##### Table of Contents



UNITED STATES SECURITIES AND
    EXCHANGE COMMISSIONWashington, D.C.
    20549
      Form 10-K
      þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934For the year ended June 30,
    2007oro

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934   SHORETEL, INC.
 (Exact name of Registrant as
    specified in its charter)
  Delaware(State or other
    jurisdiction of
    incorporation or organization)

3661(Primary standard 
    industrial code number)

77-0443568(I.R.S. employer
    identification no.)   960 Stewart Drive
    Sunnyvale, CA
    94085-3913(408) 331-3300 (Address, including zip
    code, and telephone number, including area code, of
    Registrants principal executive offices)
  Securities registered pursuant to Section 12(b) of the
    Act:
 None.
  Securities registered pursuant to Section 12(g) of the
    Act:
 Shares of Common Stock, $0.001 par value
  o þ
  o þ
  o þ
  Regulation S-K Form 10-K Form 10-K. þ
  Rule 12b-2
 o o þ
  Rule 12b-2 o þ
      DOCUMENTS INCORPORATED BY REFERENCE




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##### 



TABLE OF
    CONTENTS
  PagePART IItem 1


Business


2Item 1A


Risk
    Factors


10Item 1B


Unresolved Staff
    Comments


23Item 2


Properties


24Item 3


Legal
    Proceedings


24Item 4


Submission of
    Matters to a Vote of Security Holders


24PART IIItem 5


Market for Our
    Common Stock and Related Stockholder Matters


25Item 6


Selected
    Consolidated Financial Data


26Item 7


Managements
    Discussion and Analysis of Financial Condition and Results of
    Operations


27Item 7A


Quantitative and
    Qualitative Disclosures About Market Risk


44Item 8


Financial
    Statements and Supplementary Data


45Item 9


Changes in and
    Disagreements with Accountants on Accounting and Financial
    Disclosure


70Item 9A


Controls and
    Procedures


70Item 9B


Other
    Information


70PART IIIItem 10


Directors and
    Executive Officers of the Registrant and Corporate
    Governance


70Item 11


Executive
    Compensation


71Item 12


Security Ownership
    of Certain Beneficial Owners and Management and Related
    Stockholder Matters


71Item 13


Certain
    Relationships and Related Transactions, Director
    Independence


71Item 14


Principal
    Accountant Fees and Services


71PART IVItem 15


Exhibits


71Signatures


72Index to
    Exhibits Filed Together with this Annual Report


74EXHIBIT 3.1EXHIBIT 3.2EXHIBIT 10.18EXHIBIT 10.19EXHIBIT 21EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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TRADEMARKS
  and/or and/or
  AVAILABLE
    INFORMATION
  Form 10-K, Form 10-Q, Form 8-K,
  1-800-SEC-0330. http://www.sec.gov.
  Form 10-K.
 1




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This report contains forward-looking statements
    within the meaning of Section 27A of the Securities Act of
    1933 and Section 21E of the Securities Exchange Act of
    1934. Forward-looking statements relate to expectations
    concerning matters that are not historical facts. Words such as
    projects, believes,
    anticipates, plans, expects,
    intends and similar words and expressions are
    intended to identify forward-looking statements. While we
    believe that the expectations reflected in the forward-looking
    statements are reasonable, we cannot assure you that those
    expectations will prove to be correct. Important factors that
    could cause our actual results to differ materially from those
    expectations are disclosed in this report, including, without
    limitation, in the Risk Factors described in
    Part I, Item 1A. All forward-looking statements are
    expressly qualified in their entirety by these factors and all
    related cautionary statements. We do not undertake any
    obligation to update any forward-looking statements.
  ITEM 1.
    BUSINESS  Overview
            Products
     2




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ShoreGear switches. back-up
  ShorePhone IP phones.
  
  ShoreWare software applications.
  
    ShoreWare desktop applications.  ShoreWare
    desktop applications for end users include the following primary
    offerings: Personal Call Manager, Unified Messaging, Office
    Anywhere, Automated Attendant and a softphone.  
    Personal Call Manager.  Personal Call Manager
    is an application that allows end users to manage their voice
    communications from their desktops. With the click of a mouse,
    end users can initiate, manage, terminate, and receive calls,
    convene and manage conference calls, and see the availability of
    others on the network. This functionality is enhanced by the
    integration of our Personal Call Manager application with
    Microsoft Outlook, which allows the end user to initiate calls
    from a contact list. 3




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
    Unified Messaging.  Unified Messaging
    integrates our voicemail application with Microsoft Outlook.
    This enables end users to receive, send, be notified of and play
    voice mail messages through their Microsoft Outlook email.
    Office Anywhere.  Office Anywhere enables end
    users outside the office to manage calls with Personal Call
    Manager and to enjoy the same call handling productivity
    benefits as their office-based colleagues. Communications
    directed to the end users office phone are forwarded to
    the end users location, and the end users outbound
    calls appear to the called party as if they originated in the
    end users office. Using Office Anywhere, end users have
    the same call management and unified messaging features and
    functionality at remote locations as they have in their offices.
    Softphone.  ShoreTels softphone
    application allows an end user to turn a PC into an IP phone by
    simply connecting a headset to the PC and activating the
    application.  
    Automated Attendant.  Automated Attendant
    provides end users with a
    24-hour
    automated call answering and routing capability that enables the
    enterprise to direct callers to appropriate individuals,
    workgroups or messages.
    Workgroup.  Workgroup is an entry-level contact
    center application that provides real-time handling of incoming
    calls to enterprises, with call routing, queuing and reporting
    tools.
    ShoreWare system management.  Our browser-based
    system management applications consist of ShoreWare Director and
    ShoreWare System Monitor.  
    ShoreWare Director.  ShoreWare Director
    provides enterprises with a single point of system management,
    enabling IT administrators to view and manage the entire
    telecommunications system of the enterprise from any location
    using a single application. A new end users extension,
    mailbox and automated attendant profile can be added from a
    single management screen, avoiding the additional work required
    with most PBXs, voice mail systems and automated attendants.
    ShoreWare System Monitor.  ShoreWare System
    Monitor is an IP voice management tool that is designed to
    continuously measure the performance of every link in the
    network, enabling an enterprise to identify and address voice
    quality issues.  
    Additional business applications.  We offer
    other business applications, such as ShoreTel Contact Center,
    ShoreTel Converged Conferencing and salesforce.com integration.
    ShoreTel Contact Center allows enterprises to efficiently manage
    significant inbound or outbound call activities. ShoreTel
    Converged Conferencing enables enterprises to conduct large
    audio conferences and provides collaboration tools for
    application sharing, desktop sharing, instant messaging and end
    user availability information. Our salesforce.com integration
    application is designed to improve the productivity of end users
    that use salesforce.com by seamlessly integrating voice
    communications capabilities into their data driven workflow.  ShoreTel
    Global Services
      
    Post-contractual support services include web-based access
    support services and tools, access to technical support
    engineers, hardware replacement and software updates. These
    services are typically offered under support contracts with
    terms of up to five years.
    Training services include certification programs for channel
    partners, training programs at enterprise customer or channel
    partner locations and self-paced, desktop training programs. 4




