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:

          SEPTEMBER 30, 2000                                0-10211


                             INTER-TEL, INCORPORATED


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


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

                                 (602) 302-8900



                                  Common Stock
            (26,443,477 shares outstanding as of September 30, 2000)

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

                                                                            Page

PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

        Condensed consolidated balance sheets--September 30, 2000 and
        December 31, 1999                                                     3

        Condensed consolidated statements of operations--three and nine
        months ended September 30, 2000 and September 30, 1999                4

        Condensed consolidated statements of cash flows - three and nine
        months ended September 30, 2000 and September 30, 1999                5

        Notes to condensed consolidated financial statements --
        September 30, 2000                                                    6

Item 2. Management's Discussion and Analysis of Financial Condition
        and Results of Operations                                            10

PART II. OTHER INFORMATION                                                   24

SIGNATURES                                                                   25

                                       2
<PAGE>
                         PART I. FINANCIAL INFORMATION

INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(In thousands)                                      September 30,   December 31,
                                                        2000            1999
                                                     (Unaudited)      (Audited)
                                                      ---------       ---------
ASSETS
CURRENT ASSETS
  Cash and equivalents                                $  22,322       $  19,226
  Accounts receivable - net                              63,465          49,583
  Inventories                                            40,308          18,816
  Net investment in sales-leases                         17,198          14,466
  Restricted cash for acquisition                                        12,097
  Deferred income taxes                                                      --
  Prepaid expenses and other assets                      30,415           4,926
                                                      ---------       ---------
     TOTAL CURRENT ASSETS                               173,708         119,114

PROPERTY, PLANT & EQUIPMENT                              29,984          28,706
EQUIPMENT HELD UNDER LEASE, NET                           4,031           5,310
GOODWILL AND OTHER INTANGIBLES                           16,246          16,452
NET INVESTMENT IN SALES-LEASES                           22,954          30,258
RESTRICTED CASH FOR ACQUISITION                                          32,203
OTHER ASSETS                                                692           8,206
                                                      ---------       ---------
                                                      $ 247,615       $ 240,249
                                                      =========       =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
  Accounts payable                                    $  46,503       $  20,540
  Accrued expenses                                       30,755          25,937
  Restructuring charges                                                      --
  Current maturities of long-term debt                    1,001             525
  Other current liabilities                              11,799          11,187
                                                      ---------       ---------
     TOTAL CURRENT LIABILITIES                           90,058          58,189

DEFERRED TAX LIABILITY                                    4,870           6,278
LONG TERM DEBT                                            2,732           1,231
OTHER LIABILITIES                                        13,755           6,430

SHAREHOLDERS' EQUITY
  Common Stock                                          107,280         106,853
  Less: shareholder loans                                (1,018)         (1,116)
  Retained earnings                                      39,741          75,835
  Accumulated other comprehensive income                   (233)            177
                                                      ---------       ---------
                                                        145,770         181,749

     Less: Treasury stock at cost                        (9,570)        (13,628)
                                                      ---------       ---------

TOTAL SHAREHOLDERS' EQUITY                              136,200         168,121
                                                      ---------       ---------

                                                      $ 247,615       $ 240,249
                                                      =========       =========

See accompanying notes

                                       3
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
(In thousands, except                                 Three Months                Nine Months
per share amounts)                                 Ended September 30,        Ended September 30,
                                                 ----------------------     -----------------------
                                                    2000         1999         2000          1999
                                                 ---------     --------     ---------     ---------
<S>                                              <C>           <C>          <C>           <C>
NET SALES                                        $ 102,650     $ 81,800     $ 300,102     $ 225,113

Cost of sales                                       58,852       41,811       176,715       113,933
Cost of sales - Executone restructuring                 --           --         7,639            --
                                                 ---------     --------     ---------     ---------
Total cost of sales                                 58,852       41,811       184,354       113,933

GROSS PROFIT                                        43,798       39,989       115,748       111,180

  Research & development                             4,389        3,896        15,488        10,928
  Selling, general and administrative               31,158       25,511        95,023        70,715
  Restructuring charge                                                         45,245
  In-process research and development                   --           --         5,433            --
                                                 ---------     --------     ---------     ---------

OPERATING INCOME (LOSS)                              8,251       10,582       (45,441)       29,537

  Equity share of Cirilium Corp.'s net losses       (2,024)                    (5,938)
  Write-off of Cirilium Corp. investment            (2,045)                    (2,045)
  Interest and other income                            122          863           795         1,788
  Interest expense                                     (32)         (29)         (169)          (54)
                                                 ---------     --------     ---------     ---------

INCOME (LOSS) BEFORE INCOME TAXES                    4,272       11,416       (52,798)       31,271
INCOME TAXES                                         2,188        4,347       (19,499)       11,889
                                                 ---------     --------     ---------     ---------

NET INCOME (LOSS)                                $   2,084     $  7,069     $ (33,299)    $  19,382
                                                 =========     ========     =========     =========

NET INCOME (LOSS) PER SHARE-BASIC                $    0.08     $   0.27     $   (1.26)    $    0.75
                                                 =========     ========     =========     =========

NET INCOME (LOSS) PER SHARE-DILUTED              $    0.08     $   0.26     $   (1.26)    $    0.72
                                                 =========     ========     =========     =========
Average number of common shares
  Outstanding - Basic                               26,435       25,880        26,351        25,934
                                                 =========     ========     =========     =========
Average number of common shares
  Outstanding - Diluted                             26,940       27,040        26,351        27,009
                                                 =========     ========     =========     =========
</TABLE>

See accompanying notes.

