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:
   March 31, 2002                                                 0-10211


                             INTER-TEL, INCORPORATED


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


                               1615 S. 52ND STREET
                              TEMPE, ARIZONA 85281

                                 (480) 449-8900


                                   ----------


      Title of Class                            Outstanding as of March 31, 2002
      --------------                            --------------------------------

Common Stock, no par value                                 24,192,832

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  to 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
     FINANCIAL INFORMATION

PART I.   Item 1. Financial Statements (unaudited)

          Condensed consolidated balance sheets--March 31, 2002
          and December 31, 2001                                               3

          Condensed consolidated statements of income--three
          months ended March 31, 2002 and March 31, 2001                      4

          Condensed consolidated statements of cash flows--three
          months ended March 31, 2002 and March 31, 2001                      5

          Notes to condensed consolidated financial Statements--
          March 31, 2002                                                      6

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

          Item 3. Quantitative and Qualitative Disclosures About
          Market Risk                                                        27

PART II.  OTHER INFORMATION                                                  27

          SIGNATURES                                                         29

                                       2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
(In thousands, except share amounts)                           March 31    December 31,
                                                                 2002         2001
                                                              (Unaudited)   (Note A)
                                                              -----------   --------
<S>                                                            <C>          <C>
ASSETS
CURRENT ASSETS
Cash and equivalents                                           $  84,737    $  61,795
Accounts receivable, less allowances of $12,315 in 2002
  and $11,858 in 2001                                             42,291       45,962
Inventories, less allowances of $14,138 in 2002 and
  $13,202 in 2001                                                 20,524       20,848
Net investment in sales-leases                                    15,173       13,799
Income taxes receivable                                               --        3,257
Deferred income taxes                                              8,563        8,467
Prepaid expenses and other assets                                  6,278        4,891
                                                               ---------    ---------
TOTAL CURRENT ASSETS                                             177,566      159,019

PROPERTY, PLANT & EQUIPMENT                                       24,123       23,905
GOODWILL, NET                                                     17,764       13,711
PURCHASED INTANGIBLE ASSETS, NET                                   5,106        4,948
NET INVESTMENT IN SALES-LEASES                                    23,771       21,735
OTHER ASSETS                                                       3,339        4,144
                                                               ---------    ---------
                                                               $ 251,669    $ 227,462
                                                               ---------    ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable                                               $  25,431    $  21,812
Other current liabilities                                         48,507       44,051
                                                               ---------    ---------
TOTAL CURRENT LIABILITIES                                         73,938       65,863

DEFERRED TAX LIABILITY                                            17,634       17,390
LEASE RECOURSE LIABILITY                                           9,365        8,890
RESTRUCTURING RESERVE                                              3,060        3,060
OTHER LIABILITIES                                                  5,347        5,422

SHAREHOLDERS' EQUITY
Common stock, no par value - authorized  100,000,000 shares;
  issued 27,161,823; outstanding - 24,192,832 shares at
  March 31, 2002 and 24,166,430 shares at December 31, 2001      108,968      108,968
Less: Shareholder loans                                             (865)        (942)
Retained earnings                                                 69,692       54,877
Accumulated other comprehensive income                               431          151
                                                               ---------    ---------
                                                                 178,226      163,054
Less: Treasury stock at cost - 2,968,991 shares at
  March 31, 2002 and 2,995,393 shares at December 31, 2001       (35,901)     (36,217)
                                                               ---------    ---------

TOTAL SHAREHOLDERS' EQUITY                                       142,325      126,837
                                                               ---------    ---------
                                                               $ 251,669    $ 227,462
                                                               ---------    ---------
</TABLE>

See accompanying notes.

                                       3
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

<TABLE>
<CAPTION>
                                                               Three Months Ended
(In thousands, except                                   ----------------------------------
per share amounts)                                      March 31, 2002      March 31, 2001
                                                        --------------      --------------
<S>                                                        <C>                 <C>
NET SALES                                                  $ 90,070            $ 93,703
     Cost of sales                                           45,016              54,055
                                                           --------            --------
GROSS PROFIT                                                 45,054              39,648

   Research & development                                     4,317               4,139
   Selling, general, and administrative                      30,657              31,447
   Amortization of goodwill                                      --                 451
   Amortization of purchased intangible assets                  257                 157
                                                           --------            --------
                                                             35,231              36,194

OPERATING INCOME                                              9,823               3,454

   Litigation settlement (net of costs except for taxes)     15,302                  --
   Interest and other income                                    439                 167
   Write-down of investment in Inter-Tel.NET/Vianet            (600)                 --
   Loss on foreign translation adjustments                      (84)               (303)
   Interest expense                                             (34)               (227)
                                                           --------            --------

INCOME BEFORE INCOME TAXES                                   24,846               3,091
   Income tax provision                                       9,451               1,143
                                                           --------            --------

NET INCOME                                                 $ 15,395            $  1,948
                                                           --------            --------

NET INCOME PER SHARE
   Basic                                                   $   0.64            $   0.08
   Diluted                                                 $   0.60            $   0.08

Weighted average basic common shares                         24,179              25,500

Weighted average diluted common shares                       25,550              25,843
                                                           --------            --------
</TABLE>

See accompanying notes.

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

<TABLE>
<CAPTION>
                                                                             Three Months Ended
                                                                     ---------------------------------
(In thousands)                                                       March 31, 2002      March 31, 2001
                                                                     --------------      --------------
<S>                                                                     <C>                 <C>
OPERATING ACTIVITIES
Net income                                                              $ 15,395            $  1,948
Adjustments to reconcile net income to net
   cash provided by operating activities:
     Depreciation                                                          1,879               2,337
     Amortization of goodwill and purchased intangible assets                257                 608
     Amortization of patents included in R&D expenses                         55                  55
     Provision for losses on receivables                                   2,462               2,575
     Provision for inventory valuation                                      (201)                535
     Decrease in other liabilities                                           464                 607
     Loss on sale of property and equipment                                   16                  25
     Deferred income taxes                                                   148              (1,394)
     Effect of exchange rate changes                                         280                 342
     Changes in operating assets and liabilities                          11,792              (3,725)
                                                                        --------            --------
NET CASH PROVIDED BY
     OPERATING ACTIVITIES                                                 32,549               3,913
                                                                        --------            --------
INVESTING ACTIVITIES
     Additions to property and equipment                                  (1,250)             (3,088)
     Proceeds from disposal of property and equipment                         66                  18
     Cash used in acquisitions                                            (8,000)            (11,520)
                                                                        --------            --------
NET CASH USED IN INVESTING ACTIVITIES                                     (9,184)            (14,590)
                                                                        --------            --------
FINANCING ACTIVITIES
     Cash dividends paid                                                    (449)               (260)
     Treasury stock purchases                                                 --             (14,141)
     Payments on term debt                                                  (268)               (319)
     Proceeds from term debt                                                  --               1,095
     Proceeds from exercise of stock options                                 296                 313
                                                                        --------            --------
NET CASH USED IN FINANCING ACTIVITIES                                       (421)            (13,312)
                                                                        --------            --------
INCREASE (DECREASE) IN CASH
     AND EQUIVALENTS                                                      22,942             (23,989)
                                                                        --------            --------
CASH AND EQUIVALENTS AT
     BEGINNING OF PERIOD                                                  61,795              27,103
                                                                        --------            --------

CASH AND EQUIVALENTS AT END OF PERIOD                                   $ 84,737            $  3,114
                                                                        --------            --------
</TABLE>

See accompanying notes.

                                       5
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2002

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  months  ending  March  31,  2002  are  not  necessarily
indicative  of the results that may be expected for the year ended  December 31,
2002.  The balance  sheet at December 31, 2001 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, 2001.

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

ADOPTION OF ACCOUNTING  STANDARD.  On January 1, 2002,  we adopted  Statement of
Financial Accounting Standards (SFAS) No. 141, Business  Combinations,  and SFAS
No. 142,  Goodwill  and Other  Intangible  Assets.  When we account for acquired
businesses  as  purchases,  we  allocate  purchase  prices  to  the  assets  and
liabilities  acquired  based on the  estimated  fair  values  on the  respective
acquisition  dates.  Based on these values,  any excess  purchase price over the
fair value of the net assets acquired is allocated to goodwill.