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
    System design and installation services include the assessment
    of the telecommunications requirements of a particular
    enterprise, the configuration of a system to maximize its
    efficiency, the management of the installation, and the
    subsequent testing and implementation of our systems.
    Professional services include software development to improve
    system performance, enable integration of our systems with third
    party applications or legacy systems, streamline business
    processes and address enterprise customer-specific business
    opportunities.  Technology
      
    software that enables calling between switches and allows calls
    to be distributed among switches instead of using a single
    centralized switch;
    software that enables ShoreGear switches to obtain call routing
    information;
    software that monitors the bandwidth consumed on each WAN
    segment and prevents the system from exceeding bandwidth
    limitations;
    software that monitors all call activity on ShoreGear switches,
    and enables integration of ShoreTel and third-party applications;
    software that coordinates the functions of all servers on the
    system, allowing them to perform as a single, virtual server;
    software that enables remote ShoreTel and third-party
    applications to access and modify our systems;
    software that enables the switch to communicate with the
    application server, and receive system configuration information;
    software that allows each switch to maintain a comprehensive
    view of the system; and
    software that provides a graphical user interface for our phones.      Enterprise
    Customers
     5




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follow-up
      Sales
    and Marketing
        Research
    and Development
   6




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Manufacturing
    and Suppliers
    
    avoid costly capital expenditures for the establishment of
    manufacturing operations;
    focus on the design, development, sales and support of our
    hardware products; and
    leverage the scale, expertise and purchasing power of
    specialized contract manufacturers.        Financial
    Information about Geographic Areas
    Competition
    
    Providers of IP systems, including 3Com and Cisco
    Systems; and
    Providers of hybrid systems, including Avaya, Alcatel-Lucent,
    Avaya, Inter-Tel, Mitel Networks (which recently acquired
    Inter-Tel) and Nortel Networks.   7




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
    price of products and services and total cost of ownership;
    system reliability;
    voice quality and product features;
    ease of administration and installation, including system
    scalability;
    customer service and technical support;
    relationships with buyers and decision makers and brand
    recognition;
    an installed base of similar or related products;
    the ability to integrate various products into an enterprise
    customers existing networks, including the ability of a
    providers products to interoperate with other
    providers communications products; and
    size and financial stability of our operations compared to those
    of our competitors.    Intellectual
    Property
          Employees
   8




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Executive
    Officers
    Name

Age

PositionJohn W. Combs


60


Chairman, President and Chief
    Executive OfficerEdwin J. Basart


58


Founder, Chief Technology Officer
    and DirectorMichael E. Healy


46


Chief Financial OfficerJohn Finegan


58


Vice President, FinancePedro E. Rump


51


Vice President, Engineering and
    OperationsStephen G. Timmerman


48


Vice President, MarketingJoseph A. Vitalone


45


Vice President, SalesWalter Weisner


51


Vice President, Global ServicesAva M. Hahn


34


General Counsel and Secretary   John W. Combs
  Edwin J. Basart
  Michael E. Healy
  John Finegan
 9




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Pedro E. Rump
  Stephen G. Timmerman
  Joseph A. Vitalone
  Walter Weisner
  Ava M. Hahn
  ITEM 1A.
    RISK
    FACTORS  Risks
    Related to Our Business
  Our
    recent 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.
   10




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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;
    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.       11




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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.
  IP-based
    If the
    emerging market for enterprise IP telecommunications systems
    does not fully develop, 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; 12




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
    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.  IP-based
  Our
    operating results may fluctuate in the future, which could cause
    our stock price to decline.
    
    the timing and volume of shipments of our products during a
    particular period;
    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;
    the timing of costs related to the development or acquisition of
    technologies or businesses;
    conditions specific to the IP telecommunications market, such as
    rates of adoption of IP telecommunications systems and
    introduction of new standards;
    changes in domestic and international regulatory environments
    affecting the Internet and telecommunications industries;
    seasonality in our target markets; and
    the purchasing and budgeting cycles of enterprise customers.    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.
   13




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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.   14




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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;
    timely delivery; and
    component quality.    Our
    business may be harmed if our contract manufacturers are not
    able to provide us with adequate supplies.
         15




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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.
         16




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We are
    incurring significant increased costs as a result of operating
    as a public company, and our management will is required to
    devote substantial time to public company compliance
    initiatives. These added costs and required management focus
    could adversely affect our operating results.
        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;
    the timeliness of the introduction and delivery of our
    products; and
    the market acceptance of our products. 17




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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
    business could be harmed by adverse economic conditions in our
    target markets or reduced spending on information technology and
    telecommunication products.
   18




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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.
    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; 19




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
    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.    Failure
    to protect our intellectual property could substantially harm
    our business.
  and/or
    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.
   20




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Our
    products include third-party technology and intellectual
    property, which could present additional risks.
    We are
    subject to environmental and other health and safety regulations
    that may increase our costs of operations or limit our
    activities.
    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.
    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.
   21




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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.
  lock-up
 22




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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.    ITEM 1B.
    UNRESOLVED
    STAFF COMMENTS   23




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ITEM 2.
    PROPERTIES    third-party
    ITEM 3.
    LEGAL
    PROCEEDINGS          ITEM 4.
    SUBMISSION
    OF MATTERS TO A VOTE OF SECURITY HOLDERS    
    The approval of our reincorporation in Delaware.
    The approval of the amendment and restatement of our certificate
    of incorporation to effect a
    1-for-10
    reverse stock split of our capital stock (including all
    outstanding warrants and options exercisable for shares of our
    capital stock). 24




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
    The approval of the amendment and restatement of our certificate
    of incorporation and bylaws that became effective upon the
    completion of our initial public offering.
    The approval of the election of the incumbent board members.
    The approval and adoption of our 2007 employee stock
    purchase plan.
    The approval of a form of indemnification agreement to be
    entered into by us with each of our directors and officers.    PART II
  ITEM 5.
    MARKET
    FOR OUR COMMON STOCK AND RELATED STOCKHOLDER
    MATTERS  Market
    Information
      
    price and volume fluctuations in the overall stock market from
    time to time;
    significant volatility in the market price and trading volume of
    technology companies;
    actual or anticipated changes in our results of operations or
    fluctuations in our operating results;
    actual or anticipated changes in the expectations of investors
    or securities analysts;
    actual or anticipated developments in our competitors
    businesses or the competitive landscape generally;
    litigation involving us, our industry or both;
    regulatory developments in the United States, foreign countries
    or both;
    economic conditions and trends in our industry;
    major catastrophic events;
    sales of large blocks of our stock; or
    departures of key personnel.    Dividend
    Policy
    Sales
    of Unregistered Securities
   25




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ITEM 6.
    SELECTED
    CONSOLIDATED FINANCIAL DATA  Form 10-K.
  Year Ended June 30,2007


2006


2005


2004


2003(In thousands, except per share amounts)Revenue:Product

$
87,095


$
55,300


$
31,970


$
16,587


$
8,537Support and services


10,732



6,308



3,512



2,241



1,755Total revenue


97,827



61,608



35,482



18,828



10,292Cost of revenue:Product(1)


29,751



21,855



13,961



7,725



4,401Support and services(1)


6,837



5,425



2,907



1,660



1,539Total cost of revenue


36,588



27,280



16,868



9,385



5,940Gross profit


61,239



34,328



18,614



9,443



4,352Operating expenses:Research and development(1)


17,224



9,720



7,034



5,517



6,575Sales and marketing(1)


26,126



15,699



10,050



8,004



6,934General and administrative(1)


11,673



4,936



3,045



2,166



2,884Total operating expenses


55,023



30,355



20,129



15,687



16,393Operating income (loss)


6,216



3,973



(1,515
)


