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

                                   ----------

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

For the quarter ended                                    Commission File Number:
   March 31, 2000                                               0-10211

                             INTER-TEL, INCORPORATED

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


                        120 NORTH 44TH STREET, SUITE 200
                           PHOENIX, ARIZONA 85034-1822

                                 (602) 302-8900

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

                                  Common Stock

              (26,333,137 shares outstanding as of March 31, 2000)

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

INTER-TEL, INCORPORATED AND SUBSIDIARIES

                                                                            Page

PART I.   FINANCIAL INFORMATION

          Item 1. Financial Statements (Unaudited, except
          December 31, 1999 balance sheet)

          Condensed consolidated balance sheets--March 31,                    3
          2000 and December 31, 1999

          Condensed consolidated statements of income--three                  4
          months ended March 31, 2000 and March 31, 1999

          Condensed consolidated statements of cash flows                     5
          --three months ended March 31, 2000 and
           March 31, 1999

          Notes to condensed consolidated financial                           6
          statements--March 31, 2000

Item 2.   Management's Discussion and Analysis of Financial                   8
          Condition and Results of Operations

PART II. OTHER INFORMATION                                                   21

SIGNATURES                                                                   22

                                        2
<PAGE>
PART I. FINANCIAL INFORMATION

INTER-TEL, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


(In thousands)                                          March 31,   December 31,
                                                          2000         1999
                                                        ---------    ---------
                                                       (Unaudited)   (Audited)
ASSETS
CURRENT ASSETS
     Cash and equivalents                               $  20,768    $  19,226
     Accounts receivable -- net                            63,262       49,583
     Inventories                                           28,700       18,816
     Net investment in sales-leases                        15,479       14,466
     Restricted cash for acquisition                           --       12,097
     Prepaid expenses and other assets                     16,510        4,926
                                                        ---------    ---------
          TOTAL CURRENT ASSETS                            144,719      119,114

PROPERTY, PLANT & EQUIPMENT                                34,029       28,706
EQUIPMENT HELD UNDER LEASE, NET                             4,762        5,310
GOODWILL                                                   46,894       16,452
OTHER ASSETS                                               32,065       70,667
                                                        ---------    ---------
                                                        $ 262,469    $ 240,249
                                                        =========    =========

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
     Accounts payable                                   $  36,246    $  20,540
     Other current liabilities                             39,663       37,649
                                                        ---------    ---------
          TOTAL CURRENT LIABILITIES                        75,909       58,189

DEFERRED TAXES                                              7,927        6,278
OTHER LIABILITIES                                          10,502        7,661

SHAREHOLDERS' EQUITY
     Common stock, no par value - authorized
       100,000,000 shares, issued and outstanding
       - 26,135,640 in 1999                               107,280      106,853
     Less:  Shareholder loans                              (1,046)      (1,116)
     Retained earnings                                     72,977       75,835
     Accumulated other comprehensive income                   (83)         177
                                                        ---------    ---------
                                                          179,128      181,749

     Less: Treasury stock at cost                         (10,997)     (13,628)
                                                        ---------    ---------
        TOTAL SHAREHOLDERS' EQUITY                        168,131      168,121

                                                        $ 262,469    $ 240,249
                                                        =========    =========

See accompanying notes.

                                        3
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)


                                                           Three Months Ended
(In thousands, except                                     ---------------------
per share amounts)                                        March 31,    March 31,
                                                            2000         1999
                                                          --------     --------
NET SALES                                                 $ 96,363     $ 65,525
     Cost of sales                                          54,823       33,853
                                                          --------     --------
GROSS PROFIT                                                41,540       31,672

     Research & development                                  5,668        3,307
     Selling, general, and administrative                   30,911       20,579
     In-process research and development                     5,433           --
                                                          --------     --------
                                                            42,012       23,886

OPERATING INCOME (LOSS)                                       (472)       7,786

     Equity Share of Cirilium Corp.'s net losses            (1,699)          --
     Interest and other income                                 277          434
     Interest expense                                          (75)         (12)
                                                          --------     --------
INCOME (LOSS) BEFORE TAXES                                  (1,969)       8,208
     Income tax provision (benefit)                           (748)       3,116
                                                          --------     --------

NET INCOME (LOSS)                                         $ (1,221)    $  5,092
                                                          ========     ========

NET INCOME (LOSS) PER SHARE
     Basic                                                $  (0.05)    $   0.20
                                                          ========     ========
     Diluted                                              $  (0.05)    $   0.19
                                                          ========     ========

Average number of common shares
     Outstanding - Basic                                    26,249       26,096
                                                          ========     ========

Average number of common shares
     Outstanding - Diluted                                  26,249       27,277
                                                          ========     ========

See accompanying notes.

                                        4
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


                                                            Three Months Ended
                                                           --------------------
(In thousands)                                             March 31,   March 31,
                                                             2000        1999
                                                           --------    --------
OPERATING ACTIVITIES
Net income (loss)                                            (1,221)   $  5,092
Adjustments to reflect operating activities:
     Depreciation and amortization                            3,194       2,123
     Purchased in-process research and development            5,433          --
     Changes in operating assets and liabilities            (14,350)     (6,807)
     Other                                                    5,755       3,233
                                                           --------    --------
NET CASH PROVIDED BY (USED IN)
   OPERATING ACTIVITIES                                      (1,189)      3,641

INVESTING ACTIVITIES
     Additions to property and equipment                     (2,963)     (2,069)
     Additions to operating leases                              (41)     (2,876)
     Proceeds from disposal of property and equipment             7          --
     Proceeds from disposition of business segment            6,602          --
     Cash used in acquisitions                               (1,647)       (220)
                                                           --------    --------
NET CASH PROVIDED BY (USED IN)
  INVESTING ACTIVITIES                                        1,958      (5,165)

FINANCING ACTIVITIES
     Cash dividends paid                                       (262)       (260)
     Payments on long-term debt                                (222)         --
     Proceeds from exercise of stock options                  1,257         853
                                                           --------    --------
NET CASH PROVIDED BY FINANCING
       ACTIVITIES                                               773         593

INCREASE (DECREASE) IN CASH
        AND EQUIVALENTS                                       1,542        (931)

CASH AND EQUIVALENTS AT
     BEGINNING OF PERIOD                                     19,226      63,124
                                                           --------    --------
CASH AND EQUIVALENTS AT
     END OF PERIOD                                         $ 20,768    $ 62,193
                                                           ========    ========

See accompanying notes.