                                       4
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

<TABLE>
<CAPTION>
(In thousands, except                                      Three Months               Nine Months
per share amounts)                                      Ended September 30,       Ended September 30,
                                                       ---------------------     ---------------------
                                                         2000         1999         2000         1999
                                                       --------     --------     --------     --------
<S>                                                    <C>          <C>          <C>          <C>
OPERATING ACTIVITIES
Net Income (loss)                                      $  2,084     $  7,069     $(33,299)    $ 19,382
Adjustments to reflect operating activities:
  Depreciation and amortization                           3,076        2,250        9,832        6,574
  Non-cash portion of restructuring charge                   --           --       41,783           --
  Purchased in-process research and development              --           --        5,433           --
  Changes in operating assets and liabilities            (9,708)       1,165      (30,457)     (11,346)
  Other                                                     825          (64)      13,128        6,870
                                                       --------     --------     --------     --------

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES      (3,723)      10,420        6,420       21,480

INVESTING ACTIVITIES
  Additions to property and equipment and
    operating leases                                     (2,173)      (4,274)      (8,373)     (13,654)
  Proceeds from disposal of property and equipment           10            2           20        2,001
  Proceeds from disposition of business segment              --           --        6,602           --
  Cash used in acquisitions                                (478)      (3,068)      (2,124)      (3,788)
                                                       --------     --------     --------     --------

NET CASH USED IN INVESTING ACTIVITIES                    (2,641)      (7,340)      (3,875)     (15,441)

FINANCING ACTIVITIES
  Cash dividends paid                                      (264)        (258)        (790)        (780)
  Payments on long-term debt                               (261)          --         (812)          --
  Treasury stock purchases                                  (37)          --          (37)      (6,681)
  Proceeds from stock issued under the ESPP                  --           --          449          421
  Proceeds from exercise of stock options                    78          429        1,742        1,441
                                                       --------     --------     --------     --------

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES        (484)         171          552       (5,599)

 INCREASE (DECREASE) IN CASH AND EQUIVALENTS             (6,848)       3,251        3,097          440

CASH AND EQUIVALENTS AT BEGINNING OF PERIOD              29,170       60,313       19,225       63,124
                                                       --------     --------     --------     --------

CASH AND EQUIVALENTS AT END OF PERIOD                  $ 22,322     $ 63,564     $ 22,322     $ 63,564
                                                       ========     ========     ========     ========
</TABLE>

See accompanying notes.

                                       5
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2000

NOTE A--BASIS OF PRESENTATION

     The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally  accepted  accounting  principles for
interim  financial  information and with the  instructions to Form 10-Q and Rule
10-01 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting  principles for complete
financial statements. In the opinion of management,  all adjustments (consisting
of normal recurring  accruals)  considered  necessary for a fair presentation of
the results for the interim  periods  presented  have been  included.  Operating
results  for the  three  and  nine  months  ended  September  30,  2000  are not
necessarily  indicative  of the results that may be expected for the year ending
December 31, 2000. For further information,  refer to the consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 1999.

NOTE B--EARNINGS PER SHARE

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

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

<TABLE>
<CAPTION>
                                                 Three Months Ended     Nine Months Ended
                                                 -------------------   --------------------
(In thousands, except                           Sept. 30,   Sept. 30,  Sept. 30,   Sept. 30,
per share amounts)                                2000        1999       2000        1999
                                                 -------    --------   --------     -------
<S>                                              <C>        <C>        <C>          <C>
Numerator:
  Net income                                     $ 2,084    $  7,069   $(33,299)    $19,382
                                                 =======    ========   ========     =======
Denominator:
  Denominator for basic earnings per
   share - weighted average shares                26,435      25,880     26,351      25,934

Effect of dilutive securities:
  Employee and director stock options                505       1,160         --       1,075
                                                 -------    --------   --------     -------
Denominator for diluted earnings per
   share - adjusted weighted average
   shares and assumed conversions                 26,940      27,040     26,351      27,009
                                                 =======    ========   ========     =======

Basic earnings per share                         $  0.08    $   0.27   $  (1.26)    $  0.75
                                                 =======    ========   ========     =======

Diluted earnings per share                       $  0.08    $   0.26   $  (1.26)    $  0.72
                                                 =======    ========   ========     =======
</TABLE>

NOTE C - ACQUISITIONS, DISPOSITIONS AND RESTRUCTURING CHARGES

EXECUTONE

     On January 1, 2000 Inter-Tel  purchased  certain computer  telephony assets
and  assumed  certain  liabilities  of  Executone   Information  Systems,   Inc.
("Executone") for $44.3 million in cash plus related acquisition costs,  subject
to purchase price adjustments as of the closing date. The Executone  transaction
was  accounted  for  using the  purchase  method of  accounting.  The  aggregate
purchase  price was  allocated  to the fair value of the assets and  liabilities

                                       6
<PAGE>
acquired,  of which $5.4 million ($3.4 million after taxes) was  written-off  as
purchased in-process research and development. During the first quarter of 2000,
the Executone  division  recognized  losses of approximately  $2.5 million ($1.5
million  after  taxes,  or $.06 per  diluted  share)  excluding  the  charge for
in-process   research  and   development.   In  connection  with  the  Executone
acquisition,  the Company sold Executone's  manufacturing assets and liabilities
to Varian Associates,  Inc. ("Varian") of Tempe,  Arizona at a net book value of
$6.6 million.

     During the second  quarter of 2000,  the  Executone  division  continued to
experience  significant losses. The Executone division recognized pre-tax losses
during the second quarter and six months ended June 30, 2000 of $3.4 million, or
$2.1  million  after-tax  ($.08 per  diluted  share) and $5.9  million,  or $3.6
million after-tax ($.14 per diluted share),  respectively.  As a result of these
losses,  together with other  considerations noted below, the Company decided to
close the primary Executone facility in Milford,  Connecticut and to recognize a
restructuring  charge  related  to the  Executone  operations.  At the  time the
original  purchase was  recorded,  the Company had not  anticipated  closing the
Milford facility.  After incurring higher than anticipated losses from Executone
operations and after a deterioration in the Executone  business,  including loss
of dealers and customers, delays in introduction and acceptance of new products,
the Company's management decided it was in the best interests of the Company and
its  shareholders  to  close  the  Connecticut   facility  and  consolidate  its
operations into the Company's metro-Phoenix, Arizona facilities.

     The  Company  has  accounted  for  the   restructuring   of  the  Executone
operations,   including   severance  and  related  costs,   the  shut  down  and
consolidation  of the Milford  facility and the impairment of assets  associated
with the  restructuring.  The Company has  finalized its plan for the exiting of
activities  and the  involuntary  termination  or  relocation  of  employees  in
connection  with  the  integration  of  Executone   operations.   Accrued  costs
associated with this plan were estimates,  although the original  estimates made
for the second quarter for reserve balances have not changed as of September 30,
2000.