(6,244
)


(12,041
)Other income  net


273



248



124



(7
)


19Income (loss) before provision for
    income tax


6,489



4,221



(1,391
)


(6,251
)


(12,022
)Income tax provision


(408
)


(219
)


(11
)






Net income (loss)


6,081



4,002



(1,402
)


(6,251
)


(12,022
)Accretion of preferred stock


(50
)


(51
)


(32
)


(26
)


(38
)Net income (loss) available to
    common shareholders

$
6,031


$
3,951


$
(1,434
)

$
(6,277
)

$
(12,060
)Net income (loss) per common share
    available to common shareholders(2):Basic

$
0.70


$
0.60


$
(0.27
)

$
(1.27
)

$
(10.97
)Diluted

$
0.17


$
0.12
(3)

$
(0.27
)

$
(1.27
)

$
(10.97
)Shares used in computing net
    income (loss) per share available to common shareholders:Basic


8,565



6,609



5,352



4,935



1,100Diluted


35,581



33,431
(3)


5,352



4,935



1,100     (1)
    
    Includes stock-based compensation expense as follows:  Year Ended June 30,2007

2006

2005

2004

2003(In thousands)Cost of product revenue

$
12


$



$



$



$
Cost of support and services
    revenue


99



16











Research and development


384



14











Sales and marketing


533



7











General and administrative


1,658



45



82



45



446Total stock-based compensation
    expense

$
2,686


$
82


$
82


$
45


$
446  26




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(2)
    
    See Note 3 to our consolidated financial statements for a
    description of the method used to compute basic and diluted net
    income (loss) per share available to common shareholders, which
    gives effect to the
    1-for-10
    reverse split of our outstanding common stock on June 22,
    2007.(3)
    
    See Note 2 to our consolidated financial statements
    regarding the restatement of diluted net income per common share
    available to common shareholders and diluted shares used in
    computing net income per share available to common shareholders
    for the year ended June 30, 2006.  Share-Based Payment. Accounting for Stock Issued to
    Employees.
  As of June 30,2007


2006


2005


2004


2003(In thousands)Consolidated balance sheet
    data:Cash and cash equivalents

$
17,326


$
12,333


$
5,373


$
723


$
3,451Working capital


23,018



16,208



10,741



1,320



3,720Total assets


53,034



30,885



20,960



7,962



8,231Redeemable convertible preferred
    stock


56,341



56,332



56,281



46,300



42,814Total shareholders deficit


(31,829
)


(41,168
)


(45,713
)


(44,596
)


(38,374
)   ITEM 7.
    MANAGEMENTS
    DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
    OPERATIONS  See Note 2 to our consolidated financial statements
    regarding the restatement of diluted net income per common share
    available to common shareholders and diluted shares used in
    computing net income per share available to common shareholders
    for the year ended June 30, 2006.
  The following discussion and analysis of our financial
    condition and results of operations should be read in
    conjunction with the 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. We report results on
    a fiscal year ending June 30. For ease of reference within
    this section, 2007 refers to the fiscal year ended June 30,
    2007, 2006 refers to the fiscal year ended June 30, 2006
    and 2005 refers to the fiscal year ended June 30, 2005.
  Overview
       27




---



##### Table of Contents



Key
    Business Metrics
    Initial and repeat sales orders.
  Deferred revenue.
 28




---



##### Table of Contents



Gross margin.
    Operating expense management.
  Basis of
    Presentation
  Revenue.
    Cost of revenue.
 29




---



##### Table of Contents



Research and development expenses.
  Sales and marketing expenses.
  General and administrative expenses.
    Other income (expense).
  Income tax provision.
   30




---



##### Table of Contents



Results
    of Operations
    Year Ended June 30,2007


2006


2005(In thousands)Revenue:Product

$
87,095


$
55,300


$
31,970Support and services


10,732



6,308



3,512Total revenue


97,827



61,608



35,482Cost of revenue:Product(1)


29,751



21,855



13,961Support and services(1)


6,837



5,425



2,907Total cost of revenue


36,588



27,280



16,868Gross profit


61,239



34,328



18,614Operating expenses:Research and development(1)


17,224



9,720



7,034Sales and marketing(1)


26,126



15,699



10,050General and administrative(1)


11,673



4,936



3,045Total operating expenses


55,023



30,355



20,129Operating income (loss)


6,216



3,973



(1,515
)Other income  net


273



248



124Income (loss) before provision for
    income tax


6,489



4,221



(1,391
)Income tax provision


(408
)


(219
)


(11
)Net income (loss)

$
6,081


$
4,002


$
(1,402
)     (1)
    
    Includes stock-based compensation as follows:  Year Ended June 30,2007

2006

2005Cost of product revenue

$
12


$



$
Cost of support and services
    revenue


99



16



Research and development


384



14



Sales and marketing


533



7



General and administrative


1,658



45



82Total stock-based compensation
    expense

$
2,686


$
82


$
82  31




---



##### Table of Contents



Year Ended June 30,2007


2006


2005Revenue:Product


89
%


90
%


90
%Support and services


11
%


10
%


10
%Total revenue


100
%


100
%


100
%Cost of revenue:Product


30
%


35
%


40
%Support and services


7
%


9
%


8
%Total cost of revenue


37
%


44
%


48
%Gross profit


63
%


56
%


52
%Operating expenses:Research and development


18
%


16
%


20
%Sales and marketing


27
%


26
%


28
%General and administrative


12
%


8
%


8
%Total operating expenses


57
%


50
%


56
%Operating income (loss)


6
%


6
%


(4
)%Other income, net










Income (loss) before provision for
    income tax


6
%


6
%


(4
)%Provision for income taxes



%






Net income (loss)


6
%


6
%


(4
)%   Fiscal
    2007 compared to Fiscal 2006
  Revenue. 40-45%.
  Gross margin.
  Research and development.
 32




---



##### Table of Contents



Sales and marketing.
  General and administrative.
  Other income (expense).
  Income tax provision.
  Fiscal
    2006 compared to Fiscal 2005
  Revenue.
  Gross margin.
  Research and development.
 33




---



##### Table of Contents



Sales and marketing.
  General and administrative.
  Other income.
  Income tax provision.
 34




---



##### Table of Contents



Quarterly
    Results of Operations
  Form 10-K.
  Three Months EndedJun. 30,


Mar. 31,


Dec. 31,


Sep. 30,


Jun. 30,


Mar. 31,


Dec. 31,


Sep. 30,2007


2007


2006


2006


2006


2006


2005


2005(In thousands)Revenue:Product

$
25,622


$
23,142


$
19,864


$
18,467


$
17,328


$
14,474


$
13,498


$
10,000Support and services


3,301



2,867



2,616



1,948



1,756



2,119



1,219



1,214Total revenue


28,923



26,009



22,480



20,415



19,084



16,593



14,717



11,214Cost of revenue:Product(1)


8,480



7,997



6,767



6,507



6,132



6,011



5,668



4,044Support and services(1)


1,984



1,813



1,595



1,445



1,483



1,755



1,109



1,078Total cost of revenue


10,464



9,810



8,362



7,952



7,615



7,766



6,777



5,122Gross profit


18,459



16,199



14,118



12,463



11,469



8,827



7,940



6,092Operating expenses:Research and development(1)


5,774



4,282



4,051



3,117



3,200



2,386



2,083



2,051Sales and marketing(1)


7,685



7,009



5,755



5,677



4,843



3,916



3,873



3,067General and administrative(1)


