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, 1999                                           0-10211

                             Inter-Tel, Incorporated

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

                        120 North 44th Street, Suite 200
                           Phoenix, Arizona 85034-1826

                                 (602) 302-8900

                                   ----------

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

                                  Common Stock
              (26,321,779 shares outstanding as of March 10, 2000)

     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 the Company's Common
Stock  reported  on the  Nasdaq  National  Market  System on March 10,  2000 was
approximately  $923  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.
<PAGE>
Sections from the following  documents have been  incorporated by reference into
this Report where indicated below: (1) the Registrant's Proxy Statement relating
to its 1999 Annual Meeting of Shareholders  has  been  incorporated by reference
into Part III and Part IV of this report and (2) the  Registrant's  Registration
Statements  on Form S-1  (Nos.  2-70437  and  33-70054),  Form S-3  Registration
Statements (Nos. 33-58161, 33-61437,  333-01735,  333-12433 and 333-39221), Form
S-8 Registration  Statements (Nos. 2-94805,  33-40353,  33-73620,  333-41197 and
333-67261),  Annual  Reports on Form 10-K for the years ended December 31, 1984,
1988 and 1994,  and Reports on Form 8-K dated July 17, 1987,  August 3, 1988 and
January  14, 2000 have been  incorporated  by  reference  into Part IV, Item 14.

                             INTER-TEL, INCORPORATED
                          1999 FORM 10-K ANNUAL REPORT

                                TABLE OF CONTENTS

                                     PART I
                                                                            Page

Item 1    Business                                                            3
Item 2    Properties                                                         24
Item 3    Legal Proceedings                                                  24
Item 4    Submission of Matters to a Vote of Security Holders                24

                                     PART II

Item 5    Market for the Registrant's Common Stock
          and Related Shareholder Matters                                    24
Item 6    Selected Financial Data                                            25
Item 7    Management's Discussion and Analysis of
          Financial Condition and Results of Operations                      26
Item 7A   Quantitative and Qualitative Disclosures About Market Risk         26
Item 8    Financial Statements and Supplementary Data                        26
Item 9    Changes in and Disagreements with Accountants
          on Accounting and Financial Disclosure                             26

                                    PART III

Item 10   Directors and Executive Officers of the Registrant                 27
Item 11   Executive Compensation                                             27
Item 12   Security Ownership of Certain Beneficial Owners and Management     27
Item 13   Certain Relationships and Related Transactions                     27

                                     PART IV

Item 14   Exhibits, Financial Statement Schedules and Reports on Form 8-K    27

                                       2
<PAGE>
                                     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 RESULTS OF FUTURE  OPERATIONS"  BELOW AND ELSEWHERE IN THIS DOCUMENT.  IN
EVALUATING THE COMPANY'S BUSINESS, SHAREHOLDERS AND PROSPECTIVE INVESTORS SHOULD
CONSIDER  CAREFULLY THE FOLLOWING  FACTORS IN ADDITION TO THE OTHER  INFORMATION
SET FORTH IN THIS DOCUMENT.

     Inter-Tel,  incorporated  in Arizona in 1969, is a single point of contact,
full service provider of digital  business  telephone  systems,  call processing
software, voice processing software, call accounting software, Internet Protocol
("IP") telephony software,  computer telephone  integration ("CTI") applications
and long distance calling  services.  Inter-Tel's  products and services include
the  AXXESS  and  Inter-Tel  Axxent  digital  business   communication  software
platforms, the AXXESSORY TALK voice processing platform, the InterPrise routers,
ClearConnect Lite e-Commerce software, and Inter-Tel.net, an IP telephony packet
"switched"  long  distance  service.  The Company  also  acquired  the  Computer
Telephony business of eLot,  formerly Executone  Business  Information  Systems,
Inc.  ("Executone"),  including the IDS and INFOSTAR Computer  Telephony product
lines. The Company also provides  maintenance,  leasing and support services for
its products. The Company's Common Stock is quoted on the Nasdaq National Market
System under the symbol INTL.

     The Company has developed a  distribution  network of direct sales offices,
dealers and value added  resellers  (VARs) which sell the Company's  products to
small-to-medium-size  organizations  and to divisions or  departments  of larger
organizations,  including Fortune 500 companies, large service organizations and
governmental  agencies.  The Company has 46 direct  sales  offices in the United
States,  one in the United  Kingdom,  one in Japan and a network of  hundreds of
dealers and VARs around the world who purchase directly from the Company.

INDUSTRY BACKGROUND

     In recent years, advances in  telecommunications  technologies have enabled
the   development   of   increasingly   sophisticated   telephone   systems  and
applications.  Users rely upon a variety of applications,  including  conference
calling,  speaker  phones,  automated  attendant,  voice  processing and unified
messaging (the  integration of voice mail,  facsimile and electronic  mail),  to
improve  communications  within  their  organizations  and  with  customers  and
vendors.  Digital  technology has  facilitated  the integration of computing and
telecommunications  technologies,  which  has  made  possible  a  number  of new
applications that further enhance  productivity.  Examples of these applications
include   automatic   call   distribution   (which   provides  for  queuing  and
prioritization of incoming calls), call accounting (which permits accounting for
telephone usage and toll calls), unified messaging,  electronic data interchange
between  customers  and vendors and the use of automatic  number  identification
coupled  with  database   look-up  (where  customer   information  is  retrieved
automatically from a computerized database when the customer calls).

                                       3
<PAGE>
     The emergence of high-performance  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  rather than over  traditional
circuit switched telephone networks.  This development of voice applications for
the Internet and other IP networks  reflects a broader  convergence  of standard
voice  communications  and data 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.  The lowering of federal regulatory barriers to competition
across  traditionally  distinct sectors of the  telecommunications  industry has
opened new markets for and increased competitive pressures on telecommunications
companies. In response to these factors, telecommunications companies have begun
to  establish a presence in Internet and other IP network  voice  communications
services.

     Following   the  breakup  of  the  Bell  system  in  1984,   which  removed
restrictions on the ability of the regional Bell operating  companies  ("RBOCs")
to purchase  telecommunications  equipment  from  independent  suppliers  and to
resell such equipment to end users,  the market for  telecommunications  systems
and  applications  became  increasingly  fragmented.  The number of  independent
suppliers and distributors of telecommunications  equipment initially increased,
but increased  levels of competition  subsequently  led to  consolidation  among
suppliers and distributors.  In addition,  different  telecommunications systems
and  applications  were  often  available  from only one or a limited  number of
suppliers,  which required  businesses  seeking  complete systems to work with a
number of different suppliers. A business seeking a telephone system, voice mail
and long distance  services would most likely purchase the products and services
from three separate vendors.  As business  telecommunications  requirements have
become  more  advanced,   the  integration  of  different   systems  has  become
increasingly difficult.

PRODUCTS AND SERVICES

     The  Company  offers a broad  range of products  and  services  designed to
support the needs of businesses and other organizations requiring voice and data
communications  systems.  The Company's principal products are digital telephone
systems which support  networked  installations up to 20,000 ports, IP telephony
products and services,  CTI applications,  unified messaging  software and voice
processing  software.  The Company's  principal  system sales consist of systems
supporting 10 to 4,000 telephones with suggested retail prices of larger systems
in excess of $1,000,000 per system, depending on configuration. The Company also
offers  long  distance  calling  services,  network  design  and  implementation
services,   maintenance,   leasing  and  support  services,  and  resells  other
telecommunications products.

     DIGITAL COMMUNICATION PLATFORMS

     Inter-Tel  offers  an  extensive  line of  digital  communication  systems,
including  hardware  platforms  and C++  software  applications.  Because  these
platforms are based upon open  architecture and conform to established  computer
and telephone  industry standard  programming  interfaces and protocols (such as
TAPI,  TSAPI and TCP/IP),  customers  can choose from a variety of either server
level or desktop applications.

     AXXESS. The AXXESS platform,  incorporates advanced technology for computer
and telephone integration. The AXXESS platform is designed to provide businesses
with the ability to  customize  applications  to enhance  their  operations  and
increase  productivity.  The current AXXESS system release supports up to 20,000
ports and includes such advanced  capabilities as primary rate ISDN,  integrated
call recording, voice prompts in different languages, transparent networking and
a Windows-based attendant's console. The AXXESS platform,  allows, through fully
transparent digital networking, two or more systems to operate as one integrated
system, currently with capacity to 20,000 ports.

     The AXXESS system incorporates fully-digital processing and transmission to
the  desktop  and open  architecture  interfaces,  which  allow the system to be
integrated   with  and  controlled  by  attached   computers  such  as  PCs  and
workstations.  The system incorporates object-oriented C++ software

                                       4
<PAGE>
developed by the Company,  which  facilitates  upgrades and the incorporation of
additional features and functionality.

     AXXESS  system  telephones  feature  user-friendly,  6-by-16  character LCD
displays  with menu keys that  permit  the user to  select  from  multiple  menu
choices or access  additional menu screens.  AXXESSORY TALK permits  push-button
selection of voice processing commands to appear on the telephone's LCD display,
as well as voice-prompted  selections  through the telephone keypad.  The AXXESS
system  currently  offers  English,  Japanese and Spanish  voice prompts and LCD
displays and allows the user to switch from one language to another.  The AXXESS
system can support the addition of other  languages that the Company  expects to
add in the future.

