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

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

                                    FORM 10-Q
                  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended                                    Commission File Number:
    June 30, 2003                                               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 June 30, 2003
           --------------                        -------------------------------

Common Stock, no par value                                24,993,836

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 [_]

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

<PAGE>

                                      INDEX

                    INTER-TEL, INCORPORATED AND SUBSIDIARIES
<TABLE>
<CAPTION>

                                                                                                        Page
PART I.  FINANCIAL INFORMATION
<S>               <C>                                                                                     <C>
  Item 1.         Financial Statements (unaudited)

                  Condensed consolidated balance sheets--June 30, 2003 and December 31, 2002
                                                                                                           3

                  Condensed consolidated statements of income--three and six months ended June 30,
                  2003 and June 30, 2002                                                                   4

                  Condensed consolidated statements of cash flows--six months ended June 30, 2003
                    and June 30, 2002                                                                      5

                  Notes to condensed consolidated financial Statements--June 30, 2003
                                                                                                           6

  Item 2.         Management's Discussion and Analysis of Financial
                  Condition and Results of Operations                                                     14

  Item 3.         Quantitative and Qualitative Disclosures About Market Risk                              31

  Item 4.         Controls and Procedures                                                                 32

PART II.          OTHER INFORMATION

  Item 1.         Legal Proceedings                                                                       33

  Item 2.         Changes in Securities and Use of Proceeds                                               33

  Item 3.         Defaults on Senior Securities                                                           33

  Item 4.         Submission of Matters to a Vote of Security Holders                                     33

  Item 5.         Other Information                                                                       33

  Item 6.         Exhibits and Reports on Form 8-K                                                        33

                  SIGNATURES                                                                              34
</TABLE>

                                       2


<PAGE>


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

                                                                                      June 30,           December 31,
 (in thousands, except share amounts)                                                   2003                2002
                                                                                     (Unaudited)          (Note A)
<S>                                                                                  <C>                <C>
ASSETS
CURRENT ASSETS
Cash and equivalents                                                                 $ 86,583           $ 84,923
Short-term investments                                                                 50,444             40,916
----------------------------------------------------------------------------------------------------------------
Total cash and short-term investments                                                 137,027            125,839

Accounts receivable, net of allowances of $11,376 in 2003 and
    $12,159 in 2002                                                                    42,509             42,566
Inventories, net of allowances of $7,470 in 2003 and
    $10,558 in 2002                                                                    12,769             11,329
Net investment in sales-leases, net of allowances of $739 in
    2003 and $516 in 2002                                                              16,444             13,344
Income taxes receivable                                                                 1,543              2,604
Deferred income taxes                                                                   3,744              2,377
Prepaid expenses and other assets                                                       7,090              6,705
-----------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS                                                                  221,126            204,764

PROPERTY, PLANT & EQUIPMENT                                                            23,218             24,795
GOODWILL                                                                               17,646             17,646
PURCHASED INTANGIBLE ASSETS                                                             6,890              7,416
NET INVESTMENT IN SALES-LEASES, net of allowances of
    $1,696 in 2003 and $1,411 in 2002                                                  27,613             24,692
OTHER ASSETS                                                                              165              2,749
-----------------------------------------------------------------------------------------------------------------
                                                                                    $ 296,658          $ 282,062
-----------------------------------------------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable                                                                     $ 27,990           $ 23,089
Other current liabilities                                                              45,763             50,051
-----------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES                                                              73,753             73,140

DEFERRED TAX LIABILITY                                                                 17,991             16,320
LEASE RECOURSE LIABILITY                                                               11,977             11,125
RESTRUCTURING RESERVE                                                                     549              1,049
OTHER LIABILITIES                                                                       6,870              6,525

SHAREHOLDERS' EQUITY
Common stock, no par value-authorized 100,000,000 shares;
    issued-27,161,823 shares; outstanding-24,993,836 at June 30, 2003
    and 24,908,983 shares at December 31, 2002                                        111,779            111,639
Less: Shareholder loans                                                                  (312)              (338)
Retained earnings                                                                     100,096             89,643
Accumulated other comprehensive income                                                    170                195
-----------------------------------------------------------------------------------------------------------------
                                                                                      211,733            201,139
Less:  Treasury stock at cost - 2,167,987 shares in 2003 and 2,252,840
    shares in 2002.                                                                   (26,215)           (27,236)
-----------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY                                                            185,518            173,903
-----------------------------------------------------------------------------------------------------------------
                                                                                    $ 296,658          $ 282,062
-----------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes.

                                       3

<PAGE>


 INTER-TEL, INCORPORATED AND SUBSIDIARIES
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
<TABLE>
<CAPTION>

 (In thousands, except                                               Three Months                  Six Months
 per share amounts)                                                  Ended June 30,              Ended June 30,
                                                                   2003          2002          2003          2002
                                                                   ----          ----          ----          ----
<S>                                                             <C>           <C>           <C>           <C>
NET SALES                                                       $ 95,102      $ 95,948      $ 179,271     $ 186,017
Cost of sales                                                     44,852        47,473         84,947        92,489
--------------------------------------------------------------------------------------------------------------------
GROSS PROFIT                                                      50,250        48,475         94,324        93,528

Research & development                                             5,426         4,538         10,660         8,855
Selling, general and administrative                               33,001        32,866         64,247        63,523
Amortization of purchased intangible assets                          486           269            914           526
--------------------------------------------------------------------------------------------------------------------
                                                                  38,913        37,673         75,821        72,904

--------------------------------------------------------------------------------------------------------------------
OPERATING INCOME                                                  11,337        10,802         18,503        20,624

Litigation settlement (net of costs except for taxes)                 --           214             --        15,516
Write-down of investment in Inter-Tel.NET/Vianet                      --          (600)            --        (1,200)
Interest and other income                                            432           513            875           953
Foreign currency transaction gains (losses)                           26           284            (14)          200
Interest expense                                                     (71)          (46)          (103)          (80)
--------------------------------------------------------------------------------------------------------------------

INCOME BEFORE INCOME TAXES                                        11,724        11,167         19,261        36,013
Income tax provision                                               4,455         4,132          7,320        13,583
--------------------------------------------------------------------------------------------------------------------

NET INCOME                                                      $  7,269      $  7,035      $  11,941     $  22,430
--------------------------------------------------------------------------------------------------------------------

NET INCOME PER SHARE
--------------------------------------------------------------------------------------------------------------------
Basic                                                           $   0.29      $   0.29      $    0.48     $    0.93
Diluted                                                         $   0.28      $   0.28      $    0.46     $    0.88
--------------------------------------------------------------------------------------------------------------------

DIVIDENDS PER SHARE                                             $   0.03      $   0.02      $    0.06     $    0.04
--------------------------------------------------------------------------------------------------------------------

--------------------------------------------------------------------------------------------------------------------
Weighted average basic common shares                              24,947        24,269         24,934        24,224
--------------------------------------------------------------------------------------------------------------------

Weighted average diluted common shares                            25,970        25,563         26,004        25,556
--------------------------------------------------------------------------------------------------------------------
</TABLE>

See accompanying notes.

                                       4


<PAGE>


 INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>

(In thousands)                                                                           Six Months
                                                                                        Ended June 30,
                                                                                     2003           2002
                                                                                     ----           ----
<S>                                                                               <C>            <C>
OPERATING ACTIVITIES
Net income                                                                        $ 11,941       $ 22,430
Adjustments to reconcile net income to net cash provided by operating
activities:
    Depreciation of fixed assets                                                     3,533          3,712
    Amortization of patents included in R&D expenses                                   111            111
    Amortization of goodwill and purchased intangible assets                           914            526
    Provision for losses on receivables                                              1,595          1,954
    Provision for losses on leases                                                   2,606          3,230
    Provision for inventory valuation                                                  335            295
    Decrease in other liabilities                                                  (1,466)        (1,395)
    Loss (gain) on sale of property and equipment                                       56           (25)
    Deferred income taxes                                                              304            258
    Effect of exchange rate changes                                                   (26)             36
    Changes in operating assets and liabilities                                    (7,655)         11,454
----------------------------------------------------------------------------------------------------------

NET CASH PROVIDED BY OPERATING ACTIVITIES                                           12,248         42,586

INVESTING ACTIVITIES
    Purchases of short-term investments                                            (68,400)       (18,100)
    Maturities and sales of short-term investments                                  58,872          2,000
    Additions to property, plant and equipment                                      (2,082)        (2,773)
    Proceeds from disposal of property, plant and equipment                             70            287
    Proceeds from investment in Inter-Tel.NET/Vianet                                 1,450             --
    Cash used in acquisitions                                                           --         (7,925)
----------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES                                              (10,090)       (26,511)

FINANCING ACTIVITIES
    Cash dividends paid                                                             (1,495)          (932)
    Treasury stock purchases                                                           (12)            (5)
    Payments on term debt                                                              (75)          (337)
    Proceeds from exercise of stock options, including shareholder loan
    repayments                                                                         616          1,338
    Proceeds from stock issued under the ESPP                                          468            475
----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES                                  (498)            539
----------------------------------------------------------------------------------------------------------
INCREASE IN CASH AND EQUIVALENTS                                                     1,660         16,614
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD                                         84,923         58,795
----------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS AT END OF PERIOD                                             $ 86,583       $ 75,409
--------------------------------------------------------------------------- --------------- --------------
</TABLE>

  See accompanying notes.


