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, 2001                                              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
            (24,071,035 shares outstanding as of September 30, 2001)


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

                                                                            Page
                                                                            ----
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

        Condensed consolidated balance sheets-- September 30, 2001
        and December 31, 2000                                                 3

        Condensed consolidated statements of operations-- three and
        nine months ended September 30, 2001 and September 30, 2000           4

        Condensed consolidated statements of cash flows -- three and
        nine months ended September 30, 2001 and September 30, 2000           5


        Notes to condensed consolidated financial statements
        -- September 30, 2001                                                 6

Item 2. Management's Discussion and Analysis of Financial Condition
          and Results of Operations                                          11

PART II. OTHER INFORMATION                                                   24

         SIGNATURES                                                          25

                                       2
<PAGE>
PART I. FINANCIAL INFORMATION

INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands)                                     September 30,    December 31,
                                                       2001            2000
                                                    ---------       ---------
                                                   (Unaudited)       (Note A)
ASSETS
CURRENT ASSETS
  Cash and equivalents                              $  43,312       $  27,103
  Accounts receivable                                  52,513          61,482
  Inventories                                          26,450          35,060
  Net investment in sales-leases                       13,516          14,629
  Income taxes receivable                               2,379           9,157
  Deferred income taxes                                 5,436          13,116
  Prepaid expenses and other assets                     5,580           7,668
                                                    ---------       ---------
  TOTAL CURRENT ASSETS                                149,186         168,215

PROPERTY, PLANT & EQUIPMENT                            25,059          32,723
EQUIPMENT HELD UNDER LEASE, NET                           138             423
GOODWILL AND OTHER INTANGIBLES                         18,155          18,389
NET INVESTMENT IN SALES-LEASES                         22,406          22,808
OTHER ASSETS                                            4,046             568
                                                    ---------       ---------
                                                    $ 218,990       $ 243,126
                                                    ---------       ---------

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
  Accounts payable                                  $  30,696       $  35,438
  Current maturities of long-term debt                    543           1,766
  Other current liabilities                            42,319          45,003
                                                    ---------       ---------
  TOTAL CURRENT LIABILITIES                            73,558          82,207

DEFERRED TAX LIABILITY                                 10,134           5,222
LONG TERM DEBT                                            893           3,720
OTHER LIABILITIES                                      14,586          15,541

SHAREHOLDERS' EQUITY
Common Stock                                          108,705         109,132
Less: shareholder loans                                (1,018)         (1,018)
Retained earnings                                      49,143          44,099
Accumulated other comprehensive income                    182            (280)
                                                    ---------       ---------
                                                      157,012         151,933
Less: Treasury stock at cost                          (37,193)        (15,497)
                                                    ---------       ---------

TOTAL SHAREHOLDERS' EQUITY                            119,819         136,436
                                                    ---------       ---------
                                                    $ 218,990       $ 243,126
                                                    =========       =========

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,
                                                             ----------------------    ----------------------
                                                                2001         2000         2001         2000
                                                             ---------    ---------    ---------    ---------
<S>                                                          <C>          <C>          <C>          <C>
NET SALES                                                    $  93,487    $ 102,650    $ 291,025    $ 300,102

Cost of sales                                                   50,211       58,852      163,181      176,715
Cost of sales - Executone restructuring                             --           --           --        7,639
                                                             ---------    ---------    ---------    ---------
Total cost of sales                                             50,211       58,852      163,181      184,354
                                                             ---------    ---------    ---------    ---------
GROSS PROFIT                                                    43,276       43,798      127,844      115,748
                                                             ---------    ---------    ---------    ---------

Research & development                                           4,445        4,389       12,996       15,488
Selling, general and administrative                             32,269       31,158       98,961       95,023
Restructuring charge                                                --           --        5,357       45,245
In-process research and development                                 --           --           --        5,433
                                                             ---------    ---------    ---------    ---------
                                                                36,714       35,547      117,314      161,189
                                                             ---------    ---------    ---------    ---------

OPERATING INCOME (LOSS)                                          6,562        8,251       10,530      (45,441)

Equity share of Cirilium Corp.'s net losses                         --       (2,024)          --       (5,938)
Write-off of Cirilium Corp. investment                              --       (2,045)          --       (2,045)
Interest and other income                                          294          253          508        1,208
Gain (loss) on foreign translation adjustments                     140         (131)        (255)        (413)
Interest expense                                                   (51)         (32)        (453)        (169)
                                                             ---------    ---------    ---------    ---------

INCOME (LOSS) BEFORE INCOME TAXES                                6,945        4,272       10,330      (52,798)
INCOME TAXES                                                     2,568        2,188        3,820      (19,499)
                                                             ---------    ---------    ---------    ---------
NET INCOME (LOSS)                                            $   4,377    $   2,084    $   6,510    $ (33,299)
                                                             =========    =========    =========    =========

NET INCOME (LOSS) PER SHARE-BASIC                            $    0.18    $    0.08    $    0.26    $   (1.26)
                                                             =========    =========    =========    =========
NET INCOME (LOSS) PER SHARE-DILUTED                          $    0.18    $    0.08    $    0.26    $   (1.26)
                                                             =========    =========    =========    =========
Average number of common shares Outstanding - Basic             23,949       26,435       24,612       26,351
                                                             =========    =========    =========    =========
Average number of common shares Outstanding - Diluted           24,804       26,940       25,185       26,351
                                                             =========    =========    =========    =========
</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,
                                                          --------------------      --------------------
                                                            2001        2000          2001        2000
                                                          --------    --------      --------    --------
<S>                                                       <C>         <C>           <C>         <C>
OPERATING ACTIVITIES
Net income (loss)                                         $  4,377    $  2,084      $  6,510    $(33,299)
Adjustments to reflect operating activities:
  Depreciation and amortization                              2,745       3,076         8,953       9,832
  Non-cash portion of nonrecurring charge                       --          --         5,357      41,783
  Purchased in-process R&D                                      --          --            --       5,433
  Provision for losses on receivables                        3,062       3,568         8,879       7,581
  Provision for inventory valuation                            232          41         1,141        (120)
  Decrease in other liabilities                                807         433         1,640       7,325
  (Gain) loss on sale of property and equipment                (34)          5            21         161
  Deferred income taxes                                      7,525       2,186        12,972     (16,194)
  Effect of exchange rate changes                               28        (289)          461        (411)
  Changes in operating assets and liabilities                9,363     (14,827)       10,104     (15,671)
                                                          --------    --------      --------    --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES         28,105      (3,723)       56,038       6,420

INVESTING ACTIVITIES
  Additions to property and equipment                       (1,107)     (2,173)       (7,743)     (8,251)
  Additions to operating leases                                 --          --            --        (122)
  Proceeds from disposal of property and equipment              41          10            87          20
  Proceeds from disposition of business segment                 --          --            --       6,602
  Cash provided by (used in) acquisitions                    6,000        (478)       (6,093)     (2,124)
                                                          --------    --------      --------    --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES          4,934      (2,641)      (13,749)     (3,875)

FINANCING ACTIVITIES
  Cash dividends paid                                         (222)       (264)         (742)       (790)
  Payments on term debt                                       (327)       (261)       (1,420)       (812)
  Treasury stock purchases                                  (1,337)        (37)      (28,680)        (37)
  Proceeds from term debt                                       --          --         3,387          --
  Proceeds from stock issued under the ESPP                     --          --           508         449
  Proceeds from exercise of stock options                      411          78           867       1,742
                                                          --------    --------      --------    --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES         (1,475)       (484)      (26,080)        552

INCREASE (DECREASE) IN CASH AND EQUIVALENTS                 31,564      (6,848)       16,209       3,097

CASH AND EQUIVALENTS AT BEGINNING OF PERIOD                 11,748      29,170        27,103      19,225
                                                          --------    --------      --------    --------

CASH AND EQUIVALENTS AT END OF PERIOD                     $ 43,312    $ 22,322      $ 43,312    $ 22,322
                                                          ========    ========      ========    ========
</TABLE>

See accompanying notes.

