EXHIBIT 13.0 ANNUAL REPORT TO SECURITY HOLDERS

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

SHAREHOLDERS AND BOARD OF DIRECTORS
INTER-TEL, INCORPORATED

We have audited the accompanying consolidated balance sheets of Inter-Tel,
Incorporated and subsidiaries as of December 31, 2000 and 1999, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 2000. Our audits also
included the financial statement schedule listed in the Index at Item 14(a) 2.
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Inter-Tel,
Incorporated and subsidiaries at December 31, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.

                                        /S/ERNST & YOUNG LLP

Phoenix, Arizona
February 10, 2001


                                       33
<PAGE>


INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
(In thousands, except share amounts)                                           2000            1999
<S>                                                                         <C>            <C>
ASSETS
CURRENT ASSETS
Cash and equivalents                                                        $   27,103     $   19,226
Accounts receivable, less allowances of $17,187 in 2000
    and $8,814  in 1999                                                         61,482         49,583
Inventories, less allowances of $11,897 in 2000 and
    $5,849 in 1999                                                              35,060         18,816
Net investment in sales-leases                                                  14,629         14,466
Income taxes receivable                                                          9,157             --
Deferred income taxes                                                           13,116          7,259
Prepaid expenses and other assets                                                7,668          4,926
Restricted cash for acquisition                                                     --         12,097

-----------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS                                                           168,215        126,373

PROPERTY, PLANT & EQUIPMENT                                                     32,723         28,706
EQUIPMENT HELD UNDER LEASE, NET                                                    423          5,310
GOODWILL AND OTHER INTANGIBLES                                                  18,389         16,461
NET INVESTMENT IN SALES-LEASES                                                  22,808         30,258
RESTRICTED CASH FOR ACQUISITION                                                     --         32,203
OTHER ASSETS                                                                       568          8,206

-----------------------------------------------------------------------------------------------------
                                                                            $  243,126     $  247,517
-----------------------------------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable                                                            $   35,438     $   20,540
Other current liabilities                                                       46,769         45,034

-----------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES                                                       82,207         65,574

DEFERRED TAX LIABILITY                                                           5,222          6,278
OTHER LIABILITIES                                                               19,261          7,544

SHAREHOLDERS' EQUITY
Common stock, no par value - authorized 100,000,000 shares; issued and
    outstanding - 25,950,969 shares in 2000, and 26,135,640 shares in 1999     109,132        106,853
Less: Shareholder loans                                                         (1,018)        (1,116)
Retained earnings                                                               44,099         75,835
Accumulated other comprehensive income                                            (280)           177
-----------------------------------------------------------------------------------------------------
                                                                               151,933        181,749

Less: Treasury stock at cost                                                   (15,497)       (13,628)
-----------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY                                                     136,436        168,121
-----------------------------------------------------------------------------------------------------
                                                                            $  243,126     $  247,517
-----------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes.


                                       34
<PAGE>


INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME Years
Ended December 31, 2000, 1999 and 1998

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
(In thousands, except per share data)                    2000           1999           1998
<S>                                                  <C>            <C>            <C>
NET SALES                                            $  402,723     $  314,221     $  274,504
Cost of sales                                           243,685        159,463        140,946

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

GROSS PROFIT                                            159,038        154,758        133,558

Research and development                                 19,489         14,798         11,373
Selling, general and administrative                     127,468         98,430         86,554
In-process research and development                       5,433             --         22,755
Restructuring charges                                    45,245             --             --
----------------------------------------------------------------------------------------------

OPERATING INCOME (LOSS)                                 (38,597)        41,530         12,876
----------------------------------------------------------------------------------------------

Equity share of Cirilium Corp.'s net
   Losses                                                (5,938)            --             --
Write-off of Cirilium Corp. investment                   (2,045)            --             --
Interest and other income                                 1,053          2,345          3,018
Interest expense                                           (213)          (110)           (60)
----------------------------------------------------------------------------------------------

INCOME (LOSS) BEFORE INCOME
  TAXES                                                 (45,740)        43,765         15,834

INCOME TAXES
Current                                                  (9,904)        19,966         13,390
Deferred                                                 (6,913)        (3,347)        (6,600)
----------------------------------------------------------------------------------------------
                                                        (16,817)        16,619          6,790
----------------------------------------------------------------------------------------------

NET INCOME (LOSS)                                    $  (28,923)    $   27,146     $    9,044
----------------------------------------------------------------------------------------------

NET INCOME (LOSS) PER SHARE
Basic                                                $    (1.10)    $     1.05     $     0.34
Diluted                                              $    (1.10)    $     1.01     $     0.32
----------------------------------------------------------------------------------------------

Weighted average basic common shares                     26,273         25,949         26,602

Weighted average diluted common shares                   26,273         27,004         27,846
----------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes.


                                       35
<PAGE>


INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31, 2000, 1999 and 1998

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------
                                                                                      Accumulated
                                                                                         Other        Share-
                                            Common      Treasury       Retained      Comprehensive    Holder
(In thousands)                               Stock       Stock         Earnings      Income (loss)     Loans         Total
----------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>         <C>             <C>               <C>         <C>          <C>
BALANCE AT DECEMBER 31, 1997               $ 99,229    $       --      $ 46,547          $  (271)    $     --     $ 145,505

Stock repurchase                                          (16,815)                                                  (16,815)
Exercise of stock options                     1,487           642          (368)                                      1,761
Tax benefit from stock options                1,979                                                                   1,979
Issuance of 140,000 shares in
   Acquisition                                1,485                                                                   1,485
Stock issued under
   Employee Stock Purchase Plan                 359           322            30                                         711

Net income                                                                9,044                                       9,044
Gain on currency translation                                                                  75                         75
                                                                                                                      -----
Comprehensive income                                                                                                  9,119

Dividends                                                                (1,059)                                     (1,059)

----------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998                104,539       (15,851)       54,194             (196)          --       142,686

Stock repurchase                                           (6,700)                                                   (6,700)
Exercise of stock options                                   8,027        (4,420)                                      3,607
Tax benefit from stock options                2,421                                                                   2,421
Shareholder loans                                                                                      (1,116)       (1,116)
Stock issued under
   Employee Stock Purchase Plan                               896           (45)                                        851
Adjustment to shares previously
   issued in acquisition                       (107)                                                                   (107)

Net income                                                               27,146                                      27,146
Gain on currency translation                                                                 373                        373
                                                                                                                     ------
Comprehensive income                                                                                                 27,519

Dividends                                                                (1,040)                                     (1,040)

----------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999                106,853       (13,628)       75,835              177       (1,116)      168,121

Stock repurchase                                           (6,711)                                                   (6,711)
Exercise of stock options                                   3,496        (1,468)                                      2,028
Tax benefit from stock options                1,852                                                                   1,852
Shareholder loans                                                                                          98            98
Stock issued under
   Employee Stock Purchase Plan                             1,346          (293)                                      1,053
Issuance of shares in acquisition               427                                                                     427

Net loss                                                                (28,923)                                    (28,923)
Loss on currency translation                                                                (457)                      (457)
                                                                                                                     ------
Comprehensive income (losses)                                                                                       (29,380)

Dividends                                                                (1,052)                                     (1,052)

----------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000              $ 109,132     $ (15,497)     $ 44,099          $  (280)    $ (1,018)    $ 136,436

----------------------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes.


                                       36
<PAGE>


INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2000, 1999 and 1998

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------
(In thousands)                                                        2000          1999           1998
<S>                                                               <C>            <C>            <C>
OPERATING ACTIVITIES:
Net (loss) income                                                 $  (28,923)    $   27,146     $    9,044
Adjustments to reconcile net (loss) income to
  net cash provided by operating activities:
     Depreciation and amortization                                    12,746          9,123          6,718
     Provision for losses on receivables                              11,720          8,396          5,851
     Provision for inventory valuation                                 1,653          1,508          1,828
     Increase in other liabilities                                     9,111          6,106            586
     Loss on sale of property and equipment:                             157            197             36
     Deferred income taxes                                            (6,913)        (3,347)        (6,600)
     Effect of exchange rate changes                                    (457)           373             74
     Purchased in-process research and development                     5,433             --         22,755
     Non-cash portion of restructuring charge                         41,783             --             --
     Changes in operating assets and liabilities                     (28,971)       (16,122)        (8,541)

-----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES                             17,339         33,380         31,751

-----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Additions to property and equipment                                   (9,597)       (12,486)       (15,175)
Additions to operating leases                                           (122)        (3,115)            --
Proceeds from sale of property and equipment
  and operating leases                                                    39          2,904            117
Cash received from disposition of business segment                     6,602             --             --
Cash used in acquisitions and joint ventures                          (2,855)       (59,960)       (25,362)
-----------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES                                 (5,933)       (72,657)       (40,420)

-----------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Cash dividends paid                                                   (1,054)        (1,040)        (1,059)
Proceeds from exercise of stock options                                2,126          2,491          1,761
Proceeds from stock issued under the
   Employee Stock Purchase Plan                                        1,053            851            711
Proceeds from term debt                                                3,319             --             --
Payments on term debt                                                 (2,262)          (223)        (1,610)
Treasury stock purchases                                              (6,711)        (6,700)       (16,815)

-----------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES                                 (3,529)        (4,621)       (17,012)

-----------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND
         EQUIVALENTS                                                   7,877        (43,898)       (25,681)

CASH AND EQUIVALENTS AT BEGINNING
         OF YEAR                                                      19,226         63,124         88,805

CASH AND EQUIVALENTS AT END OF YEAR                               $   27,103     $   19,226     $   63,124
===========================================================================================================

Non cash transaction: stock acquisition                           $      563     $       --     $    1,485

===========================================================================================================
</TABLE>

See accompanying notes.