<PAGE>


INTER-TEL, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2003

NOTE A--BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance  with  accounting  principles  generally  accepted in the
United States for interim  financial  information  and with the  instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all
of the  information  and  footnotes  required by generally  accepted  accounting
principles for complete financial statements. In the opinion of management,  all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair  presentation  of the results for the interim  periods  presented have been
included.  Operating  results for the three and six months  ending June 30, 2003
are not necessarily  indicative of the results that may be expected for the year
ended December 31, 2003. The balance sheet at December 31, 2002 has been derived
from the audited financial  statements at that date, but does not include all of
the  information  and  footnotes  required by  accounting  principles  generally
accepted in the United  States 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, 2002.

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

Stock-Based Compensation

      In  2002,  the  Financial   Accounting  Standards  Board  ("FASB")  issued
Statement  No. 148  "Accounting  for  Stock-Based  Compensation--Transition  and
Disclosure,  an amendment of FASB  Statement  No. 123" ("SFAS No.  148"),  which
provides  alternative  methods  of  transition  for an entity  that  voluntarily
changes to the fair value based method of accounting  for  stock-based  employee
compensation.  It also  amends  the  disclosure  provisions  of SFAS No.  123 to
require  prominent  disclosure  about the effects on  reported  net income of an
entity's  accounting  policy  decisions  with  respect to  stock-based  employee
compensation.  Finally,  this  statement  amends APB  Opinion  No. 28,  "Interim
Financial  Reporting,"  to require  disclosure  about  those  effects in interim
financial  information.  We adopted SFAS No. 148 in the fourth  quarter of 2002.
Since we have not changed to a fair value  method of  stock-based  compensation,
the applicable portion of this statement only affects our disclosures.

      We do not  recognize  compensation  expense  relating  to  employee  stock
options  because we only grant options with an exercise  price equal to the fair
value of the stock on the effective date of grant. At June 30, 2003, the Company
has four stock-based employee and director incentive plans and an employee stock
purchase plan. The Company  accounts for these plans under the  recognition  and
measurement   principles  of  APB  No.  25,  "Accounting  for  Stock  Issued  to
Employees," and related interpretations. Stock-based employee compensation costs
are not reflected in net income,  as all options  granted under the plans had an
exercise price equal to the market value of the  underlying  common stock on the
date of grant. If we had elected to recognize  compensation expense using a fair
value approach,  and therefore determined the compensation based on the value as
determined by the modified Black-Scholes option pricing model, the pro forma net
income and earnings per share would have been as follows:
<TABLE>
<CAPTION>

                                                                                            Six Months Ended June 30,
(in thousands, except per share data)                                                       2003                2002
<S>                                                                                       <C>                <C>
Net income, as reported                                                                   $ 11,941           $ 22,430

Deduct:  total stock-based  compensation  expense  determined under fair
value based method for all awards, net of tax                                              (1,473)            (1,230)
                                                                               ------------------- ------------------

Pro forma net income                                                                      $ 10,468           $ 21,200
                                                                               =================== ==================

Earnings per share of common stock
Basic - as reported                                                                       $   0.48           $   0.93
Basic - pro forma                                                                         $   0.42           $   0.88
Diluted - as reported                                                                     $   0.46           $   0.88
Diluted - pro forma                                                                       $   0.40           $   0.83
</TABLE>

                                       6


<PAGE>

      The fair value for these  options was estimated at the date of grant using
a Black-Scholes option pricing model using the low end of reasonable assumptions
for input variables  rather than  attempting to identify a best-point  estimate.
The option pricing model utilized the following weighted average assumptions for
2003 and 2002:  risk free  interest  rates of 2.81% for 2003 and 2.73% for 2002;
dividend yields of 1.2% for 2003 and 0.75% for 2002;  volatility  factors of the
expected  market  price of our stock  averaged  .587 for 2003 and .576 for 2002.
Employee stock options vest over four to five year periods and director  options
vest at the end of six months from the grant date.

New Accounting Standards and Pronouncements

      Costs  Associated  with Exit or  Disposal  Activities:  In 2002,  the FASB
issued  Statement of Financial  Accounting  Standards No. 146,  "Accounting  for
Costs  Associated  with Exit or  Disposal  Activities"  ("SFAS No.  146").  This
standard requires  companies to recognize costs associated with exit or disposal
activities when they are incurred, rather than at the date of a commitment to an
exit or disposal plan.  Examples of costs covered by the standard  include lease
termination costs and certain employee  severance costs that are associated with
a restructuring,  plant closing, or other exit or disposal activity.  We adopted
SFAS No. 146 effective  January 1, 2003, to be applied  prospectively to exit or
disposal activities  initiated after December 31, 2002, and its adoption did not
have any effect on our financial position or results of operations.

      Asset  Retirement  Obligations:  In 2001,  the FASB  issued  Statement  of
Financial  Accounting  Standards  No.  143,  "Accounting  for  Asset  Retirement
Obligations" ("SFAS No. 143"). This statement addresses financial accounting and
reporting for obligations  associated with the retirement of tangible long-lived
assets and associated asset retirement costs. We adopted SFAS No. 143 on January
1, 2003 and its  adoption did not have any effect on our  financial  position or
results of operations.

      Variable   Interest   Entities:   In  January   2003,   the  FASB   issued
Interpretation  No.  46,   "Consolidation  of  Variable  Interest  Entities,  an
interpretation  of ARB 51" ("FIN 46").  The primary  objectives of FIN 46 are to
provide guidance on the identification of entities for which control is achieved
through  means other than through  voting  rights  ("VIEs") and how to determine
when and which business  enterprise  should  consolidate the VIE. This new model
for consolidation applies to an entity which either (1) the equity investors (if
any) do not have a controlling  financial  interest or (2) the equity investment
at risk is insufficient to finance that entity's  activities  without  receiving
additional  subordinated  financial support from other parties. We do not expect
the adoption of this  standard to have any impact on our results of  operations,
financial position or liquidity.

      Guarantees:  In  November  2002,  the FASB issued  Interpretation  No. 45,
"Guarantor's  Accounting and Disclosure  Requirements for Guarantees,  Including
Indirect  Guarantees of Indebtedness of Others" ("FIN 45"). This  interpretation
expands the disclosure  requirements  of guarantee  obligations and requires the
guarantor to recognize a liability for the fair value of the obligation  assumed
under a guarantee.  In general,  FIN 45 applies to contracts or  indemnification
agreements  that  contingently  require the  guarantor  to make  payments to the
guaranteed party based on changes in an underlying instrument that is related to
an  asset,  liability,  or  equity  security  of  the  guaranteed  party.  Other
guarantees are subject to the disclosure  requirements  of FIN 45 but not to the
recognition provisions and include, among others, a guarantee accounted for as a
derivative  instrument  under SFAS No.  133,  "Accounting  for  Derivatives  and
Hedging" ("SFAS No. 133"), a parent's guarantee of debt owed to a third party by
its subsidiary or vice versa, and a guarantee which is based on performance. The
disclosure  requirements  of FIN 45 were  effective as of December 31, 2002. The
recognition requirements of FIN 45 are to be applied prospectively to guarantees
issued or modified  after  December 31, 2002.  Adoption of FIN 45 to has not had
any impact on our results of operations, financial position or liquidity.

      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

                                       7


<PAGE>

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.


      Divisions of the United  States  Department  of Justice are  investigating
other  companies' and Inter-Tel's  participation  in a federally  funded "E-Rate
program"  to  connect  schools  and  libraries  to  the  Internet.  The  Justice
Department  has not provided  Inter-Tel  with a  description  of the evidence on
which the investigations are based.  Inter-Tel is presently unable to predict or
determine the final outcome of, or to estimate the potential  range of loss with
respect to, the  investigations.  Based upon the information known at this time,
we do not expect the  investigations to result in a material adverse impact upon
the Company's business or financial condition.  If Inter-Tel is convicted of any
crime or subjected to sanctions,  or debarred from certain government  contracts
or if  penalties,  damages  or other  monetary  remedies  are  assessed  against
Inter-Tel in connection with or related to these and other  investigations,  our
business and operating results could be materially and adversely  affected.  The
existence  and  disclosure  of  the   investigations  may  have  already  caused
competitive harm to Inter-Tel,  and any unfavorable  resolution to these matters
may further harm  Inter-Tel's  business.  Nevertheless,  the early nature of the
investigations  makes it  difficult  to determine  whether the  likelihood  of a
material adverse outcome is likely.


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>

(In thousands, except                                        Three Months Ended                       Six Months Ended
per share amounts)                                    June 30, 2003        June 30, 2002     June 30, 2003     June 30, 2002
                                                      -------------        -------------     -------------     -------------
<S>                                                     <C>                 <C>               <C>               <C>
Numerator:  Net income                                  $ 7,269             $ 7,035           $ 11,941          $ 22,430
                                                        =======             =======           ========          ========

Denominator:
  Denominator for basic earnings per
   share - weighted average shares                       24,947              24,269             24,934            24,224

Effect of dilutive securities:
  Employee and director stock options                     1,023               1,294              1,070             1,332
                                                        -------             -------           --------          --------

Denominator for diluted earnings per
   share - adjusted weighted average
   shares and assumed conversions                        25,970              25,563             26,004            25,556
                                                        =======             =======           ========          ========

Basic earnings per share                                $  0.29             $  0.29           $   0.48          $   0.93
                                                        =======             =======           ========          ========

Diluted earnings per share                              $  0.28             $  0.28           $   0.46          $   0.88
                                                        =======             =======           ========          ========
</TABLE>

At June 30, 2003 and 2002,  options to purchase  1,165,200 and 1,104,800 shares,
respectively,  of Inter-Tel  stock were excluded from the calculation of diluted
net earnings per share for the periods  presented  because the exercise price of
these options was greater than the average market price of the common shares for
the  respective   fiscal  years,  and  therefore  the  effect  would  have  been
antidilutive.

