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

                                   ----------

                                    FORM 10-K
                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED                                COMMISSION FILE NUMBER:
   DECEMBER 31, 2001                                             0-10211

                             INTER-TEL, INCORPORATED

INCORPORATED IN THE STATE OF ARIZONA                       I.R.S. NO. 86-0220994

                               1615 S. 52ND STREET
                              TEMPE, ARIZONA 85281
                                 (480) 449-8900

                                   ----------

           Securities registered pursuant to Section 12(g) of the Act:

                                  Common Stock
               (24,190,130 shares outstanding as of March 8, 2002)

     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  period  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 [ ]

     Indicate by check mark if disclosure of delinquent  filers pursuant to Item
405 of Regulation S-K (S 229.405 of this chapter) is not contained  herein,  and
will not be  contained,  to the best of  registrant's  knowledge,  in definitive
proxy or information  statements  incorporated  by reference in Part III of this
Form 10-K or any amendment to this Form 10-K - [ ].

     The aggregate  market value of the voting stock held by  non-affiliates  of
the registrant,  based upon the last reported sales price of Inter-Tel's  Common
Stock  reported  on the  Nasdaq  National  Market  System  on March 8,  2002 was
approximately  $351.8  million.  Shares of Common  Stock held by each  executive
officer and director have been excluded in that such persons may be deemed to be
affiliates.

Items 10 (as to  Directors),  11 and 12 of Part  III  incorporate  by  reference
information  from the Registrant's  Proxy Statement  relating to its 2002 Annual
Meeting of Shareholders.
<PAGE>
                             INTER-TEL, INCORPORATED
                          2001 FORM 10-K ANNUAL REPORT

                                TABLE OF CONTENTS


                                     PART I                                 Page

Item 1    Business                                                             3
Item 2    Properties                                                          22
Item 3    Legal Proceedings                                                   23
Item 4    Submission of Matters to a Vote of Security Holders                 23

                                     PART II

Item 5    Market for the Registrant's Common Stock                            23
          and Related Shareholder Matters
Item 6    Selected Financial Data                                             24
Item 7    Management's Discussion and Analysis of Financial Condition
            and Results of Operations                                         25
Item 7A   Quantitative and Qualitative Disclosures About Market Risk          35
Item 8    Financial Statements and Supplementary Data                         36

Item 9    Changes in and Disagreements with Accountants on Accounting and
            Financial Disclosure                                              36

                                    PART III

Item 10   Directors and Executive Officers of the Registrant                  36
Item 11   Executive Compensation                                              36
Item 12   Security Ownership of Certain Beneficial Owners and Management      36
Item 13   Certain Relationships and Related Transactions                      36

                                     PART IV

Item 14   Exhibits, Financial Statement Schedules and Reports on Form 8-K     37

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                                     PART I

ITEM 1. BUSINESS

THE COMPANY

     THIS  ANNUAL  REPORT  TO  SHAREHOLDERS  ON  FORM  10-K  ("10-K")   CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES.  THE STATEMENTS
CONTAINED  IN THIS  10-K  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-K
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  FUTURE  OPERATING  RESULTS"  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.

     Inter-Tel, incorporated in 1969, is a single point of contact, full service
provider of business  communications  systems, voice mail systems and networking
applications.  We  market  and  sell  voice  processing  and  unified  messaging
software,  call accounting software,  Internet Protocol (IP) telephony software,
computer-telephone   integration  (CTI)  applications,   long  distance  calling
services,  and other communications  services. Our products and services include
the AXXESS by  Inter-Tel  and  ECLIPSE(2)  by Inter-Tel  business  communication
systems,  with integrated voice  processing and unified  messaging  systems,  IP
telephony  voice and data routers,  and  ClearConnect  Talk-to-Agent  e-commerce
software.  We also  provide  maintenance,  leasing and support  services for our
products.  Our customers include business  enterprises,  government agencies and
non-profit  organizations.  Our common  stock is quoted on the  Nasdaq  National
Market System under the symbol "INTL."

     We have developed a distribution  network of direct sales offices,  dealers
and value added  resellers  (VARs),  which sell our  products  to  organizations
throughout  the United  States and  internationally,  including  to divisions of
Fortune 500 companies, large service organizations and governmental agencies. As
of December 31, 2001,  we had 49 direct sales  offices in the United  States and
one in Japan,  and a network of  hundreds  of dealers  and VARs around the world
that purchase directly from us. We also maintain a wholesale distribution office
in the  United  Kingdom  that  supplies  Inter-Tel's  dealers  and  distributors
throughout  the UK and parts of Europe.  In January 2002,  we acquired  selected
assets and assumed certain selected liabilities of McLeod USA, Inc. (McLeod). As
a result,  we added 5 new direct sales offices and we added personnel to 3 other
existing sales offices.

INDUSTRY BACKGROUND

     Since  the  mid-1980s,  the  global  telecommunications  industry  has been
characterized  by rapid structural  change caused by  technological  innovation,
economic factors and changes in government  policies that encourage  competition
and increase consumer choice.  These changes are evidenced by the growing impact
of  the  Internet,   deregulation,   optical  networking  technology,  broadband
connectivity,  wireless and mobile  communications and demand by enterprises for
cost-effective, multi-functional networks and applications.

     As a  result  of the  changes  in the  telecommunications  industry,  it is
expected that customers will demand more complex  networks over the next several
years.  In  addition,  network  platforms  are  expected to become  increasingly
multifunctional,   supporting  the   convergence   of  voice,   data  and  video
communications  services,  thus reducing the  operating  costs  associated  with
separate  networks and  facilitating  the  development  of  advanced,  converged
applications.

     Businesses  increasingly  recognize data networks such as the Internet as a
valuable and cost-efficient  medium for internal and public  communications.  In
order to reduce  their  telecommunications  costs,  businesses  are moving their
voice  communications to packet-switched  networks,  such as corporate intranets
and the Internet.  Although  packet-switched  networks can offer more efficiency
and value to businesses,  the traditional telephone network remains the standard
for  voice  communications  today.  As a  result,  businesses  that wish to

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take advantage of packet-switched  networks for voice  communications must still
be able to place and receive calls over the traditional  telephone  network with
customers,   suppliers   and   others  who  rely   solely  on  the   traditional
circuit-switched telephone network for voice communications.

     In  addition,   businesses   typically  make   substantial   investment  in
traditional  voice  systems  and  networks  and  do not  wish  to  abandon  that
investment  in  order  to  implement  entirely  new  converged  voice  and  data
platforms.  Rather than  discarding an entire  legacy  system,  many  businesses
choose to  supplement  existing  systems  with new  software  and  applications,
including remote telecommunications  network management,  enhanced voicemail and
packet-switched  voice applications.  For example,  businesses may wish to route
external  calls over their  existing  voice  network  and route  internal  calls
between  offices over data  networks,  such as an intranet or the Internet,  all
using the same telecommunications  system.  Consequently,  there is a need for a
communication system that can interface with both  packet-switched  networks and
the  traditional   circuit-switched  telephone  network  utilizing  a  business'
existing telecommunications infrastructure.

     A new  generation of  telecommunications  systems has emerged over the last
several  years to  address  the  challenges  and  inadequacies  associated  with
traditional   circuit-switched   private   telephone   systems.   Many  existing
telecommunications  systems do not address the needs of businesses  that wish to
transmit  voice  communications  over  both  the  traditional   circuit-switched
telephone network and  packet-switched  data networks.  We believe a significant
opportunity  exists to  provide  businesses  with an  integrated  solution  that
delivers the benefits of integrated,  multifunction communications systems using
both  intranets and the Internet,  as well as the  traditional  circuit-switched
telephone  network and allows those  businesses to migrate to a fully  converged
voice, video and data network at their own pace.

STRATEGY

     Inter-Tel's  objective  is to  continue  to  strengthen  its  position as a
leading single-source provider of business  communications  equipment,  software
applications and network services.  Our strategy  incorporates the following key
elements:

OFFER TOTAL COMMUNICATIONS SOLUTION

     Inter-Tel  offers a broad range of products and services  that  incorporate
advanced   technologies   and  provide   customers   with  a  single  source  to
cost-effectively  fulfill their business  communications  needs.  We couple this
solution-oriented approach with a high level of customer service and support and
a commitment to quality throughout our operations.  Our business  communications
systems are integrated with our fully-integrated computer-telephone applications
and  include  voice  mail,  auto  attendant,   unified  messaging,  call  center
applications, Interactive Voice Response (IVR), wireless applications, Automatic
Call Distribution (ACD), long distance and networking services,  together with a
variety of other communications  applications.  Because of the modular design of
our systems and the high level of software  content in our  products,  customers
can readily increase the size and  functionality of their systems as their needs
change by  adding  new  services,  software  and  hardware  applications,  or by
upgrading  to new systems or advanced  versions of their  existing  systems.  We
believe that our customers prefer to purchase business communications  equipment
and services from a single source  because of the  convenience,  consistency  of
service, ease of upgrade,  availability of financing alternatives and confidence
in the performance of integrated  systems and services all  incorporated  into a
total solution package.

FACILITATE THE CONVERGENCE OF VOICE, VIDEO AND DATA NETWORKS

     Inter-Tel's business  communications systems allow our customers to migrate
their business  communications  systems to enable real-time voice communications
to be  transmitted  on digital  packet-switched  networks as well as traditional
circuit-switched  telephone  networks.  In this regard,  Inter-Tel's  AXXESS and
ECLIPSE(2) systems,  Versions 5.x and 6.x software, IP phones and Softphones for
work at home and remote office  locations,  IP telephony voice and data routers,
voice  and data  convergence  applications,  voice  disaster  recovery  software
applications,   Internet  and  wireless   application  protocol  (WAP)  software
applications  and  e-commerce  voice  enabled  call center  applications,  allow
customers to incorporate  the benefits of Internet  protocol  communication  (or
communication  over  packet-switched  networks) without replacing their existing
Inter-Tel business communications system infrastructure.  Moreover,  Inter-Tel's
Version  6.0  software  released  in the first  quarter  of 2002  uses  Internet
Protocol  and  Asynchronous  Transfer  Mode,  or ATM, to address  larger  system
configurations.

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LEVERAGE CUSTOMER BASE

     We will  continue  to leverage  our  relationships  with our  approximately
500,000  business  customers,  to promote  increased usage and deployment of our
products  and  services  as  they  expand  or  change  their  organizations.  In
particular,  we intend to use our network of 54 (including  the five new offices
from the purchase of certain  selected  McLeod  assets and  liabilities)  direct
sales and  service  facilities,  and our dealer and  reseller  channels to drive
recurring  revenue  from  our  customers.  Existing  customers  accounted  for a
significant  portion of our 2001 net sales from maintenance  services,  software
additions and/or upgrades, support, training and hardware products such as video
conferencing,  headsets  (wired and  wireless) and  speaker-phones.  Because our
business  communications  platform  allows  for  system  migration  without  the
complete change out of hardware,  existing  customers are sold  enhancements and
new solutions through software-only upgrades. We believe that we can provide our
customers with the ability to enhance their business communications systems on a
cost-effective  basis  as  voice,  video  and  data  communications  convergence
applications evolve.

CONTINUE TO DEVELOP ADVANCED COMMUNICATIONS PRODUCTS AND EXPAND CAPACITY

     Inter-Tel commits substantial research and development resources to provide
its customers with advanced telecommunications  technologies on a cost-effective
basis. We have developed an extensive C++ and JAVA software  library and we have
significant voice and data communications  expertise.  In many cases, we develop
new  technologies  as  software  and  hardware  upgrades  or add-ons to existing
products. For example, our Version 6.0 software, which was released commercially
during the first  quarter of 2002,  will double the capacity of a single node to
1,024 ports as well as double the capacity of networked systems to 40,000 ports.
Our  ongoing   research  and  development   efforts  are  directed  towards  the
development and creation of new products,  applications and services for sale to
our existing  customer  base and to new  customers.  Through  computer-telephony
applications and advanced network services,  Inter-Tel provides  technology that
is designed to enable its  customers  to improve  their  efficiency  and enhance
their competitiveness.

EXPAND DISTRIBUTION CHANNELS

     Inter-Tel  continues  to expand its  distribution  channels  by growing our
network of direct dealers and direct sales  offices,  hiring  additional  direct
sales  personnel  and  expanding  into  new  international   markets.   We  have
established  sales  relationships  with hundreds of direct dealers in the United
States,  United  Kingdom,  parts of  Europe,  Mexico  and  Asia.  Inter-Tel  has
increased  its  direct  sales  activity  in  recent  periods  through  strategic
acquisitions  of resellers of telephony  products,  data  products and services.
These  acquisitions,  which  we  consider  on an  ongoing  basis,  increase  the
geographic  coverage  of  our  direct  sales  force,   support  our  dealer  and
distributor  channels and augment  direct  sales in areas that we have  existing
direct sales offices. To increase sales within the dealer  distribution  channel
we provide dealers with support,  on-site training, and we share best practices.
In addition,  we provide access to Inter-Tel's  demonstration  rooms, located in
our direct sales office, as well as sales,  technical and marketing support from
regional sales managers and sales engineers.

PRODUCTS AND SERVICES

     Inter-Tel  offers  voice  and  data  communications  products  and  related
services  for  business   enterprises,   government   agencies  and   non-profit
organizations.  Our core products are business communications systems supporting
scalable   networked   installations,   IP  telephony   products  and  services,
computer-telephony   applications,   unified   messaging  and  voice  processing
software.  We also offer long  distance  calling  services,  network  design and
implementation services, maintenance services, leasing and support services, and
we resell peripheral data and telecommunications products.

BUSINESS COMMUNICATIONS SYSTEMS

     Inter-Tel   has   developed  as  its  core  product   offering  a  business
communications  system  that  consists  of a  hardware  platform  and a suite of
software applications that enables specific  functionality.  Inter-Tel sells its
business  communications system to mid- and large-sized  organizations under its
AXXESS by Inter-Tel  (AXXESS) and ECLIPSE2 by Inter-Tel  (ECLIPSE2) brand names.
The AXXESS and ECLIPSE(2)  systems differ in terms of their  appearance and some
functionality  but are based  upon the same  software  and  architecture,  which
incorporate open interfaces,  employ the standard programming  languages C++ and
JAVA,  and are  built on a  computer-telephony  interface  that  allows  outside
computer applications to integrate with and monitor and control the operation of
the Inter-Tel  communications  system.  The platforms  support industry standard
computer-telephony  interfaces,  such as TAPI, TCP/IP, CSTA, and CT-Connect,  as
well as robust  proprietary  interfaces that provide

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capabilities  beyond  those  available  through  the  standard  interfaces.  Our
software architecture enables customers to choose from a variety of server-level
or desktop applications.

     AXXESS AND ECLIPSE(2).  The AXXESS and the ECLIPSE(2)  systems are designed
to enable businesses to customize their  communications  applications to enhance
their  operations and increase  productivity.  These systems deliver  integrated
voice  processing,  IP telephony  and  advanced  call center  applications,  and
incorporate  networking  solutions  that  allow  these  applications  to operate
transparently across multiple systems and locations. Our  commercially-available
systems  support up to 40,000 ports and include  advanced  capabilities  such as
primary  and basic  rate  ISDN,  integrated  call  recording,  voice  prompts in
different  languages,  and a Microsoft  Windows-based,  touch screen  sensitive,
attendant's console. Version 6.0 of the AXXESS and ECLIPSE(2) systems,  released
in the first  quarter of 2002,  doubles  the size of a single node to 1024 ports
and  commercially   supports  up  to  40,000  ports  in  a  transparent  network
environment.  Our systems  can be  networked  together  using a  combination  of
point-to-point  telephony  circuits,  voice-over-IP  interfaces,  or frame-relay
circuits depending on the customer's data and voice infrastructure.

     The AXXESS and ECLIPSE(2)  systems'  industry  standard  computer-telephony
interfaces  permit  integration  with  desktop  computers  and network  servers.
Examples of applications that are enabled by these computer-telephony interfaces
include:

     *    Database  Look-up:  uses caller  identification  to retrieve  customer
          information  from a computer  database and present it on a call center
          agent's screen automatically;

     *    Advanced ACD Routing: uses caller  identification,  corporate database
          information  and current ACD queue status to determine  where to route
          customer calls for the highest possible level of customer service;

     *    Automated  Outbound  Calling:  uses  numbers  pulled  from a  computer
          database to initiate outbound calls for telemarketing agents; and

     *    Personal  Call  Routing:   uses  caller  identification  and  customer
          identification  to screen  and  re-route  calls to  improve  workplace
          productivity.

     The AXXESS and ECLIPSE(2) systems' telephones feature user-friendly, liquid
crystal  displays,  or LCDs,  of up to 6-by-16  characters,  with menu keys that
permit  users to select from  multiple  menu choices or access  additional  menu
screens.  These AXXESS and ECLIPSE(2)  telephones  also  incorporate  integrated
voice processing, which permits key selection and push-button selection of voice
processing  commands,  such as playback and record, to appear on the telephone's
LCD, as well as  voice-prompted  selections  through the telephone  keypad.  Our
systems currently offer American English, British English,  Japanese and Spanish
voice  prompts and LCDs,  and allow users to switch from one language to another
on a phone-by-phone basis. The software is also designed to support the addition
of other languages.

     The AXXESS and ECLIPSE(2)  systems' advanced  software  configures and uses
real-time digital signal processor semiconductor  components,  known as DSPs. We
employ DSPs and related software in our systems to decrease system costs, permit
higher functionality and increase system flexibility. The system's DSP resources
can be  configured  for  different  combinations  of  speakerphones,  conference
capabilities, caller ID receivers and other DSP-based applications, depending on
the needs of an individual customer.

     Inter-Tel has also developed and incorporated a Windows  2000-based Central
Processing  Unit,  or Server CPU into the AXXESS and  ECLIPSE(2)  systems.  This
server-based  CPU is designed to handle call processing with increased speed and
efficiency and provides  enhanced  computer-telephony  interfaces.  By combining
server-based  technology with the core telephony functionality of the AXXESS and
ECLIPSE(2) systems, Inter-Tel's customers can benefit from the speed, efficiency
and  enhanced  functionality  of a  standards-based  server  while  enjoying the
benefits of a  traditional  PBX,  such as equipment  maintenance  during  system
operation  and  cost-effective  telephony  interfaces.  Because  the  Server CPU
integrates  with  existing  Inter-Tel  systems,  customers  can benefit from new
functionality and call handling capacity,  while retaining most of their current
system investment.

     Integrated  with the AXXESS and ECLIPSE(2)  systems,  our Voice  Processing
Unit  provides an automated  call  attendant  to guide  callers tO the person or
information  they  need.  An  "electronic   employee"  answers  incoming  calls,
transfers calls, records messages,  screens calls and returns calls using caller
identification  software. The Voice Processing Unit also provides enhanced voice
mail and call routing announcements.  Voice mail messages can be retrieved using
the Voice  Processing  Unit from any  location in the world  using a  touch-tone
phone.

