##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-Q
 
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                      to
 Commission File Number 001-33506
 SHORETEL, INC.
  Delaware
(State or other jurisdiction of incorporation or organization
    
    77-0443568
(I.R.S. Employer Identification No.)960 Stewart Drive, Sunnyvale, California
    
    94085-3913(Address of principal executive offices)
    
    (Zip Code)
 (408) 331-3300
 þ o
  Large accelerated
filer oAccelerated filer oNon-accelerated filer þ(Do not check if a smaller reporting company)Smaller reporting company o o þ




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##### 



SHORETEL, INC.
FORM 10-Q for the Quarter Ended March 31, 2008
 INDEX
 PagePART I: Financial InformationItem 1
    
    Financial Statements (Unaudited)
    
    3Condensed Consolidated Balance Sheets as of March 31, 2008 and June 30, 2007
    
    3Condensed Consolidated Statements of Operations for the three months and nine months ended March 31, 2008 and 2007
    
    4Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 2008 and 2007
    
    5Notes to Condensed Consolidated Financial Statements
    
    6Item 2
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    18Item 3
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    27Item 4
    
    Controls and Procedures
    
    27PART II: Other informationItem 1
    
    Legal Proceedings
    
    28Item 1A
    
    Risk Factors
    
    29Item 2
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    43Item 3
    
    Defaults Upon Senior Securities
    
    43Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    43Item 5
    
    Other Information
    
    43Item 6
    
    Exhibits
    
    43Signatures
    
    44Exhibit Index
    
    45EXHIBIT 10.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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PART I. FINANCIAL INFORMATION
 
 ITEM 1: FINANCIAL STATEMENTS (Unaudited)
 
 SHORETEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(unaudited)
 March 31,
    
    
    June 30,2008
    
    
    2007ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    95,981
    
    
    $
    17,326Short-term investments
    
    
    7,000
    
    
    
    Accounts receivable, net of allowance of
$544 and $320 as of March 31, 2008 and
June 30, 2007, respectively
    
    
    20,922
    
    
    
    19,411Inventories
    
    
    11,328
    
    
    
    7,057Prepaid expenses and other current assets
    
    
    4,151
    
    
    
    3,372Total current assets
    
    
    139,382
    
    
    
    47,166PROPERTY AND EQUIPMENT  Net
    
    
    3,646
    
    
    
    2,933OTHER ASSETS
    
    
    2,228
    
    
    
    2,935TOTAL
    
    $
    145,256
    
    
    $
    53,034LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK,
AND SHAREHOLDERS EQUITY (DEFICIT)CURRENT LIABILITIES:Accounts payable
    
    $
    8,214
    
    
    $
    7,433Accrued liabilities and other
    
    
    3,778
    
    
    
    2,807Accrued employee compensation
    
    
    4,998
    
    
    
    3,782Deferred revenue
    
    
    13,046
    
    
    
    10,126Total current liabilities
    
    
    30,036
    
    
    
    24,148LONG-TERM LIABILITIES:Preferred stock warrant liability
    
    
    
    
    
    
    549Long-term deferred revenue
    
    
    4,698
    
    
    
    3,825Total long-term liabilities
    
    
    4,698
    
    
    
    4,374Total liabilities
    
    
    34,734
    
    
    
    28,522COMMITMENTS AND CONTINGENCIES (Note 13)REDEEMABLE CONVERTIBLE PREFERRED STOCK, authorized,
0 and 23,586 shares, as of March 31, 2008 and June
30, 2007, respectively; issued and outstanding 0
and 23,316 shares as of March 31, 2008 and June 30,
2007, respectively (aggregate liquidation
preference of $44,250 at June 30, 2007)
    
    
    
    
    
    
    56,341SHAREHOLDERS EQUITY (DEFICIT):Preferred stock, par value $.001 per
share, authorized 5,000 and 0 shares
as of March 31, 2008 and June 30,
2007, respectively; none issued and
outstanding
    
    
    
    
    
    
    Common stock, par value $.001 per
share, authorized 500,000 shares as
of March 31, 2008 and June 30, 2007,
respectively; issued and
outstanding, 43,171and 10,132 shares
as of March 31, 2008 and June 30,
2007, respectively
    
    
    192,787
    
    
    
    53,206Deferred stock compensation
    
    
    (163
    )
    
    
    (237
    )Accumulated other comprehensive income
    
    
    16
    
    
    
    Accumulated deficit
    
    
    (82,118
    )
    
    
    (84,798
    )Total shareholders equity (deficit)
    
    
    110,522
    
    
    
    (31,829
    )TOTAL
    
    $
    145,256
    
    
    $
    53,034
  3




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##### Table of Contents



SHORETEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
 Three months ended
    
    
    Nine months endedMarch 31,
    
    
    March 31,2008
    
    
    2007
    
    
    2008
    
    
    2007(As restatedfor dilutedEPS; seeNote 4)REVENUE:Product
    
    $
    26,610
    
    
    $
    23,142
    
    
    $
    80,992
    
    
    $
    61,473Support and services
    
    
    4,879
    
    
    
    2,867
    
    
    
    13,033
    
    
    
    7,431Total revenue
    
    
    31,489
    
    
    
    26,009
    
    
    
    94,025
    
    
    
    68,904COST OF REVENUE:Product (1)
    
