DITECH CORP, 10-K405, 2000-07-31

DITECH CORP
10-K405, 2000-07-31
TELEPHONE & TELEGRAPH APPARATUS

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

(MARK ONE)

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.

For the Fiscal Year Ended April 30, 2000

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.

For the Transition Period From To

COMMISSION FILE NUMBER: 000-26209

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

DITECH COMMUNICATIONS CORPORATION
(Exact Name of Registrant as Specified in its Charter)

DELAWARE

(State or Other Jurisdiction of Incorporation or Organization)

[94-2935531]
(I.R.S. Employer Identification No.)

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

825 East Middlefield Road
Mountain View, CA 94043

(650) 623-1300

(Address, Including Zip Code, of Registrant's Principal Executive Offices and
Telephone Number, Including Area Code)

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

Securities Registered Pursuant to Section 12(B) of the Act: None

Securities Registered Pursuant to Section 12(G) of the Act: Common Stock,
$.001 Par Value

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
incorporated by reference to Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

The aggregate market value of voting stock held by non-affiliates of the
Registrant was approximately $1,565,125,393 as of July 18, 2000, based upon
the closing price on the Nasdaq National Market reported for such date.
Excludes an aggregate of 9,479,687 shares of common stock held by officers
and directors and by each person known by the registrant to own 5% or more of
the outstanding common stock. Exclusion of shares held by any of these
persons should not be construed to indicate that such person is an affiliate
of the registrant.

The number of shares outstanding of the Registrant's Common Stock on July
18, 2000 was 28,494,003 shares.

DOCUMENTS INCORPORATED BY REFERENCE

None.

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DITECH COMMUNICATIONS CORPORATION
FORM 10-K

INDEX

PART I

PAGE
----

<S> <C> <C>
Item 1 - Business ............................................................................................................. 2
Item 2 - Properties ........................................................................................................... 11
Item 3 - Legal Proceedings .................................................................................................... 12
Item 4 - Submission of Matters to a vote of Security Holders .................................................................. 12

PART II

Item 5 - Market for Registrant's Common Equity and Related Stockholder Matters ................................................ 12
Item 6 - Selected Financial Data .............................................................................................. 12
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations ................................ 15
Item 7A - Quantitative and Qualitative Disclosure About Market Risk ........................................................... 28
Item 8 - Financial Statements and Supplementary Data .......................................................................... 29
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ................................. 48

PART III

Item 10 - Directors and Executive Officers of the Registrant .................................................................. 49
Item 11 - Executive Compensation .............................................................................................. 52
Item 12 - Security Ownership of Certain Beneficial Owners and Management ...................................................... 56
Item 13 - Certain Relationships and Related Transactions ...................................................................... 58

PART IV

Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K ..................................................... 58
Item 15 - Exhibits and Financial Statement Schedules .......................................................................... 59
SIGNATURES .................................................................................................................... 61
</TABLE>

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TRADEMARKS:

The name Ditech Communications Corporation is a registered trademark of
Ditech. Ditech has applied for trademarks for the following: Ditech, the DART
acronym, and the wave design logo. This Annual Report on Form 10-K also includes
trademarks of companies other than Ditech.

iii

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DITECH COMMUNICATIONS CORPORATION

PART I

ITEM 1 - BUSINESS

GENERAL

This Annual Report contains forward-looking statements that relate to future
events or future financial performance. In some cases, forward looking
statements can be identified by terminology such as "may", "will", "should",
"expects", "plans", "anticipates", "believes", "estimates", "predicts",
"intends", "potential" or "continue" or the negative of such terms or other
comparable terminology. These statements are only predictions. Although we
believe that the expectations reflected in the forward looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Actual results could differ materially from those anticipated
in these forward-looking statements as a result of various factors, including
the risks outlined under "Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations - Future Growth and Operating
Results Subject to Risk" and elsewhere in this Annual Report. All
forward-looking statements included in this document are based on information
available to us on the date hereof. We assume no obligation to update any such
forward-looking statements.

Ditech Communications Corporation (Ditech) is a global telecommunications
equipment supplier for voice and data networks. Our voice products are echo
cancellers, which eliminate echo, a significant problem in existing and emerging
voice networks. Our data products are optical communications networking
products, which enable telephone companies to quickly and cost-effectively
expand network capacity to handle the new bandwidth demands of the Internet age.

We market our products domestically through a direct sales force.
Internationally, we market our products through a direct sales force,
value-added resellers, system integrators, and distributors.

Ditech was originally incorporated as Phone Info. Inc. in July 1983. In March
1997, we changed our name to Ditech Corporation. Ditech Corporation
reincorporated in Delaware in April 1999 and changed its name to Ditech
Communications Corporation. The mailing address for our corporate headquarters
is 825 East Middlefield Road, Mountain View, California 94043, and our telephone
number is 650-623-1300.

ECHO CANCELLATION MARKET

In the current deregulated market, voice quality is a key competitive
differentiator for telecommunication service providers. One of the primary
challenges faced by service providers in delivering quality voice communication
is the elimination of echo. Echo results from signal reflection at the "hybrid,"
commonly the point where two wires of the local network meet the four wires of
the long distance network. The hybrid is not completely efficient in carrying
the electrical energy from the four-wire network to the two-wire network and a
certain amount of electrical energy or voice signal is reflected back from the
hybrid towards the speaker. Echo is present whenever the one-time delay of a
rebounded voice signal exceeds 16 milliseconds. If the delay exceeds 32
milliseconds, the quality of the voice call begins to degrade and an echo is
reflected back to the person speaking. When these echo problems are present,
people describe the effect as their voices sounding hollow or like someone
talking in a tunnel. Delays, either due to a long transmission path, as in a
long distance telephone call, or due to the complex signal hand-off from one
network to another, for instance digital wireless or satellite voice calls,
exacerbate the effect of echo. Therefore, most long distance, digital wireless
and satellite calls require echo cancellation. Delays are also introduced as
intelligent processing equipment is increasingly

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incorporated into voice networks. Digital processing of voice signals requires
time to compress and decompress and route signals through networks. As there is
a greater shift towards voice-over-packet, which is a means of packaging voice
signals into units of digital data for efficient transmission, these processing
delays will continue to increase.

In addition to dealing with the problem of echo, service providers must also
address the problems of background noise and high and low voice levels.
Background noise is a particularly acute problem in wireless voice networks,
where users are attempting to use their wireless handset in a noisy environment,
such as an airport terminal or in a car. When voice calls are routed between the
networks of different service providers, particularly on international calls,
the voice of the speaker is often too high or too low for comfortable listening.

To address these voice quality problems, service providers deploy echo
cancellation technology that quickly analyzes all voice channels and implements
counter-measures to solve any problem present. When an echo signal is detected,
the echo canceller cancels the echo. If the echo canceller is sophisticated
enough, it can also detect and cancel background noise as well as raise or lower
the voice signal for more comfortable listening.

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

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

OUR ECHO CANCELLATION SOLUTIONS

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

EFFICIENT ARCHITECTURAL APPROACH. Our dynamic allocation of resource technology
is designed to solve the echo problem more efficiently than other solutions, by
applying processing power only when and where it is needed. By using our dynamic
allocation of resources technology, a single digital processor can monitor
multiple channels and dynamically assign the full processor resources to each
echo problem as it arises. Using this efficient architectural approach, we can
build our echo cancellation products with fewer dedicated processors and fewer
memory integrated circuits, which reduces product size and power consumption
requirements.

TIME-TO-MARKET ADVANTAGE. Based on an intelligent software algorithm, which is a
sophisticated process or set of rules for our software to address an array of
voice quality problems, our dynamic allocation of resources approach enables us
to utilize off-the-shelf circuits and digital signal processors. Competitive
echo cancellation solutions using application specific integrated circuits are
more expensive to design, require more development time and are difficult to
upgrade. Our approach leverages rapid technological advances in the commercial

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integrated circuit and digital signal processor industries. As a result, we
believe that we are able to deliver high performance products to market with
shorter product development cycles and lower investments in capital equipment
than alternative solutions.

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

REMOTE MONITORING AND SERVICE ASSURANCE. Our real-time monitoring technology,
known as reflectometry, allows remote monitoring of real-time performance data.
Service providers can use this technology to identify problems remotely and
address them proactively. We are also able to assist our customers on-line
during this process. As a result, service providers can improve performance
levels and monitor voice quality on a consistent basis.

OUR ECHO CANCELLATION PRODUCTS

All of our echo cancellation products are designed to solve echo and other voice
quality issues (background noise and voice levels) in wireline, wireless,
satellite and packetized networks. Our echo cancellation product family includes
software, stand-alone echo cancellers and system echo cancellers. With the
acquisition of Telinnovation (see "Business-Acquisitions" below), we now license
our echo cancellation software to several voice-over-packet network equipment
companies who incorporate this software in their voice gateways and switches. We
are also developing echo cancellation modules, boards that can be plugged into
voice gateways and switches. Our stand-alone echo cancellers consist of six
products. The 18T1 and 18E1 are our third generation echo cancellation products
and have been deployed in significant volumes since March 1995. The Quad T1 and
Quad E1 products are our fourth generation echo cancellation products and have
substantially replaced the sales of our older 18T1 and 18E1 products. Production
shipment commenced for our Quad T1 and E1 products in the first quarter of
calendar year 1999. The Broadband Echo Cancellation System, or BBEC, is a
system-level product that employs the Quad T1. Production shipment of our BBEC
began in the second quarter of calendar year 1999.

Our echo cancellation product family shares several common advantages:

HIGHER CAPACITY. We believe our fourth generation echo cancellation products
have a minimum of a 50 percent capacity advantage over currently commercially
available competitive products.

VOICE QUALITY OF SERVICE SOFTWARE (VQOS) SUITE. VQoS is a new suite of software
programs embedded in the firmware of Ditech's echo cancellers. VQoS redefines
the classic, one-dimensional echo canceller product. Where the classic echo
canceller solved only one key voice quality problem--hybrid echo--VQoS is a
suite of software programs that solves several key problems of voice quality,
including acoustic echo control, background noise control, and volume control.
To provide solutions to the problems addressed by Ditech's VQoS suite,
competitors sell add-in hardware boards at several hundred dollars a board.
Ditech's VQoS software suite comes bundled with Ditech's fourth generation echo
cancellation products for a fraction of the cost of the competing solution.

4
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LOWER POWER CONSUMPTION. We believe our products generally require less power
than competitive products as a result of our software-intensive design and
use of fewer integrated circuits.

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

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

<TABLE>
<CAPTION>
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PRODUCT DESCRIPTION FUNCTIONALITY
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<S> <C> <C>
18T1 Single port echo canceller for use at T1 - A high capacity product that cancels 220 T1 lines
(1.544 Mb/s) transmission rate (North per seven-foot industry standard equipment rack
American markets) - Low power consumption
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18E1 Single port echo canceller for use at E1 - A high capacity product that cancels 126 E1 lines
(2.048 Mb/s) transmission rate (international per 2.1 meter international industry standard
markets and North American gateway equipment rack
applications) - Low power consumption
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Quad T1 Single module including four independent T1 - Minimum of 50% greater capacity to nearest
cancellers (North American markets) commercially available competitive product
- Cancels 480 T1 lines per rack

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Quad E1 Single module including four independent E1 - Minimum of 50% greater capacity to nearest
cancellers (international markets and North commercially available competitive product
American gateway applications) - Cancels 480 E1 lines per rack
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4SA Single Quad T1 module (North American markets) - Designed for small office and network environments
---------------------------------------------------------------------------------------------------------------------------------
Broadband Echo Broadband echo cancellation system utilizing - First system level echo cancellation product
Cancellation System DS3 (45 Mb/s) interfaces to accommodate the - Uses two DS3s per shelf
(BBEC) growing adoption of higher speed broadband - Reduces bulky T1 cabling and installation
infrastructures (North American markets) - Fault tolerant architecture and autonomous alarm
reporting via Ethernet to simplify fault isolation
- Cancels 336 T1s per rack

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</TABLE>

OUR OPTICAL COMMUNICATIONS PRODUCTS SOLUTION

We design, develop and market a suite of optical communication subsystem
products for telecommunications networks. These subsystems include optical
amplifiers, an optical telemetry system, wavelength division multiplexers and
demultiplexers, transponders and a dense wavelength division multiplexing
monitor. We also sell these subsystems as a complete system, which is called the
Optical Path Solution. The key characteristics of our optical subsystem products
include:

ON-BOARD INTELLIGENCE. Our subsystems include on-board microprocessors and
memory chips which allow our products to be deployed in system products more
easily and more cost-effectively than competitive solutions.

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SOPHISTICATED SOFTWARE. The sophisticated software incorporated into our
products allows our subsystems to easily interface with the complex networking
and management systems of system-level optical products.

BUILT TO DEMANDING BELLCORE AND ITU STANDARDS. We utilize our many years of
experience of building and maintaining telephone equipment in building our
optical subsystem products. These products are designed to withstand the
environmental effects of temperature and vibration in central offices and remote
facilities.

MODULARITY AND SCALABILITY. Our products are modular in nature and adhere to
optical communications operating standards. Therefore, our products are
interoperable with the optical communications subsystems and systems of other
manufacturers. Our products are also scalable, which enables customers to
improve their existing optical communications systems, or to expand network
capacity, on an as-needed basis.

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

REMOTE MONITORING AND MANAGEMENT CAPABILITY. Our products are designed to allow
remote monitoring and management. These features enable service providers to
remotely monitor and predict service outages in optical networks, which helps to
improve reliability and lower the troubleshooting costs involved in on-site
monitoring. Our optical telemetry system, also helps facilitate communications
between legacy network management software and our products.

OUR OPTICAL COMMUNICATIONS PRODUCTS

Our optical communications subsystems discussed above can be sold as stand-alone
products or be incorporated into a complete system. All of these products are
commercially available. During fiscal 2000, the principal source of revenue from
our optical product line has been our optical amplifiers, which have been
shipping since the third quarter of calendar 1996. Our optical products share
several common advantages:

PLUG-AND-PLAY SUBSYSTEMS. Our products are built with on-board processing power
allowing them to be easily plugged into different system products.

