DITECH CORP, PRE 14A, 2000-08-03

DITECH CORP
PRE 14A, 2000-08-03
TELEPHONE & TELEGRAPH APPARATUS

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SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )

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<S> <C>
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /

Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted
by Rule 14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
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<S> <C> <C>
DITECH COMMUNICATIONS CORPORATION
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(Name of Registrant as Specified In Its Charter)

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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.

1. Title of each class of securities to which transaction
applies:
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2. Aggregate number of securities to which transaction
applies:
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3. Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how
it was determined):
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4. Proposed maximum aggregate value of transaction:
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5. Total fee paid:
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or
Schedule and the date of its filing.
6. Amount Previously Paid:
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7. Form, Schedule or Registration Statement No.:
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8. Filing Party:
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9. Date Filed:
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DITECH COMMUNICATIONS CORPORATION
825 E. MIDDLEFIELD ROAD
MOUNTAIN VIEW, CALIFORNIA 94043

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NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER 22, 2000

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TO THE STOCKHOLDERS OF DITECH COMMUNICATIONS CORPORATION:

NOTICE IS HEREBY GIVEN that the Annual Meeting of Stockholders of DITECH
COMMUNICATIONS CORPORATION, a Delaware corporation ("Ditech"), will be held on
September 22, 2000 at 11:00 a.m. local time at Ditech's offices, 825 E.
Middlefield Road, Mountain View, California 94043, for the following purpose:

1. To elect three directors to hold office until the 2003 Annual Meeting of
Stockholders.

2. To approve an amendment to our 1998 Stock Option Plan to change the
aggregate number of shares of Common Stock authorized for issuance under
the plan from 1,856,082 to 2,856,082.

3. To approve an amendment to our 1999 Non-Employee Directors' Stock Option
Plan to change the aggregate number of shares of Common Stock authorized
for issuance under the plan from 200,000 to 300,000.

4. To approve an amendment to our Employee Stock Purchase Plan to change
the aggregate number of shares of Common Stock authorized for issuance
under the plan from 266,666 to 416,666.

5. To approve an amendment to our Certificate of Incorporation to increase
the number of authorized shares of Common Stock to 200,000,000.

6. To ratify the selection of PricewaterhouseCoopers LLP as independent
auditors of Ditech for its fiscal year ending April 30, 2001.

7. To transact such other business as may properly come before the meeting
or any adjournment or postponement thereof.

The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.

The Board of Directors has fixed the close of business on July 24, 2000, as
the record date for the determination of stockholders entitled to notice of and
to vote at this Annual Meeting and at any adjournment or postponement thereof.

By Order of the Board of Directors

/s/ WILLIAM J. TAMBLYN

WILLIAM J. TAMBLYN
SECRETARY

Mountain View, California
August 14, 2000

ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE MEETING IN PERSON.
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE COMPLETE, DATE, SIGN AND
RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE IN ORDER TO ENSURE YOUR
REPRESENTATION AT THE MEETING. A RETURN ENVELOPE (WHICH IS POSTAGE PREPAID IF
MAILED IN THE UNITED STATES) IS ENCLOSED FOR THAT PURPOSE. EVEN IF YOU HAVE
GIVEN YOUR PROXY, YOU MAY STILL VOTE IN PERSON IF YOU ATTEND THE MEETING. PLEASE
NOTE, HOWEVER, THAT IF YOUR SHARES ARE HELD OF RECORD BY A BROKER,
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BANK OR OTHER NOMINEE AND YOU WISH TO VOTE AT THE MEETING, YOU MUST OBTAIN FROM
THE RECORD HOLDER A PROXY ISSUED IN YOUR NAME.
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DITECH COMMUNICATIONS CORPORATION
825 E. MIDDLEFIELD ROAD
MOUNTAIN VIEW, CALIFORNIA 94043

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PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS
SEPTEMBER 22, 2000

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INFORMATION CONCERNING SOLICITATION AND VOTING

GENERAL

The enclosed proxy is solicited on behalf of the Board of Directors of
Ditech Communications Corporation, a Delaware corporation ("Ditech" or the
"Company"), for use at the Annual Meeting of Stockholders to be held on
September 22, 2000 at 11:00 a.m. local time (the "Annual Meeting"), or at any
adjournment or postponement thereof, for the purposes set forth herein and in
the accompanying Notice of Annual Meeting. The Annual Meeting will be held at
the offices of Ditech, 825 E. Middlefield Road, Mountain View, California 94043.
We intend to mail this proxy statement and accompanying proxy card on or about
August 14, 2000, to all stockholders entitled to vote at the Annual Meeting.

SOLICITATION

We will bear the entire cost of solicitation of proxies, including
preparation, assembly, printing and mailing of this proxy statement, the proxy
and any additional information furnished to stockholders. Copies of solicitation
materials will be furnished to banks, brokerage houses, fiduciaries and
custodians holding in their names shares of Common Stock beneficially owned by
others to forward to such beneficial owners. We may reimburse persons
representing beneficial owners of Common Stock for their costs of forwarding
solicitation materials to such beneficial owners. Original solicitation of
proxies by mail may be supplemented by telephone, telegram or personal
solicitation by directors, officers or other regular employees of Ditech. No
additional compensation will be paid to directors, officers or other regular
employees for such services.

VOTING RIGHTS AND OUTSTANDING SHARES

Only holders of record of Common Stock at the close of business on July 24,
2000 will be entitled to notice of and to vote at the Annual Meeting. At the
close of business on July 24, 2000 we had outstanding and entitled to vote
28,494,003 shares of Common Stock.

Each holder of record of Common Stock on such date will be entitled to one
vote for each share held on all matters to be voted upon at the Annual Meeting.

All votes will be tabulated by the inspector of election appointed for the
meeting, who will separately tabulate affirmative and negative votes,
abstentions and broker non-votes. Except for Proposal 4, broker non-votes are
counted towards a quorum, but are not counted for any purpose in determining
whether a matter has been approved. With respect to Proposal 4, abstentions and
broker non-votes will have the same effect as negative votes.

REVOCABILITY OF PROXIES

Any person giving a proxy pursuant to this solicitation has the power to
revoke it at any time before it is voted. It may be revoked by filing with the
Secretary of Ditech at our principal executive office, 825 E. Middlefield Road,
Mountain View, California 94043, a written notice of revocation or a duly
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executed proxy bearing a later date, or it may be revoked by attending the
meeting and voting in person. Attendance at the meeting will not, by itself,
revoke a proxy.

SHAREHOLDER PROPOSALS

The deadline for submitting a stockholder proposal for inclusion in our
proxy statement and form of proxy for our 2001 annual meeting of stockholders
pursuant to Rule 14a-8 of the Securities and Exchange Commission is May 11,
2001. The deadline for submitting a stockholder proposal or a nomination for
director that is not to be included in such proxy statement and proxy is
July 6, 2001. Stockholders are also advised to review our By-laws, which contain
additional requirements with respect to advance notice of stockholder proposals
and director nominations.

PROPOSAL 1
ELECTION OF DIRECTORS

Our Amended and Restated Certificate of Incorporation and By-laws provide
that the Board of Directors shall be divided into three classes, each class
consisting, as nearly as possible, of one-third of the total number of
directors, with each class having a three-year term. Vacancies on the Board may
be filled only by persons elected by a majority of the remaining directors. A
director elected by the Board to fill a vacancy (including a vacancy created by
an increase in the Board of Directors) shall serve for the remainder of the full
term of the class of directors in which the vacancy occurred and until such
director's successor is elected and qualified.

The Board of Directors is presently composed of eight members. There are
three directors in the class whose term of office expires in 2000. Two of the
nominees for election to this class, Messrs. Chung and Jones, are currently
directors of Ditech who were previously elected by the stockholders.
Mr. Manoliu is a director of Ditech appointed by the Board of Directors to this
position in June 2000. If elected at the Annual Meeting, each of the nominees
would serve until the 2003 annual meeting and until his or her successor is
elected and has qualified, or until such director's earlier death, resignation
or removal.

Directors are elected by a plurality of the votes present in person or
represented by proxy and entitled to vote at the meeting. Shares represented by
executed proxies will be voted, if authority to do so is not withheld, for the
election of the three nominees named below. In the event that any nominee should
be unavailable for election as a result of an unexpected occurrence, such shares
will be voted for the election of such substitute nominee as management may
propose. Each person nominated for election has agreed to serve if elected, and
management has no reason to believe that any nominee will be unable to serve.
Set forth below is biographical information for each person nominated and each
person whose term of office as a director will continue after the Annual
Meeting.

NOMINEES FOR ELECTION FOR A THREE-YEAR TERM EXPIRING AT THE 2003 ANNUAL MEETING

PETER Y. CHUNG, age 32, has been a director of Ditech since February 1997.
Mr. Chung is a General Partner and Member of various entities affiliated with
Summit Partners, L.P., a venture capital and private equity firm, where he has
been employed since August 1994. 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 ADVA AG Optical Networking, an optical networking
systems company, Somera Communications, Inc., a supplier of telecommunications
equipment and outsourcing services, Splash Technology Holdings, Inc., a
developer of color server systems, Stanford Microdevices, Inc., an RF integrated
circuit company, and several privately held companies. Mr. Chung received a B.A.
from Harvard University and an M.B.A. from Stanford University.

KENNETH E. JONES, age 53, 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

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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. 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.

ANDREI MANOLIU, age 48, joined Ditech in June 2000 as a director. He is
currently an independent business and financial consultant to emerging growth
companies. From 1982 through March 2000, Mr. Manoliu was an attorney with Cooley
Godward LLP, where he was, most recently, a senior partner. During his tenure at
Cooley Godward LLP, he served as outside counsel to Ditech. Mr. Manoliu is also
a director of Be Incorporated, a software platform company, and 3dfx, a
developer and supplier of 3D graphics, technology and products. Mr. Manoliu
received a Ph.D. in solid state physics from the University of California,
Berkeley, and a J.D. from Stanford Law School.

THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF EACH NOMINEE

DIRECTORS CONTINUING IN OFFICE UNTIL THE 2001 ANNUAL MEETING

WILLIAM A. HASLER, age 57, 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, Mr. Hasler served as a Vice Chairman of KPMG Peat Marwick.
Mr. Hasler is a director of numerous companies, including Schwab Funds, a
financial service 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.

PONG C. LIM, age 46, 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.

TIMOTHY K. MONTGOMERY, age 47, 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.

DIRECTORS CONTINUING IN OFFICE UNTIL THE 2002 ANNUAL MEETING

GREGORY M. AVIS, age 41, has been a director of Ditech since February 1997.
Mr. Avis has served as a Managing Partner of Summit Partners, a venture capital
and 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 Powerwave

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Technologies, Inc., a designer and manufacturer of power amplifiers for wireless
communications; Splash Technology Holdings, Inc., a developer of color server
systems; MCK Communications, a manufacturer of remote voice products; and
several privately held companies. Mr. Avis received a B.A. from Williams College
and an M.B.A. from Harvard University.

GEORGE J. TURNER, age 62, 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 Ph.D. from
the University of California, Berkeley.

BOARD COMMITTEES AND MEETINGS

During the fiscal year ended April 30, 2000 the Board of Directors held
seven meetings. The Board has an Audit Committee and a Compensation Committee.

The Audit Committee meets with our independent auditors to review the
results of the annual audit and discuss the financial statements; recommends to
the Board the independent auditors to be retained; and receives and considers
the accountants' comments as to controls, adequacy of staff and management
performance and procedures in connection with audit and financial controls. The
Audit Committee is composed of three non-employee directors: Messrs. Chung,
Hasler and Turner. The Audit Committee met twice during such fiscal year.

The Compensation Committee makes decisions concerning salaries and incentive
compensation, awards stock options to employees and consultants under our stock
option plans and otherwise determines compensation levels and performs such
other functions regarding compensation as the Board may delegate. All decisions
by the Compensation Committee are reviewed by the Board, except that decisions
regarding stock awards under our 1999 Stock Option Plan are made solely by the
Compensation Committee. The Compensation Committee is composed of three
non-employee directors: Messrs. Avis, Hasler and Jones. It met four times during
such fiscal year.

In July 2000 the Board established a Nominating Committee, with full power
and authority to nominate persons for election as directors of Ditech and to
recommend to the stockholders of Ditech the approval of such persons as
directors. The Nominating Committee is composed of three directors,
Messrs. Montgomery, Avis and Manoliu. The Nominating Committee has just been
formed and has not yet determined whether it will consider nominees recommended
by security holders or, if so, what procedures would be followed in security
holders submitting such recommendations.

During the fiscal year ended April 30, 2000, all directors attended at least
75% of the aggregate of the meetings of the Board and of the committees on which
they served, held during the period for which they were a director or committee
member, respectively.

PROPOSAL 2
APPROVAL OF 1998 STOCK OPTION PLAN, AS AMENDED

On October 15, 1998, the Board adopted, and the stockholders subsequently
approved, our 1998 Stock Option Plan (the "Option Plan"). As a result of a
series of amendments, as of July 24, 2000, there were outstanding options to
purchase 1,542,433 shares of Common Stock under the Option Plan, and an
additional 835 shares remained available for future grant. All numbers of shares
of Common Stock referred to in this Proxy Statement give effect to all prior
stock splits, including the 2-for-1 stock split effected as a stock dividend on
February 1, 2000.

Stockholders are requested in this Proposal 2 to approve the Option Plan, as
amended. The affirmative vote of the holders of a majority of the shares present
in person or represented by proxy and

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entitled to vote at the meeting will be required to approve the amendment to the
Option Plan. Abstentions will be counted toward the tabulation of votes cast on
proposals presented to the stockholders and will have the same effect as
negative votes. Broker non-votes are counted towards a quorum, but are not
counted for any purpose in determining whether this matter has been approved.

THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 2.

The essential features of the Option Plan are outlined below:

GENERAL

The Option Plan provides for the grant of both incentive and nonstatutory
stock options. Incentive stock options granted under the Option Plan are
intended to qualify as "incentive stock options" within the meaning of
Section 422 of the Code. Nonstatutory stock options granted under the Option
Plan are not intended to qualify as incentive stock options under the Code. See
"Federal Income Tax Information" for a discussion of the tax treatment of
options.

PURPOSE

The Board adopted the Option Plan to provide a means by which employees,
directors and consultants of Ditech and its affiliates may be given an
opportunity to purchase stock in Ditech, to assist in retaining the services of
such persons, to secure and retain the services of persons capable of filling
such positions and to provide incentives for such persons to exert maximum
efforts for the success of Ditech and its affiliates. All of the approximately
150 employees, directors and consultants of Ditech and its affiliates are
eligible to participate in the Option Plan.

ADMINISTRATION

The Board administers the Option Plan. Subject to the provisions of the
Option Plan, the Board has the power to construe and interpret the Option Plan
and to determine the persons to whom and the dates on which options will be
granted, the number of shares of Common Stock to be subject to each option, the
time or times during the term of each option within which all or a portion of
such option may be exercised, the exercise price, the type of consideration and
other terms of the option.

The Board has the power to delegate administration of the Option Plan to a
committee composed of not fewer than two members of the Board (the "Committee").
In the discretion of the Board, a committee may consist solely of two or more
outside directors in accordance with Section 162(m) of the Code or solely of two
or more non-employee directors in accordance with Rule 16b-3 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Board has delegated
administration of the Option Plan to the Compensation Committee of the Board. As
used herein with respect to the Option Plan, the "Board" refers to any committee
the Board appoints as well as to the Board itself. The Board or the Committee
also may delegate to a committee of one or more members of the Board the
authority to grant options to eligible persons who (1) are not then subject to
Section 16 of the Exchange Act and/or (2) are either (i) not then Covered
Employees and are not expected to be Covered Employees at the time of
recognition of income resulting from such option, or (ii) not persons with
respect to whom we wish to comply with Section 162(m) of the Code.

The regulations under Section 162(m) of the Code require that the directors
who serve as members of the committee must be "outside directors." The Option
Plan provides that, in the Board's discretion, directors serving on the
committee may be "outside directors" within the meaning of Section 162(m). This
limitation would exclude from the committee directors who are (i) current
employees of Ditech or an affiliate, (ii) former employees of Ditech or an
affiliate receiving compensation for past services (other than benefits under a
tax-qualified pension Option Plan), (iii) current and former officers of Ditech
or an

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affiliate, (iv) directors currently receiving direct or indirect remuneration
from Ditech or an affiliate in any capacity (other than as a director), and
(v) any other person who is otherwise considered an "outside director" for
purposes of Section 162(m). The definition of an "outside director" under
Section 162(m) is generally NARROWER than the definition of a "non-employee
director" under Rule 16b-3 of the Exchange Act.

ELIGIBILITY

Incentive stock options may be granted under the Option Plan only to
employees (including officers) of Ditech and its affiliates. Employees
(including officers), directors, and consultants of both Ditech and its
affiliates are eligible to receive nonstatutory stock options under the Option
Plan. Non-employee directors of our affiliates are eligible to receive
nonstatutory stock options under the 1999 Non-Employee Directors' Stock Option
Plan.

No incentive stock option may be granted under the Option Plan 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 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. To the extent that the
aggregate fair market value, determined at the time of grant, of the shares of
Common Stock with respect to which incentive stock options are exercisable for
the first time by an optionholder during any calendar year (under the Option
Plan and all other such plans of Ditech and its affiliates) exceeds $100,000,
the options or portions thereof which exceed such limit (according to the order
in which they were granted) shall be treated as nonstatutory stock options.

No person may be granted options under the Option Plan exercisable for more
than 300,000 shares of Common Stock during any calendar year ("Section 162(m)
Limitation"). However, this limitation applies only after the closing of the
Initial Public Offering and then only upon the earliest to occur of (i) the
first material modification to the Option Plan, (ii) the issuance of all the
shares of Common Stock reserved for issuance under the Option Plan, (iii) the
expiration of the Option Plan, or (iv) the first meeting of stockholders at
which directors are to be elected that occurs after the close of the third
calendar year following the Initial Public Offering, or such other date required
by Section 162(m) of the Code and the rules and regulations promulgated
thereunder.

STOCK SUBJECT TO THE OPTION PLAN

If this Proposal is approved, an aggregate of 2,856,082 shares of Common
Stock will be reserved for issuance under the Option Plan. If options granted
under the Option Plan expire or otherwise terminate without being exercised, the
shares of Common Stock not acquired pursuant to such options again becomes
available for issuance under the Option Plan. If we reacquire unvested stock
issued under the Option Plan, the reacquired stock will again become available
for reissuance under the Option Plan.

TERMS OF OPTIONS

The following is a description of the permissible terms of options under the
Option Plan. Individual option grants may be more restrictive as to any or all
of the permissible terms described below.

