10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark one)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2012

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.

(Exact name of registrant as specified in its charter)

Delaware	77-0443568
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
960 Stewart Drive, Sunnyvale, California	94085-3913
(Address of principal executive offices)	(Zip Code)

(408) 331-3300

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	o	Accelerated filer	x
Non-accelerated filer	o  (Do not check if a smaller reporting company)	Smaller reporting company	o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  o    No   x

As of January 25, 2013, 58,735,447 shares of the registrant’s common stock were outstanding.

SHORETEL, INC. AND SUBSIDIARIES

FORM 10-Q for the Quarter Ended December 31, 2012

INDEX

		Page
PART I: Financial Information
Item 1	Financial Statements	3
	Condensed Consolidated Balance Sheets as of December 31, 2012 and June 30, 2012	3
	Condensed Consolidated Statements of Operations for the three and six months ended December 31, 2012 and 2011	4
	Condensed Consolidated Statements of Comprehensive Loss for the three and six months ended December 31, 2012 and 2011	5
	Condensed Consolidated Statements of Cash Flows for the six months ended December 31, 2012 and 2011	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4	Controls and Procedures	35
PART II: Other information
Item 1	Legal Proceedings	36
Item 1A	Risk Factors	36
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3	Defaults Upon Senior Securities	37
Item 4	Mine Safety Disclosures	37
Item 5	Other Information	37
Item 6	Exhibits	37
	Signatures	38
	Exhibit Index	39

2

PART I. FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

SHORETEL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)

	December 31, 2012			June 30, 2012
ASSETS
Current assets:
Cash and cash equivalents	$	43,839		$	37,120
Short-term investments		8,217			18,375
Accounts receivable, net of allowances of $789 as of December 31, 2012 and $774 as of June 30, 2012		31,834			34,198
Inventories		20,383			20,212
Indemnification asset		7,012			6,570
Prepaid expenses and other current assets		5,478			5,275
Total current assets		116,763			121,750
Property and equipment - net		14,502			10,495
Goodwill		122,665			122,665
Intangible assets - net		42,128			45,304
Other assets		2,769			2,939
Total assets	$	298,827		$	303,153
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	12,316		$	9,697
Accrued liabilities and other		15,178			16,134
Accrued employee compensation		13,088			12,151
Accrued taxes and surcharges		11,026			7,852
Purchase consideration		9,881			9,398
Deferred revenue		37,503			35,829
Total current liabilities		98,992			91,061
Long-term revolving credit facility, net of debt issuance costs		19,960			19,946
Long-term deferred revenue		14,373			13,683
Long-term purchase consideration		3,475			3,305
Other long-term liabilities		3,064			4,926
Total liabilities		139,864			132,921
Commitments and contingencies (Note 13)
Stockholders' equity:
Preferred stock, par value $.001 per share, authorized 5,000 shares; no shares issued and outstanding		—			—
Common stock and additional paid-in capital, par value $.001 per share, authorized 500,000;shares issued and outstanding, 58,719 and 58,057 shares as of December 31, 2012 and June 30, 2012, respectively		317,767			310,646
Accumulated other comprehensive income		3			2
Accumulated deficit		(158,807	)		(140,416	)
Total stockholders’ equity		158,963			170,232
Total liabilities and stockholders’ equity	$	298,827		$	303,153

See Notes to Condensed Consolidated Financial Statements

3

SHORETEL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2012			2011			2012			2011
Revenue:
Product	$	43,769		$	46,277		$	89,603		$	88,461
Hosted and related services		17,087			-			32,749			-
Support and services		13,780			11,735			27,268			23,409
Total revenue		74,636			58,012			149,620			111,870
Cost of revenue:
Product  (1)		15,069			16,103			30,856			30,558
Hosted and related services  (1)		11,400			-			20,542			-
Support and services  (1)		4,279			3,969			8,468			7,884
Total cost of revenue		30,748			20,072			59,866			38,442
Gross profit		43,888			37,940			89,754			73,428
Operating expenses:
Research and development  (1)		12,195			12,240			26,148			24,053
Sales and marketing  (1)		31,739			21,596			62,495			42,818
General and administrative  (1)		9,292			6,349			17,887			12,978
Total operating expenses		53,226			40,185			106,530			79,849
Loss from operations		(9,338	)		(2,245	)		(16,776	)		(6,421	)
Other income (expense):
Interest income		52			58			93			125
Interest expense		(676	)		(22	)		(1,089	)		(47	)
Other income (expense), net		(302	)		(232	)		(332	)		(673	)
Total other expense		(926	)		(196	)		(1,328	)		(595	)
Loss before provision for tax		(10,264	)		(2,441	)		(18,104	)		(7,016	)
Provision for income tax		90			97			287			164
Net loss	$	(10,354	)	$	(2,538	)	$	(18,391	)	$	(7,180	)
Net loss per share - basic and diluted	$	(0.18	)	$	(0.05	)	$	(0.32	)	$	(0.15	)
Shares used in computing net loss per share - basic and diluted (2)		58,566			47,946			58,376			47,666
(1)   Includes stock-based compensation expense as follows:
Cost of product revenue	$	34		$	33		$	84		$	74
Cost of hosted and related service revenue		40			-			78			-
Cost of support and services revenue		239			209			446			408
Research and development		919			911			1,978			1,923
Sales and marketing		1,073			1,053			1,935			2,067
General and administrative		1,194			1,066			2,331			2,050
Total stock-based compensation expense	$	3,499		$	3,272		$	6,852		$	6,522

(2) Potentially dilutive securities were not included in the compilation of diluited net loss per share for the periods which had a net loss because to do so would have been anti-dilutive.

See Notes to Condensed Consolidated Financial Statements

4

SHORETEL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(In thousands)

(Unaudited)

	Three Months Ended December 31,						Six Months Ended December 31,
	2012			2011			2012			2011
	(In thousands)						(In thousands)
Net loss	$	(10,354	)	$	(2,538	)	$	(18,391	)	$	(7,180	)
Other comprehensive income (loss), net of tax:
Unrealized gains (loss) on short-term investments		(6	)		(4	)		1			(70	)
Other comprehensive income (loss)		(6	)		(4	)		1			(70	)
Comprehensive loss	$	(10,360	)	$	(2,542	)	$	(18,390	)	$	(7,250	)

See Notes to Condensed Consolidated Financial Statements

5

SHORETEL, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

	Six Months Ended
	December 31,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(18,391	)	$	(7,180	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		7,562			3,262
Stock-based compensation expense		6,852			6,522
Amortization of premium on investments		88			136
Loss on disposal of property and equipment		87			27
Change in fair value of purchase consideration		653			-
Changes in assets and liabilities, net of effect of acquisition:
Accounts receivable		2,364			2,864
Inventories		(171	)		(3,540	)
Indemnification asset		(442	)		-
Prepaid expenses and other current assets		(203	)		(1,058	)
Other assets		170			(151	)
Accounts payable		2,181			1,476
Accrued liabilities and other		(2,975	)		1,842
Accrued employee compensation		937			(1,536	)
Accrued taxes and surcharges		3,174			-
Deferred revenue		2,364			7,523
Net cash provided by operating activities		4,250			10,187
CASH FLOWS FROM INVESTING ACTIVITES:
Purchases of property and equipment		(5,694	)		(1,408	)
Purchases of investments		(4,318	)		(24,916	)
Proceeds from sale/maturities of investments		14,389			19,408
Purchases of patents, technology and internally developed software		(1,555	)		(550	)
Net cash provided by (used in) investing activities		2,822			(7,466	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock		964			2,527
Taxes paid on vested and released stock awards		(695	)		(452	)
Borrowings from line of credit		4,974			-
Payments made for line of credit		(5,000	)		-
Payments made for capital leases		(596	)		-
Net cash provided by (used in) financing activities		(353	)		2,075
NET INCREASE IN CASH AND CASH EQUIVALENTS		6,719			4,796
CASH AND CASH EQUIVALENTS - Beginning of period		37,120			89,695
CASH AND CASH EQUIVALENTS - End of period	$	43,839		$	94,491
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest	$	418		$	41
Cash paid for taxes	$	117		$	183
NONCASH INVESTING AND FINANCING ACTIVITIES:
Property, plant and equipment acquired on capital lease	$	41		$	-
Unpaid portion of property and equipment purchases included in period-end accruals	$	1,384		$	203

See Notes to Condensed Consolidated Financial Statements

6

SHORETEL, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Description of Business

ShoreTel, Inc. and its subsidiaries (referred herein as “the Company”) is a leading provider of pure Internet Protocol, or IP, Unified Communications systems for enterprises while offering both premise-based and hosted business solutions. The Company’s premise systems are based on its distributed software architecture and switch-based hardware platforms which enable multi-site enterprises to be served by a single telecommunications system. The Company’s premise systems enable a single point of management, easy installation and a high degree of scalability and reliability, and provide end users with a consistent, full suite of features across the enterprise, regardless of location. As a result, management believes that the Company’s systems enable enhanced end user productivity and provide lower total cost of ownership and higher customer satisfaction than alternative systems.  The Company also offers a hosted solution based on the Company’s proprietary Unified Communication platform. The hosted solution offers a secure and managed business communications solution to enterprises with minimal capital investment required. The Company’s hosted architecture offers are a wide variety of applications and services which provide a full user experience along with the capability to scale based on a customer’s evolving needs.

2. Basis of Presentation and Significant Accounting Policies

The accompanying condensed consolidated financial statements as of December 31, 2012, and for the three and six months ended December 31, 2012 and 2011 have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2012. In the opinion of management, all adjustments (primarily consisting of normal recurring adjustments) considered necessary for a fair statement have been included.

The condensed consolidated balance sheet at June 30, 2012 has been derived from the audited consolidated financial statements as of that date but does not include all of the information and footnotes included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2012. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2012. The results of operations for the three and six months ended December 31, 2012 are not necessarily indicative of the operating results to be expected for the full fiscal year or any future periods.

In connection with the M5 Networks, Inc. (“M5”) acquisition, the consolidated balance sheet at June 30, 2012 has been recast to include retrospective purchase accounting adjustments. These adjustments pertain to measurement period adjustments during the six months ended December 31, 2012 based on the valuation of assets acquired and liabilities assumed in the M5 acquisition. The effect on the consolidated balance sheet at June 30, 2012, as a result of the recast, is an increase in indemnification asset of $6.6 million, a decrease to property and equipment of $2.3 million, an increase to goodwill of $2.5 million, an increase to other assets of $1.0 million, a decrease in accounts payable of $50,000, an increase in accrued liabilities and other of $0.3 million, an increase of accrued taxes and surcharges of $6.6 million and an increase to other long-term liabilities of $0.9 million.

Reclassifications

Accrued taxes and surcharges of $1.3 million have been reclassified out of accrued liabilities and other into a separate line item in the consolidated balance sheets at June 30, 2012, to conform to the presentation at December 31, 2012.

Computation of Net Loss per Share

Basic net loss per share is determined by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per share is determined by dividing net loss by the weighted average number of common shares used in the basic loss per share calculation plus the number of common shares that would be issued assuming conversion of all potentially dilutive securities outstanding under the treasury stock method. Dilutive securities of 11.8 million and 9.7 million shares were not included in the computation of diluted net loss per share for the three and six months ended December 31, 2012 and 2011, respectively, because such securities were anti-dilutive.

7

Concentration of Credit Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents, short-term investments and accounts receivable. As of December 31, 2012, all of the Company’s cash and cash equivalents and short-term investments were managed by multiple financial institutions. Accounts receivable are typically unsecured and are derived from revenue earned from customers. The Company performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses.  Accounts receivable from one value-added distributor accounted for 19% of total accounts receivable at December 31, 2012. At June 30, 2012 one value-added distributor accounted for 22% of the total accounts receivable.

Revenue Recognition

The Company’s revenue recognition policy from products and services of its premise and hosted segments is included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2012.

Recent Accounting Pronouncements

In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (ASU) No. 2011-11, Balance Sheet (Topic 210) - Disclosures about Offsetting Assets and Liabilities (ASU 2011-11), that requires an entity to disclose additional information about offsetting and related arrangements to enable users of the financial statements to understand the effect of those arrangements on the financial position. ASU 2011-11 will be effective for the Company beginning July 1, 2013. The adoption of ASU 2011-11 may impact future disclosures but will not impact the Company’s consolidated financial statements.

In September 2011, the FASB issued ASU No. 2011-8, Intangibles - Goodwill and Other (Topic 350) - Testing Goodwill for Impairment (ASU 2011-8), which provides guidance on testing goodwill for impairment. The new guidance provides an entity the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines that this is the case, it is required to perform the currently prescribed two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit (if any). If an entity determines that the fair value of a reporting unit is greater than its carrying amount, the two-step goodwill impairment test is not required. The new guidance was effective for the Company beginning July 1, 2012. The adoption of ASU 2011-8 did not have an impact to the Company’s consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-5, Comprehensive Income (Topic 220) - Presentation of Comprehensive Income, which requires companies to present the total of comprehensive income (loss), the components of net income (loss), and the components of other comprehensive income (loss) either as a single continuous statement of comprehensive income (loss) or in two separate but consecutive statements. This update eliminates the option to present the components of other comprehensive income (loss) as part of the statement of changes in stockholders’ equity. In December 2011, the FASB deferred the effective date of the specific requirement to present items that are reclassified out of accumulated other comprehensive income (loss) to net income (loss) alongside their respective components of net income (loss) and other comprehensive income (loss). The Company has adopted the disclosure provisions on a retrospective basis, except for the provision deferred. This adoption did not have an impact on the Company’s results of operations or financial position, but resulted in the presentation of a separate consolidated statement of comprehensive loss.

3. Business Combination

M5 Networks, Inc. Acquisition

On March 23, 2012, the Company acquired all outstanding common stock of M5 Networks, Inc., a privately-held company based in New York and a provider of hosted unified communications solutions.  The acquisition of M5 allows the Company to expand its product offering to include Unified Communication product and services over cloud-based platforms. The purchase consideration issued includes 9.5 million shares issued to the shareholders of M5, cash payment of $80.9 million, and additional cash earn-outs (not to exceed $13.7 million in aggregate) payable over the next two years contingent upon achieving certain revenue targets for the twelve months ending December 31, 2012. The shares issued as consideration are valued based on the closing stock price of the Company’s common stock on March 23, 2012, (representing a Level 1 measurement). As revenue targets related to the contingent consideration were met in full on December 31, 2012, the Company will pay the full $13.7 million out over the next two years, with $10.0 million to be paid in March 2013 and $3.7 million to be paid in January 2014. Any changes in the fair value of contingent consideration from events after the acquisition date were recognized in earnings of the period when the event occurred (See Note 5 to the Condensed Consolidated Financial Statements for additional information on the fair value of purchase consideration). The summary of the purchase consideration is as follows:

8

In thousands
Cash	$	80,932
Fair value of shares issued		53,675
Fair value of contingent consideration		12,500
	$	147,107

In accordance with ASC 805, Business Combinations, the acquisition of M5 was recorded as a purchase business acquisition. Under the purchase method of accounting, the fair value of the consideration was allocated to assets and liabilities assumed at their fair values. The fair value of purchased identifiable intangible assets and contingent earn-outs were derived from model-based valuations from significant unobservable inputs (“Level 3 inputs”) determined by management. The fair value of purchased identifiable intangible assets was determined using the Company’s discounted cash flow models from operating projections prepared by management using an internal rate of return ranging from 11.5% to 13.0%. The fair value of contingent earn-outs was derived using a probability-based approach that includes significant unobservable inputs. Refer to Note 5 for additional details of the inputs used to determine the fair value of the contingent earn-out. The excess of the fair value of consideration paid over the preliminary fair values of net assets and liabilities acquired and identifiable intangible assets resulted in recognition of goodwill of approximately $115.3 million. The goodwill consists largely of expected synergies from combining the operations of M5 with that of the Company. The related goodwill recognized is not deductible for income tax purposes. All of the goodwill recorded in the M5 purchase price allocation is assigned to the hosted segment.

Preliminary Purchase Price Allocation

The Company prepared an initial determination of the fair value of assets acquired and liabilities assumed as of the acquisition date using preliminary information. In accordance with ASC 805, during the measurement period an acquirer shall retrospectively adjust the provisional amounts recognized at the acquisition date to reflect information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of the acquisition date. Accordingly, the Company has recognized measurement period adjustments made during both the fourth quarter of 2012 and the first and second quarters of 2013 to the fair value of certain assets acquired and liabilities assumed as a result of further refinements in the Company’s estimates. These adjustments were retrospectively applied to the March 23, 2012 acquisition date balance sheet. The effect of these adjustments on the preliminary purchase price allocation was an increase in goodwill of $3.4 million, an increase in current assets of $0.3 million, a decrease in other long-term assets of $2.2 million, an increase in deferred tax liability, net of $0.1 million, an increase in other liabilities assumed of $0.5 million and an increase in cash paid as part of the purchase consideration of $0.3 million. None of the adjustments had a material impact on the Company’s previously reported results of operations.

The total purchase price was allocated to M5’s net tangible and identifiable intangible assets based on their estimated fair values as of March 23, 2012, including retrospective adjustments, as set forth below. The following is the purchase price allocation:

	In thousands			Estimated useful lives (in years)
Current assets	$	5,870
Intangible assets:
Existing technology		15,700			3-8
In process research and development		1,700			(a)
Customer relationships		23,000			7
Non-compete agreements		300			2
Goodwill		115,250
Other long-term assets		2,651
Deferred tax liability, net		(1,145	)
Other liabilities assumed		(16,219	)
	$	147,107

(a) In process research and development is not subject to amortization until the associated project has been completed. Alternatively, if the associated project is determined not to be viable, it will be expensed in the period when such determination is made.

9

The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The fair values assigned to tangible and identifiable intangible assets acquired and liabilities assumed are based on management’s estimates and assumptions. The estimated fair values of assets acquired and liabilities assumed are considered preliminary and are based on the most recent information available. The Company believes that the information provides a reasonable basis for assigning the fair values of assets acquired and liabilities assumed, but it is waiting for additional information, primarily related to sales, excise and ad valorem taxes which are subject to change. Thus the provisional measurements of fair value set forth above are subject to change. The Company expects to finalize the valuation as soon as practicable, but not later than one-year from the acquisition date.

In addition to the measurement period adjustment impacting the purchase price allocation, the Company recognized a measurement period adjustment of $6.6 million related to the change in estimate of the sales, use and telecommunications taxes that existed as of the acquisition date. This adjustment was retrospectively applied to the March 23, 2012 to recognize the indemnification asset and increase the accrued taxes and surcharges to record amounts as if they had been known as of acquisition date and the balance sheet presentation as of June 30, 2012 has been updated for these amounts. The indemnification asset represents expected reimbursement the Company will receive from the escrow funds, currently held by an outside bank, pursuant to the M5 acquisition agreement. At December 31, 2012, the Company had a $7.0 million indemnification asset and $11.0 million accrued taxes and surcharges recorded in the consolidated balance sheets which related pre-acquisition and post-acquisition sales, use and telecommunications taxes based on the Company’s refined methodology used to calculate these estimated amounts.

4. Balance Sheet Details

Balance sheet components consist of the following:

	December 31,			June 30,
	2012			2012
	(Amounts in thousands)
Inventories:
Raw materials	$	-		$	130
Distributor inventory		1,548			1,858
Finished goods		18,835			18,224
Total inventories	$	20,383		$	20,212
Property and equipment:
Computer equipment and tooling	$	19,718		$	16,381
Software		3,654			2,710
Furniture and fixtures		2,458			2,210
Leasehold improvements & others		5,252			2,985
Total property and equipment		31,082			24,286
Less accumulated depreciation and amortization		(16,580	)		(13,791	)
Property and equipment – net	$	14,502		$	10,495
Deferred revenue:
Product	$	4,755		$	5,803
Support and services		43,938			40,963
Hosted and related services		3,183			2,746
Total deferred revenue	$	51,876		$	49,512

10

Intangible Assets:

The following is a summary of the Company’s intangible assets as of the following dates (in thousands):

	December 31, 2012							June 30, 2012
	Gross Carrying ‎ Amount		Accumulated‎ Amortization			NetCarrying‎ Amount		Gross Carrying ‎ Amount		Accumulated‎ Amortization			NetCarrying‎ Amount
Patents	$	3,810	$	(2,053	)	$	1,757	$	3,485	$	(1,673	)	$	1,812
Technology		22,848		(6,246	)		16,602		22,848		(3,673	)		19,175
Customer relationships		23,300		(2,745	)		20,555		23,300		(1,042	)		22,258
Non-compete agreements		300		(116	)		184		300		(41	)		259
Intangible assets in process and other		3,030		-			3,030		1,800		-			1,800
Intangible assets	$	53,288	$	(11,160	)	$	42,128	$	51,733	$	(6,429	)	$	45,304

The intangible assets that are amortizable have estimated useful lives of two to eight years. During the three months ended December 31, 2012, the Company capitalized $0.7 million related to software development costs and purchased $75,000 of patents.  During the six months ended December 31, 2012, the Company capitalized $1.2 million related to software development costs and purchased $0.3 million of patents.

Research and development costs are expensed as incurred. In accordance with ASC 985-20, Costs of Computer Software to be Sold, Leased, or Marketed, development costs of computer software to be sold, leased, or otherwise marketed are subject to capitalization beginning when a product’s technological feasibility has been established and ending when a product is available for general release to customers. Such costs are amortized using the straight-line method over the estimated economic life of the product. The Company evaluates the realizability of the assets and the related periods of amortization on a regular basis. Judgment is required in determining when technological feasibility of a product is established as well as its economic life. In most instances, the Company’s products are released soon after technological feasibility has been established, therefore, costs incurred subsequent to achievement of technological feasibility are usually not significant.

During the three and six months ended December 31, 2012, the Company capitalized $0.7 million and $1.2 million of software development costs related to new products, respectively.  The software is not yet available for general release to customers; therefore, no amortization expense has been recognized related to these capitalized software costs.  The Company did not capitalize any software development costs for the three and six months ended December 31, 2011.

Amortization of intangible assets for the three months ended December 31, 2012 and 2011 was $2.4 million and $0.7 million, respectively. For the six months ended December 31, 2012 and 2011, amortization of intangible assets was $4.8 million and $1.3 million, respectively.

The estimated amortization expenses for intangible assets for the next five years and thereafter are as follows (in thousands):

Years Ending June 30,
2013 (remaining six months)	$	4,743
2014		8,940
2015		7,046
2016		6,379
2017		5,520
Thereafter		6,470
Total	$	39,098

Short-Term Investments:

The following tables summarize the Company’s short-term investments (in thousands):

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	Amortized		Gross Unrealized		Gross Unrealized
	Cost		Gains		Losses			Fair Value
As of December 31, 2012
Corporate notes and commercial paper	$	8,214	$	4	$	(1	)	$	8,217
Total short-term investments	$	8,214	$	4	$	(1	)	$	8,217
As of June 30, 2012
Corporate notes and commercial paper	$	10,667	$	6	$	(2	)	$	10,671
U.S. Government agency securities		7,706		-		(2	)		7,704
Total short-term investments	$	18,373	$	6	$	(4	)	$	18,375

The following table summarizes the maturities of the Company’s fixed income securities (in thousands):

	Amortized Cost		Fair Value
As of December 31, 2012
Less than 1 year	$	7,592	$	7,595
Due in 1 to 3 years		622		622
Total	$	8,214	$	8,217
	Amortized Cost		Fair Value
As of June 30, 2012
Less than 1 year	$	10,312	$	10,316
Due in 1 to 3 years		8,061		8,059
Total	$	18,373	$	18,375

Actual maturities may differ from the contractual maturities because borrowers may have the right to call or prepay certain obligations.

5. Fair Value Disclosure

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal market (or most advantageous market, in the absence of a principal market) for the asset or liability in an orderly transaction between market participants at the measurement date. Further, entities are required to maximize the use of observable inputs and minimize the use of unobservable inputs in measuring fair value, and to utilize a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of inputs used to measure fair value are as follows:

● Level 1 — Quoted prices in active markets for identical assets or liabilities.

● Level 2 — Observable inputs other than quoted prices included within Level 1, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs other than quoted prices that are observable or are derived principally from, or corroborated by, observable market data by correlation or other means.

● Level 3 — Unobservable inputs that are supported by little or no market activity, are significant to the fair value of the assets or liabilities, and reflect our own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

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The tables below set forth the Company’s financial instruments and liabilities measured at fair value on a recurring basis (in thousands):

	December 31, 2012
	Fair Value		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents:
Money market funds	$	20,867	$	20,867	$	-	$	-
U.S. Government agency securities		800		-		800		-
Short-term investments:
Corporate notes and commercial paper		8,217		-		8,217		-
Total assets measured and recorded at fair value	$	29,884	$	20,867	$	9,017	$	-
Liabilities:
Acquisition-related consideration (See Note 3)	$	13,356	$	-	$	13,356	$	-

The above table excludes $22.1 million of cash balances on deposit at banks.

	June 30, 2012
	Fair Value		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents:
Money market funds	$	10,322	$	10,322	$	-	$	-
Short-term investments:
Corporate notes and commercial paper		10,671		-		10,671		-
U.S. Government agency securities		7,704		-		7,704		-
Total assets measured and recorded at fair value	$	28,697	$	10,322	$	18,375	$	-
Liabilities:
Acquisition-related contingent consideration (See Note 3)	$	12,703	$	-	$	-	$	12,703

The above table excludes $26.8 million of cash balances on deposit at banks.

The foreign exchange forward contracts outstanding as of December 31, 2012 are entered into by the Company on the last day of the period. Given the relatively short duration such contracts are outstanding in relation to changes in potential market rates; the change in the fair value is not material and is not reflected either as an asset or liability.

Money market funds are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets. Short-term investments are classified within Level 2 of the fair value hierarchy because they are valued based on other observable inputs, including broker or dealer quotations, or alternative pricing sources. When quoted prices in active markets for identical assets or liabilities are not available, the Company relies on non-binding quotes from independent pricing services. Non-binding quotes are based on proprietary valuation models prepared by independent pricing services. These models use algorithms based on inputs such as observable market data, quoted market prices for similar instruments, historical pricing trends of a security as relative to its peers, internal assumptions of the independent pricing service and statistically supported models. The Company corroborates the reasonableness of non-binding quotes received from the independent pricing service by comparing them to the (a) actual experience gained from the purchases and redemption of investment securities, (b) quotes received on similar securities obtained when purchasing securities and (c) monitoring changes in ratings of similar securities and the related impact on the fair value. The types of instruments valued based on other observable inputs include corporate notes and commercial paper and U.S. Government agency securities. The Company reviewed financial and non-financial assets and liabilities and concluded that there were no material impairment charges during the three and six months ended December 31, 2012 and 2011, respectively. The Company reviews the fair value hierarchy on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels of certain securities within the fair value hierarchy. The Company recognizes transfers into and out of levels within the fair value hierarchy as of the date in which the actual event or change in circumstances that caused the transfer occurs. There were no transfers between Level 1 and Level 2 of the fair value hierarchy.

