##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the quarter ended
    
    Commission File Number:September 30, 2005
    
    0-10211
 INTER-TEL, INCORPORATED
 Incorporated in the State of Arizona
    
    I.R.S. No. 86-0220994
 1615 S. 52nd Street
Tempe, Arizona 85281
 (480) 449-8900
 
 Title of Class
    
    Outstanding as of October 31, 2005Common Stock, no par value
    
    26,199,713
 þ o
 þ o
 o þ




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INDEX
 INTER-TEL, INCORPORATED AND SUBSIDIARIES
 PagePART I. FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (unaudited)Condensed Consolidated Balance SheetsSeptember 30, 2005
and December 31, 2004
    
    
    3Condensed Consolidated Statements of Incomethree and
nine months ended September 30, 2005 and September 30,
2004
    
    
    4Condensed Consolidated Statements of Cash Flowsnine
months ended September 30, 2005 and September 30, 2004
    
    
    5Notes to Condensed Consolidated Financial
StatementsSeptember 30, 2005
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    16Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    43Item 4.
    
    Controls and Procedures
    
    
    44PART II.
    
    OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    45Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    45Item 3.
    
    Defaults Upon Senior Securities
    
    
    45Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    45Item 5.
    
    Other Information
    
    
    45Item 6.
    
    Exhibits
    
    
    45SIGNATURES
    
    
    46EX-31.1EX-31.2EX-32.1EX-32.2
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PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 
 INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
 September 30,
    
    December 31,(in thousands, except share amounts)
    
    2005
    
    2004(Unaudited)
    
    (Note A)ASSETSCURRENT ASSETSCash and equivalents
    
    $
    110,369
    
    
    $
    152,330Short-term investments
    
    
    59,229
    
    
    
    52,644TOTAL CASH AND SHORT-TERM INVESTMENTS
    
    
    169,598
    
    
    
    204,974Accounts receivable, net of allowances of
$8,533 in 2005 and $9,921 in 2004
    
    
    42,994
    
    
    
    45,176Inventories
    
    
    19,718
    
    
    
    16,055Net investment in sales-leases, net of
allowances of $865 in 2005 and $886 in 2004
    
    
    17,502
    
    
    
    17,151Income taxes receivable
    
    
    9,406
    
    
    
    4,017Deferred income taxes
    
    
    16,296
    
    
    
    9,905Prepaid expenses and other assets
    
    
    9,148
    
    
    
    7,194TOTAL CURRENT ASSETS
    
    
    284,662
    
    
    
    304,472LONG-TERM INVESTMENTS
    
    
    
    
    
    
    9,900PROPERTY, PLANT & EQUIPMENT
    
    
    27,984
    
    
    
    27,840GOODWILL
    
    
    26,662
    
    
    
    19,890PURCHASED INTANGIBLE ASSETS
    
    
    24,769
    
    
    
    10,987NET INVESTMENT IN SALES-LEASES, net of
allowances of $1,868 in 2005 and $1,810 in
2004
    
    
    34,717
    
    
    
    33,877TOTAL ASSETS
    
    $
    398,794
    
    
    $
    406,966LIABILITIES AND SHAREHOLDERS EQUITY
CURRENT LIABILITIESAccounts payable
    
    $
    30,073
    
    
    $
    30,801Accrued e-Rate settlement
    
    
    
    
    
    
    8,461Accrued legal judgment and settlement costs
    
    
    11,809
    
    
    
    Other current liabilities
    
    
    46,144
    
    
    
    43,735TOTAL CURRENT LIABILITIES
    
    
    88,026
    
    
    
    82,997DEFERRED TAX LIABILITY
    
    
    76,220
    
    
    
    65,234LEASE RECOURSE LIABILITY
    
    
    13,554
    
    
    
    12,241OTHER LIABILITIES
    
    
    6,947
    
    
    
    7,063SHAREHOLDERS EQUITYCommon stock, no par value-authorized
100,000,000 shares; issued27,161,823
shares; outstanding26,187,913 at Sept. 30,
2005 and 26,125,799 shares at December 31,
2004
    
    
    120,515
    
    
    
    116,598Retained earnings
    
    
    109,219
    
    
    
    134,455Accumulated other comprehensive income
    
    
    348
    
    
    
    924230,082
    
    
    
    251,977Less: Treasury stock at cost  973,910
shares at September 30, 2005 and 1,036,024
shares at December 31, 2004
    
    
    (16,035
    )
    
    
    (12,546
    )TOTAL SHAREHOLDERS EQUITY
    
    
    214,047
    
    
    
    239,431TOTAL LIABILITIES AND SHAREHOLDERS EQUITY
    
    $
    398,794
    
    
    $
    406,966
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INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
 (In thousands, except
    
    Three Months
    
    Nine Monthsper share amounts)
    
    Ended September 30,
    
    Ended September 30,2005
    
    2004
    
    2005
    
    2004NET SALESTelecommunications systems, software and related
    
    $
    97,014
    
    
    $
    93,015
    
    
    $
    291,320
    
    
    $
    269,731Resale of local, long distance and network services
    
    
    14,382
    
    
    
    12,491
    
    
    
    41,335
    
    
    
    36,714TOTAL NET SALES
    
    
    111,396
    
    
    
    105,506
    
    
    
    332,655
    
    
    
    306,445COST OF SALESTelecommunications systems, software and related
    
    
    46,294
    
    
    
    41,897
    
    
    
    136,595
    
    
    
    121,909Resale of local, long distance and network services
    
    
    8,780
    
    
    
    7,675
    
    
    
    25,352
    
    
    
    22,205TOTAL COST OF SALES
    
    
    55,074
    
    
    
    49,572
    
    
    
    161,947
    
    
    
    144,114GROSS PROFIT
    
    
    56,322
    
    
    
    55,934
    
    
    
    170,708
    
    
    
    162,331Research and development
    
    
    8,288
    
    
    
    7,637
    
    
    
    25,456
    
    
    
    20,816Selling, general and administrative
    
    
    36,977
    
    
    
    34,575
    
    
    
    115,952
    
    
    
