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

                                   ----------

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

FOR THE FISCAL YEAR ENDED                                COMMISSION FILE NUMBER:
    DECEMBER 31, 2002                                            0-10211

                             INTER-TEL, INCORPORATED

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

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

                                   ----------

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

                                  Common Stock
               (24,925,633 shares outstanding as of March 7, 2003)

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

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

     Indicate by check mark whether the Registrant is an  accelerated  filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X].

The  aggregate  market value of the voting stock held by  non-affiliates  of the
registrant, based upon the last reported sales price of Inter-Tel's Common Stock
reported on the Nasdaq National Market System on June 30, 2002 was approximately
$319.6  million.  Shares of Common  Stock  held by each  executive  officer  and
director have been excluded in that such persons may be deemed to be affiliates.

Items 10 (as to  Directors),  11 and 12 of Part  III  incorporate  by  reference
information  from the Registrant's  Proxy Statement  relating to its 2003 Annual
Meeting of Shareholders.
<PAGE>
                             INTER-TEL, INCORPORATED
                          2002 FORM 10-K ANNUAL REPORT

                                TABLE OF CONTENTS


                                     PART I

                                                                            Page
                                                                            ----

Item 1    Business                                                             3
Item 2    Properties                                                          23
Item 3    Legal Proceedings                                                   24
Item 4    Submission of Matters to a Vote of Security Holders                 24

                                     PART II

Item 5    Market for the Registrant's Common Stock
            and Related Shareholder Matters                                   25
Item 6    Selected Financial Data                                             26
Item 7    Management's Discussion and Analysis of Financial Condition
            and Results of Operations                                         28
Item 7A   Quantitative and Qualitative Disclosures About Market Risk          40
Item 8    Financial Statements and Supplementary Data                         41
Item 9    Changes in and Disagreements with Accountants on Accounting
            and Financial Disclosure                                          41

                                    PART III

Item 10   Directors and Executive Officers of the Registrant                  42
Item 11   Executive Compensation                                              42
Item 12   Security Ownership of Certain Beneficial Owners and Management      42
Item 13   Certain Relationships and Related Transactions                      42
Item 14   Controls and Procedures                                             42

                                     PART IV

Item 15   Exhibits, Financial Statement Schedules and Reports on Form 8-K     43

                                       2
<PAGE>
                                     PART I

ITEM 1. BUSINESS

THE COMPANY

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

     Inter-Tel, incorporated in 1969, is a single point of contact, full service
provider of converged voice and data business communications systems, voice mail
systems and  networking  applications.  We market and sell voice  processing and
unified messaging  software,  call accounting  software,  Internet Protocol (IP)
telephony software, computer-telephone integration (CTI) applications, local and
long distance calling services, and other communications  services. Our products
and services  include the AXXESS by Inter-Tel,  ECLIPSE2 by Inter-Tel and Encore
by Inter-Tel business  communication  systems,  with integrated voice processing
and  unified  messaging  systems,  IP  telephony  voice  and data  routers,  and
e-commerce software.  We also provide maintenance,  leasing and support services
for  our  products.  Our  customers  include  business  enterprises,  government
agencies and non-profit organizations.  Our common stock is quoted on the Nasdaq
National Market System under the symbol "INTL."

     We have developed a distribution  network of direct sales offices,  dealers
and value added  resellers  (VARs),  which sell our  products  to  organizations
throughout   the  United  States  and   internationally,   primarily   targeting
small-to-medium enterprises, service organizations and governmental agencies. As
of December 31, 2002, we had  fifty-two  (52) direct sales offices in the United
States,  one (1) in Japan,  and a network of hundreds of dealers and VARs around
the  world  that  purchase  directly  from  us.  We also  maintain  a  wholesale
distribution office in the United Kingdom that supplies  Inter-Tel's dealers and
distributors  throughout  the UK and parts of Europe.  In December 2002, we also
acquired Swan Solutions  Limited,  a research and development and software sales
office in the United Kingdom.

PRODUCTS AND SERVICES

     Inter-Tel is focused on the enterprise  telecommunications market and has a
track  record of  technological  innovation  and  leadership.  Inter-Tel  serves
business enterprise customers, such as manufacturers,  healthcare providers, the
automotive industry,  financial  institutions,  government agencies,  non-profit
organizations and other service organizations with value-driven  solutions.  Our
core products  include  converged  business  communications  systems  supporting
scalable networked installations,  IP telephony products and services,  computer
telephony applications, unified messaging and voice processing software. We also
offer a complete line of managed services,  including custom development,  local
and long distance calling services,  network design and implementation services,
maintenance  services,  leasing and support  services.  In  addition,  we resell
peripheral data and telecommunications products.

STANDARDS-BASED ARCHITECTURE

     Inter-Tel  intends to  continue  developing  standards-based  IP  telephony
solutions.  In the first quarter of 2003,  Inter-Tel introduced support of Media
Gateway  Control  Protocol (MGCP) and Session  Initiation  Protocol (SIP) in our
Axxess and Eclipse communication  platforms.  SIP and MGCP are industry-standard
protocols for transmitting voice over IP networks.  Through our support of these
two standard  protocols,  the Axxess and Eclipse products can interoperate  with
other industry-standard  devices such as SIP and MGCP gateways for converting IP
voice calls to standard  telephone  lines, and for using standard SIP telephones
as

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extension  numbers  on the  system.  Support  of SIP also  allows our Axxess and
Eclipse systems to  interoperate  with public SIP networks and services like MSN
Passport  and to use  MS-Messenger  as an  extension  number on the system.  Our
future  product  strategy is focused on continuing to provide  support for these
and other industry-standard interfaces.

BUSINESS COMMUNICATION APPLICATIONS FOR THE SMALL-TO-MEDIUM ENTERPRISE

     As an integral part of our Managed Services  offerings,  Inter-Tel provides
an  extensive  lineup  of  applications  designed  for  business  use,  enhanced
productivity  and  operational   performance.   Our  portfolio  of  applications
encompasses:  Converged Voice and Data Tools,  Customer  Relationship  Tools and
Mobility Tools.  Inter-Tel's  applications can automate repetitive tasks, enable
call handling tasks from a personal computer (PC),  generate historical and real
time call statistics, enable intelligent call routing, manage communications via
Web browser or Wireless  Application  Protocol  (WAP) device and more.  Specific
applications are highlighted in additional detail below.

     CONVERGED VOICE AND DATA TOOLS

     Inter-Tel's applications include seamless integration of multiple locations
in  one  transparent  network,  which  creates  the  virtual  enterprise  of  an
organization.  Inter-Tel's  solutions for combined voice and data  communication
systems or, "converged" solutions focus on fully-featured applications that link
businesses with applications  through our unified computer  telephony (CT) link.
Since the needs of each individual  end-user differ,  Inter-Tel supports various
types of endpoints for receiving,  initiating and managing your calls. Inter-Tel
designs digital telephones and IP telephones for office  applications,  wireless
phones and  soft-phones  for  customers who are mobile inside and outside of the
office, and touch-to-talk  e-commerce  software for customers wishing to place a
voice  call  from a web  site.  Inter-Tel's  IP  applications  integrate  robust
features  and  functionality  such  as  call  center  applications  that  enable
businesses to implement distributed networking across multiple locations,  agent
desktop   applications,   intelligent  routing,   and  productivity   management
applications  designed  for  business  department  managers.  Additionally,  our
customers  can  benefit  from  alternatives  to  traditional,   more  expensive,
point-to-point T-1 lines by adding Inter-Tel's IP communications applications to
their systems.

     Our converged voice and data  applications,  such as desktop  solutions and
call center  applications using Automatic Call Distribution (ACD), can also help
expand an enterprise's  capabilities.  Advanced software  applications,  such as
Unified Messaging,  Unified Communicator and networking  capabilities,  can help
increase productivity and workflow efficiency.  Alternatively, our customers can
add a human touch to their e-business by deploying ClearConnect Talk to Agent.

     Inter-Tel's  Open  Architecture  Interface  (OAI) and support for  industry
standards-based  connectivity,  such as Computer Software Telephony  Application
(CSTA),  Telephony  Applications  Protocol  Interface (TAPI) and  Intel/Dialogic
CT-Connect  allow our customers to integrate with their  existing  applications,
such as  Customer  Relationship  Management  (CRM),  Hotel  Property  Management
Systems (PMS), Personal Information  Management (PIM) software such as Microsoft
Outlook and more.

     CUSTOMER RELATIONSHIP TOOLS

     Inter-Tel's  customer  relationship  tools help our customers  maintain and
improve their  business  relationships.  Our solutions help  businesses  provide
user-friendly  Web  interfaces,  expedite call routing to the correct  person or
department,  enable 24x7 access to products and  services  and improve  customer
care.

     MOBILITY TOOLS

     Inter-Tel  offers  several  solutions  for  organizations   with  traveling
employees or  enterprises  with multiple  facilities and mobile  resources.  Our
mobility  tools  connect  mobile  and  remote  professionals  to  help  increase
productivity  and  streamline   resources.   For  example,  one  of  Inter-Tel's
applications allows call center managers on the move or working remotely to stay
connected  to  their  call  center.   Additionally,   our  Unified  Communicator
application  gives users the ability to manage their address  book,  monitor the
status  of  their  workgroup  and  their  call  routing  through  multiple  user
interfaces, including WAP-enabled cell phones, Web browsers and handheld PDAs.

                                       4
<PAGE>
CONVERGED COMMUNICATIONS PLATFORMS

     AXXESS & ECLIPSE CONVERGED COMMUNICATIONS SYSTEMS

     Designed for small to medium enterprises,  the Axxess and Eclipse converged
systems provide tightly integrated voice processing,  IP telephony functionality
and  transparent  networking  throughout  an  organization.  With  an  Inter-Tel
converged  system,  our  customers  can network up to  sixty-three  (63) systems
together with full-feature  transparency,  allowing  customers to choose between
traditional T-1 lines, frame relay, managed bandwidth or the Internet to network
sites.  Our  commercially  available  systems support up to 40,000 ports,  which
enables flexible growth options.

     The  Axxess  and  Eclipse  converged  systems  differ  in  terms  of  their
appearance  and, to a lesser  extent,  functionality,  but are based on the same
architecture.  They incorporate open interfaces, employ the standard programming
languages C++ and JAVA, and are built on a computer telephony  interface,  which
enables the integration of outside  applications.  Our converged systems combine
IP, digital,  analog and wireless into a single platform--giving our customers a
choice of  technologies  based on their  organizations'  needs.  The distributed
architecture  enables the connectivity of several phones in an office,  hundreds
of phones in a building or on a campus, remote and telecommuting  associates, or
even geographically-dispersed offices.

     Axxess  and  Eclipse  converged  systems  are  based  on open  architecture
interfaces and standard  protocols.  The open  architecture  allows for seamless
integration  of CT  applications,  development  and  customization.  The modular
platform can be tailored around the way an  organization  does business with the
flexibility to modify the solution with growth or change.

     Tightly  integrated with the Axxess and Eclipse  converged  platforms,  our
suite of IP, software and digital endpoints  deliver  exceptional voice quality,
powerful  features  and  intuitive   interfaces.   Whether  our  customers  have
associates onsite,  mobile or working from remote locations,  our endpoints help
them to perform their functions with continuity.

     IP TELEPHONY

     Inter-Tel's  platforms unify the varying technologies our customers deploy.
With  analog,  digital,  wireless  and Voice over IP (VoIP)  built into the same
platform,  our  customers  may  choose  from a variety of  solutions--at  a pace
suitable  for  their   organizations.   Whether  our  customers  want  to  blend
traditional  and IP solutions or deploy full IP  solutions,  Inter-Tel  offers a
collection of  applications  and  endpoints  that enable them to benefit from IP
telephony.

     We believe that seamlessly  connecting  multiple phone systems  together is
cost-effective for our customers.  Our Axxess and Eclipse converged systems were
designed  around  distributed,  open  architectures  for maximum  efficiency and
reliability.  All advanced  features of Axxess and Eclipse systems,  such as ACD
hunt groups, call center applications,  paging zones, centralized attendants and
tightly  integrated  voice  mail  remain in place even when an  organization  is
networking over IP.

     By using IP-based phones and data networks, our customers can connect their
local employees,  remote staff and satellite offices as if they were all located
in a single site. Our IP phones enable users anywhere to have access to advanced
features,  such as  transferring  calls,  conferencing,  accessing  voice  mail,
record-a-call  and  more.  Even  call  center  agents  working  off-site  do not
sacrifice functionality.  They can be members of ACD hunt groups or call routing
patterns,  and  supervisors  can monitor their calls as if they were in the same
office.  Additionally,  our IP phones  eliminate  the need for a separate  phone
system in geographically dispersed locations.

     IP NETWORKING

     Inter-Tel's  IP Resource  Card (IPRC) and IP  Networking  Module  allow our
customers  to  transparently  network  their  locations  over IP or Frame  Relay
networks.  The  IPRC  is  a  multipurpose  card  for  IP-based   communications.
Controlled through software,  the IPRC can be used to network multiple locations
without the need for a separate  gateway,  to connect IP endpoints or to connect
remote IP gateways.

                                       5
<PAGE>
     Inter-Tel's  InterPrise  gateways help connect remote office  locations and
facilities into a single, cost-effective IP network. InterPrise gateways deliver
reliable, high-quality voice and data communications to small branch offices, as
well  as  main  corporate  facilities,  eliminating  costly  intra-company  long
distance telephone charges.

     IP-BASED ENDPOINTS

     Inter-Tel's  IP PhonePlus  and IP SoftPhone  enable remote  associates  and
satellite offices to seamlessly connect to an organization's data network. These
IP phones fully integrate with the Axxess and Eclipse  Converged  Communications
Systems so users have access to features such as ACD hunt groups and voice mail.

     SOFTWARE-BASED ENDPOINTS

     Inter-Tel offers several  software-based  endpoint  solutions that increase
the productivity  and enhance the  communications  of mobile and  remotely-based
employees.  Whether our customers are deploying IP or traditional telephony, our
soft phones give users control of the features and  functionality  of Axxess and
Eclipse  on  desktop  PCs or  laptops.  Users can  initiate,  answer,  transfer,
conference and forward calls and more--all  with the click of a mouse.  Advanced
applications,  such as  Information  Control  Center,  allow  users  to view the
real-time  status of  associates  and enable them to process  calls  quickly via
touch screen, mouse or keyboard.

     DIGITAL ENDPOINTS

     To complement our Axxess and Eclipse converged systems,  Inter-Tel offers a
variety of fully-featured  digital endpoints to suit most organizations'  needs.
Our digital phones deliver exceptional voice quality,  advanced digital features
and a range of programmable  keys for high-speed,  high-quality call processing.
The  user-friendly,   liquid  crystal  displays  (LCDs),   with  up  to  6-by-16
characters,  lead users through  system  features and  capabilities--serving  as
built-in  user  guides.  Menu-driven,  one-touch  "soft keys" reduce the time it
takes to initiate  and receive  calls,  retrieve  messages,  leave  messages and
access features.

SPECIFIC CONVERGED APPLICATIONS

     VOICE PROCESSING

     Integrated with the Axxess and Eclipse Converged Communications  Platforms,
our Voice Processing  Software provides an automated  attendant to guide callers
to the person or  information  they need.  This  "electronic  employee"  answers
incoming calls,  transfers calls,  records  messages,  screens calls and returns
calls  using  caller  identification  software.  The Voice  Processing  Software
provides Call Routing  Announcements,  voice mail,  the ability to record a call
and various call handling  functions.  Additionally,  voice mail messages can be
retrieved  using the Voice  Processing  Software  from any location in the world
using  a  touchtone   phone.   Inter-Tel   offers   Voice   Processing   in  two
varieties--embedded in the PBX and in an external server.

     UNIFIED MESSAGING

     Designed  to  run  in  a  Microsoft  Windows(R)  environment,  our  Unified
Messaging  Software  combines  e-mail,  voice  mail and fax into a single,  mail
management program.  Depending on the level of integration our customers choose,
messages are either converted to standard file formats, or seamlessly integrated
so that  users  can view,  access  and  process  messages  through a variety  of
devices,  including Microsoft's Exchange messaging application,  Lotus Notes and
cc:Mail and Novell's GroupWise, as well as other Internet mail APPLICATIONS.

     UNIFIED COMMUNICATOR

     Inter-Tel's  Unified  Communicator  provides our customers  with control of
their endpoints through multiple user interfaces  including speech  recognition,
touchtone,  PC Web browser and WAP devices.  Unified Communicator provides users
with a powerful set of tools designed to enhance the control and  flexibility of
the desktop environment.  Users can control how and where they can be reached by
routing calls to their current  location,  or by forwarding calls to a specified
number.  They can access their Personal  Address Book and the System  Directory,
control availability and location, check availability of fellow

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associates  and initiate  calls from a Web browser or  WAP-enabled  device.  Our
mobile customers can manage communications  through speech recognition or with a
touchtone phone if a Web browser is unavailable.

