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

                                   ----------

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

For the quarter ended                                    Commission File Number:
   March 31, 2001                                               0-10211


                             INTER-TEL, INCORPORATED


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


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

                                 (602) 302-8900

                                   ----------


      Title of Class                            Outstanding as of March 31, 2001
      --------------                            --------------------------------

 Common Stock, no par value                                24,556,374


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

                    INTER-TEL, INCORPORATED AND SUBSIDIARIES

                                                                           PAGE
                                                                           ----
PART I. FINANCIAL INFORMATION

     Item 1. Financial Statements (unaudited)                                3

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

          Condensed consolidated statements of income--three
          months ended March 31, 2001 and March 31, 2000                     4

          Condensed consolidated statements of cash flows--three
          months ended March 31, 2001 and March 31, 2000                     5

          Notes to condensed consolidated financial Statements--
          March 31, 2001                                                     6

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

     Item 3. Quantitative and Qualitative Disclosures About
             Market Risk                                                    23

PART II. OTHER INFORMATION                                                  23

SIGNATURES                                                                  25

                                       2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)                                         March 31,    December 31,
                                                         2001          2000
                                                     (Unaudited)     (Note A)
                                                     -----------     --------
ASSETS
CURRENT ASSETS
  Cash and equivalents                               $   3,114        $  27,103
  Accounts receivable                                   65,249           61,482
  Inventories                                           35,390           35,060
  Net investment in sales-leases                        15,655           14,629
  Income taxes receivable                                7,964            9,157
  Deferred income taxes                                 14,347           13,116
  Prepaid expenses and other assets                      7,740            7,668
  Restricted cash for acquisition                        5,496               --
                                                     ---------        ---------
TOTAL CURRENT ASSETS                                   154,955          168,215

PROPERTY, PLANT & EQUIPMENT                             33,916           32,723
EQUIPMENT HELD UNDER LEASE, NET                            342              423
GOODWILL AND OTHER INTANGIBLES                          18,976           18,389
NET INVESTMENT IN SALES-LEASES                          21,670           22,808
OTHER ASSETS                                               498              568
                                                     ---------        ---------
                                                     $ 230,357        $ 243,126
                                                     =========        =========

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
  Accounts payable                                   $  32,120        $  35,438
  Current maturities of L-T debt                         1,952            1,766
  Other current liabilities                             46,116           45,003
                                                     ---------        ---------
       TOTAL CURRENT LIABILITIES                        80,188           82,207

DEFERRED TAX LIABILITY                                   5,059            5,222
LONG TERM DEBT                                           4,310            3,720
OTHER LIABILITIES                                       16,148           15,541

SHAREHOLDERS' EQUITY
  Common Stock                                         109,132          109,132
  Less:  Shareholder loans                              (1,018)          (1,018)
  Retained earnings                                     46,860           44,099
  Accumulated other comprehensive income                    62             (280)
                                                     ---------        ---------
                                                       155,036          151,933
  Less:  Treasury stock at cost                        (30,384)         (15,497)
                                                     ---------        ---------

       TOTAL SHAREHOLDERS' EQUITY                      124,652          136,436
                                                     ---------        ---------
                                                     $ 230,357        $ 243,126
                                                     =========        =========

See accompanying notes.

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


                                                        Three Months Ended
(In thousands, except                            -------------------------------
per share amounts)                               March 31, 2001   March 31, 2000
------------------                               --------------   --------------

NET SALES                                           $ 93,703         $ 96,363
  Cost of sales                                       54,055           54,823
                                                    --------         --------
GROSS PROFIT                                          39,648           41,540

  Research & development                               4,139            5,668
  Selling, general, and administrative                32,055           30,911
  In-process research and development                     --            5,433
                                                    --------         --------
                                                      36,194           42,012

OPERATING INCOME (LOSS)                                3,454             (472)
                                                    --------         --------

  Equity Share of Cirilium Corp.'s net losses             --           (1,699)
  Interest and other income                              167              342
  Loss on foreign translation adjustments               (303)             (65)
  Interest expense                                      (227)             (75)
                                                    --------         --------

INCOME (LOSS) BEFORE INCOME TAXES                      3,091           (1,969)
  Income tax provision (benefit)                       1,143             (748)
                                                    --------         --------

NET INCOME (LOSS)                                   $  1,948         $ (1,221)
                                                    --------         --------

NET INCOME (LOSS) PER SHARE
  Basic                                             $   0.08         $  (0.05)
                                                    ========         ========
  Diluted                                           $   0.08         $  (0.05)
                                                    ========         ========

Weighted average basic common shares                  25,500           26,249
                                                    ========         ========
Weighted average diluted common shares                25,843           26,249
                                                    ========         ========

See accompanying notes.