EXERCISE PRICE; PAYMENT. The exercise price of incentive stock options may
not be less than 100% of the fair market value of the stock subject to the
option on the date of the grant and, in some cases (see "Eligibility" above),
may not be less than 110% of such fair market value. The exercise price of
nonstatutory options may not be less than 85% of the fair market value of the
stock on the date of grant. Notwithstanding the foregoing, an option (whether an
incentive stock option or a nonstatutory stock option) may be granted with an
exercise price lower than that set for the in the preceding sentence if such
option is granted pursuant to an assumption or substitution for another option
in a manner satisfying the provisions of Section 424(a) of the Code. If options
were granted with exercise prices below market value,

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deductions for compensation attributable to the exercise of such options could
be limited by Section 162(m) of the Code. See "Federal Income Tax Information."
As of July 24, 2000, the closing price of our Common Stock as reported on the
Nasdaq National Market System was $78.375 per share.

The exercise price of options granted under the Option Plan must be paid
either (a) in cash at the time the option is exercised or (b) at the discretion
of the Board, (i) by delivery of other Common Stock of Ditech, (ii) pursuant to
a deferred payment arrangement or (iii) in any other form of legal consideration
acceptable to the Board.

OPTION EXERCISE. Options granted under the Option Plan may become
exercisable in cumulative increments ("vest") as determined by the Board. Shares
covered by currently outstanding options under the Option Plan vest according to
the particular option agreement governing the option, but the shares typically
vest at the rate of 25% per year during the optionholder's employment by, or
service as a director or consultant to, Ditech or an affiliate (collectively,
"service"). Shares covered by options granted in the future under the Option
Plan may be subject to different vesting terms. The Board has the power to
accelerate the time during which an option may vest or be exercised. In
addition, options granted under the Option Plan may permit exercise prior to
vesting, but in such event the optionholder may be required to enter into an
early exercise stock purchase agreement that allows us to repurchase unvested
shares, generally at their exercise price, should the optionholder's service
terminate before vesting. To the extent provided by the terms of an option, an
optionholder may satisfy any federal, state or local tax withholding obligation
relating to the exercise of such option by a cash payment upon exercise, by
authorizing us to withhold a portion of the stock otherwise issuable to the
optionholder, by delivering already-owned Common Stock of Ditech or by a
combination of these means.

TERM. The maximum term of options under the Option Plan is 10 years.
Options under the Option Plan generally terminate three months after termination
of the optionholder's service unless (i) such termination is due to the
optionholder's disability, in which case the option may be exercised (to the
extent the option was exercisable at the time of the termination of service) at
any time within such time period ending on the earlier of (a) 12 months of such
termination (or such longer or shorter period specified in the option agreement,
which for options granted prior to the initial public offering shall not be less
than six (6) months), or (b) the expiration of the term of the option as set
forth in the option agreement; (ii) the optionholder dies before the
optionholder's service has terminated, or within a period specified in the
option agreement after termination of such service, in which case the option
may, but need not, provide that it may be exercised (to the extent the option
was exercisable at the time of the optionholder's death) within a period ending
on the earlier of (a) 18 months following the date of the optionholder's death
by the person or persons to whom the rights to such option pass by will or by
the laws of descent and distribution, or (b) the expiration of the term of such
option as set forth in the option agreement; or (iii) the option by its terms
specifically provides otherwise. An optionholder may designate a beneficiary who
may exercise the option following the optionholder's death. Individual option
grants by their terms may provide for exercise within a longer period of time
following termination of service.

RESTRICTIONS ON TRANSFER

The optionholder may not transfer an option otherwise than by will or by the
laws of descent and distribution. During the lifetime of the optionholder, only
the optionholder may exercise an option. The Board may grant nonstatutory stock
options that are transferable in certain limited instances specified in the
option agreement. Shares subject to repurchase by us under an early exercise
stock purchase agreement may be subject to restrictions on transfer that the
Board deems appropriate.

ADJUSTMENT PROVISIONS

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the Option Plan and outstanding options. In that event, the Option Plan will be
appropriately adjusted as to the class and the maximum number of shares of
Common Stock subject to the Option Plan and the Section 162(m) Limitation, and
outstanding options will be adjusted as to the class, number of shares and price
per share of Common Stock subject to such options.

EFFECT OF CERTAIN CORPORATE EVENTS

The Option Plan provides that, in the event of a dissolution, liquidation or
sale of substantially all of the assets of Ditech, specified types of merger, or
other corporate reorganization ("change in control"), any surviving corporation
may either assume options outstanding under the Option Plan or substitute
similar options for those outstanding under the Option Plan. If any surviving
corporation declines to assume options outstanding under the Option Plan, or to
substitute similar options, then, (i) with respect to optionholders whose
service has not terminated, the vesting and the time during which such options
may be exercised will be accelerated prior to such event and the options
terminated if not exercised after such acceleration and at or prior to such
event, and (ii) with respect to any other options outstanding under the Option
Plan, such options shall be terminated if not exercised prior to such event. The
acceleration of an option in the event of an acquisition or similar corporate
event may be viewed as an anti-takeover provision, which may have the effect of
discouraging a proposal to acquire or otherwise obtain control of us.

DURATION, AMENDMENT AND TERMINATION

The Board may suspend or terminate the Option Plan without stockholder
approval or ratification at any time or from time to time. Unless sooner
terminated, the Option Plan will terminate on October 14, 2008.

The Board may also amend the Option Plan at any time or from time to time.
However, no amendment will be effective unless approved by the stockholders of
Ditech within 12 months before or after its adoption by the Board if the
amendment would (i) modify the requirements as to eligibility for participation
(to the extent such modification requires stockholder approval in order for the
Option Plan to satisfy Section 422 of the Code); (ii) increase the number of
shares reserved for issuance upon exercise of options; or (iii) change any other
provision of the Option Plan in any other way if such modification requires
stockholder approval in order to satisfy the requirements of Section 422 of the
Code or any securities exchange listing requirements. The Board may submit any
other amendment to the Option Plan for stockholder approval, including, but not
limited to, amendments intended to satisfy the requirements of Section 162(m) of
the Code regarding the exclusion of performance-based compensation from the
limitation on the deductibility of compensation paid to certain employees.

FEDERAL INCOME TAX INFORMATION

Long-term capital gains currently are generally subject to lower tax rates
than ordinary income or short-term capital gains. The maximum long-term capital
gains rate for federal income tax purposes is currently 20% while the maximum
ordinary income rate and short-term capital gains rate is effectively 39.6%.
Slightly different rules may apply to optionholders who acquire stock subject to
certain repurchase options or who are subject to Section 16(b) of the Exchange
Act.

INCENTIVE STOCK OPTIONS. Incentive stock options under the Option Plan are
intended to be eligible for the favorable federal income tax treatment accorded
"incentive stock options" under the Code.

There generally are no federal income tax consequences to the optionholder
or us by reason of the grant or exercise of an incentive stock option. However,
the exercise of an incentive stock option may increase the optionholder's
alternative minimum tax liability, if any.

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If an optionholder holds stock acquired through exercise of an incentive
stock option for at least two years from the date on which the option is granted
and at least one year from the date on which the shares are transferred to the
optionholder upon exercise of the option, any gain or loss on a disposition of
such stock will be a long-term capital gain or loss if the optionholder held the
stock for more than one year.

Generally, if the optionholder disposes of the stock before the expiration
of either of these holding periods (a "disqualifying disposition"), then at the
time of disposition the optionholder will realize taxable ordinary income equal
to the lesser of (i) the excess of the stock's fair market value on the date of
exercise over the exercise price, or (ii) the optionholder's actual gain, if
any, on the purchase and sale. The optionholder's additional gain or any loss
upon the disqualifying disposition will be a capital gain or loss, which will be
long-term or short-term depending on whether the stock was held for more than
one year.

To the extent the optionholder recognizes ordinary income by reason of a
disqualifying disposition, we will generally be entitled (subject to the
requirement of reasonableness, the provisions of Section 162(m) of the Code and
the satisfaction of a tax reporting obligation) to a corresponding business
expense deduction in the tax year in which the disqualifying disposition occurs.

NONSTATUTORY STOCK OPTIONS. Nonstatutory stock options granted under the
Option Plan generally have the following federal income tax consequences:

There are no tax consequences to the optionholder or Ditech by reason of the
grant of a nonstatutory stock option. Upon exercise of a nonstatutory stock
option, the optionholder normally will recognize taxable ordinary income equal
to the excess, if any, of the stock's fair market value on the date of exercise
over the option exercise price. However, to the extent the stock is subject to
certain types of vesting restrictions, the taxable event will be delayed until
the vesting restrictions lapse unless the participant elects to be taxed on
receipt of the stock. With respect to employees, we are generally required to
withhold from regular wages or supplemental wage payments an amount based on the
ordinary income recognized. Subject to the requirement of reasonableness, the
provisions of Section 162(m) of the Code and the satisfaction of a tax reporting
obligation, we will generally be entitled to a business expense deduction equal
to the taxable ordinary income realized by the optionholder.

Upon disposition of the stock, the optionholder will recognize a capital
gain or loss equal to the difference between the selling price and the sum of
the amount paid for such stock plus any amount recognized as ordinary income
upon exercise of the option (or vesting of the stock). Such gain or loss will be
long-term or short-term depending on whether the stock was held for more than
one year. Slightly different rules may apply to optionholders who acquire stock
subject to certain repurchase options or who are subject to Section 16(b) of the
Exchange Act.

POTENTIAL LIMITATION ON COMPANY DEDUCTIONS. Section 162(m) of the Code
denies a deduction to any publicly held corporation for compensation paid to
certain "covered employees" in a taxable year to the extent that compensation to
such covered employee exceeds $1 million. It is possible that compensation
attributable to stock options, when combined with all other types of
compensation received by a covered employee from us, may cause this limitation
to be exceeded in any particular year.

Certain kinds of compensation, including qualified "performance-based
compensation," are disregarded for purposes of the deduction limitation. In
accordance with Treasury regulations issued under Section 162(m), compensation
attributable to stock options will qualify as performance-based compensation if
the option is granted by a compensation committee comprised solely of "outside
directors" and either (i) the plan contains a per-employee limitation on the
number of shares for which options may be granted during a specified period, the
per-employee limitation is approved by the stockholders, and the exercise price
of the option is no less than the fair market value of the stock on the date of
grant, or (ii) the option is granted (or exercisable) only upon the achievement
(as certified in writing by the compensation committee) of an objective
performance goal established in writing by the compensation committee while the
outcome is substantially uncertain, and the option is approved by stockholders.

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PROPOSAL 3
APPROVAL OF 1999 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN, AS AMENDED

In March and April 1999, the Board adopted and the stockholders approved our
1999 Non-Employee Directors' Stock Option Plan ("Directors' Plan"). The Board
had reserved 200,000 shares of Common Stock for issuance under the Directors'
Plan. As of July 24, 2000, options to purchase 62,500 shares of Common Stock had
been granted under the Directors' Plan, and 137,500 shares were reserved for
future grants or purchases under the Directors' Plan.

Stockholders are requested in this Proposal 3 to approve the Directors'
Plan, as amended, which would increase the number of shares reserved for
issuance under the Directors' Plan from 200,000 to 300,000. The affirmative vote
of the holders of a majority of the shares present in person or represented by
proxy and entitled to vote at the meeting will be required to approve the
amendment to the Directors' Plan. Abstentions will be counted toward the
tabulation of votes cast on proposals presented to the stockholders and will
have the same effect as negative votes. Broker non-votes are counted towards a
quorum, but are not counted for any purpose in determining whether this matter
has been approved.

THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 3

The essential features of the Directors' Plan are outlined below:

GENERAL

The Directors' Plan provides for the automatic grant of nonstatutory stock
options. Options granted under the Directors' Plan are not intended to qualify
as "incentive stock options" within the meaning of Section 422 of the Code. See
"Federal Income Tax Information" for a discussion of the tax treatment of
nonstatutory stock options.

PURPOSE

The Board adopted the Directors' Plan to provide a means by which our
non-employee directors may be given an opportunity to purchase our stock, to
assist in retaining the services of such persons, to secure and retain the
services of persons capable of filling such positions and to provide incentives
for such persons to exert maximum efforts for the success of Ditech. Seven of
the current directors of Ditech are eligible to participate in the Directors'
Plan.

ADMINISTRATION

The Board administers the Directors' Plan. The Board has the power to
construe and interpret the Directors' Plan but not to determine the persons to
whom or the dates on which options will be granted, the number of shares to be
subject to each option, the time or times during the term of each option within
which all or a portion of such option may be exercised, the exercise price, the
type of consideration or the other terms of the option.

ELIGIBILITY

The Directors' Plan provides that options may be granted only to
non-employee directors of Ditech. A "non-employee director" is defined in the
Directors' Plan as a director of Ditech who is not otherwise an employee of or
consultant to Ditech or any affiliate.

STOCK SUBJECT TO THE DIRECTORS' PLAN

If this Proposal is approved, an aggregate of 300,000 shares of Common Stock
will be reserved for issuance under the Directors' Plan. If options granted
under the Directors' Plan expire or otherwise

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terminate without being exercised, the shares of Common Stock not acquired
pursuant to such options again becomes available for issuance under the
Directors' Plan.

TERMS OF OPTIONS

The following is a description of the terms of options under the Directors'
Plan.

AUTOMATIC GRANTS. Under the Directors' Option Plan:

- each new non-employee director who is elected or appointed for the
first time other than at an annual meeting will automatically be
granted an option to purchase that number of shares of common stock
equal to 10,000 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 10,000 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 20,000 shares rather than 10,000 shares.

EXERCISE PRICE; PAYMENT. The exercise price of options is 100% of the fair
market value of the stock subject to the option on the date of the grant. At
July 24, 2000, the closing price of our Common Stock as reported on the Nasdaq
National Market System was $78.375 per share.

The exercise price of options granted under the Directors' Plan may be paid,
to the extent permitted by applicable statutes and regulations, by (i) cash or
check at the time the option is exercised, (ii) by delivery of other Common
Stock of Ditech, (iii) pursuant to a deferred payment arrangement or (iii) by
any other form of legal consideration that may be acceptable to the Board and
provided in the option agreement; provided, however, payment of the Common
Stock's "par value," as defined in the Delaware General Corporation Law, shall
not be made by deferred payment.

OPTION EXERCISE. Options shall be fully vested and exercisable on the date
of grant.

TERM. No option shall be exercisable after the expiration of five
(5) years from the date it was granted. In the event an optionholder's
continuous service terminates (other than upon the optionholder's death or
disability), the optionholder may exercise his or her option (to the extent that
the optionholder was entitled to exercise it as of the date of termination) but
only within such period of time ending on the earlier of (i) the date three
(3) months following the termination of the optionholder's continuous service,
or (ii) the expiration of the term of the option as set forth in the option
agreement. If after termination, the optionholder does not exercise his or her
option within the time specified in the option agreement, the option shall
terminate. If the exercise of the option following the termination of the
optionholder's continuous service (other than upon the optionholder's death or
disability) would be prohibited at any time solely because the issuance of
shares would violate the registration requirements under the Securities Act,
then the option shall terminate on the earlier of (i) the expiration of the term
of the option or (ii) the expiration of a period of three (3) months after the
termination of the optionholder's continuous service during which the exercise
of the option would not be in violation of such registration requirements. In
the event of an option holder's continuous service terminates as a result of the
optionholder's disability, the optionholder may exercise his or her option (to
the extent that the optionholder was entitled to exercise it as of the date of
termination), but only within such period of time ending on the earlier of
(i) the date twelve (12) months following such termination or (ii) the
expiration of the term of the option as set forth in the option agreement. If,
after termination, the optionholder does not exercise his or her option within
the time specified herein, the option shall terminate. In the event (i) an
optionholder's continuous service terminates as a result of the optionholder's
death or (ii) the optionholder dies within the three-month period after the
termination of the optionholder's continuous service for a reason other than
death, then the option may be exercised (to the extent the optionholder was
entitled to exercise the option as of the

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date of death) by the optionholder's estate, by a person who acquired the right
to exercise the option by bequest or inheritance or by a person designated to
exercise the option upon the optionholder's death, but only within the period
ending on the earlier of (1) the date eighteen (18) months following the date of
death or (2) the expiration of the term of such option as set forth in the
option agreement. If, after death, the option is not exercised within the time
specified herein, the option shall terminate.

OTHER PROVISIONS. The option agreement may contain such other terms,
provisions and conditions not inconsistent with the Directors' Plan as
determined by the Board.

RESTRICTIONS ON TRANSFER

The optionholder may transfer an option otherwise than by will or by the
laws of descent and distribution. During the lifetime of the optionholder, an
option may be exercised only by the optionholder. Notwithstanding the foregoing,
the optionholder may, by delivering written notice to us, in a form satisfactory
to us, designate a third party who, in the event of the death of the
optionholder, shall thereafter be entitled to exercise the option.

ADJUSTMENT PROVISIONS

Transactions not involving receipt of consideration by us, such as a merger,
consolidation, reorganization, stock dividend, or stock split, may change the
class and number of shares of Common Stock subject to the Directors' Plan and
outstanding options. In that event, the Directors' Plan will be appropriately
adjusted as to the class and the maximum number of shares of Common Stock
subject to the Directors' Plan, and outstanding options will be adjusted as to
the class, number of shares and price per share of Common Stock subject to such
options.

EFFECT OF CERTAIN CORPORATE EVENTS

The Directors' Plan provides that, in the event of a dissolution,
liquidation or sale of substantially all of the assets of Ditech, specified
types of merger, or other corporate reorganization ("change in control"), to the
extent permitted by law, any surviving corporation shall either assume options
outstanding under the Directors' Plan or substitute similar options for those
outstanding under the Directors' Plan. If any surviving corporation declines to
assume options outstanding under the Directors' Plan, or to substitute similar
options, then such options will terminate if not exercised prior to such event.

DURATION, AMENDMENT AND TERMINATION

The Board may suspend or terminate the Directors' Plan without stockholder
approval or ratification at any time or from time to time. Unless sooner
terminated, the Directors' Plan will terminate on March 5, 2009.

The Board may also amend the Directors' Plan at any time or from time to
time; provided, however, that no amendment shall be effective unless approved by
the stockholders of Ditech to the extent stockholder approval is necessary to
satisfy the requirements of Rule 16b-3 or any Nasdaq or securities exchange
listing requirements, and no amendment shall impair the rights under any option
outstanding unless (i) we request the consent of the optionholder and (ii) the
optionholder consents in writing.

FEDERAL INCOME TAX INFORMATION

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NONSTATUTORY STOCK OPTIONS. Nonstatutory stock options granted under the
Directors' Plan generally have the following federal income tax consequences:

There are no tax consequences to the optionholder or us by reason of the
grant of a nonstatutory stock option. Upon exercise of a nonstatutory stock
option, the optionholder normally will recognize taxable ordinary income equal
to the excess of the stock's fair market value on the date of exercise over the
option exercise price. If the optionholder becomes an employee, we are required
to withhold from regular wages or supplemental wage payments an amount based on
the ordinary income recognized. Subject to the requirement of reasonableness,
the provisions of Section 162(m) of the Code and the satisfaction of a tax
reporting obligation, we will generally be entitled to a business expense
deduction equal to the taxable ordinary income realized by the optionholder.

