DITECH CORP, 424B4, 1999-06-09

DITECH CORP
424B4, 1999-06-09
TELEPHONE & TELEGRAPH APPARATUS

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<PAGE>
3,000,000 Shares

[LOGO]

Common Stock
---------

Ditech Communications Corporation is offering all 3,000,000 shares. Prior to
this offering, there was no public market for Ditech's common stock.

The common stock has been approved for listing on the Nasdaq National Market
under the symbol "DITC."

INVESTING IN THE COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.

<TABLE>
<CAPTION>
Per Share Total
----------- --------------
<S> <C> <C>
Public offering price.................................................. $ 11.00 $ 33,000,000
Underwriting discount.................................................. $ 0.77 $ 2,310,000
Proceeds, before expenses, to Ditech................................... $ 10.23 $ 30,690,000
</TABLE>

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.

Ditech has granted the underwriters the right to purchase up to 450,000
additional shares at the public offering price to cover any over-allotments.

--------------

The underwriters are severally underwriting the shares being offered. The
underwriters expect to deliver the shares against payment in Baltimore, Maryland
on June 14, 1999.

DEUTSCHE BANC ALEX. BROWN
BANCBOSTON ROBERTSON STEPHENS
HAMBRECHT & QUIST

JUNE 9, 1999
<PAGE>
In the top half of the page is an eight-line block of text, which is
centered in the middle of the page. The text itself is flushed left. It reads:
"Ditech Communications Corporation."

On the top right-hand corner of the page is a one-inch high rectangle of
color. It extends approximately one-third of the way across the page and
gradually fades to white. Across the middle of the page is an arrow pointing to
a tab on the right edge of the page. To the left of the tab, superimposed over
the arrow, are the words "open here."

Ditech Communications Corporation
designs,
develops and markets equipment
used in building and expanding
telecommunications and cable
communications networks.
Our products fall into two categories,
echo cancellation equipment and
optical communications products.

TRADEMARKS:

The name Ditech Corporation is a registered trademark of Ditech. Ditech has
applied for trademarks for the following: Ditech, the DART acronym, and the wave
design logo. This prospectus also includes trademarks of companies other than
Ditech.
<PAGE>
DITECH COMMUNICATIONS CORPORATION

DITECH ECHO CANCELLATION SOLUTION
VOICE QUALITY IS THE COMPETITIVE DIFFERENCE

[Graphical illustration of telecommunication networks, with a cloud in the
center in which the following words appear:

Cable
Satellite
Wireline
Wireless

Voice-over packet
(Voice-over Internet,
ATM, Frame Relay)

Above the cloud are the words "Circuit Switched Network," and below the
cloud are the words "Packet Switched Network." Leading into the cloud from the
top left is a figure of a person on a telephone with two dotted lines leading to
a vertical line on the right labeled "Echo generated at 2-to-4 conversion
hybrid." Out of this are four dotted lines leading to the right to a box labeled
"Echo Cancellers." Out of this box come four dotted lines to the right to the
upper left portion of the cloud.

At the upper right portion of the cloud is the mirror image of the figures
described in the proceeding paragraph.

Leading into the cloud from the bottom left is a figure of a person on a
telephone with two dotted lines leading to a box on the right labeled "PBX" with
rectangle labeled "Echo Canceller (4SA)" sitting on top of it. Out of this are
two dotted lines leading to a vertical line on the right labeled "Echo generated
at hybrid." Out of this are four dotted lines leading to the right to a box
labeled "Packet Switch (e.g. router)." Out of this come four dotted lines to the
right to the lower left portion of the cloud.

At the lower right portion of the cloud is the mirror image of the figures
described in the proceeding paragraph.]

<TABLE>
<CAPTION>
DITECH PRODUCTS STATUS
<S> <C> <C>
[rectangle representing Echo Canceller (4SA)
an Echo Canceller] (For small office and network environments) Shipping
18T1/E1 Echo Canceller
[box representing (220 T1's in 7 foot rack)
an Echo Canceller] (126 e1's in 2.1m rack) Shipping
[box representing Quad T1 Echo Canceller
an Echo Canceller] (480 T1's in 7 foot rack) Shipping
[box representing Quad E1 Echo Canceller
Echo Canceller] (480 E1's in 2.1m rack) Shipping
[box representing Broadband Echo Canceller (BBEC") Commercially
Echo Canceller] (For higher capacity networks) Available
</TABLE>

BENEFITS TO SERVICE PROVIDER

- High capacity

- High performance

- Remote software upgradeability

- Low power consumption
<PAGE>
BUILDING THE NEW PUBLIC NETWORK

DITECH'S OPTICAL SOLUTION
EXPANDING THE NEW OPTICAL NETWORK

[Graphical illustration of a telecommunication network labeled "Long
Distance" represented by a large ring with (i) nine triangles on the ring
representing EDFA optical amplifiers, and (ii) four balls, the lower two of
which are labeled "Switching Center." To the left of the large ring is a box
labeled "SONET/SDH Terminal Packet Switch," underneath which the words "16
Wavelength DWDM Multiplexer System" are found. Out of this box come 16 arrows to
the right to a stack of 16 boxes labeled at the top with a "T" to denote that
they are Transponders. Out of each of these boxes comes an arrow to the right to
a trapezoid labeled "DWDM Mux." Out of this comes one arrow to the large ring.
At the right of the large ring is the mirror image of the figures described in
the proceeding four sentences, except that all arrows continue to go to the
right and the trapezoid labeled "DWDM Mux" is labeled "DWDM DeMux." Above and to
the left of the large ring is the figure of a person at a computer labeled
"Technician" with a dotted line out of the computer leading to two boxes, one of
which is labeled "Network Management System" and one of which is labeled
"Optical Telemetry System (OTS)." Out of these boxes comes a dotted line that
splits into two dotted lines, each leading to a box labeled "OTS." Out of each
of these boxes is a dotted line leading through one of the optical amplifiers on
the top of the large ring, then to a box labeled "Monitor," and them to one of
the optical amplifiers on the bottom of the large ring. In the center of the
large ring are the words "Remote Monitoring and Management."

Below the large ring is a graphical illustration of a telecommunication
network labeled "Local Exchange" represented by a smaller ring with four balls,
each with a different label as follows: "Remote Terminal"; "Central Office";
"Terminal"; "Campus"; and "ISP." Each of the first two balls, which are at the
top of the small ring, has a thick line leading up from it to one of the two
balls on the large ring labeled "Switching Center." To the left of the small
ring is a box labeled "SONET/SDH Terminal Packet Switch," underneath which the
words "4 Wavelength WDM Multiplexer System" are found. Out of this box come 4
arrows to the right to a stack of 4 boxes each labeled with a "T" to denote that
they are Transponders. Out of each of these boxes come an arrow to the right to
a trapezoid labeled "WDM Mux." Out of this comes one arrow to the small ring. At
the right of the small ring is the mirror image of the figures described in the
proceeding four sentences, except that all arrows continue to go to the right
and the trapezoid labeled "WDM Mux" is labeled "WDM DeMux." In the center of the
small ring are the words "Cost-effective, scalable solution."

To the left of the large and small rings and other graphical representations
is a cloud with the words "Voice," "Data," and "Video" in it. The cloud has two
dotted lines coming out of it, each to a box labeled "SONET/SDH Terminal Packet
Switch" on the left side of each of the two rings.]

<TABLE>
<CAPTION>
DITECH PRODUCTS STATUS
<S> <C> <C>
[Triangle] EDFA (optical amplifier) Shipping
Commercially
[Box with "T" in the middle] Transponder Available
Commercially
[Trapazoid] WDM Multiplexer/Demultiplexer Available
[Trapazoid] DWDM Multiplexer/Demultiplexer Development
Commercially
[Box with "OTS" in the middle] Optical Telemetry System (OTS) Available
Commercially
[Box with "Monitor" in the middle] DWDM Channel Monitor Available
</TABLE>

BENEFITS TO SERVICE PROVIDER

- Cost-effective, scalable solutions

- Interoperable in multivendor networks

- Designed to industry standards

- Remote monitoring and management
<PAGE>
PROSPECTUS SUMMARY

YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO APPEARING ELSEWHERE IN
THIS PROSPECTUS.

UNLESS OTHERWISE INDICATED, ALL INFORMATION INCLUDED IN THIS PROSPECTUS
ASSUMES:

- THE REDEMPTION OF ALL OF DITECH'S OUTSTANDING SERIES A PREFERRED STOCK,
THE CONVERSION OF ALL OF DITECH'S SERIES B PREFERRED STOCK TO COMMON STOCK
AT A RATE OF TWO SHARES OF COMMON STOCK FOR EACH THREE SHARES OF SERIES B
PREFERRED STOCK, AND THE AMENDMENT AND RESTATEMENT OF DITECH'S CERTIFICATE
OF INCORPORATION, ALL TO OCCUR AT THE CLOSING OF THIS OFFERING; AND

- NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION.

AS USED IN THIS PROSPECTUS, UNLESS THE CONTEXT OTHERWISE REQUIRES, THE TERM
"DITECH" REFERS TO DITECH COMMUNICATIONS CORPORATION, A DELAWARE CORPORATION,
ITS PREDECESSOR CALIFORNIA CORPORATION AND THE CALIFORNIA CORPORATION'S
PREDECESSORS AND SUBSIDIARIES.

DITECH

Ditech designs, develops and markets equipment used in building and
expanding telecommunications and cable communications networks. Our products
fall into two categories, echo cancellation equipment and equipment that enables
and facilitates communications over fiber optic networks. Our echo cancellation
products eliminate echo, which is a significant problem in existing and emerging
networks. Echo results from speech signals that are reflected back to the
speaker during a telephone call, making conversation difficult. This effect is
most pronounced when two people are talking over long distance, satellite,
cellular, PCS or packetized networks. Our echo cancellation products use a
software-intensive architecture coupled with one of the latest commercially
available digital signal processors, a semiconductor device that encodes and
decodes digital signals, to cancel echo and enhance the quality of voice
communications. To date, the vast majority of our revenue has been derived from
sales of our echo cancellation products. Our optical communications products
enable the implementation of wavelength division multiplexing, or WDM,
technology, a technology that enables multiple communication links to be carried
on one fiber optic connection which is becoming more widely adopted by service
providers to address network capacity constraints. Ditech's optical
communications products are designed to function either as stand-alone products
or as a complete system known as the Optical Path Solution.

Service providers, struggling to meet the demands of increasing traffic,
also face intense competition as worldwide deregulation and privatization have
enabled new players to enter the market. Growing numbers of service providers
are both expanding legacy infrastructures and building out new networks.
Consequently, traffic that was previously carried through the network of a
single service provider, is now routed through the networks of multiple service
providers. These networks are comprised of equipment from several different
vendors that must carry traffic over existing and emerging infrastructures. This
added complexity makes it more difficult to ensure network reliability and
service quality. Service providers, operating in an increasingly competitive
industry, must cost-effectively meet these challenges or lose business to
competitors who can.

Our objective is to become a leading provider of echo cancellation and
optical communications products required to cost-effectively build and manage
the telecommunications networks of the twenty-first century. Key elements of our
strategy include the following:

- Extend technology leadership;

- Increase optical communications products growth;

- Expand and leverage distribution channels;

- Strengthen existing and develop new customer relationships;

- Deliver cost-effective solutions; and

- Expand outsourced manufacturing.

3
<PAGE>
We have established a direct sales force that sells to our customers in the
United States and internationally. We also intend to expand the use of sales
agents, systems integrators, original equipment manufacturers and distributors
to sell and market our products internationally. More than fifty companies
purchased our products in fiscal 1999.

Ditech was originally incorporated as Phone Info, Inc. in July 1983 and
subsequently changed its name to Automated Call Processing Corporation, Inc. In
March 1997, Automated Call Processing sold portions of its business and merged
with its wholly-owned subsidiary, and the surviving entity was renamed Ditech
Corporation. Ditech reincorporated in Delaware in April 1999 and changed its
name to Ditech Communications Corporation. Shortly following the
reincorporation, Ditech effected a 2-for-3 reverse split of its common stock and
redeemed all of its outstanding Series C preferred stock. Where we refer to
numbers of shares of common stock in this prospectus, we have adjusted those
numbers to reflect the reverse stock split. Our principal offices are located at
825 E. Middlefield Road, Mountain View, California 94043, and our telephone
number is (650) 623-1300.

THE OFFERING

<TABLE>
<CAPTION>
<S> <C>
Shares offered by Ditech.............................. 3,000,000 shares
Shares to be outstanding after the offering........... 11,766,846 shares
Use of proceeds....................................... Approximately $19.58 million to redeem Ditech's
outstanding Series A Preferred Stock, $2.96 million
to complete the acquisition of technology, $7.25
million to repay bank debt, and the balance for
general corporate purposes
Proposed Nasdaq National Market symbol................ DITC
</TABLE>

The number of shares to be outstanding following this offering is based on
the number of shares outstanding on April 30, 1999, assuming conversion of the
Series B preferred stock. It excludes:

- 863,482 shares of common stock issuable upon exercise of outstanding
options at a weighted average exercise price of $3.60 per share;

- 456,746 shares of common stock reserved for issuance pursuant to our 1998
Stock Option Plan;

- 133,333 shares of common stock reserved for issuance pursuant to our 1999
Employee Stock Purchase Plan; and

- 100,000 shares of common stock reserved for issuance pursuant to our 1999
Non-Employee Directors' Stock Option Plan.

4
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
------------------------------------------
1995 1996 1997 1998 1999
------ ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue..................................................... $7,979 $14,354 $14,066 $12,326 $25,364
Gross profit................................................ 4,186 7,190 7,276 6,675 13,506
Operating expenses.......................................... 1,320 2,617 3,307 6,051 12,018
Income from operations...................................... 2,866 4,573 3,969 624 1,488
Income from continuing operations........................... 1,621 2,792 2,343 7 575
Discontinued operations(1).................................. (848 ) (1,413) 92 -- --
Net income.................................................. 773 1,379 2,435 7 575
Accretion of mandatorily redeemable preferred stock......... -- -- 187 1,374 1,497
Net income (loss) attributable to common stockholders....... $ 773 $ 1,379 $ 2,248 $(1,367) $ (922)
Basic and diluted per share data (2)
Income (loss) from continuing operations.................. $0.06 $ 0.10 $ 0.09 $ (0.45) $ (0.26)
------ ------- ------- ------- -------
------ ------- ------- ------- -------
Net income (loss)......................................... $0.03 $ 0.05 $ 0.09 $ (0.45) $ (0.26)
------ ------- ------- ------- -------
------ ------- ------- ------- -------
Number of shares used in per share calculations (2)
Basic..................................................... 27,903 27,903 24,772 3,061 3,566
------ ------- ------- ------- -------
------ ------- ------- ------- -------
Diluted................................................... 27,903 28,271 25,224 3,061 3,566
------ ------- ------- ------- -------
------ ------- ------- ------- -------
Pro forma net loss per share--basic and diluted (3)......... $ (0.07)
-------
-------
Shares used in pro forma per share calculations--basic and
diluted (3)............................................... 7,739
-------
-------
Supplemental net income per share--diluted (4).............. $ 0.09
-------
-------
Shares used in supplemental per share calculation--diluted
(4)....................................................... 11,123
-------
-------
</TABLE>

<TABLE>
<CAPTION>
APRIL 30, 1999
----------------------
ACTUAL AS ADJUSTED
--------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................................... $ 3,114 $ 3,114
Total assets................................................................................ 14,330 17,290
Long-term debt.............................................................................. 6,264 76
Redeemable preferred stock.................................................................. 25,258 --
Total stockholders' equity (deficit)........................................................ (23,343) 12,125
</TABLE>

- ------------------------------

(1) See Note 3 of notes to the financial statements included elsewhere in this
prospectus.

(2) The reduction in earnings per share due to accretion for redeemable
preferred stock will not occur after this offering because the Series A
preferred stock will be redeemed and the Series B preferred stock will be
converted to common stock at the closing of the offering.

(3) See Note 12 of notes to the financial statements included elsewhere in this
prospectus for an explanation of the method employed to determine the number
of shares used to compute per share amount.

(4) Supplemental net income per share is calculated assuming that Ditech sold
enough stock at the beginning of the period to redeem its Series A preferred
stock and to retire Ditech's debt. In this calculation Ditech uses the
offering price of $11.00 per share (less underwriters discount), offering
expenses are $900,000, and the tax benefit on interest expense is 40%.

The balance sheet data has been adjusted to reflect the sale of 3,000,000
shares of Common Stock in this offering at the initial public offering price of
$11.00 per share and the receipt and use of the estimated net proceeds therefrom
after deducting estimated underwriting discounts and estimated offering
expenses. See "Use of Proceeds."

5
<PAGE>
RISK FACTORS

THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER
THE RISKS AND UNCERTAINTIES DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS
PROSPECTUS BEFORE DECIDING WHETHER TO INVEST IN SHARES OF OUR COMMON STOCK. IF
ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION OR
OPERATING RESULTS COULD BE MATERIALLY ADVERSELY AFFECTED. THIS COULD CAUSE THE
TRADING PRICE OF OUR COMMON STOCK TO DECLINE, AND YOU MAY LOSE PART OR ALL OF
YOUR INVESTMENT.

WE DEPEND ON A LIMITED NUMBER OF CUSTOMERS FOR OUR PRODUCTS, THE LOSS OF ANY ONE
OF WHICH COULD CAUSE OUR REVENUE TO DECREASE

Our revenue historically has come from a small number of customers. A
customer may stop buying our products or significantly reduce its orders for our
products for a number of reasons, including consolidation in its industry. If
this happens, our revenues and business would be materially and adversely
affected. Our five largest customers accounted for over 65% of our revenue in
fiscal 1999 and over 75% of our revenue in fiscal 1998. Qwest/LCI accounted for
42% of our revenue in fiscal 1999 and in fiscal 1998. Our four next largest
customers accounted collectively for 23% of our revenue in fiscal 1999 and 38%
of our revenue in fiscal 1998. MCI accounted for $7.6 million, or more than 50%,
of our revenue in fiscal 1997, but only $1.4 million, or approximately 11%, of
our revenue in fiscal 1998. This reduction began shortly before the acquisition
of MCI by Worldcom.

OUR OPERATING RESULTS HAVE FLUCTUATED SIGNIFICANTLY IN THE PAST, AND WE
ANTICIPATE THAT THEY MAY CONTINUE TO DO SO IN THE FUTURE, WHICH COULD ADVERSELY
AFFECT OUR STOCK PRICE

Our quarterly operating results have fluctuated significantly in the past
and may fluctuate in the future as a result of several factors, some of which
are outside of our control. If revenue declines in a quarter, whether due to a
loss in revenue or a delay in recognizing expected revenue, our operating
results will be adversely affected because many of our expenses are relatively
fixed. In particular, sales and marketing, research and development and general
and administrative expenses do not change significantly with variations in
revenue in a quarter. Adverse changes in our operating results could adversely
affect our stock price.

OUR REVENUE MAY VARY FROM PERIOD TO PERIOD. Factors that could cause our
revenue to fluctuate from period to period include:

- the timing or cancellation of orders from, or shipments to, existing and
new customers;

- the timing of new product and service introductions by us, our customers,
our partners or our competitors;

- competitive pressures;

- variations in the mix of products offered by us; and

- variations in our sales or distribution channels.

In particular, sales of our echo cancellation products, which historically
have accounted for the vast majority of our revenue, have typically come from
our major customers ordering large quantities when they deploy a switching
center. Consequently, we may get one or more large orders in one quarter from a
customer and then no orders the next quarter. As a result, our revenue may vary
significantly from quarter to quarter.

In addition, the sales cycle for our products is typically lengthy. Before
ordering our products our customers perform significant technical evaluations,
which typically last up to 90 days in the

6
<PAGE>
case of our echo cancellation products and up to 180 days in the case of our
optical communications products. Once an order is made, delivery times can vary
depending on the product ordered, with delivery times for optical communications
products exceeding those for our echo cancellation products. As a result,
revenue forecasted for a specific customer for a particular quarter may not
occur in that quarter. Because of the potential large size of our customers'
orders, this would adversely affect our revenue for the quarter.

OUR EXPENSES MAY VARY FROM PERIOD TO PERIOD. Many of our expenses do not
vary with our revenue. Factors that could cause our expenses to fluctuate from
period to period include:

- the extent of marketing and sales efforts necessary to promote and sell
our products;

- the timing and extent of our research and development efforts;

- the availability and cost of key components for our products; and

- the timing of personnel hiring.

If we incur such additional expenses in a quarter in which we do not
experience increased revenue, our profitability would be adversely affected and
we may even incur losses for that quarter.

WE ANTICIPATE THAT AVERAGE SELLING PRICES FOR OUR PRODUCTS WILL DECLINE IN THE
FUTURE, WHICH COULD ADVERSELY AFFECT OUR PROFITABILITY

We expect that the price we can charge our customers for our products will
decline as new technologies become available and as competitors lower prices
either as a result of reduced manufacturing costs or a strategy of cutting
margins to achieve or maintain market share. As a result, we may face reduced
profitability and perhaps losses in future periods. We expect price reductions
to be more pronounced in the market for our echo cancellation products, at least
in the near term, due to more established competition for these products. While
we intend to reduce our manufacturing costs in an attempt to maintain our
margins and to introduce enhanced products with higher selling prices, we may
not execute these programs on schedule. In addition, our competitors may drive
down prices faster or lower than our planned cost reduction programs. Even if we
can reduce our manufacturing costs, many of our operating costs will not decline
immediately if revenue decreases due to price competition.

IF WE DO NOT SUCCESSFULLY DEVELOP AND INTRODUCE OUR NEW PRODUCTS, OUR PRODUCTS
MAY BECOME OBSOLETE

If we do not successfully develop and introduce our new products and our
existing products become obsolete due to product introductions by competitors,
our revenues will decline. Our ability to maintain and increase revenue in the
future will depend primarily on:

- acceptance of our new Quad T1, Quad E1 and 4SA echo cancellation products;

- our successful introduction and sale of our new Broadband Echo
Cancellation System;

- our successful introduction and sale of our new optical monitors,
telemetry systems, transponders and four-channel wavelength division
multiplexing products; and

- our successful development and introduction of our sixteen-channel
wavelength division multiplexing products.

However, we may not be able to successfully produce or market our new
products in commercial quantities, complete product development when
anticipated, or increase sales. These risks are of particular concern when a new
generation product is introduced. As a result, while we believe we will achieve
our product introduction dates, they may be delayed. For the year ended April
30,

7
<PAGE>
1999, sales of our 18T1 and 18E1 echo cancellation products accounted for the
vast majority of our revenue. Shipments of our optical amplifiers began in the
third quarter of calendar 1996 and accounted for substantially all of our
revenue for optical communications products during fiscal 1999. In the past, we
experienced an unforeseen delay in the development of one of our products due to
the need to design around a part that did not function as anticipated and also
when the first version of one of our optical communications products did not
fully meet customer requirements. We may experience similar unforeseen delays in
the development of our new products. We must devote a substantial amount of
resources in order to develop and achieve commercial acceptance of our new echo
cancellation and optical communications products. We may not be able to address
evolving demands in these markets in a timely or effective way. Even if we do,
customers in these markets may purchase or otherwise implement competing
products.

CUSTOMERS MAY DELAY ORDERS FOR OUR EXISTING PRODUCTS IN ANTICIPATION OF NEW
PRODUCTS. Our customers may delay orders for our existing products in
anticipation of the release of our or our competitors' new products. Further, if
our or our competitors' new products substantially replace the functionality of
our existing products, our existing products may become obsolete, and we could
be forced to sell them at reduced prices or even at a loss.

IF WE ARE NOT ABLE TO DEVELOP SUBSTANTIAL REVENUE FROM SALES OF OUR OPTICAL
COMMUNICATIONS PRODUCTS, OUR ABILITY TO GROW OUR BUSINESS MAY BE SUBSTANTIALLY
IMPAIRED

To date, the vast majority of our revenue has been derived from sales of our
echo cancellation products. If we are not able to develop substantial revenue
from sales of our optical communications products, our ability to grow our
business may be substantially impaired. In fiscal 1997, fiscal 1998 and fiscal
1999, we derived approximately 99.5%, 94.1% and 93.7%, respectively, of our
revenue from the sale of our echo cancellation products. We expect that a
substantial majority of our revenue will continue to come from sales of our echo
cancellation products for the foreseeable future.

WE FACE INTENSE COMPETITION, WHICH COULD ADVERSELY AFFECT OUR ABILITY TO
MAINTAIN OR INCREASE SALES OF OUR PRODUCTS

The markets for our echo cancellation and optical communications products
are intensely competitive, continually evolving and subject to rapid
technological change. We may not be able to compete successfully against current
or future competitors, including our customers. Certain of our customers also
have the ability to internally produce the equipment that they currently
purchase from us. In such cases, we also compete with their internal product
development capabilities. We expect that competition in each of the echo
cancellation and optical communications markets will increase in the future. We
may not have the financial resources, technical expertise or marketing,
manufacturing, distribution and support capabilities to compete successfully.

One of our competitors, Nortel Networks, has announced that it is developing
an integrated switch, which would have echo cancellation capability built into
it and would therefore eliminate the need for the echo cancellation capability
provided by our products. Announcements such as these, or the commercial
availability of such switches or other competing products, may cause our
customers to delay or cancel orders for our products.

Most of our competitors and potential competitors have substantially greater
name recognition and technical, financial and marketing resources than we do.
Such competitors may undertake more extensive marketing campaigns, adopt more
aggressive pricing policies and devote substantially more resources to
developing new products than we will. For more information on the competition we
face, see "Business--Competition."

8
<PAGE>
WE DEPEND ON TELINNOVATION FOR TRANSITIONAL SUPPORT OF OUR ECHO CANCELLATION
TECHNOLOGY, THE LOSS OF WHICH COULD DELAY PRODUCT DEVELOPMENT

We recently acquired our echo cancellation technology from Telinnovation.
Prior to this acquisition we licensed this technology from Telinnovation, which
provided engineering support for our use of this technology. We are currently
focused on increasing our knowledge of this technology so that we will be able
to modify and enhance it ourselves. If Telinnovation does not fulfill its
obligations to assist us during this transitional phase, or if we need to devote
more resources to this technology than we currently expect, our product
development plans could be delayed.

IF WE DO NOT REDUCE MANUFACTURING COSTS OF OUR PRODUCTS TO RESPOND TO
ANTICIPATED DECREASING AVERAGE SELLING PRICES, OUR ABILITY TO GENERATE PROFITS
COULD BE ADVERSELY AFFECTED

In order to respond to increasing competition and our anticipation that
average selling prices will decrease, we are attempting to reduce manufacturing
costs of our new and existing products. If we do not reduce manufacturing costs
and average selling prices decrease, our operating results will be adversely
affected. We may not be able to successfully reduce the cost of manufacturing
our products due to a number of factors, including:

WE RELY ON A LIMITED SOURCE OF MANUFACTURING. Manufacturing of our echo
cancellation products and the electronic printed circuit board assemblies for
our optical communications products is currently outsourced to two contract
manufacturers, one of which was recently established. Until we are able to
establish additional manufacturing relationships, we may not be able to
successfully reduce manufacturing costs. In addition, if we or these contract
manufacturers terminate any of these relationships, or if we otherwise establish
new relationships, we may encounter problems in the transition of manufacturing
to another contract manufacturer, which could temporarily increase our
manufacturing costs and cause product delays. See "Business--Manufacturing."

WE HAVE NO COMMERCIAL MANUFACTURING EXPERIENCE WITH OUR NEW PRODUCTS. To
date we have manufactured our pre-production Broadband Echo Cancellation System
and optical communications products in our facilities but not in commercial
quantities. We will need to outsource the manufacturing of these products once
we begin to commercially manufacture them. We may experience delays and other
problems during the transition to outsourcing the manufacture of these products.

WE OPERATE IN AN INDUSTRY EXPERIENCING RAPID TECHNOLOGICAL CHANGE, WHICH MAY
MAKE OUR PRODUCTS OBSOLETE

Our future success will depend on our ability to develop, introduce and
market enhancements to our existing products and to introduce new products in a
timely manner to meet our customers' requirements. The echo cancellation and
optical communications markets we target are characterized by:

- rapid technological developments;

- frequent enhancements to existing products and new product introductions;

- changes in end user requirements; and

- evolving industry standards.