                                       5
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2001

NOTE A--BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial  information and with the  instructions to Form 10-Q and Rule 10-01 of
Regulation  S-X.  Accordingly,  they do not include all of the  information  and
footnotes  required by generally  accepted  accounting  principles  for complete
financial statements. In the opinion of management,  all adjustments (consisting
of normal recurring  accruals)  considered  necessary for a fair presentation of
the results for the interim  periods  presented  have been  included.  Operating
results  for the  three  and  nine  months  ending  September  30,  2001 are not
necessarily  indicative  of the results  that may be expected for the year ended
December 31, 2001.  The balance sheet at December 31, 2000 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, 2000.

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

From December 1999 to September  2000,  the Company owned more than 20% but less
than 50% of Cirilium Corporation  ("Cirilium").  Therefore, the Company recorded
the  activity  of Cirilium  using the equity  method of  accounting  during that
period.  The Company wrote-off its investment in Cirilium in September 2000, and
reduced its ownership interest below 20%. As a result,  since that time, and for
the third  quarter and nine months  ended  September  30,  2001,  the Company no
longer used the equity  method of  accounting  for the Cirilium  investment.  In
addition,  Inter-Tel  sold 83% of  Inter-Tel.NET  on July 24, 2001. As a result,
since that time the Company has accounted for its remaining investment using the
cost method of accounting.

RECENT  ACCOUNTING  PRONOUNCEMENTS.  In  June  2001,  the  Financial  Accounting
Standards  Board ("FASB")  issued  Statement of Financial  Accounting  Standards
("SFAS")  No.  141,  Business  Combinations,  and No.  142,  Goodwill  and Other
Intangible Assets, effective for fiscal years beginning after December 15, 2001.
Under the new rules,  goodwill and intangible  assets deemed to have  indefinite
lives will no longer be amortized but will be subject to annual impairment tests
in accordance with the statements.  Other intangible  assets will continue to be
amortized  over their useful lives.  The Company has not completed its review of
the impact of SFAS No. 141 and 142 and will be performing a fair-value  analysis
at a later date in  connection  with the  adoption of SFAS No. 142 on January 1,
2002.

In June  1998,  the FASB  issued  SFAS No.  133 ("SFAS  133"),  "Accounting  for
Derivative Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative  instruments and for hedging  activities.  It
requires  that  an  entity   recognize  all  derivatives  as  either  assets  or
liabilities  in the balance sheet and measure those  investments  at fair value.
Implementation  of this standard has been delayed by the FASB for a twelve-month
period. The Company adopted SFAS 133 in the first quarter of fiscal 2001 with no
effect to the Company's operations or financial position.

NOTE B--EARNINGS PER SHARE

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

                                       6
<PAGE>
The following table sets forth the computation of basic and diluted earnings per
share:

<TABLE>
<CAPTION>
(In Thousands, Except                                Three Months Ended                     Nine Months Ended
Per Share Amounts)                            ---------------------------------     ---------------------------------
                                              Sept. 30, 2001     Sept. 30, 2000     Sept. 30, 2001     Sept. 30, 2000
                                              --------------     --------------     --------------     --------------
<S>                                              <C>                <C>                <C>                <C>
Numerator:  Net income                           $  4,377           $  2,084           $  6,510           $(33,299)
                                                 ========           ========           ========           ========
Denominator:
  Denominator for basic earnings per share -
   weighted average shares                         23,949             26,435             24,612             26,351

Effect of dilutive securities:
  Employee and director stock options                 855                505                573                 --
                                                 --------           --------           --------           --------
Denominator for diluted earnings per share -
 adjusted weighted average shares and assumed
 conversions                                       24,804             26,940             25,185             26,351
                                                 ========           ========           ========           ========

Basic earnings per share                         $   0.18           $   0.08           $   0.26           $  (1.26)
                                                 ========           ========           ========           ========

Diluted earnings per share                       $   0.18           $   0.08           $   0.26           $  (1.26)
                                                 ========           ========           ========           ========
</TABLE>

Up to  809,000  shares  for  the  nine  months  ended  September  30,  2000  can
potentially dilute basic EPS in the future;  however, these shares were excluded
from the computation of diluted EPS above because they were antidilutive for the
period indicated.

NOTE C - ACQUISITIONS, DISPOSITIONS AND NONRECURRING CHARGES

CONVERGENT.  On  January  26,  2001,  the  Company  acquired  certain  assets of
Convergent  Communications  Services,  Inc.  ("Convergent")  for  cash  plus the
assumption of various specific  liabilities and related  acquisition  costs. The
Company  acquired  segments of the voice  customer  base,  accounts  receivable,
specified  inventory and fixed  assets,  and assumed  liabilities  for warranty,
maintenance and specified leased premises costs. The Convergent  transaction was
accounted for using the purchase method of accounting.

The adjusted  purchase price paid by the Company in the  Convergent  transaction
included  cash of $3.9 million plus  assumption  of  liabilities  totaling  $6.3
million.  The  final  purchase  price  was  adjusted  pursuant  to a  settlement
agreement with  Convergent  representatives  which  specified the return of $6.7
million to Inter-Tel,  representing  funds from escrow and other amounts owed to
Inter-Tel by Convergent that were previously set aside by the bankruptcy  court,
as well as adjustments  for assets to be acquired and liabilities to be assumed.
The settlement payments only required  adjustments or reallocations based on the
specified  assets  acquired  and  liabilities  assumed  in  connection  with the
purchase, and differences have been represented as adjustments to the net assets
acquired. The Company recorded goodwill of $1.25 million in connection with this
acquisition.

INTER-TEL.NET AND ICA. During the second quarter of 2000,  Inter-Tel  recorded a
pre-tax charge  associated with  Inter-Tel.NET  operations of $2.0 million ($1.2
million  after-tax),  related to the write-down to net  realizable  value of the
Vocal'Net  servers in the division's IP network and lease  termination  costs of
certain redundant facilities.

In March 2000,  the  Company's  Inter-Tel.NET  subsidiary  acquired the stock of
Intercomm Americas,  Inc. ("ICA"),  an international IP communications  reseller
for $580,000 cash and 750,000 shares of Inter-Tel.NET  Class B restricted stock,
with  conversion   rights  into  Inter-Tel,   Incorporated   Common  Stock.  The
acquisition  purchase  price was valued at $1.2 million at March 2000;  however,
this  valuation  changed to $6.2  million  based on the  exercise of  conversion
rights in July  2001,  in  accordance  with the  provisions  of the  acquisition
agreement.

On July 24, 2001, Inter-Tel agreed to sell 83% of Inter-Tel.NET to Comm-Services
Corporation  for a note of $4.95  million.  The note is secured in part by stock
and other marketable securities and 100% of the net assets of Inter-Tel.NET. The

                                       7
<PAGE>
note is due and payable with a principal payment of $250,000 due sixty (60) days
from July 24,  2001;  then  interest  only due and payable from October 16, 2001
through July 15, 2002; then monthly  principal and interest payments based on 1%
of collected  monthly  revenues from July 16, 2002 to October 15, 2002 and based
on 2% of collected  monthly  revenues  from October 16, 2002 until paid in full.
The note is due and payable on  December  31,  2007,  or earlier in the event of
default or a "change of control" of the purchased entity.

