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, 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 March 31, 2003
     --------------                             --------------------------------

Common Stock, no par value                                 24,926,167


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

                                                                            PAGE
PART I.  FINANCIAL INFORMATION

 Item 1. Financial Statements (unaudited)

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

         Condensed consolidated statements of income--three
         months ended March 31, 2003 and March 31, 2002                        4

         Condensed consolidated statements of cash flows--three months
         ended March 31, 2003 and March 31, 2002                               5

         Notes to condensed consolidated financial
         statements--March 31, 2003                                            6

 Item 2. Management's Discussion and Analysis of Financial                    13
         Condition and Results of Operations

 Item 3. Quantitative and Qualitative Disclosures About Market Risk           31

 Item 4. Controls and Procedures                                              31

PART II. OTHER INFORMATION

 Item 1. Legal Proceedings                                                    32

 Item 2. Changes in Securities and Use of Proceeds                            32

 Item 3. Defaults on Senior Securities                                        32

 Item 4. Submission of Matters to a Vote of Security Holders                  32

 Item 5. Other Information                                                    33

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

         SIGNATURES                                                           34

         MANAGEMENT CERTIFICATIONS                                            35

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

<TABLE>
<CAPTION>
                                                                             March 31,   December 31,
(in thousands, except share amounts)                                           2003         2002
                                                                            (Unaudited)   (Note A)
                                                                             ---------    ---------
<S>                                                                          <C>          <C>
ASSETS
CURRENT ASSETS
Cash and equivalents                                                         $  76,226    $  84,923
Short-term investments                                                          55,372       40,916
                                                                             ---------    ---------
Total cash and short-term investments                                          131,598      125,839

Accounts receivable, net of allowances of $11,823 in 2003 and
    $12,159 in 2002                                                             37,681       42,566
Inventories, net of allowances of $9,273 in 2003 and
    $10,558 in 2002                                                             11,405       11,329
Net investment in sales-leases, net of allowances of $511 in 2003 and
    $516 in 2002                                                                13,884       13,344
Income taxes receivable                                                            700        2,604
Deferred income taxes                                                            3,184        2,377
Prepaid expenses and other assets                                                7,942        6,705
                                                                             ---------    ---------
TOTAL CURRENT ASSETS                                                           206,394      204,764

PROPERTY, PLANT & EQUIPMENT                                                     23,734       24,795
GOODWILL                                                                        17,646       17,646
PURCHASED INTANGIBLE ASSETS                                                      6,933        7,416
NET INVESTMENT IN SALES-LEASES, net of allowances of
    $1,486 in 2003 and $1,411 in 2002                                           25,585       24,692
OTHER ASSETS                                                                       165        2,749
                                                                             ---------    ---------
                                                                             $ 280,457    $ 282,062
                                                                             ---------    ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable                                                             $  22,653    $  23,089
Other current liabilities                                                       42,963       50,051
                                                                             ---------    ---------
TOTAL CURRENT LIABILITIES                                                       65,616       73,140

DEFERRED TAX LIABILITY                                                          18,059       16,320
LEASE RECOURSE LIABILITY                                                        11,219       11,125
RESTRUCTURING RESERVE                                                              799        1,049
OTHER LIABILITIES                                                                6,589        6,525

SHAREHOLDERS' EQUITY
Common stock, no par value-authorized 100,000,000 shares;
    issued-27,161,823 shares; outstanding-24,926,167 at
    March 31, 2003 and 24,908,983 shares at
    December 31, 2002                                                          111,679      111,639
Less: Shareholder loans                                                           (312)        (338)
Retained earnings                                                               93,574       89,643
Accumulated other comprehensive income                                             266          195
                                                                             ---------    ---------
                                                                               205,207      201,139
Less: Treasury stock at cost - 2,235,656 shares in 2003
    and 2,252,840 shares in 2002                                               (27,032)     (27,236)
                                                                             ---------    ---------
TOTAL SHAREHOLDERS' EQUITY                                                     178,175      173,903
                                                                             ---------    ---------
                                                                             $ 280,457    $ 282,062
                                                                             ---------    ---------
</TABLE>

See accompanying notes.

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

<TABLE>
<CAPTION>
                                                               Three Months Ended March 31,
(In thousands, except                                          ----------------------------
per share amounts)                                                  2003        2002
                                                                  --------    --------
<S>                                                               <C>         <C>
NET SALES                                                         $ 84,169    $ 90,070
   Cost of sales                                                    40,095      45,016
                                                                  --------    --------
GROSS PROFIT                                                        44,074      45,054

   Research & development                                            5,234       4,317
   Selling, general, and administrative                             31,246      30,657
   Amortization of purchased intangible assets                         428         257
                                                                  --------    --------
                                                                    36,908      35,231
                                                                  --------    --------

OPERATING INCOME                                                     7,166       9,823

   Litigation settlement (net of costs except for taxes)                --      15,302
   Write-down of investment in Inter-Tel.NET/Vianet                     --        (600)
   Interest and other income                                           443         439
   Foreign currency transaction losses                                 (40)        (84)
   Interest expense                                                    (32)        (34)
                                                                  --------    --------

INCOME BEFORE INCOME TAXES                                           7,537      24,846
   Income tax provision                                              2,865       9,451
                                                                  --------    --------

NET INCOME                                                        $  4,672    $ 15,395
                                                                  --------    --------
NET INCOME PER SHARE
   Basic                                                          $   0.19    $   0.64
   Diluted                                                        $   0.18    $   0.60
                                                                  --------    --------

DIVIDENDS PER SHARE                                               $   0.03    $   0.02
                                                                  --------    --------

Weighted average basic common shares                                24,920      24,179

Weighted average diluted common shares                              26,039      25,550
                                                                  --------    --------
</TABLE>

See accompanying notes.