     The Company  formulated  and announced  plans during the second quarter for
the closure and consolidation of the Executone Milford facility. On May 22, 2000
the Company announced that it would be closing the Executone facility in Milford
and  consolidating  the  Executone   operations  into  the  Company's   existing
operations  in  Arizona.  On that  date,  members  of the  Company's  management
notified  all  of the  Executone  employees  of the  plans  to  consolidate  the
facilities and each employee was offered the opportunity to relocate to Arizona.
The  costs  of  employee  termination  benefits  related  to  the  reduction  of
approximately 140 positions in Milford relating to those employees who chose not
to move, which represented  substantially all of the employees of that facility.
The Company expects that the  consolidation of the Milford,  CT facility will be
completed  by  the  end  of  2000,  except  for  certain  long-term  contractual
obligations  described  below. The Company expects that the operations in Poway,
CA will be  consolidated  with the  Arizona  operations  on or before the end of
2000. The Executone operation in Oakton,  Virginia will remain in operation as a
sales office for Inter-Tel's Government Systems group.

     In addition to the  personnel  severance,  termination,  plant  closure and
other related costs attributable to the plant closing, the Company also recorded
a reserve for costs  associated  with  building,  furniture and equipment  lease
obligations,   as  well  as  write-offs  for  impairment  of  assets,  including
inventory, accounts and notes receivable, fixed assets and goodwill. Inventories
were  impaired  based on current  sales prices  compared to current  costs,  the
decision  by a number  of  dealers  to no  longer  sell the  Executone  product,
customer  preference  for  Inter-Tel  branded  products over  Executone  branded
products, excess and obsolete inventory, and management's decision not to pursue
continued product development on new or existing product lines.  Various dealers
and  customers  failed to purchase  Executone  products  for new  installations,
purchased less products, took on competitive product lines and/or otherwise gave
notice to the  Company  of the  intent to reduce or  minimize  further  business
transactions with the Company for Executone products.

     Exit costs associated with the closure of the Milford facility also include
liabilities for building,  furniture and equipment lease, and other  contractual
obligations.  The  Company  is  liable  for the lease on the  Milford  buildings

                                       7
<PAGE>
through January 2005.  Various  furniture leases run concurrently  through March
2002. Other capital leases for computer and other equipment terminate on varying
dates through  September  2002. To date,  other than a sublease  agreement  with
eLOT,  Inc. for  a portion of  the facility and  equipment, the Company has been
unable to  sublease  a  significant  portion  of the  buildings  or the  related
furniture and equipment. The reserve for lease and other contractual obligations
is identified in the table below.

     The  following  tables  summarize  details of the  restructuring  charge 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 September 30, 2000.

<TABLE>
<CAPTION>
                                                                                      RESERVE
                                                 CASH/    RESTRUCTURING               BALANCE
DESCRIPTION                                    NON-CASH      CHARGE      ACTIVITY    AT 9/30/00
-----------                                    --------      ------      --------    ----------
<S>                                           <C>          <C>          <C>          <C>
                                                                (In thousands)
PERSONNEL COSTS:
  Severance and termination costs              Cash        $ (1,583)     $ 1,399      $  (184)
  Other Plant closure costs                    Cash            (230)          30         (200)

LEASE TERMINATION AND OTHER CONTRACTUAL
 OBLIGATIONS (NET OF ANTICIPATED RECOVERY):
  Building and equipment leases                Cash          (7,444)         631       (6,813)
  Other contractual obligations                Cash          (1,700)          --       (1,700)

IMPAIRMENT OF ASSETS:
  Inventories                                  Non-Cash      (3,454)       1,060       (2,394)
  Prepaid inventory and other expenses         Non-Cash      (2,485)       2,485           --
  Accounts receivable                          Non-Cash      (1,685)          --       (1,685)
  Fixed assets                                 Non-Cash      (3,151)       3,151           --
  Net intangible assets                        Non-Cash     (29,184)      29,184           --
                                                           --------      -------     --------
TOTAL                                                      $(50,916)     $37,940     $(12,976)
                                                           ========      =======     ========
</TABLE>

     Included in the total Executone  restructuring  costs of $50.9 million is a
$45.2 million restructuring charge for exit costs and asset impairment, and $7.6
million  associated  with the impairment of  inventories,  which has accordingly
been recorded as additional costs of sales. Refer to Management's Discussion and
Analysis for additional information.

INTER-TEL.NET

     During the  second  quarter of 2000,  Inter-Tel  recorded a pre-tax  charge
associated  with   Inter-Tel.NET   operations  of  $2.0  million  ($1.2  million
after-tax),  related to the write-down to net realizable  value of the Vocal'Net
servers in the  division's IP network and lease  termination  costs of redundant
facilities.  Inter-Tel.NET  is in the  process  of adding new  technology  to be
implemented   throughout  the   Inter-Tel.NET   network.   The  changes  to  the
Inter-Tel.NET  network are  designed to improve  the voice  quality,  design and
interoperability  of the  network,  and to allow  Inter-Tel  to better  position
itself to sell services to its enterprise customers.

     The  pre-tax  charge  associated  with  Inter-Tel.NET  is  related  to  the
write-down to net realizable value of the Vocal'Net servers in the division's IP
network,  and lease  termination  costs of  certain  redundant  facilities.  The
following  table  summarizes  the details of the  write-down and activity in the
reserve balances from the date of the write-down through September 30, 2000:

                                       8
<PAGE>
<TABLE>
<CAPTION>
                                                                                      RESERVE
                                                CASH/    RESTRUCTURING               BALANCE
DESCRIPTION                                   NON-CASH      CHARGE      ACTIVITY    AT 9/30/00
-----------                                   --------      ------      --------    ----------
<S>                                          <C>          <C>          <C>          <C>
                                                               (In thousands)
LEASE TERMINATION OBLIGATIONS
 (NET OF ANTICIPATED RECOVERY):
  Building leases                              Cash         $  (144)     $   40       $(104)

IMPAIRMENT OF ASSETS:
  Fixed assets                                 Non-Cash      (1,824)      1,824          --
                                                            -------      ------       -----
TOTAL                                                       $(1,968)     $1,864       $(104)
                                                            =======      ======       =====
</TABLE>

NOTE D - PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE

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

NOTE E - SEGMENT INFORMATION

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

     Prior to 2000,  the Company had viewed its  operations as  principally  one
segment:  telephone  systems,  telecommunications  software  and  hardware,  and
related long distance calling services.  These services are provided through the
Company's  direct  sales  offices  and  dealer  network  to  business  customers
throughout  the United  States,  Europe,  Asia and South  America.  As a result,
financial information disclosed previously represented  substantially all of the
financial  information  related to the Company's  principal  operating  segment.
Although the operations of Executone were identified separately in the first and
second quarters of 2000, the Executone  operations are similar and comparable to
the principal segment.  Beginning in the 3rd quarter and directly as a result of
the charge and  reorganization  associated  with the Executone  operations,  the
Company no longer accounts for or directly reports the Executone operations on a
stand alone  basis.  The  operations  have been  integrated  with the  Company's
existing wholesale and national and government account operations.  Accordingly,
separate segment disclosures are not available.