In  connection  with this  transaction,  the  sellers of ICA  elected to convert
shares of Inter-Tel.NET into shares of Inter-Tel,  Incorporated.  The conversion
of Inter-Tel.NET shares into Inter-Tel, Incorporated common stock was treated as
an  acquisition  by  Inter-Tel  of  Inter-Tel.NET  shares,  rather  than  as  an
adjustment to the original  purchase price of ICA, as the conversion rights were
part of the original purchase agreement, even though the value of the conversion
rights could not be readily determined at that time. As a result, Inter-Tel made
adjustments  totaling  $4.85  million  to  goodwill  based  on the  value of the
converted Inter-Tel shares as of June 30, 2001.

In  addition,  the  Company  assessed  the  fair  value  of the  net  assets  of
Inter-Tel.NET  as of June 30,  2001  under FAS 121 and 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  as the  difference  between  the
carrying value of Inter-Tel's  17% interest in  Inter-Tel.NET  and the estimated
current  fair  market  value of the note and 17%  interest  in the net assets of
Inter-Tel.NET.  Except for some immaterial  post-closing expenses, the charge is
primarily non-cash related. The value of the impairment is subject to adjustment
depending on the occurrence of certain post-closing contingencies related to the
sale and, accordingly, is currently an estimate.  Inter-Tel will account for the
remaining 17% investment using the cost method of accounting.

EXECUTONE.  On January 1, 2000,  Inter-Tel  purchased certain computer telephony
assets and assumed certain liabilities of Executone  Information  Systems,  Inc.
("Executone") for cash plus related  acquisition  costs. The aggregate  purchase
price was allocated to the fair value of the assets and liabilities acquired, of
which $5.4  million  ($3.4  million  after  tax) was  written-off  as  purchased
in-process  research and  development  since there was no  alternative  use. The
Executone transaction was accounted for using the purchase method of accounting.
In connection with the Executone acquisition,  the Company sold a portion of the
assets and liabilities at net book value to Varian Associates,  Inc.  ("Varian")
of Tempe, Arizona in the first quarter of 2000.

During the second  quarter of 2000,  the  Company  decided to close the  primary
Executone  facility in Milford,  Connecticut  and to  recognize a  restructuring
charge related to the Executone  operations.  At the time the original  purchase
was  recorded,  the Company had not  anticipated  closing the Milford  facility.
After incurring  higher than  anticipated  losses from Executone  operations and
after a deterioration in the Executone  business,  including loss of dealers and
customers,  delays in introduction and acceptance of new products, the Company's
management  decided  it  was in the  best  interests  of  the  Company  and  its
shareholders  to close the Milford  facility and consolidate its operations into
the Company's metro-Phoenix, Arizona facilities.

The Company has accounted  for the  restructuring  of the Executone  operations,
including  severance and related costs,  the shut down and  consolidation of the
Milford facility and the impairment of assets associated with the restructuring.
Accrued costs associated with this plan were estimates.  The original  estimates
made for the third quarter for reserve  balances have not changed  significantly
as of September 30, 2001.

Exit costs  associated  with the closure of the Milford  facility  also included
liabilities for building,  furniture and equipment lease, and other  contractual
obligations.  The  Company  is  liable  for the lease on the  Milford  buildings
through January 2005.  Various  furniture leases run concurrently  through March
2002. Other capital leases for computer and other equipment terminate on varying
dates through  September  2002.  To date,  the Company has 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.

                                       8
<PAGE>
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, 2001.

<TABLE>
<CAPTION>
                                                                                               Reserve
                                                      Cash/      Restructuring                 Balance
       Description                                  Non-Cash        Charge       Activity     at 9/30/01
       -----------                                  --------        ------       --------     ----------
                                                                       (In thousands)
<S>                                                 <C>             <C>           <C>         <C>
PERSONNEL COSTS:
  Severance and termination costs                     Cash        $ (1,583)      $  1,583      $     --
  Other Plant closure costs                           Cash            (230)           230            --

LEASE TERMINATION AND OTHER CONTRACTUAL
  OBLIGATIONS (NET OF ANTICIPATED RECOVERY):
  Building and equipment leases                       Cash          (7,444)           942        (6,502)
  Other contractual obligations                       Cash          (1,700)         1,700            --

IMPAIRMENT OF ASSETS:
  Inventories                                       Non-Cash        (3,454)         1,980        (1,474)
  Prepaid inventory and other expenses              Non-Cash        (2,485)         2,485            --
  Accounts receivable                               Non-Cash        (1,685)           766          (919)
  Fixed assets                                      Non-Cash        (3,151)         2,942          (209)
  Net intangible assets                             Non-Cash       (29,184)        29,184            --
                                                                  --------       --------      --------
TOTAL                                                             $(50,916)      $ 41,812      $ (9,104)
                                                                  ========       ========      ========
</TABLE>

NOTE D - PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE

During  the first  quarter  of 2000,  Inter-Tel  completed  the  acquisition  of
Executone  (refer to NOTE C).  The  aggregate  purchase  price of the  Executone
acquisition  was  allocated  to the fair  value of the  assets  and  liabilities
acquired,  of which $5.4 million  ($3.4 million after tax), or $0.13 per diluted
share, was written-off as purchased in-process research and development.

NOTE E - SEGMENT INFORMATION

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

Prior to 2000, the Company  viewed its  operations as  principally  one segment:
telephone systems,  telecommunications  software and hardware,  and related long
distance  calling  services.  These services are provided  through the Company's
direct sales offices and dealer  network to business  customers  throughout  the
United  States,  Europe,  Asia  and  South  America.  As  a  result,   financial
information disclosed previously represented  substantially all of the financial
information related to the Company's principal operating segment.

                                       9
<PAGE>
During 2000, the operations of Executone were identified separately in the first
and second  quarters of 2000.  Beginning  in the 3rd  quarter and  directly as a
result  of  the  charge  and   reorganization   associated  with  the  Executone
operations, the Company no longer accounts for or directly reports the Executone
operations on a stand-alone  basis. The operations have been integrated with the
Company's existing wholesale, and national and government account, operations.

In December 1999,  Inter-Tel entered into an agreement with Hypercom Corporation
to jointly form Cirilium Corporation  ("Cirilium").  Cirilium comprises parts of
Hypercom's  data  and  Inter-Tel's   packet  telephony  products  and  services,
including Inter-Tel's Vocal'Net gateway products and technology. As of the close
of the third quarter of 2000, the Company wrote off its remaining  investment in
Cirilium of $2.0  million.  This charge  includes the  write-off of  Inter-Tel's
remaining basis in Cirilium. Total pre-tax losses from Cirilium from all sources
were $8.6 million  ($0.21 per diluted  share)  during  2000.  As a result of the
write-off,  we do not expect to report the  operations of Cirilium as a separate
business  segment.  Refer to the table below for a summary of the operations for
2000.

During 2000, the Company  determined that the operations of  Inter-Tel.NET,  the
Company's  IP long  distance  subsidiary,  would be  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.

Commencing  the third  quarter of 2001,  the Company will begin  disclosing as a
separate  business segment operating results relating to local and long distance
resale services. The Company offers these services to its customers as part of a
total telephony  solution approach.  Results of operations for this 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 the Company to its customers.

