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:

             JUNE 30, 2000                                   0-10211


                             INTER-TEL, INCORPORATED


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


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

                                 (602) 302-8900



                                  Common Stock
               (26,424,825 shares outstanding as of June 30, 2000)

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

                                                                            Page

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)                                       3

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

        Condensed consolidated statements of operations -- three and six
          months ended June 30, 2000 and June 30, 1999                         4

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

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

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

PART II. OTHER INFORMATION                                                    24

SIGNATURES                                                                    25

                                       2
<PAGE>
PART I. FINANCIAL INFORMATION

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

(In thousands)                                          June 30,    December 31,
                                                          2000          1999
                                                       ---------    ------------
                                                      (Unaudited)     (Audited)
ASSETS
CURRENT ASSETS
     Cash and equivalents                              $  29,170      $  19,226
     Accounts receivable - net                            60,225         49,583
     Inventories                                          29,977         18,816
     Net investment in sales-leases                       13,741         14,466
     Restricted cash for acquisition                          --         12,097
     Deferred income taxes                                27,165             --
     Prepaid expenses and other assets                     7,766          4,926
                                                       ---------      ---------
     TOTAL CURRENT ASSETS                                168,044        119,114

PROPERTY, PLANT & EQUIPMENT                               29,806         28,706
EQUIPMENT HELD UNDER LEASE, NET                            4,520          5,310
GOODWILL AND OTHER INTANGIBLES                            16,852         16,452
NET INVESTMENT IN SALES-LEASES                            23,639         30,258
RESTRICTED CASH FOR ACQUISITION                               --         32,203
OTHER ASSETS                                               4,745          8,206
                                                       ---------      ---------
                                                       $ 247,606      $ 240,249
                                                       =========      =========

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
     Accounts payable                                  $  41,568      $  20,540
     Accrued expenses                                     29,470         25,937
     Restructuring charges                                 4,825             --
     Current maturities of long-term debt                  1,040            525
     Other current liabilities                            11,993         11,187
                                                       ---------      ---------
     TOTAL CURRENT LIABILITIES                            88,896         58,189

DEFERRED TAX LIABILITY                                     7,804          6,278
LONG TERM DEBT                                             2,954          1,231
OTHER LIABILITIES                                         13,322          6,430

SHAREHOLDERS' EQUITY
     Common Stock                                        107,280        106,853
     Less:  shareholder loans                             (1,018)        (1,116)
     Retained earnings                                    38,093         75,835
     Accumulated other comprehensive income                   56            177
                                                       ---------      ---------
                                                         144,411        181,749

     Less:  Treasury stock at cost                        (9,781)       (13,628)
                                                       ---------      ---------

TOTAL SHAREHOLDERS' EQUITY                               134,630        168,121
                                                       ---------      ---------

                                                       $ 247,606      $ 240,249
                                                       =========      =========
See accompanying notes.

                                       3
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

<TABLE>
<CAPTION>
(In thousands, except                                   Three Months               Six Months
per share amounts)                                      Ended June 30,           Ended June 30,
                                                     2000         1999         2000         1999
                                                   ---------    ---------    ---------    ---------
<S>                                                <C>          <C>          <C>          <C>
NET SALES                                          $ 101,089    $  77,788    $ 197,452    $ 143,313

Cost of sales                                         63,040       38,269      117,863       72,122
Cost of sales - Executone restructuring                7,639           --        7,639           --
                                                   ---------    ---------    ---------    ---------
Total cost of sales                                   70,679       38,269      125,502       72,122

GROSS PROFIT                                          30,410       39,519       71,950       71,191

     Research & development                            5,431        3,725       11,099        7,032
     Selling, general and administrative              32,954       24,625       63,865       45,204
     Restructuring charge                             45,245           --       45,245           --
     In-process research and development                  --           --        5,433           --
                                                   ---------    ---------    ---------    ---------
                                                      83,630       28,350      125,642       52,236
                                                   ---------    ---------    ---------    ---------

OPERATING INCOME (LOSS)                              (53,220)      11,169      (53,692)      18,955

     Equity share of Cirilium Corp.'s net losses      (2,215)          --       (3,914)          --
     Interest and other income                           396          491          673          925
     Interest expense                                    (62)         (13)        (137)         (25)
                                                   ---------    ---------    ---------    ---------

INCOME (LOSS) BEFORE INCOME TAXES                    (55,101)      11,647      (57,070)      19,855
INCOME TAXES                                         (20,939)       4,426      (21,687)       7,542
                                                   ---------    ---------    ---------    ---------

NET INCOME (LOSS)                                  $ (34,162)   $   7,221    $ (35,383)   $  12,313
                                                   =========    =========    =========    =========

NET INCOME (LOSS) PER SHARE-BASIC                  $   (1.30)   $    0.28    $   (1.34)   $    0.47
                                                   =========    =========    =========    =========

NET INCOME (LOSS) PER SHARE-DILUTED                $   (1.30)   $    0.27    $   (1.34)   $    0.46
                                                   =========    =========    =========    =========
Average number of common shares
     Outstanding - Basic                              26,371       25,826       26,310       25,961
                                                   =========    =========    =========    =========
Average number of common shares
     Outstanding - Diluted                            26,371       26,711       26,310       26,994
                                                   =========    =========    =========    =========
</TABLE>

See accompanying notes.

