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, 2002                                0-10211


                             INTER-TEL, INCORPORATED


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


                               1615 S. 52nd Street
                              Tempe, Arizona 85281

                                 (480) 449-8900


                                  Common Stock
            (24,643,095 shares outstanding as of September 30, 2002)

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

                                                                            Page
PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements (Unaudited)

         Condensed consolidated balance sheets-- September 30, 2002
         and December 31, 2001                                               3

         Condensed consolidated statements of operations-- three and
         nine months ended September 30, 2002 and September 30, 2001         4

         Condensed consolidated statements of cash flows -- three and
         nine months ended September 30, 2002 and September 30, 2001         5

         Notes to condensed consolidated financial statements -
         September 30, 2002                                                  6

Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations                                          12

Item 3.  Quantitative and Qualitative Disclosures About Market Risk         29

Item 4.  Controls and Procedures                                            29

PART II. OTHER INFORMATION                                                  30

         SIGNATURES                                                         31

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

                                                     September 30,  December 31,
(In thousands, except share amounts)                      2002          2001
                                                       ---------     ---------
                                                      (Unaudited)     (Note A)
ASSETS
CURRENT ASSETS
  Cash and equivalents                                 $ 108,200     $  61,795
  Accounts receivable, less allowances of $12,712
    in 2002 and $11,858 in 2001                           43,959        45,962
  Inventories, less allowances of $11,172 in 2002
    and $13,202 in 2001                                   16,140        20,848
  Net investment in sales-leases                          13,697        13,799
  Income taxes receivable                                  1,735         3,257
  Deferred income taxes                                    9,672         8,467
  Prepaid expenses and other assets                        5,664         4,891
                                                       ---------     ---------
     TOTAL CURRENT ASSETS                                199,067       159,019

PROPERTY, PLANT & EQUIPMENT                               24,197        23,905
GOODWILL, NET                                             17,734        13,711
PURCHASED INTANGIBLE ASSETS, NET                           4,456         4,948
NET INVESTMENT IN SALES-LEASES                            23,694        21,735
OTHER ASSETS                                               2,772         4,144
                                                       ---------     ---------
                                                       $ 271,920     $ 227,462
                                                       ---------     ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
  Accounts payable                                     $  24,626     $  21,812
  Other current liabilities                               46,060        44,051
                                                       ---------     ---------
     TOTAL CURRENT LIABILITIES                            70,686        65,863

DEFERRED TAX LIABILITY                                    20,366        17,390
LEASE RECOURSE LIABILITY                                  10,618         8,890
RESTRUCTURING RESERVE                                      2,060         3,060
OTHER LIABILITIES                                          6,261         5,422

SHAREHOLDERS' EQUITY
Common Stock, no par value-authorized 100,000,000
  shares; issued - 27,161,823 shares; outstanding -
  24,643,095 shares at September 30, 2002 and
  24,166,430 shares at December 31, 2001                 110,673       108,968
Less: shareholder loans                                     (338)         (942)
Retained earnings                                         81,740        54,877
Accumulated other comprehensive income                       317           151
                                                       ---------     ---------
                                                         192,392       163,054
Less: Treasury stock at cost - 2,518,728 shares in
  2002 and 2,995,393 shares in 2001                      (30,463)      (36,217)
                                                       ---------     ---------

TOTAL SHAREHOLDERS' EQUITY                               161,929       126,837
                                                       ---------     ---------
                                                       $ 271,920     $ 227,462
                                                       ---------     ---------

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,
                                                   ----------------------    ----------------------
                                                      2002         2001         2002         2001
                                                   ---------    ---------    ---------    ---------
<S>                                                <C>          <C>          <C>          <C>
NET SALES                                          $  96,665    $  93,487    $ 282,682    $ 291,025
Cost of sales                                         47,615       50,211      140,104      163,181
                                                   ---------    ---------    ---------    ---------
GROSS PROFIT                                          49,050       43,276      142,578      127,844

Research & development                                 4,871        4,445       13,726       12,996
Selling, general and administrative                   32,194       31,626       95,717       97,082
Amortization of goodwill                                  --          431           --        1,243
Amortization of purchased intangible assets              269          212          795          636
Nonrecurring charge                                       --           --           --        5,357
                                                   ---------    ---------    ---------    ---------
                                                      37,334       36,714      110,238      117,314
                                                   ---------    ---------    ---------    ---------

OPERATING INCOME                                      11,716        6,562       32,340       10,530

Litigation settlement (net of costs except for
  taxes)                                                  --           --       15,516           --
Interest and other income                                411          294        1,364          508
Write-down of investment in Inter-Tel.NET/Vianet          --           --       (1,200)          --
Gain (loss) on foreign translation adjustments            73          140          273         (255)
Interest expense                                         (34)         (51)        (114)        (453)
                                                   ---------    ---------    ---------    ---------

INCOME BEFORE INCOME TAXES                            12,166        6,945       48,179       10,330
INCOME TAXES                                           4,623        2,568       18,206        3,820

                                                   ---------    ---------    ---------    ---------
NET INCOME                                         $   7,543    $   4,377    $  29,973    $   6,510
                                                   ---------    ---------    ---------    ---------

NET INCOME PER SHARE-BASIC                         $    0.31    $    0.18    $    1.23    $    0.26

NET INCOME PER SHARE-DILUTED                       $    0.29    $    0.18    $    1.17    $    0.26
                                                   ---------    ---------    ---------    ---------

Average number of common shares
  Outstanding - Basic                                 24,544       23,949       24,331       24,612

Average number of common shares
  Outstanding - Diluted                               26,033       24,804       25,715       25,185
                                                   ---------    ---------    ---------    ---------
</TABLE>

See accompanying notes.

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

<TABLE>
<CAPTION>
                                                               Three Months              Nine Months
(In thousands)                                              Ended September 30,      Ended September 30,
                                                          ----------------------    ----------------------
                                                             2002         2001        2002          2001
                                                          ---------    ---------    ---------    ---------
<S>                                                       <C>          <C>          <C>          <C>
OPERATING ACTIVITIES
Net income                                                $   7,543    $   4,377    $  29,973    $   6,510
Adjustments to reflect operating activities:
  Depreciation                                                1,753        2,047        5,465        6,908
  Amortization of goodwill and purchased intangibles            269          643          796        1,879
  Amortization of patents included in R&D expenses               55           55          166          166
  Non-cash portion of nonrecurring charge                        --           --           --        5,357
  Provision for losses on receivables                         2,747        3,062        7,931        8,879
  Provision for inventory valuation                             607          232          902        1,141
  Increase in other liabilities                                 379          807        1,705        1,640
  (Gain) loss on sale of property and equipment                  77          (34)          53           21
  Deferred income taxes                                       1,514        7,525        1,772       12,972
  Effect of exchange rate changes                               130           28          166          461
  Changes in operating assets and liabilities                (1,547)       9,363        7,184       10,104
                                                          ---------    ---------    ---------    ---------

NET CASH PROVIDED BY OPERATING ACTIVITIES                    13,527       28,105       56,113       56,038

INVESTING ACTIVITIES
  Additions to property and equipment                        (2,406)      (1,107)      (5,178)      (7,743)
  Proceeds from disposal of property and equipment                3           41          289           87
  Cash refunded from (used in) acquisitions                      13        6,000       (7,912)      (6,093)
                                                          ---------    ---------    ---------    ---------

NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES          (2,390)       4,934      (12,801)     (13,749)

FINANCING ACTIVITIES
  Cash dividends paid                                          (521)        (222)      (1,454)        (742)
  Payments on term debt                                         (75)        (327)        (412)      (1,420)
  Treasury stock purchases                                       (6)      (1,337)         (11)     (28,680)
  Proceeds from term debt                                        --           --           --        3,387
  Proceeds from stock issued under the ESPP                      --           --          475          508
  Proceeds from exercise of stock options                     3,156          411        4,495          867
                                                          ---------    ---------    ---------    ---------

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES           2,554       (1,475)       3,093      (26,080)
                                                          ---------    ---------    ---------    ---------

INCREASE IN CASH AND EQUIVALENTS                             13,691       31,564       46,405       16,209

CASH AND EQUIVALENTS AT BEGINNING OF PERIOD                  94,509       11,748       61,795       27,103
                                                          ---------    ---------    ---------    ---------

CASH AND EQUIVALENTS AT END OF PERIOD                     $ 108,200    $  43,312    $ 108,200    $  43,312
                                                          ---------    ---------    ---------    ---------
</TABLE>

See accompanying notes.

                                       5
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
September 30, 2002

NOTE A--BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance  with  accounting  principles  generally  accepted in the
United  States  of  America  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
ending September 30, 2002 are not necessarily indicative of the results that may
be expected for the year ended  December 31, 2002. The balance sheet at December
31, 2001 has been derived from the audited  financial  statements  at that date,
but does not include all of the information and footnotes  required by generally
accepted accounting  principles for complete financial  statements.  For further
information,  refer  to the  consolidated  financial  statements  and  footnotes
thereto  included in the Company's annual report on Form 10-K for the year ended
December 31, 2001.

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

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

     Prior to January 1, 2002, we amortized goodwill over the useful life of the
underlying  asset,  not to  exceed  40  years.  On  January  1,  2002,  we began
accounting  for goodwill  under the  provisions  of SFAS Nos. 141 and 142. As of
September  30, 2002 and  December  31,  2001,  we had the  following  intangible
assets:

(in thousands)                           September 30, 2002    December 31, 2001
                                         ------------------    -----------------
Goodwill                                       $24,561              $20,538
Less: Accumulated Amortization                   6,827                6,827
                                               -------              -------
Goodwill, net                                   17,734               13,711

Purchased Intangible Assets                      6,240                5,770
Less: Accumulated Amortization                   1,784                  822
                                               -------              -------
Purchased Intangible Assets, net                 4,456                4,948

Total Intangible Assets                         30,801               26,308
Less: Accumulated Amortization                   8,611                7,649
                                               -------              -------
Total Intangible Assets, net                   $22,190              $18,659
                                               -------              -------

Application  of the  non-amortization  provisions of SFAS No. 142 resulted in an
increase in income  before income taxes of  approximately  $0.4 million and $1.3
million in the quarter and nine months ended September 30, 2002, respectively.