                                       37
<PAGE>


INTER-TEL, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2000, 1999 and 1998
--------------------------------------------------------------------------------

NOTE A -- SIGNIFICANT ACCOUNTING POLICIES

         DESCRIPTION OF BUSINESS. Inter-Tel is a leading provider of business
key telephone systems, voice processing systems and related software
applications for the 40+ station key telephone system market in the United
Sates. Inter-Tel is also a leading provider of IP telephony voice and data
convergence products. Inter-Tel's products include the AXXESS and ECLIPSE2
business telephone system, voice mail and unified messaging systems, Executone
computer telephony products, call center applications, and the InterPrise voice
and data routers. Inter-Tel also operates an IP telephony-based long distance
network. The Company also provides maintenance, leasing and support services for
its products.

         PRINCIPLES OF CONSOLIDATION. The consolidated financial statements
include the accounts of Inter-Tel, Incorporated and all significant subsidiaries
(collectively, the "Company"). Intercompany accounts and transactions have been
eliminated in consolidation.

         CASH AND EQUIVALENTS. Cash and equivalents include all highly liquid
investments with a remaining maturity of three months or less at date of
acquisition. Excess cash and equivalents are primarily invested in mutual funds
comprised of foreign and domestic high quality dollar denominated money market
instruments rated A-1 by Standard & Poor's Ratings Group, or equivalent.

         INVENTORIES. Inventories, consisting principally of telephone systems,
computer equipment and related components, are stated at the lower of cost
(first-in, first-out method) or market.

         PROPERTY, PLANT AND EQUIPMENT. Property, plant and equipment is stated
at cost. Depreciation is computed using the straight-line method over the
estimated useful lives of the related real and personal property which range
from 3 years to 30 years. Leasehold improvements are depreciated over the
shorter of the related lease terms or the estimated useful lives of the
improvements.

         EXCESS OF PURCHASE PRICE OVER NET ASSETS ACQUIRED. Purchase prices of
acquired businesses that are accounted for as purchases have been allocated to
the assets and liabilities acquired based on the estimated fair values on the
respective acquisition dates. Based on these values, the excess purchase prices
over the fair value of the net assets acquired ("goodwill") are being amortized
over 3 to 40 years. Accumulated amortization through December 31, 2000 was $5.4
million.

         Impairment is recognized in operating results if a permanent decline in
value occurs. The Company measures possible impairment of its intangible assets
periodically by comparing the cash flows generated by those assets to their
carrying values. The Company periodically evaluates the useful lives assigned to
the various categories of intangible assets considering such factors as (i)
demand, obsolescence, competition, market share and other economic factors; (ii)
legal and regulatory provisions; and (iii) the periods expected to be benefited.

         SALES-LEASES. The discounted present values of minimum rental payments
under sales-type leases are recorded as sales, net of provisions for continuing
administration and other expenses over the lease period. The costs of systems
installed under these sales-leases, net of residual values at the end of the
lease periods, are recorded as costs of sales. Gains or losses resulting from
the sale of rental income from such leases are recorded as adjustments to the
original sales amounts.

         INCOME TAXES. Deferred income taxes result from temporary differences
in the recognition of revenues and expenses for financial reporting and income
tax purposes.

         ADVERTISING. The cost of advertising is expensed as incurred. The
Company incurred $513,000; $559,000 and $616,000 in advertising costs during
2000, 1999, and 1998, respectively.


                                       38
<PAGE>


         REVENUE RECOGNITION. The Company recognizes revenue pursuant to Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements."
Accordingly, revenue is recognized when all four of the following criteria are
met: (i) persuasive evidence that arrangement exists; (ii) delivery of the
products and/or services has occurred; (iii) the selling price is both fixed and
determinable and; (iv) collectibility is reasonably probable. Revenue derived
from sales of systems and services to end-user customers is recognized upon
installation of the systems and performance of the services, respectively.
Pre-payments for communications services are deferred and recognized as revenue
as the communications services are provided. For shipments to dealers and other
distributors, the Company's revenues are recorded as products are shipped and
services are rendered. IP telephony and long distance services revenues are
recognized as service is provided.

         STOCK BASED COMPENSATION. The Company grants stock options for a fixed
number of shares to employees with an exercise price equal to the fair market
value of the shares at the date of grant. The Company accounts for stock option
grants in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB 25") and related
Interpretations, in accounting for stock based awards to employees. Under APB
25, the Company generally recognizes no compensation expense with respect to
such awards.

         FOREIGN CURRENCY TRANSLATION. For the Company's foreign operations, the
local currency is the functional currency. All assets and liabilities are
translated at period-end exchange rates and all income statement amounts are
translated at an average of month-end rates. Adjustments resulting from this
translation are recorded in accumulated other comprehensive income.

         CONTINGENCIES. The Company is a party to certain litigation in the
normal course of business. Management does not anticipate that the resolution of
such matters will have a material adverse effect on the Company's consolidated
financial position. During 1999, the Company also received correspondence from a
major competitor inviting the Company to negotiate a license agreement regarding
the competitor's patents. The Company's potential liability in this matter, if
any, has not been determined at this time.

         USE OF ESTIMATES. The preparation of the consolidated financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.

         RECLASSIFICATIONS. Certain reclassifications have been made to the 1999
and 1998 financial statements to conform to the 2000 presentation.

NEW PRONOUNCEMENTS.

         In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, (FAS 133), "Accounting for Derivative
Instruments and Hedging Activities." This statement provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. In July 1999, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 137, which deferred the
effective date of FAS 133 for one year. In June 2000, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 138, (FAS
138), "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an amendment to FASB Statement No. 133." This statement amended
certain provisions of FAS 133. Accordingly, the Company will adopt FAS 133, as
amended by FAS 138, effective the first quarter of fiscal 2001. Management is
evaluating what effect, if any, this statement may have on the Company's
financial statements.

         In September 2000, the FASB issued SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities."
This statement revises the accounting standards for securitizations and other
transfers of financial assets and collateral and requires certain disclosures.
This statement is effective for transfers and servicing of financial assets
occurring after March 31, 2001.


                                       39
<PAGE>


Management is evaluating what effect, if any, this statement may have on the
company's financial statements.

NOTE B -- ACQUISITIONS, DISPOSITIONS AND RESTRUCTURING CHARGES

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

During the first quarter of 2000, the Executone division recognized losses of
approximately $2.5 million ($1.5 million after taxes, or $.06 per diluted share)
excluding the charge for in-process research and development. In connection with
the Executone acquisition, the Company sold Executone's manufacturing assets and
liabilities to Varian of Tempe, Arizona at a net book value of $6.6 million.

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

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

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

The following tables summarize details of the restructuring charge in connection
with the Executone acquisition, including the description of the type and amount
of liabilities assumed, and activity in the reserve balances from the date of
the charge through December 31, 2000.


                                       40
<PAGE>


<TABLE>
<CAPTION>
---------------------------------------------- ------------- ---------------- ------------ ----------------
                                                                                                RESERVE
                                                   CASH/       RESTRUCTURING                    BALANCE
                   DESCRIPTION                   NON-CASH         CHARGE        ACTIVITY      AT 12/31/00
---------------------------------------------- ------------- ---------------- ------------ ----------------
                                                                     (In thousands)
---------------------------------------------- ------------- ---------------- ------------ ----------------
<S>                                                <C>              <C>            <C>               <C>
---------------------------------------------- ------------- ---------------- ------------ ----------------
PERSONNEL COSTS:
---------------------------------------------- ------------- ---------------- ------------ ----------------
  Severance and termination costs                  Cash            $  (1,583)     $  1,558       $     (25)
---------------------------------------------- ------------- ---------------- ------------ ----------------
  Other Plant closure costs                        Cash                 (230)           30            (200)
---------------------------------------------- ------------- ---------------- ------------ ----------------

---------------------------------------------- ------------- ---------------- ------------ ----------------
LEASE TERMINATION AND OTHER CONTRACTUAL
OBLIGATIONS (NET OF ANTICIPATED RECOVERY):
---------------------------------------------- ------------- ---------------- ------------ ----------------
  Building and equipment leases                    Cash               (7,444)        1,348          (6,096)
---------------------------------------------- ------------- ---------------- ------------ ----------------
  Other contractual obligations                    Cash               (1,700)           --          (1,700)
---------------------------------------------- ------------- ---------------- ------------ ----------------