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

<TABLE>
<CAPTION>
                                                                 Three Months Ended March 31,
                                                                 ----------------------------
(In thousands)                                                        2003        2002
                                                                    --------    --------
<S>                                                                 <C>         <C>
OPERATING ACTIVITIES
Net income                                                          $  4,672    $ 15,395
Adjustments to reconcile net income to net
   cash provided by operating activities:
     Depreciation of fixed assets                                      1,798       1,879
     Amortization of patents included in R&D expenses                     55          55
     Amortization of goodwill and purchased intangible assets            428         257
     Provision for losses on receivables                                 933         856
     Provision for losses on leases                                    1,120       1,606
     Provision for inventory valuation                                    80         149
     Decrease in other liabilities                                    (1,031)       (871)
     Loss on sale of property and equipment                               37          16
     Deferred income taxes                                               932         148
     Effect of exchange rate changes                                      70         280
     Changes in operating assets and liabilities                      (2,033)     12,777
                                                                    --------    --------
NET CASH PROVIDED BY
     OPERATING ACTIVITIES                                              7,061      32,547
                                                                    --------    --------
INVESTING ACTIVITIES
     Purchases of short-term investments                             (33,153)     (7,000)
     Maturities and sales of short-term investments                   18,698       1,000
     Additions to property and equipment and equipment held
       under lease                                                      (837)     (1,250)
     Proceeds from disposal of property and equipment                     63          66
     Cash used in acquisitions                                            --      (8,000)
                                                                    --------    --------
NET CASH USED IN INVESTING ACTIVITIES                                (15,229)    (15,184)
                                                                    --------    --------
FINANCING ACTIVITIES
     Cash dividends paid                                                (747)       (449)
     Treasury stock purchases                                             (9)         --
     Payments on term debt                                               (13)       (268)
     Proceeds from exercise of stock options, including
       shareholder loan repayments                                       240         296
                                                                    --------    --------
NET CASH USED IN FINANCING ACTIVITIES                                   (529)       (421)
                                                                    --------    --------
INCREASE (DECREASE) IN CASH
     AND EQUIVALENTS                                                  (8,697)     16,942
                                                                    --------    --------
CASH AND EQUIVALENTS AT
     BEGINNING OF PERIOD                                              84,923      58,795
                                                                    --------    --------

CASH AND EQUIVALENTS AT END OF PERIOD                               $ 76,226    $ 75,737
                                                                    --------    --------
</TABLE>

See accompanying notes.

                                       5
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 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 months ending March 31, 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 March 31, 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>
                                                        Three Months Ended March 31,
                                                        ----------------------------
(in thousands, except per share data)                         2003        2002
                                                             -------    -------
<S>                                                          <C>        <C>
Net income, as reported                                      $ 4,672    $15,395

Deduct: total stock-based compensation expense determined
  under fair value based method for all awards, net of tax      (711)      (834)
                                                             -------    -------

Pro forma net income                                         $ 3,961    $14,561
                                                             -------    -------
Earnings per share of common stock
Basic - as reported                                          $  0.19    $  0.64
Basic - pro forma                                            $  0.16    $  0.60
Diluted - as reported                                        $  0.18    $  0.60
Diluted - pro forma                                          $  0.15    $  0.57
</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,  respectively:  risk free  interest  rates of 2.73% for 2003 and
2002; dividend yields of 1.2% for 2003 and 0.75% for 2002; volatility factors of
the expected  market price of our stock averaged .59 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
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.

                                       7
<PAGE>
Divisions of the United  States  Department of Justice are  investigating  other
companies' and Inter-Tel's  participation in a federally-funded "E-Rate program"
to connect schools and libraries to the Internet. The Justice Department has not
provided   Inter-Tel   with  a   description   of  the  evidence  on  which  the
investigations are based.  Inter-Tel is presently unable to predict or determine
the final outcome of, or to estimate the  potential  range of loss (if any) with
respect to, the  investigations.  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 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.  Nevertheless,  the early nature of the investigations makes
it difficult to determine  whether the likelihood of a material  adverse outcome
is unlikely.

NOTE B--EARNINGS PER SHARE

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

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

<TABLE>
<CAPTION>
                                                              Three Months Ended March 31,
                                                              ----------------------------
(In thousands, except per share amounts)                            2003       2002
                                                                   -------   -------
<S>                                                                <C>       <C>
Numerator:
     Net Income                                                    $ 4,672   $15,395
                                                                   -------   -------
Denominator:
     Denominator for basic earnings per
     share - weighted average shares                                24,920    24,179
Effect of dilutive securities:
Employee and director stock options                                  1,119     1,371
                                                                   -------   -------
Denominator for diluted earnings per share - adjusted
   weighted average shares and assumed conversions                  26,039    25,550

Basic earnings per share                                           $  0.19   $  0.64
                                                                   -------   -------
Diluted earnings per share                                         $  0.18   $  0.60
                                                                   -------   -------
</TABLE>

At March 31,  2003 and 2002,  options to purchase  505,350  and 575,600  shares,
respectively,  of Inter-Tel  stock were excluded from the calculation of diluted
net earnings per share  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.

                                       8
<PAGE>
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  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  March 31,  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 March 10, 2003, the first of the milestones was
achieved and $100,000 was paid to the Swan  shareholders.  Payments  relating to
the  achievement of performance  milestones  will be charged to expense,  in the
period  earned,  if  applicable.  The Company  recorded  amortizable  intangible
technology  assets  totaling $3.4 million in connection  with this  acquisition.
These  technology  assets are being  amortized over 5 years.  During the quarter
ended March 31, 2003, the amortization of purchased  intangible assets from Swan
was $172,000.

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  plus  certain  collateral  assets,  in exchange  for the release of the
remaining  collateral  and as payment  of the loan.  Inter-Tel  also  retained a

                                       9
<PAGE>
collateral interest in a Vianet  shareholder's  variable forward option contract
that matures in July 2003 for an amount up to $250,000.  We have not recorded an
asset for this right as the amount is not  guaranteed  or  reasonably  estimable
based on the  fluctuations  of future stock prices.  The value  received in this
transaction was equivalent to our remaining  investment value, less accruals for
potential obligations to the vendor discussed above.

Inter-Tel  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 March 31, 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 March 31, 2003.