    103,916Amortization of purchased intangible assets
    
    
    1,173
    
    
    
    414
    
    
    
    3,057
    
    
    
    1,295Legal judgment and settlement
    
    
    10,378
    
    
    
    
    
    
    
    10,378
    
    
    
    Write-off of in-process research and development costs
    
    
    
    
    
    
    
    
    
    
    2,600
    
    
    
    56,816
    
    
    
    42,626
    
    
    
    157,443
    
    
    
    126,027OPERATING
INCOME (LOSS)
    
    
    (494
    )
    
    
    13,308
    
    
    
    13,265
    
    
    
    36,304Interest and other income
    
    
    946
    
    
    
    732
    
    
    
    2,813
    
    
    
    1,808Foreign currency transaction gains (losses)
    
    
    (37
    )
    
    
    (7
    )
    
    
    104
    
    
    
    (281
    )Interest expense
    
    
    (19
    )
    
    
    (20
    )
    
    
    (65
    )
    
    
    (108
    )INCOME BEFORE INCOME TAXES
    
    
    396
    
    
    
    14,013
    
    
    
    16,117
    
    
    
    37,723INCOME TAX PROVISION (BENEFIT)
    
    
    (251
    )
    
    
    4,807
    
    
    
    6,542
    
    
    
    13,580NET INCOME
    
    $
    647
    
    
    $
    9,206
    
    
    $
    9,575
    
    
    $
    24,143NET INCOME PER SHARE  BASIC
    
    $
    0.02
    
    
    $
    0.36
    
    
    $
    0.36
    
    
    $
    0.94NET INCOME PER SHARE  DILUTED
    
    $
    0.02
    
    
    $
    0.34
    
    
    $
    0.35
    
    
    $
    0.89DIVIDENDS PER SHARE
    
    $
    0.08
    
    
    $
    0.07
    
    
    $
    1.24
    
    
    $
    0.19Average number of common shares outstanding  Basic26,147
    
    
    
    25,816
    
    
    
    26,274
    
    
    
    25,691Average number of common shares outstanding  Diluted27,056
    
    
    
    26,944
    
    
    
    27,304
    
    
    
    27,185
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INTER-TEL, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 (In thousands)
    
    Nine MonthsEnded September 30,2005
    
    2004OPERATING ACTIVITIESNet income
    
    $
    9,575
    
    
    $
    24,143Adjustments to reconcile net income to net cash provided
by operating activities:Depreciation of fixed assets
    
    
    7,020
    
    
    
    5,849Amortization of patents included in R&D expenses
    
    
    166
    
    
    
    166Amortization of purchased intangible assets
    
    
    3,057
    
    
    
    1,295Purchased in-process research and development
    
    
    2,600
    
    
    
    Provision for losses on receivables
    
    
    1,286
    
    
    
    1,417Provision for losses on leases
    
    
    2,901
    
    
    
    2,856Provision for inventory valuation
    
    
    426
    
    
    
    1,166Decrease in other liabilities
    
    
    (1,141
    )
    
    
    (1,268
    )Loss on sale of property and equipment
    
    
    77
    
    
    
    2Deferred income taxes
    
    
    6,094
    
    
    
    11,516Provision
for legal judgment and settlement costs
    
    
    10,378
    
    
    
    E-Rate settlement
    
    
    (8,461
    )
    
    
    Changes in operating assets and liabilities
    
    
    (6,428
    )
    
    
    649NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    27,550
    
    
    
    47,791INVESTING ACTIVITIESPurchases of available for sale investments
    
    
    (40,719
    )
    
    
    (62,403
    )Maturities and sales of available for sale investments
    
    
    41,209
    
    
    
    72,575Purchases of held-to-maturity investments
    
    
    
    
    
    
    (12,730
    )Maturities and sales of held-to-maturity investments
    
    
    2,825
    
    
    
    Additions to property, plant and equipment
    
    
    (6,202
    )
    
    
    (7,436
    )Proceeds from disposal of property, plant and equipment
    
    
    26
    
    
    
    21Cash used in
acquisitions, net of cash acquired
    
    
    (28,008
    )
    
    
    (1,458
    )NET CASH USED IN INVESTING ACTIVITIES
    
    
    (30,869
    )
    
    
    (11,431
    )FINANCING ACTIVITIESCash dividends paid
    
    
    (32,760
    )
    
    
    (4,611
    )Treasury stock purchases
    
    
    (13,777
    )
    
    
    Payments on term debt
    
    
    (35
    )
    
    
    (39
    )Proceeds from stock issued under the Employee Stock
Purchase Plan
    
    
    582
    
    
    
    500Proceeds from exercise of stock options
    
    
    7,923
    
    
    
    5,130NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
    
    
    (38,067
    )
    
    
    980EFFECT OF EXCHANGE RATE CHANGES
    
    
    (575
    )
    
    
    97(DECREASE) INCREASE IN CASH AND EQUIVALENTS
    
    
    (41,961
    )
    
    
    37,437CASH AND EQUIVALENTS AT BEGINNING OF PERIOD
    
    
    152,330
    
    
    
    115,197CASH AND EQUIVALENTS AT END OF PERIOD
    
    $
    110,369
    
    
    $
    152,634
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INTER-TEL, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 NOTE ABASIS OF PRESENTATION
   Stock-Based Compensation
   (In thousands, except
    
    Three Months Ended
    
    Nine Months Endedper share amounts)
    
    September 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Net income, as reported
    
    $
    647
    
    
    $
    9,206
    
    
    $
    9,575
    
    
    $
    24,143Deduct: total stock-based
compensation expense, determined
under fair value based method for
all awards, net of tax
    
    
    (565
    )
    
    
    (836
    )
    
    
    (7,808
    )
    
    
    (2,457
    )Pro forma net income
    
    $
    82
    
    
    $
    8,370
    
    
    $
    1,767
    
    
    $
    21,686Earnings per share of common stock:
 6




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(In thousands, except
    
    Three Months Ended
    
    Nine Months Endedper share amounts)
    
    September 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Basic  as reported
    
    $
    .02
    
    
    $
    0.36
    
    
    $
    .36
    
    
    $
    0.94Basic  pro forma
    
    $
    .00
    
    
    $
    0.32
    
    
    $
    .07
    
    
    $
    0.84Diluted  as reported
    
    $
    .02
    
    
    $
    0.34
    
    
    $
    .35
    
    
    $
    0.89Diluted  pro forma
    
    $
    .00
    
    
    $
    0.31
    
    
    $
    .06
    
    
    $
    0.80
    Contingencies
   7




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Inventories
  Income
Taxes
  8




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Recent Accounting Pronouncements
 Share Based Payment. Accounting for Stock Issued to Employees, Statement of Cash Flows.
 1.
    