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

IMPROVED TIME-TO-MARKET FOR OEM PARTNERS. Rather than having to incur the time
and delays associated with designing and building subsystem products themselves,
Ditech's OEM partners can quickly integrate Ditech's subsystems into their
system products and more quickly deliver a complete solution to the market.

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

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

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- Supports higher bandwidth fiber optic channels,
allowing service providers to expand bandwidth
without upgrading our amplifiers

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Optical Telemetry System Optical and element management and facility - Enables remote management and monitoring
monitoring solution that is designed with open of both our products and legacy network
interface architecture equipment and facilities
- Management and monitoring commands are
carried on a supervisory channel in the
same fiber as the revenue traffic but
using out-of-band wavelengths, thereby
not displacing revenue-generating
bandwidth

- Packaged in a compact module to minimize
space requirements
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WDM Multiplexer And Four channel solution that combines multiple - Packaged in a compact module to minimize
Demultiplexer optical wavelengths onto one fiber. At the far space requirements
end, these same devices function in reverse as - Accommodates network growth by supporting
demultiplexers higher bandwidth fiber optic channels
---------------------------------------------------------------------------------------------------------------------------------
Transponder Accepts an optical signal from a legacy laser - Allows legacy non-International
source and re-transmits the signal at an industry Telecommunication Union standards compliant
standard compliant optical wavelength suitable for transmission equipment to be used on WDM
transmission on a WDM network networks
- Packaged in a compact module that is half
the size of currently commercially available
competing products
---------------------------------------------------------------------------------------------------------------------------------
DWDM Measures wavelength amplitude signal-to-noise - Remotely deployable unit that is
Monitor ratio and gain flatness of each optical channel environmentally tolerant
in a multi-wavelength network, allowing service - Sophisticated real-time monitoring of
providers to identify transmission path each optical signal
degradations before they become service-affecting - User definable alarm thresholds
- Easy to use graphical user interface
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</TABLE>
CUSTOMERS

ECHO CANCELLATION CUSTOMERS. The principal customers for our stand-alone and
system echo cancellation products are wireline, wireless, and cellular service
providers. The principal customers for our echo cancellation software and module
products are voice gateway and voice switch companies. During fiscal 2000, more
than 90 percent of the Company's revenues came from the sale of echo
cancellation products. We have more than 85 echo cancellation product customers,
including four out of the top five North American long distance companies, which
includes WorldCom, Sprint, Qwest Communications, and Teleglobe. Our echo
cancellation software and module customers include Cisco, Alcatel and Nortel.
While we have increased our

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echo cancellation customer list by approximately 60 percent in fiscal 2000,
revenues from echo cancellation sales remains highly concentrated. In fiscal
2000, our largest customer, Qwest Communications, accounted for 57% of our total
company revenue. Our four next largest customers accounted collectively for 20%
of our total company revenue.

OPTICAL COMMUNICATIONS SUBSYSTEMS CUSTOMERS. The customers for our optical
communications subsystems are primarily network equipment companies, as well as
a few service providers. Ditech's principal optical subsystems customer in
fiscal 2000 has been Lucent Technologies. Ditech added six new optical customers
during fiscal 2000.

BACKLOG. Our backlog on June 1, 2000 was approximately $23.2 million compared
with backlog of approximately $5.3 million at June 1, 1999. We include in our
backlog only orders confirmed with a purchase order for products to be shipped
within 120 days to customers with approved credit status. Because of the
generally short cycle between order and shipment, and occasional customer
changes in delivery schedules, we do not believe that our backlog, as of any
particular date, is necessarily indicative of actual net sales for any future
period.

We market our products, both domestically and internationally; geographic
information is set forth in Note 10 to the Notes to our Financial Statements
included in this Annual Report on Form 10-K. Substantially, all of our revenue
to date has been generated domestically.

RESEARCH AND DEVELOPMENT

We have engineering departments dedicated to and focused on developing next
generation echo cancellation and optical communications products. Our research
and development expenses for fiscal 2000, 1999 and 1998 were approximately $8.6
million, $3.9 million and $2.4 million, respectively. In fiscal 2000, the
increase in our research and development expenses was related to both adding new
hardware and software engineers and expanding the scope of product development
for both echo cancellation and optical communication products. We believe that
recruiting and retaining qualified engineering personnel will be essential to
our continued success.

MANUFACTURING

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

SALES AND MARKETING

In fiscal 2000, we have substantially expanded our direct sales force and sales
engineer force in the United States and internationally, increasing the number
of employees in these functions by over 55% from the level at the end of fiscal
1999. We have also expanded our network of value added resellers, distributors,
and sales agents that sell our products internationally. We have also entered
into several new agreements with original

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equipment manufacturers (OEMs) for both our echo cancellation and optical
communications products and are actively exploring the possibility of entering
into others.

In fiscal 2000, we implemented an international public relations program for the
first time, complementing our strategy to increase international sales. We also
expanded and enhanced our web site marketing program, making this an effective
marketing and sales tool. In addition, in fiscal 2000, we designed and built an
expanded trade show booth, and we expanded our trade-show participation both
domestically and internationally.

In addition, in fiscal 2000 we substantially added to our product verification
team whose charter is to ensure that we meet customers' expectations.

ACQUISITIONS

Our strategy is to increase new product development through internal staffing
and acquisitions, when these potential acquisitions provide the company with
a critical new product and a decided time-to-market advantage. On February 1,
2000, we completed our first acquisition by buying substantially all the
assets and hiring of all the key employees of Telinnovation Corporation, a
company that specializes in echo cancellation software. With this
acquisition, we believe we became the leading software supplier for echo
cancellation to the voice-over-packet market. In addition, this acquisition
expanded our product offerings so we can provide the best voice enhancement
technology to service providers, whether they need software, plug-in modules,
stand-alone devices, or system-level echo cancellation.

We will continue to look to acquire companies that meet the criteria defined
above. Acquisitions involve numerous risks, which are more fully discussed in
"Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations Further Growth and Operating Results Subject to Risk." As
more fully discussed in Note 13 to the Notes to our Financial Statements
included elsewhere in the Annual Report, on June 22, 2000, we announced that we
had signed a definitive agreement to acquire privately-held Atmosphere Networks,
Inc. of Campbell, California. Atmosphere Networks is an emerging provider of
optical networking products, enabling carriers to combine various types of
traffic (voice, data and video) onto an optical network. The acquisition, which
is expected to close by the end of the first fiscal quarter of fiscal 2001, will
be accounted for as a purchase.

COMPETITION

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

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

- Cost of ownership (including ease-of-installation and cost of
maintenance);

- Ease of product deployment and installation; and

- Technical support and service.

Although we believe that we currently compete favorably with respect to all of
these factors, we may not have the financial resources, technical expertise or
marketing, manufacturing, distribution and support capabilities to compete
successfully in the future. We expect that competition in each of our markets
will increase in the future.

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In the echo cancellation market, our principal competitors are Lucent and
Tellabs. Although Alcatel, Ericsson and Nokia can provide echo cancellation in
their products and systems, they do not sell echo cancellation products or
compete in the open market. In addition, two major voice switch manufacturers,
Lucent and Nortel Networks, have announced new voice switches where echo
cancellation will be incorporated within their switches. Ditech has an array of
echo cancellation products, including software and plug-in modules, which can
work within these voice switches, but a widespread acceptance of these new voice
switches could present a competitive threat to Ditech if the net result was the
elimination of demand for Ditech's echo cancellation products.

Our principal competitors in the optical communications products market fall
into two groups, component companies and system companies. Component companies,
such as JDS Uniphase, SDL, and Corning make the sub-assemblies such as lasers
and splitters that must be built-up into subsystems, which Ditech develops and
markets. In the future it is probable that these companies will compete with
Ditech in the subsystems market. The principal optical communications systems
companies are Ciena, Lucent, Alcatel, and Nortel Networks. These companies
market and sell the same type of subsystem products that Ditech develops and
markets, as well as incorporating these subsystems in their own system products.

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

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

PATENTS AND INTELLECTUAL PROPERTY RIGHTS

Our success will depend, in part, on our ability to protect our intellectual
property. We rely primarily on patent, copyright, trademark and trade secret
laws, as well as nondisclosure agreements and other methods to protect our
proprietary technologies and processes. Nevertheless, such measures may not be
adequate to safeguard the proprietary technology underlying our echo
cancellation and optical communications products. In November 1998, we acquired
the echo cancellation technology that we previously licensed from Telinnovation.
As of April 30, 2000, we had three issued and five U.S. patent applications
pending, one of which had been allowed but has not yet issued. These patents
expire between 2014 and 2016. No patents may issue as a result of these or
future applications. If they do issue, any patent claims allowed may not be
sufficiently broad to protect our technology. In addition, any existing or
future patents may be challenged, invalidated or circumvented, and any right
granted thereunder may not provide meaningful protection to us. The failure of
any patents to provide protection to our technology would make it easier for our
competitors to offer similar products.

We generally enter into confidentiality agreements with our employees and
strategic partners, and generally

10
<PAGE>

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

The telecommunications equipment industry is characterized by vigorous
protection and pursuit of intellectual property rights. We may receive in the
future notices of claims of infringement of other parties' proprietary rights.
We may not prevail in actions alleging infringement of third-party patents. In
addition, the invalidity of our patents may be asserted or prosecuted against
us. In addition, in a patent or trade secret action, an injunction could issue
against us, requiring that we withdraw certain products from the market or
necessitating that certain products offered for sale or under development be
redesigned. We have also entered into certain indemnification obligations in
favor of our customers and strategic partners that could be triggered upon an
allegation or finding of our infringement of other parties' proprietary rights.
Irrespective of the validity or successful assertion of such claims, we would
likely incur significant costs and diversion of our resources with respect to
the defense of such claims, which could also have a material adverse effect on
our business, financial condition and results of operations. To address any
potential claims or actions asserted against us, we may seek to obtain a license
under a third party's intellectual property rights. Under such circumstances, a
license may not be available on commercially reasonable terms, if at all.

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

EMPLOYEES

As of April 30, 2000, we employed 149 persons, 33 of whom were
primarily engaged in operations, 50 of whom were engaged in research and
development, 48 of whom were engaged in sales, marketing and technical support
and 18 of whom were engaged in finance and administration. Our employees are not
represented by any collective bargaining agreement, and we have not experienced
a work stoppage. We believe our employee relations are good.

ITEM 2 - PROPERTIES

Our principal offices and facilities are currently located in one leased
building totaling 35,800 square feet in

11
<PAGE>

Mountain View, California. In March 2000, we signed a lease on approximately
26,000 square feet of space in a building adjacent to our headquarters in
Mountain View. The lease on this additional space should commence in the first
half of fiscal 2001, when the existing tenants vacate the building. The term of
the combined leases for the current 35,800 square feet and the new 26,000 square
feet expires on June 30, 2006. We believe that the space under the combined
leases is adequate to meet our needs for at least the next twelve to eighteen
months.

ITEM 3 - LEGAL PROCEEDINGS

None.

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not Applicable.

PART II

ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Ditech's common stock has been quoted on the Nasdaq National Market under
the symbol "DITC" since our initial public offering on June 9, 1999. Prior to
this time, there was no public market for our stock. The following table shows
the high and low closing sale prices per share of our common stock as reported
on the Nasdaq National Market for the periods indicated, and have been adjusted
to give retroactive effect our 2-for-1 stock split accounted for as a stock
dividend effected in February 2000:

Fiscal 2000 High Low
----------- ---- ---
<S> <C> <C>
First Quarter (Beginning June 9, 1999) $13.13 $6.06
Second Quarter $45.47 $8.88
Third Quarter $91.38 $45.25
Fourth Quarter $127.44 $61.50
</TABLE>

We have never paid any cash divideds on our common stock and currently
expect to retain future earnings, if any, for use in the operation and expansion
of our business and do not anticipate paying any cash dividends for the
foreseeable future. In addition, our credit agreement with our bank prohibits
us from paying dividends without the lender's written consent. At April 30,
2000, there were approximately 130 stockholders of record of Ditech's common
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
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 for our 2-for-1 stock split accounted for as a stock
dividend effected in February 2000). The common stock was issued in reliance on
Rule 506 of Regulation D and/or Section 4(2) under the Securities Act of 1933,
as amended. Each of the Telinnovation entites represented that they were an
accredited investor, and Mr. Hardy was represented by a purchaser
representative.

ITEM 6 - SELECTED FINANCIAL DATA

The statement of operations data for each of the three years ended
April 30, 2000, and the balance sheet

12
<PAGE>

data as of April 30, 1999 and 2000, have been derived from the audited financial
statements of Ditech included elsewhere in this Annual Report on Form 10-K that
have been audited by PricewaterhouseCoopers LLP, independent accountants. The
statement of operations data for the years ended April 30, 1996 and 1997 and the
balance sheet data as of April 30, 1998 and 1997, have been derived from audited
financial statements not included in this Annual Report on Form 10-K. The
balance sheet data as of April 30, 1996 has been derived from the unaudited
financial statements of Ditech not included in this Annual Report on Form 10-K.
The data set forth below should be read in conjunction with the financial
statements of Ditech, including the notes thereto, and with "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Form 10-K.