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

                                       6
<PAGE>
     *    Significant   underperformance  relative  to  expected  historical  or
          projected future operating results;
     *    Significant changes in the manner of our use of the acquired assets or
          the strategy for our overall business;
     *    Our market capitalization relative to net book value; and
     *    Significant negative industry or economic trends.

We have tested goodwill for impairment using the two-step process  prescribed in
SFAS No. 142.  The first step is a screen for  potential  impairment,  while the
second step  measures the amount of the  impairment,  if any. We  performed  the
first of the required  impairment  tests for goodwill as of January 1, 2002, and
determined that the carrying amount of our goodwill is not impaired.  During the
quarter  ended  September  30,  2002,  we did not record any  impairment  losses
related to goodwill and other intangible assets.

RECENT ACCOUNTING PRONOUNCEMENT.

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

NOTE B--EARNINGS PER SHARE AND DIVIDENDS

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                      ------------------------------  ------------------------------
per share amounts)                         Sept. 30, 2002  Sept. 30, 2001  Sept. 30, 2002  Sept. 30, 2001
                                           --------------  --------------  --------------  --------------
<S>                                        <C>            <C>             <C>              <C>
Numerator: Net income                          $ 7,543        $ 4,377         $29,973          $ 6,510
                                               =======        =======         =======          =======
Denominator:
  Denominator for basic earnings per
  share - weighted average shares               24,544         23,949          24,331           24,612

Effect of dilutive securities:
  Employee and director stock options            1,489            855           1,384              573
                                               -------        -------         -------          -------
Denominator for diluted earnings per
  share - adjusted weighted average
  shares and assumed conversions                26,033         24,804          25,715           25,185
                                               =======        =======         =======          =======

Basic earnings per share                       $  0.31        $  0.18         $  1.23          $  0.26
                                               =======        =======         =======          =======

Diluted earnings per share                     $  0.29        $  0.18         $  1.17          $  0.26
                                               =======        =======         =======          =======
</TABLE>

DIVIDEND  POLICY.  On July 23, 2002,  our Board of Directors  increased the cash
dividend  (the "cash  dividend")  from $0.02 to $0.03 for every  share of Common
Stock, payable quarterly to shareholders of record beginning September 30, 2002,
with  dividend  payments  to  commence on or about 15 days after the end of each
fiscal  quarter.  From  December 31, 1997 through the third  quarter of 2001, we
paid  quarterly  cash  dividends  of $0.01  for every  share of Common  Stock to
shareholders of record, and from December 31, 2001 through the second quarter of
2002,  we paid  quarterly  cash  dividends  of $0.02  per  share.  We have  made
quarterly  dividend  payments  for each  quarter  since the  dividend  was first
declared in September 1997. Prior to the cash dividend,  we had declared no cash
dividends on our Common Stock since incorporation.

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

MCLEOD. On January 24, 2002, we acquired certain assets of McLeodUSA  Integrated
Business  Systems,  Inc.  ("McLeod")  for cash plus the  assumption  of  various
specific liabilities and related acquisition costs.  Inter-Tel acquired McLeod's
voice  customer base in Minnesota,  Iowa and Colorado and DataNet  operations in
South Dakota, which also included the related accounts receivable, inventory and
fixed  assets  along with  assumption  of  scheduled  specific  liabilities  for
warranty and  maintenance  obligations.  The  aggregate  purchase  price of $7.9
million was allocated to the fair value of the assets and liabilities acquired.

We  recorded  goodwill  of  approximately   $4.0  million  and  other  purchased
intangible  assets of $0.5 million,  for a total of $4.5 million,  in connection
with the McLeod  acquisition.  The goodwill  balance  will be  accounted  for in
accordance  with SFAS 141 and 142. The balances  included in the $0.5 million in
other  purchased  intangible  assets will be amortized over periods ranging from
two to five years from the date of the acquisition. During the third quarter and
nine months ended September 30, 2002, the  amortization of purchased  intangible
assets from McLeod was approximately $38,000 and $100,000, respectively.

INTER-TEL.NET/VIANET.  On July 24, 2001, Inter-Tel sold 83% of its Inter-Tel.NET
subsidiary to Comm-Services  Corporation for a promissory note of $4.95 million,
secured by Comm-Services stock, other marketable  securities of the shareholders
of  Comm-Services  and  100% of the net  assets  of  Inter-Tel.NET.  Inter-Tel's
management has not  participated  in the management of  Inter-Tel.NET  since the
sale in July 2001.  On December  30, 2001,  Comm-Services  entered into a merger
agreement with Vianet. Inter-Tel's 17% investment in Comm-Services was converted
to  approximately  10% of Vianet  stock.  The $4.95  million note was assumed by
Vianet and  Inter-Tel  maintains  its  collateral  interests as set forth above.
Inter-Tel has accounted  for the  remaining 10%  investment in Vianet  (formerly
Comm-Services) using the cost method of accounting.

The net  investment  in the note  receivable  and 10%  interest  in  Vianet  was
recorded in other assets for approximately $3.7 million as of December 31, 2001.
Inter-Tel assessed the value of this investment at March 31, 2002 and wrote-down
this investment by $600,000 to approximately  $3.1 million as of March 31, 2002.
Inter-Tel  assessed  the  value of this  investment  again at June 30,  2002 and
wrote-down this investment by $600,000 to approximately  $2.5 million as of June
30, 2002. A principal  payment of $250,000 was due September 22, 2001.  Interest
accruing  under the note was due and payable  from October 16, 2001 through July
15, 2002;  thereafter  monthly principal and interest payments were due based on
1% of  collected  monthly  revenues  from July 16,  2002 to October 15, 2002 and
based on 2% of collected  monthly  revenues are due from October 16, 2002, until
paid in full. The note is fully due and payable on December 31, 2007, or earlier
in certain circumstances.

The marketable  securities held as collateral may be exchanged for cash or other
readily marketable assets. At all times, the fair market value of the collateral
securities  are  required  to equal or exceed $2.5  million,  in addition to the
collateral  value of Vianet stock and the net assets of  Inter-Tel.NET.  Some of
the underlying securities have been transferred to cash or marketable securities
and this collateral has fallen to $2.3 million. The debtor is required under the
agreement  to cure  this  deficiency  by  contributing  cash for  other  readily
marketable assets sufficient to raise the total collateral to $2.5 million,  and
we are currently  pursuing  enforcement  of this  agreement  provision.  We have
notified Vianet (see discussion  regarding merger of Vianet with  Comm-Services)
of default in the payment of the $250,000  principal  payment due under the note
on September 22, 2001 and negotiations are ongoing for curing the default and/or
modifying the payment terms under the note and pledging additional collateral to
make up the  collateral  shortfall in  marketable  securities.  Any funds due to
Vianet/Comm-Services  for services  rendered can be and have been applied to the
note, interest due on the note or other payments due to Inter-Tel.

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

                                       8
<PAGE>
During  1999,  2000  and  2001,   Inter-Tel.NET  entered  into  operating  lease
agreements  totaling  approximately  $6.5 million  from an equipment  vendor for
network equipment and software.  The lease agreements required  Inter-Tel.NET to
purchase vendor maintenance on their products.  Inter-Tel originally  guaranteed
the  indebtedness.  In the second  quarter of 2001,  Inter-Tel.NET  notified the
vendor of network and network  equipment  problems  encountered due to equipment
and  software  recommended  by the vendor,  and  supplied  and  financed by this
vendor. Inter-Tel.NET requested that the vendor not only solve the problems, but
also  compensate  Inter-Tel.NET  for  the  problems  and the  resulting  loss of
customers,  revenues  and  profits.  Pursuant  to  Inter-Tel's  sale  of  83% of
Inter-Tel.NET,   Comm-Services   assumed  the  vendor   lease  and   maintenance
obligations.  However,  the vendor has not released Inter-Tel from its guarantee
of these  obligations and Inter-Tel has not released the vendor from Inter-Tel's
claims, nor did we assign our rights to these claims to Comm-Services.  In April
2002,  Inter-Tel  received a notice letter from the  financing  affiliate of the
Inter-Tel.NET  equipment vendor notifying Inter-Tel of default in lease payments
due the financing affiliate.  Inter-Tel responded to the affiliate advising them
that  Inter-Tel was no longer the Lessee of the  equipment,  of the correct name
and  address  of the  Lessee of the  equipment  and of the  losses to  Inter-Tel
because of the non  performance  of the equipment and vendor related third party
software providers' breach of contract.

EXECUTONE RESTRUCTURING CHARGE. During the second quarter of 2000, we recognized
a restructuring  charge related to acquired Executone  operations.  We accounted
for the  restructuring  of the  Executone  operations,  including  severance and
related costs,  the shut down and  consolidation of the Milford facility and the
impairment  of assets  associated  with the  restructuring  as identified in the
table below.  Accrued costs  associated with this plan were estimates,  although
the original  estimates made for the second quarter of 2000 for reserve balances
have not changed significantly in 2002.

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

The following table summarizes details of the restructuring  charge taken in the
second quarter of 2000 in connection with the Executone  acquisition,  including
the description of the type and amount of liabilities  assumed,  and activity in
the reserve balances from the date of the charge through September 30, 2002.

<TABLE>
<CAPTION>
(in thousands)                                                                                   2002        Reserve
                                          Cash/         Restructuring    2000        2001      Activity      Balance
          Description                    Non-Cash          Charge      Activity    Activity     9/30/02     At 9/30/02
          -----------                    --------          ------      --------    --------     -------     ----------
<S>                                     <C>               <C>          <C>           <C>          <C>            <C>
Personnel Costs:
  Severance and termination costs          Cash           $ (1,583)    $ 1,558       $  2         $ 10           $ (13)
  Other Plant closure costs                Cash               (230)         30        200           --              --

Lease termination and other contractual
obligations (net of anticipated
recovery):
  Building and equipment leases            Cash             (7,444)      1,348      1,489        1,946          (2,661)
  Other contractual obligations            Cash             (1,700)         --      1,700           --              --

Impairment of Assets:
  Inventories                            Non-Cash           (3,454)      1,376        209        1,540            (329)
  Prepaid inventory and other expenses   Non-Cash           (2,485)      2,485         --           --              --
  Accounts receivable                    Non-Cash           (1,685)        521        245           38            (881)
  Fixed assets                           Non-Cash           (3,151)      2,942         --           53            (156)
  Net intangible assets                  Non-Cash          (29,184)     29,184         --           --              --

Total                                                    $ (50,916)   $ 39,444    $ 3,845      $ 3,587        $ (4,040)
</TABLE>

                                       9
<PAGE>
NOTE D - SEGMENT INFORMATION

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

We currently  view our  operations as primarily  composed of two  segments:  (1)
telephone systems,  telecommunications  software and hardware, and (2) local and
long distance calling services. These products and services are provided through
our direct sales offices and dealer network to business customers throughout the
United  States,  Europe,  Asia and Mexico.  As a result,  financial  information
disclosed represents  substantially all of the financial  information related to
our two principal  operating  segments.  Results of operations for the local and
long distance calling services  segment,  if the operations were not included as
part of the consolidated  group, could differ materially,  as the operations are
integral to the total telephony solution offered by us to our customers.

