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

                                    FORM 10-Q

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

For the quarter ended                                    Commission File Number:
    June 30, 2001                                                0-10211


                             INTER-TEL, INCORPORATED


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


                        120 North 44th Street, Suite 200
                           Phoenix, Arizona 85034-1822

                                 (602) 302-8900


                                  Common Stock
               (23,683,191 shares outstanding as of June 30, 2001)

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

                                                                            Page
                                                                            ----

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements (Unaudited)

         Condensed consolidated balance sheets --
         June 30, 2001 and December 31, 2000                                   3

         Condensed consolidated statements of operations --
         three and six months ended June 30, 2001 and June 30, 2000            4

         Condensed consolidated statements of cash flows --
         three and six months ended June 30, 2001 and June 30, 2000            5

         Notes to condensed consolidated financial statements --
         June 30, 2001                                                         6

Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations                                            11

PART II. OTHER INFORMATION                                                    25

         SIGNATURES                                                           26

                                        2
<PAGE>
PART I.  FINANCIAL INFORMATION

INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)                                       June 30,       December 31,
                                                       2001            2000
                                                     ---------       ---------
                                                    (Unaudited)      (Note A)
ASSETS
CURRENT ASSETS
  Cash and equivalents                               $  11,748       $  27,103
  Accounts receivable                                   53,183          61,482
  Inventories                                           31,523          35,060
  Net investment in sales-leases                        15,283          14,629
  Income taxes receivable                               18,408           9,157
  Deferred income taxes                                  7,505          13,116
  Prepaid expenses and other assets                      7,259           7,668
  Restricted cash for acquisition                        6,000              --
                                                     ---------       ---------
  TOTAL CURRENT ASSETS                                 150,909         168,215

PROPERTY, PLANT & EQUIPMENT                             34,957          32,723
EQUIPMENT HELD UNDER LEASE, NET                            254             423
GOODWILL AND OTHER INTANGIBLES                          19,651          18,389
NET INVESTMENT IN SALES-LEASES                          23,454          22,808
OTHER ASSETS                                               497             568
                                                     ---------       ---------
                                                     $ 229,722       $ 243,126
                                                     ---------       ---------

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
  Accounts payable                                   $  34,659       $  35,438
  Current maturities of long-term debt                   1,977           1,766
  Other current liabilities                             49,239          45,003
                                                     ---------       ---------
  TOTAL CURRENT LIABILITIES                             85,875          82,207

DEFERRED TAX LIABILITY                                   4,679           5,222
LONG TERM DEBT                                           5,802           3,720
OTHER LIABILITIES                                       16,374          15,541

SHAREHOLDERS' EQUITY
Common Stock                                           109,132         109,132
Less:  shareholder loans                                (1,018)         (1,018)
Retained earnings                                       45,939          44,099
Accumulated other comprehensive income                     154            (280)
                                                     ---------       ---------
                                                       154,207         151,933
Less: Treasury stock at cost                           (37,215)        (15,497)
                                                     ---------       ---------

TOTAL SHAREHOLDERS' EQUITY                             116,992         136,436
                                                     ---------       ---------
                                                     $ 229,722       $ 243,126
                                                     ---------       ---------

See accompanying notes.

                                        3
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
(In thousands, except                              Three Months               Six Months
per share amounts)                                Ended June 30,            Ended June 30,
                                              ----------------------    ----------------------
                                                2001         2000         2001         2000
                                              ---------    ---------    ---------    ---------
<S>                                           <C>          <C>          <C>          <C>
NET SALES                                     $ 103,836    $ 101,089    $ 197,539    $ 197,452

Cost of sales                                    58,916       63,040      112,971      117,863
Cost of sales - Executone restructuring              --        7,639           --        7,639
                                              ---------    ---------    ---------    ---------
Total cost of sales                              58,916       70,679      112,971      125,502

GROSS PROFIT                                     44,920       30,410       84,568       71,950

Research & development                            4,412        5,431        8,551       11,099
Selling, general and administrative              34,637       32,954       66,692       63,865
Nonrecurring charge                               5,357       45,245        5,357       45,245
In-process research and development                  --           --           --        5,433
                                              ---------    ---------    ---------    ---------
                                                 44,406       83,630       80,600      125,642
                                              ---------    ---------    ---------    ---------

OPERATING INCOME (LOSS)                             514      (53,220)       3,968      (53,692)

Equity share of Cirilium Corp.'s net losses          --       (2,215)          --       (3,914)
Interest and other income                            47          613          214          955
Loss on foreign translation adjustments             (92)        (217)        (395)        (282)
Interest expense                                   (175)         (62)        (402)        (137)
                                              ---------    ---------    ---------    ---------

INCOME (LOSS) BEFORE INCOME TAXES                   294      (55,101)       3,385      (57,070)
INCOME TAXES                                        109      (20,939)       1,252      (21,687)
                                              ---------    ---------    ---------    ---------

NET INCOME (LOSS)                             $     185    $ (34,162)   $   2,133    $ (35,383)
                                              =========    =========    =========    =========

NET INCOME (LOSS) PER SHARE-BASIC             $    0.01    $   (1.30)   $    0.09    $   (1.34)
                                              =========    =========    =========    =========

NET INCOME (LOSS) PER SHARE-DILUTED           $    0.01    $   (1.30)   $    0.08    $   (1.34)
                                              =========    =========    =========    =========

Average number of common shares
  Outstanding - Basic                            24,389       26,371       24,944       26,310
                                              =========    =========    =========    =========

Average number of common shares
  Outstanding - Diluted                          24,910       26,371       25,376       26,310
                                              =========    =========    =========    =========
</TABLE>

See accompanying notes.

                                        4
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

<TABLE>
<CAPTION>
(In thousands, except                                    Three Months             Six Months
per share amounts)                                      Ended June 30,          Ended June 30,
                                                     --------------------    --------------------
                                                       2001        2000        2001        2000
                                                     --------    --------    --------    --------
<S>                                                  <C>         <C>         <C>         <C>
OPERATING ACTIVITIES
Net income (loss)                                    $    185    $(34,162)   $  2,133    $(35,383)
Adjustments to reflect operating activities:
  Depreciation and amortization                         3,208       3,562       6,208       6,756
  Non-cash portion of nonrecurring charge               5,357      41,783       5,357      41,783
  Purchased in-process R&D                                 --          --          --       5,433
  Provision for losses on receivables                   3,241       2,020       5,817       4,013
  Provision for inventory valuation                       375      (3,526)        909        (161)
  Decrease in other liabilities                           226       8,010         833       6,892
  Loss on sale of property and equipment                   30          28          56         156
  Deferred income taxes                                 6,842     (21,038)      5,448     (18,380)
  Effect of exchange rate changes                          92         139         433        (121)
  Changes in operating assets and liabilities           4,465      14,516         730        (845)
                                                     --------    --------    --------    --------

NET CASH PROVIDED BY OPERATING
  ACTIVITIES                                           24,021      11,332      27,924      10,143

INVESTING ACTIVITIES
  Additions to property and equipment                  (3,548)     (3,116)     (6,635)     (6,079)
  Additions to operating leases                            --         (81)         --        (122)
  Proceeds from disposal of property and equipment         28           4          46          11
  Proceeds from disposition of business segment            --          --          --       6,602
  Cash used in acquisitions                              (605)         --     (12,124)     (1,647)
                                                     --------    --------    --------    --------

NET CASH USED IN INVESTING ACTIVITIES                  (4,125)     (3,193)    (18,713)     (1,235)

FINANCING ACTIVITIES
  Cash dividends paid                                    (260)       (263)       (520)       (526)
  Payments on term debt                                  (774)       (329)     (1,094)       (551)
  Treasury stock purchases                            (13,202)         --     (27,343)         --
  Proceeds from term debt                               2,292          --       3,387          --
  Proceeds from stock issued under the ESPP               508         449         508         449
  Proceeds from exercise of stock options                 183         406         496       1,664
                                                     --------    --------    --------    --------

NET CASH PROVIDED BY (USED IN)
  FINANCING ACTIVITIES                                (11,253)        263     (24,566)      1,036

INCREASE (DECREASE) IN CASH
  AND EQUIVALENTS                                       8,643       8,402     (15,355)      9,944

CASH AND EQUIVALENTS AT BEGINNING
  OF PERIOD                                             3,105      20,768      27,103      19,226
                                                     --------    --------    --------    --------
CASH AND EQUIVALENTS AT END OF
  PERIOD                                             $ 11,748    $ 29,170    $ 11,748    $ 29,170
                                                     ========    ========    ========    ========
</TABLE>

See accompanying notes.