NOTE C - ACQUISITIONS, DISPOSITIONS AND RESTRUCTURING CHARGES

McLeod. On January 24, 2002, we 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


                                       8
<PAGE>


along with  assumption  of  scheduled  specific  liabilities  for  warranty  and
maintenance  obligations.  The  aggregate  purchase  price of $7.9  million  was
allocated to the fair value of the assets and liabilities acquired.

In connection with the McLeod acquisition, we recorded goodwill of approximately
$4.0 million and other purchased  intangible assets of $0.5 million, for a total
of $4.5 million.  The goodwill balance is being accounted for in accordance with
SFAS 141 and 142. The balances  included in other  purchased  intangible  assets
will be amortized  over periods  ranging from two to five years from the date of
the  acquisition.  During  the  quarters  ended  June  30,  2003 and  2002,  the
amortization of purchased intangible assets from McLeod was $38,000 and $25,000,
respectively.

Swan. On December 3, 2002, Inter-Tel Integrated Systems,  Inc., our wholly-owned
subsidiary,  acquired  100%  of the  capital  stock  of Swan  Solutions  Limited
("Swan") in England and Wales,  for $4.0 million in cash.  Of this amount,  $3.0
million was paid at closing,  $250,000 is payable in six months from the closing
date and $250,000 is payable one year from closing date. The remaining  $500,000
is subject to the  achievement  of five  performance  milestones  triggering the
payment of $100,000  each. As of June 30, 2003,  the first two of the milestones
were achieved and $200,000 in the  aggregate was paid to the Swan  shareholders.
Achievement of performance milestones is considered a part of the purchase price
and accordingly,  for purposes of determining the total purchase price, $500,000
was deemed to be achieved and added to the  purchase  price and  capitalized  as
purchased  intangibles.  These technology assets are being amortized over a life
of 5 years.  The remaining  three  milestones must be achieved by June 30, 2004.
Accordingly,  the purchase  price may be reduced if any portion of the remaining
milestones  is not  achieved.  Through  June 30, 2003,  we recorded  amortizable
intangible   technology   assets  of  $3.9  million  in  connection   with  this
acquisition.  During  the first six  months  of 2003 the  amortization  of these
technology assets from Swan was $402,000.

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

Inter-Tel's  management has not  participated in the management of Inter-Tel.NET
since the sale in July 2001. As a result, since July 24, 2001, we have accounted
for the remaining  Inter-Tel.NET/Comm-Services  investment using the cost method
of  accounting.  On  December  30,  2001,  Comm-Services  entered  into a merger
agreement with Vianet. Inter-Tel's 17% investment in Comm-Services was converted
to  approximately  10% of Vianet stock and as a result,  Vianet assumed the loan
for the purchase and  Inter-Tel  continued  to hold  collateral  from the former
shareholders of Comm-Services  until March 2003.  During the first six months of
2002,  the net  investment  in the notes  receivable  and 10% interest in Vianet
(formerly  Comm-Services) was written down by $1.2 million ($600,000 each in the
first and second  quarters) and was recorded in other assets at a carrying value
of  approximately  $2.5  million as of December  31,  2002,  which  approximated
management's estimate of the related collateral value at that time.

During  1999,  2000  and  2001,   Inter-Tel.NET  entered  into  operating  lease
agreements  totaling  approximately  $6.5 million  from an equipment  vendor for
network equipment and software.  The lease agreements required  Inter-Tel.NET to
purchase vendor maintenance on their products.  Inter-Tel originally  guaranteed
the  indebtedness.  In February  2003, we executed an agreement  with Vianet and
this vendor releasing  Inter-Tel from its guarantee of all of these obligations,
and  Inter-Tel  and Vianet  released  the vendor  from claims  arising  from the
failure of the network equipment and software previously leased. As part of this
agreement, Inter-Tel also received payment from the Vianet shareholders of $1.45
million, in exchange for the release of the remaining  collateral and as payment
of the loan.  The value  received  in this  transaction  was  equivalent  to our
remaining  investment  value,  less  accruals for potential  obligations  to the
vendor discussed above.


                                       9
<PAGE>

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

Executone Restructuring Charge. During the second quarter of 2000, we recognized
a restructuring  charge related to acquired Executone  operations.  We 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 through June 30, 2003.

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 ran  concurrently  through March 2002.
Other  capital  leases for computer and other  equipment  terminated  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 June 30, 2003.
<TABLE>
<CAPTION>

                                                                       Activity                    Reserve
                                          Cash/         Restructuring   Through      2003          Balance
               Description              Non-Cash           Charge        2002      Activity      At 6/30/03
---------------------------------------------------------------------------------------------------------------
<S>                                                     <C>           <C>           <C>            <C>
Personnel Costs:
  Severance and termination costs          Cash         $  (1,583)    $  1,580      $   3          $      --
  Other Plant closure costs                Cash              (230)         230         --                 --

Lease termination and other contractual
obligations (net of anticipated
recovery):
  Building and equipment leases            Cash            (7,444)       5,431        477            (1,536)
  Other contractual obligations            Cash            (1,700)       1,700         --                 --

Impairment of Assets:
  Inventories                            Non-Cash          (3,454)       3,454         --                 --
  Prepaid inventory and other expenses   Non-Cash          (2,485)       2,485         --                 --
  Accounts receivable                    Non-Cash          (1,685)         854        390              (441)
  Fixed assets                           Non-Cash          (3,151)       2,995         --              (156)
  Net intangible assets                  Non-Cash         (29,184)      29,184         --                 --

-------------------------------------- ------------ -------------- ----------- ---------- ------------------
Total                                                   $ (50,916)    $ 47,913      $ 870          $ (2,133)
-------------------------------------- ------------ -------------- ----------- ---------- ------------------
</TABLE>

NOTE D  - SEGMENT INFORMATION

Inter-Tel  follows  Statement  of  Financial   Accounting   Standards  No.  131,
"Disclosures  about  Segments of an Enterprise and Related  Information"  ("SFAS
131").  SFAS 131  established  standards  for  reporting  information  regarding
operating  segments  in  annual  financial   statements  and  requires  selected
information  for those  segments to be  presented in interim  financial  reports
issued  to  stockholders.  SFAS  131  also  established  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


                                       10
<PAGE>

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 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  Canada.  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  through June of 2002.  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 assessed the value of
this  investment at March 31, 2002 and wrote-down  this  investment by $600,000.
Inter-Tel  assessed  the  value of this  investment  again at June 30,  2002 and
wrote-down this investment by another $600,000. In February 2003, we executed an
agreement with Vianet (See Note C) and the vendor  releasing  Inter-Tel from its
guarantee of any and all of these obligations, and Inter-Tel and Vianet released
the vendor from claims  arising  from the failure of the network  equipment  and
software  previously leased. As part of this agreement,  Inter-Tel also received
payment  from the Vianet  shareholders  of $1.45  million,  in exchange  for the
release of the remaining  collateral and as payment of the loan.  Inter-Tel will
account for the remaining  10%  investment  in Vianet  (formerly  Comm-Services)
using the cost method of accounting.

For the  quarters  and six months  ended June 30,  2003 and 2002,  we  generated
income from business segments, including income from a litigation settlement and
losses from our investment in Inter-Tel.NET/Vianet for 2002, as follows:
<TABLE>
<CAPTION>

                                                         Three Months Ended June 30, 2003
                                                                                                   Resale of
                                                                                                   Local and
(In thousands, except per share                                        Subtotal                       Long
amounts)                                   Principal   Litigation     Principal      Inter-Tel.NET  Distance
                                            Segment    Settlement      Segment         /Vianet      Services      Total
------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>          <C>           <C>                 <C>      <C>         <C>
Net sales                                  $ 85,621     $    --       $ 85,621            $ --     $ 9,481     $ 95,102
Gross profit                                 47,272          --         47,272              --       2,978       50,250
Operating income                              9,953          --          9,953              --       1,384       11,337
Interest and other income                       396          --            396              --          36          432
Foreign currency transaction gains               26          --             26              --          --           26
Interest expense                               (71)          --           (71)              --          --         (71)
Net income                                 $  6,389     $    --       $  6,389            $ --         880     $  7,269
Net income per diluted share (1)           $   0.25     $    --       $   0.25            $ --     $  0.03     $   0.28
Weighted average diluted shares (1)          25,970      25,970         25,970              --      25,970       25,970
Total assets                               $277,135     $    --       $277,135            $ --     $19,523     $296,658
Depreciation and amortization                 2,265          --          2,265              --          11        2,276
</TABLE>


