UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 10-K

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

(MARK ONE)

|ý                                                                    |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|-------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------
|For the Fiscal Year Ended April 30, 2008                            
|OR                                                                  
|o                                                                    |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the Transition Period
From                                    To

COMMISSION FILE NUMBER: 000-26209

GRAPHIC

DITECH NETWORKS, INC.(Exact Name of Registrant as Specified in its Charter)

|DELAWARE                                                       |  | 94-2935531                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or Other Jurisdiction of
Incorporation or Organization) |  | (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:

Title of Each Class

Name of Each Exchange on Which RegisteredCommon Stock, $.001 Par Value

The NASDAQ Stock Market, Inc


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o    No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o    No ý

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    ý No o

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. ý

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

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

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

The aggregate market value of voting stock held by non-affiliates of the Registrant was approximately $62,668,236 as of October 31, 2007 based
upon the closing price on the Nasdaq Global Market reported for such date. Excludes an aggregate of 13,357,595 shares of common stock held by executive 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 such person should not be construed to indicate that a determination has been made that such person
possesses the power, directly or indirectly, to direct or cause the direction of the management or policies of the registrant, or that such person is controlled by or under common control with the
registrant.

The
number of shares outstanding of the Registrant's Common Stock as of July 7, 2008 was 26,235,220 shares.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III of this report, to the extent not set forth herein, is incorporated by reference from the Registrant's definitive
proxy statement relating to the 2008 annual meeting of stockholders, which definitive proxy statement will be filed with the Securities and Exchange Commission within 120 days after the fiscal
year to which this Report relates.



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DITECH NETWORKS, INC.        FORM 10-K        INDEX

|                                                                                                                    |  | PAGE
|------------------------------------------------------------------------------------------------------------------- |  | ----
|PART I                                                                                                             
|Item 1Business                                                                                                     |  | 1   
|Item 1ARisk Factors                                                                                                |  | 14  
|Item 1BUnresolved Staff Comments                                                                                   |  | 23  
|Item 2Properties                                                                                                   |  | 23  
|Item 3Legal Proceedings                                                                                            |  | 23  
|Item 4Submission of Matters to a Vote of Security Holders                                                          |  | 25  
|PART II                                                                                                            
|Item 5Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 26  
|Item 6Selected Financial Data                                                                                      |  | 28  
|Item 7Management's Discussion and Analysis of Financial Condition and Results of Operations                        |  | 30  
|Item 7AQuantitative and Qualitative Disclosure About Market Risk                                                   |  | 49  
|Item 8Financial Statements and Supplementary Data                                                                  |  | 52  
|Item 9Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 86  
|Item 9AControls and Procedures                                                                                     |  | 86  
|Item 9A(T)Controls and Procedures                                                                                  |  | 87  
|Item 9BOther Information                                                                                           |  | 87  
|PART III                                                                                                           
|Item 10Directors, Executive Officers and Corporate Governance                                                      |  | 88  
|Item 11Executive Compensation                                                                                      |  | 88  
|Item 12Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters              |  | 88  
|Item 13Certain Relationships and Related Transactions, and Director Independence                                   |  | 91  
|Item 14Principal Accountant Fees and Services                                                                      |  | 91  
|PART IV                                                                                                            
|Item 15Exhibits and Financial Statement Schedules                                                                  |  | 92  
|SIGNATURES                                                                                                          |  | 93  

Trademarks:

Ditech and the Fern logo are registered trademarks of Ditech Networks. VQA and PeerPoint are trademarks of Ditech Networks. This Annual Report on
Form 10-K also includes trademarks of companies other than Ditech.

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Ditech Networks, Inc.        Part I

Item 1Business

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", "targets", "predicts", "intends", "potential"
or "continue" or the negative of these 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 1ARisk Factors" 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 forward-looking statements.

Where we use the words "Ditech," "we," "our" or similar expressions, we are referring to Ditech Networks, Inc. and each of our wholly-owned subsidiaries.
Our fiscal year ends on April 30. Consequently, when we refer to a specific fiscal year we are referring to the 12 months ended on April 30 of that year. For example, fiscal 2008
means the 12 months ended April 30, 2008.

General

Ditech Networks, Inc. is a global telecommunications equipment supplier for voice networks. Our solutions enable service providers to deliver consistently
clear, secure, end-to-end communications to their customers worldwide. Our voice quality products include echo cancellers, which are used to effectively eliminate echo, a
significant problem in existing and emerging voice networks. In the second half of fiscal 2004, we introduced a new line of voice quality products that incorporate both echo cancellation and a new
generation of voice quality enhancement technology called Voice Quality Assurance (VQA). VQA addresses various voice quality issues in wireline and wireless networks, including a broader spectrum of
echo, background noise and inconsistent voice levels. In the second half of calendar 2006, we introduced the ability to accurately measure and report on audio impairments, a technology called
Experience Intelligence (EXi). Over the last three fiscal years, voice quality products, which include our echo cancellation and VQA platforms, have comprised substantially all of our revenue.
Beginning in the second half of fiscal 2004 and continuing through fiscal 2008, we have been developing a new platform, the Packet Voice Processor, which represents our entry into service providers'
Internet Protocol (IP) networks using Voice over Internet Protocol (VoIP) technology. The Packet Voice Processor incorporates our VQA and EXi technology to address voice quality issues specific to
packet networks. In addition, we acquired Jasomi Networks, Inc. (Jasomi) in the first quarter of fiscal 2006. Jasomi developed and sold session border controllers that enable VoIP calls to
traverse the network address translation (NAT) and protect networks from external attacks by admitting only authorized sessions, ensuring that reliable VoIP service can be provided to them. We market
our products domestically through a direct sales force and, to a lesser extent, through distributors. Internationally, we market our products through the combination of a direct sales force,
value-added resellers, system integrators and agents.

Ditech
was originally incorporated as Phone Info., Inc. in July 1983 and subsequently changed its name to Automated Call Processing Corporation, Inc. In March 1997,
Automated Call Processing Corporation sold portions of its business and merged with its wholly owned subsidiary, and the surviving entity was renamed Ditech Corporation. Ditech Corporation
reincorporated in Delaware in April 1999 and changed its name to Ditech Communications Corporation. In May 2006, Ditech Communications Corporation changed its name to Ditech Networks, Inc.

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Mobile Voice Quality Market



While we supply voice processing products to the wireline network, our primary market is mobile operators. Mobile networks are currently estimated to have over
2.5 billion subscribers worldwide and recent market research reports indicate that this subscriber base is still growing at a significant rate. Global System for Mobile Communications, commonly
referred to as GSM, is the predominant technology for mobile communications outside the United States and is growing in popularity domestically. Code-Division Multiple Access, commonly
referred to as CDMA, is an alternative mobile technology used primarily in the U.S. and Korea and a number of smaller networks in other parts of the world. Mobile networks are composed of three
distinct types of equipment: (1) Radio Access Network (Cellular towers, base station with radio equipment, backhaul equipment and lines to carry traffic back to the switching site and the base
station controllers); (2) Mobile Switching Center (MSC) with switching equipment; and (3) Inter MSC network to connect switching sites across the carrier's geographical coverage area.



Voice quality is a key competitive differentiator for telecommunication service providers. To deliver excellent voice quality, service providers must eliminate a
variety of voice quality problems that include hybrid and acoustic echo, background noise, and inconsistent voice levels. We believe the result can be a reduction in churn, which is the measure of
subscribers who cancel their service and move to another carrier.

In
addition to delivering optimized voice quality, carriers in this fiercely competitive environment are seeking to lower the capital and operating costs of their voice networks. Service
providers are demanding equipment with greater capacity as well as smaller physical size as space in service provider facilities and central offices becomes more crowded. Service providers are also
interested in monitoring voice quality throughout their network so they can rapidly address quality issues and guarantee Quality of Service to their subscribers.

The
need to lower the cost of deploying and operating a mobile voice network is even greater in many international markets where carriers are expanding to reach low-income
subscribers. The Radio Access Network, with nearly 70% of overall equipment and installation costs, dominates the cost of deployment in a mobile network. To lower costs, international carriers are
utilizing various forms of voice compression to reduce radio bandwidth and infrastructure costs. Voice compression enables carriers to serve more subscribers with less bandwidth. The drawback of these
compression technologies, however, is that they can degrade voice quality. Therefore, carriers are seeking solutions that enable them to utilize voice compression while still maintaining consistent
voice quality.



It is important to understand the factors that affect voice quality in mobile calls. There are two types of echo in networks: Hybrid Echo and Acoustic Echo.
Hybrid Echo is generated within a telecommunications network and 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. Echo becomes noticeable whenever the one-time delay of a rebounded voice signal exceeds 25 milliseconds. If the delay exceeds 32 milliseconds, the quality of the voice
call begins to degrade creating an echo, which is reflected back to the person speaking and can become an annoyance during the call. When these echo problems are present, people describe the effect as
their voices sounding hollow or like someone talking in a tunnel. Acoustic echo is caused by the sound generated on the speaker device of a

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telephone
or mobile handset being reflected from surfaces such as walls, or being conducted by the device and then captured by the microphone on the same device. Acoustic echo behavior is more diverse
since the resulting echo is driven by the specific physical characteristics of the room and the mechanical properties of the device.

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, exacerbate the effect
of echo. As the telecommunications network moves to adopt VoIP, additional delay will be added to the call transmission path. Therefore, carriers are looking for comprehensive, long-range
solutions to eliminate echo from their networks.