In addition to the two  primary  segments  discussed  above,  the  Inter-Tel.NET
operations/investment,  Inter-Tel's  former  IP  long  distance  subsidiary,  is
separately  disclosed as a business segment.  The operations  represented a more
significant  component of the consolidated  operations in 2000 compared to prior
years and had a significant  impact on the revenues and net losses.  On July 24,
2001,   Inter-Tel   agreed  to  sell  83%  of   Inter-Tel.NET  to  Comm-Services
Corporation.  As a  result,  since  July 24,  2001,  we have  accounted  for the
remaining 17%  Inter-Tel.NET/Comm-Services  investment  using the cost method of
accounting.  On December 30, 2001, Comm-Services entered into a merger agreement
with Vianet.  Inter-Tel's  17%  investment  in  Inter-Tel.NET/Comm-Services  was
converted to approximately  10% of Vianet stock.  Inter-Tel will account for the
remaining  10%  investment  in Vianet  (formerly  Comm-Services)  using the cost
method of accounting.  Inter-Tel  assessed the value of this investment at March
31, 2002 and  wrote-down  this  investment  by $600,000  to  approximately  $3.1
million as of March 31, 2002.  Inter-Tel  assessed the value of this  investment
again  at  June  30,  2002  and  wrote-down   this  investment  by  $600,000  to
approximately $2.5 million.

For the quarters and nine months ended September 30, 2002 and 2001, we generated
income from business segments, including our investment in Inter-Tel.NET/Vianet,
as follows:

<TABLE>
<CAPTION>
                                                                       Three Months Ended September 30, 2002
                                                     ---------------------------------------------------------------------
                                                                                    Resale of
                                                                                    Local and
                                                                                       long
                                                     Principal    Inter-Tel.NET/    distance        Litigation
(In thousands, except per share amounts)              Segment        Vianet         services        Settlement     Total
                                                      -------        ------         --------        ----------     -----
<S>                                                   <C>           <C>               <C>                <C>        <C>
Net sales                                            $  88,842            --       $   7,823        $      --    $  96,665
Gross profit                                            46,802            --           2,248               --       49,050
Operating income                                        10,680            --           1,036               --       11,716
Interest and other, net                                    369            --              42               --          411
Gain on foreign translation adjustments                     73            --              --               --           73
Interest expense                                           (34)           --              --               --          (34)
Net income                                               6,875            --             668               --        7,543
Net income per diluted share                              0.26            --            0.03               --         0.29
Weighted average diluted shares                         26,033        26,033          26,033               --       26,033
Total assets                                           257,383            --          14,537               --      271,920
Depreciation and amortization                            2,062            --              15               --        2,077
</TABLE>

                                       10
<PAGE>
<TABLE>
<CAPTION>
                                                                        Three Months Ended September 30, 2001
                                                     ---------------------------------------------------------------------
                                                                                    Resale of
                                                                                    Local and
                                                                                       long
                                                     Principal    Inter-Tel.NET/    distance        Litigation
(In thousands, except per share amounts)              Segment        Vianet         services        Settlement     Total
                                                      -------        ------         --------        ----------     -----
<S>                                                  <C>           <C>             <C>              <C>          <C>
Net sales                                            $  85,526     $   1,214       $   6,747        $      --    $  93,487
Gross profit (loss)                                     36,588          (482)          7,170               --       43,276
Operating income                                         6,719          (923)            766               --        6,562
Interest and other, net                                    261             6              27               --          294
Gain on foreign translation adjustments                    140            --              --               --          140
Interest expense                                           (49)            0              (2)              --          (51)
Net income (loss)                                        4,457          (578)            498               --        4,377
Net income (loss) per diluted share (1)                   0.18         (0.02)           0.02               --         0.18
Weighted average diluted shares (1)                     24,804        23,949          24,804               --       24,804
Total assets                                           208,960            --          10,030               --      218,990
Depreciation and amortization                            2,450           256              38               --        2,744


                                                                        Nine Months Ended September 30, 2002
                                                     ---------------------------------------------------------------------
Net sales                                            $ 260,936            --       $  21,746        $      --    $ 282,682
Gross profit                                           136,303            --           6,275               --      142,578
Charge (see Note B)                                         --            --              --               --           --
Operating income                                        29,453            --           2,887               --       32,340
Interest and other, net                                  1,254        (1,200)            110           15,516       15,680
Gain on foreign translation adjustments                    273            --              --               --          273
Interest expense                                          (114)           --              --               --         (114)
Net income (loss)                                       19,365          (756)          1,868            9,496       29,973
Net income (loss) per diluted share (1)                    .75         (0.03)           0.07             0.37         1.17
Weighted average diluted shares (1)                     25,715        24,331          25,715           25,715       25,715
Total Assets                                           257,383            --          14,537               --      271,920
Depreciation and amortization                            6,362            --              65               --        6,427


                                                                        Nine Months Ended September 30, 2001
                                                     ---------------------------------------------------------------------
                                                                                    Resale of
                                                                                    Local and
                                                                                       long
                                                     Principal    Inter-Tel.NET/    distance        Litigation
(In thousands, except per share amounts)              Segment        Vianet         services        Settlement     Total
                                                      -------        ------         --------        ----------     -----
Net sales                                            $ 257,938     $  13,986       $  19,101        $      --    $ 291,025
Gross profit (loss)                                    128,625        (5,592)          4,811               --      127,844
Charge (see Note B)                                         --        (5,357)             --               --       (5,357)
Operating income                                        21,172       (13,118)          2,476               --       10,530
Interest and other, net                                    448            (1)             61               --          508
Loss on foreign translation adjustments                   (255)           --              --               --         (255)
Interest expense                                          (278)         (173)             (2)              --         (453)
Net income (loss)                                       13,325        (8,379)          1,564               --        6,510
Net income (loss) per diluted share (1)                   0.53         (0.34)           0.06               --         0.26
Weighted average diluted shares (1)                     25,185        24,612          25,185               --       25,185
Total assets                                           208,960            --          10,030               --      218,990
Depreciation and amortization                            6,836         1,994             122               --        8,952
</TABLE>

(1) Options that are antidilutive are not included in the computation of diluted
earnings per share when a net loss is recorded.

Our revenues are generated  predominantly  in the United States.  Total revenues
generated from U.S.  customers totaled $94.3 million or 97.5% of total revenues,
and $91.2 million or 97.6% of total  revenues for the quarters  ended  September
30, 2002 and 2001,  respectively.  Total revenues  generated from U.S. customers
totaled $275.3 million or 97.4% of total  revenues,  and $283.3 million or 97.4%
of total  revenues  for the nine  months  ended  September  30,  2002 and  2001,
respectively.  Our revenues from international  sources were primarily generated
from customers located in the United Kingdom, Europe, Asia and South America. In
the  first  nine  months  of 2002 and  2001,  revenues  from  customers  located
internationally accounted for 2.6% and 2.6% of total revenues, respectively.

                                       11
<PAGE>
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 10-Q.

OVERVIEW

     Inter-Tel, incorporated in 1969, is a leading provider in the United States
of business enterprise telephone systems and related software  applications.  We
market and sell call processing, voice processing,  unified messaging,  Internet
Protocol (IP) telephony,  networking,  productivity-enhancing CRM and IVR, voice
recognition  and  related  Computer  Telephone  (CT)  integration  software  and
applications.  Inter-Tel  resells long distance  calling services and is also in
the managed services and voice and data convergence market, with a line of voice
and data routers,  IP phones and e-commerce Web software,  which allow Inter-Tel
to handle  networked  applications  as large as 40,000  ports.  Our products and
services include the AXXESS by Inter-Tel,  ECLIPSE(2) by Inter-Tel and Encore by
Inter-Tel  business   communication   systems,   with  integrated  software  and
applications  listed  above.  We also provide  maintenance,  leasing and support
services  for  our  products.   Our  customers  include  business   enterprises,
government agencies and non-profit organizations.  Our common stock is quoted on
the Nasdaq National Market System under the symbol "INTL."

     We have developed a distribution  network of direct sales offices,  dealers
and value added  resellers  (VARs),  which sell our  products  to  organizations
throughout  the United  States and  internationally,  including  to divisions of
Fortune 500 companies, large service organizations and governmental agencies. As
of September  30, 2002,  we had 52 direct sales offices in the United States and
one in Japan,  and a network of  hundreds  of dealers  and VARs around the world
that purchase directly from us. We also maintain a wholesale distribution office
in the  United  Kingdom  that  supplies  Inter-Tel's  dealers  and  distributors
throughout the UK and parts of Europe.

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

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

     The markets we serve are  characterized by rapid  technological  change and
evolving  customer  requirements.  We have sought to address these  requirements
through the development of software  enhancements  and  improvements to existing

                                       12
<PAGE>
systems and the  introduction  of new  products  and  applications.  Inter-Tel's
research and  development  efforts over the last several years have been focused
primarily on the  development of and  enhancements  to our AXXESS and ECLIPSE(2)
systems,  including  adding  new  applications,  enhancing  our  IP  convergence
applications  and  IP  telephones,   developing   Unified   Messaging   Software
applications and enhancing our  telecommunications  networking package. Over the
last several years, we have also focused our research and development efforts on
the development of our Unified Communicator  software  application,  call center
and IVR applications,  the ClearConnect  SoftPhone and the related  ClearConnect
Talk-to-Agent web communications  software.  We are currently devoting resources
to developing and enhancing the convergence  products and  applications  for our
AXXESS and ECLIPSE(2) systems, supporting  industry-standard VoIP protocols such
as MGCP and SIP and enhancing our Unified Messaging  Software.  In addition,  we
are developing new  speech-recognition  and text-to-speech enabled applications,
developing   advanced  IVR  and  CT  applications,   enhancing  our  IP  digital
telephones, and enhancing our server-based PBX offerings.