                                        5
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2001

NOTE A -- BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial  information and with the  instructions to Form 10-Q and Rule 10-01 of
Regulation  S-X.  Accordingly,  they do not include all of the  information  and
footnotes  required by generally  accepted  accounting  principles  for complete
financial statements. In the opinion of management,  all adjustments (consisting
of normal recurring  accruals)  considered  necessary for a fair presentation of
the results for the interim  periods  presented  have been  included.  Operating
results for the three and six months  ending  June 30, 2001 are not  necessarily
indicative  of the results that may be expected for the year ended  December 31,
2001.  The balance  sheet at December 31, 2000 has been derived from the audited
financial  statements at that date, but does not include all of the  information
and footnotes required by generally accepted accounting  principles for complete
financial  statements.  For  further  information,  refer  to  the  consolidated
financial  statements  and footnotes  thereto  included in the Company's  annual
report on Form 10-K for the year ended December 31, 2000.

Certain  prior year amounts have been  reclassified  to conform with the current
period presentation.

From December 1999 to September  2000,  the Company owned more than 20% but less
than 50% of Cirilium Corporation  ("Cirilium").  Therefore, the Company recorded
the  activity  of Cirilium  using the equity  method of  accounting  during that
period.  The Company wrote-off its investment in Cirilium in September 2000, and
reduced its ownership interest below 20%. As a result,  since that time, and for
the second  quarter and six months  ended June 30,  2001,  the Company no longer
used the equity method of accounting for the Cirilium investment.

RECENT  ACCOUNTING  PRONOUNCEMENTS.  In  June  2001,  the  Financial  Accounting
Standards Board issued Statement of Financial  Accounting Standards ("SFAS") No.
141, Business  Combinations,  and No. 142, Goodwill and Other Intangible Assets,
effective  for fiscal years  beginning  after  December 15, 2001.  Under the new
rules,  goodwill and intangible  assets deemed to have indefinite  lives will no
longer be amortized but will be subject to annual impairment tests in accordance
with the statements.  Other intangible assets will continue to be amortized over
their useful  lives.  The Company is currently  reviewing the impact of SFAS No.
141 and 142 and will be  performing  a  fair-value  analysis  at a later date in
connection with the adoption of SFAS No. 142 on January 1, 2002.

In June 1998, the Financial  Accounting Standards Board ("FASB") issued SFAS No.
133  ("SFAS  133"),   "Accounting   for  Derivative   Instruments   and  Hedging
Activities," which establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity recognize all
derivatives  as either  assets or  liabilities  in the balance sheet and measure
those  investments  at fair  value.  Implementation  of this  standard  has been
delayed by the FASB for a twelve-month  period.  The Company adopted SFAS 133 in
the first quarter of fiscal 2001 with no effect to the  Company's  operations or
financial position.

NOTE B -- EARNINGS PER SHARE

Diluted earnings per share assume that outstanding  common shares were increased
by shares issuable upon the exercise of all  outstanding  stock options to which
market price exceeds  exercise price less shares which could have been purchased
with related proceeds, if the effect would not be antidilutive.

                                        6
<PAGE>
The following table sets forth the computation of basic and diluted earnings per
share:

<TABLE>
<CAPTION>
                                             Three Months Ended               Six Months Ended
(In thousands, except                   -----------------------------   -----------------------------
per share amounts)                      June 30, 2001   June 30, 2000   June 30, 2001   June 30, 2000
                                        -------------   -------------   -------------   -------------
<S>                                        <C>            <C>              <C>             <C>
Numerator: Net income                      $    185       $ (34,162)       $  2,133        $(35,383)
                                           ========       =========        ========        ========
Denominator:
  Denominator for basic earnings per
  share - weighted average shares            24,389          26,371          24,944          26,310

Effect of dilutive securities:
  Employee and director stock options           521              --             432              --
                                           --------       ---------        --------        --------
Denominator for diluted earnings per
  share - adjusted weighted average
  shares and assumed conversions             24,910          26,371          25,376          26,310
                                           ========       =========        ========        ========

Basic earnings per share                   $   0.01       $   (1.30)       $   0.09        $  (1.34)
                                           ========       =========        ========        ========

Diluted earnings per share                 $   0.01       $   (1.30)       $   0.08        $  (1.34)
                                           ========       =========        ========        ========
</TABLE>

As of June 30, 2000,  the number of  securities  that could  potentially  dilute
basic EPS in the future,  but were excluded from the  computation of diluted EPS
because they were  antidilutive,  was 692,000 shares for the quarter and 961,000
for the six months ended June 30, 2000.

NOTE C -- ACQUISITIONS, DISPOSITIONS AND NONRECURRING CHARGES

CONVERGENT.  On  January  26,  2001,  the  Company  acquired  certain  assets of
Convergent  Technologies,  Inc.  ("Convergent")  for cash plus the assumption of
various  specific  liabilities and related  acquisition  costs.  Generally,  the
Company  acquired  segments of the voice  customer  base,  accounts  receivable,
specified  inventory and fixed  assets,  and assumed  liabilities  for warranty,
maintenance and specified leased premises costs. The Convergent  transaction was
accounted for using the purchase method of accounting.

The purchase price paid by the Company in the Convergent transaction was subject
to  adjustment  based  on  the  final  balances  of  the  specified  assets  and
liabilities,  and in  particular,  actual  collected  accounts  receivable.  The
acquisition agreement provided that all accounts receivable not collected within
the 90-day period  following the closing of the  transaction  were guaranteed by
Convergent, and reserves of approximately $7.9 million were to be held in escrow
for claims  relating to  uncollected  accounts  receivable  and for  breaches of
covenants,   representations   and  warranties   contained  in  the  acquisition
agreement.  In June 2001,  the Company  filed a claim with the escrow  agent for
return of the funds held in escrow, based on uncollected accounts receivable and
adjustments to acquired assets and liabilities.

On June 15, 2001,  Inter-Tel  reached a  settlement  agreement  with  Convergent
representatives  which  specified  the  return of funds  from  escrow  and other
amounts owed to Inter-Tel by Convergent  that were  previously  set aside by the
bankruptcy  court.  The settlement  agreement also called for adjustments to the
purchase  price  based  on  adjusted  totals  for  assets  to  be  acquired  and
liabilities to be assumed.  Inter-Tel filed a petition with the bankruptcy court
for return of all monies  identified in the agreement  reached with  Convergent,
and on July 23, 2001, the bankruptcy  court ordered  payment by the escrow agent
and Convergent of an aggregate of $6.0 million plus interest,  representing  the

                                        7
<PAGE>
full amount of  Inter-Tel's  claims.  On July 25,  2001,  in  settlement  of its
claims,  Inter-Tel  received  payment from the escrow agent of $5.1 million plus
accrued  interest,  and a second  payment of  approximately  $0.9  million  plus
accrued interest directly from the Convergent funds previously ordered set aside
by the  court.  The $6.0  million  total is  included  in  "Restricted  cash for
acquisition" at June 30, 2001. Inter-Tel did not record a significant adjustment
to the acquisition goodwill based on the return of funds from escrow and payment
received  directly  from  Convergent.  The  settlement  payments  only  required
adjustments  or  reallocations  based  on  the  specified  assets  acquired  and
liabilities  assumed  in  connection  of the  purchase.  Differences  have  been
represented as adjustments to the net assets acquired.

INTER-TEL.NET AND ICA. During the second quarter of 2000,  Inter-Tel  recorded a
pre-tax charge  associated with  Inter-Tel.NET  operations of $2.0 million ($1.2
million  after-tax),  related to the write-down to net  realizable  value of the
Vocal'Net  servers in the division's IP network and lease  termination  costs of
redundant  facilities.  The pre-tax charge associated with Inter-Tel.NET  during
2000 was related to the  write-down  to net  realizable  value of the  Vocal'Net
servers in the  division's IP network,  and lease  termination  costs of certain
redundant facilities.