To ensure delivery of consistent voice quality, service providers strive to eliminate background noise and inconsistent voice levels. Background noise is a
particularly acute problem in mobile voice
networks, where users are attempting to use their wireless handset in noisy environments, such as in an airport terminal, on a noisy street or in a crowded restaurant. Background noise also affects
the performance of voice transmission in mobile networks that utilize voice compression, as the noise consumes valuable bandwidth. Inconsistent voice levels also degrade voice quality in mobile
networks. Variations in voice levels occur when calls are routed between the networks of different service providers, particularly on international calls, resulting in the voice of the speaker often
being too high or too low for comfortable listening.

Our Mobile Voice Quality Solutions

We design, develop, and market stand-alone and system-based voice quality products for mobile networks throughout the world. Our products feature
high-capacity, high-availability hardware systems coupled with a sophisticated array of voice optimization and measurement software to enhance the quality of voice
communications.

The
key technologies that we have developed and use in our voice processing solutions are:

Voice Quality Assurance (VQA).Our VQA technology integrates voice quality optimization features with some of the latest
voice processor technology to improve the quality of voice calls in all telecommunications networks, particularly mobile networks. VQA's general features include noise reduction, acoustic echo
cancellation, voice level control, and enhanced listener intelligibility.

Experience Intelligence (EXi):Our EXi technology provides detailed visibility into voice quality impairments that enter a
network. EXi enables a service provider to better manage their overall quality levels by unobtrusively measuring voice quality based on industry standards.

The
key benefits of our voice processing solutions include:

Network capacity expansion.Our VQA technology enables mobile carriers to deploy lower-cost, bandwidth-saving
compression technologies while still maintaining consistent voice quality. Our VQA technology also enables mobile carriers to deploy a capacity-saving technology called DTX (Discontinuous
Transmission). Human conversations typically occupy a phone call 50% of the time for each person. Mobile networks use DTX to stop radio transmission during silent periods. Background noise renders the
process of detecting these silent periods more difficult, thus reducing the effectiveness of DTX, increasing radio network traffic and usurping capacity. Our VQA technology detects and minimizes this
background noise.

Codec Transcoding:The ability to run different voice compression schemes (codecs) within a network allows a provider to
optimize the quality versus bandwidth tradeoff. We provide an extensive list of codecs that can be used in conjunction with both VQA and EXi on packet networks.

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Time-to-market advantage.Our core technology uses intelligent software algorithms, which are a
sophisticated process or set of rules for our software to address an array of voice quality problems, running on off-the-shelf electronic integrated circuits and digital signal
processors. Competitive voice processing solutions using application-specific integrated circuits are more expensive to design, require more development time and are difficult to upgrade. Our approach
leverages rapid technological advances in the commercial integrated circuit and digital signal processor industries, which in turn enable us to invest resources in the development of additional voice
quality algorithms to support the growing needs of the telecommunication and networking marketplace. 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 system design allows us to offer voice processing products with some of the
highest voice processing capacities currently available based on a seven-foot industry standard equipment rack located in service providers' central offices or remote facilities. This
higher capacity represents cost and space savings for service providers. Our newer generation products also offer highly 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.

Remote monitoring and service assurance.Our real-time monitoring technology, known as Experience Intelligence
(EXi), allows remote monitoring of voice quality data in real-time. Service providers can use this technology to identify problems remotely and address them proactively. As a result,
service providers can improve performance levels and monitor voice quality on a consistent basis.

Our Mobile Voice Quality Products

Our voice quality products are designed to solve voice quality issues, such as echo, background noise and inconsistent voice levels primarily in mobile networks.
Our products also serve wireline and satellite networks. Our echo cancellation product family includes a mixture of both single and multi-port, stand-alone echo cancellers and several
broadband, system-based products. In
fiscal 2004, we consolidated many of our previous generation product lines enabling customers to migrate to newer, lower cost and higher performance platforms. This also enabled us to reduce costs by
streamlining on-going development and increasing manufacturing volumes on fewer hardware components. As part of this product consolidation, we announced the availability of two new voice
processing platform families. Unlike our previous products that were designed for echo cancellation only, the new voice processing platforms are designed to support a larger variety of voice
processing algorithms, such as the features in VQA and EXi. These products are the Quad Voice Processor (QVP), with four T1 or E1 interfaces, and the Broadband Voice Processor-Flex
(BVP-Flex) with high capacity any-to-any interfaces such as DS-3, STS-1, OC-3 and STM-1. Both platforms can be
factory configured to support a wide range of digital signal processor, or DSP, computational levels and can be field upgraded to support the purchase of new software features. Over 85% of our revenue
in fiscal 2008 and over 95% of our revenue in fiscal 2007 and 2006 was generated by sales of our mobile voice quality products.

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The
following table summarizes our current mobile voice quality products.

|Product                                   |  | Description                                                                                                                                                                                                                                                                                 |  | Functionality                                                                                                                                                                                                                              
|----------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Broadband Voice Processor-Flex
(BVP-Flex) |  | Broadband Voice Processor System with flexible resource cards that permit up to six times the computational power of the previous generation BVP platform with continued support for a wide range of interface support,
targeted at both North American and international network operators |  |   Supports up to 2016 channels per system,
  Three systems per shelf
  Transmux capability for OC-3/STM1/DS-3/STS1
  Supports hybrid echo, full VQA features and EXi in a variety of hardware and software configurations              
|Quad II T1                                |  | Single module including four independent T1 echo cancellers supporting North American markets                                                                                                                                                                                               |  |   Hybrid Echo Cancellation and built-in voice enhancement technology
  Cancels 480 T1 lines per rack                                                                                                                                     
|Quad II E1                                |  | Single module including four independent E1 echo cancellers supporting international markets and North American gateway applications                                                                                                                                                        |  |   Hybrid Echo Cancellation and built-in voice enhancement technology
  Cancels 480 E1 lines per rack                                                                                                                                     
|Quad Voice Processor
(QVP)T1             |  | Narrowband Voice Processor with four independent T1 voice processing modules that support both hybrid echo cancellation and the extensive suite of VQA software and EXi software                                                                                                            |  |   High capability voice enhancement technology with industry leading algorithms for noise reduction, level control, acoustic echo control and noise compensation through enhanced voice intelligibility
  Processes 480 T1 lines per rack
|Quad Voice Processor
(QVP)E1             |  | Narrowband Voice Processor with four independent E1 voice processing modules that support both hybrid echo cancellation and the extensive suite of VQA software and EXi software                                                                                                            |  |   High capability voice enhancement technology with industry leading algorithms for noise reduction, level control, acoustic echo control and noise compensation through enhanced voice intelligibility
  Processes 480 E1 lines per rack

VoIP Market: Border Solutions and Services Market



There is a growing trend of wireline service providers transitioning away from traditional circuit-switched network infrastructure to VoIP. VoIP offers service
providers' customers an increase in features and functionality while enabling the service providers to simplify network operations, reduce capital expenditures and increase service revenue.

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Our
primary focus in our VoIP business is the Mobile Voice Quality and Border Solutions and Services markets. The "border" is the demarcation between the local access network and the
VoIP core transport network. Carriers are currently deploying key voice processing devices, such as session border controllers and media gateways, at the borders of their VoIP networks. These devices
translate and process calls originating in circuit-based and packet-based access networks, and pass them into the core VoIP network for further processing and eventual service delivery to VoIP
subscribers. We believe the VoIP border is emerging as the key location in the network to ensure voice quality and security.



As carriers seek to move mainstream telephone subscribers to their new VoIP service, they must offer the same level of voice quality and service these subscribers
have been accustomed to with their circuit-based service. "Toll-quality" service is the industry term for telephone service that always works and is always high quality. To provide
toll-quality service, VoIP carriers must address a number of traditional voice challenges and additional challenges associated with transporting voice over a data network.

Traditional Voice Quality Challenges.To become a universal, mainstream service, VoIP must interconnect calls to the wireless
and public switch networks (PSTN) from which the majority of subscribers originate and receive phone calls. As VoIP calls are connected to wireless and PSTN networks, call quality can be degraded by
the same voice quality issues that affect circuit-based calls; that is, echo, background noise, and inconsistent voice levels. In fact, VoIP adds more delay to the transmission path of a call and in
many cases this delay increases the negative effects of these voice anomalies, especially echo.

Packet Loss, Packet Delay.In the VoIP network, voice is packetized and transported in a best-available routing
method. Packets can be lost or delayed during VoIP routing resulting in degradation of call quality.

Voice compression.As VoIP becomes more widely deployed, carriers will be challenged to support different types of VoIP media
streams, including compressed voice, or codec technologies. VoIP carriers, therefore, will seek a means to normalize or translate these codecs before they are transported into the core network.



As voice is packetized and transported within the "open," best-available routing world of VoIP, carriers must ensure calls can traverse network
boundaries and barriers, including traditional data firewalls. End-to-end service delivery, therefore, becomes a significant challenge to establishing mainstream VoIP service.



VoIP represents a fundamental change in the way voice is transported. In the circuit-based world, voice is transported over dedicated circuits with dedicated
bandwidth allocated to each call. In VoIP, voice runs on a network originally built to transport data where no one entity controls the end-to-end path the data travels. While
this VoIP data network offers many cost-savings advantages, by its very nature the VoIP network is more open and prone to some of the same security issues faced by users of
computersissues like viruses, spam, and various forms of network attack and personal identity theft. Therefore, as carriers move to take advantage of the cost efficiencies of VoIP, they
must ensure that their networks guarantee a secure environment to VoIP subscribers.