    
    9,322
    
    
    
    7,997
    
    
    
    27,450
    
    
    
    21,271Support and services (1)
    
    
    2,649
    
    
    
    1,813
    
    
    
    6,988
    
    
    
    4,853Total cost of revenue
    
    
    11,971
    
    
    
    9,810
    
    
    
    34,438
    
    
    
    26,124GROSS MARGIN
    
    
    19,518
    
    
    
    16,199
    
    
    
    59,587
    
    
    
    42,780OPERATING EXPENSES:Research and development (1)
    
    
    7,064
    
    
    
    4,282
    
    
    
    19,528
    
    
    
    11,450Sales and marketing (1)
    
    
    10,309
    
    
    
    7,009
    
    
    
    27,435
    
    
    
    18,441General and administrative (1)
    
    
    4,909
    
    
    
    2,973
    
    
    
    13,110
    
    
    
    8,383Total operating expenses
    
    
    22,282
    
    
    
    14,264
    
    
    
    60,073
    
    
    
    38,274INCOME (LOSS) FROM OPERATIONS
    
    
    (2,764
    )
    
    
    1,935
    
    
    
    (486
    )
    
    
    4,506OTHER INCOME (EXPENSE):Interest income
    
    
    1,011
    
    
    
    266
    
    
    
    3,434
    
    
    
    611Increase in fair value of warrants
    
    
    
    
    
    
    (45
    )
    
    
    
    
    
    
    (624
    )Other
    
    
    (60
    )
    
    
    10
    
    
    
    (83
    )
    
    
    6Total other income (expense)
    
    
    951
    
    
    
    231
    
    
    
    3,351
    
    
    
    (7
    )INCOME (LOSS) BEFORE (PROVISION FOR) BENEFIT FROM INCOME
TAXES
    
    
    (1,813
    )
    
    
    2,166
    
    
    
    2,865
    
    
    
    4,499(PROVISION FOR) BENEFIT FROM INCOME TAXES
    
    
    99
    
    
    
    (126
    )
    
    
    (185
    )
    
    
    (311
    )NET INCOME (LOSS)
    
    
    (1,714
    )
    
    
    2,040
    
    
    
    2,680
    
    
    
    4,188ACCRETION OF PREFERRED STOCK
    
    
    
    
    
    
    (12
    )
    
    
    
    
    
    
    (38
    )NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
    
    $
    (1,714
    )
    
    $
    2,028
    
    
    $
    2,680
    
    
    $
    4,150Net income (loss) per common share available to common
shareholders:Basic
    
    $
    (0.04
    )
    
    $
    0.23
    
    
    $
    0.06
    
    
    $
    0.50Diluted
    
    $
    (0.04
    )
    
    $
    0.05
    
    
    $
    0.06
    
    
    $
    0.11Shares used in computing net income (loss) per share
available to common shareholders:Basic
    
    
    42,651
    
    
    
    8,887
    
    
    
    42,223
    
    
    
    8,342Diluted
    
    
    42,651
    
    
    
    35,754
    
    
    
    44,941
    
    
    
    35,425(1) Includes stock-based compensation expense as follows:Cost of product revenue
    
    $
    19
    
    
    $
    3
    
    
    $
    44
    
    
    $
    7Cost of support and services revenue
    
    
    164
    
    
    
    26
    
    
    
    352
    
    
    
    55Research and development
    
    
    602
    
    
    
    91
    
    
    
    1,348
    
    
    
    190Sales and marketing
    
    
    690
    
    
    
    123
    
    
    
    1,713
    
    
    
    331General and administrative
    
    
    690
    
    
    
    353
    
    
    
    1,486
    
    
    
    1,470Total stock-based compensation expense
    
    $
    2,165
    
    
    $
    596
    
    
    $
    4,943
    
    
    $
    2,053
  4




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SHORETEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 Nine Months EndedMarch 31,2008
    
    
    2007(As restated; see Note 4)CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    2,680
    
    
    $
    4,188Adjustments to reconcile net income to net cash provided by operating
activities:Depreciation and amortization
    
    
    1,181
    
    
    
    651Accretion of discount on investments
    
    
    (216
    )
    
    
    Stock compensation expense
    
    
    4,943
    
    
    
    2,053Loss on disposal of property and equipment
    
    
    192
    
    
    
    31Provision for doubtful accounts receivable
    
    
    266
    
    
    
    127Change in fair value of warrants
    
    
    
    
    
    
    624Recovery from settlement of note receivable
    
    
    
    
    
    
    (191
    )Changes in assets and liabilities:Accounts receivable
    
    
    (1,777
    )
    
    
    (7,438
    )Inventories
    
    
    (4,271
    )
    
    
    (2,127
    )Prepaid expenses and other current assets
    
    
    (779
    )
    
    
    (1,327
    )Other assets
    
    
    (2,159
    )
    
    
    (86
    )Accounts payable
    
    
    677
    
    
    
    3,245Accrued liabilities and other
    
    
    1,135
    
    
    
    398Accrued employee compensation
    
    
    1,216
    
    
    
    82Deferred revenue
    
    
    3,793
    
    
    
    5,398Net cash provided by operating activities
    
    
    6,881
    
    
    
    5,628CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (2,049
    )
    