                                       4
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
(In thousands, except                                    Three Months            Six Months
per share amounts)                                      Ended June 30,          Ended June 30,
                                                       2000        1999        2000        1999
                                                     --------    --------    --------    --------
<S>                                                  <C>         <C>         <C>         <C>
OPERATING ACTIVITIES
Net Income (loss)                                     (34,162)      7,221     (35,383)     12,313
Adjustments to reflect operating activities:
       Depreciation and amortization                    3,562       2,201       6,756       4,324
       Non-cash portion of restructuring charge        41,783          --      41,783          --
       Purchased in-process research and
          development                                      --          --       5,433          --
       Changes in operating assets and liabilities     (6,397)     (5,704)    (20,749)    (12,511)
       Other                                            6,546       3,701      12,303       6,934
                                                     --------    --------    --------    --------

NET CASH PROVIDED BY OPERATING ACTIVITIES              11,332       7,419      10,143      11,060

INVESTING ACTIVITIES
     Additions to property and equipment and
       operating leases                                (3,197)     (4,435)     (6,201)     (9,380)
     Proceeds from disposal of property
       and equipment                                        4       1,999          11       1,999
     Proceeds from disposition of business segment         --          --       6,602          --
     Cash used in acquisitions                             --        (500)     (1,647)       (720)
                                                     --------    --------    --------    --------

NET CASH USED IN INVESTING ACTIVITIES                  (3,193)     (2,936)     (1,235)     (8,101)

FINANCING ACTIVITIES
     Cash dividends paid                                 (263)       (262)       (526)       (522)
     Payments on long-term debt                          (329)         --        (551)         --
     Treasury stock purchases                              --      (6,682)         --      (6,682)
     Proceeds from stock issued under the ESPP            495         421         495         421
     Proceeds from exercise of stock options              360         160       1,618       1,013
                                                     --------    --------    --------    --------

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES       263      (6,363)      1,036      (5,770)

INCREASE (DECREASE) IN CASH AND EQUIVALENTS             8,402      (1,880)      9,944      (2,811)

CASH AND EQUIVALENTS AT BEGINNING OF PERIOD            20,768      62,193      19,226      63,124
                                                     --------    --------    --------    --------

CASH AND EQUIVALENTS AT END OF PERIOD                $ 29,170    $ 60,313    $ 29,170    $ 60,313
                                                     ========    ========    ========    ========
</TABLE>

See accompanying notes.

                                       5
<PAGE>
INTER-TEL, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 1999

NOTE A--BASIS OF PRESENTATION

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

NOTE B--EARNINGS PER SHARE

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

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

<TABLE>
<CAPTION>
(In thousands, except                       Three Months Ended              Six Months Ended
per share amounts)                      June 30, 2000  June 30, 1999   June 30, 2000  June 30, 1999
                                        -------------  -------------   -------------  -------------
<S>                                        <C>            <C>             <C>            <C>
Numerator:
  Net income                               $(34,162)      $ 7,221         $(35,383)      $12,313
                                           ========       =======         ========       =======

Denominator:
  Denominator for basic earnings per
   share - weighted average shares           26,371        25,826           26,310        25,961

Effect of dilutive securities:
  Employee and director stock options            --           885               --         1,033
                                           --------       -------         --------       -------

Denominator for diluted earnings per
   share - adjusted weighted average
   shares and assumed conversions            26,371        26,711           26,310        26,994
                                           ========       =======         ========       =======

Basic earnings per share                   $  (1.30)      $  0.28         $  (1.34)      $  0.47
                                           ========       =======         ========       =======

Diluted earnings per share                 $  (1.30)      $  0.27         $  (1.34)      $  0.46
                                           ========       =======         ========       =======
</TABLE>

NOTE C - ACQUISITIONS, DISPOSITIONS AND RESTRUCTURING CHARGES

EXECUTONE

     On January 1, 2000 Inter-Tel  purchased  certain computer  telephony assets
and  assumed  certain  liabilities  of  Executone   Information  Systems,   Inc.
("Executone") for $44.3 million in cash plus related acquisition costs,  subject
to purchase  price  adjustments  as of the closing date.  Executone was based in
Milford,  CT, with offices  located in Poway,  California and Oakton,  Virginia.
Executone  specialized in database design and systems  integration for small- to
medium-size  businesses that utilize  advanced  telecommunications  products and
services. The

                                       6
<PAGE>
     Executone  transaction  was  accounted  for  using the  purchase  method of
accounting.  The aggregate purchase price was allocated to the fair value of the
assets and  liabilities  acquired,  of which $5.4 million  ($3.4  million  after
taxes) was written-off as purchased in-process research and development.  During
the  first  quarter  of  2000,  the  Executone  division  recognized  losses  of
approximately $2.5 million ($1.5 million after taxes, or $.06 per diluted share)
excluding the charge for in-process research and development.

     In connection with the Executone acquisition,  the Company sold Executone's
manufacturing  assets and liabilities to Varian Associates,  Inc.  ("Varian") of
Tempe, Arizona at a net book value of $6.6 million.

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

     The  Company  has  revised  its  acquisition  plan  and,  accordingly,  has
accounted for the restructuring of the Executone operations, including severance
and related costs,  the shut down and  consolidation of the Milford facility and
the  impairment of assets  associated  with the  restructuring.  The Company has
finalized its plan for the exiting of activities and the involuntary termination
or  relocation  of employees in  connection  with the  integration  of Executone
operations. Accrued costs associated with this plan are estimates.

     The Company  formulated  and announced  plans during the second quarter for
the closure and consolidation of the Executone Milford facility.  On May 22, the
Company announced that it would be closing the Executone facility in Milford and
consolidating the Executone operations into the Company's existing operations in
Arizona.  On that date, members of the Company's  management notified all of the
Executone employees of the plans to consolidate the facilities and each employee
was offered  the  opportunity  to  relocate  to  Arizona.  The costs of employee
termination  benefits related to the reduction of approximately 140 positions in
Milford  relating to those  employees who chose not to move,  which  represented
substantially all of the employees of that facility.