     In  December  1999,  Inter-Tel  entered  into an  agreement  with  Hypercom
Corporation  to  jointly  form  Cirilium  Corporation   ("Cirilium").   Cirilium
comprises parts of Hypercom's data and Inter-Tel's packet telephony products and
services, including Inter-Tel's Vocal'Net gateway products and technology. As of
the close of the third quarter,  the Company wrote off its remaining  investment
in Cirilium of $2.0 million. Total pre-tax losses from Cirilium from all sources
were $4.6 million ($0.13 per diluted  share) for the third quarter.  This charge
includes the write-off of Inter-Tel's  remaining basis in Cirilium  Corporation.
Accordingly, we do not expect to report the operations of Cirilium as a separate
business  segment.  Refer to the table below for a summary of the operations for
the third quarter.

                                       9
<PAGE>
     In the third quarter of 2000,  the Company  generated  income from business
segments, including one-time charges, as follows:

<TABLE>
<CAPTION>
(in thousands, except per share                           PRINCIPAL
amounts)                                                   SEGMENT     CIRILIUM   INTER-TEL.NET    TOTAL
                                                           -------     --------   -------------    -----
<S>                                                        <C>          <C>         <C>          <C>
Net sales                                                  $ 96,234     $    --     $  6,416     $ 102,650

Operating income (loss)                                      13,038        (574)      (4,213)        8,251

Equity Share of Cirilium Corp.'s net losses                      --      (2,024)          --        (2,024)
Write-off of Cirilium Corp. investment                           --      (2,045)          --        (2,045)
Interest and other income                                       122          --           --           122
Interest expense                                                (32)         --           --           (32)

Net income (loss)                                             8,141      (3,445)      (2,612)        2,084

Net income (loss) per diluted share                        $   0.30     $ (0.13)    $  (0.10)    $    0.08

Average number of common shares outstanding - diluted        26,940      26,940       26,940        26,940
</TABLE>

     The Company's  revenues are generated  predominantly  in the United States.
Total revenues  generated from U.S.  customers  totaled $100.2 million and $79.9
million of total  revenues for the quarters  ended  September 30, 2000 and 1999,
respectively.  The Company's revenues from international  sources were primarily
generated from customers located in the United Kingdom,  Europe,  Asia and South
America. In the third quarters of 2000 and 1999, revenues from customers located
internationally accounted for 2.4% and 2.3% of total revenues, respectively.

PART I.

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

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

OVERVIEW

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

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<PAGE>
RESULTS OF OPERATIONS

     Net sales for the third quarter of 2000 increased 25.5 % to $102.6 million,
compared  to $81.8  million in the third  quarter of 1999.  Net sales  increased
33.3% to $300.1  million in the first nine  months of 2000,  compared  to $225.1
million in the first nine months of 1999.  For the quarter and nine months ended
September 30, 2000, sales from wholesale distribution, direct sales offices, and
government and national accounts  accounted for approximately  $15.5 million and
$56.2 million,  respectively,  of the increase in net sales. For the quarter and
nine months ended  September 30, 2000,  sales from  Inter-Tel.NET  accounted for
approximately $5.6 million and $14.2 million,  respectively,  of the increase in
net  sales.  The  increase  in net sales for the third  quarter of 2000 was also
attributable,  to a lesser extent,  to increases in sales of other long distance
and network services, as well as increases in sales in Inter-Tel's international
and leasing operations.

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

                                      Three Months Ended    Nine Months Ended
                                         September 30,         September 30,
                                       ----------------      ----------------
                                        2000       1999       2000       1999
                                       -----      -----      -----      -----
NET SALES                              100.0%     100.0%     100.0%     100.0%
Cost of sales                           57.3       51.1       58.9       50.6
Cost of sales - Executone
 restructuring                            --         --        2.5         --
                                       -----      -----      -----      -----
Total cost of sales                     57.3       51.1       61.4       50.6

GROSS PROFIT                            42.7       48.9       38.6       49.4

Research and development                 4.3        4.8        5.2        4.9
Selling, general and administrative     30.4       31.2       31.7       31.4
Restructuring Charge                      --                  15.1
IPRD write-off                            --         --        1.8         --
                                       -----      -----      -----      -----

OPERATING INCOME                         8.0       12.9      (15.1)      13.1

Equity Share of Cirilium Corp's
 net losses                             (2.0)        --       (2.0)        --
Write-off Cirilium Corp. investment     (2.0)                 (0.7)
Interest and other income                0.1        1.0        0.3        0.8
Interest expense                         0.0        0.0       (0.1)       0.0
Income taxes                             2.1        5.3       (6.5)       5.3
                                       -----      -----      -----      -----
Net income (loss)                        2.0%       8.6%     (11.1)%      8.6%
                                       =====      =====      =====      =====

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

     In  addition,  during the second  quarter of 2000,  Inter-Tel  recorded  an
after-tax  charge  associated  with  Inter-Tel.NET  operations  of $1.2 million,
related to the  write-down to net realizable  value of the Vocal'Net  servers in
the division's IP network and lease termination  costs of redundant  facilities.
Finally,  as of the  close of the  third  quarter,  the  Company  wrote  off its
remaining  investment  in Cirilium of $2.0 million.  Total  pre-tax  losses from

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<PAGE>
Cirilium  from all sources were $4.6 million  ($0.13 per diluted  share) for the
third quarter. This charge includes the write-off of Inter-Tel's remaining basis
in Cirilium Corporation.

     Gross profit for the third quarter of 2000 was $43.8  million,  or 42.7% of
net sales,  compared  to $40.0  million,  or 48.9% of net  sales,  for the third
quarter of 1999.  Gross profit,  excluding the  Executone  restructuring  costs,
increased  11.0% to $123.4  million,  or 41.1% of net  sales,  in the first nine
months of 2000 compared to $111.2  million,  or 49.4% of net sales, in the first
nine months of 1999. Including the Executone  restructuring cost of sales, gross
margin was 38.6% for the nine months ended September 30, 2000.  Gross margins in
the third quarter and nine months ended  September 30, 2000 decreased  primarily
as a result of lower  margins  from  Inter-Tel.NET  and the  acquired  Executone
operations.  To a lesser extent, margins were lower as a result of sales channel
and product mix, as well as competitive pricing pressures.  As compared to prior
quarters,  during the third  quarter of 2000,  the  Company  generated a smaller
portion of the Company's  sales  increases  through direct  channels,  where the
Company has historically  generated higher margins, in contrast to sales through
the  network  services  group,  which has  historically  generated  lower  gross
margins.