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

<TABLE>
<CAPTION>
                                                                    Three Months Ended
                                                            ----------------------------------
(In thousands)                                              March 31, 2001      March 31, 2000
--------------                                              --------------      --------------
<S>                                                             <C>                <C>
OPERATING ACTIVITIES
Net income (loss)                                              $  1,948            $ (1,221)
Adjustments to reconcile net income (loss) to net
 cash provided by operating activities:
  Depreciation and amortization                                   3,000               3,194
  Provision for losses on receivables                             2,575               1,993
  Provision for inventory valuation                                 535               3,366
  Decrease (Increase) in other liabilities                          607              (1,118)
  Loss on sale of property and equipment                             25                 127
  Deferred income taxes                                          (1,394)              2,658
  Effect of exchange rate changes                                   342                (260)
  Purchased in-process research and development                      --               5,433
  Changes in operating assets and liabilities                    (3,725)            (15,361)
                                                               --------            --------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES               3,913              (1,189)

INVESTING ACTIVITIES
  Additions to property and equipment                            (3,088)             (2,963)
  Additions to operating leases                                      --                 (41)
  Proceeds from disposal of property and equipment                   18                   7
  Proceeds from disposition of business segment                      --               6,602
  Cash used in acquisitions                                     (11,520)             (1,647)
                                                               --------            --------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES             (14,590)              1,958
                                                               --------            --------

FINANCING ACTIVITIES
  Cash dividends paid                                              (260)               (262)
  Treasury stock purchases                                      (14,141)                 --
  Payments on term debt                                            (319)               (222)
  Proceeds from term debt                                         1,095                  --
  Proceeds from exercise of stock options                           313               1,257
                                                               --------            --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES             (13,312)                773
                                                               --------            --------
(DECREASE) INCREASE IN CASH AND EQUIVALENTS                     (23,989)              1,542

CASH AND EQUIVALENTS AT BEGINNING OF PERIOD                      27,103              19,226
                                                               --------            --------

CASH AND EQUIVALENTS AT END OF PERIOD                          $  3,114            $ 20,768
                                                               ========            ========
</TABLE>

See accompanying notes.

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

March 31, 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  months  ending  March  31,  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 first  quarter  ended March 31, 2001,  the Company no longer used the equity
method of accounting for the Cirilium investment.

RECENT  ACCOUNTING  PRONOUNCEMENTS.  In  June  1998,  the  Financial  Accounting
Standards  Board  ("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 for which
the market  price  exceeds  exercise  price,  less shares  which could have been
purchased with related proceeds, if the effect would not be antidilutive.

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

(In thousands, except                                 Three Months Ended
per share amounts)                              March 31, 2001    March 31, 2000
------------------                              --------------    --------------
Numerator:
  Net Income                                        $ 1,948          $ (1,221)
                                                    -------          --------
Denominator:
  Denominator for basic earnings per
    share - weighted average shares                  25,500            26,249

                                       6
<PAGE>
  Effect of dilutive securities:
    Employee and director stock options                 343                --
                                                    -------          --------
  Denominator for diluted earnings per
    share - adjusted weighted average
    shares and assumed conversions                   25,843            26,249
                                                    -------          --------

Basic earnings per share                            $  0.08          $  (0.05)
                                                    =======          ========
Diluted earnings per share                          $  0.08          $  (0.05)
                                                    =======          ========

NOTE C - ACQUISITIONS, DISPOSITIONS AND RESTRUCTURING CHARGES

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

The purchase price paid by the Company in the Convergent  transaction is subject
to  adjustment  based  on  the  final  balances  of  the  specified  assets  and
liabilities,  and in  particular,  actual  collected  accounts  receivable.  The
acquisition agreement provides that all accounts receivable not collected within
the 90-day period  following the closing of the  transaction  are  guaranteed by
Convergent,  and reserves of  approximately  $7.9 million are held in escrow for
claims  relating  to  uncollected   accounts  receivable  and  for  breaches  of
covenants,   representations   and  warranties   contained  in  the  acquisition
agreement.  To date,  the  Company  has filed a claim with the escrow  agent for
return  of $7.8  million  of the  funds  held in  escrow,  based on  uncollected
accounts receivable and adjustments to acquired assets and liabilities.