<TABLE>
<CAPTION>
                                                                       ACTIVITY                   RESERVE
                                            CASH/      RESTRUCTURING   THROUGH        2003        BALANCE
            DESCRIPTION                   NON-CASH        CHARGE         2002       ACTIVITY     AT 3/31/03
            -----------                   --------        ------         ----       --------     ----------
<S>                                       <C>          <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          223        (1,790)
  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          220          (611)
  Fixed assets                            Non-Cash         (3,151)        2,995           --          (156)
  Net intangible assets                   Non-Cash        (29,184)       29,184           --            --

                                                         --------      --------     --------      --------
TOTAL                                                    $(50,916)     $ 47,913     $    443      $ (2,560)
                                                         --------      --------     --------      --------
</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

                                       10
<PAGE>
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 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 will account for the
remaining  10%  investment  in Vianet  (formerly  Comm-Services)  using the cost
method of accounting.  Inter-Tel  assessed the value of this investment at March
31, 2002 and  wrote-down  this  investment  by $600,000  to  approximately  $3.1
million.

For the  quarters  ended  March 31,  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 MARCH 31, 2003
                                      -----------------------------------------------------------------------
                                                                                        RESALE OF
                                                                                        LOCAL AND
                                                                SUBTOTAL                  LONG
(In thousands, except per share       PRINCIPAL    LITIGATION  PRINCIPAL  INTER-TEL.NET  DISTANCE
amounts)                               SEGMENT     SETTLEMENT   SEGMENT      /VIANET     SERVICES     TOTAL
                                      ---------    ----------  ---------    ---------   ---------   ---------
<S>                                   <C>          <C>         <C>          <C>         <C>         <C>
Net sales                             $  75,675    $      --   $  75,675    $      --   $   8,494   $  84,169
Gross profit                             41,560           --      41,560           --       2,514      44,074
Operating income                          5,980           --       5,980           --       1,186       7,166
Interest and other income                   409           --         409           --          34         443
Foreign currency transaction losses         (40)          --         (40)          --          --         (40)
Interest expense                            (32)          --         (32)          --          --         (32)
Net income                            $   3,916    $      --   $   3,916    $      --   $     756   $   4,672
Net income per diluted share (1)      $    0.15    $      --   $    0.15    $      --   $    0.03   $    0.18
Weighted average diluted shares (1)      26,039       26,039      26,039       26,039      26,039      26,039
Total assets                          $ 262,714    $      --   $ 262,714    $      --   $  17,743   $ 280,457
Depreciation and amortization             2,269           --       2,269           --          12       2,281
</TABLE>

                                       11
<PAGE>
<TABLE>
<CAPTION>
                                                         THREE MONTHS ENDED MARCH 31, 2002
                                      -----------------------------------------------------------------------
                                                                                        RESALE OF
                                                                                        LOCAL AND
                                                                SUBTOTAL                  LONG
(In thousands, except per share       PRINCIPAL    LITIGATION  PRINCIPAL  INTER-TEL.NET  DISTANCE
amounts)                               SEGMENT     SETTLEMENT   SEGMENT      /VIANET     SERVICES     TOTAL
                                      ---------    ----------  ---------    ---------   ---------   ---------
<S>                                   <C>          <C>         <C>          <C>         <C>         <C>
Net sales                             $  83,280    $      --   $  83,280    $      --    $   6,790   $  90,070
Gross profit                             43,597           --      43,597           --        1,457      45,054
Operating income                          9,382           --       9,382           --          441       9,823
Interest and other income                   410       15,302      15,712         (600)          29      15,141
Foreign currency transaction losses         (84)          --         (84)          --           --         (84)
Interest expense                            (34)          --         (34)          --           --         (34)
Net income (loss)                     $   6,112    $   9,365   $  15,477    $    (378)   $     296   $  15,395
Net income (loss) per diluted
   share (1)                          $    0.24    $    0.37   $    0.61    $   (0.02)   $    0.01   $    0.60
Weighted average diluted shares (1)      25,550       25,550      25,550       24,179       25,550      25,550
Total assets                          $ 239,666    $      --   $ 239,666    $      --    $  12,003   $ 251,669
Depreciation and amortization             2,161           --       2,161           --           30       2,191
</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 $81.7 million or 97.1% of total revenues,
and $87.4  million or 97.1% of total  revenues for the quarters  ended March 31,
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  quarters  of 2003 and 2002,  revenues  from  customers
located  internationally   accounted  for  2.9%  and  2.9%  of  total  revenues,
respectively.

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>
                                                                               March 31,  December 31,
                                                                                 2003         2002
                                                                               --------     --------
<S>                                                                            <C>          <C>
Lease balances included in consolidated accounts receivable, net of
allowances of $2,363 in 2003 and $2,562 in 2002                                $  6,793     $  6,470

Net investment in Sales-Leases:

    Current portion, net of allowances of $511 in 2003 and $516 in 2002          13,884       13,344

    Long-term portion, includes residual amounts of $372 in 2003 and $518
       in 2002, net of allowances of $1,486 in 2003 and $1,411 in 2002           25,585       24,692
                                                                               --------     --------
Total investment in Sales-Leases, net of allowances of $4,360 in 2003 and
    $4,489 in 2002                                                               46,262       44,506

Sold rental payments remaining unbilled (subject to limited recourse
    provisions), net of allowances of $11,219 in 2003 and $11,125 in 2002       193,170      194,684
                                                                               --------     --------
Total balance of sales-leases and sold rental payments remaining unbilled,
    net of allowances                                                          $239,432     $239,190
                                                                               --------     --------

Total allowances for entire lease portfolio (including limited recourse
    liabilities)                                                               $ 15,579     $ 15,614
                                                                               --------     --------
</TABLE>

                                       12
<PAGE>
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  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>
                                                       Quarter Ended        Year Ended
  (In thousands)                                       March 31, 2003    December 31, 2002
                                                       --------------    -----------------
<S>                                                    <C>               <C>
  Sales of rental payments                               $  20,076            $  83,141
  Sold payments remaining unbilled at end of period      $ 204,389            $ 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.  Inter-Tel is compensated for
administration and servicing of rental payments sold.