The Company measures the fair value of outstanding debts for disclosure purposes on a recurring basis. As of both December 31, 2012 and June 30, 2012, long-term debt of $20.0 million is reported at amortized cost. This outstanding debt is classified at Level 2 as it is not actively traded and is valued using a discounted cash flow model that uses observable market inputs. Based on the discounted cash flow model, the fair value of the outstanding debt approximates amortized cost.

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The purchase consideration for the Company’s acquisition of M5 included a contingent portion ranging from zero to $13.7 million and is subject to the achievement of certain revenue targets. As these revenue targets were met in full on December 31, 2012, we will pay the full $13.7 million out over the next two years, with $10.0 million to be paid in March 2013 and $3.7 million to be paid in January 2014. As these cash payments will happen in the future, the fair value of these as of December 31, 2012 was determined by taking the present value of these future cash payments using a present value discount rate of 6.0%. The purchase consideration is classified within Level 2 of the fair value hierarchy since it is based on observable inputs. As the purchase consideration changed from a Level 3 to a Level 2 liability due to the change from unobservable to observable inputs used to calculate the fair value as of December 31, 2012, the transfer in fair value hierarchy levels is as follows (in thousands):

	Acquisition-Related Consideration
Level 3 transfer out value	$	(13,356	)
Level 2 transfer in value		13,356
Gain (loss) on transfer	$	-

The change in the fair value of our purchase consideration liability is as follows (in thousands):

	Fair Value
As of June 30, 2012	$	12,703
Add: Adjustment to purchase consideration		653
As of December 31, 2012	$	13,356

Assets and Liabilities That Are Measured at Fair Value on a Nonrecurring Basis

Non-financial assets such as goodwill, intangible assets, and property, plant, and equipment are evaluated for impairment and adjusted to fair value using Level 3 inputs, only when an impairment is recognized. Fair values are considered Level 3 when management makes significant assumptions in developing a discounted cash flow model based upon a number of considerations including projections of revenues, earnings and a discount rate. In addition, in evaluating the fair value of goodwill impairment, further corroboration is obtained using our market capitalization. There was no impairment recorded in the three and six months ended December 31, 2012.

6. Line of credit

On March 15, 2012, the Company entered into a secured credit agreement (the “Credit Facility”).  The Credit Facility includes a revolving loan facility for an aggregate principal amount not exceeding $50 million. The Credit Facility matures on the fifth anniversary of its closing (March 15, 2017) and is payable in full upon maturity. The amounts borrowed and repaid under the Credit Facility are available for future borrowings.  The borrowings under the Credit Facility will accrue interest either (at the election of the Company) at (i) the London interbank offered rate then in effect, plus a margin of between 2.00% and 2.50%, which will be based on the Company’s consolidated EBITDA (as defined in the Credit Facility), or (ii) the higher of (a) the bank’s publicly-announced prime rate then in effect and (b) the federal funds rate plus 0.50%, in each case of (a) or (b), plus a margin of between 0.00% and 0.50%, which will be based upon the Company’s consolidated EBITDA.  The Company also pays annual commitment fees during the term of the Credit Facility which varies depending on the Company’s consolidated EBITDA. The Credit Facility is secured by substantially all of the Company’s assets. The amounts borrowed are recorded as long-term debt, net of the financing costs, in the Company’s consolidated financial statements. As of December 31, 2012, the Company had an additional $29.0 million available for borrowing under the Credit Facility.

The Credit Facility contains customary representations and warranties and affirmative and negative covenants, including compliance with financial ratios and metrics. On December 4, 2012, the Company entered into an amendment to the Credit Facility which updated customary representations and warranties and affirmative and negative covenants, the Credit Facility and related amendment requires the Company to maintain a minimum ratio of liquidity to its indebtedness (each as defined in the Credit Facility) and varying amounts of Liquidity and Consolidated EBITDA specified in the Credit Facility throughout the term of the Credit Facility. The Company was in compliance with all such covenants as of December 31, 2012.

For the three and six months ended December 31, 2012, the Company paid interest at an approximate rate of 2.5%. As of December 31, 2012, the Company had $20.3 million outstanding under the Credit Facility. The Company amortizes deferred financing costs to interest expense on a straight-line basis over the term of the debt.

7. Income Taxes

The Company recorded an income tax provision of $0.1 million for both the three months ended December 31, 2012 and 2011, and $0.3 million and $0.2 million for the six months ended December 31, 2012 and 2011, respectively.

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The tax provision of $0.1 million determined for the three months ended December 31, 2012 is primarily the result of income tax provisions for profitable foreign jurisdictions based upon income earned during this period and tax provisions for certain states that are determined on a basis other than income earned. No income tax benefit was accrued for jurisdictions where we anticipate incurring a loss during the full fiscal year.

The income tax provision of $0.1 million for the three months ended December 31, 2011 represents the income tax provisions for profitable foreign jurisdictions based upon income earned during this period and tax provisions for certain states that are determined on a basis other than income earned. No income tax benefit was accrued for jurisdictions where we anticipate incurring a loss during the full fiscal year.

The tax provision of $0.3 million determined for the six months ended December 31, 2012 is primarily the result of income tax provisions for profitable foreign jurisdictions based upon income earned during this period, tax provisions for certain states that are determined on a basis other than income earned and an increase in the valuation allowance recorded against deferred tax assets established upon the acquisition of M5. No income tax benefit was accrued for jurisdictions where we anticipate incurring a loss during the full fiscal year.

The income tax provision of $0.2 million for the six months ended December 31, 2011 represents the income tax provisions for profitable foreign jurisdictions based upon income earned during this period, tax provisions for certain states that are determined on a basis other than income earned. No income tax benefit was accrued for jurisdictions where we anticipate incurring a loss during the full fiscal year.

The Company maintains liabilities for uncertain tax positions. As of December 31, 2012 and June 30, 2012, the Company’s total amounts of unrecognized tax benefits were $3.6 million and $3.6 million, respectively. Of the total of $3.6 million of unrecognized tax benefit as of December 31, 2012, only $0.1 million, if recognized, would impact the effective tax rate.

On January 2, 2013, the President signed into law The American Taxpayer Relief Act of 2012.  Under prior law, a taxpayer was entitled to a research tax credit for qualifying amounts paid or incurred on or before December 31, 2011. The 2012 Taxpayer Relief Act extends the research credit for two years to December 31, 2013.  The extension of the research credit is retroactive and includes amounts paid or incurred after December 31, 2011.  While the Company expects to generate additional credits as a result of retroactive extension of the research and development credit provisions under this new law, it will not record a tax benefit for these additional credits in its financial statements. Any such tax credits generated by the Company will be offset by a full valuation allowance, as management does not believe it is more likely than not that these credits will be realized.

While management believes that the Company has adequately provided for all tax positions, amounts asserted by tax authorities could be greater or less than the Company’s current position. Accordingly, the Company’s provisions for federal, state and foreign tax related matters to be recorded in the future may change as revised estimates are made or as the underlying matters are settled or otherwise resolved. The Company does not expect its unrecognized tax benefits to change materially over the next 12 months.

The Company’s primary tax jurisdiction is in the United States. For federal and state tax purposes, the tax years 2001 through 2012 remain open and subject to tax examination by the appropriate federal or state taxing authorities.

 8. Common Stock

Common Shares Reserved for Issuance

At December 31, 2012, the Company has reserved shares of common stock for issuance as follows (in thousands):

Reserved under stock option plans	15,116
Reserved under employee stock purchase plan	143
Total	15,259

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9. Stock-Based Compensation

The Company estimated the grant date fair value of stock option awards and Employee Stock Purchase Plan (ESPP) rights using the Black-Scholes option valuation model with the following assumptions:

	Three Months Ended		Six Months Ended
	December 31,		December 31,
	2012	2011	2012	2011
Expected life from grant date of option (in years)	5.42	6.08	5.32 - 5.42	6.08
Expected life from grant date of ESPP (in years)	0.50	0.50	0.50	0.50
Risk free interest rate for options	0.69%	0.95%	0.67 - 0.69%	1.14%
Risk free interest rate for ESPP	0.13 - 0.15%	0.05 - 0.07%	0.13 - 0.15%	0.05 - 0.07%
Expected volatility  for options	69%	66%	69%	65%
Expected volatility  for ESPP	44 - 57%	52 - 74%	44 - 57%	52 - 74%
Expected dividend yield	0%	0%	0%	0%

           During the three months ended December 31, 2012 and 2011, the Company recorded non-cash stock-based compensation expense of $3.5 million and $3.3 million, respectively. During the six months ended December 31, 2012 and 2011, the Company recorded non-cash stock-based compensation expense of $6.9 million and $6.5 million, respectively.

           Compensation expense is recognized only for the portion of stock options that are expected to vest, assuming an expected forfeiture rate in determining stock-based compensation expense, which could affect the stock-based compensation expense recorded if there is a significant difference between actual and estimated forfeiture rates. As of December 31, 2012, total unrecognized compensation cost related to stock-based options and awards granted to employees and non-employee directors was $11.7 million. This cost will be amortized on a ratable basis over a weighted-average vesting period of approximately 3 years.

10. Stock Option Plan

In January 1997, the Board of Directors and stockholders adopted the 1997 stock option plan (the “1997 Plan”) which, as amended, provided for granting incentive stock options (“ISOs”) and nonqualified stock options (“NSOs”) for shares of common stock to employees, directors, and consultants of the Company. This plan was terminated in January 2007 for new issuances.

In February 2007, the Company adopted the 2007 Equity Incentive Plan (the “2007 Plan”) which, as amended, provides for grants of ISOs, NSOs, restricted stock units (“RSUs”) and restricted stock awards (“RSAs”) to employees, directors and consultants of the Company. Options granted generally vest ratably over four years from the date of grant. The 2007 Plan provides that the options shall be exercisable over a period not to exceed ten years. Five million shares of common stock were initially reserved for future issuance in the form of stock options, restricted stock awards or units, stock appreciation rights and stock bonuses. Pursuant to the provisions under the 2007 Plan, on January 1st of each year, the number of shares in the reserve shall be increased by the provisions set forth in the 2007 Plan, subject to approval by the Company’s Board of Directors. The Company’s board of directors increased the number of shares authorized and reserved for issuance under the 2007 Plan during the years ended June 30, 2012 and 2011, by 2.4 million shares and 2.2 million shares, respectively.

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Transactions under the 1997 and 2007 option plans are summarized as follows (in thousands, except per share data and contractual term):

	Options Outstanding
	Shares Subject to Options Outstanding			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value
						(in years)
Balance at July 1, 2012		8,944		$	5.65
Options granted (weighted average fair value $2.44 per share)		1,602			4.28
Options exercised		(59	)		1.92
Options cancelled/forfeited		(292	)		5.78
Restricted stock units granted (see Note 12)		-
Restricted stock units cancelled/forfeited		-
Balance at December 31, 2012		10,195		$	5.46		6.57	$	2,434
Vested and expected to vest at December 31, 2012		9,100		$	5.45		6.13	$	2,406
Options exercisable at December 31, 2012		5,880		$	5.27		4.91	$	2,351

The total pre-tax intrinsic value for options exercised in the both three months ended December 31, 2012 and 2011 was $0.1 million, and $0.2 million and $0.4 million for the six months ended December 31, 2012 and 2011, respectively, representing the difference between the fair values of the Company’s common stock underlying these options at the dates of exercise and the exercise prices paid.

11. Employee Stock Purchase Plan

On September 18, 2007, the Board of Directors approved the commencement of offering periods under a previously-approved employee stock purchase plan (the “ESPP”). The ESPP allows eligible employees to purchase shares of the Company’s common stock at a discount through payroll deductions. The ESPP consists of six-month offering periods commencing on May 1st and November 1st, each year. Under the ESPP, employees purchased shares of the Company's common stock at 85% of the market value at either the beginning of the offering period or the end of the offering period, whichever price is lower.

In January 2012 and February 2011, pursuant to the automatic increase provisions of the ESPP, the Company’s Board of Directors approved increases to the number of shares authorized and reserved for issuance under the ESPP by 481,433 and 469,980 shares, respectively.

As of December 31, 2012, 143,467 shares are reserved for future issuance.

12. Restricted Stock

Under the 2007 Plan, during the six months ended December 31, 2012 the Company issued fully vested restricted stock awards to non-employee directors electing to receive them in lieu of an annual cash retainer.

In addition, restricted stock units can be issued under the 2007 Plan to eligible employees, and generally vest 25% at each one year anniversary from the date of grant.

Restricted stock award and restricted stock unit activity for the six months ended December 31, 2012 and 2011 is as follows (in thousands):

	Six Months Ended
	December 31,
	2012			2011
Beginning units outstanding		1,641			1,196
Awarded		526			501
Released		(488	)		(221	)
Forfeited		(122	)		(69	)
Ending units outstanding		1,557			1,407

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Information regarding restricted stock awards and restricted stock units outstanding at December 31, 2012 is summarized below:

	Number of Shares  (thousands)		Weighted Average Remaining Contractual Lives		Aggregate Intrinsic Value (thousands)
Shares outstanding		1,557		1.66	$	6,601
Shares vested and expected to vest		1,108		1.44	$	4,697

13. Litigation, Commitments and Contingencies

Litigation — At December 31, 2012, the Company is involved in litigation relating to claims arising out of the ordinary course of business or otherwise. Any litigation, regardless of outcome, is costly and time-consuming, can divert the attention of management and key personnel from business operations and deter distributors from selling the Company’s products and dissuade potential customers from purchasing the Company’s products. The Company defends itself vigorously against any such claims. Due to the uncertainty surrounding the litigation process, we are unable to estimate a range of loss, if any, at this time, however the Company does not believe a material loss is probable.

Leases — The Company leases its facilities under noncancelable operating leases which expire at various times through 2023. The leases provide for the lessee to pay all costs of utilities, insurance, and taxes.  In connection with the Company’s acquisition of M5 Networks, the Company assumed certain capital leases for equipment and other operating leases for equipment and facilities. All leases acquired were recorded at their respective fair values.  Future minimum lease payments under the noncancelable capital and operating leases as of December 31, 2012, are as follows (in thousands):

Years Ending June 30,	Operating Leases		Capital Leases
2013 (remaining six months)	$	1,708	$	691
2014		3,417		1,221
2015		2,575		330
2016		2,225		-
2017		2,016		-
Therafter		6,274		-
Total minimum lease payments	$	18,215		2,242
Less: amount representing interest				(199	)
Present value of total minimum lease payments				2,043
Less: current portion liability				(1,187	)
Capital lease obligation, net of current portion			$	856

The current portion of the capital leases is included in accrued liabilities and other on the condensed consolidated balance sheet. The non-current portion of the capital leases is included in the other long-term liabilities on the consolidated balance sheet. Lease obligations for the Company’s foreign offices are denominated in foreign currencies, which were converted in the above table to U.S. dollars at the interbank exchange rate on December 31, 2012.

Rent expense for the three months ended December 31, 2012 and 2011 was $0.9 million and $0.5 million, respectively, and was $1.8 million and $1.0 million, for the six months ended December 31, 2012 and 2011, respectively.

Purchase commitments — The Company had purchase commitments with contract manufacturers for inventory and with technology firms for usage of software licenses totaling approximately $28.2 million as of December 31, 2012 and $22.3 million as of June 30, 2012.

Letters of credit — Outstanding letters of credit maintained by the Company totaled $635,000 as of December 31, 2012.

Indemnification — Under the indemnification provisions of the Company’s customer agreements, the Company agrees to indemnify and defend its customers against infringement of any patent, trademark, or copyright of any country or the misappropriation of any trade secret, arising from the customers’ legal use of the Company’s services. The exposure to the Company under these indemnification provisions is generally limited to the total amount paid by the customers under pertinent agreements. However, certain indemnification provisions potentially expose the Company to losses in excess of the aggregate amount received from the customer. To date, there have been no claims against the Company or its customers pertaining to such indemnification provisions and no amounts have been recorded.

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The Company also has entered into customary indemnification agreements with each of its officers and directors.

14. Segment Information

Prior to the acquisition of M5, the Company was organized and operated as one reportable segment. In connection with the acquisition of M5, the Company evaluated the guidance in ASC 280, Segment Reporting, and concluded that the acquired business is distinct from the Company’s historical premise solutions and is therefore a separate reportable segment. M5’s hosted solutions and related services are now operated by the Company within its hosted segment. The Company’s legacy premise solutions are operated within the premise segment. The Company’s chief operating decision-maker (“CODM”) is its Chief Executive Officer (“CEO”). The Company’s CEO reviews revenue and gross profit for these two distinct segments to evaluate financial performance and allocate resources. The Company does not allocate research and development, sales and marketing, or general and administrative expenses to its segments in this internal reporting system because management does not include the information in its measurement of the performance of the operating segments. The financial information by the two reportable segments is also accompanied by information about revenue by geographic regions.

The following presents total revenue and gross profit by reportable segments (in thousands):

	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2012		2011		2012		2011
Total revenues:
Premise	$	57,549	$	58,012	$	116,871	$	111,870
Hosted		17,087		-		32,749		-
Total	$	74,636	$	58,012	$	149,620	$	111,870
Gross profit:
Premise	$	38,201	$	37,940	$	77,547	$	73,428
Hosted		5,687		-		12,207		-
Total	$	43,888	$	37,940	$	89,754	$	73,428

Revenue by geographic region is based on the ship to address on the customer order. The following presents total revenue by geographic region (in thousands):

	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2012		2011		2012		2011
United States of America	$	66,934	$	50,858	$	133,899	$	97,988
International		7,702		7,154		15,721		13,882
Total	$	74,636	$	58,012	$	149,620	$	111,870

Revenue from one value-added distributor accounted for approximately 21% and 25% of the total revenue during the three months ended December 31, 2012 and 2011, respectively, and 22% and 20% of total revenue during the six months ended December 31, 2012 and 2011, respectively.

The Company’s assets are primarily located in the United States of America and not allocated to any specific region and it does not measure the performance of its geographic regions based upon asset-based metrics.

The following presents a summary of long-lived assets, excluding deferred tax assets, other assets, and intangible assets (in thousands):

	December 31,		June 30,
	2012		2012
United States of America	$	14,263	$	10,230
International		239		265
Total	$	14,502	$	10,495

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The following presents the carrying value of goodwill for the Company’s reportable segments (in thousands):

	Premise Segment		Hosted Segment		Total
As of June 30, 2012	$	7,415	$	115,250	$	122,665
As of December 31, 2012	$	7,415	$	115,250	$	122,665

15. Derivative Instruments and Hedging Activities

In the normal course of business, the Company is exposed to fluctuations in interest rates and the exchange rates associated with foreign currencies. During the three and six months ended December 31, 2012, the Company used derivative instruments to reduce the volatility of earnings associated with changes in foreign currency exchange rates. The Company used foreign exchange forward contracts to mitigate the gains and losses generated from the re-measurement of certain foreign monetary assets and liabilities, primarily including cash balances, third party accounts receivable and intercompany transactions recorded on the balance sheet. These derivatives are not designated and do not qualify as hedge instruments. Accordingly, changes in the fair value of these instruments are recognized in other income and expenses during the period of change. The fair values recorded during the three and six months ended December 31, 2012 and 2011 were not material since these contracts were entered into on the last day of the period. These derivatives have maturities of approximately one month.

The following table presents the gross notional value of all our foreign exchange forward contracts outstanding as of December 31, 2012 and June 30, 2012 (in thousands):

	December 31, 2012				June 30, 2012
	Local Currency Amount		Notional Contract Amount (USD)		Local Currency Amount		Notional Contract Amount (USD)
Australian dollar		1,350	$	1,410		970	$	985
British pound		4,220		6,795		1,140		1,780
Euro		490		642		480		604
Total			$	8,847			$	3,369

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 in the section entitled “Risk Factors.”

Overview

We are a leading provider of brilliantly simple business communication solutions, comprised of integrated voice, video, data and mobile applications based on Internet Protocol (“IP”) technologies. We provide customers with a choice to operate our solution in their own premise-based data centers, or to subscribe to our cloud-based hosted communication service which we refer to as ShoreTel Sky. Our distributed IP architecture enables multi-site enterprises to be served by a single integrated communication system. These solutions enable a single point of management, easy installation and a high degree of scalability and reliability. They also provide end-users with a consistent, full suite of features across the enterprise, regardless of location, which helps IT management meet growing demands for powerful communication capabilities. As a result, we believe our solutions enable enhanced end-user productivity and provide lower total cost of ownership and higher customer satisfaction than alternative systems.

We were founded in September 1996 and shipped our first system in 1998. Since that time, we have continued to develop and enhance our product line. Our acquisition of M5 Networks, Inc. (“M5”), a leader in providing hosted unified communication solutions on March 23, 2012, expanded our products and service offerings to now include hosted solutions. Our acquisition of Agito Networks, Inc. (“Agito”), a provider of platform-agnostic enterprise mobility, in the second quarter of fiscal 2011, expanded our existing mobile solution with the vision of allowing users to communicate on any device, such as a desk phone, mobile phone, or computer, at any location using any cellular or Wi-Fi network  simply and cost effectively.

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We sell our solutions through our extensive network of over 1,000 authorized resellers served either by national distributors or by ShoreTel directly. ShoreTel solutions are also sold by strategic partners under their brand names, such as AT&T and HP for our mobility services.

Our solutions are available for businesses to operate in their own premise data centers or on a hosted, cloud-based platform. Solutions within our premise segment are comprised of our switches, IP phones and software application which work with our unique IP architecture to provide an integrated communication system. The hosted solutions business acquired from M5 is now a part of our hosted segment which we also refer to as the “Cloud Division”. The products and services of the hosted segment are now branded and sold as “ShoreTel Sky”. Our ShoreTel Sky solutions are comprised of our unique software delivered to the customer using our routers and IP phones.

We sell our premise products primarily through channel partners that market and sell our systems to enterprises across all industries, including small, medium and large companies and public institutions. Our channel partners include resellers as well as value-added distributors who in turn sell to the resellers. We believe our channel strategy allows us to reach a larger number of prospective enterprise customers more effectively than if we were to sell directly. As of December 31, 2012, we worked with over 1,000 channel partners to sell our products. Our internal sales and marketing personnel support these channel partners in their selling efforts. In some circumstances, the enterprise customer will purchase products directly from us, but in these situations we typically compensate the channel partner for its sales efforts. At the request of the channel partner, we often ship our products directly to the enterprise customer.

Most channel partners perform installation and implementation services for the enterprises that use our systems. Generally, our channel partners provide the post-contractual support to the enterprise customer by providing first-level support services and purchasing additional services from us under a post-contractual support contract. For channel partners without support capabilities or that do not desire to provide support, we offer full support contracts to provide all of the support to enterprise customers. Our channel partners may provide managed services offerings to the enterprise customer under which the channel partner may purchase our products and services and, in turn, charge the enterprise customer a monthly subscription fee to access those products and services.

Our phone and switch products are manufactured by contract manufacturers located in the United States and in China. Our contract manufacturers provide us with a range of operational and manufacturing services, including component procurement, final testing and assembly of our products, which allows us to scale our business without the significant capital investment and on-going expenses required to establish and maintain a manufacturing operation.

We sell our products using both single-tier and two-tier distribution channels to enterprises across all industries, including small, medium and large companies and public institutions. Our single-tier distribution channel consists of resellers that usually sell our products to end customers. Resellers usually do not stock our products and do not have rights of return. During the second quarter of fiscal 2011, we entered into arrangements with two major value-added distributors to distribute our comprehensive line of premise business communication solutions to resellers within the United States in what we refer to as a “two-tier” distribution model. During fiscal 2012, we expanded our two-tier network and added more value-added distributors to the network. We believe that the two-tier distribution model allows us to better serve our existing channel partners, to reach a larger number of prospective enterprise customers more effectively and to position us to continue to build momentum and capture increased market share in the IP telephony, mobility and UC markets.  Furthermore, the two-tier distribution model allows us to scale our business operations without making significant investments in product distribution facilities, thus allowing us to better manage our cost structure.  Our two-tier distribution channel consists of value-added distributors that stock and sell our products to other resellers or to end customers. The value-added distributors have limited rights of return. We refer to our resellers and value-added distributors collectively as “channel partners”.

Although we have historically sold our systems primarily to small and medium sized enterprises, in recent years, we have been expanding our sales and marketing activities to increase our focus on larger enterprise customers, including the creation of a major accounts program whereby our sales personnel assist our channel partners to sell to large enterprise customers. As of December 31, 2012, we had sold our products to approximately 27,000 enterprise customers.  To the extent we continue to successfully acquire larger enterprise customers in the United States and worldwide, we expect our sales cycle to increase, and the demands on our sales and support infrastructure to increase.

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We are headquartered in Sunnyvale, California and have sales, customer support, general and administrative and engineering functions in Texas. Following the acquisition of M5, our ShoreTel Sky related functions are performed from our offices in New York and Illinois. The majority of our personnel work at these locations. Sales, engineering, and support personnel are also located throughout the United States and, to a lesser extent, in Canada, the United Kingdom, Ireland, Germany, Spain, Hong Kong, Singapore, Philippines, India and Australia. While most of our customers are located in the United States, we have remained fairly consistent in revenue from international sales, which accounted for approximately 10% and 12% of our total revenue for the three months ended December 31, 2012 and 2011, respectively and were 11% and 12% for the six months ended December 31, 2012 and 2011, respectively.  We expect sales to customers in the United States will continue to comprise the majority of our sales in the foreseeable future.

Key Business Metrics

We monitor a number of key metrics to help forecast growth, establish budgets, measure the effectiveness of sales and marketing efforts and measure operational effectiveness.

Initial and repeat sales orders. Our goal is to attract a significant number of new enterprise customers and to encourage existing enterprise customers to purchase additional products and support. Many enterprise customers make an initial purchase and deploy additional sites at a later date, and also buy additional products and support as their businesses expand. As our installed enterprise customer base has grown we have experienced an increase in revenue attributable to existing enterprise customers, which currently represents a significant portion of our premise revenue.

Deferred revenue. Deferred revenue relates to the timing of revenue recognition for specific transactions based on delivery of service, support, specific commitments, product and services delivered to our value-added distributors that have not been delivered or sold through to resellers, and other factors. Deferred revenue primarily consists of billings or payments received in advance of revenue recognition from our transactions and are recognized as the revenue recognition criteria are met. Nearly all of our premise system sales include the purchase of post-contractual support contracts with terms of up to five years, and our renewal rates on these contracts have been high historically. We recognize support revenue on a ratable basis over the term of the support contract. Since we receive payment for support in advance of recognizing the related revenue, we carry a deferred revenue balance on our consolidated balance sheet. This deferred revenue helps provide predictability to our future support and services revenue. Almost all of our hosted services are billed a month in advance. Billings that are collected before the service is delivered are included in the deferred revenue balance on our consolidated balance sheet. These amounts are recognized as revenue as the services are delivered. Deferred revenue for our hosted segment represents amounts paid by customers for future services to be provided. Our deferred revenue balance at December 31, 2012 was $51.9 million, of which $37.5 million is expected to be recognized within one year.