3,290



2,973



2,837



2,573



1,828



1,238



995



875Total operating expenses


16,749



14,264



12,643



11,367



9,871



7,540



6,951



5,993Operating income


1,710



1,935



1,475



1,096



1,598



1,287



989



99Other income  net


280



231



(395
)


157



151



61



6



30Income before provision for income
    tax


1,990



2,166



1,080



1,253



1,749



1,348



995



129Provision for income taxes


(97
)


(126
)


22



(207
)


(79
)


(76
)


(51
)


(13
)Net income

$
1,893


$
2,040


$
1,102


$
1,046


$
1,670


$
1,272


$
944


$
116     (1)
    
    Includes stock-based compensation as follows:  Three Months EndedJun. 30,

Mar. 31,

Dec. 31,

Sep. 30,

Jun. 30,

Mar. 31,

Dec. 31,

Sep. 30,2007

2007

2006

2006

2006

2006

2005

2005(In thousands)Cost of product revenue

$
5


$
3


$
3


$
1


$



$



$



$
Cost of support and services
    revenue


44



26



24



5



2











14Research and development


194



91



82



17



8



6







Sales and marketing


202



123



111



97



5



2







General and administrative


187



353



415



703



21



2



13



9Total stock-based compensation
    expense

$
632


$
596


$
635


$
823


$
36


$
10


$
13


$
23  35




---



##### Table of Contents



As a Percentage of Total RevenueThree Months EndedJun. 30,


Mar. 31,


Dec. 31,


Sep. 30,


Jun. 30,


Mar. 31,


Dec. 31,


Sep. 30,2007


2007


2006


2006


2006


2006


2005


2005Revenue:Product


89
%


89
%


88
%


90
%


91
%


87
%


92
%


89
%Support and services


11
%


11
%


12
%


10
%


9
%


13
%


8
%


11
%Total revenue


100
%


100
%


100
%


100
%


100
%


100
%


100
%


100
%Cost of revenue:Product


29
%


31
%


30
%


32
%


32
%


36
%


39
%


36
%Support and services


7
%


7
%


7
%


7
%


8
%


11
%


8
%


10
%Total cost of revenue


36
%


38
%


37
%


39
%


40
%


47
%


46
%


46
%Gross profit


64
%


62
%


63
%


61
%


60
%


53
%


54
%


54
%Operating expenses:Research and development


20
%


16
%


18
%


15
%


17
%


14
%


14
%


18
%Sales and marketing


27
%


27
%


26
%


28
%


25
%


24
%


26
%


27
%General and administrative


11
%


11
%


13
%


13
%


10
%


7
%


7
%


8
%Total operating expenses


58
%


55
%


56
%


56
%


52
%


45
%


47
%


53
%Operating income


6
%


7
%


7
%


5
%


8
%


8
%


7
%


1
%Other income  net


1
%


1
%


(2
)%


1
%


1
%


0
%


0
%


0
%Income before provision for income
    tax


7
%


8
%


5
%


6
%


9
%


8
%


7
%


1
%Provision for income taxes


0
%


0
%


0
%


(1
)%


0
%


0
%


0
%


0
%Net income


7
%


8
%


5
%


5
%


9
%


8
%


6
%


1
%    36




---



##### Table of Contents



Liquidity
    and Capital Resources
          Year Ended June 30,2007


2006


2005(In thousands)Cash provided by (used in)
    operating activities

$
7,910


$
7,266


$
(4,957
)Cash (used in) investing activities


(2,224
)


(1,293
)


(590
)Cash provided by financing
    activities


(693
)


987



10,197   Cash
    flows from operating activities
     37




---



##### Table of Contents



Cash
    flows from investing activities
      Cash
    flows from financing activities
    Contractual
    Obligations
    Payments Due by PeriodLess ThanTotal


1 Year


1-3 Years


3-5 Years


Thereafter(In thousands)Operating Lease Obligations

$
3,528


$
1,367


$
2,161


$



$
Purchase Obligations(1)


11,875



11,875











Total

$
15,403


$
13,242


$
2,161


$



$
     (1)
    
    Purchase obligations represent commitments under non-cancelable
    orders for finished goods inventory with our contract
    manufacturers.  Off-Balance
    Sheet Arrangements
   38




---



##### Table of Contents



Critical
    Accounting Policies and Estimates
      
    Revenue recognition;
    Allowance for doubtful accounts;
    Stock-based compensation;
    Inventory valuation; and
    Accounting for income taxes.    Revenue
    Recognition
  Product Revenue. back-up No. 97-2, Software Revenue Recognition Revenue Recognition in Financial
    Statements and/or
   39




---



##### Table of Contents



No. 01-9, Accounting for Consideration Given by a Vendor to a Customer
    (including a Reseller of the Vendors Products)
  Post-Contractual Support. SOP 97-2,
  SOP No. 98-9, Modification of
    SOP 97-2,
    Software Revenue Recognition With Respect to Certain
    Transactions
    Installation and training.
  Allowance
    for Doubtful Accounts
   40




---



##### Table of Contents



Stock-Based
    Compensation
  Accounting
    for Stock Issued to Employees Accounting for Certain Transactions Involving Stock
    Compensation, an Interpretation of APB No. 25 Accounting
    for Stock-Based Compensation Accounting for Stock-Based
    Compensation  Transition and Disclosure
    Share-Based Payment
  Year Ended June 30, 2007Class One

Class TwoExpected life

6.08 years

4.0 yearsInterest rate range

4.6-4.8%

4.6-4.8%Volatility

71

55Dividend yield

0

0     Estimation
    of Fair Value of Warrants to Purchase Preferred
    Stock
  No. 150-5, Issuers Accounting under FASB Statement No. 150
    for Freestanding Warrants and Other Similar Instruments on
    Shares That Are Redeemable FSP 150-5, FSP 150-5,
 41




---



##### Table of Contents



FSP 150-5.
  Inventory
    Valuation
  first-in,
  Accounting
    for Income Taxes
  Accounting for Income Taxes
       42




---



##### Table of Contents



Recent
    Accounting Pronouncements
  Accounting Changes and Error
    Corrections Accounting
    Changes Reporting Accounting
    Changes in Interim Financial Statements  An Amendment
    of APB Opinion No 28
  Accounting for Uncertainty in Income Taxes
    Fair Value Measurements
  The
    Fair Value Option for Financial Assets and Financial Liabilities
 43




---



##### Table of Contents



ITEM 7A.
    QUANTITATIVE
    AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK  Interest
    Rate Risk
    Foreign
    Currency Risk
   44




---



##### Table of Contents



ITEM 8.
    FINANCIAL
    STATEMENTS AND SUPPLEMENTARY DATA  SHORETEL,
    INC. AND SUBSIDIARIES
  INDEX TO
    CONSOLIDATED FINANCIAL STATEMENTS
  PageReport of
    Independent Registered Public Accounting Firm


46Consolidated
    Balance Sheets


47Consolidated
    Statements of Operations


48Consolidated
    Statements of Redeemable Convertible Preferred Stock and
    Shareholders Deficit


49Consolidated
    Statements of Cash Flows


50Notes to
    Consolidated Financial Statements


51  45




---



##### Table of Contents



REPORT
    OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
            Share-Based
    Payment
    DELOITTE &
    TOUCHE LLP
    46