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IP TELEPHONY PRODUCTS

     The emergence of high-performance, low-cost computers and the growth of the
Internet  and  other   digital  IP  networks   have  enabled   real-time   voice
communications to be transmitted on digital packet-switched networks in addition
to traditional circuit-switched telephone networks. Because IP network telephony
converts all transmissions to the same type of packets,  both voice and data can
use the same data circuits, thereby increasing efficiency and maximizing the use
of available bandwidth.  Using IP telephony,  bandwidth can be maximized to such
an extent  that users may be able to reduce the overall  number of circuits  and
bandwidth they require.

     With Inter-Tel's AXXESS and ECLIPSE(2)  systems,  users are able to enhance
their existing  telephone  systems with specific IP telephonY  functionality or,
alternatively,  base their entire  communications  systems on IP telephony.  Our
systems  are  designed  to  enable  our   customers   to  preserve   traditional
communications  capabilities  while  delivering  the  benefits  offered  by  new
technologies, such as packet-switched voice-over-IP.

     IP  PHONES  AND  IP  SOFTPHONES.  By  using  the  Internet  as  part  of  a
communications solution, our phone systems can be accessed by our customers from
anywhere.  Inter-Tel's IP phones, such as our IP PhonePlus and the IP Softphone,
are fully  integrated  with our AXXESS and  ECLIPSE(2)  systems,  enabling users
anywhere--whether in a home office, in a satellite office, a hotel room, or at a
warehouse--to  have  access  to the  full  functionality  of the  phone  system,
including call transferring,  conferencing, voice mail access, record-a-call and
computer-telephony integration.

     IP TELEPHONY VOICE AND DATA ROUTERS. We market and sell a line of voice and
data routers.  Voice and data routers are  transition  points between the public
circuit-switched telephone network and a packet-switched IP network, such as the
Internet.  Our IP router  products  convert regular  circuit-switched  voice and
facsimile  transmissions to or from the compressed data packets that travel over
packetized networks.  The Inter-Tel voice and data routers enable phone-to-phone
and PC-to-phone calling over packet-switched IP networks.

     IP  NETWORKING  MODULE.  Our  IP  Networking  Module  product  enables  the
transparent  networking  capabilities of the AXXESS and ECLIPSE(2)  systems over
Internet  Protocol and frame-relay data networks,  rather than using traditional
point-to-point  lines.  Whether our  customers  have 1 site or 63 sites,  all of
their  locations can interact  seamlessly  and  transparently  over IP networks:
practically  anything  that can be done using our systems in one location can be
done between  geographically-dispersed  locations.  All the advanced features of
our systems  remain in place when  networking  over IP, such as ACD hunt groups,
call center  applications,  paging  zones,  centralized  attendants  and tightly
integrated voice mail. By employing refined voice compression, jitter buffer and
echo cancellation technologies, calls consume minimal bandwidth on data networks
and provide clear connections.

COMPUTER-TELEPHONY PRODUCTS

     COMPUTER-TELEPHONY APPLICATIONS AND ENABLING TECHNOLOGIES. Through computer
telephony (CT),  Inter-Tel provides seamless  integration  between computers and
telephones.  CT automates  repetitive tasks,  which can improve  performance and
enhance customer  service.  Examples of typical CT applications  with the AXXESS
and ECLIPSE2  systems  include:  viewing  caller name,  information  and history
through a "pop-up" screen by interfacing with a company's  database,  performing
call handling tasks from a PC, and automatic call answering and routing.

     The open  architecture  interfaces of our business  communications  systems
enable   straight-forward   integration  with  "off-the-shelf,"   shrink-wrapped
applications  or custom software  packages.  Our  architecture  also enables our
systems'  capabilities  to be  expanded  because of the  support  available  for
industry standard protocols. CT applications developed by Inter-Tel are based on
this open architecture at both the desktop and system levels. Through the use of
Microsoft's TAPI,  Intel/Dialogic's  CT-Connect and CSTA protocols,  Inter-Tel's
software   applications  work  with  other  off-the-shelf   desktop  and  server
applications  such  as  personal  information  managers,  customer  relationship
management  (CRM)  applications,  help-desk  applications,  call routing or call
management.

     If  off-the-shelf  applications  do  not  fully  address  the  needs  of  a
particular  customer,  Inter-Tel can develop custom CT  applications  or provide
professional  consulting  services  for  that  customer  to  meet  their  needs.
Alternatively,  the simple-to-use  open architecture  interfaces of our software
enable independent  application  developers and end-user management  information
services  departments  to write custom CT  applications  to meet the  customer's
specific needs.

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     CALL  CENTER   SUITE.   The  Call   Center   Suite  is  a   collection   of
computer-telephony  software  applications  that maximize the  effectiveness and
productivity  of call  centers.  The  specific  modules of the Call Center Suite
include server software, reporting functionality, desktop statistical reporting,
intelligent call routing and agent task information. Each module interfaces with
Inter-Tel's business  communications systems to add cost-reducing  functionality
to call centers.  The  applications in Inter-Tel's  Call Center Suite can manage
automatic call distribution at peak efficiency or route incoming telephone calls
to a specific person based on various parameters.  The Suite can also be used to
collect, analyze and report real-time call processing information.

     CLEARCONNECT  TALK-TO-AGENT.  ClearConnect Talk-to-Agent is a voice-over-IP
product that enables customers to conduct voice  conversations with sales agents
over the Internet,  while  connected to the business' Web site.  Within seconds,
the voice-over-IP  call is routed to an Automatic Call Distribution  queue where
it can be routed to a customer service agent. With live  conversations  over the
Internet,  customers are able to obtain answers to their questions quickly,  and
our customer  service  agents can push Web pages  directly to the  customers for
increased agent productivity and enhanced revenue opportunities.

     UNIFIED  MESSAGING.   Inter-Tel's   Unified  Messaging  software  works  in
conjunction  with  a  variety  of  messaging  platforms,  including  Microsoft's
Exchange messaging application, Lotus' Notes, Lotus' cc:Mail, Novell's GroupWise
and other  Internet  mail  applications  such as AOL,  Yahoo Mail,  and Hotmail.
Designed to run on a Windows NT server,  Inter-Tel's  Unified Messaging Software
combines e-mail, voice mail and faxes into a single, centralized mail management
program.  Messages  are  converted  to  standard  file  formats  for  access and
processing through a variety of devices for improved workplace productivity.

     ENCORE BY INTER-TEL. Our Encore product is a business communications system
that addresses the small business  market.  Encore provides small  organizations
with features and benefits  associated  with more expensive PBX systems.  Encore
can be  configured  from two trunks and six  stations up to eight  trunks and 18
stations,  with or  without an  optional  integrated  voice  mail and  automated
attendant.  In  addition,  Encore can be  programmed  and  maintained  remotely,
minimizing the costs associated with on-site technician visits.

COMPUTER TELEPHONY PRODUCTS UNDER DEVELOPMENT

     APPLICATIONS  PLATFORM.  Our  Applications  Platform  product,  planned for
commercial  release in the first quarter or early in the second quarter of 2002,
is a  highly  flexible  and  robust  computer-telephony  and  voice  application
development product for enterprises.  The Applications Platform enables creative
customization  for  Interactive  Voice  Response,  or IVR,  applications  and is
comprised  principally of two  components:  a run-time engine and an easy-to-use
graphical  application  development  environment.  The  full-featured,  turn-key
Applications  Platform is being designed to include  high-performance  hardware,
state-of-the-art  enabling  technology,   integrated  IVR  capabilities  and  an
application  starter pack with two IVR  applications  for general  business use.
These starter  applications  will provide end users with a sample of the type of
functionality the platform can support. Based on specific end user requirements,
customized IVR applications  can also be created for the Applications  Platform.
Customers can further  enhance the  functionality  of their IVR  applications by
deploying the optional automatic speech recognition and text-to-speech modules.

     UNIFIED  COMMUNICATOR.  Our Inter-Tel Unified  Communicator  product,  also
scheduled  for  commercial  release in the first  quarter or early in the second
quarter of 2002, is a Web-based  user  interface  for the AXXESS and  ECLIPSE(2)
systems.  Unified  Communicator is being designed tO offer features to end users
through a standard  Web  browser,  or through a WAP Web client  using a cellular
phone or wireless PDA.  Using Unified  Communicator,  customers  will be able to
perform call handling, message management and a number of related tasks on their
desktop phones from virtually  anywhere.  Unified  Communicator will also enable
users to directly  manage and control their  personal  features and the specific
features of the users'  desktop AXXESS and ECLIPSE(2)  systems'  telephones.  To
complement the Internet and WAP interfaces of UnifieD Communicator,  a telephone
interface and a speech recognition engine will be available as separate modules.
By adding  the  appropriate  module,  users can call into the  system and manage
their messages and call routing through either a touch-tone or speech interface.

OTHER SERVICES AND PRODUCTS

     NETWORK  AND LONG  DISTANCE  SERVICES.  Through our  subsidiary,  Inter-Tel
NetSolutions,  we resell a variety  of  telecommunications  services,  including
domestic and international calling services,  calling card services, 800 calling
services, switched and dedicated services,  Internet,  frame-relay and voice and
video conferencing,  disaster recovery solutions and customized billing. We also
provide long distance calling services

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through  NetSolutions.  Because many of our customers  desire the convenience of
acquiring long distance  calling  services through the same vendor that they use
to purchase other telephony equipment and services, we also resell long distance
services to our customers  through contracts we have established with major U.S.
long distance carriers.

     We also  support  telecommunications  applications  such as T-1  access for
incoming toll-free traffic at call centers, switched long distance used at sales
offices  and frame  relay  networks  linking  together  multiple  offices  of an
enterprise.

     NETWORKING  TECHNOLOGIES  INTEGRATION.   Inter-Tel  designs,  installs  and
supports an integrated,  comprehensive  solution for our customers' complex data
and  telecommunications   networks,  from  local  area  networks,  or  LANs,  to
geographically dispersed wide area networks, or WANs.

     By forming  relationships with major manufacturers of hardware and software
technologies,  Inter-Tel  provides  the  routers,  ATM,  LAN and  WAN  switches,
wire-less  WAN  connections,  file servers,  intelligent  hubs and other devices
required for the  customer's  intranet or for access to the  Internet.  We offer
pre-sale  design  support,   project   coordination  for   implementation,   and
installation support on our full line of server-based  telephony products and IP
telephony products and services.

     PERIPHERAL PRODUCTS.  Inter-Tel also distributes leading telecommunications
peripheral  products,  applications  and services  developed  by third  parties,
through our CommSource  Division to our direct sales offices,  dealers and VARs.
We offer a selection of  third-party  peripheral  products  including  audio and
video conferencing,  computer-telephony applications,  battery backup, headsets,
surge protection, paging equipment,  wireless communications,  cabling solutions
and data multiplexers and routers. Our CommSource Division sells and distributes
products  that we have  endorsed as leading  communications  peripherals  widely
deployed  within  organizations  worldwide.  Many of these products and services
interface with our telephone systems.

     INTER-TEL.NET.  Through July 23, 2001, we provided  communications services
over data networks using IP with points of presence  (POPs) in various cities in
the United States,  Mexico and Hong Kong through our subsidiary,  Inter-Tel.NET,
Inc..  Inter-Tel.NET developed an IP network of high capacity  switches/gateways
and  privately  managed  bandwidth,  which could  accommodate  large  volumes of
traffic.  The managed  network,  routing  structure and bandwidth  capacity were
designed  to create a  cost-effective  solution  compared  to  traditional  long
distance calling services.  Through international alliances,  Inter-Tel.NET also
participated  with  businesses  in Asia,  Europe,  Mexico  and South  America to
provide  international IP telephony service.  Inter-Tel.NET's core customer base
includes  telecommunication  service providers,  such as long distance carriers,
resellers,  Competitive  Local  Exchange  Carriers,  or CLECs,  and data network
providers  that offer their end users  access to voice,  fax and other  enhanced
services.  Inter-Tel.NET utilizes other IP networks or traditional Long Distance
Carriers to complete the call where Inter-Tel.NET or one of its network partners
does not have a POP.

     On July 24, 2001,  Inter-Tel  sold 83% of  Inter-Tel.NET  to  Comm-Services
Corporation (Comm-Services) for a note in the principal amount of $4.95 million,
secured  in part by stock and other  marketable  securities  and 100% of the net
assets of  Inter-Tel.NET.  On December  30, 2001,  Comm-Services  entered into a
merger  agreement  with  Vianet  Technologies,  Inc.  (Vianet).  Pursuant to the
merger,  our 17% interest in Inter-Tel.NET was converted to 5.95 million shares,
or  approximately  10% of  Vianet,  plus the full  amount of the note.  For more
information  associated  with the  Inter-Tel.NET  transactions,  see  "Notes  to
Consolidated  Financial Statements." For risks associated with our Inter-Tel.NET
business,  see "Factors That May Affect Future Operating Results." See Note N to
the financial statements for more information about our segments.

SALES AND DISTRIBUTION

     We have developed a distribution  network of direct sales offices,  dealers
and VARs that have traditionally marketed to small- to medium-size organizations
our products,  which can support networked installations of up to 1,024 ports in
a single cabinet and 40,000 ports in a network configuration. With the advent of
Inter-Tel's  new  product  releases,  including  Version  6.0 of the  AXXESS and
ECLIPSE(2)  systemS  released  in the first  quarter of 2002,  our  distribution
network  now  markets to large  organizations  our  products,  which can support
networked  installations  of up  to  40,000  ports.  As of  December  31,  2001,
Inter-Tel had 49 direct sales offices in the United States and one in Japan, and
a network of hundreds of dealers that purchase systems directly from us. We also
maintain a wholesale distribution office in the United Kingdom that supplies and
supports Inter-Tel's dealers and distributors  throughout the United Kingdom and
in parts of Europe,  and we have  several  dealers  in Japan and in  Mexico.  In
January  2002,  we  acquired   selected  assets  and  assumed  certain  selected
liabilities of McLeod's key system, PBX and DataNet  Operations.  As a result of
the McLeod  acquisition,  we added five more direct sales  offices in the United
States. The DataNet operation located in Sioux Falls, South Dakota is a LAN, WAN
and

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network sales and service  provider.  We believe that the DataNet operation will
expand  our  product  offerings  to our  larger  customers  and  provide us with
increased revenue opportunities.

DISTRIBUTION CHANNELS

     Our success depends in part upon the strength of our distribution  channels
and our ability to maintain close access to our end user  customers  through our
distribution  channels.  In recent periods, we have sought to improve our access
to end users through strategic  acquisitions of resellers of telephony  products
and services  located in markets in which we have existing  direct sales offices
and in other markets.  As of December 31, 2001,  Inter-Tel's direct sales office
personnel and national and government  accounts personnel consisted of 1,009 and
60  persons,  respectively.  Our sales  through  our direct  sales  offices  and
government and national  accounts  group,  as a percentage of total sales,  have
increased  from 52.9% of net sales in 2000 to 58.2% of net sales in 2001.  Sales
to  distributors,  dealers,  and VARs have  decreased from 27.0% of net sales in
2000 to 22.8% of net sales in 2001.  Sales through our long distance and network
services  operations  have decreased from 13.5% of net sales in 2000 to 11.3% of
net sales in 2001.

     Direct  dealers and VARs enter into  exclusive  or  non-exclusive  reseller
agreements  with us for a term  of one or more  years.  These  agreements  often
include  requirements  that the reseller  meet or use their best efforts to meet
minimum annual purchase quotas.  We generally provide support and other services
to our resellers under the terms of the agreements.  We face intense competition
from other telephone system and voice processing  system  manufacturers  for our
dealers' attention,  as many of our dealers carry products that compete with our
products.

     During the third quarter of 2001, we launched an exclusive business partner
program.  This  program is  designed to reward  dealers who sell only  Inter-Tel
products to all new prospects and  aggressively  seek to upgrade their base. For
this  commitment  from the dealer,  we have  offered our  expertise to help them
manage their business.  This includes operational business reviews, shared human
resource forms and policies,  additional sales,  marketing and training support,
enhanced  co-op  benefits as well as special  sales  promotions  and awards.  In
addition, we will allow our branch sales offices to help dealers close business.
We believe that this program  offers us an  opportunity  to expand our wholesale
channel of distribution.

     LEASING SERVICES.  Inter-Tel offers its Total Solutions program through our
subsidiary,  Inter-Tel Leasing,  Inc. The Total Solutions program enables an end
user to acquire a full range of telephony systems, applications, maintenance and
support services from affiliated  vendors.  This program provides a total system
financing  package to the customer at a set monthly cost, with system  expansion
available for an additional fee. The typical Total Solutions contract has a term
of 60 months,  with the  customer  entitled to renew the contract at a specified
price for up to an additional 36 months.

     Inter-Tel also offers a line of low-cost lease  purchase  financing.  Lease
terms  range  from 24 to 84  months  with  $1.00,  fixed and fair  market  value
purchase  options.  Inter-Tel  can also  customize  financing  packages  to suit
customers with special  financial  needs.  By offering this type of financing to
acquire our products and services, our customers are able to lease directly from
Inter-Tel or an authorized Inter-Tel dealer,  thereby allowing us, or one of our
dealers to  maintain  a direct  relationship  with our  customers.  This  direct
relationship  allows  Inter-Tel to provide  maintenance and support services and
information regarding other Inter-Tel products and services.

     INTERNATIONAL SALES. We currently have dealers in the United Kingdom, parts
of Europe, Japan and Latin America.  International sales, which include business
communications  systems and IP telephony and peripheral products,  accounted for
approximately  2.6% of our net sales in both 2001 and 2000. In order to sell our
products  to  customers  in other  countries,  Inter-Tel  must comply with local
telecommunications standards. Our AXXESS and ECLIPSE(2) systems and IP telephony
products can be modified using our software to facilitate  compliance with thesE
local  regulations.  In addition,  the AXXESS and  ECLIPSE(2)  systems have been
designed to support  multi-lingual  functionality,  and botH  currently  support
American  English,  British  English,  Japanese  and Spanish  languages.  We are
currently working to expand our international dealer network.