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  REGARDING 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."

                                       13
<PAGE>
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 March 31, 2003, we had 51direct 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 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,  including  adding new  applications,  incorporating IP
convergence  applications  and  IP  telephones,   developing  Unified  Messaging
Software   applications,   developing  speech   recognition  and  text-to-speech
applications,  developing  and enhancing  call center  applications,  developing
Unified    Communications    Software    applications,    and    expanding   the
telecommunications  networking  package to include  networking over IP and frame
relay  networks.  Inter-Tel's  current  efforts  are focused on  developing  and
enhancing the convergence  applications  for our AXXESS and ECLIPSE(2)  systems,
enhancing  our  server-PBX  offering,   enhancing  our  unified   communications
applications,  developing  new IP endpoint  technology,  and  enhancing our call
center applications.

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

                                       14
<PAGE>
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 March 31,
                                                          ----------------------------
                                                                2003      2002
                                                               ------    ------
<S>                                                            <C>       <C>
Net sales                                                       100.0%    100.0%
Cost of sales                                                    47.6      50.0
                                                               ------    ------
Gross Profit                                                     52.4      50.0
                                                               ------    ------
Research and development                                          6.2       4.8
Selling, general and administrative                              37.1      34.0
Amortization                                                      0.5       0.3
                                                               ------    ------
Operating income                                                  8.5      10.9

Litigation settlement (net of costs except for taxes)              --      17.0
Interest and other income                                         0.5       0.5
Write-down of investment in Inter-Tel.NET/Vianet                  0.0      (0.7)
Foreign currency transaction losses                               0.0      (0.1)
Interest expense                                                 (0.0)     (0.0)
                                                               ------    ------
Income before income taxes                                        9.0      27.6
Income Taxes                                                      3.4      10.5
                                                               ------    ------
Net Income                                                        5.6%     17.1%
                                                               ======    ======
</TABLE>

     NET SALES.  Net sales  decreased 6.6% to $84.2 million in the first quarter
of 2003 from $90.1 million in the first quarter of 2002, representing a decrease
of $5.9  million.  Sales from our direct sales  offices  decreased  13.4% in the
first quarter of 2003 compared to the first quarter of 2002. Sales to our dealer
network  decreased  by 3.4% in the first  quarter of 2003  compared to the first
quarter of 2002. Sales from our government and national  accounts  division were
relatively flat, down $58,000 or 1.1%. Sales from our DataNet division decreased
33.0% and international revenues decreased by 13.5% in the first quarter of 2003
compared to the first quarter of 2002.  These  decreases  were offset in part by
increases  of $1.9  million in sales from our long  distance  resale and network
services  divisions and $0.5 million in sales from lease  financing in the first
quarter of 2003 compared to the first quarter of 2002.

     The  decrease  in net sales for the first  quarter of 2003  compared to the
first quarter of 2002 from our direct sales offices, dealer channel,  government
and  national  accounts  division and  international  operations  was  primarily
attributable to weak economic conditions,  uncertainties associated with the war
in Iraq  and  threatened  terrorist  attacks,  the  impact  of  adverse  weather
conditions,  increased  competitive  pressures and delayed  buying  decisions by
customers.  The decreases in net sales were  primarily a result of lower volumes
of systems sold. In some instances, prices of various telecommunications systems
decreased,  and  discounts  or other  highly  competitive  promotions  that were
offered to customers to generate  sales resulted in lower revenues from both our
direct and  indirect  channels.  Sales of  communications  systems  were heavily
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 first quarter of 2003; however, recurring revenues
to existing customers increased as a percentage of total sales.

     Sales from long  distance  and  network  services  represented  our largest
percentage sales increases in the first quarter of 2003 as compared to the first
quarter of 2002. Sales increased in NetSolutions, our long distance division, by
25.1%,  despite downward price 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
increased  14.1% in the first  quarter of 2003  compared to the first quarter of
2002, on higher volume of sales and  commissions  on local and network  services
such as T-1 access,  frame relay and other voice and data circuit services.  See
Note D of Notes to Condensed  Consolidated  Financial  Statements for additional
segment reporting information.

     GROSS PROFIT.  Gross profit for the first quarter of 2003 decreased 2.2% to
$44.1 million, or 52.4% of net sales, from $45.1 million, or 50.0% of net sales,
in the first quarter of 2002. The decrease in gross profit dollars resulted from
lower consolidated  sales.  However,  gross profit, as a percentage of sales (or
gross margin), increased as a result of several different factors. These factors
included  having  a  higher  proportion  of  recurring  revenues  from  existing
customers (including increased maintenance and services revenues as a percentage

                                       15
<PAGE>
of total  sales),  higher  software  content in our products,  cost  containment
efforts,   product   design   improvements,   efficiencies   achieved  with  our
manufacturing  vendors and a more favorable  sales channel mix. 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  first  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 first  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 first  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
first quarter of 2003 as a result of this recurring revenue percentage increase.

     Sales from NetSolutions  increased by 25.1%, or $1.7 million,  in the first
quarter of 2003 as compared to the first quarter of 2002. Although gross margins
are generally lower in this division than our consolidated  margins, the margins
improved in the first  quarter of 2003  relative  to the first  quarter of 2002,
based in part on our ability to negotiate more favorable pricing with vendors on
higher resale volumes.  In addition,  sales from our network  services  division
increased  14.1% in the first  quarter of 2003  compared to the first 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
first  quarter of 2003;  therefore,  the  increase  in sales from this  division
improved 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.