     Research and  development  expenses for the third quarter of 2000 were $4.4
million,  or 4.3% of net sales,  compared to $3.9 million, or 4.8% of net sales,
for the third quarter of 1999.  Research and development  expenses  increased to
$15.5 million,  or 5.2% of net sales,  in the first nine months of 2000 compared
to $10.9  million,  or 4.9% of net sales,  in the first nine months of 1999. The
increases in absolute  dollars in both periods were  primarily  attributable  to
expenses relating to the development and introduction of new products, including
the  continuing  development  and  improvement  of the Company's  AXXESS digital
communication  platforms,  call processing and voice  processing  software,  CTI
products, unified messaging and IP voice solutions. Costs were also incurred for
new and sustaining product development associated with the Executone operations.
With the exception of the acquired  Executone  operations,  the Company  expects
that  research and  development  expenses  will continue to increase in absolute
dollars as the Company continues to develop new software and to enhance existing
technologies and products.  These expenses may vary in the future, however, as a
percentage of net sales.

     Selling,  general and administrative expenses for the third quarter of 2000
increased in absolute  dollars to $31.2  million,  compared to $25.5 million for
the third quarter of 1999, but decreased as a percentage of net sales from 31.2%
in the  third  quarter  of 1999 to  30.4%  for the  comparable  period  in 2000.
Selling,  general and  administrative  expenses  increased to $95.0 million,  or
31.7% of net sales,  in the first nine months of 2000 compared to $70.7 million,
or 31.4% of net  sales,  in the first  nine  months of 1999.  The  increases  in
absolute  dollars for the quarter and nine months ended  September 30, 2000 were
attributable  in part to costs  associated  with the  closure  of the  Executone
facility in Milford,  CT, including  moving and integration  costs that were not
included  in the  charges  described  above.  Additional  costs were  related to
continued  efforts to hire and train  additional  technical and sales  personnel
throughout  Inter-Tel's  direct  sales  offices.  The Company has also  incurred
additional   personnel  and  marketing   costs  to  support  the  operations  of
Inter-Tel.NET, which added to the increase of these expenses during this period.
Selling,  general and  administrative  expenses decreased as a percentage of net
sales for the third  quarter of 2000  compared to the third quarter of 1999 as a
result of higher sales volume and reduced expenses from Executone operations and
selling expenses as a percentage of net sales. The Company expects that selling,
general  and  administrative  expenses  will  continue  to  increase in absolute
dollars, but may vary in the future as a percentage of net sales.

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

     In  December  1999,  Inter-Tel  entered  into an  agreement  with  Hypercom
Corporation  to  jointly  form  Cirilium  Corporation   ("Cirilium").   Cirilium
comprises parts of Hypercom's data and Inter-Tel's packet telephony products and
services,  including  Inter-Tel's  Vocal'Net  gateway  products and  technology.
Through  September  28,  2000,  the  Company  owned  approximately  45%  of  the
outstanding capital stock of Cirilium. Accordingly, the Company recorded the net
losses of  Cirilium  as a single line item below  operating  income.  During the
third quarter,  the Company  recorded a pre-tax net loss of  approximately  $2.0
million  relating to Inter-Tel's  equity  interest in Cirilium  Corporation.  In
addition,  as of the close of the third quarter, the Company has written off its
remaining  investment  in  Cirilium  of $2.0  million,  based  on the  Company's

                                       12
<PAGE>
decision not to provide  additional  cash to fund future  operations of Cirilum.
Total pre-tax losses from Cirilium from all sources were $4.6 million ($0.13 per
diluted  share)  for  the  quarter.   This  charge  includes  the  write-off  of
Inter-Tel's remaining basis in Cirilium. Pretax losses from Cirilium,  including
the  write-off,  totaled  $4.6 million and $8.6 million for the quarter and nine
months ended September 30, 2000, respectively.

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

     Other income  consisted  primarily of interest income and foreign  exchange
rate gains and losses. Income from interest decreased in both comparable periods
of 2000 based on a lower level of invested funds.  Other changes in other income
primarily reflected differences in net foreign exchange rate gains and losses.

     The  Company's  income  tax rate for the  third  quarter  increased  to 51%
compared  to 38% for 1999 and the first half of 2000.  The rate  increased  as a
result of the write-off of the Company's  investment in Cirilium,  for which the
Company  does not  currently  expect to obtain a full tax  benefit.  The Company
expects the fourth  quarter  tax rate to decrease to a level  similar to the tax
rate effective for the nine months ended September 30, 2000.

     Net income  for the third  quarter  was $2.1  million  ($0.08  per  diluted
share), compared to net income of $7.1 million ($0.26 per diluted share) for the
third  quarter  of  1999,  reflecting  the  charges  (including  cost of  sales)
associated  with the  Executone,  Cirilium and  Inter-Tel.NET  operations  noted
above.  Net loss for the nine months ended  September 30, 1999 was $33.3 million
(loss of $1.26 per diluted share),  compared to net income of $19.4 million,  or
$0.72 per diluted share, in the first nine months of 1999,  reflecting again the
charges noted above.  Excluding  such charges,  net income for the quarter ended
September  30,  2000 would have been $5.5  million  ($0.21 per  diluted  share).
Moreover,  excluding the charges, net income for the nine months ended September
30, 2000 would have been $8.7 million ($0.32 per diluted share).

INFLATION/CURRENCY FLUCTUATION

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

LIQUIDITY AND CAPITAL RESOURCES

     At  September  30,  2000,  the  Company  had  $22.3  million  in  cash  and
equivalents,  which  represented an increase of approximately  $3.1 million from
December  31,  1999.  On June 1,  2000,  the  Company  increased  its  unsecured
revolving line of credit with Bank One, Arizona, NA to $25 million.  This credit
facility is  available  through  June 1, 2002.  Under the credit  facility,  the
Company  has the option to borrow at a prime  rate or  adjusted  LIBOR  interest
rate.  Historically,  the  Company  has used the credit  facility  primarily  to
support international letters of credit to suppliers.  On December 31, 1999, the
Company  paid cash of  approximately  $44.3  million plus  acquisition  costs to
purchase  certain  assets of Executone.  This  transaction  closed on January 1,
2000.  The  remaining  cash  balances may be used to further  develop and expand
Inter-Tel.NET  and for  potential  acquisitions,  strategic  alliances,  working
capital and general corporate purposes.