<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
----------------------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue ............................................... $ 14,354 $ 14,066 $ 12,326 $ 25,364 $116,946
Cost of goods sold .................................... 7,164 6,790 5,651 11,858 34,913
-------- -------- -------- -------- --------
Gross profit ...................................... 7,190 7,276 6,675 13,506 82,033
-------- -------- -------- -------- --------
Operating Expenses:
Sales and marketing ............................... 1,041 1,521 2,405 5,759 9,411
Research and development .......................... 1,040 1,072 2,367 3,860 8,559
General and administrative ........................ 536 714 1,279 2,399 4,296
Purchased research and development ................ -- -- -- -- 8,684
Amortization of goodwill and purchased technology . -- -- -- -- 1,860
-------- -------- -------- -------- --------
Total operating expenses ...................... 2,617 3,307 6,051 12,018 32,810
-------- -------- -------- -------- --------
Income from operations ................................ 4,573 3,969 624 1,488 49,223
Other income (expense), net ........................... (5) (104) (593) (500) 1,545
-------- -------- -------- -------- --------
Income from continuing operations before income taxes . 4,568 3,865 31 988 50,768
Provision for income taxes ............................ 1,776 1,522 24 413 20,765
-------- -------- -------- -------- --------
Income from continuing operations ..................... 2,792 2,343 7 575 30,003
Discontinued operations:
Loss from operations (1) .......................... (1,413) (2,751) -- -- --
Gain on disposal (1) .............................. -- 2,843 -- -- --
-------- -------- -------- -------- --------
Net income ............................................ 1,379 2,435 7 575 30,003
Accretion of mandatorily redeemable preferred stock to
redemption value (2) .............................. -- 187 1,374 1,497 99
-------- -------- -------- -------- --------
Net income (loss) attributable to common
stockholders (3) .................................. $ 1,379 $ 2,248 $ (1,367) $ (922) $ 29,904
======== ======== ======== ======== ========
Per share data (2) (4)
Basic

Income (loss) from continuing operations ...... $ 0.05 $ 0.05 $ (0.22) $ (0.13) $ 1.27
Discontinued operations ....................... (0.03) -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) per share attributate to
common stockholders ........................ $ 0.02 $ 0.05 $ (0.22) $ (0.13) $ 1.27
======== ======== ======== ======== ========
Diluted (3)
Income (loss) from continuing operations ...... $ 0.05 $ 0.05 $ (0.22) $ (0.13) $ 1.11
Discontinued operations ....................... (0.03) -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) per share attributate to
common stockholders ........................ $ 0.02 $ 0.05 $ (0.22) $ (0.13) $ 1.11
======== ======== ======== ======== ========
Number of shares used in per share calculations (2) (4)
Basic ............................................. 55,806 49,544 6,122 7,132 23,505
======== ======== ======== ======== ========
Diluted ........................................... 56,542 50,448 6,122 7,132 27,016
======== ======== ======== ======== ========
</TABLE>

13
<PAGE>

SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
APRIL 30,
------------------------------------------------------------
1996 1997 1998 1999 2000
---- ---- ---- ---- ----
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents .......... $ 531 $ 4,199 $ 3,433 $ 3,114 $ 88,616
Total assets ....................... 11,075 17,508 17,274 14,330 165,152
Long-term debt ..................... -- 7,875 7,410 6,264 21
Redeemable preferred stock ......... -- 29,747 31,122 25,258 --
Total stockholders' equity (deficit) 8,172 (22,768) (24,057) (23,343) 153,573
</TABLE>
------------------------

(1) In March 1997, we sold, in their entirety, both operating entities of
Automated Call Processing and Globe Wireless. Automated Call Processing
represented the call processing segment of our business and Globe Wireless
represented the wireless marine communications segment. These segments were
reported as discontinued operations in our fiscal 1996 and 1997 financial
statements.

(2) The reduction in earnings per share due to accretion for redeemable
preferred stock ceased after our first quarter of fiscal 2000 because the
Series A preferred stock was redeemed and the Series B preferred stock was
converted to common stock in June 1999, upon completion of our initial
public offering. See Note 2 of notes to the financial statements included
elsewhere in this Annual Report on Form 10-K.

(3) Net income and net income per share for fiscal 2000 include purchased
research and development expense of $8.7 million, amortization of goodwill
and purchased technology of $1.9 million and amortization of stock
compensation of $1.9 million associated with our acquisition of
Telinnovation. Pro forma net income and diluted net income per share,
excluding these non-cash acquisition related costs net of tax, would have
been $37.3 million and $1.38, respectively.

(4) All share and per share data presented has been revised to reflect the
impact of the two-for-one stock split which was effective on February 16,
2000.

14
<PAGE>

ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SELECTED FINANCIAL DATA" AND OUR FINANCIAL STATEMENTS AND NOTES THERETO
INCLUDED ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K. THE DISCUSSION IN THIS
ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF OUR PLANS, OBJECTIVES,
EXPECTATIONS AND INTENTIONS. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE DISCUSSED HERE. IN FEBRUARY 2000, WE EFFECTED A 2-FOR-1 SPLIT OF OUR
COMMON STOCK AND ALL SHARE AND PER SHARE DATA HAVE BEEN REVISED ACCORDINGLY.

OVERVIEW

Ditech designs, develops and markets equipment used in building and
expanding telecommunications networks. Our products fall into two categories,
echo cancellation equipment and equipment that enables and facilitates
communications over fiber optic networks. To date, the vast majority of our
revenue has been derived from sales of our echo cancellation products. We began
sales of our fourth generation echo cancellation products in first calendar
quarter of 1999. We began sales of our first optical communications product in
September 1996.

In April 1999, we reincorporated in Delaware. Shortly after the
reincorporation, all of our Series B preferred stock converted to common stock,
we effected a 2-for-3 reverse split of our common stock, we redeemed our Series
A preferred stock for cash and we redeemed our Series C preferred stock in
exchange for shares of preferred stock of Globe Wireless that we held. In
February 2000, we effected a 2-for-1 stock split. Financial information for
prior periods have been restated to reflect the reincorporation and stock
splits.

In November 1998, we acquired the echo cancellation technology that we
previously licensed from Telinnovation. We acquired this technology for a total
purchase price of 333,332 shares of our common stock and $2.96 million, the cash
portion of which was paid upon the consummation of our offering in June 1999. We
paid royalties to Telinnovation on the sales of our products incorporating this
technology until the $2.96 million cash portion of the purchase price was paid
from the proceeds of our initial public offering. We will amortize the purchased
technology over a period of five years.

On February 1, 2000, we completed our acquisition of substantially all of
the assets of Telinnovation in exchange for a total of 1,200,000 shares of
common stock. The acquisition is being accounted for as a purchase. The total
value of the acquisition of approximately $69 million is being accounted for in
three discrete components. The first, approximately $9 million related to
purchased research and development which was written off in the fourth quarter
of fiscal 2000. Next, approximately $37 million related to developed technology
and goodwill which was capitalized and will be amortized to expense over its
estimated life of 5 years. The remaining $23 million relates to restricted
shares, the cost of which was recorded as deferred stock compensation and will
be charged to expense over the three year vesting period of the shares, assuming
the holders of the restricted shares remain in our employ during the vesting
period.

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

To date, the vast majority of our revenue has been derived from sales
of our echo cancellation products. In fiscal 1998, fiscal 1999 and fiscal 2000,
we derived approximately 94.1%, 93.7% and 91.8%, respectively, of our

15
<PAGE>

revenue from the sale of our echo cancellation products. We expect that a
substantial majority of our revenue will continue to come from sales of our echo
cancellation products for the foreseeable future.

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

Historically the majority of our sales have been to customers in the
U.S. These customers accounted for approximately 88% of our revenue in fiscal
2000, approximately 86% of our revenue in fiscal 1999 and approximately 93% in
fiscal 1998. However, sales to some of our customers in the U.S. may result in
our products eventually being deployed internationally, especially in the case
of any original equipment manufacturer that distributes overseas. To date,
substantially all of our international sales have been export sales and
denominated in U.S. dollars.

Our revenue historically has come from a small number of customers. Our
five largest customers accounted for over 75% of our revenue in fiscal 2000,
over 65% of our revenue in fiscal 1999 and over 75% of our revenue in fiscal
1998. Qwest/LCI accounted for 57% of our revenue in fiscal 2000, 42% of our
revenue in fiscal 1999 and in fiscal 1998. Our four next largest customers
accounted collectively for 20% of our revenue in fiscal 2000, 23% of our revenue
in fiscal 1999 and 38% of our revenue in fiscal 1998.

We entered into an agreement to license certain of our optical
technology to Antec Corporation for $1.9 million payable in fiscal 2000, all of
which was recognized in the second quarter of fiscal 2000, plus per unit
royalties.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
-------------------------------------------
1998 1999 2000
------------- ------------- -------------
<S> <C> <C> <C>
Revenue 100.0% 100.0% 100.0%
Cost of goods sold.......................................... 45.8 46.8 29.9
------------- ------------- -------------
Gross profit............................................. 54.2 53.2 70.1
------------- ------------- -------------
Operating expenses:
Sales and marketing...................................... 19.5 22.7 8.0
Research and development................................. 19.2 15.2 7.3
General and administrative............................... 10.4 9.5 3.7
Purchased research and development ...................... -- -- 7.4
Amortization of goodwill and purchased
technology ........................................... -- -- 1.6
------------- ------------- -------------
Total operating expenses.............................. 49.1 47.4 28.0
Income from operations...................................... 5.1 5.8 42.1
Other income (expense), net................................. (4.8) (2.0) 1.3
------------- ------------- -------------
Income before income taxes............................... 0.3 3.8 43.4
Provisions for income taxes.............................. 0.2 1.6 17.8
------------- ------------- -------------
Net Income .............................................. 0.1 2.2 25.6
============= ============= =============
</TABLE>

16
<PAGE>

FISCAL YEARS ENDED, APRIL 30, 2000 AND 1999

REVENUE. Revenue increased to $116.9 million in fiscal 2000 from $25.4
million in fiscal 1999. The primary reason for this increase was market
acceptance and sales of our fourth generation echo cancellation products offset
in part by decreased unit sales of our third generation echo cancellation
products. We believe that the growth generated by the acceptance of our fourth
generation echo cancellers was due in large part to our leadership position in
product density and ease of deployment. Additionally, we experienced strong
growth in the sale of optical amplifiers. By the end of fiscal 2000, sales of
our third generation echo cancellers had become an insignificant portion of our
overall echo business, and we believe that they will continue to be an
insignificant portion of our overall echo business as customers continue to
migrate to our fourth generation echo cancellers.

COST OF GOODS SOLD. Cost of goods sold consists of direct material
costs, personnel costs for test and quality assurance, and the cost of purchased
technology incorporated into our products. Cost of goods sold increased to $34.9
million in fiscal 2000 from $11.9 million in fiscal 1999. The primary reason for
the increase was costs associated with the increased unit sales of our fourth
generation echo cancellation products.

GROSS PROFIT. Gross profit increased to 70.1% in fiscal 2000 from 53.2%
in fiscal 1999. The primary factor causing this increase in gross margin was the
mix of products sold during fiscal 2000, principally our fourth general echo
cancellers. In addition, gross profit was favorably impacted by the reduction in
product royalties as a result of completing the acquisition of our core echo
cancellation technology subsequent to our initial public offering in June 1999
and continued economies of scale realized by us from our outside manufacturing
strategy.

SALES AND MARKETING. Sales and marketing expenses primarily consist of
personnel costs including commissions and costs associated with customer
service, travel, trade shows and outside consulting services. Sales and
marketing expenses increased to $9.4 million in fiscal 2000 from $5.8 million in
fiscal 1999. The primary cause for the increase was increases in personnel and
related costs, including travel, to support expansion of our customer service
functions and marketing efforts of our products both domestically and
internationally, including the formation of new direct and OEM channels
partnerships. We plan to continue to increase our expenditures in sales and
marketing both in real terms and as a percentage of sales in order to broaden
distribution of our products both domestically and internationally.

RESEARCH AND DEVELOPMENT. Research and development expenses primarily
consist of personnel costs, contract consultants, and equipment and supplies
used in the development of echo cancellation and optical communications
products. Research and development expense increased to $8.6 million in fiscal
2000 from $3.9 million in fiscal 1999. The increase is primarily related to
increased personnel and related costs and increased materials and consulting
costs associated with both our echo cancellation products and optical
communications products. In addition, research and development spending
increased due to the inclusion of a full quarter of stock compensation
attributable to the acquisition of Telinnovation ($1.9 million), which closed on
February 1, 2000. We expect that this level of stock compensation will continue
on a quarterly basis over the three-year vesting period of these restricted
stock grants. We expect research and development expenses to continue to grow in
future periods, both in real terms and as a percentage of sales, as we enhance
current products and develop new products.

GENERAL AND ADMINISTRATIVE. General and administrative expenses
primarily consist of personnel costs for corporate officers and finance
personnel, and legal, accounting and consulting costs. General and
administrative expenses increased to $4.3 million in fiscal 2000 from $2.4
million in fiscal 1999. The increase was primarily due to amortization of
deferred compensation in connection with stock options granted in fiscal 1999,
increased legal, accounting and reporting costs and insurance premiums for
directors and officers insurance as a result of becoming

17
<PAGE>

a public company and increased legal costs associated with an arbitration matter
which was resolved in our favor. General and administrative costs also increased
due to incremental bad debt provisions in fiscal 2000 attributable to growth in
our accounts receivable. We expect general and administrative expenses to
increase as a result of the additional reporting requirements and expenses
incurred as a public company and increased infrastructure costs as we continue
to expand our business.

PURCHASED RESEARCH AND DEVELOPMENT. In fiscal 2000 we charged a
total of $8.7 million for purchased research and development. This research
and development was acquired as part of the acquisition of Telinnovation. The
amount allocated to purchased research and development was determined through
established valuation techniques as detailed in Note 3 to the financial
statements.

It is reasonably possible that the development of this technology
could fail because of either prohibitive cost, inability to perform the
required efforts to complete the technology or other factors outside of our
control such as a change in the market for the resulting developed products.
In addition, at such time that the project is completed it is reasonably
possible that the completed products do not receive market acceptance or
that we are unable to produce and market the products cost effectively.

AMORTIZATION OF GOODWILL AND PURCHASED TECHNOLOGY. In fiscal 2000 we
amortized a total of $1.9 million for goodwill and purchased technology. This
was acquired as part of the acquisition of Telinnovation. The basis for the
allocation and expected amortization period is detailed in Note 3 to the
financial statements.

OTHER INCOME (EXPENSE). Other income (expense) consists of interest
expense attributable to our outstanding debt and capital leases, offset by
interest income on our invested cash and cash equivalents balances. Other income
increased to $1.5 million in fiscal 2000 from an expense of $500,000 in fiscal
1999. The improvement was primarily attributable to increased interest income on
funds invested from our public offerings and reduction in interest expense due
to the retirement of our outstanding debt in the first quarter of fiscal 2000.
We expect that other income will continue to increase due to higher average cash
balances and our reduction of debt in fiscal 2000.