     Prior to January 1, 2002, we amortized goodwill over the useful life of the
underlying  asset,  not to  exceed  40  years.  On  January  1,  2002,  we began
accounting  for goodwill  under the  provisions  of SFAS Nos. 141 and 142. As of
March 31, 2002 and December 31, 2001, we had the following intangible assets:

(in thousands)                               March 31, 2002    December 31, 2001
                                             --------------    -----------------
Goodwill                                          $24,591          $20,538
Less: Accumulated Amortization                      6,827            6,827
                                                  -------          -------
Goodwill, net                                      17,764           13,711
                                                  -------          -------

Purchased Intangible Assets                         6,240            5,770
Less: Accumulated Amortization                      1,134              822
                                                  -------          -------
Purchased Intangible Assets, net                    5,106            4,948
                                                  -------          -------

Total Intangible Assets                            30,831           26,308
Less: Accumulated Amortization                      7,961            7,649
                                                  -------          -------
Total Intangible Assets, net                      $22,870          $18,659
                                                  =======          =======

We completed one  acquisition in the fourth quarter of 2001 in which the Company
acquired purchased intangible assets, but no goodwill. Accordingly, we amortized
the purchased intangible assets, but recorded no goodwill  amortization from the
date of this acquisition. Application of the non-amortization provisions of SFAS
No.  142 is  expected  to  result  in an  increase  in  income  from  continuing
operations before income taxes of approximately $1.8 million in 2002.

     In assessing the recoverability of our goodwill and other  intangibles,  we
must make  assumptions  about  estimated  future cash flows and other factors to
determine the fair value of the respective  assets.  If these estimates or their
related  assumptions  change  in  the  future,  we  may be  required  to  record
impairment  charges for these assets not  previously  recorded.  Some factors we

                                       6
<PAGE>
consider  important  which  could  trigger  an  impairment  review  include  the
following:

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

We have tested goodwill for impairment using the two-step process  prescribed in
SFAS No. 142.  The first step is a screen for  potential  impairment,  while the
second step  measures the amount of the  impairment,  if any. We  performed  the
first of the required  impairment  tests for goodwill as of January 1, 2002, and
determined  that  the  carrying  amount  of our  goodwill  is not  impaired.  In
addition,  we will be reviewing our  classification of intangible assets between
goodwill and other identifiable intangibles.  During the quarter ended March 31,
2002,  we did not record any  impairment  losses  related to goodwill  and other
intangible assets.

RECENT ACCOUNTING PRONOUNCEMENT.

In October 2001, the FASB issued Statement of Financial Accounting Standards No.
144,  "Accounting  for the  Impairment or Disposal of Long-Lived  Assets" ("SFAS
144"). SFAS 144 establishes a single  accounting  model,  based on the framework
established in Statement of Financial  Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" ("SFAS 121"), for long-lived  assets to be disposed of by sale, and resolves
implementation  issues  related  to SFAS  121.  The  Company  adopted  SFAS  144
effective  January 1, 2002.  The  Company  does not expect the  adoption of this
standard  to have a  material  impact on its  operating  results  and  financial
condition.

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 for which
the market  price  exceeds  exercise  price,  less shares  which could have been
purchased with related proceeds, if the effect would not be antidilutive.

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

<TABLE>
<CAPTION>
                                                              Three Months Ended
(In thousands, except                                   -------------------------------
per share amounts)                                      March 31, 2002   March 31, 2001
                                                        --------------   --------------
<S>                                                         <C>             <C>
Numerator:
     Net Income                                             $15,395         $ 1,948
                                                            -------         -------
Denominator:
     Denominator for basic earnings per
     share - weighted average shares                         24,179          25,500
Effect of dilutive securities:
Employee and director stock options                           1,371             343
                                                            -------         -------
Denominator for diluted earnings per share - adjusted
   weighted average shares and assumed conversions           25,550          25,843

Basic earnings per share                                    $  0.64         $  0.08

                                                            -------         -------
Diluted earnings per share                                  $  0.60         $  0.08
                                                            -------         -------
</TABLE>

                                       7
<PAGE>
NOTE C - ACQUISITIONS, DISPOSITIONS AND RESTRUCTURING CHARGES

MCLEOD.  On January 24, 2002, the Company  acquired  certain assets of McLeodUSA
Integrated  Business  Systems,  Inc.  ("McLeod") for cash plus the assumption of
various specific  liabilities and related acquisition costs.  Inter-Tel acquired
McLeod's  voice  customer  base in  Minnesota,  Iowa and  Colorado  and  DataNet
operations in South Dakota, which also included the related accounts receivable,
inventory  and  fixed  assets  along  with  assumption  of  scheduled   specific
liabilities for warranty and  maintenance  obligations.  The aggregate  purchase
price  of $8  million  was  allocated  to  the  fair  value  of the  assets  and
liabilities  acquired.  The  McLeod  transaction  was  accounted  for  using the
purchase method of accounting.

The Company recorded goodwill of approximately  $4.0 million and other purchased
intangible  assets of $0.5 million,  for a total of $4.5 million,  in connection
with the McLeod  acquisition.  The goodwill  balance  will be  accounted  for in
accordance  with SFAS 141 and 142. The balances  included in the $0.5 million in
other  purchased  intangible  assets will be amortized over periods ranging from
two to five years  from the date of the  acquisition.  During the first  quarter
ended March 31,  2002,  the  amortization  of  purchased  intangible  assets was
approximately $25,000.

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

In connection with the sale of 83% of Inter-Tel.NET,  we assessed the fair value
of the  remaining  17%  investment  in  Inter-Tel.NET.  Pursuant to SFAS 121, we
recorded a charge as of the close of the second  quarter of 2001 of $5.4 million
($3.4 million after tax)  associated  with the  impairment of our  investment in
Inter-Tel.NET.  The  impairment  was  measured  as the  difference  between  the
carrying value of Inter-Tel's  17% interest in  Inter-Tel.NET/Comm-Services  and
the  estimated  current  fair  market  value of the note plus the 17%  ownership
interest in Inter-Tel.NET. The charge was primarily non-cash.

Inter-Tel's  management has not  participated in the management of Inter-Tel.NET
since the sale in July 2001. As a result, since July 24, 2001, we have accounted
for the remaining  Inter-Tel.NET/Comm-Services  investment using the cost method
of  accounting.  On  December  30,  2001,  Comm-Services  entered  into a merger
agreement with Vianet. Inter-Tel's 17% investment in Comm-Services was converted
to  approximately  10% of Vianet  stock.  The $4.95  million loan was assumed by
Vianet and Inter-Tel  continues to hold collateral from the former  shareholders
of  Comm-Services.  Inter-Tel  will account for the remaining 10%  investment in
Vianet  (formerly  Comm-Services)  using the cost method of accounting.  The net
investment  in the note  receivable  and 10%  interest in Vianet was recorded in
other assets for approximately  $3.7 million as of December 31, 2001.  Inter-Tel
assessed  the value of this  investment  at March 31, 2002 and  wrote-down  this
investment by $600,000 to approximately $3.1 million as of March 31, 2002.

     During 1999,  2000 and 2001,  Inter-Tel.NET  entered into  operating  lease
agreements  totaling  approximately  $6.5 million  from an equipment  vendor for
network equipment and software.  The lease agreements required  Inter-Tel.NET to
purchase vendor maintenance on their products.  Inter-Tel originally  guaranteed
the  indebtedness.  In the second  quarter of 2001,  Inter-Tel.NET  notified the
vendor of network and network  equipment  problems  encountered due to equipment
and  software  recommended  by the vendor,  and  supplied  and  financed by this
vendor. Inter-Tel.NET requested that the vendor not only solve the problems, but
also compensate Inter-Tel.NET for the problems and the resulting lost customers,
lost  revenues  and  lost  profits.  Pursuant  to  Inter-Tel's  sale  of  83% of
Inter-Tel.NET,   Comm-Services   assumed  the  vendor   lease  and   maintenance
obligations and, accordingly, Inter-Tel has not recorded any liability for these

                                       8
<PAGE>
obligations.  However,  the vendor has not released Inter-Tel from its guarantee
of these  obligations and Inter-Tel has not released the vendor from Inter-Tel's
claims, nor did we assign our rights to these claims to Comm-Services.  In April
2002,  Inter-Tel  received a notice letter from the  financing  affiliate of the
Inter-Tel.NET  equipment vendor notifying Inter-Tel of default in lease payments
due the financing affiliate.  Inter-Tel responded to the affiliate advising them
that Inter-Tel was no longer the Lessee of the  equipment,  the correct name and
address of the Lessee of the  equipment  and the losses to Inter-Tel  because of
the non  performance  of the equipment and vendor  related third party  software
providers' breach of contract.