As  of  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  must now
conclude 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 complex means. In
addition,  to the escrow  claim,  the Company has also filed a petition with the
bankruptcy court to set aside funds of Inter-Tel held by Convergent  pursuant to
the terms of the  acquisition  agreement  regarding  the  collection of accounts
receivable  within 90 days of  closing.  We will be  adversely  affected  to the
extent that the completion of these  contractual  matters will require increased
time and expense,  or result in  protracted  legal  proceedings  to conclude the
contractual agreement between the parties.

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 taxes) was  written-off  as purchased
in-process  research and  development  since there was no  alternative  use. The
Executone transaction was accounted for using the purchase method of accounting.
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

                                       7
<PAGE>
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 second quarter for reserve balances have not changed  significantly
as of March 31, 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.

The following table summarizes details of the restructuring  charge taken in the
second quarter of 2000 in connection with the Executone  acquisition,  including
the description of the type and amount of liabilities  assumed,  and activity in
the reserve balances from the date of the charge through March 31, 2001.

<TABLE>
<CAPTION>
                                                                                        RESERVE
                                               CASH/      RESTRUCTURING                 BALANCE
         DESCRIPTION                          NONCASH        CHARGE        ACTIVITY    AT 3/31/01
         -----------                          -------        ------        --------    ----------
                                                         (In thousands)
<S>                                           <C>          <C>             <C>          <C>
PERSONNEL COSTS:
  Severance and termination costs             Cash         $ (1,583)       $ 1,583      $     --
  Other Plant closure costs                   Cash             (230)           142           (88)

LEASE TERMINATION AND OTHER CONTRACTUAL
OBLIGATIONS (NET OF ANTICIPATED RECOVERY):
  Building and equipment leases               Cash           (7,444)         1,526        (5,918)
  Other contractual obligations               Cash           (1,700)            81        (1,619)

IMPAIRMENT OF ASSETS:
  Inventories                                 NonCash        (3,454)         1,612        (1,842)
  Prepaid inventory and other expenses        NonCash        (2,485)         2,485            --
  Accounts receivable                         NonCash        (1,685)           529        (1,156)
  Fixed assets                                NonCash        (3,151)         2,942          (209)
  Net intangible assets                       NonCash       (29,184)        29,184            --
                                                           --------        -------      --------

TOTAL                                                      $(50,916)       $40,084      $(10,832)
                                                           ========        =======      ========
</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 taxes), or $0.13 per diluted
share, was written-off as purchased in-process research and development.

                                       8
<PAGE>
NOTE E - SEGMENT INFORMATION

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

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

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, 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  Corporation.  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.

During  the  first  quarter  of  2001,  consistent  with  fiscal  year-end  2000
reporting,  the Company  generated  income  from  business  segments,  including
charges, as follows:

                                            PRINCIPAL
(in thousands, except per share amounts)     SEGMENT   INTER-TEL.NET     TOTAL
                                             -------   -------------     -----

Net sales                                   $ 89,293      $ 4,410      $ 93,703
Gross Profit                                  43,214       (3,566)       39,648
Operating income (loss)                        7,945       (4,491)        3,454
Interest and other income                        167           --           167
Loss of foreign translation adjustments         (303)          --          (303)
Interest expense                                (145)         (82)         (227)

                                       9
<PAGE>
Net income (loss)                           $  4,828      $(2,881)     $  1,948
                                            ========      =======      ========

Net income (loss) per diluted share         $   0.19      $ (0.11)     $   0.08
                                            ========      =======      ========

     The Company's  revenues are generated  predominantly  in the United States.
Total  revenues  generated from U.S.  customers  totaled $90.9 million and $93.8
million  of total  revenues  for the  quarters  ended  March 31,  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 quarters of 2001 and 2000, revenues from customers located
internationally accounted for 3.0% and 2.6% of total revenues, respectively.

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

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

OVERVIEW

     Inter-Tel,  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, 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

     Net sales decreased 2.8% to $93.7 million in the first quarter of 2001 from
$96.4  million in the first  quarter of 2000.  For the  quarter  ended March 31,
2001,  sales  from  the  Company's  direct  sales  offices  and  from  wholesale
distribution decreased  approximately $6.4 million compared to the first quarter
of 2000.  This  decrease is largely  the result of lower sales to the  Executone
dealers,  and to a lesser  extent,  of delayed  buying  decisions from customers
attributable to recent economic conditions and competitive pressures. Sales from
the Company's network services group, including Inter-Tel.NET,  NetSolutions and
Network  Services  agency,  increased  $1.3 million over the same  periods.  The
remaining  increases  were  attributable  to increases  from leasing and foreign
operations. Please refer to Note E for additional segment reporting information.