     The AXXESS system's open  architecture  interface permits tight integration
with a PC or workstation system bus, using several industry-standard  interfaces
to provide efficient access to voice processing and other applications on the PC
or workstation.  Applications include database look-up (which utilizes Caller-ID
information to retrieve customer  information  automatically from a computerized
database),  automated  attendant,  interactive  voice  response,  automatic call
distribution (which queues and prioritizes  incoming calls), and call accounting
(which  permits the  monitoring  of telephone  usage and toll cost).  The AXXESS
system is managed through a Microsoft  Windows-based graphical user interface on
a PC.

     The AXXESS  system  utilizes  advanced  software to  configure  and utilize
real-time   digital   signal   processor   semiconductor   components   ("DSPs")
incorporated  into the system  hardware.  The use of DSPs and  related  software
lowers  system  costs,   permits  higher   functionality  and  increases  system
flexibility.  For  example,  DSPs can be  configured  by the system  manager for
different  combinations  of  speakerphones,  conference  capabilities  and other
DSP-based  facilities.   The  system's  speakerphones   incorporate  full-duplex
technology,  which permits  speakerphones  to transmit in both directions at the
same time without the need to override one speaker's  voice to prevent  feedback
interference.

     Inter-Tel has evolved the AXXESS to a server-based  communication system by
developing  a  Windows-NT   server-based   Central  Processing  Unit  (CPU)  for
Inter-Tel's  AXXESS system.  This CPU is designed to handle call processing with
greater speed and efficiency. By combining server-based technology and Inter-Tel
AXXESS technology,  Inter-Tel leverages the benefits of a Win-Tel server and the
benefits of a PBX-like  hot card  insertion  of  telephony  cards.  Because this
server-based  CPU  integrates  with the AXXESS  system,  current  customers  can
benefit  from  the new  functionality,  while  retaining  their  current  system
investment.

     INTER-TEL  AXXENT.   Small  businesses  are  demanding  advanced  telephony
applications  formerly  within reach of only large  corporations.  The Inter-Tel
Axxent is designed to bring many of the advanced  features and  functionality of
the AXXESS  system to smaller  installations  on a  cost-effective  basis  while
enabling users to migrate to an AXXESS system as their  telecommunications needs
evolve.  The  Inter-Tel  Axxent  supports  24 lines and 12 trunks  and  provides
capabilities such as computer telephone integration,  DSP technology,  real-time
ACD reporting,  and integrated voice  processing.  Housed in a compact,  PC-type
mid-tower chassis,  the Inter-Tel Axxent platform also offers the convenience of
a default database, allowing the system to be fully operational as soon as it is
plugged in. Basic database programming can also be performed through the digital
telephone terminals.

     EXECUTONE  IDS/ECLIPSE.  The Executone IDS/Eclipse  platform,  incorporates
advanced  technology  for computer and telephone  integration.  The  IDS/Eclipse
platform  is  designed  to provide  businesses  with the  ability  to  customize
applications to enhance their operations and increase productivity.  The current
IDS/Eclipse  system release  supports up to 648 ports and includes such advanced
capabilities as primary rate ISDN, integrated automatic call distribution (ACD),
and an integrated operator's terminal.

     The   IDS/Eclipse   system   incorporates   fully-digital   processing  and
transmission to the desktop and open  architecture  interfaces,  which allow the
system to be integrated  with and  controlled by attached  computers such as PCs
and workstations.  The system incorporates  object-oriented C software developed
by the Company,  which facilitates  upgrades and the incorporation of additional
features and functionality.

                                       5
<PAGE>
     IP TELEPHONY PRODUCTS AND INTER-TEL.NET NETWORK

     IP TELEPHONY VOICE AND DATA ROUTERS.  Voice and data routers are transition
points between two different  network types,  such as between the public circuit
switched  telephone  network  and a  packet  switched  IP  network  such  as the
Internet.  IP Router products convert regular voice and facsimile  transmissions
to or from the compressed data packets that travel over packetized networks. The
Company marketss a line of voice and data routers under the InterPrise brand.

     INTER-TEL  INTERPRISE  PRODUCT  LINE.  This  product  line  consists of the
InterPrise  400 (four analog PSTN access  ports),  the  InterPrise  3200D (up to
thirty-two  digital  PSTN  access  ports),  and  the  InterPrise  3200N  (up  to
thirty-two  access  ports using  AXXESS  networking  protocol).  These  products
incorporate  high speed  embedded DSP  technology  and a  proprietary  Inter-Tel
operating  system,  and are used  primarily  by  business  customers  over their
wide-area  networks (WAN) and virtual  private  networks  (VPN).  The InterPrise
Voice and Data Routers enable  phone-to-phone  and  PC-to-phone  calling over IP
networks.

     INTERPRISE  400. The  InterPrise  400 is designed for  corporate use over a
wide area network ("WAN"). The InterPrise 400 can be attached to an analog trunk
interface  on the PBX,  and the PBX's  Automatic  Route  Selection or Least Cost
Routing  features will be programmed to  automatically  route calls through that
trunk interface for other locations that also have InterPrise  routers/gateways.
When phone users wish to place a call,  they  simply dial the desired  telephone
number like any other call. The PBX will route the call to the  InterPrise  400,
which  converts it into the compressed or  uncompressed,  digitized data packets
used by the corporate WAN, and routes the call via the WAN to another InterPrise
gateway.  The second gateway  connects with the far-end PBX and dials either the
extension number of the desired party or accesses a trunk on the PBX and makes a
call into the switched network.

     Because  IP  telephony  converts  all  transmissions  to the  same  type of
packets,  both voice and data information can be transmitted using the same data
circuits,  thereby  increasing  efficiency  and maximizing the use of bandwidth.
Bandwidth utilization can be maximized to a point that some users may be able to
reduce the overall number of circuits needed.

     INTERPRISE 3200D. The InterPrise 3200D is designed for corporate use over a
WAN or VPN.

     CLEARCONNECT  SOFTWARE  TELEPHONE  is a PC-client  software  that acts as a
single  port IP  telephony  gateway  and  allows  callers  the  ability  to make
real-time,  two-way voice  communications over IP networks and realize potential
savings compared to standard long distance telephone service.

     Callers  connected to an IP network on their PC dial the destination  phone
number from a familiar Windows graphical user interface ("GUI").  Using the PC's
microprocessor and multimedia capabilities,  the PC-client software converts the
caller's voice into  compressed,  digitized data packets and routes the call via
the IP network to an Inter-Tel  InterPrise voice and data router. The InterPrise
voice and data router connects with the traditional  telephone network and dials
the final destination.

     Possible applications for the ClearConnect Software phone are for potential
telecommunications savings for mobile employees and for use as on-ramps for long
distance minutes to Inter-Tel.net.

     The Company  believes  that the  opportunity  to leverage the potential for
reduced cost phone calls is only one of the many opportunities for IP telephony.
For this reason,  the Company continues to enhance its product line. The Company
is currently developing industry standard H.323 functionality,  which allows the
Company's IP telephony  gateways to integrate  with  non-Inter-Tel  IP telephony
gateways.

     CLEARCONNECT  LITE. The Company has designed a light-weight  version of the
ClearConnect  technology  that can be integrated  with  e-commerce  web sites to
provide real-time, two-way voice conversations. A ClearConnect Lite button, when
pushed,  would automatically  connect e-commerce customers to call center agents
that can address their questions or provide sales assistance.

                                       6
<PAGE>
     CIRILIUM  JOINT  VENTURE.  In  December  1999,  Inter-Tel  entered  into an
agreement with Hypercom Corporation to jointly form Cirilium. Cirilium comprises
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.
Inter-Tel's  investment in Cirilium included cash, selected assets,  liabilities
and technology related to the Vocal'Net products. In addition, 20 employees from
Inter-Tel joined Cirilium to work in the entity's management, engineering, sales
and  operations  groups.  Cirilium's  products  are  used  in the  Inter-Tel.net
network. Inter-Tel has entered into service agreements with Cirilium to maintain
and support ongoing Inter-Tel.net network services.

     INTER-TEL.NET.  Inter-Tel.net  is an IP long distance network that utilizes
the Inter-Tel IP telephony  solutions and Cirilium  gateways,  Service  Provider
Package and Centralized  Accounting System.  Inter-Tel.net's  points of presence
("POP") include the San Francisco Bay Area, Washington D.C., Chicago,  Reno, New
York, Phoenix, Atlanta,  Houston, Dallas, Miami/Ft.  Lauderdale and Los Angeles.
Utilizing  Cirilium's  gateway  products and  technology  (formerly  Vocal'Net),
Inter-Tel  continues to develop and expand  Inter-Tel.net,  a private IP network
designed to carry long distance  telephone traffic at rates typically lower than
traditional   long  distance   providers.   Through   international   alliances,
Inter-Tel.net is participating with businesses in Asia, Europe, Mexico and South
America to provide international IP telephony service. Through other third party
arrangements,  the network is also  expanding  its domestic  points of presence.
Commercial  traffic  is being  sold to  Inter-Tel's  base  customers  in certain
markets, and pre-paid calling cards are being sold through Inter-Tel's branches,
certain  agents  and  resellers.  Where  Inter-Tel.net  or one of  it's  network
partners does not have a POP,  Inter-Tel.net  utilizes traditional Long Distance
Carriers to complete the call.  See "Factors  That May Affect  Future  Operating
Results."