EXECUTONE  RESTRUCTURING  CHARGE. During the second quarter of 2000, the Company
recognized a restructuring charge related to acquired Executone operations.  The
Company 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  as
identified  in the table below.  Accrued  costs  associated  with this plan were
estimates,  although the original  estimates made for the second quarter of 2000
for reserve balances have not changed significantly in 2002.

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

The following 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 March 31, 2002.

<TABLE>
<CAPTION>
                                                                                                             RESERVE
                                           CASH/      RESTRUCTURING    2000         2001         2002        BALANCE
               DESCRIPTION                NON-CASH       CHARGE      ACTIVITY     ACTIVITY     ACTIVITY     AT 3/31/02
               -----------                --------       ------      --------     --------     --------     ----------
PERSONNEL COSTS:
<S>                                      <C>           <C>           <C>          <C>          <C>           <C>
  Severance and termination costs           Cash       $ (1,583)     $  1,558     $      2     $     --      $    (23)
  Other Plant closure costs                 Cash           (230)           30          200           --            --

LEASE TERMINATION AND OTHER CONTRACTUAL
OBLIGATIONS (NET OF ANTICIPATED
RECOVERY):
  Building and equipment leases             Cash         (7,444)        1,348        1,489          603        (4,004)
  Other contractual obligations             Cash         (1,700)           --        1,700           --            --

IMPAIRMENT OF ASSETS:
  Inventories                             Non-Cash       (3,454)        1,376          209           --        (1,869)
  Prepaid inventory and other expenses    Non-Cash       (2,485)        2,485           --           --            --
  Accounts receivable                     Non-Cash       (1,685)          521          245           --          (919)
  Fixed assets                            Non-Cash       (3,151)        2,942           --           --          (209)
  Net intangible assets                   Non-Cash      (29,184)       29,184           --           --            --
                                                       --------      --------     --------     --------      --------
TOTAL                                                  $(50,916)     $ 39,444     $  3,845     $    603      $ (7,024)
                                                       ========      ========     ========     ========      ========
</TABLE>

                                       9
<PAGE>
NOTE D  - SEGMENT INFORMATION

Inter-Tel  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 shareholders.  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 as
to how to  allocate  resources  and  assess  performance.  The  Company's  chief
decision maker, as defined under SFAS 131, is the Chief Executive Officer.

We currently  view our  operations as primarily  composed of two  segments:  (1)
telephone systems,  telecommunications  software and hardware, and (2) local and
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,  Mexico and South  America.  As a
result,  financial  information  disclosed  represents  substantially all of the
financial information related to the Company's two principal operating segments.
Results of operations for the local and long distance calling services  segment,
if the operations  were not included as part of the  consolidated  group,  could
differ  materially,  as the  operations  are  integral  to the  total  telephony
solution offered by us to our customers.

In addition to the two  primary  segments  discussed  above,  the  Inter-Tel.NET
operations/investment,  Inter-Tel's  former  IP  long  distance  subsidiary,  is
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.  On July 24,
2001,   Inter-Tel   agreed  to  sell  83%  of   Inter-Tel.NET  to  Comm-Services
Corporation.  As a  result,  since  July 24,  2001,  we have  accounted  for the
remaining 17%  Inter-Tel.NET/Comm-Services  investment  using the cost method of
accounting.  On December 30, 2001, Comm-Services entered into a merger agreement
with Vianet.  Inter-Tel's  17%  investment  in  Inter-Tel.NET/Comm-Services  was
converted to approximately  10% of Vianet stock.  Inter-Tel will account for the
remaining  10%  investment  in Vianet  (formerly  Comm-Services)  using the cost
method of accounting.  Inter-Tel  assessed the value of this investment at March
31, 2002 and  wrote-down  this  investment  by $600,000  to  approximately  $3.1
million.

For the  quarters  ended  March 31,  2002 and 2001,  we  generated  income  from
business segments, including our investment in Inter-Tel.NET/Vianet, as follows:

<TABLE>
<CAPTION>
                                                            THREE MONTHS ENDED MARCH 31, 2002
                                                  ----------------------------------------------------
                                                                               RESALE OF
                                                                               LOCAL AND
                                                                                 LONG
                                                   PRINCIPAL   INTER-TEL.NET/  DISTANCE
(In thousands, except per share amounts)            SEGMENT        VIANET      SERVICES         TOTAL
                                                    -------        ------      --------         -----
<S>                                               <C>            <C>           <C>           <C>
Net sales                                         $  83,280      $      --     $   6,790     $  90,070
Gross profit (loss)                                  43,597             --         1,457        45,054
Charge (see Note B)                                      --             --            --            --
Operating income (loss)                               9,340             --           483         9,823
Interest and other, net                              15,712           (600)           29        15,141
Loss on foreign translation adjustments                 (84)            --            --           (84)
Interest expense                                        (34)            --            --           (34)
Net income (loss)                                 $  15,421      $    (378)    $     352     $  15,395
Net income (loss) per diluted share (1)           $    0.60      $   (0.02)    $    0.01     $    0.60
Weighted average diluted shares (1)                  25,550         24,179        25,550        25,550
Total assets                                      $ 240,323      $      --     $  12,035     $ 252,358
Depreciation and amortization                         2,161             --            30         2,191

                                                            THREE MONTHS ENDED MARCH 31, 2001
                                                  ----------------------------------------------------
Net sales                                         $  82,877      $   4,410     $   6,416     $  93,703
Gross profit (loss)                                  41,651         (3,566)        1,563        39,648
Charge (see Note B)                                      --             --            --            --
Operating income (loss)                               7,140         (4,491)          805         3,454
Interest and other, net                                 160             --             8           168
Loss on foreign translation adjustments                (303)            --            --          (303)
Interest expense                                       (145)           (82)           --          (227)
Net income (loss)                                 $   4,325      $  (2,881)    $     504     $   1,948
Net income (loss) per diluted share (1)           $    0.17      $   (0.11)    $    0.02     $    0.08
Weighted average diluted shares (1)                  25,843         25,500        25,843        25,843
Depreciation and amortization                         2,156            802            42         3,000
</TABLE>

                                       10
<PAGE>
1) Options that are antidilutive because the exercise price was greater than the
average market price of the common shares are not included in the computation of
diluted  earnings  per  share  when  a net  loss  is  recorded.  See  Note L for
additional information.

Our revenues are generated  predominantly  in the United States.  Total revenues
generated from U.S.  customers totaled $87.4 million or 97.1% of total revenues,
and $90.9  million or 97.0% of total  revenues for the quarters  ended March 31,
2002 and 2001,  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 first  quarters of 2002 and 2001,  revenues from
customers located internationally accounted for 2.9% and 3.0% of total revenues,
respectively.

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 DOCUMENT.

OVERVIEW

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

     We have developed a distribution  network of direct sales offices,  dealers
and value added  resellers  (VARs),  which sell our  products  to  organizations
throughout  the United  States and  internationally,  including  to divisions of
Fortune 500 companies, large service organizations and governmental agencies. As
of December 31, 2001,  we had 49 direct sales  offices in the United  States and
one in Japan,  and a network of  hundreds  of dealers  and VARs around the world
that purchase directly from us. We also maintain a wholesale distribution office

                                       11
<PAGE>
in the  United  Kingdom  that  supplies  Inter-Tel's  dealers  and  distributors
throughout  the UK and parts of Europe.  In January 2002,  we acquired  selected
assets and assumed certain selected liabilities of McLeod USA, Inc. (McLeod). As
a result,  we added 5 new direct  sales  offices and added  personnel to 3 other
existing offices. We integrated several of these offices into our existing sales
offices during 2002.