During the three months ended  September 30, the Company  generated  income from
business segments, including charges, as follows:

<TABLE>
<CAPTION>
                                                                                      Resale of
                                                                                      Local and
                                                                                         Long
                                              Principal                                Distance
(In Thousands, Except Per Share Amounts)       Segment    Cirilium    Inter-Tel.net    Services      Total
                                               -------    --------    -------------    --------      -----
<S>                                           <C>          <C>          <C>            <C>         <C>
2001
----
Net sales                                     $ 83,781     $     --     $  1,638       $  8,068    $  93,487
Operating income (loss)                          6,577           --         (923)           908        6,562
Interest and other income                          262           --            6             26          294
Gain on foreign translation adjustments            140           --           --             --          140
Interest expense                                   (49)          --           --             (2)         (51)
Net income (loss)                             $  4,368     $     --     $   (578)      $    587    $   4,377
Net income (loss) per diluted share           $   0.18     $     --     $  (0.02)      $   0.02    $    0.18
Depreciation and amortization                    2,299           --          256            190        2,745

2000
----
Net sales                                     $ 84,948     $     --     $  6,416       $ 11,286    $ 102,650
Operating income (loss)                         13,291         (574)      (4,213)          (253)       8,251
Equity share of Cirilium losses                     --       (2,024)          --             --       (2,024)
Write-off of Cirilium investment                    --       (2,045)          --             --       (2,045)
Interest and other income                          374           --           --           (121)         253
Loss on foreign translation adjustments           (131)          --           --             --         (131)
Interest expense                                   (32)          --           --             --          (32)
Net income (loss)                             $  9,361     $ (3,445)    $ (2,612)      $ (1,220)   $   2,084
Net income (loss) per diluted share           $   0.35     $  (0.13)    $  (0.10)      $  (0.04)   $    0.08
Depreciation and amortization                    2,358           --          564            154        3,076
</TABLE>

The Company's revenues are generated  predominantly in the United States.  Total
revenues  generated from U.S. customers totaled $91.2 million and $100.2 million
of  total  revenues  for  the  quarters  ended  September  30,  2001  and  2000,
respectively.  The Company's revenues from international  sources were primarily
generated from customers located in the United Kingdom,  Europe,  Asia and South
America.  In the first nine  months of 2001 and 2000,  revenues  from  customers
located  internationally   accounted  for  2.4%  and  2.4%  of  total  revenues,
respectively.

                                       10
<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 Arizona in 1969, is a single point of contact,  full
service  provider  of  digital  business  telephone  systems,   call  processing
software,  voice  processing  software,  call  accounting  software,  networking
software,  Internet  Protocol  ("IP")  telephony  software,  computer  telephone
integration ("CTI") applications,  IP and traditional long distance calling, and
other  communications  services.  Inter-Tel's  products and services include the
Axxess and Eclipse  digital  business  communication  software  platforms,  with
integrated voice processing and unified messaging systems,  InterPrise voice and
data routers,  ClearConnect  Talk-to-Agent e-Commerce software, and IP telephony
communications  services.  The Company also  provides  maintenance,  leasing and
support  services for its products.  The Company's Common Stock is quoted on the
Nasdaq National Market System under the symbol "INTL."

RESULTS OF OPERATIONS

The Company's  operating  results depend on 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 the Company and its  competitors,  pricing  pressures,  the cost and
effect of acquisitions  and the availability and cost of products and components
from  the  Company's  suppliers.  Historically,  a  substantial  portion  of the
Company's  net sales in a given quarter have been recorded in the third month of
that  quarter,  with a  concentration  of net sales in the last two weeks of the
quarter.  In  addition,  the Company has  historically  been subject to seasonal
variations  in its  operating  results,  as net  sales  for the  first and third
quarters are frequently less than those experienced during the fourth and second
quarters.

Sales of systems through the Company's dealers and VARs typically generate lower
gross  margins  than sales  through the  Company's  direct  sales  organization,
although  direct sales typically  require higher levels of selling,  general and
administrative  expenses.  In addition,  the Company's long distance and network
services  typically  generate  lower gross  margins  than sales of software  and
system  products.  Sales from  Inter-Tel.NET  for each of the periods  presented
have, at times, even generated  negative gross margins,  as discussed in further
detail below. Accordingly,  the Company's 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, the Company's overall gross margin would likely decline.

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

                                       11
<PAGE>
                                         Three Months Ended   Nine Months Ended
                                            September 30,       September 30,
                                           ---------------     ---------------
                                           2001      2000      2001      2000
                                           -----     -----     -----     -----
Net Sales                                  100.0%    100.0%    100.0%    100.0%
Cost of sales                               53.7      57.3      56.1      58.9
Cost of sales - Executone Restructuring       --        --        --       2.5
                                           -----     -----     -----     -----
Total cost of sales                         53.7      57.3      56.1      61.4

Gross profit                                46.3      42.7      43.9      38.6

Research and development                     4.8       4.3       4.5       5.2
Selling, general and administrative         34.5      30.4      34.0      31.7
Nonrecurring Charge                           --        --       1.8      15.1
IPRD write-off                                --        --        --       1.8
                                           -----     -----     -----     -----
                                            39.3      34.6      40.3      53.7
                                           -----     -----     -----     -----

Operating income                             7.0       8.0       3.6     (15.1)

Equity Share of Cirilium's net losses         --      (2.0)       --      (2.0)
Write-off Cirilium Corp. investment           --      (2.0)       --      (0.7)
Interest and other income                    0.3       0.2       0.2       0.4
Loss on foreign translation adjustments      0.1      (0.1)     (0.1)     (0.1)
Interest expense                            (0.1)       --      (0.2)     (0.1)
                                           -----     -----     -----     -----
Income before income taxes                   7.4       4.2       3.5     (17.6)
Income taxes                                 2.7       2.1       1.3      (6.5)
                                           -----     -----     -----     -----
Net income (loss)                            4.7%      2.0%      2.2%    (11.1)%
                                           =====     =====     =====     =====

Included in the table above for 2001 is a 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.

Included  in the table  above for 2000 are total  nonrecurring  charges of $54.9
million,  in addition to a $5.4  million  write-off of  in-process  research and
development costs (refer to Note D). The Executone restructuring charge of $50.9
million  included $45.2 million for exit costs and asset  impairment  represents
and $7.6 million  associated with the impairment of inventories,  which has been
recorded as additional costs of sales. The restructuring costs are the result of
management's  decision  to close the  primary  Executone  facility  in  Milford,
Connecticut  and to  recognize  a  restructuring  charge  related  to the entire
Executone  operations.  After  incurring  higher  than  anticipated  losses from
Executone operations and experiencing a material  deterioration in the business,
including loss of dealers and customers,  delays in introduction  and acceptance
of new products,  management decided it was in the best interests of the Company
and  its  shareholders  to  close  the  Connecticut  facility,  consolidate  the
operations into the Company's  metro-Phoenix,  Arizona facilities and record the
one-time charge.

During the second  quarter of 2000,  Inter-Tel  also  recorded a pre-tax  charge
associated  with   Inter-Tel.NET   operations  of  $2.0  million  ($1.2  million
after-tax),  related to the write-down to net realizable  value of the Vocal'Net
servers in the  division's  IP network  and lease  termination  costs of certain
redundant facilities. Finally, as of the close of the third quarter of 2000, the
Company  wrote off its remaining  investment in Cirilium of $2.0 million.  Total
pre-tax  losses from  Cirilium  from all sources  were $4.6  million  ($0.13 per
diluted  share) for the third  quarter.  This charge  includes the  write-off of
Inter-Tel's remaining basis in Cirilium.

NET  SALES.  Net sales for the third  quarter  of 2001  decreased  8.9% to $93.5
million,  compared  to $102.6  million in the third  quarter of 2000.  Net sales
decreased 3.0% to $291.0  million in the first nine months of 2001,  compared to
$300.1 million in the first nine months of 2000. For the quarter ended September
30, 2001, sales from the direct sales offices, government and national accounts,
and from wholesale  distribution  decreased by $4.8 million compared to the same
period in 2000.