In March 2000,  the  Company's  Inter-Tel.NET  subsidiary  acquired the stock of
Intercomm Americas,  Inc. ("ICA"),  an international IP communications  reseller
for $580,000 cash and 750,000 shares of Inter-Tel.NET  Class B restricted stock,
with  conversion   rights  into  Inter-Tel,   Incorporated   Common  Stock.  The
acquisition  purchase  price was valued at $1.2 million at March 2000;  however,
this valuation  changed based on the exercise of conversion rights in July 2001,
as provided by the acquisition agreement.

On July 24, 2001, Inter-Tel agreed to sell 83% of Inter-Tel.NET to Comm-Services
Corporation  for a note of $4.95  million.  The note is secured in part by stock
and other marketable securities and 100% of the net assets of Inter-Tel.NET. The
note is due and payable with a principal payment of $250,000 due Sixty (60) days
from date of  execution;  then  interest only from October 16, 2001 through July
15, 2002;  then monthly  principal  and interest  payments from July 16, 2002 to
October 15, 2002 based on 1% of  collected  monthly  revenues and based on 2% of
collected  monthly  revenues from October 16, 2002 until paid in full). The note
has balance due clauses in the event of (1) default,  (2) "change of control" of
the purchased entity or (3) December 31, 2007.

In  connection  with this  transaction,  the  sellers of ICA  elected to convert
shares of  Inter-Tel.NET  into shares of Inter-Tel,  Incorporated.  As a result,
Inter-Tel made adjustments totaling $4.85 million to goodwill based on the value
of the converted Inter-Tel shares as of June 30, 2001. In addition,  the Company
assessed the fair value of the net assets of  Inter-Tel.NET  as of June 30, 2001
under FAS 121 and recorded a  nonrecurring  charge as of the close of the second
quarter of $5.4 million ($3.4 million after tax)  associated with the impairment
of the Company's 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  current fair market value of the note and 17%
interest  in the  net  assets  of  Inter-Tel.NET.  Except  for  some  immaterial
post-closing  expenses,  the charge is primarily non-cash related.  The value of
the  impairment is subject to adjustment  depending on the occurrence of certain
post-closing contingencies related to the sale and, accordingly, is currently an
estimate. Inter-Tel will account for the remaining 17% investment 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") for cash plus related  acquisition  costs. 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  since there was no  alternative  use. The
Executone transaction was accounted for using the purchase method of accounting.
In connection with the Executone acquisition,  the Company sold a portion of the
assets and liabilities at net book value to Varian Associates,  Inc.  ("Varian")
of Tempe, Arizona in the first quarter of 2000.

                                        8
<PAGE>
During the second  quarter of 2000,  the  Company  decided to close the  primary
Executone  facility in Milford,  Connecticut  and to  recognize a  restructuring
charge related to the Executone  operations.  At the time the original  purchase
was  recorded,  the Company had not  anticipated  closing the Milford  facility.
After incurring  higher than  anticipated  losses from Executone  operations and
after a deterioration in the Executone  business,  including loss of dealers and
customers,  delays in introduction and acceptance of new products, the Company's
management  decided  it  was in the  best  interests  of  the  Company  and  its
shareholders  to close the Milford  facility and consolidate its operations into
the Company's metro-Phoenix, Arizona facilities.

The Company has accounted  for the  restructuring  of the Executone  operations,
including  severance and related costs,  the shut down and  consolidation of the
Milford facility and the impairment of assets associated with the restructuring.
Accrued costs associated with this plan were estimates.  The original  estimates
made for the second quarter for reserve balances have not changed  significantly
as of June 30, 2001.

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

The following table summarizes details of the restructuring  charge taken in the
second quarter of 2000 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 June 30, 2001.

<TABLE>
<CAPTION>
                                                                                       RESERVE
                                              CASH/      RESTRUCTURING                 BALANCE
             DESCRIPTION                    NON-CASH        CHARGE       ACTIVITY     AT 6/30/01
             -----------                    --------        ------       --------     ----------
                                                         (In thousands)

<S>                                         <C>            <C>           <C>           <C>
PERSONNEL COSTS:
  Severance and termination costs              Cash        $  (1,583)    $  1,583      $     --
  Other Plant closure costs                    Cash             (230)         230            --

LEASE TERMINATION AND OTHER CONTRACTUAL
OBLIGATIONS (NET OF ANTICIPATED RECOVERY):
  Building and equipment leases                Cash           (7,444)       1,861        (5,583)
  Other contractual obligations                Cash           (1,700)         195        (1,505)

IMPAIRMENT OF ASSETS:
  Inventories                                Non-Cash         (3,454)       1,980        (1,474)
  Prepaid inventory and other expenses       Non-Cash         (2,485)       2,485            --
  Accounts receivable                        Non-Cash         (1,685)         764          (921)
  Fixed assets                               Non-Cash         (3,151)       2,942          (209)
  Net intangible assets                      Non-Cash        (29,184)      29,184            --

TOTAL                                                      $ (50,916)    $ 41,224      $ (9,692)
</TABLE>

                                        9
<PAGE>
NOTE D -- PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE

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

NOTE E -- SEGMENT INFORMATION

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

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

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

In December 1999,  Inter-Tel entered into an agreement with Hypercom Corporation
to jointly form Cirilium Corporation  ("Cirilium").  Cirilium comprises parts of
Hypercom's  data  and  Inter-Tel's   packet  telephony  products  and  services,
including Inter-Tel's Vocal'Net gateway products and technology. As of the close
of the third quarter, the Company wrote off its remaining investment in Cirilium
of $2.0 million.  This charge  includes the write-off of  Inter-Tel's  remaining
basis in Cirilium  Corporation.  Total  pre-tax  losses from  Cirilium  from all
sources were $8.6 million  ($0.21 per diluted share) during 2000. As a result of
the  write-off,  we do not  expect to report the  operations  of  Cirilium  as a
separate  business  segment.  Refer to the  table  below  for a  summary  of the
operations for 2000.

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

During the three  months ended June 30, 2001,  consistent  with fiscal  year-end
2000 reporting, the Company generated income from business segments, including a
charge, as follows:

                                       10
<PAGE>
                                            PRINCIPAL
(in thousands, except per share amounts)     SEGMENT   INTER-TEL.NET    TOTAL
                                            ---------    ---------    ---------
Net sales                                   $  95,898    $   7,938    $ 103,836
Gross Profit                                   46,464       (1,544)      44,920
Nonrecurring charge                                --       (5,357)      (5,357)
Operating income (loss)                         8,218       (7,704)         514
Interest and other income                          48           (1)          47
Loss on foreign translation adjustments           (92)          --          (92)
Interest expense                                  (78)         (97)        (175)

Net income (loss)                           $   5,100    $  (4,915)   $     185
                                            =========    =========    =========

Net income (loss) per diluted share         $    0.20    $   (0.20)   $    0.01
                                            =========    =========    =========

During the six months ended June 30, 2001,  consistent with fiscal year-end 2000
reporting,  the Company  generated  income from business  segments,  including a
charge, as follows:

                                            PRINCIPAL
(in thousands, except per share amounts)     SEGMENT   INTER-TEL.NET    TOTAL
                                            ---------    ---------    ---------
Net sales                                   $ 185,192    $  12,347    $ 197,539
Gross Profit                                   89,678       (5,110)      84,568
Nonrecurring charge                                --       (5,357)      (5,357)
Operating income (loss)                        16,163      (12,195)       3,968
Interest and other income                         215           (1)         214
Loss on foreign translation adjustments          (395)          --         (395)
Interest expense                                 (223)        (179)        (402)

Net income (loss)                           $   9,929    $  (7,796)   $   2,133
                                            =========    =========    =========

Net income (loss) per diluted share         $    0.39    $   (0.31)   $    0.08
                                            =========    =========    =========

The Company's revenues are generated  predominantly in the United States.  Total
revenues  generated from U.S. customers totaled $101.2 million and $98.5 million
of total revenues for the quarters  ended June 30, 2001 and 2000,  respectively.
The Company's revenues from international  sources were primarily generated from
customers located in the United Kingdom,  Europe, Asia and South America. In the
second   quarters   of  2001  and  2000,   revenues   from   customers   located
internationally accounted for 2.5% and 2.6% of total revenues, respectively.