CUSTOMER SERVICE AND SUPPORT

     Customer   service  and  support  are  critical   components   of  customer
satisfaction  and the success of our  business.  We operate a technical  support
group that provides a range of support services to our distributors, dealers and
end user  customers  through the  Internet  and  through a  toll-free  telephone
number. Inter-Tel provides on-site customer support and, using remote diagnostic
procedures,  we have the ability to detect and

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<PAGE>
correct  system  problems  from  our  technical  support  facilities.  In  2000,
Inter-Tel  began an  initiative to greatly  enhance our  Internet,  intranet and
extranet capabilities.  Through this initiative,  we re-designed our Web site to
offer to our direct sales offices and dealer  channel  state-of-the-art  support
for sales and  technical  support  activities.  Our Web site also  offers a wide
array of sales and  technical  information,  including  an on-line  product  and
service  catalog,  efficient order  processing,  portable-document-format  sales
brochures,     competitive     information,     on-line    technical    manuals,
frequently-asked-questions  on important  topics and convenient  "touch-to-talk"
live  operator  help  employing  our  own  ClearConnect  two-way   voice-over-IP
technology.  We  intend  to  further  develop  our Web  site  to add  additional
information and services.  In 2001, Inter-Tel began an initiative to enhance the
technical knowledge  database,  the automated order system and the browser-based
sales proposal platform on our intranet and extranet.

     We analyze  feedback  from our  customer  service  call  records to provide
direction  for product and service  enhancements.  Our direct sales  offices and
resellers can receive  service  activity  reports  summarizing  the reasons that
technicians  are  asking for  assistance  and  common  issues  that give rise to
technical inquiries. This allows our direct sales offices and resellers to track
trends in their  service  operations  and to  thereby  provide  better  customer
service.

     We believe that we can best serve our  customers by  continually  improving
the quality of our systems,  customer service and support,  and other aspects of
our organization.  Through our continuous improvement process initiated in 1991,
Inter-Tel implements quality processes  throughout its business  operations.  We
have  established  formal  procedures  to  ensure   responsiveness  to  customer
requests, monitor response times and measure customer satisfaction. We have also
established means by which all end users,  including customers of our resellers,
can request  product  enhancements  directly  from us.  Inter-Tel  supports  its
dealers  and  VARs  through  an  extensive   training  program  offered  at  its
facilities,  at dealer and third-party  sites, a toll-free  telephone number for
sales and technical  support,  an extranet site  offering  up-to-date  sales and
support  information,  and the  provision of end user  marketing  materials.  We
typically  provide a one year  warranty on our systems to end users  through our
direct offices. We offer eighteen-month  warranties on our systems to the dealer
channel,  which in turn are  responsible  for  providing a warranty to their end
users.

RESEARCH AND DEVELOPMENT

     We believe  that our ability to enhance our current  products,  develop and
introduce new products on a timely basis, maintain technological competitiveness
and  meet  customer  requirements  are  essential  to our  success.  Inter-Tel's
research and  development  efforts over the last several years have been focused
primarily on the development of, and  enhancements to, our AXXESS and ECLIPSE(2)
systems,  including  adding  new  applications,   incorporating  IP  convergence
applications  and  IP  telephones,   developing   Unified   Messaging   Software
applications, and expanding the telecommunications networking package to include
networking  over IP and frame relay networks.  Over the last several years,  our
research and  development  efforts have also focused on the  development  of the
ClearConnect   SoftPhone  and  the  related   ClearConnect   Talk-to-Agent   Web
communications  software.  Inter-Tel's current efforts are focused on developing
and  enhancing  the IP telephony  products and  applications  for our AXXESS and
ECLIPSE(2) systems,  increasing single-site node capacity using an ATM backbone,
enhancing our Unified Messaging Software,  developing a  speech-recognition  and
text-to-speech  enabled unified communications  product,  developing an advanced
IVR and CT application  development tool,  enhancing the IP digital  telephones,
and enhancing Inter-Tel's  server-based PBX offerings.  As of December 31, 2001,
we had a total of 209 personnel  engaged in research and development and related
technical service and support functions.  Research and development expenses were
$17,556,000, $19,489,000, and $14,798,000 for 2001, 2000, and 1999.

MANUFACTURING

     Inter-Tel manufactures substantially all of its systems through third party
subcontractors  located in the United States, the People's Republic of China and
Mexico.  These  subcontractors  use both  standard  and  proprietary  integrated
circuits  and other  electronic  devices  and  components  to produce  telephone
switches,   telephones   and   printed   circuit   boards  to  our   engineering
specifications and designs.  Our suppliers inspect and test the equipment before
delivering  them to us, and in some cases our  suppliers  also  perform  systems
integration,  software loading, final testing and shipment. Varian Associates, a
multinational electronics company, currently manufacturers a significant portion
of our products,  including substantially all of the printed circuit boards used
in the AXXESS and  ECLIPSE(2)  systems,  at Varian'S  Tempe,  Arizona and Poway,
California  facilities.  We provide  Varian  with  forecasted  schedules  of our
manufacturing   needs  and  revise  the  forecasts  on  a  periodic

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basis.  We  continuously  monitor  the quality of the  products  produced on our
behalf by our  manufacturing  subcontractors,  and we are extending  Inter-Tel's
continuous improvement process to our suppliers.

COMPETITION

     The market for our products is highly competitive and has in recent periods
been characterized by rapid technological  change,  business  consolidations and
decreasing prices. Our PABX and key systems products  competitors include Avaya,
NorTel  Networks,  3Com,  Cisco Systems,  Comdial,  Iwatsu America,  Inc., Mitel
Networks,  NEC  Corporation,  Panasonic,  Siemens and  Toshiba.  We also compete
against the regional Bell System operating  companies  (RBOCs),  which typically
offer systems  produced by one or more of our competitors  listed above and also
typically  offer  Centrex  systems in which  automatic  calling  facilities  are
provided through equipment located in the telephone company's central office. We
also compete with next-generation  service providers,  such as DSL providers and
cable  companies,   that  offer  bundled  telephony  and  data  services  in  an
application service provider telephony model.

     In the market for voice  processing  applications  including voice mail, we
compete against Captaris, Active Voice, ADC Telecommunication, InterVoice-Brite,
Lucent Technologies, Avaya, Nortel, Comdial and other competitors. In the market
for long distance services, we compete against AT&T, MCI WorldCom, Sprint, Qwest
and others.  We also expect to compete with RBOCs,  cable television  companies,
satellite  and other  wireless  broadband  service  providers  for long distance
business.  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.  We believe  that we
compete  favorably  in our markets with  respect to the price,  performance  and
features of our  systems,  as well as the level of service  and support  that we
provide to our customers. However, certain of our competitors have significantly
greater resources, name recognition and distribution capabilities than we do.

     In the market  for IP  telephony  products  geared  toward  the  enterprise
markets, Inter-Tel competes with existing IP telephony providers such as Lucent,
Avaya,  NorTel,  Cisco  Systems,  3Com,  ADC  and  Motorola.  Several  of  these
competitors  have been active in developing and marketing IP telephony  products
and have established  relationships with customers within their markets.  If the
market for IP telephony  products becomes fully developed or develops at a rapid
rate,  large computer  companies such as IBM and Microsoft,  or large  telephone
companies such as AT&T, MCI WorldCom,  Sprint or Qwest,  could choose to develop
proprietary software designed to facilitate voice communication services over an
IP network.

     As we compete for local  telephone  service,  long distance  service and IP
network access,  we face additional  competition  from  established  foreign and
domestic  long  distance  carriers,  RBOCs  and other  providers.  Many of these
competitors have larger marketing and sales organizations, significantly greater
financial and technical  resources  and a larger and more  established  customer
base  than we do. In  addition,  RBOCs and other  providers  have  greater  name
recognition,  more  established  positions  in  the  market  and  long  standing
relationships with customers.

INTELLECTUAL PROPERTY RIGHTS

     We currently hold patents for 17  telecommunications  and unified messaging
products.  The  remaining  life of these  patents  ranges  from 4 to 16 years in
duration.  We have also applied to the U.S.  Patent and  Trademark  Office for 6
additional patents. We also rely on copyright,  trademark,  trade secret law and
contractual provisions to protect our intellectual property.

EMPLOYEES

     As of December 31,  2001,  we had a total of 1,667  employees,  of whom 578
were  engaged  in  sales,  marketing  and  customer  support;  572  in  quality,
manufacturing  and related  operations;  209 in  research  and  development  and
related   technical  service  and  support   functions;   and  308  in  finance,
administration and management.  We believe that our relations with our employees
are good.

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FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

RISKS RELATED TO OUR BUSINESS

OUR MARKET IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE AND TO COMPETE SUCCESSFULLY,
WE MUST  CONTINUALLY  INTRODUCE  NEW AND ENHANCED  PRODUCTS  AND  SERVICES  THAT
ACHIEVE BROAD MARKET ACCEPTANCE.

     The  market  for our  products  and  services  is  characterized  by  rapid
technological  change,  evolving industry standards and vigorous customer demand
for new products,  applications and services. To compete  successfully,  we must
continually enhance our existing  telecommunications  products, related software
and customer services, and develop new technologies and applications in a timely
and  cost-effective  manner.  If we fail to introduce  new products and services
that  achieve  broad  market  acceptance,  or if we do not  adapt  our  existing
products and services to customer demands or evolving  industry  standards,  our
business could be significantly harmed. In addition,  current competitors or new
market  entrants may offer  products,  applications  or services that are better
adapted to changing  technology  or customer  demands and that could  render our
products and services unmarketable or obsolete.

     In  addition,  if the markets  for  computer-telephony  (CT)  applications,
Internet Protocol (IP) network products,  or related products fail to develop or
continue to develop more slowly than we anticipate,  or if we are unable for any
reason  to  capitalize  on any  of  these  emerging  market  opportunities,  our
business,  financial  condition  and operating  results  could be  significantly
harmed.

OUR FUTURE SUCCESS  LARGELY  DEPENDS ON INCREASED  COMMERCIAL  ACCEPTANCE OF OUR
AXXESS AND ECLIPSE2 SYSTEMS,  ENCORE PRODUCT,  INTERPRISE  PRODUCTS,  NEW SPEECH
RECOGNITION   AND   INTERACTIVE   VOICE   RESPONSE    PRODUCTS,    AND   RELATED
COMPUTER-TELEPHONY PRODUCTS.

     During the past few years,  we have introduced  transparent  networking and
unified messaging capabilities on our AXXESS and ECLIPSE2 systems and introduced
our Encore product and InterPrise family of voice and data convergence products.
In 2000, we introduced  ClearConnect,  a software-based telephone that runs on a
PC, ClearConnect Talk-to-Agent,  an e-commerce "touch-to-talk" Web call product,
a line of IP voice  terminals  and IP soft phones that add IP  telephony  to the
AXXESS and  ECLIPSE2  systems,  and several  other  telephony-related  products.
During the past 12 months, sales of our AXXESS business  communications  systems
and related software have comprised a substantial  portion of our net sales. Our
future success depends, in large part, upon increased commercial  acceptance and
adoption of the InterPrise and related  computer-telephony  products, the AXXESS
and ECLIPSE2 systems,  Encore products,  new speech  recognition and Interactive
Voice Response  products,  as well as future upgrades and  enhancements to these
products and networking  platforms.  We cannot assure you that these products or
platforms will achieve commercial acceptance in the future.

OUR  PRODUCTS  ARE COMPLEX AND MAY CONTAIN  ERRORS OR DEFECTS  THAT ARE DETECTED
ONLY AFTER THEIR  RELEASE,  WHICH MAY CAUSE US TO INCUR  SIGNIFICANT  UNEXPECTED
EXPENSES AND LOST SALES.

     Our telecommunications  products and software are highly complex.  Although
our new products and upgrades are examined and tested prior to release, they can
only be fully  tested  when used by a large  customer  base.  Consequently,  our
customers  may discover  program  errors,  or "bugs," or other defects after new
products and  upgrades  have been  released.  Some of these bugs may result from
defects  contained in component  parts or software  from our  suppliers or other
third  parties  that are  intended to be  compatible  with our products and over
which we have little or no control. Although we have test procedures and quality
control standards in place designed to minimize the number of errors and defects
in our products, we cannot assure you that our new products and upgrades will be
free of bugs when released.  If we are unable to quickly or successfully correct
bugs identified after release,  we could experience the following,  any of which
would harm our business:

     *    costs associated with the remediation of any problems;
     *    costs associated with design modifications;
     *    loss of or delay in revenues;
     *    loss of customers;
     *    failure to achieve market acceptance or loss of market share;
     *    increased service and warranty costs;
     *    liabilities to our customers; and
     *    increased insurance costs.

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THE COMPLEXITY OF OUR PRODUCTS COULD CAUSE DELAYS IN THE DEVELOPMENT AND RELEASE
OF NEW  PRODUCTS AND  SERVICES.  AS A RESULT,  CUSTOMER  DEMAND FOR OUR PRODUCTS
COULD DECLINE, WHICH COULD HARM OUR BUSINESS.

     Due to the  complexity  of our products and  software,  we have in the past
experienced and expect in the future to experience delays in the development and
release of new products or product  enhancements.  If we fail to  introduce  new
software,  products or services in a timely manner,  or fail to release upgrades
to our existing  systems or products and software on a regular and timely basis,
customer  demand for our products and software could  decline,  which would harm
our business.

BUSINESS ACQUISITIONS,  DISPOSITIONS OR JOINT VENTURES ENTAIL NUMEROUS RISKS AND
MAY DISRUPT  OUR  BUSINESS,  DILUTE  SHAREHOLDER  VALUE OR  DISTRACT  MANAGEMENT
ATTENTION.

     As  part  of  our  business  strategy,  we  consider  acquisitions  of,  or
significant  investments  in,  businesses  that  offer  products,  services  and
technologies complementary to ours. Such acquisitions could materially adversely
affect our operating results and/or the price of our common stock.  Acquisitions
also entail numerous risks, including:

     *    unanticipated costs and liabilities;
     *    difficulty of assimilating  the operations,  products and personnel of
          the acquired business;
     *    difficulties  in managing  the  financial  and  strategic  position of
          acquired or developed products, services and technologies;
     *    the diversion of management's attention from the core business;
     *    inability  to  maintain  uniform  standards,  controls,  policies  and
          procedures; and
     *    impairment  of  relationships  with  acquired  employees and customers
          occurring as a result of integration of the acquired business.

     In  particular,  in 2000 we acquired  certain  assets and  assumed  certain
liabilities of Executone  Information  Systems,  Inc. Our operating results were
adversely  affected by several of the factors  described  above  relating to the
Executone acquisition,  including the risks related to unanticipated acquisition
costs and liabilities and impairment of employee and customer relationships,  as
well as the erosion of gross and operating margins. For these and other reasons,
we wrote-off our investment in Executone during the second quarter of 2000.

     In addition to the Executone  losses discussed above, for the quarter ended
September 30, 2000,  we also recorded a pre-tax loss of $2.0 million  related to
our equity share of Cirilium's net losses. As of the close of the third quarter,
we wrote off our remaining investment in Cirilium of $2.0 million. Total pre-tax
losses from Cirilium from all sources were $8.6 million for 2000.

     In January 2001, we acquired certain assets and assumed certain liabilities
of Convergent Technologies,  Inc. In connection with the Convergent acquisition,
we hired over 200 Convergent employees and opened eight Inter-Tel branch offices
in previous Convergent locations.  Among other risks and uncertainties,  we have
experienced  and may continue to experience the following  difficulties or risks
associated with the Convergent acquisition:

     *    substantially  all of  Convergent's  sales  were  of our  competitor's
          products and services,  and these  competitors  have made it difficult
          and expensive for us to service and maintain some of these products;
     *    a number of  Convergent's  customers  have declined the  assignment of
          their maintenance contracts to us;
     *    a number  of the  employees  hired by  Inter-Tel  have not  integrated
          successfully into the Inter-Tel business model; and
     *    many  of  the  independent  contractors  who  performed  projects  for
          Convergent have not assumed similar roles with Inter-Tel.

     In  July  2001,   Inter-Tel   agreed  to  sell  83%  of   Inter-Tel.NET  to
Comm-Services  Corporation.  In  connection  with  this  transaction,  Inter-Tel
assessed the fair value of the net assets of  Inter-Tel.NET  as of June 30, 2001
under  FAS  121 to  arrive  at an  adjustment  to the  remaining  investment  in
Inter-Tel.NET. The charge recorded as of the close of the second quarter of 2001
totaled $5.4 million ($3.4 million after tax), associated with the impairment of
Inter-Tel's investment in Inter-Tel.NET.  The recording of this charge adversely
affected our operating  results for the second  quarter of 2001. On December 30,
2001,  Comm-Services  entered into a merger agreement with Vianet  Technologies,
Inc.  (Vianet).  Inter-Tel's  17% investment in  Comm-Services  was converted

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<PAGE>
to approximately 10% of Vianet stock. Our financial  condition will be adversely
affected to the extent that the Vianet business is unsuccessful.

     During 1999, 2000 and 2001, Inter-Tel.NET also entered into operating lease
agreements  totaling  approximately  $6.5 million  from an equipment  vendor for
network equipment and software.  The lease agreements required  Inter-Tel.NET to
have vendor maintenance on their products.  Inter-Tel originally  guaranteed the
indebtedness.  In the second quarter of 2001,  Inter-Tel.NET notified the vendor
of network and network  equipment  problems  encountered due to vendor equipment
and software  recommended,  supplied and financed by this vendor.  Inter-Tel.NET
requested  that the  vendor  not only solve the  problems,  but also  compensate
Inter-Tel.NET  for the problems and the resulting lost customers,  lost revenues
and  lost  profits.  Pursuant  to  Inter-Tel's  sale  of 83%  of  Inter-Tel.NET,
Comm-Services  assumed the vendor lease and maintenance  obligations and as such
Inter-Tel  has not recorded any liability for these  obligations.  However,  the
vendor has not released  Inter-Tel from its guarantee of these  obligations  and
Inter-Tel has not released the vendor from Inter-Tel's claims, nor did we assign
our rights to these claims to  Comm-Services.  Our financial  condition  will be
adversely  affected to the extent that payments made under the guarantee  exceed
damages realized from our claim.

     In January 2002, we acquired  selected assets and liabilities of McLeodUSA,
Inc. (McLeod). In connection with the McLeod acquisition, we hired approximately
100 McLeod  employees and opened two Inter-Tel branch offices in previous McLeod
locations.  We cannot predict whether we will be able to integrate the employees
and business of McLeod into our operations successfully.

     Finally,  to the extent  that shares of our stock or the rights to purchase
stock are issued in  connection  with any future  acquisitions,  dilution to our
existing  shareholders  will result and our earnings  per share may suffer.  Any
future  acquisitions may not generate  additional revenue or provide any benefit
to our business,  and we may not achieve a satisfactory return on our investment
in any acquired businesses.

WE MAY NOT BE ABLE TO ADEQUATELY  PROTECT OUR PROPRIETARY  TECHNOLOGY AND MAY BE
INFRINGING UPON THIRD-PARTY INTELLECTUAL PROPERTY RIGHTS.

     Our success  depends upon our  proprietary  technology.  We currently  hold
patents for 17  telecommunication  and unified messaging  products and have also
applied to the U.S. Patent and Trademark Office for six additional  patents.  We
also rely on  copyright  and trade  secret  law and  contractual  provisions  to
protect our  intellectual  property.  Despite these  precautions,  third parties
could copy or otherwise obtain and use our technology without authorization,  or
develop similar technology independently.