     APPLICATIONS PLATFORM: IVR

     Inter-Tel's Applications Platform is a highly scaleable,  flexible platform
that enables the  customization of applications  according to the specific needs
of an  organization.  It  includes  a  signaling  and  services  engine,  plus a
graphical service creation environment.  Inter-Tel's  Interactive Voice Response
(IVR) integrates  computer,  telephony,  Automatic Speech  Recognition (ASR) and
Text-To-Speech (TTS) capabilities, and allows for customization for almost every
type of environment.  Inter-Tel's IVR platform  includes a starter pack with two
IVR  applications  for  general  business  purposes,  and  can  be  expanded  or
customized.  Our customers  have the choice of having their custom  applications
developed by an authorized  Inter-Tel  reseller or engaging  Inter-Tel's  Custom
Solutions group.

     Interactive Voice Response can be deployed as a front-end to Automatic Call
Distribution (ACD) systems, which can ask questions that help routing and enable
more  intelligent  and informed call  processing.  By using IVRs as  front-ends,
recordings can be used for repetitive  messages,  and  transactions  can even be
performed without involving customer service personnel.

     CALL CENTER SUITE

     Call Center Suite is a collection of modular CT software  applications that
help  businesses  optimize  call center and  workgroup  performance.  Whether an
organization  has a department  workgroup  environment with extensions or a call
center with agents at a single or multiple locations, Call Center Suite offers a
wide range of solutions.  Combined with a flexible infrastructure,  the suite of
applications  encompass  Management Tools for reporting and activity monitoring,
plus Agent and Workgroup Tools to aid in increasing  productivity and delivering
consistent customer service.

     INFORMATION CONTROL CENTER (FORMERLY ATTENDANT CONSOLE)

     Inter-Tel's   Information  Control  Center,   formerly  Attendant  Console,
provides  attendants  and  employees  with  knowledge  of station and hunt group
status,  such as  Do-Not-Disturb  messages,  forwarding  information and busy or
available status.  The unique  user-friendly  interface allows users to view the
real-time status of associates, enabling them to process calls quickly via touch
screen, mouse or keyboard.

     CLEARCONNECT TALK TO AGENT

     ClearConnect  Talk to Agent is a Voice  over IP  application  that  enables
customers to conduct voice conversations with agents or representatives over the
Internet, while connected to an enterprise's Web site. Within seconds, a call is
initiated  to the  business  for  immediate  sales,  service and  support.  With
ClearConnect Talk to Agent,  because the calls are placed over the Internet,  an
enterprise can reduce its toll-free telephone expenses. Additionally,  employees
also have the ability to "push" Web pages to  customers  to present  products or
services  they  may  have  missed  on  their  Web  site  for  enhanced   revenue
opportunities.

     COMPUTER TELEPHONY (CT) ENABLERS

     Inter-Tel's CT Enablers,  Open  Architecture  Interface (OAI), TAPI Service
Provider,  Intel/Dialogic  CT-Connect interface and Computer Supported Telephony
Application  (CSTA)  Service  Provider,   allow  for  smooth  integrations  with
"off-the-shelf",   shrink-wrapped  applications  or  custom  developed  software
packages that help  organizations  increase  customer  satisfaction and employee
productivity.

     Open  Architecture   Interfaces  allow  our  converged  systems  to  easily
integrate with  off-the-shelf  or custom  software  applications.  There are two
types  of  Open  Architecture  Interfaces:  Desktop  OAI  and  System  OAI.  The
flexibility  of  our  open  platform  allows  for  seamless  integration  of  CT
applications,  customization  and  development,  which  protect  our  customers'
investments as technology evolves and their needs change.

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<PAGE>
     Inter-Tel's  support  for  industry  standards,  such  as  CSTA,  TAPI  and
Intel/Dialogic   CT-Connect  allow  our  Converged   Communications  Systems  to
integrate  with  Customer   Relationship   Management  (CRM)  database  software
applications  in order to  maximize  telephony  features  such as  screen  pops,
outbound dialing, etc.

     SMALL BUSINESS COMMUNICATIONS SYSTEMS

     INTER-TEL ENCORE.  Inter-Tel expands its  communications  systems offerings
with Encore, a business  communications system that addresses the small business
and residential market.  Encore provides small organizations and residences with
features and benefits associated with more expensive PBX systems.  Encore can be
configured  from two (2) trunks and six (6)  stations up to eight (8) trunks and
eighteen (18) stations,  with or without an optional  integrated  voice mail and
automated  attendant.  In  addition,  Encore can be  programmed  and  maintained
remotely, minimizing the costs associated with on-site technician visits.

     OTHER SERVICES AND PRODUCTS

     Inter-Tel offers a broad range of products and a complete and comprehensive
Managed Services program that incorporates advanced technologies while providing
customers a single source  provider to  cost-effectively  fulfill their business
communications  needs.  The Inter-Tel  Managed  Services program offers business
solutions for professional services, provisioning and facilities management, and
custom development services.

     We couple  this  solution-oriented  approach  with a high level of customer
service and support and a commitment to quality  throughout our operations.  Our
business   communications  systems  are  integrated  with  our  fully-integrated
computer-telephone  applications and include voice mail, auto attendant, unified
messaging, call center applications,  Interactive Voice Response (IVR), wireless
applications,  Automatic Call  Distribution  (ACD), long distance and networking
services, together with a variety of other communications applications.

     Because of the modular design of our systems and the high level of software
content  in  our  products,   customers  can  readily   increase  the  size  and
functionality  of their  systems as their needs  change by adding new  services,
software and hardware  applications,  or by upgrading to new systems or advanced
versions of their existing systems.

     We believe that our customers  prefer to purchase  business  communications
systems  and  services  from  a  single-source   because  of  the   convenience,
consistency of service, ease of upgrade,  availability of financing alternatives
and  confidence  in the  performance  of  integrated  systems and  services  all
incorporated into a total managed services solution package.

     NETWORK, LOCAL AND LONG DISTANCE SERVICES.

     Through our  subsidiaries,  Inter-Tel  NetSolutions  and  Network  Services
Agency, we resell a variety of telecommunications  services,  including domestic
and international calling services, calling card services, 800 calling services,
switched  and  dedicated  services,  Internet,  frame-relay  and voice and video
conferencing,  disaster  recovery  solutions and customized  billing.  We resell
these services through our agreements with major U.S. long distance  carriers or
regional Bell System operating companies (RBOCs).

     We support telecommunications  applications such as T-1 access for incoming
toll-free  traffic at call  centers,  switched  long  distance  and frame  relay
networks  linking  together  multiple  offices of an  enterprise.  Customers who
desire the  convenience  of acquiring  long distance and other  related  calling
services  through  the same  vendor  they  use to  purchase  separate  telephony
equipment and services can do so with Inter-Tel.

     NETWORKING TECHNOLOGIES INTEGRATION.

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

                                       8
<PAGE>
     By forming  relationships with major manufacturers of hardware and software
technologies,  Inter-Tel  provides  the  routers,  ATM,  LAN and  WAN  switches,
wire-less  WAN  connections,  file servers,  intelligent  hubs and other devices
required for the  customer's  intranet or for access to the  Internet.  We offer
pre-sale  design  support,   project   coordination  for   implementation,   and
installation support on our full line of server-based  telephony products and IP
telephony products and services.

     CUSTOM PROFESSIONAL SERVICES AND SOLUTIONS

     Inter-Tel  Custom  Solutions  (ICS) is an Inter-Tel  professional  services
group that delivers to our customers a broad range of turnkey  custom IVR and CT
solutions built with our  industry-leading  software and hardware products.  ICS
can also  customize  CT  applications  and extend the  capabilities  of existing
Inter-Tel  converged platforms and Call Center Suite  installations,  as well as
assist in the  integration  of  third-party  hardware and  software  that may be
required to deliver complete call center telephony solutions.

     ICS is also a resource  for  pre-sales  help,  specifying  and  selling the
Inter-Tel  Applications  Platform,  or IVR product line, the foundation on which
both  ICS  and  our  channel   partners  can  deploy   flexible  and  customized
speech-enabled  IVR solutions for all market sectors and business  applications.
Additionally,  the  ICS  team  provides  support  and  coordination  of  on-site
installations and/or remote installation support, as well as comprehensive sales
engineering and sales support services for all of the above,  including customer
calls, visits and videoconferences, product demonstrations, request for proposal
and requirements analysis, functional specification development,  quotations and
full sales cycle support.

     NATIONAL, GOVERNMENT AND EDUCATION ACCOUNTS

     Inter-Tel's  National,  Government,  and Education Accounts Division (NGEA)
services the nation's largest commercial  companies;  the Federal Government and
its  agencies;   state,   municipal  and  local  governments;   and  educational
institutions  throughout  the  United  States.  NGEA  offers  the  full  line of
Inter-Tel  converged  communications  solutions  to its  customers,  as  well as
consulting, financial planning and assistance.

     NGEA  support  programs,  including  the Special  Handling  (R) Program and
Managed  Services  Rental Program,  are  comprehensive  and flexible,  providing
companies,  government  agencies,  and  educational  bodies  superior  technical
solutions,  with a level of support and care that allows them to  concentrate on
building future  infrastructure  needs,  while supporting  previously  installed
products.

     PERIPHERAL PRODUCTS

     Through   our   CommSource   Division,    Inter-Tel   distributes   leading
telecommunications  peripheral products,  applications and services developed by
third  parties  to our  direct  sales  offices,  dealers  and  VARs.  We offer a
selection of products including the following:  analog and cordless  telephones;
audio-conferencing,    bridges   and   accessories;    call   accounting;   call
logging/recording;   CT  Products;   data  equipment;   headsets;   installation
equipment;  message-on-hold;  paging  equipment;  power  protection  and backup;
premise  wireless  and  videoconferencing,  systems and other  accessories.  Our
CommSource  division  sells and  distributes  products  that we have endorsed as
leading   communications   peripherals  widely  deployed  within   organizations
worldwide.  Many of these  products and services  interface  with our  telephone
systems.

SALES AND DISTRIBUTION

     We have developed a distribution  network of direct sales offices,  dealers
and VARs. As of December 31, 2002,  Inter-Tel  had  fifty-two  (52) direct sales
offices in the United  States,  one (1) in Japan,  and a network of  hundreds of
dealers  that  purchase  systems  directly  from us.  We  maintain  a  wholesale
distribution office in the UK that supplies and supports Inter-Tel's dealers and
distributors throughout the UK and other parts of Europe, and we have dealers in
Japan and Mexico.

DISTRIBUTION CHANNELS

     Our success depends in part upon the strength of our distribution  channels
and our ability to maintain close access to our end user  customers  through our
distribution  channels.  In recent periods, we have sought to improve our access
to end users through strategic  acquisitions of resellers of telephony  products
and  services,  some of which are  located in markets in which we have  existing
direct sales offices. As of

                                       9
<PAGE>
December 31, 2002,  Inter-Tel's  direct sales office  personnel and national and
government  accounts  personnel  consisted of 1,052 and forty-nine (49) persons,
respectively. Sales through our direct sales offices and government and national
accounts  group,  as a percentage  of total sales,  decreased  from 58.2% of net
sales in 2001 to 56.8% of net sales in 2002,  excluding  sales from our  DataNet
division  purchased in our McLeod  acquisition in 2002,  which generated 3.5% of
consolidated  sales  in 2002.  Sales to  distributors,  dealers,  and VARs  have
decreased  from 22.8% of net sales in 2001 to 22.1% of net sales in 2002.  Sales
through our long distance and network  services  operations  have increased from
7.7% of net sales in 2001 to 9.6% of net sales in 2002.

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

     We offer additional  incentives,  programs and support resources to dealers
that agree to sell  Inter-Tel  systems and solutions on an exclusive  basis.  We
launched an exclusive  business  partner  program during 2001.  This program was
designed to reward dealers who sell only Inter-Tel products to all new prospects
and  aggressively  seek to upgrade their  non-Inter-Tel  customer base. For this
commitment  from the dealers,  we have offered our expertise to help them manage
their  business.  This  includes  operational  business  reviews,  shared  human
resource forms and policies,  additional sales,  marketing and training support,
enhanced  co-op  benefits as well as special  sales  promotions  and awards.  In
addition,  we allow  exclusive  dealers  to use our  branch  sales  offices  and
demonstration  rooms to help them close  business.  We believe that this program
offers us an opportunity to expand our wholesale channel of distribution.

LEASING SERVICES

     Inter-Tel offers its Total Solutions  (formerly  TotaLease) program through
our subsidiary,  Inter-Tel Leasing, Inc. The Total Solutions program enables end
users to acquire a full range of telephony systems and applications designed and
manufactured  by Inter-Tel,  as well as maintenance and support  services.  This
program  provides a total  system  financing  package to the  customer  at a set
monthly cost, with system expansion available for an additional fee. The typical
Total  Solutions  contract  has a term of sixty  (60)  months,  and  allows  the
customer  to renew the  contract at a  specified  price for up to an  additional
thirty-six (36) months.

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

INTERNATIONAL SALES

     We  currently  have  dealers in the UK,  parts of  Europe,  Japan and Latin
America,  and we are  currently  working  to  expand  our  international  dealer
network.  International sales, which include business communications systems and
IP telephony and peripheral products,  accounted for approximately 2.7% and 2.6%
of our net sales in 2002 and 2001,  respectively.  In order to sell our products
to   customers   in  other   countries,   Inter-Tel   must   comply  with  local
telecommunications  standards.  Our AXXESS and ECLIPSE2 systems and IP telephony
products can be modified using our software to facilitate  compliance with these
local  regulations.  In  addition,  the AXXESS and  ECLIPSE2  systems  have been
designed to support  multi-lingual  functionality,  and both  currently  support
American English, British English, Japanese and Spanish languages.

CUSTOMER SERVICE AND SUPPORT

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

                                       10
<PAGE>
detect and correct system  problems from our technical  support  facilities.  In
2000,  Inter-Tel began an initiative to greatly  enhance our Internet,  intranet
and extranet capabilities.  Through this initiative, we re-designed our Web site
to offer to our direct sales offices and dealer channel state-of-the-art support
for sales and  technical  support  activities.  Our Web site also  offers a wide
array of sales and  technical  information,  including  an on-line  product  and
service  catalog,  efficient order  processing,  portable-document-format  sales
brochures,     competitive     information,     on-line    technical    manuals,
frequently-asked-questions  on important  topics and convenient  "touch-to-talk"
live  operator  help  employing  our  own  ClearConnect  two-way   voice-over-IP
technology.  In 2001,  Inter-Tel  began an  initiative  to enhance the technical
knowledge  database,  the  automated  order system and the  browser-based  sales
proposal  platform on our  intranet and  extranet,  and we have  continued  this
development  through  2002.  We intend to  further  develop  our Web site to add
additional information and services.

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

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

RESEARCH AND DEVELOPMENT

     We believe  that our ability to enhance our current  products,  develop and
introduce new products on a timely basis, maintain technological competitiveness
and  meet  customer  requirements  are  essential  to our  success.  Inter-Tel's
research and  development  efforts over the last several years have been focused
primarily on the  development of, and  enhancements  to, our AXXESS and ECLIPSE2
systems,  including  adding  new  applications,   incorporating  IP  convergence
applications  and  IP  telephones,   developing   Unified   Messaging   Software
applications, and expanding the telecommunications networking package to include
networking  over IP and frame relay networks.  Over the last several years,  our
research and  development  efforts have also focused on developing and enhancing
convergence  applications  for  our  AXXESS  and  ECLIPSE2  systems,  increasing
single-site node capacity using an ATM backbone, enhancing our UnifieD Messaging
Software,  developing a  speech-recognition  and text-to-speech  enabled unified
communications   product,   developing  an  advanced  IVR  and  CT   application
development tool, enhancing our IP digital telephones, and enhancing Inter-Tel's
server-based PBX offerings. More recently,  Inter-Tel's research and development
efforts  have  been  focused  on  support  of  industry  standard  MGCP  and SIP
functionality on our AXXESS and ECLIPSE2 systems.

     Our SIP Server product, planned for commercial release in the first quarter
of 2003,  provides a  foundation  for  standards-based  communications  within a
converged environment.  Session Initiation Protocol (SIP) allows Call Processing
to communicate with third-party SIP phones and voice-enabled routers,  Microsoft
Windows(R) XP and Microsoft Passport(R) network.