PART I.

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

This  Quarterly   Report  to  Shareholders   on  Form  10-Q  ("10-Q")   contains
forward-looking statements that involve risks and uncertainties.  The statements
contained  in this  10-Q  that are not  purely  historical  are  forward-looking
statements  within the meaning of Section 27A of the  Securities Act of 1933, as
amended,  and Section 21E of the  Securities  Exchange Act of 1934,  as amended,
including without limitation  statements  regarding the Company's  expectations,
beliefs,  intentions or strategies  regarding  the future.  All  forward-looking
statements  included in this document are based on information  available to the
Company on the date hereof,  and the Company assumes no obligation to update any
such  forward-looking  statements.  The cautionary  statements made in this 10-Q
should be read as being  applicable  to all related  forward-looking  statements
wherever they appear in this document. The Company's actual results could differ
materially  from those  anticipated  in these  forward-looking  statements  as a
result of certain  factors,  including  those set forth under  "Factors That May
Affect Results of Future Operations" below and elsewhere in this 10-Q.

                                       11
<PAGE>
OVERVIEW

Inter-Tel,  incorporated in Arizona in 1969, is a single point of contact,  full
service  provider  of  digital  business  telephone  systems,   call  processing
software,  voice  processing  software,  call  accounting  software,  networking
software,  Internet  Protocol  ("IP")  telephony  software,  computer  telephone
integration ("CTI") applications,  IP and traditional long distance calling, and
other  communications  services.  Inter-Tel's  products and services include the
Axxess and Eclipse  digital  business  communication  software  platforms,  with
integrated voice processing and unified messaging systems,  InterPrise voice and
data routers,  ClearConnect  Talk-to-Agent e-Commerce software, and IP telephony
communications  services.  The Company also  provides  maintenance,  leasing and
support  services for its products.  The Company's Common Stock is quoted on the
Nasdaq National Market System under the symbol "INTL."

RESULTS OF OPERATIONS

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

Sales of systems through the Company's dealers and VARs typically generate lower
gross  margins  than sales  through the  Company's  direct  sales  organization,
although  direct sales typically  require higher levels of selling,  general and
administrative  expenses.  In addition,  the Company's long distance and network
services  typically  generate  lower gross  margins  than sales of software  and
system  products.  Sales from  Inter-Tel.NET  for each of the periods  presented
have, at times, even generated  negative gross margins,  as discussed in further
detail below. Accordingly,  the Company's margins may vary from period to period
depending  upon  distribution  channel and product  mix. In the event that sales
through dealers or sales of long distance  services  increase as a percentage of
net sales, the Company's overall gross margin would likely decline.

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

<TABLE>
<CAPTION>
                                       Three Months Ended June 30,   Six Months Ended June 30,
                                       ---------------------------   -------------------------
                                            2001         2000            2001         2000
                                           -----        -----           -----        -----
<S>                                        <C>          <C>             <C>          <C>
NET SALES                                  100.0%       100.0%          100.0%       100.0%
Cost of sales                               56.7         62.4            57.2         59.7
Cost of sales - Executone Restructuring       --          7.6              --          3.9
                                           -----        -----           -----        -----
Total cost of sales                         56.7         69.9            57.2         63.6

GROSS PROFIT                                43.3         30.1            42.8         36.4

Research and development                     4.2          5.4             4.3          5.6
Selling, general and administrative         33.4         32.6            33.8         32.3
Nonrecurring Charge                          5.2         44.8             2.7         22.9
IPRD write-off                                --          0.0              --          2.8
                                           -----        -----           -----        -----

OPERATING INCOME                             0.5        (52.6)            2.0        (27.2)

Equity Share of Cirilium's net losses         --         (2.2)             --         (2.0)
Interest and other income                    0.0          0.4             0.0          0.3
Interest expense                            (0.2)        (0.1)           (0.2)        (0.1)
Income taxes                                 0.1        (20.7)            0.6        (11.0)
                                           -----        -----           -----        -----
Net income (loss)                            0.2%       (33.8)%           1.1%       (17.9)%
                                           =====        =====           =====        =====
</TABLE>

                                       12
<PAGE>
Included in the table above for 2001 is a charge recorded in connection with the
sale  of the  Company's  interest  in  Inter-Tel.NET.  The  Company  recorded  a
nonrecurring  charge as of the close of the second quarter of $5.4 million ($3.4
million after tax) associated with the impairment of the Company's investment in
Inter-Tel.NET.  The  impairment  was  measured  by 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.

Included  in the table  above for 2000 are total  nonrecurring  charges of $52.9
million,  plus $5.4 million  write-off of  in-process  research and  development
costs (refer to Note D). The  Executone  restructuring  charge of $50.9  million
included $45.2 million for exit costs and asset  impairment  represents and $7.6
million  associated with the impairment of inventories,  which has been recorded
as  additional  costs of  sales.  The  restructuring  costs  are the  result  of
management's  decision  to close the  primary  Executone  facility  in  Milford,
Connecticut  and to  recognize  a  restructuring  charge  related  to the entire
Executone  operations.  After  incurring  higher  than  anticipated  losses from
Executone operations and experiencing a material  deterioration in the business,
including loss of dealers and customers,  delays in introduction  and acceptance
of new products,  management decided it was in the best interests of the Company
and  its  shareholders  to  close  the  Connecticut  facility,  consolidate  the
operations into the Company's metro Phoenix,  Arizona  facilities and record the
one-time charge.

During the second  quarter of 2000,  Inter-Tel  also  recorded a pre-tax  charge
associated  with   Inter-Tel.NET   operations  of  $2.0  million  ($1.2  million
after-tax),  related to the write-down to net realizable  value of the Vocal'Net
servers in the  division's IP network and lease  termination  costs of redundant
facilities.  The pre-tax charge  associated with  Inter-Tel.NET  during 2000 was
related to the  write-down to net realizable  value of the Vocal'Net  servers in
the  division's IP network,  and lease  termination  costs of certain  redundant
facilities.

NET SALES.  Net sales for the second  quarter of 2001  increased  2.7% to $103.8
million,  compared to $101.1  million in the second  quarter of 2000.  Net sales
increased slightly to $197.54 million in the first six months of 2001,  compared
to $197.45  million in the first six months of 2000.  For the quarter ended June
30, 2001, sales from the direct sales offices, government and national accounts,
and from wholesale distribution increased approximately $3.9 million compared to
2000. The second  quarter  increase in net sales was  attributable  to increased
sales of Axxess  and  Eclipse  products,  and to sales  from the new  Convergent
offices  acquired  at  the  end  of  January  2001,  and  increased  sales  from
Inter-Tel.NET.

Sales for the  quarter  and six months  ended June 30,  2001 from  Inter-Tel.NET
increased $947,000 and $2.9 million, respectively,  compared to the same periods
in 2000.  The  Inter-Tel.NET  increases  represented a higher volume of Internet
Protocol  minutes  generated  compared to 2000. Sales for the quarter ended June
30,  2001  from  the  Company's  network  services  group,  including  Inter-Tel
NetSolutions  and Network  Services  agency,  decreased $3.1 million compared to
2000,  reflecting a lower volume of sales,  as opposed to pricing  changes.  The
remaining  increases  were  attributable  to increases  from leasing and foreign
operations. Please refer to Note E for additional segment reporting information.

Inter-Tel's  sales  increase  for the  second  quarter  of 2001  was  driven  by
increased  sales volume,  as opposed to pricing  changes.  Inter-Tel  recognized
greater revenues due to higher sales volumes of systems through the direct sales
offices and  government  and national  accounts  group;  an increased  number of
customers;  sales attributable to enhanced technologies and new products; larger
systems purchased by customers; and a greater volume of minutes sold through the
Inter-Tel.NET network. In some instances,  prices of various  telecommunications
systems  actually  decreased,  or discounts or other  promotions were offered to
customers to generate the higher volume of sales.