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Our VoIP Solutions

We design, develop and market systems that ensure service providers can provide consistently clear, secure, end-to-end VoIP communications
to their customers throughout the world. Our products feature high-capacity, high-availability hardware systems coupled with a sophisticated array of voice enhancement and
monitoring software to enhance the quality and delivery of voice communications. Our Packet Voice Processor began production shipments in first half of fiscal 2007 and we continue to develop features
as we review and clarify customer requirements. PeerPoint, our session border controller product, is currently available.

The
key currently or planned to be available benefits of our VoIP solutions include:

Toll-quality voice service.Our Packet Voice Processor system incorporates our VQA, EXi, and codec transcoding
functionality. The VQA features on the Packet Voice Processor improve voice quality in a call and offer noise reduction, enhanced voice intelligibility, voice level control and acoustic and hybrid
echo cancellation capabilities, restoration of lost packets and less delay. The following voice quality enhancement features are currently available in the Packet Voice Processor:



End-to-end connectivity.Our Packet Voice Processor, when deployed at the border between networks,
supports a wide array of codecs from the customer's premise or network edge and normalizes incoming codec types before transmission to the IP backbone. This may also eliminate service providers' need
to convert one compressed voice format to another (transcoding) at VoIP service points such as conferencing servers, media servers and voice portal servers, hence saving the service providers costs
and allowing for easier deployment and integration of additional enhanced VoIP service platforms in the future. The Packet Voice Processor also provides a full suite of VQA technology features to
ensure the delivery of consistently high voice quality in VoIP deployments.

Lower border network costs.Our Packet Voice Processor is purpose-built to support large-scale, high-capacity
voice processing at the VoIP network Border. One equipment bay (7 foot) of our Packet Voice Processor, for example, supports up to 48,000 VoIP sessions, depending on feature configuration. Combined
with its sophisticated array of voice enhancement and voice monitoring capabilities, deployment of the Packet Voice Processor represents a major capital and operating expense savings for VoIP
carriers.

Secure voice service.The success of any VoIP network depends on being able to make the right connections without having to
redefine the infrastructure or compromise security. Our PeerPoint

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Session
Border Controller helps enterprises and carriers connect diverse equipment, traverse firewalls and network boundaries, reduce bandwidth costs, and mitigate some Denial of Service attacks.

Our VoIP Products

Because of the high expectations of their customers, VoIP service providers are working to provide a service level that is as good as, or better than, services
offered over traditional circuit-switched networks. Leveraging our VQA technology, which addresses packet loss and jitter, we believe that our newest product platform, the Packet Voice Processor,
addresses these voice quality issues. Our PVP began production shipment in early fiscal 2007 and less than 5% of our revenue in fiscal 2007 and 2006 was generated from our VoIP products. In fiscal
2008, less than 15% of our revenue was generated from our VoIP products, principally our PVP product.

The
success of a voice or video IP network largely depends on being able to make the right connections without having to redefine infrastructure or compromise security. Our PeerPoint
Session Border Controller, acquired in the Jasomi business transaction, is aimed at enabling enterprises and carriers to connect diverse equipment, traverse firewalls, operate in environments prone to
security breaches, reduce bandwidth costs, and mitigate some Denial of Service attacks.

The
following table summarizes our current mobile Voice-over-IP products and currently available features.

|Product                                    |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  | Functionality                                                                                                                                                                          
|------------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|PeerPoint C100 (Session Border Controller) |  | The PeerPoint Session Border Controller enables enterprises and carriers to connect diverse equipment, traverse firewalls, operate in environments prone to security breach, reduce bandwidth costs, and mitigate some Denial
of Service attacks, and is targeted at both North American and international network operators                                                                                                                                                                                                                                |  |   Session control
  Security
  NAT/Firewall traversal
  Peering                                                                                                                    
|Packet Voice Processor                     |  | The Packet Voice Processor delivers packet voice processing for an IP network, offering a comprehensive set of voice processing features that ensure consistent, clear voice quality while maximizing carrier service offerings. These features include
codec transcoding for wireline and wireless networks, our VQA software suite, and an advanced voice quality monitoring capability. The carrier-grade system offers scalable VoIP processing with Gigabit Ethernet connectivity, targeted at both North
American and international network operators |  |   up to 48,000 VoIP sessions per 7' rack
  Any-to-many codec transcoding
  Advanced voice quality enhancement
  Sophisticated voice quality monitoring and packet quality assurance

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Customers

While we added new customers in fiscal 2008 and continued to do business with major North American long distance companies, the majority of our domestic revenue
was generated from sales to Verizon Wireless. Verizon Wireless accounted for 35% of our total worldwide revenue in fiscal 2008 compared to 64% in fiscal 2007. We also had two other customers that each
accounted for over 10% of our revenue in fiscal 2008. The first is Intercall/West, a domestic VoIP provider, which accounted for 12% of our fiscal 2008 revenue. The second is our largest international
wireless customer, Orascom, which accounted for 11% of fiscal 2008 revenue. Our next two largest customers accounted collectively for 11% of our total company revenue in fiscal 2008. All of our
revenue is from external customers.

We
market our products, both domestically and internationally; information by geographic region with respect to revenues from external customers and long-lived assets, is set
forth in Note 12 of the Notes to our Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K and is incorporated by reference here.
Historically, the majority of our sales have been to customers in the U.S. These customers accounted for approximately 63%, 71%, and 87%, of our revenue in fiscal 2008, 2007, and 2006, respectively.
Virtually all of our long-lived assets are located in the U.S. See "Item 1ARisk FactorsWe May Experience Unforeseen Problems As We Diversify Our
International Customer Base, Which Would Impair Our Ability To Grow Our Business" for a discussion of risks associated with both domestic and international operations.

Backlog.Our backlog for voice processing products was approximately $3.1 million and $7.0 million as of the
first business day of June 2008 and 2007, respectively. Our backlog consists of (1) orders confirmed with a purchase order for product from which we expect to recognize revenue within
120 days to customers with approved credit status, (2) shipments classified as deferred revenue, which we expect to recognize as revenue within 120 days, and (3) deferred
maintenance revenue, which we expect to recognize within 120 days. A shipment may be classified as deferred revenue for a variety of reasons including, but not limited to, concerns over
collectibility or contractual terms when installation is provided. Backlog at June 1, 2008 and 2007 excludes $6.8 million and $6.9 million, respectively, of orders
for which shipment dates are undefined or which extend beyond 120 days. 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 predictive of actual net sales for any future period. However, when backlog levels entering a fiscal quarter are low
relative to the forecast revenue for that quarter, it places greater reliance on generating new orders during that fiscal quarter to meet our revenue targets.

Research and Development

Our engineers are dedicated to and focused on designing and developing next generation voice processing products for both circuit-switched and VoIP networks. Our
research and development expenses for fiscal 2008, 2007, and 2006, were approximately $17.9 million, $20.8 million, and $17.9 million, respectively. The decrease in spending in
fiscal 2008 was largely due to a reduction in force that was undertaken near the end of the first half of fiscal 2008, which resulted in a reduction in payroll and stock compensation due to decreases
in engineering headcount, partially offset by the cost of the reduction in force. Our research and development efforts are driven by market demand and customer feedback. We have created a structured
process for undertaking all product development projects. Following an assessment of market demand, our research and development team develops a set of functional product specifications based on input
from our product management, sales and post-sales organizations. This process is designed to provide a framework for defining and addressing the steps, tasks and activities required to
bring product concepts and development projects to market. As of April 30, 2008, we had 48 employees in Research and Development and we believe that retaining those personnel and recruiting new
personnel, as necessary, will be essential to our continued success.

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See
"Item 1ARisk Factors" below for a discussion of risks related to timely specification and development of products for commercial viability.

Manufacturing

We operate as a "virtual" manufacturing organization by relying on contract manufacturers to assemble our voice processing products. The vast majority of our
products are currently manufactured by two contract manufacturers that manufacture our products based on rolling forecasts provided by us. The rolling forecasts we submit to our contract manufacturers
are based on our expectations of customer demand, or in the case of prototypes or lab equipment, internal demand. We generally do not own the products or components until they are shipped to us. In
certain circumstances, we may be liable to our contract manufacturers for carrying and obsolete material charges for excess components purchased based on our forecasts. We perform final test,
configuration and shipping functions for our voice processing products. Our raw materials are procured from outside suppliers, primarily through our contract manufacturers. Several components used in
our products are sole sourced. We closely monitor supplies of parts and supplier lead times in an attempt to mitigate the risk of component availability
affecting our ability to deliver product to our customers. In cases where we believe that a particular sole source component is too critical or expensive to replace and we believe that there may be
availability issues, we have, and will continue to, buy components in excess of our immediate needs to help mitigate the risk of component shortages in the future. In procuring digital signal
processors for our echo cancellation products, we and our contract manufacturers rely on Texas Instruments as our sole supplier, as our software license agreement with Texas Instruments stipulates
that we will only use their processors to run the licensed Texas Instruments software. Our future success will depend in significant part on our ability to obtain components on time, at competitive
prices, and in sufficient quantities to meet demand. Although we believe that there are currently ample supplies of components, we have experienced part shortages in prior years, which had a direct
impact on revenues and results of operations and we may experience shortages again in the future. See "Item 1ARisk Factors" below for a discussion of risks related to manufacturing
our products.