---



##### Table of Contents



SHORETEL,
    INC. AND SUBSIDIARIES
  CONSOLIDATED BALANCE SHEETS
  June 30,2007


2006(Amounts in thousands)ASSETSCURRENT ASSETS:Cash and cash equivalents

$
17,326


$
12,333Accounts receivable, net of
    allowances of $320 and $378 as of June 30, 2007 and
    June 30, 2006, respectively


19,411



11,479Inventories


7,057



4,656Prepaid expenses and other current
    assets


3,372



852Total current assets


47,166



29,320PROPERTY AND EQUIPMENT 
    Net


2,933



1,556OTHER ASSETS


2,935



9TOTAL

$
53,034


$
30,885LIABILITIES, REDEEMABLE
    CONVERTIBLE PREFERRED STOCK, AND
    SHAREHOLDERS DEFICITCURRENT LIABILITIES:Accounts payable

$
7,433


$
3,958Accrued liabilities and other


2,807



2,272Accrued employee compensation


3,782



2,918Deferred revenue


10,126



3,963Current portion of capital lease
    obligations






1Total current liabilities


24,148



13,112LONG-TERM LIABILITIES:Preferred stock warrant liability


549



Long-term deferred revenue


3,825



2,609Total long-term liabilities


4,374



2,609Total liabilities


28,522



15,721COMMITMENTS AND CONTINGENCIES
    (Note 11)REDEEMABLE CONVERTIBLE PREFERRED
    STOCK, authorized, 23,586 shares; issued and outstanding
    23,316 shares as of June 30, 2007 and June 30,
    2006 (aggregate liquidation preference of $44,250)


56,341



56,332SHAREHOLDERS DEFICIT:Common stock, authorized 500,000
    and 40,000 shares as of June 30, 2007 and
    June 30, 2006, respectively; issued and outstanding, 10,132
    and 9,289 shares as of June 30, 2007 and June 30,
    2006, respectively


53,206



50,277Deferred compensation


(237
)


(335
)Notes receivable from shareholders






(231
)Accumulated deficit


(84,798
)


(90,879
)Total shareholders deficit


(31,829
)


(41,168
)TOTAL

$
53,034


$
30,885    47




---



##### Table of Contents



SHORETEL,
    INC. AND SUBSIDIARIES
  CONSOLIDATED
    STATEMENTS OF OPERATIONS
  Year Ended June 30,2007


2006


2005(As restatedfor diluted EPS.See Note 2)(Amounts in thousands, except per share amounts)REVENUE:Product

$
87,095


$
55,300


$
31,970Support and services


10,732



6,308



3,512Total revenue


97,827



61,608



35,482COST OF REVENUE:Product


29,751



21,855



13,961Support and services


6,837



5,425



2,907Total cost of revenue


36,588



27,280



16,868GROSS PROFIT


61,239



34,328



18,614OPERATING EXPENSES:Research and development


17,224



9,720



7,034Sales and marketing


26,126



15,699



10,050General and administrative


11,673



4,936



3,045Total operating expenses


55,023



30,355



20,129INCOME (LOSS) FROM OPERATIONS


6,216



3,973



(1,515
)OTHER INCOME:Interest income


803



292



137Interest expense






(31
)


(21
)Change in fair value of warrants


(508
)






Other


(22
)


(13
)


8Total other income


273



248



124INCOME (LOSS) BEFORE PROVISION FOR
    INCOME TAXES


6,489



4,221



(1,391
)PROVISION FOR INCOME TAXES


(408
)


(219
)


(11
)NET INCOME (LOSS)


6,081



4,002



(1,402
)ACCRETION OF PREFERRED STOCK


(50
)


(51
)


(32
)NET INCOME (LOSS) AVAILABLE TO
    COMMON SHAREHOLDERS

$
6,031


$
3,951


$
(1,434
)Net income (loss) per common share
    available to common shareholders:Basic

$
0.70


$
0.60


$
(0.27
)Diluted

$
0.17


$
0.12


$
(0.27
)Shares used in computing net
    income (loss) per share available to common shareholders:Basic


8,565



6,609



5,352Diluted


35,581



33,431



5,352    48




---



##### Table of Contents



SHORETEL,
    INC. AND SUBSIDIARIES
  CONSOLIDATED
    STATEMENTS OF REDEEMABLE CONVERTIBLE
 PREFERRED
    STOCK AND SHAREHOLDERS DEFICIT
  Redeemable











NotesConvertible








Deferred


Receivable





TotalPreferred Stock


Common Stock


Stock


from


Accumulated


ShareholdersShares


Amount


Shares


Amount


Compensation


Shareholders


Deficit


Deficit(Amounts in thousands)BALANCE  June 30,
    2004


18,599


$
46,300



5,741


$
49,595


$
(118
)

$
(594
)

$
(93,479
)

$
(44,596
)Issuance of Series H preferred
    stock net of issuance costs of $51


4,717



9,949Accretion of preferred stock






32







(32
)














(32
)Exercise of common stock options










252



13















13Stock-based compensation expense


















82











82Repayment of shareholder note
    receivable






















222







222Net loss and comprehensive net loss


























(1,402
)


(1,402
)BALANCE  June 30,
    2005


23,316



56,281



5,993



49,576



(36
)


(372
)


(94,881
)


(45,713
)Accretion of preferred stock






51







(51
)














(51
)Exercise of common stock options










3,429



521















521Stock-based compensation expense














381



(299
)










82Repurchase of shares exercised
    under note receivable










(46
)


(141
)






141Repurchase of shares early exercised










(87
)


(9
)














(9
)Net income and comprehensive net
    income


























4,002



4,002BALANCE  June 30,
    2006


23,316



56,332



9,289



50,277



(335
)


(231
)


(90,879
)


(41,168
)Accretion of preferred stock






50







(50
)














(50
)Exercise of common stock options










901



573















573Stock-based compensation expense














2,588



98











2,686Repayment of note receivable from
    shareholder






















12







12Vesting of accrued early exercised
    stock options














228















228Warrants reclassified to liabilities






(41
)Surrender of common stock for
    settlement of notes receivable (Note 5)










(58
)


(410
)






219







(191
)Net income and comprehensive net
    income


























6,081



6,081BALANCE  June 30,
    2007


23,316


$
56,341



10,132


$
53,206


$
(237
)

$



$
(84,798
)

$
(31,829
)    49




---



##### Table of Contents



SHORETEL,
    INC. AND SUBSIDIARIES
  CONSOLIDATED STATEMENTS OF CASH FLOWS
  Year Ended June 30,2007


2006


2005(In thousands)CASH FLOWS FROM OPERATING
    ACTIVITIES:Net income (loss)

$
6,081


$
4,002


$
(1,402
)Adjustments to reconcile net income
    (loss) to net cash provided by (used in) operating activities:Depreciation and amortization


956



716



592Stock compensation expense


2,686



82



82Loss on disposal of property and
    equipment


38



160



Increase in fair value of warrants


508







Recovery from settlement of note
    receivable


(191
)






Provision for doubtful accounts
    receivable


238



250



202Changes in assets and liabilities:Accounts receivable


(8,170
)


(2,395
)


(4,688
)Inventories


(2,401
)


7



(3,537
)Prepaid expenses and other current
    assets


(2,520
)


(335
)


(338
)Other assets


(55
)


4



39Accounts payable


2,034



809



1,020Accrued liabilities and other


463



605



198Accrued employee compensation


864



1,856



34Deferred revenue


7,379



1,505



2,841Net cash provided by (used in)
    operating activities


7,910



7,266



(4,957
)CASH FLOWS FROM INVESTING
    ACTIVITIES:Purchases of property and equipment