    A modified prospective method in which compensation cost is recognized beginning with
the effective date (a) based on the requirements of SFAS No. 123R for all share-based
payments granted after the effective date and (b) based on the requirements of SFAS No. 123
for all awards granted to employees prior to the effective date of SFAS No. 123R that remain
unvested on the effective date, or2.
    
    A modified retrospective method which includes the requirements of the modified
prospective method described above, but also permits entities to restate based on the
amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures
either (a) all prior periods presented or (b) prior interim periods of the year of adoption.
  NOTE BEARNINGS PER SHARE
   Three Months Ended
    
    Nine Months Ended(In thousands, except
    
    September 30,
    
    September 30,per share amounts)
    
    2005
    
    2004
    
    2005
    
    2004Numerator: Net income
    
    $
    647
    
    
    $
    9,206
    
    
    $
    9,575
    
    
    $
    24,143Denominator:Denominator for basic earnings
per share  weighted average
shares
    
    
    26,147
    
    
    
    25,816
    
    
    
    26,274
    
    
    
    25,691Effect of dilutive securities:Employee and director stock options
    
    
    909
    
    
    
    1,128
    
    
    
    1,030
    
    
    
    1,494Denominator for diluted earnings per
share  adjusted weighted average
shares and assumed conversions
    
    
    27,056
    
    
    
    26,944
    
    
    
    27,304
    
    
    
    27,185
 9




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Three Months Ended
    
    Nine Months Ended(In thousands, except
    
    September 30,
    
    September 30,per share amounts)
    
    2005
    
    2004
    
    2005
    
    2004Basic earnings per share
    
    $
    0.02
    
    
    $
    0.36
    
    
    $
    0.36
    
    
    $
    0.94Diluted earnings per share
    
    $
    0.02
    
    
    $
    0.34
    
    
    $
    0.35
    
    
    $
    0.89Options excluded from diluted net
earnings per share calculations (1)
    
    
    648
    
    
    
    311
    
    
    
    633
    
    
    
    209
  NOTE C  ACQUISITIONS, TECHNOLOGY INVESTMENTS AND RESTRUCTURING CHARGES
 Lake.
  New Sales Offices in 2004.
 New Technology Investments in 2004.
 Technology Investment in 2003 .
 10




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Executone Restructuring Charge.
   11




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Cash/
    
    
    
    
    
    Activity
    
    
    
    
    
    ReserveNon-
    
    Restructuring
    
    Through
    
    2005
    
    BalanceDescription
    
    Cash
    
    Charge
    
    2004
    
    Activity
    
    At 9/30/05Personnel Costs:Severance and termination
costs
    
    Cash
    
    $
    (1,583
    )
    
    $
    1,583
    
    
    $
    
    
    
    $
    Other plant closure costs
    
    Cash
    
    
    (230
    )
    
    
    230
    
    
    
    
    
    
    
    Lease termination and other
contractual obligations (net
of anticipated recovery):Building and equipment leases
    
    Cash
    
    
    (7,444
    )
    
    
    7,436
    
    
    
    8
    
    
    
    Impairment of Assets:Inventories
    
    Non-Cash
    
    
    (3,454
    )
    
    
    3,454
    
    
    
    
    
    
    
    Other contractual obligations
    
    Cash
    
    
    (1,700
    )
    
    
    1,700
    
    
    
    
    
    
    
    Prepaid inventory and other
expenses
    
    Non-Cash
    
    
    (2,485
    )
    
    
    2,485
    
    
    
    
    
    
    
    Accounts receivable
    
    Non-Cash
    
    
    (1,685
    )
    
    
    1,685
    
    
    
    
    
    
    
    Fixed assets
    
    Non-Cash
    
    
    (3,151
    )
    
    
    3,034
    
    
    
    117
    
    
    
    Net intangible assets
    
    Non-Cash
    
    
    (29,184
    )
    
    
    29,184
    
    
    
    
    
    
    
    Total
    
    
    
    $
    (50,916
    )
    
    $
    50,791
    
    
    $
    125
    
    
    $
    
 NOTE D  SEGMENT INFORMATION
    12




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Three Months Ended September 30, 2005Principal
    
    
    
    
    
    
    
    
    
    Resale ofSegment
    
    
    
    
    
    
    
    
    
    Local, Long(excluding
    
    Legal
    
    Subtotal
    
    Distance and(In thousands, except per share
    
    legal judgment
    
    Judgment &
    
    Principal
    
    Networkamounts)
    
    & settlement)
    
    Settlement
    
    Segment
    
    Services
    
    TotalNet sales
    
    $
    97,014
    
    
    $
    
    
    
    $
    97,014
    
    
    $
    14,382
    
    
    $
    111,396Gross profit
    
    
    50,720
    
    
    
    
    
    
    
    50,720
    
    
    
    5,602
    
    
    
    56,322Legal judgment & settlement
    
    
    
    
    
    
    (10,378
    )
    
    
    (10,378
    )
    
    
    
    
    
    
    (10,378
    )Operating income
    
    
    7,387
    
    
    
    (10,378
    )
    
    
    (2,991
    )
    
    
    2,497
    
    
    
    (494
    )Interest and other income
    
    
    911
    
    
    
    
    
    
    
    911
    
    
    
    35
    
    
    
    946Foreign currency transaction gains
    
    
    (37
    )
    
    
    
    
    
    
    (37
    )
    
    
    
    
    