---------------------------------------------- ------------- ---------------- ------------ ----------------
IMPAIRMENT OF ASSETS:
---------------------------------------------- ------------- ---------------- ------------ ----------------
  Inventories                                    Non-Cash             (3,454)        1,376          (2,078)
---------------------------------------------- ------------- ---------------- ------------ ----------------
  Prepaid inventory and other expenses           Non-Cash             (2,485)        2,485              --
---------------------------------------------- ------------- ---------------- ------------ ----------------
  Accounts receivable                            Non-Cash             (1,685)          521          (1,164)
---------------------------------------------- ------------- ---------------- ------------ ----------------
  Fixed assets                                   Non-Cash             (3,151)        2,942            (209)
---------------------------------------------- ------------- ---------------- ------------ ----------------
  Net intangible assets                          Non-Cash            (29,184)       29,184              --
---------------------------------------------- ------------- ---------------- ------------ ----------------

---------------------------------------------- ------------- ---------------- ------------ ----------------
TOTAL                                                              $ (50,916)     $ 39,444       $ (11,472)
---------------------------------------------- ------------- ---------------- ------------ ----------------
</TABLE>

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

INTERCOMM AMERICAS, INC. ("ICA"). In March 2000, the Company acquired the stock
of ICA, an international IP communications reseller for $580,000 cash and
750,000 shares of Inter-Tel.NET Class B restricted stock. In the event that
Inter-Tel.NET does not complete an initial public offering of its stock by June
30, 2001, 2002 or 2003, the Inter-Tel.NET Class B stock has conversion rights
into Inter-Tel, Incorporated Common Stock. In addition, a final conversion right
exists at August 31, 2003. The acquisition purchase price was valued at $1.2
million at March 2000; however, this valuation may change based on the exercise
of conversion rights on one of the dates identified above, as provided by the
acquisition agreement. The purchase price over net assets acquired is being
amortized over 5 years.

TDI SERVICES CORPORATION, TECHNOLOGY DYNAMICS FOR THE 21ST CENTURY ("TDI"). In
October 2000, the Company acquired the stock of TDI, a communications equipment
seller and installer, for cash and a short-term note. The total purchase price
was $2.4 million. The purchase price over net assets acquired is being amortized
over 10 years.

         Each of the acquisitions discussed above was accounted for as a
purchase. The results of operations of each of these acquisitions have been
included in the accompanying consolidated statements of operations of the
Company from the date of acquisitions. The Company will not complete the final
allocation of purchase price of the ICA acquisition, based on rights granted to
the sellers to convert Inter-Tel.NET stock to Inter-Tel, Incorporated stock at
June 30, 2001, June 30, 2002, June 30, 2003 or August 31, 2003. The accompanying
consolidated financial statements reflect the allocation of purchase price for
each acquisition, including the preliminary allocation for ICA assuming no
conversion of Inter-Tel.NET stock, which is subject to adjustment. The final
reconciliation of purchase price could differ materially from the preliminary
allocation, depending on the market values of the stocks of Inter-Tel,
Incorporated and Inter-Tel.NET.

INTER-TEL.NET. During the second quarter of 2000, Inter-Tel recorded a pre-tax
charge associated with Inter-Tel.NET operations of $2.0 million ($1.2 million
after-tax), related to the write-down to net realizable value of the Vocal'Net
servers in the division's IP network and lease termination costs of redundant
facilities. Inter-Tel.NET is in the process of adding new technology to be
implemented throughout the Inter-Tel.NET network. The changes to the
Inter-Tel.NET network are designed to improve the voice quality, design and
interoperability of the network, and to allow Inter-Tel to better position
itself to sell services to its enterprise customers.


                                       41
<PAGE>


The pre-tax charge associated with Inter-Tel.NET is related to the write-down to
net realizable value of the Vocal'Net servers in the division's IP network, and
lease termination costs of certain redundant facilities. The following table
summarizes the details of the write-down and activity in the reserve balances
from the date of the write-down through December 31, 2000:

<TABLE>
<CAPTION>
-------------------------------------- ------------ ------------------ -------------- ----------------
                                                                                          RESERVE
                                           CASH/      RESTRUCTURING                       BALANCE
              DESCRIPTION                NON-CASH         CHARGE          ACTIVITY      AT 12/31/00
-------------------------------------- ------------ ------------------ -------------- ----------------
                                                               (In thousands)
-------------------------------------- ------------ ------------------ -------------- ----------------
<S>                                        <C>               <C>              <C>               <C>
LEASE TERMINATION OBLIGATIONS (NET
OF ANTICIPATED RECOVERY):
-------------------------------------- ------------ ------------------ -------------- ----------------
  Building leases                              Cash          $   (144)        $    87           $ (57)
-------------------------------------- ------------ ------------------ -------------- ----------------

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

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

CIRILIUM JOINT VENTURE. In December 1999, Inter-Tel entered into an agreement
with Hypercom Corporation to jointly form Cirilium. Cirilium comprised parts of
Hypercom's data and Inter-Tel's packet telephony experience, products and
services, including Inter-Tel's Vocal'Net gateway products and technology.
Inter-Tel's 1999 investment in Cirilium noted above included cash of $6.5
million, and net assets of $1.2 million. The Company accounted for the Cirilium
losses using the equity method of accounting through September 2000. In
September 2000, the Company wrote-off its investment in Cirilium. The Company
retains an ownership interest of 19.9% in Cirilium, and therefore no longer uses
the equity method of accounting.

CONVERGENT. During the fourth quarter of 2000, the Company agreed to acquire
certain assets and liabilities of Convergent Technologies, Inc. ("Convergent")
for cash plus the assumption of various specific liabilities and related
acquisition costs. Generally, Inter-Tel acquired the voice customer base,
accounts receivable, some inventory and fixed assets along with assumption of
liabilities for warranty, maintenance and specified leased premises costs. The
acquisition closed in January 2001, but the seller has up to 60 days from the
date of closing to provide the final listing of assets to be acquired and
liabilities to be assumed. The purchase price is subject to adjustment based on
the final balances of the specified assets and liabilities, and in particular,
actual collected accounts receivable within 90 days of the closing. The
agreement indicates that all accounts receivable not collected within the 90 day
period are guaranteed by the seller, and approximately $7.9 million is held in
escrow for this and other representations and warranties. In general, the assets
were acquired at values approximating net book value, plus transaction costs.

NOTE C -- PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE

During the first quarter of 2000, Inter-Tel completed the acquisition of
Executone (see NOTE B). The aggregate purchase price of the Executone
acquisition was allocated to the fair value of the assets and liabilities
acquired, of which $5.4 million ($3.4 million after taxes), or $0.13 per diluted
share, was written-off as purchased in-process research and development.

NOTE D -- NET INVESTMENT IN SALES-LEASES

         Net investment in sales-leases represents the value of sales-leases
presently held under the Company's Totalease program. The Company currently
sells the rental income from some of the sales-leases. The Company maintains
reserves against potential recourse following the resales based upon loss
experience and past due accounts. Activity during the years was as follows:


                                       42
<PAGE>


                                                       Year Ended December 31
(In thousands)                                     2000        1999         1998

Sales of rental income                         $ 95,127    $ 83,405     $ 68,375
Sold income remaining unbilled
    at end of year                             $198,361    $163,728     $131,292
Allowance for uncollectible minimum
    lease payments and recourse liability
    at end of year                             $  8,870    $  6,734     $  5,716

         The Company does not expect any significant losses from the recourse
provisions related to the sale of rental income. The Company is compensated for
administration and servicing of rental income sold.

NOTE E -- PROPERTY, PLANT & EQUIPMENT
                                                          December 31
(In thousands)                                         2000          1999

Computer systems and equipment                       $ 47,047      $ 37,654
Transportation equipment                                2,909         1,560
Furniture and fixtures                                  4,839         4,981
Leasehold improvements                                  3,101         2,033
Building                                                7,297         7,292
Land                                                    2,629         2,629
                                                     --------      --------
                                                       67,822        56,149
Less: Accumulated depreciation and amortization        35,099        27,443
                                                     --------      --------
Net Property, plant & equipment                      $ 32,723      $ 28,706
                                                     ========      ========

OPERATING LEASES
Operating leases (telephone equipment)               $  1,923      $  7,565
Less: Accumulated depreciation and amortization         1,500         2,255
                                                     --------      --------
                                                     $    423      $  5,310
                                                     ========      ========

NOTE F -- OTHER ASSETS

                                                          December 31
(In thousands)                                         2000          1999

Investment in Cirilium                               $     --      $  7,653
Other assets                                              568           553
                                                     --------      --------
                                                     $    568      $  8,206
                                                     ========      ========

NOTE G -- OTHER CURRENT LIABILITIES

                                                          December 31
(In thousands)                                         2000          1999

Compensation and employee benefits                   $ 12,284      $ 11,628
Restructuring Charge                                    2,318            --
Deferred revenues                                       6,308         4,515
Miscellaneous taxes payable                             8,147        18,548
Other accrued expenses                                 17,712        10,343
                                                     --------      --------
                                                     $ 46,769      $ 45,034
                                                     ========      ========


                                       43
<PAGE>


NOTE H -- CREDIT LINE

         The Company maintains a $25,000,000 unsecured bank credit line at prime
rate to cover international letters of credit and for other purposes. The credit
agreement matures June 1, 2002 and contains certain restrictions and financial
covenants. At December 31, 2000, $934,000 of the credit line was committed under
letter of credit arrangements.

