatively
fixed and have minimum use  requirements.  The market for long distance services
is  currently   experiencing  and  is  expected  to  experience  in  the  future
significant price competition, resulting in decreasing end-user rates. There can
be no assurance that the Company will meet minimum use commitments, will be able
to negotiate  lower rates with carriers in the event of any decrease in end user
rates or will be able to extend its  contracts  with long  distance  carriers at
prices favorable to the Company. The Company's ability to continue to expand its
long distance  services  depends upon its ability to continue to secure reliable
long  distance  services  from a  number  of  long  distance  carriers  and  the
willingness of such carriers to continue to provide telecommunications  services
and billing information to the Company on favorable terms.

                                       17
<PAGE>
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, and the availability and cost of
products and components from the Company's  suppliers.  The Company's  customers
typically require immediate shipment and installation of platforms and software.
As a result,  the Company has  historically  operated  with a  relatively  small
backlog,  and  sales  and  operating  results  in any  quarter  are  principally
dependent  on  orders  booked  and  shipped  in that  quarter.  Historically,  a
substantial  portion of the  Company's  net sales in a given  quarter  have been
recorded in the third month of the  quarter,  with a  concentration  of such net
sales in the last two weeks of the  quarter.  Market  demand for  investment  in
capital  equipment such as digital  communication  platforms and associated call
processing and voice processing  software  applications is largely  dependent on
general economic conditions,  and can vary significantly as a result of changing
conditions in the economy as a whole.

         In the past 12 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  they may  place 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."

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<PAGE>
VOLATILITY OF STOCK PRICE


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

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 is currently in the process of updating
its  information  systems  with systems that are designed to be Year 2000 ready.
This  decision  was  made in the  ordinary  course  of  managing  the  Company's
information  resources  and not  specifically  implemented  to address Year 2000
readiness  issues.  The Company is in the process of upgrading its long distance
billing  system,  which is  designed  to be Year 2000 ready.  In  addition,  the
Company is reviewing its lease billing and  collections  system,  which has been
warranted to be Year 2000 ready.  The Company has contracted  outside vendors to
perform detailed reviews of the readiness of information  systems devices in use
in the Company's business. This assessment is expected to be complete during the
second quarter.  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 completed  before  year-end.  The total cost of
each system is being or will be capitalized and depreciated in the normal course
of business.  The Company  expects its critical  information  systems to be Year
2000 ready by the end of the second quarter,  and secondary  systems and devices
by the end of the third 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.  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

                                       19
<PAGE>
products for Year 2000 readiness have been part of the research and  development
efforts on an ongoing basis. Any disruption in manufacturing  services  provided
by the Company as a result of Year 2000 noncompliance would materially adversely
affect the Company's business, financial condition and results of operations. If
any of the Company's  products are not Year 2000 ready, or if certain  non-ready
products  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 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.

CONCENTRATION OF OWNERSHIP

              As of March 31, 1999, Steven G. Mihaylo, the Company's Chairman of
the Board of Directors, Chief Executive Officer and President beneficially owned
approximately  20.4% 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.

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

                                       20
<PAGE>
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 at least 45 days
    prior to the month and day of mailing of the prior year's  proxy  statement,
    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.  Since the Company mailed its proxy statement for the 1999 annual
    meeting of  stockholders  on April 26, 1999, the deadline for receipt of any
    such  stockholder  proposal for the 1999 annual meeting of  stockholders  is
    March 12, 2000.


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

              Exhibits:
                  Exhibit 27:  Financial Data Schedule

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

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




                                SIGNATURES

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


                                INTER-TEL, INCORPORATED



May 14, 1999                    /s/ Steven G. Mihaylo
---------------                 --------------------------
                                    Steven G. Mihaylo
                                    Chairman of the Board, Chief Executive
                                    Officer and President



May 14, 1999                    /s/ Kurt R. Kneip
---------------                 -------------------------------
                                    Kurt R. Kneip
                                    Vice President and
                                    Chief Financial Officer

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