PROPOSAL 4
APPROVAL OF EMPLOYEE STOCK PURCHASE PLAN, AS AMENDED

In March and April 1999 the Board adopted, and the stockholders approved,
Ditech's 1999 Employee Stock Purchase Plan (the "Purchase Plan"). The Board
reserved 266,666 shares of Common Stock for issuance under the Purchase Plan.

During the last fiscal year, 67,958 shares of Common Stock were purchased
under the Purchase Plan at the weighted average price of $4.67 per share and in
the amounts for each group as follows: all current executive officers as a
group, 7,150 shares; and all employees (excluding executive officers) as a
group, 60,808 shares.

As of July 24, 2000, an aggregate of 168,293 shares of our Common Stock had
been issued under the Purchase Plan. Only 98,373 shares of Common Stock remained
available for future grant under the Purchase Plan.

Stockholders are requested in this Proposal 4 to approve the Purchase Plan,
as amended, which would increase the number of shares reserved for issuance
under the Purchase Plan from 266,666 to 416,666. The affirmative vote of the
holders of a majority of the shares present in person or represented by proxy
and entitled to vote at the meeting will be required to approve the amendment to
the Purchase Plan. Abstentions will be counted toward the tabulation of votes
cast on proposals presented to the stockholders and will have the same effect as
negative votes. Broker non-votes are counted towards a quorum, but are not
counted for any purpose in determining whether this matter has been approved.

THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 4

The essential features of the Purchase Plan, as amended, are outlined below:

PURPOSE

The purpose of the Purchase Plan is to provide a means by which our
employees (and any parent or subsidiary of Ditech designated by the Board to
participate in the Purchase Plan) may be given an opportunity to purchase our
Common Stock through payroll deductions, to assist us in retaining the services
of its employees, to secure and retain the services of new employees, and to
provide incentives for

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such persons to exert maximum efforts for the success of Ditech. All employees
are eligible to participate in the Purchase Plan.

The rights to purchase Common Stock granted under the Purchase Plan are
intended to qualify as options issued under an "employee stock purchase plan" as
that term is defined in the Code.

ADMINISTRATION

The Board administers the Purchase Plan and has the final power to construe
and interpret both the Purchase Plan and the rights granted under it. The Board
has the power, subject to the provisions of the Purchase Plan, to determine when
and how rights to purchase Common Stock of Ditech will be granted, the
provisions of each offering of such rights (which need not be identical), and
whether employees of any parent or subsidiary of Ditech will be eligible to
participate in the Purchase Plan.

The Board has the power to delegate administration of the Purchase Plan to a
committee composed of not fewer than two members of the Board. The Board has
delegated administration of the Purchase Plan to the Compensation Committee of
the Board. As used herein with respect to the Purchase Plan, the "Board" refers
to the Compensation Committee and to the Board.

OFFERINGS

The Purchase Plan is implemented by offerings of rights to all eligible
employees from time to time by the Board. In no event will an offering be more
than 27 months long. Currently, offerings are approximately 12 months in length
and are divided into two shorter "purchase periods" of approximately six months.

ELIGIBILITY

Rights may be granted only to employees of Ditech or, as the Board or the
Committee may designate within its power under the Purchase Plan, to employees
of any affiliate of Ditech. Except as designated by the Board within its power
under the Purchase Plan, an employee of Ditech or any affiliate shall not be
eligible to be granted rights under the Purchase Plan unless, on the offering
date, such employee has been in the employ of Ditech or any affiliate for such
continuous period preceding such grant as the Board or the Committee may
require, but in no event shall the required period of continuous employment be
greater than two (2) years. In addition, unless otherwise determined by the
board or the Committee and set forth in the terms of the applicable offering, no
employee of Ditech or any affiliate shall be eligible to be granted rights under
the Purchase Plan, unless, on the offering date, such employee's customary
employment with Ditech or such affiliate is for at least twenty hours per week
and at least five (5) months per calendar year. Officers of Ditech and any
designated affiliate shall be eligible to participate in offerings under the
Purchase Plan; provided, however, that the Board may provide in an offering that
certain employees who are highly compensated employees within the meaning of
Section 423(b)(4)(D) of the Code shall not be eligible to participate.

However, no employee is eligible to participate in the Purchase Plan if,
immediately after the grant of purchase rights, the employee would own, directly
or indirectly, stock possessing 5% or more of the total combined voting power or
value of all classes of stock of Ditech or of any parent or subsidiary of Ditech
(including any stock which such employee may purchase under all outstanding
rights and options). In addition, no employee may purchase more than $25,000
worth of Common Stock (determined at the fair market value of the shares at the
time such rights are granted) under all employee stock purchase plans of Ditech
and its affiliates in any calendar year in which such rights are outstanding at
any time.

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PARTICIPATION IN THE PURCHASE PLAN

On each offering date, each eligible employee, pursuant to an offering made
under the Purchase Plan, shall be granted the right to purchase up to the number
of shares of common Stock of Ditech purchasable with a percentage designated by
the Board or the Committee not exceeding ten percent (10%) of such employee's
earnings during the period which begins on the offering date (or such later date
as the Board or the Committee determines for a particular offering) and ends on
the date stated in the offering, which date shall be no later than the end of
the offering.

PURCHASE PRICE

The purchase price per share at which shares of Common Stock are sold in an
offering under the Purchase Plan shall not be less than the lesser of: (i) 85%
of the fair market value of a share of Common Stock on first day of the offering
or (ii) 85% of the fair market value of a share of Common Stock on the specified
purchase date.

PAYMENT OF PURCHASE PRICE; PAYROLL DEDUCTIONS

The purchase price of the shares is accumulated by payroll deductions over
the offering. At any time during the offering, a participant may reduce or
terminate his or her payroll deductions as the Board provides in the offering. A
participant may not increase or begin such payroll deductions after the
beginning of the offering period except, if the Board provides, in the case of
an employee who first becomes eligible to participate as of a date specified
during the offering period. All payroll deductions made for a participant are
credited to his or her account under the Purchase Plan and deposited with the
general funds of Ditech. A participant may make additional payments into such
account only if specifically provided for in the offering and only if the
participant has not had the maximum amount withheld during the offering.

PURCHASE OF STOCK

By executing an agreement to participate in the Purchase Plan, the employee
is entitled to purchase shares under the Purchase Plan. In connection with
offerings made under the Purchase Plan, the Board specifies a maximum number of
shares of Common Stock an employee may be granted the right to purchase and the
maximum aggregate number of shares of Common Stock that may be purchased
pursuant to such offering by all participants. If the aggregate number of shares
to be purchased upon exercise of rights granted in the offering would exceed the
maximum aggregate number of shares of Common Stock available, the Board would
make a pro rata allocation of available shares in a uniform and equitable
manner. Unless the employee's participation is discontinued, his or her right to
purchase shares is exercised automatically at the end of the offering period at
the applicable price. See "Withdrawal" below.

WITHDRAWAL

While each participant in the Purchase Plan is required to sign an agreement
authorizing payroll deductions, the participant may withdraw from a given
offering by terminating his or her payroll deductions and by delivering to us a
notice of withdrawal from the Purchase Plan. Such withdrawal may be elected at
any time during the applicable offering period.

Upon any withdrawal from an offering by the employee, we will distribute to
the employee his or her accumulated payroll deductions without interest, less
any accumulated deductions previously applied to the purchase of shares of
Common Stock on the employee's behalf during such offering, and such employee's
interest in the offering will be automatically terminated. The employee is not
entitled to again participate in that offering. However, an employee's
withdrawal from an offering will not have any effect upon such employee's
eligibility to participate in subsequent offerings under the Purchase Plan.

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TERMINATION OF EMPLOYMENT

Rights granted pursuant to any offering under the Purchase Plan terminate
immediately upon cessation of an employee's employment with Ditech and any
designated affiliate for any reason, and we will distribute to such employee all
of his or her accumulated payroll deductions, without interest.

RESTRICTIONS ON TRANSFER

Rights granted under the Purchase Plan are not transferable by a participant
otherwise than by will or the laws of descent and distribution, or by a
designated beneficiary, and otherwise during his or her lifetime, may be
exercised only by the person to whom such rights are granted.

DURATION, AMENDMENT AND TERMINATION

The Board may suspend, terminate or amend the Purchase Plan at any time,
subject to the limitation that no such action may adversely affect any
outstanding rights to purchase common stock. Unless terminated earlier, the
Purchase Plan will terminate on March 5, 2009. Any amendment of the Purchase
Plan, other than adjustments upon changes of stock due to corporate
reorganizations, must be approved by the stockholders within 12 months of its
adoption by the Board if the amendment would (i) increase the number of shares
of Common Stock reserved for issuance under the Purchase Plan, (ii) modify the
requirements relating to eligibility for participation in the Purchase Plan (to
the extent such modification requires stockholder approval in order for the
Purchase Plan to obtain employee stock purchase plan treatment under
Section 423 of the Code or to comply with the requirements of Rule 16b-3
promulgated under the Exchange Act ("Rule 16b-3")), or (iii) modify any other
provision of the Purchase Plan if such modification requires stockholder
approval in order for the Purchase Plan to obtain employee stock purchase plan
treatment under Section 423 of the Code or to comply with the requirements of
Rule 16b-3.

Rights granted before amendment or termination of the Purchase Plan will not
be altered or impaired by any amendment or termination of the Purchase Plan
without consent of the employee to whom such rights were granted.

EFFECT OF CERTAIN CORPORATE EVENTS

In the event of certain changes of control of Ditech, the Board has
discretion to provide that (i) each right to purchase common stock will be
assumed or an equivalent right substituted by the successor corporation,
(ii) such rights may continue in full force or effect, or (iii) participants'
accumulated payroll deductions may be used to purchase stock immediately prior
to the change in control.

STOCK SUBJECT TO PURCHASE PLAN

If this Proposal is approved, an aggregate of 416,666 shares of Common Stock
will be reserved for issuance under the Purchase Plan. If rights granted under
the Purchase Plan expire, lapse or otherwise terminate without being exercised,
the shares of Common Stock not purchased under such rights again becomes
available for issuance under the Purchase Plan.

FEDERAL INCOME TAX INFORMATION

Rights granted under the Purchase Plan are intended to qualify for favorable
federal income tax treatment associated with rights granted under an employee
stock purchase plan which qualifies under provisions of Section 423 of the Code.

A participant will be taxed on amounts withheld for the purchase of shares
of Common Stock as if such amounts were actually received. Other than this, no
income will be taxable to a participant until disposition of the acquired
shares, and the method of taxation will depend upon the holding period of the
acquired shares.

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If the stock is disposed of more than two years after the beginning of the
offering period or more than one year after the stock is transferred to the
participant, then the lesser of (i) the excess of the fair market value of the
stock at the time of such disposition over the exercise price or (ii) the excess
of the fair market value of the stock as of the beginning of the offering period
over the exercise price (determined as of the beginning of the offering period)
will be treated as ordinary income. Any further gain or any loss will be taxed
as a long-term capital gain or loss. Such capital gains currently are generally
subject to lower tax rates than ordinary income.

If the stock is sold or disposed of before the expiration of either of the
holding periods described above, then the excess of the fair market value of the
stock on the exercise date over the exercise price will be treated as ordinary
income at the time of such disposition. The balance of any gain will be treated
as capital gain. Even if the stock is later disposed of for less than its fair
market value on the exercise date, the same amount of ordinary income is
attributed to the participant, and a capital loss is recognized equal to the
difference between the sales price and the fair market value of the stock on
such exercise date. Any capital gain or loss will be short-term or long-term,
depending on how long the stock has been held.

Additionally, Ditech may be required to withhold and/or deposit employment
taxes on the discount element at the time of the purchase of Common Stock. There
are no other federal income tax consequences to us by reason of the grant or
exercise of rights under the Purchase Plan. We are entitled to a deduction to
the extent amounts are taxed as ordinary income to a participant (subject to the
requirement of reasonableness and the satisfaction of tax reporting
obligations).

PROPOSAL 5
APPROVAL OF INCREASE IN NUMBER OF AUTHORIZED SHARES OF COMMON STOCK

The Board of Directors has adopted, subject to stockholder approval, an
amendment to our Amended and Restated Certificate of Incorporation to increase
our authorized number of shares of Common Stock from 50,000,000 shares to
200,000,000 shares. As amended, Article IV.A. of our Amended and Restated
Certificate of Incorporation shall read in its entirety as follows:

"A. This corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The
total number of shares which the corporation is authorized to issue is
Two Hundred Five Million (205,000,000) shares. Two Hundred Million
(200,000,000) shares shall be Common Stock, each having a par value of
one tenth of one cent ($.001). Five Million (5,000,000) shares shall be
Preferred Stock, each having a par value of one tenth of one cent
($.001)."

The additional Common Stock to be authorized by adoption of the amendment
would have rights identical to the currently outstanding Common Stock of Ditech.
Adoption of the proposed amendment and issuance of the Common Stock would not
affect the rights of the holders of currently outstanding Common Stock of
Ditech, except for effects incidental to increasing the number of shares of our
Common Stock outstanding, such as dilution of the earnings per share and voting
rights of current holders of Common Stock. If the amendment is adopted, it will
become effective upon filing of an Amended and Restated Certificate of
Incorporation with the Secretary of State of the State of Delaware.

In addition to the 28,494,003 shares of Common Stock outstanding at
July 24, 2000, there are currently outstanding options to purchase 2,967,079
shares of Common Stock under our stock option and stock purchase plans. If
Proposals 2, 3 and 4 are approved, the number of shares reserved under our stock
option and stock purchase plans will be 8,733,332.

Although at present the Board of Directors has no other plans to issue the
additional shares of Common Stock, it desires to have such shares available to
provide additional flexibility to use our capital stock for business and
financial purposes in the future. The additional shares may be used, without
further stockholder approval, for various purposes including, without
limitation, raising capital, providing equity

17
<PAGE>
incentives to employees, officers or directors, establishing strategic
relationships with other companies and expanding our business or product lines
through the acquisition of other businesses or products, and declaring stock
splits, effective as a stock dividend.

The additional shares of Common Stock that would become available for
issuance if the proposal were adopted could also be used by us to oppose a
hostile takeover attempt or delay or prevent changes in control or management of
Ditech. For example, without further stockholder approval, the Board of
Directors could strategically sell shares of Common Stock in a private
transaction to purchasers who would oppose a takeover or favor the current Board
of Directors. In addition, if the Board of Directors were to adopt a Share
Purchase Rights Plan and person or group of persons attempted a hostile takeover
of us, such shares could be issued in connection with that plan, which would
allow stockholders (other than the hostile parties) to purchase our Common Stock
at a discount to the then current market price, which would have a dilutive
effect on the hostile parties. Although this proposal to increase the authorized
Common Stock has been prompted by business and financial considerations and not
by the threat of any hostile takeover attempt (nor is the Board of Directors
currently aware of any such attempts directed at us), nevertheless, stockholders
should be aware that approval of proposal could facilitate future efforts by us
to deter or prevent changes in control of Ditech, including transactions in
which the stockholders might otherwise receive a premium for their shares over
then current market prices.

The affirmative vote of the holders of a majority of the shares of the
Common Stock will be required to approve this amendment to our Amended and
Restated Certificate of Incorporation. As a result, abstentions and broker
non-votes will have the same effect as negative votes.

THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 5

PROPOSAL 6
RATIFICATION OF SELECTION OF INDEPENDENT AUDITORS

The Board of Directors has selected PricewaterhouseCoopers LLP as our
independent auditors for the fiscal year ending April 30, 2001 and has further
directed that management submit the selection of independent auditors for
ratification by the stockholders at the Annual Meeting. PricewaterhouseCoopers
LLP has audited our financial statements since April 1998. Representatives of
PricewaterhouseCoopers LLP are expected to be present at the Annual Meeting,
will have an opportunity to make a statement if they so desire and will be
available to respond to appropriate questions.

Stockholder ratification of the selection of PricewaterhouseCoopers LLP as
our independent auditors is not required by our By-laws or otherwise. However,
the Board is submitting the selection of PricewaterhouseCoopers LLP to the
stockholders for ratification as a matter of good corporate practice. If the
stockholders fail to ratify the selection, the Audit Committee and the Board
will reconsider whether or not to retain that firm. Even if the selection is
ratified, the Audit Committee and the Board in their discretion may direct the
appointment of different independent auditors at any time during the year if
they determine that such a change would be in the best interests of Ditech and
its stockholders.

The affirmative vote of the holders of a majority of the shares present in
person or represented by proxy and entitled to vote at the Annual Meeting will
be required to ratify the selection of PricewaterhouseCoopers LLP. Abstentions
will be counted toward the tabulation of votes cast on proposals presented to
the stockholders and will have the same effect as negative votes. Broker
non-votes are counted towards a quorum, but are not counted for any purpose in
determining whether this matter has been approved.

THE BOARD OF DIRECTORS RECOMMENDS
A VOTE IN FAVOR OF PROPOSAL 6.

18
<PAGE>
EXECUTIVE OFFICERS OF DITECH

Certain information regarding Ditech's executive officers and key employees
as of July 15, 2000 is set forth below.

<TABLE>
<CAPTION>
NAME AGE POSITION
---- -------- ---------------------------------------------------
<S> <C> <C>
Timothy K. Montgomery..................... 47 President, Chief Executive Officer and Director

Toni M. Bellin............................ 54 Vice President of Operations

Charlie Davis............................. 54 Executive Vice President and Chief Technical
Officer--DSP Products

Marc Schwager............................. 43 Vice President, Marketing

Serge Stepanoff........................... 57 Vice President of Engineering and Development, Echo
Cancellation Products

William J. Tamblyn........................ 41 Vice President and Chief Financial Officer

Ian Wright................................ 44 Senior Vice President, Development Engineering--
Optical Products
</TABLE>

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.

DR. CHARLES DAVIS joined Ditech Communications in February 2000 when Ditech
acquired Telinnovation Corporation, an echo cancellation software company
founded by Dr. Davis in 1983. From 1983 through 2000, Dr. Davis served as
Telinnovation's President. In that role he established Telinnovation as the
premier echo cancellation software company in the world, licensing his software
to many of the industry's key communications companies, including Cisco,
Alcatel, Nortel Networks. Dr. Davis has a BSEE from Southern Methodist
University, and a Ph.D. in Electrical Engineering from Stanford University.

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. in 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

19
<PAGE>
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.

IAN WRIGHT joined Ditech in February 2000 as Senior Vice President of
Engineering for Optical Networking Products. Prior to joining Ditech,
Mr. Wright was employed at Cisco Systems, an IP router manufacturer, where he
served as Director of Engineering for Cisco's optical internetworking business
unit from November 1998 to February 2000. In that role, he led the engineering
team building Cisco's advanced switch/router products. Before Cisco, Mr. Wright
served as the Senior Director of Engineering for Network Equipment Technologies
(N.E.T.), a data and voice communications equipment company, from 1993 to 1998.
In that role, he headed the engineering team building N.E.T.'s high-end ATM
wide-area networking switch. Prior to N.E.T., Mr. Wright worked as an engineer
and engineering manager for several communications companies in Australia.