NOTE I -- LEASES

         Rental expense amounted to $8,818,000; $6,254,000; and $5,060,000; in
2000, 1999, and 1998, respectively. Noncancellable operating leases are
primarily for buildings. Certain of the leases contain provisions for renewal
options and scheduled rent increases. At December 31, 2000, future minimum
commitments under noncancellable leases, including an extension through November
2001 on an original five-year lease for its headquarters facility and a 15 year
lease for its distribution and support facility, are: 2001 -- $9,231,000; 2002
-- $7,946,000; 2003 -- $6,754,000; 2004 -- $6,409,000; 2005 - 2,522,000;
thereafter - 1,701,000.

NOTE J -- INCOME TAXES

         The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under
SFAS 109, the liability method is used in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined (and classified
as current or long-term) based on differences between financial reporting and
tax bases of assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse.

         Significant components of the Company's deferred tax liabilities and
assets as of December 31, are as follows:

                                                        December 31
(In thousands)                                       2000          1999

DEFERRED TAX LIABILITIES:
  Lease--sales and reserves                        $ 24,057      $ 15,752
                                                   --------      --------
TOTAL DEFERRED TAX LIABILITIES                       24,057        15,752
                                                   --------      --------
DEFERRED TAX ASSETS:
  Inventory basis differences                         2,976         2,257
  Accounts receivable reserves                        3,039         2,263
  Maintenance reserve                                   140           117
  Accrued vacation pay                                  980           893
  Book over tax depreciation                          2,787           346
  Foreign loss carryforwards                          1,358         1,279
  In-process R&D write-off                            7,950         8,526
  Other - net                                        14,079         2,331
                                                   --------      --------
Deferred tax assets                                  33,039        18,012
  Less valuation reserve                              1,358         1,279
                                                   --------      --------
Net deferred tax assets                              31,594        16,733
                                                   --------      --------
NET DEFERRED TAX ASSETS                            $  7,894      $    981
                                                   ========      ========

         During 2000 and 1999, the Company recorded income of $226,000 and
losses of $341,000, respectively, from foreign operations. At December 31, 2000,
the Company had foreign loss carryforwards of approximately $4,000,000, which
will begin to expire in 2001. The valuation allowance in 2000 increased by
$79,000 and $119,000 in 1999 due to increases in foreign loss carryforward
benefits.


                                       44
<PAGE>


         Federal and state income taxes consisted of the following:

(In thousands)                            2000           1999          1998

Federal                                 $(15,101)      $ 13,832      $  4,910
State                                     (1,716)         2,787         1,880
                                        --------       --------      --------
                                        $(16,817)      $ 16,619      $  6,790
                                        ========       ========      ========

         The principal reasons for the difference between total income tax
expense and the amount computed by applying the statutory federal income tax
rate to income before taxes are as follows:

                                          2000           1999         1998

Federal tax at statutory rates
    Applied to pre-tax income              35%            35%          35%
State tax net of federal benefit            4              3            5
Valuation reserve increase
    for foreign losses                     --             --            1
Other - net                               (2)             --            2
                                          ---            ---          ---
                                           37%            38%          43%
                                          ===            ===          ===

NOTE K -- EQUITY TRANSACTIONS

         TREASURY STOCK. During the third quarter of 2000, the Company initiated
a stock repurchase program under which the Board of Directors authorized the
repurchase of up to 2,000,000 shares of the Company's Common Stock. The Company
purchased approximately 562,000 shares and expended approximately $6.7 million
for stock repurchases during 2000, which was funded primarily through existing
cash balances. The Company reissued shares through December through stock option
exercises and issuances. The proceeds received for the stock reissued were less
than its cost basis. Accordingly, the difference was recorded as a reduction to
retained earnings. The Company also expended approximately $6.7 million and
$16.8 million for repurchases of 558,000 and 1,203,600 shares of the Company's
Common Stock during 1999 and 1998, respectively, which was funded primarily
through existing cash balances.

         DIVIDEND POLICY. On September 24, 1997, the Company's Board of
Directors declared a cash dividend (the "Cash Dividend") of $0.01 for every
share of Common Stock, payable quarterly to shareholders of record beginning
December 31, 1997, with dividend payments to commence on or about 15 days after
the end of each fiscal quarter. The Company has made quarterly dividend payments
for each quarter since the dividend was declared. Prior to the Cash Dividend,
the Company had declared no cash dividends on its Common Stock since
incorporation.

         STOCK OPTION PLANS. In July 1990, the Company adopted the Director
Stock Option Plan ("the Director Plan") and reserved a total of 500,000 shares
of Common Stock for issuance thereunder. Options must be granted at not less
than 100% of the fair market value of the Company's stock at the dates of grant.
Commencing with the adoption of the Plan, each Eligible Director received a
one-time automatic grant of an option to purchase 5,000 shares of the Company's
Common Stock. In addition, each Eligible Director shall be granted an option to
purchase 5,000 shares upon the date five (5) days after such person became
Director, and an additional option to purchase 5,000 shares five (5) days after
the date of the regularly scheduled board meeting following the close of the
Company's third quarter. All options granted have a five-year term and fully
vest at the end of six months from the grant date.

         In November 1993, the Board of Directors authorized the Inter-Tel,
Incorporated Long-Term Incentive Plan ("the 1994 Long Term Plan"). A total of
2,000,000 shares of Common Stock has been reserved for issuance under the 1994
Long Term Plan to selected officers and key employees. Options must be granted
at not less than 100% of the fair market value of the Company's stock at the
dates of grant. Options generally vest over four or five years and expire five
to ten years from the date of grant.


                                       45
<PAGE>


         In February 1997, the Board of Directors authorized the Inter-Tel,
Incorporated 1997 Long-Term Incentive Plan ("the 1997 Long Term Plan"). A total
of 2,400,000 shares of Common Stock has been reserved for issuance under the
1997 Long Term Plan to selected officers and key employees. Options must be
granted at not less than 100% of the fair market value of the Company's stock at
the dates of grant. Options generally vest over four or five years and expire
ten years from the date of grant.

         In March 2000, the Board of Directors authorized an amendment to the
1997 Long Term Plan to add 1,250,000 more shares of Common Stock to the 1997
Long Term Plan for issuance to selected officers and key employees and to limit
the Company's ability to reprice options under the 1997 Long Term Plan.

         Under the 1994 and 1997 Long Term Plans, in some instances,
predetermined performance goals and share market value increases must be met to
allow the options to be exercised before the end of the option term.

         In April 1998, the Board of Directors authorized the Inter-Tel,
Incorporated Acquisition Stock Option Plan ("the Acquisition Plan"). A total of
82,428 shares of Common Stock was reserved for issuance under the Acquisition
Plan to selected key employees hired as a result of the acquisition of TMSI. New
options must be granted at not less than 100% of the fair market value of the
Company's stock at the dates of grant. Options generally vest over four or five
years and expire ten years from the date of grant. A portion of the options
granted were replacements for options held to purchase shares of stock of the
selling company; such replacement grants retained the original terms, including
grant dates for vesting purposes and the original grant prices, adjusted using
the applicable conversion ratio of the fair value of Inter-Tel's stock compared
to that of the selling company.

         Finally, in March 2000, the Board of Directors authorized an additional
216,000 shares of Common Stock for issuance under the Acquisition Plan to
selected employees hired as a result of the acquisition of Executone. Options
must be granted at not less than 100% of the fair market value of the Company's
stock at the dates of grant. Options vest over five years and expire ten years
from the date of grant.

         Option activity for the past three years under all plans is as follows:

                                                  Number of Shares
                                            2000           1999           1998

Outstanding at beginning of year       2,486,696      2,948,032      2,962,524
Granted                                1,213,500        491,750        576,928
Exercised                               (279,654)      (615,986)      (370,770)
Expired or canceled                     (277,250)      (337,100)      (220,650)
                                       ---------      ---------      ---------
Outstanding at end of year             3,143,292      2,486,696      2,948,032
                                       ---------      ---------      ---------
Exercise price range                $2.24-$43.44   $2.24-$26.00   $2.24-$26.00
Exercisable at end of year             1,188,356        979,630        882,310
Weighted-average fair value of
   options granted                        $13.65         $11.44          $9.75

         At December 31, 2000, the Company has reserved 4,682,068 shares of
Common Stock for issuance in connection with the stock option plans.