                                       11
<PAGE>

<TABLE>
<CAPTION>

                                                         Three Months Ended June 30, 2002
                                                                                                   Resale of
                                                                                                   Local and
(In thousands, except per share                                         Subtotal                     Long
amounts)                                   Principal      Litigation   Principal     Inter-Tel.NET  Distance
                                            Segment       Settlement    Segment         /Vianet     Services      Total
------------------------------------------------------------------------------------------------------------------------
<S>                                        <C>          <C>           <C>              <C>         <C>         <C>
Net sales                                  $ 88,815     $    --       $ 88,815         $    --     $ 7,133     $ 95,948
Gross profit                                 45,905          --         45,905              --       2,570       48,475
Operating income                              9,392          --          9,392              --       1,410       10,802
Interest and other income                       474         214            688           (600)          39          127
Foreign currency transaction gains              284          --            284              --          --          284
Interest expense                               (46)          --            (46)             --          --         (46)
Net income                                 $  6,365     $   135       $  6,500         $  (378)    $   913     $  7,035
Net income per diluted share (1)           $   0.25     $  0.01       $   0.26         $ (0.02)    $  0.04     $   0.28
Weighted average diluted shares (1)          25,563      25,563         25,563          24,269      25,563       25,563
Total assets                               $245,195     $    --       $245,195         $    --     $13,216     $258,411
Depreciation and amortization                 2,137          --          2,137              --          20        2,157

                                                          Six Months Ended June 30, 2003
                                                                                                Resale of
                                                                                                    Local and
(In thousands, except per share                                       Subtotal                        Long
amounts)                                Principal      Litigation     Principal        Inter-Tel.NET Distance
                                         Segment       Settlement      Segment            /Vianet    Services      Total
------------------------------------------------------------------------------------------------------------------------

Net sales                                  $161,296     $     --      $ 161,296        $     --    $ 17,975    $ 179,271
Gross profit                                 88,832           --         88,832              --       5,492       94,324
Operating income                             15,932           --         15,932              --       2,571       18,503
Interest and other income                       806           --            806              --          69          875
Foreign currency transaction losses             (14)          --           (14)              --                     (14)
Interest expense                               (103)          --          (103)              --                    (103)
Net income                                 $ 10,305     $     --      $  10,305        $     --    $  1,636    $  11,941
Net income per diluted share (1)           $   0.40     $     --      $    0.40        $     --    $   0.06    $    0.46
Weighted average diluted shares (1)          26,004       26,004         26,004              --      26,004       26,004
Total assets                               $277,135     $     --      $ 277,135        $     --    $ 19,523    $ 296,658
Depreciation and amortization                 4,535           --          4,535              --          23        4,558

                                                          Six Months Ended June 30, 2002
                                                                                                   Resale of
                                                                                                   Local and
(In thousands, except per share                                       Subtotal                        Long
amounts)                                    Principal   Litigation    Principal       Inter-Tel.NET Distance
                                             Segment    Settlement     Segment          /Vianet     Services      Total
------------------------------------------------------------------------------------------------------------------------

Net sales                                  $172,094     $    --       $172,094         $    --     $ 13,923    $ 186,017
Gross profit                                 89,501          --         89,501              --        4,027       93,528
Operating income                             18,773          --         18,773              --        1,851       20,624
Interest and other income                       885      15,516         16,401         (1,200)           68       15,269
Foreign currency transaction gains              200          --            200              --           --          200
Interest expense                                (80)         --            (80)             --           --          (80)
Net income                                 $ 12,480     $ 9,496       $ 21,976         $  (757)    $  1,211    $  22,430
Net income per diluted share (1)           $   0.49     $  0.37       $   0.86         $ (0.03)    $   0.05    $    0.88
Weighted average diluted shares (1)          25,556      25,556         25,556          24,224       25,556       25,556
Total assets                               $245,195     $    --       $245,195         $    --     $ 13,216    $ 258,411
Depreciation and amortization                 4,299          --          4,299              --          50         4,349
</TABLE>

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.

Our revenues are generated  predominantly  in the United States.  Total revenues
generated from U.S. customers totaled $173.8 million or 97.0% of total revenues,
and $181.1  million or 97.3% of total revenues for the six months ended June 30,
2003 and 2002,  respectively.  The Company's revenues from international sources
were primarily  generated from customers  located in the United Kingdom,  Europe
and Asia.  In the first six  months of 2003 and 2002,  revenues  from  customers
located  internationally   accounted  for  3.0%  and  2.7%  of  total  revenues,
respectively.


                                       12
<PAGE>

NOTE E - NET INVESTMENT IN SALES-LEASES

Net investment in sales-leases  represents the value of  sales-leases  presently
held under our Total Solution program. We currently sell the rental payments due
to us from some of the  sales-leases.  We maintain reserves against our estimate
of  potential  recourse for the balance of  sales-leases  and for the balance of
sold rental payments remaining unbilled.  The following table provides detail on
the total net balances in sales-leases (in thousands):
<TABLE>
<CAPTION>

                                                                                      June 30,     December 31,
                                                                                        2003          2002
---------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>              <C>
Lease balances included in consolidated accounts receivable, net of                 $   7,357        $   6,470
allowances of $2,068 in 2003 and $2,562 in 2002

Net investment in Sales-Leases:
    Current portion, net of allowances of $739 in 2003 and $516 in 2002
                                                                                       16,444           13,344
    Long-term portion, includes residual amounts of $486 in 2003 and $518 in
       2002, net of allowances of $1,696 in 2003 and $1,411 in 2002                    27,613           24,692
---------------------------------------------------------------------------------------------------------------
Total investment in Sales-Leases, net of allowances of $4,502 in 2003 and
    $4,489 in 2002                                                                     51,414           44,506

Soldrental payments remaining unbilled (subject to limited recourse
    provisions), net of allowances of $11,977 in 2003 and $11,125 in 2002             195,574          194,684
---------------------------------------------------------------------------------------------------------------
Total balance of sales-leases and sold rental payments remaining unbilled,
    net of allowances                                                               $ 246,988        $ 239,190
---------------------------------------------------------------------------------------------------------------

Total allowances for entire lease portfolio (including limited recourse
    liabilities)                                                                    $  16,479        $  15,614
---------------------------------------------------------------------------------------------------------------
</TABLE>

Reserve levels are established based on portfolio size, loss experience,  levels
of past due accounts and periodic,  detailed reviews of the portfolio.  Recourse
on the sold rental payments is contractually  limited to a percentage of the net
credit losses in a given annual  period as compared to the  beginning  portfolio
balance for a specific portfolio of sold leases.  While our recourse is limited,
we  maintain  reserves  at a level that we believe  is  sufficient  to cover all
anticipated  credit  losses.  The  aggregate  reserve  for  uncollectible  lease
payments  and  recourse  liability  represents  the reserve for the entire lease
portfolio.   These  reserves  are  either  netted  from  consolidated   accounts
receivable,  netted against current or long-term "investment in sales-leases" or
included in long-term  liabilities for sold rental payments remaining  unbilled.
Sales of rental payments per period:
<TABLE>
<CAPTION>

                                                                     Six Months Ended       Year Ended
(In thousands)                                                         June 30, 2003     December 31, 2002
----------------------------------------------------------------------------------------------------------
<S>                                                                     <C>                <C>
Sales of rental payments                                                $  41,187          $  83,141
Sold payments remaining unbilled at end of period                       $ 207,551          $ 205,809
</TABLE>

Sales of rental  payments  represents  the gross  selling price or total present
value of the payment stream on the sale of the rental payments to third parties.
Sold payments  remaining  unbilled at the end of the period represents the total
balance of leases that are not included in our balance  sheet.  We do not expect
to incur  any  significant  losses  in  excess  of  reserves  from the  recourse
provisions related to the sale of rental payments.


                                       13
<PAGE>

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 our expectations,  beliefs,
intentions or strategies for the future. All forward-looking statements included
in this  document are based on  information  available to us on the date hereof,
and we assume 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.
Our actual  results  could differ  materially  from those  anticipated  in these
forward-looking  statements as a result of certain factors,  including those set
forth  under  "Factors  That May  Affect  Future  Operating  Results"  below and
elsewhere in this document.

Overview

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

We have  developed a distribution  network of direct sales offices,  dealers and
value  added  resellers  (VARs),   which  sell  our  products  to  organizations
throughout  the United  States and  internationally,  including  to divisions of
Fortune 500 companies, large service organizations and governmental agencies. As
of June 30, 2003, we had 51 direct sales offices in the United States and one in
Japan,  and a network  of  hundreds  of dealers  and VARs  around the world that
purchase directly from us. We also maintain a wholesale  distribution  office in
the United Kingdom that supplies Inter-Tel's dealers and distributors throughout
the United Kingdom and parts of Europe.  In December 2002, we also acquired Swan
Solutions  Limited,  a research and development and software sales office in the
United Kingdom.

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

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

The markets we serve have been characterized by rapid technological  changes and
increasing  customer  requirements.  We have sought to address these changes and
requirements  through the development of software  enhancements and improvements
to  existing  systems  and  the  introduction  of  new  systems,  products,  and
applications. Inter-Tel's research and development efforts over the last several
years have been focused  primarily on the development of, and  enhancements  to,
our  Axxess  and  Eclipse(2)   systems,


                                       14
<PAGE>

including adding new applications, incorporating IP convergence applications and
IP telephones  into our product lines,  developing  Unified  Messaging  Software
applications,  developing speech  recognition and  text-to-speech  applications,
developing  and  enhancing   call  center   applications,   developing   Unified
Communications  Software  applications,  and  expanding  the  telecommunications
networking  package  to include  networking  over IP and frame  relay  networks.
Inter-Tel's  current  efforts  are  focused  on  developing  and  enhancing  the
convergence  applications  for  our  Axxess  system,  enhancing  our  server-PBX
offering, enhancing our unified communications  applications,  developing new IP
endpoint technology, and enhancing our call center applications.