Gross margin. Our gross margin for premise segment products is primarily affected by our ability to reduce hardware costs faster than the decline in average overall system sales prices. We strive to increase our product gross margin by reducing hardware costs through product redesign and volume discount pricing from our suppliers. In general, product gross margin on our switches is greater than product gross margin on our IP phones. As the prices and costs of our hardware components have decreased over time, our software components, which have lower costs than our hardware components, have represented a greater percentage of our overall margin on system sales. We consider our ability to monitor and manage these factors to be a key aspect of maintaining product gross margins and increasing our profitability.

Gross margin for premise segment support and services is impacted primarily by labor-related expenses. The primary goal of our support and services function is to ensure a high level of customer satisfaction and our investments in support personnel and infrastructure are made with this goal in mind. We expect that as our installed enterprise customer base grows, we may be able to slightly improve gross margin for support and services through economies of scale. However, the timing of additional investments in our support and services infrastructure could materially affect our cost of support and services revenue, both in absolute dollars and as a percentage of support and services revenue and total revenue, in any particular period.

Gross margin for the hosted segment services is lower than the gross margins for the premise segment and is impacted primarily by the reselling of broadband costs to customers, employee-related expense, data communication cost, carrier cost, telecom taxes, and intangible asset amortization expense. We expect that with the growth in the hosted customer base, the gross margins for our hosted business may improve over time.

Operating expenses. Our operating expenses are comprised primarily of compensation and benefits for our employees. Accordingly, increases in operating expenses historically have been primarily related to increases in our headcount. We intend to expand our workforce to support our anticipated growth, and therefore, our ability to forecast revenue is critical to managing our operating expenses.

Average revenue per user. We calculate the monthly average service revenue per user (ARPU) for our hosted segment as the average monthly recurring revenue per customer divided by the average number of seats per customer. The average monthly recurring revenue per customer is calculated as the monthly recurring service revenue from customers in the period, divided by the simple average number of business customers during the period. Our ARPU includes telecommunication Internet circuits that we resell that could, as a percentage of our business, decline over time as our average customer size increases and therefore they are more likely to have their own networks already established. Our monthly ARPU for the three month period ended December 31, 2012 was approximately $60.

Revenue churn. Revenue churn for our hosted segment is calculated by dividing the monthly recurring revenue from customers that have terminated during a period by the simple average of the total monthly recurring revenue from all customers in a given period. The effective management of the revenue churn is critical to our ability to maximize revenue growth and to maintain and improve margins. Our annualized revenue churn as of December 31, 2012 was approximately 4%.

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Basis of Presentation

Revenue. We derive our revenue from sales of our premise IP telecommunications systems and related support and services as well as hosted services.

Premise Revenue. Our typical system includes a combination of IP phones, switches and software applications primarily for our premise business. We sell our products through channel partners that include resellers and value-added distributors. Prices to a given channel partner for hardware and software products depend on that channel partner’s volume and customer satisfaction levels, as well as our own strategic considerations. In circumstances where we sell directly to the enterprise customer in transactions that have been assisted by channel partners, we report our revenue net of any associated payment to the channel partners that assisted in such sales. This results in recognized revenue from a direct sale approximating the revenue that would have been recognized from a sale of a comparable system through a channel partner. Product revenue has accounted for 59% and 80% of our total revenue for the three months ended December 31, 2012 and 2011, respectively and 60% and 79% of our total revenue for the six months ended December 31, 2012 and 2011, respectively. These sequential decreases in premise revenue as a percent of our total revenue relate to the total revenue base for the three and six months ended December 31, 2012 including hosted revenue resulting from our acquisition of M5 on March 23, 2012 with no corresponding revenue included in the total revenue for the three and six months ended December 31, 2011.

Premise support and services revenue primarily consists of post-contractual support, and to a lesser extent revenue from training services, professional services and installations that we perform. Post-contractual support includes software updates which grant rights to unspecified software license upgrades and maintenance releases issued during the support period. Post-contractual support also includes both Internet- and phone-based technical support. Revenue from post-contractual support is recognized ratably over the contractual service period. Premise support and services revenues accounted for 18% and 20% of our total revenue for the three months ended December 31, 2012 and 2011, respectively, and 18% and 21% of our total revenue for the six months ended December 31, 2012 and 2011, respectively.

Hosted Revenue. Hosted services and solutions consist primarily of our proprietary hosted VoIP Unified Communications system as well as other services such as foreign and domestic calling plans, certain UC applications, internet service provisioning, training and other professional services. Additionally, we offer our customers the ability to purchase phone systems from us directly or rent such systems as part of their service agreements. Our hosted services are sold through indirect channel resellers and a direct sales force. Our customers typically enter into 12 month service agreements whereby they are billed for such services on a monthly basis. Revenue from our hosted services is recognized on a monthly basis as services are delivered. Revenue associated with various calling plans and internet services are recognized as such services are provided. Hosted revenues accounted for 23% and 22% of our total revenues for the three and six months ended December 31, 2012, respectively. There was no hosted or related services revenue in the three and six months ended December 31, 2011.

Cost of revenue. Cost of premise product revenue consists primarily of hardware costs, royalties and license fees for third-party software included in our systems, salary and related overhead costs of operations personnel, freight, warranty costs and provision for excess inventory. The majority of these costs vary with the unit volumes of products sold. Cost of premise support and services revenue consists of salary and related overhead costs of personnel engaged in support and service activities. Cost of hosted services revenue consists of personnel and related costs of the hosted operation, data center costs, data communication cost, carrier cost and amortization of intangible assets.

Research and development expenses. Research and development expenses primarily include personnel costs, outside engineering costs, professional services, prototype costs, test equipment, software usage fees and facilities expenses. Research and development expenses are recognized when incurred on a project basis. We capitalize development costs incurred from determination of technological feasibility through general release of the product to customers. We are devoting substantial resources to the development of additional functionality for existing products and the development of new products and related software applications. We intend to continue to make investments in our research and development efforts because we believe they are essential to maintaining and improving our competitive position. Accordingly, we expect research and development expenses to continue to increase in absolute dollars.

Sales and marketing expenses. Sales and marketing expenses primarily include personnel costs, sales commissions, travel, marketing promotional and lead generation programs, branding and advertising, trade shows, sales demonstration equipment, professional services fees, amortization of intangible assets, and facilities expenses.  We plan to continue to invest in development of our distribution channel by increasing the size of our field sales force to enable us to expand into new geographies and further increase our sales to large enterprise customers.  We plan to continue investing in our domestic and international marketing activities to help build brand awareness and create sales leads for our channel partners.  We expect that sales and marketing expenses will increase in absolute dollars and remain our largest operating expense category.

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General and administrative expenses. General and administrative expenses primarily relate to our executive, finance, human resources, legal and information technology organizations. General and administrative expenses primarily consist of personnel costs, professional fees for legal, accounting, tax, compliance and information systems, travel, recruiting expense, software amortization costs, sales and telecom taxes, depreciation expense and facilities expenses. As we expand our business, we expect general and administrative expenses to increase in absolute dollars.

Other income (expense). Other income (expense) primarily consists of interest earned on cash, cash equivalents and short-term investments, gains and losses on foreign currency translations and transactions, interest expense on our debt as well as other miscellaneous items affecting our operating results.

Provision from income taxes. Provision for income taxes includes federal, state and foreign tax on our income as well as any adjustments made to our valuation allowance for deferred tax assets. Since our inception, we have accumulated substantial net operating loss and tax credit carryforwards. We account for income taxes under an asset and liability approach.  Deferred income taxes reflect the impact of temporary differences between assets and liabilities recognized for financial reporting purposes and such amounts recognized for income tax reporting purposes, net operating loss carryforwards and other tax credits measured by applying current enacted tax laws.  Valuation allowances are provided when necessary to reduce deferred tax assets to an amount that is more likely than not to be realized.

Critical Accounting Policies and Estimates

The preparation of our financial statements and related disclosures in conformity with generally accepted accounting principles in the United States of America, or GAAP, requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates and assumptions are based on historical experience and various other factors that we believe are reasonable under the circumstances. We consider our accounting policies related to revenue recognition, stock-based compensation, goodwill and purchased-intangible assets and accounting for income taxes to be critical accounting policies. A number of significant estimates, assumptions, and judgments are inherent in our determination of when to recognize revenue, how to estimate the best evidence of selling price for revenue recognition, the calculation of stock-based compensation expense, evaluation of the potential impairment of goodwill and purchased-intangible assets and the income tax related balances. We base our estimates and judgments on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates. Management believes there have been no significant changes during the six months ended December 31, 2012 to the items that we disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2012 Annual Report on Form 10-K filed with the Securities and Exchange Commission. For a description of those accounting policies, please refer to our 2012 Annual Report on Form 10-K.

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Results of Operations

The following table sets forth unaudited selected condensed consolidated statements of operations data for the three and six months ended December 31, 2012 and 2011 (in thousands, except per share amounts).

	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2012			2011			2012			2011
Revenue:
Product	$	43,769		$	46,277		$	89,603		$	88,461
Hosted and related services		17,087			-			32,749			-
Support and services		13,780			11,735			27,268			23,409
Total revenue		74,636			58,012			149,620			111,870
Cost of revenue:
Product  (1)		15,069			16,103			30,856			30,558
Hosted and related services  (1)		11,400			-			20,542			-
Support and services  (1)		4,279			3,969			8,468			7,884
Total cost of revenue		30,748			20,072			59,866			38,442
Gross profit		43,888			37,940			89,754			73,428
Gross profit %		58.8	%		65.4	%		60.0	%		65.6	%
Operating expenses:
Research and development  (1)		12,195			12,240			26,148			24,053
Sales and marketing  (1)		31,739			21,596			62,495			42,818
General and administrative  (1)		9,292			6,349			17,887			12,978
Total operating expenses		53,226			40,185			106,530			79,849
Loss from operations		(9,338	)		(2,245	)		(16,776	)		(6,421	)
Other income (expense), net		(926	)		(196	)		(1,328	)		(595	)
Loss before provision for tax		(10,264	)		(2,441	)		(18,104	)		(7,016	)
Provision for income tax		90			97			287			164
Net loss	$	(10,354	)	$	(2,538	)	$	(18,391	)	$	(7,180	)
Net loss per share - basic and diluted  (2)	$	(0.18	)	$	(0.05	)	$	(0.32	)	$	(0.15	)
Shares used in computing net loss per share - basic and diluted (2)  (2)		58,566			47,946			58,376			47,666
(1)   Includes stock-based compensation expense as follows:
Cost of product revenue	$	34		$	33		$	84		$	74
Cost of hosted and related service revenue		40			-			78			-
Cost of support and services revenue		239			209			446			408
Research and development		919			911			1,978			1,923
Sales and marketing		1,073			1,053			1,935			2,067
General and administrative		1,194			1,066			2,331			2,050
Total stock-based compensation expense	$	3,499		$	3,272		$	6,852		$	6,522

(2) Potentially dilutive securities were not included in the compilation of diluited net loss per share for the periods which had a net loss because to do so would have been anti-dilutive.

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The following table sets forth selected condensed consolidated statements of operations data as a percentage of total revenue for each of the periods indicated.

	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2012			2011			2012			2011
Revenue:
Product		59	%		80	%		60	%		79	%
Hosted and related services		23	%		-			22	%		-
Support and services		18	%		20	%		18	%		21	%
Total revenue		100	%		100	%		100	%		100	%
Cost of revenue:
Product		20	%		28	%		20	%		27	%
Hosted and related services		15	%		-			14	%		-
Support and services		6	%		7	%		6	%		7	%
Total cost of revenue		41	%		35	%		40	%		34	%
Gross profit		59	%		65	%		60	%		66	%
Operating expenses:
Research and development		16	%		21	%		17	%		22	%
Sales and marketing		43	%		37	%		42	%		38	%
General and administrative		12	%		11	%		12	%		12	%
Total operating expenses		71	%		69	%		71	%		72	%
Loss from operations		(12	%)		(4	%)		(11	%)		(6	%)
Other income (expense), net		(1	%)		-			(1	%)		-
Loss before provision for income tax		(13	%)		(4	%)		(12	%)		(6	%)
Provision for income tax		-			-			-			-
Net loss		(13	%)		(4	%)		(12	%)		(6	%)

Use of Non-GAAP Financial Measures

We believe that evaluating our ongoing operating results may limit the reader’s understanding if limited to reviewing only generally accepted accounting principles (GAAP) financial measures. Many investors and analysts have requested that, in addition to reporting financial information in accordance with GAAP that we also disclose certain non-GAAP information because it is useful in understanding our performance as it excludes non-cash and other non-recurring charges or credits that many investors and management feel may obscure our true operating performance. Likewise, we use these non-GAAP financial measures to manage and assess the profitability of the business and determine a portion of our employee compensation. We do not consider stock-based compensation charges, amortization of purchased intangibles, severance charges, interest charge from change in fair value of contingent consideration and related tax adjustments (non-GAAP adjustments) in managing the core operations. These non-GAAP measures are not based on any standardized methodology prescribed by GAAP and are not necessarily comparable to similar measures presented by other companies. Non-GAAP net income (loss) is calculated by adjusting GAAP net income (loss) for non-GAAP adjustments. Non-GAAP net income (loss) per share is calculated by dividing non-GAAP net income (loss) by the weighted average number of basic and diluted shares outstanding for the period. These measures should not be considered in isolation or as a substitute for measures prepared in accordance with GAAP, and because these amounts are not determined in accordance with GAAP, they should not be used exclusively in evaluating our business and operations. We have provided a reconciliation of non-GAAP financial measures in the following tables:

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RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES

(Amounts in thousands, except per share amounts)

(Unaudited)

	Three Months Ended										Six Months Ended
	December 31, 2012										December 31, 2012
	GAAP			Excludes				Non-GAAP			GAAP			Excludes				Non-GAAP
Revenue:
Product	$	43,769		$	-			$	43,769		$	89,603		$	-			$	89,603
Hosted and related services		17,087			-				17,087			32,749			-				32,749
Support and services		13,780			-				13,780			27,268			-				27,268
Total revenues		74,636			-				74,636			149,620			-				149,620
Cost of revenue
Product		15,069			(294	)	(a),(b)	$	14,775			30,856			(604	)	(a),(b)	$	30,252
Hosted and related services		11,400			(1,716	)	(a),(b),(e)		9,684			20,542			(2,511	)	(a),(b),(c),(e)		18,031
Support and services		4,279			(239	)	(a)		4,040			8,468			(448	)	(a),(c)		8,020
Total cost of revenue		30,748			(2,249	)			28,499			59,866			(3,563	)			56,303
Gross profit		43,888			2,249				46,137			89,754			3,563				93,317
Gross profit %		58.8	%						61.8	%		60.0	%						62.4	%
Operating expenses:
Research and development		12,195			(919	)	(a)	$	11,276			26,148			(2,077	)	(a),(c)	$	24,071
Sales and marketing		31,739			(1,924	)	(a),(b)		29,815			62,495			(3,872	)	(a),(b),(c)		58,623
General and administrative		9,292			(2,180	)	(a),(b),(e)		7,112			17,887			(3,393	)	(a),(b),(c),(e)		14,494
Total operating expenses		53,226			(5,023	)			48,203			106,530			(9,342	)			97,188
Loss from operations		(9,338	)		7,272				(2,066	)		(16,776	)		12,905				(3,871	)
Other income (expense) - net		(926	)		465		(d)		(461	)		(1,328	)		653		(d)		(675	)
Loss before provision for income tax		(10,264	)		7,737				(2,527	)		(18,104	)		13,558				(4,546	)
Provision for income tax		90			(2	)	(f)		88			287			(145	)	(f)		142
Net loss	$	(10,354	)	$	7,739			$	(2,615	)	$	(18,391	)	$	13,703			$	(4,688	)
Net loss per share:
Basic and diluted (g)	$	(0.18	)	$	0.14			$	(0.04	)	$	(0.32	)	$	0.24			$	(0.08	)
Shares used in computing net loss per share:
Basic and diluted (g)		58,566							58,566			58,376							58,376
(a) Excludes stock-based compensation included in:
Cost of product revenue				$	34									$	84
Cost of hosted and related service revenue					40										78
Cost of support and services revenue					239										446
Research and development					919										1,978
Sales and marketing					1,073										1,935
General and administrative					1,194										2,331
				$	3,499									$	6,852
(b) Excludes amortization of acquisition-related intangibles included in:
Cost of product revenue				$	260									$	520
Cost of hosted and related services					749										1,498
Sales and marketing					851										1,702
General and administrative					38										76
				$	1,898									$	3,796
(c) Excludes severance included in:
Cost of hosted and related service revenue				$	-									$	8
Cost of support and services revenue					-										2
Research and development					-										99
Sales and marketing					-										235
General and administrative					-										38
				$	-									$	382
(d) Excludes interest charge from change in fair value of contingent consideration included in:
Other expense				$	465									$	653
(e) Excludes prior quarter charge for change in estimate of sales, use and telecommunications tax recognized in the current quarter:
Cost of hosted and related service revenue				$	927									$	927
General and administrative					948										948
				$	1,875									$	1,875
(f) Excludes the deferred tax benefit arising from acquisition and tax impact of the items which are excluded in (a) to (e) above.
(g) Potentially dilutive securities were not included in the calculation of diluted net loss per share for the periods which had a net loss because to do so would have been anti-dilutive.

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RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES

(Amounts in thousands, except per share amounts)

(Unaudited)

	Three Months Ended										Six Months Ended
	December 31, 2011										December 31, 2011
	GAAP			Excludes				Non-GAAP			GAAP			Excludes				Non-GAAP
Revenue:
Product	$	46,277		$	-			$	46,277		$	88,461		$	-			$	88,461
Support and services		11,735			-				11,735			23,409			-				23,409
Total revenues		58,012			-				58,012			111,870			-				111,870
Cost of revenue
Product		16,103			(218	)	(a), (b)		15,885			30,558			(444	)	(a), (b)		30,114
Support and services		3,969			(209	)	(a)		3,760			7,884			(408	)	(a)		7,476
Total cost of revenue		20,072			(427	)			19,645			38,442			(852	)			37,590
Gross profit		37,940			427				38,367			73,428			852				74,280
Gross profit %		65.4	%						66.1	%		65.6	%						66.4	%
Operating expenses:
Research and development		12,240			(911	)	(a)		11,329			24,053			(1,923	)	(a)		22,130
Sales and marketing		21,596			(1,083	)	(a), (b)		20,513			42,818			(2,127	)	(a), (b)		40,691
General and administrative		6,349			(1,566	)	(a), (c)		4,783			12,978			(2,550	)	(a), (c)		10,428
Total operating expenses		40,185			(3,560	)			36,625			79,849			(6,600	)			73,249
Loss from operations		(2,245	)		3,987				1,742			(6,421	)		7,452				1,031
Other income (expense), net		(196	)		-				(196	)		(595	)		-				(595	)
Loss before provision for income tax		(2,441	)		3,987				1,546			(7,016	)		7,452				436
Provision for income tax		97			12		(d)		109			164			12		(d)		176
Net loss	$	(2,538	)	$	3,975			$	1,437		$	(7,180	)	$	7,440			$	260
Net loss per share:
Basic	$	(0.05	)	$	0.08			$	0.03		$	(0.15	)	$	0.16			$	0.01
Diluted	$	(0.05	)	$	0.08			$	0.03		$	(0.15	)	$	0.16			$	0.01
Shares used in computing net loss per share:
Basic		47,946							47,946			47,666							47,666
Diluted		47,946							49,228			47,666							49,202
(a) Excludes stock-based compensation as follows:
Cost of product revenue				$	33									$	74
Cost of support and services revenue					209										408
Research and development					911										1,923
Sales and marketing					1,053										2,067
General and administrative					1,066										2,050
				$	3,272									$	6,522
(b) Excludes amortization of acquisition-related intangibles:
Cost of product revenue				$	185									$	370
Sales and marketing					30										60
				$	215									$	430
(c) Excludes litigaiton settlement included in:
General and administrative				$	500									$	500
(d) Excludes the tax impact of the items which are excluded in (a) to (c) above.

Comparison of the three months ended December 31, 2012 and December 31, 2011

Revenue.

	Three Months Ended
	December 31,
	2012		2011		Change $		Change %
(in thousands, except percentages)
Revenue	$	74,636	$	58,012	$	16,624		29	%

Total revenue increased by $16.6 million or 29% in the three months ended December 31, 2012 as compared to the three months ended December 31, 2011.  The increase in the overall revenue is due primarily to $17.1 million of additional revenue associated with our hosted business following our acquisition of M5 on March 23, 2012 partially offset by a $0.5 million decline in premise revenue.

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Premise Revenue

Premise product revenue decreased by $2.5 million or 5% in the three months ended December 31, 2012 as compared to the three months ended December 31, 2011, primarily due to lower sales volumes from our larger regional partners. Our international revenue represented 13% of our premise revenue in the three months ended December 31, 2012 as compared to 12% in three months ended December 31, 2011. Premise support and services revenue increased by $2.0 million or 17% in three months ended December 31, 2012 as compared to three months ended December 31, 2011. The increase in support and services revenue was primarily due to additional sales to existing customers resulting in higher post-contractual support revenues as well as the continued expansion of our customer base resulting from sales to new customers.

Hosted Revenue

Hosted and related service revenue contributed $17.1 million of revenue for the three months ended December 31, 2012 as a result of our acquisition of M5 on March 23, 2012. There were no such revenues in the three months ended December 31, 2011

Cost of revenue and gross profit.

	Three Months Ended
	December 31,
	2012			2011			Change $		Change %
(in thousands, except percentages)
Cost of revenue	$	30,748		$	20,072		$	10,676		53	%
Gross profit		43,888			37,940			5,948		16	%
Gross margin		59	%		65	%		n/a		(6	%)

Gross margin decreased to 59% in the three months ended December 31, 2012 as compared to 65% in the three months ended December, 2011. The decrease in the overall gross margins is mostly due to the change in the revenue mix resulting from the addition of the hosted business which has lower margins than our premise-based business.

Premise Gross Margin

Premise product gross margins increased slightly to 66% in three months ended December 31, 2012 as compared to 65% in the three months ended December 31, 2011. Premise support and services gross margins increased to 69% in the three months ended December 31, 2012 as compared to 66% in the three months ended December 31, 2011. This increase was driven by synergies achieved by existing headcount which allowed lower personnel costs to support a larger customer base and generate a higher revenue amount from the same period in the prior year.

Hosted Gross Margin

Hosted and related service gross margin was 33% for the three months ended December 31, 2012. Hosted and related service gross margins for the three months ended December 31, 2012 included $0.9 million in costs related to the change in estimate of regulatory telecommunications fees. There were no related costs in the three months ended December 31, 2011.  As the related hosted business continues to expand and grow, we anticipate that we will realize improvements in our gross margins as we achieve synergies and other cost reductions in our service delivery platform.

Operating expenses.

	Three Months Ended
	December 31,
	2012		2011		Change $			Change %
(in thousands, except percentages)
Research and development	$	12,195	$	12,240	$	(45	)		0	%
Sales and marketing		31,739		21,596		10,143			47	%
General and administration		9,292		6,349		2,943			46	%

Research and development. Research and development expenses remained relatively consistent in both the three months ended December 31, 2012 and 2011, despite growth in our overall business due to synergies achieved by existing headcount which allowed lower personnel costs. Research and development expenses for the three months ended December 31, 2012 would have included a total of $0.7 million in software development costs, mainly personnel related and consulting costs, had they not been capitalized during this period.

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Sales and marketing. Sales and marketing expenses increased by $10.1 million or 47% in the three months ended December 31, 2012 as compared to the three months ended December 31, 2011.  The increase in sales and marketing expenses from the prior period is primarily due to an increase in personnel related costs including, benefits, bonus and commissions of $4.6 million due to an increase in headcount related primarily to the M5 acquisition in March 2012 as well as the expansion of our sales force associated with our premise business, advertising and promotional activities of $2.9 million, amortization expense of $0.8 million related to addition of intangible assets as part of the M5 acquisition on March 23, 2012, consulting and outside services of $0.8 million and increased facilities and office expenses of $0.4 million.

General and administrative. General and administrative expenses increased by $2.9 million or 46% in the three months ended December 31, 2012 as compared to the three months ended December 31, 2011. The increase in general and administrative expenses from the prior period is primarily due to an increase in personnel related costs including benefits and variable compensation of $1.1 million, a $0.7 million charge in the three months ended December 31, 2012 related to the change in estimate of sales, use and telecommunications taxes with no corresponding charge during the three months ended December 31, 2011, an increase in software license fees of $0.3 million, an increase in consulting and outside service fees of $0.3 million, as well as an increase in audit and tax service fees of $0.4 million. These increases are due to the increase in overall expenses to support a growing business including the addition of facilities and headcount resulting from the acquisition of M5 in March 2012.

Other income (expense), net.

	Three Months Ended
	December 31,
	2012			2011			Change $			Change %
(in thousands, except percentages)
Other income (expense), net	$	(926	)	$	(196	)	$	(730	)		372	%

Other income (expense), net. Other expense increased to $0.7 million in the three months ended December 31, 2012 as compared to the three months ended December 31, 2011 as a result of an increase in interest expense of $0.7 million due to additional interest expense associated with our Credit Facility and due to interest expense recognized in connection with contingent purchase consideration liabilities in the three months ended December 31, 2012 as compared to the three months ended December 31, 2011.

Provision for income tax.

	Three Months Ended
	December 31,
	2012		2011		Change $			Change %
(in thousands, except percentages)
Provision for income tax	$	90	$	97	$	(7	)		(7	%)

Provision for income tax. The provision from income taxes remained relatively consistent in both the three months ended December 31, 2012 and 2011.

Comparison of the six months ended December 31, 2012 and December 31, 2011

Revenue.

	Six Months Ended
	December 31,
	2012		2011		Change $		Change %
(in thousands, except percentages)
Revenue	$	149,620	$	111,870	$	37,750		34	%

Total revenue increased by $37.8 million or 34% in the six months ended December 31, 2012 as compared to the six months ended December 31, 2011.  The increase in the overall revenue is due primarily to due to $32.8 million additional revenue associated with our hosted business following our acquisition of M5 on March 23, 2012 and to $5.0 million increase in premise revenue resulting from the continued growth and expansion of our premise solution business as a result of greater market acceptance of our products and services.

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Premise Revenue

Premise product revenue increased by $1.1 million or 1% in the six months ended December 31, 2012 as compared to the six months ended December 31, 2011, primarily due to slightly higher sales volumes. Our international revenue represented 13% of our premise revenue in the six months ended December 31, 2012 as compared to 12% in six months ended December 31, 2011. Premise support and services revenue increased by $3.9 million or 16% in six months ended December 31, 2012 as compared to six months ended December 31, 2011. The increase in support and services revenue was primarily due to additional sales to the existing customers resulting in higher post-contractual support revenues as well as the growth in sales to new customers.

Hosted Revenue

Hosted and related service revenue contributed $32.8 million of revenue for the six months ended December 31, 2012 as a result of our acquisition of M5 during March 2012. There were no such revenues in the six months ended December 31, 2011.