    
    (37
    )Interest expense
    
    
    (18
    )
    
    
    
    
    
    
    (18
    )
    
    
    (1
    )
    
    
    (19
    )Net income
    
    $
    5,754
    
    
    $
    (6,798
    )
    
    $
    (1,044
    )
    
    $
    1,691
    
    
    $
    647Net income per diluted share (1)
    
    $
    0.21
    
    
    $
    (0.26
    )
    
    $
    (0.04
    )
    
    $
    0.06
    
    
    $
    0.02Weighted average diluted shares (1)
    
    
    27,056
    
    
    
    26,147
    
    
    
    27,056
    
    
    
    27,056
    
    
    
    27,056Goodwill
    
    
    24,527
    
    
    
    
    
    
    
    24,527
    
    
    
    2,135
    
    
    
    26,662Total assets
    
    $
    386,357
    
    
    $
    
    
    
    $
    386,357
    
    
    $
    12,437
    
    
    $
    398,794Depreciation and amortization
    
    
    3,522
    
    
    
    
    
    
    
    3,522
    
    
    
    14
    
    
    
    3,536
 Three Months Ended September 30, 2004Resale of Local,Long Distance and(In thousands, except per share amounts)
    
    Principal Segment
    
    Network Services
    
    TotalNet sales
    
    $
    93,015
    
    
    $
    12,491
    
    
    $
    105,506Gross profit
    
    
    51,118
    
    
    
    4,816
    
    
    
    55,934Operating income
    
    
    11,150
    
    
    
    2,158
    
    
    
    13,308Interest and other income
    
    
    675
    
    
    
    57
    
    
    
    732Foreign currency transaction losses
    
    
    (7
    )
    
    
    
    
    
    
    (7
    )Interest expense
    
    
    (12
    )
    
    
    (8
    )
    
    
    (20
    )Net income
    
    $
    7,710
    
    
    $
    1,496
    
    
    $
    9,206Net income per diluted share (1)
    
    $
    0.28
    
    
    $
    0.06
    
    
    $
    0.34Weighted average diluted shares (1)
    
    
    26,944
    
    
    
    26,944
    
    
    
    26,944Goodwill
    
    
    17,142
    
    
    
    2,135
    
    
    
    19,277Total assets
    
    $
    377,596
    
    
    $
    23,390
    
    
    $
    400,986Depreciation and amortization
    
    
    2,324
    
    
    
    19
    
    
    
    2,343
 Nine Months Ended September 30, 2005Principal
    
    
    
    
    
    
    
    
    
    Resale ofSegment
    
    
    
    
    
    
    
    
    
    Local, Long(excluding
    
    Legal
    
    Subtotal
    
    Distance(In thousands, except per share
    
    legal judgment
    
    Judgment &
    
    Principal
    
    and Networkamounts)
    
    & settlement)
    
    Settlement
    
    Segment
    
    Services
    
    TotalNet sales
    
    $
    291,320
    
    
    $
    
    
    
    $
    291,320
    
    
    $
    41,335
    
    
    $
    332,655Gross profit
    
    
    154,725
    
    
    
    
    
    
    
    154,725
    
    
    
    15,983
    
    
    
    170,708Legal judgment and settlement
    
    
    
    
    

    
    (10,378
    )
    
    
    (10,378
    )
    
    
    
    
    
    
    (10,378
    )In-process research and development
    
    
    (2,600
    )
    
    
    
    
    
    
    (2,600
    )
    
    
    
    
    
    
    (2,600
    )Operating income
    
    
    17,064
    
    
    
    (10,378
    )
    
    
    6,686
    
    
    
    6,579
    
    
    
    13,265Interest and other income
    
    
    2,700
    
    
    
    
    
    
    
    2,700
    
    
    
    113
    
    
    
    2,813Foreign currency transaction gains
    
    
    104
    
    
    
    
    
    
    
    104
    
    
    
    
    
    
    
    104Interest expense
    
    
    (60
    )
    
    
    
    
    
    
    (60
    )
    
    
    (5
    )
    
    
    (65
    )
 13




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##### Table of Contents



Nine Months Ended September 30, 2005Principal
    
    
    
    
    
    
    
    
    
    Resale ofSegment
    
    
    
    
    
    
    
    
    
    Local, Long(excluding
    
    Legal
    
    Subtotal
    
    Distance(In thousands, except per share
    
    legal judgment
    
    Judgment &
    
    Principal
    
    and Networkamounts)
    
    & settlement)
    
    Settlement
    
    Segment
    
    Services
    
    TotalNet income
    
    $
    12,026
    
    
    $
    (6,798
    )
    
    $
    5,228
    
    
    $
    4,347
    
    
    $
    9,575Net income per diluted share (1)
    
    $
    0.44
    
    
    $
    (0.26
    )
    
    $
    0.19
    
    
    $
    0.16
    
    
    $
    0.35Weighted average diluted shares (1)
    
    
    27,304
    
    
    
    26,274
    
    
    
    27,304
    
    
    
    27,304
    
    
    
    27,304Goodwill
    
    
    24,527
    
    
    
    
    
    
    
    24,527
    
    
    
    2,135
    
    
    
    26,662Total assets
    
    $
    386,357
    
    
    $
    
    
    
    $
    386,357
    
    
    $
    12,437
    
    
    $
    398,794Depreciation and amortization
    
    
    10,199
    
    
    
    
    
    
    
    10,199
    
    
    
    44
    
    
    
    10,243
 Nine Months Ended September 30, 2004Resale of Local,Long Distance and(In thousands, except per share amounts)
    
    Principal Segment
    
    Network Services
    
    TotalNet sales
    
    $
    269,731
    
    
    $
    36,714
    
    
    $
    306,445Gross profit
    
    
    147,822
    
    
    
    14,509
    
    
    
    162,331Operating income
    
    
    29,900
    
    
    
    6,404
    
    
    
    36,304Interest and other income
    
    
    1,651
    
    
    
    157
    
    
    
    1,808Foreign currency transaction losses
    
    
    (281
    )
    
    
    
    
    
    
    (281
    )Interest expense
    
    
    (99
    )
    