     As of  December  31,  2002,  we had a total  of 217  personnel  engaged  in
research and development and related  technical  service and support  functions.
Research  and   development   expenses  were   $19,340,000,   $17,556,000,   and
$19,489,000, for 2002, 2001, and 2000, respectively.

                                       11
<PAGE>
MANUFACTURING

     Inter-Tel manufactures substantially all of its systems through third party
subcontractors  located in the United  States,  the People's  Republic of China,
United  Kingdom  and  Mexico.   These   subcontractors  use  both  standard  and
proprietary  integrated  circuits and other electronic devices and components to
produce our  communications  systems,  physical  endpoints  and printed  circuit
boards to our engineering  specifications and designs. Our suppliers inspect and
test the equipment before delivery, and in some cases our suppliers also perform
systems integration,  software loading, final testing and shipment. Varian, Inc.
a  multinational  electronics  company,  currently  manufacturers  a significant
portion of our  products,  including  substantially  all of the printed  circuit
boards  used in the AXXESS and  ECLIPSE2  systems,  at Varian's  Tempe,  Arizona
facility. We provide our manufacturing  contractors with forecasted scheduleS of
our  manufacturing  needs and  revise the  forecasts  on a  periodic  basis.  We
continuously  monitor the quality of the products  produced on our behalf by our
manufacturing subcontractors.

COMPETITION

     The market for our products is highly competitive and has in recent periods
been characterized by rapid technological  change,  business  consolidations and
decreasing prices.  Competitors for our converged  communication products geared
toward the  enterprise  market  include  Avaya,  Nortel  Networks,  3Com,  Cisco
Systems,  Comdial,  Iwatsu  America,  Inc.,  Mitel  Networks,  NEC  Corporation,
NextiraOne, Panasonic, Siemens, Toshiba and Vodavi. Several of these competitors
have been active in developing  and  marketing IP  networking  products and have
established relationships with customers within their markets. If the market for
IP telephony products becomes fully developed or develops at a rapid rate, large
computer companies such as IBM and Microsoft,  or large telephone companies such
as AT&T or Sprint,  could  choose to develop  proprietary  software  designed to
facilitate voice communication services over an IP network.

     We also compete against the RBOCs,  which typically offer systems  produced
by one or more of our competitors  listed above and also typically offer Centrex
systems in which automatic  calling  facilities are provided  through  equipment
located  in the  telephone  company's  central  office.  We  also  compete  with
next-generation  service  providers,  such as DSL providers and cable  companies
that  offer  bundled  telephony  and data  services  in an  application  service
provider telephony model.

     In the market for voice processing  applications,  including voice mail, we
compete   against   Captaris,   Active  Voice   (subsidiary   of  NEC  America),
InterVoice-Brite,  Avaya, Nortel Networks, Comdial and other competitors. In the
market for long distance services,  we compete against AT&T,  Sprint,  Qwest and
others.  We also  expect to compete  with  RBOCs,  cable  television  companies,
satellite  and other  wireless  broadband  service  providers  for long distance
business.  Key  competitive  factors  in the  sale of  converged  communications
systems  and  related   applications  include  price,   performance,   features,
reliability, service and support, brand recognition and distribution capability.
We believe  that we compete  favorably in our markets with respect to the price,
performance  and  features of our  systems,  as well as the level of service and
support that we provide to our customers.  However,  certain of our  competitors
have  significantly  greater  resources,   brand  recognition  and  distribution
capabilities than we do.

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

INTELLECTUAL PROPERTY RIGHTS

     We currently hold patents for nineteen (19)  telecommunications and unified
messaging  products.  The remaining  life of these patents ranges from eight (8)
months to  fifteen  (15)  years in  duration.  We have also  applied to the U.S.
Patent and Trademark Office for eleven (11) additional  patents. We also rely on
copyright, trademark, trade secret law and contractual provisions to protect our
intellectual property.

                                       12
<PAGE>
EMPLOYEES

     As of December 31,  2002,  we had a total of 1,773  employees,  of whom 633
were engaged in sales, marketing, e-business and customer support; 229 in direct
sales office and wholesale administrative and other management personnel; 579 in
manufacturing,  quality and related  operations,  including  direct sales office
operations  personnel;  217 in research and  development  and related  technical
service  and  support  functions;  and  115  in  finance,  information  systems,
administration and executive management.  We believe that our relations with our
employees are good.

ACCESS TO INFORMATION

     Our  Internet  address  is  www.Inter-Tel.com.  We make  available  at this
address,  free of charge,  our annual report on Form 10-K,  quarterly reports on
Form 10-Q,  current reports on Form 8-K and amendments to those reports filed or
furnished  pursuant  to Section  13(a) or 15(d) of the  Exchange  Act as soon as
reasonably  practicable  after we  electronically  file such  material  with, or
furnish it to, the SEC.

FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS

RISKS RELATED TO OUR BUSINESS

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

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

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

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

     Our expense levels are based in part on  expectations  of future sales and,
if sales levels do not meet expectations, our operating results could be harmed.
In  addition,  because  sales of  business  communications  systems  through our
dealers  typically  produce  lower gross  margins than sales  through our direct
sales  organization,  operating  results have varied,  and will continue to vary
based upon the mix of sales  through  direct and indirect  channels.  Also,  the
timing and  profitability  of lease resales from quarter to quarter could impact
operating results, particularly in an environment of fluctuating interest rates.
Long  distance  sales,  which  typically  have lower gross margins than our core
business,  have grown in recent  periods at a faster  rate than our  overall net
sales.  As a result,  gross  margins  could be harmed if long  distance  calling
services  continue to increase as a percentage  of net sales.  In  addition,  we
experience seasonal  fluctuations in our operating results, as net sales for the
first quarter is frequently  less than the fourth  quarter and the third quarter
is  frequently  less  than the  second  quarter.  As a result of these and other
factors, we have historically  experienced,  and could continue to experience in
the future, fluctuations in sales and operating results on a quarterly basis.

                                       13
<PAGE>
OUR MARKET IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE AND TO COMPETE SUCCESSFULLY,
WE MUST  CONTINUALLY  INTRODUCE  NEW AND ENHANCED  PRODUCTS  AND  SERVICES  THAT
ACHIEVE BROAD MARKET ACCEPTANCE.

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

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

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

     During the past few years,  we have introduced  transparent  networking and
unified messaging capabilities on our AXXESS and ECLIPSE2 systems and introduced
our Encore product and InterPrise family of voice and data convergence products.
In 2000, we introduced Unified Communicator, a web-based, speech-recognition and
WAP software  application  for controlling and managing your calls and contacts;
Inter-Tel   Application   Platform,   a  highly   flexible   speech-recognition,
text-to-speech and CTI application  generation  platform;  enhanced  convergence
features on the AXXESS and ECLIPSE2 systems; and several other telephony-related
products. During the past 12 months, sales of our AXXESS business communications
systems and related  software have  comprised a  substantial  portion of our net
sales.  Our future success  depends,  in large part,  upon increased  commercial
acceptance and adoption of the Application  Platform,  the Unified  Communicator
and related computer-telephony products, the AXXESS and ECLIPSE2 systems, Encore
products, MGCP and SIP standards-based functionality, new speech recognition and
Interactive Voice Response products, as well as future upgrades and enhancements
to these  products and  networking  platforms.  We cannot  assure you that these
products or platforms will achieve commercial acceptance in the future.

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

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

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

                                       14
<PAGE>
THE COMPLEXITY OF OUR PRODUCTS COULD CAUSE DELAYS IN THE DEVELOPMENT AND RELEASE
OF NEW  PRODUCTS AND  SERVICES.  AS A RESULT,  CUSTOMER  DEMAND FOR OUR PRODUCTS
COULD DECLINE, WHICH COULD HARM OUR BUSINESS.

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

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

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

     *    unanticipated costs and liabilities;
     *    difficulty of assimilating  the operations,  products and personnel of
          the acquired business;
     *    difficulties  in managing  the  financial  and  strategic  position of
          acquired or developed products, services and technologies;
     *    difficulties  in  maintaining  customer  relationships,  in particular
          where a  substantial  portion of the target's  sales were derived from
          our  competitor's  products and services,  and these  competitors have
          made it difficult and  expensive for us to service and maintain  these
          products;
     *    difficulty of assimilating the vendors and independent  contractors of
          the acquired business;
     *    the diversion of management's attention from the core business;
     *    inability  to  maintain  uniform  standards,  controls,  policies  and
          procedures; and
     *    impairment  of  relationships  with  acquired  employees and customers
          occurring as a result of integration of the acquired business.

     In  particular,  in  recent  years our  operating  results  were  adversely
affected by several of the factors  described  above, in the form of substantial
acquisition-related  charges,  operating  losses or  impairment  losses from the
Executone  acquisition,  Cirilium  Corporation  joint venture and  Inter-Tel.NET
operations.  Refer to  Management's  Discussion  and  Analysis  and notes to the
consolidated  financial  statements for additional  information  regarding these
transactions.

     We  completed  four  acquisitions  during 2001 and 2002.  During  2001,  we
acquired   certain  assets  and  assumed   certain   liabilities  of  Convergent
Communication  Services,  Inc.  (Convergent) and Mastermind  Technologies,  Inc.
(Mastermind).  During  2002,  we acquired  certain  assets and  assumed  certain
liabilities  of McLeodUSA  Integrated  Business  Systems,  Inc.  (McLeod) and we
acquired  100% of the  stock of Swan  Solutions  Limited  (Swan)  in the  United
Kingdom.  These  acquisitions are subject to similar risks and  uncertainties as
indicated above.

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

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

     Our success  depends upon our  proprietary  technology.  We currently  hold
patents for nineteen (19)  telecommunication  and unified messaging products and
have also  applied to the U.S.  Patent  and  Trademark  Office  for eleven  (11)
additional  patents.  We  also  rely  on  copyright  and  trade  secret  law and
contractual  provisions  to protect our  intellectual  property.  Despite  these
precautions, third parties could copy or otherwise obtain and use our technology
without authorization, or develop similar technology independently.

     We cannot assure you that any patent, trademark or copyright that we own or
have applied to own, will not be  invalidated,  circumvented  or challenged by a
third  party.  Effective  protection  of  intellectual  property  rights  may be
unavailable  or  limited  in  foreign  countries.  We  cannot  assure  that  the
protection of our proprietary  rights will be adequate or that  competitors will
not independently  develop similar technology,  duplicate our services or design
around any patents or other intellectual property rights we hold. Litigation

                                       15
<PAGE>
may be necessary in the future to enforce our intellectual  property rights,  to
protect  our  trade  secrets,  to  determine  the  validity  and  scope  of  the
proprietary  rights of others,  or to defend against claims of  infringement  or
invalidity.  Litigation could be costly, absorb significant  management time and
harm our business.

     We are also  subject  to third  party  claims  that our  current  or future
products or services  infringe  upon the rights of others.  For example,  we are
subject to proceedings  alleging that certain of our key products  infringe upon
third  party  intellectual  property  rights,  including  patents,   trademarks,
copyrights or other intellectual  property rights. We have viewed  presentations
from Avaya,  one of our primary  competitors,  alleging that our AXXESS business
communications  system utilizes  inventions covered by certain of their patents.
We are  continuing  the  process of  investigating  this matter and we have made
claims against Avaya and Lucent for infringement of our patents. While we do not
believe these matters, collectively, would have a material adverse impact on our
financial  position and future results of operations,  the ultimate  outcomes by
their nature are uncertain.

     When any such claims are asserted  against us, among other means to resolve
the  dispute,  we may seek to license the third  party's  intellectual  property
rights. Purchasing such licenses can be expensive, and we cannot assure you that
a license  will be available  on prices or other terms  acceptable  to us, if at
all.  Alternatively,  we could resort to litigation  to challenge  such a claim.
Litigation  could require us to expend  significant  sums of cash and divert our
management's  attention.  In the  event  that a  court  renders  an  enforceable
decision with respect to our  intellectual  property,  we may be required to pay
significant damages,  develop  non-infringing  technology or acquire licenses to
the  technology  subject to the alleged  infringement.  Any of these  actions or
outcomes  could  harm our  business.  If we are  unable or choose not to license
technology,  or  decide  not to  challenge  a third  party's  rights,  we  could
encounter substantial and costly delays in product  introductions.  These delays
could result from efforts to design  around  asserted  third party rights or our
discovery that the development,  manufacture or sale of products requiring these
licenses could be foreclosed.

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

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

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

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

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

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

                                       16
<PAGE>
     Many  of our  competitors  and  potential  competitors  have  substantially
greater financial,  customer support, technical and marketing resources,  larger
customer bases,  longer operating  histories,  greater name recognition and more
established  relationships in the industry than we do. We cannot be sure that we
will have the  resources or expertise to compete  successfully.  Compared to us,
our competitors may be able to:

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

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

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

     We currently  obtain certain key  components for our digital  communication
platforms,   including  certain  microprocessors,   integrated  circuits,  power
supplies,  voice  processing  interface  cards and IP  telephony  cards,  from a
limited  number of suppliers  and  manufacturers.  Our reliance on these limited
suppliers and contract manufacturers involves risks and uncertainties, including
the  possibility  of a shortage or delivery  delay for some key  components.  We
currently manufacture our products through third-party subcontractors located in
the United  States,  the  People's  Republic  of China,  the United  Kingdom and
Mexico. Foreign manufacturing  facilities are subject to changes in governmental
policies, imposition of tariffs and import restrictions and other factors beyond
our control.  Varian,  Inc. currently  manufactures a significant portion of our
products at Varian's Tempe, Arizona facility, including substantially all of the
printed  circuit  boards  used in the  AXXESS  and  ECLIPSE2  systems,.  We have
experienced  occasional  delays in the supply of components  and finished  goods
that have harmed our business. If inventory levels are not adequately maintained
and managed we are at risk of not having the appropriate inventory quantities on
hand to meet sales demand. We cannot assure that we will not experience  similar
delays in the future.

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

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

     We derive a  substantial  portion of our net sales  through  our network of
independent  dealers.  We face intense  competition from other telephone,  voice
processing,  and voice and data router system  manufacturers  for these dealers'
business,  as most of our dealers  carry other  products  that  compete with our
products.  Our dealers may choose to promote the products of our  competitors to
our detriment.  We have developed  programs and expended  capital to incentivize
our  dealers  to  promote  our  products,  and we cannot  assure  you that these
techniques will be successful.  The loss of any  significant  dealer or group of
dealers,  or any event or condition  harming our dealer network,  could harm our
business, financial condition and operating results.

                                       17
<PAGE>
EXPANDING OUR INTERNATIONAL  SALES EFFORTS MAY EXPOSE US TO ADDITIONAL  BUSINESS
RISKS,  WHICH MAY RESULT IN REDUCED SALES OR PROFITABILITY IN OUR  INTERNATIONAL
MARKETS.

     We are in the  process of  attempting  to expand our  international  dealer
network  both in the  countries  in which we already  have a presence and in new
countries  and  regions.  International  sales are subject to a number of risks,
including  changes  in  foreign  government  regulations  and  telecommunication
standards, export license requirements, tariffs and taxes, other trade barriers,
difficulties in protecting our intellectual  property,  fluctuations in currency
exchange rates, difficulty in collecting receivables, difficulty in staffing and
managing  foreign  operations,  and  political  and  economic  instability.   In
particular,  the terrorist acts of September 11, 2001, and continued  turmoil in
the  Middle  East and North  Korea,  have  created  an  uncertain  international
economic  environment and we cannot predict the impact of these acts, any future
terrorist  acts or any  related  military  action on our  efforts  to expand our
international  sales.  Fluctuations  in currency  exchange rates could cause our
products to become  relatively  more  expensive  to  customers  in a  particular
country,  leading to a reduction in sales or profitability  in that country.  In
addition,  the costs associated with developing  international  sales may not be
offset by increased sales in the short term, or at all. Any of these risks could
cause our  products  to become  relatively  more  expensive  to  customers  in a
particular  country,  leading to reduced sales or profitability in that country.
In addition,  the costs  associated  with  developing  an  international  dealer
network may not be offset by increased sales in the short term, if at all.

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

     We depend on the  continued  service  of, and our  ability  to attract  and
retain, qualified technical,  marketing, sales and managerial personnel, many of
whom would be  difficult  to replace.  Competition  for  qualified  personnel is
intense,  and we  have  historically  had  difficulty  hiring  employees  in the
timeframe that we desire, particularly skilled engineers. The loss of any of our
key personnel or our failure to  effectively  recruit  additional  key personnel
could make it difficult for us to manage our business,  complete  timely product
introductions  or meet other  critical  business  objectives.  For example,  our
inability  to  retain  key  executives  of  Executone  following  our  Executone
acquisition  impaired our ability to benefit from the Executone  business and to
grow revenues from the Executone assets. Moreover, our operating results will be
impaired  if  we  lose  a  substantial  number  of  key  employees  from  recent
acquisitions,  including personnel from McLeod, Swan, Mastermind and Convergent.
We cannot  assure you that we will be able to continue to attract and retain the
qualified personnel necessary for the development of our business.