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

March 31, 2000

NOTE A--BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial  information and with the  instructions to Form 10-Q and Rule 10-01 of
Regulation  S-X.  Accordingly,  they do not include all of the  information  and
footnotes  required by generally  accepted  accounting  principles  for complete
financial statements. In the opinion of management,  all adjustments (consisting
of normal recurring  accruals)  considered  necessary for a fair presentation of
the results for the interim  periods  presented  have been  included.  Operating
results  for the  three  months  ending  March  31,  2000  are  not  necessarily
indicative  of the results that may be expected for the year ended  December 31,
2000. 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, 1999.

For the first quarter ended March 31, 2000,  the Company owned more than 20% but
less than 50% of  Cirilium  Corporation  ("Cirilium").  Therefore,  the  Company
recorded the activity of Cirilium using the equity method of accounting.

NOTE B--EARNINGS PER SHARE

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

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

                                                          Three Months Ended
                                                        -----------------------
(In thousands, except                                   March 31,      March 31,
per share amounts)                                        2000           1999
                                                        --------       --------
Numerator:
  Net Income                                            $ (1,221)      $  5,092
                                                        ========       ========
Denominator:
  Denominator for basic earnings per
    share - weighted average shares                       26,249         26,096

  Effect of dilutive securities:
    Employee and director stock options                       --          1,181
                                                        --------       --------
  Denominator for diluted earnings per
    share - adjusted weighted average
    shares and assumed conversions                        26,249         27,277
                                                        --------       --------

Basic earnings per share                                $  (0.05)      $   0.20
                                                        ========       ========

Diluted earnings per share                              $  (0.05)      $   0.19
                                                        ========       ========

In the first quarter of 2000, the effect of diluted securities would have had an
antidilutive  impact on earnings per share.  Accordingly,  employee and director
stock  options  were not  included in the  diluted  earnings  per share.  If the
Company had reported positive  earnings during the quarter,  the denominator for
calculating dilutive earnings per share would have increased by 1,228 to 27,477.

                                        6
<PAGE>
NOTE C - ACQUISITIONS AND DISPOSITIONS

On January 1, 2000 Inter-Tel  purchased  certain  computer  telephony assets and
assumed certain liabilities of Executone Information Systems, Inc. ("Executone")
for $44.3 million in cash plus related  acquisition  costs,  subject to purchase
price adjustments as of the closing date. Executone is based in Milford, CT, and
also has offices located in Poway,  California and Oakton,  Virginia.  Executone
specializes in database design and systems integration for small- to medium-size
businesses that utilize advanced  telecommunications  products and services. The
aggregate  purchase  price was  allocated  to the fair  value of the  assets and
liabilities  acquired,  of which $5.4  million  ($3.4  million  after taxes) was
written-off as purchased  in-process research and development since there was no
alternative use. The Executone  transaction was accounted for using the purchase
method  of  accounting.   During  the  first  quarter,  the  Executone  division
recognized  losses of  approximately  $2.5 million ($1.5 million after taxes, or
$.06 per  diluted  share)  excluding  the charge  for  in-process  research  and
development.

In connection with the Executone acquisition,  the Company sold a portion of the
assets and liabilities to Varian Associates,  Inc. ("Varian") of Tempe, Arizona.
The Company sold approximately $6.6 million of inventory and fixed assets at net
book value, thereby generating no gain or loss on the transaction.

Inter-Tel  also  acquired  Intercomm  Americas,  Inc.  ("ICA")  during the first
quarter  of 2000 for  $580,000  plus  750,000  shares  of  stock in  Inter-Tel's
wholly-owned  subsidiary,  Inter-Tel.net.  Such  stock may be  converted  by the
seller into Inter-Tel, Incorporated common stock on June 30, 2001, June 30, 2002
or June 30, 2003 if  Inter-Tel.net  has not completed an initial public offering
of  Inter-Tel.net's  stock  by any of those  dates.  If  Inter-Tel.net  does not
complete  an initial  public  offering by August 31,  2003,  the Company has the
right to convert the seller's  Inter-Tel.net  stock to Inter-Tel shares pursuant
to the same  conversion  ratio.  The  conversion  ratio is dependent on the fair
market  value  of the  Company's  common  stock at the  date of  conversion,  if
applicable.  ICA is an IP telephony-based  long distance carrier that originates
and terminates IP  telephony-based  long distance traffic from and to Mexico and
has an IP network throughout Mexico. The ICA transaction was accounted for using
the  purchase  method of  accounting.  The  operations  related  to ICA were not
significant to the Company's consolidated operations.

NOTE D - PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE

During  the first  quarter  of 2000,  Inter-Tel  completed  the  acquisition  of
Executone  (see NOTE C above).  The  aggregate  purchase  price of the Executone
acquisition  was  allocated  to the fair  value of the  assets  and  liabilities
acquired, of which $5.4 million ($3.4 million after taxes), or $0.13 per diluted
share,  was  written-off  as  purchased  in-process  research  and  development.
Including  this charge,  the Company  incurred net losses of $1.2 million ($0.05
per diluted share) for the first quarter ended March 31, 2000.

NOTE E - SEGMENT INFORMATION

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

Prior to this quarter,  the Company had viewed its operations as principally one
segment;  telephone  systems,  telecommunications  software  and  hardware,  and
related long distance calling services.  These services are provided through the
Company's  direct  sales  offices  and  dealer  network  to  business  customers
throughout  the United  States,  Europe,  Asia and South  America.  As a result,
financial  information  disclosed previously  materially  represented all of the
financial  information  related to the Company's  principal  operating  segment.
Although the  operations  of Executone  are  identified  separately  below,  the
Executone  operations  are  similar and  comparable  to the  principal  segment.
Accordingly,  future disclosures may reflect the Executone  operations  combined
with the principal segment.