         As permitted under Statement of Financial Accounting Standards No. 123
(FAS 123) "Accounting for Stock-Based Compensation," the Company has elected to
follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees," and related Interpretations, in accounting for stock based awards
to employees. Under APB 25, the Company generally recognizes no compensation
expense with respect to such awards.


                                       46
<PAGE>


The following table summarizes information about stock options outstanding at
December 31, 2000:

                               OPTIONS OUTSTANDING

                                Number       Weighted-Average        Weighted
            Range of         Outstanding        Remaining             Average
         Exercise Price      at 12-31-00     Contractual Life     Exercise Price

         $2.24 - $4.31         256,341           4 years               $2.97
         $4.81 - $7.06         289,600           6 years               $5.59
         $7.25 - $13.44       1,630,495          7 years              $11.25
        $15.13 - $43.44        966,856           8 years              $22.93

                               OPTIONS EXERCISABLE

                                Number       Weighted-Average        Weighted
            Range of         Exercisable        Remaining             Average
         Exercise Price      at 12-31-00     Contractual Life     Exercise Price

         $2.24 - $4.31         253,601           4 years               $2.98
         $4.81 - $7.06         170,800           6 years               $5.83
         $7.25 - $13.44        490,095           7 years               $9.08
        $15.13 - $43.44        273,860           8 years              $21.48

         During 2000, the weighted average exercise price of options granted,
exercised, and expired or canceled was $19.67, $6.37 and $27.49, respectively.

         Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant date for awards in 2000, 1999
and 1998 consistent with the provisions of SFAS 123, the estimated fair value of
the options would be amortized to expense over the option's vesting period and
the Company's net income and net income per share for the year ended December 31
would have been as follows:

(in thousands, except per share amounts)         2000       1999        1998

Net (loss) income as reported                 $(28,923)    $27,146     $9,044

Pro forma net (loss) income                   $(30,501)    $25,993     $7,970

Pro forma (loss) income per diluted share      $(1.16)      $0.96      $0.29

     Pro forma results disclosed are based on the provisions of SFAS 123 using
the Black-Scholes option valuation model and are not likely to be representative
of the effects on pro forma net income for future years. In addition, the
Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the estimating models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.

     The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model using the low end of reasonable assumptions
for input variables rather than attempting to identify a best-point estimate.
The option pricing model utilized the following weighted average assumptions for
2000, 1999 and 1998, respectively: risk free interest rates of 6.0% in each
year; dividend yields of .25% for each year; volatility factors of the expected
market price of the Company's stock averaged .30; and a weighted average
expected life of the option of 4 to 5 years for employee stock


                                       47
<PAGE>


options which vest over four to five year periods with a weighted average
vesting period of 2.5 years and 1.5 years for Company director options which
vest at the end of six months from the grant date.

         1997 EMPLOYEE STOCK PURCHASE PLAN. In April 1997, the Board of
Directors and stockholders adopted the Employee Stock Purchase Plan (the
"Purchase Plan") and reserved 500,000 shares for issuance to eligible employees.
Under the Purchase Plan, employees are granted the right to purchase shares of
Common Stock at a price per share that is 85% of the lesser of the fair market
value of the shares at: (i) the participant's entry date into each six-month
offering period, or (ii) the end of each six-month offering period. Employees
may designate up to 10% of their compensation for the purchase of stock. Under
the Plan, the Company sold 105,485 shares for approximately $980,000 ($9.29 per
share) to employees in 2000, 67,431 shares for approximately $851,000 ($12.62
per share) to employees in 1999, and 45,654 shares for approximately $711,000
($15.57 per share) to employees in 1998. At December 31, 2000, 245,412 shares
remained authorized under the Plan.

         STOCK OPTION LOANS. During 1999, selected officers and employees of the
Company were offered loans to acquire the Company's common stock. Promissory
Notes were established to cover the cost of exercise of stock options, including
applicable taxes, or the cost of the Company's common stock purchased in the
open market during May and June of 1999. The loans are interest-only notes with
balloon payments due on or before March 15, 2004. The loans bear interest at the
mid-term applicable federal interest rate, compounded annually. Interest
payments are due on or before March 15 of each anniversary beginning on March
15, 2000. The notes are full recourse loans and the Company retains the common
stock certificates as collateral. The outstanding balance of loans at December
31, 2000 totaled $1,018,000.

NOTE L -- EARNINGS PER SHARE

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

(in thousands, except per share amounts)     2000           1999          1998

Numerator:
  Net Income                               $(28,923)      $ 27,146      $  9,044
                                           --------       --------      --------
Denominator:
  Denominator for basic earnings per
  Share - weighted average shares            26,273         25,949        26,602

Effect of dilutive securities:
  Employee and director stock options            --          1,055         1,244
                                           --------       --------      --------

Denominator for diluted earnings per
  share - adjusted weighted average
  shares and assumed conversions             26,273         27,004        27,846
                                           --------       --------      --------

Basic (loss) income per share              $  (1.10)      $   1.05      $   0.34
                                           ========       ========      ========

Diluted (loss) income per share            $  (1.10)      $   1.01      $   0.32
                                           ========       ========      ========

         Options that are antidilutive because the exercise price was greater
than the average market price of the common shares, are not included in the
computation of diluted earnings per share. The number of options to purchase
shares of Common Stock that were outstanding during 2000 that were antidilutive
varied throughout the year, as the Company's stock price varied significantly.

NOTE M -- RETIREMENT PLANS

         The Company has two retirement plans for the benefit of all of its
employees. Under its 401(k) Retirement Plan, participants may contribute an
amount not exceeding 15 percent of compensation


                                       48
<PAGE>


received during participation in the Plan. The Company makes voluntary annual
contributions to the Plan based on a percentage of contributions made by Plan
participants of up to 10 percent of compensation. Contributions to the Plan
totaled $1,381,000; $780,000; and $639,000; in 2000, 1999 and 1998,
respectively.

         In 1992, the Company initiated an Employee Stock Ownership Plan (ESOP),
advancing $500,000 to the ESOP Trust for the purpose of purchasing Common Stock
of the Company. The Trust purchased 307,000 shares of the Company's Common Stock
in July 1992. The loan was paid in full during 1997. As the principal amount of
the loan was repaid to the Company through Company annual contributions, the
equivalent number of shares released were allocated to employees' accounts to be
held until retirement. Total shares so allocated were 32,380 in 1997.
Contributions to the ESOP totaled $62,500 in 1997, and are based upon the
historic cost of the shares purchased by the ESOP. After the final allocation of
shares in 1997, the ESOP plan was "frozen," so that all eligible participants as
of July 1, 1997 became 100% vested in their accounts, regardless of length of
service. No further purchases are anticipated through the ESOP, and the Company
does not anticipate making future allocations of shares from this plan.

NOTE N -- SEGMENT INFORMATION

The Company adopted Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131") in the fiscal year ended December 31, 1998. SFAS 131 establishes standards
for reporting information regarding operating segments in annual financial
statements and requires selected information for those segments to be presented
in interim financial reports issued to stockholders. SFAS 131 also establishes
standards for related disclosures about products and services and geographic
areas. Operating segments are identified as components of an enterprise about
which separate discrete financial information is available for evaluation by the
chief operating decision maker, or decision making group, in making decisions
how to allocate resources and assess performance. The Company's chief decision
maker, as defined under SFAS 131, is the Chief Executive Officer.

Prior to 2000, the Company had viewed its operations as principally one segment:
telephone systems, telecommunications software and hardware, and related long
distance calling services. These services are provided through the Company's
direct sales offices and dealer network to business customers throughout the
United States, Europe, Asia and South America. As a result, financial
information disclosed previously represented substantially all of the financial
information related to the Company's principal operating segment.

During 2000, the operations of Executone were identified separately in the first
and second quarters of 2000. Beginning in the 3rd quarter and directly as a
result of the charge and reorganization associated with the Executone
operations, the Company no longer accounts for or directly reports the Executone
operations on a stand alone basis. The operations have been integrated with the
Company's existing wholesale and national and government account operations.
Accordingly, the only separate segment disclosures that are included below are
the charges associated with Executone.

In December 1999, Inter-Tel entered into an agreement with Hypercom Corporation
to jointly form Cirilium Corporation ("Cirilium"). Cirilium comprises parts of
Hypercom's data and Inter-Tel's packet telephony products and services,
including Inter-Tel's Vocal'Net gateway products and technology. As of the close
of the third quarter, the Company wrote off its remaining investment in Cirilium
of $2.0 million. This charge includes the write-off of Inter-Tel's remaining
basis in Cirilium Corporation. Total pre-tax losses from Cirilium from all
sources were $8.6 million ($0.20 per diluted share) during 2000. As a result of
the write-off, we do not expect to report the operations of Cirilium as a
separate business segment. Refer to the table below for a summary of the
operations for 2000.

During 2000, the Company determined that the operations of Inter-Tel.NET, the
Company's IP long distance subsidiary, would be separately disclosed as a
business segment. The operations represented a more significant component of the
consolidated operations in 2000 compared to prior years and had a significant
impact on the revenues and net losses.