20
<PAGE>
SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth certain information regarding the beneficial
ownership of our common stock as of April 30, 2000 by:

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

- each of our Named Executive Officers (as defined under "Executive
Compensation" below);

- 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 28,274,010 shares of common stock
outstanding as of April 30, 2000.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED
--------------------
BENEFICIAL OWNER NUMBER PERCENT
---------------- --------- --------
<S> <C> <C>
Entities affiliated with Summit Partners (1).............. 688,167 2.4%
Seahawk Ranch Irrevocable Trust (2)....................... 583,967 2.1
Seahawk Investment Trust (2).............................. 594,438 2.1
Timothy Montgomery (3).................................... 840,684 3.0
Pong Lim (4).............................................. 737,796 2.6
William Tamblyn (5)....................................... 312,996 1.1
Toni Bellin (6)........................................... 195,000 *
Serge Stepanoff (7)....................................... 266,728 1.0
Ian Wright (8)............................................ 350,000 1.2
Marc Schwager (9)......................................... 200,000 *
Charles Davis (13)........................................ 654,624 2.3
Gregory Avis (10)......................................... 698,167 2.5
Peter Chung (11).......................................... 698,167 *
William Hasler (15)....................................... 74,640 *
Kenneth E. Jones (12)..................................... 1,222,634 4.3
George Turner (15)........................................ 148,336 *
All directors and executive officers as a group
(13 persons) (14)....................................... 5,721,600 20.2
Entities affiliated with Fidelity Investments (16)........ 3,582,352 12.67
Pilgrim Baxter & Associates, Ltd (17)..................... 2,787,000 9.86
</TABLE>

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

* Represents beneficial ownership of less than 1 percent.

(1) Shares consist of 625,498 shares held by Summit Ventures IV, L.P., 20,686
shares held by Summit Investors III, L.P., and 41,983 shares held by Summit
Subordinated Debt Fund, L.P. 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. 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, Peter Y. Chung and Kevin P. Mohan. As

21
<PAGE>
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 Irrevocable Trust.

(3) Includes 453,888 shares which may be acquired pursuant to the exercise of
stock options. On April 30, 2000, 131,945 of Mr. Montgomery's shares were
subject to a repurchase option in favor of Ditech.

(4) Includes 10,000 shares which may be acquired pursuant to the exercise of
stock options. The address for Mr. Lim is c/o Ditech Corporation,
825 E. Middlefield Rd., Mountain View, CA 94043.

(5) Includes 175,422 shares which may be acquired pursuant to the exercise of
stock options. On April 30, 2000, 34,581 of Mr. Tamblyn's shares were
subject to a repurchase option in favor of Ditech.

(6) Consists solely of 195,000 shares which may be acquired pursuant to the
exercise of stock options.

(7) Includes 161,130 shares which may be acquired pursuant to the exercise of
stock options.

(8) Includes 350,000 shares which may be acquired pursuant to the exercise of
stock options.

(9) Consists solely of 200,000 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). Includes 10,000
shares which may be acquired pursuant to the exercise of stock options.
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
General Partner of Stamps, Woodson & Co IV. Includes 10,000 shares which
may be acquired pursuant to the exercise of stock options. 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 583,967 shares of common stock held by
Seahawk Ranch Irrevocable Trust, of which Mr. Jones is a trustee; 594,438
shares of common stock held by Seahawk Investment Trust, of which
Mr. Jones is a trustee; and 34,224 shares of common stock held by Western
General Corporation, of which Mr. Jones is the president. Includes 10,000
shares which may be acquired pursuant to the exercise of stock options.
The address for Mr. Jones if 550 Pilgrim Drive, Foster city, California
94404.

(13) Includes 8,834 shares held by Telinnovation Corporation, 8,480 shares held
by Telinnovation Service Corporation and 637,310 shares held by
Telinnovation Partnership. Mr. Davis remains a shareholder/ partner in
each of these entities and therefore may be deemed to have beneficial
ownership of the shares held by each entity. As of April 30, 2000, 218,208
shares were subject to forfeiture if Mr. Davis were to discontinue his
employment with Ditech and 109,024 shares were subject to forfeiture
pursuant to indemnification clauses in the asset acquisition from the
Telinnovation entities.

(14) Includes 1,585,440 shares that may be acquired pursuant to the exercise of
stock options. See notes 1 through 12 above and note 15.

(15) Includes 10,000 shares which may be acquired pursuant to the exercise of
stock options.

22
<PAGE>
(16) Shares consist of: 3,342,052 shares held by Fidelity Management & Research
Company located at 82 Devonshire Street, Boston, Massachusetts 02109;
33,500 shares held by Fidelity International Limited, Pembroke Hall,
42 Crow Lane, Hamilton, Bermuda; and 206,800 shares held by Fidelity
Management Trust Company, 82 Devonshire Street, Boston,
Massachusetts 02109.

(17) Shares are owned by Pilgrim Baxter & Associates Ltd., 825 Duportail Road,
Wayne, Pennsylvania 19087

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act requires our directors and executive
officers, and persons who own more than ten percent of a registered class of our
equity securities, to file with the SEC initial reports of ownership and reports
of changes in ownership of Common Stock and other equity securities of Ditech.
Officers, directors and greater than ten percent stockholders are required by
SEC regulation to furnish Ditech with copies of all Section 16(a) forms they
file.

To our knowledge, based solely on a review of the copies of such reports
furnished to Ditech and written representation that no other reports were
required, during the fiscal year ended April 30, 2000, all Section 16(a) filing
requirements applicable to its officers, directors and greater than ten percent
beneficial owners were complied with.

EXECUTIVE COMPENSATION

COMPENSATION OF DIRECTORS

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. Non-employee directors also receive, upon initial
appointment, options to purchase 10,000 shares multiplied by the number of
months remaining until the next succeeding annual meeting of stockholders and
then divided by twelve. In addition, each non-employee director will
automatically be granted an option to purchase 10,000 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 20,000 shares rather than 10,000 shares. These options are granted at
100% of the fair market value of the common stock on the date of grant, are
fully vested and have a five-year term. See Proposal 3 for a further description
of our stock option plan for non-employee directors.

During the last fiscal year, we granted options covering 60,000 shares to
each of our non-employee directors, at an exercise price per share of $33.34.
The fair market value of the Common Stock on the date of grant was $33.34 per
share (based on the closing sales price reported on the Nasdaq National Market
for the date of grant). As of July 24, 2000, 20,000 options had been exercised
under the Directors' Plan.

SUMMARY OF COMPENSATION

The following table sets forth certain information for the fiscal years
ended April 30, 1999 and 2000, 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 fiscal 2000 were in excess of $100,000 (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.

23
<PAGE>
SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION (1) SECURITIES
------------------------------ UNDERLYING
YEAR SALARY BONUS OPTIONS
-------- -------- -------- -------------
<S> <C> <C> <C> <C>
Timothy Montgomery.......................................... 2000 $250,000 $250,000 253,888
Chief Executive Officer and President 1999 225,000 100,000 266,666
Toni Bellin................................................. 2000 160,000 53,000 50,000
Vice President of Operations 1999 47,116 33,333 200,000
Mark Schwager............................................... 2000 146,634 51,000 --
Vice President of Marketing 1999 --(1) -- 200,000
Serge Stepanoff............................................. 2000 130,000 60,000 125,020
Vice President of Engineering and Development, Echo
Cancellation Products 1999 120,000 42,960 --
William Tamblyn............................................. 2000 150,000 125,000 149,586
Vice President and Chief Financial Officer 1999 135,000 54,000 54,000
</TABLE>

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

(1) Mr. Schwager began employment on April 27, 1999 but did not receive cash
compensation until the first payroll in May 1999.

OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth each grant of stock options made during the
fiscal year ended April 30, 2000 to each of the Named Executive Officers. The
exercise price per share of each option was equal to the quoted fair market
value of the common stock on the date of grant. During the fiscal year ended
April 30, 2000, Ditech granted employees, consultants and directors options to
purchase an aggregate of 1,744,194 shares of common stock.

<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
INDIVIDUAL GRANTS AT ASSUMED
------------------------------------------------ ANNUAL RATES OF
NUMBER OF STOCK PRICE
SECURITIES % OF TOTAL APPRECIATION FOR
UNDERLYING OPTIONS EXERCISE OPTION TERM
OPTIONS GRANTED PRICE PER EXPIRATION -----------------------
NAME GRANTED 2000 SHARE DATE 5% 10%
---- ---------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Timothy Montgomery (1)........................... 253,888 14.6 $9.00 8/10/09 $1,437,019 $3,641,689

Toni Bellin (2).................................. 50,000 2.9 24.69 10/4/09 776,292 1,967,276

Marc Schwager.................................... -- -- -- -- -- --

Serge Stepanoff (3).............................. 125,020 7.2 9.00 8/10/09 707,620 1,793,247

William Tamblyn (4).............................. 149,586 8.6 9.00 8/10/09 846,664 2,145,614
</TABLE>

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

(1) 30,000, 71,666 and 152,222 shares of Mr. Montgomery's option grant vest
ratably over the twelve month periods ending May 1, 2001, 2002 and 2003,
respectively.

(2) Ms. Bellin's option grants vest ratably commencing October 5, 2003 and
ending October 4, 2004.

(3) 27,104, 47,916 and 50,000 shares of Mr. Stepanoff's option grant vest
ratably over the twelve month periods ending May 1, 2001, 2002 and 2003,
respectively.

(4) 28,334, 56,112 and 65,140 shares of Mr. Tamblyn's option grant vest ratably
over the twelve month periods ending May 1, 2001, 2002 and 2003,
respectively.

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

24
<PAGE>
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, 2000 and exercisable and
unexercisable options held as of April 30, 2000:

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
UNDERLYING AT APRIL 30, 2000 AT APRIL 30, 2000
SHARES ACQUIRED VALUE --------------------------- ---------------------------
ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
--------------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Timothy Montgomery.................... -- -- 453,888 -- $36,485,904 --
Toni Bellin........................... 55,000 $3,778,455 195,000 -- 15,378,125 --
Marc Schwager......................... -- -- 200,000 -- 16,175,000 --
Serge Stepanoff....................... 163,886 6,355,068 161,130 -- 12,676,822 --
William Tamblyn....................... 44,332 1,731,218 175,422 -- 13,680,160 --
</TABLE>

Each option grant permits immediate exercise subject to a repurchase option
in favor of Ditech, which generally lapses over a four-year period with 25%
lapsing after the first year and monthly thereafter. The quoted fair market
value of Ditech's common stock on or about April 30, 2000 was $85.75 per share.

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 533,332 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 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
200,000 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
200,000 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.

25
<PAGE>
In February 2000, Ditech entered into an employment agreement with Ian
Wright to serve as Senior Vice President--Development Engineering at a base
salary of $180,000, with a guaranteed bonus of $60,000 in 2000 and an option to
purchase 350,000 shares of Ditech common stock. The employment agreement is
at-will, although if Mr. Wright is terminated for other than cause or permanent
disability during his first year of service Ditech must pay Mr. Wright's base
salary for the period ending on the first anniversary of his first day of
employment.

REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
ON EXECUTIVE COMPENSATION(1)

The Compensation Committee of our Board of Directors generally makes
decisions on compensation of our Chief Executive Officer, Timothy K. Montgomery,
and its other executive officers. During fiscal 2000, the Compensation Committee
consisted of Gregory M. Avis, William A. Hasler and Kenneth E. Jones; all three
are outside directors. All decisions by the Compensation Committee are reviewed
by the full Board of Directors, except for decisions about awards under our 1999
Stock Option Plan, which decisions must be made solely by the Compensation
Committee for awards under such plan to satisfy Rule 16b-3 under the 1934 Act.
The Compensation Committee has furnished the following report on the 2000
compensation of Timothy K. Montgomery and our other executive officers.

In setting the compensation levels, the Compensation Committee considers the
standard practices in the telecommunications industry, including data from
surveys, as well as the practices of companies with whom Ditech competes for
executive talent. Ditech believes that its total executive compensation package
is near the median among its peers making the transition from a private company
with less than $15 million in revenues to a publicly traded company with greater
than $25 million of revenues.

It is the current philosophy of Ditech to keep the base salary of executives
between the 25th and 50th percentiles based on the RADFORD ASSOCIATES MANAGEMENT
TOTAL COMPENSATION PLAN 1998--OVERALL COMPANIES LESS THAN $40M (Radford) &
ADVANCED EQUITY PRE-IPO SURVEY--$10M LEVEL (AE), so that more of their
compensation depends on bonuses, which are contingent upon Company and
individual performance. The Radford and AE surveys include some but not all
companies included in the Graph Index. See "Comparison of Stockholder Return".
The executives are thus motivated to enhance stockholder value.

As Ditech has commercial products and developing products, the Compensation
Committee believes that corporate performance should be measured by both
traditional financial performance criteria such as profitability and earnings
per share and by analyzing the degree to which Ditech achieves certain goals
established by the Compensation Committee and approved by the Board.

Under the Executive Compensation Bonus Plan, an executive's annual incentive
award depends on improved Company performance, both revenue growth and profits
for the fiscal year and key individual contributions. The current philosophy of
Ditech is to keep total compensation including bonuses for executives between
the 50th and 75th percentiles of the companies in the Radford and AE surveys.

The performance goals for Ditech are derived from our business plans that
include critical individual performance targets relating to strategic product
positioning, revenue growth, and profitability for the fiscal year and key
internal deliveries. The performance bonuses are based on a percentage on each
related task. The incentive targets vary with each executive officer and are
based overall as a percentage of base salary. The incentive targets range from
40% to 50% with added incentives for exceeding targeted plans

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

(1) The material in this report is not "soliciting material," is not deemed
"filed" with the SEC, and is not to be incorporated by reference into any
filing of the Company under the 1933 Act or 1934 Act, whether made before or
after the date hereof and irrespective of any general incorporation language
contained in such filing.

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<PAGE>
such as revenues and profitability. The Compensation Committee annually reviews
and approves specific bonus targets, maximums and performance criteria for all
executives.

STOCK OPTIONS

The Compensation Committee grants stock options under our stock option plans
to foster executive ownership and to provide direct linkage with stockholder
interests. The Compensation Committee considers the current level of equity
holdings in Ditech, stock options previously granted, industry practices, the
executive's accountability level, and assumed potential stock value when
determining stock option grants. The Compensation Committee relies upon
competitive guideline ranges of retention-effective, target-gain objectives to
be derived from option gains based upon relatively aggressive assumptions
relating to planned growth and earnings. In this manner, potential executive
gains parallel those of other stockholders over the long term. Therefore, the
stock option program serves as our primary long-term incentive and retention
tool for executives and other key employees. The exercise prices of stock
options granted to the executive officers are equal to the market value of the
stock on the date of grant.

CEO COMPENSATION

Mr. Montgomery commenced employment with us effective November 1, 1997 as
Senior Vice President of Sales and Marketing. As of September 15, 1998 he became
the President and Chief Executive Officer. In general, as President and CEO the
factors utilized in determining Mr. Montgomery's compensation are the same as
those applied to the other executive officers in the manner described in the
preceding paragraphs, although achievement of Company financial performance
goals have a greater impact on his total compensation.

In establishing Mr. Montgomery's base salary, it was the Compensation
Committee's intent to provide him with a level of stability and certainty each
year. His base salary for the 2000 fiscal year of $250,000 approximates the 50th
percentile or competitive classification of reported base salaries for Chief
Executive Officers based on Radford and AE.

The annual bonus component of Mr. Montgomery's compensation package was
based on our financial performance and individual goal achievement, as described
above. Based upon Mr. Montgomery's performance, his resultant bonus for 2000
included his full bonus at plan of $100,000 plus an additional $150,000 for
exceeding plan in revenues and profitability, for a total of $250,000.

Mr. Montgomery also received an additional option grant in August 1999 to
vest in out years from his original grants. 30,000, 71,666 and 152,222 shares of
Mr. Montgomery's option grants vest ratably over the twelve month periods ending
May 1, 2001, 2002 and 2003, respectively.

COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(m)

Section 162(m) of the Internal Revenue Code, enacted in 1993, generally
disallows a tax deduction for compensation exceeding $1 million paid to certain
of the corporation's executive officers. It is not expected that the
compensation to be paid to our executive officers for fiscal 1999 will exceed
the $1 million limit per officer. Our 1998 Stock Option Plan is structured so
that any compensation deemed paid to an executive officer when he/she exercises
an outstanding option under the Option Plan with an exercise price equal to the
fair market value of the option shares on the grant date will qualify as
performance-based compensation; which will not be subject to the $1 million
limitation. The Compensation Committee will defer any decision on whether or not
to limit the dollar amount of all other compensation payable to our executive
officer ever approach that level.

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In summary, it is the opinion of the Compensation Committee that the adopted
executive compensation policies and plans provide the necessary total
remuneration program to properly align our performance and the interest of our
stockholders with competitive and equitable executive compensation in a balanced
and reasonable manner, for both the short and long-term.

Compensation Committee
Gregory M. Avis
William A. Hasler
Kenneth E. Jones

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

During fiscal 2000, 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 private equity capital firm that became a major
stockholder of Ditech in connection with Ditech's recapitalization.

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.

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<PAGE>
PERFORMANCE MEASUREMENT COMPARISON (2)

The following graph shows the total stockholder return of an investment of
$100 in cash on June 9, 1999 for (i) our Common Stock; (ii) the NASDAQ Stock
Market (U.S.) and (iii) the NASDAQ Telecommunications Index. All values assumes
reinvestments of the full amount of all amount of all dividends.

COMPARISON OF 11 MONTH CUMULATIVE TOTAL RETURN

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
DITECH NASDAQ
<S> <C> <C> <C>
COMMUNICATIONS STOCK NASDAQ
CORPORATION MARKET (U.S) TELECOMMUNICATIONS
6/9/99 $100.00 $100.00 $100.00
4/30/00 $1,559.09 $155.77 $114.29
</TABLE>

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

(2) This section is not "soliciting material," is not deemed "filed" with the
SEC and is not to be incorporated by references in any filing of the Company
under the 1933 Act or the 1934 Act whether made before or after the date
hereof and respecting any general corporation language in any such filing.

CERTAIN TRANSACTIONS

In June 1999, in connection with our initial public offering, we redeemed
all of our Series A Preferred Stock by payment of approximately $1.14 per share
of Series A Preferred Stock pursuant to the terms thereof. In connection with
this redemption, we redeemed: from funds affiliated with Summit Partners, of
which Mr. Avis, a director of Ditech, is Managing Partner, and of which
Mr. Chung, a director of Ditech, is a General Partner, an aggregate of
12,000,000 shares of Series A preferred stock; from The Seahawk Investment Trust
and the Seahawk Ranch Irrevocable Trust, collectively, an aggregate of 2,272,344
shares of Series A preferred stock, of which trusts Mr. Jones, a director of
Ditech, is a trustee; and from Mr. Turner, a director of Ditech, 255,461 shares
of Series A preferred stock.