We
are ISO 9001:2000 and ISO 14001:2004 certified and we encourage our contract manufacturers and strategic partners to be ISO 9000:2000 registered. As part of our
14001-certified management system and our overall commitment to the environment we have investigated the requirements set forth by the RoHS directive, which restricts the use of certain
hazardous substances in electrical and electronic equipment. Based on some independent industry benchmarking, and guidance offered by the UK's Department of Trade and Industry, we have designed our
product, telecommunication network infrastructure equipment, to comply under the lead-in-solder exemption, commonly known as "5 of 6" compliant with the RoHS directive. We have
also completed our investigation in support of the China RoHS initiative and are compliant with this initiative as well. We will continue to monitor the evolution of the EC/95 and related industry
activities and will take appropriate compliance action for those products that we sell into EU countries and territories. Effective January 1, 2006, we began shipping Waste Electrical and
Electronic Equipment (WEEE) compliant product as referenced in EC/96. We will continue to monitor the evolution of the EC/96 and related industry activities and will take appropriate compliance
actions for those products that we sell into EU countries and territories.

Sales and Marketing

We primarily rely on our direct sales force to sell our voice processing products domestically and on a combination of a direct sales force, value-added
resellers, distributors and sales agents internationally. We have continued to expand our network of value-added resellers, distributors, and sales agents that sell our products internationally, and
continued to enhance our web site marketing. During fiscal 2006 and 2007, we increased our sales and marketing spending as we invested in sales and marketing headcount, pre- and
post-sales support staff and trade shows to support sales growth in those

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years
and to create demand for our products. However, due to the decline in sales in fiscal 2008, we executed some targeted reductions in spending in an effort to control our costs until such time as
our sales recover. The focus of spending has been to increase our international presence and to promote the introduction of our new VoIP products. See "Item 1ARisk Factors" below
for a discussion of risks related to effectively marketing and selling our products.

Acquisitions and Dispositions

Our strategy is to increase new product development both through internal efforts and, when potential acquisitions provide us with a critical new product and/or a
decided time-to-market advantage, through acquisitions.

On
June 30, 2005, we acquired Jasomi Networks ("Jasomi") for $10.4 million in cash plus $7.0 million in non-transferable convertible notes. In the first
quarter of fiscal 2007, the first $3.0 million of convertible notes were paid off and the remaining balance of $4.0 million was paid off in the first quarter of fiscal 2008. In addition,
in connection with the acquisition we transferred $2.0 million into an escrow account to secure indemnification obligations for breaches of representations and warranties made by Jasomi and
certain of its affiliates, and this escrowed amount was also paid to the former stockholders of Jasomi in the first quarter of fiscal 2008. We also assumed all of the Jasomi stock options outstanding
on the date of the closing, which converted into options to acquire an aggregate of 191,111 shares of Ditech common stock. In addition, we established a restricted stock plan and issued restricted
common stock and restricted stock units to Jasomi employees and employees of a Canadian affiliate of Jasomi in the aggregate amount of 393,212 shares of Ditech common stock. See also Note 5 of
Notes to the Consolidated Financial Statements.

We
will continue to look to acquire companies that meet market attractiveness and strategic fit criteria. Acquisitions involve numerous risks, which are more fully discussed in
"Item 1ARisk FactorsAcquisitions and Investments May Adversely Affect Our Business."

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 our products also face competition in the following areas:



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 will increase in the future.

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Our
principal competitors for stand-alone echo and voice quality products in circuit-switched networks are NMS Communications Corporation and Tellabs. However, the primary competition in
the voice processing market comes from voice switch manufacturers, of which there are several companies
competing in this space, the more formidable of which are Nortel, Alcatel-Lucent, Nokia, Ericsson, Siemens-Nokia, Huawei and ZTE. These switch manufacturers do not independently sell echo cancellation
products or compete in the open echo cancellation market; however, they integrate echo cancellation functionality within their switch product offerings, either as hardware modules or as software
running on chips. A widespread adoption of internal echo cancellation solutions could present a competitive threat to us by eliminating demand for our echo cancellation system products.

Our
principal competitors in the VoIP space include Sonus Networks, Nortel, Alcatel-Lucent, Cisco, Siemens-Nokia, Audiocodes, Acme Packet, Juniper (Kagoor) and many mid-sized
companies and other startups that offer session border controller products. Large OEMs that offer media gateway products such as Nortel, Alcatel-Lucent and Cisco are also potential competitors
as our packet products are deployed in networks where equipment from these suppliers is already in the network and where we may affect the long-term incremental deployment of their
products.

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, devote greater resources to the development, promotion and
sale of products, or deliver competitive products at a lower price. We may not be able to compete successfully against our current or future competitors. See "Item 1ARisk Factors"
below for a discussion of risks related to resources needed to compete globally.

Patents and Intellectual Property Rights

Our future success will depend, in part, on our ability to protect our intellectual property. We rely primarily on nondisclosure agreements as well as copyright,
trademark, trade secret laws, and other methods to protect our proprietary voice processing technologies and processes. However, where it is applicable and when we deem it appropriate, we have and may
seek patent protection for technologies or inventions we develop. Nevertheless, these measures may not be adequate to safeguard the proprietary technology underlying our voice quality products.

In
connection with the sale of our echo cancellation intellectual property to Texas Instruments in April 2002, we secured a long-term license of the echo cancellation
software from Texas Instruments. The license had an initial four-year royalty-free period after which we (1) extended the royalty-free period for certain
legacy DSPs purchased from TI through December 31, 2007 primarily to support our remaining warranty obligation for our end-of-life products and (2) negotiated new
pricing based on the purchase of DSPs bundled with the echo software for our current products. We are dependent on the license of this technology and continued support from Texas Instruments, as it is
the fundamental technology incorporated in our echo cancellation products.

We
generally enter into confidentiality agreements with our employees and strategic partners, and generally control access to and distribution of our documentation and other proprietary
information. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use our products or technology without authorization or develop similar technology
independently. 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 these countries and territories. Additionally, we may, for a variety of reasons, decide not to file for patent, copyright, or trademark protection
outside of the U.S. Further, we occasionally incorporate the intellectual property of our customers into our designs, and we have obligations with respect to the non-use and
non-disclosure of this intellectual property. However, the steps taken by us

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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. 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. In the future, we may receive notices of claims of
infringement of other parties' proprietary rights. We may not prevail in actions alleging infringement of third-party patents. 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 these claims, we would likely incur significant costs and diversion of our resources with respect to the defense of these 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 these circumstances, a license may not be available on commercially reasonable terms, if at all.

A
few industry participants, such as Lucent, Nortel Networks and certain major universities and research laboratories hold substantial inventories of intellectual property. 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 personnel from
these 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. 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, 2008, we had 148 employees, 26 of whom were primarily engaged in operations, 48 in research and development, 57 in sales, marketing and
technical support and 17 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.

Available Information

You may obtain a free copy of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and current reports on
Form 8-K and any amendments to those reports, which we make available as soon as reasonably practicable after our filing or furnishing of these reports with or to the SEC, through
our website atwww.ditechnetworks.com. Our website address is provided solely for informational purposes. We do not intend, by this reference, that our
website should be deemed to be part of this Annual Report. The reports filed with the SEC are also available at www.sec.gov.

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Item 1ARisk Factors

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 the value of our common stock. These risk factors should be carefully reviewed.

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

Our revenue historically has come from a small number of customers. Our five largest customers accounted for approximately 68% of our revenue in fiscal 2008 and
88% of our revenue in fiscal 2007 and 2006. Our largest customer accounted for approximately 35% of our revenue in fiscal 2008, 64% of our revenue in fiscal 2007 and 79% of our revenue in fiscal 2006.
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, a delay in a scheduled
product introduction, completion of a network expansion or upgrade, or a change in technology or network architecture. If this happens, our revenue could be greatly reduced, which would materially and
adversely affect our business, including but not limited to exposing us to excess inventory levels due to declines in anticipated sales levels. In addition, our customer concentration exposes us to
credit risk as, for example, 74% of our accounts receivable balance at April 30, 2008 was from three customers.

Since
the beginning of calendar year 2004, North American telecommunication service providers have been involved in a series of merger and acquisition activities and some affected
telecommunication service providers are still assessing the network technology and deployment plans. In any merger,
product purchases for network deployment may be reviewed, postponed or canceled based on revised plans for technology or network expansion for the merged entity. We believe this is what happened at
Nextel when, in December 2004, they announced a plan to merge with Sprint. Consequently, our fiscal 2006 revenue from Nextel was nominal compared to 37% of our total worldwide revenue, or
$34.9 million, in fiscal 2005. If this situation occurs at other customers, it may result in the delay of product purchases or the loss of those customers.

WE ARE RELIANT PRIMARILY ON OUR VOICE QUALITY BUSINESS TO GENERATE REVENUE GROWTH AND PROFITABILITY, WHICH COULD LIMIT OUR RATE OF FUTURE REVENUE GROWTH.

We expect that, at least through fiscal 2009, our primary business will be the design, development and marketing of voice processing products. However, the
relatively small size of the overall echo cancellation portion of the voice market, which is where we have derived the majority of our revenue to date, could limit the rate of growth of our business.
In addition, certain telecommunication service providers may utilize different technologies, such as VoIP, which would further limit demand for products we sold in the last few fiscal years, which are
deployed in mobile and wireline networks. Although the first quarter of fiscal 2008 was the first quarter in which revenue from our Packet Voice Processor targeted at the VoIP market, was greater than
10% of our total revenue, that level of sales of our PVP did not continue throughout the balance of fiscal 2008 and there is no guarantee that we will continue to be successful in selling the Packet
Voice Processor in volume into those VoIP networks.

IF WE DO NOT SUCCESSFULLY DEVELOP AND INTRODUCE NEW PRODUCTS, OUR PRODUCTS MAY BECOME OBSOLETE WHICH COULD CAUSE OUR SALES TO DECLINE.