WE MAY NOT BE ABLE TO RESPOND QUICKLY AND EFFECTIVELY TO THESE RAPID
CHANGES. The emerging nature of these products and their rapid evolution will
require us to continually improve the performance, features and reliability of
our products, particularly in response to competitive product offerings. We may
not be able to respond quickly and effectively to these developments. The
introduction or market acceptance of products incorporating superior
technologies or the emergence of

9
<PAGE>
alternative technologies and new industry standards could render our existing
products, as well as our products currently under development, obsolete and
unmarketable. In addition, we may have only a limited amount of time to
penetrate certain markets, and we may not be successful in achieving widespread
acceptance of our products before competitors offer products and services
similar or superior to our products. We may fail to anticipate or respond on a
cost-effective and timely basis to technological developments, changes in
industry standards or end user requirements. We may also experience significant
delays in product development or introduction. In addition, we may fail to
release new products or to upgrade or enhance existing products on a timely
basis.

WE MAY NEED TO MODIFY OUR PRODUCTS AS A RESULT OF CHANGES IN INDUSTRY
STANDARDS. The emergence of new industry standards, whether through adoption by
official standards committees or widespread use by service providers, could
require us to redesign our products. If such standards become widespread, and
our products are not in compliance, our current and potential customers may not
purchase our products. The rapid development of new standards increases the risk
that our competitors could develop and introduce new products or enhancements
directed at new industry standards before us.

IF EMERGING COMPETITIVE SERVICE PROVIDERS AND THE TELECOMMUNICATIONS INDUSTRY AS
A WHOLE EXPERIENCE A DOWNTURN OR REDUCTION IN GROWTH RATE, THE DEMAND FOR OUR
PRODUCTS WILL DECREASE, WHICH WILL ADVERSELY AFFECT OUR BUSINESS

Our success will depend in large part on continued development and expansion
of voice and data communications networks. Development of communications
networks is driven in part by the growth of competitive service providers that
emerged as a result of the Telecommunications Act of 1996 and privatization of
the telecommunications industry on a global scale. We are subject to risks of
growth constraints due to our current and planned dependence on emerging
competitive and privatized overseas service providers. These potential customers
may be constrained for a number of reasons, including their limited capital
resources, changes in regulation and consolidation.

WE DEPEND ON TEXAS INSTRUMENTS AS THE SOLE SOURCE OF A COMPONENT USED IN OUR
PRODUCTS, THE LOSS OF WHICH COULD DELAY PRODUCT SHIPMENTS

We rely on Texas Instruments as the sole source of the digital signal
processors that we use in our echo cancellation products. We have no guaranteed
supply arrangements with Texas Instruments. Any extended interruption in the
supply of digital signal processors from Texas Instruments would affect our
ability to meet scheduled deliveries of our echo cancellation products to
customers. If we are unable to obtain a sufficient supply of digital signal
processors from Texas Instruments, we could experience difficulties in obtaining
alternative sources or in altering product designs to use alternative
components. Resulting delays or reductions in product shipments could damage
customer relationships, and we could lose customers and orders.

OUR BUSINESS IS GROWING, WHICH IS DIVERTING OUR MANAGEMENT'S ATTENTION FROM THE
DAY TO DAY OPERATIONS OF OUR BUSINESS AND MAY REDUCE OUR ABILITY TO FOCUS ON
FUTURE BUSINESS OPPORTUNITIES

In December 1998, we moved into our new corporate offices and research and
development facilities. We anticipate significantly expanding our management
team and business capacity to address potential growth in our customer base and
market opportunities. The relocation to our new facilities diverted our
management's attention from our business. Additional expansion of our business
may further strain our management personnel, operations and resources. Growth in
our customer base may require us to improve our predictions of what customers
are likely to need and when they will need it, which may also further strain our
sales and marketing personnel. Continued growth will require us to hire more
engineering, sales, marketing, operations, customer support and

10
<PAGE>
services, and administrative personnel and scale our research and development
capability, which we may not be able to do.

RECENT AND PLANNED PERSONNEL ADDITIONS. Our Chief Executive Officer also
functions as our Vice President of Sales, and has only been the Chief Executive
Officer since September 1998. We recently hired our new Vice President of
Operations, who began working with us in December 1998, and a Vice President of
Marketing, especially for the marketing of our optical communications products,
who began working with us in April 1999. We may experience problems in
integrating new personnel into our corporate culture. In addition, new hires may
not be productive during the time that they are being integrated into our
business.

WE MAY EXPERIENCE UNFORESEEN PROBLEMS AS WE DIVERSIFY OUR INTERNATIONAL CUSTOMER
BASE, WHICH WOULD IMPAIR OUR ABILITY TO GROW OUR BUSINESS

Historically, we have sold mostly to customers in North America. We
currently are contemplating the expansion of our international presence, which
will require additional hiring of personnel for the overseas market and other
expenditures. Our planned expansion overseas may not be successful. As we expand
our sales focus further into international markets, we will face additional and
complex issues that we may not have faced before, such as addressing currency
fluctuations, manufacturing overseas and import/export controls, which will put
additional strain on our management personnel. In the past, substantially all of
our international sales have been denominated in U.S. dollars, however, in the
future, we may be forced to denominate a greater amount of international sales
in foreign currencies. The number of installations we will be responsible for is
likely to increase as a result of our continued international expansion. In the
past, we have experienced difficulties installing one of our echo cancellation
products overseas. In addition, we may not be able to establish more
relationships with original equipment manufacturers. If we do not, our ability
to increase sales could be materially impaired.

IF WE LOSE THE SERVICES OF ANY MEMBER OF OUR SENIOR MANAGEMENT OR KEY TECHNICAL
PERSONNEL, OR ARE UNABLE TO RETAIN OR ATTRACT ADDITIONAL TECHNICAL PERSONNEL,
OUR ABILITY TO CONDUCT AND EXPAND OUR BUSINESS WILL BE IMPAIRED

We depend heavily on Tim Montgomery, our President and Chief Executive
Officer, Pong Lim, our Chairman of the Board, and on other key management and
technical personnel, for the conduct and development of our business and the
development of our products. If we lose the services of any one of these people
for any reason, this could adversely affect our ability to conduct and expand
our business and to develop new products. We do not have employment contracts
with any of our executive officers other than Mr. Montgomery, Mr. Lim, Ms. Toni
Bellin, our Vice President of Operations, and Marc Schwager, our Vice President
of Marketing, and we maintain a "key person" life insurance policy only on Mr.
Lim. We believe that our future success will depend in large part upon our
continued ability to attract, retain and motivate highly skilled employees, who
are in great demand. However, we may not be able to do so.

A SMALL GROUP OF ENTITIES OWN OR CONTROL A SUBSTANTIAL AMOUNT OF OUR STOCK AND
MAY, THEREFORE, INFLUENCE OUR AFFAIRS

Following this offering, and assuming that the underwriters' over-allotment
option is not exercised, Summit Partners and its affiliates, and Kenneth Jones,
will collectively control approximately 44.7% of our outstanding common stock,
as follows:

- Summit Partners and its affiliates 32.9%

- Kenneth Jones 11.8%

11
<PAGE>
In addition, Messrs. Avis and Chung, directors of Ditech, are affiliated with
Summit Partners, and Mr. Jones is a director of Ditech. As a result, these
stockholders as a group will be able to substantially influence the management
and affairs of Ditech and, if acting together, would be able to influence most
matters requiring the approval by our stockholders, including the election of
directors, any merger, consolidation or sale of all or substantially all of our
assets and any other significant corporate transactions. The concentration of
ownership may also delay or prevent a change of control of Ditech at a premium
price if these stockholders oppose it.

OUR ABILITY TO COMPETE SUCCESSFULLY WILL DEPEND, IN PART, ON OUR ABILITY TO
PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, WHICH WE MAY NOT BE ABLE TO PROTECT

We rely on a combination of patents, trade secrets, copyright and trademark
laws, nondisclosure agreements and other contractual provisions and technical
measures to protect our intellectual property rights. Nevertheless, such
measures may not be adequate to safeguard the technology underlying our echo
cancellation and optical communications products. In addition, employees,
consultants and others who participate in the development of our products may
breach their agreements with us regarding our intellectual property, and we may
not have adequate remedies for any such breach. In addition, we may not be able
to effectively protect our intellectual property rights in certain countries. We
may, for a variety of reasons, decide not to file for patent, copyright or
trademark protection outside of the United States. We also realize that our
trade secrets may become known through other means not currently foreseen by us.
Notwithstanding our efforts to protect our intellectual property, our
competitors may be able to develop products that are equal or superior to our
products without infringing on any of our intellectual property rights. For
further information on our intellectual property and the difficulties in
protecting it, see "Business--Patents and Intellectual Property Rights."

OUR PRODUCTS EMPLOY TECHNOLOGY THAT MAY INFRINGE ON THE PROPRIETARY RIGHTS OF
THIRD PARTIES, WHICH MAY EXPOSE US TO LITIGATION

Although we do not believe that our products infringe the proprietary rights
of any third parties, third parties may still assert infringement or invalidity
claims (or claims for indemnification resulting from infringement claims)
against us. Such assertions could materially adversely affect our business,
financial condition and results of operations. In addition, irrespective of the
validity or the successful assertion of such claims, we could incur significant
costs in defending against such claims.

WE ARE INVOLVED IN ARBITRATION PROCEEDINGS THAT MAY HAVE A MATERIAL ADVERSE
EFFECT ON OUR FINANCIAL CONDITION IF IT IS RESOLVED UNFAVORABLY TO US

We are involved in an arbitration proceeding instigated by us, in which the
opposing party has made a counter-claim against us, involving monetary damages.
The testimony phase of the arbitration was completed in May 1999 and a decision
is expected from the arbitration panel in late June 1999. Although we believe we
have a valid claim to recover monetary damages, if we do not succeed on our
claim and the opposing party succeeds on their counterclaim, it could have a
material adverse effect on our financial condition. See "Business--Legal
Proceedings."

IF WE VIOLATE OUR BANK DEBT COVENANTS, WE MAY NOT BE ABLE TO UTILIZE OUR BANK
LINE OF CREDIT

In the past we were in violation of certain minimum cash and ratio covenants
of a line of credit. If operating results do not meet certain thresholds, we may
be in violation of these covenants in the future. If we are in violation of
these covenants, we may not be able to utilize our bank line of credit.

12
<PAGE>
PROVISIONS OF OUR CHARTER DOCUMENTS AND DELAWARE LAW MAY INHIBIT A TAKEOVER,
WHICH COULD LIMIT THE PRICE INVESTORS MIGHT BE WILLING TO PAY IN THE FUTURE FOR
OUR COMMON STOCK

Provisions in our Certificate of Incorporation and Bylaws may have the
effect of delaying or preventing a change of control or changes in our
management. Such provisions could limit the price that certain investors might
be willing to pay in the future for shares of our common stock. These provisions
include, among others:

- the division of the Board of Directors into three separate classes;

- the ability of the Board of Directors to issue up to 5,000,000 shares of
preferred stock, and to determine the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares
without any further vote or action by the stockholders;

- advance notice requirements for stockholders to nominate directors and
bring stockholder proposals to a vote; and

- the inability of stockholders to act by written consent.

Furthermore, because we are incorporated in Delaware, we are subject to the
provisions of Section 203 of the Delaware General Corporation Law. These
provisions prohibit certain large stockholders, in particular those owning 15%
or more of the outstanding voting stock, from consummating a merger or
combination with a corporation unless:

- 66 2/3% of the shares of voting stock not owned by the large stockholder
approve the merger or combination; or

- Board of Directors approves the merger or combination or the transaction
that resulted in the large stockholder owning 15% or more of our
outstanding voting stock.

See "Description of Capital Stock--Anti-Takeover Effects of Provisions of
Charter Documents and Delaware Law."

THERE IS A LARGE NUMBER OF SHARES THAT MAY BE SOLD IN THE MARKET FOLLOWING THIS
OFFERING, WHICH MAY DEPRESS THE MARKET PRICE OF OUR COMMON STOCK

Sales of substantial numbers of shares of our common stock in the public
market after this offering, or the perception that such sales may be made, could
materially and adversely affect the market price of our common stock.

All of the shares issued in this offering will be freely tradeable. Of the
8,766,846 shares of common stock outstanding as of April 30, 1999:

- 8,337,677 shares will become available for sale 180 days following the
date of this prospectus upon the expiration of lock-up agreements with our
underwriters, subject to the restrictions imposed by the federal
securities laws on sales by affiliates; and

- an additional 429,169 shares may become available for sale at various
times after the 180 days following the date of this prospectus as Ditech's
repurchase option on such shares lapses, subject to the restrictions
imposed by the federal securities laws on sales by affiliates.

In addition, up to an additional 181,598 shares may become available for sale
180 days following the date of this prospectus upon the exercise of stock
options and additional shares may become available thereafter as outstanding
options vest and are exercised. The underwriters, however, may waive the lock-up
restriction at their sole discretion. See "Shares Eligible for Future Sale."

13
<PAGE>
OUR OR THIRD PARTIES' COMPUTER SYSTEMS MAY FAIL IN THE YEAR 2000, WHICH WOULD
DELAY OUR PRODUCT DEVELOPMENT AND THE MANUFACTURING OF OUR PRODUCTS

Failure of our computer systems could adversely affect our product
development processes and/or our ability to cost-effectively manage Ditech
during the time required to fix such problems. In addition, computer failures
could cause the manufacturer of our products to incur delays in manufacturing,
or our customers to postpone or cancel orders for our products. We are currently
assessing the readiness of our computer systems and those of our manufacturers
and major customers to handle dates beyond the year 1999. Unforeseen problems in
our own computers and embedded systems and from customers, our manufacturers,
suppliers and other organizations with which we conduct transactions worldwide
may arise. These statements constitute year 2000 disclosures under federal law.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Impact of the Year 2000 Computer Problem" for more information on
the status of our preparation relating to this issue.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus includes "forward-looking statements." The words "believe,"
"anticipate," "expect," "intend" and other similar words intended to identify
these statements as forward-looking statements. Such statements include
statements under the captions "Risk Factors," "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and elsewhere in this prospectus as to, among others:

- the timing of availability of products under development or in beta-test;

- our ability to commercialize new products;

- the acceptance and performance of our products;

- our ability to reduce manufacturing costs and introduce enhanced products
with higher selling prices;

- the relative contributions to our revenues from future sales of our echo
cancellation and optical communications products;

- our expectations as to margins on our new products and products we sell
through original equipment manufacturers;

- our future sales and marketing, research and development and general
administrative expenditures and income tax rates;

- our expectations as to increases in working capital and planned
expenditures on property and equipment;

- our belief as to our future cash requirements;

- our state of readiness for the year 2000, the effect it will have on us
and the timing of development of our year 2000 contingency plans;

- the effectiveness of, and our ability to carry out, each element of our
business strategy;

- our expectations as to the commencement of production shipment of our
Broadband Echo Cancellation System;

- our intentions with respect to future research and development and
manufacturing activities;

- our expectations as to the increase in demand for echo cancellation
products;

- our expectations of expanding our management team and business capacity;

14
<PAGE>
- our expectations regarding the outcome and timing of the arbitration
proceeding we instigated;

- our expectations of our international presence and hiring personnel for
the overseas market; and

- our ability to satisfy cash requirements for at least the next twelve
months from a combination of the proceeds from this offering, our cash
flow from operations and our bank line of credit;

- our plan to take corrective actions based on our assessment of the impact
of Euro conversion on internal systems, sales and global markets;

- our plan to use the proceeds from this offering to redeem Series A
preferred stock, pay for acquisition of technology, repay debt, and for
general corporate purposes; and

- our plan to enter into indemnification agreements with each director and
executive officer.

The ultimate outcome of the matters set forth in these statements are subject to
risks and uncertainties that could cause actual results to differ materially
from those projected. The cautionary statements made in this prospectus should
be read as being applicable to all related forward-looking statements wherever
they appear in this prospectus. We assume no obligation to update such
forward-looking statements or to update the reasons actual results could differ
materially from those anticipated in such forward-looking statements.

USE OF PROCEEDS

The net proceeds to Ditech from the sale of the 3,000,000 shares of common
stock being offered, at the initial public offering price of $11.00 per share,
are estimated to be approximately $29,790,000 after deducting underwriting
discounts and commissions and estimated offering expenses payable by us. We
expect to use the net proceeds:

- to redeem our outstanding Series A preferred stock upon the closing of the
offering for approximately $19.58 million (as of April 30, 1999);

- to pay Telinnovation $2.96 million as a one-time fee in connection with
the acquisition of certain of our technology;

- to repay up to approximately $7.25 million in debt owed to BankBoston,
N.A. as of April 30, 1999; and

- for general corporate purposes, including capital expenditures and
research and development.

The interest rate on the BankBoston term loan as of April 30, 1999 was 8.25%
(the current base rate of 7.75% plus 0.5%) and this debt will mature on December
31, 2002. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation--Liquidity and Capital Resources." The amounts and timing
of our actual expenditures will depend upon numerous factors, including the
status of our product development and commercialization efforts, the amount of
proceeds actually raised in this offering, the amount of cash generated by our
operations, competition, and sales and marketing activities. If we receive
substantially less net proceeds from this offering than we currently
contemplate, then we may not repay some or all of our outstanding debt. Pending
application of the net proceeds as described above, we intend to invest the net
proceeds of the offering in short-term, investment-grade, interest-bearing
securities.

DIVIDEND POLICY

Ditech has never paid any cash dividends on its capital stock. We currently
anticipate that we will retain earnings to support operations and to finance the
growth and development of our business and do not anticipate paying cash
dividends for the foreseeable future. In addition, our credit agreement with
BankBoston prohibits us from paying cash dividends without the lender's written
consent.

15
<PAGE>
CAPITALIZATION

The following table sets forth the capitalization of Ditech as of April 30,
1999:

- on an actual basis;

- on a pro forma basis assuming the conversion of all of our Series B
preferred stock to common stock, and

- on an as adjusted pro forma basis assuming the sale of the 3,000,000
shares of common stock offered by us at the initial public offering price
of $11.00 per share (after deducting the estimated underwriting discount
and offering expenses) and application of the estimated net proceeds
therefrom, including the redemption of all of our Series A preferred stock
for cash.

This table should be read in conjunction with our financial statements and
notes thereto appearing elsewhere in this prospectus.

<TABLE>
<CAPTION>
APRIL 30, 1999
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ------------- -----------
(IN
THOUSANDS)
-------------
<S> <C> <C> <C>
Capital lease, net of current.................................. $ 76 $ 76 $ 76
Note payable, net of current................................... 6,188 6,188 --
--------- ------------- -----------
Long term debt................................................. 6,264 6,264 76
--------- ------------- -----------
Redeemable preferred stock:

Series A preferred stock, $0.001 par value, 17,250,000 shares
authorized and outstanding actual and pro forma; no shares
authorized or outstanding pro forma as adjusted.............. 19,241 19,241 --

Series B preferred stock, $0.001 par value; 6,259,718 shares
authorized and outstanding actual; no shares authorized or
outstanding pro forma and pro forma as adjusted.............. 6,017 -- --
--------- ------------- -----------

Total redeemable preferred stock........................... 25,258 19,241 --
--------- ------------- -----------
Stockholders' equity (deficit):

Undesignated preferred stock, $.001 par value; no shares
authorized actual and pro forma; 5,000,000 shares authorized,
none issued and outstanding, pro forma as adjusted........... -- -- --

Common stock, $.001 par value; 50,000,000 shares authorized
actual, pro forma and pro forma as adjusted; 4,593,707 shares
issued and outstanding actual; 8,766,846 shares issued and
outstanding pro forma; and 11,766,846 shares issued and
outstanding pro forma as adjusted............................ 5 9 12
Additional paid in capital..................................... 3,085 9,098 38,885
Deferred stock compensation.................................... (1,229) (1,229) (1,229)
Accumulated deficit............................................ (25,204) (25,204) (25,543)
--------- ------------- -----------
Total stockholders' equity (deficit)........................... (23,343) (17,326) 12,125
--------- ------------- -----------
Total capitalization....................................... $ 8,179 $ 8,179 $ 12,201
--------- ------------- -----------
--------- ------------- -----------
</TABLE>

16
<PAGE>
The number of shares of common stock referenced above excludes as of April
30, 1999:

- 863,482 shares of common stock issuable upon exercise of options
outstanding at a weighted average exercise price of $3.60 per share;

- 456,746 shares of common stock reserved for issuance pursuant to our 1998
Stock Option Plan;

- 133,333 shares of common stock reserved for issuance pursuant to our 1999
Employee Stock Purchase Plan; and

- 100,000 shares of common stock reserved for issuance pursuant to our 1999
Non-Employee Director Stock Option Plan.

See "Management--Benefit Plans."

17
<PAGE>
DILUTION

The net tangible book deficit of Ditech at April 30, 1999, was approximately
$18.5 million, or $2.11 per share (assuming conversion of the Series B preferred
stock). Net tangible book value per share is determined by dividing our tangible
net worth (tangible assets less liabilities) by the number of shares of common
stock outstanding. After giving effect to the sale by us of the 3,000,000 shares
of common stock we are offering at the public offering price of $11.00 per
share, after deducting estimated underwriting discounts and commissions and
estimated offering expenses, the net tangible book value of Ditech as of April
30, 1999 would have been approximately $8.4 million, or $0.72 per share. This
represents an immediate increase in the net tangible book value of $2.83 per
share to existing stockholders and an immediate dilution in the net tangible
book value of $10.28 per share to new investors purchasing shares at the public
offering price. The following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Initial public offering price per share.................................... $ 11.00
Net tangible book value per share as of April 30, 1999................... $ (2.11)
Increase per share attributable to new investors in this offering........ 2.83
---------

Net tangible book value per share after the offering....................... 0.72
---------
Dilution per share to new investors........................................ $ 10.28
---------
---------
</TABLE>

The following table sets forth, as of April 30, 1999, the difference between
the number of shares of common stock purchased from Ditech (assuming the
conversion of Series B preferred stock), the total consideration paid and the
average price per share paid by the existing stockholders and by the new
investors at the initial public offering price of $11.00 per share for shares
purchased in this offering, before deducting underwriting discounts and
commissions and estimated offering expenses:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------- -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............................. 8,766,846 74.5% $ 8,239,000 20.0% $ 0.94
New investors..................................... 3,000,000 25.5 33,000,000 80.0 11.00
---------- ------- ----------- -------
Total........................................... 11,766,846 100.0% $41,239,000 100.0%
---------- ------- ----------- -------
---------- ------- ----------- -------
</TABLE>

To the extent our existing option holders exercise their options currently
outstanding, there will be further dilution.

18
<PAGE>
SELECTED FINANCIAL DATA

The statement of operations data for each of the three years ended April 30,
1999, and the balance sheet data as of April 30, 1999 and 1998, have been
derived from the audited financial statements of Ditech included elsewhere in
this prospectus that have been audited by PricewaterhouseCoopers LLP,
independent accountants. The statement of operations data for the year ended
April 30, 1996 and the balance sheet data as of April 30, 1997, have been
derived from audited financial statements not included in this prospectus. The
statement of operations data for the year ended April 30, 1995, and the balance
sheet data as of April 30, 1996 and 1995 have been derived from the unaudited
financial statements of Ditech not included in this prospectus. The data set
forth below should be read in conjunction with the financial statements of
Ditech, including the notes thereto, and with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this prospectus.

<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
------------------------------------------------
1995 1996 1997 1998 1999
----------- ------- ------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue................................................ $ 7,979 $14,354 $14,066 $12,326 $25,364
Cost of goods sold..................................... 3,793 7,164 6,790 5,651 11,858
----------- ------- ------- ------- -------
Gross profit......................................... 4,186 7,190 7,276 6,675 13,506
----------- ------- ------- ------- -------
Operating expenses:
Sales and marketing.................................. 563 1,041 1,521 2,405 5,759
Research and development............................. 514 1,040 1,072 2,367 3,860
General and administrative........................... 243 536 714 1,279 2,399
----------- ------- ------- ------- -------
Total operating expenses........................... 1,320 2,617 3,307 6,051 12,018
----------- ------- ------- ------- -------
Income from operations................................. 2,866 4,573 3,969 624 1,488
Other income (expense), net............................ -- (5) (104) (593) (500)
----------- ------- ------- ------- -------
Income from continuing operations before income
taxes................................................ 2,866 4,568 3,865 31 988
Provision for income taxes............................. 1,245 1,776 1,522 24 413
----------- ------- ------- ------- -------
Income from continuing operations...................... 1,621 2,792 2,343 7 575
Discontinued operations:
Income (loss) from operations (1).................... (848) (1,413) (2,751) -- --
Gain on disposal (1)................................. -- -- 2,843 -- --
----------- ------- ------- ------- -------
Net income............................................. 773 1,379 2,435 7 575
Accretion of mandatorily redeemable preferred stock to
redemption value..................................... -- -- 187 1,374 1,497
----------- ------- ------- ------- -------
Net income (loss) attributable to common
stockholders......................................... $ 773 $ 1,379 $ 2,248 $(1,367) $ (922)
----------- ------- ------- ------- -------
----------- ------- ------- ------- -------
Per share data (2)
Basic
Income (loss) from continuing operations........... $ 0.06 $ 0.10 $ 0.09 $ (0.45) $ (0.26)
Discontinued operations............................ (0.03) (0.05) 0.00 -- --
----------- ------- ------- ------- -------
Net income (loss) per share........................ $ 0.03 $ 0.05 $ 0.09 $ (0.45) $ (0.26)
----------- ------- ------- ------- -------
----------- ------- ------- ------- -------
Diluted
Income (loss) from continuing operations........... $ 0.06 $ 0.10 $ 0.09 $ (0.45) $ (0.26)
Discontinued operations............................ (0.03) (0.05) 0.00 -- --
----------- ------- ------- ------- -------
Net income (loss) per share........................ $ 0.03 $ 0.05 $ 0.09 $ (0.45) $ (0.26)
----------- ------- ------- ------- -------
----------- ------- ------- ------- -------
Number of shares used in per share calculations (2)
Basic................................................ 27,903 27,903 24,772 3,061 3,566
----------- ------- ------- ------- -------
----------- ------- ------- ------- -------
Diluted.............................................. 27,903 28,271 25,224 3,061 3,566
----------- ------- ------- ------- -------
----------- ------- ------- ------- -------
Pro forma data (3)
Net loss per share--basic and diluted................ $ (0.07)
-------
-------
Shares used in per share calculations--basic and
diluted............................................ 7,739
-------
-------
Supplemental per share data (4)
Supplemental net income per share--diluted........... $ 0.09
-------
-------
Shares used in supplemental per share
calculation--diluted............................... 11,123
-------
-------
</TABLE>

19
<PAGE>

<TABLE>
<CAPTION>
APRIL 30,
-----------------------------------------------------------
1995 1996 1997 1998 1999
------------- ----------- --------- --------- ---------
(UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................ $ 100 $ 531 $ 4,199 $ 3,433 $ 3,114
Total assets..................................... 7,333 11,075 17,508 17,274 14,330
Long-term debt................................... -- -- 7,875 7,410 6,264
Redeemable preferred stock....................... -- -- 29,747 31,122 25,258
Total stockholders' equity (deficit)............. 6,793 8,172 (22,768) (24,057) (23,343)
</TABLE>

- ------------------------

(1) See Note 3 of notes to the financial statements included elsewhere in this
prospectus.

20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SELECTED FINANCIAL DATA" AND OUR FINANCIAL STATEMENTS AND NOTES THERETO
INCLUDED ELSEWHERE IN THIS PROSPECTUS. THE DISCUSSION IN THIS PROSPECTUS
CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH
AS STATEMENTS OF OUR PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. OUR ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED HERE.

OVERVIEW

In March 1997, Automated Call Processing, a predecessor corporation to
Ditech, sold its call processing business to persons and entities related to
Ditech. Automated Call Processing also sold its wireless marine communications
business operated by its wholly-owned subsidiary, Globe Wireless, Inc., to
persons and entities related to Ditech. Automated Call Processing subsequently
merged with its wholly-owned subsidiary. The surviving entity, named Ditech
Corporation, reincorporated in Delaware in April 1999 and was renamed Ditech
Communications Corporation. Shortly after the reincorporation, Ditech effected a
2-for-3 reverse split of its common stock and a redemption of its Series C
preferred stock with the shares of preferred stock of Globe Wireless that it
held. Financial information for prior periods have been restated to reflect the
discontinuation of the lines of business in March 1997, the reincorporation and
reverse stock split. At the closing of this offering, we will redeem all of our
Series A preferred stock for approximately $19.58 million (as of April 30, 1999)
in cash.

In November 1998, we acquired the echo cancellation technology that we
previously licensed from Telinnovation. We acquired this technology for a total
purchase price of 166,666 shares of our common stock and $2.96 million, the cash
portion of which is to be paid upon the consummation of this offering. In
addition, we have been paying and are obligated to continue to pay royalties to
Telinnovation on the sales of our products incorporating this technology until
the $2.96 million cash portion of the purchase price has been paid from the
proceeds of this offering. We will amortize the purchased technology over a
period of five years.