     The Company expects that the consolidation of the Milford, CT facility will
be  completed  by the end of 2000,  except  for  certain  long-term  contractual
obligations  described  below. The Company expects that the operations in Poway,
CA will be  consolidated  with the  Arizona  operations  on or before the end of
2000. The Executone operation in Oakton,  Virginia will remain in operation as a
sales office for Inter-Tel's Government Systems group.

     In addition to the  personnel  severance,  termination,  plant  closure and
other related costs attributable to the plant closing, the Company also recorded
a reserve for costs  associated  with  building,  furniture and equipment  lease
obligations,   as  well  as  write-offs  for  impairment  of  assets,  including
inventory, accounts and notes receivable, fixed assets and goodwill.

     Inventories were impaired based on current sales prices compared to current
costs,  the  decision  by a number of  dealers to no longer  sell the  Executone
product,  customer  preference  for Inter-Tel  branded  products over  Executone
branded products,  excess and obsolete inventory,  and management's decision not
to pursue continued product development on new or existing product lines. During
the first six months of 2000,  various dealers and customers  failed to purchase
Executone  products for  new  installations,  purchased  less products,  took on

                                       7
<PAGE>
competitive  product  lines and/or  otherwise  gave notice to the Company of the
intent to reduce or minimize further business  transactions with the Company for
Executone products.

     Exit costs associated with the closure of the Milford facility also include
liabilities for building,  furniture and equipment lease, and other  contractual
obligations.  The  Company  is  liable  for the lease on the  Milford  buildings
through January 2005.  Various  furniture leases run concurrently  through March
2002. Other capital leases for computer and other equipment terminate on varying
dates through  September  2002. To date,  other than a sublease  agreement  with
eLOT,  Inc. for part of the facility and equipment,  the Company has been unable
to sublease a significant  portion of the buildings or the related furniture and
equipment. The reserve for lease and other contractual obligations is identified
in the table below.

     The Executone business has operated at a cash deficit since the acquisition
date. Pre-tax operating losses for Executone totaled  approximately $5.9 million
during the first six months of 2000,  and the Company has  experienced  negative
cash flows during this same period. In addition to incurring ongoing losses from
Executone  operations and business  deterioration,  the Company has  experienced
loss of Executone  dealers and customers,  delays in introduction and acceptance
of new products,  a deterioration in the accounts  receivable  agings,  customer
preference for Inter-Tel  branded products over the Executone brand and the lack
of  continuity  of  personnel,  including  loss of key  management  and  product
development  personnel.  As a result,  the Company  believes  that the Executone
business now offers no value from the Executone  business,  products and related
trademark,  brand and name.  Dealer and  customer  lists have  yielded much less
value than originally anticipated from the transaction. Accordingly, the Company
has increased its reserve for accounts receivable.

     In  addition,  as part of the  restructuring,  the Company  has  recorded a
charge for  impairment to the goodwill.  For the six months ended June 30, 2000,
the  Company  experienced  negative  cash flows from the  Executone  division of
approximately $9.8 million.  Revenues,  customer orders for new installations of
Executone  products,  customer  and  employee  retention,  trade and brand  name
recognition,  and other reasons for initially  purchasing the Executone computer
telephony  business have fallen  significantly  below  management  expectations.
Accordingly,  the Company has  determined  that no value  exists in the goodwill
originally recorded for the Executone  operations.  Refer to the table below for
more information regarding the details of the charge.

     The  following  tables  summarize  details of the  restructuring  charge in
connection with the Executone acquisition, including the description of the type
and amount of liabilities assumed.

                                                                       RESERVE
                                    CASH/   RESTRUCTURING              BALANCE
         DESCRIPTION               NONCASH     CHARGE      ACTIVITY   AT 6/30/00
         -----------               -------     ------      --------   ----------
                                                 (In thousands)

PERSONNEL COSTS:
  Severance and termination costs   Cash       $(1,583)        134     $(1,449)
  Other Plant closure costs         Cash          (230)         25        (205)

LEASE TERMINATION AND OTHER
CONTRACTUAL OBLIGATIONS (NET OF
ANTICIPATED RECOVERY):
  Building and equipment leases     Cash        (7,444)        173      (7,271)
  Other contractual obligations     Cash        (1,700)         --      (1,700)

IMPAIRMENT OF ASSETS:
  Inventories                      NonCash      (5,939)      5,939          --
  Accounts receivable              NonCash      (1,685)      1,685          --
  Fixed assets                     NonCash      (3,151)      3,151          --
  Net intangible assets            NonCash     (29,184)     29,184          --
                                              --------                --------
TOTAL                                          (50,916)                (10,625)
                                              ========                ========

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

INTER-TEL.NET

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

     The  pre-tax  charge  associated  with  Inter-Tel.net  is  related  to  the
write-down to net realizable value of the Vocal'Net servers in the division's IP
network,  and lease  termination  costs of redundant  facilities,  summarized as
follows:

                                                                       RESERVE
                                    CASH/   RESTRUCTURING              BALANCE
         DESCRIPTION               NONCASH     CHARGE      ACTIVITY   AT 6/30/00
         -----------               -------     ------      --------   ----------
                                                 (In thousands)
LEASE TERMINATION OBLIGATIONS
(NET OF ANTICIPATED RECOVERY):
  Building leases                   Cash         (144)          27       (117)

IMPAIRMENT OF ASSETS:
  Fixed assets                     NonCash     (1,824)       1,824         --
                                               ------                    ----
TOTAL                                          (1,968)                   (117)
                                               ======                    ====

NOTE D - PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE

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

NOTE E - SEGMENT INFORMATION

     The Company adopted  Statement of Financial  Accounting  Standards No. 131,
"Disclosures  about  Segments of an Enterprise and Related  Information"  ("SFAS
131") in the fiscal year ended December 31, 1998. SFAS 131 establishes standards
for  reporting  information  regarding  operating  segments in annual  financial
statements and requires selected  information for those segments to be presented
in interim financial reports issued to stockholders.  SFAS 131  also establishes

                                       9
<PAGE>
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 this quarter, 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  materially  represented all of the
financial  information  related to the Company's  principal  operating  segment.
Although the  operations  of Executone  are  identified  separately  below,  the
Executone  operations  are similar and  comparable to the principal  segment and
future  disclosures will likely reflect the Executone  operations  combined with
the principal segment.