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

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

     The markets we serve are  characterized by rapid  technological  change and
evolving  customer  requirements.  We have sought to address these  requirements
through the development of software  enhancements  and  improvements to existing
systems and the  introduction  of new  products  and  applications.  Inter-Tel's
research and  development  efforts over the last several years have been focused
primarily on the  development of and  enhancements  to our AXXESS and ECLIPSE(2)
systems,  including  adding  new  applications,   incorporating  IP  convergence
applications  and  IP  telephones,   developing   Unified   Messaging   Software
applications, and expanding the telecommunications networking package to include
networking  over IP and frame relay networks.  Over the last several years,  our
research and  development  efforts have also focused on the  development  of the
ClearConnect   SoftPhone  and  the  related   ClearConnect   Talk-to-Agent   web
communications  software.  Inter-Tel's current efforts are focused on developing
and  enhancing  the IP telephony  products and  applications  for our AXXESS and
ECLIPSE(2) systems,  increasing  single-site node capacity using an Asynchronous
Transfer  Mode  backbone  using  version  6.0  AXXESS and  ECLIPSE(2)  software,
enhancing our Unified Messaging Software,  developing a  speech-recognition  and
text-to-speech  enabled unified communications  product,  developing an advanced
IVR and CT application  development tool,  enhancing the IP digital  telephones,
and enhancing Inter-Tel's server-based PBX offering.

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

RESULTS OF OPERATIONS

     The  following  table sets  forth  certain  statement  of  operations  data
expressed as a percentage of net sales for the periods  indicated:  Three months
Ended March 31,

                                       12
<PAGE>
                                                               2002       2001
                                                              -----      -----
Net sales                                                     100.0%     100.0%
Cost of sales                                                  50.0       57.7
                                                              -----      -----
Gross Profit                                                   50.0       42.3
                                                              -----      -----
Research and development                                        4.8        4.4
Selling, general and administrative                            34.0       33.6
Amortization                                                    0.3        0.6
                                                              -----      -----
Operating income                                               10.9        3.7
Litigation settlement (net of costs except for taxes)          17.0         --
Interest and other income                                       0.5        0.2
Write-down of investment in Inter-Tel.NET/Vianet               (0.7)        --
Loss on foreign translation adjustments                        (0.1)      (0.3)
Interest expense                                               (0.0)      (0.2)
                                                              -----      -----
Income before income taxes                                     27.6        3.3
Income Taxes                                                   10.5        1.2
                                                              -----      -----
Net Income                                                     17.1%       2.1%
                                                              =====      =====

     NET SALES.  Net sales  decreased 3.9% to $90.1 million in the first quarter
of 2002  from  $93.7  million  in the  first  quarter  of  2001,  including  the
operations of  Inter-Tel.NET  in 2001.  Since the sale of 83% of our interest in
Inter-Tel.NET  in July 2001,  we have not  recorded  revenues or  expenses  from
Inter-Tel.NET.  By contrast, net sales attributable to Inter-Tel.NET  operations
were  $4.4  million  for  the  first  quarter  of  2001.  Excluding  sales  from
Inter-Tel.NET  in 2001, net sales in 2002 increased 0.9% compared to 2001. Since
July 24, 2001,  the date of the sale of 83% of  Inter-Tel.NET,  we have used the
cost    method    of    accounting    for   our    remaining    investment    in
Inter-Tel.NET/Comm-Services.

     For the quarter ended March 31, 2002, sales from the Company's direct sales
offices,  government  and  national  accounts  and from  wholesale  distribution
increased  approximately  $436,000  compared to the first quarter of 2001.  This
increase is largely the result of sales  generated  from  operations we acquired
from McLeod,  which represented an increase of approximately $3.6 million in net
sales in 2002 compared to 2001. Sales from our network services group, including
NetSolutions  and Network  Services  agency,  increased  $760,000  over the same
periods. These increases were offset by sales decreases of $419,000 attributable
to decreases from leasing and foreign operations. The 2002 decrease in net sales
was  also  attributable  to  delayed  customer  buying  decisions  related  to a
deterioration in  macroeconomic  conditions and competitive  pressures.  In some
instances, prices of various telecommunications systems decreased, and discounts
or other promotions that were offered to customers to generate sales resulted in
lower  revenues.  Please  refer  to Note D of Notes  to  Consolidated  Financial
Statements for additional segment reporting information.

     GROSS PROFIT. Gross profit for the first quarter of 2002 increased 13.6% to
$45.1 million, or 50.0% of net sales, from $39.6 million, or 42.3% of net sales,
in the first  quarter of 2001.  The increase in gross profit as a percentage  of
sales  (or  gross  margin)  was  primarily  attributable  to the  sale of 83% of
Inter-Tel.NET,  which  generated  negative  margins in 2001. In addition,  sales
through direct channels,  including the acquired McLeod direct sales operations,
represented a higher  percentage of total sales and higher gross margins.  Gross
margins  also  increased  in 2002 as a result  of a higher  percentage  of sales
generated  from  recurring  sales to existing  customers,  which  generally have
higher  margins  than sales to new  customers.  These  increases  were offset by
greater  competitive  pricing  pressures  and by pricing  discounts on telephone
system sales.

     Excluding the  operations of  Inter-Tel.NET  in 2001,  gross profit in 2002
increased 4.3% compared to gross profit of $43.2 million, or 48.4% of net sales,
in 2001.  Inter-Tel.NET  generated  negative gross profit of $3.6 million in the
first quarter of 2001.

     RESEARCH AND DEVELOPMENT.  Research and development  expenses for the first
quarter of 2002 increased 4.3% to $4.3 million,  or 4.8% of net sales, from $4.1
million,  or 4.4% of net  sales,  for the first  quarter  of 2001.  Included  in
research  and  development  expenses  in both 2002 and 2001 is  amortization  of
patents totaling $55,000 in each period. The increase was primarily attributable
to the  increase  in  engineers  hired in  connection  with our  acquisition  of
Mastermind  Technologies,  Inc.  in October  2001.  In  addition,  we  continued
development  efforts  to  release  the new  version  6.0 of AXXESS  and  ECLIPSE
networking software and systems,  and incurred research and development expenses
relating to the design and development of our Unified  Communicator and Computer
Telephony  Applications  platforms.  We expect that for the  foreseeable  future

                                       13
<PAGE>
research and development expenses will increase sequentially in absolute dollars
as we continue to enhance  existing and develop new  technologies  and products.
These expenses may vary, however, as a percentage of net sales.

     SELLING, GENERAL AND ADMINISTRATIVE. In the first quarter of 2002, selling,
general and administrative expenses,  excluding amortization,  decreased 2.5% in
absolute dollars to $30.7 million,  or 34.0% of net sales,  from $31.45 million,
or 33.6% of net sales,  in the first  quarter of 2001.  The decrease in absolute
dollars was primarily due to lower net sales, reflecting in part the sale of 83%
of  Inter-Tel.NET  in July 2001.  Excluding the operations of  Inter-Tel.NET  in
2001, 2002 selling,  general and administrative expenses increased 1.1% compared
to $30.6 million, or 34.2% of net sales, in 2001.

     Selling,  general and administrative expenses increased, as a percentage of
net sales,  primarily as a result of a higher  percentage of total sales through
direct sales  channels and a lower  absorption of fixed costs on lower total net
sales. We also accrued higher relative profit sharing costs,  reflecting rewards
for higher earnings per share  achievements.  We expect that for the foreseeable
future selling,  general and  administrative  expenses will increase in absolute
dollars, but may vary as a percentage of net sales.

     AMORTIZATION  OF  GOODWILL  AND  PURCHASED  INTANGIBLE  ASSETS.  We adopted
Statement  of  Financial  Accounting  Standards  No.  142,  "Goodwill  and Other
Intangible  Assets"  ("SFAS 142")  effective  the  beginning of fiscal 2002.  In
accordance  with SFAS 142, we ceased  amortizing  goodwill.  We are  required to
perform goodwill impairment tests on an annual basis and between annual tests in
certain circumstances.  As of March 31, 2002, no impairment of goodwill has been
recognized. There can be no assurance that future goodwill impairment tests will
not result in a charge to earnings.  For additional  information  regarding SFAS
142,  see  "Adoption  of  Accounting  Standard"  in  Note  A  of  Notes  to  the
Consolidated Financial Statements.

     Amortization of purchased  intangible assets included in operating expenses
was  $257,000  in the first  quarter of 2002,  compared to $157,000 in the first
quarter of 2001. The increase in the amortization of purchased intangible assets
for the first  quarter 2002  compared to the same period last year was primarily
related to the additional amortization from recent acquisitions.  For additional
information  regarding  purchased  intangible  assets,  see Note A "Adoption  of
Accounting  Standard" and Note C "Acquisitions,  Dispositions and  Restructuring
Charges " to the Consolidated Financial Statements.