We recognize revenue when a product has been shipped, no material vendor
obligations remain outstanding, and collection of the resulting receivable is
probable. In the event that we defer revenue recognition due to uncertainty
about collectibility or the existence of a material vendor obligation such as
installation, we recognize the revenue when the uncertainty is removed or the
obligation is fulfilled. We offer a five year warranty on all of our products.
The warranty generally provides that we will repair or replace any defective
product prior to the passage of five years from the invoice date.

To date, the vast majority of our revenue has been derived from sales of our
echo cancellation products. In fiscal 1997, fiscal 1998 and fiscal 1999, we
derived approximately 99.5%, 94.1% and 93.7%, respectively, of our revenue from
the sale of our echo cancellation products. We expect that a substantial
majority of our revenue will continue to come from sales of our echo
cancellation products for the foreseeable future.

21
<PAGE>
We have established a direct sales force that sells to our customers in the
U.S. and internationally. We also intend to expand the use of sales agents,
systems integrators, original equipment manufacturers and distributors to sell
and market our products internationally. In addition, we have entered into an
agreement with an original equipment manufacturer for distribution of our
optical communications products and are exploring the possibility of entering
into others. We generally expect that margins will be higher on our newer
products than on our more established products, and that margins on our new
products will decline as competition from competing products becomes more
intense. In addition, we expect that gross margins on products that we sell
through original equipment manufacturers will generally be less than gross
margins on direct sales. Gross margins in any one period may not be indicative
of gross margins for future periods.

Historically the majority of our sales have been to customers in the U.S.
These customers accounted for over 86% of our revenue in fiscal 1999 and over
93% in fiscal 1998. However, sales to some of our customers in the U.S. may
result in our products eventually being deployed internationally, especially in
the case of any original equipment manufacturer that distribute overseas. To
date, substantially all of our international sales have been export sales and
denominated in U.S. dollars.

Our revenue historically has come from a small number of customers. Our five
largest customers accounted for over 65% of our revenue in fiscal 1999 and over
75% of our revenue in fiscal 1998. Qwest/LCI accounted for 42% of our revenue in
fiscal 1999 and in fiscal 1998. Our four next largest customers accounted
collectively for 23% of our revenue in fiscal 1999 and 38% of our revenue in
fiscal 1998. MCI accounted for $7.6 million, or more than 50%, of our revenue in
fiscal 1997, but only $1.4 million, or approximately 11%, of our revenue in
fiscal 1998. This reduction began shortly before the acquisition of MCI by
Worldcom.

22
<PAGE>
RESULTS OF OPERATIONS

The following table sets forth certain items from our statements of
operations as a percentage of revenue for the periods indicated:

Income from operations................................................ 28.2 5.1 5.8
Other income (expense), net........................................... (0.7) (4.8) (2.0)
--------- --------- ---------
Income from continuing operations before income taxes............... 27.5 0.3 3.8
Provisions for income taxes........................................... 10.8 0.2 1.6
--------- --------- ---------
Income from continuing operations..................................... 16.7 0.1 2.2
Discontinued operations:
Loss from operations................................................ (19.6) -- --
Gain on disposal.................................................... 20.2 -- --
--------- --------- ---------
Net income........................................................ 17.3% 0.1% 2.2%
--------- --------- ---------
--------- --------- ---------
</TABLE>

FISCAL YEARS ENDED APRIL 30, 1999 AND 1998

REVENUE. Revenue increased to $25.4 million in fiscal 1999 from $12.3
million in fiscal 1998. The primary reason for this increase was increased unit
sales of our third generation echo cancellation products and initial sales of
our fourth generation echo cancellation products. We believe that this increase
in unit sales is in part due to increased sales and marketing efforts made
possible by the increase in the number of sales and marketing personnel in the
second half of fiscal 1998.

COST OF GOODS SOLD. Cost of goods sold consists of direct material costs,
personnel costs for test and quality assurance, and the cost of licensed
technology incorporated into our products. Cost of goods sold increased to $11.9
million in fiscal 1999 from $5.7 million in fiscal 1998. The primary reason for
the increase was costs associated with increased unit sales of our third
generation echo cancellation products and initial sales of our fourth generation
echo cancellation products.

GROSS MARGIN. Gross margin decreased to 53.2% in fiscal 1999 from 54.2% in
fiscal 1998. The primary factor causing this decline in gross margin was the
increase in royalties payable to Telinnovation.

SALES AND MARKETING. Sales and marketing expenses primarily consist of
personnel costs including commissions and costs associated with customer
service, travel, trade shows and outside consulting services. Sales and
marketing expenses increased to $5.8 million in fiscal 1999 from $2.4 million in
fiscal 1998. The primary cause for the increase was increased expenditures
associated with additional sales and marketing personnel both domestically and
internationally. The average number of sales and marketing personnel in fiscal
1999 approximately doubled as compared to fiscal 1998. This increase in sales
and marketing personnel also resulted in a corresponding increase

23
<PAGE>
in personnel related costs such as travel and accommodations. We plan to
continue to increase our expenditures in sales and marketing in order to broaden
distribution of our products both domestically and internationally.

RESEARCH AND DEVELOPMENT. Research and development expenses primarily
consist of personnel costs, contract consultants, and equipment and supplies
used in the development of echo cancellation and optical communications
products. Research and development expense increased to $3.9 million in fiscal
1999 from $2.4 million in fiscal 1998. The increase is primarily related to
increased personnel and supply costs needed to support both echo cancellation
and optical communications product development, including our fourth generation
echo cancellation, optical telemetry and wavelength division multiplexing
products. We expect research and development expenses to continue to grow in
future periods as we enhance current products and develop new products.

GENERAL AND ADMINISTRATIVE. General and administrative expenses primarily
consist of personnel costs for corporate officers and finance personnel, and
legal, accounting and consulting costs. General and administrative expenses
increased to $2.4 million in fiscal 1999 from $1.3 million in fiscal 1998. The
increase was primarily due to increased personnel costs to support the increased
level of operations and increased legal costs associated with increased contract
negotiations and an arbitration matter. See "Business--Legal Proceedings."
General and administrative expenses also increased due to consulting costs
associated with the relocation to our new headquarters and implementation of our
new financial accounting system. We expect general and administrative expenses
to increase as a result of the additional reporting requirements and expenses
incurred as a public company and increased infrastructure costs as we continue
to expand our business.

OTHER INCOME (EXPENSE). Other income (expense) consists of interest expense
attributable to our outstanding debt and capital leases, offset by interest
income on our invested cash and cash equivalents balances. Other income
(expense) decreased to $500,000 in fiscal 1999 from $593,000 in fiscal 1998. The
decrease was primarily attributable to reduced interest costs due to a decline
in the average level of debt outstanding during fiscal 1999 and increased
interest income due to increased invested cash balances.

INCOME TAXES. Income taxes consist of federal and state income taxes. The
effective tax rate in fiscal 1999 was 41.8% as compared to 77% in fiscal 1998.
The reason for the higher tax rate in 1998 was due to the existence of certain
nondeductible expenses and the limited amount of pretax profits. We expect that
our ongoing effective tax rate should remain at approximately 42%.

FISCAL YEARS ENDED APRIL 30, 1998 AND 1997

REVENUE. Revenue decreased to $12.3 million in fiscal 1998 from $14.1
million in fiscal 1997. The decrease was primarily due to a decline in purchases
of echo cancellation products by MCI, which began shortly before it was acquired
by Worldcom.

COST OF GOODS SOLD. Cost of goods sold decreased to $5.7 million in fiscal
1998 from $6.8 million in fiscal 1997. The decrease was primarily due to a
decrease in echo cancellation product sales and, to a lesser extent, to
reductions in the production cost of our echo cancellation products.

GROSS MARGIN. Gross margin as a percentage of revenue increased to 54.2% in
fiscal 1998 from 51.7% in fiscal 1997. The increase in gross margin percentage
was primarily due to a reduction in the production cost of our echo cancellation
products.

SALES AND MARKETING. Sales and marketing expenses increased to $2.4 million
in fiscal 1998 from $1.5 million in fiscal 1997. The increase was primarily
attributable to increased personnel costs associated with sales and marketing
staff added in the second half of fiscal 1998 focused on both domestic and
international markets.

24
<PAGE>
RESEARCH AND DEVELOPMENT. Research and development expense increased to
$2.4 million in fiscal 1998 from $1.1 million in fiscal 1997. The increase was
primarily caused by increased personnel and supplies needed to support both echo
cancellation and optical communications product development.

GENERAL AND ADMINISTRATIVE. General and administrative expense increased to
$1.3 million in fiscal 1998 from $714,000 in fiscal 1997. The increase was
primarily due to the expansion of the administrative services because of the
development of a stand-alone administrative organization. Prior to the
recapitalization in March 1997, the majority of our administrative services were
provided by a centralized corporate group that allocated its costs to us and the
entities that were divested as part of the discontinued operations.

OTHER INCOME (EXPENSE). Other expense increased to $593,000 in fiscal 1998
from $104,000 in fiscal 1997. The increase was due to the recognition of a full
year's interest on long term debt issued as part of the recapitalization in
March 1997 (subsequently refinanced in August 1997). This increased interest
expense was partially offset by increased interest income from increased
invested cash balances.

INCOME TAXES. The effective tax rate was 77% for fiscal 1998 as compared to
39% in fiscal 1997. The increase in the effective rate is primarily attributable
to a relatively small pre-tax income in fiscal 1998 and the existence of certain
nondeductible expenses.

DISCONTINUED OPERATIONS. We sold our call processing and marine radio
communications operations as part of our recapitalization in March 1997. As a
result, our financial information for fiscal 1997 reflects ten and one half
months of operating results of these entities and the ultimate gain realized on
their disposal (see Note 3 of notes to the financial statements).

FISCAL YEARS ENDED APRIL 30, 1997 AND 1996

REVENUE. Revenue decreased slightly to $14.1 million in fiscal 1997 from
$14.4 million in fiscal 1996. Revenue remained relatively unchanged as we were
operating at a relatively sustained operations level prior to our
recapitalization and sale of discontinued operations. The focus of Automated
Call Processing at that time was to grow the operations of Globe Wireless, Inc.,
one of the discontinued operations, while not investing heavily in our ongoing
operations to maximize our cash flow. As a result, the level of fluctuations in
our revenue was not significant.

COST OF GOODS SOLD. Cost of goods sold decreased to $6.8 million in fiscal
1997 from $7.2 million in fiscal 1996. The decrease was primarily due to the 2%
decline in sales of echo cancellation products during fiscal 1997 as well as a
small reduction in the production cost of our echo cancellation products.

GROSS MARGIN. Gross margin increased to 51.7% in fiscal 1997 from 50.1% in
fiscal 1996 due primarily to a small reduction in production costs of our echo
cancellation products.

SALES AND MARKETING. Sales and marketing expense increased to $1.5 million
in fiscal 1997 from $1.0 million in fiscal 1996. The increase was primarily
related to increases in personnel and related expenses related to a 50% increase
in the domestic sales and marketing staff.

RESEARCH AND DEVELOPMENT. Research and development expense remained
relatively constant at $1.1 million in fiscal 1997 compared to $1.0 million in
fiscal 1996, as we maintained our research and development efforts at a constant
level during that time.

GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
to $714,000 in fiscal 1997 from $536,000 in fiscal 1996. The increase in 1997 as
compared to 1996 is attributable to

25
<PAGE>
an increase in the provision for bad debt, a move to new office space and
increased personnel related costs.

OTHER INCOME (EXPENSE). Other expense increased to $104,000 in fiscal 1997
from $5,000 in fiscal 1996. The increase in 1997 as compared to 1996 was due to
interest expense associated with the issuance of debt in March 1997 as part of
the recapitalization. This increased interest cost was partially offset by
increased interest income from increased invested cash balances.

INCOME TAXES. The effective tax rate was 39% for fiscal 1997 and 1996.

DISCONTINUED OPERATIONS. The loss from operations of the discontinued
operations increased to $2.8 million in fiscal 1997 from $1.4 million in fiscal
1996. This increase was primarily attributable to increased expenditures to
expand the marine radio communications operations.

26
<PAGE>
QUARTERLY RESULTS OF OPERATIONS

The following tables set forth certain unaudited quarterly statement of
operations data for the eight quarters ended April 30, 1999. In the opinion of
our management, this information has been prepared substantially on the same
basis as the audited financial statements appearing elsewhere in this
prospectus, and all necessary adjustments, consisting of normal recurring
adjustments, have been made in the amounts stated below to present fairly the
unaudited quarterly results of operations. The quarterly data should be read in
conjunction with our audited financial statements and the notes thereto
appearing elsewhere in this prospectus. The results of operations for any one
quarter are not necessarily indicative of the results of operations for any
future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------------
JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31, OCTOBER 31, JANUARY 31,
1997 1997 1998 1998 1998 1998 1999
----------- ------------- ------------- ----------- ----------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue................... $ 2,708 $ 2,564 $ 3,415 $ 3,639 $ 5,124 $ 5,814 $ 7,087
Cost of goods sold........ 1,301 1,134 1,594 1,622 2,408 2,704 3,480
----------- ------------- ------------- ----------- ----------- ------------- -------------
Gross profit............ 1,407 1,430 1,821 2,017 2,716 3,110 3,607
----------- ------------- ------------- ----------- ----------- ------------- -------------
Operating expenses:
Sales and marketing..... 326 371 740 968 1,285 1,307 1,512
Research and
development........... 490 552 615 710 848 1,016 987
General and
administrative........ 301 295 328 355 441 551 647
----------- ------------- ------------- ----------- ----------- ------------- -------------
Total operating
expenses............ 1,117 1,218 1,683 2,033 2,574 2,874 3,146
----------- ------------- ------------- ----------- ----------- ------------- -------------
Income from operations.... 290 212 138 (16) 142 236 461
Other income (expense),
net..................... (198) (142) (118) (135) (132) (136) (131)
----------- ------------- ------------- ----------- ----------- ------------- -------------
Income (loss) before
income taxes.......... 92 70 20 (151) 10 100 330
Provision for (benefit
from) income taxes...... 37 28 8 (49) 4 40 139
----------- ------------- ------------- ----------- ----------- ------------- -------------
Net income (loss)......... $ 55 $ 42 $ 12 $ (102) $ 6 $ 60 $ 191
----------- ------------- ------------- ----------- ----------- ------------- -------------
----------- ------------- ------------- ----------- ----------- ------------- -------------

APRIL 30,
1999
-----------

<S> <C>
Revenue................... $ 7,339
Cost of goods sold........ 3,266
-----------
Gross profit............ 4,073
-----------
Operating expenses:
Sales and marketing..... 1,655
Research and
development........... 1,009
General and
administrative........ 760
-----------
Total operating
expenses............ 3,424
-----------
Income from operations.... 649
Other income (expense),
net..................... (101)
-----------
Income (loss) before
income taxes.......... 548
Provision for (benefit
from) income taxes...... 230
-----------
Net income (loss)......... $ 318
-----------
-----------
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------------------------
JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31, OCTOBER 31,
1997 1997 1998 1998 1998 1998
----------- --------------- --------------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Revenue................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold........ 48.0 44.2 46.7 44.6 47.0 46.5
----- ----- ----- ----- ----- -----
Gross margin............ 52.0 55.8 53.3 55.4 53.0 53.5
----- ----- ----- ----- ----- -----
Operating expenses:
Sales and marketing..... 12.1 14.6 21.6 26.5 25.1 22.5
Research and
development........... 18.1 21.5 18.0 19.5 16.5 17.5
General and
administrative........ 11.1 11.5 9.6 9.8 8.6 9.5
----- ----- ----- ----- ----- -----
Total operating
expenses............ 41.3 47.6 49.2 55.8 50.2 49.5
----- ----- ----- ----- ----- -----
Income from operations.... 10.7 8.2 4.1 (0.4) 2.8 4.0
Other income (expense),
net..................... (7.3) (5.5) (3.5) (3.7) (2.6) (2.3)
----- ----- ----- ----- ----- -----
Income (loss) before
income taxes........ 3.4 2.7 0.6 (4.1) 0.2 1.7
Provision for (benefit
from) income taxes...... 1.4 1.1 0.2 (1.3) 0.1 0.7
----- ----- ----- ----- ----- -----
Net income (loss)..... 2.0% 1.6% 0.4% (2.8)% 0.1% 1.0%
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----

JANUARY 31, APRIL 30,
1999 1999
--------------- -----------
<S> <C> <C>
Revenue................... 100.0% 100.0%
Cost of goods sold........ 49.1 44.5
----- -----
Gross margin............ 50.9 55.5
----- -----
Operating expenses:
Sales and marketing..... 21.3 22.6
Research and
development........... 13.9 13.7
General and
administrative........ 9.1 10.4
----- -----
Total operating
expenses............ 44.3 46.7
----- -----
Income from operations.... 6.6 8.8
Other income (expense),
net..................... (1.9) (1.4)
----- -----
Income (loss) before
income taxes........ 4.7 7.4
Provision for (benefit
from) income taxes...... 2.0 3.1
----- -----
Net income (loss)..... 2.7% 4.3%
----- -----
----- -----
</TABLE>

27
<PAGE>
Our quarterly sales trend over the eight quarters shows sequential increases
in revenue, except for the quarter ended October 31, 1997, which showed a
decline over the quarter ended July 31, 1997 due to a decline in purchases by
our largest customer shortly before it was acquired. The overall growth trend
reflects a broadening of our customer base as the increased sales staff both
domestically and internationally began to develop new customers. Gross margin
decreased in the quarter ended January 31, 1999 due to the increase in the
royalties payable to Telinnovation. Gross margin increased in the quarter ended
April 30, 1999 due primarily to product and customer mix, including the impact
of the introduction of our fourth generation echo cancellation product.
Operating expenses generally increased over the eight quarters as we expanded
personnel levels in all operating expense categories, with the largest increases
in personnel occurring in sales and marketing and research and development.
Research and development expenses for the quarter ended January 31, 1999
decreased slightly from the prior quarter's levels primarily due to a slight
reduction in spending after the development efforts on our fourth generation
echo cancellation products were substantially completed in the quarter ended
October 31, 1998.

Our quarterly operating results have fluctuated significantly in the past
and may fluctuate in the future as a result of several factors, some of which
are outside of our control. If revenue declines in a quarter, our operating
results will be adversely affected because many of our expenses are relatively
fixed. In particular, research and development and general and administrative
expenses do not change significantly with variations in revenue in a quarter.

STOCK-BASED COMPENSATION

With respect to certain stock option grants in fiscal 1999, we have recorded
deferred compensation of $1,320,000 as of April 30, 1999. We amortized
approximately $91,000 of the deferred compensation in fiscal 1999, and will
amortize the remainder over the corresponding vesting period of the stock
options. See Note 8 of notes to financial statements.

LIQUIDITY AND CAPITAL RESOURCES

From the beginning of fiscal 1994 through the date of the recapitalization
in March 1997, we satisfied the majority of our liquidity requirements through
cash flow generated from operations. In connection with our recapitalization in
March 1997, we had a net infusion of cash of approximately $4 million after
using the proceeds from issuance of preferred stock and subordinated debt to
repurchase common stock. Following our recapitalization, we satisfied the
majority of our liquidity requirements through cash flow generated from
operations and funds received upon exercises of stock options.

Operating activities used $102,000 of cash in fiscal 1998, primarily due to
the limited amount of profit for the year, increases in inventories and
reductions in accounts payable and accrued liabilities including royalties
payable, partially offset by a reduction of income taxes receivable. In fiscal
1999 we generated $715,000 in cash from operations, primarily due to increased
operating profits, increases in accounts payable, income taxes payable and
deferred revenue, partially offset by an increase in inventories, accounts
receivable and other current assets.

Investing activities used $602,000 in cash in fiscal 1998 and $1.3 million
in cash in fiscal 1999. These amounts primarily represented purchases of
property and equipment and costs associated with the initial public offering.

Financing activities used $62,000 in cash in fiscal 1998, consisting of
repayment on term debt partially offset by proceeds from the exercise of stock
options. In fiscal 1999 we generated $298,000 of cash from financing, primarily
from the exercise of stock options partially offset by the principal repayments
on the term debt and capital leases.

28
<PAGE>
As of April 30, 1999, we had cash and cash equivalents of $3.1 million. In
addition, we had a line of credit with the ability to borrow the lesser of $2.0
million or 80% of qualified accounts receivable. At April 30, 1999, borrowings
of $2.0 million were available and no borrowings were outstanding. Borrowings
under the line of credit bear interest at a rate of prime plus one-half of a
percent. The line of credit expires in August of 2000. At April 30, 1999, we
also had outstanding an aggregate of $7.3 million of term debt issued by a bank
in August of 1997. This debt replaced an original aggregate of $8.0 million
subordinated promissory notes issued to stockholders in connection with the
recapitalization in March of 1997. The term debt bears interest at a rate of
prime plus one-half of a percent per annum, payable quarterly along with
principal payments of $187,500 per calendar quarter in 1999 and $562,500 per
calendar quarter in 2000, 2001 and 2002. During the third and fourth quarter of
fiscal 1998 and the second quarter of fiscal 1999, we were in violation of
certain minimum cash flow and ratio covenants related to both the term debt and
credit line. At April 30, 1999, we were in violation of a quick ratio covenant
due primarily to the accrual for costs associated with our initial public
offering. The bank has waived all of these violations. We also had approximately
$100,000 available under a separate operating lease line of credit.

We have no material commitments other than obligations under operating
leases, particularly our facility lease. See Note 6 of notes to financial
statements.

We anticipate significant increases in working capital on a period to period
basis primarily as a result of planned increased product sales and higher
relative levels of inventory and receivables. We will also continue to expend
funds on property and equipment related to the expansion of systems
infrastructure and office equipment to support our growth and lab and test
equipment to support on-going research and development operations.

We believe that we will be able to satisfy our cash requirements for at
least the next twelve months from a combination of the proceeds of this
offering, cash flow from operations and our bank line of credit.

RECENT ACCOUNTING PRONOUNCEMENTS

In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1). This standard requires
companies to capitalize qualifying computer software costs which are incurred
during the application development stage and amortize them over the software's
estimated useful life. SOP 98-1 is effective for fiscal years beginning after
December 15, 1998. Ditech is currently evaluating the impact of SOP 98-1 on its
financial statements and related disclosures.

IMPACT OF EUROPEAN MONETARY CONVERSION

We are aware of the issues associated with the changes in Europe resulting
from the formation of a European economic and monetary union. One change
resulting from this union required EMU member states to irrevocably fix their
respective currencies to a new currency, the euro, as of January 1, 1999, at
which date the euro became a functional legal currency of these countries.
During the next three years, business in the EMU member states will be conducted
in both the existing national currency, such as the French franc or the Deutsche
mark, and the euro. As a result, companies operating or conducting business in
EMU member states will need to ensure that their financial and other software
systems are capable of processing transactions and properly handing these
currencies, including the euro.

We are still assessing the impact that the conversion to the euro will have
on our internal systems, the sale of our products, and the European and global
economies. To date we have experienced limited sales activities in the European
economies, substantially all of which have been in U.S.

29
<PAGE>
dollars. We will take appropriate corrective actions based on the results of
such assessment. We have not yet determined the cost related to addressing this
issue.

IMPACT OF THE YEAR 2000 COMPUTER PROBLEM

The Year 2000 computer problem refers to the potential for system and
processing failures of date-related data as a result of computer-controlled
systems using two digits rather than four to define the applicable year. For
example, computer programs that have time-sensitive software may recognize a
date represented as "00" as the year 1900 rather than the year 2000.
Additionally, the month of February will have 29 days in the year 2000. These
problems could result in a system failure or miscalculations causing disruptions
of operations, including among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.

STATE OF READINESS OF OUR PRODUCTS

We have been testing our existing products for use in the year 2000 and
beyond. Based on the results of these tests, we believe that the following
products are Year 2000 compliant:

<TABLE>
<CAPTION>
Echo Cancellation Products Optical Communications Products
- ------------------------------------- -------------------------------------
<S> <C>
18T1 Optical amplifiers
18E1 DWDM Monitor
Quad T1 Optical telemetry system
Quad E1 Transponder
Broadband Echo Cancellation System WDM Multiplexer/Demultiplexer
4SA
</TABLE>

Certain of our customers may be using older versions of the above products
and, based on our testing, we believe they will not be required to upgrade those
products to become Year 2000 compliant. In addition, we have not tested certain
products for Year 2000 compliance that we no longer market, some of which might
still be in use.

STATE OF READINESS OF OUR INTERNAL SYSTEMS

We may be affected by Year 2000 issues related to non-compliant internal
systems developed by us or by third-party vendors. We are seeking assurances
from our third-party vendors for all systems in use by us and that are material
to our operations that such systems are Year 2000 compliant. We are not
currently aware of any Year 2000 problem relating to any of these internal
systems. We plan to test all such systems for Year 2000 compliance by June 30,
1999. We believe that we do not have any systems material to our operations that
contain embedded chips that are not Year 2000 compliant.

Our internal operations and business are also dependent upon the
computer-controlled systems of third parties such as suppliers, customers and
service providers. We believe that absent a systemic failure outside of our
control, such as a prolonged loss of electrical or telephone service, Year 2000
problems at such third parties will not have a material impact on us.

COST

Based on our assessment to date, we do not anticipate that costs associated
with remediating our non-compliant products or internal systems will be
material.

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<PAGE>
RISKS

Any failure to make our products Year 2000 compliant could result in:

- a decrease in sales of our products;

- an increase in allocation of resources to address Year 2000 problems of
our customers without additional revenue commensurate with such dedication
of resources; and/or

- an increase in litigation costs relating to losses suffered by our
customers due to such Year 2000 problems.

Failures of our internal systems could temporarily prevent us from
processing orders, issuing invoices, and developing products, and could require
us to devote significant resources to correcting such problems. Due to the
general uncertainty inherent in the Year 2000 computer problem, resulting from
the uncertainty of the Year 2000 readiness of third-party suppliers and vendors,
we are unable to determine at this time whether the consequences of Year 2000
failures will have a material impact on our business, results of operations, and
financial condition.

CONTINGENCY PLANS

We have not yet developed contingency plans regarding our products, in house
applications or outside vendors. We expect to develop contingency plans by Fall
1999.

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<PAGE>
BUSINESS

COMPANY OVERVIEW

Ditech designs, develops and markets equipment used in building and
expanding telecommunications and cable communications networks. Our products
fall into two categories, echo cancellation equipment and equipment that enables
and facilitates communications over fiber optic networks. Our echo cancellation
products eliminate echo, which is a significant problem in existing and emerging
networks. Echo results from speech signals that are reflected back to the
speaker during a telephone call, making conversation difficult. This effect is
most pronounced when two people are talking over long distance, satellite,
cellular, personal communications services or packetized networks. Our echo
cancellation products use a software-intensive architecture coupled with one of
the latest commercially available digital signal processors to cancel echo and
enhance the quality of voice communications. To date, the vast majority of our
revenue has been derived from sales of our echo cancellation products. Our
optical communications products enable the implementation of wavelength division
multiplexing technology, which is becoming more widely adopted by service
providers to address network capacity constraints. Ditech's optical
communications products are designed to function either as stand-alone products
or as a complete system known as the Optical Path Solution.

INDUSTRY OVERVIEW

TRENDS IN THE TELECOMMUNICATIONS INDUSTRY

The overall volume of voice and data traffic transmitted over
telecommunications and cable communications networks has grown rapidly in recent
years. Data traffic has grown due to the increased utilization of the Internet,
corporate data networks and higher bandwidth applications. Voice traffic, while
a more mature market, has increased steadily in the U.S. and more quickly
worldwide as wireline, wireless and satellite services are more widely deployed
internationally. As a result of this growth in data and voice traffic, networks
are increasingly operating at or near capacity. To deal with these capacity
constraints, incumbent and emerging service providers are investing significant
resources in the enhancement of existing and the deployment of new fiber optic,
wireless and satellite networks. This infrastructure deployment results in
significant opportunities for companies that provide the building blocks for
these networks.

Service providers, struggling to meet the demands of increasing traffic,
also face intense competition as worldwide deregulation and privatization have
enabled new players to enter the market. Growing numbers of service providers
are both expanding legacy infrastructures and building out new networks. As a
result, traffic that previously was carried through the network of a single
service provider, is now routed through the networks of multiple service
providers. These networks are comprised of equipment from several different
vendors that must carry traffic over existing and emerging infrastructures. This
added complexity makes it more difficult to ensure network reliability and
service quality. Service providers operating in an increasingly competitive
industry must cost-effectively meet these challenges or lose business to
competitors who can.