                                        7
<PAGE>
In the first  quarter  of 2000,  the  Company  generated  income  from  business
segments as follows:

<TABLE>
<CAPTION>
(in thousands, except per share                 Principal
amounts)                                         Segment    Executone    Cirilium  Inter-tel.net  Total
                                                 --------    --------    --------    --------    --------
<S>                                              <C>         <C>         <C>         <C>         <C>
NET SALES                                        $ 79,121    $ 14,800                $  2,442    $ 96,363

OPERATING INCOME (LOSS)                             9,483      (7,825)         --      (2,130)       (472)

   Equity Share of Cirilium Corp.'s net losses         --          --      (1,699)         --      (1,699)

   Interest and other income                          337         (60)                     --         277

   Interest expense                                   (34)        (41)                     --         (75)

NET INCOME (LOSS)                                   6,067      (4,914)     (1,053)     (1,321)     (1,221)

NET INCOME (LOSS) PER SHARE--DILUTED             $   0.23    $  (0.19)   $  (0.04)   $  (0.05)   $  (0.05)

Average number of common
   shares outstanding -- Diluted                   26,249      26,249      26,249      26,249      26,249
</TABLE>

     In  December  1999,  Inter-Tel  entered  into an  agreement  with  Hypercom
Corporation  to  jointly  form  Cirilium  Corporation   ("Cirilium").   Cirilium
comprises parts of Hypercom's data and Inter-Tel's packet telephony products and
services, including Inter-Tel's Vocal'Net gateway products and technology.

     The Company's  revenues are generated  predominantly  in the United States.
Total  revenues  generated from U.S.  customers  totaled $93.8 million and $64.1
million  of total  revenues  for the  quarters  ended  March 31,  2000 and 1999,
respectively.  The Company's revenues from international  sources were primarily
generated from customers located in the United Kingdom,  Europe,  Asia and South
America. In the first quarters of 2000 and 1999, revenues from customers located
internationally accounted for 2.6% and 2.2% of total revenues, respectively.

PART I.

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

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

                                        8
<PAGE>
OVERVIEW

     Inter-Tel is a leading  provider of business key telephone  systems,  voice
processing  systems and related  software  applications  for the 40+ station key
telephone  system  market  in the  United  Sates.  Inter-Tel  is also a  leading
provider  of IP  telephony  voice  and data  convergence  products.  Inter-Tel's
products include the AXXESS business telephone system, AXXESSORY TALK voice mail
system, Executone computer telephony products, and the InterPrise voice and data
routers.  Inter-Tel  also operates  Inter-Tel.net,  an IP  telephony-based  long
distance  network.  The Company also provides  maintenance,  leasing and support
services for its products.  The  Company's  Common Stock is quoted on the Nasdaq
National Market System under the symbol INTL.

RESULTS OF OPERATIONS

     Net sales  increased  47.1% to $96.4  million in the first  quarter of 2000
from $65.5 million in the first quarter of 1999. For the quarter ended March 31,
2000,  sales  from  the  Company's  direct  sales  offices  and  from  wholesale
distribution increased approximately $12.2 million compared to the first quarter
of 1999. Sales from the Company's  network services group increased $3.3 million
over the same periods. The remaining increases were attributable to acquisitions
during the quarter and increases from other  operations.  Please refer to Note E
for additional segment reporting information.

The  following  table  sets  forth  selected  statements  of  income  data  as a
percentage of net sales:

                                                           Three months
                                                          Ended March 31,
                                                          ----------------
                                                          2000       1999
                                                          -----      -----
     Net sales                                            100.0%     100.0%
     Cost of sales                                         56.9       51.7
                                                          -----      -----
     Gross Profit                                          43.1       48.3
     Research and development                               5.9        5.0
     Selling, general and administrative                   32.1       31.4
     IPRD write-off                                         5.6         --
                                                          -----      -----
     Operating income (loss)                               (0.5)      11.9
     Equity share of Cirilium Corp.'s net losses           (1.8)        --
     Interest and other income                              0.3        0.6
     Interest expense                                      (0.1)       0.0
                                                          -----      -----
     Income (loss) before income taxes                     (2.0)      12.5
     Income Taxes                                          (0.8)       4.7
                                                          -----      -----
     Net Income                                            (1.3)%      7.8%
                                                          =====      =====

     Gross  profit  for the  first  quarter  of 2000  increased  31.2%  to $41.5
million,  or 43.1% of net sales,  from $31.7 million,  or 48.3% of net sales, in
the first quarter of 1999.  The decline in gross profit as a percentage of sales
(or gross  margin) was primarily  attributable  to Executone  operations,  which
generated  significantly  lower margins than the Company's principal segment, as
well as the impact of a different sales mix of products and services,  and sales
through different distribution  channels.  Increases in sales of traditional and
Internet Protocol long distance services, through the Company's NetSolutions and
Inter-Tel.net subsidiaries,  as a percentage of total sales, also contributed to
lower gross margins.  In addition,  competitive  pricing  pressures on telephone
systems negatively impacted gross margins during the first quarter of 2000.

     Research and  development  expenses for the first quarter of 2000 increased
71.4% to $5.7 million,  or 5.9% of net sales, from $3.3 million,  or 5.0% of net
sales,   for  the  first  quarter  of  1999.   These  increases  were  primarily
attributable to expenses  relating to the Executone  acquisition,  the continued
development of the AXXESS  networking  software and systems,  and the design and
development of the Company's CTI applications.  The Company expects that for the
foreseeable  future research and development  expenses will continue to increase
in absolute dollars as the Company continues to enhance existing and develop new
technologies and products.  These expenses may vary, however, as a percentage of
net sales.