     RESEARCH AND DEVELOPMENT.  Research and development  expenses for the first
quarter of 2003 increased 21.2% to $5.2 million, or 6.2% of net sales, from $4.3
million,  or 4.8% of net  sales,  for the first  quarter  of 2002.  Included  in
research  and  development  expenses  in both the first  quarter of 2003 and the
first  quarter  of 2002 is  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.  The increase is also  attributable,  to a
lesser extent,  to increased  research and development  spending  related to our
development of convergence  applications and new IP endpoint technology.  In the
first  quarter  of  2003,  research  and  development   expenses  were  directed
principally toward the continued development of the AXXESS and Eclipse2 software
and  systems  (including  versions  7.0 and 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 first quarter of 2003, selling,
general and administrative expenses,  excluding amortization,  increased 1.9% to
$31.2 million, or 37.1% of net sales, from $30.7 million, or 34.0% of net sales,
in the first quarter of 2002.  The increase in absolute  dollars was due in part
to higher costs associated with  depreciation,  insurance and professional fees.
Selling,  general and administrative  expenses increased, as a percentage of net
sales,  primarily as a result of lower  absorption of fixed costs.  In addition,
higher  relative  sales  through our long distance and network  services  agency
divisions led to high selling  expenses and  commission  costs relative to total
sales,  and we incurred higher relative  overall  compensation  costs. 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

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perform goodwill impairment tests on an annual basis and between annual tests in
certain circumstances.  As of March 31, 2003, no impairment of goodwill has been
recognized. There can be no assurance that future goodwill impairment tests will
not result in a charge to earnings.

     Amortization of purchased  intangible assets included in operating expenses
was  $428,000  in the first  quarter of 2003,  compared to $257,000 in the first
quarter of 2002. An additional  $55,000 of amortization was included in research
and development  expenses for the first quarter of 2003 and the first quarter of
2002. The increase in the  amortization of purchased  intangible  assets for the
first quarter 2003  compared to the same period last year was primarily  related
to  the  additional  amortization  from  recent  acquisitions.   For  additional
information  regarding  purchased  intangible  assets, see Note 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 $4.7 million in the first quarter of 2002, excluding income taxes,
for a net award of approximately $15.3 million.  The estimated net proceeds from
this  arbitration  settlement  were  approximately  $9.5 million after taxes, or
$0.37 per diluted share for the quarter ended March 31, 2002.

     INTEREST AND OTHER  INCOME.  Interest and other income in the first quarter
of 2003 and the first quarter of 2002 consisted primarily of interest income and
foreign  currency  transaction  losses,  with the  exception  of an  expense  of
$600,000   related   to   the   write-down   of   Inter-Tel's    investment   in
Inter-Tel.NET/Vianet  in the first  quarter of 2002.  Income from  interest  and
short-term  investments  in the first  quarter of 2003 was flat  compared to the
first  quarter of 2002  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 losses.  Interest expense in the
first quarter of 2003 was comparable to the first quarter of 2002.

     INCOME  TAXES.  Inter-Tel's  income tax rate for the first  quarter of 2003
remained  unchanged  at 38%  compared  to the first  quarter of 2002.  Inter-Tel
expects the full-year  2003 tax rate to be comparable to the tax rate  effective
for the first quarter of 2003.

     NET  INCOME.  Net  income for the first  quarter  of 2003 was $4.7  million
($0.18 per diluted  share),  compared to net income of $15.4  million  ($.60 per
diluted  share)  in the  first  quarter  of 2002.  The  decrease  was  primarily
attributable to the litigation  settlement award received in 2002. Excluding the
2002 litigation settlement, we reported net income of $6.0 million, or $0.24 per
diluted share in the first quarter of 2002.  The decrease in net income from the
first  quarter of 2003  compared  to the first  quarter of 2002,  excluding  the
litigation  settlement,  is the result of lower operating profits primarily from
the lower volume of total sales  achieved in the first  quarter of 2003 compared
to the first quarter of 2002 and other items described in further detail above.

INFLATION/CURRENCY FLUCTUATION

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

LIQUIDITY AND CAPITAL RESOURCES

     At  March  31,  2003,  we  had  $131.6   million  in  cash  and  short-term
investments,  which  represented an increase of approximately  $5.8 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, 2003.  Under the credit
facility,  we have the  option  to  borrow  at a prime  rate or  adjusted  LIBOR
interest  rate.  Historically,  we have used the credit  facility  primarily  to

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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  $7.1 million for the
three months ended March 31, 2003, compared to $32.5 million for the same period
in 2002. Cash provided by operating  activities in the first quarter of 2003 was
primarily  the result of cash  generated  from  operations,  including  non-cash
depreciation  and  amortization  charges.  Cash used in the change in  operating
assets and  liabilities in the first quarter of 2003 was $2.0 million,  compared
to cash  generated by the change in operating  assets and  liabilities  of $12.8
million in 2002. At March 31, 2003,  accounts  receivable  totaled $37.7 million
compared  to $42.6  million  at  December  31,  2002.  The $4.9  million in cash
generated by the decrease in accounts  receivable  was  substantially  offset by
decreases in accounts payable and other accrued expenses,  primarily  reflecting
payments on accrued  commissions,  bonuses,  401(k) matching  contributions  and
profit sharing in the first quarter from year-end accruals. In the first quarter
of 2003,  Inter-Tel  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 former guarantee
of vendor obligations.  In February 2002,  Inter-Tel received a gross cash award
of $20 million in  settlement  of a dispute  submitted  to binding  arbitration.
Costs  relating to  attorney's  fees,  expert  witnesses,  and  arbitration  and
additional  costs and  expenses,  including  $1.3  million in bonus  payments to
certain  employees  who  assisted in the  litigation  and  arbitration,  totaled
approximately  $4.7  million in the first  quarter of 2002,  resulting  in a net
award of $15.3  million  before  income  taxes.  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 $15.2 million for each of the
quarters  ended March 31, 2003 and March 31, 2002.  During the first  quarter of
2002,  net cash used in  acquisitions  totaled  approximately  $8.0  million and
capital expenditures totaled  approximately $1.3 million;  however, we closed no
acquisitions  during the first quarter of 2003. Net cash used in the purchase of
investments  during the three  months  ending  March 31, 2003 and March 31, 2002
were $14.5 million and $6.0 million,  respectively.  Approximately  $837,000 was
used to acquire additional property and equipment during the first quarter 2003.
We anticipate incurring additional capital expenditures during 2003, principally
relating to expenditures for equipment and management  information  systems used
in our operations.