INCOME TAXES. Income taxes consist of federal and state income taxes.
The effective tax rate in fiscal 2000 was 41% as compared to 42% in fiscal 1999.
The reason for the lower tax rate in fiscal 2000 was due to the tax benefit of
our surplus cash being invested in short-term tax exempt municipal bonds offset
in part by the existence of certain nondeductible expenses, primarily
amortization of deferred compensation in connection with stock options
previously granted. We expect that our ongoing effective tax rate should remain
at approximately 41%.

FISCAL YEARS ENDED APRIL 30, 1999 AND 1998

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

COST OF GOODS SOLD. Cost of goods sold increased to $11.9 million in
fiscal 1999 from $5.7 million in fiscal 1998. The primary reason for the
increase was costs associated with increased unit sales of our third generation
echo cancellation products and initial sales of our fourth generation echo
cancellation products.

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

SALES AND MARKETING. Sales and marketing expenses increased to $5.8
million in fiscal 1999 from $2.4 million in fiscal 1998. The primary cause for
the increase was increased expenditures associated with additional sales and
marketing personnel both domestically and internationally. The average number of
sales and marketing personnel in fiscal 1999 approximately doubled as compared
to fiscal 1998. This increase in sales and marketing personnel also resulted in
a corresponding increase in personnel related costs such as travel and
accommodations.

RESEARCH AND DEVELOPMENT. Research and development expense increased to
$3.9 million in fiscal 1999 from $2.4 million in fiscal 1998. The increase was
primarily caused by increased personnel and supplies needed to support both echo
cancellation and optical communications product development, including our
fourth generation echo cancellation, optical telemetry and wavelength division
multiplexing products.

GENERAL AND ADMINISTRATIVE. General and administrative expense
increased to $2.4 million in fiscal 1999 from $1.3 million in fiscal 1998. The
increase was primarily due to increased personnel costs to support the increased
level of operations and increased legal costs associated with increased contract
negotiations and an arbitration matter, which was resolved in our favor in
fiscal 2000. General and administrative expenses also increased due to
consulting costs associated with the relocation to our new headquarters and
implementation of our

18
<PAGE>

new financial accounting system.

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

INCOME TAXES. The effective tax rate in fiscal 1999 was 42% as compared
to 77% in fiscal 1998. The reason for the higher tax rate in 1998 was due to the
existence of certain nondeductible expenses and the limited amount of pretax
profits.

STOCK-BASED COMPENSATION

As part of our acquisition of Telinnovation, we issued 400,000 shares
of restricted common stock to the key engineers of Telinnovation. As a result of
these shares being issued, we recorded deferred compensation of $23 million,
which is being amortized to expense over the three-year vesting period of the
shares. The resulting annual charge to expense of $7.7 million will be included
in research and development expense.

With respect to certain stock option grants in fiscal 1999, we recorded
deferred compensation of $1,320,000 as of April 30, 1999. We amortized
approximately $91,000 of the deferred compensation in fiscal 1999, $330,000 in
fiscal 2000, and will amortize the remainder over the corresponding vesting
period of the stock options. See Note 8 of notes to financial statements.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. We do not believe this will have a material
effect on our operations or financial position. Implementation of this standard
is effective for fiscal years beginning after June 15, 2000.

In December 1999, the SEC issued Staff Accounting Bulletin No. 101
("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes
certain of the SEC's views in applying generally accepted accounting principles
to revenue recognition in financial statements. The SEC has deferred the
implementation date of SAB 101. The Company is required to adopt SAB 101 in the
fourth quarter of fiscal 2001. We do not expect the adoption of SAB 101 to have
a material effect on our operations or financial position.

In March 2000, the FASB issued FASB Interpretation No. 44 (FIN 44)
for certain transactions involving Stock Compensation, an interpretation of
APB Opinion No. 25. FIN 44 clarifies the application of Opinion 25 for (a)
the definition of employee for purposes of applying Opinion 25, (b) the
criteria for determining whether a plan qualifies as a noncompensatory plan,
(c) the accounting consequence for various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain provisions cover specific events that
occur after either December 15, 1998, or January 12, 2000. We do not expect
that the adoption of the provisions will have a material effect on our
financial statements.

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<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

Since March 1997, we have satisfied the majority of our liquidity
requirements through cash flow generated from operations, funds received upon
exercise of stock options and the proceeds from our initial and follow-on public
offerings in fiscal 2000.

Operating activities used $102,000 of cash in fiscal 1998, primarily
due to the limited amount of profit for the year, increases in inventories
and reductions in accounts payable and accrued liabilities including
royalties payable, partially offset by a reduction of income taxes
receivable. In fiscal 1999 we generated $715,000 in cash from operations,
primarily due to increased operating profits, increases in accounts payable,
income taxes payable and deferred revenue, partially offset by an increase in
inventories, accounts receivable and other current assets. In fiscal 2000 we
generated $34.3 million in cash from operations, primarily due to increased
operating profits, increases in accounts payable, accrued expenses and
deferred revenue, partially offset by an increase in accounts receivable,
inventories and other current assets.

Investing activities used $602,000 in cash in fiscal 1998, $1.3 million
in cash in fiscal 1999 and $5.3 million in fiscal 2000. These amounts primarily
represented purchases of property and equipment, costs associated with the
initial public offering in fiscal 1999, and the purchase of our echo technology
from Telinnovation in the first quarter of fiscal 2000.

Financing activities used $62,000 in cash in fiscal 1998, consisting of
repayment on term debt partially offset by proceeds from the exercise of stock
options. In fiscal 1999 we generated $298,000 of cash from financing, primarily
from the exercise of stock options partially offset by the principal repayments
on the term debt and capital leases. In fiscal 2000 we generated $56.5 million
of cash from financing, primarily from the net proceeds from our initial public
offering in June 1999 and our secondary offering in October 1999, partially
offset by the application of the net proceeds from our initial public offering
and principal payments on our capital leases. The application of the net
proceeds from our initial public offering that reduced cash from financing is as
follows.

<TABLE>
<S> <C>
Net proceeds ........................................................ $34.4 million
Less:

Redemption of Series A Preferred Stock ........................ 19.7 million
Retirement of long term debt .................................. 7.3 million
-------------
Remaining after application of net proceeds ......................... $ 7.4 million
=============
</TABLE>

As of April 30, 2000, we had cash and cash equivalents of $88.6 million
as compared to $3.1 million at April 30, 1999, primarily as a result of the
receipt and application of the net proceeds from our initial public offering and
secondary offering as well as cash generated by ongoing operations. In addition,
we have a line of credit with the ability to borrow the lesser of $3.0 million
or 80% of qualified accounts receivable. At April 30, 2000, borrowings of $3.0
million were available and no borrowings were outstanding. We have begun
discussions with the bank to renew the line of credit which is due to expire on
August 20, 2000.

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

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

20
<PAGE>

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

IMPACT OF EUROPEAN MONETARY CONVERSION

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

We are still assessing the impact that the conversion to the euro will
have on our internal systems, the sale of our products, and the European and
global economies. To date we have experienced limited sales activities in the
European economies, substantially all of which have been in U.S. dollars. Based
on our assessments to date, we believe our systems should be able to accommodate
the conversion to the euro and we do not expect there will be any material costs
to address this issue.

FUTURE GROWTH AND OPERATING RESULTS SUBJECT TO RISK

Our business and the value of our stock are subject to a number of
risks, which are set out below. If any of these risks actually occur, our
business, financial condition or operating results could be materially adversely
affected, which would likely have a corresponding impact on our common stock.
These risk factors should be carefully reviewed.

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

Our revenue historically has come from a small number of customers.
A customer may stop buying our products or significantly reduce its orders
for our products for a number of reasons, including the acquisition of a
customer by another company. If this happens, our revenue and business would
be materially and adversely affected. Our five largest customers accounted
for over 75% of our revenue in fiscal 2000, over 65% of our revenue in fiscal
1999 and over 75% of our revenue in fiscal 1998. Qwest/LCI accounted for 57%
of our revenue in fiscal 2000, and 42% of our revenue in fiscal 1999 and in
fiscal 1998. Our four next largest customers accounted collectively for 20%
of our revenue in fiscal 2000, 23% of our revenue in fiscal 1999 and 38% of
our revenue in fiscal 1998. As an example of this risk, MCI accounted for
$7.6 million, or more than 50%, of our revenue in fiscal 1997, but only $1.4
million, or approximately 11%, of our revenue in fiscal 1998. This reduction
began shortly before the acquisition of MCI by Worldcom.

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

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

21
<PAGE>

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

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

- delays outside of our control in the installation of product for our
customers;

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

- competitive pressures;

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

- variations in our sales or distribution channels.

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

In addition, the sales cycle for our products is typically lengthy.
Before ordering our products our customers perform significant technical
evaluations, which typically last up to 90 days in the case of our echo
cancellation products and up to 180 days in the case of our optical
communications products. Once an order is made, delivery times can vary
depending on the product ordered, with delivery times for optical communications
products exceeding those for our echo cancellation products. As a result,
revenue forecasted for a specific customer for a particular quarter may not
occur in that quarter. Because of the potential large size of our customers'
orders, this would adversely affect our revenue for the quarter.

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

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

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

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

- the timing of personnel hiring.

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

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<PAGE>

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

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

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

We operate in an industry that experiences rapid technological
change, and if we do not successfully develop and introduce our new products
and our existing products become obsolete due to product introductions by
competitors, our revenues will decline. Our ability to maintain and increase
revenue in the future will depend primarily on:

- continued acceptance of our Broadband Echo Cancellation System;

- our successful introduction of a next generation echo cancellation
system; and

- our successful introduction and sale of our new optical amplifiers.

However, we may not be able to successfully produce or market our new
products in commercial quantities, complete product development when
anticipated, or increase sales. These risks are of particular concern when a new
generation product is introduced. As a result, while we believe we will achieve
our product introduction dates, they may be delayed. Prior to fiscal 2000, sales
of our 18T1 and 18E1 echo cancellation products accounted for the vast majority
of our revenue. However, in fiscal 2000 sales of our fourth generation echo
cancellers and our broadband system have generated the majority of our revenue
growth. Shipments of our optical amplifiers began in the third quarter of
calendar 1996 and accounted for substantially all of our revenue for optical
communications products to date. In the past, we experienced an unforeseen delay
in the development of one of our products due to the need to design around a
part that did not function as anticipated and also when the first version of one
of our optical communications products did not fully meet customer requirements.
We have in the past experienced, and in the future may experience, similar
unforeseen delays in the development of our new products. We must devote a
substantial amount of resources in order to develop and achieve commercial
acceptance of our new echo cancellation and optical communications products. We
may not be able to address evolving demands in these markets in a timely or
effective way. Even if we do, customers in these markets may purchase or
otherwise implement competing products.

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

23
<PAGE>

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

To date, the vast majority of our revenue has been derived from
sales of our echo cancellation products. If we are not able to develop
substantial revenue from sales of our optical communications products, our
ability to grow our business may be substantially impaired. In fiscal 1998,
1999 and 2000, we derived approximately 94.1%, 93.7% and 91.8%, respectively,
of our revenue from the sale of our echo cancellation products. We expect
that a substantial majority of our revenue will continue to come from sales
of our echo cancellation products for the foreseeable future.

To date, the vast majority of our optical revenue has come from a few
customers, one of whom is located in the Far East. Due to our dependence on such
a small number of optical customers at this time and the political and economic
volatility in certain parts of the Far East, our optical revenue could be
subject to abrupt and unanticipated changes in demand. Until we can diversify
our optical revenue stream, both in terms of customer and geographic mix, we may
experience unexpected adverse swings in optical revenue from quarter to quarter.

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

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

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

Most of our competitors and potential competitors have substantially
greater name recognition and technical, financial and marketing resources than
we do. Such competitors may undertake more extensive marketing campaigns, adopt
more aggressive pricing policies and devote substantially more resources to
developing new products than we will. For more information on the competition we
face, see "Item 1 - Business-Competition."

IF WE DO NOT RETAIN KEY TELINNOVATION PERSONNEL, WE MAY NOT BE ABLE
TO REALIZE THE BENEFITS WE EXPECT FROM OUR ACQUISITION OF TELINNOVATION.

On February 1, 2000, we completed the acquisition of Telinnovation.
We believe this acquisition provides us with expanded opportunities in the
newly developing voice over the internet and packet based markets where echo
cancellation will be an important issue. However, our ability to successfully
execute in these new markets is greatly dependent on our ability to retain
the key personnel from Telinnovation. Although a significant portion of the
purchase price was directly linked to continued employment over a three year
period, there is no guarantee that these key employees will remain in our
employment until after we have successfully penetrated these markets.

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

In order to respond to increasing competition and our anticipation
that average selling prices will decrease,

24
<PAGE>

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

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

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

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

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

- rapid technological developments;

- frequent enhancements to existing products and new product
introductions;

- changes in end user requirements; and

- evolving industry standards.

WE MAY NOT BE ABLE TO RESPOND QUICKLY AND EFFECTIVELY TO THESE RAPID
CHANGES. The emerging nature of these products and their rapid evolution will
require us to continually improve the performance, features and reliability
of our products, particularly in response to competitive product offerings.
We may not be able to respond quickly and effectively to these developments.
The introduction or market acceptance of products incorporating superior
technologies or the emergence of alternative technologies and new industry
standards could render our existing products, as well as our products
currently under development, obsolete and unmarketable. In addition, we may
have only a limited amount of time to penetrate certain markets, and we may
not be successful in achieving widespread acceptance of our products before
competitors offer products and services similar or superior to our products.
We may fail to anticipate or respond on a cost-effective and timely basis to
technological developments, changes in industry standards or end user
requirements. We may also experience significant delays in product
development or introduction. In addition, we may fail to release new products
or to upgrade or enhance existing products on a timely basis.

25
<PAGE>

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

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

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

SOME OF THE KEY COMPONENTS USED IN OUR PRODUCTS ARE CURRENTLY
AVAILABLE ONLY FROM SOLE SOURCES, THE LOSS OF WHICH COULD DELAY PRODUCT
SHIPMENTS.