     COMPUTER-TELEPHONE INTEGRATION

     Through  CTI,  the  computer  and  the   telephone   are  linked  into  one
environment.  Inter-Tel's AXXESS and Executone digital communication systems and
software  enable users to receive  phone calls  through  their desktop PC. Using
Caller I.D., a caller's information can be retrieved from the company's database
even before the call is accepted.  On an  individual  desktop or a  company-wide
network basis,  Inter-Tel  offers a variety of products,  such as AXXESSORY Call
Center and Executone  Sentinal,  that can manage automatic call  distribution at
peak efficiency or route incoming telephone calls, based on various  parameters,
to a specific  person.  It can also collect,  analyze and report  real-time call
processing information for staff forecasting and analysis.

     Through the use of Novell's TSAPI and Microsoft's TAPI standard interfaces,
Inter-Tel's software applications  integrate with other "off-the-shelf"  Windows
applications  such  as  personal  information  managers,  call  routing  or call
management.  Inter-Tel  has formed  relationships  with a number of third  party
software  developers to integrate with their existing  applications  to create a
working  environment for database,  personal  organizer,  or terminal  emulation
programs.

     If these "off-the-shelf" applications do not adequately meet the needs of a
customer,  the open design of Inter-Tel's  software enables independent software
developers to write custom applications  through Inter-Tel's  Developer Program.
Alternatively,   Inter-Tel's  CTI  Solutions  Group  can  provide   professional
consulting services or can develop individual customer applications,  for either
desktop or local area network ("LAN")-based applications.

     UNIFIED MESSAGING AND VOICE PROCESSING SOFTWARE

     Inter-Tel's  unified messaging software,  AXXESSORY Talk Central,  works in
conjunction  with a variety of  messaging  platforms,  including  the  Microsoft
Exchange messaging application,  Lotus Notes, Lotus cc:Mail,  Novell's GroupWise
and Internet mail applications such as Qualcomm's Eudora. AXXESSORY Talk Central
integrates all types of messages into a single-user  interface on a PC, supports
both voice mail and  facsimile  mail and provides  another  means for  improving
workplace productivity and retrieving messages from a PC connected to a modem.

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<PAGE>
     Inter-Tel's  AXXESSORY Talk, Axxent Talk, IVX500,  and Executone  INFOSTAR,
DVX,  EVX, and VX2 are voice  processing  platforms  that work with  Inter-Tel's
AXXESS-brand and Executone-brand communication platforms. These voice processing
platforms provide advanced voice mail, auto attendant,  recorded  announcements,
and messaging notification features for businesses.

     OTHER SERVICES AND PRODUCTS

     NETWORKING  TECHNOLOGIES  INTEGRATION.  To develop a solid  foundation  for
state-of-the-art  data  and  telecommunications  networking,  customers  require
strategic network expertise from their networking  provider.  Inter-Tel designs,
installs and supports the complete  integration of a customer's complex data and
telecommunications  network,  from land-based LANs to  geographically  dispersed
WANs.

     By forming  relationships with major manufacturers of hardware and software
technologies,  Inter-Tel provides the routers,  ATM, LAN and WAN switches,  file
servers,  intelligent  hubs and any other  device  required  for the  customer's
intranet  or for  usage  of  the  Internet.  Pre-sale  design  support,  project
coordination for  implementation,  and  installation  support are offered on the
full line of Inter-Tel server-based telephony products, InterPrise products, and
services.

     NETWORK AND LONG  DISTANCE  SERVICES.  The Company,  through its  Inter-Tel
NetSolutions,  Inc.  subsidiary,  resells a  variety  of long  distance  calling
services,  including  domestic and international  calling services,  800 calling
services,  dedicated services, voice and video conferencing,  customized billing
and a variety of other telecommunication  services.  Inter-Tel NetSolutions also
provides long distance  calling  services that are a blend of IP Telephony  long
distance and traditional  circuit-switched  long distance.  The Company believes
that certain of its customers  desire the convenience of acquiring long distance
calling  services through the same vendor that the customer uses to purchase its
other  telephony  equipment and  services.  The Company  currently  resells long
distance services pursuant to contracts with major U.S. long distance  carriers.
See "Factors That May Affect Future Operating Results."

     Examples of the applications  currently supported by Inter-Tel NetSolutions
include call  centers  using T-1 access for incoming  toll-free  traffic,  sales
offices  using  NetSolutions'  switched  long  distance  and  companies  linking
multiple offices throughout the country on a frame relay network.

     LEASING  SERVICES.  The Company  offers its Totalease  program  through its
Inter-Tel Leasing,  Inc. subsidiary.  Totalease enables an end user to acquire a
full range of telephony systems, applications, maintenance and support services,
from  affiliated  vendors.  The  Totalease  contract  provides  a  total  system
financing  solution to the customer at a set monthly cost, with system expansion
available at predictable  additional fees. The typical Totalease  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 Inter-Tel products and services,  the customer is able to lease directly
from an  affiliate  of the  manufacturer,  thereby  allowing  Inter-Tel,  or the
Inter-Tel dealer, to maintain a direct relationship with customers.

     OTHER PRODUCTS. Inter-Tel also distributes other leading telecommunications
products from its Factored  Products  Division through its direct sales offices,
dealers and VARs.  The  Factored  Products  Division  represents  products  that
Inter-Tel has endorsed as leading  communications  peripherals  utilized in many
day-to-day functions.  Businesses require telecommunications products to provide
increased  productivity,  ease of  operations  and  reliability.  Many of  these
products  interface  with  Inter-Tel  telephone  systems.   Inter-Tel's  product
selection  consists  of  videoconferencing,   battery  backup,  headsets,  surge
protection, paging equipment, wireless communications and data multiplexers.

                                       8
<PAGE>
SALES AND DISTRIBUTION

     The Company has developed a  distribution  network of direct sales offices,
dealers  and VARs which  market the  Company's  products to small to medium size
organizations  and  divisions or  departments  of larger  organizations.  In the
United States, the Company has 46 direct sales offices and a network of hundreds
of dealers who purchase  systems  directly from Inter-Tel.  These resellers have
traditionally  sold complex  data  solutions  to  customers,  and the Company is
seeking to leverage its distribution network to capitalize on the merging of the
computer and telephony industries. The Company maintains a dealer support office
and direct sales  office in the United  Kingdom and have a network of dealers in
the United Kingdom and Europe. In addition, the Company maintains a direct sales
office in both Japan and Singapore.

     The Company  believes that its success depends in part upon the strength of
its  distribution  channels and its ability to maintain  close access to its end
user customers.  In recent periods, the Company has sought to improve its access
to end user  customers  by  effecting  strategic  acquisitions  of  resellers of
telephony  products  and  services in markets in which the Company has  existing
direct sales offices and in other  strategic  markets.  The Company has expanded
its direct  sales office  personnel  from a total of 625 persons at December 31,
1995 to a total of 1,114 at December 31, 1999.

     The  Company's  sales  through its direct sales  offices as a percentage of
total sales have decreased from 59.5% of net sales in 1995 to 56.6% of net sales
in 1999. Sales to distributors,  dealers,  and VARs have decreased from 31.7% of
net sales in 1995 to 28.0% of net sales in 1999.  Sales  through  the  Company's
long distance,  IP and network  services  operations have increased from 5.0% of
net sales in 1995 to 12.4% of net sales in 1999.

     Direct  dealers  and  VARs  typically  enter  into  non-exclusive  reseller
contracts  for a term of one or  more  years.  The  Company  generally  provides
support  and  other  services  to the  reseller  pursuant  to the  terms  of the
agreement.  The agreements often include  requirements that the reseller meet or
use its best efforts to meet minimum annual purchase  quotas.  The Company faces
intense  competition  from other telephone  system and voice  processing  system
manufacturers for its dealers' attention, as most of the Company's dealers carry
products which compete with the Company's products. See "Factors That May Affect
Future Operating Results."

     International sales, which include digital communications  platforms and IP
telephony  products,  accounted  for  approximately  2.5%,  of net sales in 1999
compared to 2.7% in 1998.  In order to sell its  products to  customers in other
countries, the Company must comply with local telecommunications  standards. The
Company's AXXESS system and IP telephony products can be readily altered through
software  modifications,  which the Company believes will facilitate  compliance
with these local regulations.  In addition,  the AXXESS system has been designed
to support multi-lingual functionality, and currently supports English, Japanese
and Spanish.  The Company is presently  establishing  AXXESS dealer  networks in
Japan, other parts of Asia and Latin America and is working to expand its dealer
network in the United  Kingdom and Europe.  Starting in 2000,  the Company  will
also  be  distributing  Executone  Computer  Telephony  products  in the  United
Kingdom, Israel, Puerto Rico, and South America. International sales are subject
to a number of risks,  including changes in foreign  government  regulations and
telecommunications  standards,  export license requirements,  tariffs and taxes,
other  trade  barriers,   difficulties  in  protecting   intellectual  property,
fluctuations  in currency  exchange  rates,  difficulty in  collecting  accounts
receivable, difficulty in staffing and managing foreign operations and political
and economic  instability.  Fluctuations in currency  exchange rates could cause
the Company's  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.

                                       9
<PAGE>
CUSTOMER SERVICE AND SUPPORT

     The Company  believes  that  customer  service  and  support  are  critical
components of customer  satisfaction and the success of the Company's  business.
The Company operates a technical support hotline to provide a range of telephone
support to its distributors,  dealers and end user customers through a toll-free
number.  The Company also provides  on-site customer support and, through remote
diagnostic  procedures,  has the ability to detect and correct  system  problems
from its technical support facilities.