Cost of revenue and gross profit.

	Six Months Ended
	December 31,
	2012			2011			Change $		Change %
(in thousands, except percentages)
Cost of revenue	$	59,866		$	38,442		$	21,424		56	%
Gross profit		89,754			73,428			16,326		22	%
Gross margin		60	%		66	%		n/a		(6	%)

Gross margin decreased to 60% in the six months ended December 31, 2012 as compared to 66% in the six months ended December, 2011. The decrease in the overall gross margins is mostly due to the change in the revenue mix resulting from the addition of the hosted business which has lower margins than our premise-based business.

Premise Gross Margin

Premise product gross margins remained consistent during the period at 66% for both the six months ended December 31, 2012 and 2011. Premise support and services gross margins increased to 69% in the six months ended December 31, 2012 as compared to 66% in the six months ended December 31, 2011. This increase was driven by synergies achieved by existing headcount which allowed lower personnel costs to support a larger customer base and generate a higher revenue amount from the same period in the prior year.

Hosted Gross Margin

Hosted and related service gross margins were 37% for the six months ended December 31, 2012. Hosted and related service gross margins for the six months ended December 31, 2012 included $0.9 million in costs related to the change in estimate of regulatory telecommunications fees. There were no related costs in the six months ended December 31, 2011.

Operating expenses.

	Six Months Ended
	December 31,
	2012		2011		Change $		Change %
(in thousands, except percentages)
Research and development	$	26,148	$	24,053	$	2,095		9	%
Sales and marketing		62,495		42,818		19,677		46	%
General and administration		17,887		12,978		4,909		38	%

Research and development. Research and development expenses increased by $2.1 million or 9% in the six months ended December 31, 2012 as compared to the six months ended December 31, 2011.  The increase in research and development expenses from the prior period is primarily due to higher personnel costs, including benefits and bonus of $2.1 million due to an increase in headcount primarily attributable to the M5 acquisition on March 23, 2012. Research and development expenses for the six months ended December 31, 2012 would have included a total of $1.2 million in software development costs, mainly personnel related and consulting costs, had they not have been capitalized during this period.

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Sales and marketing. Sales and marketing expenses increased by $19.7 million or 46% in the six months ended December 31, 2012 as compared to the six months ended December 31, 2011.  The increase in sales and marketing expenses from the prior period is primarily due to an increase in personnel related costs including, benefits, bonus and commissions of $10.1 million due to an increase in headcount related to the M5 acquisition in March 2012 as well as the expansion of our sales force associated with our premise business, advertising and promotional activities of $4.8 million, amortization expense of $1.6 million related to addition of intangible assets as part of the M5 acquisition in March 2012, consulting and outside services of $1.2 million and increased facilities and office expenses of $0.6 million.

General and administrative. General and administrative expenses increased by $4.9 million or 38% in the six months ended December 31, 2012 as compared to the six months ended December 31, 2011. The increase in general and administrative expenses from the prior period is primarily due to an increase in personnel related costs including benefits and bonus of $2.6 million, an increase in audit and tax service fees of $0.8 million, a $0.7 million charge in the six months ended December 31, 2012 related to the change in estimate of sales, use and telecommunications taxes with no corresponding charge during the six months ended December 31, 2011 and an increase in software license fees of $0.5 million. These increases are due to the increase in overall expenses to support a growing business including the addition of facilities and headcount resulting from the acquisition of M5 in March 2012.

Other income (expense), net.

	Six Months Ended
	December 31,
	2012			2011			Change $			Change %
(in thousands, except percentages)
Other income (expense), net	$	(1,328	)	$	(595	)	$	(733	)		123	%

Other income (expense), net. Other expense increased by $0.7 million in the six months ended December 31, 2012 as compared to the six months ended December 31, 2011 as a result of an increase in interest expense of $1.0 million due to interest expense associated with our Credit Facility and due to interest expense recognized in connection with contingent purchase consideration liabilities in the six months ended December 31, 2012 as compared to the six months ended December 31, 2011, offset by a decrease in foreign exchange loss of $0.4 million due to a more moderate strengthening of the U.S. dollar against foreign currencies.

Provision for income tax.

	Six Months Ended
	December 31,
	2012		2011		Change $		Change %
(in thousands, except percentages)
Provision for income tax	$	287	$	164	$	123		75	%

Provision for income tax. The provision for income taxes increased by $0.1 million in the six months ended December 31, 2012 as compared to the six months ended December 31, 2011. This increase in the income tax provision for the six months ended December 31, 2012 compared to the six months ended December 31, 2011 is due to a $0.1 million increase in the valuation allowance recorded against deferred tax assets established upon the acquisition of M5 during the six months ended December 31, 2012.

 Liquidity and Capital Resources

Balance Sheet and Cash Flows

The following table summarizes our cash, cash equivalents and short-term investments (in thousands):

	December 31,		June 30,		Increase/
	2012		2012		(Decrease)
Cash and cash equivalents	$	43,839	$	37,120	$	6,719
Short-term investments		8,217		18,375		(10,158	)
Total	$	52,056	$	55,495	$	(3,439	)

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As of December 31, 2012, our principal sources of liquidity consisted of cash and cash equivalents and short-term investments of $52.1 million, accounts receivable of $31.8 million and the balance of $29.0 million available for borrowing under our Credit Facility.

On March 15, 2012, we entered into a secured credit agreement (the “Credit Facility”) with Silicon Valley Bank to finance a portion of the M5 acquisition including paying related fees and expenses and for general corporate purposes. The Credit Facility includes a revolving loan facility for an aggregate principal amount not exceeding $50 million. The Credit Facility matures on the fifth anniversary of its closing (March 15, 2017) and is payable in full upon maturity. The amounts borrowed and repaid under the Credit facility are available for future borrowings. The borrowings under the Credit Facility will accrue interest either (at our election) at (i) the London interbank offered rate then in effect, plus a margin of between 2.00% and 2.50%, which will be based on the our Consolidated EBITDA (as defined in the Credit Agreement), or (ii) the higher of (a) SVB’s publicly-announced prime rate then in effect and (b) the federal funds rate plus 0.50%, in each case of (a) or (b), plus a margin of between 0.00% and 0.50%, which will be based upon our Consolidated EBITDA.  We also pay an annual commitment fee during the term of the Credit Agreement which varies depending on our Consolidated EBITDA. The Credit Facility is secured by substantially all of our assets. For the three and six months ended December 31, 2012, the Company paid interest at an approximate rate of 2.5%. The amount payable under the Credit Facility was $20.3 million as of December 31, 2012.

Historically, our principal uses of cash have consisted of the purchase of finished goods inventory from our contract manufacturers, payroll and other operating expenses related to the development and marketing of our new products, purchases of property and equipment and acquisitions.

Our future capital requirements will depend on many factors, including our rate of revenue growth, the expansion of our sales and marketing activities, the addition of new business initiatives, the timing and extent of our expansion into new territories, the timing of introductions of new products and enhancements to existing products, the continuing market acceptance of our products and acquisition and licensing activities. We may enter into agreements relating to potential investments in, or acquisitions of, complementary businesses or technologies in the future, which could also require us to seek additional equity or debt financing. If needed, additional funds may not be available on terms favorable to us or at all. We believe that the available amounts under the line of credit together with our cash flows from our operations will be sufficient to fund our operating requirements for at least the next twelve months.

The following table shows our cash flows from operating activities, investing activities and financing activities for the stated periods (in thousands):

	Six Months Ended
	December 31
	2012			2011
Cash provided by operating activities	$	4,250		$	10,187
Cash provided by (used in) investing activities		2,822			(7,466	)
Cash provided by (used in) financing activities		(353	)		2,075
Net increase in cash and cash equivalents	$	6,719		$	4,796

Cash flows from operating activities

Our cash flows from operating activities are significantly influenced by our cash expenditures to support the growth of our business in all areas of operating expense. Our operating cash flows are also influenced by our working capital needs to support growth and fluctuations in inventory, accounts receivable, vendor accounts payable and other current assets and liabilities. We procure finished goods inventory from our contract manufacturers and typically pay them in 30 days. We extend credit to our channel partners and value added distributors on collection terms of 30 to 60 days. In some cases we also prepay for license rights to third-party products in advance of sales.

Net loss during the six months ended December 31, 2012 and 2011 included non-cash charges of $6.9 million and $6.5 million in stock-based compensation expense, respectively, and depreciation and amortization of $7.6 million and $3.3 million, respectively. Net loss during the six months ended December 31, 2012 also included a non-cash charge of $0.7 million in interest expense recognized related to acquisition-related consideration. No such charges were included in the net loss for the six months ended December 31, 2011.

Cash provided by operating activities during the six months ended December 31, 2012 also reflects net changes in operating assets and liabilities, which provided $7.4 million of cash consisting primarily of a decrease in accounts receivable of $2.4 million due to improved collections coupled with lower revenue, increase in deferred revenue of $2.4 million due to higher support contracts and increased billings through our value-added distributors, an increase in accrued taxes and surcharges of $3.2 million due to a change in estimate of sales, use and telecommunication taxes, an increase in accounts payable of $2.2 million, an increase in accrued employee compensation of $0.9 million and a decrease in other assets of $0.2 million. These cash inflows were offset by an increase in indemnification asset of $0.4 million, an increase in prepaid expenses and other current assets of $0.2 million, an increase in inventory of $0.2 million and a decrease in accrued and other liabilities of $3.0 million.

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Cash provided by operating activities during the six months ended December 31, 2011 also reflects net changes in operating assets and liabilities, which provided $7.4 million of cash consisting primarily of a decrease in accounts receivable of $2.9 million due to a decrease in the days sales outstanding, increase in deferred revenue of $7.5 million due to higher support contracts and increased volume through our two-tier value-added distributors, increase in accounts payable of $1.5 million and increase in accrued liabilities and other of $1.8 million. These cash inflows were offset by increases in inventory of $3.5 million, and prepaid expenses and other current assets of $1.0 million and decrease in accrued employee compensation of $1.5 million.

Cash flows from investing activities

We have classified our investment portfolio as “available for sale,” and our investments are made with a policy of capital preservation and liquidity as the primary objectives. We may hold investments to maturity; however, we may sell an investment at any time if the quality rating of the investment declines, the yield on the investment is no longer attractive or we are in need of cash.

Net cash provided by investing activities was $2.8 million during the six months ended December 31, 2012 primarily related to maturities of short-term investments of $14.4 million offset by the purchase of short-term investments of $4.3 million, purchases of property and equipment of $5.7 million and purchases of patents, technology and internally developed software of $1.6 million.

Net cash used in investing activities was $7.5 million during the six months ended December 31, 2011. Net cash used in investing activities in the six months ended December 31, 2011 mainly related to the purchase of short-term investments of $24.9 million, purchase of property, plant and equipment of $1.4 million and purchase of patents of $0.6 million. These cash outflows were offset by maturities of short-term investments of $19.4 million.

Cash flows from financing activities

Net cash used in financing activities was $0.4 million for the six months ended December 31, 2012. In the six months ended December, 2012, we received proceeds of $1.0 million from the issuance of common stock under various employee benefit plans, offset by $0.7 million paid for employee tax obligations on the vesting of restricted stock units and $0.6 million in payments in relation to our capital leases. Net cash provided by financing activities was $2.1 million for the six months ended December 31, 2011. In the six months ended December 31, 2011 we received $2.5 million from the exercise of stock options and issuance of common stock under our employee stock purchase plan, and paid $0.4 million associated with employee tax obligations on the vesting of restricted stock units which had been settled on a “net basis” to compensated for the payment of such obligations.

Off-Balance Sheet Arrangements

We do not have any material off-balance sheet arrangements (other than those disclosed below within Contractual obligations and commitments section) nor do we have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.

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Contractual obligations and commitments

The following table summarizes our contractual obligations as of December 31, 2012 and the effect that such obligations are expected to have on our liquidity and cash flows in future periods:

	Payments Due by Period
	Total		Less Than		1-3 Years		3-5 Years		Thereafter
(In thousands)			1 Year
Operating lease obligations	$	18,215	$	3,407	$	5,417	$	5,161	$	4,230
Capital lease obligations		2,242		1,345		897		-		-
Line of credit		20,332		-		-		20,332		-
Non-cancellable purchase commitments (inventory and software licenses)		28,233		27,920		313		-		-
Outstanding letters of credit		635		635		-		-		-
Total	$	69,657	$	33,307	$	6,627	$	25,493	$	4,230

The purchase consideration for our acquisition of M5 included a contingent portion ranging from zero to $13.7 million and is subject to the achievement of certain revenue targets. As these revenue targets were met in full as of December 31, 2012, we will pay the $13.7 million in cash over the next two years to the former shareholders of M5. See Note 3 to the Condensed Consolidated Financial Statements for additional information on the acquisition of M5.

ITEM  3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In the normal course of our business, we are exposed to foreign currency exchange rate risk inherent in conducting business globally in foreign currencies. We are primarily exposed to foreign currency fluctuations related to collections from accounts receivable balances and cash in banks that are denominated in Australian dollar, British pound and the Euro. We use relatively short-term foreign currency forward contractsto minimize the risk associated with the foreign exchange effects of the losses and gains of the related foreign currency denominated exposures. We recognize the gains and losses on foreign currency forward contracts in the same period as the losses and gains of the related foreign currency denominated exposures. The gains and losses on foreign exchange contracts mitigate the effect of currency movements on our cash and accounts receivable balances. As of December 31, 2012, a 10% change in the applicable foreign exchange rates would result in an increase or decrease in our pretax earnings of approximately $1.0 million.

We do not have any material changes in the market risk and the interest rate risk disclosure included in the “Quantitative and Qualitative Disclosures About Market Risk” in Item 7A of Part II of our Annual Report on Form 10-K, for the fiscal year ended June 30, 2012.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures were effective.

Internal Control Over Financial Reporting. There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II: OTHER INFORMATION

ITEM  1. LEGAL PROCEEDINGS

See Note 13 to the Financial Statements.

ITEM  1A. RISK FACTORS

Except as set forth below, there were no material changes in our risk factors as described in “Part I, Item 1A. Risk Factors” of our Annual Report on Form 10-K, for the fiscal year ended June 30, 2012.  We updated the following risk factor to read in its entirety as follows:

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 principal offices and our disaster recovery site are located in California near known earthquake fault zones and, therefore, are vulnerable to damage from earthquakes. Our primary data centers for our ShoreTel Sky services are located in New York, which can experience natural disasters such as the recent superstorm.  We are also vulnerable to damage from other types of disasters, such as power loss, fire, floods and similar events. If any disaster were to occur, our ability to operate our business could be seriously impaired. For example, as a result of the recent superstorm Sandy that affected the east coast, our New York data centers experienced outages for a period of time.  This outage could have an adverse effect on our brand and ultimately our results of operations.  In addition, we may not have adequate insurance to cover our losses resulting from disasters or other similar significant business interruptions. Any significant losses that are not recoverable under our insurance policies could seriously impair our business and financial condition.

 Any failure in our physical infrastructure for our ShoreTel Sky services could lead to significant costs and disruptions and could reduce our revenue, inhibit our ability to obtain future orders, harm our business reputation and have a material adverse effect on our financial results.

The physical infrastructure network for our ShoreTel Sky services is operating by external companies on data centers. The network and data centers are subject to various points of failure. Problems with cooling equipment, generators, uninterruptible power supply, routers, switches, or other equipment, whether or not within our control, could result in service interruptions for our customers as well as equipment damage. Because our services do not require geographic proximity of our data centers to our customers, our infrastructure is consolidated into a few large facilities in New York and Illinois. Any failure or downtime in one of our leased data center facilities could affect a significant percentage of our customers. The total destruction or severe impairment of any of our leased data center facilities could result in significant downtime of our services and the loss of customer data. Because our ability to attract and retain customers depends on our ability to provide customers with highly reliable service, even minor interruptions in our service could harm our reputation. Additionally, in connection with the expansion or consolidation of our existing leased data center facilities from time to time, there is an increased risk that service interruptions may occur as a result of server relocation or other unforeseen construction-related issues.

We have experienced interruptions in service in the past, including as a result of the recent superstorm Sandy in October 2012. While we have not experienced a material increase in customer attrition following these past events, the harm to our reputation is difficult to assess. We have taken and continue to take steps to improve our infrastructure to prevent service interruptions, including upgrading our electrical and mechanical infrastructure and expanding the redundancy capabilities of our data centers. However, service interruptions continue to be a significant risk for us and could materially impact our business.

Any future service interruptions could:

● cause our customers to seek damages for losses incurred;

● require us to replace existing equipment or add redundant facilities;

● affect our reputation as a reliable provider of hosting services;

● cause existing customers to cancel or elect to not renew their contracts; or

● make it more difficult for us to attract new customers.

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Any of these events could materially increase our expenses or reduce our revenue, which would have a material adverse effect on our operating results.

ITEM  2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Unregistered Sales of Equity Securities

None.

ITEM  3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM  4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM  5. OTHER INFORMATION

Not applicable.

ITEM  6. EXHIBITS

See Index to Exhibits following the signature page to this Form 10-Q, which is incorporated by reference herein.

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SIGNATURES

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

Date: February 8, 2013

ShoreTel, Inc.
By:	/s/    MICHAEL E. HEALY
	Michael E. Healy
	Chief Financial Officer

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EXHIBIT INDEX

Exhibit Number	Exhibit Title
10.1	Amendment Letter to $50,000,000 Senior Secured Credit Facilities Credit Agreement dated as of March 15, 2012 among the Company, the lenders named therein and Silicon Valley Bank
31.1(1)	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
31.2(1)	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32.1(1)	Section 1350 Certification of Chief Executive Officer.
32.2(1)	Section 1350 Certification of Chief Financial Officer.

101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

(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.

39

EX-10.1

Exhibit 10.1

November 12, 2012

ShoreTel, Inc.

960 Stewart Drive

Sunnyvale, CA 94085

Attn:  Michael Healy, CFO

Re: (i) Credit Agreement, dated as of March 15, 2012, among ShoreTel, Inc., a Delaware corporation (the “Borrower”), the “Lenders” party thereto (each a “Lender” and, collectively, the “Lenders”), and Silicon Valley Bank, a California corporation, as administrative agent and collateral agent for the Lenders (in such capacity, the “Administrative Agent”) (the “Credit Agreement” the terms defined therein and not otherwise defined herein being used herein as therein defined), (ii) the consent and waiver letter agreement, dated as of April 13, 2012, among the Borrower, the sole Lender and the Administrative Agent (the “First Waiver”), (iii) the consent and waiver letter agreement, dated as of May 15, 2012, among the Borrower, the sole Lender and the Administrative Agent (the “Second Waiver”), (iii) the consent and waiver letter agreement, dated as of June 15, 2012, among the Borrower, the sole Lender and the Administrative Agent (the “Third Waiver”), and (iv) the consent and waiver letter agreement, dated as of July 31, 2012, among the Borrower, the sole Lender and the Administrative Agent (the “Fourth Waiver”).

Dear Mr. Healy:

The Borrower has informed the Administrative Agent that certain of the documents, agreements, certificates and other items required to be delivered by or on behalf of the Borrower and/or the Acquired Business on a post-closing basis pursuant to Section 4.3 of the Credit Agreement will not be delivered on or prior to the respective delivery due dates specified therefor in such Section 4.3 of the Credit Agreement (as modified by the terms of the First Waiver, the Second Waiver, the Third Waiver and the Fourth Waiver).  In addition, the Borrower has proposed to the Administrative Agent and the Lenders that certain provisions of the Credit Agreement be amended as contemplated herein and the Borrower and the Acquired Business have proposed that certain provisions of the Guarantee and Collateral Agreement be amended as contemplated herein.  As a result of the foregoing, (a) the Borrower has requested that the Administrative Agent and the Required Lenders (i) extend the respective dates by which such post-closing deliverables are required to be delivered under such Section 4.3 of the Credit Agreement (as modified by the terms of the First Waiver, the Second Waiver, the Third Waiver and the Fourth Waiver), and (ii) waive any Defaults and Events of Default that may otherwise have arisen under the Credit Agreement solely as a result of the failure by the Borrower and/or the Acquired Business, as applicable, to have delivered such post-closing deliverables by the respective dates specified therefor in Section 4.3 of the Credit Agreement (as modified by the terms of the First Waiver, the Second Waiver, the Third Waiver and the Fourth Waiver), and (b) the Borrower and the Acquired Business have requested that the Administrative Agent and the Required Lenders agree to amend the Credit Agreement and the Guarantee and Collateral Agreement as contemplated herein.  The Administrative Agent and the Required Lenders have agreed to grant such consents and waivers and to make such amendments to the Credit Agreement and the Guarantee and Collateral Agreement, in each case subject to the terms and conditions hereof.

1

1.             Consents.  Notwithstanding anything to the contrary set forth in the Credit Agreement or the other Loan Documents (including the First Waiver, the Second Waiver, the Third Waiver, the Fourth Waiver and Sections 4.3 and 5.11 of the Credit Agreement), and subject to the satisfaction of the conditions to effectiveness specified in Section 6 hereof, each of the Administrative Agent and each of the Required Lenders named in the signature pages hereto hereby consents to:

(a)           subject to Section 5.7 of the Guaranty and Collateral Agreement (after giving effect to the amendment of such Section contemplated herein), the disposition of the requirement set forth in Sections 4.3 and 5.11 of the Credit Agreement and Sections 3.3(e), 5.3(a) and 5.7 of the Guarantee and Collateral Agreement that the Borrower and the Acquired Business cause the delivery to the Administrative Agent of Deposit Account Control Agreements and/or Securities Account Control Agreements, as applicable, in respect of the Deposit Accounts and Securities Accounts of the Acquired Business listed in Schedule 1 hereto;

(b)           the delivery by or on behalf of the Borrower to the Administrative Agent of the stock certificates and stock powers evidencing the Pledged Stock in (i) ShoreTel Australia Pty Ltd, (ii) 8058644 Canada Inc., and (iii) ShoreTel Singapore PTE Ltd, in each case, by no later than November 30, 2012; and

(c)           the delivery by or on behalf of the Acquired Business (in its capacity as a Guarantor) to the Administrative Agent of any landlord access agreements required to be delivered pursuant to Sections 4.3 and 5.11 of the Credit Agreement or pursuant to the terms of the Guarantee and Collateral Agreement, in each case by no later than November 30, 2012.

2.             Waivers.  The Administrative Agent and the Required Lenders hereby waive any Default or Event of Default that may have arisen under Sections 7.1(c) or (d) of the Credit Agreement solely as a result of the failure by the Borrower and/or the Acquired Business, as applicable, to have delivered any of the any of the post-closing deliverables  specified in Section 1 hereof by the respective due dates specified therefor in Section 4.3 of the Credit Agreement (as modified by the terms of the First Waiver, the Second Waiver, the Third Waiver and the Fourth Waiver).

3.             Amendments to the Credit Agreement.  With effect from and after the Effective Date, the Credit Agreement shall be amended as follows:

(a)           Section 6.1(b) of the Credit Agreement shall be amended and restated to read in its entirety as follows:

(b)           Minimum Liquidity.  Permit Liquidity, measured as of the last day of any month, to be less than the sum of (i) $30,000,000, and (ii) up to $20,000,000 of the difference, if any, between the aggregate principal amount of Revolving Loans outstanding on such day and $30,000,000.

(b)           Section 6.1(c) of the Credit Agreement shall be amended and restated to read in its entirety as follows:

(c)           Minimum Consolidated EBITDA.  Permit Consolidated EBITDA, measured as of the last day of each fiscal quarter of the Borrower specified below and with reference to the four consecutive fiscal quarter period then ended, to be less than the amount indicated below for such period:

2

Four Fiscal Quarter Period Ending	Minimum Consolidated EBITDA
March 31, 2012	$	1
June 30, 2012	$	1,000,000
September 30, 2012	$	(1,500,000	)
December 31, 2012	$	(1,500,000	)
March 31, 2013	$	(1,000,000	)
June 30, 2013	$	1
September 30, 2013	$	1
December 31, 2013	$	1,000,000
March 31, 2014	$	1,500,000
June 30, 2014 and thereafter	$	2,000,000

(c)           Exhibit B to the Credit Agreement (Form of Compliance Certificate) shall be amended and restated to read in its entirety as set forth in Exhibit B hereto.

4.             Amendment to the Guarantee and Collateral Agreement.  With effect from and after the Effective Date, Section 5.7 of the Guarantee and Collateral Agreement shall be amended by adding the following as new subsection (d) to the end of such Section 5.7:

(d)           Notwithstanding anything to the contrary set forth in any Loan Document (including Sections 4.3 and 5.11 of the Credit Agreement and Sections 3.3(e), 5.3(a) and 5.7(a) through (c) hereof), the Acquired Business shall not be required to cause the execution and delivery to the Administrative Agent of any Deposit Account Control Agreements or Securities Account Control Agreements, as applicable, with respect to any of the following Deposit Accounts and Securities Account of the Acquired Business:  (i) Square 1 Bank Deposit Account No. 103125, (ii) Sovereign Bank Deposit Account No. 7581014991, (iii) Square 1 Bank Money Market Account No. 237065, (iv) Square 1 Bank Money Market Account No. 100083, (v) Square 1 Bank Money Market Collateral Account No. 65794, (vi) Sovereign Bank Money Market Account No. 5460, and (vii) Sovereign Bank Money Market Account No. 300; provided that the aggregate amount of all cash and Investment Property maintained at any time in all such Deposit Accounts and Securities Accounts which are not subject to Control Agreements in favor of the Administrative Agent shall not exceed $2,000,000 at such time.

5.             Representations and Warranties.  In order to induce the Administrative Agent and the Required Lenders to provide the consents and waivers specified in Sections 1 and 2 hereof and the amendments specified in Sections 3 and 4 hereof, each of the Borrower and the Acquired Business represents and warrants to the Administrative Agent and the Required Lenders that:

(a)           no Event of Default exists immediately before and that no Default or Event of Default exists immediately after giving effect to the waivers contemplated in Section 2 above and to the amendments contemplated by Sections 3 and 4 hereof;

(b)           the execution, delivery and performance by such Person of this letter agreement have been duly authorized by all necessary corporate, limited liability company or other action on the part of such Person and do not and will not require any registration with, consent or approval of, or notice to or action by, any Person (including any Governmental Authority) in order to be effective and enforceable;

3

(c)           this letter agreement and the other Loan Documents to which such Person is party constitute the legal, valid and binding obligations of such Person, and are enforceable against such Person in accordance with their respective terms, without defense, counterclaim or offset; and

(d)           each of the representations and warranties made by such Person in or pursuant to any Loan Document (i) that is qualified by materiality shall be true and correct, and (ii) that is not qualified by materiality, shall be true and correct in all material respects, in each case, on and as of the date hereof, as if made on and as of such date, except to the extent any such representation and warranty expressly relates to an earlier date, in which case such representation and warranty shall have been true and correct in all material respects as of such earlier date.