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

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

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

     In the past few years,  we introduced  the AXXESS and ECLIPSE2 ATM business
communications  system and  networking  software,  which are  typically  sold to
larger  customers  at a higher  average  selling  price  and often  represent  a
significant communications infrastructure capital expenditure by the prospective
enterprise  customer.  Accordingly,  the  purchase  of  our  products  typically
involves  numerous  internal  approvals  relating  to the  evaluation,  testing,
implementation  and  acceptance of new  technologies.  This  evaluation  process
frequently results in a lengthy sales process, which can range from a few months
to more  than 12  months,  thereby  subjecting  our  sales  cycle to a number of
significant   uncertainties   concerning  budgetary   constraints  and  internal
acceptance  reviews.  The length of our sales cycle also may vary  substantially
from customer to customer.  While our customers are  evaluating our products and
before  placing an order with us, we may incur  substantial  sales and marketing
expenses  and  expend  significant  management  effort.  Consequently,  if sales
forecasted from a specific customer for a particular quarter are not realized in
that quarter, our operating results could be materially adversely affected.

                                       18
<PAGE>
WE RELY HEAVILY UPON THIRD-PARTY PACKAGED SOFTWARE SYSTEMS TO MANAGE AND RUN OUR
BUSINESS PROCESSES AND TO PRODUCE OUR FINANCIAL STATEMENTS. FROM TIME TO TIME WE
UPGRADE  THESE  SYSTEMS  TO ENSURE  CONTINUATION  OF  SUPPORT  AND TO EXPAND THE
FUNCTIONALITY  OF THE SYSTEMS TO MEET OUR BUSINESS NEEDS.  THE RISKS  ASSOCIATED
WITH THE UPGRADE PROCESS  INCLUDE  DISRUPTION OF OUR BUSINESS  PROCESSES,  WHICH
COULD HARM OUR BUSINESS.

     We  currently  run  third-party  applications  for data  processing  in our
distribution center operations,  shipping, materials movement, customer service,
invoicing,  financial  record  keeping and reporting,  and other  operations and
administration.  The nature of the  software  industry  is to  upgrade  software
systems  to make  architectural  changes,  increase  functionality  and  address
software bugs.  Over time,  older versions of the software become less supported
by our vendors for financial and other reasons and eventually  become  obsolete.
Oracle provides notice of the dates that Oracle will de-support the software and
companies  are  expected  to either  make plans to upgrade to newer  versions or
operate without Oracle support. While these third-party vendors provide advanced
notice of product  upgrade  schedules  and take other  steps to make the upgrade
process as straight-forward as possible, we are subject to risks associated with
the process.  Our software  systems could become  unstable  following an upgrade
process  and impact  our  ability to process  data  properly  in these  systems,
including  timely and accurate  shipment of products,  invoicing  our  customers
properly and the production of accurate and timely financial statements. We also
cannot assure you that these software  upgrades or enhancements  will operate as
intended or be free from bugs.  We upgraded our Oracle  applications  during the
fourth  quarter of 2002 and expect to affect  similar  software  upgrades in the
future.  If we are unable to  successfully  integrate  the new software into our
information  systems,  our operations,  customer service and financial reporting
could be adversely affected and could harm our business.

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

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

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

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

                                       19
<PAGE>
WE ARE CURRENTLY SUBJECT TO GOVERNMENT  INVESTIGATIONS  AND IN THE FUTURE WE MAY
BE SUBJECT TO LITIGATION, WHICH IF THEY RESULT IN ANY CONVICTIONS,  SANCTIONS OR
PENALTIES AGAINST US, COULD HARM OUR BUSINESS.

     Divisions  of the United  States  Department  of Justice are  investigating
other  companies' and Inter-Tel's  participation in a  federally-funded  "E-Rate
program"  to  connect  schools  and  libraries  to  the  Internet.  The  Justice
Department  has not provided  Inter-Tel  with a  description  of the evidence on
which the investigations are based.

     Inter-Tel is presently unable to predict or determine the final outcome of,
or to  estimate  the  potential  range of loss (if any)  with  respect  to,  the
investigations.  If  Inter-Tel  is  convicted  of  any  crime  or  subjected  to
sanctions,  or if  penalties,  damages or other  monetary  remedies are assessed
against  Inter-Tel  in  connection  with any  investigations,  our  business and
operating results could be materially and adversely affected.

     Inter-Tel is also subject to litigation in the ordinary course of business.
We cannot assure you that any adverse outcome in connection with such litigation
would not impair our business or financial condition.

OUR CHAIRMAN OF THE BOARD OF DIRECTORS,  CEO AND PRESIDENT CONTROLS 21.1% OF OUR
COMMON  STOCK  AND  IS  ABLE  TO  SIGNIFICANTLY   INFLUENCE   MATTERS  REQUIRING
SHAREHOLDER APPROVAL.

     As of March 7, 2003, Steven G. Mihaylo,  Inter-Tel's  Chairman of the Board
of  Directors,  Chief  Executive  Officer  and  President,   beneficially  owned
approximately  21.1% of the outstanding shares of the common stock. As a result,
he has the ability to exercise significant  influence over all matters requiring
shareholder approval. In addition, the concentration of ownership could have the
effect of delaying or preventing a change in control of Inter-Tel.

RISKS RELATED TO OUR INDUSTRY

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

     The overall  economic  slowdown has had a harmful  effect on the market for
enterprise  communications  equipment.  Our customers have reduced significantly
their capital spending on communications  equipment in an effort to reduce their
own costs and bolster their revenues.  The market for enterprise  communications
equipment may continue to grow at a modest rate or possibly not grow at all, and
our  financial  performance  has  been and may  continue  to be  materially  and
adversely  affected by the  reductions in spending on enterprise  communications
equipment.

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

     The  market  for IP  network  voice  communications  products  has begun to
develop only recently, is evolving rapidly and is characterized by an increasing
number of market entrants who have introduced or developed products and services
for Internet or other IP network  voice  communications.  As is typical of a new
and rapidly evolving industry, the demand for and market acceptance of, recently
introduced  IP network  products and services  are highly  uncertain.  We cannot
assure you that packet-switched  voice networks will become widespread.  Even if
packet-switched voice networks become widespread in the future, we cannot assure
that our  products,  including  the IP  telephony  features  of the  AXXESS  and
ECLIPSE2 systems, our IP endpoints and IP applications will successfully compete
against other market players and attain broad market acceptance.

     Moreover,  the adoption of packet-switched voice networks and importance of
development of products using industry standards such as MGCP and SIP, generally
require the  acceptance of a new way of exchanging  information.  In particular,
enterprises that have already invested  substantial  resources in other means of
communicating  information  may be  reluctant or slow to adopt a new approach to
communications.  If the  market  for IP network  voice  communications  fails to
develop or develops  more slowly than we  anticipate,  our IP network  telephony
products  could  fail  to  achieve  market  acceptance,   which  in  turn  could
significantly harm our business, financial condition and operating results. This
growth  may  be  inhibited   by  a  number  of  factors,   such  as  quality  of
infrastructure;  security  concerns;  equipment,  software  or other  technology
failures; regulatory encroachments;  inconsistent quality of service; poor voice
quality over IP networks as compared to circuit-switched  networks;  and lack of
availability of cost-effective, high-speed

                                       20
<PAGE>
network capacity.  Moreover, as IP-based data communications and telephony usage
grow, the  infrastructure  used to support these IP networks,  whether public or
private,  may not be able to  support  the  demands  placed  on them  and  their
performance or  reliability  may decline.  The technology  that allows voice and
facsimile  communications  over the  Internet and other data  networks,  and the
delivery  of  other  value-added  services,  is  still in the  early  stages  of
development.

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

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

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

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

TERRORIST  ACTIVITIES  AND  RESULTING  MILITARY AND OTHER ACTIONS COULD HARM OUR
BUSINESS.

     Terrorist  attacks in New York and  Washington,  D.C. in  September of 2001
disrupted  commerce  throughout the world. The continued threat of terrorism and
the potential for military action and heightened  security  measures in response
to this  threat may cause  significant  disruption  to commerce  throughout  the
world. To the extent that disruptions  result in a general decrease in corporate
spending on information  technology or advertising,  our business and results of
operations  could be  harmed.  We are unable to  predict  whether  the threat of
terrorism  or the  responses  thereto  will result in any  long-term  commercial
disruptions  or if such  activities or responses  will have a long-term  adverse
effect  on  our  business,   results  of  operations  or  financial   condition.
Additionally, if any attacks were to affect the operation of the Internet or key
data centers, our business could be harmed. These and other developments arising
out of the  attacks  may  make  the  occurrence  of one or more  of the  factors
discussed under "Factors That May Effect Future  Operating  Results" more likely
to occur.

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The names of the  executive  officers and  directors of Inter-Tel and their
ages, titles, and biographies as of the date hereof are set forth below.

     STEVEN  G.  MIHAYLO;  AGE 59;  CHAIRMAN  OF THE BOARD OF  DIRECTORS,  CHIEF
EXECUTIVE  OFFICER AND PRESIDENT.  Mr.  Mihaylo,  the founder of Inter-Tel,  has
served as Chairman of the Board of Directors of Inter-Tel  since September 1983,
as President  since May 1998 and as Chief  Executive  Officer since  Inter-Tel's
formation in July 1969.  Mr.  Mihaylo served as President of Inter-Tel from 1969
to 1983  and  from  1984 to  December  1994,  and as  Chairman  of the  Board of
Directors from July 1969 to October 1982.

                                       21
<PAGE>
     NORMAN STOUT;  AGE 45;  EXECUTIVE VICE  PRESIDENT AND CHIEF  ADMINISTRATIVE
OFFICER.  Mr. Stout was elected Executive Vice President,  Chief  Administrative
Officer and President of Inter-Tel  Software and Services in June 1998. As Chief
Administrative  Officer,  Mr. Stout is  responsible  for  Inter-Tel's  strategic
planning,  mergers and acquisitions,  leasing business and centralized corporate
support functions  including  finance,  treasury,  accounting,  human resources,
legal,  MIS and  eCommerce.  From October 1994 to June 1998, he served as one of
our directors. Prior to joining Inter-Tel, Mr. Stout was Chief Operating Officer
of Oldcastle Architectural Products and since 1996, Mr. Stout also had served as
President of Oldcastle Architectural West. Mr. Stout was previously President of
Superlite  Block,  a  subsidiary  of  Oldcastle  Architectural  Products  and  a
manufacturer  of concrete  products,  since February 1993.  Prior thereto he was
employed by  Boorhem-Fields,  Inc. of Dallas,  Texas, a manufacturer  of crushed
stone,  as Chief  Executive  Officer  from  1990 to 1993 and as Chief  Financial
Officer  from 1986 to 1990.  Prior to that,  Mr.  Stout was a  Certified  Public
Accountant with Coopers & Lybrand.  Mr. Stout holds a Bachelor of Science degree
in Accounting from Texas A&M and an MBA from the University of Texas.

     CRAIG W. RAUCHLE;  AGE 47;  EXECUTIVE  VICE  PRESIDENT AND CHIEF  OPERATING
OFFICER.  Mr. Rauchle was elected Chief Operating Officer in August 2001 and has
been our Executive  Vice  President  since  December  1994.  As Chief  Operating
Officer, Mr. Rauchle is responsible for Inter-Tel's sales and support functions,
marketing, procurement, distribution and research and development activities. He
had been our Senior Vice  President  and  continues  as  President  of Inter-Tel
Technologies,  Inc.,  our wholly  owned sales  subsidiary.  Mr.  Rauchle  joined
Inter-Tel in 1979 as Branch  General  Manager of the Denver  Direct Sales Office
and in 1983 was appointed the Central Region Vice President and subsequently the
Western  Regional  Vice  President.  From 1990 to 1992,  Mr.  Rauchle  served as
President of Inter-Tel Communications, Inc. Mr. Rauchle holds a Bachelor of Arts
degree in Communications from the University of Denver.

     JEFFREY  T.  FORD;  AGE 41;  SENIOR  VICE  PRESIDENT  AND CHIEF  TECHNOLOGY
OFFICER.  Mr. Ford was elected  Senior Vice President in May 1998 and has served
as our  Chief  Technology  Officer  since  1997.  He was  elected  President  of
Inter-Tel  Integrated  Systems,  Inc. (IIS) in May 1998, after serving as Senior
Vice President of IIS for one year and Vice President of Software Engineering of
Inter-Tel Integrated Systems from 1993 to 1997. He joined Inter-Tel in 1983 as a
software  design  engineer.  Mr.  Ford  holds a Bachelor  of  Science  degree in
Computer   Systems   Engineering  from  Arizona  State  University  and  an  SEP
certificate from the Stanford Graduate School of Business.

     KURT R. KNEIP; AGE 40; CHIEF FINANCIAL  OFFICER,  SENIOR VICE PRESIDENT AND
SECRETARY.  Mr. Kneip has served as our Chief Financial  Officer since September
1993.  He has served as Senior Vice  President  since  February 2003 and as Vice
President from  September  1993 to February  2003. He was elected  Secretary and
Treasurer in October 1994. In May 1996 he was elected  Assistant  Treasurer,  as
John Abbott was elected  Treasurer.  He joined Inter-Tel in May 1992 as Director
of Corporate Tax,  after seven years with the accounting  firms of Ernst & Young
and KPMG Peat Marwick.  Mr. Kneip is a Certified Public Accountant,  and holds a
Bachelor of Science  degree in  Commercial  Economics  from South  Dakota  State
University and a Masters Degree in Professional  Accountancy from the University
of South Dakota.

     J. ROBERT ANDERSON; AGE 66; DIRECTOR. Mr. Anderson has served as one of our
directors since February 1997. Mr. Anderson held various positions at Ford Motor
Company  from  1963 to  1983,  serving  as  President  of the  Ford  Motor  Land
Development  Corporation  from 1978 to 1983. He served as Senior Vice President,
Chief  Financial  Officer  and as a  member  of the  Board of  Directors  of The
Firestone  Tire and Rubber  Company from 1983 to 1989,  and as Vice  Chairman of
Bridgestone/Firestone,  Inc. from 1989 through 1991. He most recently  served as
Vice Chairman, Chief Financial Officer and as a member of the Board of Directors
of the Grumman  Corporation from 1991 to 1994. He currently serves on the boards
of GenCorp, Inc. and B-G Corp. Mr. Anderson is currently semi-retired, and he is
an active leader in various business, civic and philanthropic organizations.

     JERRY W. CHAPMAN;  AGE 62; DIRECTOR.  Mr. Chapman was elected as one of our
directors in December 1999 and  previously  served as one of our directors  from
1989 to 1992.  A CPA, he served  with a local firm from 1963  through  1969,  at
which time he joined Ernst & Ernst,  a predecessor  entity of Ernst & Young LLP.
He became a partner of Ernst & Young in 1977 and,  until  retiring from the firm
in 1989, served as engagement partner on a wide variety of audit,  assurance and
consulting  engagements.  Additionally,  he managed Ernst & Young's practices in
Arizona as well as various offices in the adjoining  southwest  states from 1980
through 1989. He then operated his own  consulting  firm through 1992 and joined
Arthur

                                       22
<PAGE>
Andersen in 1993 as a partner  specializing  in  providing  business  consulting
services.  He  retired  from  Arthur  Andersen  in 1999 and  currently  provides
services for a small number of clients  requiring  strategic  and  market-driven
services.

     GARY EDENS; AGE 61; DIRECTOR.  Mr. Edens has served as one of our directors
since October 1994. He was a  broadcasting  media  executive  from 1970 to 1994,
serving as Chairman and Chief Executive Officer of Edens Broadcasting, Inc. from
1984 to 1994,  when that  corporation's  nine radio  stations  were sold.  He is
currently President of The Hanover Companies, Inc., an investment firm. He is an
active leader in various business, civic and philanthropic organizations.