                                        9
<PAGE>
     Selling,  general and administrative  expenses in the first quarter of 2000
increased to $30.9 million,  or 32.1% of net sales, from $20.6 million, or 31.4%
of net sales, in the first quarter of 1999. The increase in absolute dollars and
as a percentage of net sales was primarily due to the  acquisition of Executone,
as well as increased selling,  incentive,  training and other compensation costs
attributable to the growth of the Company's  direct sales offices and additional
personnel and marketing expenses to support the operations of Inter-Tel.net. The
Company   expects  that  for  the  foreseeable   future  selling,   general  and
administrative  expenses will continue to increase in absolute dollars,  but may
vary as a percentage of net sales.

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

     In  December  1999,  Inter-Tel  entered  into an  agreement  with  Hypercom
Corporation  to  jointly  form  Cirilium  Corporation   ("Cirilium").   Cirilium
comprises parts of Hypercom's data and Inter-Tel's packet telephony products and
services,  including Inter-Tel's Vocal'Net gateway products and technology.  The
Company owns approximately  47.5% of the outstanding  capital stock of Cirilium.
Accordingly,  the Company  recorded  the net losses of Cirilium as a single line
item below operating  income.  Pretax losses from Cirilium  totaled $1.7 million
during the first quarter of 2000.

     Other income in both  periods  consisted  primarily of interest  income and
foreign exchange rate gains and losses.  Income from interest  decreased in 2000
compared to 1999 based on a lower level of invested  funds,  principally  due to
expenditures  relating  to the  Executone  acquisition.  Other  changes in other
income  primarily  reflected  differences in net foreign exchange rate gains and
losses.

     Net loss for the first quarter was $1.2 million  ($0.05 per diluted  share)
reflecting  the write-off of  in-process  research and  development  costs noted
above,  compared to net income of $5.1 million ($0.19 per diluted share) for the
first  quarter of 1999.  Excluding  the  write-off  of  in-process  research and
development  costs,  net income for the quarter  ended March 31, 2000 would have
been $2.15 million, or $0.08 per diluted share.

INFLATION/CURRENCY FLUCTUATION

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

LIQUIDITY AND CAPITAL RESOURCES

     At March 31, 2000,  the Company had $20.8 million in cash and  equivalents,
which  represented an increase of  approximately  $1.5 million from December 31,
1999. The Company maintains a $15.0 million  unsecured  revolving line of credit
with Bank One,  Arizona,  NA. This credit facility is annually  renewable and is
available  through June 1, 2000. Under the credit facility,  the Company has the
option to borrow at a prime rate or adjusted LIBOR interest rate.  Historically,
the  Company has used the credit  facility  primarily  to support  international
letters of credit to suppliers.  On December 31, 1999,  the Company paid cash of
approximately $44.3 million plus acquisition costs to purchase certain assets of
Executone.  This  transaction  closed on  January 1, 2000.  The  remaining  cash
balances  may be  used to  further  develop  and  expand  Inter-Tel.net  and for
potential  acquisitions,   strategic  alliances,  working  capital  and  general
corporate purposes.

         Net cash used in  operating  activities  totaled  $1.2  million for the
three  months  ended  March 31,  2000,  compared to cash  provided by  operating
activities of $3.6 million for the same period in 1999.  The operating cash used
in the first  quarter  of 2000 was  primarily  the  result of  increases  in net
operating  assets and  liabilities,  offset by cash  generated  from  operations

                                       10
<PAGE>
(excluding the write-off of in-process  research and  development  costs of $5.4
million   associated  with  the  Executone   acquisition),   including  non-cash
depreciation  and  amortization  charges.  Cash  used in  operating  assets  and
liabilities  in the three month period  ended March 31, 2000 was $14.4  million,
compared  to cash used of $6.8  million in the same  period of 1999.  During the
first quarter of 2000, the Company had higher  accounts  receivable,  inventory,
investment  in  sales-leases  and prepaid  expenses  and other  assets that were
attributable  primarily to the  Executone  acquisition.  The Company  expects to
expand  sales  through its direct sales  office and dealer  networks,  including
those  acquired  in the  Executone  acquisition,  which is  expected  to require
working capital for increased  accounts  receivable and inventories.  During the
first quarter of 2000, accounts payable and other current liabilities  increased
primarily as a result of the assumption of liabilities of Executone.

     Net cash  provided by investing  activities,  primarily in the form of cash
received from the  disposition of the  manufacturing  operations of Executone to
Varian  of $6.6  million,  offset  by cash used for  acquisitions,  capital  and
operating lease  expenditures,  totaled $2.0 million for the quarter ended March
31, 2000,  compared to cash used of $5.2 million for the quarter ended March 31,
1999. Net cash used in acquisitions totaled  approximately $1.6 million in 2000.
Capital expenditures totaled approximately $3.0 million for the same period. The
Company anticipates  additional capital  expenditures  during 2000,  principally
relating to expenditures for equipment and management  information  systems used
in its  operations,  for  facilities  expansion and Executone and  Inter-Tel.net
operations.

     Net cash  provided by financing  activities  totaled  $773,000 in the three
months  ended March 31, 2000  compared to $593,000  for the same period in 1999,
related  primarily  to proceeds  from the exercise of stock  options,  less cash
dividends paid.

     The Company  offers to its customers  lease  financing and other  services,
including its Totalease program,  through its Inter-Tel Leasing subsidiary.  The
Company  funds its  Totalease  program  in part  through  the sale to  financial
institutions of rental income streams under the leases. Resold Totalease rentals
totaling $175.5 million and $163.7 million  remained  unbilled at March 31, 2000
and December 31, 1999, respectively. The Company is obligated to repurchase such
income  streams in the event of defaults by lease  customers  and,  accordingly,
maintains reserves based on loss experience and past due accounts.  Although the
Company to date has been able to resell the rental streams from leases under the
Totalease  program  profitably and on a substantially  current basis, the timing
and  profitability  of lease  resales  could impact the  Company's  business and
operating results,  particularly in an environment of fluctuating interest rates
and  economic  uncertainty.  If the  Company is required  to  repurchase  rental
streams and realizes  losses  thereon in amounts  exceeding  its  reserves,  its
operating results will be adversely affected.