GROSS PROFIT.  Gross profit for the second  quarter of 2001  increased  22.6% to
$44.9 million,  or 43.3% of net sales, from $30.4 million, or 30.1% of net sales
including the 2000  Executone  restructuring  charge,  in the second  quarter of
2000. Excluding the 2000 Executone  restructuring charge, gross profit increased
18.1% in the second  quarter  of 2001  compared  to the second  quarter of 2000.
Gross profit  increased  6.9% to $84.6  million,  or 42.8% of net sales,  in the
first six months of 2001 compared to $72.0  million,  or 36.4% of net sales,  in
the first six months of 2000 including the 2000 charge.  Excluding the Executone
restructuring  charge,  gross  profit  for the six months  ended  June 30,  2001

                                       13
<PAGE>
increased 6.3% compared to the comparable period in 2000. The increases in gross
profit as a percentage of sales (or gross margin) were  attributable to a higher
percentage  of  sales  generated  by the  Company's  direct  sales  offices  and
government and national  accounts  group.  In addition,  although  Inter-Tel.NET
continued to recognize negative margins,  the margins improved  significantly in
both periods in 2001  compared to 2000.  Margins  improved  despite  competitive
pricing pressures throughout the business.

RESEARCH  AND  DEVELOPMENT.  Research  and  development  expenses for the second
quarter of 2001  decreased to $4.4  million,  or 4.2% of net sales,  compared to
$5.4 million, or 5.4% of net sales, for the second quarter of 2000. Research and
development  expenses  decreased to $8.6 million,  or 4.3% of net sales,  in the
first six months of 2001 compared to $11.1 million, or 5.6% of net sales, in the
first six months of 2000.  These  decreases were primarily  attributable  to the
reduction of expenses relating to the Executone operations. However, the Company
experienced  comparable research and development  expenses in the remaining core
business  operations,  primarily  related to the  continued  development  of the
Axxess  and  Eclipse  networking   software  and  systems  and  the  design  and
development of the Company's CTI applications.  The Company expects that for the
foreseeable future research and development expenses will increase  sequentially
in absolute dollars as the Company continues to enhance existing and develop new
technologies and products.  These expenses may vary, however, as a percentage of
net sales.

SELLING,  GENERAL  AND  ADMINISTRATIVE.   Selling,  general  and  administrative
expenses for the second quarter of 2001 increased to $34.6 million,  or 33.4% of
net sales,  compared  to $33.0  million,  or 32.6% of net sales,  for the second
quarter of 2000. Selling, general and administrative expenses increased to $66.7
million,  or 33.8% of net  sales,  in the first six months of 2001  compared  to
$63.9  million,  or 32.3% of net  sales,  in the first six  months of 2000.  The
increases in absolute  dollars and as a percentage  of net sales for the quarter
and six months  ended June 30, 2001 were  attributable  primarily  to the higher
percentage  sales generated by the Company's direct sales offices and government
and  national  accounts  division,  as well as  increased  reserves for accounts
receivable.  Selling,  general and  administrative  expenses from  Inter-Tel.NET
decreased more than $0.5 million during the quarter and first six months of 2001
compared to 2000, reflecting  cost-cutting measures implemented during 2001. The
Company expects that selling,  general and administrative expenses will continue
to increase in absolute  dollars,  but may vary in the future as a percentage of
net sales.

IN-PROCESS  RESEARCH AND  DEVELOPMENT.  On January 1, 2000  Inter-Tel  purchased
certain computer  telephony assets and assumed certain  liabilities of Executone
Information  Systems,  Inc. for $44.3  million in cash plus related  acquisition
costs,  subject to purchase  price  adjustments  as of the closing  date. Of the
total purchase price, $5.4 million, or $3.4 million after taxes, was written-off
as purchased in-process research and development.

NONRECURRING   CHARGES.   In  connection  with  the  sale  of  its  interest  in
Inter-Tel.NET in July 2001, the Company recorded a nonrecurring charge as of the
close of the second quarter of $5.4 million ($3.4 million after tax)  associated
with the impairment of the Company's 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.

During the second  quarter of 2000,  the Company  recorded a one-time  after-tax
restructuring  charge of $31.6 million  associated  with the  restructuring  and
write-off  of assets  in  connection  with the  acquired  Executone  operations,
including $4.7 million  after-tax for the impairment of inventories  included in
cost of sales.  Included in the remaining after-tax charge of $26.9 million were
costs for the plant  closure,  severance  and related  termination  benefits for
terminated employees,  lease obligations and other contractual  obligations,  as
well as the  impairment  of accounts  receivable,  fixed  assets and  intangible
assets. In addition, during the second quarter,  Inter-Tel recorded an after-tax
charge associated with Inter-Tel.NET  operations of $1.2 million, related to the
write-down to net realizable value of the Vocal'Net servers in the division's IP
network  and lease  termination  costs of  redundant  facilities.  The  charges,
including the amounts  attributable to cost of sales,  reduced diluted  earnings
per share by $1.24 per share and $1.25 per share for the second  quarter and six
months ended June 30, 2000, respectively.

                                       14
<PAGE>
INTEREST AND OTHER INCOME.  Other income in both periods consisted  primarily of
interest income and foreign  exchange rate gains and losses.  Interest and other
income  decreased  approximately  $0.7  million  in the first six months of 2001
compared to 2000  principally  as a result of lower levels of cash available for
investment.  During the first six months of 2001, the Company recognized foreign
exchange  rate  losses of  $395,000,  a decrease  of 40%  compared  to losses of
$282,000 in 2000. Interest expense was $402,000 in the first six months of 2001,
an increase of 193% compared to $137,000 in 2000, primarily  attributable to the
use of cash for the repurchase of the Company's Common Stock during 2001.

NET  INCOME/(LOSS).  Net income for the second  quarter was $185,000  ($0.01 per
diluted  share),   including  the  nonrecurring   charge   associated  with  the
Inter-Tel.NET  impairment,  compared  to net loss of $34.2  million  ($1.30  per
diluted  share) for the second  quarter of 2000,  reflecting  the charges  noted
above associated with the Executone and Inter-Tel.NET operations.  Excluding the
charges,  net income  reached  $3.6  million  ($0.15 per diluted  share) for the
second quarter of 2001, compared to a loss of $336,000 ($0.05 per diluted share)
in 2000.  Net  income for the six months  ended June 30,  2001 was $2.1  million
($0.08 per diluted share), including the nonrecurring charge associated with the
Inter-Tel.NET  impairment,  compared  to net loss of $35.4  million  ($1.34  per
diluted share) for the second quarter of 2000, reflecting the charges associated
with the  Executone and  Inter-Tel.NET  operations.  Excluding the charges,  net
income  totaled $5.5 million ($0.22 per diluted share) for the second quarter of
2001, compared to net income of $773,000 ($0.03 per diluted share) in 2000.

Excluding the charges and operations of Inter-Tel.NET,  the Company reported net
income of $5.1 million ($0.20 per diluted share) for the second quarter of 2001,
compared  to net  income of $3.4  million  ($0.13 per  diluted  share) for 2000.
Excluding the charges and operations of Inter-Tel.NET,  the Company reported net
income of $9.9 million  ($0.39 per diluted  share) for the six months ended June
30, 2001,  compared to net income of $8.0 million  ($0.29 per diluted share) for
2000.

INFLATION/CURRENCY FLUCTUATION

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

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2001, the Company had $11.7 million in cash and  equivalents,  which
represented  an increase of  approximately  $8.6  million  from March 31,  2001.
During the second  quarter of 2001,  the Company  expended  approximately  $13.2
million  to  repurchase  shares  of the  Company's  Common  Stock.  The  Company
maintains  a $25  million  unsecured  revolving  line of  credit  with Bank One,
Arizona, NA. This credit facility is annually renewable and is available through
June 1, 2002. Under the credit facility, the Company has the option to borrow at
a prime rate or adjusted LIBOR interest rate. Historically, the Company has used
the credit  facility  primarily  to support  international  letters of credit to
suppliers.  The  remaining  cash  balances  and credit  facility may be used for
potential acquisitions,  strategic alliances, working capital, stock repurchases
and general corporate purposes.

Net cash  provided by operating  activities  totaled $24.0 million for the three
months ended June 30, 2001, compared to cash provided by operating activities of
$11.3 million for the same period in 2000. Cash provided by operating activities
in the second  quarter of 2001 was primarily the result of the non-cash  portion
of restructuring charge of $5.4 million,  non-cash depreciation and amortization
charges of $3.2 million,  decreased  accounts  receivable  of $8.3 million,  and
decreased inventory of $3.5 million. The Company expects to expand sales through
its direct  sales  office  and dealer  networks,  and this  sales  expansion  is
expected  to require  working  capital for  increased  accounts  receivable  and
inventories.