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

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                Three Months Ended Sept. 30,   Nine Months Ended Sept. 30,
                                                ----------------------------   ---------------------------
                                                      2002          2001            2002          2001
                                                     -----         -----           -----         -----
<S>                                                  <C>           <C>             <C>           <C>
NET SALES                                            100.0%        100.0%          100.0%        100.0%
Cost of sales                                         49.3          53.7            49.6          56.1
                                                     -----         -----           -----         -----

GROSS PROFIT                                          50.7          46.3            50.4          43.9

Research and development                               5.0           4.8             4.9           4.5
Selling, general and administrative                   33.3          33.8            33.9          33.4
Amortization of goodwill                                --           0.5              --           0.4

Amortization of purchased intangible assets            0.3           0.2             0.3           0.2
Nonrecurring charge                                     --            --              --           1.8
                                                     -----         -----           -----         -----

OPERATING INCOME                                      12.1           7.0            11.4           3.6

Litigation settlement (net of costs except
  for taxes                                             --            --             5.5            --
Interest and other income                              0.4           0.3             0.5           0.2
Write-down of investment in
  Inter-Tel.NET/Vianet                                  --            --            (0.4)           --

Gain (loss) on foreign translation adjustments         0.1           0.1             0.1          (0.1)
Interest expense                                      (0.0)         (0.1)           (0.0)         (0.2)
                                                     -----         -----           -----         -----
Income before income taxes                            12.6           7.4            17.0           3.5
Income taxes                                           4.8           2.7             6.4           1.3
                                                     -----         -----           -----         -----
Net income                                             7.8%          4.7%           10.6%          2.2%
                                                     -----         -----           -----         -----
</TABLE>

     Included in the table above for 2001 is a nonrecurring  charge  recorded in
connection with the sale of the Company's interest in Inter-Tel.NET. The Company
recorded a  nonrecurring  charge as of the close of the  second  quarter of $5.4
million ($3.4 million after tax) associated with the impairment of the Company's
investment  in  Inter-Tel.NET.  The  impairment  was measured by the  difference
between the carrying value of Inter-Tel's 17% interest in Inter-Tel.NET  and the
estimated  fair  market  value  of  the  17%  interest  in  the  net  assets  of
Inter-Tel.NET. In 2001, the charge was recorded in operating income.

                                       13
<PAGE>
     NET SALES.  Net sales for the third quarter of 2002 increased 3.4% to $96.7
million,  compared to $93.5 million in the third quarter of 2001,  including the
operations of Inter-Tel.NET  through July 24, 2001. Since the sale of 83% of our
interest in Inter-Tel.NET in July 2001, we have not recorded  operating revenues
or  expenses  from  Inter-Tel.NET.   Net  sales  attributable  to  Inter-Tel.NET
operations were $1.6 million for the third quarter of 2001. Excluding sales from
Inter-Tel.NET  in the third quarter of 2001,  net sales in 2002  increased  5.2%
compared to $91.8 million in 2001. Net sales decreased 2.9% to $282.7 million in
the first  nine  months of 2002,  compared  to $291.0  million in the first nine
months of 2001. Net sales  attributable to  Inter-Tel.NET  operations were $14.0
million for the first seven months of 2001.  Excluding sales from  Inter-Tel.NET
in the first nine months of 2001,  net sales in 2002  increased 2.0% compared to
2001.  Since  July  24,  2001,  the  date of the  sale of our  83%  interest  in
Inter-Tel.NET,  we have used the cost  method of  accounting  for our  remaining
investment  in Vianet  (which  merged  with  Inter-Tel.NET's  successor  entity,
Comm-Services).

     The third quarter increase in net sales was primarily attributable to sales
from our network  services group and acquired McLeod  operations.  The increases
were largely offset because,  as discussed  above,  the 2002 results included no
revenues from the operations of Inter-Tel.NET. For the third quarter of 2002, we
experienced an increase of $2.6 million in sales of business telephone software,
systems and related data  products on a combined  basis through our direct sales
offices, government and national accounts and wholesale distribution compared to
2001. Sales from McLeod operations represented an increase of approximately $5.9
million  in the third  quarter  of 2002  compared  to 2001.  Although  net sales
increased  slightly,  our 2002 net sales  were  negatively  impacted  by delayed
customer buying decisions  related to deterioration in macroeconomic  conditions
and  increased  competitive  pressures.  In some  instances,  prices of  various
telecommunications  systems decreased, and discounts or other promotions that we
offered to customers to generate sales resulted in lower revenues.

     Sales from our network services group,  including  NetSolutions and Network
Services agency,  increased $1.5 million,  and sales from our leasing operations
increased  by $575,000  in the third  quarter of 2002  compared  to 2001.  These
increases were largely offset by sales decreases of $1.6 million attributable to
the sale of our interest in Inter-Tel.NET  in the third quarter of 2001.  Please
refer to Note D of Notes to  Consolidated  Financial  Statements  for additional
segment reporting information.

     GROSS PROFIT. Gross profit for the third quarter of 2002 increased 13.3% to
$49.1 million,  or 50.7% of net sales, from $43.3 million, or 46.3% of net sales
in  the  third  quarter  of  2001,   which   included   operating   results  for
Inter-Tel.NET.  Excluding Inter-Tel.NET results, gross profit increased 12.1% in
the third quarter of 2002,  compared to $43.8 million,  or 47.6% of net sales in
the third quarter of 2001.  Gross profit  increased 11.5% to $142.6 million,  or
50.4% of net sales, in the first nine months of 2002 compared to $127.8 million,
or 43.9% of net sales, in the first nine months of 2001 including Inter-Tel.NET.
Excluding  Inter-Tel.NET,  gross profit for the nine months ended  September 30,
2002 increased 6.9%,  compared to $133.4 million,  or 48.2% of net sales, in the
first nine months of 2001. The increase in gross profit as a percentage of sales
(or gross margin) was primarily  attributable to the sale of our 83% interest in
Inter-Tel.NET, which generated negative margins in 2001. Inter-Tel.NET generated
negative gross profit of $(482,000) and $(5.6 million), in the third quarter and
nine months ended September 30, 2001, respectively.

     The  increases in gross profit as a percentage  of sales (or gross  margin)
were also attributable to a higher amount of software in system solutions,  cost
reductions,   including   reduced  costs  from   suppliers  on  products   sold,
implementation  of  design  improvements  into  the  manufacturing  process  and
efficiencies  achieved  from a higher  percentage  of  orders  placed  using the
Internet. We also generated a higher percentage of sales from recurring revenues
on sales to  existing  business  telephone  customers,  which  improved  margins
because of lower  materials  costs.  Margins also improved  despite  competitive
pricing pressures  throughout the business and despite increased sales from long
distance  services,  which generate lower margins  compared to sales of business
telephone  software  and  systems.  Our  gross  margins  may vary in the  future
depending  on a  number  of  factors,  including  the mix of  products  sold and
services  provided,  the mix of new systems sales relative to recurring revenues
from our existing  customer  base, the mix of sales through direct sales offices
and dealer network, as well as macroeconomic and competitive influences.

     RESEARCH AND DEVELOPMENT.  Research and development  expenses for the third
quarter of 2002 increased 9.6% to $4.9 million,  or 5.0% of net sales,  compared
to $4.4 million,  or 4.8% of net sales, for the third quarter of 2001.  Research
and development  expenses increased 5.6% to $13.7 million, or 4.9% of net sales,

                                       14
<PAGE>
in the first  nine  months of 2002  compared  to $13.0  million,  or 4.5% of net
sales,  in the  first  nine  months  of 2001.  These  increases  were  primarily
attributable  to increased  expenses  associated with  engineering  personnel we
hired in connection  with our purchase of assets from  Mastermind  Technologies,
Inc. in October 2001.  Research and  development  expenses  also  increased as a
result of development  associated with enhancing convergence features,  software
solutions and  applications  and devices on our AXXESS by Inter-Tel and ECLIPSE2
by Inter-Tel  communications  platforms, as well as development of voice-enabled
and speech  recognition  vertical  market  applications,  including  the Unified
Communicator application. We expect that for the foreseeable future research and
development  expenses  will  increase  sequentially  in  absolute  dollars as we
continue to enhance existing and develop new  technologies  and products.  These
expenses may vary, however, as a percentage of net sales.

     SELLING,  GENERAL AND ADMINISTRATIVE.  Selling,  general and administrative
expenses,  excluding amortization,  for the third quarter of 2002 increased 1.8%
to $32.2  million,  compared to $31.6  million,  for the second quarter of 2001.
However,  these expenses  decreased as a percentage of net sales to 33.3% of net
sales in the  third  quarter  of 2002  compared  to 33.8% of net  sales in 2001.
Selling, general and administrative expenses, excluding amortization,  decreased
1.4% to $95.7 million,  or 33.9% of net sales, in the first nine months of 2002,
compared to $97.1  million,  or 33.4% of net sales,  in the first nine months of
2001. The increase in absolute  dollars for the quarter ended September 30, 2002
was primarily due to higher net sales  compared to the same period in 2001.  The
decrease  in  absolute  dollars for the nine  months  ended  September  30, 2002
compared  to 2001 was  primarily  due to lower net  sales  for the 2002  period,
reflecting in part the sale of our 83% interest in Inter-Tel.NET in July 2001.

     Excluding the operations of  Inter-Tel.NET  in 2001,  selling,  general and
administrative expenses for the third quarter of 2002 increased 3.2% compared to
$31.2  million,  or 34.0% of net sales,  in 2001.  Excluding  the  operations of
Inter-Tel.NET in 2001, selling, general and administrative expenses for the nine
months ended  September 30, 2002 increased  0.7% compared to $95.0  million,  or
34.3% of net sales, in 2001.