     We cannot assure you that any patent, trademark or copyright that we own or
have applied to own, will not be  invalidated,  circumvented  or challenged by a
third  party.  Effective  protection  of  intellectual  property  rights  may be
unavailable  or  limited  in foreign  countries.  We cannot  assure you that the
protection of our proprietary  rights will be adequate or that  competitors will
not independently  develop similar technology,  duplicate our services or design
around any patents or other intellectual property rights we hold. Litigation may
be  necessary  in the future to enforce our  intellectual  property  rights,  to
protect  our  trade  secrets,  to  determine  the  validity  and  scope  of  the
proprietary  rights of others,  or to defend against claims of  infringement  or
invalidity.  Litigation could be costly, absorb significant  management time and
harm our business.

     We are also  subject  to third  party  claims  that our  current  or future
products or services  infringe  upon the rights of others.  For example,  we are
subject to proceedings  alleging that certain of our key products  infringe upon
third  party  intellectual  property  rights,  including  patents,   trademarks,
copyrights or other intellectual  property rights. We have viewed  presentations
from one of our primary competitors,  Lucent and subsequently  Lucent's spin off
Avaya,  alleging  that  our  AXXESS  business   communications  system  utilizes
inventions covered by certain of their patents. We are continuing the process of
investigating  this matter and we have made claims  against Avaya and Lucent for
infringement of our patents.  Additionally,  we recently  received a letter from
AT&T alleging that some of our IP products infringe upon  intellectual  property
protected by AT&T's  patents.  Although we have denied  AT&T's  allegations  and
intend to defend  our  position  vigorously,  we cannot  assure you that we will
ultimately  prevail in this dispute.  When any such claims are asserted  against
us, among other means to resolve the  dispute,  we may seek to license the third
party's intellectual property rights. Purchasing such licenses can be expensive,
and we cannot  assure you that a license  will be  available  on prices or other
terms acceptable to us, if at all. Alternatively,  we could resort to litigation
to challenge  such a claim.  Litigation  could require us to expend  significant
sums of cash and divert our  management's  attention.  In the event that a court
renders an enforceable  decision with respect to our intellectual  property,  we
may be required to pay significant damages, develop non-

                                       15
<PAGE>
infringing  technology  or acquire  licenses  to the  technology  subject to the
alleged infringement.  Any of these actions or outcomes could harm our business.
If we are unable or choose not to license technology, or decide not to challenge
a third party's  rights,  we could  encounter  substantial  and costly delays in
product  introductions.  These delays could result from efforts to design around
asserted third party rights or our discovery that the  development,  manufacture
or sale of products requiring these licenses could be foreclosed.

OUR IP NETWORK PRODUCTS MAY BE VULNERABLE TO VIRUSES, OTHER SYSTEM FAILURE RISKS
AND SECURITY  CONCERNS,  WHICH MAY RESULT IN LOST  CUSTOMERS OR SLOW  COMMERCIAL
ACCEPTANCE OF OUR IP NETWORK PRODUCTS.

     Inter-Tel's IP telephony and network products may 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 that
could harm our  operations and revenues.  In addition,  we may lose customers if
inappropriate  use of the  Internet  or  other  IP  networks  by  third  parties
jeopardize the security of confidential information, such as credit card or bank
account  information  or the content of  conversations  over the IP network.  In
addition,  user  concerns  about  privacy and  security may cause IP networks in
general to grow more  slowly,  and impair  market  acceptance  of our IP network
products in  particular,  until more  comprehensive  security  technologies  are
developed.

WE HAVE MANY  COMPETITORS AND EXPECT NEW COMPETITORS TO ENTER OUR MARKET,  WHICH
COULD INCREASE PRICE  COMPETITION  AND SPENDING ON RESEARCH AND  DEVELOPMENT AND
WHICH MAY IMPAIR OUR ABILITY TO COMPETE SUCCESSFULLY.

     The markets for our products and services are extremely  competitive and we
expect  competition  to  increase  in the  future.  Our  current  and  potential
competitors in our primary business segments include:

     *    PABX and core systems providers such as Avaya, Cisco Systems, Comdial,
          3Com, Iwatsu, Mitel, NEC, Nortel, Panasonic, Siemens, and Toshiba;
     *    large data routing and  convergence  companies  such as 3Com and Cisco
          Systems;
     *    voice processing applications providers such as ADC, InterVoice-Brite,
          Active Voice (a subsidiary of NEC America),  Avaya, Captaris (formerly
          AVT) and Lucent;
     *    long distance services providers such as AT&T, MCI WorldCom, Qwest and
          Sprint;
     *    large  computer and software  corporations  such as IBM and Microsoft;
          and
     *    regional  Bell  operating   companies,   or  RBOCs,  cable  television
          companies  and  satellite  and  other   wireless   broadband   service
          providers.

     These and other companies may form strategic  relationships with each other
to  compete  with  us.  These  relationships  may  take  the  form of  strategic
investments,   joint-marketing   agreements,   licenses  or  other   contractual
arrangements,  which could increase our competitors' ability to address customer
needs with their product and service offerings.

     Many  of our  competitors  and  potential  competitors  have  substantially
greater financial,  customer support, technical and marketing resources,  larger
customer bases,  longer operating  histories,  greater name recognition and more
established  relationships in the industry than we do. We cannot be sure that we
will have the  resources or expertise to compete  successfully.  Compared to us,
our competitors may be able to:

     *    develop and expand their product and service offerings more quickly;
     *    adapt to new or emerging  technologies  and  changing  customer  needs
          faster;
     *    take advantage of acquisitions and other opportunities more readily;
     *    negotiate more favorable licensing agreements with vendors;
     *    devote greater  resources to the marketing and sale of their products;
          and
     *    address customers' service-related issues more adequately.

     Some  of our  competitors  may  also  be able  to  provide  customers  with
additional  benefits at lower  overall  costs or to reduce  their gross  margins
aggressively  in an effort to increase  market share.  We cannot be sure that we
will be able to match  cost  reductions  by our  competitors.  In  addition,  we
believe that there is likely to be  consolidation  in our  markets,  which could
lead to increased price  competition  and other forms of competition  that could
cause our business to suffer.

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<PAGE>
OUR  RELIANCE  ON A  LIMITED  NUMBER OF  SUPPLIERS  FOR KEY  COMPONENTS  AND OUR
INCREASING  DEPENDENCE  ON CONTRACT  MANUFACTURERS  COULD  IMPAIR OUR ABILITY TO
MANUFACTURE AND DELIVER OUR PRODUCTS AND SERVICES IN A TIMELY AND COST-EFFECTIVE
MANNER.

     We currently  obtain certain key  components for our digital  communication
platforms,   including  certain  microprocessors,   integrated  circuits,  power
supplies,  voice  processing  interface  cards and IP  telephony  cards,  from a
limited  number of suppliers  and  manufacturers.  Our reliance on these limited
suppliers and contract manufacturers involves risks and uncertainties, including
the  possibility  of a shortage or delivery  delay for some key  components.  We
currently manufacture our products through third-party subcontractors located in
the United  States,  the  People's  Republic  of China,  the United  Kingdom and
Mexico.  The  Encore  system is  manufactured  by an OEM  partner  in the United
Kingdom. Foreign manufacturing facilities are subject to changes in governmental
policies, imposition of tariffs and import restrictions and other factors beyond
our control. Varian currently manufactures a significant portion of our products
at  Varian's  Tempe,  Arizona  and  Poway,   California  facilities,   including
substantially  all of the printed circuit boards used in the AXXESS and ECLIPSE2
systems,  as  well  as  substantially  all of the  Executone  computer-telephony
products. We have experienced  occasional delays in the supply of components and
finished goods that have harmed our business.  We cannot assure that we will not
experience similar delays in the future.

     Our  reliance  on third party  manufacturers  and OEM  partners  involves a
number of additional risks,  including reduced control over delivery  schedules,
quality assurance and costs. Our business may be harmed by any delay in delivery
or any shortage of supply of components or finished  goods from a supplier.  Our
business  may  also  be  harmed  if we are  unable  to  develop  alternative  or
additional  supply  sources as  necessary.  To date, we have been able to obtain
supplies of  components  and  products in a timely  manner even though we do not
have long-term supply contracts with any of our contract manufacturers. However,
we cannot  assure you that we will be able to continue to obtain  components  or
finished  goods in sufficient  quantities or quality or on favorable  pricing or
delivery terms in the future.

WE DERIVE A SUBSTANTIAL  PORTION OF OUR NET SALES FROM OUR DEALER NETWORK AND IF
THESE DEALERS DO NOT EFFECTIVELY PROMOTE AND SELL OUR PRODUCTS, OUR BUSINESS AND
OPERATING RESULTS COULD BE HARMED.

     We derive a  substantial  portion of our net sales  through  our network of
independent  dealers.  We face intense  competition from other telephone,  voice
processing,  and voice and data router system  manufacturers  for these dealers'
business,  as most of our dealers carry products that compete with our products.
Our  dealers  may choose to  promote  the  products  of our  competitors  to our
detriment.  The loss of any significant dealer or group of dealers, or any event
or condition  harming our dealer  network,  could harm our  business,  financial
condition and operating results.

EXPANDING OUR INTERNATIONAL  SALES EFFORTS MAY EXPOSE US TO ADDITIONAL  BUSINESS
RISKS,  WHICH MAY RESULT IN REDUCED SALES OR PROFITABILITY IN OUR  INTERNATIONAL
MARKETS.

     We are in the  process of  attempting  to expand our  international  dealer
network  both in the  countries  in which we already  have a presence and in new
countries  and  regions.  International  sales are subject to a number of risks,
including  changes  in  foreign  government  regulations  and  telecommunication
standards, export license requirements, tariffs and taxes, other trade barriers,
difficulties in protecting our intellectual  property,  fluctuations in currency
exchange rates, difficulty in collecting receivables, difficulty in staffing and
managing   foreign   operations,   and  political   and  economic   instability.
Fluctuations  in currency  exchange  rates  could  cause our  products to become
relatively  more  expensive to customers in a particular  country,  leading to a
reduction in sales or  profitability  in that  country.  In addition,  the costs
associated  with developing  international  sales may not be offset by increased
sales in the short term,  or at all. Any of these risks could cause our products
to become  relatively  more  expensive to  customers  in a  particular  country,
leading to reduced  sales or  profitability  in that country.  In addition,  the
costs  associated  with  developing an  international  dealer network may not be
offset by increased sales in the short term, if at all.

IF WE LOSE KEY PERSONNEL OR ARE UNABLE TO HIRE ADDITIONAL QUALIFIED PERSONNEL AS
NECESSARY, WE MAY NOT BE ABLE TO ACHIEVE OUR OBJECTIVES.

     We depend on the  continued  service  of, and our  ability  to attract  and
retain, qualified technical,  marketing, sales and managerial personnel, many of
whom would be  difficult  to replace.  Competition  for  qualified  personnel is
intense,  and we  have  historically  had  difficulty  hiring  employees  in the
timeframe that we desire, particularly skilled engineers. The loss of any of our
key personnel or our failure to  effectively  recruit  additional  key personnel
could make it difficult for us to manage our business,  complete  timely product
introductions  or meet

                                       17
<PAGE>
other critical  business  objectives.  For example,  our inability to retain key
executives of Executone following our Executone acquisition impaired our ability
to benefit from the  Executone  business and to grow revenues from the Executone
assets.  Moreover,  our  operating  results  will  be  impaired  if  we  lose  a
substantial number of key Convergent and McLeod employees.  We cannot assure you
that we will be able to continue to attract and retain the  qualified  personnel
necessary for the development of our business.

WE MAY BE UNABLE TO MANAGE OUR GROWTH EFFECTIVELY, WHICH MAY HARM OUR BUSINESS.

     The ability to operate our business in a rapidly  evolving  market requires
an effective  planning and  management  process.  The growth in our business has
placed,  and is  expected  to continue  to place,  a  significant  strain on our
personnel,  management systems,  infrastructure and other resources. Our ability
to manage any future growth effectively will require us to successfully attract,
train,  motivate and manage new  employees,  to integrate new employees into our
overall  operations  and to continue to improve our  operational,  financial and
management  controls  and  procedures.  Furthermore,  we expect  that we will be
required  to  manage  an  increasing  number of  relationships  with  suppliers,
manufacturers,  customers and other third parties. If we are unable to implement
adequate  controls or integrate new employees  into our business in an efficient
and timely  manner,  our operations  could be adversely  affected and our growth
could be impaired which could harm our business.

THE  INTRODUCTION  OF NEW PRODUCTS AND SERVICES HAS LENGTHENED OUR SALES CYCLES,
WHICH MAY RESULT IN SIGNIFICANT SALES AND MARKETING EXPENSES.

     In the past few years,  we introduced  the AXXESS and ECLIPSE2 ATM business
communications  system and  networking  software,  which are  typically  sold to
larger  customers  at a higher  average  selling  price  and often  represent  a
significant communications infrastructure capital expenditure by the prospective
enterprise  customer.  Accordingly,  the  purchase  of  our  products  typically
involves  numerous  internal  approvals  relating  to the  evaluation,  testing,
implementation  and  acceptance of new  technologies.  This  evaluation  process
frequently results in a lengthy sales process, which can range from a few months
to more  than 12  months,  thereby  subjecting  our  sales  cycle to a number of
significant   uncertainties   concerning  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, our operating results could be materially adversely affected.

OUR OPERATING  RESULTS HAVE  HISTORICALLY  DEPENDED ON A NUMBER OF FACTORS,  AND
THESE FACTORS MAY CAUSE OUR OPERATING RESULTS TO FLUCTUATE IN THE FUTURE.

     Our  quarterly  operating  results have  historically  depended on, and may
fluctuate in the future as a result of, many factors including:

     *    volume and timing of orders received during the quarter;
     *    gross margin fluctuations associated with the mix of products sold;
     *    the mix of distribution channels;
     *    general economic conditions;
     *    patterns of capital spending by customers;
     *    the timing of new  product  announcements  and  releases by us and our
          competitors;
     *    pricing pressures, the cost and effect of acquisitions,  in particular
          the Executone and Convergent acquisitions; and
     *    the  availability  and  cost  of  products  and  components  from  our
          suppliers.

     In addition, we have historically operated with a relatively small backlog,
with sales and operating results in any quarter depending  principally on orders
booked and shipped in that quarter.  In the past, we have recorded a substantial
portion of our net sales for a given quarter in the third month of that 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  business
communications  systems and  associated  call  processing  and voice  processing
software  applications depends largely on general economic  conditions,  and can
vary significantly as a result of changing conditions in the economy as a whole.
We cannot assure you that  historical  trends for small backlog will continue in
the future.

     Our expense levels are based in part on  expectations  of future sales and,
if sales levels do not meet expectations, our operating results could be harmed.
In  addition,  because  sales of  business  communications  systems  through our
dealers  typically  produce  lower gross  margins than sales  through our direct
sales

                                       18
<PAGE>
organization,  operating  results have varied,  and will  continue to vary based
upon the mix of sales through direct and indirect channels. Also, 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 typically have lower gross margins than our core business,
have grown in recent  periods at a faster rate than our overall net sales.  As a
result, gross margins could be harmed if long distance calling services continue
to increase as a percentage of net sales.  In addition,  we experience  seasonal
fluctuations  in our  operating  results,  as net sales for the first quarter is
frequently less than the fourth quarter and the third quarter is frequently less
than the  second  quarter.  As a result  of these  and  other  factors,  we have
historically  experienced,  and could  continue  to  experience  in the  future,
fluctuations in sales and operating results on a quarterly basis.

OUR STOCK PRICE HAS BEEN AND MAY CONTINUE TO BE VOLATILE, IMPAIRING YOUR ABILITY
TO SELL YOUR SHARES AT OR ABOVE PURCHASE PRICE.

     The  market  price for our  common  stock  has been  highly  volatile.  The
volatility  of our stock  could be subject to  continued  wide  fluctuations  in
response to many risk  factors  listed in this  section,  and others  beyond our
control, including:

     *    announcements of developments relating to our business;
     *    fluctuations in our operating results;
     *    shortfalls  in revenue or earnings  relative to  securities  analysts'
          expectations;
     *    announcements  of   technological   innovations  or  new  products  or
          enhancements by us or our competitors;
     *    announcements  of  acquisitions  or  planned   acquisitions  of  other
          companies or businesses;
     *    investors' reactions to acquisition  announcements or our forecasts of
          future results;
     *    general conditions in the telecommunications industry;
     *    the market for Internet-related products and services;
     *    changes in the national or worldwide economy;
     *    changes in legislation or regulation affecting the  telecommunications
          industry;
     *    an outbreak of hostilities or terrorist acts;
     *    developments  relating  to our and third party  intellectual  property
          rights; and
     *    changes in our relationships with our customers and suppliers.

     In addition, stock prices of technology companies in general, and for voice
and data  communications  companies of  technology  stocks in  particular,  have
experienced  extreme  price  fluctuations  in recent years which have often been
unrelated to the operating  performance of affected companies.  We cannot assure
you that the market  price of our common stock will not  experience  significant
fluctuations  in the future,  including  fluctuations  that are unrelated to our
performance.

OUR CHAIRMAN OF THE BOARD OF DIRECTORS,  CEO AND PRESIDENT CONTROLS 21.7% OF OUR
COMMON  STOCK  AND  IS  ABLE  TO  SIGNIFICANTLY   INFLUENCE   MATTERS  REQUIRING
SHAREHOLDER APPROVAL.

     As of March 1, 2002, Steven G. Mihaylo,  Inter-Tel's  Chairman of the Board
of  Directors,  Chief  Executive  Officer  and  President,   beneficially  owned
approximately  21.7% 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 Inter-Tel.

RISKS RELATED TO OUR INDUSTRY

THE  EMERGING  MARKET FOR IP NETWORK  TELEPHONY  IS SUBJECT TO MARKET  RISKS AND
UNCERTAINTIES THAT COULD CAUSE SIGNIFICANT DELAYS AND EXPENSES.

     The  market  for IP  network  voice  communications  products  has begun to
develop only recently, is evolving rapidly 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 of a new
and rapidly evolving industry, the demand for and market acceptance of, recently
introduced  IP network  products and services  are highly  uncertain.  We cannot
assure you that packet-switched  voice networks will become widespread.  Even if
packet-switched voice networks become widespread in the future, we cannot assure
you that our products,  including the Inter-Tel  InterPrise  product line and IP
telephony features of the AXXESS and ECLIPSE2 systems, will successfully compete
against other market players and attain broad market acceptance.  Inter-Tel sold
83% of Inter-Tel.NET,  an IP telephony provider,  to Comm-Services in July 2001,
and our remaining

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<PAGE>
17%  investment  was  subsequently  converted to  approximately  10% interest in
Vianet  Technologies,  Inc.  via a  merger  between  Comm-Services  and  Vianet.
Accordingly,   Inter-Tel   continues  to  maintain  an   investment  of  10%  in
Inter-Tel.NET  through  Vianet.  Accordingly,  our financial  condition  will be
adversely affected if the Inter-Tel.NET/Vianet business is unsuccessful.