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

                                       10
<PAGE>
                                                          Three months
                                                         Ended March 31,
                                                      -------------------
                                                        2001         2000
                                                      ------       ------
     Net sales                                         100.0%       100.0%
     Cost of sales                                      57.7         56.9
                                                      ------       ------
     Gross Profit                                       42.3         43.1
     Research and development                            4.4          5.9
     Selling, general and administrative                34.2         32.1
     IPRD write-off                                       --          5.6
                                                      ------       ------
     Operating income (loss)                             3.7         (0.5)
     Equity share of Cirilium Corp.'s net losses          --         (1.8)
     Interest and other income                          (0.1)         0.3
     Interest expense                                   (0.2)        (0.1)
                                                      ------       ------
     Income (loss) before income taxes                  (3.3)        (2.0)
     Income Taxes                                        1.2         (0.8)
                                                      ------       ------
     Net Income                                          2.1%        (1.3)%
                                                      ======       ======

     Gross profit for the first quarter of 2001 decreased 4.6% to $39.6 million,
or 42.3% of net sales,  from $41.5 million,  or 43.1% of net sales, in the first
quarter of 2000.  The decline in gross profit as a percentage of sales (or gross
margin) was primarily attributable to increases, as a percentage of total sales,
in sales through Inter-Tel.NET  operations,  which generated negative margins. A
different sales mix of products and services, including more sales of relatively
smaller  systems  compared to 2000,  and sales  through  different  distribution
channels,  also  contributed  to lower gross margins.  In addition,  competitive
pricing pressures on telephone systems negatively  impacted gross margins during
the first quarter of 2001 as net sales from the  Company's  direct sales offices
and wholesale distribution decreased.

     Research and  development  expenses for the first quarter of 2001 decreased
27.0% to $4.1 million,  or 4.4% of net sales, from $5.7 million,  or 5.9% of net
sales,   for  the  first  quarter  of  2000.   These  decreases  were  primarily
attributable  to the  reduction  of expenses  relating  to the former  Executone
operations.   However,  the  Company  experienced  comparable  expenses  in  the
remaining core business  operations for the continued  development of the Axxess
and Eclipse networking  software and systems,  and the design and development of
the Company's CTI  applications.  The Company  expects that for the  foreseeable
future research and development expenses will increase  sequentially in absolute
dollars  as  the  Company   continues  to  enhance   existing  and  develop  new
technologies and products.  These expenses may vary, however, as a percentage of
net sales.

     Selling,  general and administrative  expenses in the first quarter of 2001
increased 3.7% to $32.1 million,  or 34.2% of net sales, from $30.9 million,  or
32.1% of net sales,  in the first  quarter of 2000.  The  increase  in  absolute
dollars and as a percentage of net sales was primarily  due to  integrating  the
operations  of  Convergent,  acquired  in January  2001.  Selling,  general  and
administrative  expenses  also  increased,  as a percentage  of net sales,  as a
result of lower  absorption of fixed costs on lower total net sales. The Company
expects that for the  foreseeable  future  selling,  general and  administrative
expenses  will  continue  to increase  in  absolute  dollars,  but may vary as a
percentage of net sales.

     Other income in both  periods  consisted  primarily of interest  income and
foreign exchange rate gains and losses.  Income from interest  decreased in 2001
compared to 2000 based on a lower level of invested  funds,  principally  due to
repurchases of the Company's  Common Stock, as well as expenditures  relating to
the Convergent  acquisition.  Other changes in other income primarily  reflected
higher net foreign exchange rate losses.

     The Company's  income tax rate for the first  quarter of 2001  decreased to
37%  compared  to 38% for  2000.  The  rate  decreased  as a result  of  greater
utilization of research tax credits and anticipated lower effective state taxes.
The Company  expects  the 2001 tax rate to be similar to the tax rate  effective
for the quarter ended March 31, 2001.

                                       11
<PAGE>
     Net income  for the first  quarter  was $1.9  million  ($0.08  per  diluted
share), compared to a net loss of $1.2 million (loss of $0.05 per diluted share)
reflecting  the write-off of  in-process  research and  development  costs noted
above. Excluding the write-off of in-process research and development costs, net
income for the quarter  ended March 31,  2000 would have been $2.1  million,  or
$0.08 per diluted share.