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

FACTORS THAT MAY AFFECT RESULTS OF FUTURE OPERATIONS

     THIS REPORT ON FORM 10-Q  CONTAINS  FORWARD-LOOKING  STATEMENTS  WITHIN THE
MEANING OF SECTION  27A OF THE  SECURITIES  ACT OF 1933 AND  SECTION  21E OF THE
SECURITIES  EXCHANGE ACT OF 1934.  ACTUAL RESULTS COULD DIFFER  MATERIALLY  FROM
THOSE  PROJECTED  IN THE  FORWARD-LOOKING  STATEMENTS  AS A RESULT  OF MANY RISK
FACTORS INCLUDING,  WITHOUT LIMITATION,  THOSE SET FORTH UNDER "FACTORS THAT MAY
AFFECT  FUTURE  RESULTS  OF  OPERATIONS"  BELOW.  IN  EVALUATING  THE  COMPANY'S
BUSINESS,  SHAREHOLDERS AND PROSPECTIVE  INVESTORS SHOULD CONSIDER CAREFULLY THE
FOLLOWING  FACTORS  IN  ADDITION  TO THE  OTHER  INFORMATION  SET  FORTH IN THIS
DOCUMENT.

                                       11
<PAGE>
OUR MARKET IS SUBJECT TO RAPID TECHNOLOGICAL CHANGE AND TO COMPETE SUCCESSFULLY,
WE MUST  CONTINUALLY  INTRODUCE  NEW AND ENHANCED  PRODUCTS  AND  SERVICES  THAT
ACHIEVE BROAD MARKET ACCEPTANCE.

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

In addition,  if the markets for IP network products or CTI applications fail to
develop  as  quickly  as we  anticipate,  or if we are  unable for any reason to
capitalize  on  any  of  these  emerging  market  opportunities,  our  business,
financial condition and operating results could be significantly harmed.

OUR FUTURE SUCCESS  LARGELY DEPENDS ON INCREASING  COMMERCIAL  ACCEPTANCE OF OUR
INTERPRISE PRODUCTS, AXXESS PLATFORM, AND EXECUTONE COMPUTER TELEPHONY PRODUCTS.

During the past few years, we have introduced unified messaging on our AXXESSORY
TALK platform,  developed a number of  enhancements  to our existing  AXXESS and
AXXESSORY Talk platforms,  introduced the Inter-Tel Vocal'Net Gateway Server and
the Inter-Tel Vocal'Net Service Provider Package, and in April 1999, we released
the  InterPrise  400 voice and data  router,  our first of a family of voice and
data convergence products. Also, during October 1999, we released AXXESS 5.1 and
AXXESSORY TALK 5.1 software into production. During the past 12 months, sales of
our AXXESS digital communications  platforms and related software have comprised
a substantial  portion of our net sales.  We expect that our future success will
continue to depend, in large part, upon the increasing  commercial acceptance of
the InterPrise products and the AXXESS platform,  as well as future upgrades and
enhancements  to these products and networking  platforms.  We cannot assure you
that these products or platforms will succeed in the future.  Our future success
will also  depend  upon the  market  acceptance  of our other new  products  and
enhancements,  including the products that we purchased from Executone, pursuant
to our announcement on January 1, 2000.

WE FACE  RISKS  ASSOCIATED  WITH  THE  INTER-TEL  VOCAL'NET,  INTER-TEL  SERVICE
PROVIDER PACKAGE AND INTER-TEL INTERPRISE PRODUCTS.

Over the past 2 years, we have introduced the Inter-Tel  Vocal'Net  Server,  the
Inter-Tel Service Provider Package, and Inter-Tel InterPrise products.  Although
the Inter-Tel  Vocal'Net  gateways and Service Provider Package were transferred
to  Cirilium in 1999,  the  products  continue  to be used in the  Inter-Tel.net
network.  We  cannot  assure  you  that  the  functionality,   scalability,  and
reliability of the Inter-Tel  Vocal'Net  gateways,  Inter-Tel  Service  Provider
Package  and  Inter-Tel  InterPrise  product  lines will  achieve  broad  market
acceptance.  In addition,  we cannot assure you that these  products will comply
with industry  standards or that emerging industry standards will not render our
IP  telephony  products  obsolete.  If these  products  fail to  achieve  market
acceptance,  our business,  financial  condition and operating  results could be
significantly harmed.

THE SUCCESS OF OUR JOINT VENTURE WITH HYPERCOM, AND THE MARKET ACCEPTANCE OF OUR
CIRILIUM VENTURE,  AS WELL AS OUR OTHER IP NETWORK TELEPHONY PRODUCT AND SERVICE
OFFERINGS,  IS  UNCERTAIN  AND IS  SUBJECT  TO RISKS  THAT MAY  PREVENT  US FROM
ACHIEVING OUR OBJECTIVES.

In December 1999,  Inter-Tel entered into an agreement with Hypercom Corporation
to jointly  form  Cirilium.  Cirilium  comprises  parts of  Hypercom's  data and
Inter-Tel's  packet  telephony  experience,  products  and  services,  including
Inter-Tel's  Vocal'Net  gateway  products and  technology.  The market for voice
communications  over IP  networks,  as well as the  market  for  data  telephony
products,  services  and  applications  in general,  is  intensely  competitive.

                                       12
<PAGE>
Consequently,  we cannot assure you that our expectations and objectives for the
Cirilium  venture with Hypercom will be successfully  attained.  For the quarter
ended March 31,  2000,  we recorded a net loss of $1.2  million,  or $(0.04) per
share, related to our interest in Cirilium.