     DR. C. ROLAND HADEN; AGE 62;  DIRECTOR.  Dr. Haden has served as one of our
directors  since 1983. Dr. Haden was Vice  Chancellor and Dean of Engineering of
Texas  A&M  University  from 1993  until his  retirement  on  August  31,  2002.
Previously,  he was Vice Chancellor of Louisiana State  University,  Dean of the
College of Engineering  and Applied  Sciences at Arizona State  University,  and
Vice  President  for Academic  Affairs at Arizona State  University.  He earlier
served as department head at the University of Oklahoma. Dr. Haden has served on
a number of corporate boards, such as Square D Company and E-Systems, Inc., both
then Fortune 500 companies. He currently serves on the board of Crosstex Energy,
GP, LLC of Dallas.  Dr. Haden holds a Ph.D. in Electrical  Engineering  from the
University of Texas.

     The Board of Directors  of the Company  held a total of four (4)  regularly
scheduled meetings during the fiscal year ended December 31, 2002.

     The  Audit  Committee  of the Board of  Directors  consisted  of  directors
Chapman,  Anderson and Haden,  through February 11, 2002. Effective February 12,
2002,  director Edens was elected as a member of the Audit Committee.  The Audit
Committee  amended its  charter on  February  17, 2003 and a copy of the amended
charter is attached as Exhibit A to our Proxy  Statement.  Pursuant to the Audit
Committee charter, the Audit Committee reviews, acts and reports to the Board of
Directors of the Company on various auditing and accounting  matters,  including
the  appointment  of the  Company's  independent  accountants,  the scope of the
Company's  annual  audits,  fees  to  be  paid  to  the  Company's   independent
accountants,  the  performance  of the Company's  independent  accountants,  the
sufficiency of the Company's internal controls and the Company's  accounting and
financial  management  practices.  The Audit Committee met five (5) times during
the  last  fiscal  year.  All  of  the  members  of  the  Audit   Committee  are
"independent"  members  as  defined  under  Rule  4200(a)(15)  of  the  National
Association of Securities Dealers.

     The  Compensation  Committee  consisted  of  directors  Anderson  and Edens
through  December  31,  2002.  The  Compensation   Committee   reviews  employee
compensation  and makes  recommendations  thereon to the Board of Directors  and
administers the Company's Stock Incentive Plans. The Compensation Committee also
determines,  upon review of relevant information,  the employees to whom options
shall be granted.  The Compensation  Committee met two (2) times during the last
fiscal year.

     During the fiscal year ended December 31, 2002, each director  attended all
of the Board meetings. Each member of the Board who served on one or more of the
above-listed  committees attended all of the committee(s) on which such director
served, in person or by consent.

ITEM 2. PROPERTIES

     Our corporate  headquarters in Tempe, Arizona is located in a 22,600 square
foot building pursuant to a lease that expires in August 2003, with an option to
renew. Our 68,000 square foot operations and distribution center is also located
in Tempe,  Arizona pursuant to a lease that expires in March 2006. The principal
product  development  and  support  operations  remain in a 96,000  square  foot
building  located in Chandler,  Arizona  pursuant to a lease that expires in May
2008.  We also own a 70,000 square foot  facility  located in Reno,  Nevada that
houses credit and lease finance facilities,  a business development center and a
sales office. We also lease sales and support offices in a total of 57 locations
in the United  States,  including  approximately  147,000  square feet of office
space in Milford,  Connecticut that we acquired in the Executone  acquisition (a
portion of which has been subleased),  and three locations overseas. In February
2003, we consolidated  three Phoenix,  Arizona area offices with an aggregate of
31,300 square feet into a single Phoenix location of 35,000 square feet pursuant
to a lease,  which expires in July 2008. This reduced our total number of office
locations to 55 in the United States. Our aggregate monthly payments under these
leases were  approximately  $793,000 at December 31,  2002.  We believe that our
facilities will be adequate

                                       23
<PAGE>
to meet our  current  needs and that  additional  or  alternative  space will be
available as necessary in the future on commercially reasonable terms.

ITEM 3. LEGAL PROCEEDINGS

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

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

     None.

                                       24
<PAGE>
                                     PART II

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

     Inter-Tel Common Stock is traded over-the-counter (Nasdaq symbol: INTL) and
since February 1983 has been included in the Nasdaq National  Market System.  As
of March 7, 2003 there were of record  approximately  2,340  shareholders of our
Common Stock.  The following table sets forth high and low sales prices reported
by Nasdaq for each quarter in the last two years.

2002              HIGH     LOW                 2001               HIGH      LOW
----              ----     ---                 ----               ----      ---
First Quarter     22.77   14.98                First Quarter      13.13     6.81
Second Quarter    21.70   15.57                Second Quarter     14.74     7.75
Third Quarter     27.00   15.65                Third Quarter      16.95     9.90
Fourth Quarter    28.98   17.03                Fourth Quarter     20.90    11.21

     A dividend of $.01 per share of Common Stock has been paid to  shareholders
of record for each quarter since  December 31, 1997. In October 2001,  the Board
of Directors  declared an increase to the  quarterly  cash  dividend to $.02 per
share of Common Stock,  effective  December 31, 2001. In July 2002, the Board of
Directors  declared an increase to the quarterly cash dividend to $.03 per share
of Common Stock, effective September 30, 2002. The continuation of this dividend
policy  and  the  amount  (if  any)  of  the  quarterly  dividend  paid  to  our
shareholders  will  depend on our  earnings,  capital  requirements  for growth,
financial conditions and other factors.

NO SALES OF UNREGISTERED SECURITIES

     We have not made any sales of unregistered securities during the past three
years, except for sales of our common stock to employees  exercising their stock
options during the period prior to the effectiveness of a registration statement
on Form S-8 relating to such sales.

EQUITY COMPENSATION PLAN INFORMATION

     Information regarding Inter-Tel's equity compensation plans, including both
shareholder  approved plans and non-shareholder  approved plans, is set forth in
the section  entitled  "Equity  Compensation  Plan  Information"  in Inter-Tel's
Notice of Annual Meeting of Shareowners and Proxy Statement,  to be filed within
120 days after  Registrant's  fiscal year end of December  31, 2002 (the "Notice
and Proxy Statement").  The table required by S-K 201(d) is set forth under Item
12 and is incorporated by reference to the proxy statement.

                                       25
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA FINANCIAL SUMMARY

     The  following  selected  consolidated  financial  data  should  be read in
conjunction  with Item 7,  "Management's  Discussion  and  Analysis of Financial
Condition  and Results of  Operations"  and Item 8,  "Financial  Statements  and
Supplementary Data." The table contains selected consolidated financial data for
the years ended December 31, 1998, 1999,  2000, 2001 and 2002,  derived from our
audited consolidated financial statements.

<TABLE>
<CAPTION>
(In thousands, except
per share amounts and ratios)                                 For the years ended December 31,
                                       --------------------------------------------------------------------------
                                          2002             2001             2000             1999          1998
                                       ---------        ---------        ---------        ---------     ---------
<S>                                    <C>              <C>              <C>              <C>           <C>
Net Sales                              $ 381,456        $ 385,655        $ 402,723        $ 314,221     $ 274,504
Cost of sales                            186,983          211,161          243,685(3)       159,463       140,946
Research and development                  19,340           17,556           19,489           14,798        11,373
Selling, general and administrative      128,284          128,604          124,664           97,163        85,897
Amortization of goodwill                      --            1,876            2,228              856           339
Amortization of purchased
  intangible assets                        1,122              677              576              411           318
In-process research and development           --               --            5,433(3)            --        22,755(4)
Other charges                                 --            5,357(2)        45,245(3)            --            --
                                       ---------        ---------        ---------        ---------     ---------
Operating (loss) income                   45,727           20,424(2)       (38,597)(3)       41,530        12,876(4)
                                       =========        =========        =========        =========     =========

Litigation settlement (net of costs
  except for taxes)                       15,516(1)            --               --               --            --
Write-down of investment in
  Inter-Tel.NET/Vianet                    (1,200)              --               --               --            --
Equity share of Cirilium Corp.'s
  net losses                                  --               --           (5,938)(3)           --            --
Write-off of Cirilium Corp.
  investment                                  --               --           (2,045)(3)           --            --
Interest and other income                  1,936            1,081            1,474            2,391         2,913
Foreign currency transaction gain
  (loss)                                     330             (337)            (421)             (46)          105
Interest expense                            (156)            (468)            (213)            (110)          (60)
                                       ---------        ---------        ---------        ---------     ---------
Income (loss) before income taxes
  (benefit)                               62,153(1)        20,700(2)       (45,740)(3)       43,765        15,834(4)
Income taxes (benefit)                    23,516            7,659          (16,817)          16,619         6,790
                                       ---------        ---------        ---------        ---------     ---------

Net income (loss)                      $  38,637(1)     $  13,041(2)     $ (28,923)(3)    $  27,146     $   9,044(4)
                                       =========        =========        =========        =========     =========
Net income (loss) per share
  Basic                                $    1.58(1)     $    0.53(2)     $   (1.10)(3)    $    1.05     $    0.34(4)
  Diluted                              $    1.49(1)     $    0.52(2)     $   (1.10)(3)    $    1.01     $    0.32(4)
                                       ---------        ---------        ---------        ---------     ---------
Weighted average basic common
  shares                                  24,444           24,488           26,273           25,949        26,602
Weighted average diluted common
  shares                                  25,864           25,240           26,273           27,004        27,846
                                       ---------        ---------        ---------        ---------     ---------

BALANCE SHEET DATA
Total assets                           $ 282,062        $ 227,462        $ 243,126        $ 247,517     $ 197,030
Working capital                          131,624           93,156           86,008           60,799        96,317
Shareholders' equity                     173,903          126,837          136,436          168,121       142,686
                                       ---------        ---------        ---------        ---------     ---------
KEY RATIOS
Current ratio                               2.80             2.41             2.05             1.93          3.17
Dividends declared per share           $    0.10        $    0.05        $    0.04        $    0.04     $    0.04
Return on beginning equity                  30.5%             9.6%           (17.2)%           19.0%          6.2%
Return on beginning equity-excluding
  charges and litigation settlement         23.6%(1)         12.0%(2)          7.8%(3)         19.0%         15.6%(4)
Net cash provided by operating
  activities                           $  77,195        $  75,006        $  17,339        $  33,380     $  31,751
                                       =========        =========        =========        =========     =========
</TABLE>
                                       26
<PAGE>
----------
(1)  2002 income before taxes includes $15.5 million of proceeds, net of related
     expenses from a binding arbitration settlement,  which increased net income
     by $9.5 million, or $0.37 per share after tax. Without this settlement,  we
     would have reported net income of $29.1 million  ($1.13 per diluted  share)
     for the year ended December 31, 2002.
(2)  2001  operating  income  includes a pre-tax  charge of $5.4 million,  which
     reduced  net income by $3.4  million,  or $0.13 per share  after tax.  This
     pre-tax charge  reflects the write-down of our investment in  Inter-Tel.NET
     to net realizable value.
(3)  2000 operating  income  includes  pre-tax  charges of $66.8 million,  which
     reduced net income by $42.0  million,  or $1.60 per share after tax.  These
     pre-tax charges reflect the write-off of the Executone acquisition of $50.9
     million  ($7.6 million of which is included in cost of sales) in the second
     quarter, the write-off of IPRD in connection with the Executone purchase of
     $5.4 million  during the first  quarter,  the  write-down to net realizable
     value of  Inter-Tel.NET  assets of $2.0 million during the second  quarter,
     the equity share of  Cirilium's  losses of $5.9  million for the year,  and
     write-off of our investment in Cirilium of $2.6 million  (including reserve
     adjustments) during the third quarter. Without these charges, we would have
     reported net income of $13.1 million ($0.50 per diluted share) for the year
     ended December 31, 2000.
(4)  1998 operating  income  includes a special pre-tax charge of $22.8 million,
     which  reduced net income by $13.7  million or $.49 per diluted share after
     tax.  This  charge  reflects  the  write-off  of  in-process  research  and
     development  in  connection   with  the  purchase  of  certain  assets  and
     liabilities of Telecom Multimedia Systems, Inc. Without this write-off,  we
     would have reported net income of $22.7  million  ($.82 per diluted  share)
     for the year ended December 31, 1998.

                                       27
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

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

GENERAL

     Inter-Tel, incorporated in 1969, is a single point of contact, full service
provider of converged voice and data business communications systems, voice mail
systems and  networking  applications.  We market and sell voice  processing and
unified messaging  software,  call accounting  software,  Internet Protocol (IP)
telephony software, computer-telephone integration (CTI) applications, local and
long distance calling services, and other communications  services. Our products
and services  include the AXXESS by Inter-Tel,  ECLIPSE2 by Inter-Tel and Encore
by Inter-Tel business  communication  systems,  with integrated voice processing
and  unified  messaging  systems,  IP  telephony  voice  and data  routers,  and
e-commerce software.  We also provide maintenance,  leasing and support services
for  our  products.  Our  customers  include  business  enterprises,  government
agencies and non-profit organizations.  Our common stock is quoted on the Nasdaq
National Market System under the symbol "INTL."

     We have developed a distribution  network of direct sales offices,  dealers
and value added  resellers  (VARs),  which sell our  products  to  organizations
throughout  the United  States and  internationally,  including  to divisions of
Fortune 500 companies, large service organizations and governmental agencies. As
of December 31, 2002,  we had 52 direct sales  offices in the United  States and
one in Japan,  and a network of  hundreds  of dealers  and VARs around the world
that purchase directly from us. We also maintain a wholesale distribution office
in the  United  Kingdom  that  supplies  Inter-Tel's  dealers  and  distributors
throughout  the UK and parts of Europe.  In December 2002, we also acquired Swan
Solutions  Limited,  a research and development and software sales office in the
United Kingdom.

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

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

     The markets we serve have been characterized by rapid technological changes
and  increasing  customer   requirements.   We  have  sought  to  address  these
requirements  through the development of software  enhancements and improvements
to  existing  systems  and  the  introduction  of  new  systems,  products,  and
applications. Inter-Tel's research and development efforts over the last several
years have been focused  primarily on the development of, and  enhancements  to,
our  AXXESS  and   ECLIPSE2   systems,   including   adding  new   applications,
incorporating IP convergence applications and IP telephones,  developing Unified
Messaging   Software    applications,    developing   speech   recognition   and
text-to-speech applications,  developing and enhancing call center applications,
developing Unified Communications Software

                                       28
<PAGE>
applications, and expanding the telecommunications networking package to include
networking  over IP and frame relay  networks.  Inter-Tel's  current efforts are
focused on developing and enhancing the convergence  applications for our AXXESS
and ECLIPSE2 systems,  enhancing our server-PBX offering,  enhancing our unified
communications   applications,   developing  new  IP  endpoint  technology,  and
enhancing our call center applications.

     We offer to our customers a package of lease  financing and other  services
under the name Total Solution (formerly, Totalease). Total Solution provides our
customers  lease  financing,  maintenance  and  support  services,  fixed  price
upgrades and other benefits. We finance this program through the periodic resale
of lease rental streams to financial  institutions.  Refer to Note E of Notes to
Consolidated  Financial  Statements  for  additional  information  regarding our
program.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                          Year Ended December 31
                                                     --------------------------------
                                                      2002         2001         2000
                                                     ------       ------       ------
<S>                                                   <C>          <C>          <C>
     Net sales                                        100.0%       100.0%       100.0%
     Cost of sales                                     49.0         54.8         60.5
                                                     ------       ------       ------
     Gross profit                                      51.0         45.2         39.5
     Research and development                           5.1          4.6          4.8
     Selling, general and administrative               33.6         33.3         31.0
     Amortization of goodwill and intangibles           0.3          0.7          0.7
     In-process research and development                 --           --          1.3
     Other charges                                       --          1.4         11.2
                                                     ------       ------       ------
     Operating income (loss)                           12.0          5.3         (9.6)
     Litigation settlement                              4.1           --           --
     Equity share of Cirilium Corp.'s net losses         --           --         (1.5)
     Write-off of Cirilium Corp. investment              --           --         (0.5)
     Write-down of Inter-Tel/Vianet investment         (0.3)          --           --
     Interest and other income                          0.5          0.3          0.4
     Foreign currency transaction gains (losses)        0.1         (0.1)        (0.1)
     Interest expense                                    --         (0.1)        (0.1)
     Income taxes (benefit)                             6.2          2.0         (4.2)
                                                     ------       ------       ------
     Net income (loss)                                 10.1%         3.4%        (7.2)%
                                                     ======       ======       ======
</TABLE>

YEAR ENDED DECEMBER 31, 2002 VERSUS YEAR ENDED DECEMBER 31, 2001

     NET SALES.  Net sales  decreased 1.1% to $381.5 million in 2002 from $385.7
million in 2001,  representing  a decrease of $4.2 million.  The decrease in net
sales was primarily  attributable to the fact that sales from  Inter-Tel.NET (of
which  Inter-Tel  sold 83% of its  interest  in July 2001) were not  included in
2002.  Inter-Tel.NET  sales  were $14.0  million in 2001.  Sales from our direct
sales offices were relatively flat in 2002 compared to 2001 including sales from
McLeod offices acquired in 2002. Excluding the McLeod acquisition, sales in this
division declined by approximately  5.4%. Sales from our government and national
accounts  division  decreased $7.1 million,  or 25.6%, in 2002 compared to 2001.
The DataNet division,  which sells networking  products through our direct sales
offices,  government  and national  accounts  division and dealer  channel,  was
purchased in the 2002 McLeod  acquisition,  and  accounted  for $13.5 million in
sales in 2002.  Sales  to our  dealer  network  decreased  by 4.1% in 2002,  due
primarily to the impact of the McLeod acquisition,  since, prior to 2002, McLeod
was a dealer that purchased  $4.2 million from Inter-Tel in 2001.  Excluding the
McLeod acquisition, sales to the dealer network increased 1.5%.