INFLATION/CURRENCY FLUCTUATION

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

LIQUIDITY AND CAPITAL RESOURCES

    At March 31,  2001,  the Company had $3.1  million in cash and  equivalents,
which  represented a decrease of  approximately  $24.0 million from December 31,
2000. During the first quarter of 2001, the Company expended approximately $14.1
million to repurchase  shares of the Company's  Common  Stock.  In addition,  on
January 26, 2001,  the Company  paid cash of  approximately  $10.6  million plus
acquisition and integration costs to purchase certain assets of Convergent. $7.9
million of this total is currently held in escrow,  against which  Inter-Tel has
made  claims of $7.8  million  to date.  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 to further  develop
Inter-Tel.NET  and for  potential  acquisitions,  strategic  alliances,  working
capital, stock repurchases and general corporate purposes.

    Net cash provided by operating activities totaled $3.9 million for the three
months ended March 31, 2001,  compared to cash used in operating  activities  of
$1.2 million for the same period in 2000. Cash provided by operating  activities
in the first  quarter of 2001 was primarily  the result of cash  generated  from
operations including non-cash depreciation and amortization  charges,  which was
partially offset by increased accounts receivable,  inventory,  prepaid expenses
and restricted funds associated with the acquisition of Convergent.  The Company
expects to expand sales  through its direct  sales  office and dealer  networks,
including those acquired in the Convergent acquisition. The Company expects this
sales expansion to require working capital for increased accounts receivable and
inventories.

    Net cash used in investing  activities totaled $14.6 million for the quarter
ended March 31, 2001, compared to cash provided by investing  activities of $2.0
million for the quarter ended March 31, 2000.  During the first quarter of 2001,
net cash used in  acquisitions  totaled  approximately  $11.5 million,  $10.6 of
which was  attributable  to the  Convergent  acquisition.  Capital  expenditures
totaled  approximately  $3.1  million  for the same  period.  Cash  provided  by
investing  activities in the comparable  period of March 31, 2000 benefited from
$6.6  million  in  cash  received  from  the  disposition  of the  manufacturing
operations of Executone. The Company anticipates additional capital expenditures
during 2001,  principally  relating to expenditures for equipment and management
information  systems  used  in its  operations,  for  facilities  expansion  and
Inter-Tel.NET operations.

    Net cash used in financing  activities  totaled  $13.3  million in the three
months  ended  March  31,  2001,  compared  to net cash  provided  by  financing
activities of $773,000 for the same period in 2000.  During the first quarter of
2001, the Company purchased  treasury stock using  approximately  $14.1 million,
which was  partially  offset by the net proceeds  from the issuance of term debt
totaling  $1.1  million in  connection  with the  purchase of assets used in the
Inter-Tel.NET network. Net cash used for dividends totaled

                                       12
<PAGE>
approximately  $260,000  during the first  quarter of 2001,  which was offset by
cash provided by the exercise of stock options totaling $313,000.

    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 $195.2 million and $198.4 million  remained  unbilled at March 31, 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.

    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 sufficient resources, the Company may also 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,  operation of the business or the Inter-Tel.NET network 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 do not adapt our existing
products and services to customer demands or evolving  industry  standards,  our
business could be significantly harmed. In addition,  current competitors or new
market  entrants may offer  products,  applications  or services that are better
adapted to changing technology or customer demands and could render our products
and services obsolete.

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

                                       13
<PAGE>
OUR FUTURE SUCCESS  LARGELY DEPENDS ON INCREASING  COMMERCIAL  ACCEPTANCE OF OUR
AXXESS  AND  ECLIPSE  PLATFORMS,   INTERPRISE  PRODUCTS,  AND  RELATED  COMPUTER
TELEPHONY PRODUCTS.

During the past few years, we have introduced transparent networking and unified
messaging on our Axxess and Eclipse  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.  We expect that our future success will
continue to depend, in large part, upon the increasing  commercial acceptance of
the InterPrise and related Computer Telephony products, the Axxess platform, and
the Eclipse  platform,  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 or other  defects after new products and upgrades have
been released.  Some of these errors or "bugs" may result from defects contained
in component  parts or software  from our  suppliers or other third parties that
are intended to be compatible with our products and over which we have little or
no control.  Although we have test  procedures  and  quality  control  standards
designed to minimize the number of errors or other defects in our  products,  we
cannot  assure  that our new  products  and  upgrades  will be free of bugs when
released.  If we are unable to quickly or  successfully  correct bugs identified
after release, we could experience:

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

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

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

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

The market for IP network  voice  communications  products  has begun to develop
only recently,  is evolving rapidly and is characterized by an increasing number
of market  entrants who have  introduced or developed  products and services for
Internet or other IP network  voice  communications.  As is typical of a new and

                                       14
<PAGE>
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.  Our overall financial  condition will be adversely  affected if our
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.