     Net cash provided by operating activities totaled $6.4 million for the nine
months ended  September 30, 2000,  compared to $21.5 million for the same period
in 1999. The operating cash provided in the nine months ended September 30, 2000
was  primarily  the  result of income  from  operations  after  considering  the
non-cash  portion of  restructuring  charges and the non-cash  depreciation  and
amortization  charges. Cash used in operating assets and liabilities in the nine

                                       13
<PAGE>
month  period  ended  September  30, 2000 was $30.5  million,  compared to $11.3
million in the same period of 1999.  During the first nine  months of 2000,  the
Company had higher  accounts  receivable,  inventory,  and prepaid  expenses and
other assets than at December 31, 1999,  attributable primarily to the Executone
acquisition. The Company expects to expand sales through its direct sales office
and dealer  networks,  which is expected to require the  expenditure  of working
capital for increased accounts receivable and inventories.  During the fist nine
months  of 2000,  accounts  payable  and  other  current  liabilities  increased
primarily as a result of the assumption of liabilities of Executone.

     Net cash used in investing  activities,  primarily in the form of cash used
for  acquisitions,  capital and  operating  lease  expenditures,  offset by cash
received from the  disposition of the  manufacturing  operations of Executone to
Varian of $6.6 million, totaled $3.9 million for the nine months ended September
30,  2000,  compared to $15.4  million for the nine months ended  September  30,
1999. Net cash used in acquisitions totaled  approximately $2.1 million in 2000.
Capital expenditures totaled approximately $8.4 million for the same period. The
Company anticipates  additional capital  expenditures  during 2000,  principally
relating to expenditures for equipment and management  information  systems used
in its operations,  for facilities  expansion and expansion of the Inter-Tel.NET
network and operations.

     Net cash  provided by  financing  activities  totaled  $552,000 in the nine
months ended September 30, 2000 was primarily  attributable to the proceeds from
the stock option and  purchase  plans,  offset by payments  for cash  dividends,
long-term debt and stock  repurchases.  For the nine months ended  September 30,
1999, net cash used in financing activities of $5.6 million related primarily to
treasury stock  purchases of $6.7 million and cash dividends paid, less proceeds
from the stock option and purchase plans.

     The Company  offers to its customers  lease  financing and other  services,
including its Totalease program, through its Inter-Tel Leasing, Inc. subsidiary.
The Company  funds its  Totalease  program in part through the sale to financial
institutions of rental income streams under the leases. Resold Totalease rentals
totaling  $188.3 million and $163.7 million  remained  unbilled at September 30,
2000 and December 31, 1999, respectively. The Company is obligated to repurchase
such  income  streams  in  the  event  of  defaults  by  lease   customers  and,
accordingly,  maintains reserves based on loss experience and past due accounts.
Although  the  Company to date has been able to resell the rental  streams  from
leases under the Totalease  program  profitably and on a  substantially  current
basis, the timing and  profitability of lease resales could impact the Company's
business and operating  results,  particularly  in an environment of fluctuating
interest  rates  and  economic  uncertainty.  If  the  Company  is  required  to
repurchase  rental streams and realizes losses thereon in amounts  exceeding its
reserves, its operating results will be adversely affected.

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

FACTORS THAT MAY AFFECT RESULTS OF FUTURE OPERATIONS

     This Report on Form 10-Q  contains  forward-looking  statements  within the
meaning of Section  27A of the  Securities  Act of 1933 and  Section  21E of the
Securities  Exchange Act of 1934.  Actual results could differ  materially  from
those  projected  in the  forward-looking  statements  as a result  of many risk
factors including,  without limitation,  those set forth under "Factors That May
Affect  Future  Results  Of  Operations"  below.  In  evaluating  the  Company's
business,  shareholders and prospective  investors should consider carefully the
following  factors  in  addition  to the  other  information  set  forth in this
document.

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.

                                       14
<PAGE>
     The  market  for our  products  and  services  is  characterized  by  rapid
technological change, evolving industry standards and persistent customer demand
for new products,  applications and services. To compete  successfully,  we must
continually enhance our existing  telecommunications  products, related software
and customer  services as well as develop new technologies and applications in a
timely and  cost-effective  manner.  If we fail to  introduce  new  products and
services  that  achieve  broad market  acceptance,  or do not adapt our existing
products and services to customer demands or evolving  industry  standards,  our
business could be significantly harmed. In addition,  current competitors or new
market  entrants may offer  products,  applications  or services that are better
adapted to changing technology or customer demands and could render our products
and services obsolete.

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

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

     During the past few years,  we have introduced  transparent  networking and
unified  messaging on our AXXESS and AXXESSORY Talk platforms and introduced our
InterPrise family of voice and data convergence products. In 2000, we introduced
ClearConnect, a software-based telephone that runs on a PC, ClearConnectLite, an
e-commerce  "touch-to-talk"  web call product, a line of IP voice terminals that
add IP telephony to the AXXESS  platform,  and several  other  telephony-related
products.  During the past 12 months, sales of our AXXESS digital communications
platforms and related  software have comprised a substantial  portion of our net
sales. We expect that our future success will continue to depend, in large part,
upon the increasing  commercial  acceptance of the  InterPrise  products and the
AXXESS  platform,  as well as future upgrades and enhancements to these products
and networking platforms. We cannot assure that these products or platforms will
succeed in the  future.  Our future  success  will also  depend  upon the market
acceptance of our other new products and enhancements.

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

     Over the past few years, we have introduced the Inter-Tel Vocal'Net Server,
the Inter-Tel  Service  Provider  Package,  and Inter-Tel  InterPrise  products.
Although the  Inter-Tel  Vocal'Net  gateways and Service  Provider  Package were
transferred  in 1999 to  Cirilium,  a  Company  in  which we  currently  have an
ownership stake of approximately  19%, we continue to use some of these products
in  the  Inter-Tel.NET   network.  We  cannot  assure  that  the  functionality,
scalability,  and  reliability  of  the  Inter-Tel  Vocal'Net  gateways  or  its
replacement  technology,   Inter-Tel  Service  Provider  Package  and  Inter-Tel
InterPrise product lines will achieve market acceptance.  In addition, we cannot
assure that these products will comply with industry  standards or that emerging
industry standards will not render our IP telephony products obsolete.  If these
products fail to achieve market acceptance,  our business,  financial  condition
and operating results could be significantly harmed.