     Selling,  general and  administrative  expenses also  increased in absolute
dollars as a result of a higher  percentage of total sales generated through our
direct sales offices and government and national accounts  divisions,  including
the acquired McLeod  operations in January 2002. In addition to reduced expenses
attributable  to the  sale  of  Inter-Tel.NET  in  2001,  selling,  general  and
administrative  expenses decreased as a percentage of net sales in 2002 compared
to 2001, due in part to lower  depreciation and bad debt costs relative to total
sales. In addition, the growth in sales from the resale of long distance calling
services and Datanet products led to lower selling,  general and  administrative
costs  relative  to total  sales.  We  expect  that for the  foreseeable  future
selling,  general and  administrative  expenses  will increase  sequentially  in
absolute dollars as we continue to enhance existing and develop new technologies
and products. These expenses may vary, however, as a percentage of net sales.

     AMORTIZATION OF GOODWILL AND PURCHASED  INTANGIBLE  ASSETS. We adopted SFAS
No. 142 effective the beginning of fiscal 2002. In accordance  with SFAS 142, we
ceased amortizing goodwill. We are required to perform goodwill impairment tests
on an annual  basis and between  annual  tests in certain  circumstances.  As of
September 30, 2002, no impairment of goodwill has been recognized.  There can be
no assurance that future goodwill  impairment  tests will not result in a charge
to earnings.  For  additional  information  regarding SFAS 142, see "Adoption of
Accounting Standard" in Note A of Notes to the Condensed  Consolidated Financial
Statements.

     Amortization of purchased  intangible assets included in operating expenses
was  $269,000 in the third  quarter of 2002,  compared to $212,000 in the second
quarter  of 2001.  Amortization  of  purchased  intangible  assets  included  in
operating  expenses was $795,000 for the nine months ended  September  30, 2002,
compared to $636,000 for the nine months ended September 30, 2001. The increases
in the  amortization  of  purchased  intangible  assets for the quarter and nine
months  ended  September  30,  2002  compared  to the same  periods in 2001 were
primarily related to the additional  amortization from recent acquisitions.  For
additional  information  regarding  purchased  intangible  assets,  see  Note  A
"Adoption of Accounting  Standard" and Note C  "Acquisitions,  Dispositions  and
Restructuring Charges " to the Condensed Consolidated Financial Statements.

                                       15
<PAGE>
     NONRECURRING  CHARGE.  In  connection  with  the  sale of our  interest  in
Inter-Tel.NET in July 2001, we recorded a nonrecurring charge as of the close of
the second  quarter of 2001 of $5.4 million ($3.4 million after tax)  associated
with the impairment of the Company's investment in Inter-Tel.NET. The impairment
was measured as the difference  between the carrying  value of  Inter-Tel's  17%
interest  in  Inter-Tel.NET  and the  estimated  fair  market  value  of the 17%
interest in the net assets of Inter-Tel.NET.

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

     INTEREST AND OTHER  INCOME.  Other income in of 2002 included an expense of
approximately  $1.2 million related to the write-down of Inter-Tel's  investment
in  Inter-Tel.NET/Vianet  in the first six  months  of 2002,  but no  additional
expenses were recorded in the third quarter of 2002.  Other than the write-down,
other income in all periods  consisted  primarily of interest income and foreign
exchange rate gains and losses. Interest income increased approximately $724,000
in the nine months ended  September  30, 2002 compared to 2001 based on a higher
level of  invested  funds,  due in part to cash  received  from  the  litigation
settlement  noted  above,   offset  by  expenditures   relating  to  the  McLeod
acquisition.  During  the first  nine  months  of 2002,  we  recognized  foreign
exchange rate gains of $273,000,  an improvement of $528,000  compared to losses
of $255,000 in 2001.  Interest  expense was $114,000 in the first nine months of
2002, a decrease of $339,000 compared to $453,000 in 2001.

     INCOME  TAXES.  Our  income  tax rate for the  first  nine  months  of 2002
increased to 37.8% compared to 37.0% for 2001. The rate increased primarily as a
result of higher  marginal  tax rates  anticipated  from the receipt of the cash
litigation  settlement award. We expect the full-year 2002 tax rate to be higher
than the tax rate effective for 2001.

     NET INCOME/(LOSS). Net income for the third quarter was $7.5 million ($0.29
per diluted  share)  compared to net income of $4.4  million  ($0.18 per diluted
share)  for  the  third  quarter  of  2001,  including  the  2001  Inter-Tel.NET
operations.  Net income for the nine months ended  September  30, 2002 was $30.0
million ($1.17 per diluted  share),  including the 2002  litigation  settlement,
compared to net income of $6.5 million  ($0.26 per diluted  share) for the first
nine months of 2001,  including the 2001  nonrecurring  charge and Inter-Tel.NET
operations.

     Excluding the 2001 operations of  Inter-Tel.NET,  we reported net income of
$7.5 million,  or $0.29 per diluted share in the third quarter of 2002, compared
to net income of $5.0 million,  or $0.20 per diluted share, in the third quarter
of 2001.  Excluding  the 2002  litigation  settlement  and  2001  operations  of
Inter-Tel.NET,  we reported  net income of $20.5  million,  or $0.80 per diluted
share in the first nine months of 2002, compared to net income of $14.9 million,
or $0.59 per diluted share, in the first nine months of 2001. These increases in
both  periods  are the result of higher  gross  profit and  increased  operating
efficiencies.

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 our consolidated operations.

LIQUIDITY AND CAPITAL RESOURCES

     At September 30, 2002, we had $108.2 million in cash and cash  equivalents,
which  represented  an increase of  approximately  $46.4  million  from our cash
position as of December 31, 2001. We maintain a $10 million unsecured, revolving

                                       16
<PAGE>
line of credit with Bank One, N.A. that is available through June 1, 2003. Under
this credit  facility,  we have the option to borrow at a prime rate or adjusted
LIBOR interest rate. Historically, we have used the credit facility primarily to
support international letters of credit to suppliers. Inter-Tel received a gross
cash award of $20 million in February 2002 in settlement of a dispute  submitted
to binding arbitration. Costs relating to attorney's fees, expert witnesses, and
arbitration  and  additional  costs and  expenses,  totaled  approximately  $4.5
million  in the first  nine  months of 2002,  resulting  in a net award of $15.5
million before income taxes.  During the first nine months of 2002, $7.9 million
of available  cash,  net, was used to fund  acquisitions.  During the first nine
months  of 2001,  approximately  $28.7  million  of  available  cash was used to
repurchase  our common stock and an additional  $6.1 million of available  cash,
net,  was used to fund  acquisitions.  In the first nine  months of 2001,  $12.1
million of available cash was used to fund  acquisitions,  of which $6.0 million
was  subsequently  returned to us from an escrow  account to reduce the net cash
used in the Convergent acquisition.  Proceeds from the exercise of stock options
yielded an  increase  in net cash of $4.5  million  for the first nine months of
2002,  compared to $867,000 for the nine months ended  September  30, 2001.  The
remaining  cash  balances  and  credit   facility  may  be  used  for  potential
acquisitions,  strategic  alliances,  working capital,  stock repurchases and/or
general corporate purposes.

     Net cash  provided by operating  activities  totaled  $56.1 million for the
nine months ended  September  30, 2002,  compared to cash  provided by operating
activities  of $56.0  million  for the same  period in 2001.  Cash  provided  by
operating  activities in 2002 was primarily  the result of cash  generated  from
operations,  including  non-cash  depreciation and amortization  charges of $6.4
million,  as well as proceeds from the litigation  settlement  discussed  above.
Cash  generated by the change in operating  assets and  liabilities  in 2002 was
$7.2 million,  compared to $10.1 million in 2001. Of the $7.2 million  change in
operating assets and liabilities,  $1.7 million was due to the tax benefits from
the exercise of the stock  options.  At September  30, 2002,  we achieved  lower
accounts receivable and inventory than at December 31, 2001, which was primarily
a result of close  management of  receivables  and  inventory.  At September 30,
2002,  cash  generated  by the change in net  deferred  taxes was $1.8  million,
compared to $13.0 million in 2001. Net cash provided by operating activities was
partially  offset by  increases  in prepaid  expenses  at  September  30,  2002,
primarily  reflecting amounts assumed from the McLeod acquisition.  We expect to
expand  sales  through our direct  sales  office and dealer  networks,  which is
expected to require the  expenditure of working  capital for increased  accounts
receivable and inventories.

     Net cash used in investing  activities  totaled  $12.8 million for the nine
months ended  September 30, 2002,  compared to $13.7 million for the same period
in 2001.  During the nine months  ended  September  30,  2002,  net cash used in
acquisitions  totaled   approximately  $7.9  million  and  capital  expenditures
approximately  $5.2  million,  compared  to net  cash  used in  acquisitions  of
approximately   $6.1  million  in  the  first  nine  months  of  2001.   Capital
expenditures  totaled  approximately  $7.7  million in the first nine  months of
2001, $3.8 million of which was attributable to assets used in the Inter-Tel.NET
network,  83% of which was  disposed of in July 2001.  We  anticipate  incurring
additional  capital  expenditures  during  the  remainder  of 2002,  principally
relating to  expenditures  for equipment  and  management  information  systems,
facilities expansion and acquisition activities.

     Net cash provided by financing  activities totaled $3.1 million in the nine
months  ended  September  30,  2002,  compared  to net  cash  used in  financing
activities of $26.1 million for the same period in 2001.  Net cash proceeds from
the exercise of stock options and stock issued under our Employee Stock Purchase
Plan  totaled $5.0 million and $1.4 million in the first nine months of 2002 and
2001,  respectively,  which was offset in each period by cash used for dividends
totaling  approximately  $1.5 million and  $742,000.  During  2002,  we reissued
treasury shares through stock option exercises and issuances,  with the proceeds
received  totaling  less that the cost  basis of the  treasury  stock  reissued.
Accordingly,  the difference  was recorded as a reduction to retained  earnings.
During  the first  nine  months  of 2001,  we  purchased  treasury  stock  using
approximately  $28.7 million.  We issued  long-term debt, net of repayments,  of
$2.0  million  in 2001  primarily  in the form of  long-term  capital  leases to
support  capital  additions to  Inter-Tel.NET  prior to our  divestiture  of our
majority ownership in July 2001.