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

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

We anticipate significantly expanding our business capacity to
address potential growth in our customer base and market opportunities.
Expansion of our business may strain our management personnel, operations and
resources. Growth in our customer base may require us to improve our
predictions of what customers are likely to need and when they will need it,
which may also further strain our sales and marketing personnel. Continued
growth will require us to hire more engineering, sales, marketing,
operations, customer support and services, and administrative personnel and
scale our research and development capability, which we may not be able to
do. We may also experience problems in integrating new personnel into our
corporate culture. In addition, new hires may not be productive during the
time that they are being integrated into our business.

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

Historically, we have sold mostly to customers in North America. We
are currently implementing our plans to expand our international presence,
which will require additional hiring of personnel for the overseas market and
other expenditures. Our planned expansion overseas may not be successful. As
we expand our sales focus further into international markets, we will face
additional and complex issues that we may not have faced before, such as
addressing currency fluctuations, manufacturing overseas and import/export
controls, which will put additional

26
<PAGE>

strain on our management personnel. In the past, substantially all of our
international sales have been denominated in U.S. dollars, however, in the
future, we may be forced to denominate a greater amount of international sales
in foreign currencies. The number of installations we will be responsible for is
likely to increase as a result of our continued international expansion. In the
past, we have experienced difficulties installing one of our echo cancellation
products overseas. In addition, we may not be able to establish more
relationships with original equipment manufacturers. If we do not, our ability
to increase sales could be materially impaired.

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

We depend heavily on Tim Montgomery, our President and Chief
Executive Officer, and on other key management and technical personnel, for
the conduct and development of our business and the development of our
products. If we lose the services of any one of these people for any reason,
this could adversely affect our ability to conduct and expand our business
and to develop new products. We believe that our future success will depend
in large part upon our continued ability to attract, retain and motivate
highly skilled employees, who are in great demand. However, we may not be
able to do so.

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

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

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

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

ACQUISITIONS AND INVESTMENTS MAY ADVERSELY AFFECT OUR BUSINESS.

We regularly review acquisition and investment prospects that would
complement our existing product offerings, augment our market coverage,
secure supplies of critical materials or enhance our technological
capabilities. Acquisitions or investments could result in a number of
financial consequences, including:

- potentially dilutive issuances of equity securities;

27
<PAGE>

- large one-time write-offs;

- reduced cash balances and related interest income;

- higher fixed expenses which require a higher level of revenues to
maintain gross margins;

- the incurrence of debt and contingent liabilities; and

- amortization expenses related to goodwill and other intangible assets.

Furthermore, acquisitions involve numerous operational risks,
including:

- difficulties in the integration of operations, personnel,
technologies, products and the information systems of the acquired
companies;

- diversion of management's attention from other business concerns;

- diversion of resources from our existing businesses, products or
technologies;

- risks of entering geographic and business markets in which we have no
or limited prior experience; and

- potential loss of key employees of acquired organizations.

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We do not engage in any foreign currency hedging transactions, and
therefore do not believe we are subject to exchange rate risk. Our exposure to
market risk for changes in interest rates relates primarily to our cash and cash
equivalents. We maintain our invested cash and cash equivalent portfolio
holdings in various short-term securities. Because of the short-term duration of
the financial instruments held, we do not believe that our financial instruments
are materially sensitive to changes in interest rates. Our cash and cash
equivalents as of April 30, 2000 of $88.6 million all have maturities of 35 days
or less and bear an average interest rate of 4.2%. The estimated fair value of
our cash and cash equivalents approximates the principal amounts reflected above
based on the short maturities of these instruments.

28
<PAGE>

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

DITECH COMMUNICATIONS CORPORATION
INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants ............................................. 30
Balance Sheets ................................................................ 31
Statements of Operations ...................................................... 32
Statements of Stockholders' Equity (Deficit) .................................. 33
Statements of Cash Flows ...................................................... 34
Notes to Financial Statements ................................................. 35
</TABLE>

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<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS

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

In our opinion, the accompanying balance sheets and the related
statements of operations, stockholders' equity (deficit) and cash flows present
fairly, in all material respects, the financial position of Ditech
Communications Corporation at April 30, 1999 and 2000, and the results of its
operations and its cash flows for each of the three years in the period ended
April 30, 2000, in conformity with accounting principles generally accepted in
the United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.

PricewaterhouseCoopers LLP
May 24, 2000
San Jose, California

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<PAGE>

DITECH COMMUNICATIONS CORPORATION

BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
APRIL 30,
------------------------------------
1999 2000
---------------- ----------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................................ $3,114 $88,616
Accounts receivable, net of allowance for doubtful accounts of $100 and
$400 at April 30, 1999 and 2000, respectively ....................... 3,068 20,349
Inventories .......................................................... 4,606 6,596
Deferred income taxes ................................................ 575 1,839
Other current assets ................................................. 88 352
Income taxes receivable .............................................. -- 1,412
---------------- ----------------
Total current assets ............................................. 11,451 119,164
Property and equipment, net .............................................. 1,538 2,680
Purchased technology, net ................................................ -- 24,617
Goodwill, net ............................................................ -- 10,790
Deferred income taxes .................................................... -- 4,703
Other assets ............................................................. 1,341 3,198
---------------- ----------------
Total assets ..................................................... $14,330 $165,152
================ ================
LIABILITIES

Current liabilities:
Accounts payable ..................................................... $2,559 $5,201
Note payable, current portion ........................................ 1,125 --
Accrued expenses ..................................................... 1,454 4,228
Deferred revenue ..................................................... 531 2,074
Income taxes payable ................................................. 417 --
Obligations under capital lease, current portion ..................... 61 55
---------------- ----------------
Total current liabilities ........................................ 6,147 11,558
Deferred income taxes .................................................... 4 --
Note payable, net of current portion ..................................... 6,188 --
Obligations under capital lease, net of current portion .................. 76 21
---------------- ----------------
Total liabilities ................................................ 12,415 11,579
---------------- ----------------
Commitments and contingencies (Note 6)
Redeemable preferred stock:
Series A preferred stock, $0.001 par value, 17,250 shares authorized,
issued and outstanding at April 30, 1999, no shares at April 30, 2000 19,241 --
Series B convertible preferred stock, $0.001 par value, 6,260 shares
authorized issued and outstanding at April 30, 1999, no shares at April
30, 2000............................................................. 6,017 --
---------------- ----------------
Total redeemable preferred stock ................................. 25,258 --
---------------- ----------------
STOCKHOLDERS' EQUITY (DEFICIT)

Common stock, $0.001 par value: 50,000 shares authorized and 9,188 and
28,274 shares issued and outstanding at April 30, 1999 and 2000 ....... 9 28
Deferred stock compensation .............................................. (1,229) (21,937)
Additional paid in capital ............................................... 3,081 171,119
Retained earnings/(accumulated deficit) .................................. (25,204) 4,363
---------------- ----------------
Total stockholders' equity (deficit) ............................. (23,343) 153,573
---------------- ----------------
Total liabilities, redeemable preferred stock and stockholders' equity
(deficit) ........................................................... $14,330 $165,152
================ ================
</TABLE>
The accompanying notes are an integral part of these financial statements

31
<PAGE>

DITECH COMMUNICATIONS CORPORATION

STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
------------------------------------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Revenue ............................................. $ 12,326 $ 25,364 $116,946
Cost of goods sold .................................. 5,651 11,858 34,913
-------- -------- --------
Gross profit .................................... 6,675 13,506 82,033
-------- -------- --------
Operating expenses:
Sales and marketing ............................. 2,405 5,759 9,411
Research and development ........................ 2,367 3,860 8,559
General and administrative ...................... 1,279 2,399 4,296
Purchased research and development .............. -- -- 8,684
Amortization of goodwill and purchased technology -- -- 1,860
-------- -------- --------
Total operating expenses ........................ 6,051 12,018 32,810
-------- -------- --------
Income from operations .............................. 624 1,488 49,223
Other income (expense):
Interest income ................................. 175 202 1,725
Interest expense ................................ (768) (702) (180)
-------- -------- --------
Total other income (expense) ................. (593) (500) 1,545
-------- -------- --------
Income before provision for income taxes ..... 31 988 50,768
Provision for income taxes .......................... 24 413 20,765
-------- -------- --------
Net income .......................................... 7 575 30,003
Accretion of mandatorily redeemable preferred stock to
redemption value ............................... 1,374 1,497 99
-------- -------- --------
Net income (loss) attributable to common stockholders $ (1,367) $ (922) $ 29,904
======== ======== ========
Net income (loss) per share attributable to common
stockholders
Basic ........................................... $ (0.22) $ (0.13) $ 1.27
======== ======== ========
Diluted ......................................... $ (0.22) $ (0.13) $ 1.11
======== ======== ========
Number of shares used in per share calculations
Basic ........................................... 6,122 7,132 23,505
======== ======== ========
Diluted ......................................... 6,122 7,132 27,016
======== ======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements

32
<PAGE>

DITECH COMMUNICATIONS CORPORATION

STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)

(IN THOUSANDS)

<TABLE>
<CAPTION>
RETAINED
COMMON STOCK DEFERRED ADDITIONAL EARNINGS/
--------------------------- STOCK PAID IN (ACCUMULATED
SHARES AMOUNT COMPENSATION CAPITAL DEFICIT) TOTAL
----------- ----------- ---------------- ------------ -------------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, MAY 1, 1997 ............. 5,720 $-- $-- $-- $ (22,768) $ (22,768)
Issuance of stock under employee
stock plans ..................... 306 4 -- 19 -- 23
Issuance of common stock .......... 134 2 -- 53 -- 55
Accretion for dividend on Series A
and B redeemable preferred stock -- -- -- -- (1,374) (1,374)
Net income ........................ -- -- -- -- 7 7
--------- --------- --------- ------- --------- ---------
BALANCES, APRIL 30, 1998 .......... 6,160 6 -- 72 (24,135) (24,057)
Issuance of stock under employee
stock plans ..................... 2,698 2 -- 909 -- 911
Issuance of common stock .......... 334 1 -- 739 -- 740
Repurchase of common stock ........ (4) -- -- (2) -- (2)
Accretion for dividend on Series A
and B redeemable preferred stock -- -- -- -- (1,497) (1,497)
Redemption of Series C preferred
stock ........................... -- -- -- -- (147) (147)
Tax benefit on exercise of stock
options ......................... -- -- -- 43 -- 43
Deferred compensation on issuance
of stock options ................ -- -- (1,320) 1,320 -- --
Amortization of deferred stock
compensation .................... -- -- 91 -- -- 91
Net income ........................ -- -- -- -- 575 575
--------- --------- --------- ------- --------- ---------
BALANCES, APRIL 30, 1999 .......... 9,188 9 (1,229) 3,081 (25,204) (23,343)
Issuance of stock under employee
stock plans ..................... 651 1 -- 690 -- 691
Issuance of common stock, net of
issuance costs .................. 8,900 9 -- 82,376 -- 82,385
Repurchase of common stock ........ (11) -- -- (4) -- (4)
Accretion for divided on Series A
and Series B redeemable preferred
stock ........................... -- -- -- -- (99) (99)
Redemption of Series A preferred
stock ........................... -- -- -- -- (337) (337)
Conversion of Series B preferred
stock ........................... 8,346 8 -- 6,033 -- 6,041
Issuance of common stock in
purchase acquisition ............ 1,200 1 (22,950) 68,849 -- 45,900
Tax benefit of employee stock
transactions .................... -- -- -- 9,995 -- 9,995
Deferred compensation on issuance
of stock options to a consultant -- -- (99) 99 -- --
Amortization of deferred stock
compensation .................... -- -- 2,341 -- -- 2,341
Net income ........................ -- -- -- -- 30,003 30,003
--------- --------- --------- ----------- --------- ---------
BALANCES, APRIL 30, 2000 .......... 28,274 $ 28 $ (21,937) $ 171,119 $ 4,363 $ 153,573
========= ========= ========= =========== ========= =========
</TABLE>

The accompanying notes are an integral part of these financial statements

33
<PAGE>

DITECH COMMUNICATIONS CORPORATION

STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
---------------------------------------
1998 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ................................................ $ 7 $ 575 $ 30,003
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization .......................... 175 482 1,715
Increase (decrease) in provision for doubtful accounts . (45) 70 300
Loss on disposal of property and equipment ............. -- 34 89
Tax benefit from exercise of stock options.............. -- 43 9,995
Deferred income taxes .................................. (18) (189) (5,970)
Amortization of deferred stock compensation ............ -- 91 2,341
Amortization of purchased technology and goodwill ...... -- -- 1,860
Purchased research and development ..................... -- -- 8,684
Change in assets and liabilities:
Accounts receivable ................................. 58 (948) (17,581)
Inventories ......................................... (503) (2,443) (1,990)
Other current assets ................................ (58) 1 (263)
Income taxes receivable/payable ..................... 705 559 (1,874)
Accounts payable .................................... (177) 1,347 2,642
Accrued expenses and other .......................... (246) 562 2,774
Deferred revenue .................................... -- 531 1,543
-------- -------- --------
Net cash provided by (used in) operating activities (102) 715 34,268
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment ....................... (823) (698) (1,968)
Other assets .............................................. -- (634) (3,305)
Maturity of investments ................................... 221 -- --
-------- -------- --------
Net cash used in investing activities ................. (602) (1,332) (5,273)
-------- -------- --------
Cash flows from financing activities:
Issuance of note payable .................................. 8,000 -- --
Repayment of subordinated promissory notes ................ (8,000) -- --
Repurchase of common stock ................................ -- (2) (4)
Principal payments on note payable ........................ (125) (563) (7,313)
Principal payments under capital lease obligations ........ (15) (48) (61)
Redemption Series A preferred stock ....................... -- -- (19,655)
Proceeds from issuance of common stock .................... 55 -- 82,849
Proceeds from employee stock plan issuances ............... 23 911 691
-------- -------- --------
Net cash provided by (used in) financing activities ... (62) 298 56,507
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ........ (766) (319) 85,502
Cash and cash equivalents, beginning of year ................ 4,199 3,433 3,114
-------- -------- --------
Cash and cash equivalents, end of year ...................... $ 3,433 $ 3,114 $ 88,616
======== ======== ========
</TABLE>

The accompanying notes are an integral part of these financial statements

34
<PAGE>

DITECH COMMUNICATIONS CORPORATION

NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND NATURE OF BUSINESS

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

USE OF ESTIMATES

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

REVENUE RECOGNITION

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

WARRANTIES

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

RESEARCH AND DEVELOPMENT

Research and development costs are expensed as incurred.