     In the second quarter of 2000, the Company  generated  income from business
segments, including one-time charges, as follows:

<TABLE>
<CAPTION>
(in thousands, except per share                 PRINCIPAL                             INTER-
amounts)                                         SEGMENT     EXECUTONE   CIRILIUM    TEL.NET       TOTAL
                                                 -------     ---------   --------    -------       -----
<S>                                              <C>         <C>         <C>         <C>         <C>
Net sales                                        $ 80,460    $ 13,638    $     --    $  6,991    $ 101,089


Operating income (loss)                             8,555     (54,218)         --      (7,557)   $ (53,220)

   Equity Share of Cirilium Corp.'s net losses         --          --      (2,215)         --       (2,215)
   Interest and other income                          422         (27)         --           1          396
   Interest expense                                   (27)        (35)         --          --          (62)

Net income (loss)                                   5,549     (33,654)     (1,373)     (4,684)     (34,162)

Net Income (loss) per share--diluted             $   0.21    $  (1.28)   $  (0.05)   $  (0.18)   $   (1.30)

Average number of common
   shares outstanding - diluted                    27,063      26,371      26,371      26,371       26,371
</TABLE>

     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.

     The Company's  revenues are generated  predominantly  in the United States.
Total  revenues  generated from U.S.  customers  totaled $98.4 million and $76.0
million  of total  revenues  for the  quarters  ended  June 30,  2000 and  1999,
respectively.  The Company's revenues from international  sources were primarily
generated from customers located in the United Kingdom,  Europe,  Asia and South
America.  In the  second  quarters  of 2000 and 1999,  revenues  from  customers
located  internationally   accounted  for  2.6%  and  2.2%  of  total  revenues,
respectively.

                                       10
<PAGE>
PART I.

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

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

OVERVIEW

     Inter-Tel  is a leading  provider  of  business  telephone  systems,  voice
processing  systems  and  related  software  applications  for the  40+  station
telephone  system  market  in the  United  Sates.  Inter-Tel  is also a  leading
provider  of IP  telephony  voice  and data  convergence  products.  Inter-Tel's
products include the AXXESS business telephone system, AXXESSORY TALK voice mail
system, Executone computer telephony products, and the InterPrise voice and data
routers.  Inter-Tel  also operates  Inter-Tel.net,  an IP  telephony-based  long
distance  network.  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 for the second quarter of 2000 increased 30.0% to $101.1 million,
compared to $77.8  million in the second  quarter of 1999.  Net sales  increased
37.8% to $197.5  million  in the first six  months of 2000,  compared  to $143.3
million in the first six months of 1999.  For the quarter  and six months  ended
June 30,  2000,  sales from  wholesale  distribution  and direct  sales  offices
accounted for approximately  $14.5 million and $42.6 million,  respectively,  of
the increase in net sales.  The increase in net sales was also  attributable  to
increases in sales of network services.

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

                                   Three Months Ended        Six Months Ended
                                         June 30,                June 30,
                                   -------------------      -------------------
                                    2000         1999        2000         1999
                                   ------       ------      ------       ------

NET SALES                           100.0%       100.0%      100.0%       100.0%
Cost of sales                        62.4         49.2        59.7         50.3
Cost of sales - Executone
    Restructuring                     7.6          0.0         3.9          0.0
                                   ------       ------      ------       ------
Total cost of sales                  69.9         49.2        63.6         50.3

GROSS PROFIT                         30.1         50.8        36.4         49.7

Research and development              5.4          4.8         5.6          4.9
Selling, general and
    administrative                   32.6         31.6        32.3         31.5
Restructuring Charge                 44.7          0.0        22.9          0.0
IPRD write-off                        0.0          0.0         2.8          0.0
                                   ------       ------      ------       ------

                                       11
<PAGE>
OPERATING INCOME                    (52.6)        14.4       (27.2)        13.3

Equity Share of Cirilium
  Corp's net losses                  (2.2)         0.0        (2.0)         0.0
Interest and other income             0.4          0.6         0.3          0.6
Interest expense                     (0.1)         0.0        (0.1)         0.0
Income taxes                        (20.7)         5.7       (11.0)         5.3
                                   ------       ------      ------       ------
Net income (loss)                   (33.8)%        9.3%      (17.9)%        8.6%
                                   ======       ======      ======       ======

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

     Gross  profit  for the  second  quarter  of 2000  excluding  the  Executone
restructuring costs was $38.0 million, or 37.6% of net sales,  compared to $39.5
million,  or 50.8% of net sales,  for the second  quarter of 1999.  Gross profit
increased 11.8% to $79.6 million, or 40.3% of net sales, in the first six months
of 2000  compared  to $71.2  million,  or 49.7% of net  sales,  in the first six
months of 1999.  Including  the  Executone  restructuring  cost of sales,  gross
margin was 30.1% and 36.4% for the second  quarter and six months ended June 30,
2000,  respectively.  Gross margins in the second  quarter of 2000 excluding the
Executone  restructuring  costs decreased primarily as a result of lower margins
from  Inter-Tel.net and the acquired Executone  operations.  To a lesser extent,
margins  were lower as a result of sales  channel  and  product  mix, as well as
competitive  pricing  pressures.  A  smaller  portion  of  the  Company's  sales
increases  were  through  direct  channels,  where the Company has  historically
generated  higher  margins,  as compared to sales  through the network  services
group, which has generated lower gross margins.