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

     In  December  1999,  Inter-Tel  entered  into an  agreement  with  Hypercom
Corporation to jointly form  Cirilium.  Cirilium  comprises  parts of Hypercom's
data  and  Inter-Tel's  packet  telephony  experience,  products  and  services,
including Inter-Tel's Vocal'Net gateway products and technology.  The market for
packet switched  technology,  as well as the market for data telephony products,
services and applications in general, is intensely competitive. Consequently, we
cannot assure that our expectations and objectives for the Cirilium venture with
Hypercom will be  successfully  attained.  For the quarter  ended  September 30,
2000, we recorded a pre-tax loss of $2.0 million  related to our equity share of
Cirilium's net losses.  As of the close of the third quarter,  the Company wrote
off its remaining  investment in Cirilium of $2.0 million.  Total pre-tax losses
from Cirilium from all sources were $4.6 million  ($0.13 per diluted  share) for

                                       15
<PAGE>
the third quarter.  This charge includes the write-off of Inter-Tel's  remaining
basis in Cirilium Corporation.

     During the second  quarter of 2000, we also incurred a charge to write-down
the Vocal'Net Servers in the Inter-Tel.NET  network to net realizable value. The
prospects for market acceptance of the Cirilium venture,  and other IP telephony
products  acquired  through our September 1998 purchase of TMSI assets,  must be
considered  in light of the  uncertainties  to which  companies  and products in
rapidly evolving markets such as IP network telephony are particularly  exposed.
These uncertainties include:

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

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

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

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

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

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

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

                                       16
<PAGE>
     The  market  for IP  network  voice  communications  products  has begun to
develop only recently, is evolving rapidly and is characterized by an increasing
number of market entrants who have introduced or developed products and services
for Internet or other IP network  voice  communications.  As is typical of a new
and rapidly evolving industry,  the demand for and market acceptance of recently
introduced  IP network  products and services  are highly  uncertain.  We cannot
assure that packet switched technology networks will become widespread.  Even if
packet switched  technology  networks become widespread in the future, we cannot
assure that our products,  particularly the Inter-Tel  InterPrise product lines,
will  successfully  compete against other market players and attain broad market
acceptance.

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

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

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

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

In particular,  in January 2000, we acquired  certain assets and  liabilities of
Executone Information Systems, Inc. We were adversely affected by several of the
risks described above relating to our Executone acquisition, including the risks
related to  unanticipated  acquisition  costs and  impairment  of  employee  and
customer  relationships,  as well as the erosion of gross and operating margins,
which risks  substantially  harmed our  operating  results.  For these and other
reasons  noted in the  footnotes  and in the section  above titled  Management's
Discussion  and Analysis of financial  condition and results of  operations,  we
wrote-off  our  investment  in Executone  during the second  quarter of 2000. In
addition  to the  Executone  losses  discussed  above,  for  the  quarter  ended
September  30, 2000,  we recorded a pre-tax loss of $2.0 million  related to our
equity share of Cirilium's net losses. As of the close of the third quarter, the
Company  wrote off its remaining  investment in Cirilium of $2.0 million.  Total
pre-tax  losses from  Cirilium  from all sources were $4.6 million for the third
quarter.

In addition to the risks related to acquisitions  mentioned above, 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.

                                       17
<PAGE>
WE MAY BECOME  SUBJECT TO GOVERNMENT  REGULATION  AND LEGAL  UNCERTAINTIES  THAT
COULD HARM OUR BUSINESS.

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

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

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

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

     Our success  depends upon our  proprietary  technology.  We currently  hold
patents for 18  telecommunication  and unified messaging  products and have also
applied to the U.S. Patent and Trademark Office for seven additional patents. We
also rely on  copyright  and trade  secret  law and  contractual  provisions  to
protect our  intellectual  property.  Despite these  precautions,  third parties
could copy or otherwise obtain and use our technology without authorization,  or
develop similar technology independently.

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

     We also  cannot  assure  that third  parties  will not claim our current or
future  products or services  infringe upon their rights.  Occasionally,  we are
subject to proceedings  alleging that certain of our key products infringed upon
third  party  intellectual  property  rights,  including  patents,   trademarks,
copyrights,  or other intellectual property rights. We have viewed presentations
from one of our primary  competitors,  Lucent,  alleging that our AXXESS digital
communications   platform  utilizes   inventions  covered  by  certain  of  such
competitor's  patents.  We are  continuing  the  process of  investigating  this
matter.  Additionally,  we recently  received a letter from AT&T  alleging  that
certain of our IP products infringe upon certain intellectual property protected
by AT&T's patents. This matter is also being investigated.  When any such claims
are asserted  against us, we may seek to license the third party's  intellectual
property rights. Purchasing such licenses can be expensive, and we cannot assure
that a license will be available on prices or other terms  acceptable  to us, if
at all.

     Alternatively,  we could resort to  litigation  to challenge  such a claim.
Litigation  could require us to expend  significant  sums of cash and divert our
management's  attention.  In the  event  that a  court  renders  an  enforceable

                                       18
<PAGE>
decision with respect to our  intellectual  property,  we may be required to pay
significant damages,  develop  non-infringing  technology or acquire licenses to
the technology that is the subject of the infringement.  Any of these actions or
outcomes could harm our business,  financial condition and operating results. If
we are unable or choose not to license technology,  or decide not to challenge a
third  party's  rights,  we could  encounter  substantial  and costly  delays in
product  introductions.  These delays could result from efforts to design around
asserted third party rights or our discovery that the  development,  manufacture
or sale of products requiring these licenses could be foreclosed.