    
    (1,106
    )Purchases of investments
    
    
    (19,569
    )
    
    
    Proceeds from maturities of investments
    
    
    12,801
    
    
    
    Net cash used in investing activities
    
    
    (8,817
    )
    
    
    (1,106
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from initial public offering, net of underwriting discounts
    
    
    80,265
    
    
    
    Repayment of capital leases
    
    
    
    
    
    
    (1
    )Exercise of common stock options (including proceeds from unvested shares)
    
    
    326
    
    
    
    534Repayment of shareholder notes issued in connection with stock option
exercises
    
    
    
    
    
    
    12Deferred initial public offering costs included in other assets
    
    
    
    
    
    
    (589
    )Net cash provided by (used in) financing activities
    
    
    80,591
    
    
    
    (44
    )NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    78,655
    
    
    
    4,478CASH AND CASH EQUIVALENTS  Beginning of period
    
    
    17,326
    
    
    
    12,333CASH AND CASH EQUIVALENTS  End of period
    
    $
    95,981
    
    
    $
    16,811NONCASH INVESTING AND FINANCING ACTIVITIES:Conversion of redeemable convertible preferred stock to common stock
    
    $
    56,341
    
    
    $
    Reclassification of initial public offering costs from other assets to
common stock
    
    $
    2,866
    
    
    $
    Deferred initial public offering costs included in period-end accounts
payable
    
    $
    
    
    
    $
    535Reclassification of preferred stock warrant liability to common stock
    
    $
    549
    
    
    $
    Vesting of accrued early exercised stock options
    
    $
    164
    
    
    $
    157Purchase of property and equipment included in period-end accounts payable
    
    $
    37
    
    
    $
    349Surrender of common stock for settlement of notes receivable
    
    $
    
    
    
    $
    536Accretion of preferred stock
    
    $
    
    
    
    $
    38Preferred stock warrants reclassified to liabilities
    
    $
    
    
    
    $
    41
  5




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##### Table of Contents



SHORETEL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 1. Description of Business
   2. Basis of Presentation and Significant Accounting Policies
   Computation of Net Income (loss) per Share
  Cash and Cash Equivalents
  6




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Investments
   Recent Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109
 Fair Value Measurements Effective Date of FASB
Statement No. 157
 The Fair Value Option for Financial Assets and
Financial Liabilities
 Business Combinations
 7




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##### Table of Contents



Noncontrolling Interests in Consolidated
Financial Statements  an amendment of Accounting Research Bulletin No. 51
 Reclassifications
  3. Balance Sheet Details
  March 31,
    
    
    June 30,2008
    
    
    2007(in thousands)Inventories:Raw materials
    
    $
    2
    
    
    $
    47Inventory in process/transit
    
    
    1,074
    
    
    
    325Finished goods
    
    
    10,252
    
    
    
    6,685Total inventories
    
    $
    11,328
    
    
    $
    7,057Prepaid expenses and other current assets:Prepaid expenses
    
    $
    3,208
    
    
    $
    2,600Deferred cost of revenue
    
    
    663
    
    
    
    772Deferred taxes
    
    
    280
    
    
    
    Total prepaid expenses and other current assets
    
    $
    4,151
    
    
    $
    3,372Property and equipment:Computer equipment and tooling
    
    $
    4,458
    
    
    $
    3,573Software
    
    
    1,045
    
    
    
    982Furniture and fixtures
    
    
    702
    
    
    
    403Leasehold improvements
    
    
    206
    
    
    
    203Total property and equipment
    
    
    6,411
    
    
    
    5,161Less accumulated depreciation and amortization
    
    
    2,765
    
    
    
    2,228Property and equipment  net
    
    $
    3,646
    
    
    $
    2,933Deferred Revenue  current and long-term:Product
    
    $
    2,536
    
    
    $
    2,618Support and services
    
    
    15,208
    
    
    
    11,333$
    17,744
    
    
    $
    13,951
 8




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Gross
    
    GrossAmortized
    
    Unrealized
    
    Unrealized
    
    FairMarch 31, 2008
    
    Cost
    
    Gains
    
    Losses
    
    ValueCorporate notes and bonds
    
    $
    6,984
    
    
    $
    16
    
    
    $
    
    
    
    $
    7,000Total
    
    $
    6,984
    
    
    $
    16
    
    
    $
    
    
    
    $
    7,000
    4. Restatement
 Diluted Net Income per Common Share Available to Common Shareholders and Cash Flows for the Nine
Months Ended March 31, 2007
  As PreviouslyReported
    
    Adjustment
    
    As RestatedCondensed Consolidated Statements of Operations:Net income per common share available to common shareholders  Diluted
    
    $
    0.34
    
    
    $
    (0.23
    )
    
    $
    0.11Shares used in computing net income per common share available to common
shareholders  Diluted
    
    
    12,176,351
    
    
    
    23,248,703
    
    
    
    35,425,054Condensed Consolidated Statements of Cash Flows:Cash flows from operating activities:Change in assets and liabilities:Other assets
    
    $
    (1,210
    )
    
    $
    1,124
    
    
    $
    (86
    )Accounts payable
    
    $
    3,780
    
    
    $
    (535
    )
    
    $
    3,245Net cash provided by operating activities
    
    $
    5,039
    
    
    $
    589
    
    
    $
    5,628Cash flows from financing activities:Deferred initial public offering costs included in other assets
    