     LITIGATION SETTLEMENT.  In May 2001, Inter-Tel entered into an agreement to
submit  a  lawsuit  filed  by  Inter-Tel  in 1996 to  binding  arbitration.  The
arbitration  was completed in January 2002 and, as a result of the  arbitration,
Inter-Tel  received a gross cash award of $20 million in February  2002.  Direct
costs  for  attorney's  fees,  expert  witness  costs,   arbitration  costs  and
additional  costs and  expenses,  including  $1.3  million in bonus  payments to
employees who assisted in the litigation and arbitration,  totaled approximately
$4.7 million in the first quarter 2002,  excluding income taxes, for a net award
of  approximately  $15.3 million.  Estimated net proceeds from this  arbitration
settlement  are  approximately  $9.3 million  after taxes,  or $0.37 per diluted
share.

     INTEREST  AND OTHER  INCOME.  Other  income in 2002  included an expense of
$600,000   related   to   the   write-down   of   Inter-Tel's    investment   in
Inter-Tel.NET/Vianet.   Other  than  the  write-down,   both  periods  consisted
primarily of interest income and foreign exchange rate gains and losses.  Income
from  interest  increased  in 2002  compared to 2001 based on a higher  level of
invested funds, due to cash received from the litigation settlement noted above,
offset by  expenditures  relating to the McLeod  acquisition.  Other  changes in
other income  primarily  reflected  lower net foreign  exchange  rate losses and
lower interest expense.

     INCOME TAXES.  The Company's  income tax rate for the first quarter of 2002
increased to 38%  compared to 37% for 2001.  The rate  increased  primarily as a
result of higher  marginal  tax rates  anticipated  from the receipt of the cash
litigation  settlement award. The Company expects the full-year 2002 tax rate to
be slightly higher than the tax rate effective for 2001.

     NET  INCOME.  Net  income for the first  quarter of 2002 was $15.4  million
($.60 per diluted  share),  an increase of 690.3% compared to net income of $1.9
million   ($0.08  per  diluted  share)  in  2001.  The  increase  was  primarily
attributable to the litigation  settlement award received in 2002. Excluding the

                                       14
<PAGE>
2002  litigation  settlement and 2001 operations of  Inter-Tel.NET,  the Company
reported  net  income  of $6.0  million,  or $0.24  per  diluted  share in 2002,
compared to net income of $4.8  million,  or $0.19 per diluted  share,  in 2001.
This  increase  is the  result of higher  gross  profit  and  reduced  operating
expenses in the first quarter of 2002 relative to the first quarter of 2001.

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 our contract  manufacturing has been moved to domestic sources. The expansion
of  international  operations in the United  Kingdom and Europe and  anticipated
increased  sales  in Japan  and  Asia  and  elsewhere  could  result  in  higher
international  sales  as a  percentage  of  total  revenues,  but  international
revenues are currently not significant.

LIQUIDITY AND CAPITAL RESOURCES

     At March 31, 2002,  the Company had $85.4 million in cash and  equivalents,
which  represented a increase of  approximately  $23.6 million from December 31,
2001. We maintain a $10 million  unsecured,  revolving  line of credit with Bank
One, NA, that is available  through June 1, 2003. Under the credit facility,  we
have the  option to borrow at a prime  rate or  adjusted  LIBOR  interest  rate.
Historically,   we  have  used  the  credit   facility   primarily   to  support
international  letters of credit to suppliers.  Inter-Tel  received a gross cash
award of $20 million in February 2002 in  settlement  of a dispute  submitted to
binding  arbitration.  Costs relating to attorney's fees, expert witnesses,  and
arbitration and additional  costs and expenses,  including $1.3 million in bonus
payments to employees who assisted in the  litigation and  arbitration,  totaled
approximately  $4.7  million in the first  quarter of 2002,  resulting  in a net
award of $15.3 million  before  income taxes.  During the first quarter of 2002,
$8.0 million of available cash was used to fund  acquisitions.  During the first
quarter  of 2001,  approximately  $14.1  million of  available  cash was used to
repurchase  our common stock and an additional  $11.5 million of available  cash
was used to fund acquisitions. Of the $11.5 million used in the first quarter of
2001 to fund acquisitions,  $6.0 million was subsequently  returned to us in the
third quarter of 2001 to reduce the net cash used in the Convergent acquisition.
The remaining cash balances may be used for acquisitions,  strategic  alliances,
working capital and general corporate purposes.

     Net cash  provided by operating  activities  totaled  $33.2 million for the
three months ended March 31, 2002,  compared to $3.9 million for the same period
in 2001. Cash provided by operating  activities in the first quarter of 2002 was
the result of cash generated from operations,  including  non-cash  depreciation
and  amortization  charges,  as well as proceeds from the litigation  settlement
discussed  above.   Cash  generated  by  the  change  in  operating  assets  and
liabilities  in 2002 was $12.5  million,  compared to cash used by the change in
operating  assets and liabilities of $3.7 million in 2001. At March 31, 2002, we
achieved  lower  accounts  receivable  and inventory  than at December 31, 2001,
which was primarily a result of close  management of receivables  and inventory.
Net cash  provided by operating  activities  was offset by increases in accounts
payable and other  accrued  expenses  at March 31,  2002,  primarily  reflecting
higher tax accruals and  liabilities  assumed  from the McLeod  acquisition.  We
expect to expand  sales  through our direct  sales  office and dealer  networks,
which is expected to require the  expenditure  of working  capital for increased
accounts receivable and inventories.

     Net cash used in investing  activities totaled $9.2 million for the quarter
ended March 31, 2002,  compared to $14.6 million for the quarter ended March 31,
2001.  During the first quarter of 2002, net cash used in  acquisitions  totaled
approximately $8.0 million and capital expenditures  totaled  approximately $1.3
million. During the first quarter of 2001, net cash used in acquisitions totaled
approximately  $11.5 million,  $10.6 of which was attributable to the Convergent
acquisition.  Of the $11.5  million  used in the first  quarter  of 2001 to fund
acquisitions,  $6.0 million was subsequently returned to us in the third quarter
of 2001 to  reduce  the net cash  used in the  Convergent  acquisition.  Capital
expenditures totaled approximately $3.1 million in the first quarter of 2001. We
anticipate incurring  additional capital  expenditures during 2002,  principally
relating to expenditures for equipment and management  information  systems used
in its operations, facilities expansion and acquisition activities.

                                       15
<PAGE>
     Net cash used in financing  activities totaled $421,000 in the three months
ended March 31, 2002, compared to $13.3 million for the same period in 2001. Net
cash  used  for   dividends   totaled   approximately   $449,000  and  $260,000,
respectively,  during the first  quarter  of 2002 and 2001,  which was offset in
each period by cash provided by the exercise of stock options totaling $296,000.
During 2002 and 2001, we reissued treasury shares through stock option exercises
and issuances,  with the proceeds  received totaling less than the cost basis of
the treasury  stock  reissued.  Accordingly,  the  difference  was recorded as a
reduction to retained  earnings.  During the first quarter of 2001, we purchased
treasury stock using  approximately $14.1 million. We issued long-term debt, net
of  repayments,  of $1.1  million  in 2001  primarily  in the form of  long-term
capital  leases to  support  capital  additions  to  Inter-Tel.net  prior to our
divestiture of our majority ownership in July 2001.

     We offer to our customers lease financing and other services, including our
Total Solution (formerly Totalease) program, through our Inter-Tel Leasing, Inc.
subsidiary.  We fund our Total  Solution  program  in part  through  the sale to
financial  institutions of rental income streams under the leases.  Resold lease
rentals  totaling $201.7 million and $202.7 million remain unbilled at March 31,
2002 and December 31, 2001,  respectively.  We are obligated to repurchase  such
income  streams in the event of defaults by lease  customers on a limited  basis
and,  accordingly,  maintain  reserves  based  on loss  experience  and past due
accounts.  Although we to date have been able to resell the rental  streams from
leases  under the  Total  Solution  program  profitably  and on a  substantially
current basis,  the timing and  profitability  of lease resales could impact our
business and operating  results,  particularly  in an environment of fluctuating
interest rates and economic uncertainty. If we are required to repurchase rental
streams and realizes  losses  thereon in amounts  exceeding  our  reserves,  our
operating results will be adversely affected.