We operate in an industry that experiences rapid technological change, and if we do not successfully develop and introduce new products and our existing products
become obsolete, our

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revenues
will decline. Even if we are successful in developing new products, we may not be able to successfully produce or market our new products in commercial quantities, or increase our overall
sales levels. These risks are of particular concern when a new generation product is introduced. Although we believe we will meet our product introduction timetables, there is no guarantee that delays
will not occur. For example, we realized our first modest levels of revenue from our new voice quality features, which are offered on our BVP-Flex and Quad Voice Processor (QVP) voice
processing hardware platforms, in the fourth quarter of fiscal 2004 and are continuing to experience numerous customer evaluations of these features around the world. These evaluations have typically
taken longer than we anticipated. Although we have experienced substantial revenue from our VQA products over the last two fiscal years, there is no guarantee that our VQA products will continue to
meet the expectations of new potential customers and the timing of our realization of any additional revenues from the VQA platforms could be delayed or not materialize at all.

The
Packet Voice Processor, which has only experienced modest levels of production shipments to date, provides voice processing functionality to enable the deployment of
end-to-end VoIP services. This is the first packet-based product developed by us. The product may not achieve broad market acceptance due to feature or capabilities mismatches
with customer requirements, product pricing, or limitations of our sales and marketing organizations to properly interact with customers to communicate the benefits of the product.

We
must devote a substantial amount of resources in order to develop and achieve commercial acceptance of our new products, most recently our Packet Voice Processor and our voice quality
features offered on our BVP-Flex and QVP hardware platforms. Our new and/or existing products may not be able to address evolving demands in the telecommunications market in a timely or
effective way. Even if they do, customers in these markets may purchase or otherwise implement competing products.

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 significantly declines, as we experienced in the first nine months of fiscal 2006 and again in fiscal 2008, 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. For example, we have experienced delays in customers finalizing contracts and/or issuing purchase orders,
which have resulted in revenues slipping out of the quarter in which we had expected to recognize them. This resulted in a revenue shortfall from investor expectations in the second and fourth
quarters of fiscal 2007 and again in the first six months of fiscal 2008. In each of these cases we experienced a minimum of a 10% - 15% drop in our stock price following the announcement of
these revenue shortfalls.

OUR REVENUE MAY VARY FROM PERIOD TO PERIOD.

Factors that could cause our revenue to fluctuate from period to period include:



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Sales
of our products 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 in the next quarter. As a result, our revenue may vary significantly from quarter to quarter.

Our
customers may delay or rescind orders for our existing products in anticipation of the release of our or our competitors' new products, due to merger and acquisition activity or if
they are unable to secure sufficient credit to enable their purchases. Further, if our or our competitors' new products substantially replace the functionality of our existing products, our existing
products may become obsolete, which could result in inventory write-downs, and/or we could be forced to sell them at reduced prices or even at a loss.

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 or more for our base echo cancellation systems and up to 180 days or more for our newer VQA and PVP product offerings. Once an order is placed, delivery times can vary depending
on the product ordered and the timing of installations or product acceptance may be delayed by our customers. As a result, revenue forecasted for a specific customer for a particular quarter may not
occur in that quarter. Further, in a fiscal quarter for which we enter the quarter with a small backlog relative to our revenue target, we are at heightened risk for the factors noted above as we are
more dependent on the generation of new orders within the quarter to meet the revenue targets. Because of the potentially 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:



If
we incur these additional expenses in a quarter in which we do not experience increased revenue, our operating results would be adversely affected.

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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 markets we target are characterized by:



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.

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 these standards become widespread, and our products are
not in compliance with these standards, 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.

ACQUISITIONS AND INVESTMENTS MAY ADVERSELY AFFECT OUR BUSINESS.

From time to time, we 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. For example, in June 2005 we acquired Jasomi. Acquisitions or investments could result in a number of financial consequences,
including:



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Furthermore,
acquisitions involve numerous operational risks, including:



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

We expect that the price we can charge our customers for our products will decline as new technologies become available, as we expand the distribution of products
through value-added resellers and distributors internationally 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. If this occurs, our operating results will be adversely affected. We expect price reductions to be more pronounced due to our planned expansion internationally. 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.

In
order to respond to increasing competition and our anticipation that average-selling prices will decrease, we are attempting to reduce manufacturing costs of our new and existing
products. If we do not reduce manufacturing costs and average selling prices decrease, our operating results will be adversely affected.

WE USE PRIMARILY TWO CONTRACT MANUFACTURERS TO MANUFACTURE OUR PRODUCTS, AND IF WE LOSE THE SERVICES OF THESE MANUFACTURERS THEN WE COULD EXPERIENCE INCREASED MANUFACTURING
COSTS AND PRODUCTION DELAYS

Manufacturing is currently outsourced to primarily two contract manufacturers. We believe that our current contract manufacturing relationships provide us with
competitive manufacturing costs for our products. However, if we or these contract manufacturers terminate our 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 production delays.

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

We depend heavily on key management and technical personnel for the conduct and development of our business and the development of our products. However, there is
no guarantee that if we lost the services of one or more of these people for any reason, that it would not 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
technical employees. However, we may not be able to do so.

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

The markets for our 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. Certain of our customers also have the ability to internally produce the equipment that they currently purchase from us. In these cases, we also compete with
their internal product development capabilities. We expect that competition will increase in the future. We may not have the financial resources, technical expertise or marketing, manufacturing,
distribution and support capabilities to compete successfully.

We
face competition from two direct manufacturers of stand-alone voice processing products, Tellabs and Natural Microsystems. The other competition in these markets comes from voice
switch manufacturers. These switch manufacturers do not sell voice processing products or compete in the stand-alone voice processing product market, but they integrate voice processing functionality
within their switches, either as hardware modules or as software running on chips. A more widespread adoption of internal voice processing solutions would present an increased competitive threat to
us, if the net result was the elimination of demand for our voice processing system products.

Many
of our competitors and potential competitors have long-standing relationships with our existing and potential customers, and have substantially greater name recognition
and technical, financial and marketing resources than we do. These competitors may undertake more extensive marketing campaigns, adopt more aggressive pricing policies and devote substantially more
resources to developing new products than we will.

WE DO NOT HAVE THE RESOURCES TO ACT AS A SYSTEMS INTEGRATOR, WHICH MAY BE REQUIRED TO WIN DEALS WITH SOME LARGE U.S. AND INTERNATIONAL TELECOMMUNICATIONS SERVICES COMPANIES.

When implementing significant technology upgrades, large U.S. and international telecommunications services companies often require one major equipment supplier
to act as a "systems integrator" to ensure interoperability of all the network elements. Normally the system integrator would provide the most crucial network elements and also take responsibility for
the interoperation of their own equipment with the equipment provided by other suppliers. We are not in a position to take such a lead system integrator position and therefore we may have to partner
with a system integrator (other, much larger, telecommunication equipment supplier) to have a chance to win business with certain customers. As a result, we may experience delays in revenue because it
could take a long time to agree to terms with the necessary system integrator and the terms may reduce our profitability for that transaction. Moreover, there is no guarantee that we will reach
agreement with a system integrator.

IF INCUMBENT AND 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 continue to depend in large part on development, expansion and/or upgrade of voice and communications networks. We are subject to risks of growth
constraints due to our current and planned dependence on U.S. and international telecommunications service providers. These potential customers may be constrained for a number of reasons, including
their limited capital resources, economic conditions, changes in regulation and mergers or consolidations which we have seen in North America since calendar year 2004. New service providers
(e.g., Skype, Google and Yahoo) are beginning to compete against our traditional customers with new business models that are substantially reducing the prices charged to end users. This
competition may force network operators to reduce capital expenditures, which could reduce our revenue.

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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 continuing to execute on our plans to expand our international presence through the
establishment of new relationships with established international value-added resellers and distributors. However, we may still be required to hire additional personnel for the overseas market, may
invest in markets that ultimately generate little or no revenue, and may incur other unforeseen expenditures related to our international expansion. Despite these efforts, to date our expansion
overseas has met with success in only a few markets and there is no guarantee of future success.

As
we expand our sales focus farther into international markets, we will face new and complex issues that we may not have faced before, such as expanded risk to currency fluctuations,
longer payment cycles, manufacturing overseas, political or economic instability, potential adverse tax consequences and broadened import/export controls, which will put additional strain on our
management personnel. In the past, the vast majority 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, which may expose us to greater exchange rate risk.

The
number of installations we will be responsible for may increase as a result of our continued international expansion and recognition of revenue may be dependent on product
acceptances that are tied to completion of the installations. In addition, we may not be able to establish more relationships with international value-added resellers and distributors. If we do not,
our ability to increase sales could be materially impaired.

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 suppliers as the sole source of certain key components that we use in our products. For example, we rely on Texas Instruments as the sole
source supplier for the digital signal processors used in our echo cancellation and voice enhancement products. We have no guaranteed supply arrangements with our suppliers. Any extended interruption
in the supply of these components would
affect our ability to meet scheduled deliveries of our 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. Additionally, because these suppliers are the sole source
of these components, we are at risk that adverse increases in the price of these components could have negative impacts on the cost of our products or require us to find alternative, less expensive
components, which would have to be designed into our products in an effort to avoid erosion in our product margin.

WE NOW LICENSE OUR ECHO CANCELLATION SOFTWARE FROM TEXAS INSTRUMENTS, AND IF WE DO NOT RECEIVE THE LEVEL OF SUPPORT WE EXPECT FROM TEXAS INSTRUMENTS, IT COULD ADVERSELY AFFECT
OUR ECHO CANCELLATION SYSTEMS BUSINESS.