ECHO CANCELLATION MARKET

In the current deregulated market, voice quality is a key competitive
differentiator. One of the primary challenges faced by service providers in
delivering quality voice communication is the elimination of echo. Echo results
from signal reflection at the "hybrid," commonly the point where the two wires
of the local network meet the four wires of the long distance network. The
hybrid is not completely efficient in carrying the electrical energy from the
four-wire network to the two-wire network, and a certain amount of the
electrical energy or voice signal is reflected back from the hybrid towards the
speaker. Echo is present whenever the one-time delay of a rebounded voice

32
<PAGE>
signal exceeds 16 milliseconds. If the delay exceeds 32 milliseconds, the
quality of the voice call begins to degrade and an echo is reflected back to the
speaker. When these echo problems are present, people describe the effect as
their voices sounding hollow or like someone talking in a tunnel. Delays, either
due to a long transmission path, as in a long distance telephone call, or due to
the complex signal hand-off from one network to another, for instance wireless
to wireline, exacerbate the effect of echo. Therefore, most long distance,
digital wireless and satellite voice calls require echo cancellation. Delays are
also introduced as intelligent processing equipment is increasingly incorporated
into networks. Digital processing of voice signals requires time to compress,
decompress and route signals through networks. As there is a greater shift
towards voice-over packet, which is a means of packaging voice signals into
units of digital data for efficient transmission, these processing delays will
continue to increase.

To address these delays, service providers deploy echo cancellation
technology that quickly analyzes all voice channels and cancels any reflected
signals.

How an Echo Canceller Works

[Box in the center labeled "Echo Canceller" in which a smaller box is found
labeled "DSP." Inside the large box and above the smaller box are the words
"DSP" Cancels Echo." At the right of the box is a telephone, with a line leading
out of it to the left through the embedded boxes and out the other side, then
through a small box labeled "Hybrid" and to another telephone. At the small box
labeled "Hybrid" there is a dotted line leading back into the large box to the
box labeled "DSP" where it stops. Above the dotted line are the words "Reflected
signal." The text below this graphical representation describes what is being
depicted in the graphical representation]

As the figure above shows, a speaker's voice signal travels over the
network. At the hybrid, part of the speaker's voice signal is
reflected back towards the speaker. The digital signal processor, or
DSP, within the echo canceller eliminates or cancels this reflected
signal so the original speaker does not hear an echo.

Service providers are demanding both smaller and higher capacity equipment
as space in service provider facilities and central offices is becoming more
crowded. In addition, due to intense competition, service providers are
expanding network services offered to consumers. In order to compete
successfully, they must deliver these services reliably and under the strict
time-to-market and cost constraints demanded by consumers. Echo cancellation
products that address these market pressures are poised to gain share in a
market that is expanding worldwide.

While we are unaware of any independent analysis of the size and growth
characteristics of the echo cancellation market, we believe the demand for echo
cancellation will increase with the growth of the international market for voice
services, digital wireless networks and voice-over packet technology.
Additionally, as data and voice networks converge, we expect echo cancellation
products to be key building blocks for most existing and emerging networks,
regardless of the proportion of voice traffic that they carry.

33
<PAGE>
OPTICAL COMMUNICATIONS PRODUCTS MARKET

The rise in traffic volumes, increased competition in the telecommunications
industry, and the increased complexity of voice and data networks have spurred
the deployment of several new technologies. Service providers seeking to expand
the capacity of their fiber optic network currently have three primary
alternatives: laying new fiber optic cables, implementing time division
multiplexing, another technology that enables multiple communication links to be
carried on one fiber optical connection, or deploying wavelength division
multiplexing. While appropriate for certain service providers, laying new fiber
optic cables and implementing technologies based on legacy infrastructures such
as time division multiplexing have significant drawbacks. Installing new fiber
optic cable is a costly and time-consuming process for service providers.
Similarly, time division multiplexing requires significant investment in network
equipment and has inherent bandwidth limitations. Wavelength division
multiplexing allows service providers to multiply their bandwidth capacity
without the costs and delays associated with installing new fiber. By
multiplying the number of channels that travel over wavelengths of light in a
fiber optic cable, wavelength division multiplexing significantly increases the
ability to expand network bandwidth. Dense wavelength division multiplexing, or
DWDM, increases network bandwidth even more by increasing the number of channels
on a single fiber optic connection. As a result, many service providers are
attracted to the scalability of wavelength division multiplexing and dense
wavelength division multiplexing and their ability to multiply the capacity of
existing fiber. Like traditional service providers, cable communications service
providers are increasingly deploying wavelength division multiplexing systems in
order to meet traffic demands from a growing number of subscribers using cable
modems and other high-bandwidth access devices. According to Ryan Hankin Kent, a
market research firm in the telecommunications industry, sales of wavelength
division multiplexing systems in the U.S. are expected to increase approximately
58% over the next five years, rising from $1.9 billion in 1998 to $3.0 billion
in 2002.

Despite the substantial growth in data and voice traffic, there are
currently impediments to the widespread deployment of wavelength division
multiplexing by service providers. Wavelength division multiplexing enables a
single fiber connection to carry more traffic, making the reliability of that
connection increasingly important. Any interruption of service on a single fiber
could disrupt service to tens of thousands of end-users, which may result in
severe business consequences for service providers, including regulatory fines
and loss of business. WDM is also currently expensive to implement. To date,
wavelength division multiplexing has been deployed primarily in U.S. long
distance networks where the vast aggregation of traffic and the revenue it
generates can justify its expense. Local exchange carriers and international
service providers have lagged behind U.S. long distance service providers in
deploying wavelength division multiplexing technology. Industry analysts expect
this trend to reverse as local exchange and international service providers face
growing bandwidth demands of consumers and businesses using high bandwidth
applications, such as the Internet.

DITECH'S SOLUTIONS

ECHO CANCELLATION SOLUTION

Ditech designs, develops and markets echo cancellation products for
wireline, wireless, satellite and cable communications networks throughout the
world. Our products use a software-intensive architecture coupled with one of
the latest commercially available digital signal processors to cancel echo and
enhance the quality of voice communications. We believe our architectural
approach enables us to offer the highest capacity echo cancellation products
currently commercially available. The key elements of our echo cancellation
solution include:

EFFICIENT ARCHITECTURAL APPROACH. Our dynamic allocation of resources
technology is designed to solve the echo problem more efficiently than other
solutions, by applying processing power only when and where it is needed. By
using our dynamic allocation of resources technology, a single

34
<PAGE>
digital signal processor can monitor multiple channels and dynamically assign
the full processor resources to each echo problem as it arises. Using this
efficient architectural approach, we can build our echo cancellation products
with fewer dedicated processors and fewer memory integrated circuits, which
reduces product size and power consumption requirements.

TIME-TO-MARKET ADVANTAGE. Based on an intelligent software algorithm, which
is a sophisticated process or set of rules for our software to cancel echo, our
dynamic allocation of resources approach enables us to utilize off-the-shelf
integrated circuits and digital signal processors. Competitive echo cancellation
solutions using application specific integrated circuits are more expensive to
design, require more development time and are difficult to upgrade. Our approach
leverages rapid technological advances in the commercial integrated circuit and
digital signal processor industries. As a result, we believe that we are able to
deliver high performance products to market with shorter product development
cycles and lower investments in capital equipment than alternative solutions.

LOWER TOTAL COST OF OWNERSHIP. Our software-intensive compact design allows
us to offer echo cancellation products with approximately two to four times as
much echo cancelling capacity as other commercial suppliers based on a
seven-foot industry standard equipment rack located in service providers'
central offices or remote facilities. This higher capacity (more echo
cancellation capacity per rack) represents cost and space savings for service
providers. Our newest generation product will also offer more efficient cabling
and network equipment installation, saving service providers even more space and
deployment expense. Our products are designed to allow service providers to
remotely download and upgrade software via the Internet without interrupting
network service or dispatching a technician to the remote site, which also
lowers the cost of ownership. Finally, our products consume less power than
other solutions, resulting in greater reliability and additional cost savings
for our customers.

REMOTE MONITORING AND SERVICE ASSURANCE. Our real-time monitoring
technology, known as reflectometry, allows remote monitoring of real-time
performance data. Service providers can use this technology to identify problems
remotely and address them proactively. We are also able to assist our customers
on-line during this process. As a result, service providers can improve
performance levels and monitor voice quality on a consistent basis. Remote
monitoring systems also reduce our customers' costs by reducing the number of
technical personnel required for on-site services.

OPTICAL COMMUNICATIONS PRODUCTS SOLUTION

Ditech designs, develops and markets a suite of optical communications
products for telecommunications and cable communications networks. This suite of
products is called the Optical Path Solution and is comprised of optical
amplifiers, an optical telemetry system, or OTS, wavelength division
multiplexing multiplexers and demultiplexers, transponders and a dense
wavelength division multiplexing monitor. To date we have shipped only our
optical amplifier product. The key characteristics of our Optical Path Solution
include:

PRODUCT BREADTH, MODULARITY, INTEROPERABILITY AND SCALABILITY. We provide
our customers with the option of purchasing our optical communications products
as either stand-alone products or our Optical Path Solution as a complete
system. Our products are modular in nature and adhere to optical communications
operating standards. Therefore, our products are interoperable with the optical
communications subsystems and systems of other manufacturers. Customers can
purchase our products to expand or improve existing optical communications
systems. Our products are also scalable, which enables our customers to improve
their existing optical communications systems, or to expand network capacity, on
an as-needed basis.

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<PAGE>
COST-EFFECTIVE SOLUTIONS FOR SERVICE PROVIDERS. Our optical products offer:
sophisticated monitoring and control features; modular, scalable subsystems; and
standards-based software and hardware. These characteristics are designed to
reduce overall network maintenance costs. In addition, we believe our optical
amplifiers' superior performance lowers our customers' capital costs. We have
focused on cost-effectiveness as a product design goal so that not only long
distance carriers, but also local exchange carriers, can justify deploying
wavelength division multiplexing technology.

SUPERIOR OPTICAL AMPLIFIER PERFORMANCE. Our optical amplifiers are based on
widely accepted EDFA (erbium doped fiber amplifier) technology, and we believe
that our optical amplifiers provide superior performance features that offer
consistent amplification and low noise figures, allowing optical signals to
travel longer distances without degradation. As a result, our products maintain
the quality of the optical signal over longer territorial spans, which reduces
the need for additional equipment and intervention by service providers.

REMOTE MONITORING AND MANAGEMENT CAPABILITY. All of our products are
designed with features that allow remote monitoring and management. These
features enable service providers to remotely monitor and predict service
outages in optical networks, which helps to improve reliability and lower the
troubleshooting costs involved in on-site monitoring. Optical telemetry system
management software also helps facilitate communications between legacy network
management software and our products. This promotes the use of our products on
existing networks and lowers overall cost of ownership. Additionally, the
optical telemetry system has many customizable capabilities for service
providers to cost-effectively monitor and manage their facilities and equipment.

DITECH'S STRATEGY

Our objective is to become a leading provider of the echo cancellation and
optical communications products required to cost-effectively build and manage
telecommunications and cable communications networks. Key elements of our
strategy include the following:

EXTEND TECHNOLOGY LEADERSHIP. We invest in product development and
enhancement efforts that are designed to provide service providers and the
original equipment manufacturers that serve them higher capacity products with
key price performance and management advantages. Our use of commercially
available technology and products enables us to incorporate technological
advances quickly with reduced research and development costs. This provides a
time-to-market advantage that enables us to rapidly deploy our products within
strict time constraints demanded by our customers. We collaborate with our
customers to develop value-added products designed to meet customer needs.

INCREASE OPTICAL COMMUNICATIONS PRODUCTS GROWTH. Our optical amplifier
began shipping in the third quarter of calendar 1996. Since our initial product
release, we have introduced three optical communications products and are
developing additional products, which together comprise our complete suite of
optical communications products known as the Optical Path Solution. We intend to
allocate significant resources to expand this product line and increase our
optical communications product revenue.

EXPAND AND LEVERAGE DISTRIBUTION CHANNELS. We have expanded our direct
sales channels in North America to Latin America, Europe and Asia. In addition,
we are actively pursuing select and strategic original equipment manufacturer
relationships for specific geographical markets or technology segments, and have
already entered into one such relationship. We believe that original equipment
manufacturer channels enable greater market share penetration while reducing
customer support costs. We intend to leverage our reputation for providing high
quality products and customer support in the echo cancellation market to
increase the penetration of our optical communications

36
<PAGE>
products. To further our presence and penetration in the global
telecommunications market, we will continue to expand our direct sales force and
broaden channels of distribution.

STRENGTHEN EXISTING AND DEVELOP NEW CUSTOMER RELATIONSHIPS. We intend to
continue to strengthen our customer-centric culture and support programs. We
offer a full suite of support services, including twenty-four hour technical
support seven days a week, a five-year product warranty, and engineering,
installation and field support. We intend to continue to design and develop
technology that enables us to assist our customers in diagnosing problems
on-line.

DELIVER COST-EFFECTIVE SOLUTIONS. We achieve cost-effective solutions as a
result of our business approach and product design philosophy. Our
software-intensive designs provide high performance, flexibility, upgradabililty
and remote monitoring and management. In addition, our modular, scalable
products allow our customers to build-out their networks on an incremental
basis. With designs that allow the use of some of the latest commercially
available electronic and optical component technologies, we can rapidly deliver
advanced products at low cost. Our products' open architecture also enables our
customers to build and operate multi-vendor equipment networks, allowing them to
better choose the combination of products most suitable for their specific
needs.

EXPAND OUTSOURCED MANUFACTURING. We intend to establish additional
third-party turnkey manufacturing relationships designed to decrease production
costs while increasing manufacturing volumes and order fulfillment requirements
and accelerating product deployment. We fulfill a majority of our echo
cancellation equipment orders within thirty days, which is a key competitive
advantage. We intend to continue to design products that facilitate higher
manufacturing volumes, rapid order fulfillment and deployment at lower costs.

PRODUCTS

ECHO CANCELLATION PRODUCTS

All of our echo cancellation products are designed to cancel echo in
wireline, wireless, satellite, packetized and cable communications networks. Our
echo cancellation product family consists of six products. The 18T1 and 18E1 are
our third generation echo cancellation products and have been deployed in
significant volumes since March 1995. The Quad T1 and Quad E1 products are our
fourth generation echo cancellation products. Production shipment commenced for
our Quad T1 and E1 products in the first quarter of calendar 1999. The 4SA is
designed for small office and network environments by utilizing a single Quad T1
module that is placed on top of a voice access device, such as a private branch
exchange, or PBX. The 4SA commenced production shipment in the first quarter of
calendar 1999. The Broadband Echo Cancellation System, or BBEC, is a system
level product that employs the Quad T1. We believe we will begin production
shipment of our Broadband Echo Cancellation System in the second quarter of
calendar 1999.

Our echo cancellation product family shares several common advantages:

HIGHER CAPACITY. We believe our fourth generation echo cancellation
products have approximately two to four times the echo cancellation capacity of
currently commercially available competitive products.

HIGH PERFORMANCE. Our echo cancellation products cancel echo in less than
50 milliseconds, which is a significant improvement relative to industry
standard cancellation times of 100 to 500 milliseconds as defined by the
International Telecommunication Union, the organization responsible for
developing global telecommunications standards.

REMOTE SOFTWARE UPGRADABILITY. With our products, the latest software
upgrades can be downloaded remotely and incorporated into our products without
taking the echo cancellation products off-line and interrupting service.

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<PAGE>
LOWER POWER CONSUMPTION. We believe our products generally require less
power than competitive products as a result of our software-intensive design and
use of fewer integrated circuits.

ITU STANDARDS. Our products are fully compliant with current International
Telecommunication Union standards. As a member of the International
Telecommunication Union, we actively participate in establishing the evolving
global standards.

WARRANTY. We offer a five-year warranty on all of our echo cancellation
products.

The following table provides additional information with respect to each of
our echo cancellation products:

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
PRODUCT DESCRIPTION FUNCTIONALITY
<S> <C> <C>
18T1 Single port echo canceller for use - A high capacity product that
at T1 (1.544 Mb/s) transmission rate cancels 220 T1 lines per seven-foot
(North American markets) industry standard equipment rack
- Low power consumption
18E1 Single port echo canceller for use - A high capacity product that
at E1 (2.048 Mb/s) transmission rate cancels 126 E1 lines per 2.1 meter
(international markets and North international industry standard
American gateway applications) equipment rack
- Low power consumption
Quad T1 Single module including four - Doubles the capacity of nearest
independent T1 cancellers (North commercially available competitive
American markets) product
- Cancels 480 T1 lines per rack
Quad E1 Single module including four - Doubles the capacity of nearest
independent E1 cancellers commercially available competitive
(international markets and North product
American gateway applications) - Cancels 480 E1 lines per rack
4SA Single Quad T1 module (North Ameri- - Designed for small office and net-
can markets) work environments
Broadband Echo Broadband echo cancellation system - First system level echo
Cancellation System utilizing DS3 (45 Mb/s) interfaces cancellation product
(BBEC) to accommodate the growing adoption - Uses two DS3s per shelf
of higher speed broadband - Reduces bulky T1 cabling and
infrastructures (North American installation
markets) - Fault tolerant architecture and
autonomous alarm reporting via
Ethernet to simplify fault
isolation
- Cancels 336 T1s per rack
</TABLE>

OPTICAL COMMUNICATIONS PRODUCTS

Our suite of optical communications products, called the Optical Path
Solution, is intended for use in telecommunications and cable communications
networks throughout the world. Our Optical Path Solution is comprised of optical
amplifiers, an optical telemetry system, transponders, four-channel wavelength
division multiplexing multiplexers and demultiplexers, and a dense wavelength
division multiplexing monitor. All of these products are intended to be sold
either as stand-alone products or as a complete system. All of our optical
communications products are commercially available, except the dense wavelength
division multiplexing monitor, which is undergoing customer beta testing. As of
April 30, 1999, the principal source of revenue from our optical product line
has been our optical amplifiers, which have been shipping since the third
quarter of calendar 1996. However, during the quarter ended April 30, 1999, we
shipped the first production units of our Optical Telemetry System, WDM
Multiplexer and Demultiplexer, and DWDM Monitor. Our sixteen-channel dense
wavelength division multiplexing multiplexers and demultiplexers are currently
in development.

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<PAGE>
Our optical product family shares several common advantages:

INTEROPERABLE IN MULTI-VENDOR ENVIRONMENT. Our products and modules are
built to industry standards so that they easily interoperate with different
vendors' facilities and shelving.

DESIGNED TO INDUSTRY STANDARDS. Our suite of products are designed to meet
industry standards, such as those from the International Telecommunication
Union.

REMOTE MONITORING AND MANAGEMENT. Our products are designed to function in
a sophisticated, remote monitoring and management environment.

WARRANTY. We offer a five-year warranty on all of our optical products.

The following table provides additional information with respect to each of
our optical products:

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
PRODUCT DESCRIPTION FUNCTIONALITY
<S> <C> <C>
Optical amplifiers Complete suite of transmit, line and - Consistent optical amplification
receive amplifiers that are based on and low noise figures, making them
erbium doped fiber amplifier (EDFA) suitable for dense wavelength
technology division multiplexing applications
- Supports higher bandwidth fiber
optic channels, allowing service
providers to expand bandwidth
without upgrading our amplifiers
Optical Telemetry Optical and element management and - Enables remote management and
System (OTS) facility monitoring solution that is monitoring of both our products and
designed with open interface legacy network equipment and
architecture facilities
- Management and monitoring commands
are carried on a supervisory
channel in the same fiber as the
revenue traffic but using
out-of-band wavelengths, thereby
not displacing revenue-generating
bandwidth
- Packaged in a compact module to
minimize space requirements
WDM Multiplexer And Four channel solution that combines - Packaged in a compact module to
Demultiplexer multiple optical wavelengths onto minimize space requirements
one fiber. At the far end, these - Accommodates network growth by
same devices function in reverse as supporting higher bandwidth fiber
demultiplexers optic channels
Transponder Accepts an optical signal from a - Allows legacy non-International
legacy laser source and re-transmits Telecommunication Union standards
the signal at an industry standard compliant transmission equipment to
compliant optical wavelength be used on WDM networks
suitable for transmission on a WDM - Packaged in a compact module that
network is half the size of currently
commercially available competing
products
DWDM Measures wavelength amplitude - Remotely deployable unit that is
Monitor signal- to-noise ratio and gain environmentally tolerant
flatness of each optical channel in - Sophisticated real-time monitoring
a multi-wavelength network, allowing of each optical signal
service providers to identify - User definable alarm thresholds
transmission path degradations - Easy to use graphical user
before they become service-affecting interface
</TABLE>

39
<PAGE>
The following diagram illustrates how our optical communications operate in
a network environment.

DITECH'S OPTICAL COMMUNICATION PRODUCTS

[Graphical illustration of a telecommunication network. To the left is a white
box labeled "SONET/ SDH Terminal Packet Switch." Out of this box come 4 arrows
to the right to a stack of 4 gray boxes each labeled with a "T" to denote that
they are Transponders. Out of each of these boxes come an arrow to the right to
a gray trapezoid labeled "WDM Mux." Out of this comes one arrow to the right to
a gray triangle labeled "EDFA" and under which are the words "Transmit
Amplifier." Out of this comes one arrow to the right to a gray triangle labeled
"EDFA" and under which are the words "Line Amplifier." Out of this comes one
arrow to the right to a gray triangle labeled "EDFA" and under which are the
words "Receive Amplifier." Out of this comes an arrow to the right to a gray
trapezoid labeled "WDM DeMux." Out of this come 4 arrows to the right to a white
box labeled "SONET/SDH Terminal Packet Switch." Above each of the two white
boxes labeled "SONET/SDH Terminal Packet Switch" is a cloud with the words
"Voice," "Data," and "Video" in it with a dotted line coming out of it to the
white box.

Above the graphical representation described above is the figure of a person at
a computer labeled "Technician" with a dotted line out of the computer leading
to two boxes, one of which is labeled "Network Management System" and one of
which is labeled "Optical Telemetry System (OTS)." Out of these boxes comes a
dotted line that splits into three lines, each leading to a box labeled "OTS."
Out of each of these boxes is a dotted line leading through one of the optical
amplifiers described above, then to a box labeled "Monitor."

Below the graphical representation described above is a white box and a gray
box. The white box is labeled "Multivendor Equipment" and the gray box is
labeled "Ditech Subsystems" to denote which of the components in the items
graphical representation are Ditech's subsystems]

CUSTOMERS

Our principal customers are competitive local exchange carriers, satellite,
wireless, cellular and cable communications service providers. Among our more
than fifty customers that have purchased our products in fiscal 1999, the
following is a list of our top ten customers by sales volume for that period:

<TABLE>
<S> <C>
Qwest/LCI GTE Telecom
Frontier Communications GCI
Facilicom Teleglobe Canada
Electronica Multimedia GST
MCI Worldcom RSL Com
</TABLE>

In addition to these service providers, we have sold products to one
original equipment manufacturer.

Our customer base is highly concentrated, and a small number of customers
has accounted for a significant portion of our total revenue. Our five largest
customers accounted for over 65% of our revenue in fiscal 1999 and over 75% of
our revenue in fiscal 1998. Qwest/LCI accounted for 42% of our revenue in fiscal
1999 and in fiscal 1998. Our four next largest customers accounted collectively
for 23% of our revenue in fiscal 1999 and 38% of our revenue in fiscal 1998. MCI
accounted for $7.6 million, or more than 50%, of our revenue in fiscal 1997, but
only $1.4 million, or approximately 11%, of our revenue in fiscal 1998. This
reduction began shortly before the acquisition of MCI by Worldcom.

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<PAGE>
RESEARCH AND DEVELOPMENT

We have engineering departments dedicated to and focused on developing high
performance echo cancellation products and optical communications products.
These engineering departments are staffed with appropriate talent in software
and hardware, radio-frequency, mechanical and test engineering, and photonic
physics. In addition, we have created an independent product verification group
whose charter is to ensure that we meet customers' expectations from an
ease-of-use perspective.

Our research and development expenses for fiscal 1999, fiscal 1998 and
fiscal 1997 were approximately $3.9 million, $2.4 million, and $1.1 million,
respectively. We intend to increase our research and development budget and
staffing levels in fiscal 2000. As of April 30, 1999, we had 28 employees
engaged in research and development, including 10 engineers with advanced
degrees. By continuing to develop new generation echo cancellation and optical
communications products, we intend to leverage our ability to address various
markets with a relatively focused investment in research and development. We
believe that recruiting and retaining qualified engineering personnel will be
essential to our continuing success.

MANUFACTURING

We intend to operate as a "virtual" manufacturing organization by relying on
contract manufacturers to assemble our echo cancellation products and our
optical communications products. We perform only final test functions for our
echo cancellation products and both final assembly and test functions for our
optical communications products at our facility. We are ISO 9001 certified and
require that our contract manufacturers have ISO 9002 registration as a
condition of qualification. Our stringent incoming inspection procedures for
critical optical components include analysis and monitoring of the performance
characteristics of critical optical components and sub-assemblies. Our raw
materials are procured from outside suppliers through our contract
manufacturers. In procuring components, we and our contract manufacturers rely
on Texas Instruments as the sole source of our digital signal processors. Our
future success will depend in significant part on our ability to obtain
manufacturing on time, at low costs and in sufficient quantities to meet demand.

SALES AND MARKETING

We have established a direct sales force that sells to our customers in the
U.S. and internationally. We also intend to expand the use of sales agents,
systems integrators, original equipment manufacturers, and distributors to sell
and market our products internationally. We have entered into an agreement with
an original equipment manufacturer for distribution of our optical
communications products and are exploring the possibility of entering into
others.

In 1998, we expanded our direct sales coverage by establishing regional
sales offices throughout the U.S. We believe that our products can serve a
substantial market for echo cancellation products and optical communications
products outside of the U.S. To address these growing international markets, we
opened a sales office in Beijing, China to support Asia, another office in
Stuttgart, Germany to cover Europe and an office in Miami, Florida to focus on
Latin America. In fiscal 1998 and fiscal 1999, we derived approximately 6% and
13% of our total revenue, respectively, from customers in international markets.

We are committed to enhancing our brand recognition by continuing to exhibit
in trade shows, participate in industry conferences (e.g. SuperComm, CTIA, OFC,
Telexpo in Brazil, Com Cable in China) and organize targeted technical seminars
to expand our company and product visibility. We conduct direct marketing and
have ongoing communications with our customers, the press and industry analysts.
In addition, we intend to develop a sophisticated web site that will provide
detailed technical briefings and sales presentations to our customers.

41
<PAGE>
CUSTOMER SUPPORT

We have established a dedicated department to provide pre-sales technical,
system engineering, post-sales and field service support. These services are
available from headquarters as well as regional offices. In addition, we offer
customer service around the clock every day of the week. We have also
established relationships with third-party organizations for engineering,
furnish and installation services in North America and Europe.

With remote monitoring and management capabilities designed into all of our
products, we are capable of assisting our customers in diagnosing problems
on-line, thereby reducing the time and costs associated with dispatching a
technician to the remote site. In addition, the detailed technical information
we intend to provide on our website will provide our customers with useful
support information.

COMPETITION

The markets for our products are intensely competitive, continually evolving
and subject to rapid technological change. We believe that rapid product
introductions with price performance advantages is a critical competitive
factor. We believe we and our products also face competition in the following
areas:

- product features and enhancements (including improvements in product
performance, reliability, size, compatibility and scalability);

- cost of ownership (including power consumption and ease and cost of
maintenance);

- ease of product deployment and installation; and

- technical support and service.

Although we believe that we currently compete favorably with respect to all
of these factors, we may not have the financial resources, technical expertise
or marketing, manufacturing, distribution and support capabilities to compete
successfully in the future. We expect that competition in each of our markets
will increase in the future. In the echo cancellation market, our principal
competitors are Lucent and Tellabs for stand-alone products. Although Alcatel,
Nortel Networks, Ericsson and Nokia can provide echo cancellation in their
systems, they do not sell stand-alone products or compete in the open market.
Our principal competitors in the optical communications products market are
Alcatel, Ciena, Lucent and Pirelli.

Nortel Networks has announced that it is developing an integrated switch,
which would have echo cancellation capability built into it and would therefore
eliminate the need for the echo cancellation capability provided by our
products. Announcements such as these, or the commercial availability of such
switches or other competing products, may cause our customers to delay or cancel
orders for our products.

Competitors in any portion of our business are also capable of rapidly
becoming our competitors in other portions of our business. Many of our
competitors and potential competitors have substantially greater name
recognition and technical, financial, marketing, purchasing and other resources
than we do. As a result, these competitors may be able to respond more quickly
to new or emerging technologies or standards and to changes in customer
requirements, to devote greater resources to the development, promotion and sale
of products, or to deliver competitive products at a lower price. We may not be
able to compete successfully against our current or future competitors.