6.             Conditions to Effectiveness.  This letter agreement shall become effective as of the date upon which each of the following conditions precedent is satisfied (such date, the “Effective Date”):

(a)           the Administrative Agent shall have received from each of the Borrower and the Acquired Business a duly executed original (or, if elected by the Administrative Agent, an executed facsimile or PDF followed promptly by an executed original) counterpart of this letter agreement;

(b)           the Administrative Agent shall have received from the Acquired Business (in its capacity as a Guarantor) a duly executed original (or, if elected by the Administrative Agent, an executed facsimile or PDF followed promptly by an executed original) signature page to the Guarantor Acknowledgment and Consent attached hereto as Exhibit A;

(c)           the Administrative Agent shall have received from the Borrower an amendment fee in the amount of $5,000; and

(d)           the Borrower shall have paid, in accordance with Section 9.5 of the Credit Agreement, all costs and expenses of counsel to the Administrative Agent to the extent invoiced to the Borrower prior to the Effective Date.

7.             Reservation.  Each of the Borrower and the Acquired Business acknowledges and agrees that neither the execution nor the delivery by the Administrative Agent and the Required Lenders of this letter agreement shall (a) be deemed to create a course of dealing or otherwise obligate the Administrative Agent or such Required Lenders to grant similar consents, waivers or amendments under the same or similar circumstances in the future, or (b) be deemed to create an implied waiver of any right or remedy of the Administrative Agent or such Required Lenders with respect to any term or provision of any Loan Document (including any term or provision relating to the occurrence of a Material Adverse Effect).

8.             Governing Law.  THIS LETTER AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES UNDER THIS LETTER AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA.  This letter agreement is subject to the provisions of Section 9.14 of the Credit Agreement relating to submission to jurisdiction, jury trial waiver and judicial reference, which provisions are by this reference incorporated herein, mutatis mutandis, as if set forth herein in full.

9.             Successors and Assigns.  This letter agreement shall be binding upon and inure to the benefit of the parties hereto and to the benefit of their respective successors and assigns.  No third party beneficiaries are intended in connection with this letter agreement.

4

10.           Entire Agreement; Amendments.  This letter agreement, together with the Credit Agreement and the other Loan Documents, contains the entire and exclusive agreement of the parties hereto with reference to the matters discussed herein and therein.  This letter agreement supersedes all prior drafts and communications with respect hereto and may not be amended except in accordance with the provisions of Section 9.1 of the Credit Agreement.

11.           Severability.  If any term or provision of this letter agreement shall be deemed prohibited by or invalid under any applicable law, such provision shall be invalidated without affecting the remaining provisions of this letter agreement, respectively.

12.           Reimbursement of Costs and Expenses.  The Borrower covenants to pay or reimburse the Administrative Agent, upon demand, for all reasonable and documented costs and expenses (including the allocated costs of in-house counsel) incurred by the Administrative Agent in connection with the development, preparation, negotiation, execution and delivery of this letter agreement.

13.           Counterparts.  This letter agreement may be executed in any number of counterparts, each of which shall be deemed an original, but all such counterparts together shall constitute but one agreement.

14.           Loan Document.  This letter agreement shall constitute a Loan Document.

Please indicate your acknowledgement of and agreement with the terms and provisions set forth in this letter agreement by countersigning and returning four originally-executed counterpart signature pages hereto, and four originally-executed signature pages to the Guarantor Acknowledgment and Consent attached hereto as Exhibit A, to the attention of Lance Peterson at the following address:

Lance Peterson

Morrison & Foerster LLP

425 Market Street, 32nd Floor

San Francisco, CA 94105

Very truly yours,

SILICON VALLEY BANK,

as Administrative Agent

By:

Name:

Title: 

SILICON VALLEY BANK,

as a Lender

By:

Name:

Title: 

5

ACKNOWLEDGED AND AGREED:
SHORETEL, INC.,
as the Borrower
By:
Name:	Mike Healy
Title:	Senior VP of Finance & CFO

M5 NETWORKS, LLC,
as the Acquired Business
By:
Name:	Mike Healy
Title:	Senior VP of Finance & CFO

6

SCHEDULE 1

SPECIFIED DEPOSIT ACCOUNTS AND SECURITIES ACCOUNTS OF

THE ACQUIRED BUSINESS

DEPOSIT ACCOUNTS:

Square 1 Bank Deposit Account No. 103125

Sovereign Bank Deposit Account No. 7581014991

SECURITIES ACCOUNTS:

Square 1 Bank Money Market Account No. 237065

Square 1 Bank Money Market Account No. 100083

Square 1 Bank Money Market Collateral Account No. 65794

Sovereign Bank Money Market Account No. 5460

Sovereign Bank Money Market Account No. 300

Schedule 1

EXHIBIT A

GUARANTOR ACKNOWLEDGEMENT AND CONSENT

The undersigned, a Guarantor with respect to the Obligations of the Borrower to the Administrative Agent and the Lenders under the terms of the Loan Documents, hereby:

(a)           acknowledges and consents to the execution, delivery and performance by the Borrower of the foregoing letter agreement (the “Consent, Waiver and Amendment Letter”);

(b)           represents and warrants that (i) no default exists under the Guarantee and Collateral Agreement or any other Loan Document to which the undersigned is a party, and (ii) the execution and delivery by it of this Guarantor Acknowledgement and Consent (A) are within its limited liability company power, (B) have been duly authorized by all necessary limited liability company action, and (C) do not require the consent, approval or authorization of any Person which has not been previously obtained; and

(c)           reaffirms and agrees that the Guarantee and Collateral Agreement as to which the undersigned is party, and all other Loan Documents and agreements executed and delivered by the undersigned to the Administrative Agent and/or the Lenders in connection with the Guarantee and Collateral Agreement, are in full force and effect without defense, offset or counterclaim and will so continue.

All capitalized terms used but not otherwise defined herein shall have the respective meanings assigned to such terms in the Credit Agreement (as defined in the Consent, Waiver and Amendment Letter).

This Guarantor Acknowledgement and Consent shall constitute a Loan Document under the Credit Agreement.

M5 NETWORKS, LLC
By:
Name:	Mike Healy
Title:	Senior VP of Finance & CFO

Exhibit A

EXHIBIT B

AMENDED AND RESTATED EXHIBIT B TO CREDIT AGREEMENT

(FORM OF COMPLIANCE CERTIFICATE)

EXHIBIT B

FORM OF COMPLIANCE CERTIFICATE

SHORETEL, INC.

Date:   November 12, 2012 for Period Ending September 30, 2012

This Compliance Certificate is delivered pursuant to Section [5.2(b)(ii)][5.2(g)(ii)(F)] of that certain Credit Agreement, dated as of March 15, 2012, among ShoreTel, Inc., a Delaware corporation (the “Borrower”), the Lenders party thereto, and Silicon Valley Bank, as Administrative Agent (as amended, restated, amended and restated, supplemented, restructured or otherwise modified from time to time, the “Credit Agreement”).  Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement.

1.      I am the duly elected, qualified and acting [Insert title of applicable Responsible Officer] of the Borrower.

2.      I have reviewed and am familiar with the contents of this Compliance Certificate.

3.      I have reviewed the terms of the Credit Agreement and the other Loan Documents and have made, or caused to be made under my supervision, a review in reasonable detail of the transactions and condition of the Borrower and its Subsidiaries during the accounting period covered by the financial statements attached hereto as Attachment 1 (the “Financial Statements”).  Such review did not disclose the existence during or at the end of the accounting period covered by the Financial Statements, and I have no knowledge of the existence as of the date of this Compliance Certificate, of any condition or event which constitutes a Default or an Event of Default.

4.      [Attached hereto as Attachment 2 are the computations showing compliance with the covenants set forth in Section 6.1 of the Credit Agreement.]. See Excel file “Borrowing Base Certificate Testing – 9.30.12.xlsx” that was electronically transmitted to Silicon Valley Bank at 6:02pm on November 8, 2012.

5.      [To the extent not previously disclosed to the Administrative Agent, a description of any change in the jurisdiction of organization of any Loan Party.] No change reported.

6.      [To the extent not previously disclosed to the Administrative Agent, a list of any material patents, registered trademarks or registered copyrights issued to or acquired by any Loan Party since [the Closing Date][the date of the most recent report delivered].]

[Remainder of page intentionally left blank; signature page follows]

Exhibit B

IN WITNESS WHEREOF, I have executed this Compliance Certificate as of the date first written above.

SHORETEL, INC.
By:
Name:	Mike Healy
Title:	Senior VP of Finance & CFO

Exhibit B

Attachment 1

to Compliance Certificate

[Attach Financial Statements]

Exhibit B

Attachment 2

to Compliance Certificate

The information described herein is as of September 30, 2012 (the “Statement Date”), and pertains to the four consecutive fiscal quarter period of the Borrower ended on the Statement Date (the “Subject Period”).

I.	Section 6.1(a) — Minimum Liquidity Ratio
		A.	Liquidity as of the Statement Date (Line II.C):			$___________
		B.	Aggregate amount of Eligible Accounts as of the Statement Date (as determined by the Administrative Agent with reference to the most recent Borrowing Base Certificate delivered to the Administrative Agent pursuant to the terms of the Credit Agreement):			$___________
		C.	Aggregate amount of all Indebtedness of the Borrower and its consolidated Subsidiaries as of the Statement Date:			$___________
		D.	Liquidity Ratio as of the Statement Date ((Line I.A plus Line I.B) to Line I.C):			[__] to 1.00
			Minimum ratio required:			1.50 to 1.00
			Covenant compliance:	Yes  o	No  o

II.	Section 6.1(b) — Minimum Liquidity
		A.	Aggregate amount of all unrestricted cash of the Borrower and its Domestic Subsidiaries subject as of the Statement Date to a perfected Lien of the Administrative Agent (held for the ratable benefit of the Lenders):			$___________
		B.	Aggregate amount of Cash Equivalents of the Borrower and its Domestic Subsidiaries subject as of the Statement Date to a perfected Lien of the Administrative Agent (held for the ratable benefit of the Lenders):			$___________
		C.	Liquidity as of the Statement Date (Lines II.A plus Line II.B):			$___________
			Minimum liquidity required:
			The sum of (i) $30,000,000, and (ii) up to $20,000,000 of the difference, if any, between the aggregate amount of Revolving Loans outstanding on the Statement Date and $30,000,000			$___________
			Covenant compliance:	Yes  o	No  o

See Excel file “Borrowing Base Certificate Testing – 9.30.12.xlsx” for analysis.

Exhibit B

III.	Section 6.1(c) — Minimum Consolidated EBITDA
		A.	Consolidated EBITDA for the Subject Period:
			1.	Consolidated Net Income for the Subject Period:	$___________
			2.	Consolidated Interest Expense for the Subject Period:	$___________
			3.	provision for income taxes (as reported in accordance with GAAP) for the Subject Period:	$___________
			4.	depreciation expenses for the Subject Period:	$___________
			5.	amortization expenses for the Subject Period:	$___________
			6.	integration expenses (other than restructuring charges) and transaction expenses for the Subject Period related to the Initial Acquisition and Permitted Acquisitions:	$___________
			7.	Earn-Out Liabilities and any other earn-out liabilities arising in connection with Permitted Acquisitions and paid during the Subject Period:	$___________
			8.	non-recurring one-time charges for the Subject Period in respect of settlements, litigation and casualty events in an amount not exceeding $500,000 for all such charges taken together during the term of this Agreement:	$___________
			9.	restructuring charges incurred in connection with the Initial Acquisition or any Permitted Acquisition in an amount not exceeding $2,500,000:	$___________
			10.	charges taken during the Subject Period related to equity compensation and impairment of intangible assets and other non-cash items reducing Consolidated Net Income (excluding any such non-cash item to the extent that it represents an accrual or reserve for potential cash items in any future period or amortization of a prepaid cash item that was paid in a prior period) approved by the Administrative Agent in writing as an ‘add back’ to Consolidated EBITDA:	$___________
			11.	other non-cash items during the Subject Period increasing Consolidated Net Income for such period (excluding any such non-cash item to the extent it represents the reversal of an accrual or reserve for potential cash item in any prior period):	$___________
			12.	interest income during the Subject Period:	$___________
			13.	Consolidated EBITDA for the Subject Period (Lines III.A.1+III.A.2+III.A.3+III.A.4+III.A.5+III.A.6 +III.A.7 +III.A.8 +III.A.9 +III.A.10 minus III.A.11 minus III.A.12):	$___________

Exhibit B

Minimum Consolidated EBITDA required:
Subject Period Ending	Minimum Consolidated EBITDA
March 31, 2012	$1
June 30, 2012	$1,000,000
September 30, 2012	$(1,500,000)
December 31, 2012	$(1,500,000)
March 31, 2013	$(1,000,000)
June 30, 2013	$1
September 30, 2013	$1
December 31, 2013	$1,000,000
March 31, 2014	$1,500,000
June 30, 2014 and thereafter	$2,000,000	$___________

Covenant compliance: Yes o No o

See Excel file “Borrowing Base Certificate Testing – 9.30.12.xlsx” for analysis.

 Exhibit B

EX-31.1

Exhibit 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER

PURSUANT TO EXCHANGE ACT RULES 13a-14(a) AND 15(d)-14(a), AS ADOPTED

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Peter Blackmore, certify that:

1. I have reviewed this quarterly report on Form 10-Q of ShoreTel, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financing reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 8, 2013

/s/ Peter Blackmore

Peter Blackmore

Chief Executive Officer

(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

PURSUANT TO EXCHANGE ACT RULES 13a-14(a) AND 15(d)-14(a), AS ADOPTED

PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Michael E. Healy, certify that:

1. I have reviewed this quarterly report on Form 10-Q of ShoreTel, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financing reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: February 8, 2013

/s/ Michael E. Healy

Michael E. Healy

Chief Financial Officer

(Principal Accounting and Financial Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Peter Blackmore, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of ShoreTel, Inc. for the quarter ended December 31, 2012 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of ShoreTel, Inc.

Date: February 8, 2013

By:	/s/ Peter Blackmore
Name:	Peter Blackmore
Title:	Chief Executive Officer
	(Principal Executive Officer)

This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by referenced into any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934 (whether made on or before or after the date of this Report), irrespective at any general incorporation language contained in such filing.

EX-32.2

Exhibit 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED

PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Michael E. Healy, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report on Form 10-Q of ShoreTel, Inc. for the quarter ended December 31, 2012 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of ShoreTel, Inc.

Date: February 8, 2013

By:	/s/ Michael E. Healy
Name:	Michael E. Healy
Title:	Chief Financial Officer
	(Principal Accounting and Financial Officer)

This certification accompanies this Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by referenced into any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934 (whether made on or before or after the date of this Report), irrespective at any general incorporation language contained in such filing.

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Income Taxes (Details) (USD $)	3 Months Ended		6 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2012	Dec. 31, 2011	Jun. 30, 2012
Income Taxes [Abstract]
Income tax provision	$ 90,000	$ 97,000	$ 287,000	$ 164,000
Unrecognized tax benefits	3,600,000		3,600,000		3,600,000
Unrecognized Tax Benefits that Would Impact Effective Tax Rate	$ 100,000		$ 100,000
Period of research credit extension under new Taxpayer Relief Act			2 years
Open Tax Years			2001 through 2012

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Segment Information (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2012	Dec. 31, 2011	Jun. 30, 2012
Segment Information [Abstract]
Number of reportable segments prior acquisition			1
Number of reportable segments			2
Total revenue and gross profit by reportable segments [Abstract]
Revenue	$ 74,636	$ 58,012	$ 149,620	$ 111,870
Total gross profit	43,888	37,940	89,754	73,428
Goodwill [Abstract]
Goodwill	122,665		122,665		122,665
Revenue by geographic region [Abstract]
United States of America	66,934	50,858	133,899	97,988
International	7,702	7,154	15,721	13,882
Total revenue	74,636	58,012	149,620	111,870
Number of major customers	1	1	1	1
Revenue from one value added distributor accounted more than 10% (in hundredths)	21.00%	25.00%	22.00%	20.00%
Geographic Areas, Long-Lived Assets [Abstract]
United States of America	14,263		14,263		10,230
International	239		239		265
Property and equipment - net	14,502		14,502		10,495
Premise [Member]
Total revenue and gross profit by reportable segments [Abstract]
Revenue	57,549	58,012	116,871	111,870
Total gross profit	38,201	37,940	77,547	73,428
Goodwill [Abstract]
Goodwill	7,415		7,415		7,415
Revenue by geographic region [Abstract]
Total revenue	57,549	58,012	116,871	111,870
Hosted [Member]
Total revenue and gross profit by reportable segments [Abstract]
Revenue	17,087	0	32,749	0
Total gross profit	5,687	0	12,207	0
Goodwill [Abstract]
Goodwill	115,250		115,250		115,250
Revenue by geographic region [Abstract]
Total revenue	$ 17,087	$ 0	$ 32,749	$ 0

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Derivative Instruments and Hedging Activities (Tables)

6 Months Ended

Dec. 31, 2012

Derivative Instruments and Hedging Activities [Abstract]

Notional amounts of outstanding derivative positions

The following table presents the gross notional value of all our foreign exchange forward contracts outstanding as of December 31, 2012 and June 30, 2012 (in thousands):

	December 31, 2012				June 30, 2012
	Local Currency Amount		Notional Contract Amount (USD)		Local Currency Amount		Notional Contract Amount (USD)
Australian dollar		1,350	$	1,410		970	$	985
British pound		4,220		6,795		1,140		1,780
Euro		490		642		480		604
Total			$	8,847			$	3,369

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Balance Sheet Details (Tables)

6 Months Ended

Dec. 31, 2012

Balance Sheet Details [Abstract]

Balance sheet components

Balance sheet components consist of the following:

	December 31,			June 30,
	2012			2012
	(Amounts in thousands)
Inventories:
Raw materials	$	-		$	130
Distributor inventory		1,548			1,858
Finished goods		18,835			18,224
Total inventories	$	20,383		$	20,212
Property and equipment:
Computer equipment and tooling	$	19,718		$	16,381
Software		3,654			2,710
Furniture and fixtures		2,458			2,210
Leasehold improvements & others		5,252			2,985
Total property and equipment		31,082			24,286
Less accumulated depreciation and amortization		(16,580	)		(13,791	)
Property and equipment – net	$	14,502		$	10,495
Deferred revenue:
Product	$	4,755		$	5,803
Support and services		43,938			40,963
Hosted and related services		3,183			2,746
Total deferred revenue	$	51,876		$	49,512

Summary of intangible assets

Intangible Assets:

The following is a summary of the Company's intangible assets as of the following dates (in thousands):

	December 31, 2012							June 30, 2012
	GrossCarrying‎ Amount		Accumulated‎ Amortization			NetCarrying‎ Amount		GrossCarrying‎ Amount		Accumulated‎ Amortization			NetCarrying‎ Amount
Patents	$	3,810	$	(2,053	)	$	1,757	$	3,485	$	(1,673	)	$	1,812
Technology		22,848		(6,246	)		16,602		22,848		(3,673	)		19,175
Customer relationships		23,300		(2,745	)		20,555		23,300		(1,042	)		22,258
Non-compete agreements		300		(116	)		184		300		(41	)		259
Intangible assets in process and other		3,030		-			3,030		1,800		-			1,800
Intangible assets	$	53,288	$	(11,160	)	$	42,128	$	51,733	$	(6,429	)	$	45,304

Estimated amortization expenses for intangible assets

The estimated amortization expenses for intangible assets for the next five years and thereafter are as follows (in thousands):

Years Ending June 30,
2013 (remaining six months)	$	4,743
2014		8,940
2015		7,046
2016		6,379
2017		5,520
Thereafter		6,470
Total	$	39,098

Summary of short-term investments

The following tables summarize the Company's short-term investments (in thousands):

	Amortized		Gross Unrealized		Gross Unrealized
	Cost		Gains		Losses			Fair Value
As of December 31, 2012
Corporate notes and commercial paper	$	8,214	$	4	$	(1	)	$	8,217
Total short-term investments	$	8,214	$	4	$	(1	)	$	8,217
As of June 30, 2012
Corporate notes and commercial paper	$	10,667	$	6	$	(2	)	$	10,671
U.S. Government agency securities		7,706		-		(2	)		7,704
Total short-term investments	$	18,373	$	6	$	(4	)	$	18,375

Short term investments by contractual maturity

The following table summarizes the maturities of the Company's fixed income securities (in thousands):

	Amortized Cost		Fair Value
As of December 31, 2012
Less than 1 year	$	7,592	$	7,595
Due in 1 to 3 years		622		622
Total	$	8,214	$	8,217
	Amortized Cost		Fair Value
As of June 30, 2012
Less than 1 year	$	10,312	$	10,316
Due in 1 to 3 years		8,061		8,059
Total	$	18,373	$	18,375

Actual maturities may differ from the contractual maturities because borrowers may have the right to call or prepay certain obligations.

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Stock Option Plan (Details) (Stock Options [Member], USD $)	3 Months Ended		6 Months Ended		12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2012	Dec. 31, 2011	Jun. 30, 2012	Jun. 30, 2011	Feb. 02, 2007
Stock Options [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vesting period	4 years		4 years
Expiration period	10 years		10 years
Number of shares reserved for future issuance (in shares)							5,000,000
Increase in number of share authorized and reserved for issuance (in shares)					2,400,000	2,200,000
Shares Subject to Options Outstanding [Roll Forward]
Beginning Balance (in shares)			8,944,000
Options granted (in shares)			1,602,000
Options exercised (in shares)			(59,000)
Options cancelled/forfeited (in shares)			(292,000)
Ending Balance (in shares)	10,195,000		10,195,000		8,944,000
Vested and expected to vest (in shares)	9,100,000		9,100,000
Options exercisable (in shares)	5,880,000		5,880,000
Weighted-Average Exercise Price [Roll Forward]
Beginning Balance (in dollars per share)			$ 5.65
Options granted (in dollars per share)			$ 4.28
Options exercised (in dollars per share)			$ 1.92
Options cancelled/forfeited (in dollars per share)			$ 5.78
Ending Balance (in dollars per share)	$ 5.46		$ 5.46		$ 5.65
Vested and expected to vest (in dollars per share)	$ 5.45		$ 5.45
Options exercisable (in dollars per share)	$ 5.27		$ 5.27
Weighted Average Remaining Contractual Term [Abstract]
Ending Balance	6 years 6 months 25 days		6 years 6 months 25 days
Vested and expected to vest	6 years 1 month 17 days		6 years 1 month 17 days
Options exercisable	4 years 10 months 28 days		4 years 10 months 28 days
Average Intrinsic Value [Abstract]
Ending Balance	$ 2,434,000		$ 2,434,000
Vested and expected to vest	2,406,000		2,406,000
Options exercisable	2,351,000		2,351,000
Weighted Average Grant Date Fair Value [Abstract]
Weighted average grant date fair value of options granted (in dollars per share)			$ 2.44
Total pre-tax intrinsic value for options exercised	$ 100,000	$ 100,000	$ 200,000	$ 400,000

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Fair Value Disclosure (Details) (USD $)	3 Months Ended	6 Months Ended			3 Months Ended	6 Months Ended
	Dec. 31, 2012	Dec. 31, 2012	Dec. 31, 2011	Jun. 30, 2012	Dec. 31, 2012 M5 Networks, Inc [Member]	Dec. 31, 2012 M5 Networks, Inc [Member]	Jun. 30, 2012 M5 Networks, Inc [Member]	Mar. 23, 2012 M5 Networks, Inc [Member]	Mar. 23, 2012 M5 Networks, Inc [Member] Minimum [Member]	Mar. 23, 2012 M5 Networks, Inc [Member] Maximum [Member]	Dec. 31, 2012 Level 1 [Member]	Jun. 30, 2012 Level 1 [Member]	Dec. 31, 2012 Level 2 [Member]	Jun. 30, 2012 Level 2 [Member]	Dec. 31, 2012 Level 2 [Member] M5 Networks, Inc [Member]	Jun. 30, 2012 Level 3 [Member] M5 Networks, Inc [Member]	Dec. 31, 2012 Money market funds [Member]	Jun. 30, 2012 Money market funds [Member]	Dec. 31, 2012 Money market funds [Member] Level 1 [Member]	Jun. 30, 2012 Money market funds [Member] Level 1 [Member]	Dec. 31, 2012 Corporate notes and commercial paper [Member]	Jun. 30, 2012 Corporate notes and commercial paper [Member]	Dec. 31, 2012 Corporate notes and commercial paper [Member] Level 2 [Member]	Jun. 30, 2012 Corporate notes and commercial paper [Member] Level 2 [Member]	Dec. 31, 2012 U.S. Government agency securities [Member]	Jun. 30, 2012 U.S. Government agency securities [Member]	Dec. 31, 2012 U.S. Government agency securities [Member] Level 2 [Member]	Jun. 30, 2012 U.S. Government agency securities [Member] Level 2 [Member]
Assets: [Abstract]
Cash and cash equivalents																	$ 20,867,000	$ 10,322,000	$ 20,867,000	$ 10,322,000					$ 800,000		$ 800,000
Short-term investments	8,217,000	8,217,000		18,375,000																	8,217,000	10,671,000	8,217,000	10,671,000		7,704,000		7,704,000
Total assets measured and recorded at fair value	29,884,000	29,884,000		28,697,000							20,867,000	10,322,000	9,017,000	18,375,000
Cash balances on deposit at banks	22,100,000	22,100,000		26,800,000
Liabilities: [Abstract]
Acquisition-related consideration (see Note 3)					13,356,000	13,356,000	12,703,000								13,356,000	12,703,000
Impairment charges	0	0
Quantitative information about the inputs and valuation methodologies used for our fair value measurements [Abstract]
Long-term debt outstanding	19,960,000	19,960,000		19,946,000
Earn-out liability									0	13,700,000
Acquisition related consideration first installment payable					10,000,000	10,000,000
Acquisition related consideration second installment payable					3,700,000	3,700,000
Total acquisition related consideration payable					13,700,000	13,700,000
Period over which consideration is payable					2 years	2 years		2 years
Discount rate (%) (in hundredths)					6.00%	6.00%
Transfer in fair value hierarchy levels [Abstract]
Acquisition Related Consideration, Level 3 transfer out value					(13,356,000)	(13,356,000)
Acquisition Related Consideration, Level 2 transfer in value					13,356,000	13,356,000
Acquisition Related Consideration, Gain (loss) on transfer					0	0
Change in the fair value of our purchase consideration liability [Abstract]
As of June 30, 2012						12,703,000
Add: Adjustment to present value of purchase consideration		653,000	0			653,000
As of December 31, 2012					$ 13,356,000	$ 13,356,000

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Derivative Instruments and Hedging Activities (Details) In Thousands, unless otherwise specified	3 Months Ended	6 Months Ended	12 Months Ended
	Dec. 31, 2012 USD ($)	Dec. 31, 2012 USD ($)	Jun. 30, 2012 USD ($)	Dec. 31, 2012 Australian dollar [Member] USD ($)	Dec. 31, 2012 Australian dollar [Member] AUD	Jun. 30, 2012 Australian dollar [Member] USD ($)	Jun. 30, 2012 Australian dollar [Member] AUD	Dec. 31, 2012 British pound [Member] USD ($)	Dec. 31, 2012 British pound [Member] GBP (£)	Jun. 30, 2012 British pound [Member] USD ($)	Jun. 30, 2012 British pound [Member] GBP (£)	Dec. 31, 2012 Euro [Member] USD ($)	Dec. 31, 2012 Euro [Member] EUR (€)	Jun. 30, 2012 Euro [Member] USD ($)	Jun. 30, 2012 Euro [Member] EUR (€)
Derivative [Line Items]
Derivative maturity period	1 month	1 month	1 month
Notional contract amount	$ 8,847	$ 8,847	$ 3,369	$ 1,410	1,350	$ 985	970	$ 6,795	£ 4,220	$ 1,780	£ 1,140	$ 642	€ 490	$ 604	€ 480

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Basis of Presentation and Significant Accounting Policies

6 Months Ended

Dec. 31, 2012

Basis of Presentation and Significant Accounting Policies [Abstract]

Basis of Presentation and Significant Accounting Policies

2. Basis of Presentation and Significant Accounting Policies

The accompanying condensed consolidated financial statements as of December 31, 2012, and for the three and six months ended December 31, 2012 and 2011 have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto, included in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2012. In the opinion of management, all adjustments (primarily consisting of normal recurring adjustments) considered necessary for a fair statement have been included.