     Information  taken from customer  service call records allows feedback into
Inter-Tel's  Quality  First  continuous   improvement  process,  thus  providing
direction  for product and service  enhancements.  Each direct  sales  office is
given  a  periodic  service   activity  report   summarizing  the  reasons  that
technicians  are  asking for  assistance  and  common  issues  that give rise to
technical  inquiries.  This  allows  them to  analyze  trends  in their  service
operations and provide better customer service.

RESEARCH AND DEVELOPMENT

     The Company  believes  that its  ability to enhance  its current  products,
develop and  introduce new products on a timely  basis,  maintain  technological
competitiveness  and meet customer  requirements  are essential to the Company's
success.  The Company's  research and development  efforts over the last several
years have been focused  primarily on  development  of and  enhancements  to the
existing  AXXESS  and  AXXESSORY  TALK  systems  with  additional  applications,
capacity and features;  development of a unified messaging software application,
and expanding the  telecommunications  networking package. Over the last several
years,  the research and development  efforts of the acquired TMSI  organization
have  focused  on the  development  of  the  InterPrise  IP  product  line,  the
ClearConnect software phone, and the ClearConnect Lite e-commerce software.  The
Company's  current  efforts are focused on the development and enhancement of IP
telephony  products such as  enhancements  to the AXXESS and  Executone  digital
communication  systems,  enhancements  to the  AXXESSORY  Talk  Central  unified
messaging  platform,  the IP Phone+ digital  telephone,  the InterPrise  product
line,  and   enhancements   to  Inter-Tel's   NT-CPU  PBX.  The   software-based
architecture  of the AXXESS and Executone  systems  facilitate  maintenance  and
support, upgrades, and incorporation of additional features and functionality.

     The  Company  had  a  total  of  136  personnel  engaged  in  research  and
development  as of December 31, 1999.  Research and  development  expenses  were
$14,798,000; $11,373,000; and $7,998,000 for 1999, 1998, and 1997, respectively.

MANUFACTURING

     The Company  manufactures  substantially  all of its systems  through third
party subcontractors located in the United States, the Philippines, 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 the
Company's engineering specifications and designs. The suppliers also inspect and
test the equipment  before  delivering them to the Company,  which in some cases
then performs systems integration, software loading, final testing and shipment.
Varian  Associates,   Inc.  ("Varian"),   a  multinational  electronic  company,
currently  manufacturers  a  significant  portion  of  the  Company's  products,
including  substantially  all of the printed  circuit boards used in the AXXESS,
Executone  IDS and Inter-Tel  Axxent  systems,  at the Varian Tempe,  Arizona or
Poway,  California facilities.  The Company sold its manufacturing operation for
the  Executone  line of  products  to Varian on January  31,  2000.  Varian will
manufacture  the  Executone  line out of the  Poway,  California  facility.  The
Company maintains written agreements with its principal  suppliers.  The Company
provides a forecast  schedule to its  suppliers  and  revises the  forecast on a
periodic basis. See "Factors That May Effect Future Operating Results."

                                       10
<PAGE>
QUALITY

     The Company believes that the quality of its systems,  customer service and
support, and other aspects of its organization are a critical element of meeting
the needs of its  customers.  Through its Quality First  continuous  improvement
process initiated in 1991, Inter-Tel implements quality processes throughout its
business  operations.  The Company has established  formal  procedures to ensure
responsiveness to customer requests, monitor response times and measure customer
satisfaction.  The  Company has also  established  means by which all end users,
including  customers of the Company's  resellers,  can make product  enhancement
requests  directly to the  Company.  The Company  supports  its dealers and VARs
through an extensive  training  program at the Company's  facility and at dealer
sites, a toll-free  telephone  number for sales and technical  support,  and the
provision of end user marketing materials.  The Company typically provides a one
year  warranty  on its  systems  to end users.  In  manufacturing,  the  Company
continuously  monitors the quality of the products produced on its behalf by the
Company's manufacturing  subcontractors,  and is extending the Company's Quality
First continuous improvement process to its suppliers.

COMPETITION

     The market for the Company's  products is highly  competitive and in recent
periods has been characterized by pricing pressures and business consolidations.
The  Company's  PABX  and  key  systems  products   competitors  include  Lucent
Technologies,  Inc. ("Lucent") and Northern Telecom Limited ("NorTel"),  as well
as Comdial  Corporation  ("Comdial"),  Iwatsu America,  Inc.  ("Iwatsu"),  Mitel
Corporation ("Mitel"), NEC Corporation ("NEC"), Nitsuko Corporation ("Nitsuko"),
Matsushita   Electric   Industrial   Co.,  Ltd.   ("Panasonic"),   Siemens  Rolm
Communications,  Inc. ("Siemens"), Toshiba America, Inc. ("Toshiba") and others.
Many of these competitors have significantly  greater  financial,  marketing and
technical  resources  than the Company.  The Company also  competes  against the
RBOCs,  which  offer  systems  produced  by one or  more  of the  aforementioned
competitors and also offer Centrex systems in which automatic calling facilities
are  provided  through  equipment  located in the  telephone  company's  central
office.

     In the market for voice processing applications,  including voice mail, the
Company competes against Applied Voice Technology,  Inc.  ("AVT"),  Active Voice
Corporation    ("Active   Voice"),    Centigram    Communications    Corporation
("Centigram"), Lucent and other competitors, certain of which have significantly
greater  resources than the Company.  In the market for long distance  services,
the  Company  competes  against  AT&T,  MCI  WorldCom,   Inc.  ("MCI"),   Sprint
Corporation,  Qwest Communications  Corporation ("Qwest") and other competitors,
many of which have significantly greater resources than the Company. The Company
also expects to compete with RBOCs,  cable television  companies,  satellite and
other wireless broadband service providers and others for long distance business
as  those  companies  gradually  respond  to  the  Telecommunications  Act.  Key
competitive  factors in the sale of telephone  systems and related  applications
include price,  performance,  features,  reliability,  service and support, name
recognition and distribution  capability.  The Company believes that it competes
favorably in its markets with respect to the price,  performance and features of
its  systems,  as well as the level of  service  and  support  that the  Company
provides  to  its  customers.   Certain  of  the  Company's   competitors   have
significantly  greater name recognition and distribution  capabilities  than the
Company.

     In the market for IP  telephony  products,  the  Company  competes  against
existing IP telephony gateway providers such as Clarent Lucent, NorTel, NetSpeak
Corporation,  VocalTec  Communications  Ltd., Nokia IP Products (formerly Vienna
Systems Corporation),  CISCO Systems,  3Com, Motorola,  Cirilium and others. The
Company competes  against  existing IP long distance  service  providers such as
Net2Phone,  deltathree.com,  ITXC, AT&T and others. Several of these competitors
have been active in  developing  and  marketing IP  telephony  products and have
established  relationships with customers within their market. Should the market
for IP telephony  products  become  fully  developed or develop at a rapid rate,
large  computer  companies  such  as  IBM  Corporation   ("IBM")  and  Microsoft
Corporation  ("Microsoft"),  or large  telephone  companies  such as AT&T,  MCI,
Sprint  Corporation  or Qwest,  could  choose to  develop  proprietary  software
designed to  facilitate  voice  communication  over an IP network.  In addition,
Inter-Tel's router IP solutions may also compete with Cirilium products.

                                       11
<PAGE>
     As the Company competes for local telephone service,  Long Distance Service
and IP network access, it faces additional  competition from established foreign
and domestic Long Distance Carriers, RBOCs and other providers. Many have larger
marketing and sales organizations, significantly greater financial and technical
resources and a larger and more established  customer base than the Company.  In
addition,  RBOCs  and  other  providers  have  greater  name  recognition,  more
established  positions  in the  market  and  long  standing  relationships  with
customers.  Therefore,  there can be no assurance  that the Company will compete
successfully in these markets.

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

INTELLECTUAL PROPERTY RIGHTS

     The  Company's  future  success  will  depend in part upon its  proprietary
technology. The Company currently holds patents for eighteen  telecommunications
and unified messaging products.  The remaining life of these patents ranges from
5 to 18 years in duration.  The Company has also applied to the U.S.  Patent and
Trademark  Office for seven  additional  patents.  The  Company  also  relies on
copyright  and trade  secret  law and  contractual  provisions  to  protect  its
intellectual property. See "Factors That May Effect Future Operating Results."

EMPLOYEES

     As of December 31,  1999,  the Company had a total of 1,652  employees,  of
whom 1,392 were engaged in sales, marketing and customer support, 45 in quality,
manufacturing and related operations, 136 in research and development, and 79 in
finance and  administration.  The Company's  future success will depend upon its
ability to attract,  retain and motivate highly qualified employees,  who are in
great demand. The Company believes that its employee relations are good.

FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

     In addition,  to the other information in this Form 10-K, the following are
important  factors that should be  considered  in  evaluating  Inter-Tel and 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 persistent customer demand
for new products,  applications and services. To compete  successfully,  we must
continually enhance our existing  telecommunications  products, related software
and customer  services as well as 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 no 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 could render our products
and services obsolete.

     In  addition,  if the markets for IP network  products or CTI  applications
fail to develop as quickly as 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 INCREASING  COMMERCIAL  ACCEPTANCE OF OUR
INTERPRISE PRODUCTS, AXXESS PLATFORM, AND EXECUTONE COMPUTER TELEPHONY PRODUCTS.