    $
    
    
    
    $
    (589
    )
    
    $
    (589
    )Net cash provided by (used in) financing activities
    
    $
    545
    
    
    $
    (589
    )
    
    $
    (44
    )
  9




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##### Table of Contents



5. Related Party Transactions
 Unsecured Promissory Note
  6. Income Taxes
  Accounting for
Income Taxes in Interim Periods
 10




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Accounting for
Uncertainty in Income Taxesan interpretation of FASB Statement No. 109 Accounting for Income Taxes
     7. Redeemable Convertible Preferred Stock and Stock Warrants
  Preferred Stock Warrants
  
    
    Warrants to purchase 685 shares of common stock issued with respect to an equipment lease line
signed in June 1998, exercisable at $21.18 per share.
    
    Warrants to purchase 1,224 shares of common stock issued in February 2001 for consulting
services, exercisable at $26.22 per share.
 Issuers Accounting under FASB Statement No. 150 for Freestanding
Warrants and Other Similar Instruments on Shares that are Redeemable.
 11




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8. Common Stock
 Reverse Stock Split
  Initial Public Offering
  Common Shares Subject to Repurchase
  Common Shares Reserved for Issuance
  Reserved under stock option plans
    
    
    9,521Reserved under employee stock purchase plan
    
    
    927Conversion of warrants
    
    
    2Total
    
    
    10,450
 9. Stock-Based Compensation
 Share-Based Payment
 Nine Months EndedNine Months Ended
    
    March 31, 2007March 31, 2008
    
    Class One
    
    Class TwoExpected life of option plan
    
    6.08 years
    
    6.08 years
    
    4.0 yearsExpected life of Employee Stock Purchase Plan ESPP)
    
    0.50 years
    
    
    
    
    
    
    Risk-free interest rate range for option plan
    
    
    2.42-4.50
    %
    
    
    4.6 - .8
    %
    
    
    4.6 - 4.8
    %Risk-free interest rate for ESPP
    
    
    2.67
    %
    
    
    
    
    
    
    Volatility for option plan
    
    
    62
    %
    
    
    71
    %
    
    
    55
    %Volatility for ESPP
    
    
    47
    %
    
    
    
    
    
    
    Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
 12




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10. Stock Option Plan
     13




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##### Table of Contents



Stock OptionsOutstandingShares
    
    
    Weighted-Shares
    
    
    Subject to
    
    
    AverageAvailable
    
    
    Options
    
    
    Exercisefor Grant
    
    
    Outstanding
    
    
    Price(Amounts in thousands, except per share amounts)Outstanding  June 30, 2007
    
    
    4,504
    
    
    
    4,626
    
    
    $
    4.57Shares Authorized
    
    
   2,137Termination of remaining shares
available for grant under the 1997
Option Plan and other non-plan
options
    
    
    (1,169
    )
    
    
    
    
    
    
    Options granted  (weighted average
grant date fair value of $7.46 per
share)
    
    
    (3,150
    )
    
    
    3,150
    
    
    
    12.32Options exercised
    
    
    
    
    
    
    (561
    )
    
    
    0.58Options canceled
    
    
    282
    
    
    
    (282
    )
    
    
    6.67Restricted stock awards (see Note 12)
    
    
    (66
    )
    
    
    
    
    
    
    Outstanding  March 31, 2008
    
    
    2,538
    
    
    
    6,933
    
    
    $
    8.33Options exercisable at March 31, 2008
    
    
    
    
    
    
    1,898
    
    
    $
    1.81
   WeightedAverage
    
    WeightedRemaining
    
    Average
    
    AggregateExercise
    
    Options
    
    Contractual
    
    Exercise
    
    IntrinsicPrices
    
    Outstanding
    
    Life (Years)
    
    Price
    
    Value(Amounts in thousands, except years and per share data)$0.10  0.40
    
    
    976
    
    
    
    6.45
    
    
    $
    0.31$0.80  3.20
    
    
    1,314
    
    
    
    7.93
    
    
    $
    2.15$3.60  4.93
    
    
    693
    
    
    
    9.72
    
    
    $
    4.76$4.94  10.50
    
    
    385
    
    
    
    9.15
    
    
    $
    8.24$11.30
    
    
    717
    
    
    
    9.04
    
    
    $
    11.30$11.40  13.73
    
    
    1,339
    
    
    
    9.30
    
    
    $
    12.69$14.61
    
    
    850
    
    
    
    9.67
    
    
    $
    14.61$15.38
    
    
    68
    
    
    
    9.70
    
    
    $
    15.38$15.41
    
    
    304
    
    
    
    9.62
    
    
    $
    15.41$17.00
    
    
    287
    
    
    
    9.52
    
    
    $
    17.00Total Outstanding
    
    
    6,933
    
    
    
    8.72
    
    
    $
    8.33
    
    
    $
    8,847Exercisable
    
    
    1,898
    
    
    
    7.14
    
    
    $
    1.81
    
    
    $
    6,899Vested and expected
to vest
    
    
    5,742
    
    
    
    8.62
    
    
    $
    8.06
    
    
    $
    7,935
 14




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##### Table of Contents



11. Employee Stock Purchase Plan
    12. Restricted Stock
   2008
    
    
    2007Beginning balance
    
    
    