The condensed consolidated balance sheet at June 30, 2012 has been derived from the audited consolidated financial statements as of that date but does not include all of the information and footnotes included in the Company's Annual Report on Form 10-K for the year ended June 30, 2012. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended June 30, 2012. The results of operations for the three and six months ended December 31, 2012 are not necessarily indicative of the operating results to be expected for the full fiscal year or any future periods.

In connection with the M5 Networks, Inc. ("M5") acquisition, the consolidated balance sheet at June 30, 2012 has been recast to include retrospective purchase accounting adjustments. These adjustments pertain to measurement period adjustments during the six months ended December 31, 2012 based on the valuation of assets acquired and liabilities assumed in the M5 acquisition. The effect on the consolidated balance sheet at June 30, 2012, as a result of the recast, is an increase in indemnification asset of $6.6 million, a decrease to property and equipment of $2.3 million, an increase to goodwill of $2.5 million, an increase to other assets of $1.0 million, a decrease in accounts payable of $50,000, an increase in accrued liabilities and other of $0.3 million, an increase of accrued taxes and surcharges of $6.6 million and an increase to other long-term liabilities of $0.9 million.

Reclassifications

Accrued taxes and surcharges of $1.3 million have been reclassified out of accrued liabilities and other into a separate line item in the consolidated balance sheets at June 30, 2012, to conform to the presentation at December 31, 2012.

Computation of Net Loss per Share

Basic net loss per share is determined by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per share is determined by dividing net loss by the weighted average number of common shares used in the basic loss per share calculation plus the number of common shares that would be issued assuming conversion of all potentially dilutive securities outstanding under the treasury stock method. Dilutive securities of 11.8 million and 9.7 million shares were not included in the computation of diluted net loss per share for the three and six months ended December 31, 2012 and 2011, respectively, because such securities were anti-dilutive.

Concentration of Credit Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents, short-term investments and accounts receivable. As of December 31, 2012, all of the Company's cash and cash equivalents and short-term investments were managed by multiple financial institutions. Accounts receivable are typically unsecured and are derived from revenue earned from customers. The Company performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses. Accounts receivable from one value-added distributor accounted for 19% of total accounts receivable at December 31, 2012. At June 30, 2012 one value-added distributor accounted for 22% of the total accounts receivable.

Revenue Recognition

The Company's revenue recognition policy from products and services of its premise and hosted segments is included in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2012.

Recent Accounting Pronouncements

In December 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update (ASU) No. 2011-11, Balance Sheet (Topic 210) -Disclosures about Offsetting Assets and Liabilities (ASU 2011-11), that requires an entity to disclose additional information about offsetting and related arrangements to enable users of the financial statements to understand the effect of those arrangements on the financial position. ASU 2011-11 will be effective for the Company beginning July 1, 2013. The adoption of ASU 2011-11 may impact future disclosures but will not impact the Company's consolidated financial statements.

In September 2011, the FASB issued ASU No. 2011-8, Intangibles -Goodwill and Other (Topic 350) - Testing Goodwill for Impairment (ASU 2011-8), which provides guidance on testing goodwill for impairment. The new guidance provides an entity the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines that this is the case, it is required to perform the currently prescribed two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit (if any). If an entity determines that the fair value of a reporting unit is greater than its carrying amount, the two-step goodwill impairment test is not required. The new guidance was effective for the Company beginning July 1, 2012. The adoption of ASU 2011-8 did not have an impact to the Company's consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-5, Comprehensive Income (Topic 220) - Presentation of Comprehensive Income, which requires companies to present the total of comprehensive income (loss), the components of net income (loss), and the components of other comprehensive income (loss) either as a single continuous statement of comprehensive income (loss) or in two separate but consecutive statements. This update eliminates the option to present the components of other comprehensive income (loss) as part of the statement of changes in stockholders' equity. In December 2011, the FASB deferred the effective date of the specific requirement to present items that are reclassified out of accumulated other comprehensive income (loss) to net income (loss) alongside their respective components of net income (loss) and other comprehensive income (loss). The Company has adopted the disclosure provisions on a retrospective basis, except for the provision deferred. This adoption did not have an impact on the Company's results of operations or financial position, but resulted in the presentation of a separate consolidated statement of comprehensive loss.

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Employee Stock Purchase Plan (Details) (Employee Stock Purchase Plan [Member])	1 Months Ended		6 Months Ended
	Jan. 31, 2012	Feb. 28, 2011	Dec. 31, 2012
Employee Stock Purchase Plan [Member]
Share-based Compensation Awards [Line Items]
Plan description and terms			On September 18, 2007, the Board of Directors approved the commencement of offering periods under a previously-approved employee stock purchase plan (the "ESPP"). The ESPP allows eligible employees to purchase shares of the Company's common stock at a discount through payroll deductions. The ESPP consists of six-month offering periods commencing on May 1st and November 1st, each year.
Purchase price of share (in hundredths)			85.00%
Number of shares authorized and reserved for issuance (in shares)	481,433	469,980
Number of shares reserved for future issuance (in shares)			143,467

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Stock Option Plan (Tables)

6 Months Ended

Dec. 31, 2012

Stock Option Plan [Abstract]

Schedule of stock options activity

Transactions under the 1997 and 2007 option plans are summarized as follows (in thousands, except per share data and contractual term):

	Options Outstanding
	Shares Subject to Options Outstanding			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value
						(in years)
Balance at July 1, 2012		8,944		$	5.65
Options granted (weighted average fair value $2.44 per share)		1,602			4.28
Options exercised		(59	)		1.92
Options cancelled/forfeited		(292	)		5.78
Restricted stock units granted (see Note 12)		-
Restricted stock units cancelled/forfeited		-
Balance at December 31, 2012		10,195		$	5.46		6.57	$	2,434
Vested and expected to vest at December 31, 2012		9,100		$	5.45		6.13	$	2,406
Options exercisable at December 31, 2012		5,880		$	5.27		4.91	$	2,351

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Stock-Based Compensation (Tables)

6 Months Ended

Dec. 31, 2012

Stock-Based Compensation [Abstract]

Estimated grant date fair value of stock option awards and Employee Stock Purchase Plan (ESPP) rights using the Black-Scholes option valuation model

The Company estimated the grant date fair value of stock option awards and Employee Stock Purchase Plan (ESPP) rights using the Black-Scholes option valuation model with the following assumptions:

	Three Months Ended		Six Months Ended
	December 31,		December 31,
	2012	2011	2012	2011
Expected life from grant date of option (in years)	5.42	6.08	5.32 - 5.42	6.08
Expected life from grant date of ESPP (in years)	0.50	0.50	0.50	0.50
Risk free interest rate for options	0.69%	0.95%	0.67 - 0.69%	1.14%
Risk free interest rate for ESPP	0.13 - 0.15%	0.05 - 0.07%	0.13 - 0.15%	0.05 - 0.07%
Expected volatility for options	69%	66%	69%	65%
Expected volatility for ESPP	44 - 57%	52 - 74%	44 - 57%	52 - 74%
Expected dividend yield	0%	0%	0%	0%

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Restricted Stock (Details) (Restricted Stock Awards and Restricted Stock Units [Member], USD $) In Thousands, unless otherwise specified	6 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
Restricted Stock Awards and Restricted Stock Units [Member]
Share-based Compensation Awards [Line Items]
Vesting percentage each year (in hundredths)	25.00%
Restricted stock award and restricted stock unit activity [Roll Forward]
Beginning units outstanding (in shares)	1,641	1,196
Awarded (in shares)	526	501
Released (in shares)	(488)	(221)
Forfeited (in shares)	(122)	(69)
Ending units outstanding (in shares)	1,557	1,407
Information regarding restricted stock awards and restricted stock units outstanding [Abstract]
Number of shares outstanding (in shares)	1,557	1,407
Number of shares vested and expected to vest (in shares)	1,108
Shares outstanding, Weighted Average Remaining Contractual Lives	1 year 7 months 28 days
Shares vested and expected to vest, Weighted Average Remaining Contractual Lives	1 year 5 months 9 days
Shares outstanding, Aggregate Intrinsic Value	$ 6,601
Shares vested or expected to vest, Aggregate Intrinsic Value	$ 4,697

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Restricted Stock (Tables)

6 Months Ended

Dec. 31, 2012

Restricted Stock [Abstract]

Restricted stock award and restricted stock unit activity

Restricted stock award and restricted stock unit activity for the six months ended December 31, 2012 and 2011 is as follows (in thousands):

	Six Months Ended
	December 31,
	2012			2011
Beginning units outstanding		1,641			1,196
Awarded		526			501
Released		(488	)		(221	)
Forfeited		(122	)		(69	)
Ending units outstanding		1,557			1,407

Information regarding restricted stock awards and restricted stock units outstanding

Information regarding restricted stock awards and restricted stock units outstanding at December 31, 2012 is summarized below:

	Number of Shares (thousands)		Weighted Average Remaining Contractual Lives		Aggregate Intrinsic Value (thousands)
Shares outstanding		1,557		1.66	$	6,601
Shares vested and expected to vest		1,108		1.44	$	4,697

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Litigation, Commitments and Contingencies (Tables)

6 Months Ended

Dec. 31, 2012

Litigation, Commitments and Contingencies [Abstract]

Schedule of future minimum payments under noncancelable capital and operating leases

Leases — The Company leases its facilities under noncancelable operating leases which expire at various times through 2023. The leases provide for the lessee to pay all costs of utilities, insurance, and taxes. In connection with the Company's acquisition of M5 Networks, the Company assumed certain capital leases for equipment and other operating leases for equipment and facilities. All leases acquired were recorded at their respective fair values. Future minimum lease payments under the noncancelable capital and operating leases as of December 31, 2012, are as follows (in thousands):

Years Ending June 30,	Operating Leases		Capital Leases
2013 (remaining six months)	$	1,708	$	691
2014		3,417		1,221
2015		2,575		330
2016		2,225		-
2017		2,016		-
Therafter		6,274		-
Total minimum lease payments	$	18,215		2,242
Less: amount representing interest				(199	)
Present value of total minimum lease payments				2,043
Less: current portion liability				(1,187	)
Capital lease obligation, net of current portion			$	856

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Description of Business

6 Months Ended

Dec. 31, 2012

Description of Business [Abstract]

Description of Business

1. Description of Business

ShoreTel, Inc. and its subsidiaries (referred herein as "the Company") is a leading provider of pure Internet Protocol, or IP, Unified Communications systems for enterprises while offering both premise-based and hosted business solutions. The Company's premise systems are based on its distributed software architecture and switch-based hardware platforms which enable multi-site enterprises to be served by a single telecommunications system. The Company's premise systems enable a single point of management, easy installation and a high degree of scalability and reliability, and provide end users with a consistent, full suite of features across the enterprise, regardless of location. As a result, management believes that the Company's systems enable enhanced end user productivity and provide lower total cost of ownership and higher customer satisfaction than alternative systems. The Company also offers a hosted solution based on the Company's proprietary Unified Communication platform. The hosted solution offers a secure and managed business communications solution to enterprises with minimal capital investment required. The Company's hosted architecture offers are a wide variety of applications and services which provide a full user experience along with the capability to scale based on a customer's evolving needs.

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Segment Information (Tables)

6 Months Ended

Dec. 31, 2012

Segment Information [Abstract]

Total revenue and gross profit by reportable segments

The following presents total revenue and gross profit by reportable segments (in thousands):

	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2012		2011		2012		2011
Total revenues:
Premise	$	57,549	$	58,012	$	116,871	$	111,870
Hosted		17,087		-		32,749		-
Total	$	74,636	$	58,012	$	149,620	$	111,870
Gross profit:
Premise	$	38,201	$	37,940	$	77,547	$	73,428
Hosted		5,687		-		12,207		-
Total	$	43,888	$	37,940	$	89,754	$	73,428

Total revenue and long-lived assets, excluding deferred tax assets, other assets, and intangible assets by geographic region

Revenue by geographic region is based on the ship to address on the customer order. The following presents total revenue by geographic region (in thousands):

	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2012		2011		2012		2011
United States of America	$	66,934	$	50,858	$	133,899	$	97,988
International		7,702		7,154		15,721		13,882
Total	$	74,636	$	58,012	$	149,620	$	111,870

The following presents a summary of long-lived assets, excluding deferred tax assets, other assets, and intangible assets (in thousands):

	December 31,		June 30,
	2012		2012
United States of America	$	14,263	$	10,230
International		239		265
Total	$	14,502	$	10,495

Schedule of carrying value of goodwill by reportable segment

The following presents the carrying value of goodwill for the Company's reportable segments (in thousands):

	Premise Segment		Hosted Segment		Total
As of June 30, 2012	$	7,415	$	115,250	$	122,665
As of December 31, 2012	$	7,415	$	115,250	$	122,665

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Common Stock (Details)	Dec. 31, 2012
Stock Options [Member]
Share-based Compensation Awards [Line Items]
Common stock shares reserved for issuance (in shares)	15,116,000
Employee Stock Purchase Plan [Member]
Share-based Compensation Awards [Line Items]
Common stock shares reserved for issuance (in shares)	143,467
Stock Options and Employee Stock Purchase Plan [Member]
Share-based Compensation Awards [Line Items]
Common stock shares reserved for issuance (in shares)	15,259,000

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CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (USD $) In Thousands, unless otherwise specified	Dec. 31, 2012	Jun. 30, 2012
Current assets:
Cash and cash equivalents	$ 43,839	$ 37,120
Short-term investments	8,217	18,375
Accounts receivable, net of allowances of $789 as of December 31, 2012 and $774 as of June 30, 2012	31,834	34,198
Inventories	20,383	20,212
Indemnification asset	7,012	6,570
Prepaid expenses and other current assets	5,478	5,275
Total current assets	116,763	121,750
Property and equipment - net	14,502	10,495
Goodwill	122,665	122,665
Intangible assets - net	42,128	45,304
Other assets	2,769	2,939
Total assets	298,827	303,153
Current liabilities:
Accounts payable	12,316	9,697
Accrued liabilities and other	15,178	16,134
Accrued employee compensation	13,088	12,151
Accrued taxes and surcharges	11,026	7,852
Purchase consideration	9,881	9,398
Deferred revenue	37,503	35,829
Total current liabilities	98,992	91,061
Long-term revolving credit facility, net of debt issuance costs	19,960	19,946
Long-term deferred revenue	14,373	13,683
Long-term purchase consideration	3,475	3,305
Other long-term liabilities	3,064	4,926
Total liabilities	139,864	132,921
Commitments and contingencies (Note 13)
Stockholders' equity:
Preferred stock, par value $.001 per share, authorized 5,000 shares; no shares issued and outstanding	0	0
Common stock and additional paid-in capital, par value $.001 per share, authorized 500,000; shares issued and outstanding, 58,719 and 58,057 shares as of December 31, 2012 and June 30, 2012, respectively	317,767	310,646
Accumulated other comprehensive income	3	2
Accumulated deficit	(158,807)	(140,416)
Total stockholders' equity	158,963	170,232
Total liabilities and stockholders' equity	$ 298,827	$ 303,153

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Litigation, Commitments and Contingencies (Details) (USD $)	3 Months Ended		6 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2012	Dec. 31, 2011	Jun. 30, 2012
Operating Leases [Abstract]
2013 (remaining nine months)	$ 1,708,000		$ 1,708,000
2014	3,417,000		3,417,000
2015	2,575,000		2,575,000
2016	2,225,000		2,225,000
2017	2,016,000		2,016,000
Thereafter	6,274,000		6,274,000
Total minimum lease payments	18,215,000		18,215,000
Capital Leases [Abstract]
2013 (remaining nine months)	691,000		691,000
2014	1,221,000		1,221,000
2015	330,000		330,000
2016	0		0
2017	0		0
Therafter	0		0
Total minimum lease payments	2,242,000		2,242,000
Less: amount representing interest	(199,000)		(199,000)
Present value of total minimum lease payments	2,043,000		2,043,000
Less: current portion liability	(1,187,000)		(1,187,000)
Capital lease obligation, net of current portion	856,000		856,000
Rent expense	900,000	500,000	1,800,000	1,000,000
Purchase commitments [Abstract]
Purchase commitment with contract manufacturers	28,200,000		28,200,000		22,300,000
Outstanding letters of credit	$ 635,000		$ 635,000

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2012	Dec. 31, 2011
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited) [Abstract]
Net loss	$ (10,354)	$ (2,538)	$ (18,391)	$ (7,180)
Other comprehensive income (loss), net of tax:
Unrealized gains (loss) on short-term investments	(6)	(4)	1	(70)
Other comprehensive income (loss)	(6)	(4)	1	(70)
Comprehensive loss	$ (10,360)	$ (2,542)	$ (18,390)	$ (7,250)

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Business Combination (Details) (USD $) Share data in Millions, unless otherwise specified			0 Months Ended	12 Months Ended					0 Months Ended			3 Months Ended		3 Months Ended
	Dec. 31, 2012	Jun. 30, 2012	Mar. 23, 2012 M5 Networks, Inc [Member]	Jun. 30, 2012 M5 Networks, Inc [Member]	Dec. 31, 2012 M5 Networks, Inc [Member]	Mar. 23, 2012 M5 Networks, Inc [Member] Existing technology [Member]	Mar. 23, 2012 M5 Networks, Inc [Member] In process research and development [Member]		Mar. 23, 2012 M5 Networks, Inc [Member] Customer relationships [Member]	Mar. 23, 2012 M5 Networks, Inc [Member] Non-compete agreements [Member]	Mar. 23, 2012 M5 Networks, Inc [Member] Minimum [Member]	Mar. 23, 2012 M5 Networks, Inc [Member] Minimum [Member] Existing technology [Member]	Mar. 23, 2012 M5 Networks, Inc [Member] Maximum [Member]	Mar. 23, 2012 M5 Networks, Inc [Member] Maximum [Member] Existing technology [Member]
Business Acquisition [Line Items]
Shares issued to the shareholders (in shares)			9.5
Earn-out liability											$ 0		$ 13,700,000
Acquisition related consideration first installment payable					10,000,000
Acquisition related consideration second installment payable					3,700,000
Total acquisition related consideration payable					13,700,000
Period over which consideration is payable			2 years		2 years
Summary of the purchase consideration [Abstract]
Cash			80,932,000
Fair value of shares issued			53,675,000
Fair value of contingent consideration			12,500,000
Total			147,107,000
Business acquisition, internal rate of return assumption (in hundredths)											11.50%		13.00%
Preliminary Purchase Price Allocation [Abstract]
Increase in goodwill			3,400,000	2,500,000
Increase in current assets			300,000
Decrease in other long-term assets			(2,200,000)
Increase in deferred tax liability			100,000
Increase in other liabilities			500,000
Increase in cash paid as part of the purchase consideration			300,000
Increase in indemnification asset			6,600,000	6,600,000
Increase in accrued taxes and surcharges			6,600,000	6,600,000
Indemnification asset	7,012,000	6,570,000			7,012,000
Accrued taxes and surcharges	11,026,000	7,852,000			11,026,000
Allocation of Purchase Price [Abstract]
Current assets			5,870,000
Intangible assets						15,700,000	1,700,000	[1]	23,000,000	300,000
Goodwill			115,250,000
Other long-term assets			2,651,000
Deferred tax liability, net			(1,145,000)
Other liabilities assumed			(16,219,000)
Total			$ 147,107,000
Estimated useful lives (in years)									7 years	2 years		3 years		8 years
Maximum period to finalize the valuation			1 year

[1] In process research and development is not subject to amortization until the associated project has been completed. Alternatively, if the associated project is determined not to be viable, it will be expensed in the period when such determination is made.

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Derivative Instruments and Hedging Activities

6 Months Ended

Dec. 31, 2012

Derivative Instruments and Hedging Activities [Abstract]

Derivative Instruments and Hedging Activities

15. Derivative Instruments and Hedging Activities

In the normal course of business, the Company is exposed to fluctuations in interest rates and the exchange rates associated with foreign currencies. During the three and six months ended December 31, 2012, the Company used derivative instruments to reduce the volatility of earnings associated with changes in foreign currency exchange rates. The Company used foreign exchange forward contracts to mitigate the gains and losses generated from the re-measurement of certain foreign monetary assets and liabilities, primarily including cash balances, third party accounts receivable and intercompany transactions recorded on the balance sheet. These derivatives are not designated and do not qualify as hedge instruments. Accordingly, changes in the fair value of these instruments are recognized in other income and expenses during the period of change. The fair values recorded during the three and six months ended December 31, 2012 and 2011 were not material since these contracts were entered into on the last day of the period. These derivatives have maturities of approximately one month.

The following table presents the gross notional value of all our foreign exchange forward contracts outstanding as of December 31, 2012 and June 30, 2012 (in thousands):

	December 31, 2012				June 30, 2012
	Local Currency Amount		Notional Contract Amount (USD)		Local Currency Amount		Notional Contract Amount (USD)
Australian dollar		1,350	$	1,410		970	$	985
British pound		4,220		6,795		1,140		1,780
Euro		490		642		480		604
Total			$	8,847			$	3,369

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Balance Sheet Details (Details) (USD $)	3 Months Ended		6 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2012	Dec. 31, 2011	Jun. 30, 2012
Inventories [Abstract]
Raw materials	$ 0		$ 0		$ 130,000
Distributor inventory	1,548,000		1,548,000		1,858,000
Finished goods	18,835,000		18,835,000		18,224,000
Total inventories	20,383,000		20,383,000		20,212,000
Property, Plant and Equipment [Line Items]
Total property and equipment	31,082,000		31,082,000		24,286,000
Less accumulated depreciation and amortization	(16,580,000)		(16,580,000)		(13,791,000)
Property and equipment - net	14,502,000		14,502,000		10,495,000
Deferred revenue:
Total deferred revenue	51,876,000		51,876,000		49,512,000
Intangible assets [Abstract]
Gross Carrying Amount	53,288,000		53,288,000		51,733,000
Accumulated Amortization	(11,160,000)		(11,160,000)		(6,429,000)
Net Carrying Amount	42,128,000		42,128,000		45,304,000
Capitalize software development cost during period	700,000		1,200,000
Purchased patents	75,000		300,000
Amortization of intangible assets	2,400,000	700,000	4,800,000	1,300,000
Estimated future amortization expenses for intangible assets [Abstract]
2013 (remaining six months)	4,743,000		4,743,000
2014	8,940,000		8,940,000
2015	7,046,000		7,046,000
2016	6,379,000		6,379,000
2017	5,520,000		5,520,000
Thereafter	6,470,000		6,470,000
Total	39,098,000		39,098,000
Short-term investments [Abstract]
Amortized Cost	8,214,000		8,214,000		18,373,000
Gross Unrealized Gains	4,000		4,000		6,000
Gross Unrealized Losses	(1,000)		(1,000)		(4,000)
Fair Value	8,217,000		8,217,000		18,375,000
Amortized Cost [Abstract]
Less than 1 year	7,592,000		7,592,000		10,312,000
Due in 1 to 3 years	622,000		622,000		8,061,000
Total	8,214,000		8,214,000		18,373,000
Fair Value [Abstract]
Less than 1 year	7,595,000		7,595,000		10,316,000
Due in 1 to 3 years	622,000		622,000		8,059,000
Fair Value	8,217,000		8,217,000		18,375,000
Corporate notes and commercial paper [Member]
Short-term investments [Abstract]
Amortized Cost	8,214,000		8,214,000		10,667,000
Gross Unrealized Gains	4,000		4,000		6,000
Gross Unrealized Losses	(1,000)		(1,000)		(2,000)
Fair Value	8,217,000		8,217,000		10,671,000
Amortized Cost [Abstract]
Total	8,214,000		8,214,000		10,667,000
Fair Value [Abstract]
Fair Value	8,217,000		8,217,000		10,671,000
U.S. Government agency securities [Member]
Short-term investments [Abstract]
Amortized Cost					7,706,000
Gross Unrealized Gains					0
Gross Unrealized Losses					(2,000)
Fair Value					7,704,000
Amortized Cost [Abstract]
Total					7,706,000
Fair Value [Abstract]
Fair Value					7,704,000
Minimum [Member]
Intangible assets [Abstract]
Useful lives of intangible assets	2 years		2 years
Maximum [Member]
Intangible assets [Abstract]
Useful lives of intangible assets	8 years		8 years
Patents [Member]
Intangible assets [Abstract]
Gross Carrying Amount	3,810,000		3,810,000		3,485,000
Accumulated Amortization	(2,053,000)		(2,053,000)		(1,673,000)
Net Carrying Amount	1,757,000		1,757,000		1,812,000
Technology [Member]
Intangible assets [Abstract]
Gross Carrying Amount	22,848,000		22,848,000		22,848,000
Accumulated Amortization	(6,246,000)		(6,246,000)		(3,673,000)
Net Carrying Amount	16,602,000		16,602,000		19,175,000
Customer relationships [Member]
Intangible assets [Abstract]
Gross Carrying Amount	23,300,000		23,300,000		23,300,000
Accumulated Amortization	(2,745,000)		(2,745,000)		(1,042,000)
Net Carrying Amount	20,555,000		20,555,000		22,258,000
Non-compete agreements [Member]
Intangible assets [Abstract]
Gross Carrying Amount	300,000		300,000		300,000
Accumulated Amortization	(116,000)		(116,000)		(41,000)
Net Carrying Amount	184,000		184,000		259,000
Intangible assets in process and other [Member]
Intangible assets [Abstract]
Gross Carrying Amount	3,030,000		3,030,000		1,800,000
Accumulated Amortization	0		0		0
Net Carrying Amount	3,030,000		3,030,000		1,800,000
Product [Member]
Deferred revenue:
Total deferred revenue	4,755,000		4,755,000		5,803,000
Support and services [Member]
Deferred revenue:
Total deferred revenue	43,938,000		43,938,000		40,963,000
Hosted and related services [Member]
Deferred revenue:
Total deferred revenue	3,183,000		3,183,000		2,746,000
Computer equipment and tooling [Member]
Property, Plant and Equipment [Line Items]
Total property and equipment	19,718,000		19,718,000		16,381,000
Software [Member]
Property, Plant and Equipment [Line Items]
Total property and equipment	3,654,000		3,654,000		2,710,000
Furniture and fixtures [Member]
Property, Plant and Equipment [Line Items]
Total property and equipment	2,458,000		2,458,000		2,210,000
Leaseholds improvements & others [Member]
Property, Plant and Equipment [Line Items]
Total property and equipment	$ 5,252,000		$ 5,252,000		$ 2,985,000