                                       12
<PAGE>
     During the past few years, we introduced unified messaging on our AXXESSORY
TALK platform,  developed a number of  enhancements  to our existing  AXXESS and
AXXESSORY Talk platforms and introduced the Inter-Tel  Vocal'Net  Gateway Server
and the Inter-Tel Vocal'Net Service Provider Package. In April 1999, we released
the  InterPrise  400 voice and data  router,  the first of a family of voice and
data convergence products that will be released over the next year. Also, during
October  1999,  we released  AXXESS 5.1 and  AXXESSORY  TALK 5.1  software  into
production.   During   the  past  12  months,   sales  of  our  AXXESS   digital
communications  platforms  and related  software  have  comprised a  substantial
portion of our net sales.  We expect that our future  success  will  continue to
depend,  in  large  part,  upon  the  increasing  commercial  acceptance  of the
InterPrise  products  and the AXXESS  platform,  as well as future  upgrades and
enhancements  to these products and networking  platforms.  We cannot assure you
that these products or platforms will succeed in the future.  Our future success
will also  depend  upon the  market  acceptance  of our other new  products  and
enhancements,  including the products that we purchased from Executone, pursuant
to our announcement on January 1, 2000.

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  are  highly  complex.  Although  our new
products  and upgrades  are  examined  prior to release,  they can only be fully
tested when used by a large  customer  base.  Consequently,  our  customers  may
discover  program  errors or other  defects after new products and upgrades have
been released.  Some of these errors or "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
designed to minimize the number of errors or other 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:

     *   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;
     *   Legal actions by our customers; and
     *   Increased insurance costs.

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 AND OUR BUSINESS WOULD BE HARMED.

     Due to the  complexity of our  products,  we have in the past 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 on a regular and efficient  basis,  customer demand for our products
could decline and our business would be harmed.

THE EMERGING MARKET FOR INTERNET PROTOCOL 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 only recently
begun to develop,  is rapidly  evolving and is  characterized  by an  increasing
number of market entrants who have introduced or developed products and services
for Internet or other IP network voice communications. As is typical in the case
of a new and rapidly evolving industry,  the demand for and market acceptance of
recently  introduced IP network products and services are highly  uncertain.  We
cannot  assure  you that  voice  communications  over IP  networks  will  become
widespread.  Even if voice  communications over IP networks do become

                                       13
<PAGE>
widespread in the future,  we cannot assure you that our products,  particularly
the Inter-Tel  InterPrise product lines, will successfully compete against other
market players and attain broad market acceptance.

     Additional  uncertainties involving the development of IP network telephony
could harm our business.  The adoption of voice  communications over IP networks
generally  requires the  acceptance of a new way of exchanging  information.  In
particular,  enterprises  that have already  invested  substantial  resources in
other means of communicating information may be reluctant or slow to adopt a new
approach  to  communications.  Due to the  lack of  user  control  over  network
infrastructure  and individual system  configuration,  users of IP network voice
communications  may experience  delays in the  transmission  of speech,  loss of
voice packets or inferior sound quality relative to standard telephony networks.
If these factors cause the market for IP network voice communications to fail to
develop or to develop more slowly than 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.

WE MAY BECOME  SUBJECT TO GOVERNMENT  REGULATION  AND LEGAL  UNCERTAINTIES  THAT
COULD HARM OUR BUSINESS.

     The  regulatory   environment  for  IP  network  telephony  is  subject  to
substantial  uncertainty.  In the  United  States,  we  believe  that  there are
currently few laws or regulations  directly  applicable to voice  communications
over IP networks or to access to, or commerce on, IP networks generally.  Future
changes in the regulatory  environment,  particularly in regulations relating to
the  telecommunications  industry,  could  significantly harm our business.  The
increasing  commercial  acceptance of voice communications over IP networks,  as
well as other  factors,  may result in the future  application  or adoption of a
number of laws and  regulations  relating to the  conduct of our  business as it
relates to telecommunications, such as:

     *   Fees or charges on users and providers of products and services;
     *   Pricing;
     *   Characteristics and quality of services;
     *   Taxes;
     *   Copyrights; and
     *   Additional regulations and obligations upon on-line service providers.

     We cannot assure you that government regulation or government imposition of
fees,  charges,  taxes or regulation would not significantly harm the acceptance
and  attractiveness of IP network voice  communications.  We also cannot predict
the likelihood that any future  legislation or regulation  will be enacted,  nor
the financial  impact, if any, of such resulting  legislation or regulation.  In
addition, we may develop and release other products with new  telecommunications
capabilities or services which could be subject to existing  federal  government
regulations  or which could  trigger the  enactment  of  additional  domestic or
foreign government regulations.

WE FACE  RISKS  ASSOCIATED  WITH  THE  INTER-TEL  VOCAL'NET,  INTER-TEL  SERVICE
PROVIDER PACKAGE AND INTER-TEL INTERPRISE PRODUCTS.

Over the past 2 years, we have introduced the Inter-Tel  Vocal'Net  Server,  the
Inter-Tel Service Provider Package, and Inter-Tel InterPrise products. We cannot
assure you that the functionality, scalability, and reliability of the Inter-Tel
Vocal'Net,  Inter-Tel Service Provider Package and Inter-Tel  InterPrise product
lines will achieve broad market  acceptance.  In addition,  we cannot assure you
that these  products  will  comply  with  industry  standards  or that  emerging
industry standards will not render our IP telephony products obsolete.  If these
products fail to achieve market acceptance,  our business,  financial  condition
and operating results could be significantly harmed.

THE SUCCESS OF OUR JOINT VENTURE WITH HYPERCOM, AND THE MARKET ACCEPTANCE OF OUR
CIRILIUM VENTURE,  AS WELL AS OUR OTHER IP NETWORK TELEPHONY PRODUCT AND SERVICE
OFFERINGS,  IS  UNCERTAIN  AND IS  SUBJECT  TO RISKS  THAT MAY  PREVENT  US FROM
ACHIEVING OUR OBJECTIVES.

                                       14
<PAGE>
     In  December  1999,  Inter-Tel  entered  into an  agreement  with  Hypercom
Corporation to jointly form  Cirilium.  Cirilium  comprises  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.  The market for
voice communications over IP networks,  as well as the market for data telephony
products,  services  and  applications  in general,  is  intensely  competitive.
Consequently,  we cannot assure you that our expectations and objectives for the
Cirilium venture with Hypercom will be successfully attained.

     The prospects for market acceptance of the Cirilium  venture,  and other IP
telephony products acquired through our June 1998 purchase of TMSI assets,  must
be considered in light of the  uncertainties  to which companies and products in
rapidly evolving markets such as IP network telephony are particularly  exposed.
These uncertainties include:

     *    The continued expansion of the Internet and Internet infrastructures;
     *    The  development  of  complementary  products  necessary  to make  the
          Internet a viable commercial network;
     *    The   continued   expansion  of  other  IP  networks  and  IP  network
          infrastructures;
     *    The preservation of current volume,  distance and time-of-day  pricing
          structures by IP networks;
     *    The successful  management of access costs, network capacity and voice
          transmission quality relating to IP network products and services;
     *    The  resolution of critical  issues  concerning  commercial use of the
          Internet, such as security, reliability, cost, ease of use, access and
          quality of service; and
     *    The ability of the  Internet to meet  additional  demand or its users'
          changing  requirements  on  a  timely  basis  and  at  a  commercially
          reasonable cost.

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 eighteen  telecommunication  and unified messaging products and have
also  applied to the U.S.  Patent  and  Trademark  Office  for seven  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
could harm our business.

     We also cannot  assure you that third parties will not claim our current or
future  products or services  infringe upon their rights.  Occasionally,  we are
subject to proceedings  alleging that we infringed upon third party intellectual
property  rights,   including   patents,   trademarks,   copyrights,   or  other
intellectual  property  rights.  We  recently  received  a letter  and  viewed a
presentation  from one of our primary  competitors,  Lucent,  alleging  that our
AXXESS digital communications platform utilizes inventions covered by certain of
such competitor's  patents.  We are continuing the process of investigating this
matter. When any such claims are asserted against us, 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,  divert our  management's  attention and require us to
pay significant damages,  develop non-infringing  technology or acquire licenses
to the

                                       15
<PAGE>
technology  which is the  subject  of the  asserted  infringement.  Any of these
actions or outcomes could harm our business,  financial  condition and operating
results. 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.

     The Inter-Tel InterPrise,  ClearConnect,  AXXESS NT-CPU, and AXXESSORY Talk
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  jeopardized  the  security of
confidential information, such as credit card or bank account information or the
content of  conversations  over the IP network.  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 MAY EXPERIENCE DIFFICULTIES DEVELOPING, MAINTAINING AND IMPROVING THE QUALITY
OF OUR INTERNAL IP NETWORK, INTER-TEL.NET AND DEPEND ON THIRD-PARTY SUPPLIERS OF
TELECOMMUNICATIONS AND NETWORK TRANSMISSION SERVICES.

     The  Company  is  currently   utilizing   Cirilium's   Inter-Tel  Vocal'Net
technology  and Inter-Tel  InterPrise  products to develop and expand our own IP
long-distance network,  Inter-Tel.net, to carry voice traffic. The Inter-Tel.net
network is currently in the process of deployment and,  accordingly,  is subject
to risks and uncertainties.  To date, the Inter-Tel.net  network has established
points of presence in the San Francisco Bay Area, Washington, D.C., Chicago, New
York,  Phoenix,  Reno,  Atlanta,  Houston,  Los Angeles,  Dallas,  and Miami/Ft.
Lauderdale.  If the  domestic or  international  market for IP network  products
fails to develop or develops more slowly than we anticipate, or if we experience
difficulty in the integration of the TMSI technology,  our Inter-Tel.net network
could become  financially  burdensome to maintain or obsolete,  which could harm
our business, financial condition and operating results.