     Sales  from  our  long  distance  resale  and  network  services  divisions
increased $7.1 million in 2002 compared to 2001. Net sales from lease  financing
increased 3.2% in 2002 compared to 2001 and international  revenues increased by
less than 1% in 2002 compared to 2001.

                                       29
<PAGE>
     Since July 24, 2001, the date of the sale of 83% of Inter-Tel.NET,  we have
used  the  cost  method  of   accounting   for  our   remaining   investment  in
Inter-Tel.NET/Comm-Services.  Accordingly,  we have  not  recorded  revenues  or
expenses  of  Inter-Tel.NET  since  the date of  sale.  The  reduction  in sales
attributable  to  Inter-Tel.NET  was  due  entirely  to our  sale of 83% of this
subsidiary.

     The 2002  decrease in net sales from our direct sales  offices,  government
and national  accounts  division  and dealer  channel was also  attributable  to
delayed  customer  buying  decisions  related to a  continued  deterioration  in
industry and macroeconomic conditions, among other factors as follows. Inter-Tel
recognized  lower  revenues due to lower sales  volumes of systems  collectively
through the direct sales  offices,  government  and national  accounts group and
dealer  channel,  offset in part by sales  increases  in our long  distance  and
network  services  divisions,  sales from acquired McLeod  operations,  and to a
lesser extent,  lease finance and international  operations.  In some instances,
prices of various  telecommunications  systems decreased, and discounts or other
highly  competitive  promotions that were offered to customers to generate sales
resulted in lower revenues through both our direct and indirect channels.  Sales
of communications systems were heavily impacted by delayed buying decisions,  in
particular in our national accounts division and direct sales offices.  Although
sales to new  customers  declined  during 2002,  recurring  revenues to existing
customers increased as a percentage of total sales.

     Sales from long distance and network services increased in 2002 compared to
2001 and represented the divisions with our largest  percentage sales increases.
Sales increased in our long distance  division by 17.5%,  despite downward price
pressure  and  significant  competition.  Increased  sales  volume  has  allowed
NetSolutions,  our long  distance  resale  division,  to offer more  competitive
pricing,  which improved sales to our existing  customer base.  Network services
revenues  increased  66% in 2002 compared to 2001, on higher volume of sales and
commissions  on local and network  services such as T-1 access,  frame relay and
other  voice  and  data  circuit  services.  Please  refer to Note P of Notes to
Consolidated Financial Statements for additional segment reporting information.

      GROSS PROFIT. Gross profit increased 11.4% to $194.5 million, or 51.0% of
net sales in 2002,  from $174.5  million,  or 45.2% of net sales,  in 2001.  The
increases in gross profit and gross margins were the result of several different
factors. Gross profit and gross margin in 2002 improved as a result of no longer
including the results of Inter-Tel.NET, which experienced negative gross margins
of $5.9 million during 2001.  Gross profit and margins also increased in 2002 as
compared to 2001 as a result of a higher  proportion of recurring  revenues from
existing customers,  including increased  maintenance and services revenues as a
percentage  of total  sales,  higher  software  content  in our  products,  cost
containment efforts, product design improvements, efficiencies achieved with our
manufacturing vendors and a more favorable sales channel mix.

     During 2002, recurring revenues from existing customers in our direct sales
and national and government accounts channels increased as a percentage of total
sales from these same channels from  approximately  44% in 2001 to more than 46%
in 2002.  Existing customers accounted for a significant portion of our 2002 net
sales from maintenance and other services,  software  additions and/or upgrades,
support,  training and hardware  products such as video  conferencing,  headsets
(wired and  wireless),  networking  products  and  speakerphones.  Our  business
communications  platforms  allow  for  system  migration  without  the  complete
change-out of hardware, which enables us to offer enhancements and new solutions
through software-only upgrades to our existing customers.  Our gross margins are
generally  higher with recurring  revenues because we incur less materials costs
relative  to new  installations.  Accordingly,  our  gross  profit  and  margins
improved in 2002 as a result of this recurring revenue percentage increase.

     Sales from  NetSolutions  increased by 17.5%, or $4.5 million,  compared to
2001.  Although  gross  margins are  generally  lower in this  division than our
consolidated  margins,  the margins improved  slightly in 2002 relative to 2001,
based in part on our ability to negotiate more favorable pricing with vendors on
higher resale volumes.  In addition,  sales from our network  services  division
increased 66%, or 2.6 million, in 2002 compared to 2001. This division generally
receives  commissions on network  services we sell as an agent for RBOCs.  These
sales carry little to no equipment costs and generated  margins of approximately
91% in 2002.  The increase in sales from this  division  therefore  improved our
consolidated gross profit and margins.

                                       30
<PAGE>
     The  increases in gross margin noted above were offset in part by continued
competitive  pricing  pressures  in our direct  sales  offices,  government  and
national  accounts and dealer channels in 2002,  including  pricing discounts or
special competitor promotions on telephone system and software sales and related
equipment.

     RESEARCH AND DEVELOPMENT. Research and development expenses increased 10.2%
to $19.3 million,  or 5.1% of net sales in 2002, from $17.6 million,  or 4.6% of
net  sales  in  2001.  The  increase  is  attributable  in  large  part  to  the
acquisitions of Mastermind in late October 2001 and Swan in early December 2002.
The increase is also attributable, to a lesser extent, to increased research and
development  spending  related to convergence  applications  and new IP endpoint
development.   In  2002,   research  and  development   expenses  were  directed
principally toward the continued development of the AXXESS and Eclipse2 software
and  systems  (including  versions  6.0 and 7.0),  unified  messaging  and voice
processing software,  speech recognition and text-to-speech  applications,  call
center   applications,   unified   communications   applications,   IP  endpoint
development,  and certain CTI and IVR applications.  We expect that research and
development expenses will increase in absolute dollars as we continue to develop
and enhance existing and new technologies and products. These expenses may vary,
however, as a percentage of net sales.

     SELLING,  GENERAL AND ADMINISTRATIVE.  Selling,  general and administrative
expenses  decreased  slightly  in  absolute  dollars to $128.3  million in 2002,
compared to $128.6  million in 2001.  However,  these  expenses  increased  as a
percentage  of net  sales  to  33.6% in 2002  compared  to  33.3% in 2001.  This
decrease in absolute  dollars was  primarily  due to the  reduction in total net
sales of $4.2 million in 2002 compared to 2001.  The increase in these  expenses
as a percentage of net sales is in large part attributable to the sale of 83% of
Inter-Tel.NET  operations  in July 2001.  Selling,  general  and  administrative
expenses  for  Inter-Tel.NET  were  16.8%  of net  sales  when  compared  to the
consolidated average. Accordingly, when these operations were no longer included
in our consolidated  results, our selling,  general and administrative  expenses
increased as a percentage of net sales.

     Inter-Tel.NET  incurred  selling,   general  and  administrative  expenses,
excluding amortization, of $2.3 million during 2001. Excluding the operations of
Inter-Tel.NET  for comparative  purposes,  selling,  general and  administrative
expenses  decreased as a percentage of net sales reflecting the lower percentage
of  total  sales  generated  through  our  combined  direct  sales  offices  and
government  and national  accounts  divisions,  including  the  acquired  McLeod
operations in January 2002.  Selling,  general and administrative  expenses also
decreased as a percentage  of net sales due to lower  depreciation  and bad debt
costs relative to total sales. In addition,  the growth in sales from the resale
of long distance  calling  services and Datanet  products led to lower  selling,
general and administrative costs relative to total sales. We expect that for the
foreseeable future selling,  general and  administrative  expenses will increase
sequentially in absolute dollars assuming that we increase sales and continue to
enhance existing and develop new  technologies and products.  These expenses may
vary, however, as a percentage of net sales.

     AMORTIZATION OF GOODWILL AND PURCHASED  INTANGIBLE  ASSETS. We adopted SFAS
No. 142 effective the beginning of fiscal 2002. In accordance  with SFAS 142, we
ceased amortizing goodwill. We are required to perform goodwill impairment tests
on an annual  basis and between  annual  tests in certain  circumstances.  As of
December 31, 2002, no impairment of goodwill has been  recognized.  There can be
no assurance that future goodwill  impairment  tests will not result in a charge
to  earnings.  Although  amortization  of  goodwill  ceased  for 2002,  goodwill
amortization  totaled  $1.9  million  in  2001,  reflecting   amortization  from
acquisitions  completed prior to 2002. For additional information regarding SFAS
142,  see  "Goodwill  and  Other  Intangible  Assets"  in  Note  A of  Notes  to
Consolidated Financial Statements.

     Amortization of purchased  intangible assets included in operating expenses
was $1.1  million in 2002  compared to $677,000 for 2001.  The  increases in the
amortization  of  purchased  intangible  assets  for 2002  compared  to 2001 was
primarily related to the additional  amortization from recent acquisitions.  For
additional  information  regarding  purchased  intangible  assets,  see  Note  A
"Goodwill and Other Intangible  Assets" and Note B  "Acquisitions,  Dispositions
and Restructuring Charges " to Consolidated Financial Statements.

     OTHER CHARGES.  We recorded no charges in 2002. In connection with the sale
of 83 percent of our  interest  in  Inter-Tel.NET  in July 2001,  we  recorded a
pre-tax  charge or $5.4 million  during 2001,  which  reduced net income by $3.4
million,  or $0.13 per share  after-tax.  This  charge was  associated  with the
impairment of our remaining  investment in  Inter-Tel.NET.  The  impairment  was
measured as the difference

                                       31
<PAGE>
between  the  carrying   value  of   Inter-Tel's   remaining   17%  interest  in
Inter-Tel.NET and the estimated fair market value of the 17% interest.

     LITIGATION  SETTLEMENT,  NET OF COSTS EXCEPT TAXES. In May 2001,  Inter-Tel
entered into an agreement to submit to binding arbitration a lawsuit we filed in
1996.  The  arbitration  was  completed  in January 2002 and, as a result of the
arbitration,  Inter-Tel  received a one-time  gross cash award of $20 million in
February  2002.   Direct  costs  for  attorney's  fees,  expert  witness  costs,
arbitration costs and additional  payments and expenses,  totaled  approximately
$4.5 million in 2002,  excluding  income taxes, for a net award of approximately
$15.5 million. The estimated net proceeds from this arbitration  settlement were
approximately  $9.5 million after taxes, or $0.37 per diluted share for the year
ended December 31, 2002.

     INTEREST  AND OTHER  INCOME.  In 2002 the other  component  of this caption
included an expense of  approximately  $1.2 million related to the write-down of
Inter-Tel's investment in Inter-Tel.NET/Vianet. Other than the write-down, other
income in all  periods  consisted  primarily  of  interest  income  and  foreign
currency  transaction  gains and losses.  Interest  and other  income  increased
approximately  $855,000  in 2002  compared  to 2001  based on a higher  level of
invested  funds,  due in part to cash  received from the  litigation  settlement
noted  above,   offset  by   expenditures   relating  to  the  McLeod  and  Swan
acquisitions.  During 2002, we recognized foreign currency  transaction gains of
$330,000,  an  improvement  of $667,000  compared to losses of $337,000 in 2001.
Interest  expense  was  $156,000 in 2002,  a decrease  of  $312,000  compared to
$468,000 in 2001,  due primarily to reduced  interest on capital  leases held by
Inter-Tel.NET, 83% of which was sold in July 2001.

     INCOME  TAXES.  Our effective  income tax rate for 2002  increased to 37.8%
compared to 37.0% for 2001. The rate  increased  primarily as a result of higher
marginal tax rates  anticipated from higher net income.  We expect the full-year
2003 tax rates to be  comparable  to or slightly  higher than the  effective tax
rate for 2002.

     NET INCOME/(LOSS). Net income for 2002, including the litigation settlement
in 2002,  increased to $38.6 million,  or $1.49 per diluted  share,  compared to
2001 net income of $13.0  million,  or $0.52 per diluted  share,  including  the
charge for the impairment of the investment in Inter-Tel.NET.

     Excluding the 2002 litigation settlement, we would have reported net income
of $29.1  million,  or $1.13 per diluted share in 2002.  Excluding both the 2001
charge and entire 2001  business  operations of  Inter-Tel.NET,  we reported net
income of $21.8 million,  or $0.86 per diluted  share,  in 2001. The increase is
the result of higher gross profit and increased operating efficiencies described
in further detail above.

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

     NET SALES.  Net sales  decreased 4.2% to $385.7 million in 2001 from $402.7
million  in  2000,   representing  a  decrease  of  $17.1  million.  Sales  from
Inter-Tel.NET  (of  which  Inter-Tel  sold 83% of its  interest  in July  2001),
accounted for $8.8 million of the decrease.  Reduced sales from our direct sales
offices,   including  government  and  national  accounts,  and  from  wholesale
distribution  accounted  for $9.4 million of the  decrease.  Reduced  sales from
NetSolutions  accounted for $1.0 million of the decrease from 2000 to 2001.  Net
sales  from  lease  financing  increased  to  21.8%  in 2001  compared  to 2000.
International revenues decreased approximately $300,000 from 2000 to 2001.

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

     The 2001 decrease in net sales was also  attributable  to delayed  customer
buying decisions in 2001 related to a deterioration in macroeconomic conditions.
Inter-Tel  recognized  lower  revenues  due to lower  sales  volumes  of systems
collectively through the direct sales offices,  government and national accounts
group,  dealer  channel  and  foreign  operations,  offset  partially  by  sales
increases in our lease finance

                                       32
<PAGE>
operations.  In some  instances,  prices of various  telecommunications  systems
decreased,  and discounts or other  promotions that were offered to customers to
generate  sales resulted in lower  revenues.  Please refer to Note P of Notes to
Consolidated Financial Statements for additional segment reporting information.

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

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

     RESEARCH AND DEVELOPMENT.  Research and development  expenses  decreased to
$17.6 million,  or 4.6% of net sales in 2001, from $19.5 million, or 4.8% of net
sales in 2000.  This decline is attributable in large part to the closure of the
Executone  research and development  operations in Milford,  Connecticut in July
2000.  Accordingly,  our 2001  costs did not  reflect  the  Executone  expenses,
compared to seven months of activity in 2000. In 2001,  research and development
expenses  were directed  principally  toward the  continued  development  of the
digital  AXXESS and  Eclipse2  software  and systems  (including  version  6.0),
unified messaging and voice processing software, InterPrise IP router solutions,
Talk-to-Agent web e-commerce  solutions,  speech  recognition and text-to-speech
applications, and certain CTI and IVR applications.

     SELLING,  GENERAL AND ADMINISTRATIVE.  Selling,  general and administrative
expenses increased to $131.2 million, or 34.0% of net sales in 2001, from $127.5
million, or 31.7% of net sales in 2000. The increase in these expenses reflected
an increase in costs  associated  with sales through our direct office  channels
compared to our dealer network,  increased reserves for accounts receivable, and
an increase in costs of  maintaining  additional  facilities,  including our new
facilities  in the Phoenix  metro area and the  Convergent  offices  acquired in
January 2001.

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

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

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

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

                                       33
<PAGE>
     INTEREST AND OTHER INCOME. Other income in both periods consisted primarily
of interest income and foreign currency  transaction gains and losses.  Interest
and other income decreased  $393,000 in 2001 compared to the same period in 2000
principally as a result of lower levels of cash available for investment. During
2001, we recognized foreign currency  transaction losses of $337,000 compared to
losses of $421,000 in 2000.  Interest  expense was $468,000 in 2001  compared to
$213,000  in 2000,  primarily  attributable  to debt from  assets  financed  for
Inter-Tel.NET  operations.  This  debt was  transferred  upon the sale of 83% of
Inter-Tel.NET in July 2001.