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

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<PAGE>
CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

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

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

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

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

     When we determine that the carrying value of goodwill and other  identified
intangibles  may not be  recoverable,  we  measure  any  impairment  based  on a
projected  discounted  cash flow method using a discount rate  determined by our
management to be  commensurate  with the risk  inherent in our current  business
model. In accordance with SFAS No. 142, "Goodwill and Other Intangible  Assets,"
on January 1, 2002 we ceased to  amortize  goodwill  arising  from  acquisitions

                                       17
<PAGE>
completed  prior to July 1, 2001.  Inter-Tel has tested  goodwill for impairment
using the two-step  process  prescribed  in SFAS 142. The first step is a screen
for  potential  impairment,  while the second  step  measures  the amount of the
impairment, if any. Inter-Tel has performed the first of the required impairment
tests for  goodwill as of January 1, 2002 and has  determined  that the carrying
amount of goodwill is not impaired.

     Application  of the  nonamortization  provisions of SFAS 142 is expected to
result in an increase in income from continuing  operations  before income taxes
of approximately $1.8 million in 2002, excluding acquisitions completed in 2002.
Had we adopted SFAS 142 effective January 1, 2001, income from operations before
income taxes would have increased approximately $1.8 million for 2001.

     ALLOWANCE  FOR  DOUBTFUL  ACCOUNTS.  We maintain  allowances  for  doubtful
accounts for estimated  losses  resulting from the inability of our customers to
make required payments.  If the financial  condition of our customers or channel
partners  were to  deteriorate,  resulting in an  impairment of their ability to
make payments,  additional  allowances may be required.  Additional  reserves or
allowances  for  doubtful  accounts  are  recorded  for our  sales-type  leases,
discussed above in "Sales-Leases."

     INVENTORIES.  We value our inventories at lower of cost or market.  Cost is
determined by the first-in,  first-out (FIFO) method,  including material, labor
and factory overhead.  Significant  management judgment is required to determine
the  reserve  for  obsolete or excess  inventory.  Inventory  on hand may exceed
future demand either  because the product is outdated,  or obsolete,  or because
the amount on hand is more than can be used to meet future need,  or excess.  We
currently  consider to be excess all inventory  that has no activity  within one
year, or quantities  in excess of one year's  usage,  as well as any  additional
specifically  identified  inventory.  We also  provide  for the  total  value of
inventories  that we determine to be obsolete based on criteria such as customer
demand,  product life-cycles,  changing  technologies and market conditions.  We
write down our excess and obsolete inventory equal to the difference between the
cost of  inventory  and the  estimated  market  value.  At March 31,  2002,  our
inventory reserves were $14.1 million of our $34.7 million gross inventories. If
actual customer demand,  product life-cycles,  changing  technologies and market
conditions  are less favorable  than those  projected by management,  additional
inventory write-downs may be required.

     CONTINGENCIES.  We are a party to  various  claims  and  litigation  in the
normal course of business.  Management's  current  estimated  range of liability
related to various  claims and pending  litigation  is based on claims for which
our  management  can  estimate  the  amount  and range of loss.  Because  of the
uncertainties  related  to both the  amount  and range of loss on the  remaining
pending  claims  and  litigation,  management  is  unable  to make a  reasonable
estimate of the  liability  that could result from an  unfavorable  outcome.  As
additional information becomes available, we will assess the potential liability
related to our pending  litigation and revise our  estimates.  Such revisions in
our estimates of the potential  liability could materially impact our results of
operations and financial position. We received correspondence during 1999 from a
major  competitor  and subsidiary  inviting us to negotiate a license  agreement
regarding the  competitors'  patents.  We have continued to negotiate with these
competitors  regarding their patent claims and have made claims for our patents.
We received  additional  correspondence from another competitor in 2000 alleging
that we violated their  intellectual  property  rights.  Inter-Tel  responded by
providing  a copy of a notice of  consent to  transfer  the  license,  which was
previously granted by this competitor.

     During 1999, 2000 and 2001, Inter-Tel.NET also entered into operating lease
agreements  totaling  approximately  $6.5 million  from an equipment  vendor for
network equipment and software.  The lease agreements required  Inter-Tel.NET to
have vendor maintenance on their products.  Inter-Tel originally  guaranteed the
indebtedness.  In the second quarter of 2001,  Inter-Tel.NET notified the vendor
of network and network  equipment  problems  encountered due to vendor equipment
and software  recommended,  supplied and financed by this vendor.  Inter-Tel.NET
requested  that the  vendor  not only solve the  problems,  but also  compensate
Inter-Tel.NET  for the problems and the resulting lost customers,  lost revenues
and  lost  profits.  Pursuant  to  Inter-Tel's  sale  of 83%  of  Inter-Tel.NET,
Comm-Services  assumed the vendor lease and maintenance  obligations and as such
Inter-Tel  has not recorded any liability for these  obligations.  However,  the
vendor has not released  Inter-Tel from its guarantee of these  obligations  and
Inter-Tel has not released the vendor from Inter-Tel's claims, nor did we assign
our rights to these claims to Comm-Services. In April 2002, Inter-Tel received a
notice letter from the financing affiliate of the Inter-tel.NET equipment vendor
notifying  Inter-Tel of default in lease  payments due the financing  affiliate.
Inter-Tel responded to  the  affiliate  advising them that Inter-Tel was not the

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<PAGE>
Lessee of the  equipment,  the  correct  name and  address  of the Lessee of the
equipment  and the losses to  Inter-Tel  because of the non  performance  of the
equipment and vendor related third party software providers' breach of contract.

     We do not  anticipate  that the  resolution  of such  matters  will  have a
material adverse effect on our consolidated financial position.

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.

RISKS RELATED TO OUR BUSINESS

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

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

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

OUR FUTURE SUCCESS  LARGELY  DEPENDS ON INCREASED  COMMERCIAL  ACCEPTANCE OF OUR
AXXESS AND ECLIPSE(2) SYSTEMS,  ENCORE PRODUCT,  INTERPRISE PRODUCTS, NEW SPEECH
RECOGNITION   AND   INTERACTIVE   VOICE   RESPONSE    PRODUCTS,    AND   RELATED
COMPUTER-TELEPHONY PRODUCTS.

     During the past few years,  we have introduced  transparent  networking and
unified  messaging  capabilities  on  our  AXXESS  and  ECLIPSE(2)  systems  and
introduced  our  Encore  product  and  InterPrise   family  of  voice  and  data
convergence  products.  In 2000, we introduced  ClearConnect,  a  software-based
telephone  that  runs  on  a  PC,  ClearConnect  Talk-to-Agent,   an  e-commerce
"touch-to-talk"  Web  call  product,  a line of IP voice  terminals  and IP soft
phones that add IP telephony to the AXXESS and ECLIPSE(2)  systems,  and several
other telephony-related products. During the past 12 months, sales of our AXXESS
business   communications   systems  and  related   software  have  comprised  a
substantial portion of our net sales. Our future success depends, in large part,
upon increased commercial  acceptance and adoption of the InterPrise and related
computer-telephony products, the AXXESS and ECLIPSE(2) systems, Encore products,
new speech  recognition  and  Interactive  Voice Response  products,  as well as
future upgrades and enhancements to these products and networking platforms.  We
cannot  assure you that these  products or  platforms  will  achieve  commercial
acceptance in the future.

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

     Our telecommunications  products and software are highly complex.  Although
our new products and upgrades are examined and tested prior to release, they can
only be fully  tested  when used by a large  customer  base.  Consequently,  our
customers  may discover  program  errors,  or "bugs," or other defects after new
products and  upgrades  have been  released.  Some of these bugs may result from
defects  contained in component  parts or software  from our  suppliers or other

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<PAGE>
third  parties  that are  intended to be  compatible  with our products and over
which we have little or no control. Although we have test procedures and quality
control standards in place designed to minimize the number of errors and defects
in our products, we cannot assure you that our new products and upgrades will be
free of bugs when released.  If we are unable to quickly or successfully correct
bugs identified after release,  we could experience the following,  any of which
would harm our business:

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

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

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

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

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

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

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

     In January 2001, we acquired certain assets and assumed certain liabilities
of Convergent Technologies,  Inc. In connection with the Convergent acquisition,
we hired over 200 Convergent employees and opened eight Inter-Tel branch offices
in previous Convergent locations. Among potential other risks and uncertainties,
difficulties or risks associated with the Convergent acquisition include service
and  maintenance of  competitors  products,  and the  successful  integration of
employees,  independent contractors and customers.  Similar risks could apply to
the recently completed McLeod acquisition.