                                       49
<PAGE>


During 2000, the Company generated income from business segments, including
charges, as follows:

<TABLE>
<CAPTION>
                                               PRINCIPAL
                                                SEGMENT    EXECUTONE
(in thousands, except per share               (EXCLUDING   (CHARGES
amounts)                                       CHARGES)      ONLY)      CIRILIUM   INTER-TEL.NET    TOTAL
                                             ---------------------------------------------------------------
<S>                                           <C>          <C>          <C>          <C>          <C>
Net sales                                     $ 379,889    $      --    $      --    $  22,834    $ 402,7230
Gross Profit                                    177,889       (7,639)          --      (11,212)     159,038
Charges and write-off of IPRD                        --      (48,710)          --       (1,968)     (50,678)
Operating income (loss)                          37,413      (56,349)        (574)     (19,087)     (38,597)
Equity Share of Cirilium Corp.'s net losses          --           --       (5,938)          --       (5,938)
Write-off of Cirilium Corp. investment               --           --       (2,045)          --       (2,045)
Interest and other income                         1,053           --           --           --        1,053
Interest expense                                   (213)          --           --           --         (213)
Net income (loss)                             $  24,241    $ (35,631)   $  (5,411)   $ (12,122)   $ (28,923)
                                              =========    =========    =========    =========    =========

Net income (loss) per diluted share           $    0.91    $   (1.36)   $   (0.21)   $   (0.46)   $   (1.10)
                                              =========    =========    =========    =========    =========
</TABLE>

The Company's revenues are generated predominantly in the United States. Total
revenues generated from U.S. customers totaled $392.1 million, $306.5 million,
and $263.9 million of total revenues for the years ended December 31, 2000, 1999
and 1998, respectively. The Company's revenues from international sources were
primarily generated from customers located in the United Kingdom, Europe, Asia
and South America. In 2000, 1999 and 1998, revenues from customers located
internationally accounted for 2.6%, 2.5%, and 3.9% of total revenues,
respectively.

NOTE O -- FINANCIAL INSTRUMENTS

         CONCENTRATION OF CREDIT RISK. Financial instruments that potentially
subject the Company to significant concentrations of credit risk consist
principally of cash investments, trade accounts receivable, and net investment
in sales-leases. The Company maintains cash and equivalents not invested in
money market funds with a major bank in its marketplace. The Company performs
periodic evaluations of the relative credit standing of the financial
institution. Concentrations of credit risk with respect to trade accounts
receivable and net investment in sales-leases are limited due to the large
number of entities comprising the Company's customer base.

         FAIR VALUE OF FINANCIAL INSTRUMENTS. The carrying amount of cash and
equivalents, accounts receivable, net investment in sales-leases, and accounts
payable reported in the consolidated balance sheets approximate their fair
value.

NOTE P -- SUPPLEMENTAL CASH FLOW

<TABLE>
<CAPTION>
(in thousands)                                      2000        1999        1998
<S>                                               <C>         <C>         <C>
CASH PAID FOR:
  Interest                                        $    214    $     65    $     60
  Income taxes                                    $  4,788    $ 12,405    $  5,528
                                                  --------    --------    --------
CHANGES IN OPERATING ASSETS AND LIABILITIES:
  Increase in receivables                         $ (8,472)   $(13,208)   $(17,887)
  (Increase) decrease in inventories               (15,034)       (656)      1,151
  (Increase) decrease in prepaid expenses and
    other assets                                   (20,640)     (8,277)      2,526
  Increase in long-term other assets                14,717     (13,525)     (3,635)
  Increase in accounts payable
     and other current liabilities                     458      19,544       9,304
                                                  --------    --------    --------
                                                  $(28,971)   $(16,122)   $ (8,541)
                                                  ========    ========    ========
</TABLE>


                                       50
<PAGE>


NOTE Q -- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

         A summary of the quarterly results of operations for the years ended
December 31, 2000 and 1999 follows:

(In thousands, except per share amounts)

<TABLE>
<CAPTION>
2000                                       1ST QTR        2ND QTR        3RD QTR       4TH QTR
<S>                                      <C>            <C>            <C>           <C>
Net sales                                $  96,363      $ 101,089      $ 102,650     $ 102,621
Gross profit                                41,540         30,410         43,798        43,290
Net (loss) income                           (1,221)       (34,162)         2,084         4,376
Net (loss) income per share--Basic       $   (0.05)     $   (1.30)     $    0.08     $    0.17
Net (loss) income per share--Diluted     $   (0.05)     $   (1.30)     $    0.08     $    0.17
Weighted average basic
  common shares                             26,249         26,371         26,435        26,039
Weighted average diluted
  common shares                             26,249         26,371         26,940        26,368

<CAPTION>
1999                                       1ST QTR        2ND QTR        3RD QTR       4TH QTR
<S>                                      <C>            <C>            <C>           <C>
Net sales                                $  65,525      $  77,788      $  81,800     $  89,108
Gross profit                                31,672         39,519         39,989        43,578
Net income                                   5,092          7,221          7,069         7,764
Net income per share--Basic              $    0.20      $    0.28      $    0.27     $    0.30
Net income per share--Diluted            $    0.19      $    0.27      $    0.26     $    0.29
Weighted average basic
  common shares                             26,096         25,826         25,880        25,996
Weighted average diluted
  common shares                             27,277         26,711         27,040        26,989
</TABLE>


                                       51
<PAGE>


                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

         THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS AND OTHER PARTS OF THIS REPORT ON FORM 10-K CONTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE WORDS
"EXPECTS," "ANTICIPATES," "BELIEVES," "INTENDS," "WILL" AND SIMILAR EXPRESSIONS
IDENTIFY FORWARD-LOOKING STATEMENTS WHICH ARE BASED ON INFORMATION AVAILABLE TO
THE COMPANY ON THE DATE HEREOF, AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE
ANY SUCH FORWARD-LOOKING STATEMENTS. 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 IN "FACTORS THAT MAY AFFECT
FUTURE OPERATING RESULTS" AND ELSEWHERE IN THIS 10-K.

GENERAL

         Inter-Tel is a leading provider of business telephone systems in the
United States and related call processing software, voice processing software
and call accounting software. Inter-Tel is also an emerging provider in the
voice and data convergence market, with a line of voice and data routers, IP
phones, e-commerce software, client software and related networking software,
which allow Inter-Tel to handle networked applications as large as 20,000 ports.
Inter-Tel's products are marketed to small-to-large-sized organizations and
divisions through 55 company owned direct sales offices, two international
offices, a nationwide network of dealers and data and e-commerce VARs.
Inter-Tel's products include the AXXESS and ECLIPSE2 business telephone
systems, as well as the InterPrise voice and data products, including
ClearConnect e-commerce software. The Company also provides maintenance, leasing
and support services for its products. Inter-Tel's Common Stock is quoted on the
Nasdaq under the symbol "INTL."

         The Company has developed networks of direct sales offices, dealers and
value added resellers in VARs, which sell the Company's products. In recent
periods, the Company has focused on expanding its direct sales capabilities and
its dealer and VAR network. The Company has acquired a number of resellers of
telephony products and integrated these operations with its existing direct
sales operations in the same geographic areas and in other strategic markets.

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

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

         The markets served by the Company have been characterized by rapid
technological changes and increasing customer requirements. The Company has
sought to address these requirements through the development of software
enhancements and improvements to existing systems and the introduction of new
products and applications. The Company's research and development efforts over
the last several years have been focused primarily on developing new products
such as the Inter-Tel InterPrise Voice and Data Routers, the ClearConnect
products, Inter-Tel Unified Messaging; enhancing the CTI capabilities of the
AXXESS and ECLIPSE2 digital communications platform; and expanding the


                                       52
<PAGE>


capacity of the Company's AXXESS and ECLIPSE2 systems. Current efforts are
related to the support of industry standard CTI interfaces, the development of
additional applications and features for the AXXESS and ECLIPSE2 digital
communication systems, the enhancement of the Inter-Tel InterPrise router
solutions, and the development of a LAN-based Communications Server
incorporating the Company's Call Processing and Voice Processing software. New
applications under development also include Basic Rate ISDN, enhanced PBX
networking, the Inter-Tel.NET private IP telephony service and enhanced unified
messaging. The software-based architecture of the Inter-Tel digital
communication systems facilitate maintenance, support, upgrades, and
incorporation of additional features and functionality.

         The Company offers to our customers a package of lease financing and
other services under the name Totalease. Totalease provides to customers lease
financing, maintenance and support services, fixed price upgrades and other
benefits. The Company finances this program through the periodic resale of lease
rental streams to financial institutions.

         Net sales of the Company have increased substantially in each of the
past three years. Such increases were 28.2%, 14.5%, and 22.8%, in 2000, 1999,
and 1998 over the preceding year.