On February 1, 2000, we acquired: (i) substantially all of the assets of
Telinnovation, a California general partnership, Telinnovation Corporation, a
California corporation, and Telinnovation Service Corporation, a California
corporation, and (ii) all of the assets relating to voice enhancement and echo

29
<PAGE>
cancellation technology from Richard Hardy, an individual. The Telinnovation
entities and Mr. Hardy received in exchange for the assets an aggregate total of
one million two hundred thousand (1,200,000) shares of our common stock (after
giving retroactive effect our 2-for-1 stock split accounted for as a stock
dividend effected in February 2000). Charlie Davis, our Executive Vice President
and Chief Technology Officer--DSP Products, was a principal of Telinnovation as
a Founder and Chief Executive Officer. His portion of the transaction is
approximately 654,624 shares, a portion of which is subject to forfeiture upon
termination of employment or under indemnification obligations.

In fiscal 2000, we paid Pong Lim salary and bonuses totaling $155,160
related to services rendered as an employee of Ditech. Mr. Lim's employment
ended on September 30, 1999. Subsequent to that date, Mr. Lim received no
further compensation.

See also Employment Agreements above.

OTHER MATTERS

The Board of Directors knows of no other matters that will be presented for
consideration at the Annual Meeting. If any other matters are properly brought
before the meeting, it is the intention of the persons named in the accompanying
proxy to vote on such matters in accordance with their best judgment.

By Order of the Board of Directors
/s/ WILLIAM J. TAMBLYN
William J. Tamblyn
Secretary

August 14, 2000

A COPY OF OUR ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION ON
FORM 10-K FOR THE FISCAL YEAR ENDED APRIL 30, 2000 IS AVAILABLE WITHOUT CHARGE
UPON WRITTEN REQUEST TO INVESTOR RELATIONS DEPARTMENT, DITECH COMMUNICATION
CORPORATION, 825 E. MIDDLEFIELD ROAD, MOUNTAIN VIEW, CA 94043.

30
<PAGE>

DITECH CORPORATION

1998 STOCK OPTION PLAN

ADOPTED BY THE BOARD OF DIRECTORS OCTOBER 15, 1998
APPROVED BY THE STOCKHOLDERS NOVEMBER 6, 1998
AMENDED AND RESTATED APRIL 21, 1999
AMENDED BY THE BOARD OF DIRECTORS JULY 6, 2000
AMENDMENT APPROVED BY STOCKHOLDERS ______, 2000

1. PURPOSES.

(a) The purpose of the Plan is to provide a means by which
selected Employees and Directors of and Consultants to the Company, and its
Affiliates, may be given an opportunity to purchase stock of the Company.

(b) The Company, by means of the Plan, seeks to retain the
services of persons who are now Employees or Directors of or Consultants to the
Company or its Affiliates, to secure and retain the services of new Employees,
Directors and Consultants, and to provide incentives for such persons to exert
maximum efforts for the success of the Company and its Affiliates.

(c) The Company intends that the Options issued under the Plan
shall, in the discretion of the Board or any Committee to which responsibility
for administration of the Plan has been delegated pursuant to subsection 3(c),
be either Incentive Stock Options or Nonstatutory Stock Options. All Options
shall be separately designated Incentive Stock Options or Nonstatutory Stock
Options at the time of grant, and in such form as issued pursuant to Section 6,
and a separate certificate or certificates will be issued for shares purchased
on exercise of each type of Option.

2. DEFINITIONS.

<PAGE>

(a) "AFFILIATE" means any parent corporation or subsidiary
corporation, whether now or hereafter existing, as those terms are defined in
Sections 424(e) and (f) respectively, of the Code.

(b) "BOARD" means the Board of Directors of the Company.

(d) "COMMITTEE" means a Committee appointed by the Board in
accordance with subsection 3(c) of the Plan.

(e) "COMPANY" means Ditech Communications Corporation, a Delaware
corporation.

(f) "CONSULTANT" means any person, including an advisor, engaged
by the Company or an Affiliate to render consulting services and who is
compensated for such services, provided that the term "Consultant" shall not
include Directors who are paid only a director's fee by the Company or who are
not compensated by the Company for their services as Directors.

(g) "CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT"
means that the service of an individual to the Company, whether as an Employee,
Director or Consultant, is not interrupted or terminated. The Board or the chief
executive officer of the Company may determine, in that party's sole discretion,
whether Continuous Status as an Employee, Director or Consultant shall be
considered interrupted in the case of: (i) any leave of absence approved by the
Board or the chief executive officer of the Company, including sick leave,
military leave, or any other personal leave; or (ii) transfers between the
Company, Affiliates or their successors.

(h) "COVERED EMPLOYEE" means the chief executive officer and the
four (4) other highest compensated officers of the Company for whom total
compensation is required to be

2
<PAGE>

reported to shareholders under the Exchange Act, as determined for purposes of
Section 162(m) of the Code.

(i) "DIRECTOR" means a member of the Board.

(j) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or any Affiliate of the Company. Neither service as a
Director nor payment of a director's fee by the Company shall be sufficient to
constitute "employment" by the Company.

(k) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.

(l) "FAIR MARKET VALUE" means, as of any date, the value of the
common stock of the Company determined as follows:

(1) If the common stock is listed on any established
stock exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap
Market, the Fair Market Value of a share of common stock shall be the closing
sales price for such stock (or the closing bid, if no sales were reported) as
quoted on such exchange or market (or the exchange or market with the greatest
volume of trading in the Company's common stock) on the day of determination, as
reported in THE WALL STREET JOURNAL or such other source as the Board deems
reliable.

(2) In the absence of such markets for the common stock,
the Fair Market Value shall be determined in good faith by the Board.

(3) Prior to the Listing Date, the value of the common
stock shall be determined in a manner consistent with Section 260.140.50 of
Title 10 of the California Code of Regulations.

(m) "INCENTIVE STOCK OPTION" means an Option intended to qualify
as an incentive stock option within the meaning of Section 422 of the Code and
the regulations promulgated thereunder.

3
<PAGE>

(n) "LISTING DATE" means the first date upon which any security of
the Company is listed (or approved for listing) upon notice of issuance on any
securities exchange, or designated (or approved for designation) upon notice of
issuance as a national market security on an interdealer quotation system if
such securities exchange or interdealer quotation system has been certified in
accordance with the provisions of Section 25100(o) of the California Corporate
Securities Law of 1968.

(o) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not
a current Employee or Officer of the Company or its parent or subsidiary, does
not receive compensation (directly or indirectly) from the Company or its parent
or subsidiary for services rendered as a consultant or in any capacity other
than as a Director (except for an amount as to which disclosure would not be
required under Item 404(a) of Regulation S-K promulgated pursuant to the
Securities Act ("Regulation S-K")), does not possess an interest in any other
transaction as to which disclosure would be required under Item 404(a) of
Regulation S-K, and is not engaged in a business relationship as to which
disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is
otherwise considered a "non-employee director" for purposes of Rule 16b-3.

(p) "NONSTATUTORY STOCK OPTION" means an Option not intended to
qualify as an Incentive Stock Option.

(q) "OFFICER" means a person who is an officer of the Company
within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.

(r) "OPTION" means a stock option granted pursuant to the Plan.

(s) "OPTION AGREEMENT" means a written agreement between the
Company and an Optionee evidencing the terms and conditions of an individual
Option grant. Each Option Agreement shall be subject to the terms and conditions
of the Plan.

4
<PAGE>

(t) "OPTIONEE" means a person to whom an Option is granted
pursuant to the Plan or, if applicable, such other person who holds an
outstanding Option.

(u) "OUTSIDE DIRECTOR" means a Director who either (i) is not a
current employee of the Company or an "affiliated corporation" (within the
meaning of the Treasury regulations promulgated under Section 162(m) of the
Code), is not a former employee of the Company or an "affiliated corporation"
receiving compensation for prior services (other than benefits under a tax
qualified pension plan), was not an officer of the Company or an "affiliated
corporation" at any time, and is not currently receiving direct or indirect
remuneration from the Company or an "affiliated corporation" for services in any
capacity other than as a Director, or (ii) is otherwise considered an "outside
director" for purposes of Section 162(m) of the Code.

(v) "PLAN" means this 1998 Stock Option Plan.

(w) "RULE 16b-3" means Rule 16b-3 of the Exchange Act or any
successor to Rule 16b-3 as in effect with respect to the Company at the time
discretion is being exercised regarding the Plan.

(x) "SECURITIES ACT" means the Securities Act of 1933, as amended.

3. ADMINISTRATION.

(a) The Plan shall be administered by the Board unless and until
the Board delegates administration to a Committee, as provided in subsection
3(c).

(b) The Board shall have the power, subject to, and within the
limitations of, the express provisions of the Plan:

(1) To determine from time to time which of the persons
eligible under the Plan shall be granted Options; when and how each Option shall
be granted; whether an Option will be an Incentive Stock Option or a
Nonstatutory Stock Option; the provisions of each Option

5
<PAGE>

granted (which need not be identical), including the time or times such Option
may be exercised in whole or in part; and the number of shares for which an
Option shall be granted to each such person.

(2) To construe and interpret the Plan and Options
granted under it, and to establish, amend and revoke rules and regulations for
its administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Option Agreement, in a
manner and to the extent it shall deem necessary or expedient to make the Plan
fully effective.

(3) To amend the Plan or an Option as provided in Section
11.

(4) Generally, to exercise such powers and to perform
such acts as the Board deems necessary or expedient to promote the best
interests of the Company.

(c) The Board may delegate administration of the Plan to a
committee of the Board composed of not fewer than two (2) members (the
"Committee"), all of the members of which Committee may be, in the discretion of
the Board, Non-Employee Directors and/or Outside Directors. If administration is
delegated to a Committee, the Committee shall have, in connection with the
administration of the Plan, the powers theretofore possessed by the Board,
including the power to delegate to a subcommittee of two (2) or more Outside
Directors any of the administrative powers the Committee is authorized to
exercise (and references in this Plan to the Board shall thereafter be to the
Committee or such a subcommittee), subject, however, to such resolutions, not
inconsistent with the provisions of the Plan, as may be adopted from time to
time by the Board. The Board may abolish the Committee at any time and revest in
the Board the administration of the Plan. Additionally, prior to the Listing
Date, and notwithstanding anything to the contrary contained herein, the Board
may delegate administration of the Plan to

6
<PAGE>

any person or persons and the term "Committee" shall apply to any person or
persons to whom such authority has been delegated. Notwithstanding anything in
this Section 3 to the contrary, the Board or the Committee may delegate to a
committee of one or more members of the Board the authority to grant Options to
eligible persons who (1) are not then subject to Section 16 of the Exchange Act
and/or (2) are either (i) not then Covered Employees and are not expected to be
Covered Employees at the time of recognition of income resulting from such
Option, or (ii) not persons with respect to whom the Company wishes to comply
with Section 162(m) of the Code.

4. SHARES SUBJECT TO THE PLAN.

(a) Subject to the provisions of Section 10 relating to
adjustments upon changes in stock, the stock that may be sold pursuant to
Options shall not exceed in the aggregate two million eight hundred fifty-six
thousand eighty-two (2,856,082) shares of the Company's common stock. If any
Option shall for any reason expire or otherwise terminate, in whole or in part,
without having been exercised in full, the stock not purchased under such Option
shall revert to and again become available for issuance under the Plan.

(b) The stock subject to the Plan may be unissued shares or
reacquired shares, bought on the market or otherwise.

5. ELIGIBILITY.

(a) Incentive Stock Options may be granted only to Employees.
Nonstatutory Stock Options may be granted only to Employees, Directors or
Consultants.

(b) No person shall be eligible for the grant of an Option if, at
the time of grant, such person owns (or is deemed to own pursuant to Section
424(d) of the Code) stock possessing more than ten percent (10%) of the total
combined voting power of all classes of stock of the Company or of any of its
Affiliates unless the exercise price of such Option is at least one

7
<PAGE>

hundred ten percent (110%) of the Fair Market Value of such stock at the date of
grant and the Option is not exercisable after the expiration of five (5) years
from the date of grant.

(c) Subject to the provisions of Section 10 relating to
adjustments upon changes in stock, no person shall be eligible to be granted
Options covering more than four hundred thousand (400,000) shares of the
Company's common stock in any calendar year. This subsection 5(c) shall not
apply prior to the Listing Date and, following the Listing Date, shall not apply
until (i) the earliest of: (A) the first material modification of the Plan
(including any increase to the number of shares reserved for issuance under the
Plan in accordance with Section 4); (B) the issuance of all of the shares of
common stock reserved for issuance under the Plan; (C) the expiration of the
Plan; or (D) the first meeting of shareholders at which directors are to be
elected that occurs after the close of the third calendar year following the
calendar year in which occurred the first registration of an equity security
under Section 12 of the Exchange Act; or (ii) such other date required by
Section 162(m) of the Code and the rules and regulations promulgated thereunder.

6. OPTION PROVISIONS.

Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. The provisions of separate
Options need not be identical, but each Option shall include (through
incorporation of provisions hereof by reference in the Option or otherwise) the
substance of each of the following provisions:

(a) TERM. No Option shall be exercisable after the expiration of
ten (10) years from the date it was granted.

(b) PRICE. The exercise price of each Incentive Stock Option shall
be not less than one hundred percent (100%) of the Fair Market Value of the
stock subject to the Option on the

8
<PAGE>

date the Option is granted; the exercise price of each Nonstatutory Stock
Option shall be not less than eighty-five percent (85%) of the Fair Market
Value of the stock subject to the Option on the date the Option is granted.
Notwithstanding the foregoing, an Option (whether an Incentive Stock Option
or a Nonstatutory Stock Option) may be granted with an exercise price lower
than that set forth in the preceding sentence if such Option is granted
pursuant to an assumption or substitution for another option in a manner
satisfying the provisions of Section 424(a) of the Code.

(c) CONSIDERATION. The purchase price of stock acquired pursuant
to an Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash at the time the Option is exercised, or (ii) at
the discretion of the Board or the Committee, at the time of the grant of the
Option, (A) by delivery to the Company of other common stock of the Company, (B)
according to a deferred payment or other arrangement (which may include, without
limiting the generality of the foregoing, the use of other common stock of the
Company) with the person to whom the Option is granted or to whom the Option is
transferred pursuant to subsection 6(d), or (C) in any other form of legal
consideration that may be acceptable to the Board.

In the case of any deferred payment arrangement, interest shall be
compounded at least annually and shall be charged at the minimum rate of
interest necessary to avoid the treatment as interest, under any applicable
provisions of the Code, of any amounts other than amounts stated to be interest
under the deferred payment arrangement.

(d) TRANSFERABILITY. An Option shall not be transferable except by
will or by the laws of descent and distribution, and shall be exercisable during
the lifetime of the person to whom the Option is granted only by such person. A
Nonstatutory Stock Option granted after the Listing Date shall only be
transferable by the Optionee upon such terms and conditions as are set

9
<PAGE>

forth in the Option Agreement for such Nonstatutory Stock Option, as the Board
or the Committee shall determine in its discretion. The person to whom the
Option is granted may, by delivering written notice to the Company, in a form
satisfactory to the Company, designate a third party who, in the event of the
death of the Optionee, shall thereafter be entitled to exercise the Option.

(e) VESTING. The total number of shares of stock subject to an
Option may, but need not, be allotted in periodic installments (which may, but
need not, be equal). The Option Agreement may provide that from time to time
during each of such installment periods, the Option may become exercisable
("vest") with respect to some or all of the shares allotted to that period, and
may be exercised with respect to some or all of the shares allotted to such
period and/or any prior period as to which the Option became vested but was not
fully exercised. The Option may be subject to such other terms and conditions on
the time or times when it may be exercised (which may be based on performance or
other criteria) as the Board may deem appropriate. The vesting provisions of
individual Options may vary. The provisions of this subsection 6(e) are subject
to any Option provisions governing the minimum number of shares as to which an
Option may be exercised.

Notwithstanding the foregoing, Options granted prior to the Listing
Date shall provide for vesting of at least twenty percent (20%) per year of the
total number of shares subject to the Option; PROVIDED, HOWEVER, that an Option
granted to an officer, director or consultant (within the meaning of Section
260.140.41 of Title 10 of the California Code of Regulations) prior to the
Listing Date may become fully exercisable, subject to reasonable conditions such
as continued employment, at any time or during any period established by the
Company or of any of its Affiliates.

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<PAGE>

(f) SECURITIES LAW COMPLIANCE. The Company may require any
Optionee, or any person to whom an Option is transferred under subsection 6(d),
as a condition of exercising any such Option, (1) to give written assurances
satisfactory to the Company as to the Optionee's knowledge and experience in
financial and business matters and/or to employ a purchaser representative
reasonably satisfactory to the Company who is knowledgeable and experienced in
financial and business matters, and that he or she is capable of evaluating,
alone or together with the purchaser representative, the merits and risks of
exercising the Option; and (2) to give written assurances satisfactory to the
Company stating that such person is acquiring the stock subject to the Option
for such person's own account and not with any present intention of selling or
otherwise distributing the stock. The foregoing requirements, and any assurances
given pursuant to such requirements, shall be inoperative if (i) the issuance of
the shares upon the exercise of the Option has been registered under a then
currently effective registration statement under the Securities Act, or (ii) as
to any particular requirement, a determination is made by counsel for the
Company that such requirement need not be met in the circumstances under the
then applicable securities laws. The Company may require the Optionee to provide
such other representations, written assurances or information which the Company
shall determine is necessary, desirable or appropriate to comply with applicable
securities and other laws as a condition of granting an Option to such Optionee
or permitting the Optionee to exercise such Option. The Company may, upon advice
of counsel to the Company, place legends on stock certificates issued under the
Plan as such counsel deems necessary or appropriate in order to comply with
applicable securities laws, including, but not limited to, legends restricting
the transfer of the stock.

(g) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR
CONSULTANT. In the event an Optionee's Continuous Status as an Employee,
Director or Consultant terminates

11
<PAGE>

(other than upon the Optionee's death or disability), the Optionee may exercise
his or her Option (to the extent that the Optionee was entitled to exercise it
as of the date of termination) but only within such period of time ending on the
earlier of (i) the date three (3) months following the termination of the
Optionee's Continuous Status as an Employee, Director or Consultant, or such
longer or shorter period specified in the Option Agreement, which for Options
granted prior to the Listing Date shall not be less than thirty (30) days, or
(ii) the expiration of the term of the Option as set forth in the Option
Agreement. If, at the date of termination, the Optionee is not entitled to
exercise his or her entire Option, the shares covered by the unexercisable
portion of the Option shall revert to and again become available for issuance
under the Plan. If, after termination, the Optionee does not exercise his or her
Option within the time specified in the Option Agreement, the Option shall
terminate, and the shares covered by such Option shall revert to and again
become available for issuance under the Plan.