The  prospects  for market  acceptance  of the  Cirilium  venture,  and other IP
telephony products acquired through our June 1998 purchase of TMSI assets,  must
be considered in light of the  uncertainties  to which companies and products in
rapidly evolving markets such as IP network telephony are particularly  exposed.
These uncertainties include:

     *    the continued expansion of the Internet and Internet infrastructures;
     *    the  development  of  complementary  products  necessary  to make  the
          Internet a viable commercial network;
     *    the   continued   expansion  of  other  IP  networks  and  IP  network
          infrastructures;
     *    the preservation of current volume,  distance and time-of-day  pricing
          structures by IP networks;
     *    the successful  management of access costs, network capacity and voice
          transmission quality relating to IP network products and services;
     *    the  resolution of critical  issues  concerning  commercial use of the
          Internet, such as security, reliability, cost, ease of use, access and
          quality of service; and
     *    the ability of the  Internet to meet  additional  demand or its users'
          changing  requirements  on  a  timely  basis  and  at  a  commercially
          reasonable cost.

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

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

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

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

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

                                       13
<PAGE>
THE EMERGING MARKET FOR INTERNET PROTOCOL 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 voice  communications  over IP networks will become  widespread.
Even if voice  communications  over IP networks become widespread in the future,
we cannot assure you that our products,  particularly  the Inter-Tel  InterPrise
product lines, will successfully compete against other market players and attain
broad market acceptance.

Additional uncertainties involving the development of IP network telephony could
harm our  business.  The  adoption  of  voice  communications  over IP  networks
generally  requires the  acceptance of a new way of exchanging  information.  In
particular,  enterprises  that have already  invested  substantial  resources in
other means of communicating information may be reluctant or slow to adopt a new
approach  to  communications.  Due to the  lack of  user  control  over  network
infrastructure  and individual system  configuration,  users of IP network voice
communications  may experience  delays in the  transmission  of speech,  loss of
voice packets or inferior sound quality relative to standard telephony networks.
If these factors cause the market for IP network voice communications to fail to
develop or to develop more slowly than we anticipate,  our IP network  telephony
products  could  fail  to  achieve  market  acceptance,   which  in  turn  could
significantly harm our business, financial condition and operating results.

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

The regulatory  environment  for IP network  telephony is subject to substantial
uncertainty.  In the United States, we believe that there are currently few laws
or regulations  directly applicable to voice  communications over IP networks or
to access to, or  commerce  on, IP  networks  generally.  Future  changes in the
regulatory   environment,   particularly   in   regulations   relating   to  the
telecommunications   industry,   could  significantly  harm  our  business.  The
increasing  commercial  acceptance of voice communications over IP networks,  as
well as other  factors,  may result in the future  application  or adoption of a
number of laws and  regulations  relating to the  conduct of our  business as it
relates to telecommunications, such as:

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

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

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 18 telecommunication and unified messaging products and have also applied to
the U.S. Patent and Trademark Office for seven additional  patents. We also rely
on copyright  and trade  secret law and  contractual  provisions  to protect our

                                       14
<PAGE>
intellectual  property.  Despite these precautions,  third parties could copy or
otherwise  obtain  and use our  technology  without  authorization,  or  develop
similar technology independently.

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

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

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

The Inter-Tel  InterPrise,  ClearConnect,  AXXESS  NT-CPU,  and  AXXESSORY  Talk
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  jeopardized  the  security of
confidential information, such as credit card or bank account information or the
content of  conversations  over the IP network.  User concerns about privacy and
security may cause IP networks in general to grow more slowly, and impair market
acceptance of our IP network  products in particular,  until more  comprehensive
security technologies are developed.

WE MAY EXPERIENCE DIFFICULTIES DEVELOPING, MAINTAINING AND IMPROVING THE QUALITY
OF  INTER-TEL.NET,  OUR  INTERNAL IP NETWORK,  AND REQUIRE  MORE  DEPENDENCE  ON
THIRD-PARTY SUPPLIERS OF TELECOMMUNICATIONS AND NETWORK TRANSMISSION SERVICES.

The Company is currently utilizing Cirilium's Inter-Tel Vocal'Net technology and
Inter-Tel  InterPrise  products to develop  and expand our own IP  long-distance
network,  Inter-Tel.net,  to carry  voice and data  traffic.  The  Inter-Tel.net
network is currently in the process of deployment and,  accordingly,  is subject
to risks and uncertainties.  To date, the Inter-Tel.net  network has established
domestic  points of presence in the San  Francisco Bay Area,  Washington,  D.C.,
Chicago,  New York, Phoenix,  Reno, Atlanta,  Houston,  Los Angeles,  Dallas and
Miami/Ft.  Lauderdale, and international points of presence in Monterey, Puebla,
Mexico City and Guadalajara. In addition, Inter-Tel.net has alliances with other
third party domestic and  international IP long distance  providers to originate

                                       15
<PAGE>
and  terminate  calls.  If the domestic or  international  market for IP network
products fails to develop or develops more slowly than we  anticipate,  or if we
experience   difficulty  in  the  integration  of  the  TMSI   technology,   our
Inter-Tel.net  network  could  become  financially  burdensome  to  maintain  or
obsolete, which could harm our business.

In  addition,  we  are  dependent  on  third-party  or  affiliate  suppliers  of
telecommunications and Internet network transmission services for implementation
of  Inter-Tel.net,  and we currently do not have long-term  contracts with these
suppliers.  The successful expansion of Inter-Tel.net  depends on our ability to
obtain services from these suppliers.  Some of these suppliers are or may become
our competitors and have not agreed to restrict competition against us. If these
suppliers raise rates, change pricing structures,  experience power or bandwidth
outages,  or suffer delays in provision of local  circuits,  our  operations and
business  may  be  harmed.  We  cannot  assure  you  that  there  will  not be a
significant  disruption of service  provided by these  suppliers,  now or in the
future,  that would harm our  ability to  provide  undisrupted  services  to our
customers.  We also cannot assure you that  products  developed by our suppliers
will not  suffer  from  speed  and  scalability  problems  that  could  harm our
business.

Moreover,  although we have devoted and intend to continue devoting  substantial
resources to improving the quality of telephone  conversations  using Cirilium's
Inter-Tel  Vocal'Net,  Inter-Tel  InterPrise  products,  and  the  Inter-Tel.net
network,  we cannot  assure you that we will be able to  eliminate or reduce the
problems of voice communications over the Inter-Tel.net  network, such as delays
in the speech transmission,  loss of voice packets and poor sound quality. If we
fail to improve the sound quality and other limitations of voice  communications
over the  Inter-Tel.net  network and to offer such improvements to our customers
on a  cost-effective  basis,  the  Inter-Tel.net  network  could fail to achieve
market  acceptance and our business,  financial  condition and operating results
would suffer.