    
    
    
    Awarded
    
    
    66
    
    
    
    Released
    
    
    (16
    )
    
    
    Forfeited
    
    
    
    
    
    
    Ending balance
    
    
    50
    
    
    
    
  WeightedAverageNumber of
    
    Remaining
    
    AggregateShares
    
    Contractual
    
    Intrinsic Value(thousands)
    
    Life
    
    (thousands)Shares outstanding
    
    
    50
    
    
    2.62 years
    
    $
    256Shares vested and expected to vest
    
    
    38
    
    
    2.55 years
    
    $
    196Shares exercisable
    
    
    
    
    
    
    
    
    
    $
    
 13. Commitments and Contingencies
 Leases
 15




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##### Table of Contents



Years Ending June 30,2008 (remaining 3 months)
    
    $
    4042009
    
    
    1,7022010
    
    
    7372011
    
    
    1632012
    
    
    1632013
    
    
    108Total
    
    $
    3,277
   Purchase commitments
 Mitel Patent Litigation 
 ShoreTel Countersuits 
  16




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##### Table of Contents



Securities-related litigation
 U.S. Federal Court litigation  Watkins v. ShoreTel, Inc., et al Kelley v. ShoreTel, Inc., et al
 California State Court derivative action  Berkovitz v. Combs, et al.
  Indemnification 
  14. Segment Information
 Disclosures About Segments of an Enterprise and Related Information
 17




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedMarch 31,
    
    
    March 31,2008
    
    
    2007
    
    
    2008
    
    
    2007North America
    
    $
    29,665
    
    
    $
    25,375
    
    
    $
    89,367
    
    
    $
    67,195International
    
    
    1,824
    
    
    
    634
    
    
    
    4,658
    
    
    
    1,709Total
    
    $
    31,489
    
    
    $
    26,009
    
    
    $
    94,025
    
    
    $
    68,904
 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 The following discussion and analysis of our financial condition and results of operations
should be read in conjunction with the condensed consolidated financial statements and related
notes included elsewhere in this document. This discussion contains forward-looking statements that
involve risks and uncertainties. Our actual results could differ materially from those discussed
below. Factors that could
cause or contribute to such differences include, but are not limited to, those identified
below, and those discussed above in the section entitled Risk Factors.
 Overview
     18




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Key Business Metrics
  Initial and repeat sales orders.
 Deferred revenue.
 Gross margin.
 19




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##### Table of Contents



Operating expense management.
 Basis of Presentation
 Revenue.
  Cost of revenue.
 Research and development expenses.
 Sales and marketing expenses.
 20




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##### Table of Contents



General and administrative expenses.
  Other income (expense).
 Income tax provision.
 Critical Accounting Policies and Estimates
 Accounting for Uncertainty
of Income Taxes an interpretation of FASB Statement No. 109
 21




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##### Table of Contents



Results of Operations
  Three Months Ended
    
    
    Nine Months EndedMarch 31,
    
    
    March 31,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands)
    
    
    (In thousands)Revenue:Product
    
    $
    26,610
    
    
    $
    23,142
    
    
    $
    80,992
    
    
    $
    61,473Support and services
    
    
    4,879
    
    
    
    2,867
    
    
    
    13,033
    
    
    
    7,431Total revenue
    
    
    31,489
    
    
    
    26,009
    
    
    
    94,025
    
    
    
    68,904Cost of revenue:Product(1)
    
    
    9,322
    
    
    
    7,997
    
    
    
    27,450
    
    
    
    21,271Support and services(1)
    
    
    2,649
    
    
    
    1,813
    
    
    
    6,988
    
    
    
    4,853Total cost of revenue
    
    
    11,971
    
    
    
    9,810
    
    
    
    34,438
    
    
    
    26,124Gross margin
    
    
    19,518
    
    
    
    16,199
    
    
    
    59,587
    
    
    
    42,780Operating expenses:Research and development(1)
    
    
    7,064
    
    
    
    4,282
    
    
    
    19,528
    
    
    
    11,450Sales and marketing(1)
    
    
    10,309
    
    
    
    7,009
    
    
    
    27,435
    
    
    
    18,441General and administrative(1)
    
    
    4,909
    
    
    
    2,973
    
    
    
    13,110
    
    
    
    8,383Total operating expenses
    
    
    22,282
    
    
    
    14,264
    
    
    
    60,073
    
    
    
    38,274Operating income (loss)
    
    
    (2,764
    )
    
    
    1,935
    
    
    
    (486
    )
    
    
    4,506Other income (expense)  net
    
    
    951
    
    
    
    231
    
    
    
    3,351
    
    
    
    (7
    )Income (loss) before (provision for)
benefit from income tax
    
    
    (1,813
    )
    
    
    2,166
    
    
    
    2,865
    
    
    
    4,499(Provision for) benefit from income taxes
    
    
    99
    
    
    
    (126
    )
    
    
    (185
    )
    
    
    (311
    )Net income (loss)
    
    $
    (1,714
    )
    
    $
    2,040
    
    
    $
    2,680
    
    
    $
    4,188
 
 (1)
    