     Research and development  expenses for the second quarter of 2000 increased
to $5.4 million, or 5.4% of net sales,  compared to $3.7 million, or 4.8% of net
sales,  for the  second  quarter  of 1999.  Research  and  development  expenses
increased  to $11.1  million,  or 5.6% of net sales,  in the first six months of
2000 compared to $7.0 million,  or 4.9% of net sales, in the first six months of
1999. The increases in absolute dollars and as a percentage of net sales in both
periods were primarily  attributable to expenses relating to the development and
introduction  of  new  products,   including  the  continuing   development  and
improvement  of the  Company's  AXXESS  digital  communication  platforms,  call
processing and voice processing software, CTI products, unified messaging and IP
voice  solutions.  Costs  were  also  incurred  for new and  sustaining  product
development associated with the Executone operations.  With the exception of the
acquired Executone operations, the Company expects that research and development
expenses will continue to increase in absolute dollars as the Company  continues
to develop new software and to enhance existing technologies and products. These
expenses may vary in the future, however, as a percentage of net sales.

     Selling, general and administrative expenses for the second quarter of 2000
increased in absolute  dollars to $32.95  million  compared to $24.6 million for
the  second  quarter  of 1999.  Selling,  general  and  administrative  expenses
increased  to $63.9  million in the first six months of 2000  compared  to $45.2
million in the first six months of 1999.  The increases in absolute  dollars and
as a percentage of net sales for the quarter and six months ended June 30, 2000,
were  attributable  in part to  continued  efforts to hire and train  additional
sales personnel throughout  Inter-Tel's direct sales offices.  During the second
quarter,  the Company  analyzed  productive and  non-productive  employees,  and
through  attrition and layoffs,  incurred  higher than  anticipated  costs.  The
Company has also incurred  additional  personnel and marketing  costs to support
the  operations  of  Inter-Tel.net.  The  Company  has  incurred  and will incur
additional  costs  associated  with the  closure of the  Executone  facility  in
Milford,  CT, including  moving and integration  costs that were not included in

                                       12
<PAGE>
the one-time  charge.  With the exception of costs associated with the Executone
operations,  the  Company  expects  that  selling,  general  and  administrative
expenses  will  continue to increase  in absolute  dollars,  but may vary in the
future as a percentage of net sales.

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

     In  December  1999,  Inter-Tel  entered  into an  agreement  with  Hypercom
Corporation  to  jointly  form  Cirilium  Corporation   ("Cirilium").   Cirilium
comprises parts of Hypercom's data and Inter-Tel's packet telephony products and
services,  including Inter-Tel's Vocal'Net gateway products and technology.  The
Company owns approximately  45.25% of the outstanding capital stock of Cirilium.
Accordingly,  the Company  recorded  the net losses of Cirilium as a single line
item below operating  income.  Pretax losses from Cirilium  totaled $2.2 million
and  $3.9  million  for  the  quarter  and  six  months  ended  June  30,  2000,
respectively.

     During the  second  quarter,  the  Company  recorded  a one-time  after-tax
restructuring  charge of $31.6 million  associated  with the  restructuring  and
write-off  of assets  in  connection  with the  acquired  Executone  operations,
including $4.7 million  after-tax for the impairment of inventories  included in
cost of sales.  Included in the remaining after-tax charge of $26.9 million were
costs for the plant  closure,  severance  and related  termination  benefits for
terminated employees,  lease obligations and other contractual  obligations,  as
well as the  impairment  of accounts  receivable,  fixed  assets and  intangible
assets. In addition, during the second quarter,  Inter-Tel recorded an after-tax
charge associated with Inter-Tel.net  operations of $1.2 million, related to the
write-down to net realizable value of the Vocal'Net servers in the division's IP
network  and lease  termination  costs of  redundant  facilities.  The  charges,
including the amounts  attributable to cost of sales,  reduced diluted  earnings
per share by $1.24 per share and $1.25 per share for the second  quarter and six
months ended June 30, 2000, respectively.

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

     Net loss for the  second  quarter  was  $34.2  million  (loss of $1.30  per
diluted share), compared to net income of $7.2 million ($0.27 per diluted share)
for the second quarter of 1999, reflecting the charges (including cost of sales)
associated with the Executone and Inter-Tel.net operations noted above. Net loss
for the six months  ended  June 30,  1999 was $35.4  million  (loss of $1.34 per
diluted  share),  compared to net income of $12.3 million,  or $0.46 per diluted
share,  in the first six  months of 1999,  reflecting  again the  charges  noted
above.  Excluding  such  charges,  net loss for the quarter  ended June 30, 2000
would have been  reduced to $1.4  million  (loss of $0.05 per share).  Moreover,
excluding  the charges,  net income for the six months ended June 30, 1999 would
have been $773,000 ($0.03 per diluted share).