     We offer to our customers lease financing and other services, including our
TotalSolution (formerly Totalease) program,  through our Inter-Tel Leasing, Inc.
subsidiary.  We fund  our  TotalSolution  program  in part  through  the sale to
financial  institutions  of  rental  income  streams  under the  leases.  Resold
TotalSolution  rentals  totaling  $204.0  million  and $202.7  million  remained
unbilled at  September  30, 2002 and December  31,  2001,  respectively.  We are
obligated to  repurchase  such income  streams in the event of defaults by lease

                                       17
<PAGE>
customers on a limited recourse basis and, accordingly,  maintain reserves based
on loss  experience,  past due  accounts,  specific  account  analysis and total
portfolio  analysis.  Although  to date we have been able to resell  the  rental
streams  from  leases  under  the  TotalSolution  program  profitably  and  on a
substantially current basis, the timing and profitability of lease resales could
impact our business and operating  results,  particularly  in an  environment of
fluctuating  interest  rates and  economic  uncertainty.  If we are  required to
repurchase  rental streams and realizes losses thereon in amounts  exceeding our
reserves, our operating results will be adversely affected.

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

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

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

                                       18
<PAGE>
     GOODWILL AND OTHER  IDENTIFIABLE  INTANGIBLES.  We assess the impairment of
goodwill  and other  identifiable  intangibles  whenever  events or  changes  in
circumstances  indicate  that the carrying  value may not be  recoverable.  Some
factors we consider  important which could trigger an impairment  review include
the following:

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

     When we determine that the carrying value of goodwill and other  identified
intangibles  may not be  recoverable,  we  measure  any  impairment  based  on a
projected  discounted  cash flow method using a discount rate  determined by our
management to be  commensurate  with the risk  inherent in our current  business
model. In accordance with SFAS No. 142, on January 1, 2002 we ceased  amortizing
goodwill arising from  acquisitions  completed prior to July 1, 2001.  Inter-Tel
has tested goodwill for impairment using the two-step process prescribed in SFAS
No. 142. The first step is a screen for potential  impairment,  while the second
step measures the amount of the impairment,  if any. Inter-Tel has performed the
first of the  required  impairment  tests for goodwill as of January 1, 2002 and
has determined that the carrying amount of goodwill is not impaired.

     Inter-Tel has adopted SFAS No. 142 effective  January 1, 2002.  Application
of the  nonamortization  provisions  of SFAS 142 has  resulted in an increase in
income from  continuing  operations  before income taxes of  approximately  $1.3
million in 2002 for the nine months ended September 30, 2002.

     ALLOWANCE  FOR  DOUBTFUL  ACCOUNTS.  We maintain  allowances  for  doubtful
accounts for estimated  losses  resulting from the inability of our customers to
make required payments.  If the financial  condition of our customers or channel
partners  were to  deteriorate,  resulting in an  impairment of their ability to
make payments, additional allowances may be required. At September 30, 2002, our
allowance  for doubtful  accounts  were $12.7 million of our $56.7 million gross
accounts receivable. Additional reserves or allowances for doubtful accounts are
recorded for our sales-type leases, discussed above in "Sales-Leases."

     INVENTORIES.  We value our inventories at lower of cost or market.  Cost is
determined by the first-in,  first-out  (FIFO)  method,  including  material and
labor.  Significant management judgment is required to determine the reserve for
obsolete or excess inventory.  Inventory on hand may exceed future demand either
because the product is outdated,  or obsolete,  or because the amount on hand is
more than can be used to meet future need, or excess. We currently  consider all
inventory  that  has no  activity  within  one  year as  well as any  additional
specifically  identified  inventory to be excess.  We also provide for the total
value of inventories  that we determine to be obsolete based on criteria such as
customer  demand,   product  life-cycles,   changing   technologies  and  market
conditions.  We write  down  our  excess  and  obsolete  inventory  equal to the
difference  between the cost of inventory  and the estimated  market  value.  At
September  30, 2002,  our  inventory  reserves  were $11.2  million of our $27.3
million gross  inventories.  If actual  customer  demand,  product  life-cycles,
changing  technologies  and  market  conditions  are less  favorable  than those
projected by management, additional inventory write-downs may be required.

     CONTINGENCIES.  We are a party to  various  claims  and  litigation  in the
normal course of business.  Management's  current  estimated  range of liability
related to various  claims and pending  litigation  is based on claims for which
our  management  can  estimate  the  amount  and range of loss.  Because  of the
uncertainties  related  to both the  amount  and range of loss on the  remaining
pending  claims  and  litigation,  management  is  unable  to make a  reasonable
estimate of the  liability  that could result from an  unfavorable  outcome.  As
additional information becomes available, we will assess the potential liability
related to our pending  litigation and revise our  estimates.  Such revisions in
our estimates of the potential  liability could materially impact our results of
operation and financial position.  We also received  correspondence  during 1999
from a major  competitor  and  subsidiary  inviting  us to  negotiate  a license
agreement  regarding the  competitors'  patents.  We have continued to negotiate
with these  competitors  regarding their patent claims as well as make claim for
our patents.  We do not anticipate that the resolution of such matters will have
a material adverse effect on our consolidated financial position.

                                       19
<PAGE>
FACTORS THAT MAY AFFECT RESULTS OF FUTURE OPERATIONS

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

RISKS RELATED TO OUR BUSINESS

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

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

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

OUR FUTURE SUCCESS  LARGELY  DEPENDS ON INCREASED  COMMERCIAL  ACCEPTANCE OF OUR
AXXESS  AND  ECLIPSE2  SYSTEMS,  ENCORE  PRODUCT,  INTERPRISE  PRODUCTS,  SPEECH
RECOGNITION   AND   INTERACTIVE   VOICE   RESPONSE    PRODUCTS,    AND   RELATED
COMPUTER-TELEPHONY PRODUCTS.

     During the past few years, among other development efforts, we enhanced our
transparent networking and voice and data convergence capabilities on our AXXESS
and ECLIPSE2  systems,  introduced our Encore product and introduced our Unified
Communicator  and  Applications  software  packages.  During the past 12 months,
sales of our AXXESS and  ECLIPSE2  business  communications  systems and related
software  have  comprised  a  substantial  portion of our net sales.  Our future
success  depends,  in large  part,  upon  increased  commercial  acceptance  and
adoption  of our voice and data  convergence  features,  new  computer-telephony
products,  Encore  products,  Interprise  products,  new speech  recognition and
Interactive  Voice  Response  products,  continued  popularity  and sales of the
AXXESS and ECLIPSE2  systems,  as well as future  upgrades and  enhancements  to
these  products  and  networking  platforms.  We cannot  assure  you that  these
products or platforms will achieve commercial  acceptance in the future, or will
maintain current levels of sales.

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

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

     *    costs associated with the remediation of any problems;
     *    costs associated with design modifications;
     *    loss of or delay in revenues;
     *    loss of customers;

                                       20
<PAGE>
     *    failure to achieve market acceptance or loss of market share;
     *    increased service and warranty costs;
     *    liabilities to our customers; and
     *    increased insurance costs.

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

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

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

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

     *    inability to complete acquisition transactions timely or at all;
     *    unanticipated costs and liabilities;
     *    difficulty of integrating  the  operations,  products and personnel of
          the acquired business;
     *    difficulties  in managing  the  financial  and  strategic  position of
          acquired or developed products, services and technologies;
     *    the diversion of management's attention from the core business;
     *    inability  to  maintain  uniform  standards,  controls,  policies  and
          procedures;
     *    impairment  of  relationships  with  acquired  employees and customers
          occurring as a result of integration of the acquired business; and
     *    difficulties  or risks  associated with the service and maintenance of
          competitors' products.

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

     In  July  2001,   Inter-Tel   agreed  to  sell  83%  of   Inter-Tel.NET  to
Comm-Services  Corporation.  In  connection  with  this  transaction,  Inter-Tel
assessed the fair value of the net assets of  Inter-Tel.NET  as of June 30, 2001
under  FAS  121 to  arrive  at an  adjustment  to the  remaining  investment  in
Inter-Tel.NET. The charge recorded as of the close of the second quarter of 2001
totaled $5.4 million ($3.4 million after tax), associated with the impairment of
Inter-Tel's investment in Inter-Tel.NET.  The recording of this charge adversely
affected our operating  results for the second  quarter of 2001. On December 30,
2001,  Comm-Services  entered into a merger agreement with Vianet  Technologies,
Inc.  (Vianet).  Inter-Tel's  17% investment in  Comm-Services  was converted to
approximately  10% of Vianet stock.  As of March 31, 2002, we assessed the value
of our  investment  in Vianet and we recorded an expense of $600,000  related to
the  write-down  of  this  investment.  Inter-Tel  assessed  the  value  of this
investment  again at June 30, 2002 and wrote-down this investment by $600,000 to
approximately  $2.5 million.  We notified Vianet of default in principal payment
of  $250,000  due  under  a  note  issued  to us by  Comm-Services,  and  we are
negotiating with  Comm-Services/Vianet to cure this default and/or to modify the
terms of payment  under this note.  Our financial  condition  would be adversely
affected to the extent that the Vianet business is unsuccessful.

     During 1999, 2000 and 2001, Inter-Tel.NET also entered into operating lease
agreements  totaling  approximately  $6.5 million  from an equipment  vendor for
network equipment and software.  The lease agreements required  Inter-Tel.NET to
have vendor maintenance on their products.  Inter-Tel originally  guaranteed the
indebtedness.  In the second quarter of 2001,  Inter-Tel.NET notified the vendor
of network and network  equipment  problems  encountered due to vendor equipment

                                       21
<PAGE>
and software  recommended,  supplied and financed by this vendor.  Inter-Tel.NET
requested  that the  vendor  not only solve the  problems,  but also  compensate
Inter-Tel.NET  for the problems and the resulting lost customers,  lost revenues
and  lost  profits.  Pursuant  to  Inter-Tel's  sale  of 83%  of  Inter-Tel.NET,
Comm-Services assumed the vendor lease and maintenance obligations. However, the
vendor has not released  Inter-Tel from its guarantee of these  obligations  and
Inter-Tel has not released the vendor from Inter-Tel's claims, nor did we assign
our rights to these claims to Comm-Services. In April 2002, Inter-Tel received a
notice letter from the financing affiliate of the Inter-tel.NET equipment vendor
notifying  Inter-Tel of default in lease  payments due the financing  affiliate.
Subsequently,  Inter-Tel responded to the affiliate advising them that Inter-Tel
was not the lessee of the  equipment,  of the  correct  name and  address of the
current  lessee of the equipment  and of the losses to Inter-Tel  because of the
non  performance  of the  equipment  and vendor  related  third  party  software
providers'  breach of  contract.  Our  financial  condition  would be  adversely
affected to the extent that  payments made under the  guarantee  exceed  damages
realized from our claim.