                                       12
<PAGE>
Excluding  sales  from  Inter-Tel.NET,  net sales for the third  quarter of 2001
decreased 4.6% to $91.8 million,  compared to $96.2 million in the third quarter
of 2000. Excluding sales from Inter-Tel.NET,  net sales in the first nine months
of 2001  decreased  2.5% to $277.0  million,  compared to $284.3  million in the
first nine months of 2000. The reduction in sales  attributable to Inter-Tel.NET
reflected  a reduced  volume  of  Internet  Protocol  minutes  consumed  in 2001
compared to 2000, due primarily to our sale of 83% of  Inter-Tel.NET on July 24,
2001.  Accordingly,  less  than one month of  activity  from  Inter-Tel.NET  was
reflected  in the 2001 third  quarter  results as compared to a full  quarter of
Inter-Tel.NET results shown in 2000.

The  third  quarter  decrease  in net  sales was also  attributable  to  delayed
customer  buying   decisions   related  to  a  deterioration   in  macroeconomic
conditions.  Inter-Tel  recognized  lower revenues due to lower sales volumes of
systems through the direct sales offices, dealer channel and foreign operations,
offset  partially by sales  increases in the Company's  government  and national
accounts group. In some instances,  prices of various telecommunications systems
decreased,  and discounts or other  promotions that were offered to customers to
generate sales resulted in lower revenues. Sales for the quarter ended September
30,  2001  from  the  Company's  network  services  group,  including  Inter-Tel
NetSolutions and Network Services agency, were flat compared to 2000. Sales from
leasing  operations  increased slightly compared to 2000. Please refer to Note E
for additional segment reporting information.

GROSS PROFIT.  Gross profit  decreased  1.2% to $43.3  million,  or 46.3% of net
sales, for the third quarter of 2001, from $43.8 million, or 42.7% of net sales,
in the third quarter of 2000. Gross profit increased 10.5% to $127.8 million, or
43.9% of net sales, in the first nine months of 2001 compared to $115.7 million,
or 38.6% of net sales,  in the first nine months of 2000 including the Executone
restructuring  charge.  Excluding  the 2000  charge,  gross  profit for the nine
months ended  September 30, 2001 increased  3.6% to $127.8  million  compared to
$123.4  million for the same period in 2000.  The increases in gross profit as a
percentage  of sales (or gross  margin) were  attributable  to lower total sales
from Inter-Tel.NET, which recognized negative margins in all comparable periods,
and  cost  reductions  from  vendors,  offset  by a lower  percentage  of  sales
generated  by the  Company's  direct sales  offices.  Margins  improved  despite
competitive pricing pressures throughout the business.

RESEARCH AND DEVELOPMENT.  Research and development  expenses increased slightly
to $4.45 million,  or 4.8% of net sales, for the third quarter of 2001, compared
to $4.4 million,  or 4.3% of net sales, for the third quarter of 2000.  Research
and development  expenses  decreased to $13.0 million,  or 4.5% of net sales, in
the first nine months of 2001 compared to $15.5  million,  or 5.2% of net sales,
in the first nine months of 2000. These decreases were primarily attributable to
the reduction of expenses relating to the Executone operations.  However, in the
third quarter of 2001, the Company experienced research and development expenses
in the remaining core business  operations,  primarily  related to the continued
development  of the Axxess and Eclipse  networking  software and systems and the
design and development of the Company's CTI applications that were comparable to
expenditures  in those  areas  made in the third  quarter of 2000.  The  Company
expects that for the foreseeable future,  research and development expenses will
increase  sequentially in absolute  dollars as the Company  continues to enhance
existing  products and to 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  increased 3.6% to $32.3 million,  or 34.5% of net sales, for the third
quarter of 2001, compared to $31.2 million, or 30.4% of net sales, for the third
quarter of 2000. Selling, general and administrative expenses increased to $99.0
million,  or 34.0% of net sales,  in the first nine  months of 2001  compared to
$95.0  million,  or 31.7% of net sales,  in the first nine  months of 2000.  The
increases in absolute  dollars and as a percentage  of net sales for the quarter
and nine months ended September 30, 2001 were  attributable  primarily to higher
administrative  costs in the  Company's  direct  sales  offices,  due in part to
integration of the offices acquired from Convergent,  as well as increased sales
from the government and national accounts  division,  and increased reserves for
accounts  receivable  attributable  in  part  to  current  economic  conditions.
Selling, general and administrative expense increases were offset by lower costs
from  Inter-Tel.NET  of  approximately  $1.2 million during the quarter and $1.7
million in the first nine months of 2001 compared to 2000,  primarily the result
of the sale of 83% of  Inter-Tel.NET  in July 2001.  The  Company  expects  that
selling,  general  and  administrative  expenses  will  continue  to increase in
absolute dollars, but may vary in the future as a percentage of net sales.

                                       13
<PAGE>
IN-PROCESS  RESEARCH AND DEVELOPMENT.  On January 1, 2000,  Inter-Tel  purchased
certain computer  telephony assets and assumed certain  liabilities of Executone
Information  Systems,  Inc. for $44.3  million in cash plus related  acquisition
costs,  subject to purchase  price  adjustments  as of the closing  date. Of the
total purchase price,  $5.4 million ($3.4 million after tax), was written-off as
purchased in-process research and development.

NONRECURRING   CHARGES.   In  connection  with  the  sale  of  its  interest  in
Inter-Tel.NET in July 2001, the Company recorded a nonrecurring charge as of the
close of the third  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.

During the third quarter of 2000, the Company wrote off its remaining investment
in Cirilium of $2.0 million. In addition, during the second quarter of 2000, the
Company  recorded  a  one-time  pre-tax  restructuring  charge of $50.9  million
associated with the restructuring and write-off of assets in connection with the
acquired  Executone  operations,  including  $7.6 million for the  impairment of
inventories included in cost of sales. Included in the remaining charge of $43.3
million  were costs for the plant  closure,  severance  and related  termination
benefits for  terminated  employees,  lease  obligations  and other  contractual
obligations, as well as the impairment of accounts receivable,  fixed assets and
intangible  assets.  In addition,  during the second quarter of 2000,  Inter-Tel
recorded an pre-tax  charge  associated  with  Inter-Tel.NET  operations of $2.0
million,  related to the  write-down  to net  realizable  value of the Vocal'Net
servers in the  division's  IP network  and lease  termination  costs of certain
redundant facilities.

All 2000 charges noted above, plus in-process  research and development costs of
$5.4 million and losses from the equity share of  Cirilium's  net losses of $5.9
million,  reduced diluted  earnings per share by $1.60 per diluted share for the
nine months ended September 30, 2000.

INTEREST AND OTHER INCOME.  Other income in both periods consisted  primarily of
interest income and foreign  exchange rate gains and losses.  Interest and other
income  decreased  approximately  $0.7  million in the first nine months of 2001
compared to the same period in 2000  principally  as a result of lower levels of
cash available for investment. During the first nine months of 2001, the Company
recognized  foreign  exchange  rate  losses of  $255,000  compared  to losses of
$413,000  in 2000.  Interest  expense  was  $453,000 in the first nine months of
2001, an increase of 168% compared to $169,000 in 2000,  primarily  attributable
to debt  from  assets  financed  for  Inter-Tel.NET  operations.  This  debt was
transferred upon the sale of 83% of Inter-Tel.NET in July 2001.