    
    (9
    )
    
    
    (108
    )Net income
    
    $
    19,910
    
    
    $
    4,233
    
    
    $
    24,143Net income per diluted share (1)
    
    $
    0.73
    
    
    $
    0.16
    
    
    $
    0.89Weighted average diluted shares (1)
    
    
    27,185
    
    
    
    27,185
    
    
    
    27,185Goodwill
    
    
    17,142
    
    
    
    2,135
    
    
    
    19,277Total assets
    
    $
    377,596
    
    
    $
    23,390
    
    
    $
    400,986Depreciation and amortization
    
    
    7,219
    
    
    
    91
    
    
    
    7,310
 
 (1)
    
    Options that are antidilutive because the exercise price was greater than the average
market price of the common shares are not included in the computation of diluted earnings per
share.  (in thousands, except percentages)
    
    Quarter Ended September 30, 2005
    
    Quarter Ended September 30, 2004Source of net sales
    
    $
    
    %
    
    $
    
    %Domestic
    
    $
    100,250
    
    
    
    90.0
    %
    
    $
    102,282
    
    
    
    96.9
    %Lake Communications
    
    
    7,076
    
    
    
    6.4
    %
    
    
    
    
    
    
    0.0
    %Other International
    
    
    4,070
    
    
    
    3.7
    %
    
    
    3,224
    
    
    
    3.1
    %Total net sales
    
    $
    111,396
    
    
    
    100.0
    %
    
    $
    105,506
    
    
    
    100.0
    %
 Nine Months Ended September 30,
    
    Nine Months Ended September 30,(in thousands, except percentages)
    
    2005
    
    2004Source of net sales
    
    $
    
    %
    
    $
    
    %Domestic
    
    $
    304,570
    
    
    
    91.6
    %
    
    $
    296,725
    
    
    
    96.8
    %Lake Communications
    
    
    17,573
    
    
    
    5.3
    %
    
    
    
    
    
    
    0.0
    %Other International
    
    
    10,512
    
    
    
    3.2
    %
    
    
    9,720
    
    
    
    3.2
    %Total net sales
    
    $
    332,655
    
    
    
    100.0
    %
    
    $
    306,445
    
    
    
    100.0
    %
  14




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NOTE E NET INVESTMENT IN SALES-LEASES
 sm
 September 30,
    
    December 31,(in thousands)
    
    2005
    
    2004Lease balances included in consolidated
accounts receivable, net of allowances of
$1,009 in 2005, and $1,177 in 2004
    
    $
    6,574
    
    
    $
    6,390Net investment in Sales-Leases:Current portion, net of allowances of $865
in 2005, and $886 in 2004
    
    
    17,502
    
    
    
    17,151Long-term portion, includes residual
amounts of $530 in 2005 and, $510 in 2004,
net of allowances of $1,868 in 2005, and
$1,810 in 2004
    
    
    34,717
    
    
    
    33,877Total investment in Sales-Leases, net of
allowances of $3,742 in 2005, and $3,873 in
2004
    
    
    58,793
    
    
    
    57,418Sold rental payments remaining unbilled
(subject to limited recourse provisions), net
of allowances of $13,554 in 2005, and $12,241
in 2004
    
    
    251,931
    
    
    
    229,163Total balance of sales-leases and sold rental
payments remaining unbilled, net of allowances
    
    $
    310,724
    
    
    $
    286,581Total allowances for entire lease portfolio
(including limited recourse liabilities)
    
    $
    17,296
    
    
    $
    16,114
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##### Table of Contents



Nine Months Ended
    
    Year Ended(In thousands)
    
    September 30, 2005
    
    December 31, 2004Sales of rental payments
    
    $
    91,204
    
    
    $
    113,172Sold payments remaining unbilled at end of period
    
    
    265,486
    
    
    
    241,404
   
 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 our expectations, beliefs, intentions or
strategies for the future. All forward-looking statements included in this document are based on
information available to us on the date hereof, and we assume 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. Our
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 Future
Operating Results below and elsewhere in this document.
 Overview
  
    
    Inter-Tel Axxessâ and Inter-Tel 5000 Network Communications Solutions converged
voice and data business communication systems;
    
    integrated voice mail, voice processing and unified messaging systems;
    
    presence management, collaboration, and desk-to-desk video software applications,
    
    managed services, including voice and data network design and traffic provisioning,
custom application development, and financial solutions packages (leasing);
    
    networking applications, including the design and implementation of voice and data networks,
    
    maintenance and support services for our products;
    
    Lake Communications converged voice and data business communication systems, including
those sold in the US under the EncoreCXâ brand;
    
    local and long distance calling services, voice circuits, data circuits and other
communications services and peripheral products;
    
    call accounting software, computer-telephone integration (CTI) applications; and
    
    call center software applications for both Inter-Tel and other communication system providers.
 16




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##### Table of Contents



Ò
   
    
    End-user sales and sales-type leases through our direct sales offices and government and
national accounts division. We recognize revenue from sales of systems and services to
end-user customers upon installation of the systems and performance of the services,
respectively, allowing for use by our customers of these systems. We defer pre-payments for
communications services and recognize these pre-payments as revenue as the communications
services are provided. For our sales-type lease accounting, we record the discounted
present values of minimum rental payments under sales-type leases as sales, net of
provisions for continuing administration and other expenses over the lease period. We
record the lease sales at the time of system sale and installation as discussed above for
sales to end user customers, and upon receipt of the executed lease documents. The net
rental streams are sold to funding sources on a regular basis with the income streams
discounted by prevailing like-term rates at the time of sale. Gains or losses resulting
from the sale of net rental payments from such leases are also recorded as net sales.
    
    Dealer and VAR sales. For shipments to dealers and other distributors, our revenue is
recognized as products are shipped to the dealers and VARs and services are rendered,
because the sales process is complete. Title to these products passes when goods are
shipped (free-on-board shipping point). However, in connection with our recent Lake
acquisition, shipments to one international dealer are initially held by that dealer on a
consignment basis. Such inventory is owned by Inter-Tel and reported on Inter-Tels books
and records until the inventory is sold through to third parties, at which time the revenue
is recorded.
    