(2,106
)


(1,308
)


(590
)Decrease in restricted cash






15



Long-term deposit on operating
    facility


(118
)






Net cash used in investing
    activities


(2,224
)


(1,293
)


(590
)CASH FLOWS FROM FINANCING
    ACTIVITIES:Borrowings under line of credit
    agreement






1,000



6,000Repayments under line of credit
    agreement






(1,000
)


(6,000
)Repayment of capital leases


(1
)


(7
)


(26
)Net proceeds from issuance of
    redeemable convertible preferred stock










9,949Exercise of common stock options
    (including proceeds from unvested shares)


573



1,003



52Repurchase of shares early exercised






(9
)


Repayment of shareholder notes
    issued in connection with stock option exercises


12







222Deferred initial public offering
    costs included in other assets


(1,277
)






Net cash provided by (used in)
    financing activities


(693
)


987



10,197NET INCREASE IN CASH AND CASH
    EQUIVALENTS


4,993



6,960



4,650CASH AND CASH
    EQUIVALENTS  Beginning of period


12,333



5,373



723CASH AND CASH
    EQUIVALENTS  End of period

$
17,326


$
12,333


$
5,373SUPPLEMENTAL DISCLOSURES OF CASH
    FLOW INFORMATION:Cash paid during the period for
    interest

$



$
31


$
21Cash paid during the period for
    income taxes


697



82



11NONCASH FINANCING AND INVESTING
    ACTIVITIES:Accretion of preferred stock

$
50


$
51


$
32Surrender of common stock for
    settlement of notes receivable


536







Repurchase of shares exercised
    under notes receivable






141



Purchase of property and equipment
    included in period-end accounts payable


265



79



28Deferred initial public offering
    costs included in period-end accounts payable and accrued
    liabilities


1,476







Warrants reclassified to liabilities


41







Vesting of accrued early exercised
    stock options


228







    50




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##### Table of Contents



SHORETEL,
    INC. AND SUBSIDIARIES
  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  1.
    THE
    COMPANY AND SIGNIFICANT ACCOUNTING POLICIES  The Company
  Fiscal Year End
  Consolidation
  Use of Estimates
  Certain Significant Risks and Uncertainties
  Concentration of Credit Risk
  Fair Value of Financial Instruments and/or
  Dependence on Suppliers
  Cash and Cash Equivalents
  Accounts Receivable
 51




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##### Table of Contents



SHORETEL,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    June 30,2007


2006


2005Allowance for doubtful
    accounts  beginning

$
378


$
200


$
119Current period provision


238



250



202Write-offs charged to allowance


(296
)


(72
)


(121
)Allowance for doubtful
    accounts  ending

$
320


$
378


$
200   Inventories first-in,
  Property and Equipment
  Long-Lived Assets
  Revenue Recognition
  Product Revenue. No. 97-2, Software Revenue Recognition Revenue Recognition
   52




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##### Table of Contents



SHORETEL,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      No. 01-9, Accounting for Consideration Given by a Vendor to a Customer
    (including a Reseller of the Vendors Products)
  Post-Contractual Support. SOP 97-2,
    SOP 98-9, Modification of
    SOP 97-2
    Software Revenue Recognition With Respect to Certain
    Transactions
    Installation and Training.
 53




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##### Table of Contents



SHORETEL,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
        Warranties Guarantors Accounting
    and Disclosure Requirements for Guarantee, Including Indirect
    Guarantees of Indebtedness of Others.
      June 30,2007


2006


2005Accrued warranty
    balance  beginning

$
206


$
100


$
112Current period accrual


512



646



190Warranty expenditures charged to
    accrual


(416
)


(540
)


(202
)Adjustment to estimate


(135
)






Accrued warranty
    balance  end

$
167


$
206


$
100   Research and Development Costs
  Income Taxes Accounting for Income Taxes.
  Stock-Based Compensation Share-Based Payment
 54




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##### Table of Contents



SHORETEL,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  1 48
  Accounting for Stock Issued to Employees Accounting for Certain Transactions
    involving Stock Compensation  an interpretation of
    APB Opinion No. 25.
    Year Ended June 30,2007


2006


2005Cost of product revenue

$
12


$



$
Cost of support and services
    revenue


99



16



Research and development


384



14



Sales and marketing


533



7



General and administrative


1,658



45



82Total stock-based compensation
    expense

$
2,686


$
82


$
82             No. 96-18, Accounting for Equity Instruments that are Issued to Other
    Than Employees for Acquiring, or in Conjunction with Selling
    Goods or Services.
  Determining
    Fair Value of Stock Compensation
  Valuation and amortization method
 55




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##### Table of Contents



SHORETEL,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Expected Term
  Expected Volatility
  Risk-Free Interest Rate
  Expected Dividend
  Foreign currency translation
  Other income
  Comprehensive Income/Loss
  Reclassifications
  Recent
    Accounting Pronouncements
  Accounting Changes and Error Corrections Accounting Changes Reporting Accounting Changes in Interim
    Financial Statements  An Amendment of APB Opinion No
    28.
  Accounting for Uncertainty in Income
    Taxes
 56




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##### Table of Contents



SHORETEL,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
      Fair Value Measurements
  The
    Fair Value Option for Financial Assets and Financial Liabilities
  2.
    RESTATEMENT  Diluted
    Net Income per Common Share Available to Common Shareholders for
    the Year Ended June 30, 2006
  Form S-1
  As PreviouslyReported


Adjustment


As RestatedNet income per common share
    available to common shareholders  Diluted

$
0.39


$
(0.27
)

$
0.12Shares used in computing net
    income per common share available to common
    shareholders  Diluted


10,114,513



23,316,406



33,430,919  57




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##### Table of Contents



SHORETEL,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  3.
    NET
    INCOME (LOSS) PER COMMON SHARE      Year Ended June 30,2007


2006


2005(As restated fordiluted EPS.See Note 2)(Amounts in thousands, exceptper share amounts)Numerator:Net income (loss) available to
    common shareholders

$
6,031


$
3,951


$
(1,434
)Denominator:Weighted average common shares
    outstanding


9,713



7,402



5,801Weighted average common shares
    subject to repurchase


(1,148
)


(793
)


(449
)Weighted average common shares
    outstanding (basic)


8,565



6,609



5,352Effect of dilutive securities:Weighted average common shares
    subject to repurchase


1,148



793



Common equivalent shares from
    options to purchase common stock


2,484



2,650



Common equivalent shares from
    common stock warrants


68



63



Conversion of redeemable
    convertible preferred stock


23,316



23,316



Weighted average common shares
    outstanding (diluted)


35,581



33,431



5,352Net income (loss) per common share
    available to common shareholders:Basic

$
0.70


$
0.60


$
(0.27
)Diluted

$
0.17


$
0.12


$
(0.27
)    58




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##### Table of Contents



SHORETEL,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  4.
    BALANCE
    SHEET COMPONENTS    As of June 30,2007