CASH AND CASH EQUIVALENTS

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

financial institutions.

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

35
<PAGE>

INVENTORIES

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

PROPERTY AND EQUIPMENT

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

INTANGIBLE ASSETS

The excess of the cost over the fair value of net assets of
purchased businesses is recorded as goodwill and is amortized on a
straight-line basis over its estimated useful life, generally five years or
less. The cost of other acquired intangibles is amortized on a straight-line
basis over their estimated useful lives. The Company continually evaluates
the carrying value of goodwill and other intangible assets. Any impairments
would be recognized when the expected future operating cash flows derived
from such intangible assets is less than their carrying value.

Amortization expense for goodwill and purchased technology
associated with the Telinnovation acquisition (see Note 3) was $1.3 million
and $564,000, respectively.

LONG-LIVED ASSETS

The Company periodically evaluates the recoverability of its long-lived
assets based upon expected undiscounted cash flows and recognizes impairment
from the carrying value of long-lived assets, if any, based on the fair value of
such assets.

CERTAIN RISKS AND CONCENTRATIONS

The Company's products are concentrated in the telecommunications
component industry, which is highly competitive and rapidly changing. Revenues
for the Company's products are concentrated with a relatively limited number of
customers. During the year ended April 30, 1998, three customers accounted for
67% (42%, 14%, and 11%) of net revenues. During the year ended April 30, 1999,
one customer accounted for 42% of net revenues. During the year ended April 30,
2000, one customer accounted for 57% of net revenues. Net revenues from
customers outside the United States, which were denominated in U.S. dollars,
were 6%, 13% and 12% in 1998, 1999 and 2000, respectively. The Company's
accounts receivable was concentrated with four customers at April 30, 1999
(representing 25%, 12%, 12% and 10% of receivables) and two customers at April
30, 2000 (57% and 12%). The Company performs ongoing credit evaluations of its
customers' financial condition and generally requires no collateral from its
customers. The Company maintains an allowance for doubtful accounts receivable
based upon the expected collectibility of accounts receivable.

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

36
<PAGE>

INCOME TAXES

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

COMPREHENSIVE INCOME

The Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("FAS 130"). FAS 130 establishes standards
for reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. There was no difference between the
Company's net income and its total comprehensive income for 1998, 1999 and 2000.

ACCOUNTING FOR STOCK-BASED COMPENSATION

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

EARNINGS PER SHARE

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

37
<PAGE>

A reconciliation of the numerator and denominator used in the
calculation of the historical basic and diluted net income (loss) per share
follows (in thousands, except per share amounts):

<TABLE>
<CAPTION>
YEARS ENDED APRIL 30,
---------------------------------
1998 1999 2000
------- ------ --------
<S> <C> <C> <C>
Historical net income (loss) per share, basic and diluted:
Basic:
Net income ............................................. $ 7 $ 575 $ 30,003
Less accretion on mandatorily redeemable preferred stock 1,374 1,497 99
------- ------ --------
Net income (loss) attributable to common stockholders .. $(1,367) $ (922) $ 29,904
======= ====== ========
Weighted average shares of common stock outstanding .... 6,122 8,088 24,417
Less stock subject to repurchase ....................... -- (956) (912)
------- ------ --------
Shares used in calculation of basic per share numbers .. 6,122 7,132 23,505
======= ====== ========
Net income (loss) per share ............................ $ (0.22) $(0.13) $ 1.27
======= ====== ========
Diluted:
Net income ............................................. $ 7 $ 575 $ 30,003
Less accretion on mandatorily redeemable preferred stock 1,374 1,497 99
------- ------ --------
Net income (loss) attributable to common stockholders .. $(1,367) $ (922) $ 29,904
======= ====== ========
Shares used in calculation of basic per share numbers .. 6,122 7,132 23,505
Add back shares subject to repurchase .................. -- -- 912
Assumed conversion of Series B preferred ............... -- -- 894
Dilutive effect of stock options ....................... -- -- 1,705
------- ------ --------
Shares used in calculation of diluted per share numbers 6,122 7,132 27,016
======= ====== ========
Net income (loss) per share ............................ $ (0.22) $(0.13) $ 1.11
======= ====== ========
</TABLE>

SEGMENT INFORMATION

The Company applies the Financial Accounting Standards Board's
Statement of Financial Accounting Standard No. 131 "Disclosures about Segments
of an Enterprise and Related Information," ("SFAS 131"). Under SFAS 131, the
Company is required to use a "management" approach to reporting its segments.
The management approach designates that internal organization that is used by
management for making operating decisions and assessing performance as the
source of the Company's segments. The Company currently generates the vast
majority of its revenue from a single product line/segment.

RECENT ACCOUNTING PRONOUNCEMENTS

38
<PAGE>

previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. FIN 44 is effective July
1, 2000, but certain provisions cover specific events that occur after either
December 15, 1998, or January 12, 2000. The Company does not expect that the
adoption of the provisions will have a material effect on the financial
statements.

3. ACQUISITIONS

On February 1, 2000, the Company completed the acquisition of
substantially all the assets of Telinnovation Service Corporation, Telinnovation
Corporation and Telinnovation Partners (collectively "Telinnovation") of
Mountain View, California in exchange for 1,200,000 shares of the Company's
common stock. A portion of these shares are being held in escrow and will be
released upon completion of certain events. The acquisition has been accounted
for using the purchase method.

Included in the 1,200,000 shares issued as part of the Telinnovation
Purchase Agreement were 400,000 restricted shares of common stock issued to the
Telinnovation Employees. These restricted shares are tied to the employees'
continued employment with Ditech and vest over a three-year period following the
closing of the Acquisition. This stock has been recorded as deferred stock
compensation and will be charged to the statement of operations as stock
compensation over the three-year vesting period.

The allocation of the stock purchase price is summarized below (in
thousands):

<TABLE>
<S> <C>
Developed technology ................................ $25,914
Purchased research and development .................. 8,684
Goodwill ............................................ 11,213
Net assets acquired ................................. 89
-------------
45,900
Restricted shares tied to continued employment 22,950
-------------
$68,850
=============
</TABLE>

The amounts allocated to purchased research and development were
determined through established valuation techniques in the high-technology
communications industry and were expensed upon acquisition because
technological feasibility had not been established and no future alternative
uses existed. The purchased research and development relates to the
development of packet based echo cancellation and voice quality products
which were under development as of the acquisition date. Research and
development costs to bring the products from the acquired company to
technological feasibility are estimated to total approximately $430,000. The
Company anticipates the development will be completed between twelve and
eighteen months.

The nature of the efforts to develop the purchased in-process research
and development into commercially viable products principally relates to the
completion of all planning, designing, prototyping and testing activities that
are necessary to establish that the product can be produced to meet its design
specifications including function, features and technical performance
requirements. The resulting net cash flows from such products are based on
estimates of revenue, cost of revenue, research and development costs, sales and
marketing costs, and income taxes from such projects.

The amount allocated to purchased research and development was charged
to the statement of operations in the fourth quarter of fiscal year 2000. The
cost of developed technology and goodwill will be amortized to expense over
their estimated useful lives of five years. Amortization expense associated with
purchased technology and goodwill totaled $1.9 million in fiscal 2000.

The following unaudited pro forma financial information reflects the
results of operations for the years ended April 30, 1999 and 2000, as if the
acquisition had occurred on May 1, 1998. These pro forma results have

39
<PAGE>

been prepared for comparative purposes only and do not purport to be indicative
of what operating results would have been had the acquisitions actually taken
place on May 1, 1998, and may not be indicative of future operating results, (in
thousands except share and per share amounts).

<TABLE>
<CAPTION>
YEAR ENDED APRIL 30,
---------------------------------
1999 2000
---------------- -------------
(UNAUDITED)
<S> <C> <C>
Pro forma financial information (unaudited)
Net revenues ........................................................ $26,474 $117,332
---------------- -------------
Income (loss) from operations ....................................... $(12,022) $42,251
---------------- -------------
Net income (loss) attributable to common stockholders ............... $(8,987) $25,742
---------------- -------------
Net income (loss) per share attributable to common stockholders:
Basic ........................................................... $(1.13) $1.07
---------------- -------------
Diluted ......................................................... $(1.13) $0.92
---------------- -------------
Weighted average shares:
Basic ........................................................... 7,932 24,105
---------------- -------------
Diluted ......................................................... 7,932 27,916
---------------- -------------
</TABLE>

4. BALANCE SHEET ACCOUNTS

INVENTORIES:

Inventories comprised (in thousands):

<TABLE>
<CAPTION>
APRIL 30,
-------------------------------
1999 2000
------------- --------------
<S> <C> <C>
Raw materials and work in progress ...................... $2,099 $1,717
Work in progress ........................................ 263 849
Finished goods .......................................... 2,244 4,030
------------- --------------
Total ............................................... $4,606 $6,596
============= ==============
</TABLE>

PROPERTY AND EQUIPMENT:

Property and equipment comprised (in thousands):

<TABLE>
<CAPTION>
APRIL 30,
------------------------------
1999 2000
------------- -------------
<S> <C> <C>
Furniture and fixtures .................................................... $154 $339
Equipment ................................................................. 1,680 3,067
Leasehold improvements .................................................... 89 114
Computer software ......................................................... 250 620
------------- -------------
2,173 4,140
Less: accumulated depreciation and amortization ........................... (635) (1,460)
------------- -------------
Total ................................................................. $1,538 $2,680
============= =============
</TABLE>

Included in property and equipment are assets under capital leases of
$209,000 at April 30, 1999 and 2000, respectively, with related accumulated
amortization of $46,000 and $86,000, respectively. Prior to fiscal year 1998,
the Company did not have any assets under capital lease.

40
<PAGE>
ACCRUED EXPENSES:

Accrued expenses comprised (in thousands):

<TABLE>
<CAPTION>
APRIL 30,
------------------------------
1999 2000
------------- -------------
<S> <C> <C>
Accrued royalties ......................................................... $388 $--
Accrued employee compensation ............................................. 624 2,425
Accrued professional services ............................................. 420 108
Accrued warranty .......................................................... 12 905
Other accrued expenses .................................................... 10 790
------------- -------------
Total ................................................................. $1,454 $4,228
============= =============
</TABLE>

5. NOTE PAYABLE

In August 1997, the Company entered into an $8 million loan with a bank
in conjunction with its line of credit (see Note 6), collateralized by
substantially all the Company assets. The balance of this loan was repaid in
full in July of 1999, subsequent to the completion of our initial public
offering. No amounts remain outstanding as of April 30, 2000.

6. COMMITMENTS AND CONTINGENCIES

LEASES

The Company leases its office facilities under a non-cancelable
operating lease expiring in June 2006. The Company is responsible for taxes,
insurance and maintenance expenses related to the leased facilities. Under the
terms of the lease agreement, the lease may be extended, at the Company's
option, and the lease provides for potential adjustments of the minimum monthly
rent upon exercise of the option(s). The Company also has operating leases on
furniture and equipment from unrelated parties. Additionally, the Company has
capital leased equipment with future minimum payments.

At April 30, 2000, future minimum payments under the leases are as
follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED APRIL 30, OPERATING CAPITAL
--------------------- --------- -------
<S> <C> <C>
2001 $1,730 $58
2002 1,917 23
2003 1,889 9
2004 1,853 --
2005 1,909 --
2006 and thereafter 2,296 --
-------------- --------------
$11,594 90
==============
Less amount representing interest 14
--------------
76
Less current portion 55
--------------
$21
==============

</TABLE>

Rent expense for the years ended April 30, 1998, 1999 and 2000 was
$384,000, $728,000 and $1,276,000, respectively.

41
<PAGE>

LINE OF CREDIT

The Company has a line of credit agreement with its bank under which it
may borrow the lesser of $3 million or 80% of eligible accounts receivable.
Borrowings bear interest at the lesser of the bank's prime rate or LIBOR plus
1.25%. The line of credit is subject to certain covenants including a minimum
quick ratio and minimum quarter earnings before interest, taxes, depreciation
and amortization. The line expires on August 20, 2000. There were no amounts
outstanding at April 30, 1999 or 2000. However, letter of credit facilities
outstanding of $12,000 have reduced the amount available under the line of
credit by an equal amount.

ARBITRATION

In January 1998, the Company filed a demand for Arbitration with the
American Arbitration Association in Los Angeles County against Antec
Corporation, the successor-in-interest through merger to Texscan Corporation.
The demand for arbitration alleges that Antec/Texscan breached a contract to
purchase optical amplifier products and sought monetary damages. In June 1999,
the Company received a favorable ruling from the arbitration panel in the matter
related to Antec Corporation's breach of a purchase contract. Subsequent to the
favorable ruling, the Company was notified by Antec's counsel of its intent to
contest the arbitrator's decision. In August, the Company and Antec reached a
final settlement in which the Company received a minor settlement award.
Additionally, the Company and Antec entered into a patent license agreement. The
Company recognized $1.9 million of revenue in the Company's second quarter of
fiscal 2000 associated with the fixed license fee paid in fiscal 2000.

7. REDEEMABLE PREFERRED STOCK

Ditech is authorized to issue, from time to time, in one or more
series, 5,000,000 shares of preferred stock at a $0.001 par value. The board of
directors may determine the rights, preferences, privileges and restrictions
granted or imposed upon any series of preferred stock. As of April 30, 2000, no
preferred stock was outstanding.

In March 1997, the Company issued 17,250,000 shares of Series A
redeemable preferred stock and 6,259,718 shares of Series B redeemable preferred
stock, in conjunction with the recapitalization of the Company. In June 1999,
after completion of our initial public offering, all shares of Series A
redeemable preferred were retired in exchange for cash generated from our
initial public offering and all shares of Series B redeemable preferred stock
were converted into common stock at the stated exchange ratio. Prior to the
retirement or conversion these shares carried certain rights and privileges as
more fully set out below.