    Resale of long distance. We recognize revenue from long distance resale services as
services are provided.
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##### Table of Contents




    
    Software Sales. We recognize revenues from sales of software, such as our new Linktivity
products discussed above upon shipment to dealers or end-users.
    
    Maintenance and software support. Maintenance and software support revenue is recognized
ratably over the term of the maintenance or support agreement.
 Costs and gross margins
   
    
    Customer leases generally expire at end of the month and commence at the beginning of
the month, which naturally leads to end-of-period sales. These factors apply to both
end-user and dealer sales.
    
    Internal sales compensation programs for our sales personnel are linked to revenues and
the sales commissions generally increase at accelerated rates as sales volumes increase.
Sales performance bonuses are also frequently tied to quarter-end and year-end performance
targets, providing incentives to sales personnel to close business before the end of each
quarter.
    
    Some price discounting to our dealer channel occurs during the last month of a quarter
or year, and some dealers purchase consistently to take advantage of potential pricing
discounts or end-of-quarter promotions. Dealer buying habits have been consistently
applied for years.
  18




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Cash Flows
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Results of Operations
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004NET SALESTelecommunications systems, software and
related
    
    
    87.1
    %
    
    
    88.2
    %
    
    
    87.6
    %
    
    
    88.0
    %Resale of local, long distance and
network services
    
    
    12.9
    
    
    
    11.8
    
    
    
    12.4
    
    
    
    12.0TOTAL NET SALES
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %COST OF SALESTelecommunications systems, software and
related
    
    
    41.5
    
    
    
    39.7
    
    
    
    41.1
    
    
    
    39.8Resale of local, long distance and
network services
    
    
    7.9
    
    
    
    7.3
    
    
    
    7.6
    
    
    
    7.2TOTAL COST OF SALES
    
    
    49.4
    
    
    
    47.0
    
    
    
    48.7
    
    
    
    47.0GROSS PROFIT
    
    
    50.6
    
    
    
    53.0
    
    
    
    51.3
    
    
    
    53.0Research and development
    
    
    7.4
    
    
    
    7.2
    
    
    
    7.7
    
    
    
    6.8Selling, general and administrative
    
    
    33.2
    
    
    
    32.8
    
    
    
    34.9
    
    
    
    33.9Amortization of intangibles
    
    
    1.1
    
    
    
    0.4
    
    
    
    0.9
    
    
    
    0.4Write-off of in-process research and
development costs
    
    
    
    
    
    
    
    
    
    
    0.8
    
    
    
    Legal judgment and settlement
    
    
    9.3
    
    
    
    
    
    
    
    3.1
    
    
    
    OPERATING INCOME (LOSS)
    
    
    (0.4
    )
    
    
    12.6
    
    
    
    4.0
    
    
    
    11.8Interest and other income
    
    
    0.8
    
    
    
    0.7
    
    
    
    0.8
    
    
    
    0.6Foreign currency transaction gains (losses)
    
    
    (0.0
    )
    
    
    (0.0
    )
    
    
    0.0
    
    
    
    (0.1
    )Interest expense
    
    
    (0.0
    )
    
    
    (0.0
    )
    
    
    (0.0
    )
    
    
    (0.0
    )INCOME BEFORE INCOME TAXES
    
    
    0.4
    
    
    
    13.3
    
    
    
    4.8
    
    
    
    12.3INCOME TAX PROVISION (BENEFIT)
    
    
    (0.2
    )
    
    
    4.6
    
    
    
    2.0
    
    
    
    4.4NET INCOME
    
    
    0.6
    %
    
    
    8.7
    %
    
    
    2.9
    %
    
    
    7.9
    %
 Net Sales.
 20




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â â â
 Gross Profit
 21




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##### Table of Contents



â
  Research and Development (R&D)
 Selling, general and administrative (SG&A).
 22




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Amortization of purchased intangible assets
  Write-off of in-process research and development (IPRD) costs
 Legal judgment, legal settlement and related legal costs.
 Interest and Other Income
 23




---



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Income Taxes
 Net Income
  Reconciliation of GAAP and non-GAAP financial measures included in net income above
 24




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##### Table of Contents



Quarter ended September 30, 2005Legal judgment,
    
    Non-GAAP/legal settlement
    
    Pro formaIPRD
    
    and related
    
    excluding IPRD(in thousands, except per share amounts)
    
    GAAP
    
    write-off
    
    litigation costs
    
    and legal issuesIncome (loss) before income taxes
    
    
    396
    
    
    
    
    
    
    
    (10,378
    )
    
    
    10,774Income tax provision (benefit)
    
    
    (251
    )
    
    
    
    
    
    
    (3,580
    )
    
    
    3,329Net income (loss)
    
    
    647
    
    
    
    
    
    
    
    (6,798
    )
    
    
    7,445Net income (loss) per share  basic
    
    $
    0.02
    
    
    $
    
    
    
    $
    (0.26
    )
    
    $
    0.28Net income (loss) per share 
diluted
    
    $
    0.02
    
    
    $
    
    
    
    $
    (0.26
    )
    
    $
    0.28
 Nine months ended September 30, 2005Legal judgment,
    
    Non-GAAP/legal settlement
    
    Pro formaIPRD
    
    and related
    
    excluding IPRD(in thousands, except per share amounts)
    
    GAAP
    
    write-off
    
    litigation costs
    
    and legal issuesIncome (loss) before income taxes
    
    
    16,117
    
    
    
    (2,600
    )
    
    
    (10,378
    )
    
    
    29,095Income taxes
    
    
    6,542
    
    
    
    
    
    
    
    (3,580
    )
    
    
    10,122Net income (loss)
    
    
    9,575
    
    
    
    (2,600
    )
    
    
    (6,798
    )
    
    
    18,973Net income (loss) per share  basic
    
    $
    0.36
    
    
    $
    (0.10
    )
    
    $
    (0.26
    )
    
    $
    0.72Net income (loss) per share 
diluted
    
    $
    0.35
    
    
    $
    (0.10
    )
    