     Moreover, the adoption of packet-switched voice 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.  If the  market  for IP network  voice  communications  fails to
develop or develops  more slowly than we  anticipate,  our IP network  telephony
products  could  fail  to  achieve  market  acceptance,   which  in  turn  could
significantly harm our business, financial condition and operating results. This
growth  may  be  inhibited   by  a  number  of  factors,   such  as  quality  of
infrastructure;  security  concerns;  equipment,  software  or other  technology
failures; regulatory encroachments;  inconsistent quality of service; poor voice
quality over IP networks as compared to circuit-switched  networks;  and lack of
availability  of  cost-effective,  high-speed  network  capacity.  Moreover,  as
IP-based data  communications and telephony usage grow, the infrastructure  used
to support  these IP  networks,  whether  public or private,  may not be able to
support the demands  placed on them and their  performance  or  reliability  may
decline. The technology that allows voice and facsimile  communications over the
Internet  and  other  data  networks,  and the  delivery  of  other  value-added
services, is still in the early stages of development.

GOVERNMENT  REGULATION OF THIRD PARTY LONG DISTANCE AND NETWORK SERVICE ENTITIES
ON WHICH WE RELY MAY HARM OUR BUSINESS.

     Our  supply of  telecommunications  services  and  information  depends  on
several long distance carriers,  RBOCs,  local exchange  carriers,  or LECs, and
competitive  local  exchange  carriers,  or CLECs.  We rely on these carriers to
provide  network  services  to our  customers  and to  provide  us with  billing
information.  Long  distance  services  are subject to extensive  and  uncertain
governmental  regulation  on both the federal and state level.  We cannot assure
that the  increase  in  regulations  will not harm  our  business.  Our  current
contracts  for the resale of services  through long  distance  carriers  include
multi-year  periods during which we have minimum use requirements  and/or costs.
The market for long  distance  services  is  experiencing,  and is  expected  to
continue  to  experience  significant  price  competition,  and this may cause a
decrease in end-user  rates.  We cannot assure you that we will meet minimum use
commitments,  that we will be able to  negotiate  lower  rates with  carriers if
end-user  rates  decrease or that we will be able to extend our  contracts  with
carriers at favorable  prices. If we are unable to secure reliable long distance
and network services from certain long distance carriers, RBOCs, LECs and CLECs,
or if these  entities  are  unwilling  or unable to  provide  telecommunications
services and billing information to us on favorable terms, our ability to expand
our own long distance and network services will be harmed. Carriers that provide
telecommunications services to us may also experience financial difficulties, up
to  and  including   bankruptcies,   which  could  harm  our  ability  to  offer
telecommunications services.

CONSOLIDATION WITHIN THE TELECOMMUNICATIONS  INDUSTRY COULD INCREASE COMPETITION
AND REDUCE OUR CUSTOMER BASE.

     During  the past  year,  there  has been a trend in the  telecommunications
industry  towards  consolidation  and we expect  this trend to  continue  as the
industry  evolves.  As a  result  of  this  consolidation  trend,  new  stronger
companies may emerge that have improved financial  resources,  enhanced research
and development  capabilities  and a larger and more diverse  customer base. The
changes  within  the  telecommunications   industry  may  adversely  affect  our
business, operating results and financial condition.

REDUCTIONS IN SPENDING ON ENTERPRISE COMMUNICATIONS EQUIPMENT MAY MATERIALLY AND
ADVERSELY AFFECT OUR BUSINESS.

     The overall  economic  slowdown has had a harmful  effect on the market for
enterprise  communications  equipment.  Our customers have reduced significantly
their capital spending on communications  equipment in an effort to reduce their
own costs and bolster their revenues.  The market for enterprise  communications
equipment  may continue to grow at a modest rate and our  financial  performance
has been  and may  continue  to be  materially  and  adversely  affected  by the
reductions in spending on enterprise communications equipment.

                                       20
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The  following  table  sets  forth  certain  information  regarding  Inter-Tel's
directors and executive officers as of March 8, 2002.

Name                       Age                Position
----                       ---                --------

Steven G. Mihaylo          58                 Chairman of the Board of
                                              Directors, Chief Executive Officer
                                              and President
Norman Stout               44                 Executive Vice President/Chief
                                              Administrative Officer
Craig W. Rauchle           46                 Executive Vice President/Chief
                                              Operating Officer
Jeffrey T. Ford            40                 Senior Vice President/Chief
                                              Technology Officer
Kurt R. Kneip              39                 Chief Financial Officer,
                                              Vice President and Secretary
J. Robert Anderson         65                 Director
Jerry W. Chapman           61                 Director
Gary Edens                 60                 Director
C. Roland Haden            61                 Director

     MR. MIHAYLO, the founder of Inter-Tel,  has served as Chairman of the Board
of Directors of Inter-Tel  since September 1983, as President since May 1998 and
as Chief Executive Officer since Inter-Tel's formation in July 1969. Mr. Mihaylo
served as  President  of  Inter-Tel  from 1969 to 1983 and from 1984 to December
1994, and as Chairman of the Board of Directors from July 1969 to October 1982.

     MR.  STOUT was  elected  Executive  Vice  President,  Chief  Administrative
Officer and  President  of Inter-Tel  Software  and Services in June 1998.  From
October 1994 to June 1998, he served as one of our  directors.  Prior to joining
Inter-Tel,  Mr. Stout was Chief  Operating  Officer of  Oldcastle  Architectural
Products  and since 1996,  Mr.  Stout also had served as  President of Oldcastle
Architectural  West.  Mr. Stout was previously  President of Superlite  Block, a
subsidiary of Oldcastle  Architectural  Products and a manufacturer  of concrete
products,  since February 1993. Prior thereto he was employed by Boorhem-Fields,
Inc. of Dallas,  Texas, a  manufacturer  of crushed  stone,  as Chief  Executive
Officer  from  1990 to 1993 and as Chief  Financial  Officer  from 1986 to 1990.
Prior to that,  Mr.  Stout was a  Certified  Public  Accountant  with  Coopers &
Lybrand.  Mr. Stout holds a Bachelor of Science degree in Accounting  from Texas
A&M and an MBA from the University of Texas.

     MR. RAUCHLE was elected Chief Operating Officer in August 2001 and has been
our Executive  Vice  President  since December 1994. He had been our Senior Vice
President and continues as President of Inter-Tel Technologies, Inc., our wholly
owned sales  subsidiary.  In  addition,  he  currently  is  responsible  for our
corporate  strategic  planning and mergers and acquisitions.  Mr. Rauchle joined
Inter-Tel in 1979 as Branch  General  Manager of the Denver  Direct Sales Office
and in 1983 was appointed the Central Region Vice President and subsequently the
Western  Regional  Vice  President.  From 1990 to 1992,  Mr.  Rauchle  served as
President of Inter-Tel Communications, Inc. Mr. Rauchle holds a Bachelor of Arts
degree in Communications from the University of Denver.

     MR. FORD was elected  Senior Vice  President  in May 1998 and has served as
our Chief Technology  Officer since 1997. He was elected  President of Inter-Tel
Integrated  Systems,  Inc.  ("IIS") in May 1998,  after  serving as Senior  Vice
President  of IIS for one year and Vice  President  of Software  Engineering  of
Inter-Tel Integrated Systems from 1993 to 1997. He joined Inter-Tel in 1983 as a
software  design  engineer.  Mr.  Ford  holds a Bachelor  of  Science  degree in
Computer   Systems   Engineering  from  Arizona  State  University  and  an  SEP
certificate from the Stanford Graduate School of Business.

     MR.  KNEIP has served as our Vice  President  and Chief  Financial  Officer
since September 1993. He was elected Secretary and Treasurer in October 1994. In
May  1996 he was  elected  Assistant  Treasurer,  as  John  Abbott  was  elected
Treasurer.  He joined  Inter-Tel in May 1992 as Director of Corporate Tax, after
seven years

                                       21
<PAGE>
with the accounting firms of Ernst & Young and KPMG Peat Marwick. Mr. Kneip is a
Certified  Public  Accountant,  and  holds  a  Bachelor  of  Science  degree  in
Commercial  Economics from South Dakota State University and a Masters Degree in
Professional Accountancy from the University of South Dakota.

     MR.  ANDERSON has served as one of our directors  since  February 1997. Mr.
Anderson held various positions at Ford Motor Company from 1963 to 1983, serving
as President of the Ford Motor Land  Development  Corporation from 1978 to 1983.
He served as Senior Vice President,  Chief Financial Officer and a member of the
Board of Directors of The Firestone  Tire and Rubber  Company from 1983 to 1989,
and as Vice Chairman of  Bridgestone/Firestone,  Inc. from 1989 through 1991. He
most recently served as Vice Chairman,  Chief Financial  Officer and a member of
the  Board of  Directors  of the  Grumman  Corporation  from  1991 to 1994.  Mr.
Anderson  is  currently  semi-retired,  and he is an active  leader  in  various
business, civic and philanthropic organizations.

     MR.  CHAPMAN  was  elected as one of our  directors  in  December  1999 and
previously  served as one of our  directors in the late 1980's and early 1990's.
He served with a local CPA firm from 1963 through  1969, at which time he joined
Ernst & Young (then Ernst & Ernst). He became a partner of Ernst & Young in 1977
and,  until  retiring from the firm in 1989,  served as engagement  partner on a
wide variety of audit, assurance and consulting  engagements.  Additionally,  he
managed Ernst & Young's  practices in Arizona as well as certain  offices in the
adjoining  southwest  states from 1980 through  1989.  He then  operated his own
consulting  firm  through 1992 and joined  Arthur  Andersen in 1993 as a partner
specializing in providing business consulting  services.  He retired from Arthur
Andersen in 1999 and currently  provides  services for a small number of clients
requiring strategic and market-driven services.

     MR. EDENS has served as one of our  directors  since October 1994. He was a
broadcasting  media  executive from 1970 to 1994,  serving as Chairman and Chief
Executive  Officer  of Edens  Broadcasting,  Inc.  from 1984 to 1994,  when that
corporation's  nine radio  stations were sold. He is currently  President of The
Hanover  Companies,  Inc., an investment firm. He is an active leader in various
business, civic and philanthropic organizations.

     DR. HADEN has served as one of our directors since 1983. Dr. Haden has been
Vice  Chancellor and Dean of  Engineering  of Texas A&M  University  since 1993.
Previously,  he was Vice Chancellor of Louisiana State  University,  Dean of the
College of Engineering  and Applied  Sciences at Arizona State  University,  and
Vice  President  for Academic  Affairs at Arizona State  University.  He earlier
served as department head at the University of Oklahoma. Dr. Haden has served on
a number of corporate boards, such as Square D Company and E-Systems, Inc., both
then Fortune 500  companies.  His Ph.D.  is in Electrical  Engineering  from the
University of Texas.

     The Audit Committee of our Board of Directors consisted of Messrs. Chapman,
Anderson and Haden,  through December 31, 2001.  Pursuant to the Audit Committee
charter, the Audit Committee reviews, acts and reports to our Board of Directors
on various  auditing and accounting  matters,  including the  appointment of our
independent accountants,  the scope of our annual audits, fees to be paid to our
independent accountants,  the performance of our independent accountants and our
accounting and financial management  practices.  A report of the Audit Committee
is set forth below.  The Audit  Committee  met five times during the last fiscal
year.  All of the members of our Audit  Committee are  "independent"  members in
accordance with the National Association of Securities Dealers.

     The Compensation Committee consisted of Messrs.  Anderson and Edens through
December 31, 2001. The Compensation  Committee reviews employee compensation and
makes  recommendations  thereon to our Board of Directors  and  administers  our
Stock Incentive Plans. The Compensation  Committee also determines,  upon review
of relevant  information,  the employees to whom options  shall be granted.  The
Compensation Committee met two times during the last fiscal year.

ITEM 2. PROPERTIES

     We recently  relocated our corporate  headquarters  to a 22,600 square foot
building located in Tempe,  Arizona pursuant to a lease that expires in December
2003, and consolidated our two distribution  centers from the existing Chandler,
Arizona and Poway, California locations to a 68,000 square foot building also in
Tempe,  Arizona  pursuant to a lease that expires in March 2006.  The  principal
product  development  and  support

                                       22
<PAGE>
operations remain in a 96,000 square foot building located in Chandler,  Arizona
pursuant to a lease that expires in May 2008.  We also own a 70,000  square foot
facility  located  in  Reno,   Nevada  that  houses  credit  and  lease  finance
facilities,  business  development  center and sales office. We also lease sales
and support  offices in a total of 52 locations in the United States,  including
approximately  147,000  square  feet of  office  space in  Milford,  Connecticut
pursuant to the Executone  acquisition (a portion of which has been  subleased),
and two locations  overseas.  Our aggregate  monthly payments under these leases
were approximately $563,000 at December 31, 2001. We believe that our facilities
will be adequate to meet our current needs and that  additional  or  alternative
space will be available as  necessary in the future on  commercially  reasonable
terms.

ITEM 3. LEGAL PROCEEDINGS

     We are involved from time to time in litigation incidental to our business.
We  believe  that the  outcome of  current  litigation  will not have a material
adverse effect upon our business,  financial  condition or results of operations
and will not disrupt our normal operations.

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

     None.

                                     PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS

     Inter-Tel Common Stock is traded over-the-counter (Nasdaq symbol: INTL) and
since February 1983 has been included in the Nasdaq National  Market System.  As
of March 8, 2002 there were of record  approximately  1,684  shareholders of our
Common Stock.  The following table sets forth high and low sales prices reported
by Nasdaq for each quarter in the last two years.

          A  dividend  of $.01  per  share of  Common  Stock  has  been  paid to
shareholders  of record for each quarter  since  December  31, 1997.  In October
2001, the Board of Directors declared an increase to the quarterly cash dividend
to $.02 per share of Common Stock, effective December 31, 2001. The continuation
of this dividend policy will depend on our earnings,  capital  requirements  for
growth, financial conditions and other factors.

2001                  HIGH      LOW        2000               HIGH        LOW
----                  ----      ---        ----               ----        ---
First Quarter         13.125    6.8125     First Quarter      46.375      21.50
Second Quarter        14.74     7.75       Second Quarter     28.00       12.875
Third Quarter         16.95     9.90       Third Quarter      16 3125     11.00
Fourth Quarter        20.90     11.21      Fourth Quarter     13.25       6.1875

                                       23
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA

FINANCIAL SUMMARY

<TABLE>
<CAPTION>
(In thousands, except
per share amounts and ratios)                                  For the years ended December 31,
--------------------------------------------------------------------------------------------------------------------
                                             2001             2000            1999          1998             1997
                                          ---------        ---------        ---------     ---------        ---------
<S>                                       <C>              <C>              <C>           <C>              <C>
Net Sales                                 $ 385,655        $ 402,723        $ 314,221     $ 274,504        $ 223,569
Cost of sales                               211,161          243,685(2)       159,463       140,946          122,363
Research and development                     17,556           19,489           14,798        11,373            7,998
Selling, general and
  Administrative                            131,157          127,468           98,430        86,554           69,942
Write-off in-process research
  and development                                --            5,433(2)            --        22,755(3)            --
Other charges                                 5,357(1)        45,245(2)            --            --               --
                                          ---------        ---------        ---------     ---------        ---------
Operating (loss) income                      20,424(1)       (38,597)(2)       41,530        12,876(3)        23,266
                                          ---------        ---------        ---------     ---------        ---------
Equity share of Cirilium losses                  --           (5,938)              --            --               --
Write-off of Cirilium investment                 --           (2,045)              --            --               --
Interest and other income                     1,081            1,474            2,391         2,913            1,556
Gain (loss) on foreign translation
  adjustments                                  (337)            (421)             (46)          105             (173)
Interest expense                               (468)            (213)            (110)          (60)             (47)
                                          ---------        ---------        ---------     ---------        ---------
(Loss) income before taxes                   20,700(1)       (45,740)(2)       43,765        15,834(3)        24,602
Income taxes                                  7,659          (16,817)          16,619         6,790            9,920
                                          ---------        ---------        ---------     ---------        ---------

Net (loss) income                            13,041(1)       (28,923)(2)    $  27,146     $   9,044(3)     $  14,682
                                          ---------        ---------        ---------     ---------        ---------
Net (loss) income per share
  Basic                                   $    0.53(1)     $   (1.10)(2)    $    1.05     $    0.34(3)     $    0.59
  Diluted                                 $    0.52(1)     $   (1.10)(2)    $    1.01     $    0.32(3)     $    0.57
                                          ---------        ---------        ---------     ---------        ---------
Weighted average basic
  common shares                              24,488           26,273           25,949        26,602           24,836
Weighted average diluted
  common shares                              25,240           26,273           27,004        27,846           25,983
                                          ---------        ---------        ---------     ---------        ---------
BALANCE SHEET DATA
Total assets                              $ 227,462        $ 243,126        $ 247,517     $ 197,030        $ 194,988
Working capital                              93,156           86,008           60,799        96,317          123,814
Shareholders' equity                        126,837          136,436          168,121       142,686          145,505
                                          ---------        ---------        ---------     ---------        ---------
KEY RATIOS
Current ratio                                  2.41             2.05             1.93          3.17             4.69
Dividends declared per share              $    0.05        $    0.04        $    0.04     $    0.04        $    0.01
Return on equity-continuing
  Operations                                    9.6%           (17.2)%           19.0%          6.2%            15.5%
Return on equity-excluding
  Charges                                      12.0%(1)          7.8%(2)         19.0%         15.6%(3)         15.5%
                                          ---------        ---------        ---------     ---------        ---------
</TABLE>

(1)  2001  operating  income  includes a pre-tax  charge of $5.4 million,  which
     reduced  net income by $3.4  million,  or $0.13 per share  after tax.  This
     pre-tax charge  reflects the write-down of our investment in  Inter-Tel.NET
     to net realizable value.
(2)  2000 operating  income  includes  pre-tax  charges of $66.8 million,  which
     reduced net income by $42.0  million,  or $1.60 per share after tax.  These
     pre-tax charges reflect the write-off of the Executone acquisition of $50.9
     million  ($7.6 million of which is included in cost of sales) in the second
     quarter, the write-off of IPRD in connection with the Executone purchase of
     $5.4 million  during the first  quarter,  the  write-down to net realizable
     value of  Inter-Tel.NET  assets of $2.0 million during the second  quarter,
     the equity share of  Cirilium's  losses of $5.9  million for the year,  and
     write-off of our investment in Cirilium of $2.6 million  (including reserve
     adjustments) during the third quarter. Without these charges, we would have
     reported net income of $13.1 million ($0.50 per diluted share) for the year
     ended December 31, 2000.
(3)  1998 operating  income  includes a special pre-tax charge of $22.8 million,
     which  reduced net income by $13.7  million or $.49 per diluted share after
     tax.  This  charge  reflects  the  write-off  of  in-process  research  and
     development  in  connection   with  the  purchase  of  certain  assets  and
     liabilities of Telecom  Multimedia  Systems,  Inc.  ("TMSI").  Without this
     write-off,  we would have  reported net income of $22.7  million  ($.82 per
     diluted share) for the year ended December 31, 1998.