NET  INCOME/(LOSS).  Net income for the third  quarter of 2001 was $4.4  million
($0.18 per diluted  share),  compared to net income of $2.1  million  ($0.08 per
diluted share) for the third quarter of 2000, reflecting the charges noted above
associated with the Cirilium and  Inter-Tel.NET  operations.  Net income for the
nine months ended September 30, 2001 was $6.5 million ($0.26 per diluted share),
including the nonrecurring charge associated with the Inter-Tel.NET  impairment,
compared to net loss of $33.3  million  ($1.26 per  diluted  share) for the same
period in 2000,  reflecting the charges associated with the Executone,  Cirilium
and Inter-Tel.NET operations.

Excluding the charges, all Cirilium losses and operations of Inter-Tel.NET,  the
Company  reported net income of $5.0 million  ($0.20 per diluted  share) for the
third quarter of 2001, compared to net income of $8.1 million ($0.30 per diluted
share) for the third quarter of 2000. Excluding the charges, all Cirilium losses
and  operations  of  Inter-Tel.NET,  the  Company  reported  net income of $14.5
million ($0.59 per diluted share) for the nine months ended  September 30, 2001,
compared to net income of $16.4 million  ($0.60 per diluted  share) for the nine
months ended September 30, 2000.

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

                                       14
<PAGE>
operations  in the United  Kingdom and Europe and  increased  sales,  if any, in
Japan and Asia and  elsewhere  could result in higher  international  sales as a
percentage of total revenues; however,  international revenues are currently not
a significant component of the Company's consolidated operations.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2001,  the Company had $43.3  million in cash and  equivalents,
which  represented an increase of approximately  $16.2 million from December 31,
2000.  During the first nine months of 2001, the Company expended  approximately
$28.7 million to repurchase  shares of the Company's  Common Stock.  The Company
maintains  a $25  million  unsecured  revolving  line of  credit  with Bank One,
Arizona, NA. This credit facility is annually renewable and is available through
June 1, 2002. Under the credit facility, the Company has the option to borrow at
a prime rate or adjusted LIBOR interest rate. Historically, the Company has used
the credit  facility  primarily  to support  international  letters of credit to
suppliers.  The  remaining  cash  balances  and credit  facility may be used for
potential acquisitions,  strategic alliances, working capital, stock repurchases
and general corporate purposes.

Net cash  provided by operating  activities  totaled  $56.0 million for the nine
months  ended  September  30,  2001,  compared  to cash  provided  by  operating
activities  of $6.4  million  for the same  period  in 2000.  Cash  provided  by
operating  activities  in the first nine months of 2001 was primarily the result
of  income  from  operations   after   considering   the  non-cash   portion  of
restructuring  charge of $5.4 million,  non-cash  depreciation  and amortization
charges of $9.0  million,  decreased  accounts  receivable  of $9.0  million and
decreased inventory of $8.6 million.  In addition,  the Company received federal
income tax refunds of $17.1  million in the third  quarter of 2001.  The Company
expects to expand sales through its direct sales office and dealer networks, and
this sales  expansion is expected to require the  expenditure of working capital
for increased accounts receivable and inventories.

Net cash used in investing  activities totaled $13.7 million for the nine months
ended  September  30,  2001,  compared to $3.9 million for the nine months ended
September  30,  2000.  During  the first nine  months of 2001,  net cash used in
acquisitions  netted to  approximately  $6.1  million and  capital  expenditures
totaled   approximately   $7.7  million   including  assets  purchased  for  the
Inter-Tel.NET  network.  Net cash used for  capital  expenditures  totaled  $8.3
million for the same period in 2000. The Company anticipates  additional capital
expenditures during 2001, principally relating to expenditures for equipment and
management  information  systems  used  in its  operations  and  for  facilities
expansion.

Net cash used in financing  activities  totaled $26.1 million in the nine months
ended September 30, 2001, compared to net cash provided by financing  activities
of $552,000  for the same period in 2000.  During the first nine months of 2001,
the Company purchased treasury stock using  approximately $28.7 million and paid
$742,000  in cash  dividends,  which  was  offset by the net  proceeds  from the
exercise of stock options of $867,000 and proceeds of $508,000 from stock issued
under  Inter-Tel's  Employee Stock Purchase Plan.  Payments on term debt totaled
$1.4 million in the first nine months of 2001,  primarily in connection with the
purchase of assets used in the Inter-Tel.NET network.

The  Company  offers  to its  customers  lease  financing  and  other  services,
including its TotaLease program,  through its Inter-Tel Leasing subsidiary.  The
Company  funds its  TotaLease  program  in part  through  the sale to  financial
institutions of rental income streams under the leases. Resold TotaLease rentals
totaling  $205.0 million and $198.4 million  remained  unbilled at September 30,
2001 and December 31, 2000, respectively. The Company is obligated to repurchase
such  income  streams  in  the  event  of  defaults  by  lease   customers  and,
accordingly,  maintains reserves based on loss experience and past due accounts.
Although  the  Company to date has been able to resell the rental  streams  from
leases under the TotaLease  program  profitably and on a  substantially  current
basis, the timing and  profitability of lease resales could impact the Company's
business and operating  results,  particularly  in an environment of fluctuating
interest  rates  and  economic  uncertainty.  If  the  Company  is  required  to
repurchase  rental streams and realizes losses thereon in amounts  exceeding its
reserves, its operating results will be adversely affected.

                                       15
<PAGE>
The Company  believes that its working capital and credit  facilities,  together
with cash  generated from  operations,  will be sufficient to fund the Company's
operations and to provide  adequate  working capital for the next twelve months.
Provided the Company has sufficient resources,  the Company may also continue to
repurchase  shares of its  Common  Stock  pursuant  to board  authorization,  or
finance  acquisitions  of  additional  resellers of telephony  products or other
strategic  acquisitions  or  corporate  alliances.  However,  to the extent that
additional funds are required in the future to address working capital needs and
to provide funding for capital  expenditures  or for additional  acquisitions or
stock repurchases,  the Company will seek additional financing.  There can be no
assurance  that  additional  financing  will be  available  when  required or on
acceptable terms.

FACTORS THAT MAY AFFECT RESULTS OF FUTURE OPERATIONS

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

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

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 as well as develop new technologies and applications in a
timely and  cost-effective  manner.  If we fail to  introduce  new  products and
services  that  achieve  broad  market  acceptance,  or 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 CTI  applications,  Internet  Protocol,  or IP,
network  products,  or related  products  fail to develop or continue to develop
more slowly than we anticipate, or if we are unable for any reason to capitalize
on any of these emerging market opportunities, our business, financial condition
and operating results could be significantly harmed.

                                       16
<PAGE>
OUR FUTURE SUCCESS  LARGELY DEPENDS ON INCREASING  COMMERCIAL  ACCEPTANCE OF OUR
AXXESS, ECLIPSE AND ENCORE PLATFORMS,  INTERPRISE PRODUCTS, AND RELATED COMPUTER
TELEPHONY PRODUCTS.

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

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

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

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

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

Due to the  complexity  of our  products,  we have in the past  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 on a regular and efficient  basis,  customer  demand for our
products could decline, which would harm our business.

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

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

*    unanticipated costs and liabilities associated with the acquisition;
*    difficulty of assimilating  the  operations,  products and personnel of the
     acquired business;

                                       17
<PAGE>
*    inability of management  to manage the financial and strategic  position of
     acquired or developed products, services and technologies;
*    the diversion of management's attention from our core business;
*    inability to maintain uniform standards, controls, policies and procedures;
     and
*    impairment of relationships with employees and customers which may occur as
     a result of integration of the acquired business.