2006(Amounts in thousands)Inventories:Raw materials

$
47


$
Inventory in process/transit


325



100Finished goods


6,685



4,556Total inventories

$
7,057


$
4,656Prepaid expenses and other current
    assets:Prepaid expenses

$
2,595


$
786Deferred cost of revenue


772



Contract manufacturing receivables


5



66Total prepaid expenses and other
    current assets

$
3,372


$
852Property and equipment:Computer equipment and tooling

$
3,573


$
4,143Software


982



1,034Furniture and fixtures


403



350Leasehold improvements


203



311Total property and equipment


5,161



5,838Less accumulated depreciation and
    amortization


2,228



4,282Property and equipment 
    Net

$
2,933


$
1,556Deferred Revenue:Product

$
2,618


$
233Support and services


11,333



6,339$
13,951


$
6,572       5.
    RELATED-PARTY
    TRANSACTIONS  Unsecured Promissory Note
 59




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##### Table of Contents



SHORETEL,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    6.
    DEBT  Bank Agreement
  7.
    INCOME
    TAXES    Year Ended June 30,2007


2006


2005Current:Federal

$
178


$
114


$
4State


199



99



Foreign


31



6



7$
408


$
219


$
11     June 30,2007


2006


2005Income tax provision (benefit) at
    federal statutory rate

$
2,206


$
1,450


$
(478
)Change in state deferred items


380



(242
)


(214
)Non-deductible stock compensation
    charges


423







Credits


102



(284
)


(284
)State taxes


288



99



Other


530



327



129Change in valuation allowance


(3,521
)


(1,131
)


858Total

$
408


$
219


$
11  60




---



##### Table of Contents



SHORETEL,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    June 30,2007


2006Net operating loss carryforwards

$
26,209


$
31,246Tax credit carryforwards


4,677



4,514Other


3,261



1,908Total deferred tax assets


34,147



37,668Less valuation allowance


(34,147
)


(37,668
)Net deferred tax assets

$



$
           8.
    REDEEMABLE
    CONVERTIBLE PREFERRED STOCK AND PREFERRED STOCK
    WARRANTS    June 30, 2007Shares


Shares


Carrying


Redemption andSeries

Authorized


Outstanding


Value


Liquidation Value(In thousands)E


3,386



3,179


$
29,759


$
20,000F


13,471



13,408



10,727



10,750G


2,012



2,012



3,485



3,500H


4,717



4,717



9,981



10,000Warrants










2,38923,586



23,316


$
56,341


$
44,250  61




---



##### Table of Contents



SHORETEL,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  June 30, 2006Shares


Shares


Carrying


Redemption andSeries

Authorized


Outstanding


Value


Liquidation Value(In thousands)E


3,386



3,179


$
29,746


$
20,000F


13,471



13,408



10,712



10,750G


2,012



2,012



3,475



3,500H


4,717



4,717



9,969



10,000Warrants










2,43023,586



23,316


$
56,332


$
44,250     Redemption
  Voting
      Dividends
  Liquidation
 62




---



##### Table of Contents



SHORETEL,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Conversion
      Preferred Stock Warrants
  
    Warrants to purchase 685 shares of common stock issued with
    respect to the equipment lease line signed in June 1998,
    exercisable at $21.18 per share.
    Warrants to purchase 1,271 shares of common stock issued
    with respect to the equipment lease line signed in March 2000,
    exercisable at $39.33 per share.
    Warrants to purchase 1,224 shares of common stock issued in
    February 2001 for consulting services, exercisable at $26.22 per
    share.    
    Warrants to purchase 5,336 shares of Series E
    redeemable convertible preferred stock issued with respect to
    the line of credit in March 2001, exercisable at $9.37 per share
    which shares are convertible to 5,336 shares of common
    stock.
    Warrants to purchase 62,367 shares of Series F
    redeemable convertible preferred stock issued with respect to
    the line of credit in September 2003, exercisable at $0.80 per
    share which shares are convertible to 62,367 shares of
    common stock.  FAS 150-5, Issuers Accounting under FASB Statement No. 150
    for Freestanding Warrants and Other Similar Instruments on
    Shares that are Redeemable.
 63




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##### Table of Contents



SHORETEL,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    9.
    COMMON
    STOCK  Reverse
    Stock Split
  1-for-10 1-for-10
  Common
    Shares Subject to Repurchase
    Common
    Shares Reserved for Issuance
    Reserved under stock option plans


9,130Conversion of Series E
    preferred stock


3,179Conversion of Series F
    preferred stock


13,408Conversion of Series G
    preferred stock


2,012Conversion of Series H
    preferred stock


4,717Conversion of warrants


72Total


32,518   10.
    STOCK
    OPTION PLAN   64




---



##### Table of Contents



SHORETEL,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
         65




---



##### Table of Contents



SHORETEL,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    Shares


Weighted-Shares


Subject to


AverageAvailable


Options


Exercisefor Grant


Outstanding


Price(Amounts in thousands, except per share amounts)Outstanding 
    June 30, 2004


844



2,673


$
0.70Shares authorized on issuance of
    Series H preferred stock


2,532







Options granted 
    Class 1 (weighted average fair value of $0.10 per share)


(471
)


471



0.40Options granted 
    Class 2 (weighted average fair value of $0.10 per share)


(2,510
)


2,510



0.30Options exercised






(252
)


0.90Options canceled


66



(66
)


1.60Outstanding 
    June 30, 2005


461



5,336


$
0.40Shares authorized


1,500Options granted 
    Class 1 (weighted average fair value of $0.60 per share)


(449
)


449



0.80Options granted 
    Class 2 (weighted average fair value of $0.40 per share)


(851
)


851



0.60Options exercised






(3,429
)


0.30Options repurchased


133







1.10Options canceled


129



(129
)


0.50Outstanding 
    June 30, 2006


923



3,078


$
0.60Shares authorized


6,030Options granted 
    Class 1 (weighted average fair value of $6.02 per share)


(2,094
)


2,094



8.89Options granted 
    Class 2 (weighted average fair value of $5.00 per share)


(530
)


530



2.75Options exercised






(901
)


0.64Options canceled


175



(175
)


1.07Outstanding 
    June 30, 2007


4,504



4,626


$
4.57Options exercisable at
    June 30, 2007






2,133


$
1.11      66




---



##### Table of Contents



SHORETEL,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
    As of June 30, 2007WeightedAverage


WeightedRemaining


Average


AggregateExercise

Options


Contractual


Exercise


IntrinsicPrices

Outstanding


Life (Years)


Price


Value(Amounts in thousands, except per share data)$0.10 - 0.30


750



6.24


$
0.21$0.40


663



7.95


$
0.40$0.80 - 1.00


759



8.23


$
0.92$2.00 - 3.00


149



8.15


$
2.51$3.20


673



9.28


$
3.20$3.60


90



9.46


$
3.60$6.00


28



3.21


$
6.00$10.50


212



9.99


$
10.50$11.30


738



9.79


$
11.30$11.40


564



9.89


$
11.40Total Outstanding


4,626



8.54


$
4.57


$
25,423Exercisable


2,133



7.54


$
1.11


$
17,896Vested and expected to vest


3,900



8.31


$
4.22


$
22,616   11.
    COMMITMENTS
    AND CONTINGENCIES  Leases
    Years Ending June 302008

$
1,3672009


1,5902010


571$
3,528      67




---



##### Table of Contents



SHORETEL,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
  Purchase commitments
  Litigation
      Indemnification 
  Line of Credit.
  12.
    EMPLOYEE
    BENEFIT PLAN   68




---



##### Table of Contents



SHORETEL,
    INC. AND SUBSIDIARIES
  NOTES TO
    CONSOLIDATED FINANCIAL
    STATEMENTS  (Continued)
   13.
    SEGMENT
    INFORMATION  Disclosures About
    Segments of an Enterprise and Related Information
    Year Ended June 30,2007