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

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

     Our success  depends upon our  proprietary  technology.  We currently  hold
patents for eighteen (18)  telecommunication  and unified messaging products and
have also applied to the U.S. Patent and Trademark Office for six (6) additional
patents.  We  also  rely on  copyright  and  trade  secret  law and  contractual
provisions to protect our  intellectual  property.  Despite  these  precautions,
third  parties  could copy or otherwise  obtain and use our  technology  without
authorization, or develop similar technology independently.

     We cannot assure you that any patent, trademark or copyright that we own or
have applied to own, will not be  invalidated,  circumvented  or challenged by a
third  party.  Effective  protection  of  intellectual  property  rights  may be
unavailable  or  limited  in foreign  countries.  We cannot  assure you that the
protection of our proprietary  rights will be adequate or that  competitors will
not independently  develop similar technology,  duplicate our services or design
around any patents or other  intellectual  property rights we hold.  Although we
generally exclude coverage where  infringement  arises out of the combination of
our products with others,  we may be required to indemnify some of our customers
for some of the costs and damages of patent  infringement in circumstances where
our product separately creates a potential  infringement  liability.  Litigation
may be necessary in the future to enforce our intellectual  property rights,  to
protect  our  trade  secrets,  to  determine  the  validity  and  scope  of  the
proprietary  rights of others,  or to defend against claims of  infringement  or
invalidity.  Litigation could be costly, absorb significant  management time and
harm our business.

     We are also  subject  to third  party  claims  that our  current  or future
products or services  infringe  upon the rights of others.  For example,  we are
subject to proceedings  alleging that certain of our key products  infringe upon
third  party  intellectual  property  rights,  including  patents,   trademarks,
copyrights  or  other  intellectual  property  rights.  We  may  be  unaware  of
intellectual property rights of others that may cover some of our technology. We
have viewed  presentations from one of our primary competitors alleging that our
AXXESS business  communications system utilizes inventions covered by certain of
their patents. We are continuing the process of investigating this matter and we
have made claims against the competitor for  infringement  of our patents.  When
any such  claims are  asserted  against  us,  among  other  means to resolve the
dispute, we may seek to license the third party's intellectual  property rights.
Purchasing  such  licenses  can be  expensive,  and we cannot  assure you that a
license will be available on prices or other terms  acceptable to us, if at all.
Alternatively,  we  could  resort  to  litigation  to  challenge  such a  claim.
Litigation  could require us to expend  significant  sums of cash and divert our
management's  attention.  In the  event  that a  court  renders  an  enforceable
decision with respect to our  intellectual  property,  we may be required to pay
significant  damages,  be  subject  to an  injunction  against  the  use  of our
proprietary systems, be required to develop non-infringing technology or acquire
licenses to the  technology  subject to the alleged  infringement.  Any of these
actions or outcomes  could harm our business.  If we are unable or choose not to
license technology,  or decide not to challenge a third party's rights, we could
encounter substantial and costly delays in product  introductions.  These delays
could result from efforts to design  around  asserted  third party rights or our
discovery that the development,  manufacture or sale of products requiring these
licenses could be foreclosed.

                                       22
<PAGE>
OUR IP NETWORK PRODUCTS MAY BE VULNERABLE TO VIRUSES, OTHER SYSTEM FAILURE RISKS
AND SECURITY  CONCERNS,  WHICH MAY RESULT IN LOST  CUSTOMERS OR SLOW  COMMERCIAL
ACCEPTANCE OF OUR IP NETWORK PRODUCTS.

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

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

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

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

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

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

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

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

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

     We currently  obtain certain key  components for our digital  communication
platforms,   including  certain  microprocessors,   integrated  circuits,  power
supplies,  voice  processing  interface  cards and IP  telephony  cards,  from a
limited  number of suppliers  and  manufacturers.  Our reliance on these limited

                                       23
<PAGE>
suppliers and contract manufacturers involves risks and uncertainties, including
the  possibility  of a shortage or delivery  delay for some key  components.  We
currently manufacture our products through third-party subcontractors located in
the United  States,  the  People's  Republic  of China,  the United  Kingdom and
Mexico.  The  Encore  system is  manufactured  by an OEM  partner  in the United
Kingdom. Foreign manufacturing facilities are subject to changes in governmental
policies, imposition of tariffs and import restrictions and other factors beyond
our control. Varian currently manufactures a significant portion of our products
at Varian's Tempe, Arizona facility,  including substantially all of the printed
circuit  boards used in the AXXESS and  ECLIPSE2  systems.  We have  experienced
occasional  delays in the  supply of  components  and  finished  goods that have
harmed our business. We cannot assure that we will not experience similar delays
in the future.

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

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

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

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

     We are in the process of attempting to expand our  international  sales and
dealer  network both in the countries in which we already have a presence and in
new countries and regions. International sales are subject to a number of risks,
including  changes  in  foreign  government  regulations  and  telecommunication
standards,  export  license  requirements,   tariffs  and  taxes,  long-standing
relationships  between our potential customers and their local providers,  other
trade   barriers,   difficulties  in  protecting  our   intellectual   property,
fluctuations in currency exchange rates,  difficulty in collecting  receivables,
difficulty  in staffing and  managing  foreign  operations,  and  political  and
economic  instability.  Fluctuations in currency  exchange rates could cause our
products to become  relatively  more  expensive  to  customers  in a  particular
country,  leading to a reduction in sales or profitability  in that country.  In
addition,  the costs associated with developing  international  sales may not be
offset by increased sales in the short term, or at all. International operations
may require the  expenditure  of  significant  amounts of time or money to build
brand  identity  or  loyalty  in  locations  where our  brand is not  recognized
currently,  without any certainty that we will be successful. Any of these risks
could cause our products to become  relatively  more expensive to customers in a
particular country, leading to reduced sales or profitability in that country.

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

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

                                       24
<PAGE>
WE MAY BE UNABLE TO MANAGE OUR GROWTH EFFECTIVELY, WHICH MAY HARM OUR BUSINESS.

     The ability to operate our  business in an uncertain  and  evolving  market
requires an effective  planning and  management  process.  While growth has been
difficult  to  achieve  in  the  current  economy,  and  in  particular,  in the
telecommunications industry, we have attempted to grow our business and maintain
existing customers, while controlling costs. As a result, this has stretched our
resources.  An upturn in the economy or the potential  increase in business from
customers  who  have  been  delaying  capital  spending  decisions  could  place
additional   significant   strains  on  our   personnel,   management   systems,
infrastructure  and other  resources.  Our  ability to manage any future  growth
effectively will require us to successfully attract,  train, motivate and manage
new  employees,  to integrate new employees  into our overall  operations and to
continue to improve our  operational,  financial  and  management  controls  and
procedures.  Furthermore,  we  expect  that we will be  required  to  manage  an
increasing number of relationships with suppliers, manufacturers,  customers and
other  third  parties.  If we are  unable  to  implement  adequate  controls  or
integrate new employees into our business in an efficient and timely manner, our
operations  could be adversely  affected and our growth could be impaired  which
could harm our business.

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

     In the  past few  years,  we  introduced  new  versions  of,  or  completed
significant  upgrades to, the AXXESS and  ECLIPSE2  ATM business  communications
system and networking software,  which are typically sold to larger customers at
a higher average selling price and often represent a significant  communications
infrastructure  capital  expenditure  by the  prospective  enterprise  customer.
Accordingly,  the purchase of our products  typically involves numerous internal
approvals relating to the evaluation,  testing, implementation and acceptance of
new technologies.  This evaluation process frequently results in a lengthy sales
process,  which can range  from a few  months  to more than 12  months,  thereby
subjecting our sales cycle to a number of significant  uncertainties  concerning
budgetary constraints and internal acceptance reviews. Moreover, our sales cycle
has lengthened in recent periods, as our prospective customers are reevaluating,
and in some  cases  deferring,  purchasing  decisions  in  light  of the  recent
economic  downturn.  The length of our sales  cycle also may vary  substantially
from customer to customer.  While our customers are  evaluating our products and
before  placing an order with us, we may incur  substantial  sales and marketing
expenses  and  expend  significant  management  effort.  Consequently,  if sales
forecasted from a specific customer for a particular quarter are not realized in
that quarter, our operating results could be materially adversely affected.

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

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

     *    volume and timing of orders received during the quarter;
     *    gross margin fluctuations associated with the mix of products sold;
     *    the mix of distribution channels;
     *    general economic conditions;
     *    patterns of capital spending by customers;
     *    the timing of new  product  announcements  and  releases by us and our
          competitors;
     *    pricing pressures,
     *    the ability to resell  lease income  streams to third party  financial
          institutions,
     *    the cost and effect of acquisitions;
     *    the cost of defending pending or threatened litigation; 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 depending  principally on orders
booked and shipped in that quarter.  In the past, we have recorded a substantial
portion of our net sales for a given quarter in the third month of that quarter,
with a  concentration  of such net sales in the last two  weeks of the  quarter.
Market   demand  for   investment   in  capital   equipment   such  as  business

                                       25
<PAGE>
communications  systems and  associated  call  processing  and voice  processing
software  applications depends largely on general economic  conditions,  and can
vary significantly as a result of changing conditions in the economy as a whole.
We cannot assure you that  historical  trends for small backlog will continue in
the future.

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

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

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

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

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

OUR CHAIRMAN OF THE BOARD OF DIRECTORS,  CEO AND PRESIDENT CONTROLS 21.6% OF OUR
COMMON  STOCK  AND  IS  ABLE  TO  SIGNIFICANTLY   INFLUENCE   MATTERS  REQUIRING
SHAREHOLDER APPROVAL.

     As of September 30, 2002,  Steven G. Mihaylo,  Inter-Tel's  Chairman of the
Board of Directors,  Chief Executive Officer and President,  beneficially  owned
approximately  21.6% of the outstanding shares of the common stock. As a result,
he has the ability to exercise significant  influence over all matters requiring
shareholder approval. In addition, the concentration of ownership could have the
effect of delaying or preventing a change in control of Inter-Tel.