In  particular,   in  2000  we  acquired  certain  assets  and  assumed  certain
liabilities of Executone  Information  Systems,  Inc. Our operating results were
adversely  affected by several of the factors  described  above  relating to the
Executone acquisition,  including the risks related to unanticipated acquisition
costs and liabilities and impairment of employee and customer relationships,  as
well as the erosion of gross and operating margins.  For these and other reasons
noted in the footnotes to our  financial  statements  and in the section  titled
Management's  Discussion  and  Analysis of  Financial  Condition  and Results of
Operations, we wrote-off our investment in Executone during the third quarter of
2000. In addition to the Executone losses discussed above, for the quarter ended
September 30, 2000,  we also recorded a pre-tax loss of $2.0 million  related to
our equity share of Cirilium's net losses. As of the close of the third quarter,
the Company  wrote off its  remaining  investment  in Cirilium of $2.0  million.
Total pre-tax losses from Cirilium from all sources were $8.6 million for 2000.

Moreover,  in January  2001,  we acquired  certain  assets and  assumed  certain
liabilities of Convergent.  In connection  with the Convergent  acquisition,  we
hired  Convergent  employees,  and opened 8 Inter-Tel branch offices in previous
Convergent  locations.  In addition to the foregoing risks and  uncertainties we
face generally in our acquisitions, we may experience the following difficulties
or risks associated with the Convergent acquisition:

*    substantially all of Convergent's  sales were of our competitor's  products
     and services,  and these manufacturers may make our service and maintenance
     of such products expensive and difficult;
*    a large number of  Convergent's  customers  may decline the  assignment  of
     their maintenance contracts to us;
*    a  number  of  the  employees   hired  by  Inter-Tel  have  not  integrated
     successfully,  and additional  employees may not integrate  successfully or
     timely into the Inter-Tel business model and plans; and
*    some or all of the  independent  contractors  who  performed  projects  for
     Convergent may not assume similar roles with Inter-Tel.

In April 2001, Convergent and its parent corporation, Convergent Communications,
Inc.,  filed for protection  under Chapter 11 of the U.S.  Bankruptcy Code. As a
result of this bankruptcy  filing,  Inter-Tel  concluded its  transactions  with
Convergent  and its  representatives,  including  matters  relating  to accounts
receivable,   inventory,  maintenance  and  customer  relations  issues  through
bankruptcy   court  petitions  and  other  means.   Inter-Tel   completed  these
contractual  matters and reached a settlement  agreement  which  resulted in the
payment  of $6.7  million to  Inter-Tel  from  escrow  funds and  directly  from
Convergent.

On July 24, 2001, Inter-Tel agreed to sell 83% of Inter-Tel.NET to Comm-Services
Corporation. In connection with this transaction,  the Company assessed the fair
value of the net assets of  Inter-Tel.NET as of September 30, 2001 under FAS 121
to arrive at an  adjustment to the remaining  investment in  Inter-Tel.NET.  The
nonrecurring  charge  recorded as of the close of the third quarter totaled $5.4
million  ($3.4  million  after  tax),  associated  with  the  impairment  of the
Company's  investment in  Inter-Tel.NET.  The recording of this charge adversely
affected our operating  results for the third quarter of 2001. In addition,  the
Company  continues to maintain an  investment  of 17% in  Inter-Tel.NET  and our
financial condition will be adversely affected if the Inter-Tel.NET  business is
unsuccessful.

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.

                                       18
<PAGE>
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 17 telecommunication and unified messaging products and have also applied to
the U.S. Patent and Trademark Office for six additional patents. We also rely on
copyright  and trade  secret  law and  contractual  provisions  to  protect  our
intellectual  property.  Despite these precautions,  third parties could copy or
otherwise  obtain  and use our  technology  without  authorization,  or  develop
similar technology independently.

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

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

Alternatively,  we  could  resort  to  litigation  to  challenge  such a  claim.
Litigation  could require us to expend  significant  sums of cash and divert our
management's  attention.  In the  event  that a  court  renders  an  enforceable
decision with respect to our  intellectual  property,  we may be required to pay
significant damages,  develop  non-infringing  technology or acquire licenses to
the technology that is the subject of the infringement.  Any of these actions or
outcomes could harm our business,  financial condition and operating results. If
we are unable or choose not to license technology,  or decide not to challenge a
third  party's  rights,  we could  encounter  substantial  and costly  delays in
product  introductions.  These delays could result from efforts to design around
asserted third party rights or our discovery that the  development,  manufacture
or sale of products requiring these licenses could be foreclosed.

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

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

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

                                       19
<PAGE>
The markets for our  products  and services  are  extremely  competitive  and we
expect  competition  to  increase  in the  future.  Our  current  and  potential
competitors in our primary business segments include:

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

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

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

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

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

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

We  currently  obtain  certain  key  components  for our  digital  communication
platforms,   including  certain  microprocessors,   integrated  circuits,  power
supplies,  voice  processing  interface  cards and IP  telephony  cards,  from a
limited  number of suppliers  and  manufacturers.  Our reliance on these limited
suppliers and contract  manufacturers  involves certain risks and uncertainties,
including  the  possibility  of a shortage  or  delivery  delay for  certain key
components,  although we believe that  alternate  sources are available for most
key  components.  We currently  manufacture our products  through  manufacturers
located in the United States, the People's Republic of China, the United Kingdom
and  Mexico.  Foreign  manufacturing   facilities  are  subject  to  changes  in
governmental  policies,  imposition of tariffs and import restrictions and other
factors beyond our control.  Varian currently manufactures a significant portion
of our products at Varian's  Tempe,  Arizona and Poway,  California  facilities,
including  substantially  all of the printed  circuit boards used in the Axxess,
the Eclipse, the Inter-Tel Axxent, as well as substantially all of the Executone
computer  telephony  products.  We have occasionally  experienced  delays in the
supply of  components  and  finished  goods.  We cannot  assure that we will not
experience similar delays in the future.

Our reliance on third party manufacturers involves a number of additional risks,
including reduced control over delivery schedules,  quality assurance and costs.
Our business may be harmed by any delay in delivery or any shortage of supply of
components or finished goods from a supplier. Our business may also be harmed if

                                       20
<PAGE>
we cannot efficiently develop alternative or additional sources if necessary. To
date,  we have been able to obtain  supplies  of  components  and  products in a
timely manner even though we do not have long-term  supply contracts with any of
our contract  manufacturers.  However,  we cannot assure that we will be able to
continue to obtain  components  or finished  goods in  sufficient  quantities or
quality or on favorable pricing and delivery terms in the future.

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

A  substantial  portion  of our  net  sales  is  made  through  our  network  of
independent  dealers.  We face intense  competition from other telephone,  voice
processing,  and  voice/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.

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

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

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

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

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

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

                                       21
<PAGE>
The market for IP network  voice  communications  products  has begun to develop
only recently,  is evolving rapidly and is characterized by an increasing number
of market  entrants who have  introduced or developed  products and services for
Internet or other IP network  voice  communications.  As is typical of a new and
rapidly  evolving  industry,  the demand for and market  acceptance  of recently
introduced  IP network  products and services  are highly  uncertain.  We cannot
assure that packet switched technology networks will become widespread.  Even if
packet switched  technology  networks become widespread in the future, we cannot
assure that our products,  particularly the Inter-Tel  InterPrise product lines,
will  successfully  compete against other market players and attain broad market
acceptance.  Although the Company sold 83% of  Inter-Tel.NET  in July 2001,  the
Company   continues  to  maintain  an  investment   of  17%  in   Inter-Tel.NET.
Accordingly,   our  financial  condition  will  be  adversely  affected  if  the
Inter-Tel.NET business is unsuccessful.