LIQUIDATION RIGHTS

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

CONVERSION RIGHTS

The Series A preferred stock has no conversion rights. The Series B
preferred stockholders have the right at any time to convert each share of
preferred stock into shares of common stock at the specified conversion rate per
share, which currently is $1.29 per share of common stock. The conversion rate
will be adjusted for stock splits

42
<PAGE>

and recapitalization. In the event of a public offering of the Company's common
stock where the net proceeds received by the Company equals or exceeds
$20,000,000 and the offering price is at least $3.89 per share, or in the event
of approval from two thirds of Series B preferred stockholders, all shares of
the Series B preferred stock automatically convert into common stock at the
specified conversion rate.

REDEMPTION RIGHTS

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

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

VOTING RIGHTS

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

DIVIDEND RIGHTS

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

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

8. STOCKHOLDERS' EQUITY (DEFICIT)

REINCORPORATION AND STOCK SPLITS

The Company reincorporated in Delaware on April 21, 1999; all amounts
have been retroactively adjusted to effect this presentation. On April 27, 1999,
the Company effected a two-for-three reverse split of the Company's common
stock. On February 16, 2000, the Company effected a two-for-one split of the
Company's common stock. All relevant share data has been adjusted to reflect
these stock splits.

RECAPITALIZATION

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

43
<PAGE>

EMPLOYEE STOCK PURCHASE PLAN.

In March and April 1999 the Board adopted, and the stockholders
approved, the Company's 1999 Employee Stock Purchase Plan (the "Purchase Plan")
covering an aggregate of 266,666 shares of common stock. Employees who
participate in an offering period can have up to 10% of their earnings withheld
pursuant to the Purchase Plan. The amount withheld will then be used to purchase
shares of the common stock on specified dates determined by the Board. The price
of common stock purchased under the Purchase Plan will be equal to 85% of the
lower of the fair market value of the common stock on the commencement date of
each offering period or on the specified purchase date. No shares were purchased
under this Plan during fiscal 1999. In fiscal 2000, 67,958 shares were purchased
under the plan.

STOCK OPTION PLANS

The Company's 1997 Stock Option Plan serves as the successor equity
incentive program to the Company's 1987 Stock Option Plan and the Supplemental
Stock Option Plan (the "Predecessor Plans"). All outstanding stock options under
the Predecessor Plans continue to be governed by the terms and conditions of the
1997 Stock Option Plan. The Company has reserved 4,000,000 shares of common
stock for issuance under the 1997 Stock Option Plan. Under the 1997 Stock Option
Plan, the Board of Directors could grant incentive or non-statutory stock
options at a price not less than 100% or 85%, respectively, of fair market value
of common stock, as determined by the Board of Directors, at grant date. In
November 1998, the Company adopted its 1998 Stock Option Plan and determined not
to grant any further options under its 1997 Stock Option Plan. In March and
April 1998 the Company increased the number of shares reserved for issuance
under the 1998 Stock Option Plan. The Company has reserved a total of 1,856,082
shares of common stock for issuance under the 1998 Stock Option Plan, under
terms similar to those granted under the 1997 Stock Option Plan. During fiscal
2000, the Company adopted two non-statutory stock option plans under which a
total of 1,350,000 shares were reserved for issuance. The terms of non-statutory
options granted under these plans are substantially consistent with
non-statutory options granted under the 1997 and 1998 plans.

Options under the 1997 Stock Option Plan and 1998 Stock Option Plan may
be immediately exercisable. The options have a ten-year term. Shares issued
through early option exercises are subject to the Company's right of repurchase
at the original exercise price. The number of shares subject to repurchase
generally decreases by 25% of the options shares one year after the grant date,
and thereafter, ratably over 48 months. As of April 30, 2000, 493,000 shares
were subject to repurchase.

In March 1999, the Company adopted the 1999 Non-Employee Directors
Stock Option Plan, and reserved 200,000 shares for issuance under the plan.
Options granted under the plan have a 5 year term and are fully vested at the
date of grant.

44
<PAGE>

Activity under the stock option plans referenced above was as follows
(in thousands, except per share amounts):

<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-----------------------------------------------------------------
SHARES WEIGHTED
AVAILABLE NUMBER OF AGGREGATE AVERAGE
FOR GRANT SHARES EXERCISE PRICE PRICE EXERCISE PRICE
------------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Balances, May 1, 1997 ....... 1,200 1,540 $0.08-$0.41 $222 $0.15
Reservation of shares ... 1,264
Options granted ......... (1,964) 1,964 $0.41 810 $0.41
Options exercised ....... -- (306) $0.08 (23) $0.08
Options cancelled ....... 66 (66) $0.41 (27) $0.41
-------- -------- ------------- -------- ---------
Balances, April 30, 1998 .... 566 3,132 $0.08-$0.41 982 $0.32
Reservation of shares ... 2,056
Reserved shares cancelled (190)

Options granted ......... (1,406) 1,406 $0.41-$4.88 3,110 $2.21
Options exercised ....... -- (2,698) $0.08-$3.75 (911) $0.34
Options cancelled ....... 88 (112) $0.41-$3.75 (67) $0.60
-------- -------- ------------- -------- ---------
Balances, April 30, 1999 .... 1,114 1,728 $0.08-$4.88 3,114 $1.80
Reservation of shares ... 1,350
Options granted ......... (1,744) 1,744 $5.50-$85.75 54,617 $31.32
Options exercised ....... -- (583) $0.08-$4.88 (357) $0.61
Options cancelled ....... 177 (248) $0.41-$48.94 (1,839) $7.48
-------- -------- ------------- -------- ---------
Balances, April 30, 2000 .... 897 2,641 $0.41-$85.75 $55,535 $21.00
======== ======== ======== =========
</TABLE>

Options outstanding at April 30, 2000 (in thousands, except per share
amounts):

<TABLE>
<CAPTION> OPTIONS EXERCISABLE AT
WEIGHTED APRIL 30, 2000
AVERAGE --------------------------------------
WEIGHTED REMAINING WEIGHTED
RANGE OF EXERCISE OPTIONS AVERAGE CONTRACTUAL AVERAGE
PRICES OUTSTANDING EXERCISE PRICE LIFE YEARS OPTIONS EXERCISE PRICE
--------------------- ----------------- ----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
$0.41-$1.50 606 $0.77 8.29 606 $0.77
$3.75-$5.50 507 $4.94 9.00 507 $4.94
$9.00-$11.19 534 $9.03 9.28 534 $9.03
$24.69-$48.94 479 $30.98 8.86 479 $30.98
$56.38-$85.75 515 $63.96 9.80 515 $63.96
--- ---
$0.41-$85.75 2,641 $21.02 9.02 2,641 $21.02
===== =====
</TABLE>

The estimated weighted average fair value of options granted during
fiscal year 1998, 1999 and 2000 was $0.29, $0.60 and $28.74 per share,
respectively. The estimated weighted average fair value of shares granted under
the Employee Stock Purchase Plan was $3.51 in fiscal 2000. The Company applies
Accounting Principles Board Opinion No. 25 and related Interpretations in
accounting for its stock option plan other than that described above. If
compensation cost for the Company's stock option plan had been determined based
on the fair value at the grant dates for awards under those plans consistent
with the method of SFAS 123, the Company's net income for the years ended April
30, 1998, 1999 and 2000 would have been reduced to the pro forma amounts
indicated in the following table (in thousands, except per share amounts):

45
<PAGE>

<TABLE>
<CAPTION>
APRIL 30,
-----------------------------------
1998 1999 2000
------ ------ -------
<S> <C> <C> <C>
Income before provision for income taxes, as reported ... $31 $988 $50,768
Less: net expense per SFAS 123 .......................... 86 128 9,027
------ ------ -------
Pro forma income (loss) before provision for income taxes (55) 860 41,741
Less: pro forma provision (benefit) for income taxes .... (22) 362 17,072
------ ------ -------
Pro forma income (loss) ................................. $(33) $498 $24,669
====== ====== =======
Income as reported ...................................... $7 $575 $30,003
====== ====== =======
Net income (loss) attributable to common shareholders
per share:

Pro forma ........................................... $(0.23) $(0.14) $0.91
====== ====== =======
As reported ......................................... $(0.22) $(0.13) $1.11
====== ====== =======
</TABLE>

The fair value of options granted under the Company's stock plans
during 1998, 1999 and 2000 was estimated on the date of grant using the
Black-Scholes option pricing model. The model utilized the multiple option
approach with the following weighted average assumptions used: no dividend
yield, expected volatility is zero based on private company status in 1998 and
1999, and was 130% in 2000, risk-free interest rates of 5.90%, 4.74% and 6.28%
in 1998, 1999 and 2000, respectively, and expected lives of four years for the
option plans and 6 months for the Employee Stock Purchase Plan. Forfeitures are
recognized as they occur.

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

9. INCOME TAXES

The provision for income taxes reflected in the statements for the
years ended April 30, 1998, 1999 and 2000 were as follows (in thousands):

1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal .......... $41 $590 $21,454
State ............ 1 12 5,282
-------- -------- --------
Total current 42 602 26,736
-------- -------- --------
Deferred:
Federal .......... (19) (258) (5,190)
State ............ 1 69 (781)
-------- -------- --------
Total deferred (18) (189) (5,971)
-------- -------- --------
Total ....... $24 $413 $20,765
======== ======== ========
</TABLE>

The deferred income tax provision reflects the tax effect of changes in
the amounts of temporary differences during each year ended April 30, 1998, 1999
and 2000. As of April 30, 1999 and 2000, the Company's

46
<PAGE>

deferred tax assets and liabilities consisted of (in thousands):

1999 2000
------- -------
<S> <C> <C>
Deferred tax asset (liability):
Uniform capitalization ................................. $314 $283
Depreciation ........................................... (128) (231)
Inventory reserves and other, net ...................... 385 1,691
Purchased technology, goodwill and other
intangibles ........................................ -- 4,799
------- -------
Total .............................................. $571 $6,542
======= =======
</TABLE>

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

<TABLE>
<CAPTION>
1998 1999 2000
--------- --------- --------
<S> <C> <C> <C>
Tax provision at federal statutory rate 34.0% 34.0% 35.0%
State taxes, net of federal benefit .... 13.0 6.1 6.7
Tax-exempt interest income ............. -- -- (0.9)
Other, primarily non-deductible expenses 30.4 1.7 0.1
--------- --------- --------
Total .......................... 77.4% 41.8% 40.9%
========= ========= ========
</TABLE>

10. SEGMENT INFORMATION

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

1998 1999 2000
----------- ----------- ------------
<S> <C> <C> <C>
USA $11,539 $22,107 $102,632
China ........................... -- 275 6,732
Mexico 345 1,294 1,004
Rest of the world .................. 442 1,688 6,578
----------- ----------- ------------
$12,326 $25,364 $116,946
=========== =========== ============
</TABLE>

International sales are entirely comprised of export sales.

11. PROFIT SHARING PLAN

The Company maintains a 401(k) profit sharing plan for all eligible
employees. Employees may contribute to the Plan based on statutory limits. Any
Company contributions are at the discretion of the Board of Directors. The
Company made no contributions to the Plan during the years ended April 30, 1998
and 1999. For the year ended April 30, 2000, the Company contributed $24,000 to
the plan.

47
<PAGE>

12. SUPPLEMENTAL CASHFLOW INFORMATION

<TABLE>
<CAPTION>
1998 1999 2000
----------- ------------ -----------
<S> <C> <C> <C>
Operating:
Interest paid ................................................... $600 $736 $104
Income taxes paid ............................................... -- -- 18,609

Noncash financing and investing activities:
Accretion of preferred stock .................................... 1,374 1,497 99
Acquisition of asset under capital lease ........................ 154 47 --
Redemption of Series C preferred stock .......................... -- 7,508 --
Deferred stock compensation ..................................... -- 1,320 22,950
Purchase of technology rights for common stock .................. -- 740 --
Purchase method acquisition for common stock .................... -- -- 37,216
Conversion of Series B Preferred Stock .......................... -- -- 6,041
Compensation associated with stock options issued to
consultants ................................................. -- -- 99
</TABLE>

13. SUBSEQUENT EVENTS (UNAUDITED)

On June 22, 2000, the Company announced that it had signed a definitive
agreement to acquire privately-held Atmosphere Networks, Inc. of Campbell,
California in a stock and cash merger. Atmosphere Networks is an emerging
provider of optical networking products, enabling carriers to combine various
types of traffic (voice, data and video) onto an optical network. The
acquisition, which is expected to close by the end of the first fiscal quarter
of fiscal 2001, will be accounted for as a purchase.

Under the terms of the agreement, the stockholders of Atmosphere
Networks will receive merger consideration valued at approximately $88.5
million, provided that if the average closing price of a share of Ditech common
stock for a designated period prior to the closing is less than $73.75, the
merger consideration will be valued at 1,200,000 shares of Ditech common stock,
and if such average closing price is greater than $88.50, the merger
consideration will be valued at 1,000,000 shares of Ditech common stock. The
actual merger consideration will consist primarily of Ditech common stock,
provided that certain holders of Atmosphere Networks common stock will receive
cash (estimated not to exceed approximately $10 million) upon the consummation
of the merger. Ditech is also expected to grant the Atmosphere Networks
employees 4-year vesting stock options covering up to 750,000 shares of Ditech
common stock at a price representing up to a 50% discount to market. As a
result, the Company will record deferred stock compensation attributable to
these option grants, which will be recognized as expense ratably over the 4-year
option term. The Company is still evaluating the allocation of the purchased
price to intangible assets including the extent of any purchased research and
development write-off, if any, associated with this acquisition.

ITEM 9 - CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE

Not applicable.

48
<PAGE>

PART III

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Certain information regarding Ditech's directors, 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
Pong C. Lim.............................. 46 Chairman of the Board of Directors
Gregory M. Avis(1)....................... 41 Director
Peter Y. Chung(2)........................ 32 Director
William A. Hasler(1)(2).................. 57 Director
Kenneth E. Jones(1)...................... 53 Director
Andrei M. Manoliu ....................... 48 Director
George J. Turner(2)...................... 62 Director
</TABLE>
------------------------

(1) Member of the Compensation Committee

(2) Member of the Audit Committee

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

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

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

49
<PAGE>

communications companies, including Cisco, Alcatel, Nortel Networks. Dr. Davis
has a BSEE from Southern Methodist University, and a PhD 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 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.