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

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

     *    PABX and core  systems  providers  such as  Lucent,  Nortel,  Comdial,
          Iwatsu, Mitel, NEC, Nitsuko, Panasonic, Siemens and Toshiba;
     *    large data routing companies such as Cisco Systems and 3Com;
     *    voice  processing  applications  providers such as AVT,  Active Voice,
          Centigram and Lucent;
     *    long distance  services  providers such as AT&T, MCI WorldCom,  Sprint
          and Qwest Communications;
     *    IP telephony  product and service  providers such as Clarent,  Lucent,
          NetSpeak,  Nortel, VocalTec, Nokia, ITXC,  deltathree.com,  Net2Phone,
          Cirilium and others;
     *    our current vendors, such as Cisco Systems, Nortel, 3Com, Motorola and
          MICOM;
     *    large computer corporations such as Microsoft and IBM; and
     *    regional  Bell  operating   companies,   or  RBOCs,  cable  television
          companies  and  satellite  and  other   wireless   broadband   service
          providers.

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

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

     *    develop and expand their product and service offerings more quickly;
     *    adapt to new or emerging  technologies  and  changing  customer  needs
          faster;

                                       16
<PAGE>
     *    take advantage of acquisitions and other opportunities more readily;
     *    negotiate more favorable licensing agreements with vendors;
     *    devote greater  resources to the marketing and sale of their products;
          and
     *    address customers' service-related issues better.

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

ANY BUSINESS ACQUISITIONS MAY DISRUPT OUR BUSINESS,  DILUTE SHAREHOLDER VALUE OR
DISTRACT MANAGEMENT ATTENTION.

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

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

In particular,  in January 2000, we acquired  certain assets and  liabilities of
Executone  Information  Systems.  We may fail to  address  adequately  the risks
described  above relating to our Executone  acquisition,  and this failure could
harm our  operating  results.  In this regard,  our gross profit for the quarter
ended March 31, 2000 was  negatively  affected by  Executone  operations,  which
generated   significant   operating   losses.   These  losses  were  principally
attributable  to  significant  margin erosion in  Executone's  system sales.  In
addition, 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.

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

We  currently  obtain  certain  key  components  for our  digital  communication
platforms,   including  certain  microprocessors,   integrated  circuits,  power
supplies,  voice  processing  interface  cards and IP  telephony  cards,  from a
limited  number of suppliers  and  manufacturers.  Our reliance on these limited
suppliers and contract  manufacturers  involves certain risks and uncertainties,
including  the  possibility  of a shortage  or  delivery  delay for  certain key
components,  although we believe that  alternate  sources are available for most
key  components.  We currently  manufacture our products  through  manufacturers
located in the United States,  the Philippines,  the People's  Republic of China
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 currently manufactures a significant portion
of our products at Varian's  Tempe,  Arizona and Poway,  California  facilities,
including substantially all of the printed circuit boards used in the AXXESS and
Inter-Tel Axxent digital communication platforms as well as substantially all of
the  Executone  Computer  Telephony  products.  Although  we  set  manufacturing
specifications  and  conditions  for  our  products,  and  all of  our  contract

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manufacturers  must meet our requirements for manufacturing  process and quality
assurance before we enter into  manufacturing  agreements,  we have occasionally
experienced  delays in the supply of components  and finished  goods.  We cannot
assure you that we will not experience similar delays in the future.

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

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

A  substantial  portion  of our  net  sales  is  made  through  our  network  of
independent dealers. We face intense competition from other telephone system and
voice processing system  manufacturers for these dealers'  business,  as most of
our dealers carry products that compete with our products.  We cannot assure you
that any of our dealers will not promote the products of our  competitors to our
detriment.  The loss of any  significant  dealer or group of dealers,  including
those who distribute our recently acquired Executone  products,  or any event or
condition  harming  our  dealer  network,  could  harm our  business,  financial
condition and operating results.

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

We depend on the  continued  service  of, and our ability to attract and retain,
qualified technical,  marketing,  sales and managerial  personnel,  many of whom
would be difficult to replace.  Competition for qualified  personnel is intense,
and we have had  difficulty  hiring  employees in the timeframe  that we desire,
particularly skilled engineers.  Our loss of any key personnel or our failure to
effectively  recruit  additional key personnel could make it difficult for us to
manage  our  business,  make  timely  product  introductions  and meet other key
objectives and therefore harm our business. We cannot assure you that we will be
able to continue  attracting and retaining the qualified personnel necessary for
the  development  of our  business.  Moreover,  the growth in our  business  has
placed,  and is  expected  to continue  to place,  a  significant  strain on our
personnel,  management  and other  resources.  Our  ability to manage any future
growth effectively will require us to successfully attract,  train, motivate and
manage new employees, to integrate new employees into our overall operations and
to continue to improve our  operational,  financial and  management  information
systems.

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 you that the increase in
regulations will not harm our business.  Our current contracts for the resale of
services through long distance carriers include  multi-year periods during which
we have minimum use  requirements  and/or  costs.  The market for long  distance
services is experiencing,  and is expected to continue experiencing  significant
price  competition,  and this may cause a decrease in end-user  rates. We cannot
assure 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 to

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<PAGE>
provide  telecommunications  services and billing information to us on favorable
terms,  our ability to expand our own long distance and network services will be
harmed.