     In addition,  we are  dependent on  third-party  or affiliate  suppliers of
telecommunications and Internet network transmission services for implementation
of  Inter-Tel.net  and we currently do not have  long-term  contracts with these
suppliers.  The successful expansion of Inter-Tel.net  depends on our ability to
obtain services from these suppliers.  Some of these suppliers are or may become
our competitors and have not agreed to restrict competition against us. If these
suppliers raise rates, change pricing structures,  experience power or bandwidth
outages,  or suffer delays in provision of local  circuits,  our  operations and
business  may  be  harmed.  We  cannot  assure  you  that  there  will  not be a
significant  disruption of service  provided by these  suppliers,  now or in the
future,  that would harm our  ability to  provide  undisrupted  services  to our
customers.  We also cannot assure you that  products  developed by our suppliers
will not  suffer  from  speed  and  scalability  problems  that  could  harm our
business.

     Moreover,  although  we  have  devoted  and  intend  to  continue  devoting
substantial resources to improving the quality of telephone  conversations using
Cirilium's   Inter-Tel  Vocal'Net,   Inter-Tel  InterPrise  products,   and  the
Inter-Tel.net network, we cannot assure you that we will be able to eliminate or
reduce the problems of voice communications over the Inter-Tel.net network, such
as delays in the  speech  transmission,  loss of voice  packets  and poor  sound
quality.  If we fail to improve the sound quality and other limitations of voice
communications over the Inter-Tel.net  network and to offer such improvements to
our customers on a cost-effective basis, the Inter-Tel.net network could fail to
achieve market  acceptance and our business,  financial  condition and operating
results would suffer.

WE HAVE MANY  COMPETITORS AND EXPECT NEW COMPETITORS TO ENTER OUR MARKET,  WHICH
COULD PUT PRESSURES ON US.

                                       16
<PAGE>
     The markets for our products and services are extremely  competitive and we
expect  competition  to  increase  in the  future.  Our  current  and  potential
competitors primarily include:

     *    PABX and core  systems  providers  such as  Lucent,  Nortel,  Comdial,
          Iwatsu, Mitel, NEC, Nitsuko, Panasonic, Siemens and Toshiba;
     *    large data routing companies such as Cisco Systems and 3Com;
     *    voice  processing  applications  providers such as AVT,  Active Voice,
          Centigram and Lucent;
     *    long distance  services  providers such as AT&T, MCI WorldCom,  Sprint
          and Qwest Communications;
     *    IP telephony  product and service  providers such as Clarent,  Lucent,
          NetSpeak,  Nortel, VocalTec, Nokia, ITXC,  deltathree.com,  Net2Phone,
          Cirilium and others;
     *    our current vendors, such as Cisco Systems, Nortel, 3Com, Motorola and
          MICOM;
     *    large computer corporations such as Microsoft and IBM; 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 arrangements  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 in the future. 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 better.

     Some  of our  competitors  may  also  be able  to  provide  customers  with
additional  benefits  at lower  overall  costs or to  reduce  their  application
service charges 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.

ANY FUTURE BUSINESS  ACQUISITIONS MAY DISRUPT OUR BUSINESS,  DILUTE  SHAREHOLDER
VALUE OR DISTRACT MANAGEMENT ATTENTION.

     As part of our  business  strategy,  we may  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:

     *    difficulty of assimilating  the operations,  products and personnel of
          the acquired business;
     *    potential disruption of our ongoing business;
     *    unanticipated costs associated with the acquisition;
     *    inability of management to manage the financial and strategic position
          of acquired or developed products, services and technologies;
     *    inability  to  maintain  uniform  standards,  controls,  policies  and
          procedures; and
     *    impairment of  relationships  with  employees and customers  which may
          occur as a result of integration of the acquired business.

                                       17
<PAGE>
     In particular,  in January 2000, we acquired certain assets and liabilities
of Executone  Information  Systems.  We may fail to address adequately the risks
described  above relating to our Executone  acquisition,  and this failure could
harm our operating results. In addition,  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.

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 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 certain risks and uncertainties,
including  the  possibility  of a shortage  or  delivery  delay for  certain key
components although we believe that alternate sources are available for most key
components.  We currently manufacture our products through manufacturers located
in the United  States,  the  Philippines,  the  People's  Republic  of China and
Mexico. Foreign manufacturing  facilities are subject to changes in governmental
policies, imposition of tariffs and import restrictions and other factors beyond
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 Inter-Tel
Axxent  digital  communication  platforms  as well as  substantially  all of the
Executone   Computer   Telephony   products.   Although  we  set   manufacturing
specifications  and  conditions  for  our  products,  and  all of  our  contract
manufacturers  must meet our requirements for manufacturing  process and quality
assurance before we enter into  manufacturing  agreements,  we have occasionally
experienced  delays in the supply of components  and finished  goods.  We cannot
assure you that we will not experience similar delays in the future.

     Our reliance on third party  manufacturers  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 cannot  efficiently  develop  alternative or additional  sources if
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 and delivery terms in
the future.

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

     A  substantial  portion  of our net sales is made  through  our  network of
independent dealers. We face intense competition from other telephone system and
voice processing system  manufacturers for these dealers'  business,  as most of
our dealers carry products which compete with our products. We cannot assure you
that any of our dealers will not promote the products of our  competitors to our
detriment.  The loss of any  significant  dealer or group of dealers,  including
those who distribute the our recently acquired Executone products,  or any event
or condition  harming our dealer  network,  could harm our  business,  financial
condition and operating results.

IF WE LOSE KEY PERSONNEL OR ARE UNABLE TO HIRE ADDITIONAL QUALIFIED PERSONNEL AS
NECESSARY,  WE MAY NOT BE ABLE TO EFFECTIVELY  MANAGE GROWTH IN OUR BUSINESS OUR
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 had difficulty  hiring  employees in the timeframe that we
desire,

                                       18
<PAGE>
particularly skilled engineers.  Our loss of any key personnel or our failure to
effectively  recruit  additional key personnel could make it difficult for us to
manage  our  business,  make  timely  product  introductions  and meet other key
objectives and therefore harm our business. We cannot assure you that we will be
able to continue  attracting and retaining the qualified personnel necessary for
the  development  of our  business.  Moreover,  the growth in our  business  has
placed,  and is  expected  to continue  to place,  a  significant  strain on our
personnel,  management  and other  resources.  Our  ability to manage any future
growth  effectively will require us to attract,  train,  motivate and manage new
employees  successfully,  to integrate new employees into our overall operations
and to continue to improve our operational, financial and management information
systems.

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
you 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  our  prices  minimum  use  requirements  are
relatively fixed. The market for long distance services is experiencing,  and is
expected to continue  experiencing  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 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.

THE  INTRODUCTION  OF NEW  PRODUCTS  AND SERVICES HAS RESULTED IN CHANGES TO OUR
SALES CYCLES AND BACKLOG WHICH MAY CAUSE FLUCTUATIONS IN OUR QUARTERLY RESULTS.

     In the past 24 months, we introduced AXXESS networking systems and software
which are typically sold to larger  customers at a higher average selling price.
Our AXXESS networking  products have a relatively high sales price per unit, and
often represent a significant and strategic decision by an enterprise  regarding
our  communications  infrastructure.  Accordingly,  the purchase of our products
typically  involves   significant   internal  procedures   associated  with  the
evaluation,  testing,  implementation  and acceptance of new technologies.  This
evaluation  process  frequently  results in a lengthy sales  process,  typically
ranging from three months to more than nine months, and subjects the sales cycle
associated  with the purchase of our products to a number of significant  risks,
including budgetary  constraints and internal acceptance reviews.  The length of
our sales cycle also may vary substantially from customer to customer. While our
customers are  evaluating  our products and before  placing an order with us, we
may incur  substantial  sales and  marketing  expenses  and  expend  significant
management  effort.  Consequently,  if sales forecasted from a specific customer
for a particular quarter are not realized in that quarter, our operating results
could be materially adversely affected.

     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;
     *    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 acquisition; and

                                       19
<PAGE>
     *    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 principally  dependent on orders
booked and shipped in that quarter.  This results  primarily from our customers'
desire for immediate shipment and installation of platforms and software. 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 digital  communication  platforms and associated call
processing and voice processing  software  applications is largely  dependent on
general economic conditions,  and can vary significantly as a result of changing
conditions  in the  economy as a whole.  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,  operating  results  could be harmed.
Because sales of digital  communication  platforms  through our dealers  produce
lower gross margins than sales through our direct sales organization,  operating
results  have  varied,  and will  continue  to vary  based upon the mix of sales
through  direct and  indirect  channels.  Although  to date we have been able to
resell the rental streams from leases under our Totalease program profitably and
on a substantially  current basis, the timing and profitability of lease resales
from  quarter to quarter  could impact  operating  results,  particularly  in an
environment of fluctuating interest rates. Long distance sales, which have lower
gross margins than 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 and third quarters are frequently less than
those experienced in the fourth and second quarters,  respectively.  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.  See  "Management's   Discussion  and  Analysis  of  Financial
Condition and Results of Operations."

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.  We cannot
assure you that you will be able to sell your shares at or above purchase price.
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;
     *    investors' reactions to acquisition announcements;
     *    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;
     *    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
Internet-based  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.