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Business Combination (Tables)

6 Months Ended

Dec. 31, 2012

Business Combination [Abstract]

Summary of the purchase consideration

On March 23, 2012, the Company acquired all outstanding common stock of M5 Networks, Inc., a privately-held company based in New York and a provider of hosted unified communications solutions. The acquisition of M5 allows the Company to expand its product offering to include Unified Communication product and services over cloud-based platforms. The purchase consideration issued includes 9.5 million shares issued to the shareholders of M5, cash payment of $80.9 million, and additional cash earn-outs (not to exceed $13.7 million in aggregate) payable over the next two years contingent upon achieving certain revenue targets for the twelve months ending December 31, 2012. The shares issued as consideration are valued based on the closing stock price of the Company's common stock on March 23, 2012, (representing a Level 1 measurement). As revenue targets related to the contingent consideration were met in full on December 31, 2012, the Company will pay the full $13.7 million out over the next two years, with $10.0 million to be paid in March 2013 and $3.7 million to be paid in January 2014. Any changes in the fair value of contingent consideration from events after the acquisition date were recognized in earnings of the period when the event occurred (See Note 5 to the Condensed Consolidated Financial Statements for additional information on the fair value of purchase consideration). The summary of the purchase consideration is as follows:

In thousands
Cash	$	80,932
Fair value of shares issued		53,675
Fair value of contingent consideration		12,500
	$	147,107

Allocation of purchase price

The total purchase price was allocated to M5's net tangible and identifiable intangible assets based on their estimated fair values as of March 23, 2012, including retrospective adjustments, as set forth below. The following is the purchase price allocation:

	In thousands			Estimated useful lives (in years)
Current assets	$	5,870
Intangible assets:
Existing technology		15,700			3-8
In process research and development		1,700			(a)
Customer relationships		23,000			7
Non-compete agreements		300			2
Goodwill		115,250
Other long-term assets		2,651
Deferred tax liability, net		(1,145	)
Other liabilities assumed		(16,219	)
	$	147,107

(a) In process research and development is not subject to amortization until the associated project has been completed. Alternatively, if the associated project is determined not to be viable, it will be expensed in the period when such determination is made.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Dec. 31, 2012	Dec. 31, 2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$ (18,391)	$ (7,180)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	7,562	3,262
Stock-based compensation expense	6,852	6,522
Amortization of premium on investments	88	136
Loss on disposal of property and equipment	87	27
Change in fair value of purchase consideration	653	0
Changes in assets and liabilities, net of effect of acquisition:
Accounts receivable	2,364	2,864
Inventories	(171)	(3,540)
Indemnification asset	(442)	0
Prepaid expenses and other current assets	(203)	(1,058)
Other assets	170	(151)
Accounts payable	2,181	1,476
Accrued liabilities and other	(2,975)	1,842
Accrued employee compensation	937	(1,536)
Accrued taxes and surcharges	3,174	0
Deferred revenue	2,364	7,523
Net cash provided by operating activities	4,250	10,187
CASH FLOWS FROM INVESTING ACTIVITES:
Purchases of property and equipment	(5,694)	(1,408)
Purchases of investments	(4,318)	(24,916)
Proceeds from sale/maturities of investments	14,389	19,408
Purchases of patents, technology and internally developed software	(1,555)	(550)
Net cash provided by (used in) investing activities	2,822	(7,466)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock	964	2,527
Taxes paid on vested and released stock awards	(695)	(452)
Borrowings from line of credit	4,974	0
Payments made for line of credit	(5,000)	0
Payments made for capital leases	(596)	0
Net cash provided by (used in) financing activities	(353)	2,075
NET INCREASE IN CASH AND CASH EQUIVALENTS	6,719	4,796
CASH AND CASH EQUIVALENTS - Beginning of period	37,120	89,695
CASH AND CASH EQUIVALENTS - End of period	43,839	94,491
SUPPLEMENTAL CASH FLOW DISCLOSURE:
Cash paid for interest	418	41
Cash paid for taxes	117	183
NONCASH INVESTING AND FINANCING ACTIVITIES:
Property, plant and equipment acquired on capital lease	41	0
Unpaid portion of property and equipment purchases included in period-end accruals	$ 1,384	$ 203

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CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Dec. 31, 2012	Jun. 30, 2012
Current assets:
Accounts receivable, allowances	$ 789	$ 774
Stockholders' equity:
Preferred stock, par value (in dollars per share)	$ 0.001	$ 0.001
Preferred stock, authorized (in shares)	5,000	5,000
Preferred stock, issued (in shares)	0	0
Preferred stock, outstanding (in shares)	0	0
Common stock, par value (in dollars per share)	$ 0.001	$ 0.001
Common stock, authorized (in shares)	500,000	500,000
Common stock, issued (in shares)	58,719	58,057
Common stock, outstanding (in shares)	58,719	58,057

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Stock Option Plan

6 Months Ended

Dec. 31, 2012

Stock Option Plan [Abstract]

Stock Option Plan

10. Stock Option Plan

In January 1997, the Board of Directors and stockholders adopted the 1997 stock option plan (the "1997 Plan") which, as amended, provided for granting incentive stock options ("ISOs") and nonqualified stock options ("NSOs") for shares of common stock to employees, directors, and consultants of the Company. This plan was terminated in January 2007 for new issuances.

In February 2007, the Company adopted the 2007 Equity Incentive Plan (the "2007 Plan") which, as amended, provides for grants of ISOs, NSOs, restricted stock units ("RSUs") and restricted stock awards ("RSAs") to employees, directors and consultants of the Company. Options granted generally vest ratably over four years from the date of grant. The 2007 Plan provides that the options shall be exercisable over a period not to exceed ten years. Five million shares of common stock were initially reserved for future issuance in the form of stock options, restricted stock awards or units, stock appreciation rights and stock bonuses. Pursuant to the provisions under the 2007 Plan, on January 1st of each year, the number of shares in the reserve shall be increased by the provisions set forth in the 2007 Plan, subject to approval by the Company's Board of Directors. The Company's board of directors increased the number of shares authorized and reserved for issuance under the 2007 Plan during the years ended June 30, 2012 and 2011, by 2.4 million shares and 2.2 million shares, respectively.

Transactions under the 1997 and 2007 option plans are summarized as follows (in thousands, except per share data and contractual term):

	Options Outstanding
	Shares Subject to Options Outstanding			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term		Aggregate Intrinsic Value
						(in years)
Balance at July 1, 2012		8,944		$	5.65
Options granted (weighted average fair value $2.44 per share)		1,602			4.28
Options exercised		(59	)		1.92
Options cancelled/forfeited		(292	)		5.78
Restricted stock units granted (see Note 12)		-
Restricted stock units cancelled/forfeited		-
Balance at December 31, 2012		10,195		$	5.46		6.57	$	2,434
Vested and expected to vest at December 31, 2012		9,100		$	5.45		6.13	$	2,406
Options exercisable at December 31, 2012		5,880		$	5.27		4.91	$	2,351

The total pre-tax intrinsic value for options exercised in the both three months ended December 31, 2012 and 2011 was $0.1 million, and $0.2 million and $0.4 million for the six months ended December 31, 2012 and 2011, respectively, representing the difference between the fair values of the Company's common stock underlying these options at the dates of exercise and the exercise prices paid.

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Document and Entity Information	6 Months Ended
	Dec. 31, 2012	Jan. 25, 2013
Document and Entity Information [Abstract]
Entity Registrant Name	ShoreTel Inc
Entity Central Index Key	0001388133
Current Fiscal Year End Date	--06-30
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		58,735,447
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	Q2
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Dec. 31, 2012

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Employee Stock Purchase Plan

6 Months Ended

Dec. 31, 2012

Employee Stock Purchase Plan [Abstract]

Employee Stock Purchase Plan

11. Employee Stock Purchase Plan

On September 18, 2007, the Board of Directors approved the commencement of offering periods under a previously-approved employee stock purchase plan (the "ESPP"). The ESPP allows eligible employees to purchase shares of the Company's common stock at a discount through payroll deductions. The ESPP consists of six-month offering periods commencing on May 1st and November 1st, each year. Under the ESPP, employees purchased shares of the Company's common stock at 85% of the market value at either the beginning of the offering period or the end of the offering period, whichever price is lower.

In January 2012 and February 2011, pursuant to the automatic increase provisions of the ESPP, the Company's Board of Directors approved increases to the number of shares authorized and reserved for issuance under the ESPP by 481,433 and 469,980 shares, respectively.

As of December 31, 2012, 143,467 shares are reserved for future issuance.

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended				6 Months Ended
	Dec. 31, 2012		Dec. 31, 2011		Dec. 31, 2012		Dec. 31, 2011
Revenue:
Product	$ 43,769		$ 46,277		$ 89,603		$ 88,461
Hosted and related services	17,087		0		32,749		0
Support and services	13,780		11,735		27,268		23,409
Total revenue	74,636		58,012		149,620		111,870
Cost of revenue:
Product	15,069	[1]	16,103	[1]	30,856	[1]	30,558	[1]
Hosted and related services	11,400	[1]	0	[1]	20,542	[1]	0	[1]
Support and services	4,279	[1]	3,969	[1]	8,468	[1]	7,884	[1]
Total cost of revenue	30,748		20,072		59,866		38,442
Gross profit	43,888		37,940		89,754		73,428
Operating expenses:
Research and development	12,195	[1]	12,240	[1]	26,148	[1]	24,053	[1]
Sales and marketing	31,739	[1]	21,596	[1]	62,495	[1]	42,818	[1]
General and administrative	9,292	[1]	6,349	[1]	17,887	[1]	12,978	[1]
Total operating expenses	53,226		40,185		106,530		79,849
Loss from operations	(9,338)		(2,245)		(16,776)		(6,421)
Other income (expense):
Interest income	52		58		93		125
Interest expense	(676)		(22)		(1,089)		(47)
Other income (expense), net	(302)		(232)		(332)		(673)
Total other expense	(926)		(196)		(1,328)		(595)
Loss before provision for tax	(10,264)		(2,441)		(18,104)		(7,016)
Provision for income tax	90		97		287		164
Net loss	$ (10,354)		$ (2,538)		$ (18,391)		$ (7,180)
Net loss per share - basic and diluted (in dollars per share)	$ (0.18)		$ (0.05)		$ (0.32)		$ (0.15)
Shares used in computing net loss per share - basic and diluted (in shares)	58,566	[2]	47,946	[2]	58,376	[2]	47,666	[2]

[1] Includes stock-based compensation expense as follows: Cost of product revenue $34 $33 $84 $74 Cost of hosted and related service revenue 40 - 78 - Cost of support and services revenue 239 209 446 408 Research and development 919 911 1,978 1,923 Sales and marketing 1,073 1,053 1,935 2,067 General and administrative 1,194 1,066 2,331 2,050 Total stock-based compensation expense $3,499 $3,272 $6,852 $6,522

[2] Potentially dilutive securities were not included in the compilation of diluited net loss per share for the periods which had a net loss because to do so would have been anti-dilutive

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Fair Value Disclosure

6 Months Ended

Dec. 31, 2012

Fair Value Disclosure [Abstract]

Fair Value Disclosure

5. Fair Value Disclosure

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal market (or most advantageous market, in the absence of a principal market) for the asset or liability in an orderly transaction between market participants at the measurement date. Further, entities are required to maximize the use of observable inputs and minimize the use of unobservable inputs in measuring fair value, and to utilize a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of inputs used to measure fair value are as follows:

● Level 1 — Quoted prices in active markets for identical assets or liabilities.

● Level 2 — Observable inputs other than quoted prices included within Level 1, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs other than quoted prices that are observable or are derived principally from, or corroborated by, observable market data by correlation or other means.

● Level 3 — Unobservable inputs that are supported by little or no market activity, are significant to the fair value of the assets or liabilities, and reflect our own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

The tables below set forth the Company's financial instruments and liabilities measured at fair value on a recurring basis (in thousands):

	December 31, 2012
	Fair Value		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents:
Money market funds	$	20,867	$	20,867	$	-	$	-
U.S. Government agency securities		800		-		800		-
Short-term investments:
Corporate notes and commercial paper		8,217		-		8,217		-
Total assets measured and recorded at fair value	$	29,884	$	20,867	$	9,017	$	-
Liabilities:
Acquisition-related consideration (See Note 3)	$	13,356	$	-	$	13,356	$	-

The above table excludes $22.1 million of cash balances on deposit at banks.

	June 30, 2012
	Fair Value		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents:
Money market funds	$	10,322	$	10,322	$	-	$	-
Short-term investments:
Corporate notes and commercial paper		10,671		-		10,671		-
U.S. Government agency securities		7,704		-		7,704		-
Total assets measured and recorded at fair value	$	28,697	$	10,322	$	18,375	$	-
Liabilities:
Acquisition-related contingent consideration (See Note 3)	$	12,703	$	-	$	-	$	12,703

The above table excludes $26.8 million of cash balances on deposit at banks.

The foreign exchange forward contracts outstanding as of December 31, 2012 are entered into by the Company on the last day of the period. Given the relatively short duration such contracts are outstanding in relation to changes in potential market rates; the change in the fair value is not material and is not reflected either as an asset or liability.

Money market funds are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices in active markets. Short-term investments are classified within Level 2 of the fair value hierarchy because they are valued based on other observable inputs, including broker or dealer quotations, or alternative pricing sources. When quoted prices in active markets for identical assets or liabilities are not available, the Company relies on non-binding quotes from independent pricing services. Non-binding quotes are based on proprietary valuation models prepared by independent pricing services. These models use algorithms based on inputs such as observable market data, quoted market prices for similar instruments, historical pricing trends of a security as relative to its peers, internal assumptions of the independent pricing service and statistically supported models. The Company corroborates the reasonableness of non-binding quotes received from the independent pricing service by comparing them to the (a) actual experience gained from the purchases and redemption of investment securities, (b) quotes received on similar securities obtained when purchasing securities and (c) monitoring changes in ratings of similar securities and the related impact on the fair value. The types of instruments valued based on other observable inputs include corporate notes and commercial paper and U.S. Government agency securities. The Company reviewed financial and non-financial assets and liabilities and concluded that there were no material impairment charges during the three and six months ended December 31, 2012 and 2011, respectively.The Company reviews the fair value hierarchy on a quarterly basis. Changes in the ability to observe valuation inputs may result in a reclassification of levels of certain securities within the fair value hierarchy. The Company recognizes transfers into and out of levels within the fair value hierarchy as of the date in which the actual event or change in circumstances that caused the transfer occurs. There were no transfers between Level 1 and Level 2 of the fair value hierarchy.

The Company measures the fair value of outstanding debts for disclosure purposes on a recurring basis. As of both December 31, 2012 and June 30, 2012, long-term debt of $20.0 million is reported at amortized cost. This outstanding debt is classified at Level 2 as it is not actively traded and is valued using a discounted cash flow model that uses observable market inputs. Based on the discounted cash flow model, the fair value of the outstanding debt approximates amortized cost.

The purchase consideration for the Company's acquisition of M5 included a contingent portion ranging from zero to $13.7 million and is subject to the achievement of certain revenue targets. As these revenue targets were met in full on December 31, 2012, we will pay the full $13.7 million out over the next two years, with $10.0 million to be paid in March 2013 and $3.7 million to be paid in January 2014. As these cash payments will happen in the future, the fair value of these as of December 31, 2012 was determined by taking the present value of these future cash payments using a present value discount rate of 6.0%. The purchase consideration is classified within Level 2 of the fair value hierarchy since it is based on observable inputs. As the purchase consideration changed from a Level 3 to a Level 2 liability due to the change from unobservable to observable inputs used to calculate the fair value as of December 31, 2012, the transfer in fair value hierarchy levels is as follows (in thousands):

	Acquisition-Related Consideration
Level 3 transfer out value	$	(13,356	)
Level 2 transfer in value		13,356
Gain (loss) on transfer	$	-

The change in the fair value of our purchase consideration liability is as follows (in thousands):

	Fair Value
As of June 30, 2012	$	12,703
Add: Adjustment to purchase consideration		653
As of December 31, 2012	$	13,356

Assets and Liabilities That Are Measured at Fair Value on a Nonrecurring Basis

Non-financial assets such as goodwill, intangible assets, and property, plant, and equipment are evaluated for impairment and adjusted to fair value using Level 3 inputs, only when an impairment is recognized. Fair values are considered Level 3 when management makes significant assumptions in developing a discounted cash flow model based upon a number of considerations including projections of revenues, earnings and a discount rate. In addition, in evaluating the fair value of goodwill impairment, further corroboration is obtained using our market capitalization. There was no impairment recorded in the three and six months ended December 31, 2012.

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Balance Sheet Details

6 Months Ended

Dec. 31, 2012

Balance Sheet Details [Abstract]

Balance Sheet Details

4. Balance Sheet Details

Balance sheet components consist of the following:

	December 31,			June 30,
	2012			2012
	(Amounts in thousands)
Inventories:
Raw materials	$	-		$	130
Distributor inventory		1,548			1,858
Finished goods		18,835			18,224
Total inventories	$	20,383		$	20,212
Property and equipment:
Computer equipment and tooling	$	19,718		$	16,381
Software		3,654			2,710
Furniture and fixtures		2,458			2,210
Leasehold improvements & others		5,252			2,985
Total property and equipment		31,082			24,286
Less accumulated depreciation and amortization		(16,580	)		(13,791	)
Property and equipment – net	$	14,502		$	10,495
Deferred revenue:
Product	$	4,755		$	5,803
Support and services		43,938			40,963
Hosted and related services		3,183			2,746
Total deferred revenue	$	51,876		$	49,512

Intangible Assets:

The following is a summary of the Company's intangible assets as of the following dates (in thousands):

	December 31, 2012							June 30, 2012
	GrossCarrying‎ Amount		Accumulated‎ Amortization			NetCarrying‎ Amount		GrossCarrying‎ Amount		Accumulated‎ Amortization			NetCarrying‎ Amount
Patents	$	3,810	$	(2,053	)	$	1,757	$	3,485	$	(1,673	)	$	1,812
Technology		22,848		(6,246	)		16,602		22,848		(3,673	)		19,175
Customer relationships		23,300		(2,745	)		20,555		23,300		(1,042	)		22,258
Non-compete agreements		300		(116	)		184		300		(41	)		259
Intangible assets in process and other		3,030		-			3,030		1,800		-			1,800
Intangible assets	$	53,288	$	(11,160	)	$	42,128	$	51,733	$	(6,429	)	$	45,304

The intangible assets that are amortizable have estimated useful lives of two to eight years. During the three months ended December 31, 2012, the Company capitalized $0.7 million related to software development costs and purchased $75,000 of patents. During the six months ended December 31, 2012, the Company capitalized $1.2 million related to software development costs and purchased $0.3 million of patents.

Research and development costs are expensed as incurred. In accordance with ASC 985-20, Costs of Computer Software to be Sold, Leased, or Marketed, development costs of computer software to be sold, leased, or otherwise marketed are subject to capitalization beginning when a product's technological feasibility has been established and ending when a product is available for general release to customers. Such costs are amortized using the straight-line method over the estimated economic life of the product. The Company evaluates the realizability of the assets and the related periods of amortization on a regular basis. Judgment is required in determining when technological feasibility of a product is established as well as its economic life. In most instances, the Company's products are released soon after technological feasibility has been established, therefore, costs incurred subsequent to achievement of technological feasibility are usually not significant.

During the three and six months ended December 31, 2012, the Company capitalized $0.7 million and $1.2 million of software development costs related to new products, respectively. The software is not yet available for general release to customers; therefore, no amortization expense has been recognized related to these capitalized software costs. The Company did not capitalize any software development costs for the three and six months ended December 31, 2011.

Amortization of intangible assets for the three months ended December 31, 2012 and 2011 was $2.4 million and $0.7 million, respectively. For the six months ended December 31, 2012 and 2011, amortization of intangible assets was $4.8 million and $1.3 million, respectively.

The estimated amortization expenses for intangible assets for the next five years and thereafter are as follows (in thousands):

Years Ending June 30,
2013 (remaining six months)	$	4,743
2014		8,940
2015		7,046
2016		6,379
2017		5,520
Thereafter		6,470
Total	$	39,098

Short-Term Investments:

The following tables summarize the Company's short-term investments (in thousands):

	Amortized		Gross Unrealized		Gross Unrealized
	Cost		Gains		Losses			Fair Value
As of December 31, 2012
Corporate notes and commercial paper	$	8,214	$	4	$	(1	)	$	8,217
Total short-term investments	$	8,214	$	4	$	(1	)	$	8,217
As of June 30, 2012
Corporate notes and commercial paper	$	10,667	$	6	$	(2	)	$	10,671
U.S. Government agency securities		7,706		-		(2	)		7,704
Total short-term investments	$	18,373	$	6	$	(4	)	$	18,375

The following table summarizes the maturities of the Company's fixed income securities (in thousands):

	Amortized Cost		Fair Value
As of December 31, 2012
Less than 1 year	$	7,592	$	7,595
Due in 1 to 3 years		622		622
Total	$	8,214	$	8,217
	Amortized Cost		Fair Value
As of June 30, 2012
Less than 1 year	$	10,312	$	10,316
Due in 1 to 3 years		8,061		8,059
Total	$	18,373	$	18,375

Actual maturities may differ from the contractual maturities because borrowers may have the right to call or prepay certain obligations.

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Basis of Presentation and Significant Accounting Policies (Policies)

6 Months Ended

Dec. 31, 2012

Basis of Presentation and Significant Accounting Policies [Abstract]

Reclassifications

Reclassifications

Accrued taxes and surcharges of $1.3 million have been reclassified out of accrued liabilities and other into a separate line item in the consolidated balance sheets at June 30, 2012, to conform to the presentation at December 31, 2012.

Computation of Net Loss per Share

Computation of Net Loss per Share

Basic net loss per share is determined by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per share is determined by dividing net loss by the weighted average number of common shares used in the basic loss per share calculation plus the number of common shares that would be issued assuming conversion of all potentially dilutive securities outstanding under the treasury stock method. Dilutive securities of 11.8 million and 9.7 million shares were not included in the computation of diluted net loss per share for the three and six months ended December 31, 2012 and 2011, respectively, because such securities were anti-dilutive.

Concentration of Credit Risk

Concentration of Credit Risk

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents, short-term investments and accounts receivable. As of December 31, 2012, all of the Company's cash and cash equivalents and short-term investments were managed by multiple financial institutions. Accounts receivable are typically unsecured and are derived from revenue earned from customers. The Company performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses. Accounts receivable from one value-added distributor accounted for 19% of total accounts receivable at December 31, 2012. At June 30, 2012 one value-added distributor accounted for 22% of the total accounts receivable.

Revenue Recognition

Revenue Recognition

The Company's revenue recognition policy from products and services of its premise and hosted segments is included in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2012.

Recent Accounting Pronouncements

Recent Accounting Pronouncements

In December 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update (ASU) No. 2011-11, Balance Sheet (Topic 210) -Disclosures about Offsetting Assets and Liabilities (ASU 2011-11), that requires an entity to disclose additional information about offsetting and related arrangements to enable users of the financial statements to understand the effect of those arrangements on the financial position. ASU 2011-11 will be effective for the Company beginning July 1, 2013. The adoption of ASU 2011-11 may impact future disclosures but will not impact the Company's consolidated financial statements.

In September 2011, the FASB issued ASU No. 2011-8, Intangibles -Goodwill and Other (Topic 350) - Testing Goodwill for Impairment (ASU 2011-8), which provides guidance on testing goodwill for impairment. The new guidance provides an entity the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines that this is the case, it is required to perform the currently prescribed two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit (if any). If an entity determines that the fair value of a reporting unit is greater than its carrying amount, the two-step goodwill impairment test is not required. The new guidance was effective for the Company beginning July 1, 2012. The adoption of ASU 2011-8 did not have an impact to the Company's consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-5, Comprehensive Income (Topic 220) - Presentation of Comprehensive Income, which requires companies to present the total of comprehensive income (loss), the components of net income (loss), and the components of other comprehensive income (loss) either as a single continuous statement of comprehensive income (loss) or in two separate but consecutive statements. This update eliminates the option to present the components of other comprehensive income (loss) as part of the statement of changes in stockholders' equity. In December 2011, the FASB deferred the effective date of the specific requirement to present items that are reclassified out of accumulated other comprehensive income (loss) to net income (loss) alongside their respective components of net income (loss) and other comprehensive income (loss). The Company has adopted the disclosure provisions on a retrospective basis, except for the provision deferred. This adoption did not have an impact on the Company's results of operations or financial position, but resulted in the presentation of a separate consolidated statement of comprehensive loss.

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Restricted Stock

6 Months Ended

Dec. 31, 2012

Restricted Stock [Abstract]

Restricted Stock

12. Restricted Stock

Under the 2007 Plan, during the six months ended December 31, 2012 the Company issued fully vested restricted stock awards to non-employee directors electing to receive them in lieu of an annual cash retainer.

In addition, restricted stock units can be issued under the 2007 Plan to eligible employees, and generally vest 25% at each one year anniversary from the date of grant.

Restricted stock award and restricted stock unit activity for the six months ended December 31, 2012 and 2011 is as follows (in thousands):

	Six Months Ended
	December 31,
	2012			2011
Beginning units outstanding		1,641			1,196
Awarded		526			501
Released		(488	)		(221	)
Forfeited		(122	)		(69	)
Ending units outstanding		1,557			1,407

Information regarding restricted stock awards and restricted stock units outstanding at December 31, 2012 is summarized below:

	Number of Shares (thousands)		Weighted Average Remaining Contractual Lives		Aggregate Intrinsic Value (thousands)
Shares outstanding		1,557		1.66	$	6,601
Shares vested and expected to vest		1,108		1.44	$	4,697

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Common Stock

6 Months Ended

Dec. 31, 2012

Common Stock [Abstract]

Common Stock

8. Common Stock

Common Shares Reserved for Issuance

At December 31, 2012, the Company has reserved shares of common stock for issuance as follows (in thousands):

Reserved under stock option plans	15,116
Reserved under employee stock purchase plan	143
Total	15,259

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Line of credit

6 Months Ended

Dec. 31, 2012

Line of credit [Abstract]

Line of credit

6. Line of credit

On March 15, 2012, the Company entered into a secured credit agreement (the "Credit Facility"). The Credit Facility includes a revolving loan facility for an aggregate principal amount not exceeding $50 million. The Credit Facility matures on the fifth anniversary of its closing (March 15, 2017) and is payable in full upon maturity. The amounts borrowed and repaid under the Credit Facility are available for future borrowings. The borrowings under the Credit Facility will accrue interest either (at the election of the Company) at (i) the London interbank offered rate then in effect, plus a margin of between 2.00% and 2.50%, which will be based on the Company's consolidated EBITDA (as defined in the Credit Facility), or (ii) the higher of (a) the bank's publicly-announced prime rate then in effect and (b) the federal funds rate plus 0.50%, in each case of (a) or (b), plus a margin of between 0.00% and 0.50%, which will be based upon the Company's consolidated EBITDA. The Company also pays annual commitment fees during the term of the Credit Facility which varies depending on the Company's consolidated EBITDA. The Credit Facility is secured by substantially all of the Company's assets. The amounts borrowed are recorded as long-term debt, net of the financing costs, in the Company's consolidated financial statements. As of December 31, 2012, the Company had an additional $29.0 million available for borrowing under the Credit Facility.