(h) DISABILITY OF OPTIONEE. In the event an Optionee's Continuous
Status as an Employee, Director or Consultant terminates as a result of the
Optionee's disability, the Optionee may exercise his or her Option (to the
extent that the Optionee was entitled to exercise it as of the date of
termination), but only within such period of time ending on the earlier of (i)
the date twelve (12) months following such termination (or such longer or
shorter period specified in the Option Agreement, which for Options granted
prior to the Listing Date shall not be less than six (6) months), or (ii) the
expiration of the term of the Option as set forth in the Option Agreement. If,
at the date of termination, the Optionee is not entitled to exercise his or her
entire Option, the shares covered by the unexercisable portion of the Option
shall revert to and again become available for issuance under the Plan. If,
after termination, the Optionee does not exercise his or her Option within the
time specified herein, the Option shall terminate, and

12
<PAGE>

the shares covered by such Option shall revert to and again become available for
issuance under the Plan.

(i) DEATH OF OPTIONEE. In the event of the death of an Optionee
during, or within a period specified in the Option Agreement after the
termination of, the Optionee's Continuous Status as an Employee, Director or
Consultant, the Option may be exercised (to the extent the Optionee was entitled
to exercise the Option as of the date of death) by the Optionee's estate, by a
person who acquired the right to exercise the Option by bequest or inheritance
or by a person designated to exercise the option upon the Optionee's death
pursuant to subsection 6(d), but only within the period ending on the earlier of
(i) the date eighteen (18) months following the date of death (or such longer or
shorter period specified in the Option Agreement, which for Options granted
prior to the Listing Date shall not be less than six (6) months), or (ii) the
expiration of the term of such Option as set forth in the Option Agreement. If,
at the time of death, the Optionee was not entitled to exercise his or her
entire Option, the shares covered by the unexercisable portion of the Option
shall revert to and again become available for issuance under the Plan. If,
after death, the Option is not exercised within the time specified herein, the
Option shall terminate, and the shares covered by such Option shall revert to
and again become available for issuance under the Plan.

(j) EARLY EXERCISE. The Option may, but need not, include a
provision whereby the Optionee may elect at any time while an Employee, Director
or Consultant to exercise the Option as to any part or all of the shares subject
to the Option prior to the full vesting of the Option. Any unvested shares so
purchased shall be subject to a repurchase right in favor of the Company, with
the repurchase price to be equal to the original purchase price of the stock, or
to any other restriction the Board determines to be appropriate; PROVIDED,
HOWEVER, that for Options granted

13
<PAGE>

prior to the Listing Date (i) the right to repurchase at the original purchase
price shall lapse at a minimum rate of twenty percent (20%) per year over five
(5) years from the date the Option was granted, and (ii) such right shall be
exercisable only within (A) the ninety (90) day period following the termination
of employment or the relationship as a Director or Consultant, or (B) such
longer period as may be agreed to by the Company and the Optionee (for example,
for purposes of satisfying the requirements of Section 1202(c)(3) of the Code
(regarding "qualified small business stock")), and (iii) such right shall be
exercisable only for cash or cancellation of purchase money indebtedness for the
shares. Notwithstanding the foregoing, shares received on exercise of an Option
by an officer, director or consultant (within the meaning of Section 260.140.41
of Title 10 of the California Code of Regulations) may be subject to additional
or greater restrictions.

(k) RIGHT OF FIRST REFUSAL. The Option may, but need not, include
a provision whereby the Company may elect, prior to the Listing Date, to
exercise a right of first refusal following receipt of notice from the Optionee
of the intent to transfer all or any part of the shares exercised pursuant to
the Option. Except as expressly provided in this subsection 6(k), such right of
first refusal shall otherwise comply with the provisions of the Bylaws of the
Company.

(l) WITHHOLDING. To the extent provided by the terms of an Option
Agreement, the Optionee may satisfy any federal, state or local tax withholding
obligation relating to the exercise of such Option by any of the following means
or by a combination of such means: (1) tendering a cash payment; (2) authorizing
the Company to withhold shares from the shares of the common stock otherwise
issuable to the Optionee as a result of the exercise of the Option; or (3)
delivering to the Company owned and unencumbered shares of the common stock of
the Company.

14
<PAGE>

7. COVENANTS OF THE COMPANY.

(a) During the terms of the Options, the Company shall keep
available at all times the number of shares of stock required to satisfy such
Options.

(b) The Company shall seek to obtain from each regulatory
commission or agency having jurisdiction over the Plan such authority as may be
required to issue and sell shares of stock upon exercise of the Options;
PROVIDED, HOWEVER, that this undertaking shall not require the Company to
register under the Securities Act either the Plan, any Option or any stock
issued or issuable pursuant to any such Option. If, after reasonable efforts,
the Company is unable to obtain from any such regulatory commission or agency
the authority which counsel for the Company deems necessary for the lawful
issuance and sale of stock under the Plan, the Company shall be relieved from
any liability for failure to issue and sell stock upon exercise of such Options
unless and until such authority is obtained.

8. USE OF PROCEEDS FROM STOCK.

Proceeds from the sale of stock pursuant to Options shall constitute
general funds of the Company.

9. MISCELLANEOUS.

(a) The Board shall have the power to accelerate the time at which
an Option may first be exercised or the time during which an Option or any part
thereof will vest pursuant to subsection 6(e), notwithstanding the provisions in
the Option stating the time at which it may first be exercised or the time
during which it will vest.

(b) Neither an Optionee nor any person to whom an Option is
transferred under subsection 6(d) shall be deemed to be the holder of, or to
have any of the rights of a holder with

15
<PAGE>

respect to, any shares subject to such Option unless and until such person has
satisfied all requirements for exercise of the Option pursuant to its terms.

(c) Prior to the Listing Date, to the extent required by Section
260.140.46 of Title 10 of the California Code of Regulations, the Company shall
deliver financial statements to Optionees at least annually. This subsection
9(c) shall not apply to key employees whose duties in connection with the
Company assure them access to equivalent information.

(d) Nothing in the Plan or any instrument executed or Option
granted pursuant thereto shall confer upon any Employee, Director, Consultant or
Optionee any right to continue in the employ of the Company or any Affiliate (or
to continue acting as a Director or Consultant) or shall affect the right of the
Company or any Affiliate to terminate the employment of any Employee, with or
without cause, to remove any Director as provided in the Company's Bylaws and
the provisions of the corporate law of the state in which the Company or the
Affiliate, as the case may be, is incorporated, or to terminate the relationship
of any Consultant subject to the terms of that Consultant's agreement with the
Company or Affiliate to which such Consultant is providing services.

(e) To the extent that the aggregate Fair Market Value (determined
at the time of grant) of stock with respect to which Incentive Stock Options are
exercisable for the first time by any Optionee during any calendar year under
all plans of the Company and its Affiliates exceeds one hundred thousand dollars
($100,000), the Options or portions thereof which exceed such limit (according
to the order in which they were granted) shall be treated as Nonstatutory Stock
Options.

10. ADJUSTMENTS UPON CHANGES IN STOCK.

16
<PAGE>

(a) If any change is made in the stock subject to the Plan, or
subject to any Option (through merger, consolidation, reorganization,
recapitalization, stock dividend, dividend in property other than cash, stock
split, liquidating dividend, combination of shares, exchange of shares, change
in corporate structure or other transaction not involving the receipt of
consideration by the Company), the Plan will be appropriately adjusted in the
type(s) and maximum number of securities subject to the Plan pursuant to
subsection 4(a) and the maximum number of securities subject to award to any
person during any calendar year pursuant to subsection 5(c), and the outstanding
Options will be appropriately adjusted in the type(s) and number of securities
and price per share of stock subject to such outstanding Options. Such
adjustments shall be made by the Board or Committee, the determination of which
shall be final, binding and conclusive. (The conversion of any convertible
securities of the Company shall not be treated as a "transaction not involving
the receipt of consideration by the Company.")

(b) In the event of: (1) a dissolution, liquidation, or sale of
all or substantially all of the assets of the Company; (2) a merger or
consolidation in which the Company is not the surviving corporation; or (3) a
reverse merger in which the Company is the surviving corporation but the shares
of the Company's common stock outstanding immediately preceding the merger are
converted by virtue of the merger into other property, whether in the form of
securities, cash or otherwise, then: (i) any surviving or acquiring corporation
shall assume Options outstanding under the Plan or shall substitute similar
options (including an option to acquire the same consideration paid to
shareholders in the transaction described in this subsection 10(b)) for those
outstanding under the Plan, or (ii) in the event any surviving or acquiring
corporation refuses to assume such Options or to substitute similar options for
those outstanding under the Plan, (A) with respect to Options held by persons
then performing services as Employees, Directors or

17
<PAGE>

Consultants, the vesting of such Options and the time during which such Options
may be exercised shall be accelerated prior to such event and the Options
terminated if not exercised after such acceleration and at or prior to such
event, and (B) with respect to any other Options outstanding under the Plan,
such Options shall be terminated if not exercised prior to such event.

11. AMENDMENT OF THE PLAN AND OPTIONS.

(a) The Board at any time, and from time to time, may amend the
Plan. However, except as provided in Section 10 relating to adjustments upon
changes in stock, no amendment shall be effective unless approved by the
shareholders of the Company within twelve (12) months before or after the
adoption of the amendment, where the amendment will:

(1) Increase the number of shares reserved for Options
under the Plan;

(2) Modify the requirements as to eligibility for
participation in the Plan (to the extent such modification requires stockholder
approval in order for the Plan to satisfy the requirements of Section 422 of the
Code); or

(3) Modify the Plan in any other way if such modification
requires stockholder approval in order for the Plan to satisfy the requirements
of Section 422 of the Code or to comply with applicable stock exchange listing
requirements.

(b) The Board may in its sole discretion submit any other
amendment to the Plan for stockholder approval, including, but not limited to,
amendments to the Plan intended to satisfy the requirements of Section 162(m) of
the Code and the regulations promulgated thereunder regarding the exclusion of
performance-based compensation from the limit on corporate deductibility of
compensation paid to certain executive officers.

(c) It is expressly contemplated that the Board may amend the Plan
in any respect the Board deems necessary or advisable to provide Optionees with
the maximum benefits provided

18
<PAGE>

or to be provided under the provisions of the Code and the regulations
promulgated thereunder relating to Incentive Stock Options and/or to bring the
Plan and/or Incentive Stock Options granted under it into compliance therewith.

(d) Rights and obligations under any Option granted before
amendment of the Plan shall not be impaired by any amendment of the Plan unless
(i) the Company requests the consent of the person to whom the Option was
granted and (ii) such person consents in writing.

(e) The Board at any time, and from time to time, may amend the
terms of any one or more Options; PROVIDED, HOWEVER, that the rights and
obligations under any Option shall not be impaired by any such amendment unless
(i) the Company requests the consent of the person to whom the Option was
granted and (ii) such person consents in writing.

12. TERMINATION OR SUSPENSION OF THE PLAN.

(a) The Board may suspend or terminate the Plan at any time.
Unless sooner terminated, the Plan shall terminate on October 14, 2008, which
shall be within ten (10) years from the date the Plan is adopted by the Board or
approved by the shareholders of the Company, whichever is earlier. No Options
may be granted under the Plan while the Plan is suspended or after it is
terminated.

(b) Rights and obligations under any Option granted while the Plan
is in effect shall not be impaired by suspension or termination of the Plan,
except with the written consent of the person to whom the Option was granted.

13. EFFECTIVE DATE OF PLAN.

The Plan shall become effective as determined by the Board, but no
Options granted under the Plan shall be exercised unless and until the Plan has
been approved by the shareholders

19
<PAGE>

of the Company, which approval shall be within twelve (12) months before or
after the date the Plan is adopted by the Board.

20
<PAGE>

DITECH COMMUNICATION CORPORATION

1999 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN

APPROVED BY THE BOARD OF DIRECTORS MARCH 5, 1999
APPROVED BY STOCKHOLDERS APRIL 21, 1999
AMENDED BY THE BOARD OF DIRECTORS APRIL 23, 1999
AMENDMENT APPROVED BY STOCKHOLDERS APRIL 26, 1999
AMENDED BY THE BOARD OF DIRECTORS JULY 6, 2000
AMENDMENT APPROVED BY STOCKHOLDERS _____, 2000

EFFECTIVE DATE: MARCH 5, 1999
TERMINATION DATE: MARCH 4, 2009

1. PURPOSES.

(a) ELIGIBLE OPTION RECIPIENTS. The persons eligible to receive
Options are the Non-Employee Directors of the Company.

(b) AVAILABLE OPTIONS. The purpose of the Plan is to provide a
means by which Non-Employee Directors may be given an opportunity to benefit
from increases in value of the Common Stock through the granting of Nonstatutory
Stock Options.

(c) GENERAL PURPOSE. The Company, by means of the Plan, seeks to
retain the services of its Non-Employee Directors, to secure and retain the
services of new Non-Employee Directors and to provide incentives for such
persons to exert maximum efforts for the success of the Company and its
Affiliates.

2. DEFINITIONS.

(a) "AFFILIATE" means any parent corporation or subsidiary
corporation of the Company, whether now or hereafter existing, as those terms
are defined in Sections 424(e) and (f), respectively, of the Code.

(b) "ANNUAL GRANT" means an Option granted annually to all
Non-Employee Directors who meet the specified criteria pursuant to subsection
6(b) of the Plan.

(d) "BOARD" means the Board of Directors of the Company.

(e) "CODE" means the Internal Revenue Code of 1986, as amended.

(f) "COMMON STOCK" means the common stock of the Company.

1.
<PAGE>

(g) "COMPANY" means Ditech Communication Corporation, a Delaware
corporation.

(h) "CONSULTANT" means any person, including an advisor, (i)
engaged by the Company or an Affiliate to render consulting or advisory services
and who is compensated for such services or (ii) who is a member of the Board of
Directors of an Affiliate. However, the term "Consultant" shall not include
either Directors of the Company who are not compensated by the Company for their
services as Directors or Directors of the Company who are merely paid a
director's fee by the Company for their services as Directors.

(i) "CONTINUOUS SERVICE" means that the Optionholder's service
with the Company or an Affiliate, whether as an Employee, Director or
Consultant, is not interrupted or terminated. The Optionholder's Continuous
Service shall not be deemed to have terminated merely because of a change in the
capacity in which the Optionholder renders service to the Company or an
Affiliate as an Employee, Consultant or Director or a change in the entity for
which the Optionholder renders such service, provided that there is no
interruption or termination of the Optionholder's Continuous Service. For
example, a change in status from a Non-Employee Director of the Company to a
Consultant of an Affiliate or an Employee of the Company will not constitute an
interruption of Continuous Service. The Board or the chief executive officer of
the Company, in that party's sole discretion, may determine whether Continuous
Service shall be considered interrupted in the case of any leave of absence
approved by that party, including sick leave, military leave or any other
personal leave.

(j) "DIRECTOR" means a member of the Board of Directors of the
Company.

(k) "DISABILITY" means the permanent and total disability of a
person within the meaning of Section 22(e)(3) of the Code.

(l) "EMPLOYEE" means any person employed by the Company or an
Affiliate. Mere service as a Director or payment of a director's fee by the
Company or an Affiliate shall not be sufficient to constitute "employment" by
the Company or an Affiliate.

(m) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.

(n) "FAIR MARKET VALUE" means, as of any date, the value of the
Common Stock determined as follows:

(i) If the Common Stock is listed on any established
stock exchange or traded on the Nasdaq National Market or the Nasdaq SmallCap
Market, the Fair Market Value of a share of Common Stock shall be the closing
sales price for such stock (or the closing bid, if no sales were reported) as
quoted on such exchange or market (or the exchange or market with the greatest
volume of trading in the Common Stock) on the day of determination, as reported
in The Wall Street Journal or such other source as the Board deems reliable.

(ii) In the absence of such markets for the Common Stock,
the Fair Market Value shall be determined in good faith by the Board.

2.
<PAGE>

(o) "INITIAL GRANT" means an Option granted to a Non-Employee
Director who meets the specified criteria pursuant to subsection 6(a) of the
Plan.

(p) "NON-EMPLOYEE DIRECTOR" means a Director who is not employed
by the Company or an Affiliate.

(q) "NONSTATUTORY STOCK OPTION" means an Option not intended to
qualify as an incentive stock option within the meaning of Section 422 of the
Code and the regulations promulgated thereunder.

(r) "OFFICER" means a person who is an officer of the Company
within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.

(s) "OPTION" means a Nonstatutory Stock Option granted pursuant to
the Plan.

(t) "OPTION AGREEMENT" means a written agreement between the
Company and an Optionholder evidencing the terms and conditions of an individual
Option grant. Each Option Agreement shall be subject to the terms and conditions
of the Plan.

(u) "OPTIONHOLDER" means a person to whom an Option is granted
pursuant to the Plan or, if applicable, such other person who holds an
outstanding Option.

(v) "PLAN" means this Ditech Communication Corporation 1999
Non-Employee Directors' Stock Option Plan.

(w) "RULE 16B-3" means Rule 16b-3 promulgated under the Exchange
Act or any successor to Rule 16b-3, as in effect from time to time.

(x) "SECURITIES ACT" means the Securities Act of 1933, as amended.

3. ADMINISTRATION.

(a) ADMINISTRATION BY BOARD. The Board shall administer the Plan.
The Board may not delegate administration of the Plan to a committee.

(b) POWERS OF BOARD. The Board shall have the power, subject to,
and within the limitations of, the express provisions of the Plan:

(i) To determine the provisions of each Option to the
extent not specified in the Plan.

(ii) To construe and interpret the Plan and Options
granted under it, and to establish, amend and revoke rules and regulations for
its administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Option Agreement, in a
manner and to the extent it shall deem necessary or expedient to make the Plan
fully effective.

3.
<PAGE>

(iii) To amend the Plan or an Option as provided in Section
12.

(iv) Generally, to exercise such powers and to perform
such acts as the Board deems necessary or expedient to promote the best
interests of the Company which are not in conflict with the provisions of the
Plan.

4. SHARES SUBJECT TO THE PLAN.

(a) SHARE RESERVE. Subject to the provisions of Section 11
relating to adjustments upon changes in stock, the stock that may be issued
pursuant to Options shall not exceed in the aggregate three hundred thousand
(300,000) shares of Common Stock.

(b) REVERSION OF SHARES TO THE SHARE RESERVE. If any Option shall
for any reason expire or otherwise terminate, in whole or in part, without
having been exercised in full, the stock not acquired under such Option shall
revert to and again become available for issuance under the Plan.

(c) SOURCE OF SHARES. The stock subject to the Plan may be
unissued shares or reacquired shares, bought on the market or otherwise.

5. ELIGIBILITY.

Nondiscretionary Options as set forth in section 6 shall be granted
under the Plan to all Non-Employee Directors.

6. NON-DISCRETIONARY GRANTS.

Without any further action of the Board, each Non-Employee Director
shall be granted the following Options:

(a) INITIAL GRANTS. After the date of approval of the Plan by the
Board, each person who is appointed or elected for the first time to be a
Non-Employee Director other than at an Annual Meeting automatically shall, upon
the date of his or her appointment or election to be a Non-Employee Director by
the Board or stockholders of the Company, be granted an Initial Grant to
purchase the number of shares of Common Stock equal to the Initial Grant Number
on the terms and conditions set forth herein. The "Initial Grant Number" shall
be ten thousand (10,000) multiplied by the fraction equal (i) to the number of
months remaining from such date of appointment or election until the date of the
next Annual Meeting or, if no such date has been set then the first anniversary
of the previous year's Annual Meeting (with a fraction of a month rounded up to
the next whole month), divided by (ii) 12.