                                       24
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

          THIS MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND
     RESULTS OF  OPERATIONS  AND OTHER PARTS OF THIS REPORT ON FORM 10-K CONTAIN
     FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES.  THE WORDS
     "EXPECTS,"   "ANTICIPATES,"   "BELIEVES,"  "INTENDS,"  "WILL"  AND  SIMILAR
     EXPRESSIONS  IDENTIFY   FORWARD-LOOKING   STATEMENTS  WHICH  ARE  BASED  ON
     INFORMATION AVAILABLE TO US ON THE DATE HEREOF, AND WE ASSUME NO OBLIGATION
     TO UPDATE ANY SUCH  FORWARD-LOOKING  STATEMENTS.  OUR ACTUAL  RESULTS COULD
     DIFFER   MATERIALLY  FROM  THOSE   ANTICIPATED  IN  THESE   FORWARD-LOOKING
     STATEMENTS  AS A RESULT OF CERTAIN  FACTORS,  INCLUDING  THOSE SET FORTH IN
     "FACTORS  THAT MAY AFFECT FUTURE  OPERATING  RESULTS" AND ELSEWHERE IN THIS
     10-K.

GENERAL

     Inter-Tel, incorporated in 1969, is a single point of contact, full service
provider of business  communications  systems, voice mail systems and networking
applications.  We  market  and  sell  voice  processing  and  unified  messaging
software,  call accounting software,  Internet Protocol (IP) telephony software,
computer-telephone   integration  (CTI)  applications,   long  distance  calling
services,  and other communications  services. Our products and services include
the AXXESS by  Inter-Tel  and  ECLIPSE(2)  by Inter-Tel  business  communication
systems,  with integrated voice  processing and unified  messaging  systems,  IP
telephony  voice and data routers,  and  ClearConnect  Talk-to-Agent  e-commerce
software.  We also  provide  maintenance,  leasing and support  services for our
products.  Our customers include business  enterprises,  government agencies and
non-profit  organizations.  Our common  stock is quoted on the  Nasdaq  National
Market System under the symbol "INTL."

     We have developed a distribution  network of direct sales offices,  dealers
and value added  resellers  (VARs),  which sell our  products  to  organizations
throughout  the United  States and  internationally,  including  to divisions of
Fortune 500 companies, large service organizations and governmental agencies. As
of December 31, 2001,  we had 49 direct sales  offices in the United  States and
one in Japan,  and a network of  hundreds  of dealers  and VARs around the world
that purchase directly from us. We also maintain a wholesale distribution office
in the  United  Kingdom  that  supplies  Inter-Tel's  dealers  and  distributors
throughout  the UK and parts of Europe.  In January 2002,  we acquired  selected
assets and assumed certain selected liabilities of McLeod USA, Inc. (McLeod). As
a result,  we added 5 new direct  sales  offices and added  personnel to 3 other
existing  offices.  We integrated  several of these offices into existing  sales
offices during 2002.

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

     Our  operating  results  depend  upon a variety of factors,  including  the
volume and timing of orders received  during a period,  the mix of products sold
and the mix of distribution channels,  general economic conditions,  patterns of
capital  spending  by  customers,  the timing of new product  announcements  and
releases by us and our competitors,  pricing  pressures,  the cost and effect of
acquisitions  and the  availability and cost of products and components from our
suppliers.  Historically,  a  substantial  portion  of our net  sales in a given
quarter  have  been  recorded  in  the  third  month  of  the  quarter,  with  a
concentration  of such  net  sales in the last  two  weeks  of the  quarter.  In
addition, we are subject to seasonal variations in our operating results, as net
sales  for  the  first  and  third  quarters  are  frequently  less  than  those
experienced during the fourth and second quarters, respectively.

The markets served by us have been characterized by rapid technological  changes
and  increasing  customer   requirements.   We  have  sought  to  address  these
requirements  through the development of software  enhancements and improvements
to existing  systems and the  introduction  of new  products  and  applications.
Inter-Tel's  research and  development  efforts over the last several years have
been focused  primarily on the development of, and  enhancements  to, our AXXESS
and ECLIPSE(2)  systems,  including  adding new  applications,  incorporating IP
convergence  applications  and  IP  telephones,   developing  Unified  Messaging
Software applications,  and expanding the telecommunications  networking package
to include  networking over IP and frame relay  networks.  Over the last several
years, our research and development efforts have also focused on the

                                       25
<PAGE>
development  of  the  ClearConnect   SoftPhone  and  the  related   ClearConnect
Talk-to-Agent  Web  communications  software.  Inter-Tel's  current  efforts are
focused on developing and enhancing the IP telephony  products and  applications
for our AXXESS and  ECLIPSE(2)  systems,  increasing  single-site  node capacity
using an  Asynchronous  Transfer  Mode  backbone  using  version  6.0 AXXESS AND
ECLIPSE2  SOFTWARE,  enhancing  our Unified  Messaging  Software,  developing  a
speech-recognition and text-to-speech  enabled unified  communications  product,
developing an advanced IVR and CT application development tool, enhancing the IP
digital telephones, and enhancing Inter-Tel's server-based PBX offering.

     We offer to our customers a package of lease  financing and other  services
under the name Total Solution (formerly, Totalease). Total Solution provides our
customers  lease  financing,  maintenance  and  support  services,  fixed  price
upgrades and other benefits. We finance this program through the periodic resale
of lease rental streams to financial institutions.

     Net sales  decreased  4.2% in 2001 compared to 2000.  Net sales in 2000 and
1999  increased  substantially  by  28.2%,  and  14.5%,  respectively,  over the
preceding years.

RESULTS OF OPERATIONS

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

                                                      Year Ended December 31
                                                  -----------------------------
                                                   2001        2000        1999
                                                  -----       -----       -----
Net sales                                         100.0%      100.0%      100.0%
Cost of sales                                      54.8        60.5        50.7
                                                  -----       -----       -----
Gross margin                                       45.2        39.5        49.3
Research and development                            4.6         4.8         4.7
Selling, general and administrative                34.0        31.7        31.3
Other charges                                       1.4        12.6          --
                                                  -----       -----       -----
Operating income (loss)                             5.3        (9.6)       13.2
Equity share of Cirilium's net losses                --        (1.5)         --
Write-off of Cirilium investment                     --        (0.5)         --
Interest and other income                           0.3         0.4         0.7
Loss on foreign translation adjustments            (0.1)       (0.1)         --
Interest expense                                   (0.1)       (0.1)        0.0
Income taxes (benefit)                              2.0        (4.2)        5.3
                                                  -----       -----       -----
Net income (loss)                                   3.4%       (7.2)%       8.6%
                                                  -----       -----       -----

YEAR ENDED DECEMBER 31, 2001 VERSUS YEAR ENDED DECEMBER 31, 2000

     NET SALES.  Net sales  decreased 4.2% to $385.7 million in 2001 from $402.7
million  in  2000,   representing  a  decrease  of  $17.1  million.  Sales  from
Inter-Tel.NET  (in which  Inter-Tel  sold 83% in July 2001),  accounted for $8.8
million  of the  decrease.  Sales  from  our  direct  sales  offices,  including
government and national accounts,  and from wholesale distribution accounted for
$9.4 million of the decrease. Sales from NetSolutions accounted for $1.0 million
of the decrease from 2000 to 2001. Net sales from lease  financing  increased to
$19.8  million  in 2001  from  $16.2  million  in 2000.  International  revenues
decreased approximately $300,000 from 2000 to 2001.

     Since July 24, 2001, the date of the sale of 83% of Inter-Tel.NET,  we have
used the  investment  method  of  accounting  for our  remaining  investment  in
Inter-Tel.NET/Comm-Services.  Accordingly,  we have  not  recorded  revenues  or
expenses  of  Inter-Tel.NET  since  the  date  of  sale.  Excluding  sales  from
Inter-Tel.NET,  net sales for 2001 decreased 2.2% to $371.7 million, compared to
$379.9  million in 2000.  Inter-Tel.NET  generated net sales of $14.0 million in
2001 compared to $22.8 million in 2000. The reduction in sales  attributable  to
Inter-Tel.NET  was due primarily to our sale of 83% of Inter-Tel.NET on July 24,
2001.  Accordingly,  less than seven months of activity from  Inter-Tel.NET  was
reflected  in  the  2001  results  as  compared  to the  full  year  results  of
Inter-Tel.NET reported in 2000.

     The 2001 decrease in net sales was also  attributable  to delayed  customer
buying decisions in 2001 related to a deterioration in macroeconomic conditions.
Inter-Tel  recognized  lower  revenues  due to lower  sales  volumes

                                       26
<PAGE>
of  systems  collectively  through  the direct  sales  offices,  government  and
national accounts group, dealer channel and foreign operations, offset partially
by sales increases in our lease finance operations. In some instances, prices of
various  telecommunications systems decreased, and discounts or other promotions
that were  offered to customers to generate  sales  resulted in lower  revenues.
Please  refer  to Note N of  Notes  to  Consolidated  Financial  Statements  for
additional segment reporting information.

     GROSS PROFIT.  Gross profit  increased 9.7% to $174.5 million,  or 45.2% of
net sales in 2001, from $159.0 million, or 39.5% of net sales in 2000. Excluding
the Executone  restructuring  charge,  gross profit  increased  4.7% compared to
166.7 million,  or 41.4% of net sales in 2000. This increase in gross profit was
primarily a result of lower sales from Inter-Tel.NET, which experienced negative
gross margins,  an increase in sales, as a percentage of consolidated net sales,
through our direct sales channel compared to our dealer network, reduced product
costs and higher relative recurring  revenues.  Gross profit also increased as a
percentage of net sales, due in large part to items noted above. These increases
were  offset by greater  competitive  pricing  pressures  in 2001 and by pricing
discounts on telephone system sales.

     Excluding the operations of Inter-Tel.NET,  gross profit for 2001 increased
1.4% to $180.4 million,  or 48.5% of net sales,  compared to $177.9 million,  or
46.8% of net sales, in 2000.  Inter-Tel.NET  generated  negative gross profit of
$5.9 million in 2001 compared to negative $11.2 million in 2000.

     RESEARCH AND DEVELOPMENT.  Research and development  expenses  decreased to
$17.6 million,  or 4.6% of net sales in 2001, from $19.5 million, or 4.8% of net
sales in 2000. The decline is  attributable  in large part to the closure of the
Executone  research and development  operations in Milford,  Connecticut in July
2000.  Accordingly,  our 2001  costs did not  reflect  the  Executone  expenses,
compared to seven months of activity in 2000. In 2001,  research and development
expenses  were directed  principally  toward the  continued  development  of the
digital  AXXESS and  Eclipse2  software  and systems  (including  version  6.0),
unified messaging and voice processing software, InterPrise IP router solutions,
Talk-to-Agent web e-commerce  solutions,  speech  recognition and text-to-speech
applications,  and certain CTI and IVR applications. We expect that research and
development expenses will increase in absolute dollars as we continue 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.  Selling,  general and administrative
expenses increased to $131.2 million, or 34.0% of net sales in 2001, from $127.5
million, or 31.7% of net sales in 2000. The increase in these expenses reflected
an increase in costs  associated  with sales through our direct office  channels
compared to our dealer network,  increased reserves for accounts receivable, and
an increase in costs of  maintaining  additional  facilities,  including our new
facilities  in the Phoenix  metro area and the  Convergent  offices  acquired in
January 2001. We expect that selling,  general and administrative  expenses will
increase in absolute dollars, but may vary as a percentage of net sales.

     Excluding  the   operations   of   Inter-Tel.NET,   selling,   general  and
administrative  expenses increased to $128.7 million,  or 34.6% of net sales for
2001,  compared  to $121.0  million,  or 31.8% of net  sales in 2000.  Excluding
charges,  Inter-Tel.NET incurred selling, general and administrative expenses of
$2.5 million in 2001 compared to $5.9 million in 2000.

     OTHER CHARGES. In connection with the sale of its interest in Inter-Tel.NET
in July 2001, the Company recorded a pre-tax charge or $5.4 million during 2001,
which reduced net income by $3.4  million,  or $0.13 per share  after-tax.  This
charge was associated  with the  impairment of our investment in  Inter-Tel.NET.
The  impairment  was measured as the  difference  between the carrying  value of
Inter-Tel's 17% interest in Inter-Tel.NET and the estimated fair market value of
the 17% interest in the net assets of Inter-Tel.NET.

     We reported pre-tax charges of $66.8 million during 2000, which reduced net
income by $42.0  million,  or $1.60 per share after tax.  These pre-tax  charges
reflected  the write-off of the  Executone  acquisition  of $50.9 million in the
second  quarter,  the  write-off  of in  process  research  and  development  in
connection with the Executone purchase of $5.4 million during the first quarter,
the write-down to net realizable value of  Inter-Tel.NET  assets of $2.0 million
during the second quarter, the equity share of Cirilium's losses of $5.9 million
for the year,  and  write-off  of  Inter-Tel's  investment  in  Cirilium of $2.6
million (including reserve adjustments) during the third quarter.  Without these
charges,  we would have reported net income of $24.2 million  ($0.90 per diluted
share) for the year ended December 31, 2000.  Refer to  "Restructuring  Charges"
below for additional information.

                                       27
<PAGE>
     CHARGES AND WRITE-OFF OF IN PROCESS RESEARCH AND DEVELOPMENT. We reported a
pre-tax  charge of $5.4 million  during 2001,  which  reduced net income by $3.4
million, or $0.13 per share after tax. This pre-tax charge reflected the sale of
83% of our interest in  Inter-Tel.NET  and the  write-down of our  investment in
Inter-Tel.NET  to anticipated  net realizable  value.  Without this charges,  we
would have  reported net income of $16.4 million  ($0.65 per diluted  share) for
the year ended December 31, 2001.

     INTEREST AND OTHER INCOME. Other income in both periods consisted primarily
of interest  income and foreign  exchange  rate gains and losses.  Interest  and
other  income  decreased  $393,000  in 2001  compared to the same period in 2000
principally as a result of lower levels of cash available for investment. During
2001, the Company  recognized  foreign exchange rate losses of $337,000 compared
to losses of $421,000 in 2000. Interest expense was $468,000 in 2001 compared to
$213,000  in 2000,  primarily  attributable  to debt from  assets  financed  for
Inter-Tel.NET  operations.  This  debt was  transferred  upon the sale of 83% of
Inter-Tel.NET in July 2001.

     INCOME TAXES. The 2001 income tax rate increased to 37.0% compared to 36.8%
for 2000.  The rate was lower in 2000  because we received no tax benefits for a
component of the Cirilium losses that were capital losses during 2000 (lower tax
benefits were  received to apply to 2000 net losses).  In 2002, we anticipate an
effective tax rate comparable to or slightly higher than 2001.

     NET INCOME.  Including the charge recorded in 2001, net income increased to
$13.0 million,  or $.52 per diluted share, in 2001 compared to net loss of $28.9
million,  or a net loss of $1.10  per  diluted  share,  in 2000  reflecting  the
charges noted above  associated with the Executone,  Cirilium and  Inter-Tel.NET
operations.  Excluding the charges, net income would have been $16.4 million, or
$.65 per diluted share, in 2001.

     Excluding the charges, all Cirilium losses and operations of Inter-Tel.NET,
the Company reported net income of $21.8 million, or $0.86 per diluted share, in
2001,  compared to net income of $24.2 million,  or $0.90 per diluted share,  in
2000.

YEAR ENDED DECEMBER 31, 2000 VERSUS YEAR ENDED DECEMBER 31, 1999

     NET SALES.  Net sales increased 28.2% to $402.7 million in 2000 from $314.2
million in 1999,  representing  an  increase  of $88.5  million.  Sales from our
direct  sales  offices,  including  government  and national  account,  and from
wholesale  distribution  accounted  for $61.5  million of the  increase  and the
network services group accounted for $21.2 million of the increase. In addition,
sales from Inter-Tel.NET increased to $22.8 million in 2000 from $2.8 million in
1999.

     GROSS PROFIT.  Gross profit  including the Executone  restructuring  charge
increased  2.8% to $159.0  million,  or 39.5% of net  sales in 2000 from  $154.8
million, or 49.3% of net sales, in 1999.  Excluding the Executone  restructuring
charge,  gross profit increased 7.7% to 166.7 million,  or 41.4% of net sales in
2000. This increase in gross profit was primarily a result of the large increase
in consolidated  sales.  However,  gross profit decreased as a percentage of net
sales, due in large part to increases in sales of IP and long distance services,
which have lower gross  margins than sales of our digital  systems and software.
In addition, we experienced a lower proportion of sales through our direct sales
offices compared to our dealer network,  and were impacted by pricing  discounts
on telephone system sales.

     RESEARCH AND DEVELOPMENT.  Research and development  expenses  increased to
$19.5 million,  or 4.8% of net sales in 2000 from $14.8 million,  or 4.7% of net
sales,  in 1999. The increase was  attributable in large part to the purchase of
Executone  and  related   research  and   development   operations  in  Milford,
Connecticut in January 2000.  Accordingly,  our 2000 costs included seven months
of Executone  activity,  compared to none in 1999. In 2000,  these expenses were
directed principally toward the continued development of the AXXESS and Eclipse2
business communication systems, unified messaging and voice processing software,
InterPrise  IP  router  solutions,   ClearConnect   solutions  and  certain  CTI
applications.

     SELLING,  GENERAL AND ADMINISTRATIVE.  Selling,  general and administrative
expenses increased to $127.5 million,  or 31.7% of net sales, in 2000 from $98.4
million,  or 31.3% of net sales, in 1999. The increase reflected increased costs
from continued  development of the  Inter-Tel.net  network and related expenses,
increased reserves for accounts receivable,  additional personnel to support the
direct dealer network, and selling,  incentive,  training and other compensation
costs at our direct sales office operations.