     INCOME TAXES  (BENEFIT).  The 2001  effective  income tax rate increased to
37.0% compared to 36.8% for 2000. The rate was lower in 2000 because we received
no tax benefits for a component of the Cirilium  losses that were capital losses
during 2000 (lower tax benefits were received to apply to 2000 net losses).

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

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

2001 AND 2000 OTHER CHARGES.

     Set forth herein is a further  description of the items  reflected in other
charges during the years ended December 31, 2001 and 2000.

     INTER-TEL.NET/COMM-SERVICES/VIANET.  During  the  second  quarter  of 2000,
Inter-Tel recorded a pre-tax charge associated with Inter-Tel.NET  operations of
$2.0  million  ($1.2  million  after-tax),  related  to  the  write-down  to net
realizable  value of network  equipment and lease  termination  costs of certain
redundant  facilities.  The reserves  established  at the time of the write-down
have been fully utilized as of December 31, 2001.

     On July 24, 2001, Inter-Tel sold 83% of the stock of Inter-Tel.NET, Inc. to
Comm-Services  Corporation  for a  note  of  $4.95  million,  collateralized  by
Comm-Services  stock,  other  marketable   securities  of  the  shareholders  of
Comm-Services  and 100% of the net assets of  Inter-Tel.NET.  In connection with
the sale of 83% of  Inter-Tel.NET,  we assessed the fair value of the  remaining
17% investment in  Inter-Tel.NET.  Pursuant to SFAS 121, we recorded a charge as
of the close of the second  quarter of 2001 of $5.4 million  ($3.4 million after
tax)  associated with the impairment of our investment in  Inter-Tel.NET.  After
the impairment charge, the carrying value of our investment (the note receivable
from  Comm-Services  plus the 17% ownership  interest in Comm-Services)  totaled
$3.7 million as of December 31, 2001. The charge was primarily non-cash.

     Inter-Tel's   management  has  not   participated   in  the  management  of
Inter-Tel.NET since the sale in July 2001. As a result,  since July 24, 2001, we
have accounted for the remaining  Inter-Tel.NET/Comm-Services  investment  using
the cost method of accounting.  On December 30, 2001, Comm-Services entered into
a merger agreement with Vianet.  Inter-Tel's 17% investment in Comm-Services was
converted to approximately 10% of Vianet stock and as a result, the loan for the
purchase was assumed by Vianet and Inter-Tel  continued to hold  collateral from
the former  shareholders of Comm-Services until March 2003. During 2002, the net
investment  in the  notes  receivable  and  10%  interest  in  Vianet  (formerly
Comm-Services) was written down by $1.2 million and was recorded in other assets
at a carrying value of approximately $2.5 million as of December 31, 2002, which
approximated management's estimate of the related collateral value at that time.

     During 1999,  2000 and 2001,  Inter-Tel.NET  entered into  operating  lease
agreements  totaling  approximately  $6.5 million  from an equipment  vendor for
network equipment and software.  The lease agreements required  Inter-Tel.NET to
purchase vendor maintenance on their products.  Inter-Tel originally  guaranteed
the  indebtedness.  In February  2003, we executed an agreement  with Vianet and
this  vendor  releasing  Inter-Tel  from its  guarantee  of any and all of these
obligations, and Inter-Tel and Vianet released

                                       34
<PAGE>
the vendor from claims  arising  from the failure of the network  equipment  and
software  previously leased. As part of this agreement,  Inter-Tel also received
payment  from the Vianet  shareholders  of $1.45  million,  in exchange  for the
release of the remaining  collateral and as payment of the loan.  Inter-Tel also
retained a collateral interest in a Vianet shareholder's variable forward option
contract  that  matures in July 2003 for an amount up to  $250,000.  We have not
recorded an asset for this right as the amount is not  guaranteed  or reasonably
estimable based on the  fluctuations of future stock prices.  The value received
in this  transaction  was  equivalent to our remaining  investment  value,  less
accruals for potential obligations to the vendor discussed above.

     Inter-Tel  also retains its  ownership  interest in Vianet and will account
for the remaining  investment  interest of approximately 10% in Vianet using the
cost method of accounting.

     EXECUTONE.   On  January  1,  2000  Inter-Tel  purchased  certain  computer
telephony  assets and  assumed  certain  liabilities  of  Executone  Information
Systems, Inc. (Executone). 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.  In connection with the Executone acquisition,  we sold Executone's
manufacturing  assets and liabilities to Varian of Tempe,  Arizona at a net book
value of $6.6 million.

     During  the  second  quarter  of 2000,  we  decided  to close  the  primary
Executone  facility in Milford,  Connecticut  and to  recognize a  restructuring
charge related to our exit plan and closure of the Executone operations. We have
accounted for the restructuring of the Executone operations, including severance
and related costs,  the shut down and  consolidation of the Milford facility and
the impairment of assets  associated  with the  restructuring.  We finalized our
plan for the exiting of activities and the involuntary termination or relocation
of the  employees.  Accrued  costs  associated  with this  plan were  estimates,
although the original  estimates made for the second quarter of 2000 for reserve
balances have not changed significantly as of December 31, 2002.

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

     The total restructuring  charge from this event totaled $50.9 million.  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, 2002.  Activity  represents  payments  made or
amounts written off.

                                       35
<PAGE>
<TABLE>
<CAPTION>
                                                                                                      RESERVE
                                      CASH/    RESTRUCTURING     2000         2001        2002        BALANCE
          DESCRIPTION               NON-CASH      CHARGE       ACTIVITY     ACTIVITY    ACTIVITY    AT 12/31/02
          -----------               --------      ------       --------     --------    --------    -----------
                                                                   (In thousands)
<S>                                <C>          <C>           <C>          <C>          <C>          <C>
PERSONNEL COSTS:
  Severance and termination
     Costs                            Cash       $ (1,583)     $  1,558     $      2     $     20     $     (3)
  Other Plant closure costs           Cash           (230)           30          200           --           --

LEASE TERMINATION AND OTHER
CONTRACTUAL OBLIGATIONS (NET
OF ANTICIPATED RECOVERY):
  Building and equipment
     Leases                           Cash         (7,444)        1,348        1,489        2,594       (2,013)
  Other contractual obligations       Cash         (1,700)           --        1,700           --           --

IMPAIRMENT OF ASSETS:
  Inventories                       Non-Cash       (3,454)        1,376          209        1,869           --
  Prepaid inventory and other
    Expenses                        Non-Cash       (2,485)        2,485           --           --
  Accounts receivable               Non-Cash       (1,685)          521          245           88         (831)
  Fixed assets                      Non-Cash       (3,151)        2,942           --           53         (156)
  Net intangible assets             Non-Cash      (29,184)       29,184           --           --           --

TOTAL                                            $(50,916)     $ 39,444     $  3,845     $  4,624     $ (3,003)
</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 included
in  other  charges,   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.

INFLATION/CURRENCY FLUCTUATION

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

LIQUIDITY AND CAPITAL RESOURCES

     At December 31,  2002,  cash and  equivalents  and  short-term  investments
totaled $125.8 million,  which  represented an increase of  approximately  $64.0
million from the $61.8  million  total at December  31, 2001.  We maintain a $10
million unsecured, revolving line of credit with BankOne, NA, which is available
through June 1, 2003. Under the credit facility, we have the option to borrow at
a prime rate or adjusted  LIBOR interest  rate.  Historically,  we have used the
credit  facility  primarily  to  support  international  letters  of  credit  to
suppliers  and we intend to renew this facility  again in 2003.  During the year
ended December 31, 2002, we received approximately $9.5 million in net after-tax
proceeds ($15.5 million pre-tax and net of related expenses) from the settlement
of an  arbitration  claim (Refer to  "Litigation  Settlement"  in  "Management's
Discussion and Analysis, Year Ended December 31, 2002 Versus Year Ended December
31, 2001").  During the year ended December 31, 2002, we expended  approximately
$13,000 to  repurchase  our common  stock,  compared  to $28.9  million  used to
repurchase  common stock in 2001. During 2002, we expended $11.4 million to fund
acquisitions, compared to $6.8 million in 2001. A portion of our cash

                                       36
<PAGE>
balances may be used for, among other things, acquisitions, strategic alliances,
working capital and general corporate purposes.

     Net cash  provided by operating  activities  totaled  $77.2 million for the
year ended  December 31, 2002,  compared to $75.0 million for the same period in
2001. Cash provided by operating  activities in 2002 primarily resulted from net
income plus non-cash  charges for  depreciation  and  amortization  expenses and
provision for losses on receivables and leases.  Cash generated by the change in
operating  assets and  liabilities in 2002 was $15.5  million,  compared to cash
generated by the change in operating  assets and liabilities of $21.0 million in
2001.  At  December  31,  2002,  we  achieved  lower  net  accounts  receivable,
inventory,  prepaid expenses and other current assets than at December 31, 2001,
which was primarily a result of close  management of  receivables  and inventory
and working  down  elevated  levels of working  capital  assets  acquired in the
Executone acquisition. We expect to expand sales through our direct sales office
and dealer  networks,  which is expected to require the  expenditure  of working
capital for increased accounts receivable and inventories.

     Net cash used in investing  activities totaled $56.6 million,  primarily in
the form of acquisitions and capital expenditures, as well as $37.9 million used
to purchase short-term investments net of sales and maturities,  compared to net
cash used in  investing  activities  of $17.6  million in 2001,  including  $3.0
million used to purchase short-term  investments.  Cash used in acquisitions and
investments  in joint  ventures  totaled  approximately  $11.4  million  in 2002
compared to $6.8 million in 2001.  Capital  expenditures  totaled  approximately
$7.6  million  for 2002  compared  to $8.0  million  in 2001.  Net cash  used in
investing  activities  in 2000 was  partially  offset by cash  received  of $6.6
million from the disposition of the  manufacturing  operations of Executone.  We
anticipate additional capital expenditures during 2003,  principally relating to
expenditures   for  equipment  and  management   information   systems  used  in
operations, facilities expansion and acquisition activities.

     Net cash provided by financing  activities totaled $5.5 million during 2002
compared to the use of $25.7 million in 2001. We expended  approximately $13,000
and $28.9  million for stock  repurchases  during  2002 and 2001,  respectively,
funded by existing cash balances during each period.  Repayment of our long-term
debt for the year 2002 was  $481,000,  while we issued  long-term  debt,  net of
repayments,  of $1.8 million in 2001 primarily in the form of long-term  capital
leases to support capital additions to Inter-Tel.NET prior to our divestiture of
our majority  ownership in July, 2001.  During 2002, we reissued treasury shares
through  stock  option  exercises  and  issuances,  with the  proceeds  received
totaling less than the cost basis of the treasury stock  reissued.  Accordingly,
the difference was recorded as a reduction to retained  earnings.  Net cash used
for cash  dividends  totaled $2.2 million in 2002 and $1.0 million  during 2001.
Cash provided by the exercise of stock options and stock  issuances  pursuant to
our Employee  Stock  Purchase Plan totaled $8.2 million in 2002 and $2.3 million
in 2001.

     We offer to our customers lease financing and other services, including our
Total Solution (formerly Totalease) program, through our Inter-Tel Leasing, Inc.
subsidiary.  We fund our Total  Solution  program  in part  through  the sale to
financial  institutions of rental payment  streams under the leases.  Sold lease
rentals  totaling  $205.8 and $202.7 million  remained  unbilled at December 31,
2002 and December 31, 2001,  respectively.  We are obligated to repurchase  such
income  streams in the event of defaults by lease  customers  and,  accordingly,
maintain reserves based on loss experience and past due accounts. Although we to
date have been able to resell the rental  streams  from  leases  under the Total
Solution program profitably and on a substantially current basis, the timing and
profitability of lease resales could impact our business and operating  results,
particularly  in an  environment  of  fluctuating  interest  rates and  economic
uncertainty.  If we are required to repurchase rental streams and realize losses
thereon in  amounts  exceeding  our  reserves,  our  operating  results  will be
adversely affected.

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

                                       37
<PAGE>
CONTRACTUAL OBLIGATIONS

     We had the following contractual obligations outstanding as of December 31,
2002:

<TABLE>
<CAPTION>
                                                      Amount of Commitment Expiration Per Period
                                               -------------------------------------------------------
(in thousands)                                           Less Than 1                           After 5
                                                Total        Year     1-3 Years   4-5 Years     Years
                                                -----        ----     ---------   ---------     -----
<S>                                            <C>         <C>         <C>         <C>         <C>
Operating lease obligations, primarily for     $28,819     $ 9,390     $13,939     $ 5,142     $   348
   building and equipment leases
Letters of credit                                  545         545          --          --          --
                                               -------     -------     -------     -------     -------
                                               $29,364     $ 9,935     $13,939     $ 5,142     $   348
                                               =======     =======     =======     =======     =======
</TABLE>

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

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

     SALES-LEASES.  For our sales-type lease accounting,  we follow the guidance
provided by FASB Statement No. 13,  Accounting for Leases and FASB Statement No.
140,   Accounting   for  Transfers   and  Servicing  of  Financial   Assets  and
Extinguishments  of  Liabilities - A Replacement  of FASB  Statement No. 125. We
record the discounted present values of minimum rental payments under sales-type
leases as sales,  net of  provisions  for  continuing  administration  and other
expenses over the lease period.  We record the lease sales at the time of system
sale and  installation  pursuant  to  Staff  Accounting  Bulletin  No.  101,  as
discussed  above  for  sales to end user  customers,  and  upon  receipt  of the
executed  lease   documents.   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.  The net rental streams are sold to funding  sources
on a regular basis with the income  streams  discounted by prevailing  like-term
rates at the time of sale. Gains or losses resulting from the sale of net rental
payments  from such leases are recorded as net sales.  We establish and maintain
reserves against potential  recourse following the resales based upon historical
loss experience,  past due accounts and specific account analysis. The allowance
for  uncollectible  minimum lease payments and recourse  liability at the end of
the year  represent  reserves  against the entire  lease  portfolio.  Management
reviews  the  adequacy  of the  allowance  on a regular  basis and  adjusts  the
allowance  as  required.  These  reserves  are  either  netted  in the  accounts
receivable,   current  and   long-term   components  of  "Net   investments   in
Sales-Leases" on the balance sheet, or included in long-term  liabilities on our
balance sheet for off-balance sheet leases.

                                       38
<PAGE>
     GOODWILL AND OTHER INTANGIBLE  ASSETS. We assess the impairment of goodwill
and other identifiable  intangibles  whenever events or changes in circumstances
indicate  that the  carrying  value  may not be  recoverable.  Some  factors  we
consider  important  which  could  trigger  an  impairment  review  include  the
following:

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

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

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

     ALLOWANCE  FOR  DOUBTFUL  ACCOUNTS.  We maintain  allowances  for  doubtful
accounts for estimated  losses  resulting from the inability of our customers to
make required payments.  Additional reserves or allowances for doubtful accounts
are recorded for our sales-type  leases,  discussed above in  "Sales-Leases." We
establish and maintain  reserves against  estimated losses based upon historical
loss  experience,  past due accounts and specific account  analysis.  Management
reviews the level of the allowances for doubtful accounts on a regular basis and
adjusts  the level of the  allowances  as needed.  At  December  31,  2002,  our
allowance for doubtful  accounts for accounts  receivable  were $12.2 million of
our $54.7 million in gross accounts  receivable.  If the financial  condition of
our  customers  or  channel  partners  were  to  deteriorate,  resulting  in  an
impairment  of their  ability to make  payments,  additional  allowances  may be
required.

     INVENTORIES.  We value our inventories at lower of cost or market.  Cost is
determined by the first-in,  first-out (FIFO) method,  including material, labor
and factory overhead.  Significant  management judgment is required to determine
the  reserve  for  obsolete or excess  inventory.  Inventory  on hand may exceed
future demand either  because the product is outdated,  or obsolete,  or because
the amount on hand is more than can be used to meet future need,  or excess.  We
currently consider all inventory that has no activity within one year as well as
any additional  specifically  identified inventory to be excess. We also provide
for the total value of  inventories  that we determine  to be obsolete  based on
criteria such as customer demand, product life-cycles, changing technologies and
market conditions.  We write down our excess and obsolete inventory equal to the
difference  between the cost of inventory  and the estimated  market  value.  At
December  31,  2002,  our  inventory  reserves  were $10.6  million of our $21.9
million gross  inventories.  If actual  customer  demand,  product  life-cycles,
changing  technologies  and  market  conditions  are less  favorable  than those
projected by management, additional inventory write-downs may be required.