(b) ANNUAL GRANTS. On the day of each Annual Meeting immediately
following such Annual Meeting, each Non-Employee Director then serving as such
automatically shall be granted an Annual Grant to purchase ten thousand (10,000)
shares of Common Stock on the terms and conditions set forth herein; provided,
however, that an Annual Grant to a Non-Employee Director receiving an Annual
Grant for the first time, AND who was not a director of

4.
<PAGE>

the Company at the closing of the Company's initial public offering of its
Common Stock, shall be an option to purchase 20,000 shares of Common Stock.

7. OPTION PROVISIONS.

Each Option shall be in such form and shall contain such terms and
conditions as required by the Plan. Each Option shall contain such additional
terms and conditions, not inconsistent with the Plan, as the Board shall deem
appropriate. Each Option shall include (through incorporation of provisions
hereof by reference in the Option or otherwise) the substance of each of the
following provisions:

(a) TERM. No Option shall be exercisable after the expiration of
five (5) years from the date it was granted.

(b) EXERCISE PRICE. The exercise price of each Option shall be one
hundred percent (100%) of the Fair Market Value of the stock subject to the
Option on the date the Option is granted. Notwithstanding the foregoing, an
Option may be granted with an exercise price lower than that set forth in the
preceding sentence if such Option is granted pursuant to an assumption or
substitution for another option in a manner satisfying the provisions of Section
424(a) of the Code.

(c) CONSIDERATION. The purchase price of stock acquired pursuant
to an Option may be paid, to the extent permitted by applicable statutes and
regulations, in any combination of (i) cash or check, (ii) delivery to the
Company of other Common Stock, (ii) deferred payment or (iv) any other form of
legal consideration that may be acceptable to the Board and provided in the
Option Agreement; provided, however, that at any time that the Company is
incorporated in Delaware, payment of the Common Stock's "par value," as defined
in the Delaware General Corporation Law, shall not be made by deferred payment.

(d) TRANSFERABILITY. An Option shall not be transferable except by
will or by the laws of descent and distribution and shall be exercisable during
the lifetime of the Optionholder only by the Optionholder. Notwithstanding the
foregoing, the Optionholder may, by delivering written notice to the Company, in
a form satisfactory to the Company, designate a third party who, in the event of
the death of the Optionholder, shall thereafter be entitled to exercise the
Option.

(e) VESTING GENERALLY. Options shall be fully vested and
exercisable on the date of grant.

(f) TERMINATION OF CONTINUOUS SERVICE. In the event an
Optionholder's Continuous Service terminates (other than upon the Optionholder's
death or Disability), the Optionholder

5.
<PAGE>

may exercise his or her Option (to the extent that the Optionholder was entitled
to exercise it as of the date of termination) but only within such period of
time ending on the earlier of (i) the date three (3) months following the
termination of the Optionholder's Continuous Service, or (ii) the expiration of
the term of the Option as set forth in the Option Agreement. If, after
termination, the Optionholder does not exercise his or her Option within the
time specified in the Option Agreement, the Option shall terminate.

(g) EXTENSION OF TERMINATION DATE. If the exercise of the Option
following the termination of the Optionholder's Continuous Service (other than
upon the Optionholder's death or Disability) would be prohibited at any time
solely because the issuance of shares would violate the registration
requirements under the Securities Act, then the Option shall terminate on the
earlier of (i) the expiration of the term of the Option set forth in subsection
7(a) or (ii) the expiration of a period of three (3) months after the
termination of the Optionholder's Continuous Service during which the exercise
of the Option would not be in violation of such registration requirements.

(h) DISABILITY OF OPTIONHOLDER. In the event an Optionholder's
Continuous Service terminates as a result of the Optionholder's Disability, the
Optionholder may exercise his or her Option (to the extent that the Optionholder
was entitled to exercise it as of the date of termination), but only within such
period of time ending on the earlier of (i) the date twelve (12) months
following such termination or (ii) the expiration of the term of the Option as
set forth in the Option Agreement. If, after termination, the Optionholder does
not exercise his or her Option within the time specified herein, the Option
shall terminate.

(i) DEATH OF OPTIONHOLDER. In the event (i) an Optionholder's
Continuous Service terminates as a result of the Optionholder's death or (ii)
the Optionholder dies within the three-month period after the termination of the
Optionholder's Continuous Service for a reason other than death, then the Option
may be exercised (to the extent the Optionholder was entitled to exercise the
Option as of the date of death) by the Optionholder's estate, by a person who
acquired the right to exercise the Option by bequest or inheritance or by a
person designated to exercise the Option upon the Optionholder's death, but only
within the period ending on the earlier of (1) the date eighteen (18) months
following the date of death or (2) the expiration of the term of such Option as
set forth in the Option Agreement. If, after death, the Option is not exercised
within the time specified herein, the Option shall terminate.

8. COVENANTS OF THE COMPANY.

(a) AVAILABILITY OF SHARES. During the terms of the Options, the
Company shall keep available at all times the number of shares of Common Stock
required to satisfy such Options.

(b) SECURITIES LAW COMPLIANCE. The Company shall seek to obtain
from each regulatory commission or agency having jurisdiction over the Plan such
authority as may be required to grant Options and to issue and sell shares of
Common Stock upon exercise of the Options; provided, however, that this
undertaking shall not require the Company to register under the Securities Act
the Plan, any Option or any stock issued or issuable pursuant to any such
Option. If, after reasonable efforts, the Company is unable to obtain from any
such

6.
<PAGE>

regulatory commission or agency the authority which counsel for the Company
deems necessary for the lawful issuance and sale of stock under the Plan, the
Company shall be relieved from any liability for failure to issue and sell stock
upon exercise of such Options unless and until such authority is obtained.

9. USE OF PROCEEDS FROM STOCK.

Proceeds from the sale of stock pursuant to Options shall constitute
general funds of the Company.

10. MISCELLANEOUS.

(a) STOCKHOLDER RIGHTS. No Optionholder shall be deemed to be the
holder of, or to have any of the rights of a holder with respect to, any shares
subject to such Option unless and until such Optionholder has satisfied all
requirements for exercise of the Option pursuant to its terms.

(b) NO SERVICE RIGHTS. Nothing in the Plan or any instrument
executed or Option granted pursuant thereto shall confer upon any Optionholder
any right to continue to serve the Company as a Non-Employee Director or shall
affect the right of the Company or an Affiliate to terminate (i) the employment
of an Employee with or without notice and with or without cause, (ii) the
service of a Consultant pursuant to the terms of such Consultant's agreement
with the Company or an Affiliate or (iii) the service of a Director pursuant to
the Bylaws of the Company or an Affiliate, and any applicable provisions of the
corporate law of the state in which the Company or the Affiliate is
incorporated, as the case may be.

(c) INVESTMENT ASSURANCES. The Company may require an
Optionholder, as a condition of exercising or acquiring stock under any Option,
(i) to give written assurances satisfactory to the Company as to the
Optionholder's knowledge and experience in financial and business matters and/or
to employ a purchaser representative reasonably satisfactory to the Company who
is knowledgeable and experienced in financial and business matters and that he
or she is capable of evaluating, alone or together with the purchaser
representative, the merits and risks of exercising the Option; and (ii) to give
written assurances satisfactory to the Company stating that the Optionholder is
acquiring the stock subject to the Option for the Optionholder's own account and
not with any present intention of selling or otherwise distributing the stock.
The foregoing requirements, and any assurances given pursuant to such
requirements, shall be inoperative if (iii) the issuance of the shares upon the
exercise or acquisition of stock under the Option has been registered under a
then currently effective registration statement under the Securities Act or (iv)
as to any particular requirement, a determination is made by counsel for the
Company that such requirement need not be met in the circumstances under the
then applicable securities laws. The Company may, upon advice of counsel to the
Company, place legends on stock certificates issued under the Plan as such
counsel deems necessary or appropriate in order to comply with applicable
securities laws, including, but not limited to, legends restricting the transfer
of the stock.

7.
<PAGE>

(d) WITHHOLDING OBLIGATIONS. The Optionholder may satisfy any
federal, state or local tax withholding obligation relating to the exercise or
acquisition of stock under an Option by any of the following means (in addition
to the Company's right to withhold from any compensation paid to the
Optionholder by the Company) or by a combination of such means: (i) tendering a
cash payment; (ii) authorizing the Company to withhold shares from the shares of
the Common Stock otherwise issuable to the Optionholder as a result of the
exercise or acquisition of stock under the Option; or (iii) delivering to the
Company owned and unencumbered shares of the Common Stock.

11. ADJUSTMENTS UPON CHANGES IN STOCK.

(a) CAPITALIZATION ADJUSTMENTS. If any change is made in the stock
subject to the Plan, or subject to any Option, without the receipt of
consideration by the Company (through merger, consolidation, reorganization,
recapitalization, reincorporation, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or other transaction not involving the
receipt of consideration by the Company), the Plan will be appropriately
adjusted in the class(es) and maximum number of securities subject both to the
Plan pursuant to subsection 4(a) and to the nondiscretionary Options specified
in Section 5, and the outstanding Options will be appropriately adjusted in the
class(es) and number of securities and price per share of stock subject to such
outstanding Options. The Board shall make such adjustments, and its
determination shall be final, binding and conclusive. (The conversion of any
convertible securities of the Company shall not be treated as a transaction
"without receipt of consideration" by the Company.)

(b) CHANGE IN CONTROL--ASSET SALE, MERGER, CONSOLIDATION OR
REVERSE MERGER. In the event of (i) a dissolution, liquidation or sale of all or
substantially all of the assets of the Company, (ii) a merger or consolidation
in which the Company is not the surviving corporation or (iii) a reverse merger
in which the Company is the surviving corporation but the shares of Common Stock
outstanding immediately preceding the merger are converted by virtue of the
merger into other property, whether in the form of securities, cash or
otherwise, then (i) any surviving corporation or acquiring corporation shall
assume any Options outstanding under the Plan or shall substitute similar
Options (including an option to acquire the same consideration paid to the
stockholders in the transaction described in this subsection 11(b) for those
outstanding under the Plan, or (ii) in the event any surviving corporation or
acquiring corporation refuses to assume such Options or to substitute similar
Options for those outstanding under the Plan, then such Options shall terminate
if not exercised prior to such event.

12. AMENDMENT OF THE PLAN AND OPTIONS.

(a) AMENDMENT OF PLAN. The Board at any time, and from time to
time, may amend the Plan. However, except as provided in Section 11 relating to
adjustments upon changes in stock, no amendment shall be effective unless
approved by the stockholders of the Company to the extent stockholder approval
is necessary to satisfy the requirements of Rule 16b-3 or any Nasdaq or
securities exchange listing requirements.

8.
<PAGE>

(b) STOCKHOLDER APPROVAL. The Board may, in its sole discretion,
submit any other amendment to the Plan for stockholder approval.

(c) NO IMPAIRMENT OF RIGHTS. Rights under any Option granted
before amendment of the Plan shall not be impaired by any amendment of the Plan
unless (i) the Company requests the consent of the Optionholder and (ii) the
Optionholder consents in writing.

(d) AMENDMENT OF OPTIONS. The Board at any time, and from time to
time, may amend the terms of any one or more Options; provided, however, that
the rights under any Option shall not be impaired by any such amendment unless
(i) the Company requests the consent of the Optionholder and (ii) the
Optionholder consents in writing.

13. TERMINATION OR SUSPENSION OF THE PLAN.

(a) PLAN TERM. The Board may suspend or terminate the Plan at any
time. Unless sooner terminated, the Plan shall terminate on the day before the
tenth (10th) anniversary of the date the Plan is adopted by the Board or
approved by the stockholders of the Company, whichever is earlier. No Options
may be granted under the Plan while the Plan is suspended or after it is
terminated.

(b) NO IMPAIRMENT OF RIGHTS. Suspension or termination of the Plan
shall not impair rights and obligations under any Option granted while the Plan
is in effect except with the written consent of the Optionholder.

14. EFFECTIVE DATE OF PLAN.

The Plan shall become effective on the date the Plan is adopted by the
Board but no Option shall be exercised unless and until the Plan has been
approved by the stockholders of the Company, which approval shall be within
twelve (12) months before or after the date the Plan is adopted by the Board.

15. CHOICE OF LAW.

All questions concerning the construction, validity and interpretation
of this Plan shall be governed by the law of the State of California, without
regard to such state's conflict of laws rules.

9.
<PAGE>

DITECH CORPORATION

1999 EMPLOYEE STOCK PURCHASE PLAN

APPROVED BY THE BOARD OF DIRECTORS MARCH 5, 1999
APPROVED BY STOCKHOLDERS APRIL 21, 1999
AMENDED BY THE BOARD OF DIRECTORS JULY 25, 2000
AMENDMENT APPROVED BY STOCKHOLDERS ________, 2000
TERMINATION DATE MARCH 4, 2009

1. PURPOSE.

(a) The purpose of this Employee Stock Purchase Plan (the "Plan")
is to provide a means by which employees of Ditech Corporation (the "Company")
and its Affiliates, as defined in subparagraph 1(b), which are designated as
provided in subparagraph 2(b), may be given an opportunity to purchase common
stock of the Company.

(b) The word "Affiliate" as used in the Plan means any parent
corporation or subsidiary corporation of the Company, as those terms are defined
in Sections 424(e) and (f), respectively, of the Internal Revenue Code of 1986,
as amended (the "Code").

(c) The Company, by means of the Plan, seeks to retain the
services of its employees, to secure and retain the services of new employees,
and to provide incentives for such persons to exert maximum efforts for the
success of the Company.

(d) The Company intends that the rights to purchase stock of the
Company granted under the Plan be considered options issued under an "employee
stock purchase plan" as that term is defined in Section 423(b) of the Code.

2. ADMINISTRATION.

(a) The Plan shall be administered by the Board of Directors (the
"Board") of the Company unless and until the Board delegates administration to a
Committee, as provided in subparagraph 2(c). Whether or not the Board has
delegated administration, the Board shall have the final power to determine all
questions of policy and expediency that may arise in the administration of the
Plan.

(b) The Board shall have the power, subject to, and within the
limitations of, the express provisions of the Plan:

(i) To determine when and how rights to purchase stock of
the Company shall be granted and the provisions of each offering of such rights
(which need not be identical).

(ii) To designate from time to time which Affiliates of
the Company shall be eligible to participate in the Plan.

1.
<PAGE>

(iii) To construe and interpret the Plan and rights granted
under it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan, in a manner and to the extent it
shall deem necessary or expedient to make the Plan fully effective.

(iv) To amend the Plan as provided in paragraph 13.

(v) Generally, to exercise such powers and to perform
such acts as the Board deems necessary or expedient to promote the best
interests of the Company and its Affiliates and to carry out the intent that the
Plan be treated as an "employee stock purchase plan" within the meaning of
Section 423 of the Code.

(c) The Board may delegate administration of the Plan to a
Committee composed of not fewer than two (2) members of the Board (the
"Committee"). If administration is delegated to a Committee, the Committee shall
have, in connection with the administration of the Plan, the powers theretofore
possessed by the Board, subject, however, to such resolutions, not inconsistent
with the provisions of the Plan, as may be adopted from time to time by the
Board. The Board may abolish the Committee at any time and revest in the Board
the administration of the Plan.

3. SHARES SUBJECT TO THE PLAN.

(a) Subject to the provisions of paragraph 12 relating to
adjustments upon changes in stock, the stock that may be sold pursuant to rights
granted under the Plan shall not exceed in the aggregate four hundred sixteen
thousand six hundred sixty-six (416,666) shares of the Company's common stock
(the "Common Stock"). If any right granted under the Plan shall for any reason
terminate without having been exercised, the Common Stock not purchased under
such right shall again become available for the Plan.

(b) The stock subject to the Plan may be unissued shares or
reacquired shares, bought on the market or otherwise.

4. GRANT OF RIGHTS; OFFERING.

The Board or the Committee may from time to time grant or provide for
the grant of rights to purchase Common Stock of the Company under the Plan to
eligible employees (an "Offering") on a date or dates (the "Offering Date(s)")
selected by the Board or the Committee. Each Offering shall be in such form and
shall contain such terms and conditions as the Board or the Committee shall deem
appropriate, which shall comply with the requirements of Section 423(b)(5) of
the Code that all employees granted rights to purchase stock under the Plan
shall have the same rights and privileges. The terms and conditions of an
Offering shall be incorporated by reference into the Plan and treated as part of
the Plan. The provisions of separate Offerings need not be identical, but each
Offering shall include (through incorporation of the provisions of this Plan by
reference in the document comprising the Offering or otherwise) the period
during which the Offering shall be effective, which period shall not exceed
twenty-seven

2.
<PAGE>

(27) months beginning with the Offering Date, and the substance of the
provisions contained in paragraphs 5 through 8, inclusive.

5. ELIGIBILITY.

(a) Rights may be granted only to employees of the Company or, as
the Board or the Committee may designate as provided in subparagraph 2(b), to
employees of any Affiliate of the Company. Except as provided in subparagraph
5(b), an employee of the Company or any Affiliate shall not be eligible to be
granted rights under the Plan unless, on the Offering Date, such employee has
been in the employ of the Company or any Affiliate for such continuous period
preceding such grant as the Board or the Committee may require, but in no event
shall the required period of continuous employment be greater than two (2)
years. In addition, unless otherwise determined by the Board or the Committee
and set forth in the terms of the applicable Offering, no employee of the
Company or any Affiliate shall be eligible to be granted rights under the Plan,
unless, on the Offering Date, such employee's customary employment with the
Company or such Affiliate is for at least twenty (20) hours per week and at
least five (5) months per calendar year.

(b) The Board or the Committee may provide that each person who,
during the course of an Offering, first becomes an eligible employee of the
Company or designated Affiliate will, on a date or dates specified in the
Offering which coincides with the day on which such person becomes an eligible
employee or occurs thereafter, receive a right under that Offering, which right
shall thereafter be deemed to be a part of that Offering. Such right shall have
the same characteristics as any rights originally granted under that Offering,
as described herein, except that:

(i) the date on which such right is granted shall be the
"Offering Date" of such right for all purposes, including determination of the
exercise price of such right;

(ii) the period of the Offering with respect to such right
shall begin on its Offering Date and end coincident with the end of such
Offering; and

(iii) the Board or the Committee may provide that if such
person first becomes an eligible employee within a specified period of time
before the end of the Offering, he or she will not receive any right under that
Offering.

(c) No employee shall be eligible for the grant of any rights
under the Plan if, immediately after any such rights are granted, such employee
owns stock possessing five percent (5%) or more of the total combined voting
power or value of all classes of stock of the Company or of any Affiliate. For
purposes of this subparagraph 5(c), the rules of Section 424(d) of the Code
shall apply in determining the stock ownership of any employee, and stock which
such employee may purchase under all outstanding rights and options shall be
treated as stock owned by such employee.