                                       20
<PAGE>
YEAR 2000 COMPLICATIONS MAY DISRUPT OUR OPERATIONS AND HARM OUR BUSINESS.

     The date fields coded in many software  products and computer  systems need
to be able to  distinguish  21st  century  dates  from the 20th  century  dates,
including  leap  year  calculations.  the  failure  to  be  able  to  accurately
distinguish  these dates is commonly  known as the year 2000  problem.  While we
have yet to  experience  any major year 2000  problems,  the  computer  software
programs and operating  systems used in our internal  operations,  including our
financial,  product  development,  order management and  manufacturing  systems,
could  experience  errors  or  interruptions  due to the year 2000  problem.  In
addition,  it is possible that our suppliers' and service  providers' failure to
adequately  address the year 2000 problem could have an adverse  effect on their
operations, which, in turn, could have an adverse impact on us.

OUR CHAIRMAN OF THE BOARD OF DIRECTORS,  CEO AND PRESIDENT WILL CONTROL 20.2% OF
OUR  COMMON  STOCK  AND BE ABLE TO  SIGNIFICANTLY  INFLUENCE  MATTERS  REQUIRING
SHAREHOLDER APPROVAL

     As of December 31, 1999,  Steven G.  Mihaylo,  our Chairman of the Board of
Directors,   Chief   Executive   Officer  and   President   beneficially   owned
approximately  20.2% 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 us.

ANY OF THE FOREGOING COULD RESULT IN A MATERIAL  ADVERSE EFFECT ON THE COMPANY'S
BUSINESS, FINANCIAL CONDITION AND OPERATING RESULTS.

                                       21
<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 1, 2000.

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

Steven G. Mihaylo        56     Chairman of the Board of Directors,
                                  Chief Executive Officer and President
Norman Stout             42     Executive Vice President/Chief
                                  Administrative Officer
Craig W. Rauchle         44     Executive Vice President
Jeffrey T. Ford          38     Senior Vice President/Chief Technology Officer
Kurt R. Kneip            37     Chief Financial Officer, Vice President
                                  and Secretary
J. Robert Anderson       63     Director
Jerry W. Chapman         59     Director
Gary Edens               58     Director
Maurice H. Esperseth     74     Director
C. Roland Haden          59     Director

     MR.  MIHAYLO,  the  founder of the  Company,  has served as Chairman of the
Board of Directors of the Company since  September  1983, as President since May
1998 and as Chief  Executive  Officer of the Company since its formation in July
1969.  Mr. Mihaylo served as President of the Company 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. Mihaylo is also a director of MicroAge, Inc. and Microtest,
Inc.

     MR. STOUT was elected  Executive  Vice  President and Chief  Administrative
Officer and  President  of Inter-Tel  Software  and Services in June 1998.  From
October 1994 to June 1998, he served as a director of the Company. Mr. Stout had
been  President of Superlite  Block,  a manufacturer  of concrete  block,  since
February  1993.  Since 1996 Mr.  Stout also had served as President of Oldcastle
Architectural West, the parent company of Superlite Block and ten other concrete
products  plants.  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.  Previously,  Mr.
Stout was a Certified Public Accountant with Coopers & Lybrand.  Mr. Stout holds
an  undergraduate  degree  in  Accounting  from  Texas  A&M and an MBA  from the
University of Texas.

     MR.  RAUCHLE was elected  Executive Vice President in December 1994. He had
been  Senior  Vice  President  of the  Company and  continues  as  President  of
Inter-Tel Technologies, Inc., a wholly owned sales subsidiary of the Company. In
addition,  he  currently  serves the Company and all  subsidiaries  in corporate
strategic  planning  and in mergers and  acquisitions.  Mr.  Rauchle  joined the
Company 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
the Company's Chief Technology  Officer since 1997. He was elected  President of
Inter-Tel Integrated Systems,  Inc. ("IIS") in

                                       22
<PAGE>
May 1998,  after  serving as Senior Vice  President of IIS for one year and Vice
President of Software Engineering 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.

     MR. KNEIP has served as Vice President and Chief  Financial  Officer of the
Company 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 the Company in May 1992 as Director of Corporate Tax, after
seven years with the accounting firm of Ernst & Young.  Mr. Kneip is a Certified
Public  Accountant,  and holds an undergraduate  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 been a director of the Company since  February  1997. Mr.
Anderson held various positions at Ford Motor Company from 1963 to 1983, serving
from 1978 to 1983 as President of the Ford Motor Land  Development  Corporation.
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 a director  in  December  1999 and  previously
served as a director  in the late  1980's and early  1990's.  He is a  Certified
Public  Accountant  and recently  retired as a partner with Arthur  Andersen LLP
after over 37 years in public  accounting and consulting.  During the first half
of his career,  Mr. Chapman focused his energies in the Audit and Assurance area
of practice.  In 1980, he moved into the Business and Strategic Consulting areas
of practice as well as managing major practice areas for his firms.  Mr. Chapman
has now opened a consulting  practice focusing on providing strategic and market
driven services for his clients.

     MR. EDENS has been a director of the Company  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.

     MR.  ESPERSETH has been a director of the Company  since October 1986.  Mr.
Esperseth  joined the Company in January 1983 as Senior Vice  President-Research
and  Development,  after a 32-year career with GTE, and served as Executive Vice
President of Inter-Tel from 1986 to 1988. Mr. Esperseth retired as an officer of
the Company on December 31, 1989.  Mr.  Esperseth is not standing for reelection
in April 2000.

     DR. HADEN has been a director of the Company since 1983. Dr. Haden has been
Vice  Chancellor and Dean of  Engineering  of Texas A&M  University  since 1993.
Previously, he served as Vice Chancellor of Louisiana State University from 1991
to 1993,  Dean of the College of  Engineering  and  Applied  Sciences at Arizona
State  University  from 1989 to 1991,  Vice  President  for Academic  Affairs at
Arizona  State  University  from  1987  to  1988,  and  Dean of the  College  of
Engineering  and Applied  Sciences from 1978 to 1987. Dr. Haden holds a doctoral
degree  in  Electrical  Engineering  from the  University  of Texas and has also
served on the faculty of the University of Oklahoma.

     The Board of Directors has an Audit Committee and a Compensation Committee.
The Audit Committee,  consisted of Directors  Chapman,  Anderson and Haden as of
December 31, 1999,  is charged with  reviewing  the  Company's  annual audit and
meets with the Company's  independent  auditors to review the Company's internal
controls and financial management  practices.  The Audit Committee met two times
during the last fiscal year. The Compensation Committee,  consisted of Directors
Anderson,  Esperseth and Edens as of December 31, 1999,  recommends to the Board
of Directors  compensation  for the Company's key employees and  administers the
Company's stock option plans.  The  Compensation  Committee met two times during
the last fiscal year.

                                       23
<PAGE>
ITEM 2. PROPERTIES

     The Company maintains its corporate headquarters in 23,000 square feet of a
building  located in Phoenix,  Arizona pursuant to a lease that expires in 2000,
and its principal  development  and  distribution  operations in a 96,000 square
foot building  located in Chandler,  Arizona pursuant to a lease that expires in
2008.  The  Company  also owns a 70,000  square foot  facility  located in Reno,
Nevada that houses the Inter-Tel.net network operations center, credit and lease
finance  facilities,  business  development center and sales office. The Company
also leases  sales and support  offices in a total of 47 locations in the United
States,  including approximately 147,000 square feet of office space in Milford,
Connecticut pursuant to the Executone  acquisition,  and two locations overseas.
The Company's  aggregate monthly payments under these leases were  approximately
$345,000 at December 31, 1999. The Company  believes that its facilities will be
adequate to meet its current needs and that additional or alternative space will
be available as necessary in the future on commercially  reasonable  terms.  See
"Factors That May Effect Future Operating Results."

ITEM 3. LEGAL PROCEEDINGS

     The Company is involved from time to time in  litigation  incidental to its
business.  The Company believes that the outcome of current  litigation will not
have a material adverse effect upon its business, financial condition or results
of operations and will not disrupt the normal operations of the Company.

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  (symbol INTL) and since
February  1983 has been included in the Nasdaq  National  Market  System.  As of
March 10,  2000 there were of record  approximately  1,711  shareholders  of the
Company's  Common Stock.  The Company  believes there are  approximately  11,750
additional beneficial holders of the Company's Common Stock. The following table
sets forth high and low closing prices reported by Nasdaq.

     Until 1997,  Inter-Tel  had never paid a cash dividend on its Common Stock.
During 1998,  the Board of Directors  declared a quarterly cash dividend of $.01
per share of Common Stock.  A dividend has been paid to  shareholders  of record
for each quarter  since  December 31, 1997.  The  continuation  of this dividend
policy  will  depend on  Company  earnings,  capital  requirements  for  growth,
financial conditions and other factors.