2006


2005North America

$
95,448


$
60,954


$
34,863International


2,379



654



619Total

$
97,827


$
61,608


$
35,482   14.
    QUARTERLY
    RESULTS OF OPERATIONS (Unaudited)  Three Months EndedJun. 30,


Mar. 31,


Dec. 31,


Sep. 30,


Jun. 30,


Mar. 31,


Dec. 31,


Sep. 30,2007


2007


2006


2006


2006


2006


2005


2005(In thousands, except per share amounts)Total revenue

$
28,923


$
26,009


$
22,480


$
20,415


$
19,084


$
16,593


$
14,717


$
11,214Gross profit


18,459



16,199



14,118



12,463



11,469



8,827



7,940



6,092Net income


1,893



2,040



1,102



1,046



1,670



1,272



944



116Accretion of preferred stock


(13
)


(12
)


(13
)


(12
)


(13
)


(13
)


(13
)


(12
)Net income available to common
    shareholders


1,880



2,028



1,089



1,034



1,657



1,259



931



104Basic net income per share
    available to common shareholders

$
0.20


$
0.23


$
0.13


$
0.13


$
0.22


$
0.19


$
0.15


$
0.02Diluted net income per share
    available to common shareholders

$
0.05


$
0.05


$
0.03


$
0.03


$
0.05


$
0.04


$
0.03


$
0.00   15.
    SUBSEQUENT
    EVENT  Initial Public Offering.
   69




---



##### Table of Contents



ITEM 9.
    CHANGES
    IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
    FINANCIAL DISCLOSURE    ITEM 9A.
    CONTROLS
    AND PROCEDURES  Rule 13a-15(e) Form 10-K,
        ITEM 9B.
    OTHER
    INFORMATION    PART III
  ITEM 10.
    DIRECTORS
    AND EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE
    GOVERNANCE   70




---



##### Table of Contents



www.shoretel.com Form 8-K
  ITEM 11.
    EXECUTIVE
    COMPENSATION    ITEM 12.
    SECURITY
    OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
    RELATED STOCKHOLDER MATTERS    Form 10-K.
  ITEM 13.
    CERTAIN
    RELATIONSHIPS AND RELATED TRANSACTIONS, DIRECTOR
    INDEPENDENCE    ITEM 14.
    PRINCIPAL
    ACCOUNTING FEES AND SERVICES    PART IV
  ITEM 15.
    EXHIBITS AND
    FINANCIAL STATEMENT SCHEDULES.  (1) Financial
    Statements
  Financial Statement
    Schedule
  Exhibits
 71




---



##### Table of Contents



SIGNATURES
  Form 10-K th
    MICHAEL
    E. HEALY
     POWER OF
    ATTORNEY
  Form 10-K,
  Form 10-K
  Name

Title

Date/s/  JOHN
    W. COMBSJohn
    W. Combs

Chairman, President and
    Chief Executive Officer
    (Principal Executive Officer)

September 27, 2007/s/  MICHAEL
    E. HEALYMichael
    E. Healy

Chief Financial Officer
    (Principal Financial Officer and Principal Accounting Officer)

September 27, 2007/s/  EDWIN
    J. BASARTEdwin
    J. Basart

Director

September 27, 2007/s/  MARK
    F. BREGMANMark
    F. Bregman

Director

September 27, 2007/s/  GARY
    J. DAICHENDTGary
    J. Daichendt

Director

September 27, 2007/s/  KENNETH
    D. DENMANKenneth
    D. Denman

Director

September 27, 2007/s/  CHARLES
    D. KISSNERCharles
    D. Kissner

Director

September 27, 2007/s/  THOMAS
    VAN OVERBEEKThomas
    van Overbeek

Director

September 27, 2007/s/  EDWARD
    F. THOMPSONEdward
    F. Thompson

Director

September 27, 2007  72




---



##### Table of Contents



INDEX TO
    FINANCIAL STATEMENT SCHEDULES
  FINANCIAL STATEMENT SCHEDULESchedule II 
    Valuation and Qualifying Accounts and Reserves    73




---



##### Table of Contents



EXHIBIT INDEX
  ExhibitNumber

Exhibit Title3
.1

Third Restated Certificate of
    Incorporation of the Registrant3
.2

Second Amended and Restated Bylaws
    of the Registrant.4
.1**

Form of Registrants Common
    Stock certificate.4
.2**

Seventh Amended and Restated
    Rights Agreement dated October 20, 2004 by and among the
    Registrant and certain of its equityholders.10
.1**

Form of Indemnity Agreement
    between the Registrant and each of its directors and executive
    officers.10
.2** +

1997 Stock Option Plan and forms
    of stock option agreement and stock option exercise agreement.10
.3** +

2007 Equity Incentive Plan and
    forms of stock option agreement and stock option exercise
    agreement.10
.4** +

Description of ShoreTel Executive
    Bonus Incentive Plan for the first and second half of fiscal
    2007.10
.5** +

Offer Letter, dated as of
    July 14, 2004, by the Registrant and John W. Combs.10
.6** +

Offer Letter, dated as of
    March 10, 2003, by the Registrant and John Finegan.10
.7** +

Offer Letter, dated as of
    September 8, 2005, by the Registrant and Joseph A. Vitalone.10
.8** +

Offer Letter, dated as of
    April 13, 2005, by the Registrant and Walter Weisner.10
.9** +

Change of Control Agreement, dated
    as of August 5, 2004, between the Registrant and John W.
    Combs.10
.10**+

Change of Control Agreement, dated
    as of May 7, 2003, between the Registrant and John Finegan.10
.11**+

Change of Control Agreement, dated
    as of August 1, 2001, between the Registrant and Edwin J.
    Basart.10
.12**+

Separation Agreement, dated as of
    August 9, 2004, between the Registrant and Thomas van
    Overbeek.10
.13**

Sublease, dated as of October
    1998, between Registrant and Applied Materials, Inc., as amended.10
.14**

ODM Product Development and
    Purchase Agreement, dated as of March 19, 2004, between
    Registrant and Giant Electronics Ltd., as amended.10
.15**

Manufacturing Services Agreement,
    dated October 28, 2005, between Registrant and Jabil
    Circuit, Inc.10
.16**

Office Lease Oakmead West, dated
    April 20, 2007, between Registrant and Carr NP Properties,
    L.L.C.10
.17**+

Offer Letter, dated April 22,
    2007, by the Registrant and Michael E. Healy10
.18+

ShoreTel Executive Bonus Plan10
.19+

2007 Employee Stock Purchase Plan21


Subsidiaries23
.1

Consent of Deloitte &
    Touche LLP, independent registered public accounting firm.24
.1

Power of Attorney (included on the
    signature page hereto).31
.1

Rule 13a-14(a)/15d-14(a)
    Certification of Chief Executive Officer31
.2

Rule 13a-14(a)/15d-14(a)
    Certification of Chief Financial Officer32
.1

Section 1350 Certification of
    Chief Executive Officer.32
.2

Section 1350 Certification of
    Chief Financial Officer.     **
    
    Previously filed as an exhibit to the Registrants
    Registration Statement on
    Form S-1
    (333-140630).+
    
    Management Compensatory Plan or Arrangement
    
    Confidential treatment has been granted with respect to selected
    portions of this agreement has been filed with the Commission.  Financial Statement Schedules.
   74