    Includes stock-based compensation as follows: Three Months Ended
    
    
    Nine Months EndedMarch 31,
    
    
    March 31,2008
    
    
    2007
    
    
    2008
    
    
    2007Cost of product revenue
    
    $
    19
    
    
    $
    3
    
    
    $
    44
    
    
    $
    7Cost of support and services revenue
    
    
    164
    
    
    
    26
    
    
    
    352
    
    
    
    55Research and development
    
    
    602
    
    
    
    91
    
    
    
    1,348
    
    
    
    190Sales and marketing
    
    
    690
    
    
    
    123
    
    
    
    1,713
    
    
    
    331General and administrative
    
    
    690
    
    
    
    353
    
    
    
    1,486
    
    
    
    1,470Total stock-based compensation expense
    
    $
    2,165
    
    
    $
    596
    
    
    $
    4,943
    
    
    $
    2,053
  Three Months Ended
    
    Nine Months EndedMarch 31,
    
    March 31,2008
    
    2007
    
    2008
    
    2007Revenue:Product
    
    
    85
    %
    
    
    89
    %
    
    
    86
    %
    
    
    89
    %Support and services
    
    
    15
    %
    
    
    11
    %
    
    
    14
    %
    
    
    11
    %Total revenue
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Cost of revenue:Product
    
    
    30
    %
    
    
    31
    %
    
    
    29
    %
    
    
    31
    %Support and services
    
    
    8
    %
    
    
    7
    %
    
    
    8
    %
    
    
    7
    %Total cost of revenue
    
    
    38
    %
    
    
    38
    %
    
    
    37
    %
    
    
    38
    %Gross margin
    
    
    62
    %
    
    
    62
    %
    
    
    63
    %
    
    
    62
    %Operating expenses:Research and development
    
    
    22
    %
    
    
    16
    %
    
    
    21
    %
    
    
    17
    %Sales and marketing
    
    
    33
    %
    
    
    27
    %
    
    
    29
    %
    
    
    27
    %General and administrative
    
    
    16
    %
    
    
    12
    %
    
    
    14
    %
    
    
    12
    %Total operating expenses
    
    
    71
    %
    
    
    55
    %
    
    
    64
    %
    
    
    56
    %Operating income (loss)
    
    
    (9
    %)
    
    
    7
    %
    
    
    (1
    %)
    
    
    6
    %Other income (expense), net
    
    
    3
    %
    
    
    1
    %
    
    
    4
    %
    
    
    Income (loss) before (provision for)
benefit from income tax
    
    
    (6
    %)
    
    
    8
    %
    
    
    3
    %
    
    
    6
    %(Provision for) benefit from income taxes
    
    
    1
    %
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    
    (5
    %)
    
    
    8
    %
    
    
    3
    %
    
    
    6
    %
 22




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Revenue.
  Gross margin.
  Research and development.
  Sales and marketing.
 23




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General and administrative.
  Other income (expense).
  Income tax provision.
 24




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Liquidity and Capital Resources
 Balance Sheet and Cash Flows
   March 31,
    
    June 30,2008
    
    2007
    
    IncreaseCash and cash equivalents
    
    $
    95,981
    
    
    $
    17,326
    
    
    $
    78,655Short-term investments
    
    
    7,000
    
    
    
    
    
    
    
    7,000Total
    
    $
    102,981
    
    
    $
    17,326
    
    
    $
    85,655
     Nine Months Ended March 31,2008
    
    2007(In thousands)Cash provided by operating activities
    
    $
    6,881
    
    
    $
    5,628Cash used in investing activities
    
    
    (8,817
    )
    
    
    (1,106
    )Cash provided by (used in) financing activities
    
    
    80,591
    
    
    
    (44
    )
 Cash flows from operating activities
   25




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Cash flows from investing activities
   Cash flows from financing activities
  Off-Balance Sheet Arrangements
  Contractual obligations and commitments
  Payments Due by PeriodLess than
    
    
    1-3
    
    
    4-5
    
    
    5 years andTotal
    
    
    1 year
    
    
    years
    
    
    years
    
    
    afterOperating lease obligations
    
    $
    3,277
    
    
    $
    1,663
    
    
    $
    1,302
    
    
    $
    312
    
    
    $
    Non-cancelable purchase commitments for finished goods
    
    
    11,728
    
    
    
    11,728
    
    
    
    
    
    
    
    
    
    
    
    Purchase commitments for software license use
    
    
    3,906
    
    
    
    2,229
    
    
    
    1,677
    
    
    
    
    
    
    
    Total contractual obligations
    
    $
    18,911
    
    
    $
    15,620
    
    
    $
    2,979
    
    
    $
    312
    
    
    $
    
 26




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Market Risk
  Interest Rate Risk
   Decrease in interest rates
    
    Increase in interest rates(in thousands)
    
    -100BPS
    
    -75 BPS
    
    -50BPS
    
    50 BPS
    
    75 BPS
    
    100 BPSTotal Fair Market Value
    
    $
    7,018
    
    
    $
    7,014
    
    
    $
    7,009
    
    
    $
    6,990
    
    
    $
    6,986
    
    
    $
    6,981Percent Change in Fair Value
    
    
    0.27
    %
    
    
    0.20
    %
    
    
    0.13
    %
    
    
    (0.13
    )%
    
    
    (0.20
    )%
    
    
    (0.27
    )%
 
 ITEM 4 CONTROLS AND PROCEDURES
   27




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PART II: OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
 Mitel Litigation.
  U.S. Federal Court litigation Watkins v. ShoreTel, Inc., et al Kelley v. ShoreTel, Inc., et al
 California State Court derivative action Berkovitz v. Combs, et al.
  28