     Net cash used in financing  activities totaled $529,000 in the three months
ended March 31, 2003, compared to $421,000 for the same period in 2002. Net cash
used for dividends totaled  approximately  $747,000 and $449,000,  respectively,
during the first  quarters of 2003 and 2002,  which was offset in each period by
cash provided by the exercise of stock options  totaling  $240,000 and $296,000.
During the first  quarter of 2003 and the first  quarter  of 2002,  we  reissued
treasury shares through stock option exercises and issuances. In the three month
period ending March 31, 2003 the proceeds  received from these reissued treasury
shares  were  approximately  the same as the cost  basis of the  treasury  stock
reissued,  recording a minimal impact on retained earnings.  However, during the
three month period  ending March 31, 2002,  the proceeds  received  totaled less
than the cost basis of the treasury stock reissued;  accordingly, the difference
was recorded as a reduction to retained earnings.

     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 $204.4 million and $205.8 million  remained  unbilled at March
31, 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  we to date have been able to resell the  rental  streams  from  leases
under the Total  Solution  program  profitably  and on a  substantially  current
basis,  the timing and  profitability of lease resales could impact our business
and operating  results,  particularly in an environment of fluctuating  interest
rates and economic uncertainty.  If we are required to repurchase rental streams
and realize  losses  thereon in amounts  exceeding our  reserves,  our operating
results will be adversely affected.

     We believe that our working  capital and credit  facilities,  together with
cash  generated  from  operations,  will be sufficient to develop and expand our
business  operations,   to  finance  acquisitions  of  additional  resellers  of

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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 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:

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

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

     Inter-Tel  adopted SFAS 142 effective  January 1, 2002.  Application of the
nonamortization  provisions  of SFAS 142  resulted in an increase in income from
continuing  operations  before  income taxes of $439,000  for the quarter  ended
March 31, 2003 and $439,000 for the quarter ended March 31, 2002.

     ALLOWANCE  FOR  DOUBTFUL  ACCOUNTS.  We maintain  allowances  for  doubtful
accounts for estimated  losses  resulting from the inability of our customers to
make required payments.  Additional reserves or allowances for doubtful accounts
are recorded for our sales-type  leases,  discussed above in  "Sales-Leases." We
establish and maintain  reserves against  estimated losses based upon historical
loss  experience,  past due accounts and specific account  analysis.  Management
reviews the level of the allowances for doubtful accounts on a regular basis and
adjusts the level of the allowances as needed.  At March 31, 2003, our allowance
for doubtful  accounts for accounts  receivable  were $11.8 million of our $49.5
million  in  gross  accounts  receivable.  If  the  financial  condition  of our
customers or channel partners were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required.

     INVENTORIES.  We value our inventories at lower of cost or market.  Cost is
determined by the first-in,  first-out (FIFO) method,  including material, labor
and factory overhead.  Significant  management judgment is required to determine
the  reserve  for  obsolete or excess  inventory.  Inventory  on hand may exceed
future demand either  because the product is outdated,  or obsolete,  or because
the amount on hand is more than can be used to meet  future  need.  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 March 31, 2003,  our  inventory  reserves were $9.3
million of our $20.7  million  gross  inventories.  If actual  customer  demand,
product  life-cycles,  changing  technologies  and  market  conditions  are less
favorable than those projected by management,  additional inventory  write-downs
may be required.

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

     Divisions  of the United  States  Department  of Justice are  investigating
other  companies' and Inter-Tel's  participation in a  federally-funded  "E-Rate
program"  to  connect  schools  and  libraries  to  the  Internet.  The  Justice
Department  has not provided  Inter-Tel  with a  description  of the evidence on
which the investigations are based.  Inter-Tel is presently unable to predict or
determine the final  outcome of, or to estimate the potential  range of loss (if
any) with respect to, the  investigations.  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 if  penalties,  damages or
other monetary  remedies are assessed against Inter-Tel in connection with these

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and other investigations, our business and operating results could be materially
and adversely  affected.  Nevertheless,  the early nature of the  investigations
makes it difficult to determine  whether the  likelihood  of a material  adverse
outcome is unlikely.

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:

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

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

     Our expense levels are based in part on  expectations  of future sales and,
if sales levels do not meet expectations, our operating results could be harmed.
In  addition,  because  sales of  business  communications  systems  through our
dealers  typically  produce  lower gross  margins than sales  through our direct
sales  organization,  operating  results have varied,  and will continue to vary
based upon the mix of sales through direct and indirect  channels.  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.
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.

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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 AND ECLIPSE2 SYSTEMS,  ENCORE PRODUCT, SPEECH RECOGNITION AND INTERACTIVE
VOICE RESPONSE PRODUCTS, AND RELATED COMPUTER-TELEPHONY PRODUCTS.

     During the past few years,  we have introduced  transparent  networking and
unified messaging capabilities on our AXXESS and ECLIPSE2 systems and introduced
our Encore product and InterPrise family of voice and data convergence products.
In 2002, we introduced Unified Communicator, a web-based, speech-recognition and
WAP software  application  for controlling and managing your calls and contacts;
Inter-Tel   Application   Platform,   a  highly   flexible   speech-recognition,
text-to-speech and CTI application  generation  platform;  enhanced  convergence
features on the AXXESS and ECLIPSE2 systems; and several other telephony-related
products. During the past 12 months, sales of our AXXESS business communications
systems and related  software have  comprised a  substantial  portion of our net
sales.  Our future success  depends,  in large part,  upon increased  commercial
acceptance and adoption of the Application  Platform,  the Unified  Communicator
and related computer-telephony products, the AXXESS and ECLIPSE2 systems, Encore
products, MGCP and SIP standards-based functionality, new speech recognition and
Interactive Voice Response products, as well as future upgrades and enhancements
to these  products and  networking  platforms.  We cannot  assure you that these
products or platforms will achieve commercial acceptance in the future.