INFLATION/CURRENCY FLUCTUATION

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

LIQUIDITY AND CAPITAL RESOURCES

     At June 30, 2000,  the Company had $29.2  million in cash and  equivalents,
which  represented an increase of  approximately  $9.9 million from December 31,
1999. On June 1, 2000,  the Company  increased its unsecured  revolving  line of
credit  with Bank One,  Arizona,  NA to $25  million.  This  credit  facility is

                                       13
<PAGE>
available  through June 1, 2002. Under the credit facility,  the Company has the
option to borrow at a prime rate or adjusted LIBOR interest rate.  Historically,
the  Company has used the credit  facility  primarily  to support  international
letters of credit to suppliers.  On December 31, 1999,  the Company paid cash of
approximately $44.3 million plus acquisition costs to purchase certain assets of
Executone.  This  transaction  closed on  January 1, 2000.  The  remaining  cash
balances  may be  used to  further  develop  and  expand  Inter-Tel.net  and for
potential  acquisitions,   strategic  alliances,  working  capital  and  general
corporate purposes.

     Net cash provided by operating activities totaled $10.1 million for the six
months  ended June 30,  2000,  compared to $11.1  million for the same period in
1999.  The  operating  cash  provided in the six months  ended June 30, 2000 was
primarily the result of income from  operations  after  considering the non-cash
portion of restructuring  charges and the non-cash depreciation and amortization
charges.  Cash used in operating  assets and liabilities in the six month period
ended June 30, 2000 was $20.7  million,  compared  to $12.5  million in the same
period of 1999.  During the first six  months of 2000,  the  Company  had higher
accounts  receivable,  inventory,  and prepaid expenses and other assets than at
December 31, 1999,  attributable  primarily to the  Executone  acquisition.  The
Company  expects to expand  sales  through  its direct  sales  office and dealer
networks,  which is expected to require working  capital for increased  accounts
receivable and inventories. During the fist six months of 2000, accounts payable
and other current liabilities  increased primarily as a result of the assumption
of liabilities of Executone.

     Net cash used in investing  activities,  primarily in the form of cash used
for  acquisitions,  capital and  operating  lease  expenditures,  offset by cash
received from the  disposition of the  manufacturing  operations of Executone to
Varian of $6.6  million,  totaled $1.2 million for the six months ended June 30,
2000,  compared to cash used of $8.1  million for the six months  ended June 30,
1999. Net cash used in acquisitions totaled  approximately $1.6 million in 2000.
Capital expenditures totaled approximately $6.2 million for the same period. The
Company anticipates  additional capital  expenditures  during 2000,  principally
relating to expenditures for equipment and management  information  systems used
in its operations,  for facilities  expansion and the Inter-Tel.net  network and
operations.

     Net cash provided by financing  activities  totaled $1.0 million in the six
months ended June 30, 2000 was primarily  attributable  to the proceeds from the
stock  option and purchase  plans,  offset by payments  for cash  dividends  and
long-term  debt.  For the six  months  ended  June 30,  1999,  net cash  used in
financing  activities  of $5.8  million  related  primarily  to  treasury  stock
purchases of $6.7 million and cash dividends  paid, less proceeds from the stock
option and purchase plans.

     The Company  offers to its customers  lease  financing and other  services,
including its Totalease program, through its Inter-Tel Leasing, Inc. subsidiary.
The Company  funds its  Totalease  program in part through the sale to financial
institutions of rental income streams under the leases. Resold Totalease rentals
totaling  $180.2 million and $163.7 million  remained  unbilled at June 30, 2000
and December 31, 1999, respectively. The Company is obligated to repurchase such
income  streams in the event of defaults by lease  customers  and,  accordingly,
maintains reserves based on loss experience and past due accounts.  Although the
Company to date has been able to resell the rental streams from leases under the
Totalease  program  profitably and on a substantially  current basis, the timing
and  profitability  of lease  resales  could impact the  Company's  business and
operating results,  particularly in an environment of fluctuating interest rates
and  economic  uncertainty.  If the  Company is required  to  repurchase  rental
streams and realizes  losses  thereon in amounts  exceeding  its  reserves,  its
operating results will be adversely affected.

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

                                       14
<PAGE>
FACTORS THAT MAY AFFECT RESULTS OF FUTURE OPERATIONS

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

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

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

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

     During the past few years,  we have  introduced  unified  messaging  on our
AXXESSORY  TALK  platform,  developed a number of  enhancements  to our existing
AXXESS and AXXESSORY Talk platforms,  introduced the Inter-Tel Vocal'Net Gateway
Server and the Inter-Tel Vocal'Net Service Provider Package,  and in April 1999,
we released the InterPrise  400 voice and data router,  our first of a family of
voice and data  convergence  products.  Also,  during  October 1999, we released
AXXESS 5.1 and AXXESSORY TALK 5.1 software into  production.  During the past 12
months,  sales  of our  AXXESS  digital  communications  platforms  and  related
software have comprised a substantial  portion of our net sales.  We expect that
our future success will continue to depend,  in large part,  upon the increasing
commercial  acceptance of the InterPrise  products and the AXXESS  platform,  as
well as future  upgrades  and  enhancements  to these  products  and  networking
platforms. We cannot assure that these products or platforms will succeed in the
future.  Our future  success will also depend upon the market  acceptance of our
other new products and enhancements.

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

     Over the past 2 years, we have introduced the Inter-Tel  Vocal'Net  Server,
the Inter-Tel  Service  Provider  Package,  and Inter-Tel  InterPrise  products.
Although the  Inter-Tel  Vocal'Net  gateways and Service  Provider  Package were
transferred  to  Cirilium  in  1999,  the  products  continue  to be used in the
Inter-Tel.net  network.  However, we recently announced that we will replace the
Vocal'Net  Servers  currently  in place in this  network,  and  accordingly,  we
wrote-down  these assets to net realizable  value as of June 30, 2000. We cannot
assure that the  functionality,  scalability,  and  reliability of the Inter-Tel
Vocal'Net gateways or its respective replacement  technology,  Inter-Tel Service
Provider  Package and  Inter-Tel  InterPrise  product  lines will achieve  broad
market acceptance. In addition, we cannot assure that these products will comply
with industry  standards or that emerging industry standards will not render our
IP  telephony  products  obsolete.  If these  products  fail to  achieve  market
acceptance,  our business,  financial  condition and operating  results could be
significantly harmed.