    $
    (0.26
    )
    
    $
    0.69
  Inflation/Currency Fluctuation
  Liquidity and Capital Resources
 Nine Months EndedSeptember 30,(In thousands)
    
    2005
    
    2004Net cash provided by operating activities
    
    $
    27,550
    
    
    $
    47,791Net cash used in investing activities
    
    
    (30,869
    )
    
    
    (11,431
    )Net cash (used in) provided by financing activities
    
    
    (38,067
    )
    
    
    980Effect of exchange rate changes
    
    
    (575
    )
    
    
    97(Decrease) Increase in cash and equivalents
    
    
    (41,961
    )
    
    
    37,437Cash and equivalents at beginning of period
    
    
    152,330
    
    
    
    115,197Cash and equivalents at end of period
    
    $
    110,369
    
    
    $
    152,634
  25




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sm
  26




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27




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Off-Balance Sheet Arrangements
  Critical Accounting Policies and Estimates
  Revenue Recognition
 End-user sales through our direct sales offices and government and national accounts division
 28




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Dealer and VAR sales
 Resale of long distance
 Maintenance revenues
 Sales-Leases
  Goodwill and Other Intangible Assets. Business Combinations Goodwill and Other Intangible Assets.
  29




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Allowance for Doubtful Accounts
 Inventories
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Contingencies
 FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
 This Report on Form 10-Q contains 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. 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 Inter-Tels business,
shareholders and prospective investors should consider carefully the following factors in
addition to the other information set forth in this document.
 Risks Related to Our Business
 Our operating results have historically depended on a number of factors, and these factors may
cause our operating results to fluctuate in the future.
  
    
    volume and timing of orders received during the quarter;
    
    gross margin fluctuations associated with the mix of products sold;
    
    the mix of distribution channels;
    
    general economic conditions and the condition of the markets our business addresses;
    
    patterns of capital spending by customers;
    
    the timing of new product announcements and releases by us and our competitors and other competitive factors;
    
    pricing pressures;
    
    the cost and effect of acquisitions;
    
    the availability and cost of products and components from our suppliers, including shipping and manufacturing problems
associated with subcontracted vendors;
    
    the impact on our business of the E-Rate settlement, possible FCC debarment, and expected fines and penalties
associated with the GSA variances and noncompliance which could affect both our government business and our commercial
business;
    
    the impact on our business of settlements, continuing litigations, proceedings and other contingencies, which could
affect our business;
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
    
    the potential impact of new accounting pronouncements such as FAS 123R;
    
    national and regional weather patterns; and
    
    threats of or outbreaks of war, hostilities, terrorist acts or other civil disturbances.
   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.
   Our future success largely depends on increased commercial acceptance of our Inter-Tel 5000 Network
Communications Solutions, Axxessâ system, the Lake OfficeLink product (branded
EncoreCXâ in North America), speech recognition, Interactive Voice Response, presence
 32




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management, collaboration, messaging products, Session Initiation Protocol (SIP) applications, and
related computer-telephony products.
 â â
 We have many competitors and expect new competitors to enter our market, which could increase price
competition and spending on research and development and which may impair our ability to compete
successfully.
  
    
    PABX, converged systems and IP-PBX providers, distributors, or resellers such as Alcatel, Altigen, Avaya, Cisco
Systems, Comdial, 3Com, EADS Telecom, Iwatsu, Interactive Intelligence, Lucky Goldstar, Mitel, NEC, Nortel, Panasonic,
Samsung, ShoreTel, Siemens, Toshiba, Vertical Networks/ArtiSoft and Vodavi;
    
    large data routing and convergence companies such as 3Com, Adtran and Cisco Systems;
    
    voice processing applications providers such as ADC, InterVoice-Brite, Active Voice (a subsidiary of NEC America),
Avaya, and Captaris (formerly AVT);
    
    web collaboration product and service providers, such as Centra, eDial (a division of Alcatel), IBM, Microsoft,
Raindance Communications, and WebEx;
    
    hosting service providers such as Layered Technologies and Vonage using servers to host call processing functions that
have traditionally been owned by customers;
    
    long distance services providers such as AT&T, MCI, Qwest and Sprint;
    
    large computer and software corporations such as IBM, HP, Intel and Microsoft;
    
    peer-to-peer softphone services such as Skype (which recently announced an agreement to be acquired by eBay);
    
    regional Bell operating companies, or RBOCs, competitive local exchange companies (CLECs); cable television companies,
IP Centrex service providers, and satellite and other wireless and wireline broadband service providers offering IP
centrex services such as AT&T, Covad, Level-3, Qwest, SBC, and Time-Warner Telecom; and
    
    independent leasing companies that provide telecom equipment financing.
   33




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
    
    develop and expand their product and service offerings more quickly;
    
    offer greater price discounts or make substantial product promotions;
    
    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 more adequately.
  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.
  
    
    costs associated with the remediation of any problems;
    
    costs associated with design modifications;
    
    loss of or delay in revenues;
    
    loss of customers;
    
    damage to our reputation;
    
    failure to achieve market acceptance or loss of market share;
    
    increased service and warranty costs;
    
    liabilities to our customers; and
    
    increased insurance costs.
 The complexity of our products could cause delays in the development and release of new products
and services. As a result, customer demand for our products could decline, which could harm our
business.
  Business acquisitions, new business ventures, dispositions or joint ventures entail numerous risks
and may disrupt our business, dilute shareholder value and distract management attention.
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
    
    unanticipated costs and liabilities;
    
    difficulty of assimilating the operations, products and personnel of the acquired business;
    
    difficulties in managing the financial and strategic position of acquired or developed products, services and
technologies;
    
    difficulties in maintaining customer relationships;
    
    difficulties in servicing and maintaining acquired products, in particular where a substantial portion of the targets
sales were derived from our competitors products and services;
    
    difficulty of assimilating the vendors and independent contractors of the acquired business;
    
    the diversion of managements attention from the core business;
    