In addition,  the  development of new services,  such as unified  communications
services,  may  require  substantial  capital  expenditures  to be made  well in
advance of generating any revenue from such services or demonstrating any market
acceptance of such services. If carriers and communications service providers do
not employ our network to offer any new services to their customers, or if their
customers do not subscribe  for the services when offered,  our own IP telephony
business would not grow as rapidly as we anticipate, which would likely harm our
overall 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:

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

In particular,  in January 2000, we acquired  certain assets and assumed certain
liabilities of Executone Information Systems, Inc. We were adversely affected by
several of the factors  described  above relating to our Executone  acquisition,
including the risks related to unanticipated acquisition costs and impairment of
employee  and  customer  relationships,  as well as the  erosion  of  gross  and
operating margins,  which risks substantially  harmed our operating results. For
these and other reasons noted in the footnotes 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 second quarter of 2000. In

                                       15
<PAGE>
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.

In January 2001, we acquired  certain assets and assumed certain  liabilities of
Convergent.   In  connection   with  the   Convergent   acquisition,   we  hired
approximately 210 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;
     *    any number of the  approximately  210 employees hired by Inter-Tel 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.

As  of  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  must now
conclude 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 complex means. We
will  be  adversely  affected  to  the  extent  that  the  completion  of  these
contractual  matters  will  require  increased  time and  expense,  or result in
protracted legal  proceedings to conclude the contractual  agreement between the
parties.  To the extent  that the  bankruptcy  filing  prohibits  or impairs our
ability to make claims against Convergent pursuant to the acquisition agreement,
our results of operations may be adversely affected.

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

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

Our success depends upon our proprietary  technology.  We currently hold patents
for 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.

                                       16
<PAGE>
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 MAY EXPERIENCE DIFFICULTIES DEVELOPING, MAINTAINING AND IMPROVING THE QUALITY
OF THE INTER-TEL.NET NETWORK.

We may be vulnerable to the risk of network failure. Despite the use of security
measures,  our network is susceptible to damage or interruption from earthquake,
fire,  flood and other  natural  disasters;  and power  loss,  network  failure,
improper operation by employees,  physical and electronic break-ins, and similar
events.  We  presently  have no  off-site  back-up  facilities  for our  Network
Operating Center (NOC),  which handles all monitoring of our network,  including
trouble reporting, network analysis and network testing. We also use our NOC for
monitoring our partners'  networks.  Any network  interruption  that impairs our
ability to transmit and complete calls, as well as conduct  adequate  monitoring
of our network and our  partners'  networks  could  damage our  reputations  and
reduce demand for our services.

The   Inter-Tel.NET   network  is  still  in  the  process  of  deployment  and,
accordingly,  is subject to risks and  uncertainties.  We have replaced some and
expect to replace additional Vocal'Net Servers in the Inter-Tel.NET network with
new technology to improve the reliability, functionality and interoperability of
the network.

                                       17
<PAGE>
WE ARE  DEPENDENT ON  THIRD-PARTY  SUPPLIERS OF  TELECOMMUNICATIONS  AND NETWORK
TRANSMISSION SERVICES.

We rely upon  third-party  vendors to provide us with the equipment and software
that we use to transfer and translate calls from  traditional  voice networks to
the IP-based networks,  and vice versa. For example,  we purchase  substantially
all of our IP-based telephony  equipment and software from Cisco Systems,  Inc.,
Cirilium, Inc., Info Directions,  Inc., XACCT Technologies,  Inc. and Simplified
Telesys.  We cannot assure you that we will be able to continue  purchasing such
equipment and software from these vendors on acceptable terms, if at all or that
these vendors will continue to support  their  products.  If we become unable to
purchase  from these  vendors the  equipment  needed to maintain  and expand our
network as currently configured,  or if these vendors discontinue support we may
not be able to maintain or expand our network to  accommodate  growth and we may
consequently be unable to grow revenues sufficiently to become profitable.  Some
of  these   vendors  are  smaller   companies   with   limited   resources   and
capitalization,  and may not be able to sustain their business in the future. We
also cannot assure that products developed by our suppliers will not suffer from
speed and scalability problems that could harm our business.