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

GREGORY M. AVIS has been a director of Ditech since February 1997.
Mr. Avis has served as a Managing Partner of Summit Partners, a venture
capital and a private equity capital firm, since 1990 and has been a General
Partner since 1987. Summit Partners and its affiliates manage a number of
venture capital funds, including Summit Ventures IV, L.P., Summit Investors
III, L.P. and Summit Subordinated Debt Fund, L.P., which are all stockholders
of Ditech. Mr. Avis also serves as a director of Powerwave 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.

50
<PAGE>

PETER Y. CHUNG 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.

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

KENNETH E. JONES has been a director of Ditech since July 1983. He is
currently the Chairman and Chief Executive Officer of Globe Wireless, Inc., a
position he has held since Globe Wireless was sold by Automated Call Processing
and became an independent company in 1997. Mr. Jones founded Automated Call
Processing in 1983 (which in 1997 merged with Ditech and changed its name to
Ditech Corporation), and worked as its President and Chief Executive Officer
until 1997. From 1986 to 1994, he also served as President and Chief Executive
Officer of Automated Call Processing's wholly-owned subsidiary, Ditech
Corporation. 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 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.

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

from the University of California, Berkeley.

BOARD COMPOSITION

We currently have authorized eight directors. In accordance with the
terms of our Amended and Restated Certificate of Incorporation, the terms of
office of the Board of Directors are divided into three classes: Class I, whose
term will expire at the annual meeting of stockholders to be held in 2002;
Class II, whose term will expire at the annual meeting of stockholders to be
held in 2000; and Class III, whose term will expire at the annual meeting of
stockholders to be held in 2001. The Class I directors are Gregory Avis and
George Turner, the Class II directors are Peter Chung, Kenneth Jones and Andrei
Manoliu and the Class III directors are William Hasler, Pong Lim, and Timothy
Montgomery. At each annual meeting of stockholders after the initial
classification, the successors to directors whose terms will then expire will
be elected to serve from the time of election and qualification until the third
annual meeting following election. In addition, our Certificate of
Incorporation

51
<PAGE>

provides that the authorized number of directors may be changed only by
resolution of the Board of Directors. Any additional directorships resulting
from an increase in the number of directors will be distributed among the three
classes so that, as nearly as possible, each class will consist of one-third of
the directors. This classification of the Board of Directors may have the
effect of delaying or preventing changes in control or management of Ditech.
Although directors of Ditech may be removed for cause by the affirmative vote
of the holders of a majority of the common stock, our Amended and Restated
Certificate of Incorporation provides that holders of two-thirds of the common
stock must vote to approve the removal of a director without cause.

BOARD COMMITTEES

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

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

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Securities Exchange Act of 1934 (the "1934 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 our common
stock and other equity securities. Officers, directors and greater than ten
percent stockholders are required by SEC regulation to furnish us 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 us and written representations that no
other reports were required, during the fiscal year ended April 30, 2000, all
Section 16(a) filing requirements applicable to our officers, directors and
greater than ten percent beneficial owners were complied with.

ITEM 11 - EXECUTIVE 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.

52
<PAGE>

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------------
ANNUAL COMPENSATION (1) SECURITIES
---------------------------------------- UNDERLYING
NAME AND PRINCIPAL POSITION 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

Vice President of Engineering and 2000 130,000 60,000 125,020
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 33,332

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

</TABLE>

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.

INDIVIDUAL GRANTS POTENTIAL
--------------------------------------------------------- REALIZABLE VALUE AT
NUMBER OF ASSUMED ANNUAL
SECURITIES % OF TOTAL RATES OF STOCK
UNDERLYING OPTIONS EXERCISE PRICE APPRECIATION
OPTIONS GRANTED PRICE PER EXPIRATION FOR OPTION TERM
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) Mr. Montgomery's option grant vests 0% during the first year, 12% during
the second year, 28% during the third year and 60% during the fourth year
of its term.

(2) Ms. Bellin's option grant vests 0% during the first through fourth years
and 100% during the fifth year of its term.

(3) Mr. Stepanoff's option grant vests 0% during the first year, 22% during
the second year, 38% during the third year and 40% during the fourth
year of its term.

(4) Mr. Tamblyn's option grant vests 0% during the first year, 19% during
the second year, 37% during the third year and 44% during the fourth
year of its term.

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

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

The following table sets forth information regarding option exercises,
and the fiscal year end values of stock options held by each of the Named
Executive Officers during the fiscal year ended April 30, 2000 and exercisable
and unexercisable options held as of April 30, 2000:

53
<PAGE>

<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
SHARES AT APRIL 30, 2000 APRIL 30, 2000
ACQUIRED ON VALUE ------------------------------------- ---------------------------------------
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.
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.

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.

54
<PAGE>

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 our recapitalization in 1997.

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.

DIRECTOR COMPENSATION

Ditech does not currently provide cash compensation to non-employee
directors for services in such capacity, but directors may be reimbursed for
certain expenses in connection with attendance at Board of Directors and
committee meetings. 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.

LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY

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

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

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

Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers, and controlling persons
pursuant to the provisions described above or otherwise, we have been advised

55
<PAGE>

that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable.

ITEM 12 - 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;

- 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 2.9
Pong Lim (4) ................................................. 737,796 2.6
William Tamblyn (5) .......................................... 312,996 1.1
Toni Bellin (6) .............................................. 195,000 *
Serge Stepanoff (7) .......................................... 266,728 *
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 2.5
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 19.1
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.

56
<PAGE>

(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 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

57
<PAGE>

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.

(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

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED 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 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 the Company. Mr. Lim's employment
ended on September 30, 1999. Subsequent to that date, Mr. Lim received no
further compensation.

See also Employment Agreements in Item 11 of this Annual Report on Form
10-K.

ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

The following documents are filed as part of this Form 10-K:

(1) FINANCIAL STATEMENTS

Reference is made to the Index to Financial Statements of
Ditech Communications Corporation under Item 8 in Part II of
this Form 10-K

(2) FINANCIAL STATEMENT SCHEDULES

58
<PAGE>
All schedules are omitted because they are not required, they
are not applicable or information appears included in the
financial statements or notes thereto.

(3) EXHIBITS

The exhibits listed below are required by Item 601 of
Regulation S-K. Each management contract or compensatory plan
or arrangement required to be filed as an exhibit to this Form
10-K has been identified.

(4) REPORTS ON FORM 8-K

Ditech filed one report on Form 8-K during the fourth quarter
of fiscal 2000. This report was filed on February 16, 2000 and
related to the acquisition of substantially all the assets of
Telinnovation.

ITEM 15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

59
<PAGE>

<TABLE>
<S> <C>
10.18** Stock Purchase Agreement, dated as of September 15, 1997 between Ditech and William Hasler
10.19**(1) Form of option agreement under the 1997 Stock Option Plan
10.20**(1) Form of option agreement under the 1998 Stock Option Plan
10.21++ Patent License Agreement, dated as of August 13, 1999, between Ditech and Antec Corporation
10.22*** Asset Purchase Agreement, dated as of December 8, 1999 among Ditech Communications Corporation, Telinnovation,
Telinnovation Corporation and Telinnovation Service Corporation, Charles Davis and David Shvarts
10.23*** Asset Purchase Agreement, dated as of December 8, 1999 among Ditech Communications Corporation, and
Richard Hardy
10.24(1) Employment Agreement, dated January 31, 2000, between Ditech and Ian Wright
10.25*** 1999 Non-Qualified Stock Option Plan
10.26 Lease Amendment, dated February 15, 2000, between Ditech and Middlefield-Bernardo Associates LCC
10.27(1) Stock Option Agreement for Ian Wright-outside of the 1998 Stock Option Plan
23.1 Consent of PricewaterhouseCoopers LLP
27.1 Financial Data Schedule
------------------------
</TABLE>

* Incorporated by reference from the exhibits with corresponding numbers
from the Registrant's Registration Statement (No. 333-86691), filed
September 8, 1999.

** Incorporated by reference from the exhibits with corresponding numbers
from the Registrant's Registration Statement (No. 333-75063), declared
effective on June 9, 1999.

*** Incorporated by reference from the exhibits with titles from the
Registrant's Current Report on Form 8-K filed February 16, 2000.

(1) Management contract or compensatory plan or arrangement.

+ Confidential treatment has been granted as to a portion of this exhibit
pursuant to Rule 406 under the Securities Act. The confidential portion
of such exhibit has been omitted and filed separately with the
Commission.

++ Incorporated by reference from the exhibit with the corresponding
exhibit number from the Registrant's Quarterly Report on Form 10-Q for
the quarter ending July 31, 1999. Confidential treatment has been
granted for a portion of this exhibit.

<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.

July 28, 2000 DITECH COMMUNICATIONS CORPORATION

By: /s/ Timothy K. Montgomery
-----------------------------
Timothy K. Montgomery
CHIEF EXECUTIVE OFFICER AND PRESIDENT

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
----------
<S> <C> <C>
/s/ Timothy K. Montgomery President, Chief Executive Officer July 28, 2000
---------------------------------------------- and Director (principal executive
Timothy K. Montgomery officer)

/s/ William J. Tamblyn Vice President and Chief Financial Officer July 28, 2000
---------------------------------------------- (principal financial and accounting
William J. Tamblyn officer)

/s/ Pong C. Lim Chairman of the Board of Directors July 28, 2000
----------------------------------------------
Pong C. Lim

/s/ Gregory M. Avis Director July 28, 2000
----------------------------------------------
Gregory M. Avis

/s/ Peter Y. Chung Director July 28, 2000
----------------------------------------------
Peter Y. Chung

/s/ William A. Hasler Director July 28, 2000
----------------------------------------------
William A. Hasler

/s/ Kenneth E. Jones Director July 28, 2000
----------------------------------------------
Kenneth E. Jones

/s/ George J. Turner Director July 28, 2000
----------------------------------------------
George J. Turner

/s/ Andrei M. Manoliu Director July 28, 2000
----------------------------------------------
Andrei M. Manoliu
</TABLE>

<PAGE>

INDEX TO EXHIBITS

EXHIBIT DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
2.1 Agreement and Plan of Merger and Reorganization, dated June 21, 2000, among Ditech Communications Corporation,
a Delaware corporation, Oxygen Acquisition Corporation, a Delaware corporation, and Atmosphere Networks,
Inc., a Delaware corporation.
3.1 * Amended and Restated Certificate of Incorporation of the Registrant,
filed June 14, 1999
3.2 * Bylaws of the Registrant
4.1 * Reference is made to Exhibits 3.1 and 3.2
4.2 ** Specimen Stock Certificate
4.3 ** Amended and Restated Registration Agreement, dated March 19, 1999, between Ditech and certain
investors
10.1 ** Lease Agreement, dated August 31, 1998, between Ditech and Lincoln-Whitehall Pacific, LLC, as amended
January 25, 1999
10.2 **(1) 1997 Ditech Stock Option Plan
10.3 **(1) 1998 Amended and Restated Ditech Stock Option Plan
10.4 **(1) 1999 Employee Stock Purchase Plan
10.5 ** 1999 Non-employee Directors' Stock Option Plan
10.6 **(1) Employment Agreement, dated September 1998, between Ditech and Timothy Montgomery
10.7 **(1) Employment Agreement, dated September 14, 1998, between Ditech and Pong Lim
10.8 **(1) Employment Agreement, dated November 4, 1998, between Ditech and Toni Bellin
10.9 ** Credit Agreement, dated August 20, 1997, between Ditech and BankBoston, N.A.
10.10** First Amendment to the Credit Agreement, dated August 13, 1998, between Ditech and BankBoston, N.A.
10.11** Second Amendment to the Credit Agreement, dated December 18, 1998, between Ditech and BankBoston, N.A.
10.11.1* Third Amendment to Credit Agreement, dated August 13, 1999, between Ditech and BankBoston, N.A.
10.12** Security Agreement, dated August 20, 1997, between Ditech and BankBoston, N.A.
10.13** Intellectual Property Security Agreement, dated August 20, 1997, between Ditech and BankBoston, N.A.
10.14** Master Amendment and Lease Schedule, dated December 15, 1998, between Ditech and BancBoston Leasing Inc.
10.15+** Invention Purchase Agreement, dated November 15, 1998, between Ditech and Telinnovation
10.16**(1) Form of Indemnity Agreement to be entered between Ditech and its executive officers and directors
10.17**(1) Employment Agreement dated April 27, 1999, between Ditech and Marc Schwager
10.18** Stock Purchase Agreement, dated as of September 15, 1997 between Ditech and William Hasler
10.19**(1) Form of option agreement under the 1997 Stock Option Plan
10.20**(1) Form of option agreement under the 1998 Stock Option Plan
10.21++ Patent License Agreement, dated as of August 13, 1999, between Ditech and Antec Corporation
10.22*** Asset Purchase Agreement, dated as of December 8, 1999 among Ditech Communications Corporation, Telinnovation,
Telinnovation Corporation and Telinnovation Service Corporation, Charles Davis and David Shvarts
10.23*** Asset Purchase Agreement, dated as of December 8, 1999 among Ditech Communications Corporation, and
Richard Hardy
10.24(1) Employment Agreement, dated January 31, 2000, between Ditech and Ian Wright
10.25*** 1999 Non-Qualified Stock Option Plan
10.26 Lease Amendment, dated February 15, 2000, between Ditech and Middlefield-Bernardo Associates LCC
10.27(1) Stock Option Agreement for Ian Wright-outside of the 1998 Stock Option Plan
23.1 Consent of PricewaterhouseCoopers LLP
27.1 Financial Data Schedule
------------------------
</TABLE>

* Incorporated by reference from the exhibits with corresponding numbers
from the Registrant's Registration Statement (No. 333-86691), filed
September 8, 1999.

** Incorporated by reference from the exhibits with corresponding numbers
from the Registrant's Registration Statement (No. 333-75063), declared
effective on June 9, 1999.

*** Incorporated by reference from the exhibits with titles from the
Registrant's Current Report on Form 8-K filed February 16, 2000.

(1) Management contract or compensatory plan or arrangement.