    inability to maintain uniform standards, controls, policies and procedures; and
    
    impairment of relationships with acquired employees and customers occurring as a result of integration of the acquired
business.
    We may not be able to adequately protect our proprietary technology and may be infringing upon
third-party intellectual property rights.
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rd
  Our reliance on a limited number of suppliers for key components and our dependence on contract
manufacturers could impair our ability to manufacture and deliver our products and services in a
timely and cost-effective manner.
   We derive a substantial portion of our net sales from our dealer network and if these dealers do
not effectively promote and sell our products, our business and operating results could be harmed.
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We have been the subject of government investigations, which have resulted in convictions and civil
penalties and may cause further competitive and financial harm to our business.
     We have been involved in legal disputes, which have resulted in a jury verdict, legal settlement
and associated legal costs, which may cause further competitive and financial harm to our business.
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Managing our international sales efforts may expose us to additional business risks, which may
result in reduced sales or profitability in our international markets.
     If we lose key personnel or are unable to hire additional qualified personnel as necessary, we may
not be able to achieve our objectives.
  Our IP network products may be vulnerable to viruses, other system failure risks and security
concerns, which may result in lost customers or slow commercial acceptance of our IP network
products.
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We may be unable to achieve or manage our growth effectively, which may harm our business.
  The introduction of new products and services has lengthened our sales cycles, which may result in
significant sales and marketing expenses.
 â
 We rely heavily upon third-party packaged software systems to manage and run our business
processes, to provide certain products and services and to produce our financial statements. From
time to time we upgrade these systems to ensure continuation of support and to expand the
functionality of the systems to meet our business needs. The risks associated with the upgrade
process include disruption of our business processes, which could harm our business.
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Our stock price has been and may continue to be volatile, impairing your ability to sell your
shares at or above purchase price.
  
    
    announcements of developments relating to our business;
    
    fluctuations in our operating results;
    
    the impact of our dividend announcements, repurchase program or sales of stock by officers and directors;
    
    shortfalls in revenue or earnings relative to securities analysts expectations;
    
    announcements of technological innovations or new products or enhancements by us or our competitors, including product
delays;
    
    announcements of acquisitions or planned acquisitions of other companies or businesses;
    
    investors reactions to acquisition announcements or any forecasts of our future results;
    
    general economic conditions in the telecommunications industry;
    
    the market for Internet-related voice and data products and services;
    
    changes in the national or worldwide economy;
    
    changes in legislation or regulation affecting the telecommunications industry;
    
    developments relating to our intellectual property rights and the intellectual property rights of third parties;
    
    litigation or governmental investigations of our business practices;
    
    the impact on our business of the E-Rate settlement, possible FCC debarment, and expected fines and penalties
associated with the GSA variances and noncompliance which could affect both our government business and our commercial
business;
    
    the impact on our business of settlements, continuing litigations, proceedings and other contingencies, which could
affect our business;
    
    changes in our relationships with our customers and suppliers, including shipping and manufacturing problems associated
with subcontracted vendors;
    
    national and regional weather patterns; and
    
    threats of or outbreaks of war, hostilities, terrorist acts or other civil disturbances.
  Our CEO controls 19.8% of our Common Stock and is able to significantly influence matters requiring
shareholder approval.
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Changes in stock option accounting rules may adversely impact our reported operating results
prepared in accordance with generally accepted accounting principles, our stock price and our
competitiveness in the employee marketplace.
     Risks Related to Our Industry
 Reductions in spending on enterprise communications equipment may materially and adversely affect
our business.
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The emerging market for IP network telephony is subject to market risks and uncertainties that
could cause significant delays and expenses.
 Axxess
  Government regulation of third party long distance and network service entities on which we rely
may harm our business.
  Consolidation within the telecommunications industry could increase competition and adversely
affect our business.
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Terrorist activities and resulting military and other actions could harm our business.
  We Are Exposed To Increased Costs And Risks Associated With Compliance With Changing Laws,
Regulations And Standards In General, and Specifically With Increased And New Regulation Of
Corporate Governance And Disclosure Standards.
  
 ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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ITEM 4.
    
    CONTROLS AND PROCEDURES
 Evaluation of disclosure controls and procedures
  Changes in internal controls over financial reporting
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INTER-TEL, INCORPORATED AND SUBSIDIARIES
 
 PART II.
    
    OTHER INFORMATION
 
 ITEM 1.
    
    LEGAL PROCEEDINGS
  
 ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 Board Authorization to Repurchase up to $75 Million of Inter-Tel Stock .
 ISSUER PURCHASES OF EQUITY SECURITIES
 (d) Maximum Number (or(a) Total
    
    
    
    
    
    (c) Total Number of
    
    Approximate Dollar Value)Number of
    
    (b) Average
    
    Shares (or Units)
    
    of Shares (or Units) thatShares (or
    
    Price Paid
    
    Purchased as Part of
    
    May Yet Be PurchasedUnits)
    
    per Share
    
    Publicly Announced
    
    Under the Plans orPeriod
    
    Purchased
    
    (or Unit)
    
    Plans or Programs
    
    ProgramsApril 1 to April 30
    
    None
    
    
    N/A
    
    
    NoneMay 1 to May 31
    
    
    716,500
    
    
    $
    19.228
    
    
    
    716,500June 1 to June 30
    
    None
    
    
    N/A
    
    
    NoneJuly 1 to Sept. 30
    
    None
    
    
    N/A
    
    
    NoneTotal
    
    
    716,500
    
    
    $
    19.228
    
    
    
    716,500
    
    
    $
    61,223,000
    (1)
  
 ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIES Not Applicable
 
 ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable
 
 ITEM 5.
    
    OTHER INFORMATION Not Applicable.
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ITEM 6.
    
    EXHIBITS:
 Exhibit 31.1:
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002Exhibit 31.2:
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002Exhibit 32.1:
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002Exhibit 32.2:
    
    Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
  
 SIGNATURES
  INTER-TEL, INCORPORATEDNovember 8, 2005
    
    /s/ Steven G. MihayloSteven G. Mihaylo
Chief Executive OfficerNovember 8, 2005
    
    /s/ Kurt R. KneipKurt R. Kneip
Senior Vice President and
Chief Financial Officer
 46