Moreover, the adoption of packet switched technology networks generally requires
the  acceptance  of  a  new  way  of  exchanging  information.   In  particular,
enterprises that have already invested  substantial  resources in other means of
communicating  information  may be  reluctant or slow to adopt a new approach to
communications.  If the  market  for IP network  voice  communications  fails to
develop or to develop more slowly than we anticipate,  our IP network  telephony
products  could  fail  to  achieve  market  acceptance,   which  in  turn  could
significantly harm our business, financial condition and operating results. 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 sound
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 fax  communications  over the
Internet,  and the delivery of other value-added services, is still in the early
stages of development.

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

In the past few years,  we introduced  Axxess  networking  systems and software,
which are typically sold to larger  customers at a higher average selling price.
Our Axxess networking  products have a relatively high sales price per unit, and
often represent a significant and strategic decision by an enterprise  regarding
our  communications  infrastructure.  Accordingly,  the purchase of our products
typically  involves   significant   internal  procedures   associated  with  the
evaluation,  testing,  implementation  and acceptance of new technologies.  This
evaluation process frequently results in a lengthy sales process which can range
from a few  months  to  more  than 12  months,  and  subjects  the  sales  cycle
associated  with the purchase of our products to a number of significant  risks,
including budgetary  constraints and internal acceptance reviews.  The length of
our sales cycle also may vary substantially from customer to customer. While our
customers are  evaluating  our products and before  placing an order with us, we
may incur  substantial  sales and  marketing  expenses  and  expend  significant
management  effort.  Consequently,  if sales forecasted from a specific customer
for a particular quarter are not realized in that quarter, our operating results
could be materially adversely affected.

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

*    volume and timing of orders received during the quarter;
*    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 cost and effect of acquisitions,  in particular the
     Executone and Convergent acquisitions; and
*    the availability and cost of products and components from our suppliers.

                                       22
<PAGE>
In addition, we have historically operated with a relatively small backlog, with
sales and  operating  results in any  quarter  principally  dependent  on orders
booked and shipped in that quarter.  This results  primarily from our customers'
desire for immediate shipment and installation of platforms and software. In the
past,  we have  recorded  a  substantial  portion  of our net  sales for a given
quarter in the third month of that  quarter,  with a  concentration  of such net
sales in the last two weeks of the  quarter.  Market  demand for  investment  in
capital  equipment such as digital  communication  platforms and associated call
processing and voice processing  software  applications is largely  dependent on
general economic conditions,  and can vary significantly as a result of changing
conditions in the economy as a whole.  We cannot assure that  historical  trends
for small backlog will continue in the future.

Our expense  levels are based in part on  expectations  of future  sales and, if
sales  levels  do not meet  expectations,  operating  results  could be  harmed.
Because sales of digital  communication  platforms  through our dealers  produce
lower gross margins than sales through our direct sales organization,  operating
results  have  varied,  and will  continue  to vary  based upon the mix of sales
through  direct and indirect  channels.  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 have lower gross  margins  than our core  business,  have grown in
recent periods at a faster rate than our overall net sales.  As a result,  gross
margins could be harmed if long distance calling  services  continue to increase
as a percentage of net sales. In addition,  we experience seasonal  fluctuations
in our  operating  results,  as net sales for the first and third  quarters  are
frequently  less than  those  experienced  in the  fourth  and  third  quarters,
respectively.  As a result  of these  and other  factors,  we have  historically
experienced,  and could  continue to experience in the future,  fluctuations  in
sales and operating results on a quarterly basis.

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

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

*    announcements of developments relating to our business;
*    fluctuations in our operating results;
*    shortfalls  in  revenue  or  earnings  relative  to  securities   analysts'
     expectations;
*    announcements of technological  innovations or new products or enhancements
     by us or our competitors;
*    announcements of acquisitions or planned acquisitions of other companies or
     businesses;
*    investors' reactions to acquisition announcements;
*    general conditions in the telecommunications industry;
*    the market for Internet-related products and services
*    changes in the national or worldwide economy;
*    changes in  legislation  or  regulation  affecting  the  telecommunications
     industry;
*    an outbreak of hostilities 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
Internet-based  voice and data communications  companies of technology stocks in
particular,  have experienced  extreme price  fluctuations in recent years which
have often been unrelated to the operating performance of affected companies. We
cannot  assure  that the market  price of our Common  Stock will not  experience
significant   fluctuations  in  the  future,  including  fluctuations  that  are
unrelated to our performance.

OUR CHAIRMAN OF THE BOARD OF DIRECTORS,  CEO AND PRESIDENT CONTROLS 22.1% OF OUR
COMMON  STOCK  AND  BE  ABLE  TO  SIGNIFICANTLY   INFLUENCE   MATTERS  REQUIRING
SHAREHOLDER APPROVAL.

As of September 30, 2001, Steven G. Mihaylo, the Company's Chairman of the Board
of  Directors,  Chief  Executive  Officer  and  President,   beneficially  owned
approximately  22.1% of the outstanding shares of the Common Stock. As a result,

                                       23
<PAGE>
he has the ability to exercise significant  influence over all matters requiring
shareholder approval. In addition, the concentration of ownership could have the
effect of delaying or preventing a change in control of the Company.
Any of the foregoing could result in a material  adverse effect on the Company's
business, financial condition and operating results.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to the impact of interest  rate changes and changes in the market
values of our investments.

INTEREST RATE RISK. We protect and preserve our invested  funds with  investment
policies and procedures  that limit default,  market and  reinvestment  risk. We
have not utilized derivative financial  instruments in our investment portfolio.
As of September 30, 2001,  we had cash and cash  equivalents  of $43.3  million,
consisting  of cash and  highly  liquid  short-term  investments  with  original
maturities of three months or less at the date of purchase. Declines in interest
rates over time will result in lower interest income.

FOREIGN CURRENCY EXCHANGE RISK.  We generate our revenue primarily from sales in
the United States, however we also sell our products to customers located in the
United  Kingdom,  Europe,  Asia and South  America.  As a result,  our financial
results  could be  affected  by factors  such as  changes  in  foreign  currency
exchange rates or weak economic  conditions in foreign markets.  Since our sales
are currently priced in U.S. dollars and translated to local currency amounts, a
strengthening  of the dollar could make our products less competitive in foreign
markets.  As exchange rates vary, our expenses,  when translated,  may vary from
expectations and adversely impact overall expected profitability.  Our operating
results have not been  significantly  affected by exchange rate  fluctuations to
date in 2001.  If,  during the  remainder  of 2001,  the U.S.  dollar  uniformly
decreases in strength by 10% relative to the currency  used in our foreign sales
of our foreign  subsidiaries,  our  operating  results for the remainder of 2001
would likely not be significantly affected.

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

ITEM 1. LEGAL PROCEEDINGS--NOT APPLICABLE

ITEM 2. CHANGES IN SECURITIES--NOT APPLICABLE

ITEM 3. DEFAULTS ON SENIOR SECURITIES--NOT APPLICABLE

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

ITEM 5. OTHER INFORMATION

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

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

        Exhibits: None

        Reports on Form 8-K: None

                                       24
<PAGE>
                                   SIGNATURES

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

                                        INTER-TEL, INCORPORATED


Date: November 14, 2001                 /s/ Steven G. Mihaylo
                                        ----------------------------------------
                                        Steven G. Mihaylo,
                                        Chairman of the Board,
                                        Chief Executive Officer and President


Date: November 14, 2001                 /s/ Kurt R. Kneip
                                        ----------------------------------------
                                        Kurt R. Kneip,
                                        Vice President
                                        and Chief Financial Officer

                                       25