Net cash used in investing activities totaled $4.1 million for the quarter ended
June 30, 2001, compared to net cash used by investing activities of $3.2 million
for the quarter ended June 30, 2000. During the second quarter of 2001, net cash

                                       15
<PAGE>
used in acquisitions  totaled  approximately  $605,000 and capital  expenditures
$3.5 million.  Net cash used for capital  expenditures  totaled $3.1 million for
the same period in 2000. The Company anticipates additional capital expenditures
during 2001,  principally  relating to expenditures for equipment and management
information systems used in its operations and for facilities expansion.

Net cash used in financing  activities totaled $11.3 million in the three months
ended June 30, 2001,  compared to net cash  provided by financing  activities of
$263,000  for the same period in 2000.  During the second  quarter of 2001,  the
Company  purchased  treasury  stock using  approximately  $13.2 million and paid
$260,000 in cash dividends,  which was partially offset by the net proceeds from
the exercise of stock  options of $183,000  and proceeds of $508,000  from stock
issued under  Inter-Tel's  Employee  Stock Purchase Plan. Net proceeds from term
debt,  net of debt  repayments,  totaled $1.5  million in the second  quarter of
2001,  primarily  in  connection  with  the  purchase  of  assets  used  in  the
Inter-Tel.NET network.

The  Company  offers  to its  customers  lease  financing  and  other  services,
including its TotaLease program,  through its Inter-Tel Leasing subsidiary.  The
Company  funds its  TotaLease  program  in part  through  the sale to  financial
institutions of rental income streams under the leases. Resold TotaLease rentals
totaling  $203.2 million and $198.4 million  remained  unbilled at June 30, 2001
and December 31, 2000, respectively. The Company is obligated to repurchase such
income  streams in the event of defaults by lease  customers  and,  accordingly,
maintains reserves based on loss experience and past due accounts.  Although the
Company to date has been able to resell the rental streams from leases under the
TotaLease  program  profitably and on a substantially  current basis, the timing
and  profitability  of lease  resales  could impact the  Company's  business and
operating results,  particularly in an environment of fluctuating interest rates
and  economic  uncertainty.  If the  Company is required  to  repurchase  rental
streams and realizes  losses  thereon in amounts  exceeding  its  reserves,  its
operating results will be adversely affected.

The Company  believes that its working capital and credit  facilities,  together
with cash  generated from  operations,  will be sufficient to fund the Company's
operations and to provide  adequate  working capital for the next twelve months.
Provided  sufficient  resources,  the Company may also repurchase  shares of its
Common  Stock  pursuant  to board  authorization,  or  finance  acquisitions  of
additional  resellers of telephony  products or other strategic  acquisitions or
corporate  alliances.  However, to the extent that additional funds are required
in the future to  address  working  capital  needs and to  provide  funding  for
capital  expenditures or for additional  acquisitions or stock repurchases,  the
Company  will  seek  additional  financing.  There  can  be  no  assurance  that
additional financing will be available when required or on acceptable terms.

FACTORS THAT MAY AFFECT RESULTS OF FUTURE OPERATIONS

THIS REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING  STATEMENTS WITHIN THE MEANING
OF SECTION 27A OF THE  SECURITIES  ACT OF 1933 AND SECTION 21E OF THE SECURITIES
EXCHANGE  ACT OF  1934.  ACTUAL  RESULTS  COULD  DIFFER  MATERIALLY  FROM  THOSE
PROJECTED  IN THE  FORWARD-LOOKING  STATEMENTS  AS A RESULT OF MANY RISK FACTORS
INCLUDING,  WITHOUT  LIMITATION,  THOSE SET FORTH UNDER "FACTORS THAT MAY AFFECT
FUTURE  RESULTS OF  OPERATIONS"  BELOW.  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.

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 as well as develop new technologies and applications in a
timely and  cost-effective  manner.  If we fail to  introduce  new  products and
services  that  achieve  broad  market  acceptance,  or 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 could
render our products and services obsolete.

                                       16
<PAGE>
In addition, if the markets for Internet Protocol, or IP, network products,  CTI
applications  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 INCREASING  COMMERCIAL  ACCEPTANCE OF OUR
AXXESS  AND  ECLIPSE  PLATFORMS,   INTERPRISE  PRODUCTS,  AND  RELATED  COMPUTER
TELEPHONY PRODUCTS.

During the past few years, we have introduced transparent networking and unified
messaging on our Axxess and Eclipse  platforms  and  introduced  our  InterPrise
family  of  voice  and  data  convergence   products.  In  2000,  we  introduced
ClearConnect,  a  software-based  telephone  that  runs  on a  PC,  ClearConnect
Talk-to-Agent,  an e-commerce  "touch-to-talk"  web call  product,  a line of IP
voice terminals that add IP telephony to the Axxess and Eclipse  platforms,  and
several other  telephony-related  products.  During the past 12 months, sales of
our Axxess digital communications  platforms and related software have comprised
a substantial  portion of our net sales.  We expect that our future success will
continue to depend,  in large part,  upon  increased  commercial  acceptance and
adoption of the InterPrise and related Computer Telephony  products,  the Axxess
platform,  and the Eclipse platform, as well as future upgrades and enhancements
to these products and networking platforms. We cannot assure 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 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 other  defects after new products and upgrades have
been released.  Some of these errors or "bugs" may result from defects contained
in component  parts or software  from our  suppliers or other third parties that
are intended to be compatible with our products and over which we have little or
no control.  Although we have test  procedures  and  quality  control  standards
designed to minimize the number of errors or other defects in our  products,  we
cannot  assure  that our new  products  and  upgrades  will be free of bugs when
released.  If we are unable to quickly or  successfully  correct bugs identified
after release, we could experience:

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

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

Due to the  complexity  of our  products,  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 on a regular and efficient  basis,  customer  demand for our
products could decline, which would harm our business.

                                       17
<PAGE>
BUSINESS  ACQUISITIONS  OR JOINT  VENTURES  MAY  DISRUPT  OUR  BUSINESS,  DILUTE
SHAREHOLDER VALUE OR DISTRACT MANAGEMENT ATTENTION.

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

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

In particular,  in January 2000, we acquired  certain assets and assumed certain
liabilities of Executone  Information  Systems,  Inc. Our operating results were
adversely  affected by several of the factors  described  above  relating to the
Executone acquisition,  including the risks related to unanticipated acquisition
costs and liabilities and impairment of employee and customer relationships,  as
well as the erosion of gross and operating margins.  For these and other reasons
noted in the footnotes to our  financial  statements  and in the section  titled
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations,  we wrote-off our investment in Executone  during the second quarter
of 2000. In addition to the Executone  losses  discussed  above, for the quarter
ended  September  30,  2000,  we also  recorded a pre-tax  loss of $2.0  million
related to our equity  share of  Cirilium's  net losses.  As of the close of the
third  quarter,  the Company wrote off its  remaining  investment in Cirilium of
$2.0  million.  Total  pre-tax  losses from  Cirilium from all sources were $8.6
million for 2000.

In January 2001, we acquired  certain assets and assumed certain  liabilities of
Convergent.   In  connection   with  the   Convergent   acquisition,   we  hired
approximately 210 Convergent employees, and opened 8 Inter-Tel branch offices in
previous  Convergent   locations.   In  addition  to  the  foregoing  risks  and
uncertainties  we face  generally in our  acquisitions,  we may  experience  the
following difficulties or risks associated with the Convergent acquisition:

     *    substantially  all of  Convergent's  sales  were  of our  competitor's
          products and services,  and these  manufacturers  may make our service
          and maintenance of such products expensive and difficult;
     *    a large number of Convergent's customers may decline the assignment of
          their maintenance contracts to us;
     *    any number of the  approximately  210 employees hired by Inter-Tel may
          not integrate successfully or timely into the Inter-Tel business model
          and plans; and
     *    some or all of the independent  contractors who performed projects for
          Convergent may not assume similar roles with Inter-Tel.