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

Results of Operations

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

                                                 Three Months Ended June 30,  Six Months Ended June 30,
                                                      2003        2002           2003           2002
                                                      ----        ----           ----           ----
<S>                                                   <C>         <C>           <C>             <C>
NET SALES                                             100.0%      100.0%        100.0%          100.0%
Cost of sales                                          47.2        49.5          47.4            49.7
------------------------------------------------------------------------------------------------------

GROSS PROFIT                                           52.8        50.5          52.6            50.3

Research and development                                5.7         4.7           5.9             4.8
Selling, general and administrative                    34.7        34.2          35.8            34.1
Amortization                                            0.5         0.3           0.5             0.3
------------------------------------------------------------------------------------------------------

OPERATING INCOME                                       11.9        11.3          10.3            11.1

Litigation settlement (net of costs except
   for taxes)                                            --         0.2            --             8.3
Interest and other income                               0.5         0.5           0.5             0.5
Write-down of investment in
   Inter-Tel.NET/Vianet                                  --        (0.6)           --            (0.6)
Foreign currency transaction gains (losses)
                                                        0.0         0.3          (0.0)            0.1

Interest expense                                       (0.1)       (0.0)         (0.1)           (0.0)
------------------------------------------------------------------------------------------------------
Income before income taxes                             12.3        11.6          10.7            19.4
Income taxes                                            4.7         4.3           4.1             7.3
------------------------------------------------------------------------------------------------------
Net income                                              7.6%        7.3%          6.7%           12.1%
------------------------------------------------------------------------------------------------------
</TABLE>

      Net Sales. Net sales decreased 0.9% to $95.1 million in the second quarter
of 2003 from  $95.9  million  in the  second  quarter  of 2002,  representing  a
decrease of $846,000. Sales from our direct sales offices decreased $2.3 million
in the second quarter of 2003 compared to the second quarter of 2002. Sales from
our  government  and  national  accounts  decreased  $0.4  million over the same
periods.  Sales from our DataNet  division  decreased $2.0 million in the second
quarter of 2003 compared to the second  quarter of 2002.  These  decreases  were
offset in part by  increases  of $2.3  million in sales  from our long  distance
resale and network  services  division  and $0.4  million in sales to our dealer
network in the second quarter of 2003 compared to the second quarter of 2002.

      The decrease in net sales for the second  quarter of 2003  compared to the
second  quarter of 2002 from our direct sales  offices,  government and national
accounts division and Datanet division,  offset in part by a slight increases in
dealer network sales and  international  operations,  were primarily a result of
lower volumes of systems sold as a result of weak economic conditions, increased
competitive  pressures  and  delayed  buying  decisions  by  customers.  In some
instances, prices of various telecommunications systems decreased, and discounts
or other competitive promotions that were offered to customers to generate


                                       15
<PAGE>

sales  resulted  in lower  revenues  from both our  direct  and  indirect  sales
channels.  Sales of  communications  systems  were  impacted  by delayed  buying
decisions,  in  particular  in our  direct  sales  offices  resulting  from weak
economic  conditions  affecting  our industry.  Sales to new customers  declined
during the second quarter of 2003, as recurring  revenues to existing  customers
increased as a percentage of total sales.

      Sales  from  our  long  distance  resale  and  network  services  division
represented our largest percentage sales increases in the second quarter of 2003
as compared to the second quarter of 2002. Sales increased in NetSolutions,  our
long  distance  division,  by  32.9%,  despite  downward  pricing  pressure  and
significant  competition.  Increased  sales volume has allowed  NetSolutions  to
offer more competitive  pricing,  which improved sales to our existing  customer
base.  Network services  revenues  decreased 46.9% in the second quarter of 2003
compared to the second quarter of 2002, on lower sales volume and commissions on
local and network  services such as T-1 access,  frame relay and other voice and
data  circuit  services,  due in part to  changes to agency  terms and  contract
provisions  with a  regional  bell  operating  company.  See  Note D of Notes to
Condensed  Consolidated  Financial  Statements for additional  segment reporting
information.

      Gross Profit.  Gross profit for the second  quarter of 2003 increased 3.7%
to $50.3 million,  or 52.8% of net sales,  from $48.5  million,  or 50.5% of net
sales,  in the second  quarter of 2002.  Gross  profit  increased  0.9% to $94.3
million,  or 52.6% of net  sales,  in the first six months of 2003  compared  to
$93.5  million,  or 50.3% of net  sales,  in the first six  months of 2002.  The
increases  in gross profit  dollars and as a  percentage  of net sales (or gross
margin), resulted from several different factors,  including a higher proportion
of recurring revenues from existing customers (including  increased  maintenance
and services  revenues as a percentage of total sales),  higher software content
in  our  products,  cost  containment  efforts,   product  design  improvements,
component  price  declines,  and  efficiencies  achieved with our  manufacturing
vendors,  as well as  efficiencies  achieved from a higher  percentage of orders
placed  using the  Internet.  These  increases  were  offset in part by  greater
competitive  pricing pressures and by pricing discounts or special promotions on
telephone system and software sales and related equipment.

      During  the second  quarter  of 2003,  recurring  revenues  from  existing
customers  in our direct sales and national  and  government  accounts  channels
increased as a percentage  of total sales from these same  channels  relative to
the second  quarter of 2002.  Existing  customers  accounted  for a  significant
portion of our net sales from maintenance and other services, software additions
and/or  upgrades,   support,  training  and  hardware  products  such  as  video
conferencing,   headsets   (wired  and   wireless),   networking   products  and
speakerphones  during the second  quarter of 2003.  Our business  communications
platforms  allow  for  system  migration  without  the  complete  change-out  of
hardware,  which  enables us to offer  enhancements  and new  solutions  through
software-only  upgrades  to  our  existing  customers.  Our  gross  margins  are
generally  higher with recurring  revenues because we incur less materials costs
relative to new  installations.  Accordingly,  our gross margins improved in the
second  quarter of 2003 as a result of the  increased  proportion  of  recurring
revenues.

      Sales from NetSolutions, our long distance resale subsidiary, increased by
32.9%, or $2.3 million,  in the second quarter of 2003 as compared to the second
quarter of 2002.  Gross  margins are  generally  lower in this division than our
consolidated  margins.  However,  NetSolutions  margins  improved  in the second
quarter of 2003  relative  to the second  quarter of 2002,  based in part on our
ability to  negotiate  more  favorable  pricing  with  vendors on higher  resale
volumes.  Sales from our network services division decreased 46.9% in the second
quarter of 2003 compared to the second quarter of 2002. This division  generally
receives  commissions on network  services we sell as an agent for regional bell
operating companies. Sales from this division carry little to no equipment costs
and generated margins of over 90% during the second quarter of 2003;  therefore,
the  decrease  in  sales  from  this  division   partially  offset  the  overall
improvement of our  consolidated  gross margins.  We cannot  accurately  predict
future  gross  margins  based on a number of  factors,  including,  among  other
factors,  competitive pricing pressures, sales of systems, software and services
through different distribution  channels,  and the mix of systems,  software and
services we sell, as well as macroeconomic conditions.

      Research and Development. Research and development expenses for the second
quarter of 2003 increased 19.6% to $5.4 million, or 5.7% of net sales, from $4.5
million,  or 4.7% of net sales,  for the second  quarter of 2002.  Research  and
development  expenses increased 20.4% to $10.7 million, or 5.9%




                                       16
<PAGE>

of net sales, in the first six months of 2003 compared to $8.9 million,  or 4.8%
of net  sales,  in the  first six  months  of 2002.  Included  in  research  and
development  expenses in both the second  quarter of 2003 and the second quarter
of 2002 was  amortization  of  patents  totaling  $55,000  in each  period.  The
increase in research and development expenses was primarily  attributable to the
increase  in  engineers  hired in  connection  with our  acquisition  of Swan in
December 2002 and our development of new product end-points. To a lesser extent,
the increase is also attributable to increased research and development spending
related to our  development  of  convergence  applications  and new IP  endpoint
technology.  In the second quarter of 2003,  research and  development  expenses
were  directed  principally  toward  the  continued  development  of the  AXXESS
software  and systems  (including  version  8.0),  unified  messaging  and voice
processing software,  speech recognition and text-to-speech  applications,  call
center   applications,   unified   communications   applications,   IP  endpoint
development,  and certain CTI and IVR applications.  We expect that research and
development expenses will increase in absolute dollars as we continue to develop
and enhance existing and new technologies and products. These expenses may vary,
however, as a percentage of net sales.