     In  July  2001,   Inter-Tel   agreed  to  sell  83%  of   Inter-Tel.NET  to
Comm-Services  Corporation.  In  connection  with  this  transaction,  Inter-Tel
assessed the fair value of the net assets of  Inter-Tel.NET  as of June 30, 2001
under  FAS  121 to  arrive  at an  adjustment  to the  remaining  investment  in
Inter-Tel.NET. The charge recorded as of the close of the second quarter of 2001
totaled $5.4 million ($3.4 million after tax), associated with the impairment of
Inter-Tel's investment in Inter-Tel.NET.  The recording of this charge adversely

                                       20
<PAGE>
affected our operating  results for the second  quarter of 2001. On December 30,
2001,  Comm-Services  entered into a merger agreement with Vianet  Technologies,
Inc.  (Vianet).  Inter-Tel's  17% investment in  Comm-Services  was converted to
approximately  10% of Vianet stock.  As of March 31, 2002, we assessed the value
of our  investment  in Vianet and we recorded an expense of $600,000  related to
the  write-down of this  investment.  Our financial  condition will be adversely
affected to the extent that the Vianet business is unsuccessful.

     During 1999, 2000 and 2001, Inter-Tel.NET also entered into operating lease
agreements  totaling  approximately  $6.5 million  from an equipment  vendor for
network equipment and software.  The lease agreements required  Inter-Tel.NET to
have vendor maintenance on their products.  Inter-Tel originally  guaranteed the
indebtedness.  In the second quarter of 2001,  Inter-Tel.NET notified the vendor
of network and network  equipment  problems  encountered due to vendor equipment
and software  recommended,  supplied and financed by this vendor.  Inter-Tel.NET
requested  that the  vendor  not only solve the  problems,  but also  compensate
Inter-Tel.NET  for the problems and the resulting lost customers,  lost revenues
and  lost  profits.  Pursuant  to  Inter-Tel's  sale  of 83%  of  Inter-Tel.NET,
Comm-Services  assumed the vendor lease and maintenance  obligations and as such
Inter-Tel  has not recorded any liability for these  obligations.  However,  the
vendor has not released  Inter-Tel from its guarantee of these  obligations  and
Inter-Tel has not released the vendor from Inter-Tel's claims, nor did we assign
our rights to these claims to Comm-Services. In April 2002, Inter-Tel received a
notice letter from the financing affiliate of the Inter-tel.NET equipment vendor
notifying  Inter-Tel of default in lease  payments due the financing  affiliate.
Subsequently,  Inter-Tel responded to the affiliate advising them that Inter-Tel
was not the Lessee of the equipment,  the correct name and address of the Lessee
of the equipment and the losses to Inter-Tel  because of the non  performance of
the  equipment  and vendor  related third party  software  providers'  breach of
contract.  Our financial condition will be adversely affected to the extent that
payments made under the guarantee exceed damages realized from our claim.

     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 seventeen (17)  telecommunication and unified messaging products and
have  also  applied  to the U.S.  Patent  and  Trademark  Office  for  seven (7)
additional  patents.  We  also  rely  on  copyright  and  trade  secret  law and
contractual  provisions  to protect our  intellectual  property.  Despite  these
precautions, third parties could copy or otherwise obtain and use our technology
without authorization, or develop similar technology independently.

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

     We are also  subject  to third  party  claims  that our  current  or future
products or services  infringe  upon the rights of others.  For example,  we are
subject to proceedings  alleging that certain of our key products  infringe upon
third  party  intellectual  property  rights,  including  patents,   trademarks,
copyrights or other intellectual  property rights. We have viewed  presentations
from one of our primary competitors,  Lucent and subsequently  Lucent's spin off
Avaya,  alleging  that  our  AXXESS  business   communications  system  utilizes
inventions covered by certain of their patents. We are continuing the process of
investigating  this matter and we have made claims  against Avaya and Lucent for

                                       21
<PAGE>
infringement of our patents.  Additionally,  we recently  received a letter from
AT&T alleging that some of our IP products infringe upon  intellectual  property
protected by AT&T's  patents.  Although we have denied  AT&T's  allegations  and
intend to defend  our  position  vigorously,  we cannot  assure you that we will
ultimately  prevail in this dispute.  When any such claims are asserted  against
us, among other means to resolve the  dispute,  we may seek to license the third
party's intellectual property rights. Purchasing such licenses can be expensive,
and we cannot  assure you that a license  will be  available  on prices or other
terms acceptable to us, if at all. Alternatively,  we could resort to litigation
to challenge  such a claim.  Litigation  could require us to expend  significant
sums of cash and divert our  management's  attention.  In the event that a court
renders an enforceable  decision with respect to our intellectual  property,  we
may be required to pay significant damages, develop non-infringing technology or
acquire licenses to the technology subject to the alleged  infringement.  Any of
these actions or outcomes  could harm our  business.  If we are unable or choose
not to license technology, or decide not to challenge a third party's rights, we
could encounter  substantial and costly delays in product  introductions.  These
delays could result from efforts to design around asserted third party rights or
our discovery that the  development,  manufacture or sale of products  requiring
these licenses could be foreclosed.

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

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

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

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

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

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

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

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

                                       22
<PAGE>
     Some  of our  competitors  may  also  be able  to  provide  customers  with
additional  benefits at lower  overall  costs or to reduce  their gross  margins
aggressively  in an effort to increase  market share.  We cannot be sure that we
will be able to match  cost  reductions  by our  competitors.  In  addition,  we
believe that there is likely to be  consolidation  in our  markets,  which could
lead to increased price  competition  and other forms of competition  that could
cause our business to suffer.

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

     We currently  obtain certain key  components for our digital  communication
platforms,   including  certain  microprocessors,   integrated  circuits,  power
supplies,  voice  processing  interface  cards and IP  telephony  cards,  from a
limited  number of suppliers  and  manufacturers.  Our reliance on these limited
suppliers and contract manufacturers involves risks and uncertainties, including
the  possibility  of a shortage or delivery  delay for some key  components.  We
currently manufacture our products through third-party subcontractors located in
the United  States,  the  People's  Republic  of China,  the United  Kingdom and
Mexico.  The  Encore  system is  manufactured  by an OEM  partner  in the United
Kingdom. Foreign manufacturing facilities are subject to changes in governmental
policies, imposition of tariffs and import restrictions and other factors beyond
our control. Varian currently manufactures a significant portion of our products
at  Varian's  Tempe,  Arizona  and  Poway,   California  facilities,   including
substantially  all of  the  printed  circuit  boards  used  in  the  AXXESS  and
ECLIPSE(2)  systems,  as well  as  substantially  all of the  computer-telephony
products purchased in the Executone acquisition.  We have experienced occasional
delays in the supply of  components  and  finished  goods  that have  harmed our
business.  We cannot assure that we will not  experience  similar  delays in the
future.

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

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

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

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

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

                                       23
<PAGE>
IF WE LOSE KEY PERSONNEL OR ARE UNABLE TO HIRE ADDITIONAL QUALIFIED PERSONNEL AS
NECESSARY, WE MAY NOT BE ABLE TO ACHIEVE OUR OBJECTIVES.

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

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

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

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

     In the past few years, we introduced the AXXESS and ECLIPSE(2) ATM business
communications  system and  networking  software,  which are  typically  sold to
larger  customers  at a higher  average  selling  price  and often  represent  a
significant communications infrastructure capital expenditure by the prospective
enterprise  customer.  Accordingly,  the  purchase  of  our  products  typically
involves  numerous  internal  approvals  relating  to the  evaluation,  testing,
implementation  and  acceptance of new  technologies.  This  evaluation  process
frequently results in a lengthy sales process, which can range from a few months
to more  than 12  months,  thereby  subjecting  our  sales  cycle to a number of
significant   uncertainties   concerning  budgetary   constraints  and  internal
acceptance  reviews.  The length of our sales cycle also may vary  substantially
from customer to customer.  While our customers are  evaluating our products and
before  placing an order with us, we may incur  substantial  sales and marketing
expenses  and  expend  significant  management  effort.  Consequently,  if sales
forecasted from a specific customer for a particular quarter are not realized in
that quarter, our operating results could be materially adversely affected.