In addition to its own network,  Inter-Tel.NET  has  alliances  with other third
party  domestic and  international  IP long  distance  and local  communications
service providers to originate and terminate calls. The successful  expansion of
our IP network depends on our ability to obtain  services from these  suppliers.
Some of these suppliers are or may become our competitors and have not agreed to
restrict  competition against us. If these suppliers raise rates, change pricing
structures,  or  experience  power or  bandwidth  outages,  our  operations  and
business may be harmed.  There is a risk that the local  communications  service
providers may be slow, or fail, to provide lines, which would affect our ability
to complete calls to those  destinations.  We also may not be able to enter into
relationships  with enough overseas local service  providers to handle increases
in the volume of calls that we receive from our customers. We cannot assure that
there  will  not be a  significant  disruption  of  service  provided  by  these
suppliers,  now or in the future. If the domestic or international market for IP
network products fails to develop or develops more slowly than we anticipate, or
if we experience difficulty in the integration of technology,  our Inter-Tel.NET
network could become financially burdensome to maintain or obsolete, which could
harm our business.

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

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

*    PABX and core systems  providers  such as Avaya  (formerly part of Lucent),
     Nortel, Comdial, Iwatsu, Mitel, NEC, Nitsuko, 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;
*    IP telephony  product and service  providers such as Lucent,  Nortel,  ADC,
     3Com,  Cisco Systems,  iBasis,  Concert,  DeltaThree,  ITXC,  deltasix.com,
     Net2Phone, Cirilium and others;
*    large computer corporations such as Microsoft and IBM; and
*    regional Bell operating companies, or RBOCs, cable television companies and
     satellite and other wireless broadband service providers.

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

                                       18
<PAGE>
Many of our competitors and potential  competitors  have  substantially  greater
financial,  customer support, technical and marketing resources, larger customer
bases, longer operating histories, greater name recognition and more established
relationships  in the  industry  than we do. We cannot be sure that we will have
the  resources  or  expertise  to  compete   successfully  in  the  future.  Our
competitors may be able to:

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

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

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

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

                                       19
<PAGE>
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 Convergent  employees in the months to come following the
Convergent  acquisition.  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.

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

The regulatory  environment  for IP network  telephony is subject to substantial
uncertainty.  In the United States, we believe that there are currently few laws
or regulations  directly applicable to packet switched technology networks or to
access  to, or  commerce  on,  IP  networks  generally.  For  example,  there is
currently a bill in the U.S. congress to allow the large LECs to provide broader
Internet  services that could effect  Inter-Tel.  This change, as well as future
changes in the regulatory  environment,  particularly in regulations relating to
the  telecommunications  industry,  could  significantly harm our business.  The
increasing commercial acceptance of packet switched technology networks, as well
as other factors,  may result in the future  application or adoption of a number
of laws and regulations relating to the conduct of our business as it relates to
telecommunications, such as:

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

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

                                       20
<PAGE>
The  regulatory  treatment of IP-based  telephony  outside of the United  States
varies widely from country to country. A number of countries  currently prohibit
or limit competition in the provision of traditional  voice telephony  services.
Some  countries  prohibit,  limit or regulate  how  companies  provide  IP-based
telephony.  Increased  regulation  of the  Internet  and/or  IP-based  telephony
providers,  or the  prohibition  of IP-based  telephony in one or more countries
could limit our ability to provide our services or make them more expensive.  If
foreign  governments  or other  bodies  begin to regulate  or prohibit  IP-based
telephony,  this regulation  could have a material adverse effect on our ability
to attain or maintain profitability.

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

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

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

*    volume and timing of orders received during the quarter;
*    the mix of products sold;
*    the mix of distribution channels;
*    general economic conditions;
*    patterns of capital spending by customers;
*    the  timing  of new  product  announcements  and  releases  by us  and  our
     competitors;
*    the operating results of Cirilium,  which are largely beyond our ability to
     control;

                                       21
<PAGE>
*    pricing pressures,  the cost and effect of acquisitions,  in particular the
     Executone acquisition; and
*    the availability and cost of products and components from our suppliers.