      Selling,  general  and  administrative.  In the  second  quarter  of 2003,
selling, general and administrative expenses, excluding amortization,  increased
0.4% to $33.0 million,  or 34.7% of net sales,  from $32.9 million,  or 34.3% of
net sales,  in the second  quarter of 2002.  The  slight  increase  in  absolute
dollars  and as a  percentage  of net  sales  was due in part  to  higher  costs
associated  with  increases  in  depreciation   expenses   associated  with  the
implementation  of an information  systems  upgrade,  insurance costs and higher
professional fees, partially offset by lower expenses attributable to bad debts.
In addition,  higher relative sales through SWAN,  acquired in December 2002 and
sales in our long  distance  division  led to  increased  selling  expenses  and
commission  costs in the first six months of 2003 relative to total sales in the
first six months of 2002.  We expect that for the  foreseeable  future  selling,
general  and  administrative  expenses  may vary in  absolute  dollars  and 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 in 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 June 30, 2003, no impairment of goodwill has been
recognized. We face the risk that future goodwill impairment tests may result in
charges to earnings.

      Amortization of purchased intangible assets included in operating expenses
was $486,000 in the second  quarter of 2003,  compared to $269,000 in the second
quarter of 2002. In addition,  $55,000 of amortization  was included in research
and  development  expenses for the second quarter of 2003 and the second quarter
of 2002.  Amortization  of  purchased  intangible  assets  included in operating
expenses  was  $914,000  for the six months  ended June 30,  2003,  compared  to
$526,000  for the six months  ended June 30,  2002.  An  additional  $111,000 of
amortization  was  included in research  and  development  expenses  for the six
months ended June 30, 2003 and June 30, 2002.  The increase in the  amortization
of purchased  intangible assets for the second quarter and six months ended June
30,  2003,  compared to the same periods in 2002 were  primarily  related to the
additional  amortization from recent  acquisitions.  For additional  information
regarding  purchased  intangible assets, see Note C "Acquisitions,  Dispositions
and Restructuring Charges " to the Condensed Consolidated Financial Statements.

      Litigation  Settlement,  Net of Costs Except Taxes. In May 2001, Inter-Tel
entered into an agreement to submit to binding arbitration a lawsuit we filed in
1996.  The  arbitration  was  completed  in January 2002 and, as a result of the
arbitration,  Inter-Tel  received a one-time  gross cash award of $20 million in
February  2002.   Direct  costs  for  attorney's  fees,  expert  witness  costs,
arbitration  costs and  estimated  additional  payments  and  expenses,  totaled
approximately  $4.5  million in the first six months of 2002,  excluding  income
taxes,  for a net  award of  approximately  $15.5  million.  The  estimated  net
proceeds from this arbitration  settlement were approximately $9.5 million after
taxes, or $0.37 per diluted share for six months ended June 30, 2002.

      Interest  and Other  Income.  Interest  and other  income in 2003 and 2002
consisted primarily of interest income and foreign currency transaction gains or
losses,  with  the  exception  of an  expense  of $1.2  million  related  to the
write-down of Inter-Tel's  investment in  Inter-Tel.NET/Vianet  in the first six
months of 2002.  Income from  interest and  short-term  investments  in 2003 was
relatively flat compared to 2002


                                       17
<PAGE>

despite  higher level of invested  funds,  due to lower  yields on  investments.
Other changes in other income  primarily  reflected  slightly  lower net foreign
currency transaction gains and losses of approximately $214,000 in the first six
months of 2003 compared to the first six months of 2002. Interest expense in the
first six months of 2003 increased  $23,000  compared to the first six months of
2002.

      Income Taxes.  Inter-Tel's  income tax rate for the second quarter of 2003
was 38% compared to 37% for the second  quarter of 2002.  Inter-Tel  expects the
full-year  2003 tax rate to be  comparable  to the tax  rate  effective  for the
second quarter of 2003.

      Net  Income.  Net income for the second  quarter of 2003 was $7.3  million
($0.28 per  diluted  share),  compared to net income of $7.0  million  ($.28 per
diluted  share)  in  the  second  quarter  of  2002,  including  the  litigation
settlement adjustment in 2002. Net income for the six months ended June 30, 2003
was $11.9  million,  compared to net income of $22.4 million  ($0.88 per diluted
share) for the six months ended June 30,  2002,  including  the 2002  litigation
settlement. Excluding the 2002 litigation settlement adjustment, we reported net
income of $6.9  million,  or $0.27 per  diluted  share in the second  quarter of
2002. Excluding the 2002 litigation settlement,  we reported net income of $12.9
million, or $0.51 per diluted share in the first six months of 2002.

      Net income increased slightly for the quarter ended June 30, 2003 compared
to same  period in 2002,  primarily  attributable  to higher  gross  profit  and
increased  operating  efficiencies  and other items  described in further detail
above. The decrease in net income for the six months was primarily  attributable
to the litigation settlement award received in 2002.


                                       18
<PAGE>

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.  The potential  expansion of
international  operations in the United Kingdom and Europe and increased  sales,
if any,  in Japan and other parts of Asia could  result in higher  international
sales as a percentage of total revenues; however,  international revenues do not
currently represent a significant portion of our total revenues.

Liquidity and Capital Resources

      At June 30, 2003, cash and short-term  investments totaled $137.0 million,
an increase of approximately $11.2 million from December 31, 2002. We maintain a
$10  million  unsecured,  revolving  line of credit  with  Bank One,  NA that is
available through June 1, 2004. 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.  The remaining cash balances may be used for acquisitions,  strategic
alliances, working capital, dividends and general corporate purposes.

      Net cash  provided by operating  activities  totaled $12.2 million for the
six months ended June 30, 2003, compared to $42.6 million for the same period in
2002. Cash provided by operating  activities in the first six months of 2003 was
primarily the result of cash generated  from  profitable  operations,  including
non-cash  depreciation,  provisions for losses and  amortization  charges.  Cash
provided by operating  activities  in the first six months of 2002 was primarily
the result of cash generated from operations,  as well as the receipt of a gross
cash award of $20 million (net award of $15.5  million  before  income taxes) in
settlement  of a dispute  submitted  to  binding  arbitration.  Cash used in the
change in operating  assets and  liabilities in the first six months of 2003 was
$7.7 million,  compared to cash provided by operating  assets and liabilities of
$11.5  million  for the same  period  in 2002.  The cash  used in the  change in
operating assets and liabilities was primarily due to the increased level of net
investment  in  sales-leases.  The  increase in net  inventory  in the first six
months of 2003 was partially offset by a slight decrease in accounts receivable,
while the increase in accounts payable was substantially  offset by decreases in
other accrued expenses,  primarily  reflecting payments on accrued  commissions,
bonuses,  401(k)  matching  contributions  and  profit  sharing in the first six
months of 2003. If we are able to expand sales through our direct sales offices,
dealer network and government and national accounts divisions, this would likely
require the expenditure of working capital for increased accounts receivable and
inventories.

      Net cash used in investing  activities  totaled  $10.1 million for the six
months  ended June 30, 2003  compared to $26.5  million for the six months ended
June 30,  2002.  Net cash used in the  purchase  of  investments  during the six
months  ended  June 30,  2003 and June 30,  2002 were  $68.4  million  and $18.1
million, respectively, offset in part during each period by maturities and sales
of  short-term  investments  of $58.9  million and $2.0  million,  respectively.
During  the  first six  months of 2003,  we  expended  no cash for  acquisitions
compared  to the first six  months of 2002,  when net cash used in  acquisitions
totaled approximately $7.9 million. In the first quarter of 2003, Inter-Tel also
received payment from the Vianet  shareholders of $1.45 million, as payment of a
loan in connection with the sale of 83% of our interest in Inter-Tel.NET, and in
exchange  for  the  full  release  of  our  guarantee  of  vendor   obligations.
Approximately $2.1 million was used to acquire additional property and equipment
during the first six months of 2003 compared to $2.8 million for the same period
in 2002. We anticipate  incurring  additional  capital  expenditures  during the
second half of 2003,  principally  relating to  expenditures  for  equipment and
management information systems used in our operations.

      Net cash used in financing  activities totaled  approximately $0.5 million
in the six months  ended June 30, 2003,  compared to cash  provided by financing
activities  of $0.5  million  for the same  period  in 2002.  Net cash  used for
dividends  totaled  approximately  $1.5 million and $0.9 million,  respectively,
during the first six months of 2003 and 2002, which was offset in each period by
cash  provided by the exercise of stock  options and from stock issued under the
company's  employee  stock purchase plan totaling $1.1 million and $1.8 million.
During  the first  six  months of 2003 and 2002,  we  reissued  treasury  shares
through stock option  exercises and  issuances.  In the six month periods ending
June 30, 2003 and 2002,  the  proceeds  received  from these  reissued  treasury
shares  were  approximately  the same as the cost  basis of the  treasury  stock
reissued, resulting in a minimal impact on retained earnings.


                                       19
<PAGE>

      We offer to our customers lease  financing and other  services,  including
our Total Solution (formerly Totalease) program,  through our Inter-Tel Leasing,
Inc. subsidiary.  We fund our Total Solution program in part through the sale to
financial  institutions of rental payment  streams under the leases.  Sold lease
rentals totaling $207.6 million and $205.8 million remained unbilled at June 30,
2003 and December 31, 2002,  respectively.  We are obligated to repurchase  such
income  streams in the event of defaults by lease  customers  and,  accordingly,
maintain reserves based on loss experience and past due accounts.  Although,  to
date, we have been able to resell the rental streams from leases under the Total
Solution program profitably and on a substantially current basis, the timing and
profitability of lease resales could impact our business and operating  results,
particularly  in an  environment  of  fluctuating  interest  rates and  economic
uncertainty.  If we are required to repurchase rental streams and realize losses
thereon in  amounts  exceeding  our  reserves,  our  operating  results  will be
adversely affected.