                                       15
<PAGE>
THE SUCCESS OF OUR JOINT VENTURE WITH HYPERCOM, AND THE MARKET ACCEPTANCE OF OUR
CIRILIUM VENTURE,  AS WELL AS OUR OTHER IP NETWORK TELEPHONY PRODUCT AND SERVICE
OFFERINGS,  IS  UNCERTAIN  AND IS  SUBJECT  TO RISKS  THAT MAY  PREVENT  US FROM
ACHIEVING OUR OBJECTIVES.

     In  December  1999,  Inter-Tel  entered  into an  agreement  with  Hypercom
Corporation to jointly form  Cirilium.  Cirilium  comprises  parts of Hypercom's
data  and  Inter-Tel's  packet  telephony  experience,  products  and  services,
including Inter-Tel's Vocal'Net gateway products and technology.  The market for
packet switched  technology,  as well as the market for data telephony products,
services and applications in general, is intensely competitive. Consequently, we
cannot assure that our expectations and objectives for the Cirilium venture with
Hypercom will be successfully  attained. For the quarter ended June 30, 2000, we
recorded a pre-tax  loss of $2.2  million,  or $1.4 million  after-tax  (loss of
$0.05 per diluted  share)  related to our  interest in  Cirilium.  In  addition,
during the second  quarter,  we incurred a charge to  write-down  the  Vocal'Net
Servers in the Inter-Tel.net network to net realizable value.

     The prospects for market acceptance of the Cirilium  venture,  and other IP
telephony products acquired through our June 1998 purchase of TMSI assets,  must
be considered in light of the  uncertainties  to which companies and products in
rapidly evolving markets such as IP network telephony are particularly  exposed.
These uncertainties include:

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

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

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

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

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

                                       16
<PAGE>
     Due to the  complexity of our  products,  we have in the past and expect in
the future to experience  delays in the  development and release of new products
or product  enhancements.  If we fail to  introduce  new  software,  products or
services in a timely manner, or fail to release upgrades to our existing systems
or products on a regular and efficient  basis,  customer demand for our products
could decline and our business would be harmed.

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

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

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

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

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

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

     In particular,  in January 2000, we acquired certain assets and liabilities
of Executone  Information Systems, Inc. We were adversely affected by several of
the risks described above relating to our Executone  acquisition,  including the
risks related to unanticipated  acquisition costs and impairment of employee and
customer relationships,  which risks substantially harmed our operating results.
Specifically,  our  gross  profit  for the  quarter  ended  June  30,  2000  was
negatively  affected  by  Executone  operations,   which  generated  significant
operating  losses,  principally  attributable  to significant  margin erosion in
Executone's system sales and sustained high operating costs. For these and other
reasons  noted in the  footnotes  and in the section  above titled  Management's
Discussion  and Analysis of financial  condition and results of  operations,  we
wrote-off our investment in Executone.

                                       17
<PAGE>
     In addition to the risks related to  acquisitions  mentioned  above, to the
extent that  shares of our stock or the rights to  purchase  stock are issued in
connection with any future acquisitions,  dilution to our existing  shareholders
will result and our earnings per share may suffer.  Any future  acquisitions may
not generate  additional revenue or provide any benefit to our business,  and we
may  not  achieve  a  satisfactory  return  on our  investment  in any  acquired
businesses.

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

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

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

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

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

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

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

     We also  cannot  assure  that third  parties  will not claim our current or
future  products or services  infringe upon their rights.  Occasionally,  we are
subject to proceedings  alleging that certain of our key products infringed upon
third  party  intellectual  property  rights,  including  patents,   trademarks,
copyrights, or other intellectual property rights. We recently received a letter
and viewed a presentation from one of our primary competitors,  Lucent, alleging
that our AXXESS digital  communications  platform utilizes inventions covered by
certain  of  such  competitor's  patents.  We  are  continuing  the  process  of
investigating this matter. Additionally, we recently received a letter from AT&T

                                       18
<PAGE>
alleging  that certain of our IP products  infringe  upon  certain  intellectual
property  protected by AT&T's patents.  This matter is also being  investigated.
When any such claims are  asserted  against us, we may seek to license the third
party's intellectual property rights. Purchasing such licenses can be expensive,
and we cannot  assure that a license  will be available on prices or other terms
acceptable  to us, if at all.  Alternatively,  we could resort to  litigation to
challenge such a claim.  Litigation could require us to expend  significant sums
of cash and divert our management's attention. In the event that a court renders
an enforceable  decision with respect to our  intellectual  property,  we may be
required  to pay  significant  damages,  develop  non-infringing  technology  or
acquire licenses to the technology that is the subject of the infringement.  Any
of these actions or outcomes  could harm our business,  financial  condition and
operating  results.  If we are unable or choose not to  license  technology,  or
decide not to challenge a third party's rights,  we could encounter  substantial
and costly  delays in product  introductions.  These  delays  could  result from
efforts to design around  asserted  third party rights or our discovery that the
development,  manufacture or sale of products  requiring these licenses could be
foreclosed.