RESULTS OF OPERATIONS

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

                                                 Year Ended December 31
                                            2000           1999          1998
                                            ----           ----          ----
Net sales                                  100.0%         100.0%        100.0%
Cost of sales                               60.5           50.7          51.3
                                           -----          -----         -----
Gross margin                                39.5           49.3          48.7
Research and development                     4.8            4.7           4.2
Selling, general and administrative         31.7           31.3          31.5
Special charges                             12.6             --           8.3
                                           -----          -----         -----
Operating income                            (9.6)          13.2           4.7
Equity share of Cirilium's net losses       (1.5)            --            --
Write-off of Cirilium investment            (0.5)            --            --
Interest and other income                    0.3            0.7           1.1
Interest expense                            (0.1)           0.0           0.0
Income taxes (benefit)                      (4.2)           5.3           2.5
                                           -----          -----         -----
Net income                                  (7.2)%          8.6%          3.3%
                                           -----          -----         -----

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

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

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


                                       53
<PAGE>


         RESEARCH AND DEVELOPMENT. Research and development expenses increased
to $19.5 million, or 4.8% of net sales in 2000 from $14.8 million, or 4.7% of
net sales, in 1999. In 2000, these expenses were directed principally toward the
continued development of the digital AXXESS and Eclipse2 software and systems,
unified messaging and voice processing software, InterPrise IP router solutions,
ClearConnect solutions, and certain CTI applications. The Company expects that
research and development expenses will continue to increase in absolute dollars
as the Company continues to develop and enhance existing and new technologies
and products. These expenses may vary, however, as a percentage of net sales.

         SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses increased to $127.5 million, or 31.7% of net sales, in
2000 from $98.4 million, or 31.3% of net sales, in 1999. The increase reflected
increased costs from continued development of the Inter-Tel.net network and
related expenses, increased reserves for accounts receivable, additional
personnel to support the direct dealer network, and selling, incentive, training
and other compensation costs at the Company's direct sales office operations.
The Company expects that selling, general and administrative expenses will
increase in absolute dollars, but may vary as a percentage of net sales.

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

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

         INCOME TAXES. The 2000 income tax rate decreased to 36.8% compared to
38.0% for 1999. The Company anticipates no tax benefit for a component of the
Cirilium losses during 2000 that are capital losses. Accordingly, the Company
anticipates a lower effective tax benefit on a consolidated basis in 2000.

         NET INCOME. Including the charges recorded in 2000, net income
decreased to a loss of $28.9 million, or a loss of $1.10 per diluted share, in
20000 compared to net income of $27.1 million, or $1.01 per diluted share, in
1999. Excluding the charges, net income would have been $13.1 million, or $.50
per diluted share, in 2000.

YEAR ENDED DECEMBER 31, 1999 VERSUS YEAR ENDED DECEMBER 31, 1998

         NET SALES. Net sales increased 14.5% to $314.2 million in 1999 from
$274.5 million in 1998, representing an increase of $39.7 million. Sales from
the Company's direct sales offices and from wholesale distribution accounted for
$30.4 million of the increase and the network services group accounted for $11.0
million of the increase.

         GROSS PROFIT. Gross profit increased 15.9% to $154.8 million, or 49.3%
of net sales in 1999 from $133.6 million, or 48.7% of net sales, in 1998. This
increase in gross profit was primarily a result of higher sales, as a percentage
of total net sales, of AXXESS digital communication platforms, call processing
software and voice processing software. The increase in gross margin was
primarily the result of a higher proportion of sales through the Company's
direct sales offices compared to its dealer network and a higher software
content in systems sales, offset in part by increases in sales of long distance
services, and the impact of some pricing discounts on sales of smaller telephone
systems.

         RESEARCH AND DEVELOPMENT. Research and development expenses increased
to $14.8 million, or 4.7% of net sales in 1999 from $11.4 million, or 4.2% of
net sales, in 1998. In 1999, these expenses were


                                       54
<PAGE>


directed principally toward the continued development of the digital AXXESS and
Inter-Tel Axxent software and systems, unified messaging and voice processing
software, InterPrise IP router solutions, ClearConnect solutions, and certain
CTI applications.

         SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses increased to $98.4 million, or 31.3% of net sales, in
1999 from $86.6 million, or 31.5% of net sales, in 1998. This reflected
increased selling, incentive, training and other compensation costs attributable
to the increased sales through the Company's direct sales offices, continued
development of the Inter-Tel.net network and related expenses, additional
personnel to support the direct dealer network, and expenses associated with
international operations. This increase is also attributable to the hiring of
additional sales and technical training staff, consolidation and expansion of
our credit management group, and increases in reserves for patent royalty claims
and accounts receivable.

         INTEREST AND OTHER INCOME. Other income decreased approximately
$673,000 in 1999 principally as a result of lower levels of cash available for
investment.

         NET INCOME. Net income increased 200.2% to $27.1 million, or $1.01 per
diluted share, in 1999 compared to net income of $9.0 million, or $0.32 per
diluted share, in 1998. Excluding the special charge in 1998 related to the
write-off of in process research and development costs, net income for 1998
would have been $22.7 million, or $0.82 per diluted share.

INFLATION/CURRENCY FLUCTUATION

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

LIQUIDITY AND CAPITAL RESOURCES

         At December 31, 2000, cash and equivalents totaled $27.1 million, which
represented an increase of approximately $7.9 million from December 31, 1999. On
June 1, 2000, the Company increased its unsecured revolving line of credit with
Bank One, Arizona, NA to $25 million. This credit facility is available through
June 1, 2002. Under the credit facility, the Company has the option to borrow at
a prime rate or adjusted LIBOR interest rate. Historically, the Company has used
the credit facility primarily to support international letters of credit to
suppliers. During the year ended December 31, 1999, approximately $15.7 million
of available cash was used in acquisitions closed in 1999 and to fund the
Cirilium joint venture and an additional $6.7 million was expended to repurchase
shares of the Company's Common Stock. In addition, approximately $44.3 million
was used to fund the subsequent acquisition of certain assets and liabilities of
Executone, which closed on January 1, 2000, offset by cash received from the
disposition of the manufacturing operations of Executone to Varian of $6.6
million. During the year ended December 31, 2000, the Company expended an
additional $2.9 million in acquisitions and joint ventures and an additional
$6.7 million to repurchase shares of the Company's Common Stock. In addition,
the Company expended approximately $11.0 million in the restructuring of the
Executone operations, including severance and related costs, the shut down and
consolidation of the Milford facility and the impairment of assets associated
with the restructuring. The remaining cash balances may be used to develop
Inter-Tel.NET and for potential acquisitions, strategic alliances, working
capital and general corporate purposes.

         Net cash provided by operating activities totaled $17.3 million for the
year ended December 31, 2000, compared to $33.4 million for the same period in
1999. Cash provided by operating activities in 2000 was primarily the result of
income from operations after considering the non-cash portion of restructuring
charges and the non-cash depreciation and amortization charges. Cash used in
operating assets and liabilities in 2000 was $29.0 million, compared to $16.1
million in 1999. At December 31, 2000, the Company had higher accounts
receivable, inventory, and prepaid expenses and other assets than at


                                       55
<PAGE>


December 31, 1999, attributable primarily to the Executone acquisition.
Correspondingly, at December 31, 2000 accounts payable and other current
liabilities increased primarily as a result of the assumption of liabilities of
Executone. The Company expects to expand sales through its direct sales office
and dealer networks, which is expected to require the expenditure of working
capital for increased accounts receivable and inventories.

         Net cash used in investing activities, primarily in the form of
acquisitions and capital and operating lease expenditures, offset by cash
received from the disposition of the manufacturing operations of Executone to
Varian of $6.6 million, totaled $5.9 million and $72.7 million for the years
ended December 31, 2000 and 1999, respectively. Cash used in acquisitions and
investments in joint ventures totaled approximately $2.9 million in 2000.
Capital expenditures totaled approximately $9.6 million for the same period. The
Company anticipates additional capital expenditures during 2001, principally
relating to expenditures for equipment and management information systems used
in operations, facilities expansion and acquisition activities.

         Net cash used in financing activities totaled $3.5 million during 2000
compared to $4.6 million in 1999. Net cash used in financing activities during
both periods was primarily attributable to the proceeds from the stock option
and purchase plans, offset by payments for cash dividends, long-term debt and
stock repurchases. The Company expended approximately $6.7 million and $6.7
million for stock repurchases during 2000 and 1999, respectively, funded by
existing cash balances during each period. During 2000, the Company reissued
treasury shares through stock option exercises and issuances, with the proceeds
received totaling less than the cost basis of the treasury stock reissued.
Accordingly, the difference was recorded as a reduction to retained earnings.
Net cash used for cash dividends totaled $1.1 million during 2000, which was
offset by cash provided by the exercise of stock options and stock issuances
pursuant to our Employee Stock Purchase Plan.