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

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,
allowing  for  use  by  our  customers  of  these  systems.   Pre-payments   for
communications   services  are  deferred  and   recognized  as  revenue  as  the
communications services are provided.

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

      Sales-Leases.  For our sales-type lease accounting, we follow the guidance
provided by FASB Statement No. 13,  Accounting for Leases and FASB Statement No.
140,   Accounting   for  Transfers   and  Servicing  of  Financial   Assets  and
Extinguishments  of  Liabilities - A Replacement  of FASB  Statement No. 125. We
record the discounted present values of minimum rental payments under sales-type
leases as sales,  net of  provisions  for  continuing  administration  and other
expenses over the lease period.  We record the lease sales at the time of system
sale and  installation  pursuant  to  Staff  Accounting  Bulletin  No.  101,  as
discussed  above  for  sales to end user  customers,  and  upon  receipt  of the
executed  lease   documents.   The  costs  of  systems   installed  under  these
sales-leases,  net of  residual  values  at the end of the  lease  periods,  are
recorded as costs of sales.  The net rental streams are sold to funding  sources
on a regular basis with the income  streams  discounted by prevailing  like-term
rates at the time of sale. Gains or losses resulting


                                       20
<PAGE>

from the sale of net rental payments from such leases are recorded as net sales.
We establish and maintain  reserves  against  potential  recourse  following the
resales based upon  historical loss  experience,  past due accounts and specific
account  analysis.  The allowance for  uncollectible  minimum lease payments and
recourse  liability at the end of the year represent reserves against the entire
lease portfolio.  Management  reviews the adequacy of the allowance on a regular
basis and adjusts the allowance as required. These reserves are either netted in
the accounts receivable, current and long-term components of "Net investments in
Sales-Leases" on the balance sheet, or included in long-term  liabilities on our
balance sheet for off-balance sheet leases.

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

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

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

      Allowance  for  Doubtful  Accounts.  We maintain  allowances  for doubtful
accounts for estimated  losses  resulting from the inability of our customers to
make required payments.  Additional reserves or allowances for doubtful accounts
are recorded for our sales-type  leases,  discussed above in  "Sales-Leases." We
establish and maintain  reserves against  estimated losses based upon historical
loss  experience,  past due accounts and specific account  analysis.  Management
reviews the level of the allowances for doubtful accounts on a regular basis and
adjusts the level of the  allowances as needed.  At June 30, 2003, our allowance
for doubtful  accounts for accounts  receivable  were $11.4 million of our $53.9
million  in  gross  accounts  receivable.  If  the  financial  condition  of our
customers or channel partners were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required.

      Inventories.  We value our inventories at lower of cost or market. Cost is
determined by the first-in,  first-out (FIFO) method,  including material, labor
and factory overhead.  Significant  management judgment is required to determine
the  reserve  for  obsolete or excess  inventory.  Inventory  on hand may exceed
future demand either because the product is outdated or obsolete, or because the
amount  on hand is more  than can be used to meet  estimated  future  needs.  We
consider  criteria  such  as  customer  demand,  product  life-cycles,  changing
technologies,  slow moving  inventory 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 June 30, 2003,  our  inventory
reserves  were $7.5 million of our $20.2 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


                                       21
<PAGE>

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.


      Divisions of the United  States  Department  of Justice are  investigating
other  companies' and Inter-Tel's  participation  in a federally  funded "E-Rate
program"  to  connect  schools  and  libraries  to  the  Internet.  The  Justice
Department  has not provided  Inter-Tel  with a  description  of the evidence on
which the investigations are based.  Inter-Tel is presently unable to predict or
determine the final outcome of, or to estimate the potential  range of loss with
respect to, the  investigations.  Based upon the information known at this time,
we do not expect the  investigations to result in a material adverse impact upon
the Company's business or financial condition.  If Inter-Tel is convicted of any
crime or subjected to sanctions,  or debarred from certain government  contracts
or if  penalties,  damages  or other  monetary  remedies  are  assessed  against
Inter-Tel in connection with or related to these and other  investigations,  our
business and operating results could be materially and adversely  affected.  The
existence  and  disclosure  of  the   investigations  may  have  already  caused
competitive harm to Inter-Tel,  and any unfavorable  resolution to these matters
may further harm  Inter-Tel's  business.  Nevertheless,  the early nature of the
investigations  makes it  difficult  to determine  whether the  likelihood  of a
material adverse outcome is likely.


Factors That May Affect Future Operating Results

      This Report on Form 10-Q contains  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.  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  Inter-Tel'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 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:

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

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

      Our expense levels are based in part on  expectations of future sales and,
if sales levels do not meet expectations, our operating results could be harmed.
In  addition,  because  sales of  business  communications  systems  through our
dealers  typically  produce  lower gross  margins than sales  through our


                                       22
<PAGE>

direct sales  organization,  operating results have varied, and will continue to
vary  based  upon the mix of sales  through  direct and  indirect  channels.  In
addition,  in the past we have  derived a  significant  part of our revenue from
recurring revenue streams,  which typically produce higher gross margins.  If we
do not maintain  recurring  revenue streams at current or historic  levels,  our
operating results will suffer if we do not  significantly  increase sales to new
customers.  For example,  in the most recent  quarter  ended,  sales through our
direct  sales  offices and  government  and national  accounts  divisions to new
customers  declined as a percentage  of total sales,  resulting in decreased net
sales  compared  to the  comparable  quarter in 2002.  Moreover,  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.  We  also  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 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.  We believe that  problems and delays
associated  with new product  development  have in the past  contributed to lost
sales.  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 applications,  Internet
Protocol  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 system, Encore product, speech recognition and Interactive Voice Response
products, and related computer-telephony products.

      In   2002,   we   introduced    Unified    Communicator,    a   web-based,
speech-recognition  and Wireless Application Protocol (WAP) software application
for controlling and managing your calls, contacts and presence status; Inter-Tel
Application Platform, a highly flexible  speech-recognition,  text-to-speech and
CTI application generation platform; enhanced convergence features on the Axxess
system,   including  support  of  standard  Session  Initiation  Protocol  (SIP)
endpoints  and trunk  gateways;  and several other  telephony-related  products.
During the past 12 months, sales of our Axxess business  communications  systems
and related software have comprised a substantial  portion of our net sales. Our
future success depends, in large part, upon increased commercial  acceptance and
adoption  of the  Application  Platform,  the Unified  Communicator  and related
computer-telephony  products, the Axxess system, Encore products,  Media Gateway
Control Protocol (MGCP) and SIP  standards-based  applications and devices,  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


                                       23
<PAGE>

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

      o     costs associated with the remediation of any problems;
      o     costs associated with design modifications;
      o     loss of or delay in revenues;
      o     loss of customers;
      o     failure to achieve market acceptance or loss of market share;
      o     increased service and warranty costs;
      o     liabilities to our customers; and
      o     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,  some of which we have  experienced and may continue
to experience, including:

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

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

      We completed  four  acquisitions  during 2001 and 2002.  During  2001,  we
acquired   certain  assets  and  assumed   certain   liabilities  of  Convergent
Communication Services, Inc.  ("Convergent") and Mastermind  Technologies,  Inc.
("Mastermind").  During 2002,  we acquired  certain  assets and assumed  certain
liabilities of McLeodUSA  Integrated  Business Systems,  Inc.  ("McLeod") and we
acquired  100% of the stock of Swan


                                       24
<PAGE>

Solutions Limited ("Swan") in the United Kingdom. These acquisitions are subject
to risks and uncertainties including those indicated above.

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

We may not be able to adequately  protect our proprietary  technology and may be
infringing upon third-party intellectual property rights.

      Our success  depends upon our  proprietary  technology.  We currently hold
patents for twenty (20)  telecommunication  and unified  messaging  products and
have also  applied to the U.S.  Patent  and  Trademark  Office  for eleven  (11)
additional  patents.  We  also  rely  on  copyright  and  trade  secret  law and
contractual  provisions  to protect our  intellectual  property.  Despite  these
precautions, third parties could copy or otherwise obtain and use our technology
without authorization, or develop similar technology independently.

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

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

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

Our IP network products may be vulnerable to viruses, other system failure risks
and security  concerns,  which may result in lost  customers or slow  commercial
acceptance of our IP network products.

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


                                       25
<PAGE>


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:

      o     PABX and converged systems  providers such as Avaya,  Cisco Systems,
            Comdial,  3Com, Iwatsu, Mitel, NEC, NextiraOne,  Nortel,  Panasonic,
            Shoreline, Siemens, Toshiba, Vertical Networks and Vodavi;
      o     large data routing and convergence  companies such as 3Com and Cisco
            Systems;
      o     voice    processing    applications    providers    such   as   ADC,
            InterVoice-Brite, Active Voice (a subsidiary of NEC America), Avaya,
            and Captaris (formerly AVT);
      o     long  distance  services  providers  such as AT&T,  MCI,  Qwest  and
            Sprint;
      o     large computer and software  corporations such as IBM, HP, Intel and
            Microsoft; and
      o     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:

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

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

Our  reliance  on a  limited  number of  suppliers  for key  components  and our
dependence on contract manufacturers could impair our ability to manufacture and
deliver our products and services in a timely and cost-effective manner.