The Credit Facility contains customary representations and warranties and affirmative and negative covenants, including compliance with financial ratios and metrics. On December 4, 2012, the Company entered into an amendment to the Credit Facility which updated customary representations and warranties and affirmative and negative covenants, the Credit Facility and related amendment requires the Company to maintain a minimum ratio of liquidity to its indebtedness (each as defined in the Credit Facility) and varying amounts of Liquidity and Consolidated EBITDA specified in the Credit Facility throughout the term of the Credit Facility. The Company was in compliance with all such covenants as of December 31, 2012.

For the three and six months ended December 31, 2012, the Company paid interest at an approximate rate of 2.5%. As of December 31, 2012, the Company had $20.3 million outstanding under the Credit Facility. The Company amortizes deferred financing costs to interest expense on a straight-line basis over the term of the debt.

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Income Taxes

6 Months Ended

Dec. 31, 2012

Income Taxes [Abstract]

Income Taxes

7. Income Taxes

The Company recorded an income tax provision of $0.1 million for both the three months ended December 31, 2012 and 2011, and $0.3 million and $0.2 million for the six months ended December 31, 2012 and 2011, respectively.

The tax provision of $0.1 million determined for the three months ended December 31, 2012 is primarily the result of income tax provisions for profitable foreign jurisdictions based upon income earned during this period and tax provisions for certain states that are determined on a basis other than income earned. No income tax benefit was accrued for jurisdictions where we anticipate incurring a loss during the full fiscal year.

The income tax provision of $0.1 million for the three months ended December 31, 2011 represents the income tax provisions for profitable foreign jurisdictions based upon income earned during this period and tax provisions for certain states that are determined on a basis other than income earned. No income tax benefit was accrued for jurisdictions where we anticipate incurring a loss during the full fiscal year.

The tax provision of $0.3 million determined for the six months ended December 31, 2012 is primarily the result of income tax provisions for profitable foreign jurisdictions based upon income earned during this period, tax provisions for certain states that are determined on a basis other than income earned and an increase in the valuation allowance recorded against deferred tax assets established upon the acquisition of M5. No income tax benefit was accrued for jurisdictions where we anticipate incurring a loss during the full fiscal year.

The income tax provision of $0.2 million for the six months ended December 31, 2011 represents the income tax provisions for profitable foreign jurisdictions based upon income earned during this period, tax provisions for certain states that are determined on a basis other than income earned. No income tax benefit was accrued for jurisdictions where we anticipate incurring a loss during the full fiscal year.

The Company maintains liabilities for uncertain tax positions. As of December 31, 2012 and June 30, 2012, the Company's total amounts of unrecognized tax benefits were $3.6 million and $3.6 million, respectively. Of the total of $3.6 million of unrecognized tax benefit as of December 31, 2012, only $0.1 million, if recognized, would impact the effective tax rate.

On January 2, 2013, the President signed into law The American Taxpayer Relief Act of 2012. Under prior law, a taxpayer was entitled to a research tax credit for qualifying amounts paid or incurred on or before December 31, 2011. The 2012 Taxpayer Relief Act extends the research credit for two years to December 31, 2013. The extension of the research credit is retroactive and includes amounts paid or incurred after December 31, 2011. While the Company expects to generate additional credits as a result of retroactive extension of the research and development credit provisions under this new law, it will not record a tax benefit for these additional credits in its financial statements. Any such tax credits generated by the Company will be offset by a full valuation allowance, as management does not believe it is more likely than not that these credits will be realized.

While management believes that the Company has adequately provided for all tax positions, amounts asserted by tax authorities could be greater or less than the Company's current position. Accordingly, the Company's provisions for federal, state and foreign tax related matters to be recorded in the future may change as revised estimates are made or as the underlying matters are settled or otherwise resolved. The Company does not expect its unrecognized tax benefits to change materially over the next 12 months.

The Company's primary tax jurisdiction is in the United States. For federal and state tax purposes, the tax years 2001 through 2012 remain open and subject to tax examination by the appropriate federal or state taxing authorities.

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Stock-Based Compensation

6 Months Ended

Dec. 31, 2012

Stock-Based Compensation [Abstract]

Stock-Based Compensation

9. Stock-Based Compensation

The Company estimated the grant date fair value of stock option awards and Employee Stock Purchase Plan (ESPP) rights using the Black-Scholes option valuation model with the following assumptions:

	Three Months Ended		Six Months Ended
	December 31,		December 31,
	2012	2011	2012	2011
Expected life from grant date of option (in years)	5.42	6.08	5.32 - 5.42	6.08
Expected life from grant date of ESPP (in years)	0.50	0.50	0.50	0.50
Risk free interest rate for options	0.69%	0.95%	0.67 - 0.69%	1.14%
Risk free interest rate for ESPP	0.13 - 0.15%	0.05 - 0.07%	0.13 - 0.15%	0.05 - 0.07%
Expected volatility for options	69%	66%	69%	65%
Expected volatility for ESPP	44 - 57%	52 - 74%	44 - 57%	52 - 74%
Expected dividend yield	0%	0%	0%	0%

During the three months ended December 31, 2012 and 2011, the Company recorded non-cash stock-based compensation expense of $3.5 million and $3.3 million, respectively. During the six months ended December 31, 2012 and 2011, the Company recorded non-cash stock-based compensation expense of $6.9 million and $6.5 million, respectively.

Compensation expense is recognized only for the portion of stock options that are expected to vest, assuming an expected forfeiture rate in determining stock-based compensation expense, which could affect the stock-based compensation expense recorded if there is a significant difference between actual and estimated forfeiture rates. As of December 31, 2012, total unrecognized compensation cost related to stock-based options and awards granted to employees and non-employee directors was $11.7 million. This cost will be amortized on a ratable basis over a weighted-average vesting period of approximately 3 years.

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Basis of Presentation and Significant Accounting Policies (Details) (USD $) In Millions, unless otherwise specified	3 Months Ended		6 Months Ended		12 Months Ended	6 Months Ended	12 Months Ended	0 Months Ended	12 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2012	Dec. 31, 2011	Jun. 30, 2012	Dec. 31, 2012 Credit Concentration Risk [Member]	Jun. 30, 2012 Credit Concentration Risk [Member]	Mar. 23, 2012 M5 Networks, Inc [Member]	Jun. 30, 2012 M5 Networks, Inc [Member]
M5 Networks, Inc. Acquisition [Abstract]
Increase in indemnification asset								$ 6.6	$ 6.6
Decrease in property, plant and equipment									(2.3)
Increase in goodwill								3.4	2.5
Increase in other assets									1.0
Decrease in accounts payable									(0.05)
Increase in accrued liabilities									0.3
Increase in accrued taxes and surcharges								6.6	6.6
Increase in other long-term liabilities									0.9
Reclassifications [Abstract]
Reclassification from accrued liabilities to accrued taxes and surcharges					$ 1.3
Computation of Net Loss per Share [Abstract]
Diluted securities not included in computation of diluted net loss per share as result would have been anti-dilutive (in shares)	11.8	9.7	11.8	9.7
Concentration Risk [Line Items]
Concentration risk, percentage (in hundredths)						19.00%	22.00%

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Segment Information

6 Months Ended

Dec. 31, 2012

Segment Information [Abstract]

Segment Information

14. Segment Information

Prior to the acquisition of M5, the Company was organized and operated as one reportable segment. In connection with the acquisition of M5, the Company evaluated the guidance in ASC 280, Segment Reporting, and concluded that the acquired business is distinct from the Company's historical premise solutions and is therefore a separate reportable segment. M5's hosted solutions and related services are now operated by the Company within its hosted segment. The Company's legacy premise solutions are operated within the premise segment. The Company's chief operating decision-maker ("CODM") is its Chief Executive Officer ("CEO"). The Company's CEO reviews revenue and gross profit for these two distinct segments to evaluate financial performance and allocate resources. The Company does not allocate research and development, sales and marketing, or general and administrative expenses to its segments in this internal reporting system because management does not include the information in its measurement of the performance of the operating segments. The financial information by the two reportable segments is also accompanied by information about revenue by geographic regions.

The following presents total revenue and gross profit by reportable segments (in thousands):

	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2012		2011		2012		2011
Total revenues:
Premise	$	57,549	$	58,012	$	116,871	$	111,870
Hosted		17,087		-		32,749		-
Total	$	74,636	$	58,012	$	149,620	$	111,870
Gross profit:
Premise	$	38,201	$	37,940	$	77,547	$	73,428
Hosted		5,687		-		12,207		-
Total	$	43,888	$	37,940	$	89,754	$	73,428

Revenue by geographic region is based on the ship to address on the customer order. The following presents total revenue by geographic region (in thousands):

	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2012		2011		2012		2011
United States of America	$	66,934	$	50,858	$	133,899	$	97,988
International		7,702		7,154		15,721		13,882
Total	$	74,636	$	58,012	$	149,620	$	111,870

Revenue from one value-added distributor accounted for approximately 21% and 25% of the total revenue during the three months ended December 31, 2012 and 2011, respectively, and 22% and 20% of total revenue during the six months ended December 31, 2012 and 2011, respectively.

The Company's assets are primarily located in the United States of America and not allocated to any specific region and it does not measure the performance of its geographic regions based upon asset-based metrics.

The following presents a summary of long-lived assets, excluding deferred tax assets, other assets, and intangible assets (in thousands):

	December 31,		June 30,
	2012		2012
United States of America	$	14,263	$	10,230
International		239		265
Total	$	14,502	$	10,495

The following presents the carrying value of goodwill for the Company's reportable segments (in thousands):

	Premise Segment		Hosted Segment		Total
As of June 30, 2012	$	7,415	$	115,250	$	122,665
As of December 31, 2012	$	7,415	$	115,250	$	122,665

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Fair Value Disclosure (Tables)

6 Months Ended

Dec. 31, 2012

Fair Value Disclosure [Abstract]

Schedule of financial instruments and liabilities measured at fair value on a recurring basis

The tables below set forth the Company's financial instruments and liabilities measured at fair value on a recurring basis (in thousands):

	December 31, 2012
	Fair Value		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents:
Money market funds	$	20,867	$	20,867	$	-	$	-
U.S. Government agency securities		800		-		800		-
Short-term investments:
Corporate notes and commercial paper		8,217		-		8,217		-
Total assets measured and recorded at fair value	$	29,884	$	20,867	$	9,017	$	-
Liabilities:
Acquisition-related consideration (See Note 3)	$	13,356	$	-	$	13,356	$	-

The above table excludes $22.1 million of cash balances on deposit at banks.

	June 30, 2012
	Fair Value		Level 1		Level 2		Level 3
Assets:
Cash and cash equivalents:
Money market funds	$	10,322	$	10,322	$	-	$	-
Short-term investments:
Corporate notes and commercial paper		10,671		-		10,671		-
U.S. Government agency securities		7,704		-		7,704		-
Total assets measured and recorded at fair value	$	28,697	$	10,322	$	18,375	$	-
Liabilities:
Acquisition-related contingent consideration (See Note 3)	$	12,703	$	-	$	-	$	12,703

The above table excludes $26.8 million of cash balances on deposit at banks.

Transfer in fair value hierarchy levels

The purchase consideration for the Company's acquisition of M5 included a contingent portion ranging from zero to $13.7 million and is subject to the achievement of certain revenue targets. As these revenue targets were met in full on December 31, 2012, we will pay the full $13.7 million out over the next two years, with $10.0 million to be paid in March 2013 and $3.7 million to be paid in January 2014. As these cash payments will happen in the future, the fair value of these as of December 31, 2012 was determined by taking the present value of these future cash payments using a present value discount rate of 6.0%. The purchase consideration is classified within Level 2 of the fair value hierarchy since it is based on observable inputs. As the purchase consideration changed from a Level 3 to a Level 2 liability due to the change from unobservable to observable inputs used to calculate the fair value as of December 31, 2012, the transfer in fair value hierarchy levels is as follows (in thousands):

	Acquisition-Related Consideration
Level 3 transfer out value	$	(13,356	)
Level 2 transfer in value		13,356
Gain (loss) on transfer	$	-

Change in the fair value of our contingent consideration

The change in the fair value of our purchase consideration liability is as follows (in thousands):

	Fair Value
As of June 30, 2012	$	12,703
Add: Adjustment to purchase consideration		653
As of December 31, 2012	$	13,356

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Stock-Based Compensation (Details) (USD $)	3 Months Ended		6 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2012	Dec. 31, 2011
Black-Scholes option valuation assumptions [Abstract]
Expected dividend yield (in hundredths)	0.00%	0.00%	0.00%	0.00%
Non-cash stock-based compensation expense	$ 3,499,000	$ 3,272,000	$ 6,852,000	$ 6,522,000
Unrecognized compensation cost related to stock options and awards granted to employees and non-employee directors	$ 11,700,000		$ 11,700,000
Period to recognize unrecognized compensation cost	3 years		3 years
Stock Options [Member]
Black-Scholes option valuation assumptions [Abstract]
Expected life from grant date	5 years 5 months 1 day	6 years 29 days		6 years 29 days
Risk free interest rate (in hundredths)	0.69%	0.95%		1.14%
Expected volatility (in hundredths)	69.00%	66.00%	69.00%	65.00%
Stock Options [Member] | Minimum [Member]
Black-Scholes option valuation assumptions [Abstract]
Expected life from grant date			5 years 3 months 26 days
Risk free interest rate (in hundredths)			0.67%
Stock Options [Member] | Maximum [Member]
Black-Scholes option valuation assumptions [Abstract]
Expected life from grant date			5 years 5 months 1 day
Risk free interest rate (in hundredths)			0.69%
Employee Stock Purchase Plan [Member]
Black-Scholes option valuation assumptions [Abstract]
Expected life from grant date	6 months	6 months	6 months	6 months
Employee Stock Purchase Plan [Member] | Minimum [Member]
Black-Scholes option valuation assumptions [Abstract]
Risk free interest rate (in hundredths)	0.13%	0.05%	0.13%	0.05%
Expected volatility (in hundredths)	44.00%	52.00%	44.00%	52.00%
Employee Stock Purchase Plan [Member] | Maximum [Member]
Black-Scholes option valuation assumptions [Abstract]
Risk free interest rate (in hundredths)	0.15%	0.07%	0.15%	0.07%
Expected volatility (in hundredths)	57.00%	74.00%	57.00%	74.00%

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Parenthetical) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Dec. 31, 2012	Dec. 31, 2011	Dec. 31, 2012	Dec. 31, 2011
Stock-based compensation expense:
Total stock-based compensation expense	$ 3,499	$ 3,272	$ 6,852	$ 6,522
Cost of product revenue [Member]
Stock-based compensation expense:
Total stock-based compensation expense	34	33	84	74
Cost of hosted and related service revenue [Member]
Stock-based compensation expense:
Total stock-based compensation expense	40	0	78	0
Cost of support and services revenue [Member]
Stock-based compensation expense:
Total stock-based compensation expense	239	209	446	408
Research and development [Member]
Stock-based compensation expense:
Total stock-based compensation expense	919	911	1,978	1,923
Sales and marketing [Member]
Stock-based compensation expense:
Total stock-based compensation expense	1,073	1,053	1,935	2,067
General and administrative [Member]
Stock-based compensation expense:
Total stock-based compensation expense	$ 1,194	$ 1,066	$ 2,331	$ 2,050

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Business Combination

6 Months Ended

Dec. 31, 2012

Business Combination [Abstract]

Business Combination

3. Business Combination

M5 Networks, Inc. Acquisition

On March 23, 2012, the Company acquired all outstanding common stock of M5 Networks, Inc., a privately-held company based in New York and a provider of hosted unified communications solutions. The acquisition of M5 allows the Company to expand its product offering to include Unified Communication product and services over cloud-based platforms. The purchase consideration issued includes 9.5 million shares issued to the shareholders of M5, cash payment of $80.9 million, and additional cash earn-outs (not to exceed $13.7 million in aggregate) payable over the next two years contingent upon achieving certain revenue targets for the twelve months ending December 31, 2012. The shares issued as consideration are valued based on the closing stock price of the Company's common stock on March 23, 2012, (representing a Level 1 measurement). As revenue targets related to the contingent consideration were met in full on December 31, 2012, the Company will pay the full $13.7 million out over the next two years, with $10.0 million to be paid in March 2013 and $3.7 million to be paid in January 2014. Any changes in the fair value of contingent consideration from events after the acquisition date were recognized in earnings of the period when the event occurred (See Note 5 to the Condensed Consolidated Financial Statements for additional information on the fair value of purchase consideration). The summary of the purchase consideration is as follows:

In thousands
Cash	$	80,932
Fair value of shares issued		53,675
Fair value of contingent consideration		12,500
	$	147,107

In accordance with ASC 805, Business Combinations, the acquisition of M5 was recorded as a purchase business acquisition. Under the purchase method of accounting, the fair value of the consideration was allocated to assets and liabilities assumed at their fair values. The fair value of purchased identifiable intangible assets and contingent earn-outs were derived from model-based valuations from significant unobservable inputs ("Level 3 inputs") determined by management. The fair value of purchased identifiable intangible assets was determined using the Company's discounted cash flow models from operating projections prepared by management using an internal rate of return ranging from 11.5% to 13.0%. The fair value of contingent earn-outs was derived using a probability-based approach that includes significant unobservable inputs. Refer to Note 5 for additional details of the inputs used to determine the fair value of the contingent earn-out. The excess of the fair value of consideration paid over the preliminary fair values of net assets and liabilities acquired and identifiable intangible assets resulted in recognition of goodwill of approximately $115.3 million. The goodwill consists largely of expected synergies from combining the operations of M5 with that of the Company. The related goodwill recognized is not deductible for income tax purposes. All of the goodwill recorded in the M5 purchase price allocation is assigned to the hosted segment.

Preliminary Purchase Price Allocation

The Company prepared an initial determination of the fair value of assets acquired and liabilities assumed as of the acquisition date using preliminary information. In accordance with ASC 805, during the measurement period an acquirer shall retrospectively adjust the provisional amounts recognized at the acquisition date to reflect information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the amounts recognized as of the acquisition date. Accordingly, the Company has recognized measurement period adjustments made during both the fourth quarter of 2012 and the first and second quarters of 2013 to the fair value of certain assets acquired and liabilities assumed as a result of further refinements in the Company's estimates. These adjustments were retrospectively applied to the March 23, 2012 acquisition date balance sheet. The effect of these adjustments on the preliminary purchase price allocation was an increase in goodwill of $3.4 million, an increase in current assets of $0.3 million, a decrease in other long-term assets of $2.2 million, an increase in deferred tax liability, net of $0.1 million, an increase in other liabilities assumed of $0.5 million and an increase in cash paid as part of the purchase consideration of $0.3 million. None of the adjustments had a material impact on the Company's previously reported results of operations.

The total purchase price was allocated to M5's net tangible and identifiable intangible assets based on their estimated fair values as of March 23, 2012, including retrospective adjustments, as set forth below. The following is the purchase price allocation:

	In thousands			Estimated useful lives (in years)
Current assets	$	5,870
Intangible assets:
Existing technology		15,700			3-8
In process research and development		1,700			(a)
Customer relationships		23,000			7
Non-compete agreements		300			2
Goodwill		115,250
Other long-term assets		2,651
Deferred tax liability, net		(1,145	)
Other liabilities assumed		(16,219	)
	$	147,107

(a) In process research and development is not subject to amortization until the associated project has been completed. Alternatively, if the associated project is determined not to be viable, it will be expensed in the period when such determination is made.

The excess of purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill. The fair values assigned to tangible and identifiable intangible assets acquired and liabilities assumed are based on management's estimates and assumptions. The estimated fair values of assets acquired and liabilities assumed are considered preliminary and are based on the most recent information available. The Company believes that the information provides a reasonable basis for assigning the fair values of assets acquired and liabilities assumed, but it is waiting for additional information, primarily related to sales, excise and ad valorem taxes which are subject to change. Thus the provisional measurements of fair value set forth above are subject to change. The Company expects to finalize the valuation as soon as practicable, but not later than one-year from the acquisition date.

In addition to the measurement period adjustment impacting the purchase price allocation, the Company recognized a measurement period adjustment of $6.6 million related to the change in estimate of the sales, use and telecommunications taxes that existed as of the acquisition date. This adjustment was retrospectively applied to the March 23, 2012 to recognize the indemnification asset and increase the accrued taxes and surcharges to record amounts as if they had been known as of acquisition date and the balance sheet presentation as of June 30, 2012 has been updated for these amounts. The indemnification asset represents expected reimbursement the Company will receive from the escrow funds, currently held by an outside bank, pursuant to the M5 acquisition agreement. At December 31, 2012, the Company had a $7.0 million indemnification asset and $11.0 million accrued taxes and surcharges recorded in the consolidated balance sheets which related pre-acquisition and post-acquisition sales, use and telecommunications taxes based on the Company's refined methodology used to calculate these estimated amounts.

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Common Stock (Tables)

6 Months Ended

Dec. 31, 2012

Common Stock [Abstract]

Reserved shares of common stock for issuance

Common Shares Reserved for Issuance

At December 31, 2012, the Company has reserved shares of common stock for issuance as follows (in thousands):

Reserved under stock option plans	15,116
Reserved under employee stock purchase plan	143
Total	15,259

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Line of credit (Details) (USD $) In Millions, unless otherwise specified	6 Months Ended
	Dec. 31, 2012
Line of Credit Facility [Line Items]
Credit Facility revolving Loan Facility for aggregate principal amount	$ 50
Line of credit facility, maturity date	Mar. 15, 2017
Line of credit facility, remaining borrowing capacity	29
Interest rate for the year (in hundredths)	2.50%
Line of credit facility, amount outstanding	$ 20.3
Federal funds rate [Member]
Line of Credit Facility [Line Items]
Debt instrument, basis spread on variable rate (in hundredths)	0.50%
Debt instrument, description of variable rate basis	federal funds rate
SVB Prime Rate [Member]
Line of Credit Facility [Line Items]
Debt instrument, description of variable rate basis	SVB prime rate
London interbank [Member]
Line of Credit Facility [Line Items]
Debt instrument, description of variable rate basis	London interbank
Minimum [Member] | Federal funds rate [Member]
Line of Credit Facility [Line Items]
Debt instrument, basis spread on variable rate (in hundredths)	0.00%
Minimum [Member] | SVB Prime Rate [Member]
Line of Credit Facility [Line Items]
Debt instrument, basis spread on variable rate (in hundredths)	0.00%
Minimum [Member] | London interbank [Member]
Line of Credit Facility [Line Items]
Debt instrument, basis spread on variable rate (in hundredths)	2.00%
Maximum [Member] | Federal funds rate [Member]
Line of Credit Facility [Line Items]
Debt instrument, basis spread on variable rate (in hundredths)	0.50%
Maximum [Member] | SVB Prime Rate [Member]
Line of Credit Facility [Line Items]
Debt instrument, basis spread on variable rate (in hundredths)	0.50%
Maximum [Member] | London interbank [Member]
Line of Credit Facility [Line Items]
Debt instrument, basis spread on variable rate (in hundredths)	2.50%

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Litigation, Commitments and Contingencies

6 Months Ended

Dec. 31, 2012

Litigation, Commitments and Contingencies [Abstract]

Litigation, Commitments and Contingencies

13. Litigation, Commitments and Contingencies

Litigation — At December 31, 2012, the Company is involved in litigation relating to claims arising out of the ordinary course of business or otherwise. Any litigation, regardless of outcome, is costly and time-consuming, can divert the attention of management and key personnel from business operations and deter distributors from selling the Company's products and dissuade potential customers from purchasing the Company's products. The Company defends itself vigorously against any such claims. Due to the uncertainty surrounding the litigation process, we are unable to estimate a range of loss, if any, at this time, however the Company does not believe a material loss is probable.

Leases — The Company leases its facilities under noncancelable operating leases which expire at various times through 2023. The leases provide for the lessee to pay all costs of utilities, insurance, and taxes. In connection with the Company's acquisition of M5 Networks, the Company assumed certain capital leases for equipment and other operating leases for equipment and facilities. All leases acquired were recorded at their respective fair values. Future minimum lease payments under the noncancelable capital and operating leases as of December 31, 2012, are as follows (in thousands):

Years Ending June 30,	Operating Leases		Capital Leases
2013 (remaining six months)	$	1,708	$	691
2014		3,417		1,221
2015		2,575		330
2016		2,225		-
2017		2,016		-
Therafter		6,274		-
Total minimum lease payments	$	18,215		2,242
Less: amount representing interest				(199	)
Present value of total minimum lease payments				2,043
Less: current portion liability				(1,187	)
Capital lease obligation, net of current portion			$	856

The current portion of the capital leases is included in accrued liabilities and other on the condensed consolidated balance sheet. The non-current portion of the capital leases is included in the other long-term liabilities on the consolidated balance sheet. Lease obligations for the Company's foreign offices are denominated in foreign currencies, which were converted in the above table to U.S. dollars at the interbank exchange rate on December 31, 2012.

Rent expense for the three months ended December 31, 2012 and 2011 was $0.9 million and $0.5 million, respectively, and was $1.8 million and $1.0 million, for the six months ended December 31, 2012 and 2011, respectively.

Purchase commitments — The Company had purchase commitments with contract manufacturers for inventory and with technology firms for usage of software licenses totaling approximately $28.2 million as of December 31, 2012 and $22.3 million as of June 30, 2012.

Letters of credit — Outstanding letters of credit maintained by the Company totaled $635,000 as of December 31, 2012.

Indemnification — Under the indemnification provisions of the Company's customer agreements, the Company agrees to indemnify and defend its customers against infringement of any patent, trademark, or copyright of any country or the misappropriation of any trade secret, arising from the customers' legal use of the Company's services. The exposure to the Company under these indemnification provisions is generally limited to the total amount paid by the customers under pertinent agreements. However, certain indemnification provisions potentially expose the Company to losses in excess of the aggregate amount received from the customer. To date, there have been no claims against the Company or its customers pertaining to such indemnification provisions and no amounts have been recorded.

The Company also has entered into customary indemnification agreements with each of its officers and directors.