The Company offers to its customers lease financing and other services,
including its Totalease program, through its Inter-Tel Leasing, Inc. subsidiary.
The Company funds its Totalease program in part through the sale to financial
institutions of rental income streams under the leases. Resold lease rentals
totaling $198.4 million and $163.7 million remain unbilled at December 31, 2000
and December 31, 1999, respectively. The Company is obligated to repurchase such
income streams in the event of defaults by lease customers and, accordingly,
maintains reserves based on loss experience and past due accounts. Although the
Company to date has been able to resell the rental streams from leases under the
Totalease program profitably and on a substantially current basis, the timing
and profitability of lease resales could impact the Company's business and
operating results, particularly in an environment of fluctuating interest rates
and economic uncertainty. If the Company is required to repurchase rental
streams and realizes losses thereon in amounts exceeding its reserves, its
operating results will be adversely affected.

         The Company believes that its working capital and credit facilities,
together with cash generated from operations, will be sufficient to develop and
expand its business operations and the Inter-Tel.NET network, to finance
acquisitions of additional resellers of telephony products and other strategic
acquisitions or corporate alliances, and to provide adequate working capital for
the next twelve months. However, to the extent that additional funds are
required in the future to address working capital needs and to provide funding
for capital expenditures, expansion of the business or the Inter-Tel.NET network
or additional acquisitions, the Company will seek additional financing. There
can be no assurance that additional financing will be available when required or
on acceptable terms.

RESTRUCTURING CHARGES

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


                                       56
<PAGE>


During the first quarter of 2000, the Executone division recognized losses of
approximately $2.5 million ($1.5 million after taxes, or $.06 per diluted share)
excluding the charge for in-process research and development. During the second
quarter of 2000, the Executone division continued to experience significant
losses. The Executone division recognized pre-tax losses during the second
quarter and six months ended June 30, 2000 of $3.4 million, or $2.1 million
after-tax ($.08 per diluted share) and $5.9 million, or $3.6 million after-tax
($.14 per diluted share), respectively. As a result of these losses, together
with other considerations noted below, the Company decided to close the primary
Executone facility in Milford, Connecticut and to recognize a restructuring
charge related to the Executone operations. At the time the original purchase
was recorded, the Company had not anticipated closing the Milford facility.
After incurring higher than anticipated losses from Executone operations and
after a deterioration in the Executone business, including loss of dealers and
customers, delays in introduction and acceptance of new products, the Company's
management decided it was in the best interests of the Company and its
shareholders to close the Milford facility and consolidate its operations into
the Company's metro-Phoenix, Arizona facilities.

The restructuring of the Executone operations included severance and related
costs, the shut down and consolidation of the Milford facility and the
impairment of assets associated with the restructuring. Exit costs associated
with the closure of the Milford facility also included liabilities for building,
furniture and equipment lease, and other contractual obligations. The Company is
liable for the lease on the Milford buildings through January 2005. Various
furniture leases run concurrently through March 2002. Other capital leases for
computer and other equipment terminate on varying dates through September 2002.
To date, the Company has entered into sublease agreements with third parties to
sublease portions of the facility and equipment. The reserve for lease and other
contractual obligations is identified in the table below.

The following tables summarize details of the restructuring charge in connection
with the Executone acquisition:

<TABLE>
<CAPTION>
--------------------------------------------- ------------- ---------------- ------------ -----------------
                                                                                              RESERVE
                                                 CASH/        RESTRUCTURING                   BALANCE
                     DESCRIPTION                NON-CASH         CHARGE        ACTIVITY     AT 12/31/00
--------------------------------------------- ------------- ---------------- ------------ -----------------
                                                                   (In thousands)
--------------------------------------------- ------------- ---------------- ------------ -----------------
<S>                                             <C>                <C>            <C>                <C>
--------------------------------------------- ------------- ---------------- ------------ -----------------
PERSONNEL COSTS:
--------------------------------------------- ------------- ---------------- ------------ -----------------
  Severance and termination costs                 Cash            $  (1,583)     $  1,558        $     (25)
--------------------------------------------- ------------- ---------------- ------------ -----------------
  Other Plant closure costs                       Cash                 (230)           30             (200)
--------------------------------------------- ------------- ---------------- ------------ -----------------

--------------------------------------------- ------------- ---------------- ------------ -----------------
LEASE TERMINATION AND OTHER CONTRACTUAL
OBLIGATIONS (NET OF ANTICIPATED RECOVERY):
--------------------------------------------- ------------- ---------------- ------------ -----------------
  Building and equipment leases                   Cash               (7,444)        1,348           (6,096)
--------------------------------------------- ------------- ---------------- ------------ -----------------
  Other contractual obligations                   Cash               (1,700)           --           (1,700)
--------------------------------------------- ------------- ---------------- ------------ -----------------

--------------------------------------------- ------------- ---------------- ------------ -----------------
IMPAIRMENT OF ASSETS:
--------------------------------------------- ------------- ---------------- ------------ -----------------
  Inventories                                   Non-Cash             (3,454)        1,376           (2,078)
--------------------------------------------- ------------- ---------------- ------------ -----------------
  Prepaid inventory and other expenses          Non-Cash             (2,485)        2,485                --
--------------------------------------------- ------------- ---------------- ------------ -----------------
  Accounts receivable                           Non-Cash             (1,685)          521           (1,164)
--------------------------------------------- ------------- ---------------- ------------ -----------------
  Fixed assets                                  Non-Cash             (3,151)        2,942             (209)
--------------------------------------------- ------------- ---------------- ------------ -----------------
  Net intangible assets                         Non-Cash            (29,184)       29,184                --
--------------------------------------------- ------------- ---------------- ------------ -----------------

--------------------------------------------- ------------- ---------------- ------------ -----------------
TOTAL                                                             $ (50,916)     $ 39,444        $ (11,472)
--------------------------------------------- ------------- ---------------- ------------ -----------------
</TABLE>

Included in the total Executone restructuring costs of $50.9 million is a $43.3
million restructuring charge for exit costs and asset impairment, and $7.6
million associated with the impairment of inventories, which has accordingly
been recorded as additional costs of sales.


                                       57
<PAGE>


INTER-TEL.NET. During the second quarter of 2000, Inter-Tel recorded a pre-tax
charge associated with Inter-Tel.NET operations of $2.0 million ($1.2 million
after-tax), related to the write-down to net realizable value of the Vocal'Net
servers in the division's IP network and lease termination costs of redundant
facilities. Inter-Tel.NET is in the process of adding new technology to be
implemented throughout the Inter-Tel.NET network. The changes to the
Inter-Tel.NET network are designed to improve the voice quality, design and
interoperability of the network, and to allow Inter-Tel to better position
itself to sell services to its enterprise customers.

The pre-tax charge associated with Inter-Tel.NET is related to the write-down to
net realizable value of the Vocal'Net servers in the division's IP network, and
lease termination costs of certain redundant facilities. The following table
summarizes the details of the write-down and activity in the reserve balances
from the date of the write-down through December 31, 2000:

<TABLE>
<CAPTION>
--------------------------------------- ------------- ---------------- -------------- -------------------
                                                                                           RESERVE
                                            CASH/        RESTRUCTURING                     BALANCE
                DESCRIPTION                NON-CASH         CHARGE        ACTIVITY       AT 12/31/00
--------------------------------------- ------------- ---------------- -------------- -------------------
                                                               (In thousands)
--------------------------------------- ------------- ---------------- -------------- -------------------
<S>                                         <C>              <C>              <C>                  <C>
LEASE TERMINATION OBLIGATIONS (NET
OF ANTICIPATED RECOVERY):
--------------------------------------- ------------- ---------------- -------------- -------------------
  Building leases                                Cash        $   (144)        $    87              $ (57)
--------------------------------------- ------------- ---------------- -------------- -------------------

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

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

CIRILIUM JOINT VENTURE. In December 1999, Inter-Tel entered into an agreement
with Hypercom Corporation to jointly form Cirilium. Cirilium comprised parts of
Hypercom's data and Inter-Tel's packet telephony experience, products and
services, including Inter-Tel's Vocal'Net gateway products and technology.
Inter-Tel's 1999 investment in Cirilium noted above included cash of $6.5
million, and net assets of $1.2 million. The Company accounted for the Cirilium
losses using the equity method of accounting through September 2000. In
September 2000, the Company wrote-off its investment in Cirilium. The Company
retains an ownership interest of 19.9% in Cirilium, and therefore no longer uses
the equity method of accounting.

NEW PRONOUNCEMENTS.

     In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, (FAS 133), "Accounting for Derivative
Instruments and Hedging Activities." This statement provides a comprehensive and
consistent standard for the recognition and measurement of derivatives and
hedging activities. In July 1999, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 137, which deferred the
effective date of FAS 133 for one year. In June 2000, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 138, (FAS
138), "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - an amendment to FASB Statement No. 133." This statement amended
certain provisions of FAS 133. Accordingly, the Company will adopt FAS 133, as
amended by FAS 138, effective the first quarter of fiscal 2001. Management is
evaluating what effect, if any, this statement may have on the Company's
financial statements.

     In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities." This
statement revises the accounting standards for securitizations and other
transfers of financial assets and collateral and requires certain disclosures.
This statement is effective for transfers and servicing of financial assets
occurring after March 31, 2001. Management is evaluating what effect, if any,
this statement may have on the company's financial statements.


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