Existing and potential customers are also our current and potential
competitors. These companies may develop or acquire additional competitive
products or technologies in the future and

42
<PAGE>
thereby reduce or cease their purchases from us. In addition, we believe that
the size of suppliers will be an increasingly important part of purchasers'
decision-making criteria in the future. We may not be able to grow rapidly and
therefore compete successfully with our existing or new competitors. In
addition, competitive pressures faced by us may result in lower prices for our
products, loss of market share, or reduced gross margins, any of which could
materially and adversely affect our business, financial condition and results of
operations.

PATENTS AND INTELLECTUAL PROPERTY RIGHTS

Our success will depend, in part, on our ability to protect our intellectual
property. We rely primarily on patent, copyright, trademark and trade secret
laws, as well as nondisclosure agreements and other methods to protect our
proprietary technologies and processes. Nevertheless, such measures may not be
adequate to safeguard the proprietary technology underlying our echo
cancellation and optical communications products. As of April 30, 1999, we had
three U.S. patents issued and five U.S. patent applications pending, one of
which had been allowed but has not yet issued. These patents expire between 2014
and 2016. No patents may issue as a result of these or future applications. If
they do issue, any patent claims allowed may not be sufficiently broad to
protect our technology. In addition, any existing or future patents may be
challenged, invalidated or circumvented, and any right granted thereunder may
not provide meaningful protection to us. The failure of any patents to provide
protection to our technology would make it easier for our competitors to offer
similar products.

We generally enter into confidentiality agreements with our employees and
strategic partners, and generally control access to and distribution of our
documentation and other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise obtain and use our
products or technology without authorization, develop similar technology
independently or design around our patents. In addition, effective patent,
copyright, trademark and trade secret protection may be unavailable or limited
outside of the U.S., Europe and Japan. We may not be able to obtain any
meaningful intellectual property protection in such countries and territories.
Additionally, we may, for a variety of reasons, decide not to file for patent,
copyright, or trademark protection outside of the United States. Further, we
occasionally incorporate the intellectual property of our customers into our
designs, and we have certain obligations with respect to the non-use and
non-disclosure of such intellectual property. However, the steps taken by us to
prevent misappropriation or infringement of the intellectual property of our
company or our customers may not be successful. Moreover, litigation may be
necessary in the future to enforce our intellectual property rights, to protect
our trade secrets or to determine the validity and scope of proprietary rights
of others, including our customers. Such litigation could result in substantial
costs and diversion of our resources and could have a material adverse effect on
our business, financial condition and results of operations.

The telecommunications equipment industry is characterized by vigorous
protection and pursuit of intellectual property rights. We may receive in the
future notices of claims of infringement of other parties' proprietary rights.
We may not prevail in actions alleging infringement of third-party patents. In
addition, the invalidity of our patents may be asserted or prosecuted against
us. In addition, in a patent or trade secret action, an injunction could issue
against us, requiring that we withdraw certain products from the market or
necessitating that certain products offered for sale or

43
<PAGE>
under development be redesigned. We have also entered into certain
indemnification obligations in favor of our customers and strategic partners
that could be triggered upon an allegation or finding of our infringement of
other parties' proprietary rights. Irrespective of the validity or successful
assertion of such claims, we would likely incur significant costs and diversion
of our resources with respect to the defense of such claims, which could also
have a material adverse effect on our business, financial condition and results
of operations. To address any potential claims or actions asserted against us,
we may seek to obtain a license under a third party's intellectual property
rights. Under such circumstances, a license may not be available on commercially
reasonable terms, if at all.

Substantial inventories of intellectual property are held by a few industry
participants, such as Lucent, Nortel Networks and certain major universities and
research laboratories. This concentration of intellectual property in the hands
of a few major entities also poses certain risks to us in seeking to hire
qualified personnel. We have on a few occasions recruited such personnel from
such entities. These entities or others may claim the misappropriation or
infringement of their intellectual property, particularly when and if employees
of these entities leave to work for us. We may not be able to avoid litigation
in the future, particularly if new employees join us after having worked for a
competing company. Such litigation could be very expensive to defend, regardless
of the merits of the claims, and could have a material adverse effect on our
business, financial condition and results of operations.

EMPLOYEES

As of April 30, 1999, we employed 90 persons, 21 of whom were primarily
engaged in operations, 28 of whom were engaged in research and development, 29
of whom were engaged in sales, marketing and technical support and 12 of whom
were engaged in finance and administration. Our employees are not represented by
any collective bargaining agreement, and we have not experienced a work
stoppage. We believe our employee relations are good.

FACILITIES

Our principal offices and facilities are located in one leased building
totaling 35,800 square feet in Mountain View, California. This lease expires on
December 15, 2003. We believe that our existing facilities are adequate to meet
our current needs.

LEGAL PROCEEDINGS

In January 1998, we filed a demand for Arbitration with the American
Arbitration Association in Los Angeles County against Antec Corporation, the
successor-in-interest through merger to Texscan Corporation. The demand for
arbitration alleges that Antec/Texscan breached a contract to purchase our
optical amplifier products and seeks monetary damages. Antec/Texscan have denied
liability and, in December 1998, filed a counterclaim against us claiming that
we breached the purchase contract first and seeking monetary damages. The
testimony phase of the arbitration was completed in May 1999 and a decision is
expected from the arbitration panel in late June 1999. Although we believe that
we have a valid claim to recover against Antec/Texscan for breach of contract
and have meritorious defenses to the counterclaim, if the case is resolved
unfavorably to us it could have a material adverse effect on our financial
condition.

As of the date of this Prospectus, and other than as described above, we are
not involved in any material legal proceedings.

44
<PAGE>
MANAGEMENT

DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES

Certain information regarding Ditech's directors, executive officers and key
employees as of April 30, 1999 is set forth below.

<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --- ---------------------------------------------------------------------
<S> <C> <C>
Timothy K. Montgomery............... 46 President, Chief Executive Officer and Director
Toni M. Bellin...................... 53 Vice President of Operations
Salim N. Jabr....................... 47 Vice President of Engineering and Development, Optical Products
Marc Schwager....................... 42 Vice President, Marketing
Serge Stepanoff..................... 56 Vice President of Engineering and Development, Echo Cancellation
Products
William J. Tamblyn.................. 40 Vice President and Chief Financial Officer
Pong C. Lim......................... 45 Chairman of the Board of Directors
Gregory M. Avis(1).................. 40 Director
Peter Y. Chung(2)................... 31 Director
William A. Hasler(1)(2)............. 57 Director
Kenneth E. Jones(1)................. 52 Director
George J. Turner.................... 61 Director
</TABLE>

- ------------------------

(1) Member of the Compensation Committee

(2) Member of the Audit Committee

TIMOTHY K. MONTGOMERY has served as Ditech's President and Chief Executive
Officer since September 1998 and as a Director since October 1998. From November
1997 to September 1998, he served as Ditech's Senior Vice President of Sales and
Marketing. Mr. Montgomery served as Vice President of Sales of Digital Link
Corporation, a manufacturer of digital access products for wide area networks,
from August 1993 to October 1997. From October 1992 to July 1993, Mr. Montgomery
worked as an independent consultant. From August 1986 to September 1992 Mr.
Montgomery was employed as Vice President of Sales at Telebit Corporation, a
networking company. Mr. Montgomery has a B.S.B.A. in marketing from Florida
State University.

TONI M. BELLIN joined Ditech in December 1998 as Vice President of
Operations. Before joining Ditech, Ms. Bellin served as the Vice President of
Operations for Digital Link Corporation from December 1993 to December 1998, and
as the Vice President of Operations of Zeiss Humphrey Systems, a medical capital
equipment manufacturer, from July 1987 to December 1993. Ms. Bellin has a B.A.
in business administration and an M.B.A. in executive management from St. Mary's
College.

SALIM N. JABR joined Ditech in May 1995 as Vice President of Engineering and
Development, Optical Products. In August 1994, Mr. Jabr founded ORCA Technology,
a company engaged in the development of DWDM systems. From November 1993 to
December 1994, Mr. Jabr was a senior staff manager for SDL Inc., a designer and
manufacturer of specialized semiconductor products. Mr. Jabr served as Director
of Optical Technology at Raychem Corporate Technology, a telecommunications and
industrial equipment manufacturing company, from September 1989 to November
1993. From June 1981 to September 1989, he worked at Litton Guidance and
Control, an aerospace company. He was also an Assistant Professor in Physics at
the University of Southern California from September 1979 to August 1981. Mr.
Jabr has a Ph.D. in physics and an M.S. in electrical engineering from Yale
University, and a B.S. in physics from The American University in Beirut.

45
<PAGE>
MARC SCHWAGER joined Ditech in April 1999 as its Vice President, Marketing.
Before joining Ditech, Mr. Schwager served as the Director of Product Management
for Bandwidth Unlimited, a Silicon Valley start-up working in the optical
networking field, from November 1998 to April 1999. From May 1981 through
October of 1998, Mr. Schwager held a series of marketing positions at
Hewlett-Packard, most recently as Director of Marketing for the Advanced
Networks Division. Mr. Schwager holds a B.S. Chemical Engineering from
Rensselaer Polytechnic Institute.

SERGE STEPANOFF joined Ditech in February 1987 and was its Vice President of
Engineering until May 1991. In September 1996, he rejoined Ditech and assumed
his current position of Vice President of Engineering and Development, Echo
Cancellation Products. Mr. Stepanoff worked as Director of Software at Telecom
Solutions, a telecommunications company, from March 1995 to August 1996. From
May 1991 to February 1995, he was a Senior Manager for MCI Communications, a
telecommunications company. He has a B.S. in electrical engineering from Heald
Engineering College and an M.S. in Computer Science from West Coast University.

WILLIAM J. TAMBLYN joined Ditech in June 1997 as a Vice President and Chief
Financial Officer. Mr. Tamblyn was the Chief Financial Officer at Conductus,
Inc., a telecommunications company, from December 1993 to June 1997. He served
as Chief Financial Officer at Ramtek, an imaging company, from May 1993 to
December 1993. Prior to May 1993, Mr. Tamblyn worked in public accounting,
including for Coopers & Lybrand, LLP. He has a B.S. in accounting from San Jose
State University and is a certified public accountant.

PONG C. LIM has served as Ditech's Chairman of the Board since October 1998.
From March 1997 to September 1998, Mr. Lim served as Ditech's Chief Executive
Officer and President. From May 1994 to March 1997, Mr. Lim served as Ditech's
President and Chief Operating Officer. From June 1989 to April 1994, Mr. Lim
served as General Manager of Santa Clara Business Unit, a division of DSC
Communications, a telecommunications company. Mr. Lim has a B.S. in civil
engineering from Drexel University and an M.B.A. in marketing and finance from
the University of Phoenix.

GREGORY M. AVIS has been a director of Ditech since February 1997. Mr. Avis
has served as a Managing Partner of Summit Partners, a private equity capital
firm, since 1990 and has been a General Partner since 1987. Summit Partners and
its affiliates manage a number of venture capital funds, including Summit
Ventures IV, L.P., Summit Investors III, L.P. and Summit Subordinated Debt Fund,
L.P., which are all stockholders of Ditech. Mr. Avis also serves as a director
of Extended Systems, Inc., a network peripherals and wireless communications
company; Powerwave Technologies, Inc., a designer and manufacturer of power
amplifiers for wireless communications; Splash Technology Holdings, Inc., a
developer of color server systems; and several privately held companies. Mr.
Avis received a B.A. from Williams College and an M.B.A. from Harvard
University.

PETER Y. CHUNG has been a director of Ditech since February 1997. Mr. Chung
is a Principal of Summit Partners, a private equity capital firm, where he has
been employed since August 1994. Summit Partners and its affiliates manage a
number of venture capital funds, including Summit Ventures IV, L.P., Summit
Investors III, L.P. and Summit Subordinated Debt Fund, L.P., which are all
stockholders of Ditech. From August 1989 to July 1992, Mr. Chung worked in the
Mergers and Acquisitions Department of Goldman, Sachs & Co. Mr. Chung also
serves as a director of E-Tek Dynamics, Inc., an optical components and modules
company; Splash Technology Holdings, Inc., a developer of color server systems;
and several privately held companies. Mr. Chung received a B.A. from Harvard
University and an M.B.A. from Stanford University.

WILLIAM A. HASLER has been a director of Ditech since May 1997. He also
serves as a Co-Chief Executive Officer and Director of Aphton Corp., a
bio-pharmaceutical company, a position he has held since July 1998. From August
1991 to July 1998, Mr. Hasler was the Dean of the Haas School of Business at the
University of California at Berkeley, and from January 1984 to August 1991,

46
<PAGE>
Mr. Hasler served as a Vice Chairman of KPMG Peat Marwick. Mr. Hasler is a
director of numerous companies, including Quickturn Design Systems, Inc., a
design verification company, Solectron Corp., an electronics manufacturing
services company, TCSI Corporation, a telecommunications software company,
Tenera Inc., an engineering consulting firm, and Walker Interactive Systems,
Inc., an operations and analytical software company. He received a B.A. from
Pomona College and an M.B.A. from Harvard University.

KENNETH E. JONES has been a director of Ditech since July 1983. He is
currently the Chairman and Chief Executive Officer of Globe Wireless, Inc., a
position he has held since Globe Wireless was sold by Automated Call Processing
and became an independent company in 1997. Mr. Jones founded Automated Call
Processing in 1983 (which in 1997 merged with Ditech and changed its name to
Ditech Corporation), and worked as its President and Chief Executive Officer
until 1997. From 1986 to 1994, he also served as President and Chief Executive
Officer of Automated Call Processing's wholly-owned subsidiary, Ditech
Corporation. Prior to founding Automated Call Processing, Mr. Jones served as
President and Chief Executive Officer of Clausen-Koch Company, a private label
manufacturer of canned meats. Mr. Jones also served as the Chief Financial
Officer of Hills Brothers Coffee, Inc. from 1976 to 1979. Mr. Jones is a
director of Quadramed Corporation, a medical software company. He served as a
commanding officer of USS Flagstaff in the United States Navy and has a B.S.
from the University of Nebraska and an M.B.A. from Harvard University.

GEORGE J. TURNER has been a director of Ditech since November 1993. He is
currently the President and Chief Operating Officer of Globe Wireless, Inc., a
position he has held since December 1996. He previously worked for Automated
Call Processing for over ten years, serving the company in several senior
management roles. Mr. Turner has a B.A., an M.A. and a PhD. from the University
of California, Berkeley.

BOARD COMPOSITION

Ditech currently has authorized seven directors. In accordance with the
terms of our Amended and Restated Certificate of Incorporation, effective upon
the closing of this offering, the terms of office of the Board of Directors will
be divided into three classes: Class I, whose term will expire at the annual
meeting of stockholders to be held in 1999; Class II, whose term will expire at
the annual meeting of stockholders to be held in 2000; and Class III, whose term
will expire at the annual meeting of stockholders to be held in 2001. The Class
I directors are Gregory Avis and George Turner, the Class II directors are Peter
Chung and Kenneth Jones, and the Class III directors are William Hasler, Pong
Lim, and Timothy Montgomery. At each annual meeting of stockholders after the
initial classification, the successors to directors whose terms will then expire
will be elected to serve from the time of election and qualification until the
third annual meeting following election. In addition, our Certificate of
Incorporation provides that the authorized number of directors may be changed
only by resolution of the Board of Directors. Any additional directorships
resulting from an increase in the number of directors will be distributed among
the three classes so that, as nearly as possible, each class will consist of
one-third of the directors. This classification of the Board of Directors may
have the effect of delaying or preventing changes in control or management of
Ditech. Although directors of Ditech may be removed for cause by the affirmative
vote of the holders of a majority of the common stock, our Amended and Restated
Certificate of Incorporation provides that holders of two-thirds of the common
stock must vote to approve the removal of a director without cause.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During fiscal 1999, Messrs. Avis, Hasler and Jones served as members of the
Compensation Committee of Ditech's Board of Directors. Mr. Avis is a Managing
Partner of Summit Partners, a

47
<PAGE>
private equity capital firm that became a major stockholder of Ditech in
connection with our recapitalization. See "Certain Transactions."

No member of the Compensation Committee serves as a member of the board of
directors or compensation committee of any other entity that has one or more
executive officers serving as a member of Ditech's Board of Directors or
Compensation Committee. Prior to the formation of the Compensation Committee in
May 1997, the Board of Directors of Ditech as a whole made decisions relating to
compensation of Ditech's executive officers.

BOARD COMMITTEES

The Audit Committee of the Board of Directors reviews the internal
accounting procedures of Ditech and consults with, and reviews the services
provided by, Ditech's independent accountants. Current members of the Audit
Committee are Messrs. Chung and Hasler.

The Compensation Committee of the Board of Directors reviews and recommends
to the Board of Directors the compensation and benefits of all officers of
Ditech and reviews general policy relating to compensation and benefits of
employees of Ditech. The Compensation Committee also administers the issuance of
stock options and other awards under Ditech's stock plans. Current members of
the Compensation Committee are Messrs. Avis, Hasler and Jones.

DIRECTOR COMPENSATION

Ditech does not currently provide cash compensation to non-employee
directors for services in such capacity, but directors may be reimbursed for
certain expenses in connection with attendance at Board of Directors and
committee meetings. See also "--Benefit Plans--1999 Non-Employee Directors'
Stock Option Plan."

LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY

Ditech's Bylaws provide that Ditech will indemnify its directors and
executive officers and may indemnify its other officers, employees and other
agents to the fullest extent permitted by Delaware law. Ditech is also empowered
under its Bylaws to enter into indemnification contracts with its directors and
officers and to purchase insurance on behalf of any person it is required or
permitted to indemnify. Pursuant to this provision, Ditech expects to enter into
indemnification agreements with each of its directors and executive officers.

Ditech has obtained officer and director liability insurance with respect to
liabilities arising out of certain matters, including matters arising under the
Securities Act. In addition, Ditech's Certificate of Incorporation provides
that, to the fullest extent permitted by Delaware law, Ditech's directors will
not be liable for monetary damages for breach of the directors' fiduciary duty
of care to Ditech and its stockholders. This provision in the Certificate of
Incorporation does not eliminate the duty of care, and in appropriate
circumstances, equitable remedies such as an injunction or other forms of
non-monetary relief would remain available under Delaware law. Under current
Delaware law, a director's liability to Ditech or its stockholders may not be
limited with respect to any breach of the director's duty of loyalty to Ditech
or its stockholders, for acts or omissions not in good faith or involving
intentional misconduct, for knowing violations of law, for any transaction from
which the director derived an improper personal benefit, for improper
transactions between the director and Ditech and for improper distributions to
stockholders and loans to directors and officers. This provision also does not
affect a director's responsibilities under any other laws such as the federal
securities laws or state or federal environmental laws.

48
<PAGE>
There is no pending litigation or proceeding involving a director or officer
of Ditech as to which indemnification is being sought, nor is Ditech aware of
any pending or threatened litigation that may result in claims for
indemnification by any director or officer.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers, and controlling persons pursuant to
the provisions described above or otherwise, we have been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.

EXECUTIVE COMPENSATION

The following table sets forth certain information for the fiscal year ended
April 30, 1999, regarding the compensation of Ditech's Chief Executive Officer
and each of the most highly compensated executive officers of Ditech whose
salary and bonus for such year were in excess of $100,000 on an annualized basis
(the "Named Executive Officers"). In accordance with Securities and Exchange
Commission rules, annual compensation in the form of perquisites and other
personal benefits has been omitted where the aggregate amount of such
perquisites and other personal benefits constitutes less than the lesser of
$50,000 or 10% of the total annual salary and bonus for the Named Executive
Officer for the fiscal year.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
--------------
ANNUAL COMPENSATION (1) SECURITIES
----------------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION
- ----------------------------------------------- --------- ----------- ----------- -------------- -------------------
<S> <C> <C> <C> <C> <C>
Timothy Montgomery
Chief Executive Officer, President and Senior
Vice President, Sales and Marketing (1)...... 1999 $ 225,000 $ 100,000 133,333 --
Pong Lim
Chairman of the Board (2).................... 1999 175,000 100,000 -- $ 1,636
Salim Jabr
Vice President of Engineering and
Development, Optical Products................ 1999 120,000 43,000 -- --
Serge Stepanoff
Vice President of Engineering and
Development, Echo Cancellation Products...... 1999 120,000 42,960 -- --
William Tamblyn
Vice President and Chief Financial Officer... 1999 135,000 54,000 16,666 --
</TABLE>

- ------------------------

(1) Mr. Montgomery was promoted to his current position of President, Chief
Executive Officer of Ditech in September 1998.

(2) Mr. Lim served as President and Chief Executive Officer of Ditech until
September 1998, at which time Mr. Montgomery became President and Chief
Executive Officer. Mr. Lim became Chairman of the Board of Ditech in October
1998. Compensation listed in the "all other compensation" column consists of
insurance premiums paid by Ditech for the benefit of Mr. Lim.

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<PAGE>
OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth each grant of stock options made during the
fiscal year ended April 30, 1999 to each of the Named Executive Officers. The
exercise price per share of each option was equal to the fair market value of
the common stock on the date of grant as determined in good faith by the Board
of Directors on such date based upon such factors as the purchase price paid by
investors for shares of Ditech's preferred stock, the absence of a trading
market for Ditech's securities and Ditech's financial outlook and results of
operations. During the fiscal year ended April 30, 1999, Ditech granted
employees, consultants and directors options to purchase an aggregate of 702,956
shares of common stock.

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
------------------------------------------------------ ANNUAL RATES OF
NUMBER OF STOCK PRICE
SECURITIES APPRECIATION FOR
UNDERLYING % OF TOTAL EXERCISE OPTION TERM
OPTIONS OPTIONS GRANTED PRICE PER EXPIRATION --------------------
NAME GRANTED 1998 SHARE DATE 5% 10%
- ------------------------------------------------- ----------- --------------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Timothy Montgomery............................... 133,333 19.0 $ 1.50 10/15/08 $ 125,779 $ 318,748

Pong Lim......................................... -- -- -- -- -- --

William Tamblyn.................................. 16,666 2.4 1.50 11/6/08 15,772 39,842

Serge Stepanoff.................................. -- -- -- -- -- --

Salim Jabr....................................... -- -- -- -- -- --
</TABLE>

The options granted to Messrs. Montgomery and Tamblyn vest over a standard
four-year period, with 25% vesting after one year and monthly vesting
thereafter.

In accordance with the rules of the Securities and Exchange Commission, the
columns referring to potential realizable value show the gains or "option
spreads" that would exist for the options granted based on the assumed rates of
annual compound stock price appreciation of 5% and 10% from the date the option
was granted over the full option term. The rules of the SEC require us to use
these assumed annual compound rates of stock price appreciation. These estimated
rates do not represent our estimate or projection of future common stock prices.

AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES

The following table sets forth information regarding option exercises, and
the fiscal year end values of stock options held by each of the Named Executive
Officers during the fiscal year ended April 30, 1999 and exercisable and
unexercisable options held as of April 30, 1999:

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
UNDERLYING AT APRIL 30, 1999 APRIL 30, 1999
SHARES ACQUIRED VALUE ---------------------------- --------------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------- ----------------- --------- ----------- --------------- ----------- -------------------
<S> <C> <C> <C> <C> <C> <C>
Timothy Montgomery............... 299,998 $ 54,373 100,000 -- $ 825,000 --
Pong Lim......................... 479,998 247,499 -- -- -- --
William Tamblyn.................. 81,581 38,349 35,084 -- 304,969 --
Serge Stepanoff.................. -- -- 99,998 -- 89,482 --
Salim Jabr....................... 74,999 45,000 125,000 -- 1,138,125 --
</TABLE>

Each option grant permits immediate exercise subject to a repurchase option
in favor of Ditech, which lapses over a four-year period with 25% lapsing after
the first year and monthly thereafter. The fair market value of Ditech's common
stock on or about April 30, 1999 was $9.75 per share as determined in good faith
by the Board of Directors on such date based upon such factors as the

50
<PAGE>
absence of a trading market for Ditech's common stock, the probability of
completing the initial public offering and the low price of the initial public
offering price range.

BENEFIT PLANS

1997 STOCK OPTION PLAN. Ditech's 1997 Stock Option Plan was adopted by the
Board of Directors on February 20, 1997 and amended on November 13, 1997. The
1997 plan was approved by the stockholders on March 7, 1997. The Board
authorized and reserved an aggregate of 2,000,000 shares of Ditech common stock
for issuance under the 1997 plan. The 1997 plan provides for the grant of
incentive stock options to employees and nonstatutory stock options to
employees, directors and consultants of Ditech and its affiliates. The 1997 plan
provides that it will be administered by the Board of Directors, or a committee
appointed by the Board, which determines recipients and types of options to be
granted, including number of shares subject to the option and the exercisability
of the shares.

The terms of stock options granted under the 1997 plan may not exceed ten
years. The exercise price for a nonstatutory stock option granted under the 1997
plan cannot be less than 85% of the fair market value of the common stock on the
date of the option grant and the exercise price for an incentive stock option
granted under the 1997 plan cannot be less than 100% of the fair market value of
the common stock on the date of the option grant. However, options granted in
substitution for other options may be granted with a lower exercise price than
that above. The options may, but need not, contain provisions for early exercise
and the right of first refusal.

Options granted under the 1997 plan vest at the rate specified in each
optionee's option agreement. No stock option may be transferred by the optionee
other than by will or the laws of descent or distribution or, for a nonstatutory
stock option, upon the terms of the option agreement. An optionee whose
relationship with Ditech or any affiliate ceases for any reason (other than by
death or permanent and total disability) may exercise options in a period not to
exceed three months following such cessation. When an optionee's relationship
with Ditech and any affiliate ceases due to death or disability, options may be
exercised for between six and eighteen months.

No incentive stock option may be granted to any person who, at the time of
the grant, owns (or is deemed to own) stock possessing more than 10% of the
total combined voting power of Ditech or any affiliate of Ditech, unless the
option exercise price is at least 110% of the fair market value of the stock
subject to the option on the date of grant, and the term of the option does not
exceed five years from the date of grant. No person shall be granted options
covering more than 200,000 shares of Ditech's common stock in any calendar year.

Upon certain changes in control of Ditech, all outstanding options under the
1997 plan shall either be assumed or substituted by the surviving entity. If the
surviving entity determines not to assume, continue or substitute such options,
the time during which such options may be exercised shall be accelerated. If the
options are not exercised following the acceleration, the options shall
terminate.

As of April 30, 1999, under the 1997 plan options to purchase 448,398 shares
of common stock were outstanding, and options to purchase 1,446,438 shares had
been exercised. On October 15, 1998, the Board voted that no additional grants
would be made under the 1997 plan.

1998 STOCK OPTION PLAN. Ditech's 1998 Stock Option Plan was adopted by the
Board of Directors on October 15, 1998 and approved by the stockholders on
November 6, 1998. The Board authorized and reserved an aggregate of 761,375
shares of Ditech common stock for issuance under the 1998 plan. In March and
April 1999 the Board of Directors and stockholders approved an amendment to the
1998 plan increasing the number of shares issuable under the 1998 plan by

51
<PAGE>
166,666 shares, and made certain technical amendments to the 1998 plan in
anticipation of Ditech becoming a public company.

The 1998 plan provides for the grant of incentive stock options to employees
and nonstatutory stock options to employees, directors and consultants of Ditech
and our affiliates. The 1998 plan provides that it will be administered by the
Board of Directors, or a committee appointed by the Board, which determines
recipients and types of options to be granted, including number of shares
subject to the option and the exercisability of the shares.

The terms of stock options granted under the 1998 plan may not exceed ten
years. The exercise price for a nonstatutory stock option granted under the 1998
plan cannot be less than 85% of the fair market value of the common stock on the
date of the option grant and the exercise price for an incentive stock option
granted under the 1998 plan cannot be less than 100% of the fair market value of
the common stock on the date of the option grant. However, options granted in
substitution for other options may be granted with a lower exercise price than
that above. The options may, but need not, contain provisions for early exercise
and the right of first refusal.

Options granted under the 1998 plan vest at the rate specified in each
optionee's option agreement. No stock option may be transferred by the optionee
other than by will or the laws of descent or distribution or, for a nonstatutory
stock option, upon the terms of the option agreement. An optionee whose
relationship with Ditech or any affiliate ceases for any reason (other than by
death or permanent and total disability) may exercise options in a period not to
exceed three months following such cessation. When an optionee's relationship
with Ditech and any affiliate ceases due to death or disability, options may be
exercised for between six and eighteen months.