(d) An eligible employee may be granted rights under the Plan only
if such rights, together with any other rights granted under "employee stock
purchase plans" of the Company

3.
<PAGE>

and any Affiliates, as specified by Section 423(b)(8) of the Code, do not permit
such employee's rights to purchase stock of the Company or any Affiliate to
accrue at a rate which exceeds twenty-five thousand dollars ($25,000) of fair
market value of such stock (determined at the time such rights are granted) for
each calendar year in which such rights are outstanding at any time.

(e) Officers of the Company and any designated Affiliate shall be
eligible to participate in Offerings under the Plan; PROVIDED, HOWEVER, that the
Board may provide in an Offering that certain employees who are highly
compensated employees within the meaning of Section 423(b)(4)(D) of the Code
shall not be eligible to participate.

6. RIGHTS; PURCHASE PRICE.

(a) On each Offering Date, each eligible employee, pursuant to an
Offering made under the Plan, shall be granted the right to purchase up to the
number of shares of Common Stock of the Company purchasable with a percentage
designated by the Board or the Committee not exceeding ten percent (10%) of such
employee's Earnings (as defined in subparagraph 7(a)) during the period which
begins on the Offering Date (or such later date as the Board or the Committee
determines for a particular Offering) and ends on the date stated in the
Offering, which date shall be no later than the end of the Offering. The Board
or the Committee shall establish one or more dates during an Offering (the
"Purchase Date(s)") on which rights granted under the Plan shall be exercised
and purchases of Common Stock carried out in accordance with such Offering.

(b) In connection with each Offering made under the Plan, the
Board or the Committee may specify a maximum number of shares that may be
purchased by any employee as well as a maximum aggregate number of shares that
may be purchased by all eligible employees pursuant to such Offering. In
addition, in connection with each Offering that contains more than one Purchase
Date, the Board or the Committee may specify a maximum aggregate number of
shares which may be purchased by all eligible employees on any given Purchase
Date under the Offering. If the aggregate purchase of shares upon exercise of
rights granted under the Offering would exceed any such maximum aggregate
number, the Board or the Committee shall make a pro rata allocation of the
shares available in as nearly a uniform manner as shall be practicable and as it
shall deem to be equitable.

(d) The purchase price of stock acquired pursuant to rights
granted under the Plan shall be not less than the lesser of:

(i) an amount equal to eighty-five percent (85%) of the
fair market value of the stock on the Offering Date; or

(ii) an amount equal to eighty-five percent (85%) of the
fair market value of the stock on the Purchase Date.

4.
<PAGE>

7. PARTICIPATION; WITHDRAWAL; TERMINATION.

(a) An eligible employee may become a participant in the Plan
pursuant to an Offering by delivering a participation agreement to the Company
within the time specified in the Offering, in such form as the Company provides.
Each such agreement shall authorize payroll deductions of up to the maximum
percentage specified by the Board or the Committee of such employee's Earnings
during the Offering. "Earnings" is defined as an employee's wages (including
amounts thereof elected to be deferred by the employee, that would otherwise
have been paid, under any arrangement established by the Company that is
intended to comply with Section 125, Section 401(k), Section 402(h) or Section
403(b) of the Code or that provides non-qualified deferred compensation), which
shall include overtime pay, bonuses and commissions, but shall exclude incentive
pay, profit sharing, other remuneration paid directly to the employee, the cost
of employee benefits paid for by the Company or an Affiliate, education or
tuition reimbursements, imputed income arising under any group insurance or
benefit program, traveling expenses, business and moving expense reimbursements,
income received in connection with stock options, contributions made by the
Company or an Affiliate under any employee benefit plan, and similar items of
compensation, as determined by the Board or the Committee. The payroll
deductions made for each participant shall be credited to an account for such
participant under the Plan and shall be deposited with the general funds of the
Company. A participant may reduce (including to zero) or increase such payroll
deductions, and an eligible employee may begin such payroll deductions, after
the beginning of any Offering only as provided for in the Offering. A
participant may make additional payments into his or her account only if
specifically provided for in the Offering and only if the participant has not
had the maximum amount withheld during the Offering.

(b) At any time during an Offering, a participant may terminate
his or her payroll deductions under the Plan and withdraw from the Offering by
delivering to the Company a notice of withdrawal in such form as the Company
provides. Such withdrawal may be elected at any time prior to the end of the
Offering except as provided by the Board or the Committee in the Offering. Upon
such withdrawal from the Offering by a participant, the Company shall distribute
to such participant all of his or her accumulated payroll deductions (reduced to
the extent, if any, such deductions have been used to acquire stock for the
participant) under the Offering, without interest, and such participant's
interest in that Offering shall be automatically terminated. A participant's
withdrawal from an Offering will have no effect upon such participant's
eligibility to participate in any other Offerings under the Plan but such
participant will be required to deliver a new participation agreement in order
to participate in subsequent Offerings under the Plan.

(c) Rights granted pursuant to any Offering under the Plan shall
terminate immediately upon cessation of any participating employee's employment
with the Company and any designated Affiliate, for any reason, and the Company
shall distribute to such terminated employee all of his or her accumulated
payroll deductions (reduced to the extent, if any, such deductions have been
used to acquire stock for the terminated employee), under the Offering, without
interest.

5.
<PAGE>

(d) Rights granted under the Plan shall not be transferable by a
participant otherwise than by will or the laws of descent and distribution, or
by a beneficiary designation as provided in paragraph 14 and, otherwise during
his or her lifetime, shall be exercisable only by the person to whom such rights
are granted.

8. EXERCISE.

(a) On each Purchase Date specified therefor in the relevant
Offering, each participant's accumulated payroll deductions and other additional
payments specifically provided for in the Offering (without any increase for
interest) will be applied to the purchase of whole shares of stock of the
Company, up to the maximum number of shares permitted pursuant to the terms of
the Plan and the applicable Offering, at the purchase price specified in the
Offering. No fractional shares shall be issued upon the exercise of rights
granted under the Plan. The amount, if any, of accumulated payroll deductions
remaining in each participant's account after the purchase of shares which is
less than the amount required to purchase one share of stock on the final
Purchase Date of an Offering shall be held in each such participant's account
for the purchase of shares under the next Offering under the Plan, unless such
participant withdraws from such next Offering, as provided in subparagraph 7(b),
or is no longer eligible to be granted rights under the Plan, as provided in
paragraph 5, in which case such amount shall be distributed to the participant
after such final Purchase Date, without interest. The amount, if any, of
accumulated payroll deductions remaining in any participant's account after the
purchase of shares which is equal to the amount required to purchase whole
shares of stock on the final Purchase Date of an Offering shall be distributed
in full to the participant after such Purchase Date, without interest.

(b) No rights granted under the Plan may be exercised to any
extent unless the shares to be issued upon such exercise under the Plan
(including rights granted thereunder) are covered by an effective registration
statement pursuant to the Securities Act of 1933, as amended (the "Securities
Act") and the Plan is in material compliance with all applicable state, foreign
and other securities and other laws applicable to the Plan. If on a Purchase
Date in any Offering hereunder the Plan is not so registered or in such
compliance, no rights granted under the Plan or any Offering shall be exercised
on such Purchase Date, and the Purchase Date shall be delayed until the Plan is
subject to such an effective registration statement and such compliance, except
that the Purchase Date shall not be delayed more than twelve (12) months and the
Purchase Date shall in no event be more than twenty-seven (27) months from the
Offering Date. If on the Purchase Date of any Offering hereunder, as delayed to
the maximum extent permissible, the Plan is not registered and in such
compliance, no rights granted under the Plan or any Offering shall be exercised
and all payroll deductions accumulated during the Offering (reduced to the
extent, if any, such deductions have been used to acquire stock) shall be
distributed to the participants, without interest.

9. COVENANTS OF THE COMPANY.

(a) During the terms of the rights granted under the Plan, the
Company shall keep available at all times the number of shares of stock required
to satisfy such rights.

6.
<PAGE>

(b) The Company shall seek to obtain from each federal, state,
foreign or other regulatory commission or agency having jurisdiction over the
Plan such authority as may be required to issue and sell shares of stock upon
exercise of the rights granted under the Plan. If, after reasonable efforts, the
Company is unable to obtain from any such regulatory commission or agency the
authority which counsel for the Company deems necessary for the lawful issuance
and sale of stock under the Plan, the Company shall be relieved from any
liability for failure to issue and sell stock upon exercise of such rights
unless and until such authority is obtained.

10. USE OF PROCEEDS FROM STOCK.

Proceeds from the sale of stock pursuant to rights granted under the
Plan shall constitute general funds of the Company.

11. RIGHTS AS A STOCKHOLDER.

A participant shall not be deemed to be the holder of, or to have any
of the rights of a holder with respect to, any shares subject to rights granted
under the Plan unless and until the participant's shareholdings acquired upon
exercise of rights under the Plan are recorded in the books of the Company.

12. ADJUSTMENTS UPON CHANGES IN STOCK.

(a) If any change is made in the stock subject to the Plan, or
subject to any rights granted under the Plan, due to a change in corporate
capitalization and without the receipt of consideration by the Company (through
reincorporation, stock dividend, stock split, reverse stock split, combination
or reclassification of shares), the Plan will be appropriately adjusted in the
class(es) and maximum number of securities subject to the Plan pursuant to
subsection 3(a), and the outstanding rights will be appropriately adjusted in
the class(es) and number of securities and price per share of stock subject to
such outstanding rights. Such adjustments shall be made by the Board, the
determination of which shall be final, binding and conclusive.

(b) In the event of: (1) a dissolution or liquidation of the
Company; (2) a sale of all or substantially all of the assets of the Company,
(3) a merger or consolidation in which the Company is not the surviving
corporation, (4) a reverse merger in which the Company is the surviving
corporation but the shares of Common Stock outstanding immediately preceding the
merger are converted by virtue of the merger into other property, whether in the
form of securities, cash or otherwise, (5) an acquisition by any person, entity
or group within the meaning of Section 13(d) or 14(d) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), or any comparable successor
provisions (excluding any employee benefit plan, or related trust, sponsored or
maintained by the Company or a Subsidiary) of the beneficial ownership (within
the meaning of Rule 13d-3 promulgated under the Exchange Act, or comparable
successor rule) of securities of the Company representing at least fifty percent
(50%) of the combined voting power entitled to vote in the election of
Directors, or (6) the individuals who, as of the date of the adoption of this
Plan, are members of the Board (the "Incumbent Board"), cease for any reason to
constitute at least fifty percent (50%) of the Board (if the election, or
nomination for election, by the Company's stockholders of any new director was
approved by a

7.
<PAGE>

vote of at least fifty percent (50%) of the Incumbent Board, such new director
shall be considered as a member of the Incumbent Board), then, as determined by
the Board in its sole discretion, (i) any surviving corporation may assume
outstanding rights or substitute similar rights for those under the Plan, (ii)
such rights may continue in full force and effect, or (iii) participants'
accumulated payroll deductions may be used to purchase Common Stock immediately
prior to the transaction described above and the participants' rights under the
ongoing Offering terminated.

13. AMENDMENT OF THE PLAN.

(a) The Board at any time, and from time to time, may amend the
Plan. However, except as provided in paragraph 12 relating to adjustments upon
changes in stock, no amendment shall be effective unless approved by the
stockholders of the Company within twelve (12) months before or after the
adoption of the amendment, where the amendment will:

(i) Increase the number of shares reserved for rights
under the Plan;

(ii) Modify the provisions as to eligibility for
participation in the Plan (to the extent such modification requires stockholder
approval in order for the Plan to obtain employee stock purchase plan treatment
under Section 423 of the Code or to comply with the requirements of Rule 16b-3
promulgated under the Securities Exchange Act of 1934, as amended ("Rule
16b-3")); or

(iii) Modify the Plan in any other way if such modification
requires stockholder approval in order for the Plan to obtain employee stock
purchase plan treatment under Section 423 of the Code or to comply with the
requirements of Rule 16b-3.

It is expressly contemplated that the Board may amend the Plan in any respect
the Board deems necessary or advisable to provide eligible employees with the
maximum benefits provided or to be provided under the provisions of the Code and
the regulations promulgated thereunder relating to employee stock purchase plans
and/or to bring the Plan and/or rights granted under it into compliance
therewith.

(b) Rights and obligations under any rights granted before
amendment of the Plan shall not be impaired by any amendment of the Plan, except
with the consent of the person to whom such rights were granted, or except as
necessary to comply with any laws or governmental regulations, or except as
necessary to ensure that the Plan and/or rights granted under the Plan comply
with the requirements of Section 423 of the Code.

14. DESIGNATION OF BENEFICIARY.

(a) A participant may file a written designation of a beneficiary
who is to receive any shares and cash, if any, from the participant's account
under the Plan in the event of such participant's death subsequent to the end of
an Offering but prior to delivery to the participant of such shares and cash. In
addition, a participant may file a written designation of a beneficiary

8.
<PAGE>

who is to receive any cash from the participant's account under the Plan in the
event of such participant's death during an Offering.

(b) Such designation of beneficiary may be changed by the
participant at any time by written notice. In the event of the death of a
participant and in the absence of a beneficiary validly designated under the
Plan who is living at the time of such participant's death, the Company shall
deliver such shares and/or cash to the executor or administrator of the estate
of the participant, or if no such executor or administrator has been appointed
(to the knowledge of the Company), the Company, in its sole discretion, may
deliver such shares and/or cash to the spouse or to any one or more dependents
or relatives of the participant, or if no spouse, dependent or relative is known
to the Company, then to such other person as the Company may designate.

15. TERMINATION OR SUSPENSION OF THE PLAN.

(a) The Board in its discretion, may suspend or terminate the Plan
at any time. No rights may be granted under the Plan while the Plan is suspended
or after it is terminated.

(b) Rights and obligations under any rights granted while the Plan
is in effect shall not be altered or impaired by suspension or termination of
the Plan, except as expressly provided in the Plan or with the consent of the
person to whom such rights were granted, or except as necessary to comply with
any laws or governmental regulation, or except as necessary to ensure that the
Plan and/or rights granted under the Plan comply with the requirements of
Section 423 of the Code.

(c) Notwithstanding the foregoing, the Plan shall terminate and no
rights may be granted under the Plan after the tenth anniversary of the
Effective Date.

16. EFFECTIVE DATE OF PLAN.

The Plan shall become effective on the day immediately prior to the
effectiveness of the Company's registration statement under the Securities Act
with respect to the initial public offering of shares of the Company's Common
Stock (the "Effective Date"), but no rights granted under the Plan shall be
exercised unless and until the Plan has been approved by the stockholders of the
Company within twelve (12) months before or after the date the Plan is adopted
by the Board or the Committee, which date may be prior to the Effective Date.

9.
<PAGE>

DITECH COMMUNICATIONS CORPORATION

ANNUAL MEETING OF STOCKHOLDERS

FRIDAY, SEPTEMBER 22, 2000
11:00 A.M. (LOCAL TIME)

OFFICE OF DITECH COMMUNICATIONS CORPORATION
825 E. MIDDLEFIELD ROAD
MOUNTAIN VIEW, CALIFORNIA 94043

DITECH COMMUNICATIONS CORPORATION
825 E. MIDDLEFIELD ROAD, MOUNTAIN VIEW, CALIFORNIA 94043 PROXY
--------------------------------------------------------------------------------

PROXY SOLICITED BY THE BOARD OF DIRECTORS FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON SEPTEMBER 22, 2000

The undersigned hereby appoints Timothy K. Montgomery and William J. Tamblyn,
and each of them, as attorneys and proxies of the undersigned, with full
power of substitution, to vote all of the shares of stock of Ditech
Communications Corporation which the undersigned may be entitled to vote at
the Annual Meeting of Stockholders of Ditech Communications Corporation to be
held at the offices of Ditech Communications Corporation, 825 E. Middlefield
Road, Mountain View, California 94043, on Friday, September 22, 2000 at
11:00 a.m. (local time), and at any and all postponements, continuations and
adjournments thereof, with all powers that the undersigned would possess if
personally present, upon and in respect of the following matters and in
accordance with the following instructions, with discretionary authority as
to any and all other matters that may properly come before the meeting.

UNLESS A CONTRARY DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED FOR ALL
NOMINEES LISTED IN PROPOSAL 1 AND FOR PROPOSALS 2, 3, 4, 5 AND 6 AS MORE
SPECIFICALLY DESCRIBED IN THE PROXY STATEMENT. IF SPECIFIC INSTRUCTIONS ARE
INDICATED, THIS PROXY WILL BE VOTED IN ACCORDANCE THEREWITH.

PLEASE VOTE, DATE AND PROMPTLY RETURN THIS PROXY IN THE ENCLOSED RETURN
ENVELOPE WHICH IS POSTAGE PREPAID IF MAILED IN THE UNITED STATES.

<PAGE>

MANAGEMENT RECOMMENDS A VOTE FOR THE NOMINEES FOR DIRECTOR LISTED BELOW.

<TABLE>
<S><C>
1. To elect three directors 01 Peter Y. Chung 03 Andrei Manoliu / / Vote FOR / / Vote WITHHELD
to hold office until the 02 Kenneth E. Jones all nominees from all nominees
2003 Annual Meeting (except as marked)
of Stockholders.
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(INSTRUCTIONS: TO WITHHOLD AUTHORITY TO VOTE FOR ANY NOMINEE(S), | |
WRITE THE NUMBER(S) OF THE NOMINEE(S) IN THE BOX PROVIDED TO THE RIGHT.) --------------------------------------------

- PLEASE FOLD HERE -

MANAGEMENT RECOMMENDS A VOTE FOR PROPOSALS 2, 3, 4, 5, AND 6.

2. To approve an amendment to Ditech's 1998 Stock Option Plan to change the
aggregate number of shares of Common Stock authorized for issuance under the / / For / / Against / / Abstain
plan from 1,856,082 to 2,856,082.

3. To approve an amendment to Ditech's 1999 Non-Employee Directors' Stock
Option Plan to change the aggregate number of shares of Common Stock / / For / / Against / / Abstain
authorized for issuance under the plan from 200,000 to 300,000.

4. To approve an amendment to Ditech's Employee Stock Purchase Plan to change
the aggregate number of shares of Common Stock authorized for issuance under / / For / / Against / / Abstain
the plan from 266,666 to 416,666.

5. To approve an amendment to Ditech's Certificate of Incorporation to
increase the number of authorized shares of Common Stock to 200,000,000. / / For / / Against / / Abstain

6. To ratify the selection of PricewaterhouseCoopers LLP as independent / / For / / Against / / Abstain
auditors of Ditech for its fiscal year ending April 30, 2001.

Address Change? Mark Box / / Dated: ________________________
Indicate changes below:
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Signature(s) in Box

Please sign exactly as your name appears
hereon. If the stock is registered in the
names of two or more persons, each should
sign. Executors, administrators, trustees,
guardians and attorneys-in-fact should add
their titles. If signer is a corporation,
please give full corporate name and have a
duly authorized officer sign, stating title.
If signer is a partnership, please sign in
partnership name by authorized person.
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