In April 2001, Convergent and its parent corporation, Convergent Communications,
Inc. filed for  protection  under Chapter 11 of the U.S.  Bankruptcy  Code. As a
result of this bankruptcy  filing,  Inter-Tel  concluded its  transactions  with
Convergent  and its  representatives,  including  matters  relating  to accounts
receivable,   inventory,  maintenance  and  customer  relations  issues  through
bankruptcy  court petitions and other complex means.  Inter-Tel  completed these
contractual  matters and reached a  settlement  agreement  that  stipulated  the
return  of $6.0  million  to  Inter-Tel  from  escrow  funds and  directly  from
Convergent.

On July 24, 2001, Inter-Tel agreed to sell 83% of Inter-Tel.NET to Comm-Services
Corporation. In connection with this transaction,  the Company assessed the fair
value of the net assets of  Inter-Tel.NET  as of June 30,  2001 under FAS 121 to
arrive at an  adjustment  to the  remaining  investment  in  Inter-Tel.NET.  The
nonrecurring  charge recorded as of the close of the second quarter totaled $5.4
million  ($3.4  million  after  tax),  associated  with  the  impairment  of the
Company's  investment in  Inter-Tel.NET.  The recording of this charge adversely
affected  our  operating  results for the second  quarter of 2001.  In addition,
since the Company  continues to maintain an investment of 17% in  Inter-Tel.NET,
our financial condition will be adversely affected if the Inter-Tel.NET business
is unsuccessful.

                                       18
<PAGE>
Finally,  to the extent that shares of our stock or the rights to purchase stock
are issued in connection with any future acquisitions,  dilution to our existing
shareholders  will  result and our  earnings  per share may  suffer.  Any future
acquisitions may not generate  additional  revenue or provide any benefit to our
business,  and we may not achieve a satisfactory return on our investment in any
acquired businesses.

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

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

We cannot  assure 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 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 also cannot  assure that third  parties  will not claim our current or future
products or services infringe upon their rights. Occasionally, we are subject to
proceedings alleging that certain of our key products infringed upon third party
intellectual  property rights,  including patents,  trademarks,  copyrights,  or
other intellectual property rights. We have viewed presentations from two of our
primary competitors,  Lucent and Avaya, a spin-off of Lucent,  alleging that our
Axxess digital communications platform utilizes inventions covered by certain of
such competitor's  patents.  We are continuing the process of investigating this
matter.  Additionally,  we recently  received a letter from AT&T  alleging  that
certain of our IP products infringe upon certain intellectual property protected
by AT&T's  patents.  Although we have denied  AT&T's  allegations  and intend to
vigorously  defend our position,  we cannot  assure you that we will  ultimately
prevail in this  dispute.  When any such claims are asserted  against us, we may
seek to license the third party's intellectual property rights.  Purchasing such
licenses can be expensive, and we cannot assure 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 that is the subject of the infringement.  Any of these actions or
outcomes could harm our business,  financial condition and operating results. If
we are unable or choose not to license technology,  or decide not to challenge a
third  party's  rights,  we could  encounter  substantial  and costly  delays in
product  introductions.  These delays could result from efforts to design around
asserted third party rights or our discovery that the  development,  manufacture
or sale of products requiring these licenses could be foreclosed.

OUR IP NETWORK PRODUCTS MAY BE VULNERABLE TO VIRUSES, OTHER SYSTEM FAILURE RISKS
AND SECURITY CONCERNS.

The  Inter-Tel  InterPrise,   ClearConnect,   Axxess  NT-CPU,  Voice  Processing
Software,  and Unified Messaging Software 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

                                       19
<PAGE>
jeopardized  the security of  confidential  information,  such as credit card or
bank account  information or the content of  conversations  over the IP network.
User  concerns  about  privacy and  security may cause IP networks in general to
grow more slowly,  and impair market  acceptance  of our IP network  products in
particular, until more comprehensive security technologies are developed.

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

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

*    PABX and core systems  providers  such as Avaya  (formerly part of Lucent),
     Nortel, Comdial, Iwatsu, Mitel, NEC, Nitsuko, Panasonic,  Siemens, Toshiba,
     3Com and Cisco Systems;
*    large data routing companies such as Cisco Systems and 3Com;
*    voice  processing  applications  providers such as AVT, Active Voice,  ADC,
     Lucent and Avaya;
*    long distance  services  providers such as AT&T,  MCI WorldCom,  Sprint and
     Qwest Communications;
*    IP telephony  product and service  providers such as Lucent,  Nortel,  ADC,
     3Com,  Cisco Systems,  iBasis,  Concert,  DeltaThree,  ITXC,  deltasix.com,
     Net2Phone, Cirilium and others;
*    large computer corporations such as Microsoft and IBM; and
*    regional Bell operating companies, or RBOCs, cable television companies and
     satellite and other wireless broadband service providers.

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

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

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

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

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

We  currently  obtain  certain  key  components  for our  digital  communication
platforms,   including  certain  microprocessors,   integrated  circuits,  power
supplies,  voice  processing  interface  cards and IP  telephony  cards,  from a
limited  number of suppliers  and  manufacturers.  Our reliance on these limited
suppliers and contract  manufacturers  involves certain risks and uncertainties,
including  the  possibility  of a shortage  or  delivery  delay for  certain key
components,  although we believe that  alternate  sources are available for most
key  components.  We currently  manufacture our products  through  manufacturers
located in the United States, the People's Republic of China, the United Kingdom
and  Mexico.  Foreign  manufacturing   facilities  are  subject  to  changes  in

                                       20
<PAGE>
governmental  policies,  imposition of tariffs and import restrictions and other
factors beyond our control.  Varian currently manufactures a significant portion
of our products at Varian's  Tempe,  Arizona and Poway,  California  facilities,
including  substantially  all of the printed  circuit boards used in the Axxess,
the Eclipse, the Inter-Tel Axxent, as well as substantially all of the Executone
Computer  Telephony  products.  We have occasionally  experienced  delays in the
supply of  components  and  finished  goods.  We cannot  assure that we will not
experience similar delays in the future.

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

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

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

                                       21
<PAGE>
IF WE LOSE KEY PERSONNEL OR ARE UNABLE TO HIRE ADDITIONAL QUALIFIED PERSONNEL AS
NECESSARY,  WE MAY NOT BE ABLE TO  EFFECTIVELY  MANAGE GROWTH IN OUR BUSINESS OR
ACHIEVE OUR OBJECTIVES.

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

Moreover,  the growth in our business has placed, and is expected to continue to
place, a significant  strain on our personnel,  management and other  resources.
Our  ability  to  manage  any  future  growth  effectively  will  require  us to
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 information systems.

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

The regulatory  environment  for IP network  telephony is subject to substantial
uncertainty.  In the United States, we believe that there are currently few laws
or regulations  directly applicable to packet switched technology networks or to
access  to, or  commerce  on,  IP  networks  generally.  For  example,  there is
currently a bill in the U.S. congress to allow the large LECs to provide broader
Internet  services that could effect  Inter-Tel.  This change, as well as future
changes in the regulatory  environment,  particularly in regulations relating to
the  telecommunications  industry,  could  significantly harm our business.  The
increasing commercial acceptance of packet switched technology networks, as well
as other factors,  may result in the future  application or adoption of a number
of laws and regulations relating to the conduct of our business as it relates to
telecommunications, such as:

*    fees or charges on users and providers of products and services;
*    pricing;
*    characteristics and quality of services;
*    taxes;
*    copyrights; and
*    additional regulations and obligations upon on-line service providers.

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

The  regulatory  treatment of IP-based  telephony  outside of the United  States
varies widely from country to country. A number of countries  currently prohibit
or limit competition in the provision of traditional  voice telephony  services.
Some  countries  prohibit,  limit or regulate  how  companies  provide  IP-based
telephony.  Increased  regulation  of the  Internet  and/or  IP-based  telephony
providers,  or the  prohibition  of IP-based  telephony in one or more countries
could limit our ability to provide our services or make them more expensive.  If
foreign  governments  or other  bodies  begin to regulate  or prohibit  IP-based
telephony,  this regulation  could have a material adverse effect on our ability
to attain or maintain profitability.