Upon certain changes in control of Ditech, all outstanding options under the
1998 plan shall either be assumed or substituted by the surviving entity. If the
surviving entity determines not to assume, continue or substitute such options,
the time during which such options may be exercised shall be accelerated. If the
options are not exercised following the acceleration, the options shall
terminate.

As of April 30, 1999, Ditech had granted options to purchase 474,628 shares
of common stock under the 1998 plan and an additional 456,746 shares remained
available for future grant. Of the options granted:

- options to purchase 415,084 shares of common stock were outstanding;

- options to purchase 56,211 shares had been exercised;

- options to purchase 3,333 shares had been cancelled and became available
for future grant; and

- no options to purchase shares had been repurchased or had lapsed without
being exercised.

1999 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN. In March and April 1999 the
Board adopted, and the stockholders approved, Ditech's 1999 Non-Employee
Directors' Stock Option Plan

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<PAGE>
(the "Directors' Option Plan"). The Board has reserved 100,000 shares of common
stock for issuance under the Director's Option Plan. Under the Directors' Option
Plan

- each new non-employee director who is elected or appointed for the first
time following this offering other than at an annual meeting will
automatically be granted an option to purchase that number of shares of
common stock equal to 5,000 multiplied by the number of months remaining
until the next succeeding annual meeting of stockholders divided by
twelve; and

- each non-employee director will automatically be granted an option to
purchase 5,000 shares of common stock immediately following each annual
meeting of stockholders; provided, that such grant to a non-employee
director receiving such annual grant for the first time shall be 10,000
shares rather than 5,000 shares.

Options granted under the Directors' Option Plan are granted at 100% of the
fair market value of the common stock on the date of grant. Options granted
under the Directors' Option Plan have a five-year term and are fully vested. The
Directors' Option Plan will terminate in March 2009, unless earlier terminated
by the Board of Directors.

Upon certain changes in control of Ditech, all outstanding options under the
Directors' Option Plan shall be assumed by the surviving entity or the surviving
entity shall substitute similar options for such outstanding options. If the
surviving entity determines not to assume such outstanding options or substitute
similar options therefor, then the options will terminate if not exercised prior
to such change in control.

As of April 30, 1999, no options had been granted under the Directors'
Option Plan, and 100,000 shares were reserved for future grants or purchases
under the Directors' Option Plan.

EMPLOYEE STOCK PURCHASE PLAN. In March and April 1999 the Board adopted,
and the stockholders approved, Ditech's 1999 Employee Stock Purchase Plan (the
"Purchase Plan") covering an aggregate 133,333 shares of common stock. The
Purchase Plan is intended to qualify as an employee stock purchase plan within
the meaning of Section 423 of the Code. Under the Purchase Plan, the Board may
authorize participation by eligible employees, including officers, in periodic
offerings following the adoption of the Purchase Plan. The offering period for
any offering will be no more than 27 months.

Employees are eligible to participate if they have been continuously
employed by Ditech, or an affiliate of Ditech designated by the Board for at
least three months on the commencement date of an offering or on the day after a
purchase date under an offering, and are customarily scheduled to work at least
20 hours per week and for at least five months per calendar year. Such three
month qualification requirement will not apply to the first offering under the
Purchase Plan. Employees who participate in an offering can have up to 10% of
their earnings withheld pursuant to the Purchase Plan. The amount withheld will
then be used to purchase shares of the common stock on specified dates
determined by the Board. The price of common stock purchased under the Purchase
Plan will be equal to 85% of the lower of the fair market value of the common
stock on the commencement date of each offering period or on the specified
purchase date. Employees may end their participation in the offering at any time
during the offering period. Participation ends automatically on termination of
employment with Ditech.

In the event of certain changes of control of Ditech, the Board has
discretion to provide that each right to purchase common stock will be assumed
or an equivalent right substituted by the successor corporation, or the Board
may shorten the offering period and provide for all sums collected by payroll
deductions to be applied to purchase stock immediately prior to the change in
control. The Purchase Plan will terminate at the Board's discretion. The Board
has the authority to amend or terminate the Purchase Plan, subject to the
limitation that no such action may adversely affect any outstanding rights to
purchase common stock.

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<PAGE>
401(k) PLAN. We maintain a retirement and deferred savings plan for our
employees that is intended to qualify as a tax-qualified plan under the Code.
The 401(k) Plan provides that each participant may contribute up to a statutory
limit, which was $10,000 in calendar year 1998.

EMPLOYMENT AGREEMENTS

In September 1998, Ditech entered into an employment agreement with Timothy
Montgomery to serve as Ditech's President and Chief Executive Officer at a base
salary of $225,000 a year starting on November 1, 1998, with an annual
discretionary bonus set by the Board and based upon specific objectives to be
agreed upon by Mr. Montgomery and the Board. The employment agreement also
provides that Mr. Montgomery will receive an option to purchase 133,333 shares
of Ditech common stock. The employment agreement is at-will, contains a
non-solicitation agreement, and provides that if Mr. Montgomery is terminated
without cause, he will be paid a lump sum equal to twelve months base salary.
However, if Mr. Montgomery resigns, his employment is terminated for cause, or
there is a change in control of Ditech, he will receive no severance benefits.
In the event of a change of control of Ditech, all of Mr. Montgomery's
outstanding, unvested options will immediately become fully vested.

In September 1998, Ditech entered into an employment agreement with Pong Lim
to serve as Chairman of the Board of Directors and a Ditech employee at a base
salary of $175,000 a year, with an annual bonus based on Ditech financial
achievements. In addition, if the requirements tied to the bonus are met, all of
Mr. Lim's remaining unvested stock options will become fully vested in September
1999. The employment agreement is at-will, contains a non-solicitation agreement
and provides that if Mr. Lim is terminated for any reason before September 1999,
his compensation package will be paid in full, including the bonus and
accelerated vesting provisions.

In November 1998, Ditech entered into an employment agreement with Toni
Bellin to serve as Vice President of Operations at a base salary of $150,000 a
year, with a guaranteed bonus of $25,000 in 1999 and an option to purchase
100,000 shares of Ditech common stock. The employment agreement is at-will,
although if Ms. Bellin is terminated for other than cause or permanent
disability during her first two years of service Ditech must pay Ms. Bellin's
base salary for the lesser of a period of one year following the termination of
her employment, or the period ending on the second anniversary of her first day
of employment. Ms. Bellin received a signing bonus of $25,000, though if she
severs her employment with Ditech within her first twelve months with the
company she must repay $12,500 of the signing bonus.

In April 1999, Ditech entered into an employment agreement with Marc
Schwager to serve as Vice President of Marketing at a base salary of $150,000 a
year, with a guaranteed bonus of $30,000 in 1999 and an option to purchase
100,000 shares of Ditech common stock. The employment agreement is at-will,
although if Mr. Schwager is terminated for other than cause or permanent
disability during his first year of service Ditech must pay Mr. Schwager's base
salary for the period ending on the first anniversary of his first day of
employment. Mr. Schwager received a signing bonus of $25,000, though if he
severs his employment with Ditech within his first twelve months with the
company he must repay $12,500 of the signing bonus.

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<PAGE>
CERTAIN TRANSACTIONS

STOCK AND NOTE PURCHASE AGREEMENT. On March 11, 1997, Ditech completed a
recapitalization. In connection with the recapitalization, Ditech entered into a
Stock and Note Purchase Agreement with entities affiliated with Summit Partners
(collectively, "Summit Partners") and a small group of other accredited
investors. Pursuant to this agreement, Ditech issued an aggregate of 12,506,539
shares of Series A preferred stock at a purchase price of $1.00 per share or an
aggregate purchase price of $12,506,539; 6,259,718 shares of Series B
convertible preferred stock at a purchase price of approximately $0.86 per share
or an aggregate purchase price of approximately $5,394,937; and two Class A
subordinated promissory notes in the aggregate original principal amount of
$8,000,000, for a total purchase price of approximately $25,901,476. Of these
amounts, Summit Partners purchased 12,000,000 shares of Series A preferred
stock, 5,801,475 shares of Series B preferred stock and both Class A
subordinated promissory notes. Subsequent to the deal, Mr. Avis, a Managing
Partner of Summit Partners, and Mr. Chung, a Principal of Summit Partners, were
elected to our Board of Directors.

SHAREHOLDERS AGREEMENT. Concurrent with the Stock and Note Purchase
Agreement, Ditech entered into a Shareholders Agreement with the investors who
were part of the Purchase Agreement, including Summit Partners, and with Kenneth
E. Jones, the founder and a current director of Ditech. The investors agreed to
vote in favor of the election of certain representatives, a joint director and
at least one Series B director, designated by the investors to serve as members
of Ditech's Board of Directors. Messrs. Avis and Chung were elected pursuant to
this provision. The restrictions under this agreement terminate upon this
offering. In addition, Mr. Jones agreed to restrictions on the sale, transfer,
assignment, pledge or other disposition of any interest in any of his shares,
except pursuant to a public sale or a sale to Ditech which does not otherwise
violate the provisions of the Purchase Agreement. The agreement provides Summit
Partners with a right of first refusal should Mr. Jones elect to transfer any of
his shares and also with a right to participate in any transfer of Mr. Jones'
shares.

REGISTRATION AGREEMENT. Concurrent with the Stock and Note Purchase
Agreement, Ditech entered into a Registration Agreement with certain investors,
including Summit Partners, pursuant to which the holders of a majority of the
Series B preferred stock and the common stock held by holders of Series B
preferred stock may request registration under the Securities Act of all or any
portion of the shares of common stock issuable upon conversion of the Series B
preferred stock and the common stock held by holders of Series B preferred stock
on Form S-1, and the holders of at least 15% of the Series B preferred stock and
common stock held by holders of Series B preferred stock may request
registration under the Securities Act of all or any portion of their shares of
Series B preferred stock and common stock held by holders of Series B preferred
stock on Form S-2 or S-3.

ESCROW AGREEMENT. Concurrent with the Stock and Note Purchase Agreement,
Ditech entered into an Escrow Agreement with State Street Bank and Trust Company
of California, N.A. as Escrow Agent and a group of redeeming shareholders
pursuant to which Ditech authorized the redemption of 90.12% of its outstanding
common stock (26,092,717 shares) in exchange for $21,485,621 in cash, 4,743,461
shares of its Series A preferred stock, valued at $1.00 per share, and 7,508,221
shares of its Series C preferred stock, valued at approximately $1.00 per share,
for an aggregate redemption price of $33,737,303. Of these shares redeemed,
Ditech redeemed 12,655,750 shares of common stock from two trusts and one
company controlled by Mr. Jones (Seahawk Investment Trust, Seahawk Ranch
Irrevocable Trust, and Western General Corporation), and 1,405,234 shares of
common stock from Mr. Turner. Each of Messrs. Jones and Turner are directors of
Ditech. The shares of common stock referred to above reflect a forward stock
split that occurred on March 11, 1997.

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<PAGE>
STOCK PURCHASE AGREEMENT. Concurrent with the Stock and Note Purchase
Agreement, Ditech entered into a Stock Purchase Agreement with Kenneth E. Jones
pursuant to which Ditech sold 8,347,437 shares of the common stock of Globe
Wireless, Inc., a Delaware corporation, to Mr. Jones for an aggregate purchase
price of $1,413,000.

ASSET PURCHASE AGREEMENTS. Concurrent with the Stock and Note Purchase
Agreement, Ditech entered into two Asset Purchase Agreements with entities
controlled by Kenneth E. Jones. As part of the first agreement, Automated Call
Processing LLC, a California limited liability company controlled by Mr. Jones,
purchased assets including technical equipment, raw materials and intellectual
property, from Ditech for a total of $690,000. As part of the second agreement,
ACP Interactive LLC, a California limited liability company controlled by Mr.
Jones, purchased assets including technical equipment, raw materials and
intellectual property, from Ditech for a total of $520,000.

Ditech believes that the foregoing transactions were in its best interests
and were on terms no less favorable to Ditech than could be obtained from
unaffiliated third parties.

Ditech has entered into employment contracts with each of its Chief
Executive Officer, Chairman, and Vice President of Operations. See
"Management--Employment Agreements."

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<PAGE>
PRINCIPAL STOCKHOLDERS

The following table sets forth certain information regarding the beneficial
ownership of our common stock as of April 30, 1999, and as adjusted to reflect
the sale of the common stock offered by this prospectus, by:

- each stockholder who is known by us to own beneficially more than 5% of
our common stock;

- each of our Named Executive Officers;

- each of our directors; and

- all of our directors and executive officers as a group.

Beneficial ownership is determined in accordance with the rules of the SEC
and generally includes voting or investment power with respect to securities.
Except as indicated by footnote, and subject to community property laws where
applicable, we believe, based on information furnished by such persons, that the
persons named in the table below have sole voting and investment power with
respect to all shares of common stock shown as beneficially owned by them.
Percentage of beneficial ownership is based on 8,766,846 shares of common stock
(including shares issuable upon conversion of Series B preferred stock that will
convert to common stock on a two-for-three ratio on or prior to the closing of
the offering) outstanding as of April 30, 1999, and 11,766,846 shares of common
stock outstanding after completion of this offering.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED PERCENT BENEFICIALLY
OWNED AFTER THE
PRIOR TO THE OFFERING OFFERING
-------------------------- -----------------------
BENEFICIAL OWNER NUMBER PERCENT PERCENT
- ------------------------------------------------------------------- ------------- ----------- -----------------------
<S> <C> <C> <C>
Entities affiliated with Summit Partners (1)....................... 3,867,649 44.1% 32.9%

Seahawk Ranch Irrevocable Trust (2)................................ 758,985 8.7 6.5

Seahawk Investment Trust (2)....................................... 611,324 7.0 5.2

Timothy Montgomery (3)............................................. 399,998 4.5 3.4

Pong Lim (4)....................................................... 499,998 5.7 4.2

William Tamblyn (5)................................................ 116,665 1.3 *

Toni Bellin (6).................................................... 100,000 1.1 *

Serge Stepanoff (7)................................................ 99,998 1.1 *

Salim Jabr (8)..................................................... 199,999 2.2 1.7

Marc Schwager (9).................................................. 100,000 1.1 *

Gregory Avis (10).................................................. 3,867,649 44.1 32.9

Peter Chung (11)................................................... 3,867,649 44.1 32.9

William Hasler..................................................... 66,666 * *

Kenneth E. Jones (12).............................................. 1,387,421 15.8 11.8

George Turner...................................................... 154,052 1.8 1.3

All directors and executive officers as a group (12 persons)(13)... 6,992,446 75.0% 56.7%
</TABLE>

- ------------------------

* Represents beneficial ownership of less than 1 percent.

(1) Shares consist of 3,515,433 shares held by Summit Ventures IV, L.P., 116,262
shares held by Summit Investors III, L.P., and 235,954 shares held by Summit
Subordinated Debt Fund, L.P.

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<PAGE>
Summit Partners is located at 600 Atlantic Ave., Suite 2800, Boston, MA
02210-2227. Summit Partners IV, L.P. is the General Partner of Summit
Ventures IV, L.P. and Stamps, Woodsum & Co., IV is the General Partner of
Summit Partners IV, L.P. Summit Partners SD, L.P. is the General Partner of
Summit Subordinated Debt Fund, L.P. and Stamps, Woodsum & Co., III is the
General Partner of Summit Partners SD, L.P. The following individuals are
General Partners of Stamps, Woodsum & Co., IV, Summit Investors III, L.P.
and Stamps, Woodsum & Co., III, L.P.: E. Roe Stamps, IV, Stephen G. Woodsum,
Martin J. Mannion, John A. Genest, Gregory M. Avis, Bruce R. Evans, Walter
G. Kortschak, Thomas S. Roberts, Joseph F. Trustey and Kevin P. Mohan. As
general partners, such persons may be deemed to have beneficial ownership of
the shares held by Summit Ventures IV, L.P., Summit Investors III, L.P. and
Summit Subordinated Debt Fund, L.P.

(2) Seahawk Investment Trust and Seahawk Ranch Irrevocable Trust are located at
550 Pilgrim Drive, Foster City, California 94404. Kenneth Jones and Signe
Kim Lauridsen-Jones are trustees of the Seahawk Investment Trust and, as
such, may be deemed to have beneficial ownership of the shares held by
Seahawk Investment Trust. Mr. Jones and Philip E. Blake are trustees of the
Seahawk Ranch Irrevocable Trust and, as such, may be deemed to have
beneficial ownership of the shares held by Seahawk Ranch IrrevocableTrust.

(3) Includes 100,000 shares which may be acquired pursuant to the exercise of
stock options. On April 30, 1999, 190,972 of Mr. Montgomery's shares were
subject to a repurchase option in favor of Ditech.

(4) On April 30, 1999, 71,388 of Mr. Lim's shares were subject to a repurchase
option in favor of Ditech. The address for Mr. Lim is c/o Ditech
Corporation, 825 E. Middlefield Rd., Mountain View, CA 94043.

(5) Includes 35,084 shares which may be acquired pursuant to the exercise of
stock options. On April 30, 1999, 34,359 of Mr. Tamblyn's shares were
subject to a repurchase option in favor of Ditech.

(6) Consists solely of 100,000 shares which may be acquired pursuant to the
exercise of stock options.

(7) Consists solely of 99,998 shares which may be acquired pursuant to the
exercise of stock options.

(8) Includes 125,000 shares which may be acquired pursuant to the exercise of
stock options.

(9) Consists solely of 100,000 shares which may be acquired pursuant to the
exercise of stock options.

(10) The shares are beneficially owned by Summit Partners. Mr. Avis is a
Managing Partner of Summit Partners. See footnote (1). The address for Mr.
Avis is c/o Summit Partners, 600 Atlantic Ave., Suite 2800, Boston, MA
02210-2227.

(11) The shares are beneficially owned by Summit Partners. Mr. Chung is a
Principal of Summit Partners. See footnote (1). The address for Mr. Chung is
c/o Summit Partners, 600 Atlantic Ave., Suite 2800, Boston, MA 02210-2227.

(12) Total number of shares includes 758,985 shares of common stock held by
Seahawk Ranch Irrevocable Trust, of which Mr. Jones is a trustee; 611,324
shares of common stock held by Seahawk Investment Trust, of which Mr. Jones
is a trustee; and 17,112 shares of common stock held by Western General
Corporation, of which Mr. Jones is the president. The address for Mr. Jones
is 550 Pilgrim Drive, Foster City, California 94404.

(13) Includes 560,082 shares that may be acquired pursuant to the exercise of
stock options. See notes 1 through 12 above.

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<PAGE>
DESCRIPTION OF CAPITAL STOCK

Upon completion of this offering, the authorized capital stock of Ditech
will consist of 50,000,000 shares of common stock, $0.001 par value, and
5,000,000 shares of undesignated Preferred Stock, $0.001 par value.

COMMON STOCK

As of April 30, 1999, and assuming conversion of our Series B preferred
stock, there were 8,766,846 shares of common stock outstanding held of record by
approximately 140 stockholders. The holders of common stock are entitled to one
vote for each share held of record on all matters submitted to a vote of the
stockholders. The holders of common stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefore, subject to the rights of the holders of preferred stock. In
the event of a liquidation, dissolution or winding up of Ditech, holders of the
common stock are entitled to share ratably in all assets remaining after payment
of liabilities and amounts due to the holders of preferred stock as described
below. Holders of common stock have no preemptive rights and no right to convert
their common stock into any other securities. There are no redemption or sinking
fund provisions applicable to the common stock.

PREFERRED STOCK

The Board of Directors has the authority to issue up to 5,000,000 shares of
preferred stock in one or more series and to fix the rights, preferences,
privileges and restrictions granted to or imposed upon such preferred stock,
including dividend rights, conversion rights, terms of redemption, liquidation
preference, sinking fund terms and the number of shares constituting any series
or the designation of such series, without any further vote or action by the
stockholders. The Board of Directors, without stockholder approval, can issue
preferred stock with voting and conversion rights which could adversely affect
the voting power of the holders of common stock. The issuance of preferred stock
could have the effect of delaying, deferring or preventing a change in control
of Ditech. We have no present plan to issue any shares of preferred stock.

ANTI-TAKEOVER EFFECTS OF PROVISIONS OF CHARTER DOCUMENTS AND DELAWARE LAW

CHARTER DOCUMENTS. The Certificate of Incorporation and Bylaws include a
number of provisions that may have the effect of deterring hostile takeovers or
delaying or preventing changes in control or management of Ditech:

- First, the Certificate of Incorporation provides that all stockholder
actions upon completion of this offering must be effected at a duly called
meeting of holders and not by a consent in writing.

- Second, the Bylaws provide that special meetings of the holders may be
called only by (1) the Chairman of the Board of Directors, (2) the Chief
Executive Officer or (3) Board of Directors pursuant to a resolution
adopted by a majority of the total number of authorized directors.

- Third, the Certificate of Incorporation and the Bylaws provide for a
classified Board of Directors, in which approximately one-third of the
directors would be elected each year. Consequently, any potential acquiror
would need to successfully complete two proxy contests in order to take
control of the Board of Directors.

- Fourth, stockholders will not be able to cumulate votes for directors
(under cumulative voting, a minority stockholder holding a sufficient
percentage of a class of shares may be able to ensure the election of one
or more directors).

- Fifth, the Bylaws establish procedures, including advance notice
procedures with regard to the nomination of candidates for election as
directors and stockholder proposals.

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<PAGE>
These provisions of the Certificate of Incorporation and Bylaws could discourage
potential acquisition proposals and could delay or prevent a change in control
or management of Ditech. Such provisions also may have the effect of preventing
changes in the management of Ditech.

DELAWARE TAKEOVER STATUTE. Ditech is subject to the provisions of Section
203 of the Delaware General Corporation Law ("Section 203"). In general, Section
203 prohibits a publicly-held Delaware corporation, such as Ditech upon
completion of this offering, from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction pursuant to which the person became an interested stockholder,
unless the business combination is approved in a manner prescribed by Delaware
law. For purposes of Section 203, a "business combination" includes a merger,
asset sale or other transaction resulting in a financial benefit to the
interested stockholder, and an "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years prior, did
own) 15% or more of the corporation's voting stock.

REGISTRATION RIGHTS

Following this offering, holders of approximately 4,363,365 shares of common
stock will have registration rights pursuant to an agreement entered into with
those stockholders. The agreement specifies that its terms will not apply to
this offering. Following this offering, the holders of a majority of such shares
of common stock may request registration under the Securities Act of all or any
portion of such shares of common stock on Form S-1, and the holders of at least
15% of the common stock held by such holders may request registration under the
Securities Act of all or any portion of their shares of common stock held by
such holders on Form S-2 or S-3. In addition, if we propose to register any of
our securities under the Securities Act, the holders of those shares of common
stock are entitled, subject to certain restrictions and exceptions, to include
their shares of common stock in the registration. The underwriters of any such
offering have the right, in certain circumstances and subject to certain
conditions, to limit the number of shares included in the offering. We are
required to bear all registration and selling expenses (other than underwriters'
discounts and commissions) in any such offering.

TRANSFER AGENT AND REGISTRAR

Norwest Bank Minnesota N.A. has been appointed as the transfer agent and
registrar for Ditech's common stock.

60
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE

Prior to this offering, there has been no public market for our common
stock. Future sales of substantial amounts of common stock in the public market
could adversely affect the market price of the common stock prevailing from time
to time. Furthermore, since only a limited number of shares will be available
for sale shortly after this offering because of certain contractual and legal
restrictions on resale described below, sales of substantial amounts of our
common stock in the public market after the restrictions lapse could adversely
affect the prevailing market price and the ability of Ditech to raise equity
capital in the future.

Upon completion of this offering, based on the number of shares outstanding
as of April 30, 1999, Ditech will have outstanding an aggregate of 11,766,846
shares of common stock assuming:

- the issuance by Ditech of the shares of common stock offered hereby;

- no exercise of exercisable options to purchase 863,482 shares of common
stock; and

- no exercise of the Underwriters' over-allotment option to purchase 450,000
shares of common stock.

Of these shares, the 3,000,000 shares sold in this offering will be freely
tradable without restriction or further registration under the Securities Act,
except for shares held by "affiliates" of Ditech as that term is defined in Rule
144 under the Securities Act (whose sales would be subject to certain
limitations and restrictions described below) and the regulations promulgated
thereunder.

The remaining 8,766,846 shares held by officers, directors, employees,
consultants and other stockholders of Ditech were sold by Ditech in reliance on
exemptions from registration requirements of the Securities Act and are
"restricted securities" within the meaning of Rule 144 under the Securities Act.
Restricted securities may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rules 144 or 701
promulgated under the Securities Act, which rules are summarized below. As a
result of and subject to the provisions of the 180-day lock-up agreements
described below and the provisions of Rules 144 and 701, additional shares may
be available for sale in the public market as follows, subject to the
restrictions imposed by the federal securities laws on sales by affiliates:

- 8,337,677 restricted securities will be eligible for sale 180 days after
the date of this prospectus upon expiration of the lock-up agreements
referred to below; and

- an additional 429,169 shares may become available for sale at various
times after the 180 days following the date of this prospectus as Ditech's
repurchase option on such shares lapses.

An additional 181,598 shares may be eligible for sale 180 days after the date of
this prospectus upon the exercise of stock options and additional shares may
become available at various times thereafter as outstanding options vest and are
exercised. In order to sell shares of common stock under Rule 144, the shares
must be held for a period longer than one year prior to such sale.

The stockholders and optionholders of Ditech have agreed with the
representatives of the Underwriters for a period of 180 days after the date of
this prospectus, that they will not, directly or indirectly, offer, sell,
contract to sell or grant any option to sell or otherwise dispose of, directly
or indirectly, any shares of common stock or securities convertible into or
exchangeable for, or any rights to purchase or acquire, common stock, without
the prior written consent of BT Alex. Brown Incorporated. BT Alex. Brown
Incorporated, in its sole discretion and at any time without notice, may release
all or any portion of the securities subject to the 180-day lock-up agreement.
If BT Alex. Brown Incorporated releases securities subject to the lock-up
agreements, these securities will be available for sale prior to the expiration
of the 180-day period. Ditech has agreed that it will not, without the prior
written consent of BT Alex. Brown Incorporated, offer, sell or otherwise dispose
of any shares of common stock, options to acquire shares of common stock or
securities exchangeable for or convertible into shares of common stock during
the 180-day period following the date of this prospectus, except that Ditech may
issue shares upon the exercise of options granted prior to the date hereof, and
may grant additional options under its stock option plans, provided that,

61
<PAGE>
without the prior written consent of BT Alex. Brown Incorporated, such
additional options shall not be exercisable during such 180-day period.

In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, an affiliate of Ditech, or person (or persons whose
shares are aggregated) who has beneficially owned restricted securities that
were not acquired from Ditech or an affiliate of Ditech within the previous one
year, will be entitled to sell in any three-month period a number of shares that
does not exceed the greater of:

- 1% (approximately 117,668 shares immediately after this offering) of the
then outstanding shares of Ditech's common stock or

- the average weekly trading volume of Ditech's common stock in the Nasdaq
National Market during the four calendar weeks immediately preceding the
date on which notice of the sale is filed with the Commission.

Sales pursuant to Rule 144 are subject to certain requirements relating to
manner of sale, notice and availability of current public information about
Ditech. A person (or person whose shares are aggregated) who is not deemed to
have been an affiliate of Ditech at any time during the 90 days immediately
preceding the sale and who beneficially owns restricted securities is entitled
to sell such shares pursuant to Rule 144(k) without regard to the limitations
described above; provided that at least two years have elapsed since the later
of the date the shares were acquired from Ditech or from an affiliate of Ditech.

An employee, officer or director of or consultant to Ditech who purchased or
was awarded shares or options to purchase shares pursuant to a written
compensatory plan or contract is entitled to rely on the resale provisions of
Rule 701 under the Securities Act, which permits affiliates and non-affiliates
to sell their Rule 701 shares without having to comply with Rule 144's holding
period restrictions, in each case commencing 90 days after the date of this
prospectus. In addition, non-affiliates may sell Rule 701 shares without
complying with public information, volume and notice provisions of Rule 144.

We intend to file a registration statement under the Securities Act to
register shares of common stock reserved for issuance under our stock option and
employee stock purchase plans, thus permitting the resale of such shares by
non-affiliates in the public market without restriction under the Securities
Act. Such registration statement will become effective immediately upon filing.