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ITEM 1A. RISK FACTORS
 Risks Related to Our Business
 Our operating results may fluctuate in the future, which could cause our stock price to decline.
  
    
    the purchasing and budgeting cycles of enterprise customers;
    
    the timing and volume of shipments of our products during a quarter, particularly as we
have recently begun to experience an increased level of sales occurring towards the end of a
quarter;
    
    delays in purchasing decisions by our customers from one quarter to the next, or later;
    
    adverse conditions specific to the IP telecommunications market, including decreased demand due
to overall economic conditions or reduced discretionary spending by enterprises, rates of
adoption of IP telecommunications systems and introduction of new standards;
    
    the timing and success of new product introductions by us or our competitors;
    
    the timing of recognition of revenue from sales to our customers;
    
    changes in our or our competitors pricing policies or sales terms;
    
    changes in the mix of our products and services sold during a particular period;
    
    the amount and timing of operating costs related to the maintenance and expansion of our
business, operations and infrastructure;
    
    our ability to control costs, including third-party manufacturing costs and costs of
components;
    
    our ability to obtain sufficient supplies of components;
    
    our ability to maintain sufficient production volumes for our products;
    
    volatility in our stock price, which may lead to higher stock compensation expenses pursuant to
Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, or SFAS 123(R);
    
    publicly-announced litigation, such as the lawsuit by Mitel or stockholder litigation,
and the impact of such litigation on our sales;
    
    the timing of costs related to the development or acquisition of technologies or businesses;
    
    changes in domestic and international regulatory environments affecting the Internet and
telecommunications industries;
    
    seasonality in our target markets; and
    
    general economic conditions or economic recession.
 29




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Our past profitability and growth rates may not be indicative of our future profitability or
growth, and we may not be able to continue to maintain or increase our profitability or growth.
  Our business could be harmed by adverse economic conditions in our target markets or reduced
spending on information technology and telecommunication products.
  The market in which we operate is intensely competitive, and many of our competitors are larger,
more established and better capitalized than we are.
  
    
    greater market presence, name recognition and brand reputation;
    
    a larger installed base of telecommunications and networking systems with enterprise customers;
    
    larger and more geographically distributed services and support organizations and capabilities;
    
    a broader offering of telecommunications and networking products, applications and services;
    
    a more established international presence to address the needs of global enterprises;
    
    substantially larger patent and intellectual property portfolios;
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##### Table of Contents




    
    longer operating histories;
    
    a longer history of implementing large-scale telecommunications or networking systems;
    
    more established relationships with industry participants, customers, suppliers,
distributors and other technology companies; and
    
    the ability to acquire technologies or consolidate with other companies in the industry to
compete more effectively.
    As voice and data networks converge, we are likely to face increased competition from companies
in the information technology, personal and business applications and software industries.
   31




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If the emerging market for enterprise IP telecommunications systems does not fully develop or is
delayed due to an economic slowdowns, our future business would be harmed.
  
    
    initial costs of implementation for a new system;
    
    quality of infrastructure;
    
    security concerns;
    
    equipment, software or other technology failures;
    
    regulatory encroachments;
    
    inconsistent quality of service;
    
    perceived unreliability or poor voice quality over IP networks as compared to
circuit-switched networks; and
    
    lack of availability of cost-effective, high-speed network capacity.
  We rely on third-party resellers to sell our products, and disruptions to, or our failure to
develop and manage our distribution channels and the processes and procedures that support them
could adversely affect our business.
  32




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Our sales cycle can be lengthy and unpredictable, which makes it difficult to forecast the amount
of our sales and operating expenses in any particular period.
  
    
    the timing of enterprise customers budget cycles and approval processes;
    
    a technical evaluation or trial by potential enterprise customers;
    
    our ability to introduce new products, features or functionality in a manner that suits the
needs of a particular enterprise customer;
    
    the announcement or introduction of competing products; and
    
    the strength of existing relationships between our competitors and potential enterprise
customers.
  If we fail to develop and introduce new products and features in a timely manner, or if we fail
to manage product transitions, we could experience decreased revenue or decreased selling prices
in the future.
  
    
    the ability of our products to compete with the products and solutions offered by our
competitors;
    
    the cost of our products;
    
    the reliability of our products;
 33




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##### Table of Contents




    
    the timeliness of the introduction and delivery of our products; and
    
    the market acceptance of our products.
   Our products include third-party technology and intellectual property, which could present
additional risks.
  Failure to protect our intellectual property could substantially harm our business.
   If a third party asserts that we are infringing on its intellectual property, whether successful
or not, it could subject us to costly and time-consuming litigation or expensive licenses, which
could harm our business.
  34




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##### Table of Contents



Our products incorporate some sole sourced components and the inability of these sole source
suppliers to provide adequate supplies of these components may prevent us from selling our products
for a significant period of time or limit our ability to deliver sufficient amounts of our
products.
  