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

In the past 24 months,  we  introduced  AXXESS  networking  systems and software
which are typically sold to larger  customers at a higher average selling price.
Our AXXESS networking  products have a relatively high sales price per unit, and
often represent a significant and strategic decision by an enterprise  regarding
our  communications  infrastructure.  Accordingly,  the purchase of our products
typically  involves   significant   internal  procedures   associated  with  the
evaluation,  testing,  implementation  and acceptance of new technologies.  This
evaluation  process  frequently  results in a lengthy sales  process,  typically
ranging from three months to more than nine months, and subjects the sales cycle
associated  with the purchase of our products to a number of significant  risks,
including budgetary  constraints and internal acceptance reviews.  The length of
our sales cycle also may vary substantially from customer to customer. While our
customers are  evaluating  our products and before  placing an order with us, we
may incur  substantial  sales and  marketing  expenses  and  expend  significant
management  effort.  Consequently,  if sales forecasted from a specific customer
for a particular quarter are not realized in that quarter, our operating results
could be materially adversely affected.

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

     *    volume and timing of orders received during the quarter;
     *    the mix of products sold;
     *    the mix of distribution channels;
     *    general economic conditions;
     *    patterns of capital spending by customers;
     *    the timing of new  product  announcements  and  releases by us and our
          competitors;
     *    the  operating  results  of  Cirilium,  which are  largely  beyond our
          ability to control;
     *    pricing pressures, the cost and effect of acquisitions,  in particular
          the Executone acquisition; and
     *    the  availability  and  cost  of  products  and  components  from  our
          suppliers.

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

Our expense  levels are based in part on  expectations  of future  sales and, if
sales  levels  do not meet  expectations,  operating  results  could be  harmed.
Because sales of digital  communication  platforms  through our dealers  produce
lower gross margins than sales through our direct sales organization,  operating
results  have  varied,  and will  continue  to vary  based upon the mix of sales
through  direct and  indirect  channels.  Although  to date we have been able to
resell the rental streams from leases under our Totalease program profitably and
on a substantially  current basis, the timing and profitability of lease resales
from  quarter to quarter  could impact  operating  results,  particularly  in an
environment of fluctuating interest rates. Long distance sales, which have lower
gross margins than our core  business,  have grown in recent periods at a faster
rate than our overall net sales.  As a result,  gross margins could be harmed if
long  distance  calling  services  continue to increase as a  percentage  of net
sales.  In  addition,  we  experience  seasonal  fluctuations  in our  operating
results,  as net sales for the first and third quarters are frequently less than
those experienced in the fourth and second quarters,  respectively.  As a result
of these and other factors, we have historically experienced, and could continue
to experience in the future,  fluctuations  in sales and operating  results on a
quarterly  basis.  See  "Management's   Discussion  and  Analysis  of  Financial
Condition and Results of Operations."

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

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

In  addition,   stock  prices  of  technology  companies  in  general,  and  for
Internet-based  voice and data communications  companies of technology stocks in
particular,  have experienced  extreme price  fluctuations in recent years which
have often been unrelated to the operating performance of affected companies. We
cannot assure 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.

YEAR 2000 COMPLICATIONS MAY DISRUPT OUR OPERATIONS AND HARM OUR BUSINESS.

The date fields coded in many software  products and computer systems need to be
able to distinguish  21st century dates from the 20th century  dates,  including
leap year calculations.  The failure to be able to accurately  distinguish these
dates  is  commonly  known  as the  year  2000  problem.  While  we have  yet to
experience any material year 2000 problems,  the computer  software programs and
operating  systems used in our internal  operations,  including  our  financial,
product  development,   order  management  and  manufacturing   systems,   could
experience errors or interruptions due to the year 2000 problem. In addition, it
is possible that our  suppliers'  and service  providers'  failure to adequately
address the year 2000 problem could have an adverse effect on their  operations,
which, in turn, could have an adverse impact on us.

OUR CHAIRMAN OF THE BOARD OF DIRECTORS,  CEO AND PRESIDENT WILL CONTROL 20.6% OF
OUR  COMMON  STOCK  AND BE ABLE TO  SIGNIFICANTLY  INFLUENCE  MATTERS  REQUIRING
SHAREHOLDER APPROVAL

As of  December  31,  1999,  Steven G.  Mihaylo,  our  Chairman  of the Board of
Directors,   Chief   Executive   Officer  and   President   beneficially   owned
approximately  20.6% of the outstanding shares of the Common Stock. As a result,
he has the ability to exercise significant  influence over all matters requiring
shareholder approval. In addition, the concentration of ownership could have the
effect of delaying or preventing a change in control of us.

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

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<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS--NOT APPLICABLE

ITEM 2. CHANGES IN SECURITIES--NOT APPLICABLE

ITEM 3. DEFAULTS ON SENIOR SECURITIES--NOT APPLICABLE

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS--NOT APPLICABLE

ITEM 5. OTHER INFORMATION

     Pursuant to Rule 14a-4(c)(1) under the Securities  Exchange Act of 1934, in
     connection  with  the  Company's  annual  meeting  of  shareholders,  if  a
     stockholder  of the  Company  fails to notify the  Company 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 stockholders,  without any discussion of the matter in the proxy
     statement. Since the Company mailed its proxy statement for the 2000 annual
     meeting of  stockholders  on May 3, 2000,  the  deadline for receipt of any
     such  stockholder  proposal for the 2001 annual meeting of  stockholders is
     March 9, 2001.

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

     Exhibits: Exhibit 27: Financial Data Schedule

     Reports on Form 8-K:

     During the quarter  ended March 31,  2000 the Company  filed the  following
current reports on Form 8-K:

     1. On January 14,  2000,  effective  on the report date of January 1, 2000,
the  Company  filed Form 8-K in  connection  with  acquisition  of the  computer
telephony assets of Executone Information Systems, Inc.  ("Executone") for $44.3
million in cash plus the assumption of certain liabilities,  subject to purchase
price adjustments as of the closing date.

                                   SIGNATURES

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


                                        INTER-TEL, INCORPORATED


May 15, 2000                            /s/ Steven G. Mihaylo
                                        ----------------------------------------
                                        Steven G. Mihaylo
                                        Chairman of the Board, Chief Executive
                                        Officer and President


May 15, 2000                            /s/ Kurt R. Kneip
                                        ----------------------------------------
                                        Kurt R. Kneip
                                        Vice President and
                                        Chief Financial Officer

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