                                       28
<PAGE>
     OTHER  CHARGES AND IPRD  WRITE-OFF.  We reported  pre-tax  charges of $66.8
million  during 2000,  which reduced net income by $42.0  million,  or $1.60 per
share after tax. These pre-tax charges  reflected the write-off of the Executone
acquisition  of $50.9  million in the second  quarter,  the write-off of IPRD in
connection with the Executone purchase of $5.4 million during the first quarter,
the write-down to net realizable value of  Inter-Tel.NET  assets of $2.0 million
during the second quarter, the equity share of Cirilium's losses of $5.9 million
for the year,  and  write-off  of our  investment  in Cirilium  of $2.6  million
(including reserve adjustments) during the third quarter. Without these charges,
we would have reported net income of $13.1 million ($0.50 per diluted share) for
the year ended  December 31, 2001.  Refer to  "Restructuring  Charges" below for
additional information.

     INTEREST AND OTHER INCOME. Other income in both periods consisted primarily
of interest  income and foreign  exchange  rate gains and losses.  Other  income
decreased  approximately  $1.3 million in 2000  principally as a result of lower
levels of cash available for investment.

     INCOME TAXES. The 2000 income tax rate decreased to 36.8% compared to 38.0%
for 1999.  We received no tax benefit  for a component  of the  Cirilium  losses
during 2000 that were capital losses.

     NET INCOME. Including the charges recorded in 2000, net income decreased to
a loss of $28.9 million,  or a loss of $1.10 per diluted share, in 2000 compared
to net income of $27.1 million,  or $1.01 per diluted share, in 1999.  Excluding
the  charges,  net income  would have been $13.1  million,  or $.50 per  diluted
share, in 2000.

INFLATION/CURRENCY FLUCTUATION

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

LIQUIDITY AND CAPITAL RESOURCES

     At December 31, 2001,  cash and  equivalents  totaled $61.8 million,  which
represented an increase of  approximately  $34.7 million from December 31, 2000.
We  maintain a $25 million  unsecured,  revolving  line of credit  with  BankOne
Arizona,  NA, that is available through June 1, 2002. Under the credit facility,
we have the option to borrow at a prime rate or adjusted  LIBOR  interest  rate.
Historically,   we  have  used  the  credit   facility   primarily   to  support
international letters of credit to suppliers. During the year ended December 31,
2001,  approximately  $28.9 million of available cash was used to repurchase our
common stock and an additional  $6.8 million of available  cash was used to fund
acquisitions.   During  the  prior  year  ended   December  31,  2000,  we  used
approximately  $6.7  million to  repurchase  shares of our  Common  Stock and an
additional  $2.9 million of available cash in  acquisitions  and joint ventures.
Also during 2000, we expended  approximately  $11.0 million in the restructuring
of the Executone  operations,  including  severance and related costs,  the shut
down and  consolidation  of the Milford  facility and the  impairment  of assets
associated with the  restructuring.  The remaining cash balances may be used for
acquisitions,   strategic  alliances,  working  capital  and  general  corporate
purposes.

     Net cash  provided by operating  activities  totaled  $75.0 million for the
year ended  December 31, 2001,  compared to $17.3 million for the same period in
2000.  Cash  provided by operating  activities in 2001  primarily  resulted from
income from operations  after  considering the non-cash portion of restructuring
charges and the non-cash depreciation and amortization expenses.  Cash generated
by the change in operating  assets and  liabilities  in 2001 was $16.1  million,
compared to cash used by the change in operating assets and liabilities of $29.0
million in 2000. At December 31, 2001, we achieved  lower  accounts  receivable,
inventory,  prepaid expenses and other current assets than at December 31, 2000,
which was primarily a result of close  management of  receivables  and inventory
and working  down  elevated  levels of working  capital  assets  acquired in the
Executone acquisition.  In addition,  accounts payable at December 31, 2001 were
lower than prior year end consistent with the lower inventory  levels  achieved.
We expect to expand sales  through our direct sales office and dealer  networks,
which is expected to require the  expenditure  of working  capital for increased
accounts receivable and inventories.

                                       29
<PAGE>
     Net  cash  used  in  investing   activities,   primarily  in  the  form  of
acquisitions and capital expenditures totaled $14.6 million and $5.9 million for
the  years  ended  December  31,  2001  and  2000,  respectively.  Cash  used in
acquisitions  and  investments  in joint  ventures  totaled  approximately  $6.8
million in 2001 compared to $2.9 million in 2000. Capital  expenditures  totaled
approximately  $8.0 million for 2001 compared to $9.6 million in 2000.  Net cash
used in investing  activities in 2000 were partially  offset by cash received of
$6.6 million from the disposition of the manufacturing  operations of Executone.
We anticipate additional capital expenditures during 2002,  principally relating
to  expenditures  for  equipment  and  management  information  systems  used in
operations, facilities expansion and acquisition activities.

     Net cash used in financing  activities  totaled $25.7  million  during 2001
compared to $3.5 million in 2000.  We expended  approximately  $28.9 million and
$6.7 million for stock repurchases during 2001 and 2000, respectively, funded by
existing  cash  balances  during each period.  We issued long term debt,  net of
repayments,  of $1.8 million in 2001 and $1.0  million in 2000  primarily in the
form of long term capital leases to support capital  additions to  Inter-Tel.net
prior to our divestiture of our majority  ownership in July, 2001.  During 2001,
we reissued  treasury shares through stock option exercises and issuances,  with
the proceeds  received  totaling less than the cost basis of the treasury  stock
reissued.  Accordingly,  the  difference was recorded as a reduction to retained
earnings. Net cash used for cash dividends totaled $1.0 million in 2001 and $1.1
million  during  2000,  which was offset in each period by cash  provided by the
exercise of stock  options and stock  issuances  pursuant to our Employee  Stock
Purchase Plan.

     We offer to our customers lease financing and other services, including our
Total Solution (formerly Totalease) program, through our Inter-Tel Leasing, Inc.
subsidiary.  We fund our Total  Solution  program  in part  through  the sale to
financial  institutions of rental income streams under the leases.  Resold lease
rentals  totaling $202.7 and $198.4 million remain unbilled at December 31, 2001
and December 31, 2000, respectively.  We are obligated to repurchase such income
streams in the event of defaults by lease customers and,  accordingly,  maintain
reserves  based on loss  experience  and past due accounts.  Although we to date
have been able to resell the rental streams from leases under the Total Solution
program  profitably  and  on a  substantially  current  basis,  the  timing  and
profitability of lease resales could impact our business and operating  results,
particularly  in an  environment  of  fluctuating  interest  rates and  economic
uncertainty. If we are required to repurchase rental streams and realizes losses
thereon in  amounts  exceeding  our  reserves,  our  operating  results  will be
adversely affected.

     Inter-Tel  received a gross cash award of $20 million in  February  2002 in
settlement of a binding arbitration claim. Income taxes, attorney's fees, expert
witness costs,  arbitration  costs and additional costs and expenses,  including
$1.3 million in bonus  payments to employees who assisted in the  litigation and
arbitration,  totaled  approximately  $10.7  million in 2002.  Accordingly,  net
proceeds  from  this  arbitration  totaled   approximately  $9.3  million.  This
transaction  concluded in 2002;  therefore no cash proceeds were included in the
2001 financial statements.

     We believe that our working  capital and credit  facilities,  together with
cash  generated  from  operations,  will be sufficient to develop and expand our
business  operations,   to  finance  acquisitions  of  additional  resellers  of
telephony products and other strategic acquisitions or corporate alliances,  and
to provide adequate working capital for 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 additional  acquisitions,  we will seek additional financing.  There
can be no assurance that additional financing will be available when required or
on acceptable terms.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

     The methods,  estimates  and judgments we use in applying our most critical
accounting  policies have a  significant  impact on the results we report in our
consolidated financial statements. We evaluate our estimates and judgments on an
on-going  basis.  We  base  our  estimates  on  historical   experience  and  on
assumptions  that we  believe  to be  reasonable  under the  circumstances.  Our
experience and  assumptions  form the basis for our judgments about the carrying
value of  assets  and  liabilities  that are not  readily  apparent  from  other
sources.  Actual  results  may  vary  from  what  we  anticipate  and  different
assumptions or estimates about the future could change our reported results.  We
believe the following  accounting  policies are the most critical to us, in that
they

                                       30
<PAGE>
are important to the portrayal of our financial  statements and they require our
most  difficult,  subjective  or complex  judgments  in the  preparation  of our
consolidated financial statements:

     REVENUE  RECOGNITION.  We recognize  revenue  pursuant to Staff  Accounting
Bulletin No. 101 "Revenue  Recognition  in Financial  Statements."  Accordingly,
revenue is  recognized  when all four of the  following  criteria  are met:  (i)
persuasive  evidence  that  arrangement  exists;  (ii)  delivery of the products
and/or  services  has  occurred;  (iii)  the  selling  price is both  fixed  and
determinable and; (iv)  collectibility is reasonably  probable.  Revenue derived
from sales of systems and  services to end-user  customers  is  recognized  upon
installation  of the  systems and  performance  of the  services,  respectively.
Pre-payments for communications  services are deferred and recognized as revenue
as the communications services are provided.

     For shipments to dealers and other distributors,  our revenues are recorded
as products are shipped and services are rendered,  because the sales process is
complete.  These shipments are primarily to third-party dealers and distributors
and title passes when goods are shipped  (free-on-board  shipping point)..  Long
distance services revenues are recognized as service is provided.

     SALES-LEASES.  For our sales-type lease accounting,  we follow the guidance
provided by FASB  Statement No. 140,  Accounting  for Transfers and Servicing of
Financial  Assets and  Extinguishments  of  Liabilities - A Replacement  of FASB
Statement No. 125. We record the  discounted  present  values of minimum  rental
payments  under  sales-type  leases as sales,  net of provisions  for continuing
administration  and other  expenses over the lease period.  The costs of systems
installed  under these  sales-leases,  net of residual  values at the end of the
lease periods,  are recorded as costs of sales.  Gains or losses  resulting from
the sale of rental  income  from such  leases  are  recorded  as net  sales.  We
maintain  reserves against potential  recourse  following the resales based upon
loss experience and past due accounts.  The allowance for uncollectible  minimum
lease payments and recourse  liability at the end of the year represent reserves
against  the  entire  lease  portfolio  or  allowance  for  collectibility  from
customers.  These  reserves  are  either  netted in the  current  and  long-term
components  of "Net  investments  in  Sales-Leases"  on the  balance  sheet,  or
included in long-term liabilities on our balance sheet for off-book leases.

     GOODWILL AND OTHER  IDENTIFIABLE  INTANGIBLES.  We assess the impairment of
goodwill  and other  identifiable  intangibles  whenever  events or  changes  in
circumstances  indicate  that the carrying  value may not be  recoverable.  Some
factors we consider  important which could trigger an impairment  review include
the following:

     *    Significant  under-performance  relative  to  historical,  expected or
          projected future operating results;
     *    Significant changes in the manner of our use of the acquired assets or
          the strategy for our overall business;
     *    Our market capitalization relative to net book value, and
     *    Significant negative industry or economic trends.

     When we determine that the carrying value of goodwill and other  identified
intangibles  may not be  recoverable,  we  measure  any  impairment  based  on a
projected  discounted  cash flow method using a discount rate  determined by our
management to be  commensurate  with the risk  inherent in our current  business
model. In accordance with SFAS No. 142, "Goodwill and Other Intangible  Assets,"
on January 1, 2002 we will cease to amortize  goodwill arising from acquisitions
completed  prior to July 1, 2001.  Inter-Tel has tested  goodwill for impairment
using the two-step  process  prescribed  in SFAS 142. The first step is a screen
for  potential  impairment,  while the second  step  measures  the amount of the
impairment, if any. Inter-Tel has performed the first of the required impairment
tests for  goodwill as of January 1, 2002 and has  determined  that the carrying
amount of goodwill is not impaired.

     Inter-Tel has adopted SFAS 142 effective  January 1, 2002.  Application  of
the nonamortization  provisions of SFAS 142 is expected to result in an increase
in income from continuing  operations before income taxes of approximately  $1.8
million in 2002.

     ALLOWANCE  FOR  DOUBTFUL  ACCOUNTS.  We maintain  allowances  for  doubtful
accounts for estimated  losses  resulting from the inability of our customers to
make required payments.  If the financial  condition of our customers or channel
partners  were to  deteriorate,  resulting in an  impairment of their ability to
make payments,  additional

                                       31
<PAGE>
allowances  may be  required.  Additional  reserves or  allowances  for doubtful
accounts  are  recorded  for  our   sales-type   leases,   discussed   above  in
"Sales-Leases."

     INVENTORIES.  We value our inventories at lower of cost or market.  Cost is
determined by the first-in,  first-out (FIFO) method,  including material, labor
and factory overhead.  Significant  management judgment is required to determine
the  reserve  for  obsolete or excess  inventory.  Inventory  on hand may exceed
future demand either  because the product is outdated,  or obsolete,  or because
the amount on hand is more than can be used to meet future need,  or excess.  We
currently consider all inventory that has no activity within one year as well as
any additional  specifically  identified inventory to be excess. We also provide
for the total value of  inventories  that we determine  to be obsolete  based on
criteria such as customer demand, product life-cycles, changing technologies and
market conditions.  We write down our excess and obsolete inventory equal to the
difference  between the cost of inventory  and the estimated  market  value.  At
December  31,  2001,  our  inventory  reserves  were $13.2  million of our $34.1
million gross  inventories.  If actual  customer  demand,  product  life-cycles,
changing  technologies  and  market  conditions  are less  favorable  than those
projected by management, additional inventory write-downs may be required.

     CONTINGENCIES.  We are a party to  various  claims  and  litigation  in the
normal course of business.  Management's  current  estimated  range of liability
related to various  claims and pending  litigation  is based on claims for which
our  management  can  estimate  the  amount  and range of loss.  Because  of the
uncertainties  related  to both the  amount  and range of loss on the  remaining
pending  claims  and  litigation,  management  is  unable  to make a  reasonable
estimate of the  liability  that could result from an  unfavorable  outcome.  As
additional information becomes available, we will assess the potential liability
related to our pending  litigation and revise our  estimates.  Such revisions in
our estimates of the potential  liability could materially impact our results of
operation and financial position.  We also received  correspondence  during 1999
from a major  competitor  and  subsidiary  inviting  us to  negotiate  a license
agreement  regarding the  competitors'  patents.  We have continued to negotiate
with these  competitors  regarding their patent claims as well as make claim for
our patents. We received additional correspondence in 2000 alleging intellectual
property claims from another competitor. Inter-Tel responded by providing notice
of consent to transfer license previously granted by this competitor.  We do not
anticipate  that the  resolution  of such matters  will have a material  adverse
effect on our consolidated financial position.

OTHER CHARGES

INTER-TEL.NET AND ICA. During the second quarter of 2000,  Inter-Tel  recorded a
pre-tax charge  associated with  Inter-Tel.NET  operations of $2.0 million ($1.2
million after-tax), related to the write-down to net realizable value of network
equipment  and lease  termination  costs of certain  redundant  facilities.  The
reserves  established at the time of the write-down  have been fully utilized as
of  December  31,  2001.  The  following  table  summarizes  the  details of the
write-down and activity in the reserve  balances from the date of the write-down
through December 31, 2001.  Activity represents payments made or amounts written
off.

<TABLE>
<CAPTION>
                                                                                                         RESERVE
                                            CASH/          OTHER           2000          2001            BALANCE
             DESCRIPTION                  NON-CASH         CHARGE        ACTIVITY      ACTIVITY        AT 12/31/01
             -----------                  --------         ------        --------      --------        -----------
                                                                      (in thousands)
<S>                                      <C>              <C>            <C>           <C>               <C>
LEASE TERMINATION OBLIGATIONS
  (NET OF ANTICIPATED RECOVERY):
  Building leases                           Cash           $  (144)       $    87       $  57             $ --

IMPAIRMENT OF ASSETS:
  Fixed assets                             Non-Cash         (1,824)         1,824          --               --

TOTAL                                                      $(1,968)       $ 1,911       $  57             $ --
</TABLE>

     In March 2000, the Company's Inter-Tel.NET subsidiary acquired the stock of
Intercomm Americas,  Inc. (ICA), an international IP communications reseller for
$580,000 cash and 750,000 shares of  Inter-Tel.NET,  with conversion rights into
Inter-Tel,  Incorporated Common Stock. The acquisition purchase price was valued
at $1.2 million at March 2000.;  The ICA shareholders did not intend to exercise
conversion rights.  However,  due to

                                       32
<PAGE>
market  conditions,  they  decided  to  convert  their  Inter-Tel.NET  shares to
Inter-Tel  shares in July 2001.  Based on the exercise of  conversion  rights in
July 2001,  the valuation of purchase  price of ICA increased to $6.2 million in
accordance with the provisions of the acquisition  agreement.  The conversion of
Inter-Tel.NET shares into Inter-Tel, Incorporated common stock was treated as an
acquisition by Inter-Tel of Inter-Tel.NET  shares,  rather than as an adjustment
to the original purchase price of ICA, as the conversion rights were part of the
original  purchase  agreement,  even though the value of the  conversion  rights
could not be  readily  determined  at that  time.  As a result,  Inter-Tel  made
adjustments  totaling  $4.85  million  to  goodwill  based  on the  value of the
converted Inter-Tel shares as of June 30, 2001.

     On July  24,  2001,  Inter-Tel  agreed  to  sell  83% of  Inter-Tel.NET  to
Comm-Services  Corporation for a note of $4.95 million, secured by Comm Services
stock, other marketable securities of the shareholders of Comm Services and 100%
of the net assets of Inter-Tel.NET. The marketable securities held as collateral
may be exchanged for cash or other readily marketable assets as long as the fair
market value of the collateral exceeds $2.5 million. The note is due and payable
interest  only from October 16, 2001  through  July 15,  2002;  then a principal
payment of $250,000 due July 15, 2002,  monthly  principal and interest payments
based on 1% of collected monthly revenues from July 16, 2002 to October 15, 2002
and based on 2% of collected  monthly  revenues from October 16, 2002 until paid
in full. Additionally,  any funds due Comm-Services for services rendered can be
applied  against the note.  The note is due and payable on December 31, 2007, or
earlier in certain circumstances.

     In connection with the sale of 83% of  Inter-Tel.NET,  we assessed the fair
value of the remaining 17% investment in Inter-Tel.NET. Pursuant to SFAS 121, we
recorded a charge as of the close of the second  quarter of $5.4  million  ($3.4
million  after  tax)  associated  with  the  impairment  of  our  investment  in
Inter-Tel.NET.  The  impairment  was  measured  as the  difference  between  the
carrying value of Inter-Tel's  17% interest in  Inter-Tel.NET/Comm-Services  and
the  estimated  current  fair  market  value of the note plus the 17%  ownership
interest in Inter-Tel.NET. The charge is primarily non-cash.