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

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

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

     The Company is currently  utilizing some of Cirilium's  Inter-Tel Vocal'Net
technology,  but has also  installed  new Cisco  Systems and new  Cirilium  6200
technology  in the  Inter-Tel.NET  network.  We  are  also  utilizing  Inter-Tel
InterPrise  products to develop and expand our own IP  long-distance  network to
carry voice and data traffic. The Inter-Tel.NET  network is still in the process
of deployment and, accordingly, is subject to risks and uncertainties.  As noted
earlier,  we have  replaced  some and  expect to  replace  additional  Vocal'Net
Servers  in the  Inter-Tel.NET  network  with  new  technology  to  improve  the
reliability,  functionality and  interoperability  of the network.  To date, the
Inter-Tel.NET  network has  established  domestic  points of presence in the San
Francisco Bay Area, Washington, D.C., Chicago, New York, Phoenix, Reno, Atlanta,
Houston, Los Angeles, Dallas and Miami/Ft.  Lauderdale, and international points
of presence in Hong Kong,  Monterey,  Puebla,  Mexico City and  Guadalajara.  In
addition,  Inter-Tel.NET  has  alliances  with other  third party  domestic  and
international  IP long distance  providers to originate and terminate  calls. If
the domestic or international market for IP network products fails to develop or
develops more slowly than we anticipate,  or if we experience  difficulty in the
integration  of the TMSI  technology,  our  Inter-Tel.NET  network  could become
financially burdensome to maintain or obsolete, which could harm our business.

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

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

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<PAGE>
Inter-Tel.NET  network could fail to achieve market acceptance and our business,
financial condition and operating results would suffer.

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

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

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

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

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

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

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

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

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

                                       20
<PAGE>
of our products at Varian's  Tempe,  Arizona and Poway,  California  facilities,
including substantially all of the printed circuit boards used in the AXXESS and
Inter-Tel Axxent digital communication platforms as well as substantially all of
what remains to support the Executone Computer Telephony  products.  Although we
set manufacturing specifications and conditions for our products, and all of our
contract  manufacturers must meet our requirements for manufacturing process and
quality  assurance  before  we  enter  into  manufacturing  agreements,  we have
occasionally  experienced delays in the supply of components and finished goods.
We cannot assure that we will not experience similar delays in the future.

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

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

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

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

     We depend on the  continued  service  of, and our  ability  to attract  and
retain, qualified technical,  marketing, sales and managerial personnel, many of
whom would be  difficult  to replace.  Competition  for  qualified  personnel is
intense,  and we have had difficulty  hiring  employees in the timeframe that we
desire,  particularly  skilled  engineers.  Our loss of any key personnel or our
failure to effectively  recruit additional key personnel could make it difficult
for us to manage our business,  make timely product introductions and meet other
key objectives and therefore  harm our business.  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.  We cannot assure that we will be able to continue  attracting
and retaining  the qualified  personnel  necessary  for the  development  of our
business.

     Moreover,  the  growth in our  business  has  placed,  and is  expected  to
continue to place, a significant  strain on our personnel,  management and other
resources.  Our ability to manage any future growth  effectively will require us
to successfully attract,  train, motivate and manage new employees, to integrate
new  employees  into our  overall  operations  and to  continue  to improve  our
operational, financial and management information systems.

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

                                       21
<PAGE>
continue  experiencing  significant  price  competition,  and this  may  cause a
decrease  in end-user  rates.  We cannot  assure  that we will meet  minimum use
commitments,  that we will be able to  negotiate  lower  rates with  carriers if
end-user  rates  decrease or that we will be able to extend our  contracts  with
carriers at favorable  prices. If we are unable to secure reliable long distance
and network services from certain long distance carriers, RBOCs, LECs and CLECs,
or if these  entities are unwilling to provide  telecommunications  services and
billing information to us on favorable terms, our ability to expand our own long
distance and network services will be harmed.

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

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

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

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

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

     Our expense levels are based in part on  expectations  of future sales and,
if sales levels do not meet  expectations,  operating  results  could be harmed.
Because sales of digital  communication  platforms  through our dealers  produce
lower gross margins than sales through our direct sales organization,  operating
results  have  varied,  and will  continue  to vary  based upon the mix of sales
through  direct and  indirect  channels.  Although  to date we have been able to
resell the rental streams from leases under our Totalease program profitably and
on a substantially  current basis, the timing and profitability of lease resales
from  quarter to quarter  could impact  operating  results,  particularly  in an

                                       22
<PAGE>
environment of fluctuating interest rates. Long distance sales, which have lower
gross margins than our core  business,  have grown in recent periods at a faster
rate than our overall net sales.  As a result,  gross margins could be harmed if
long  distance  calling  services  continue to increase as a  percentage  of net
sales.  In  addition,  we  experience  seasonal  fluctuations  in our  operating
results,  as net sales for the first and third quarters are frequently less than
those experienced in the fourth and third quarters, respectively. As a result of
these and other factors, we have historically experienced, and could continue to
experience  in the  future,  fluctuations  in sales and  operating  results on a
quarterly  basis.  See  "Management's   Discussion  and  Analysis  of  Financial
Condition and Results of Operations."

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

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

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

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

OUR CHAIRMAN OF THE BOARD OF DIRECTORS,  CEO AND PRESIDENT WILL CONTROL 20.3% OF
OUR  COMMON  STOCK  AND BE ABLE TO  SIGNIFICANTLY  INFLUENCE  MATTERS  REQUIRING
SHAREHOLDER APPROVAL

     As of September 30, 2000, Steven G. Mihaylo,  the Company's Chairman of the
Board of Directors,  Chief Executive  Officer and President  beneficially  owned
approximately  20.3% of the outstanding shares of the Common Stock. As a result,
he has the ability to exercise significant  influence over all matters requiring
shareholder approval. In addition, the concentration of ownership could have the
effect of delaying or preventing a change in control of the Company.

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

                                       23
<PAGE>
                    INTER-TEL, INCORPORATED AND SUBSIDIARIES

                           PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS--NOT APPLICABLE

ITEM 2. CHANGES IN SECURITIES--NOT APPLICABLE

ITEM 3. DEFAULTS ON SENIOR SECURITIES--NOT APPLICABLE

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

ITEM 5. OTHER INFORMATION

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

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     Exhibits:

     Exhibit 27.1 - Financial  Data Schedule for September 30, 2000

     Reports on Form 8-K -- None

                                       24
<PAGE>
                                   SIGNATURES

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

                                        INTER-TEL, INCORPORATED


Date: November 14, 2000                 /s/ Steven G. Mihaylo
                                        ----------------------------------------
                                        Steven G. Mihaylo,
                                        Chairman of the Board,
                                        Chief Executive Officer and President



Date: November 14, 2000                 /s/ Kurt R. Kneip
                                        ----------------------------------------
                                        Kurt R. Kneip,
                                        Vice President and Chief Financial
                                        Officer

                                       25