                                       26
<PAGE>
RISKS RELATED TO OUR INDUSTRY

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

The  overall  economic  slowdown  has had a  harmful  effect on the  market  for
enterprise  communications  equipment.  Our customers have reduced significantly
their capital spending on communications  equipment in an effort to reduce their
own costs and bolster their revenues.  To the extent that economic conditions do
not  improve  and  enterprise   communications  spending  does  not  improve  or
deteriorates,  our revenue and operating results may be adversely affected.  The
market for enterprise  communications  equipment may not grow or may continue to
grow at a modest rate and our financial performance has been and may continue to
be materially and adversely affected by the reductions in spending on enterprise
communications equipment.

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

     The market for IP network voice communications products is evolving rapidly
and is  characterized  by an  increasing  number  of  market  entrants  who have
introduced  or developed  products and services for Internet or other IP network
voice communications.  As is typical of a new and rapidly evolving industry, the
demand for and market acceptance of, recently introduced IP network products and
services are highly uncertain.  We cannot assure you that packet-switched  voice
networks will become widespread.  Even if packet-switched  voice networks become
widespread in the future, we cannot assure you that our products,  including the
Inter-Tel  InterPrise  product line and IP telephony  features of the AXXESS and
ECLIPSE2  systems,  will  successfully  compete against other market players and
attain broad  market  acceptance.  Inter-Tel  sold 83% of  Inter-Tel.NET,  an IP
telephony  provider,  to  Comm-Services  in July  2001,  and our  remaining  17%
investment was subsequently  converted to  approximately  10% interest in Vianet
Technologies,   Inc.  through  a  merger  between   Comm-Services   and  Vianet.
Accordingly,   Inter-Tel   continues  to  maintain  an   investment  of  10%  in
Inter-Tel.NET through Vianet. Our financial condition will be adversely affected
if the Inter-Tel.NET/Vianet business is unsuccessful.

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

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

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

                                       27
<PAGE>
are  unwilling  or unable to provide  telecommunications  services  and  billing
information  to us on  favorable  terms,  our  ability  to  expand  our own long
distance  and  network   services   will  be  harmed.   Carriers   that  provide
telecommunications services to us may also experience financial difficulties, up
to  and  including   bankruptcies,   which  could  harm  our  ability  to  offer
telecommunications services.

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

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

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

ITEM 4. CONTROLS AND PROCEDURES

During  the 90 day  period  prior to the  filing of this  quarterly  report,  an
evaluation was performed under the supervision and with the participation of our
management,  including our Chief  Executive  Officer  (CEO) and Chief  Financial
Officer  (CFO),  of  the  effectiveness  of  the  design  and  operation  of our
disclosure  controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c)
under the Securities Exchange Act of 1934, as amended).  Our CEO and CFO believe
based on the evaluation that the design and operation of our disclosure controls
and  procedures  are effective to ensure that material  information  relating to
Inter-Tel,  Incorporated  is made  known to them by others  within  the  Company
during the period in which this  Report of Form 10-Q was being  prepared.  There
have been no significant  changes in our internal controls or, to our knowledge,
in other factors that could significantly affect internal controls subsequent to
that evaluation.

                                       28
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES
PART II. OTHER INFORMATION

ITEM l. LEGAL PROCEEDINGS

We are  involved  from  time to  time  in  litigation  and  arbitration  matters
incidental to our business, and as part of normal business operations. Inter-Tel
Integrated  Systems,  Inc.  (IISI),  a  wholly-owned  subsidiary  of  Inter-Tel,
Incorporated,  recently  received  a  complaint  filed on July  22,  2002 in the
Arizona Federal  District Court by OCIS Ltd., a former reseller of Vocal'Net and
Axxess  products in the UK,  alleging that IISI caused  monetary  damages in the
amount of $159 million to the dealer by denying it the ability to resell a large
amount of Vocal'Net product to a specified  customer.  We do not believe that we
have any liability for any of the alleged  damages to this reseller.  We believe
that the claims are without merit and we are vigorously  defending  ourselves in
this matter.

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 HOLDER--Not Applicable

ITEM 5. OTHER INFORMATION--Not Applicable

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

        Exhibits:

        Exhibit 3.1:   Articles of Incorporation, as amended (1)

        Exhibit 3.2:   By-laws, as amended (2)

        Exhibit 99.1:  Certification of Chief Executive Officer Pursuant to 18
                       U.S.C. Section 1350, as Adopted Pursuant to Section 906
                       of the Sarbanes-Oxley Act of 2002

        Exhibit 99.2:  Certification of Chief Financial Officer Pursuant to 18
                       U.S.C. Section 1350, as Adopted Pursuant to Section 906
                       of the Sarbanes-Oxley Act of 2002

          (1)  Incorporated by reference to  Registrant's  Annual Report on Form
               10-K for the year ended December 31, 1988 (File No. 0-10211).

          (2)  Incorporated by reference to  Registrant's  Annual Report on Form
               10-K for the year ended December 31, 1995 (File No. 0-10211).

        Reports on Form 8-K:  None

                                       29
<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 8, 2002                  /s/ Steven G. Mihaylo
                                        ----------------------------------------
                                        Steven G. Mihaylo,
                                        Chairman of the Board,
                                        Chief Executive Officer and President


Date: November 8, 2002                  /s/ Kurt R. Kneip
                                        ----------------------------------------
                                        Kurt R. Kneip,
                                        Vice President
                                        and Chief Financial Officer

                                       30
<PAGE>
                    CERTIFICATION OF CHIEF EXECUTIVE OFFICER
                             AS ADOPTED PURSUANT TO
                  SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Steven G. Mihaylo, certify that:

     1.   I have  reviewed  this  quarterly  report on Form  10-Q of  Inter-Tel,
          Incorporated.

     2.   Based on my  knowledge,  this  report  does  not  contain  any  untrue
          statement of material fact or omit to state a material fact  necessary
          to make the statements made, in light of the circumstances under which
          such  statements  were made, not misleading with respect to the period
          covered by this report.

     3.   Based on my knowledge,  the financial statements,  and other financial
          information  included in this report,  fairly  present in all material
          respects the financial condition, results of operations and cash flows
          of the  registrant  as of,  and for,  the  periods  presented  in this
          report;

     4.   The registrant's  other certifying  officers and I are responsible for
          establishing  and maintaining  disclosure  controls and procedures (as
          defined in Exchange  Act Rules  13a-14 and 15d-14) for the  registrant
          and we have:

          a.   designed such  disclosure  controls and procedures to ensure that
               material  information  relating to the registrant,  including its
               consolidated  subsidiaries,  is made known to us by others within
               those  entities,  particularly  during  the  period in which this
               report is being prepared;

          b.   evaluated  the  effectiveness  of  the  registrant's   disclosure
               controls and  procedures as of a date within 90 days prior to the
               filing date of this report (the "Evaluation Date"); and

          c.   presented in this report our conclusions  about the effectiveness
               of the disclosure controls and procedures based on our evaluation
               as of the Evaluation Date;

     5.   The registrant's other certifying officers and I have disclosed, based
          on our most recent evaluation,  to the registrant's auditors and audit
          committee of the registrant's board of directors:

          a.   all  significant  deficiencies  in the  design  or  operation  of
               internal  controls which could adversely  affect the registrant's
               ability to record,  process,  summarize and report financial data
               and have  identified for the  registrant's  auditors any material
               weaknesses in internal controls; and

          b.   any fraud,  whether or not material,  that involves management or
               other employees who have a significant  role in the  registrant's
               internal controls; and

     6.   The  registrant's  other  certifying  officers and I have indicated in
          this report whether or not there were significant  changes in internal
          controls or in other factors that could significantly  affect internal
          controls  subsequent  to the  date  of  our  most  recent  evaluation,
          including   any   corrective   actions  with  regard  to   significant
          deficiencies and material weaknesses.

Date: November 8, 2002


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

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

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

                                       31
<PAGE>
                    CERTIFICATION OF CHIEF FINANCIAL OFFICER
                             AS ADOPTED PURSUANT TO
                  SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Kurt R. Kneip, certify that:

     1.   I have  reviewed  this  quarterly  report on Form  10-Q of  Inter-Tel,
          Incorporated.

     2.   Based on my  knowledge,  this  report  does  not  contain  any  untrue
          statement of material fact or omit to state a material fact  necessary
          to make the statements made, in light of the circumstances under which
          such  statements  were made, not misleading with respect to the period
          covered by this report.

     3.   Based on my knowledge,  the financial statements,  and other financial
          information  included in this report,  fairly  present in all material
          respects the financial condition, results of operations and cash flows
          of the  registrant  as of,  and for,  the  periods  presented  in this
          report;

     4.   The registrant's  other certifying  officers and I are responsible for
          establishing  and maintaining  disclosure  controls and procedures (as
          defined in Exchange  Act Rules  13a-14 and 15d-14) for the  registrant
          and we have:

          a.   designed such  disclosure  controls and procedures to ensure that
               material  information  relating to the registrant,  including its
               consolidated  subsidiaries,  is made known to us by others within
               those  entities,  particularly  during  the  period in which this
               report is being prepared;

          b.   evaluated  the  effectiveness  of  the  registrant's   disclosure
               controls and  procedures as of a date within 90 days prior to the
               filing date of this report (the "Evaluation Date"); and

          c.   presented in this report our conclusions  about the effectiveness
               of the disclosure controls and procedures based on our evaluation
               as of the Evaluation Date;

     5.   The registrant's other certifying officers and I have disclosed, based
          on our most recent evaluation,  to the registrant's auditors and audit
          committee of the registrant's board of directors:

          a.   all  significant  deficiencies  in the  design  or  operation  of
               internal  controls which could adversely  affect the registrant's
               ability to record,  process,  summarize and report financial data
               and have  identified for the  registrant's  auditors any material
               weaknesses in internal controls; and

          b.   any fraud,  whether or not material,  that involves management or
               other employees who have a significant  role in the  registrant's
               internal controls; and

     6.   The  registrant's  other  certifying  officers and I have indicated in
          this report whether or not there were significant  changes in internal
          controls or in other factors that could significantly  affect internal
          controls  subsequent  to the  date  of  our  most  recent  evaluation,
          including   any   corrective   actions  with  regard  to   significant
          deficiencies and material weaknesses.

Date: November 8, 2002


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

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

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

                                       32