In April 2002, we sold our echo cancellation software technology and future revenue streams from our licenses of acquired technology to Texas Instruments, in
return for cash and a long-term license of the echo cancellation software. The license had an initial four-year royalty-free period after which, in March 2006, we
(1) extended the royalty-free period through December 31, 2007 for certain legacy DSPs purchased from TI primarily to support our remaining warranty obligation for our
end-of-life products and (2) negotiated new pricing based on the purchase of DSPs bundled with the echo software for our current products. Although the licensing
agreement has strong guarantees of support

20

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for
the software used in our products, if Texas Instruments were to not deliver complete and timely support to us, our success in the echo cancellation systems business could be adversely affected.

IF TEXAS INSTRUMENTS LICENSES ITS ECHO CANCELLATION SOFTWARE TO OTHER ECHO CANCELLATION SYSTEMS COMPANIES, THIS COULD INCREASE THE COMPETITIVE PRESSURES ON OUR ECHO
CANCELLATION SYSTEMS BUSINESS.

If Texas Instruments licenses its echo cancellation software, that it acquired from us in April 2002, to other echo cancellation systems companies, it could
increase the level of competition we face. By providing those companies with similar technological advantages to our product offering those companies might be able to compete on a more direct basis
with us, which could adversely affect our success in our echo cancellation systems business.

SOME SUPPLIERS OF KEY COMPONENTS MAY REDUCE THEIR INVENTORY LEVELS WHICH COULD RESULT IN LONGER LEAD TIMES FOR FUTURE COMPONENT PURCHASES AND ANY DELAYS IN FILLING OUR DEMAND
MAY REDUCE OR DELAY OUR EXPECTED PRODUCT SHIPMENTS AND REVENUES.

Although we believe there are currently ample supplies of components for our products, it is possible that in the near-term component manufacturers
may reduce their inventory levels and require firm orders before they manufacture components. This reduction in stocking levels could lead to extended lead times in the future. If we are unable to
procure our planned quantities of materials from all prospective suppliers, and if we cannot use alternative components, we could experience revenue delays or reductions and potential harm to customer
relationships.

IF WE ARE UNSUCCESSFUL IN MANUFACTURING PRODUCTS THAT COMPLY WITH ENVIRONMENTAL REQUIREMENTS, IT MAY LIMIT OUR ABILITY TO SELL IN REGIONS ADOPTING THESE REQUIREMENTS.

As part of our ISO 14001-certified management system and our overall commitment to the environment we are investigating the requirements set
forth by the RoHS directive. Based on some independent industry benchmarking, and guidance offered by the UK's Department of Trade and Industry, we believe that our product, telecommunication network
infrastructure equipment, qualifies for the lead-in-solder exemption of the RoHS Directive. Consequently, we have obtained what is commonly called "5 of 6" compliance. We will
continue to monitor the evolution of the EC/95 and related industry activities and will take appropriate action for those products that we sell into EU countries and territories. Moreover, we will
continue to monitor the evolution of the EC/96 and related industry activities elsewhere in the world and will take appropriate action for those products that we sell into regions adopting new
environmental standards. There is no guarantee that we will be successful in complying with these evolving environmental requirements or that the costs involved with compliance might be prohibitive.
In either case, if we are unsuccessful in complying with these environmental requirements, it would limit our ability to sell into territories adopting new environmental requirements, which could
impact our total revenue and overall results of operations.

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 may 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, these measures may not be adequate to safeguard the technology underlying our products. In addition, employees, consultants and
others who participate in the development of our products may breach their agreements with us regarding our intellectual

21

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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.

WE CURRENTLY ARE, AND IN THE FUTURE MAY BE, SUBJECT TO SECURITIES CLASS ACTION LAWSUITS DUE TO DECREASES IN OUR STOCK PRICE.

We are at risk of being subject to securities class action lawsuits if our stock price declines substantially, as has happened recently. Securities class action
litigation has often been brought against a company following a decline in the market price of its securities. For example, in May 2005, we announced that we expected our first quarter fiscal 2006
revenue to be approximately one half of our last quarter fiscal 2005 revenue, and our stock price declined dramatically. On June 14, 2005, a lawsuit entitled Richard E. Jaffe v. Ditech Communications Corp.,
Timothy K. Montgomery and William J. Tamblyn,Case No. C 05 02406 was filed
in the United States District Court for the Northern District of California, purportedly on behalf of a class of investors who purchased Ditech's stock between August 25, 2004 and
May 26, 2005. The complaint alleges claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 against Ditech, our Chief Financial Officer and our former Chief
Executive Officer. Several similar lawsuits were filed and all of the cases were consolidated into a single action. Although the court has dismissed this action with prejudice, the plaintiffs in this
action have appealed the dismissal.

We
cannot predict the outcome of the lawsuits. As a result of the recent substantial decline in our stock price, or if our stock price declines substantially in the future, we may be the
target of similar litigation. The current, and any future, securities litigation could result in substantial costs and divert management's attention and resources, and could seriously harm our
business.

WE CURRENTLY ARE, AND IN THE FUTURE MAY BE, SUBJECT TO ADDITIONAL SECURITIES LAWSUITS.

We are at risk of being subject to other lawsuits as a result of being a public company. Four actions have been filed purportedly as derivative actions on behalf
of Ditech Networks against certain of our current and former officers and directors. The complaints allege that between 1999 and 2001 a number of stock option grants were backdated, and that as a
result the defendants breached their fiduciary duties to Ditech Networks and violated provisions of federal securities laws and California statutory and common law. The complaints also allege that
some of our officers and former officers were unjustly enriched. These lawsuits could result in substantial costs and divert management's attention and resources, and thus could seriously harm our
business.

AS PLANNED WE HAVE COMPLETED A STOCK REPURCHASE, WHICH SIGNIFICANTLY DECREASED OUR CASH RESOURCES AND MAY IMPAIR OUR ABILITY TO ACQUIRE OR DEVELOP ADDITIONAL TECHNOLOGIES.

In the second quarter of fiscal 2008, we completed the repurchase of over seven million shares of our common stock for a total cost of $41 million. As a
result, we have significantly less cash resources, which may inhibit our ability to acquire companies or technologies, or develop new technologies, that we believe would be beneficial to our company
and our stockholders. Further, if we experience a continued downturn in our business, we may need to rely on our cash reserves to fund our business during the period of the downturn which, if
prolonged and severe, we may not be able to do.

22

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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. If made, these assertions could materially adversely affect our business, financial condition and results of
operations. In addition, irrespective of the validity or the successful assertion of these claims, we could incur significant costs in defending against these claims.

THERE IS RISK THAT OUR AUCTION RATE SECURTIES WILL NOT SETTLE AT AUCTION AND WE MAY EXPERIENCE ADDITIONAL OTHER THAN TEMPORARY DECLINES IN VALUE, WHICH WOULD CAUSE ADDITIONAL
CHARGES TO BE REALIZED ON OUR STATEMENT OF OPERATIONS.

As of April 30, 2008, we held ten AA rated auction rate securities, totaling $34.3 million of par value, which failed to settle at auctions.
Although the majority of these securities only began to fail to auction in the fourth quarter of fiscal 2008, two of the securities with a par value of $10.0 million have failed to settle since
the second quarter of fiscal 2008. Due to the prolonged nature of the decline in value of these two auction rate securities that have failed to settle since the second quarter of fiscal 2008 and no
clear indication of when they might settle, we determined that the unrealized loss was no longer temporary. Therefore, we recognized a $4.2 million impairment charge in the consolidated
statement of operations in the fourth quarter of fiscal 2008. We believe that the $0.6 million decline in value that we have experienced in the remaining eight auction rate securities as of
April 30, 2008 is a temporary event and we have accounted for this decline as an unrealized loss in accumulated other comprehensive loss within stockholders' equity in the consolidated balance
sheets. It is possible that we will incur further unrealized losses in fiscal 2009 related to these securities. In addition, in the future should we determine that the decline in value of the other
auction rate securities is other than temporary, we would recognize a further impairment charge on our consolidated statement of operations, which could be material. As of June 30, 2008, we
continued to hold auction rate securities with a par value of $26.4 million. See Item 7A. below for a further discussion of our auction rate securities.

Item 1BUnresolved Staff Comments

None.

Item 2Properties

Our principal offices and facilities are currently located in two leased buildings totaling approximately 61,000 square feet in Mountain View, California. Of the
space occupied, approximately 65% is used for manufacturing and research and development and the balance is used for office space for sales and marketing and general and administrative functions. The
term of the lease expires on July 31, 2011. We believe that the space under the lease is adequate to meet our needs for the foreseeable future.

Item 3Legal Proceedings

Beginning on June 14, 2005, several purported class action lawsuits were filed in the United States District Court for the Northern District of California,
purportedly on behalf of a class of investors who purchased Ditech's stock between August 25, 2004 and May 26, 2005. The complaints allege claims under Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 against Ditech and its Chief Executive Officer and Chief Financial Officer in connection with alleged misrepresentations concerning VQA orders and the potential
effect on Ditech of the merger between Sprint and Nextel, seeking

23

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monetary
damages. All of the lawsuits were consolidated into a single action entitledIn re Ditech Communications Corp. Securities Litigation,No. C 05-02406-JSW, and a consolidated amended complaint was filed on February 2, 2006. The defendants moved to dismiss the complaint, and by order dated
August 10, 2006, the court granted the defendants' motion and dismissed the complaint with leave to amend. The plaintiffs filed their Second Amended Complaint on September 11, 2006. The
defendants again moved to dismiss, and by order dated March 22, 2007, the court dismissed the Second Amended Complaint with leave to amend. The plaintiffs filed their Third Amended Complaint on
April 23, 2007. On May 14, 2007, the defendants again moved to dismiss. By order dated October 11, 2007, the court dismissed the third amended complaint with prejudice. On
November 8, 2007, the plaintiffs filed a notice of appeal to the Ninth U.S. Circuit Court of Appeals. The appeal has been fully briefed. No date for oral argument of the appeal has been set.