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

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

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

                                       22
<PAGE>
THE COMPLEXITY OF OUR PRODUCTS COULD CAUSE DELAYS IN THE DEVELOPMENT AND RELEASE
OF NEW  PRODUCTS AND  SERVICES.  AS A RESULT,  CUSTOMER  DEMAND FOR OUR PRODUCTS
COULD DECLINE, WHICH COULD HARM OUR BUSINESS.

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

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

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

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

     In  particular,  in recent  years our  operating  results  were  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  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 nineteen (19)  telecommunication  and unified messaging products and
have also  applied to the U.S.  Patent  and  Trademark  Office  for eleven  (11)
additional  patents.  We  also  rely  on  copyright  and  trade  secret  law and
contractual  provisions  to protect our  intellectual  property.  Despite  these
precautions, third parties could copy or otherwise obtain and use our technology
without authorization, or develop similar technology independently.

                                       23
<PAGE>
     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
general to grow more  slowly,  and impair  market  acceptance  of our IP network
products in  particular,  until more  comprehensive  security  technologies  are
developed.

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

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

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

                                       24
<PAGE>
     *    large  computer  and  software  corporations  such as IBM,  Intel  and
          Microsoft; and
     *    regional  Bell  operating   companies,   or  RBOCs,  cable  television
          companies  and  satellite  and  other   wireless   broadband   service
          providers.

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

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

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

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

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

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

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

                                       25
<PAGE>
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.

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.

                                       26
<PAGE>
THE  INTRODUCTION  OF NEW PRODUCTS AND SERVICES HAS LENGTHENED OUR SALES CYCLES,
WHICH MAY RESULT IN SIGNIFICANT SALES AND MARKETING EXPENSES.

     In the past few years,  we introduced  the AXXESS and ECLIPSE2 ATM business
communications  system and our version  7.0 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.

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

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

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

                                       27
<PAGE>
     *    developments  relating  to our  intellectual  property  rights and the
          intellectual property rights or third parties;
     *    changes in our relationships with our customers and suppliers; and
     *    national and regional weather patterns.

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

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

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

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

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

OUR CHAIRMAN OF THE BOARD OF DIRECTORS,  CEO AND PRESIDENT CONTROLS 21.9% OF OUR
COMMON  STOCK  AND  IS  ABLE  TO  SIGNIFICANTLY   INFLUENCE   MATTERS  REQUIRING
SHAREHOLDER APPROVAL.

     As of March 31, 2003, Steven G. Mihaylo,  Inter-Tel's Chairman of the Board
of  Directors,  Chief  Executive  Officer  and  President,   beneficially  owned
approximately 21.9% 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.

RISKS RELATED TO OUR INDUSTRY

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

     The overall  economic  slowdown has had a harmful  effect on the market for
enterprise  communications  equipment.  Our customers have reduced significantly
their capital spending on communications  equipment in an effort to reduce their
own costs and bolster their revenues.  The market for enterprise  communications
equipment  may 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

                                       28
<PAGE>
assure you that packet-switched  voice networks will become widespread.  Even if
packet-switched  voice networks become more widespread in the future,  we cannot
assure that our products,  including the IP telephony features of the AXXESS and
ECLIPSE2 systems, our IP endpoints and IP applications will successfully compete
against other market players and attain broad market acceptance.

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

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

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

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

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

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

     Terrorist  attacks in New York and  Washington,  D.C. in  September of 2001
disrupted commerce throughout the world. The continued threat of terrorism,  the
war 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 war in Iraq,  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.

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<PAGE>
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  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

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

                                       30
<PAGE>
In addition,  there were no significant  changes in our internal  controls or in
other factors that could  significantly  affect these controls subsequent to the
Evaluation Date. We have not identified any significant deficiencies or material
weaknesses  in our internal  controls,  and  therefore  there were no corrective
actions taken.

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

Our Annual Meeting of Shareholders was held April 21, 2003 (the Annual Meeting).
On March 21, 2003 we mailed a Proxy Statement,  pursuant to Regulation 14A under
the  Securities  Exchange Act of 1934,  as amended,  to our security  holders to
solicit their votes  regarding the following  matters that were discussed at our
Annual Meeting:

1.   Election of Directors:  Steven G.  Mihaylo,  J. Robert  Anderson,  Jerry W.
     Chapman,  Gary D.  Edens  and C.  Roland  Haden  were  elected  to serve as
     directors until the 2004 Annual Meeting of Shareholders.  The votes were as
     follows:

     Nominee                    For:        Against:     Abstain:
     -------                    ----        --------     --------
     Steven G. Mihaylo       17,043,186    6,034,605        --
     J. Robert Anderson      21,795,009    1,282,782        --
     Jerry W. Chapman        21,928,157    1,149,634        --
     Gary D. Edens           22,685,532      392,259        --
     C. Roland Haden         22,859,833      217,958        --

2.   The  shareholders  also  voted on and  approved  a  proposal  to ratify the
     appointment  of Ernst & Young  LLP to act as the  independent  auditors  to
     audit our and our subsidiaries' financial statements for the year 2003. The
     votes were as follows:

                                For:        Against:     Abstain:
                                ----        --------     --------
                             22,733,160      336,710       7,921

3.   Inter-Tel's   shareholders   voted  on  and  approved  an  amendment   (the
     "Amendment") to the Inter-Tel,  Incorporated 1997 Long-Term  Incentive Plan
     (the "1997 Plan") that was  previously  approved by the Board of Directors.
     The Amendment  would remove the 500,000  share  lifetime  individual  grant
     limitation and to create an annual individual grant limit per individual of
     1% or less of the total  outstanding  shares for any one year  period.  The
     votes were as follows:

                                For:        Against:     Abstain:
                                ----        --------     --------
                             14,117,993    8,942,140      17,658

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<PAGE>
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, 2002, 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 99.1:  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 99.2:  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  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  Item  9  (Regulation  FD
          Disclosure)   to  report  our  Press  release  dated  April  21,  2003
          announcing  non-GAAP  results for the fiscal  quarter  ended March 31,
          2003,  and  comparing  such  results  with the results for the quarter
          ended March 31, 2002.