      We currently  obtain certain key components for our digital  communication
platforms,   including  certain  microprocessors,   integrated  circuits,  power
supplies,  voice  processing  interface  cards and IP  telephony  cards,  from a
limited  number of suppliers  and  manufacturers.  Our reliance on these limited
suppliers and contract manufacturers involves risks and uncertainties, including
the  possibility  of a shortage or delivery  delay for some key  components.  We
currently manufacture our products through third-party subcontractors located in
the United  States,  the  People's  Republic  of China,  the United  Kingdom and
Mexico. Foreign manufacturing  facilities are subject to changes in governmental
policies, imposition of tariffs and import restrictions and other factors beyond
our control.  Varian,  Inc. currently  manufactures a significant portion of our
products at Varian's Tempe, Arizona facility, including substantially all of the
printed  circuit  boards  used  in the  Axxess  and  Eclipse2  systems.  We have
experienced  occasional  delays in


                                       26
<PAGE>

the supply of components  and finished  goods that have harmed our business.  If
inventory levels are not adequately maintained and managed we are at risk of not
having the  appropriate  inventory  quantities on hand to meet sales demand.  We
cannot assure that we will not experience similar delays in the future.

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

We derive a substantial  portion of our net sales from our dealer network and if
these dealers do not effectively promote and sell our products, our business and
operating results could be harmed.

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

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

If we lose key personnel or are unable to hire additional qualified personnel as
necessary, we may not be able to achieve our objectives.

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


                                       27
<PAGE>

We may be unable to achieve or manage our growth effectively, which may harm our
business.

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

The  introduction  of new products and services has lengthened our sales cycles,
which may result in significant sales and marketing expenses.

      In  the  past  few  years,   we   introduced   the  Axxess  ATM   business
communications system and our versions 7.0 and 8.0 IP 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.

We rely heavily upon third-party packaged software systems to manage and run our
business processes and to produce our financial statements. From time to time we
upgrade  these  systems  to ensure  continuation  of  support  and to expand the
functionality  of the systems to meet our business needs.  The risks  associated
with the upgrade process  include  disruption of our business  processes,  which
could harm our business.

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


                                       28
<PAGE>

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:

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

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


We are currently the target of  government  investigations  and in the future we
may be subject to litigation, which if they result in any convictions, sanctions
or penalties against us, could harm our business.

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

      Inter-Tel is presently  unable to predict or determine  the final  outcome
of,  or  to  estimate  the  potential   range  of  loss  with  respect  to,  the
investigations.  If  Inter-Tel  is  convicted  of  any  crime  or  subjected  to
sanctions,  or debarred  from  certain  government  contracts  or if  penalties,
damages or other monetary  remedies are assessed against Inter-Tel in connection
with these and other investigations, our business and operating results could be
materially  and  adversely  affected.   The  existence  and  disclosure  of  the
investigations  may have already caused  competitive harm to Inter-Tel,  and any
unfavorable resolution to these matters may further harm Inter-Tel's business.

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


Our Chairman of the Board of Directors,  CEO and President controls 21.4% of our
Common  Stock  and  is  able  to  significantly   influence   matters  requiring
shareholder approval.

      As of June 30, 2003, Steven G. Mihaylo,  Inter-Tel's Chairman of the Board
of  Directors,  Chief  Executive  Officer  and  President,   beneficially  owned
approximately 21.4% of the existing 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.


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<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 and  continues  to have 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 only grow at a modest rate or possibly
not grow at all, and our financial  performance  has been and may continue to be
materially  and adversely  affected by the  reductions in spending on enterprise
communications equipment.

The  emerging  market for IP network  telephony  is subject to market  risks and
uncertainties that could cause significant delays and expenses.

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

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

Government  regulation of third party long distance and network service entities
on which we rely may harm our business.

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


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<PAGE>

Consolidation within the telecommunications  industry could increase competition
and reduce our customer base.

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

Terrorist  activities  and  resulting  military and other actions could harm our
business.

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

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.

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

LEASE  PORTFOLIO.  We offer to our customers lease financing and other services,
including our Total Solutions program, through our Inter-Tel Leasing subsidiary.
We fund these  programs in part  through the sale to financial  institutions  of
rental  payment  streams under the leases.  Upon the sale of the rental  payment
streams,  we continue to service the leases and maintain limited recourse on the
leases.  We maintain  reserves for loan losses on all leases based on historical
loss experience,  past due accounts and specific account  analysis.  Although to
date we have been able to resell the rental  streams from leases under our lease
programs  profitably  and on a  substantially  current  basis,  the  timing  and
profitability of lease resales could impact our business and operating  results,
particularly  in an  environment  of  fluctuating


                                       31
<PAGE>

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"  and  "Critical   Accounting   Policies  and  Estimates"  in
Management's  Discussion and Analysis for more  information  regarding our lease
portfolio and financing.

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

ITEM 4.  CONTROLS AND PROCEDURES

      Evaluation  of  disclosure   controls  and   procedures.   Our  management
evaluated,  with the  participation of our Chief Executive Officer and our Chief
Financial Officer,  the effectiveness of our disclosure  controls and procedures
(as defined in Rules 13a-14(c) and 15d-14(c)  under the Securities  Exchange Act
of 1934,  as  amended)  as of the end of the period  covered  by this  Quarterly
Report on Form 10-Q. Based on this evaluation,  our Chief Executive  Officer and
Chief  Financial  Officer  have  concluded  that  our  disclosure  controls  and
procedures were effective to ensure that material information we are required to
disclose in reports that we file or submit under the Securities  Exchange Act of
1934, as amended,  is recorded,  processed,  summarized and reported  within the
time periods specified in Securities and Exchange Commission rules and forms.

      Changes in  internal  controls  over  financial  reporting.  There were no
changes in our internal  controls over financial  reporting that occurred during
the period  covered by this Quarterly  Report on Form 10-Q that have  materially
affected,  or are reasonably likely to materially  affect, our internal controls
over financial reporting.


                                       32
<PAGE>

INTER-TEL, INCORPORATED AND SUBSIDIARIES
PART II.      OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

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

ITEM 2.    CHANGES IN SECURITIES AND USE OF PROCEEDS--Not Applicable

ITEM 3.    DEFAULTS ON SENIOR SECURITIES--Not Applicable

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

The voting  results of our Annual Meeting Of  Shareholders  dated April 21, 2003
were reported in the Company's Form 10-Q filed May 12, 2003.

ITEM 5.    OTHER INFORMATION

Pursuant to Rule  14a-4(c)(1)  under the  Securities  Exchange  Act of 1934,  as
amended,  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  2003  annual  meeting  of
shareholders on March 21, 2003, the deadline for receipt of any such shareholder
proposal for the 2004 annual meeting of shareholders is February 5, 2004.

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

         Exhibits:

         Exhibit 31.1:  Certification  of Chief  Executive  Officer  Pursuant to
                       Section 302 of the Sarbanes-Oxley Act of 2002

         Exhibit 31.2:  Certification  of  Chief  Financial  Officer Pursuant to
                       Section 302 of the Sarbanes-Oxley Act of 2002

         Exhibit 32.1:  Certification of Chief Executive  Officer Pursuant to 18
                       U.S.C.  Section 1350, as Adopted  Pursuant to Section 906
                       of the Sarbanes-Oxley Act of 2002

         Exhibit 32.2:  Certification of Chief  Financial Officer Pursuant to 18
                       U.S.C.  Section 1350, as Adopted  Pursuant to Section 906
                       of the Sarbanes-Oxley Act of 2002

         Reports on Form 8-K:

              On April 7, 2003, we filed a Current Report on Form 8-K under Item
              7 (Financial  Statements  and Exhibits)  and furnished  disclosure
              under  Item 9  (Regulation  FD  Disclosure)  to  report  our Press
              release dated April 7, 2003  announcing  anticipated net sales and
              earnings  per  share  results  for,  and   anticipated   cash  and
              short-term investment levels as of, the fiscal quarter ended March
              31, 2003.

              On April 21,  2003,  we filed a  Current  Report on Form 8-K under
              Item  7  (Financial   Statements   and   Exhibits)  and  furnished
              disclosure  under Item 9 (Regulation  FD Disclosure) to report our
              Press  release dated April 21, 2003  announcing  GAAP and non-GAAP
              results


                                       33
<PAGE>

              for the fiscal  quarter ended March 31, 2003,  and comparing  such
              results with the results for the quarter ended March 31, 2002.

              On July 21, 2003, we filed a Current Report on Form 8-K under Item
              7 (Financial  Statements  and Exhibits)  and furnished  disclosure
              under  Item 9  (Regulation  FD  Disclosure)  to  report  our Press
              release dated July 21, 2003 announcing  GAAP and non-GAAP  results
              for the fiscal  quarter ended June 30, 2003,  and  comparing  such
              results with the results for the quarter ended June 30, 2002.

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

                                   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


August 14, 2003                                /s/    Steven G. Mihaylo
---------------                           ------------------------------------
                                          Steven G. Mihaylo
                                          Chairman of the Board, Chief Executive
                                          Officer and President


August 14, 2003                               /s/     Kurt R. Kneip
---------------                           --------------------------------------
                                           Kurt R. Kneip
                                           Vice President and
                                           Chief Financial Officer

                                       34