62
<PAGE>
UNDERWRITING

Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives, BT Alex. Brown
Incorporated, BancBoston Robertson Stephens Inc. and Hambrecht & Quist LLC, have
severally agreed to purchase from Ditech the following respective number of
shares of common stock at the assumed public offering price less the
underwriting discounts and commissions set forth on the cover page of this
prospectus:

<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
- ----------------------------------------------------------------------------- -----------
<S> <C>
BT Alex. Brown Incorporated.................................................. 930,000
BancBoston Robertson Stephens Inc............................................ 558,000
Hambrecht & Quist LLC........................................................ 372,000
Banc of America Securities LLC............................................... 60,000
CIBC World Markets........................................................... 60,000
Credit Suisse First Boston Corporation....................................... 60,000
Goldman, Sachs & Co.......................................................... 60,000
Lehman Brothers Inc.......................................................... 60,000
Morgan Stanley & Co. Incorporated............................................ 60,000
Prudential Securities Incorporated........................................... 60,000
SG Cowen..................................................................... 60,000
Warburg Dillon Read LLC...................................................... 60,000
Advest, Inc.................................................................. 40,000
Dain Rauscher Wessels........................................................ 40,000
Fahnestock & Co. Inc......................................................... 40,000
Gerard Klauer Mattison & Co., Inc............................................ 40,000
Hoefer & Arnett, Inc......................................................... 40,000
Parker/Hunter Incorporated................................................... 40,000
Pennsylvania Merchant Group.................................................. 40,000
U.S. Bancorp Piper Jaffray Inc............................................... 40,000
Raymond James & Associates, Inc.............................................. 40,000
The Robinson-Humphrey Company, LLC........................................... 40,000
Soundview Technology Group, Inc.............................................. 40,000
Stephens Inc................................................................. 40,000
Tucker Anthony Incorporated.................................................. 40,000
First Security Van Kasper.................................................... 40,000
Volpe Brown Whelan & Company, LLC............................................ 40,000
-----------
Total.................................................................... 3,000,000
-----------
-----------
</TABLE>

The underwriting agreement provides that the obligations of the underwriters
are subject to certain conditions precedent and that the underwriters will
purchase all shares of the common stock offered hereby if any of such shares are
purchased.

We have been advised by BT Alex. Brown Incorporated that the underwriters
propose to offer the shares of common stock directly to the public at the
initial public offering price set forth on the cover page of this prospectus and
to certain dealers at such price less a concession not in excess of $0.44 per
share. The underwriters may allow and such dealers may reallow a concession not
in excess of $0.10 per share to certain other dealers. After the initial public
offering of the shares, the offering price and other selling terms may be
changed by the representatives of the underwriters.

We have granted to the underwriters an option, exercisable no later than 30
days after the date of this prospectus, to purchase up to 450,000 additional
shares of common stock at the initial public offering price less the
underwriting discounts and commissions set forth on the cover page of this
prospectus. To the extent that the underwriters exercise such option, each of
the underwriters

63
<PAGE>
will have a firm commitment to purchase approximately the same percentage of
such additional shares as the number set forth next to such underwriter's name
in the above table bears to the total number of shares of common stock offered
hereby. The underwriters may exercise such option only to cover over-allotments
made in connection with the sale of common stock offered by this prospectus. If
purchased, the underwriters will offer such additional shares on the same terms
as those on which the 3,000,000 shares are being offered.

The following table summarizes the compensation to be paid to the
underwriters by Ditech, and the expenses payable by Ditech.

<TABLE>
<CAPTION>
TOTAL
--------------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
----------- --------------- ---------------
<S> <C> <C> <C>
Underwriting discounts and commissions paid by
Ditech............................................................ $ 0.77 $ 2,310,000 $ 2,656,500
</TABLE>

Ditech has agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, and to contribute to payments
the underwriters may be required to make in respect thereof.

Ditech and its officers and directors and certain stockholders have agreed
not to offer, sell or otherwise dispose of any shares of common stock for a
period of 180 days after the date of this prospectus without the prior written
consent of BT Alex. Brown Incorporated. Such consent may be given at any time
without any public notice.

Prior to this offering, there has been no public market for the common
stock. Consequently, the initial public offering price for the common stock was
determined by negotiation between us and the representatives of the
underwriters. Among the factors that were considered in such negotiations were
prevailing market conditions, the results of operations of Ditech in recent
periods, the market capitalization and stages of development of other companies
that we and the representatives of the underwriters believed to be comparable to
Ditech, estimates of the business potential, and its industry in general and the
present state of Ditech's development and other factors deemed relevant.

We have been advised by the representatives of the underwriters that during
and after this offering, the underwriters may purchase and sell common stock in
the open market. These transactions may include over-allotment and stabilizing
transactions and purchases to cover syndicate short positions created in
connection with this offering. Stabilizing transactions consist of certain bids
or purchases for the purpose of preventing or retarding a decline in the market
price of the common stock; and syndicate short positions involve the sale by the
underwriters of a greater number of shares of common stock than they are
required to purchase from us in this offering. The underwriters also may impose
penalty bids, whereby selling concessions allowed to the syndicate members or
other broker-dealers in respect of the common stock sold in this offering for
their account may be reclaimed by the syndicate if such securities are
repurchased by the syndicate in stabilizing or short-covering transactions.
These activities may stabilize, maintain or otherwise affect the market price of
the common stock, which may be higher than the price that might otherwise
prevail in the open market. These transactions may be effected on the Nasdaq
National Market or otherwise and these activities, if commenced, may be
discontinued at any time.

The representatives of the underwriters have informed us that the
underwriters do not intend to confirm orders to any account over which they
exercise discretionary authority.

We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $900,000.

We are obligated to pay interest under a credit agreement with and granted a
security interest in our assets to BankBoston, N.A., an affiliate of BancBoston
Robertson Stephens Inc., a representative of the underwriters. We are also
obligated to pay rent to BancBoston Leasing Inc., also an affiliate of
BancBoston Robertson Stephens Inc., pursuant to a lease line of credit.

64
<PAGE>
LEGAL MATTERS

The validity of the issuance of the common stock offered hereby will be
passed upon for Ditech by Cooley Godward LLP, Palo Alto, California. Certain
legal matters in connection with the offering will be passed upon for the
Underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo
Alto, California.

EXPERTS

The financial statements of Ditech as of April 30, 1998 and 1999, and for
each of the three years in the period ended April 30, 1999, appearing in this
prospectus and registration statement have been audited by and have been
included herein in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.

CHANGE IN ACCOUNTANTS

In April 1998, Ditech's Board of Directors determined to change its
accountants and approved the engagement of PricewaterhouseCoopers LLP (formerly
Coopers & Lybrand LLP) to replace the former accountants as Ditech's principal
accountants. Prior to and as of PricewaterhouseCoopers' appointment, there were
no disagreements with the former accountants during the two years ended April
30, 1997 or during the subsequent interim period preceding their replacement on
any matters of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures which, if not resolved to the former
accountants' satisfaction, would have caused them to make reference to the
matter in their report. The former accountants issued an unqualified opinion on
the financial statements of Ditech as of and for the two years ended April 30,
1997. The former accountants' report does not cover any of the financial
statements of Ditech included in this Prospectus. Ditech did not consult with
PricewaterhouseCoopers LLP on any accounting or financial reporting matters in
the periods prior to their appointment.

ADDITIONAL INFORMATION

We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, a registration statement on Form S-1 under the Securities Act with
respect to the shares of common stock being offered. This prospectus does not
contain all the information set forth in the registration statement and the
exhibits and schedules thereto. For further information with respect to Ditech
and our common stock, we refer you to the registration statement and to the
exhibits and schedules filed therewith. Statements contained in this prospectus
as to the contents of any contract or other document referred to are not
necessarily complete, and in each instance we refer you to the copy of such
contract or other document filed as an exhibit to the registration statement,
each such statement being qualified in all respects by such reference. A copy of
the registration statement may be inspected and copied by anyone at the SEC's
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. The SEC also maintains a World Wide Web site that
contains reports, proxy and information statements and other information
regarding registrants, such as Ditech, that file electronically with the SEC.
The address of the site is http://www.sec.gov.

Ditech intends to furnish to its stockholders annual reports containing
audited financial statements certified by an independent public accounting firm
and quarterly reports containing unaudited interim financial information for
each of the first three fiscal quarters of each fiscal year of Ditech.

65
<PAGE>
DITECH COMMUNICATIONS CORPORATION
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Accountants...................................................... F-2

Balance Sheets......................................................................... F-3

Statements of Operations............................................................... F-4

Statements of Stockholders' Equity (Deficit)........................................... F-5

Statements of Cash Flows............................................................... F-6

Notes to Financial Statements.......................................................... F-7
</TABLE>

F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Ditech Communications Corporation:

In our opinion, the accompanying balance sheets and the related statements
of operations, stockholders' equity (deficit) and cash flows present fairly, in
all material respects, the financial position of Ditech Corporation at April 30,
1998 and 1999, and the results of its operations and its cash flows for each of
the three years in the period ended April 30, 1999, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

/s/ PRICEWATERHOUSECOOPERS LLP

May 21, 1999
San Jose, California

F-2
<PAGE>
DITECH COMMUNICATIONS CORPORATION

BALANCE SHEETS

(IN THOUSANDS)

<TABLE>
<CAPTION>
APRIL 30, PRO FORMA
-------------------- APRIL 30,
1998 1999 ------------
--------- --------- 1999
------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS

Current assets:
Cash and cash equivalents................................................... $ 3,433 $ 3,114
Investments................................................................. -- --
Accounts receivable, net of allowance for doubtful accounts of $30 and $100
in 1998 and 1999, respectively............................................ 2,190 3,068
Inventories................................................................. 2,163 4,606
Deferred income taxes....................................................... 473 575
Other current assets........................................................ 89 88
Income taxes receivable..................................................... 142 --
--------- ---------
Total current assets...................................................... 8,490 11,451
Property and equipment, net................................................... 1,228 1,538
Investment in preferred stock................................................. 7,508 --
Other assets.................................................................. 48 1,341
--------- ---------
Total assets.............................................................. $ 17,274 $ 14,330
--------- ---------
--------- ---------
LIABILITIES

Current liabilities:
Note payable, current portion............................................... $ 563 $ 1,125
Accounts payable............................................................ 1,212 2,559
Accrued expenses............................................................ 892 1,454
Deferred revenue............................................................ -- 531
Income taxes payable........................................................ -- 417
Obligations under capital lease, current portion............................ 41 61
--------- ---------
Total current liabilities................................................. 2,708 6,147
Deferred income taxes......................................................... 91 4
Note payable, net of current portion.......................................... 7,313 6,188
Obligations under capital lease, net of current portion....................... 97 76
--------- ---------
Total liabilities......................................................... 10,209 12,415
--------- ---------
Commitments and contingencies (Note 6)
Redeemable preferred stock:
Series A preferred stock, $0.001 par value, 17,250 shares authorized, issued
and outstanding actual and pro forma
(Liquidation value: $19,579 in 1999)...................................... 18,100 19,241 $ 19,241
Series B convertible preferred stock, $0.001 par value, 6,260 shares
authorized, issued and outstanding actual and no pro forma shares
(Liquidation value: $6,123 in 1999)....................................... 5,661 6,017 --
Series C preferred stock, $0.001 par value, 7,508 shares authorized, issued
and outstanding actual at April 30, 1998 and no shares at April 30, 1999
and pro forma............................................................. 7,361 -- --
--------- --------- ------------
Total redeemable preferred stock.......................................... 31,122 25,258 $ 19,241
--------- --------- ------------
------------
STOCKHOLDERS' DEFICIT

Common stock, $0.001 par value: 50,000 shares authorized and 3,080 and 4,594
shares issued and outstanding at April 30, 1998 and 1999, respectively;
8,767 shares pro forma...................................................... 3 5 $ 9
Deferred stock compensation................................................... -- (1,229) (1,229)
Additional paid in capital.................................................... 75 3,085 9,098
Accumulated deficit........................................................... (24,135) (25,204) (25,204)
--------- --------- ------------
Total stockholders' deficit............................................... (24,057) (23,343) $ (17,326)
--------- --------- ------------
------------
Total liabilities, redeemable preferred stock and stockholders' deficit..... $ 17,274 $ 14,330
--------- ---------
--------- ---------
</TABLE>

The accompanying notes are an integral part of these financial statements

F-3
<PAGE>
DITECH COMMUNICATIONS CORPORATION

STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Revenue.......................................................................... $ 14,066 $ 12,326 $ 25,364
Cost of goods sold............................................................... 6,790 5,651 11,858
--------- --------- ---------
Gross profit................................................................... 7,276 6,675 13,506
--------- --------- ---------
Operating expenses:
Sales and marketing............................................................ 1,521 2,405 5,759
Research and development....................................................... 1,072 2,367 3,860
General and administrative..................................................... 714 1,279 2,399
--------- --------- ---------
Total operating expenses....................................................... 3,307 6,051 12,018
--------- --------- ---------
Income from operations........................................................... 3,969 624 1,488
--------- --------- ---------
Other income (expense):
Interest income................................................................ 21 175 202
Interest expense............................................................... (125) (768) (702)
--------- --------- ---------
Total other income (expense)................................................. (104) (593) (500)
--------- --------- ---------
Income from continuing operations before income taxes........................ 3,865 31 988
Provision for income taxes....................................................... 1,522 24 413
--------- --------- ---------
Income from continuing operations................................................ 2,343 7 575
Discontinued operations:
Loss from operations (net of income tax benefits of $1,037).................... (2,751) -- --
Gain on disposal (net of income tax benefit of $364)........................... 2,843 -- --
--------- --------- ---------
Net income....................................................................... 2,435 7 575
Accretion of mandatorily redeemable preferred stock to redemption value.......... 187 1,374 1,497
--------- --------- ---------
Net income (loss) attributable to common stockholders............................ $ 2,248 $ (1,367) $ (922)
--------- --------- ---------
--------- --------- ---------
Per share data
Basic
Income from continuing operations............................................ $ 0.09 $ (0.45) $ (0.26)
Discontinued operations...................................................... 0.00 -- --
--------- --------- ---------
Net income (loss) per share.................................................. $ 0.09 $ (0.45) $ (0.26)
--------- --------- ---------
--------- --------- ---------
Diluted
Income from continuing operations............................................ $ 0.09 $ (0.45) $ (0.26)
Discontinued operations...................................................... 0.00 -- --
--------- --------- ---------
Net income (loss) per share.................................................. $ 0.09 $ (0.45) $ (0.26)
--------- --------- ---------
--------- --------- ---------
Number of shares used in per share calculations
Basic.......................................................................... 24,772 3,061 3,566
--------- --------- ---------
--------- --------- ---------
Diluted........................................................................ 25,224 3,061 3,566
--------- --------- ---------
--------- --------- ---------
Pro forma data
Net loss per share--basic and diluted.......................................... $ (0.07)
---------
---------
Shares used in per share calculation--basic and diluted........................ 7,739
---------
---------
</TABLE>

The accompanying notes are an integral part of these financial statements

F-4
<PAGE>
DITECH COMMUNICATIONS CORPORATION

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK NOTES ADDITIONAL
---------------------- RECEIVABLE FROM DEFERRED STOCK PAID IN ACCUMULATED
SHARES AMOUNT STOCKHOLDERS COMPENSATION CAPITAL DEFICIT
--------- ----------- --------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, MAY 1, 1996.................. 27,903 $ 28 $ (87) -- $ 9,610 $ (1,379)
Exercise of stock options.............. 1,050 1 -- -- 154 --
Tax benefit on exercise of stock
options.............................. -- -- -- -- 307 --
Collection of stockholder notes
receivable........................... -- -- 87 -- -- --
Repurchase of common stock............. (26,093) (29) -- -- (10,071) (23,637)
Accretion for dividend on Series A and
B redeemable preferred stock......... -- -- -- -- -- (187)
Net income............................. -- -- -- -- -- 2,435
--------- ----- ----- -------------- ----------- -------------
BALANCES, APRIL 30, 1997............... 2,860 -- -- -- -- (22,768)
Exercise of stock options.............. 153 2 -- -- 21 --
Issuance of common stock............... 67 1 -- -- 54 --
Accretion for dividend on Series A and
B redeemable preferred stock......... -- -- -- -- -- (1,374)
Net income............................. -- -- -- -- -- 7
--------- ----- ----- -------------- ----------- -------------
BALANCES, APRIL 30, 1998............... 3,080 3 -- -- 75 (24,135)
Exercise of stock options.............. 1,349 1 -- -- 910 --
Issuance of common stock............... 167 1 -- -- 739 --
Repurchase of common stock............. (2) -- -- -- (2) --
Accretion for dividend on Series A and
B redeemable preferred stock......... -- -- -- -- -- (1,497)
Redemption of Series C preferred
stock................................ -- -- -- -- -- (147)
Tax benefit on exercise of stock
options.............................. -- -- -- -- 43 --
Deferred compensation on issuance of
stock options........................ -- -- -- $ (1,320) 1,320 --
Amortization of deferred stock
compensation......................... -- -- -- 91 -- --
Net income............................. -- -- -- -- 575
--------- ----- ----- -------------- ----------- -------------
BALANCES, APRIL 30, 1999............... 4,594 $ 5 $ -- $ (1,229) $ 3,085 $ (25,204)
--------- ----- ----- -------------- ----------- -------------
--------- ----- ----- -------------- ----------- -------------

TOTAL
----------
<S> <C>
BALANCES, MAY 1, 1996.................. $ 8,172
Exercise of stock options.............. 155
Tax benefit on exercise of stock
options.............................. 307
Collection of stockholder notes
receivable........................... 87
Repurchase of common stock............. (33,737)
Accretion for dividend on Series A and
B redeemable preferred stock......... (187)
Net income............................. 2,435
----------
BALANCES, APRIL 30, 1997............... (22,768)
Exercise of stock options.............. 23
Issuance of common stock............... 55
Accretion for dividend on Series A and
B redeemable preferred stock......... (1,374)
Net income............................. 7
----------
BALANCES, APRIL 30, 1998............... (24,057)
Exercise of stock options.............. 911
Issuance of common stock............... 740
Repurchase of common stock............. (2)
Accretion for dividend on Series A and
B redeemable preferred stock......... (1,497)
Redemption of Series C preferred
stock................................ (147)
Tax benefit on exercise of stock
options.............................. 43
Deferred compensation on issuance of
stock options........................ --
Amortization of deferred stock
compensation......................... 91
Net income............................. 575
----------
BALANCES, APRIL 30, 1999............... $ (23,343)
----------
----------
</TABLE>

The accompanying notes are an integral part of these financial statements

F-5
<PAGE>
DITECH COMMUNICATIONS CORPORATION

STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................................................... $ 2,435 $ 7 $ 575
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Loss from discontinued operations.................................................. 2,751 -- --
Gain on disposal of discontinued operations........................................ (2,843) -- --
Depreciation and amortization...................................................... 68 175 482
Increase (decrease) in provision for doubtful accounts............................. 75 (45) 70
Loss on disposal of property and equipment......................................... 1 -- 34
Deferred income taxes.............................................................. (142) (18) (189)
Amortization of deferred stock compensation........................................ -- -- 91
Change in assets and liabilities:
Accounts receivable.............................................................. 749 58 (948)
Inventories...................................................................... (562) (503) (2,443)
Other current assets............................................................. (69) (58) 1
Income taxes receivable/payable.................................................. (848) 705 602
Accounts payable................................................................. 80 (177) 1,347
Accrued expenses and other....................................................... (455) (246) 562
Deferred revenue................................................................. -- -- 531
--------- --------- ---------
Net cash provided by (used in) operating activities of continuing operations... 1,240 (102) 715
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sales of discontinued operations....................................... 2,623 -- --
Purchases of property and equipment.................................................. (289) (823) (698)
Other assets......................................................................... -- -- (634)
Maturity (purchase) of investments................................................... 293 221 --
--------- --------- ---------
Net cash provided by (used in) investing activities of continuing operations....... 2,627 (602) (1,332)
--------- --------- ---------
Cash flows from financing activities:
Issuance of note payable............................................................. -- 8,000 --
Issuance of subordinated promissory notes............................................ 8,000 -- --
Collection of notes receivable from stockholders..................................... 87 -- --
Repayment of subordinated promissory notes........................................... -- (8,000) --
Repurchase of common stock........................................................... (21,486) -- (2)
Principal payments on note payable................................................... -- (125) (563)
Principal payments under capital lease obligations................................... -- (15) (48)
Proceeds from issuance of preferred stock............................................ 17,901 -- --
Proceeds from issuance of common stock............................................... -- 55 --
Proceeds from exercise of stock options.............................................. 155 23 911
--------- --------- ---------
Net cash provided by (used in) financing activities of continuing operations....... 4,657 (62) 298
--------- --------- ---------
Net cash used in discontinued operations............................................... (4,856) -- --
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents................................... 3,668 (766) (319)
Cash and cash equivalents, beginning of year........................................... 531 4,199 3,433
--------- --------- ---------
Cash and cash equivalents, end of year................................................. $ 4,199 $ 3,433 $ 3,114
--------- --------- ---------
--------- --------- ---------
</TABLE>

The accompanying notes are an integral part of these financial statements

F-6
<PAGE>
DITECH COMMUNICATIONS CORPORATION

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND NATURE OF BUSINESS

Ditech Communications Corporation (formerly Automated Call Processing
Corporation) (the "Company") is a Delaware corporation that reincorporated from
a California corporation in April 1999. The Company designs, develops and
markets echo cancellation equipment and optical communications products for use
in building and expanding telecommunications and cable communications networks.
The Company has established a direct sales force that sells its products in the
U.S. and internationally. The Company operates in one business segment.

Effective March 11, 1997, the Company sold its operations doing business as
Automated Call Processing Corporation ("ACP") and its wholly owned subsidiary,
Globe Wireless ("GW") and subsequently merged with its wholly owned subsidiary,
Ditech Corporation and renamed the Company. The operations of ACP and GW have
been presented as discontinued operations in the financial statements.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

REVENUE RECOGNITION

The Company recognizes revenue when a product has been shipped, no material
vendor obligations remain outstanding and collection of the resulting receivable
is probable. In the event that revenue recognition is deferred due to
uncertainty about collectibility or the existence of a material vendor
obligation such as installation, the revenue is recognized when the uncertainty
is removed and/or the vendor obligation is fulfilled.

WARRANTIES

The Company's products are warranted for one to five years. A provision for
the estimated future cost of warranty is made at the time a sale is recorded.

RESEARCH AND DEVELOPMENT

Research and development costs are expensed as incurred.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Management
believes that the financial institutions in which it maintains such deposits are
financially sound and, accordingly, minimal credit risk exists with respect to
these deposits. Cash and cash equivalents are held by two major U.S. financial
institutions.

F-7
<PAGE>
DITECH COMMUNICATIONS CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS

Carrying amounts of certain of the Company's financial instruments,
including cash and cash equivalents, investments, accounts receivable, accounts
payable and note payable are considered to approximate fair value based upon
comparable market information available at the respective balance sheet dates.

INVENTORIES

Inventories are stated at the lower of cost or market. Cost is determined by
using the first-in, first-out ("FIFO") method. Appropriate consideration is
given to obsolescence, excessive levels, deterioration and other factors in
evaluating net realizable value.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost and are depreciated using the
straight-line method over their estimated useful lives ranging from three to
five years or, in the case of leasehold improvements, the lease period, if
shorter. Upon disposal, the assets and related accumulated depreciation are
removed from the Company's accounts, and the resulting gains or losses are
reflected in the statements of operations.

CERTAIN RISKS AND CONCENTRATIONS

The Company's products are concentrated in the telecommunications component
industry, which is highly competitive and rapidly changing. Revenues for the
Company's products are concentrated with a relatively limited number of
customers. During the year ended April 30, 1997, two customers accounted for 65%
(54% and 11%) of net revenues. During the year ended April 30, 1998, three
customers accounted for 67% (42%, 14%, and 11%) of net revenues. During the year
ended April 30, 1999, one customer accounted for 42% of net revenues. Net
revenues from customers outside the United States, which were denominated in
U.S. dollars, were 10%, 6% and 13% in 1997, 1998 and 1999, respectively. The
Company's accounts receivable was concentrated with one customer at April 30,
1998 (representing 75% of receivables) and four customers at April 30, 1999
(representing 25%, 12%, 12% and 10% of receivables).

A significant component of one of the Company's products is purchased from a
sole vendor. If the Company was unable to obtain the component at prices
reasonable to the Company, it would experience delays in redesigning the product
to function with a component from an alternative supplier. The Company relies on
two manufacturers for a majority of the Company's products. The Company may
experience delays if it were to shift production to an alternative vender.

INCOME TAXES

Income taxes are accounted for under the liability method. Under this
method, deferred income taxes are recognized for temporary differences by
applying enacted statutory rates applicable to future years to differences
between the financial statement carrying amounts and the tax basis of existing
assets and liabilities. The effect on deferred taxes of a change in tax rates is
recognized in income in the period that includes the enactment date.

F-8
<PAGE>
DITECH COMMUNICATIONS CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRINCIPALS OF CONSOLIDATION

In fiscal year 1997, the Company's financial statements included the
accounts of the Company and its two subsidiaries. Intercompany transactions and
balances were eliminated in consolidation. See Note 3 for discussion on
discontinued operations presentation for ACP and GW.

COMPREHENSIVE INCOME

The Company adopted Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("FAS 130"). FAS 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general-purpose financial statements. There was no difference between the
Company's net income and its total comprehensive income for 1997, 1998 and 1999.

ACCOUNTING FOR STOCK-BASED COMPENSATION

As prescribed by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-based Compensation," ("SFAS 123"), the Company accounts
for grants of equity instruments to employees using the intrinsic value method
described in Accounting Practice Bulletin No. 25, "Accounting for Stock Issued
to Employees," ("APB 25"). All other grants are accounted for using the fair
value method described in FAS 123, with appropriate compensation expense
recognition in the statement of operations, where significant.

RECENT ACCOUNTING PRONOUNCEMENTS

In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1). This standard requires
companies to capitalize qualifying computer software costs which are incurred
during the application's development stage and amortize them over the software's
estimated useful life. SOP 98-1 is effective for fiscal years beginning after
December 15, 1998. The Company is currently evaluating the impact of SOP 98-1 on
its financial statements and related disclosures.

EARNINGS PER SHARE

Basic earnings per share is calculated based on the weighted average number
of shares of common stock outstanding during the period less shares subject to
repurchase, which are considered contingently issuable shares. Diluted earnings
per share is calculated based on the weighted average number of shares of common
stock and common stock equivalents outstanding, including the dilutive effect of
stock options, using the treasury stock method, common stock subject to
repurchase and the assumed conversion of all outstanding shares of Series B
preferred stock.

F-9
<PAGE>
DITECH COMMUNICATIONS CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A reconciliation of the numerator and denominator used in the calculation of
the historical basic and diluted net income (loss) per share follows (in
thousands, except per share amounts):

<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Historical net income (loss) per share, basic and diluted:
Basic:
Net income........................................................... $ 2,435 $ 7 $ 575
Less accretion on mandatorily redeemable preferred stock............. 187 1,374 1,497
--------- --------- ---------
Net income (loss) attributable to common stockholders................ $ 2,248 $ (1,367) $ (922)
--------- --------- ---------
--------- --------- ---------
Weighted average shares of common stock outstanding.................. 24,772 3,061 4,044
Less stock subject to repurchase..................................... -- -- (478)
--------- --------- ---------
Shares used in calculation of basic per share numbers................ 24,772 3,061 3,566
--------- --------- ---------
--------- --------- ---------
Net income (loss) per share.......................................... $ 0.09 $ (0.45) $ (0.26)
--------- --------- ---------
--------- --------- ---------
Diluted:
Net income........................................................... $ 2,435 $ 7 $ 575
Less accretion on mandatorily redeemable preferred stock............. 187 1,374 1,497
--------- --------- ---------
Net income (loss) attributable to common stockholders................ $ 2,248 $ (1,367) $ (922)
--------- --------- ---------
--------- --------- ---------
Shares used in calculation of basic per share numbers................ 24,772 3,061 3,566
Dilutive effect of stock options..................................... 452 -- --
--------- --------- ---------
Shares used in calculation of diluted per share numbers.............. 25,224 3,061 3,566
--------- --------- ---------
--------- --------- ---------
Net income (loss) per share.......................................... $ 0.09 $ (0.45) $ (0.26)
--------- --------- ---------
--------- --------- ---------
</TABLE>

RECLASSIFICATIONS

Certain 1997 and 1998 amounts in the Statement of Operations have been
reclassified to conform with the 1999 presentation. These reclassifications did
not change previously reported shareholders' equity (deficit) or net income.

3. DISCONTINUED OPERATIONS

Effective March 11, 1997 the Company sold, in their entirety, both the
operating entities of ACP and GW. ACP represented the call processing segment of
the Company's business and GW represented the wireless marine communications
segment of the Company's business. Both had operations that were separate and
distinct from Ditech Corporation and each other. ACP was sold for cash of
$1,210,000, to a limited liability company and a limited partnership of which
the manager and controlling member is a director and shareholder of the Company.