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

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

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

                                       24
<PAGE>
     In addition, we have historically operated with a relatively small backlog,
with sales and operating results in any quarter depending  principally on orders
booked and shipped in that quarter.  In the past, we have recorded a substantial
portion of our net sales for a given quarter in the third month of that quarter,
with a  concentration  of such net sales in the last two  weeks of the  quarter.
Market   demand  for   investment   in  capital   equipment   such  as  business
communications  systems and  associated  call  processing  and voice  processing
software  applications depends largely on general economic  conditions,  and can
vary significantly as a result of changing conditions in the economy as a whole.
We cannot assure you that  historical  trends for small backlog will continue in
the future.

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

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

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

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

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

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

     As of March 31, 2002, Steven G. Mihaylo,  Inter-Tel's Chairman of the Board
of  Directors,  Chief  Executive  Officer  and  President,   beneficially  owned
approximately  21.7% of the outstanding shares of the common stock. As a result,
he has the ability to exercise significant  influence over all matters requiring
shareholder approval. In addition, the concentration of ownership could have the
effect of delaying or preventing a change in control of Inter-Tel.

                                       25
<PAGE>
RISKS RELATED TO OUR INDUSTRY

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

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

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

     The market for IP network voice communications products is evolving rapidly
and is  characterized  by an  increasing  number  of  market  entrants  who have
introduced  or developed  products and services for Internet or other IP network
voice communications.  As is typical of a new and rapidly evolving industry, the
demand for and market acceptance of, recently introduced IP network products and
services are highly uncertain.  We cannot assure you that packet-switched  voice
networks will become widespread.  Even if packet-switched  voice networks become
widespread in the future, we cannot assure you that our products,  including the
Inter-Tel  InterPrise  product line and IP telephony  features of the AXXESS and
ECLIPSE(2) systems,  will successfully  compete against other market players and
attain broad  market  acceptance.  Inter-Tel  sold 83% of  Inter-Tel.NET,  an IP
telephony  provider,  to  Comm-Services  in July  2001,  and our  remaining  17%
investment was subsequently  converted to  approximately  10% interest in Vianet
Technologies,  Inc. via a merger between Comm-Services and Vianet.  Accordingly,
Inter-Tel  continues to maintain an investment of 10% in  Inter-Tel.NET  through
Vianet.  Accordingly,  our financial condition will be adversely affected if the
Inter-Tel.NET/Vianet business is unsuccessful.

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

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

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

                                       26
<PAGE>
or if these  entities  are  unwilling  or unable to  provide  telecommunications
services and billing information to us on favorable terms, our ability to expand
our own long distance and network services will be harmed. Carriers that provide
telecommunications services to us may also experience financial difficulties, up
to  and  including   bankruptcies,   which  could  harm  our  ability  to  offer
telecommunications services.

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

INVESTMENT  PORTFOLIO.  We do not use  derivative  financial  instruments in our
non-trading  investment  portfolio.  Inter-Tel  maintains a portfolio  of highly
liquid cash  equivalents  typically  maturing in three  months or less as of the
date of purchase. Inter-Tel places its investments in instruments that meet high
credit  quality  standards,  as specified in our investment  policy  guidelines.
Given the short-term nature of these investments, and that we have no borrowings
outstanding  other than  short-term  letters of  credit,  we are not  subject to
significant interest rate risk.

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

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

INTER-TEL, INCORPORATED AND SUBSIDIARIES

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS--NOT APPLICABLE

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS--NOT APPLICABLE

ITEM 3. DEFAULTS ON SENIOR SECURITIES--NOT APPLICABLE

                                       27
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Our Annual Meeting of Shareholders was held April 23, 2002 (the Annual Meeting).
On March 25, 2002 we mailed a Proxy Statement,  pursuant to Regulation 14A under
the  Securities  Exchange Act of 1934, to our security  holders to solicit their
votes regarding the following matters that were discussed at our Annual Meeting:

     1.   Election of Directors: Steven G. Mihaylo, J. Robert Anderson, Jerry W.
          Chapman,  Gary D. Edens and C. Roland  Haden were  elected to serve as
          directors  until the 2003 Annual  Meeting of  Shareholders.  The votes
          were as follows:

Nominee                     For:        Against:     Abstain:    Broker Non-Vote
-------                     ----        --------     --------    ---------------
Steven G. Mihaylo        17,748,456    3,703,364        --              --
J. Robert Anderson       21,121,096     330,724         --              --
Jerry W. Chapman         21,035,221     416,599         --              --
Gary D. Edens            21,260,661     191,159         --              --
C. Roland Haden          20,964,647     487,173         --              --

     2.   Inter-Tel's  shareholders  voted on and approved five  amendments (the
          "Amendments")  to the  Inter-Tel,  Incorporated  Director Stock Option
          Plan (the "Director Plan") that were previously  approved by the Board
          of Directors.

          These Amendments consist of the following:

          *    Increasing  the term of the Director  Plan from ten (10) years to
               twenty  (20)  years,  thereby  extending  the period in which the
               Company's outside directors are eligible to receive option grants
               thereunder;
          *    Including the "Service  Provider" concept in the Director Plan in
               order to allow  grantees  under the plan to  continue to vest and
               exercise  his or her  options so long as such  grantee  remains a
               director, employee or consultant of the Company;
          *    Changing  the date of the annual  grant of  options  to  grantees
               under the Director  Plan from five (5) days after the date of the
               Board  meeting held during the third quarter of each year to five
               (5) days after the date of the re-election of Eligible  Directors
               (defined in the Director Plan) at the Company's Annual Meeting of
               Shareholders to be effective in 2002;
          *    Increasing  each  option  grant to  Eligible  Directors  by 2,500
               shares,  from an option to purchase  5,000 shares to an option to
               purchase  7,500  shares in  response to changes in the market for
               outside directors; and
          *    Increasing  the term of options  granted  under the Director Plan
               from  five (5) years to ten (10)  years,  thereby  extending  the
               period in which optionees may exercise their option grants.

          The votes were as follows:

            For:              Against:           Abstain:        Broker Non-Vote
            ----              --------           --------        ---------------
         13,582,660          7,815,559            53,601                --

3.   Inter-Tel's  shareholders  voted  on  and  approved  an  amendment  to  the
     Inter-Tel, Incorporated Employee Stock Purchase Plan ("the "Purchase Plan")
     to increase  the shares of Common Stock  reserved  for  issuance  under the
     Purchase  Plan by  500,000  shares,  bringing  the total  shares  currently
     reserved for issuance under the Option Plan to 1,000,000 shares.  The votes
     were as follows:

            For:              Against:           Abstain:        Broker Non-Vote
            ----              --------           --------        ---------------
         19,922,198          1,499,717            29,905                --

                                       28
<PAGE>
4.   The  shareholders  also  voted on and  approved  a  proposal  to ratify the
     appointment  of Ernst & Young  LLP to act as the  independent  auditors  to
     audit our and our subsidiaries' financial statements for the year 2001. The
     votes were as follows:

            For:              Against:           Abstain:        Broker Non-Vote
            ----              --------           --------        ---------------
         21,085,940            346,096            19,784                --

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 shareholder
of the  Company  fails to notify the Company at least 45 days prior to the month
and day of mailing of the prior  year's  proxy  statement,  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 shareholders, without
any  discussion of the matter in the proxy  statement.  Since the Company mailed
its proxy  statement for the 2002 annual  meeting of  shareholders  on March 25,
2002,  the  deadline for receipt of any such  shareholder  proposal for the 2003
annual meeting of shareholders is February 8, 2003.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:

     Exhibits: None.
     Reports on Form 8-K: None.


                                   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


May 13, 2002                            /s/ Steven G. Mihaylo
------------                            ----------------------------------------
                                        Steven G. Mihaylo
                                        Chairman of the Board, Chief Executive
                                        Officer and President


May 13, 2002                            /s/ Kurt R. Kneip
------------                            ----------------------------------------
                                        Kurt  R. Kneip
                                        Vice President and
                                        Chief Financial Officer

                                       29