     1999        HIGH      LOW                    1998         HIGH       LOW
     ----        ----      ---                    ----         ----       ---
First Quarter    28 1/8    13 3/8            First Quarter     28 1/2     17
Second Quarter   19        11 1/2            Second Quarter    27 1/2     14 7/8
Third Quarter    25 1/2    15 1/8            Third Quarter     18 3/4     12 7/8
Fourth Quarter   26 3/8    14                Fourth Quarter    25 1/4      9 1/2

                                       24
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
FINANCIAL SUMMARY
---------------------------------------------------------------------------------------------------
(In thousands, except
per share amounts and ratios)                       For the years ended December 31,
                                       ------------------------------------------------------------
                                         1999         1998        1997        1996        1995
                                         ----         ----        ----        ----        ----
<S>                                    <C>         <C>         <C>         <C>          <C>
Net sales                              $314,221    $274,504    $223,569    $185,884     $150,533

Cost of sales                           159,463     140,946     122,363     104,966       87,696
Research and development                 14,798      11,373       7,998       6,581        5,764
Selling, general and administrative      98,430      86,554      69,942      56,386       43,578
Write-off of in-process research and
 development and related costs               --      22,755(1)       --          --           --
Special charge                               --          --          --       4,542(2)     1,315(3)
                                       --------    --------    --------    --------     --------
Operating income                         41,530      12,876(1)   23,266      13,409(2)    12,180(3)
                                       --------    --------    --------    --------     --------

Interest and other income                 2,345       3,018       1,383       1,974        1,674
Interest expense                           (110)        (60)        (47)        (77)        (106)
                                       --------    --------    --------    --------     --------
Income before income taxes               43,765      15,834(1)   24,602      15,306(2)    13,748(3)
Income taxes                             16,619       6,790       9,920       6,264        5,249
                                       --------    --------    --------    --------     --------

Net income                             $ 27,146      $9,044(1)  $14,682      $9,042(2)    $8,499(3)
                                       --------    --------    --------    --------     --------

Net income per share
     Basic                                $1.05       $0.34(1)   $ 0.59      $ 0.35(2)    $ 0.37(3)
     Diluted                              $1.01       $0.32(1)   $ 0.57      $ 0.34(2)    $ 0.36(3)

Average shares outstanding
     Common shares outstanding           25,949      26,602      24,836      25,780       23,056
     Common shares outstanding
      assuming dilution                  27,004      27,846      25,983      26,572       23,766
                                       --------    --------    --------    --------     --------

BALANCE SHEET DATA
Total assets                           $240,249    $197,030    $194,988    $132,611     $118,767
Working capital                          60,925      96,317     123,814      79,709       75,623
Long-term debt                            1,231          --          --          --           --
Shareholders' equity                    168,121     142,686     145,505      94,934       85,117
                                       --------    --------    --------    --------     --------

KEY RATIOS
Current ratio                              2.05        3.17        4.69        4.09         4.36
Term debt/equity                            .01          --          --          --           --
Return on equity-continuing operations     19.0%        6.2%       15.5%       10.6%        18.8%
Return on equity-excluding charges         19.0%       15.6%(1)    15.5%       13.8%(2)     20.6%(3)
                                       --------    --------    --------    --------     --------
</TABLE>

----------
(1)  1998 operating  income  includes a special  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,  the
     Company  would have  reported net income of $22.7 million ($.82 per diluted
     share) for the year ended December 31, 1998.

(2)  1996  operating  income  includes a special  charge of $4.5 million,  which
     reduced  net income by $2.7  million or $.10 per  diluted  share after tax.
     This special charge reflects the decision by the Company to replace its MIS
     system  software.  Without  this  special  charge,  the Company  would have
     reported net income of $11.8 million ($.44 per diluted  share) for the year
     ended December 31, 1996.

(3)  1995  operating  income  includes a special  charge of $1.3 million,  which
     reduced net income by $815,000,  or $.03 per diluted  share after tax. This
     special  charge  reflects  the  costs   associated  with   integrating  the
     operations of entities  acquired in May 1995.  Without this special charge,
     the Company would have reported  operating  income of  approximately  $13.5
     million  and net income of  approximately  $9.3  million  ($.39 per diluted
     share) for the year ended December 31, 1995.

                                       25
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

     INVESTMENT  PORTFOLIO.  The  Company  does  not  use  derivative  financial
instruments  in its  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 the
Company's  investment  policy  guidelines.  Given the short-term nature of these
investments,  and that the  Company  has no  borrowings  outstanding  other than
short-term letters of credit, the Company is not subject to significant interest
rate risk.

     LEASE  PORTFOLIO.  The Company offers to its customers  lease financing and
other services,  including its Totalease program,  through its Inter-Tel Leasing
subsidiary.  The  Company  funds  these  programs  in part  through  the sale to
financial  institutions of rental income streams under the leases.  Although the
Company to date has been able to resell the rental streams from leases under its
lease programs  profitably and on a substantially  current basis, the timing and
profitability of lease resales could impact the Company's business and operating
results,  particularly  in an  environment  of  fluctuating  interest  rates and
economic uncertainty.  If the Company were required to repurchase rental streams
and realize  losses  thereon in amounts  exceeding its  reserves,  its operating
results could be  materially  adversely  affected.  See  "Liquidity  and Capital
Resources"  in  Management's   Discussion  and  Analysis  for  more  information
regarding the Company's lease portfolio and financing.

     IMPACT OF FOREIGN CURRENCY RATE CHANGES.  Inter-Tel  invoices the customers
of its  international  subsidiaries  primarily  in the local  currencies  of its
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.

                                       26
<PAGE>
                                    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 of 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

     Not applicable.

                                     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, 1999 and 1998

     Consolidated  statements of income--years ended December 31, 1999, 1998 and
     1997

     Consolidated  statements of shareholders'  equity--years ended December 31,
     1999, 1998 and 1997

     Consolidated  statements of cash flows--years ended December 31, 1999, 1998
     and 1997

     Notes to consolidated financial statements

                                       27
<PAGE>
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, 1999:

                                                                        Page No.
                                                                        --------
         Schedule II--Valuation and Qualifying Accounts                    31

     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.

    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.

    13.0(18)    Excerpts from Annual Report to Security Holders.
----------

(1)  Previously filed with Registrant's Registration Statement on Form S-1 (File
     No. 2-70437).

                                       28
<PAGE>
(2)  Previously filed with Registrant's Registration Statement on Form S-8 (File
     No. 2-94805).

(3)  Previously filed with Registrant's  Annual Report on Form 10-K for the year
     ended November 30, 1984 (File No. 0-10211).

(10) Previously filed with Registrant's  Annual Report on Form 10-K for the year
     ended December 31, 1988 (File No. 0-10211).

(11) Previously filed with Registrant's Registration Statement on Form S-8 (File
     No. 33-40353).

(12) Previously filed with Registrant's Registration Statement on Form S-1 (File
     No. 33-70054).

(13) Previously filed with Registrant's Registration Statement on Form S-8 (File
     No. 33-73620).

(14) Previously filed with Registrant's  Annual Report on Form 10-K for the year
     ended December 31, 1988 (File No. 0-10211).

(15) Previously filed with Registrant's Proxy Statement dated March 23, 1994.

(16) Previously filed with Registrant's  Annual Report on Form 10-K for the year
     ended December 31, 1995 (File No. 0-10211).

(17) Previously filed with Registrant's Registration Statement on Form S-8 (File
     No. 333-41197).

(18) 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.  The Company filed Form 8-K (File No.  333-67261) on January 14, 2000
in connection  with the  acquisition of selected  assets and  liabilities of the
computer telephone division of Executone Business Information Systems, Inc.

     (c) Exhibits.

     13.0 Excerpts from Annual Report to Security Holders. (financial statements
and  management's  discussion  and  analysis  are filed  herewith; a copy of the
excerpts of the Company's  Annual  Report to Security  Holders will be available
upon request by writing to Shareholder Relations,  Inter-Tel,  Incorporated, 120
N. 44th Street, Suite 200, Phoenix, Arizona 85034)

     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.

                                       29
<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 15, 2000

                                       30
<PAGE>
                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                                 (in thousands)
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
 COL. A                       COL. B               COL. C             COL. D       COL. E
 ------                       ------               ------             ------       ------
                             ----------------------------------------------------------------
                                                        ADDITIONS
                             ----------------------------------------------------------------
                                           Charged      Charged to
                             Balance at    to           Other         Charged to    Balance
                             Beginning     Costs &      Accounts      Deductions    at End of
 DESCRIPTION                 of Period     Expenses     Describe      Describe      Period
 -----------                 ---------     --------     --------      --------      ------
<S>                           <C>          <C>           <C>           <C>           <C>
YEAR ENDED DECEMBER 31, 1999

Deducted from asset accounts:
 Allowance for doubtful
 accounts                     $4,604       $4,623        $2,628(3)     $3,041(1)     $8,814
 Allowance for lease
 accounts                     $5,716       $3,773        $   --        $2,755(1)     $6,734
 Inventory allowance          $5,453       $1,508        $   83(3)     $1,195(2)     $5,849

YEAR ENDED DECEMBER 31, 1998

Deducted from asset accounts:
 Allowance for doubtful
 accounts                     $3,722       $2,963        $  137(4)     $2,218(1)     $4,604
 Allowance for lease
 accounts                     $3,969       $2,688        $   --        $  941(1)     $5,716
 Inventory allowance          $5,740       $1,828        $   --        $2,115(2)     $5,453

YEAR ENDED DECEMBER 31, 1997

Deducted from asset accounts:
 Allowance for doubtful
 accounts                     $3,096       $2,194        $   17        $1,585(1)     $3,722
 Allowance for lease
 accounts                     $2,706       $1,910        $   --        $  647(1)     $3,969
 Inventory allowance          $2,979       $4,021        $   --        $1,260(2)     $5,740
</TABLE>

----------
(1)  Uncollectible accounts written off, net of recoveries.
(2)  Inventory written off.
(3)  Acquired in purchase of Tri-Com, Matrix and Network Services Agency.
(4)  Acquired in purchase of TMSI and Integrated Telecom Services Corporation.

                                       31