All of the common stock in GW was sold for cash of $1,413,000. The sale of
GW was to certain shareholders of the Company, a new investor and entities
controlled by a director and shareholder of the Company. The Company accounts
for its investment in GW Series A preferred stock at the lesser of historical
cost or market. As no liquid market exists for the stock, the Company has

F-10
<PAGE>
DITECH COMMUNICATIONS CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

3. DISCONTINUED OPERATIONS (CONTINUED)
evaluated the recoverability of the investment based on secondary financings
that GW has completed. To date the financings that have been completed indicate
that no impairment has occurred. The shares of Series A preferred stock of Globe
Wireless are nonredeemable, nonvoting and nonconvertible securities. The shares
are entitled to a 6% per annum noncumulative dividend when and if declared by
the Board of Directors of Globe Wireless.

On April 29, 1999 the Company redeemed its Series C preferred stock by
distributing the Company's investment in GW preferred stock. This distribution
was for full settlement and redemption of the Company's Series C preferred
stock.

The following summarizes the revenues, operations and gain on disposal of
the entities.

Revenue from discontinued operations for the year ended April 30, 1997 were
(in thousands):

<TABLE>
<CAPTION>
<S> <C>
ACP................................................................................. $ 5,161
GW.................................................................................. 2,072
---------
Total............................................................................. $ 7,233
---------
---------
</TABLE>

Income (loss) from operations of discontinued operations for the year ended
April 30, 1997 were (in thousands):

<TABLE>
<CAPTION>
<S> <C>
ACP (net of tax benefit of $583)................................................... $ 119
GW (net of tax benefit of $454).................................................... (2,870)
---------
$ (2,751)
---------
---------
</TABLE>

Gain on disposal of discontinued operations during the year ended April 30,
1997 were (in thousands):

<TABLE>
<S> <C>
ACP (net of tax benefit of $305).................................. $ 63
GW (net of tax benefit of $59).................................... 2,780
---------
$ 2,843
---------
---------
</TABLE>

F-11
<PAGE>
DITECH COMMUNICATIONS CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

4. BALANCE SHEET ACCOUNTS

INVENTORIES:

Inventories comprised (in thousands):

<TABLE>
<CAPTION>
APRIL 30,
--------------------
1998 1999
--------- ---------
<S> <C> <C>
Raw materials and work in progress....................................... $ 484 $ 2,362
Finished goods........................................................... 1,679 2,244
--------- ---------
Total.................................................................. $ 2,163 $ 4,606
--------- ---------
--------- ---------
</TABLE>

PROPERTY AND EQUIPMENT:

Property and equipment comprised (in thousands):

<TABLE>
<CAPTION>
APRIL 30,
--------------------
1998 1999
--------- ---------
<S> <C> <C>
Furniture and fixtures................................................... $ 118 $ 154
Equipment................................................................ 1,190 1,680
Leasehold improvements................................................... 25 89
Computer software........................................................ 190 250
--------- ---------
1,523 2,173
Less: accumulated depreciation and amortization.......................... (295) (635)
--------- ---------
Total.................................................................. $ 1,228 $ 1,538
--------- ---------
--------- ---------
</TABLE>

Included in property and equipment are assets under capital lease of
$154,000 and $209,000 at April 30, 1998 and 1999, respectively, with related
accumulated amortization of $9,000 and $46,000, respectively. Prior to fiscal
year 1998, the Company did not have any assets under capital lease.

ACCRUED EXPENSES:

Accrued expenses comprised (in thousands):

<TABLE>
<CAPTION>
APRIL 30,
--------------------
1998 1999
--------- ---------
<S> <C> <C>
Accrued royalties........................................................ $ 171 $ 388
Accrued compensation..................................................... 332 624
Accrued professional services............................................ 32 420
Other accrued expenses................................................... 357 22
--------- ---------
Total.................................................................. $ 892 $ 1,454
--------- ---------
--------- ---------
</TABLE>

5. NOTE PAYABLE

In August 1997, the Company entered into an $8 million loan with a bank in
conjunction with its line of credit (see Note 6), collateralized by
substantially all the Company assets. Interest is based

F-12
<PAGE>
DITECH COMMUNICATIONS CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

5. NOTE PAYABLE (CONTINUED)
on the bank's Base Rate plus .25% to 1% or LIBOR Rate plus 2.0% to 2.75%, as
allowed based on compliance with certain covenants and the Company's elected
instrument. Based on the quarterly principal payments the loan will be paid in
full December 31, 2002. The Note has covenants including a minimum quick ratio
and minimum quarterly earnings before interest, taxes, depreciation and
amortization. During fiscal 1998, the Company was out of compliance with certain
of the notes covenants. In the second quarter of fiscal 1999 and at April 30,
1999 the Company was out of compliance with specific financial covenants. The
Company has received waivers from the bank for these instances of
non-compliance. The loan was used to repay the subordinated promissory notes of
$8,000,000 to shareholders, which were issued as part of the recapitalization.

At April 30, 1999, principal payments consist of the following (in
thousands):

<TABLE>
<S> <C>
2000....................................................... $ 1,125
2001....................................................... 2,250
2002....................................................... 2,250
2003....................................................... 1,688
---------
7,313
Less current portion....................................... (1,125)
---------
$ 6,188
---------
---------
</TABLE>

6. COMMITMENTS AND CONTINGENCIES

LEASES

The Company leases its office facilities under a non-cancelable operating
lease expiring in December 2003. The Company is responsible for taxes, insurance
and maintenance expenses related to the leased facilities. Under the terms of
the lease agreement, the lease may be extended, at the Company's option, and the
lease provides for potential adjustments of the minimum monthly rent upon
exercise of the option(s). The Company also has operating leases on furniture
and equipment from unrelated parties. Additionally, the Company has capital
leased equipment with future minimum payments.

F-13
<PAGE>
DITECH COMMUNICATIONS CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
At April 30, 1999, future minimum payments under the leases are as follows
(in thousands):

<TABLE>
<CAPTION>
YEARS ENDED APRIL 30, OPERATING CAPITAL
- ------------------------------------------------------------------------ ----------- -----------
<S> <C> <C>
2000.................................................................... $ 932 $ 73
2001.................................................................... 931 58
2002.................................................................... 945 23
2003.................................................................... 948 9
2004.................................................................... 524 --
----------- -----
$ 4,280 163
-----------
-----------
Less amount representing interest....................................... 26
-----
137
Less current portion 61
-----
$ 76
-----
-----
</TABLE>

Rent expense for the years ended April 30, 1997, 1998 and 1999 was $131,000,
$384,000 and $728,000, respectively.

LINE OF CREDIT

At April 30, 1998, the Company had a revolving line of credit of $3 million
collateralized by substantially all of the Company's assets. Borrowings under
the agreement bear interest at the bank's Base Rate plus .25% to 1.0% or at
LIBOR Rate plus 2.0% to 2.75%, as allowed based on covenants and the Company's
elected instrument. On August 13, 1998, the Company converted the existing line
into a new revolving line of credit with available borrowings of $2 million or
80% of eligible accounts receivable, whichever is lower, with the same financial
institution. The line of credit is subject to the same covenants as the note
payable to a bank (see note 5). Borrowings under the agreement are at the bank's
Base Rate plus .50% until April 30, 1999 and then are adjustable based on
attaining certain covenants at the bank's Base Rate plus .25% to 1.0% or LIBOR
Rate plus 2.0% to 3.0%. The line expires on August 20, 2000. There were no
amounts outstanding at April 30, 1998 or 1999.

ARBITRATION

In January 1998, the Company filed a demand for Arbitration with the
American Arbitration Association in Los Angeles County against Antec
Corporation, the successor-in-interest through merger to Texscan Corporation.
The demand for arbitration alleges that Antec/Texscan breached a contract to
purchase optical amplifier products and seeks monetary damages. Antec/Texscan
have denied liability and, in December 1998, filed a counterclaim against the
Company claiming that the Company breached the purchase contract first and
seeking monetary damages. A decision from the arbitration panel is expected in
June 1999. Although management believes that it has a valid claim to recover
against Antec/Texscan for breach of contract and has meritorious defenses to the
counterclaim, if the case is resolved unfavorably to us it could have a material
adverse effect on our financial condition and results of operations. The Company
has not accrued for any potential losses as they are not probable and currently
cannot be estimated.

F-14
<PAGE>
DITECH COMMUNICATIONS CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
TECHNOLOGY ACQUISITION

In November 1998, the Company entered into an agreement with a partnership
for the purchase of technology included in its echo cancellation products which
it had previously licensed. The Company issued 166,666 shares of its common
stock, increased the royalty percentage until a triggering event and agreed to
pay $2.96 million upon a triggering event. A triggering event is defined as an
IPO or merger where the Company is not the surviving entity. After the
triggering event the Company is no longer required to pay royalties on the
technology.

The value of the technology was capitalized at $740,000 and is included in
other assets. The cost will be amortised over a five year life.

7. REDEEMABLE PREFERRED STOCK

The Company has authorized and issued 17,250,000 shares of Series A
preferred stock and 6,259,718 shares of Series B preferred stock. Certain former
common stockholders of the Company own a portion of the Series A preferred
stock. The rights, preferences and privileges of the Series A and Series B
preferred stock are as follows:

LIQUIDATION RIGHTS

The preferred stock has certain liquidation preferences over the common
stock in the event of a liquidating event such as dissolution of the affairs of
the Company or a take-over by another corporation. The liquidation preferences
entitle the Series A and Series B preferred stockholders to receive $1.00 and
$0.86 per share, respectively, in addition to amounts due on unpaid dividends
which have been accrued or declared. The Series A preferred stockholders have
preference over the Series B preferred stockholders in determining the order of
liquidation payout. The preferred stock does not participate in the distribution
of assets remaining after the liquidation preference has been paid.

CONVERSION RIGHTS

The Series A preferred stock has no conversion rights. The Series B
preferred stockholders have the right at any time to convert each share of
preferred stock into shares of common stock at the specified conversion rate per
share, which currently is $1.29 per share of common stock. The conversion rate
will be adjusted for stock splits and recapitalization. In the event of a public
offering of the Company's common stock where the net proceeds received by the
Company equals or exceeds $20,000,000 and the offering price is at least $3.89
per share, or in the event of approval from two thirds of Series B preferred
stockholders, all shares of the Series B preferred stock automatically convert
into common stock at the specified conversion rate.

REDEMPTION RIGHTS

The Company may not redeem any or all of the Series A and Series B preferred
stock until after February 1, 2004, with a request of the majority of the
outstanding stockholders. The Series B preferred stock may be redeemed only if
there are no shares of Series A preferred stock then outstanding.

F-15
<PAGE>
DITECH COMMUNICATIONS CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

7. REDEEMABLE PREFERRED STOCK (CONTINUED)
The Company, upon the election of the holders of a majority of the
outstanding shares, will redeem all of the Series A preferred stock in the event
of a public offering of the Company's common stock. Upon a change in ownership
or fundamental change in the Company and an election by a majority of the
stockholders, the Series A and Series B preferred stockholders may redeem all of
their shares at liquidation value and unpaid dividends. The Series A preferred
has preference over the Series B preferred.

VOTING RIGHTS

The Series B preferred stockholders are entitled to vote on all matters with
the holders of common stock as if on an as converted basis and have the right to
elect two directors to the Board of Directors. The Series A preferred
stockholders have no rights to vote.

DIVIDEND RIGHTS

The preferred stockholders will be entitled to receive dividends in
preference to the common stockholders. In addition, Series A and Series B
stockholders dividends shall be on a pro rata basis based on liquidation values
of each. From the date of issuance, cumulative dividends are payable when and if
declared or accumulate as part of the shares' liquidation preferences at 6% per
year, compounded daily.

The carrying amounts of both Series A and Series B have been increased by
amounts representing dividends not currently declared or paid but which will be
payable under the dividend rights of the respective series of preferred stock.
The increases have been effected by a charge against accumulated deficit.

8. STOCKHOLDERS' EQUITY (DEFICIT)

REINCORPORATION AND REVERSE STOCK SPLIT

The Company reincorporated in Delaware on April 21, 1999; all amounts have
been retroactively adjusted to effect this presentation. On April 27, 1999 the
Company effected a two-for-three reverse split of the Company's common stock.
All relevant share data has been adjusted to reflect this reverse stock split.

RECAPITALIZATION

In March 1997, the Company recapitalized its financial structure by
exchanging substantially all of the then outstanding shares of common stock for
cash of $21,486,000 and Series A and C preferred stock. In retiring the common
stock outstanding at that time, the excess of the fair value of the common stock
over the original issuance price of common stock of $23,637,000 was recorded
against retained earnings, which gave rise to the accumulated deficit of
$22,768,000 as of April 30, 1997.

STOCK OPTION PLANS

The Company's 1997 Stock Option Plan serves as the successor equity
incentive program to the Company's 1987 Stock Option Plan and the Supplemental
Stock Option Plan (the "Predecessor Plans"). All outstanding stock options under
the Predecessor Plans continue to be governed by the

F-16
<PAGE>
DITECH COMMUNICATIONS CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

8. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
terms and conditions of the 1997 Stock Option Plan. The Company has reserved
2,000,000 shares of common stock for issuance under the 1997 Stock Option Plan.
Under the 1997 Stock Option Plan, the Board of Directors could grant incentive
or non-statutory stock options at a price not less than 100% or 85%,
respectively, of fair market value of common stock, as determined by the Board
of Directors, at grant date. In November 1998, the Company adopted its 1998
Stock Option Plan and determined not to grant any further options under its 1997
Stock Option Plan. In March and April 1998 the Company increased the number of
shares reserved for issuance under the 1998 Stock Option Plan. The Company has
reserved a total of 928,041 shares of common stock for issuance under the 1998
Stock Option Plan, under terms similar to those granted under the 1997 Stock
Option Plan.

Options under the 1997 Stock Option Plan and 1998 Stock Option Plan may be
immediately exercisable. The options have a ten-year term. Shares issued through
early option exercises are subject to the Company's right of repurchase at the
original exercise price. The number of shares subject to repurchase generally
decreases by 25% of the options shares one year after the grant date, and
thereafter, ratably over 48 months. 596,000 shares were subject to repurchase as
of April 30, 1999.

In March 1999, the Company adopted the 1999 Non-Employee Directors Stock
Option Plan, and reserved 100,000 shares for issuance under the plan. Options
granted under the plan have a 5 year term and are fully vested at the date of
grant.

All the options associated with the ACP operations were either exercised or
cancelled during the year ended April 30, 1997 (with the discontinued
operations).

F-17
<PAGE>
DITECH COMMUNICATIONS CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

8. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
Activity under the stock option plans referenced above was as follows (in
thousands, except per share amounts):

<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
---------------------------------------------------------
SHARES WEIGHTED
AVAILABLE NUMBER OF AGGREGATE AVERAGE
FOR GRANT SHARES EXERCISE PRICE PRICE EXERCISE PRICE
----------- ----------- -------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Balances, May 1, 1996....................... 693 1,727 $0.15-$1.50 $ 339 $ 0.20
Options granted........................... (255) 255 $0.83-$1.50 281 $ 1.10
Options exercised......................... -- (1,050) $0.15 (155) $ 0.15
Options canceled.......................... 162 (162) $1.50 (243) $ 1.50
----------- ----------- -------------- ----------- -----
Balances, April 30, 1997.................... 600 770 $0.15-$0.83 222 $ 0.29
Reservation of shares..................... 632
Options granted........................... (982) 982 $0.83 810 $ 0.83
Options exercised......................... -- (153) $0.15 (23) $ 0.15
Options canceled.......................... 33 (33) $0.83 (27) $ 0.83
----------- ----------- -------------- ----------- -----
Balances, April 30, 1998.................... 283 1,566 $0.15-$0.83 982 $ 0.63
Additional shares reserved................ 1,028
Reserved shares cancelled................. (95)
Options granted........................... (703) 703 $0.83-$9.75 3,110 $ 4.42
Options exercised......................... -- (1,349) $0.15-$7.50 (911) $ 0.68
Options canceled.......................... 44 (56) $0.83-$7.50 (67) $ 1.20
----------- ----------- -------------- ----------- -----
Balances, April 30, 1999.................... 557 864 $0.15-$7.50 $ 3,114 $ 3.60
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

F-18
<PAGE>
DITECH COMMUNICATIONS CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

8. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)

Options outstanding at April 30, 1999 (in thousands, except per share
amounts):

<TABLE>
<CAPTION>
OPTIONS EXERCISABLE AT
APRIL 30, 1999
WEIGHTED AVERAGE ----------------------------
WEIGHTED REMAINING WEIGHTED
RANGE OF OPTIONS AVERAGE CONTRACTUAL LIFE AVERAGE
EXERCISE PRICES OUTSTANDING EXERCISE PRICE YEARS OPTIONS EXERCISE PRICE
- --------------- --------------- --------------- ------------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
$0.15 33 $ 0.15 6.00 33 $ 0.15
$0.83 315 $ 0.83 8.31 315 $ 0.83
$1.50 216 $ 1.50 9.49 216 $ 1.50
$3.00 57 $ 3.00 9.04 57 $ 3.00
$7.50 9 $ 7.50 9.84 9 $ 7.50
$9.75 234 $ 9.75 9.99 234 $ 9.75
--- ---
$0.15-$9.75 864 $ 3.60 9.08 864 $ 3.60
--- ---
--- ---
</TABLE>

The estimated weighted average fair value of options granted during fiscal
year 1997, 1998 and 1999 was $0.29, $0.29 and $0.60 per share, respectively. The
Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock option plan other than that
described above. If compensation cost for the Company's stock option plan had
been determined based on the fair value at the grant dates for awards under
those plans consistent with the method of SFAS 123, the Company's net income for
the years ended April 30, 1997, 1998 and 1999 would have been reduced to the pro
forma amounts indicated in the following table (in thousands, except per share
amounts):

<TABLE>
<CAPTION>
APRIL 30,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Income from continuing operations before income taxes, as reported....... $ 3,865 $ 31 $ 988
Less: net expense per SFAS 123........................................... 31 86 128
--------- --------- ---------
Pro forma income (loss) from continuing operations....................... 3,834 (55) 860
Less: pro forma provision (benefit) for income taxes..................... 1,510 (22) 362
--------- --------- ---------
Pro forma income (loss) from continuing operations....................... $ 2,324 $ (33) 498
--------- --------- ---------
--------- --------- ---------
Income from continuing operations as reported............................ $ 2,343 $ 7 $ 575
--------- --------- ---------
--------- --------- ---------
Net income from continuing operations per share:
Pro forma.............................................................. $ 0.09 $ (0.46) $ (0.28)
--------- --------- ---------
--------- --------- ---------
As reported............................................................ $ 0.09 $ (0.45) $ (0.26)
--------- --------- ---------
--------- --------- ---------
</TABLE>

The fair value of options granted under the Company's stock option plans
during 1997, 1998 and 1999 was estimated on the date of grant using the
Black-Scholes option pricing model. The model utilized the multiple option
approach with the following weighted average assumptions used: no dividend
yield, expected volatility is zero based on private company status, risk-free
interest rates

F-19
<PAGE>
DITECH COMMUNICATIONS CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

8. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
of 6.48%, 5.90% and 4.74% in 1997, 1998 and 1999, respectively, and expected
lives of four years. Forfeitures are recognized as they occur.

During fiscal 1999, the Company granted options to certain employees under
the 1997 Stock Plan and 1998 Stock Option Plan with exercise prices below the
deemed fair market value of the Company's common stock at the date of grant. In
accordance with the requirements of APB 25, the Company has recorded deferred
compensation for the difference between the exercise price of the stock options
and the fair market value of the Company's shares at the date of grant. This
deferred compensation is being amortized to expense over the period during which
the options become exercisable, generally four years. At April 30, 1999, the
Company had recorded deferred compensation related to these options in the total
amount of $1,320,000, of which $91,000 had been amortized to expense during
1999. Future compensation expense from options granted through April 30, 1999 is
estimated to be $330,000, $330,000, $330,000 and $239,000 for the years ending
April 30, 2000, 2001, 2002 and 2003, respectively.

EMPLOYEE STOCK PURCHASE PLAN.

In March and April 1999 the Board adopted, and the stockholders approved,
the Company's 1999 Employee Stock Purchase Plan (the "Purchase Plan") covering
an aggregate of 133,333 shares of common stock. Employees who participate in an
offering period can have up to 10% of their earnings withheld pursuant to the
Purchase Plan. The amount withheld will then be used to purchase shares of the
common stock on specified dates determined by the Board. The price of common
stock purchased under the Purchase Plan will be equal to 85% of the lower of the
fair market value of the common stock on the commencement date of each offering
period or on the specified purchase date. No shares were purchased under this
Plan during fiscal 1999.

9. INCOME TAXES

The provision for income taxes for continuing operations reflected in the
statements for the years ended April 30, 1997, 1998 and 1999 were as follows (in
thousands):

<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal.................................................... $ 1,308 $ 41 $ 590
State...................................................... 356 1 12
--------- --------- ---------
Total current............................................ 1,664 42 602
--------- --------- ---------
Deferred:
Federal.................................................... (105) (19) (258)
State...................................................... (37) 1 69
--------- --------- ---------
Total deferred........................................... (142) (18) (189)
--------- --------- ---------
Total.................................................. $ 1,522 $ 24 $ 413
--------- --------- ---------
--------- --------- ---------
</TABLE>

F-20
<PAGE>
DITECH COMMUNICATIONS CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

9. INCOME TAXES (CONTINUED)
The deferred income tax provision reflects the tax effect of changes in the
amounts of temporary differences during each year ended April 30, 1997, 1998 and
1999. As of April 30, 1998 and 1999, the Company's deferred tax assets and
liabilities consisted of (in thousands):

<TABLE>
<CAPTION>
1998 1999
--------- ---------
<S> <C> <C>
Deferred tax asset (liability):
Uniform capitalization.................................................. $ 238 $ 314
Depreciation............................................................ (79) (128)
Inventory reserves and other, net....................................... 223 385
--------- ---------
Total................................................................. $ 382 $ 571
--------- ---------
--------- ---------
</TABLE>

The Company's effective tax rate differs from the statutory federal income
tax rate as shown in the following schedule:

<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Tax provision at federal statutory rate.......................... 34.0% 34.0% 34.0%
State taxes, net of federal benefit.............................. 6.1 13.0 6.1
Other, primarily non-deductible expenses......................... (0.7) 30.4 1.7
--- --- ---
Total........................................................ 39.4% 77.4% 41.8%
--- --- ---
--- --- ---
</TABLE>

10. SEGMENT INFORMATION

The Company has adopted the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information," ("SFAS 131") effective for fiscal years
beginning after December 31, 1997. This statement supercedes Statement of
Financial Accounting Standards No. 14, "Financial Reporting for Segments of a
Business Enterprise." SFAS 131 changes current practice under Statement No. 14
by establishing a new framework on which to base segment reporting and also
required interim reporting of segment information.

The Company markets its products from its continuing operations, primarily
to customers in the United States and in the telecommunications industry.
Management uses one measurement of profitability and does not disaggregate its
business for internal reporting. The Company's revenues, from its continuing
operations, by geographic area are summarized as follows (in thousands):

<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
USA............................................................ $ 12,673 $ 11,539 $ 22,107
Mexico......................................................... 120 345 1,294
Rest of the world.............................................. 1,273 442 1,963
--------- --------- ---------
$ 14,066 $ 12,326 $ 25,364
--------- --------- ---------
--------- --------- ---------
</TABLE>

International sales are entirely comprised of export sales.

F-21
<PAGE>
DITECH COMMUNICATIONS CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

11. RELATED PARTY TRANSACTIONS

Transactions between the Company and its former wholly owned subsidiaries,
other than the reorganization transactions described in Notes 1 and 3 to these
financial statements, are as follows (in thousands):

<TABLE>
<CAPTION>
GW ACP
--------- ---------
<S> <C> <C>
Year ended April 30, 1997:
Benefits, goods and services provided/(used)....................................... $ 450 $ (30)
Income tax refund transferred...................................................... -- 420
</TABLE>

12. UNAUDITED PRO FORMA NET LOSS PER SHARE AND PRO FORMA
STOCKHOLDERS EQUITY (DEFICIT) (UNAUDITED):

Pro forma basic net loss per share has been computed as described in Note 2
and also gives effect to common equivalent shares from Series B Preferred Shares
that will automatically convert upon the closing of the Company's initial public
offering (using the as-if-converted method).

A reconciliation of the numerator and denominator used in the calculation of
unaudited pro forma basic and diluted net income per share follow (in thousands
except per share data):

<TABLE>
<CAPTION>
YEAR ENDED
APRIL 30, 1999
---------------
<S> <C>
Pro forma net income per share, basic and diluted:
Net income.................................................................. $ 575
Less accretion of non-convertible mandatorily redeemable Series A preferred
stock....................................................................... 1,140
-------
Net loss attributable to common stockholders................................ $ (565)
-------
-------
Weighted average shares of common stock outstanding......................... 4,044
Less stock subject to repurchase............................................ (478)
Adjustments to reflect the effect of the assumed conversion of convertible
Series B preferred stock.................................................... 4,173
-------
Shares used in computing pro forma net loss per share....................... 7,739
-------
-------
Pro forma net loss per share................................................ $ (0.07)
-------
-------
</TABLE>

If the offering contemplated by this Prospectus is consummated, all of the
shares of Series B convertible Preferred stock outstanding as of the closing
date will automatically be converted into an aggregate of approximately
4,173,139 shares of common stock based on the number of shares of Series B
convertible preferred stock outstanding at April 30, 1999. Unaudited pro forma
stockholders' equity at April 30, 1999, as adjusted for the conversion of the
Series B convertible preferred stock, is disclosed on the balance sheet.

13. PROFIT SHARING PLAN

The Company maintains a 401(k) profit sharing plan for all eligible
employees. Employees may contribute to the Plan based on statutory limits. Any
Company contributions are at the discretion of the Board of Directors. The
Company made no contributions to the Plan during the years ended April 30, 1997,
1998 and 1999.

F-22
<PAGE>
DITECH COMMUNICATIONS CORPORATION

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

14. SUPPLEMENTAL CASHFLOW INFORMATION

<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Interest paid............................................................ $ 7 $ 600 $ 736
Income taxes paid........................................................ 1,072 -- --

Noncash financing and investing activities:
Accretion of preferred stock............................................. 187 1,374 1,497
Acquisition of asset under capital lease................................. -- 154 47
Issuance of Series A preferred stock..................................... 4,743 -- --
Issuance of Series C preferred stock..................................... 7,508 -- --
Redemption of Series C preferred stock................................... -- -- 7,508
Tax benefit on stock options............................................. 307 -- 43
Deferred stock compensation.............................................. -- -- 1,320
Purchase of technology rights for common stock........................... -- -- 740
</TABLE>

15. PUBLIC OFFERING

In March 1999, the Company's Board of Directors (i) authorized management of
the Company to file a Registration Statement with the Securities and Exchange
Commission permitting the Company to sell its common stock to the public and
(ii) approved the reincorporation of the Company from California to Delaware.

F-23
<PAGE>
[LOGO]
<PAGE>
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YOU MAY RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS
PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR SALE OF COMMON STOCK
MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE DATE OF
THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR SOLICITATION OF AN
OFFER TO BUY THESE SHARES OF THE COMMON STOCK IN ANY CIRCUMSTANCES UNDER WHICH
THE OFFER OR SOLICITATION IS UNLAWFUL.

--------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Disclosure Regarding Forward-Looking Statements........................... 14
Use of Proceeds........................................................... 15
Dividend Policy........................................................... 15
Capitalization............................................................ 16
Dilution.................................................................. 18
Selected Financial Data................................................... 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 21
Business.................................................................. 32
Management................................................................ 45
Certain Transactions...................................................... 55
Principal Stockholders.................................................... 57
Description of Capital Stock.............................................. 59
Shares Eligible for Future Sale........................................... 61
Underwriting.............................................................. 63
Legal Matters............................................................. 65
Experts................................................................... 65
Change in Accountants..................................................... 65
Additional Information.................................................... 65
Index to Financial Statements............................................. F-1
</TABLE>

--------------

DEALER PROSPECTUS DELIVERY OBLIGATION:

Until July 4, 1999 (25 days after the date of this Prospectus), all dealers that
buy, sell or trade these shares of common stock, whether or not participating in
this offering, may be required to deliver a Prospectus. This is in addition to
the dealers' obligation to deliver a Prospectus when acting as underwriters and
with respect to their unsold allotments or subscriptions.

3,000,000 SHARES

[LOGO]

COMMON STOCK

------------------
P R O S P E C T U S
------------------

DEUTSCHE BANC ALEX. BROWN

BANCBOSTON ROBERTSON STEPHENS

HAMBRECHT & QUIST

June 9, 1999

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