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

Our expense  levels are based in part on  expectations  of future  sales and, if
sales  levels  do not meet  expectations,  operating  results  could be  harmed.
Because sales of digital  communication  platforms  through our dealers  produce
lower gross margins than sales through our direct sales organization,  operating
results  have  varied,  and will  continue  to vary  based upon the mix of sales
through  direct and indirect  channels.  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;
*    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

                                       22
<PAGE>
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 21.5% OF OUR
COMMON  STOCK  AND  BE  ABLE  TO  SIGNIFICANTLY   INFLUENCE   MATTERS  REQUIRING
SHAREHOLDER APPROVAL

As of March 31, 2001 Steven G. Mihaylo,  the Company's  Chairman of the Board of
Directors,   Chief   Executive   Officer  and   President   beneficially   owned
approximately  21.5% of the outstanding shares of the Common Stock. As a result,
he has the ability to exercise significant  influence over all matters requiring
shareholder approval. In addition, the concentration of ownership could have the
effect of delaying or preventing a change in control of the Company.

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to the impact of interest  rate  changes and change 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  March  31,  2001,  we had  cash and  cash  equivalents  of $3.1  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 in
the first quarter of 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 AND USE OF PROCEEDS--NOT APPLICABLE

ITEM 3. DEFAULTS ON SENIOR SECURITIES--NOT APPLICABLE

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Our Annual Meeting of Stockholders was held April 30, 2001 (the Annual Meeting).
On March 28, 2001 we mailed a Proxy Statement,  pursuant to Regulation 14A under
the  Securities  Exchange Act of 1934, to our security  holders to solicit their
votes regarding the following matters that were discussed at our Annual Meeting:

                                       23
<PAGE>
1.   Election of Directors:  Steven G.  Mihaylo,  J. Robert  Anderson,  Jerry W.
     Chapman,  Gary D.  Edens  and C.  Roland  Haden  were  elected  to serve as
     directors until the 2002 Annual Meeting of Stockholders.  The votes were as
     follows:

Nominee                    For:         Against:    Abstain:     Broker Non-Vote
-------                    ----         --------    --------     ---------------
Steven G. Mihaylo       20,166,675     1,679,289     434,139            0
J. Robert Anderson      21,401,082      444,882      434,139            0
Jerry W. Chapman        21,064,744      781,220      434,139            0
Gary D. Edens           21,403,929      442,035      434,139            0
C. Roland Haden         21,406,148      439,816      434,139            0

2.   1997 Long Term  Incentive Plan  Amendment:  The  stockholders  voted on and
     approved a proposal to approve an amendment to the Company's 1997 Long Term
     Incentive Plan to provide for an automatic increase in the number of shares
     of Common Stock  reserved  thereunder  on the first day of each fiscal year
     equal to the lesser of (a) 2.5% of the outstanding shares on that date, (b)
     750,000  shares  (subject to  appropriate  adjustment for all stock splits,
     dividends,   subdivisions,   combinations,   recapitalizations   and   like
     transactions)  or  (c) a  lesser  amount  as  determined  by the  Board  of
     Directors. The votes were as follows:

        For:              Against:           Abstain:         Broker Non-Vote
        ----              --------           --------         ---------------
     7,901,079           7,011,622            24,935             6,908,328

3.   The  stockholders  also  voted on and  approved  a  proposal  to ratify the
     appointment  of Ernst & Young  LLP to act as the  independent  auditors  to
     audit our and our subsidiaries' financial statements for the year 2001. The
     votes were as follows:

        For:              Against:           Abstain:         Broker Non-Vote
        ----              --------           --------         ---------------
     21,783,982            40,457             21,525                 0

ITEM 5. OTHER INFORMATION

Pursuant to Rule  14a-4(c)(1)  under the  Securities  Exchange  Act of 1934,  in
connection with the Company's annual meeting of  shareholders,  if a stockholder
of the  Company  fails to notify the Company at least 45 days prior to the month
and day of mailing of the prior  year's  proxy  statement,  then the  proxies of
management would be allowed to use their discretionary voting authority when any
such proposal is raised at the Company's annual meeting of stockholders, without
any  discussion of the matter in the proxy  statement.  Since the Company mailed
its proxy  statement for the 2001 annual  meeting of  stockholders  on March 28,
2001,  the  deadline for receipt of any such  stockholder  proposal for the 2002
annual meeting of stockholders is February 11, 2002.

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


May 15, 2001                        /s/ Steven G. Mihaylo
------------                        --------------------------------------------
                                    Steven G. Mihaylo
                                    Chairman of the Board, Chief Executive
                                    Officer and President


May 15, 2001                        /s/ Kurt R. Kneip
------------                        --------------------------------------------
                                    Kurt  R. Kneip
                                    Vice President and
                                    Chief Financial Officer

                                       25