    
    supplier capacity constraints;
    
    price increases;
    
    purchasing lead times;
    
    timely delivery ; and
    
    component quality.
  35




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Our business may be harmed if our contract manufacturers are not able to provide us with adequate
supplies.
        If we fail to forecast demand for our products accurately, we may have excess or insufficient
inventory, which may increase our operating costs, decrease our revenues and harm our business.
  36




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The gross margins on our products may decrease due to competitive pressures or otherwise, which
could negatively impact our profitability.
  If we fail to make necessary improvements to address a material weakness in our internal control
over financial reporting, we may not be able to report our financial results accurately and
timely, any of which could harm our business, reputation and cause the price of our common stock
to decline.
      37




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If we fail to respond to technological changes and evolving industry standards, our products
could become obsolete or less competitive in the future.
   Our products are highly complex and may contain undetected software or hardware errors, which
could harm our reputation and future product sales.
  Our future success depends on our ability to attract, integrate and retain key personnel, and our
failure to do so could harm our ability to grow our business.
  If we fail to manage our growth effectively, our business could be harmed.
  38




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We intend to expand our international operations, which could expose us to significant risks.
  
    
    our ability to comply with differing technical and environmental standards and certification
requirements outside the United States;
    
    difficulties and costs associated with staffing and managing foreign operations;
    
    greater difficulty collecting accounts receivable and longer payment cycles;
    
    the need to adapt our products for specific countries;
    
    availability of reliable broadband connectivity and wide area networks in targeted areas for
expansion;
    
    unexpected changes in regulatory requirements;
    
    difficulties in understanding and complying with local laws, regulations and customs in foreign
jurisdictions;
    
    tariffs, export controls and other non-tariff barriers such as quotas and local content rules;
    
    more limited protection for intellectual property rights in some countries;
    
    adverse tax consequences;
    
    fluctuations in currency exchange rates, which could increase the price of our products outside
of the United States, increase the expenses of our international operations and expose us to
foreign currency exchange rate risk;
    
    restrictions on the transfer of funds; and
    
    new and different sources of competition.
  We face certain litigation risks.
  We are subject to environmental and other health and safety regulations that may increase our
costs of operations or limit our activities.
  39




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Some of our competitors could design their products to prevent or impair the interoperability of
our products with enterprise customers networks, which could cause installations to be delayed
or cancelled.
  We are incurring significant increased costs as a result of operating as a public company, and
our management is required to devote substantial time to public company compliance initiatives.
These added costs and required management focus could adversely affect our operating results.
    40




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Our products require reliable broadband connections, and we may be unable to sell our products in
markets where broadband connections are not yet widely available.
  If our enterprise customers experience inadequate performance with their wide area networks, even
if unrelated to our systems, our product performance could be adversely affected, which could
harm our relationships with current enterprise customers and make it more difficult to attract
new enterprise customers.
  We might require additional capital to support our business in the future, and this capital might
not be available on acceptable terms, or at all.
  
    
    issuing additional common stock or other equity securities;
    
    issuing debt securities; or
    
    borrowing funds under a credit facility.
  Future sales of outstanding shares of our common stock into the market in the future could cause
the market price of our common stock to drop significantly, even if our business is doing well.
  41




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We are exposed to fluctuations in the market values of our money market funds and investments;
impairment of our money market funds or investments could harm our earnings
   Our principal offices and the facilities of our contract manufacturers are located near known
earthquake fault zones, and the occurrence of an earthquake or other catastrophic disaster could
damage our facilities or the facilities of our contract manufacturers, which could cause us to
curtail our operations.
  Our charter documents and Delaware law may inhibit a takeover that stockholders consider
favorable and could also limit the market price of our stock.
  
    
    prohibit stockholder action by written consent, thereby requiring all stockholder actions to
be taken at a meeting of our stockholders;
    
    limit who may call a special meeting of stockholders;
    
    establish a classified board of directors, so that not all members of our board of directors
may be elected at one time;
    
    provide our board of directors with the ability to designate the terms of and issue a new
series of preferred stock without stockholder approval;
    
    require the approval of two-thirds of the shares entitled to vote at an election of
directors to adopt, amend or repeal our bylaws or repeal certain provisions of our
certificate of incorporation;
    
    allow a majority of the authorized number of directors to adopt, amend or repeal our
bylaws without stockholder approval;
    
    do not permit cumulative voting in the election of our directors, which would otherwise
permit less than a majority of stockholders to elect directors; and
    
    set limitations on the removal of directors.
  42




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ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 Use of Proceeds from Public Offering of Common Stock
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
  43




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SIGNATURES
   ShoreTel, Inc.By:
    /s/ Michael E. HealyMichael E. HealyChief Financial Officer 44




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EXHIBIT INDEX
 ExhibitNumber
    
    Exhibit Title10.1
    
    Employment Agreement with Don Girskis dated January 23, 200831.1 (1)
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer31.2 (1)
    
    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer32.1 (1)
    
    Section 1350 Certification of Chief Executive Officer.32.2 (1)
    
    Section 1350 Certification of Chief Financial Officer.
 
 (1)
    
    This certification accompanying this report pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 is not deemed filed with the Securities and Exchange Commission and is not to be
incorporated by reference into any filing of the Company under the Securities Act of 1933 or the
Securities Exchange Act of 1934 (whether made before or after the date of the Report), irrespective
of any general incorporation language contained in such filing. (b)
    
    Financial Statement Schedules.
  45