     CONTINGENCIES.  We are a party to  various  claims  and  litigation  in the
normal course of business.  Management's  current  estimated  range of liability
related to various  claims and pending  litigation  is based on claims for which
our  management  can  estimate  the  amount  and range of loss.  Because  of the
uncertainties  related  to both the  amount  and range of loss on the  remaining
pending  claims  and  litigation,  management  is  unable  to make a  reasonable
estimate of the  liability  that could result from an  unfavorable  outcome.  As
additional information becomes available, we will assess the potential liability
related to our pending  litigation and revise our  estimates.  Such revisions in
our estimates of the potential  liability could materially impact our results of
operations and financial position.

                                       39
<PAGE>
     Divisions  of the United  States  Department  of Justice are  investigating
other  companies' and Inter-Tel's  participation in a  federally-funded  "E-Rate
program"  to  connect  schools  and  libraries  to  the  Internet.  The  Justice
Department  has not provided  Inter-Tel  with a  description  of the evidence on
which the investigations are based.  Inter-Tel is presently unable to predict or
determine the final  outcome of, or to estimate the potential  range of loss (if
any) with respect to, the investigations. If Inter-Tel is convicted of any crime
or subjected to sanctions,  or if penalties,  damages or other monetary remedies
are  assessed  against  Inter-Tel in  connection  with any  investigations,  our
business and operating results could be materially and adversely affected. Based
upon the information known at this time, we do not expect the  investigations to
result in a material  adverse  impact upon the  Company's  business or financial
condition.  Nevertheless,  the  early  nature  of the  investigations  makes  it
difficult to determine  whether the likelihood of a material  adverse outcome is
unlikely.

RECENT ACCOUNTING PRONOUNCEMENTS

     In August 2001, the Financial  Accounting  Standards  Board ("SFAS") issued
SFAS No. 144,  "Accounting for the Impairment or Disposal of Long-Lived Assets",
which  addresses  financial  accounting  and  reporting  for the  impairment  or
disposal of long-lived  assets and supersedes SFAS No. 121,  "Accounting for the
Impairment  or Disposal of  Long-Lived  Assets and for  Long-Lived  Assets to be
Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations" for a disposal of a segment of a business.
SFAS No. 144 was effective for fiscal years  beginning  after December 15, 2001,
with earlier application encouraged.  The Company's adoption of SFAS No. 144 had
no effect on the Company's financial position or results of operation.

     In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146
supersedes Emerging Issues Task Force ("EITF") No. 94-3, "Liability  Recognition
for Certain  Employee  Termination  Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring)."  SFAS No. 146 eliminates
the  provisions of EITF No. 94-3 that required a liability to be recognized  for
certain exit or disposal  activities at the date an entity  committed to an exit
plan.  SFAS No. 146 requires a liability  for costs  associated  with an exit or
disposal activity to be recognized when the liability is incurred.  SFAS No. 146
is effective for exit or disposal  activities  that are initiated after December
31, 2002.  The Company does not expect the adoption of this  statement to have a
material impact on its results of operations or financial position.

     In December 2002, the Financial  Accounting Standards Board issued SFAS No.
148,  "Accounting  for Stock-Based  Compensation -- Transition and  Disclosure."
SFAS No.  148  amends  FASB  Statement  No.  123,  "Accounting  for  Stock-Based
Compensation",  to provide  alternative  methods of transition to SFAS No. 123's
fair value method of accounting for stock-based employee compensation. Statement
148 also amends the  disclosure  provisions  of SFAS No. 123 and APB Opinion No.
28,  "Interim  Financial  Reporting,"  to require  disclosure  in the summary of
significant  accounting policies of the effects of an entity's accounting policy
with respect to  stock-based  employee  compensation  on reported net income and
earnings per share in annual and interim  financial  statements.  While SFAS No.
148 does not amend SFAS No. 123 to require  companies  to account  for  employee
stock options using the fair value method, the disclosure provisions of SFAS No.
148 are  applicable to all companies  with  stock-based  employee  compensation,
regardless  of whether they account for that  compensation  using the fair value
method of SFAS No. 123 or the  intrinsic  value method of APB Opinion No. 25. As
allowed by SFAS No.  123,  the  Company  has  elected to continue to utilize the
accounting  method  prescribed  by APB  Opinion  No.  25  and  has  adopted  the
disclosure  requirements  of SFAS No. 123 as of  December  31,  2002.  We do not
expect  the  adoption  of this  statement  to have an impact on our  results  of
operations or financial position.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

     INVESTMENT PORTFOLIO. We do not use derivative financial instruments in our
non-trading  investment  portfolio.  Inter-Tel  maintains a portfolio  of highly
liquid cash  equivalents  typically  maturing in three  months or

                                       40
<PAGE>
less as of the date of purchase. Inter-Tel places its investments in instruments
that meet high credit quality  standards,  as specified in our investment policy
guidelines.

     The Company also maintains short-term investments, which are all classified
as available for sale, and have been recorded at fair value,  which approximates
cost.  Short-term  investments  include  certificates  of deposit,  auction rate
certificates,  auction rate preferred securities, municipal preferred securities
and mutual funds.  The auction rate  securities are  adjustable-rate  securities
with dividend  rates that are reset  periodically  by bidders  through  periodic
"Dutch  auctions"  generally  conducted every 7 to 49 days by a trust company or
broker/dealer on behalf of the issuer. The Company believes these securities are
highly  liquid   investments   through  the  related  auctions;   however,   the
collateralizing  securities have stated terms of up to thirty (30) years.  These
instruments  are  rated A or higher  by  Standard  & Poor's  Ratings  Group,  or
equivalent.  The Company's  short-term  investments  are intended to establish a
high-quality  portfolio that preserves principal,  meets liquidity needs, avoids
inappropriate  concentrations  and delivers an appropriate yield in relationship
to  the  Company's  investment  guidelines  and  market  conditions.  Given  the
short-term  nature  of  these  investments,  and  that  we  have  no  borrowings
outstanding  other than  short-term  letters of  credit,  we are not  subject to
significant interest rate risk.

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

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

     Not applicable.

                                       41
<PAGE>
                                    PART III

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

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

ITEM 11. EXECUTIVE COMPENSATION

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

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     None.

ITEM 14. CONTROLS AND PROCEDURES

     Under  the  supervision  and  with  the  participation  of our  management,
including our principal  executive officer and principal  financial officer,  we
conducted an evaluation of the  effectiveness of the design and operation of our
disclosure controls and procedures,  as defined in Rules 13a-14(c) and 15d-14(c)
under the  Securities  Exchange Act of 1934,  as amended,  within 90 days of the
filing date of this report (the  "Evaluation  Date").  Based on this evaluation,
our principal  executive officer and principal financial officer concluded as of
the Evaluation  Date that our disclosure  controls and procedures were effective
such that the material information required to be included in our Securities and
Exchange  Commission  ("SEC")  reports is recorded,  processed,  summarized  and
reported  within the time periods  specified in SEC rules and forms  relating to
Inter-Tel,  including our consolidated subsidiaries,  and was made known to them
by others within those entities, particularly during the period when this report
was being prepared.

     In addition,  there were no significant changes in our internal controls or
in other factors that could  significantly  affect these controls  subsequent to
the  Evaluation  Date. We have not identified any  significant  deficiencies  or
material  weaknesses  in our  internal  controls,  and  therefore  there were no
corrective actions taken.

                                       42
<PAGE>
                                     PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

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

1.   FINANCIAL STATEMENTS

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

     Report of Ernst & Young LLP, Independent Auditors
     Consolidated balance sheets--December 31, 2002 and 2001
     Consolidated  statements of operations--years ended December 31, 2002,
       2001 and 2000
     Consolidated statements of shareholders' equity--years ended December 31,
       2002, 2001 and 2000
     Consolidated statements of cash flows--years ended December 31, 2002, 2001
       and 2000 Notes to consolidated financial statements

2.   FINANCIAL STATEMENT SCHEDULES

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

     Schedule for the three years ended December 31, 2002:

     Schedule II--Valuation and Qualifying Accounts                  Page No. 50

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

3.   EXHIBITS

     3.1(10)     Articles of Incorporation, as amended.

     3.2(16)     By-Laws, as amended.

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

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

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

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

     10.37(3)*   Tax Deferred Savings Plan.

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

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

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

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

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

     10.56(13)*  Employee Stock Ownership Plan.

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

                                       43
<PAGE>
     10.58(16)   Development, Supply and License Agreement between Registrant
                 and QUALCOMM dated January 17, 1996.

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

     10.60(18)*  Inter-Tel, Incorporated 1997 Employee Stock Purchase Plan.

     10.61(19)*  Inter-Tel, Incorporated Acquisition Stock Option Plan and form
                 of Stock Option Agreement.

     10.61(20)   Computer Telephony Asset Purchase Agreement dated as of
                 October 17, 1999 by and between Executone Information Systems,
                 Inc., Inter-Tel, Incorporated and Executone Inter-Tel Business
                 Information Systems, Inc.

     13.0(21)    Excerpts from Annual Report to Security Holders.

----------
(1)  Incorporated by reference to Registrant's Registration Statement on Form
     S-1 (File No. 2-70437).

(2)  Incorporated by reference to Registrant's Registration Statement on Form
     S-8 (File No. 2-94805).

(3)  Incorporated by reference to Registrant's Annual Report on Form 10-K for
     the year ended November 30, 1984 (File No. 0-10211).

(10) Incorporated by reference to Registrant's Annual Report on Form 10-K for
     the year ended December 31, 1988 (File No. 0-10211).

(11) Incorporated by reference to Registrant's Registration Statement on Form
     S-8 (File No. 33-40353).

(12) Incorporated by reference to Registrant's Registration Statement on Form
     S-1 (File No. 33-70054).

(13) Incorporated by reference to Registrant's Registration Statement on Form
     S-8 (File No. 33-73620).

(14) Incorporated by reference to Registrant's Annual Report on Form 10-K for
     the year ended December 31, 1998 (File No. 0-10211).

(15) Incorporated by reference to Registrant's Proxy Statement dated March 23,
     1994 and to Registrant's Registration Statement on Form S-8 (File No.
     33-83826).

(16) Incorporated by reference to Registrant's Annual Report on Form 10-K for
     the year ended December 31, 1995 (File No. 0-10211).

(17) Incorporated by reference to Registrant's Registration Statements on Forms
     S-8 (File Nos. 333-41197 and 333-85098).

(18) Incorporated by reference to Registrant's Registration Statements on Forms
     S-8 (File Nos. 333-41197 and 333-87474).

(19) Incorporated by reference to Registrant's Registration Statements on Forms
     S-8 (File Nos. 333-56872, 333-67261 and 333-85098).

(20) Incorporated by reference to Registrant's Report on Form 8-K (File No.
     333-67261).

(21) Filed herewith, except as noted.

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

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

                                       44
<PAGE>
(c)  Exhibits.

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

     21.0      Subsidiaries of Inter-Tel, Incorporated.

     23.0      Consent of Ernst & Young LLP, Independent Auditors.

     24.1      Power of Attorney.

     99.1      Certification of Chief Executive Officer Pursuant to 18 U.S.C.
               1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
               Act of 2002.

     99.2      Certification of Chief Financial Officer Pursuant to 18 U.S.C.
               1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
               Act of 2002.

     See Item 15(a) 3 also.

(d)  Financial Statement Schedule. The response to this portion of Item 15 is
     submitted as a separate section of this report. See Item 8.

                                       45
<PAGE>
                                   SIGNATURES

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


                                        INTER-TEL, INCORPORATED


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

Dated: March 19, 2003

                                       46
<PAGE>
               CERTIFICATION OF CHIEF EXECUTIVE OFFICER AS ADOPTED
            PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Steven G. Mihaylo, certify that:

1.   I have reviewed this annual report on Form 10-K of Inter-Tel, Incorporated;

2.   Based on my  knowledge,  this  annual  report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this annual report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual report,  fairly present in all material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

     a)   designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during the period in which this annual report
          is being prepared;

     b)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and

     c)   presented   in  this   annual   report  our   conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of the registrant's board of directors (or persons performing the
     equivalent functions):

     a)   all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

6.   The  registrant's  other  certifying  officers and I have indicated in this
     annual report whether there were significant  changes in internal  controls
     or in other  factors  that could  significantly  affect  internal  controls
     subsequent  to the  date  of our  most  recent  evaluation,  including  any
     corrective  actions with regard to  significant  deficiencies  and material
     weaknesses.


                                            /s/ STEVEN G. MIHAYLO
                                            ------------------------------------
                                            Steven G. Mihaylo
                                            CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Date: March 19, 2003                        (PRINCIPAL EXECUTIVE OFFICER)

                                       47
<PAGE>
               CERTIFICATION OF CHIEF FINANCIAL OFFICER AS ADOPTED
            PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Kurt R. Kneip, certify that:

1.   I have reviewed this annual report on Form 10-K of Inter-Tel, Incorporated;

2.   Based on my  knowledge,  this  annual  report  does not  contain any untrue
     statement of a material fact or omit to state a material fact  necessary to
     make the statements  made, in light of the  circumstances  under which such
     statements  were made, not misleading with respect to the period covered by
     this annual report;

3.   Based on my  knowledge,  the  financial  statements,  and  other  financial
     information included in this annual report,  fairly present in all material
     respects the financial  condition,  results of operations and cash flows of
     the registrant as of, and for, the periods presented in this annual report;

4.   The  registrant's  other  certifying  officers  and I are  responsible  for
     establishing and maintaining disclosure controls and procedures (as defined
     in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

     a)   designed  such  disclosure  controls  and  procedures  to ensure  that
          material  information  relating  to  the  registrant,   including  its
          consolidated subsidiaries,  is made known to us by others within those
          entities,  particularly  during the period in which this annual report
          is being prepared;

     b)   evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this annual report (the "Evaluation Date"); and

     c)   presented   in  this   annual   report  our   conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5.   The registrant's other certifying  officers and I have disclosed,  based on
     our most recent  evaluation,  to the  registrant's  auditors  and the audit
     committee of the registrant's board of directors (or persons performing the
     equivalent functions):

     a)   all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

     b)   any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and

6.   The  registrant's  other  certifying  officers and I have indicated in this
     annual report whether there were significant  changes in internal  controls
     or in other  factors  that could  significantly  affect  internal  controls
     subsequent  to the  date  of our  most  recent  evaluation,  including  any
     corrective  actions with regard to  significant  deficiencies  and material
     weaknesses.


                                            /s/ KURT R. KNEIP
                                            ------------------------------------
                                            Kurt R. Kneip,
                                            SENIOR VICE PRESIDENT AND CHIEF
                                            FINANCIAL OFFICER
Date: March 19, 2003                        (PRINCIPAL FINANCIAL OFFICER)

                                       48
<PAGE>
                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                                 (In thousands)

<TABLE>
<CAPTION>
                                             COL. A       COL. B        COL. C          COL. D           COL. E
                                           ---------    ----------     --------        --------          ------
                                                        ADDITIONS
                                                                       Charged
                                           Balance at    Charged       to Other       Charged to        Balance
                                           Beginning     to Costs      Accounts       Deductions       at End of
        DESCRIPTION                        of Period    & Expenses     Describe        Describe          Period
        -----------                        ---------    ----------     --------        --------          ------
<S>                                        <C>          <C>            <C>             <C>             <C>
YEAR ENDED DECEMBER 31, 2002

Deducted from asset accounts:
Allowance for doubtful accounts            $ 11,858      $  4,177      $    517 (4)    $  4,393 (2)     $ 12,159
Allowance for lease accounts                 10,736         6,356            --           4,040 (2)       13,052
Inventory allowance                          13,202         1,526            --           4,170 (3)       10,558

YEAR ENDED DECEMBER 31, 2001

Deducted from asset accounts:
Allowance for doubtful accounts              17,187         6,260           207 (4)      11,796 (1,2)     11,858
Allowance for lease accounts                  9,200         5,840            --           4,304 (2)       10,736
Inventory allowance                          11,897         1,614         2,000 (4)       2,309 (3)       13,202

YEAR ENDED DECEMBER 31, 2000

Deducted from asset accounts:
Allowance for doubtful accounts               8,814         6,793         4,994 (4)       3,414 (2)       17,187
Allowance for lease accounts                  6,891         4,927            --           2,618 (2)        9,200
Inventory allowance                           5,849         1,653         6,278 (4)       1,883 (3)       11,897
</TABLE>

----------
(1)  Includes $4.6 million related to 2000  acquisitions and included in balance
     at end of period 2000 (see item 4 below). Additionally,  this includes $1.9
     million  transferred to Comm-Services  with sale of Inter-Tel.NET  that was
     also included in balance at end of period.
(2)  Uncollectible accounts written off, net of recoveries.
(3)  Inventory written off or sold.
(4)  Acquired in purchase transaction.

                                       49