                                       22
<PAGE>
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 experiencing  significant
price  competition,  and this may cause a decrease in end-user  rates. We cannot
assure  that we  will  meet  minimum  use  commitments,  that we will be able to
negotiate  lower rates with carriers if end-user  rates decrease or that we will
be able to extend our  contracts  with carriers at favorable  prices.  If we are
unable to secure  reliable long distance and network  services from certain long
distance carriers,  RBOCs, LECs and CLECs, or if these entities are unwilling to
provide  telecommunications  services and billing information to us on favorable
terms,  our ability to expand our own long distance and network services will be
harmed.

THE  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 that packet switched technology networks will become widespread.  Even if
packet switched  technology  networks become widespread in the future, we cannot
assure that our products,  particularly the Inter-Tel  InterPrise product lines,
will  successfully  compete against other market players and attain broad market
acceptance.  Although the Company sold 83% of  Inter-Tel.NET  in July 2001,  the
Company   continues  to  maintain  an  investment   of  17%  in   Inter-Tel.NET.
Accordingly,   our  financial  condition  will  be  adversely  affected  if  the
Inter-Tel.NET business is unsuccessful.

Moreover, the adoption of packet switched technology networks generally requires
the  acceptance  of  a  new  way  of  exchanging  information.   In  particular,
enterprises that have already invested  substantial  resources in other means of
communicating  information  may be  reluctant or slow to adopt a new approach to
communications.  If the  market  for IP network  voice  communications  fails to
develop or to develop more slowly than we anticipate,  our IP network  telephony
products  could  fail  to  achieve  market  acceptance,   which  in  turn  could
significantly harm our business, financial condition and operating results. 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 sound
quality over IP networks as compared to circuit-switched  networks;  and lack of
availability  of  cost-effective,  high-speed  network  capacity.  Moreover,  as
IP-based data  communications and telephony usage grow, the infrastructure  used
to support  these IP  networks,  whether  public or private,  may not be able to
support the demands  placed on them and their  performance  or  reliability  may
decline.  The  technology  that  allows  voice and fax  communications  over the
Internet,  and the delivery of other value-added services, is still in the early
stages of development.

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

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

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

*    volume and timing of orders received during the quarter;
*    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;
*    the operating results of Cirilium,  which are largely beyond our ability to
     control;
*    pricing pressures,  the cost and effect of acquisitions,  in particular the
     Executone acquisition; and
*    the availability and cost of products and components from our suppliers.

In addition, we have historically operated with a relatively small backlog, with
sales and  operating  results in any  quarter  principally  dependent  on orders
booked and shipped in that quarter.  This results  primarily from our customers'
desire for immediate shipment and installation of platforms and software. In the
past,  we have  recorded  a  substantial  portion  of our net  sales for a given
quarter in the third month of that  quarter,  with a  concentration  of such net
sales in the last two weeks of the  quarter.  Market  demand for  investment  in
capital  equipment such as digital  communication  platforms and associated call
processing and voice processing  software  applications is largely  dependent on
general economic conditions,  and can vary significantly as a result of changing
conditions in the economy as a whole.  We cannot assure that  historical  trends
for small backlog will continue in the future.

Our expense  levels are based in part on  expectations  of future  sales and, if
sales  levels  do not meet  expectations,  operating  results  could be  harmed.
Because sales of digital  communication  platforms  through our dealers  produce
lower gross margins than sales through our direct sales organization,  operating
results  have  varied,  and will  continue  to vary  based upon the mix of sales
through  direct and indirect  channels.  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 have lower gross  margins  than our core  business,  have grown in
recent periods at a faster rate than our overall net sales.  As a result,  gross
margins could be harmed if long distance calling  services  continue to increase
as a percentage of net sales. In addition,  we experience seasonal  fluctuations
in our  operating  results,  as net sales for the first and third  quarters  are
frequently  less than  those  experienced  in the  fourth  and  third  quarters,
respectively.  As a result  of these  and other  factors,  we have  historically
experienced,  and could  continue to experience in the future,  fluctuations  in
sales and operating results on a quarterly basis.

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

The market price for our Common Stock has been highly volatile. We cannot assure
that you  will be able to sell  your  shares  at or above  purchase  price.  The
volatility  of our stock  could be subject to  continued  wide  fluctuations  in
response to many risk  factors  listed in this  section,  and others  beyond our
control, including:

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<PAGE>
*    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;
*    general conditions in the telecommunications industry;
*    the market for Internet-related products and services
*    changes in the national or worldwide economy;
*    changes in  legislation  or  regulation  affecting  the  telecommunications
     industry;
*    an outbreak of hostilities;
*    developments  relating to our and third party intellectual property rights;
     and
*    changes in our relationships with our customers and suppliers.

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

OUR CHAIRMAN OF THE BOARD OF DIRECTORS,  CEO AND PRESIDENT CONTROLS 22.5% OF OUR
COMMON  STOCK  AND  BE  ABLE  TO  SIGNIFICANTLY   INFLUENCE   MATTERS  REQUIRING
SHAREHOLDER APPROVAL

As of June 30, 2001 Steven G. Mihaylo,  the  Company's  Chairman of the Board of
Directors,   Chief   Executive   Officer  and   President   beneficially   owned
approximately  22.5% of the outstanding shares of the Common Stock. As a result,
he has the ability to exercise significant  influence over all matters requiring
shareholder approval. In addition, the concentration of ownership could have the
effect of delaying or preventing a change in control of the Company.

Any of the foregoing could result in a material  adverse effect on the Company's
business, financial condition and operating results.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to the impact of interest  rate  changes and change in the market
values of our investments.

Interest Rate Risk. We protect and preserve our invested  funds with  investment
policies and procedures  that limit default,  market and  reinvestment  risk. We
have not utilized derivative financial  instruments in our investment portfolio.
As of June  30,  2001,  we had  cash and  cash  equivalents  of  $11.7  million,
consisting  of cash and  highly  liquid  short-term  investments  with  original
maturities of three months or less at the date of purchase. The Company also had
restricted   cash  of  $6.0  million  in  connection  with  the  acquisition  of
Convergent, which the Company collected subsequent to June 30, 2001. Declines in
interest rates over time will result in lower interest income.

Foreign Currency  Exchange Risk. We generate our revenue primarily from sales in
the United States, however we also sell our products to customers located in the
United  Kingdom,  Europe,  Asia and South  America.  As a result,  our financial
results  could be  affected  by factors  such as  changes  in  foreign  currency
exchange rates or weak economic  conditions in foreign markets.  Since our sales
are currently priced in U.S. dollars and translated to local currency amounts, a
strengthening  of the dollar could make our products less competitive in foreign
markets.  As exchange rates vary, our expenses,  when translated,  may vary from
expectations and adversely impact overall expected profitability.  Our operating
results have not been  significantly  affected by exchange rate  fluctuations to
date in 2001.  If,  during the  remainder  of 2001,  the U.S.  dollar  uniformly
decreases in strength by 10% relative to the currency  used in our foreign sales
of our foreign  subsidiaries,  our  operating  results for the remainder of 2001
would likely not be significantly affected.

                                       25
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES
PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS -- NOT APPLICABLE

ITEM 2. CHANGES IN SECURITIES -- NOT APPLICABLE

ITEM 3. DEFAULTS ON SENIOR SECURITIES -- NOT APPLICABLE

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

The voting  results of our Annual Meeting of  Shareholders  dated April 30, 2001
were reported in the Company's Form 10-Q filed on May 15, 2001.

ITEM 5. OTHER INFORMATION

Pursuant to Rule  14a-4(c)(1)  under the  Securities  Exchange  Act of 1934,  in
connection with the Company's annual meeting of  shareholders,  if a stockholder
of the Company fails to notify the Company by January 3, 2001,  then the proxies
of management would be allowed to use their discretionary  voting authority when
any such proposal is raised at the  Company's  annual  meeting of  stockholders,
without any discussion of the matter in the proxy statement.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     Exhibits: None
     Reports on Form 8-K: None

                                       26
<PAGE>
                                   SIGNATURES

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


                                        INTER-TEL, INCORPORATED


Date: August 14, 2001                   /s/ Steven G. Mihaylo
                                        ----------------------------------------
                                        Steven G. Mihaylo,
                                        Chairman of the Board,
                                        Chief Executive Officer and President


Date: August 14, 2001                   /s/ Kurt R. Kneip
                                        ----------------------------------------
                                        Kurt R. Kneip,
                                        Vice President
                                        and Chief Financial Officer

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