                                       32
<PAGE>
                                   SIGNATURES

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


                                        INTER-TEL, INCORPORATED

May 12, 2003                            /s/ Steven G. Mihaylo
--------------                          ----------------------------------------
                                        Steven G. Mihaylo
                                        Chairman of the Board, Chief Executive
                                        Officer and President

May 12, 2003                            /s/ Kurt R. Kneip
--------------                          ----------------------------------------
                                        Kurt R. Kneip
                                        Vice President and
                                        Chief Financial Officer

                                       33
<PAGE>
                    CERTIFICATION OF CHIEF EXECUTIVE OFFICER
                             AS ADOPTED PURSUANT TO
                  SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Steven G. Mihaylo, certify that:
     1.   I have  reviewed  this  quarterly  report on Form  10-Q of  Inter-Tel,
          Incorporated.
     2.   Based on my  knowledge,  this  report  does  not  contain  any  untrue
          statement of material fact or omit to state a material fact  necessary
          to make the statements made, in light of the circumstances under which
          such  statements  were made, not misleading with respect to the period
          covered by this report.
     3.   Based on my knowledge,  the financial statements,  and other financial
          information  included in this report,  fairly  present in all material
          respects the financial condition, results of operations and cash flows
          of the  registrant  as of,  and for,  the  periods  presented  in this
          report;
     4.   The registrant's  other certifying  officers and I are responsible for
          establishing  and maintaining  disclosure  controls and procedures (as
          defined in Exchange  Act Rules  13a-14 and 15d-14) for the  registrant
          and we have:
          a.   designed such  disclosure  controls and procedures to ensure that
               material  information  relating to the registrant,  including its
               consolidated  subsidiaries,  is made known to us by others within
               those  entities,  particularly  during  the  period in which this
               report is being prepared;
          b.   evaluated  the  effectiveness  of  the  registrant's   disclosure
               controls and  procedures as of a date within 90 days prior to the
               filing date of this report (the "Evaluation Date"); and
          c.   presented in this report our conclusions  about the effectiveness
               of the disclosure controls and procedures based on our evaluation
               as of the Evaluation Date;
     5.   The registrant's other certifying officers and I have disclosed, based
          on our most recent evaluation,  to the registrant's auditors and audit
          committee of the registrant's board of directors:
          a.   all  significant  deficiencies  in the  design  or  operation  of
               internal  controls which could adversely  affect the registrant's
               ability to record,  process,  summarize and report financial data
               and have  identified for the  registrant's  auditors any material
               weaknesses in internal controls; and
          b.   any fraud,  whether or not material,  that involves management or
               other employees who have a significant  role in the  registrant's
               internal controls; and
     6.   The  registrant's  other  certifying  officers and I have indicated in
          this report whether or not there were significant  changes in internal
          controls or in other factors that could significantly  affect internal
          controls  subsequent  to the  date  of  our  most  recent  evaluation,
          including   any   corrective   actions  with  regard  to   significant
          deficiencies and material weaknesses.

Date: May 12, 2003

                                        By: /s/ Steven G. Mihaylo
                                            ------------------------------------

                                        Name: Steven G. Mihaylo
                                              ----------------------------------

                                        Title: Chief Executive Officer
                                               ---------------------------------

                                       34
<PAGE>
                    CERTIFICATION OF CHIEF FINANCIAL OFFICER
                             AS ADOPTED PURSUANT TO
                  SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Kurt R. Kneip, certify that:
     1.   I have  reviewed  this  quarterly  report on Form  10-Q of  Inter-Tel,
          Incorporated.
     2.   Based on my  knowledge,  this  report  does  not  contain  any  untrue
          statement of material fact or omit to state a material fact  necessary
          to make the statements made, in light of the circumstances under which
          such  statements  were made, not misleading with respect to the period
          covered by this report.
     3.   Based on my knowledge,  the financial statements,  and other financial
          information  included in this report,  fairly  present in all material
          respects the financial condition, results of operations and cash flows
          of the  registrant  as of,  and for,  the  periods  presented  in this
          report;
     4.   The registrant's  other certifying  officers and I are responsible for
          establishing  and maintaining  disclosure  controls and procedures (as
          defined in Exchange  Act Rules  13a-14 and 15d-14) for the  registrant
          and we have:
          a.   designed such  disclosure  controls and procedures to ensure that
               material  information  relating to the registrant,  including its
               consolidated  subsidiaries,  is made known to us by others within
               those  entities,  particularly  during  the  period in which this
               report is being prepared;
          b.   evaluated  the  effectiveness  of  the  registrant's   disclosure
               controls and  procedures as of a date within 90 days prior to the
               filing date of this report (the "Evaluation Date"); and
          c.   presented in this report our conclusions  about the effectiveness
               of the disclosure controls and procedures based on our evaluation
               as of the Evaluation Date;
     5.   The registrant's other certifying officers and I have disclosed, based
          on our most recent evaluation,  to the registrant's auditors and audit
          committee of the registrant's board of directors:
          a.   all  significant  deficiencies  in the  design  or  operation  of
               internal  controls which could adversely  affect the registrant's
               ability to record,  process,  summarize and report financial data
               and have  identified for the  registrant's  auditors any material
               weaknesses in internal controls; and
          b.   any fraud,  whether or not material,  that involves management or
               other employees who have a significant  role in the  registrant's
               internal controls; and
6.   The  registrant's  other  certifying  officers and I have indicated in this
     report whether or not there were significant  changes in internal  controls
     or in other  factors  that could  significantly  affect  internal  controls
     subsequent  to the  date  of our  most  recent  evaluation,  including  any
     corrective  actions with regard to  significant  deficiencies  and material
     weaknesses.

Date: May 12, 2003

                                        By: /s/ Kurt R. Kneip
                                            ------------------------------------

                                        Name: Kurt R. Kneip
                                              ----------------------------------

                                        Title: Chief Financial Officer
                                               ---------------------------------

                                       35