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

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

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

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

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

                                       19
<PAGE>
     Moreover,  although  we  have  devoted  and  intend  to  continue  devoting
substantial resources to improving the quality of telephone  conversations using
technology  that  will  replace  Cirilium's   Inter-Tel   Vocal'Net,   Inter-Tel
InterPrise  products,  and the Inter-Tel.net  network,  we cannot assure that we
will be able to eliminate or reduce the  problems of voice  communications  over
the Inter-Tel.net  network,  such as delays in the speech transmission,  loss of
voice  packets and poor sound  quality.  If we fail to improve the sound quality
and other limitations of voice communications over the Inter-Tel.net network and
to offer such  improvements  to our  customers on a  cost-effective  basis,  the
Inter-Tel.net  network could fail to achieve market acceptance and our business,
financial condition and operating results would suffer.

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

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

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

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

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

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

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

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

     We currently  obtain certain key  components for our digital  communication
platforms,   including  certain  microprocessors,   integrated  circuits,  power
supplies,  voice  processing  interface  cards and IP  telephony  cards,  from a

                                       20
<PAGE>
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 and
Inter-Tel Axxent digital communication platforms as well as substantially all of
the  Executone  Computer  Telephony  products.  Although  we  set  manufacturing
specifications  and  conditions  for  our  products,  and  all of  our  contract
manufacturers  must meet our requirements for manufacturing  process and quality
assurance before we enter into  manufacturing  agreements,  we have occasionally
experienced  delays in the supply of components  and finished  goods.  We cannot
assure that we will not experience similar delays in the future.

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

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

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

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

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

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

                                       21
<PAGE>
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 three months to more than nine months, and subjects the sales cycle
associated  with the purchase of our products to a number of significant  risks,
including budgetary  constraints and internal acceptance reviews.  The length of
our sales cycle also may vary substantially from customer to customer. While our
customers are  evaluating  our products and before  placing an order with us, we
may incur  substantial  sales and  marketing  expenses  and  expend  significant
management  effort.  Consequently,  if sales forecasted from a specific customer
for a particular quarter are not realized in that quarter, our operating results
could be materially adversely affected.

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

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

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

                                       22
<PAGE>
     Our expense levels are based in part on  expectations  of future sales and,
if sales levels do not meet  expectations,  operating  results  could be harmed.
Because sales of digital  communication  platforms  through our dealers  produce
lower gross margins than sales through our direct sales organization,  operating
results  have  varied,  and will  continue  to vary  based upon the mix of sales
through  direct and  indirect  channels.  Although  to date we have been able to
resell the rental streams from leases under our Totalease program profitably and
on a substantially  current basis, the timing and profitability of lease resales
from  quarter to quarter  could impact  operating  results,  particularly  in an
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 second quarters,  respectively.  As a result
of these and other factors, we have historically experienced, and could continue
to experience in the future,  fluctuations  in sales and operating  results on a
quarterly  basis.  See  "Management's   Discussion  and  Analysis  of  Financial
Condition and Results of Operations."

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

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

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

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

YEAR 2000 COMPLICATIONS MAY DISRUPT OUR OPERATIONS AND HARM OUR BUSINESS.

     The date fields coded in many software  products and computer  systems need
to be able to  distinguish  21st  century  dates  from the 20th  century  dates,
including  leap  year  calculations.  The  failure  to  be  able  to  accurately
distinguish  these dates is commonly  known as the year 2000  problem.  While we
have yet to experience  any material year 2000 problems,  the computer  software
programs and operating  systems used in our internal  operations,  including our
financial,  product  development,  order management and  manufacturing  systems,
could  experience  errors  or  interruptions  due to the year 2000  problem.  In
addition,  it is possible that our suppliers' and service  providers' failure to
adequately  address the year 2000 problem could have an adverse  effect on their
operations, which, in turn, could have an adverse impact on us.

                                       23
<PAGE>
OUR CHAIRMAN OF THE BOARD OF DIRECTORS,  CEO AND PRESIDENT WILL CONTROL 20.5% OF
OUR  COMMON  STOCK  AND BE ABLE TO  SIGNIFICANTLY  INFLUENCE  MATTERS  REQUIRING
SHAREHOLDER APPROVAL

     As of June 30, 2000, Steven G. Mihaylo, the Company's Chairman of the Board
of  Directors,   Chief  Executive  Officer  and  President   beneficially  owned
approximately  20.5% 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.

INTER-TEL, INCORPORATED AND SUBSIDIARIES

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS--NOT APPLICABLE

ITEM 2. CHANGES IN SECURITIES--NOT APPLICABLE

ITEM 3. DEFAULTS ON SENIOR SECURITIES--NOT APPLICABLE

                                       24
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

1.   On May 3,  2000,  at the  Company's  annual  meeting of  shareholders,  the
     shareholders of the Company elected the following  directors,  each of whom
     was a nominee of the Company:

Name                              Votes For     Votes Withheld
----                              ---------     --------------

Steven G. Mihaylo                 16,237,162        375,896
J. Robert Anderson                16,235,862        377,196
Jerry W. Chapman                  16,233,722        379,336
Gary D. Edens                     16,236,072        376,986
C. Roland Haden                   16,236,384        376,674

ITEM 5. OTHER INFORMATION

     Pursuant to Rule 14a-4(c)(1) under the Securities  Exchange Act of 1934, in
connection with the Company's annual meeting of  shareholders,  if a stockholder
of the Company fails to notify the Company by January 3, 2000,  then the proxies
of management would be allowed to use their discretionary  voting authority when
any such proposal is raised at the  Company's  annual  meeting of  stockholders,
without any discussion of the matter in the proxy statement.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

     Exhibits:

     Exhibit 27.1 - Financial Data Schedule for June 30, 2000

     Reports on Form 8-K -- None

                                   SIGNATURES

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

                                        INTER-TEL, INCORPORATED


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


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

                                       24