On
August 23, 2006, August 25, 2006, and November 3, 2006, three actions were filed in United States District Court for the Northern District of California (Case
Nos. C06-05157, C06-05242, and C06-6877) purportedly as derivative actions on behalf of Ditech against certain of Ditech's current and former officers and directors
alleging that between 1999 and 2001 certain stock option grants were backdated; that these options were not properly accounted for; and that as a result false and misleading financial statements were
filed. These three actions have been consolidated under case number C06-05157. On December 1, 2006, a fourth derivative complaint making similar allegations against many of the same
defendants was filed in California Superior Court for the County of Santa Clara (Case No.106-CV-075695). On April 19, 2007, the California Superior Court granted
Ditech's motion to stay the state court action pending the outcome of the federal consolidated actions.

The
defendants named in the derivative actions are Timothy Montgomery, Gregory Avis, Edwin Harper, William Hasler, Andrei Manoliu, David Sugishita, William Tamblyn, Caglan Aras, Toni
Bellin, Robert DeVincenzi, James Grady, Lee House, Serge Stepanoff, Gary Testa, Lowell Trangsrud, Kenneth Jones, Pong Lim, Glenda Dubsky, Ian Wright, and Peter Chung. These derivative complaints raise
claims under Section 10(b) and 10b-5 of the Securities Exchange Act, Section 14(a) of the Securities Act, and California Corporations Code Section 25403, as well as
common law claims for breach of fiduciary duty, unjust enrichment, waste of corporate assets, gross mismanagement, constructive fraud, and abuse of control. The plaintiffs seek remedies including
money damages,
disgorgement of profits, accounting, rescission, and punitive damages. With respect to the consolidated federal actions, the plaintiffs filed an amended consolidated complaint on March 2, 2007,
adding new allegations regarding another stock option grant. On April 2, 2007, Ditech moved to dismiss the amended complaint based on plaintiffs' failure to make a demand on the board before
bringing suit. On the same day, the individual defendants moved to dismiss the amended complaint for failure to state a claim. On July 16, 2007, the Court granted the individual defendants'
motion to dismiss without prejudice. On September 21, 2007, plaintiffs filed a second amended complaint. On November 30, 2007, we moved to dismiss the complaint for failure to make a
demand on the board of directors and for lack of standing. On the same day, the individual defendants moved to dismiss the complaint for failure to state a claim upon which relief may be granted. A
hearing on these motions was held on February 8, 2008. On March 26, 2008, the Court granted the individual defendants' motion to dismiss without prejudice, ordering plaintiffs to file
any amended complaint by April 25, 2008. Plaintiffs did not file an amended complaint. On April 25, 2008, plaintiffs purported to make a shareholder demand on Ditech's board of
directors, demanding that Ditech's board investigate and remedy the alleged stock option manipulation and insider trading. On May 12, 2008, defendants filed a motion for dismissal with
prejudice based, in part, on plaintiffs' failure to comply with the Court's March 26, 2008 Order. That motion is set for hearing on August 1, 2008.

These
actions are in their preliminary stages; no discovery has taken place and no trial date has been set.

24

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Item 4Submission of Matters to a Vote of Security Holders

Not Applicable.

Executive Officers of the Registrant

The following are our executive officers, together with their ages and biographical information, as of July 1, 2008:

Name

Age

PositionTodd G. Simpson

42

Chief Executive Officer and DirectorWilliam J. Tamblyn

49

Executive Vice President and Chief Financial OfficerLowell B. Trangsrud

56

Executive Vice President and Chief Operating Officer


Biographical
information relating to our executive officers is as follows:

Todd G. Simpsonjoined Ditech in June 2005 as our Vice President, General Manager in connection with our acquisition of Jasomi
Networks, Inc., and became the Vice President, Marketing, in May 2007. Mr. Simpson was promoted to our President and Chief Executive Officer in September 2007. Prior to joining Ditech,
Mr. Simpson was President and CEO from January 2005 until June 2005. Prior to joining Jasomi, Mr. Simpson was a Founder and Director of Call Genie Inc., a provider of automated
voice solutions for the directory services business. From January 2001 to December 2003, Mr. Simpson served as CTO for Zi Corporation, a provider of embedded software for mobile phones, and
where previously, in 2000, he was Vice President of Engineering. Prior to this, he founded a series of companies including Headplay Inc. and Conversion Works. He holds a BSc. and PhD. in
Computer Science from the University of Calgary.

William J. Tamblynjoined Ditech in June 1997 as our Vice President and Chief Financial Officer, and was promoted to Executive Vice
President in May 2004. Mr. Tamblyn was the Chief Financial Officer at Conductus, Inc., a telecommunications company, from January 1994 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.

Lowell B. Trangsrudjoined Ditech in July 2001 as our Vice President of Operations after his service at Compaq Computers, a computer and
peripherals company, where he worked from 1995 to 2001. Mr. Trangsrud was promoted to Executive Vice President in May 2004 and promoted to Chief
Operating Officer in May 2005. In his last position at Compaq, Mr. Trangsrud served as Vice President of Manufacturing for High Availability Solutions Manufacturing. From 1990 to 1995, he
worked for Tandem Computers, and in his last position served as Vice President, Worldwide Supply Chain Operation. From 1973 to 1990, Mr. Trangsrud worked for Sperry Corporation and Honeywell,
serving in a variety of engineering and management roles. Mr. Trangsrud has an A.A. in Electronics from North Dakota State College of Science, a B.A. in Management and a B.S. in Business
Administration from the University of Phoenix.

There
are no family relationships between any director or executive officer of Ditech.

25

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Part II

Item 5Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Ditech's common stock is quoted on the NASDAQ Global Market (formerly the Nasdaq National Market) under the symbol "DITC." The following table shows the high and
low sale prices per share of our common stock as reported on the NASDAQ Global Market for the periods indicated:

Fiscal 2008

Fiscal 2007High

Low

High

LowFirst Quarter

$
8.99

$
7.35

$
11.44

$
7.62Second Quarter

$
7.53

$
4.40

$
9.35

$
7.44Third Quarter

$
4.98

$
2.96

$
8.95

$
6.59Fourth Quarter

$
3.36

$
2.46

$
8.87

$
7.09


On
July 7, 2008 the last reported sale price of our common stock as reported on the NASDAQ Global Market was $2.06 per share.

Holders

According to the records of our transfer agent, there were 102 stockholders of record of Ditech's common stock at July 7, 2008. Because many of our shares
of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.

Dividend Policy

We have never declared or paid any cash dividend on our capital stock and do not anticipate, at this time, paying any cash dividends on our capital stock in the
near future.

26

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Stock Performance Graph(1)

---

The
following graph shows the total stockholder return of an investment of $100 in cash on April 30, 2003 for (i) our Common Stock; (ii) the NASDAQ Composite Index
(U.S.) and (iii) the NASDAQ Telecommunications Index. All values assume reinvestments of the full amount of all dividends.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*Among Ditech Networks, Inc., The NASDAQ Composite Index  And The NASDAQ Telecommunications Index

GRAPHIC

27

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Item 6Selected Financial Data

The consolidated statement of operations data for the fiscal years ended April 30, 2008, 2007 and 2006, and the consolidated balance sheet data as of
April 30, 2008 and 2007, have been derived from our audited consolidated financial statements included in Item 8 of this Annual Report on Form 10-K. The consolidated
statement of operations data for the fiscal years ended April 30, 2005 and 2004, and the consolidated balance sheet data as of April 30, 2006, 2005, and 2004, have been derived from our
consolidated financial statements not included in this Annual Report on Form 10-K. The data set forth below should be read in conjunction with our consolidated financial statements,
including the notes thereto, set forth in "Item 8Financial Statements and Supplementary Data" of this Annual Report on Form 10-K, and with
"Item 7Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Form 10-K.

|                                                             |                                                              | Years Ended April 30,    |        
|------------------------------------------------------------ | ------------------------------------------------------------ | ------------------------ | -------
|
|
|Consolidated Statement of Operations Data:                   |                                                              |                          |        
|Revenue                                                      |                                                              | $                        | 35,089 
|Cost of goods sold                                           |                                                              |                          | 19,595 
|                                                             |                                                              |                          |        
|                                                             | Gross profit                                                 |                          |        
|                                                             |                                                              |                          |        
|Operating expenses:                                          |                                                              |                          |        
|                                                             | Sales and marketing                                          |                          |        
|                                                             | Research and development                                     |                          |        
|                                                             | General and administrative                                   |                          |        
|                                                             | Amortization of purchased intangible assets                  |                          |        
|                                                             | Impairment of goodwill and other purchased intangibles       |                          |        
|                                                             | In-process research and development                          |                          |        
|                                                             | Restructuring charges                                        |                          |        
|                                                             |                                                              |                          |        
|                                                             |                                                              | Total operating expenses |        
|                                                             |                                                              |                          |        
|Income (loss) from continuing operations                     |                                                              |                          | (49,453
|Total other income                                           |                                                              |                          | 676    
|                                                             |                                                              |                          |        
|Income (loss) from continuing operations before income taxes |                                                              |                          | (48,777
|Provision for (benefit from) income taxes                    |                                                              |                          | 45,876 
|                                                             |                                                              |                          |        
|Income (loss) from continuing operations                     |                                                              |                          | (94,653
|Discontinued operations:                                     |                                                              |                          |        
|                                                             | Loss from discontinued operations                            |                          |        
|                                                             | Gain (loss) on disposition                                   |                          |        
|                                                             | Income tax expense (benefit) from gain (loss) on disposition |                          |        
|                                                             |                                                              |                          |        
|Income (loss) from discontinued operations                   |                                                              |                          |       
|                                                             |                                                              |                          |        
|Net income (loss)                                            |                                                              | $                        | (94,653
|                                                             |                                                              |                          |        