     Inter-Tel's   management  has  not   participated   in  the  management  of
Inter-Tel.NET since the sale in July 2001. As a result,  since July 24, 2001, we
have accounted for the remaining  Inter-Tel.NET/Comm-Services  investment  using
the cost method of accounting.  On December 30, 2001, Comm-Services entered into
a merger agreement with Vianet.  Inter-Tel's 17% investment in Comm-Services was
converted  to  approximately  10% of Vianet  stock.  The $4.95  million loan was
assumed by Vianet and  Inter-Tel  continues to hold  collateral  from the former
shareholders  of  Comm-Services.  Inter-Tel  will account for the  remaining 10%
investment in Vianet using the cost method of accounting.  The net investment in
the notes  receivable  and 10% interest in Vianet  (formerly  Comm-Services)  is
recorded in other assets for approximately $3.7 million.

     During 1999,  2000 and 2001,  Inter-Tel.NET  entered into  operating  lease
agreements  totaling  approximately  $6.5 million  from an equipment  vendor for
network equipment and software.  The lease agreements required  Inter-Tel.NET to
purchase vendor maintenance on their products.  Inter-Tel originally  guaranteed
the  indebtedness.  In the second  quarter of 2001,  Inter-Tel.NET  notified the
vendor of network and network  equipment  problems  encountered due to equipment
and  software  recommended  by the vendor,  and  supplied  and  financed by this
vendor. Inter-Tel.NET requested that the vendor not only solve the problems, but
also compensate Inter-Tel.NET for the problems and the resulting lost customers,
lost  revenues  and  lost  profits.  Pursuant  to  Inter-Tel's  sale  of  83% of
Inter-Tel.NET,   Comm-Services   assumed  the  vendor   lease  and   maintenance
obligations  and as such  Inter-Tel  has not  recorded any  liability  for these
obligations.  However,  the vendor has not released Inter-Tel from its guarantee
of these  obligations and Inter-Tel has not released the vendor from Inter-Tel's
claims, nor did we assign our rights to these claims to Comm-Services.

EXECUTONE.  On January 1, 2000 Inter-Tel  purchased  certain computer  telephony
assets and assumed certain liabilities of Executone  Information  Systems,  Inc.
(Executone) for $44.3 million in cash plus related acquisition costs, subject to
purchase price adjustments as of the closing date. The Executone transaction was
accounted for using the purchase  method of accounting.  The aggregate  purchase
price was allocated to the fair value of the assets and liabilities acquired, of
which $5.4  million  ($3.4  million  after taxes) was  written-off  as purchased
in-process research and development.

     During the first quarter of 2000, the Executone division  recognized losses
of  approximately  $2.5 million ($1.5  million after taxes,  or $.06 per diluted
share)  excluding  the  charge  for  in-process  research  and  development.  In

                                       33
<PAGE>
connection with the Executone  acquisition,  we sold  Executone's  manufacturing
assets and  liabilities to Varian of Tempe,  Arizona at a net book value of $6.6
million.

     During the second  quarter of 2000,  the  Executone  division  continued to
experience  significant losses. The Executone division recognized pre-tax losses
during the second quarter and six months ended June 30, 2000 of $3.4 million, or
$2.1  million  after-tax  ($.08 per  diluted  share) and $5.9  million,  or $3.6
million after-tax ($.14 per diluted share),  respectively.  As a result of these
losses,  together with other considerations noted below, we decided to close the
primary  Executone   facility  in  Milford,   Connecticut  and  to  recognize  a
restructuring  charge  related  to the  Executone  operations.  At the  time the
original  purchase  was  recorded,  we had not  anticipated  closing the Milford
facility.   After  incurring  higher  than  anticipated  losses  from  Executone
operations and after a deterioration in the Executone  business,  including loss
of dealers and customers, delays in introduction and acceptance of new products,
we decided it was in the best interests of us and our  shareholders to close the
Milford  facility and  consolidate  operations into our  metro-Phoenix,  Arizona
facilities.

     We  have  accounted  for the  restructuring  of the  Executone  operations,
including  severance and related costs,  the shut down and  consolidation of the
Milford facility and the impairment of assets associated with the restructuring.
We  finalized  our  plan  for the  exiting  of  activities  and the  involuntary
termination or relocation of approximately  137 employees in connection with the
integration of Executone  operations.  Accrued costs  associated  with this plan
were estimates,  although the original  estimates made for the second quarter of
2000 for reserve  balances  have not changed  significantly  as of December  31,
2001.

     Exit  costs  associated  with the  closure  of the  Milford  facility  also
included  liabilities  for building,  furniture and equipment  lease,  and other
contractual  obligations.  We are liable for the lease on the Milford  buildings
through January 2005.  Various  furniture leases run concurrently  through March
2002. Other capital leases for computer and other equipment terminate on varying
dates through September 2002. To date, we have entered into sublease  agreements
with third  parties to sublease  portions of the  facility  and  equipment.  The
reserve for lease and other  contractual  obligations is identified in the table
below.

     The  following  tables  summarize  details of the  restructuring  charge in
connection with the Executone acquisition, including the description of the type
and amount of liabilities assumed, and activity in the reserve balances from the
date of the charge through December 31, 2001.  Activity represents payments made
or amounts written off.

<TABLE>
<CAPTION>
                                                                                                                 RESERVE
                                                   CASH/        RESTRUCTURING      2000           2001           BALANCE
     DESCRIPTION                                  NON-CASH         CHARGE        ACTIVITY       ACTIVITY       AT 12/31/01
     -----------                                  --------         ------        --------       --------       -----------
                                                                              (In thousands)
<S>                                              <C>                <C>             <C>            <C>             <C>
PERSONNEL COSTS:
  Severance and termination costs                   Cash         $ (1,583)       $  1,558       $      2        $    (23)
  Other Plant closure costs                         Cash             (230)             30            200              --

LEASE TERMINATION AND OTHER CONTRACTUAL
OBLIGATIONS (NET OF ANTICIPATED RECOVERY):
  Building and equipment leases                     Cash           (7,444)          1,348          1,489          (4,607)
  Other contractual obligations                     Cash           (1,700)             --          1,700              --

IMPAIRMENT OF ASSETS:
  Inventories                                     Non-Cash         (3,454)          1,376            209          (1,869)
  Prepaid inventory and other expenses            Non-Cash         (2,485)          2,485             --              --
  Accounts receivable                             Non-Cash         (1,685)            521            245            (919)
  Fixed assets                                    Non-Cash         (3,151)          2,942             --            (209)
  Net intangible assets                           Non-Cash        (29,184)         29,184             --              --

TOTAL                                                            $(50,916)       $ 39,444       $  3,845        $ (7,627)
</TABLE>

                                       34
<PAGE>
Included in the total Executone  restructuring costs of $50.9 million is a $43.3
million  restructuring  charge  for exit  costs and asset  impairment,  and $7.6
million  associated  with the impairment of  inventories,  which has accordingly
been recorded as additional costs of sales. Refer to Management's Discussion and
Analysis for additional information.

CIRILIUM JOINT VENTURE.  In December 1999,  Inter-Tel  entered into an agreement
with Hypercom Corporation to jointly form Cirilium.  Cirilium comprised parts of
Hypercom's  data and  Inter-Tel's  packet  telephony  experience,  products  and
services,  including Inter-Tel's  Vocal'Net gateway products and technology.  We
accounted for the Cirilium losses using the equity method of accounting  through
September  2000. In September  2000,  we wrote-off  our remaining  investment in
Cirilium. Our Cirilium ownership interest of 19.9% has been fully written-off in
our financial  statements,  and we have not used the equity method of accounting
since the date of the write-off.

RECENT ACCOUNTING PRONOUNCEMENTS

     In June 2001, the Financial  Accounting  Standards Board (FASB) issued SFAS
141,  "Business  Combinations",  and SFAS 142,  "Goodwill  and Other  Intangible
Assets",  effective for our fiscal year beginning January 1, 2002. Inter-Tel has
adopted SFAS 142 effective January 1, 2002.  Application of the  nonamortization
provisions  of SFAS 142 is  expected  to result in an  increase  in income  from
continuing   operations   before  income  taxes  and  trust   distributions   of
approximately $1.8 million in 2002. Inter-Tel has tested goodwill for impairment
using the two-step  process  prescribed  in SFAS 142. The first step is a screen
for  potential  impairment,  while the second  step  measures  the amount of the
impairment, if any. Inter-Tel has performed the first of the required impairment
tests for  goodwill as of January 1, 2002 and has  determined  that the carrying
amount of goodwill is not impaired.

     In April 2001,  the Emerging  Issues Task Force (EITF)  issued Issue 00-25,
Vendor Income Statement  Characterization of Consideration Paid to a Reseller of
the Vendor's Products.  EITF 00-25 addresses the accounting and income statement
classification  of costs that a vendor  incurs to or on behalf of a reseller  in
connection with the reseller's  purchase or promotion of the vendor's  products.
The standard is effective for fiscal periods  beginning  after December 15, 2001
and will be adopted  by us as of  December  2002.  It is not  expected  that the
adoption of this standard will have a material impact on our financial position,
results of operations or cash flows.

     In July 2001,  the FASB  issued  Statement  No. 143,  Accounting  for Asset
Retirement Obligations.  The standard applies to obligations associated with the
retirement of tangible  long-lived  assets. The standard is effective for fiscal
periods  beginning  after June 15, 2002 and will be adopted by us as of December
2003. It is not expected that the adoption of this standard will have a material
impact on our financial position, results of operations or cash flows.

     In August  2001,  the FASB issued  Statement  No. 144,  Accounting  for the
Impairment or Disposal of Long-Lived  Assets  (Statement)  which supersedes FASB
Statement No. 121,  Accounting for the  Impairment of Long-Lived  Assets and for
Long-Lived  Assets  to Be  Disposed  Of;  however  it  retains  the  fundamental
provisions of that statement  related to the  recognition and measurement of the
impairment of long-lived assets to be "held and used." The standard is effective
for fiscal periods  beginning  after December 15, 2001 and will be adopted by us
as of December  2002. It is not expected that the adoption of this standard will
have a material impact on our financial position,  results of operations or cash
flows.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The   following   discussion   about  our  market  risk   disclosures   involves
forward-looking  statements.  Actual results could differ  materially from those
projected  in the  forward-looking  statements.  We are  exposed to market  risk
related to changes in interest rates and foreign currency  exchange rates. We do
not use derivative financial instruments.

INVESTMENT  PORTFOLIO.  We do not use  derivative  financial  instruments in our
non-trading  investment  portfolio.  Inter-Tel  maintains a portfolio  of highly
liquid cash  equivalents  typically  maturing in three  months or less as of the
date of purchase. Inter-Tel places its investments in instruments that meet high
credit  quality  standards,  as specified in our investment  policy  guidelines.
Given the short-term nature of these investments, and that we

                                       35
<PAGE>
have no borrowings  outstanding other than short-term  letters of credit, we are
not subject to significant interest rate risk.

LEASE  PORTFOLIO.  We offer to our customers lease financing and other services,
including our Total Solutions program, through our Inter-Tel Leasing subsidiary.
We fund these  programs in part  through the sale to financial  institutions  of
rental  income  streams  under the  leases.  Upon the sale of the rental  income
streams,  we continue to service the leases and maintain limited recourse on the
leases.  We maintain  reserves for loan losses on all leases based on historical
loss  experience and specific  account  analysis.  Although to date we have been
able to  resell  the  rental  streams  from  leases  under  our  lease  programs
profitably and on a substantially current basis, the timing and profitability of
lease resales could impact our business and operating  results,  particularly in
an  environment of fluctuating  interest rates and economic  uncertainty.  If we
were required to repurchase rental streams and realize losses thereon in amounts
exceeding our  reserves,  our  operating  results could be materially  adversely
affected.  See "Liquidity and Capital Resources" in Management's  Discussion and
Analysis  and Notes A and D to the  financial  statements  for more  information
regarding our lease portfolio and financing.

IMPACT OF FOREIGN  CURRENCY  RATE  CHANGES.  We  invoice  the  customers  of our
international subsidiaries primarily in the local currencies of our subsidiaries
for product and service revenues.  Inter-Tel is exposed to foreign exchange rate
fluctuations  as the financial  results of foreign  subsidiaries  are translated
into U.S. dollars in consolidation.  The impact of foreign currency rate changes
have historically been insignificant.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The  information  required by this Item is  incorporated by reference to Exhibit
13.0.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

Not applicable.

                                    PART III

     Certain  information  required  by Part III is omitted  from this report in
that  the  Registrant  will  file  a  definitive  proxy  statement  pursuant  to
Regulation 14A (the "Proxy  Statement") not later than 120 days after the end of
the fiscal year covered by this Report, and the information  included therein is
incorporated herein by reference to the extent stated below.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information with respect to directors and executive  officers is included at the
end of Part I, Item 1 on this report under the caption  "Directors and Executive
Officers of the Registrant."

ITEM 11. EXECUTIVE COMPENSATION

The  information  required  by this Item is  incorporated  by  reference  to the
Company's Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The  information  required  by this Item is  incorporated  by  reference  to the
Company's Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

None.

                                       36
<PAGE>
                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)  The following documents are filed as part of this Report:

1. FINANCIAL STATEMENTS

The following consolidated financial statements of Inter-Tel,  Incorporated, and
subsidiaries, are incorporated by reference to Exhibit 13.0:

     Report of Ernst & Young LLP, Independent Auditors
     Consolidated balance sheets--December 31, 2001 and 2000
     Consolidated statements of operations--years ended
       December 31, 2001, 2000 and 1999
     Consolidated statements of shareholders' equity--years
       ended December 31, 2001, 2000 and 1999
     Consolidated statements of cash flows--years ended
       December 31, 2001, 2000 and 1999
     Notes to consolidated financial statements

2. FINANCIAL STATEMENT SCHEDULES

The  following   consolidated   financial   statement   schedule  of  Inter-Tel,
Incorporated,  and  subsidiaries  is filed as part of this  Report and should be
read in conjunction  with the  Consolidated  Financial  Statements of Inter-Tel,
Incorporated and subsidiaries, and the notes thereto.

     Schedule for the three years ended December 31, 2001:

          Schedule II--Valuation and Qualifying Accounts             Page No. 40

     Schedules  not  listed  above  have  been  omitted  because  they  are  not
applicable  or are not  required  or the  information  required  to be set forth
therein is included in the Consolidated Financial Statements or notes thereto.

3. EXHIBITS

    3.1(10)       Articles of Incorporation, as amended.

    3.2(16)       By-Laws, as amended.

    10.15(1)      Registrant's form of standard Distributor Agreement.

    10.16(1)      Registrant's form of standard Service Agreement.

    10.34(2) *    1984 Incentive Stock Option Plan and forms of Stock Option
                  Agreement.

    10.35(3)      Agreement between Registrant and Samsung Semiconductor and
                  Telecommunications Company, Ltd. dated October 17, 1984.

    10.37(3) *    Tax Deferred Savings Plan.

    10.51(11) *   1990 Directors' Stock Option Plan and form of Stock Option
                  Agreement.

    10.52(15) *   Inter-Tel, Incorporated Long-Term Incentive Plan and forms of
                  Stock Option Agreements.

    10.53(12)     Agreement between Registrant and Maxon Systems, Inc. dated
                  February 27, 1990.

    10.54(12)     Agreement between Registrant and Varian Tempe Electronics
                  Center dated February 26, 1991.

    10.55(12)     Agreement between Registrant and Jetcrown Industrial Ltd.
                  dated February 18, 1993.

    10.56(13) *   Employee Stock Ownership Plan.

                                       37
<PAGE>
    10.57(14)     Loan and Security Agreement dated March 4, 1997 between Bank
                  One, Arizona, N.A. and Registrant and Modification Agreement
                  dated July 25, 1997.

    10.58 (16)    Development, Supply and License Agreement between Registrant
                  and QUALCOMM dated January 17, 1996.

    10.59(17) *   Inter-Tel, Incorporated 1997 Long-Term Incentive Plan.

    10.60(17) *   Inter-Tel, Incorporated 1997 Employee Stock Purchase Plan.

    10.61(18) *   Inter-Tel, Incorporated Acquisition Stock Option Plan and form
                  of Stock Option Agreement.

    10.61(19)     Computer Telephony Asset Purchase Agreement dated as of
                  October 17, 1999 by and between Executone Information Systems,
                  Inc., Inter-Tel, Incorporated and Executone Inter-Tel Business
                  Information Systems, Inc.

    13.0 (20)     Excerpts from Annual Report to Security Holders.

----------
(1)  Incorporated  by reference to Registrant's  Registration  Statement on Form
     S-1 (File No. 2-70437).
(2)  Incorporated  by reference to Registrant's  Registration  Statement on Form
     S-8 (File No. 2-94805).
(3)  Incorporated  by reference to  Registrant's  Annual Report on Form 10-K for
     the year ended November 30, 1984 (File No. 0-10211).
(10) Incorporated  by reference to  Registrant's  Annual Report on Form 10-K for
     the year ended December 31, 1988 (File No. 0-10211).
(11) Incorporated  by reference to Registrant's  Registration  Statement on Form
     S-8 (File No. 33-40353).
(12) Incorporated  by reference to Registrant's  Registration  Statement on Form
     S-1 (File No. 33-70054).
(13) Incorporated  by reference to Registrant's  Registration  Statement on Form
     S-8 (File No. 33-73620).
(14) Incorporated  by reference to  Registrant's  Annual Report on Form 10-K for
     the year ended December 31, 1998 (File No. 0-10211).
(15) Incorporated by reference to  Registrant's  Proxy Statement dated March 23,
     1994.
(16) Incorporated  by reference to  Registrant's  Annual Report on Form 10-K for
     the year ended December 31, 1995 (File No. 0-10211).
(17) Incorporated  by reference to Registrant's  Registration  Statement on Form
     S-8 (File No. 333-41197).
(18) Incorporated  by reference to Registrant's  Registration  Statement on Form
     S-8 (File No. 333-67261).
(19) Incorporated  by  reference  to  Registrant's  Report on Form 8-K (File No.
     333-67261).
(20) Filed herewith, except as noted.

*    Management  contracts or  compensatory  plan or arrangement  required to be
     filed as an exhibit to this report on Form 10-K.

(b)  Reports on Form 8-K. None.

(c)  Exhibits.

     13.0  Excerpts from Annual Report to Security Holders.  Filed herewith.

     23.0  Consent of Ernst & Young LLP, Independent Auditors.

     24.1  Power of Attorney.

     See Item 14(a) 3 also.

(d)  Financial Statement  Schedules.  The response to this portion of Item 14 is
     submitted as a separate section of this report. See Item 8.

                                       38
<PAGE>
                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant,  Inter-Tel,  Incorporated, has duly caused
this  Report to be  signed on its  behalf  by the  undersigned,  thereunto  duly
authorized.


                                        INTER-TEL, INCORPORATED


                                        BY: /S/ Steven G. Mihaylo
                                            ------------------------------------
                                            Steven G. Mihaylo
                                            Chairman and Chief Executive Officer

Dated: March 21, 2002

                                       39