28

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|Per share data                                   |         |                                                                                        |  |        |       |   |        |      |  |        |       |   |        |      |  |       
|------------------------------------------------ | ------- | -------------------------------------------------------------------------------------- |  | ------ | ----- | - | ------ | ---- |  | ------ | ----- | - | ------ | ---- |  | ------
|                                                 | Basic   |                                                                                        |  |        |       |   |        |      |  |        |       |   |        |      |  |       
|                                                 |         | Income (loss) from continuing operations before cumulative effect of accounting change |  | $      | (3.29 | ) | $      | 0.16 |  | $      | (0.04 | ) | $      | 2.12 |  | $     
|                                                 |         | Discontinued operations                                                                |  |        |      |   |        |     |  |        | 0.01  |   |        | 0.01 |  |       
|                                                 |         | Net income (loss) per share attributable to common stockholders                        |  | $      | (3.29 | ) | $      | 0.16 |  | $      | (0.03 | ) | $      | 2.13 |  | $     
|                                                 |         |                                                                                        |  |        |       |   |        |      |  |        |      
|                                                 | Diluted |                                                                                        |  |        |       |   |        |      |  |        |       |   |        |      |  |       
|                                                 |         | Income (loss) from continuing operations before cumulative effect of accounting change |  | $      | (3.29 | ) | $      | 0.16 |  | $      | (0.04 | ) | $      | 2.02 |  | $     
|                                                 |         | Discontinued operations                                                                |  |        |      |   |        |     |  |        | 0.01  |   |        |     |  |       
|                                                 |         | Net income (loss) per share attributable to common stockholders                        |  | $      | (3.29 | ) | $      | 0.16 |  | $      | (0.03 | ) | $      | 2.02 |  | $     
|                                                 |         |                                                                                        |  |        |       |   |        |      |  |        |      
|Number of shares used in per share calculations: |         |                                                                                        |  |        |       |   |        |      |  |        |       |   |        |      |  |       
|                                                 | Basic   |                                                                                        |  | 28,805 |       |   | 32,579 |      |  | 32,119 |       |   | 33,408 |      |  | 31,734
|                                                 |         |                                                                                        |  |        |       |   |        |      |  |        |      
|                                                 | Diluted |                                                                                        |  | 28,805 |       |   | 34,020 |      |  | 32,119 |       |   | 35,140 |      |  | 33,496
|                                                 |         |                                                                                        |  |        |       |   |        |      |  |        |      

|
|

|                                 |  | April 30,
|-------------------------------- |  | ---------
|
|Consolidated Balance Sheet Data: |  |          
|Cash and cash equivalents        |  | $        
|Short-term investments           |  |          
|Total assets                     |  |          
|Total stockholders' equity       |  |          

The
selected financial data for the five years ended April 30, 2008 reflects the following:

We
disposed of our optical business in July 2003, which resulted in the financial results from our optical business being reported as a discontinued operation for all periods presented
and contributed to our ability to return to positive net income during fiscal 2004.

Following
our fiscal 2004 return to profitability, we reversed a valuation allowance on our deferred tax assets, resulting in a $36.1 million tax benefit in fiscal 2005.

Following
our acquisition of Jasomi, we wrote off $0.7 million of in-process R&D in fiscal 2006 and amortized $1.0 million, $1.0 million and
$0.8 million of acquired intangible assets in fiscal 2008, 2007 and 2006, respectively.

In
accordance with Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, we began recognizing stock-based compensation expense based on the fair
value of equity instruments granted to employees beginning in fiscal 2007 (See Note 2 of Notes to the

29

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Consolidated
Financial Statements). As a result, operating results include stock based compensation charges of:

Years Ended April 30,2008

2007Cost of Sales

$
380

$
370Sales and marketing


1,618


2,714Research and development


1,127


1,951General and administrative


1,274


1,124


In
fiscal 2008, we recorded impairment losses related to our goodwill and other purchased intangibles, associated with the Jasomi acquisition, totaling $17.7 million, a
write-down for excess levels of inventory of $5.1 million, and an impairment loss of $4.2 million associated with auction rate securities that have failed to settle at
auction since the second quarter of fiscal 2008. In addition, we recorded a full valuation allowance of $59.1 million against our deferred tax assets. All of these events had a significant
impact on our fiscal 2008 operating results.

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 Consolidated 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. See our cautionary language in the first paragraph of "Item 1.
Business" regarding these statements. Our actual results could differ materially from those discussed here. See "Item 1A-Risk Factors" for factors that could cause future results to
differ materially.

Overview

We design, develop and market telecommunications equipment for use in enhancing voice quality and canceling echo in voice calls over wireline, wireless and
internet protocol (IP) telecommunications networks. Our products monitor and enhance voice quality and provide security in the delivery of voice services. Since entering the voice processing market,
we have continued to refine our echo cancellation products to meet the needs of the ever-changing telecommunications marketplace. Our more recent product introductions have leveraged the
processing capacity of our newer hardware platforms to offer not only echo cancellation but also enhanced Voice Quality Assurance ("VQA") features including noise reduction, acoustic echo
cancellation, voice level control and noise compensation through enhanced voice intelligibility.

Since
becoming a public company in June 1999, our financial success has been primarily predicated on the macroeconomic environment of U.S. wireline and, more recently, wireless carriers
as well as our success in selling to the larger carriers. Since the beginning of calendar year 2004, large North American telecommunications service providers have been engaged in merger and
acquisition activity. This activity largely drove a decline in our fiscal 2006 revenue as one of our two largest fiscal 2005 U.S. customers was and continues to be involved in post-merger
integration and, consequently, orders from that customer since the first quarter of fiscal 2006 have been nominal. Over the last few quarters, we have experienced delays in purchasing decisions
relative to voice quality equipment by our domestic and international carriers due to the interplay of budget constraints with the strategic nature of their voice quality deployment and their
transition to third generation cellular technology ("3G") networks. Our revenue will continue to be generated primarily from sales of our BVP-Flex, which accounted for 42% of our revenue
in fiscal 2008.

30

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In
an attempt to diversify our customer base, we have added sales and marketing resources over the last few years to focus on new large account opportunities in the United States and
internationally. In the United States, we believe that our continued focus on voice quality in the competitive wireless services landscape and the continued expansion of wireless networks will be key
factors in adding new customers and driving opportunities for revenue growth. The development of our VQA feature set was originally targeted at the international Global System for Mobile
Communications ("GSM") market but has seen growing importance in the domestic market as well. We continue to focus sales and marketing efforts on international and domestic mobile carriers who might
best apply our VQA solution. We have added sales resources and invested in customer trials domestically and internationally in an attempt to better avail ourselves of these opportunities as they
arise. Despite these efforts we have experienced mixed results as we remain dependant on the buying patterns of a small, yet more diverse, group of large customers. In fiscal 2006, Orascom Telecom
Holding (Orascom) became our largest VQA customer to-date, as well as a step toward our goal of greater customer diversification. Although our international business accounted for
$24.2 million of revenue in fiscal 2007, largely attributable to Orascom, revenue from international customers in fiscal 2008 was only $12.8 million, due to delays in closing
international transactions.

We
expect additional long-term opportunities for growth will occur in VoIP-based network deployments as there appears to be a growing trend of service providers
transitioning from traditional circuit-switched network infrastructure to VoIP. As such, since the beginning of fiscal 2005 we have directed, and expect to continue to direct, the majority of our R&D
spending towards the development of our Packet Voice Processor, a platform targeting VoIP-based network deployments. The Packet Voice Processor introduces cost-effective voice
format transcoding capabilities combined with our VQA technology to improve call quality and clarity by eliminating acoustic echo and voice level imbalances and reducing packet loss, delay and jitter.
To further develop a presence in the VoIP market and future wireless carrier networks, we acquired Jasomi in the first quarter of fiscal 2006. Jasomi's currently available PeerPoint C100 session
border controller enables VoIP calls over smaller carrier networks to traverse the network address translation ("NAT") and protects networks from external attacks by admitting only authorized
sessions, ensuring that reliable VoIP service can be provided to them. To date, we have recognized modest revenue from PeerPoint. Although fiscal 2008 marked the first period in which revenue from the
Packet Voice Processor exceeded 10% of total revenue, ordering patterns are still volatile leading to spikes in the timing and amount of revenue.

Exit of Optical Business.In May 2003, we announced a change to our strategic direction. We decided to focus all of our
assets in continuing to grow our voice processing business, including our echo cancellation and VQA products, and as a result we decided to sell our optical communications business. In July 2003, we
completed the primary step in our planned exit of our optical communications business through the sale of a large portion of the assets of the optical communications business to JDS Uniphase
Corporation ("JDSU"). The assets sold consisted primarily of inventory, certain specified optical-related equipment and intellectual property rights, which were sold for an aggregate purchase price of
up to approximately $6.5 million in cash, of which up to $4.9 million was to be paid to us based on the level of inventory consumed by JDSU, and revenues generated by the optical
business acquired by JDSU through June 30, 2005, if any. JDSU also had indemnification rights in connection with the performance of certain warranty obligations relating to optical products
that were sold by us on or prior to July 16, 2003. In June 2006, we and JDSU came to a mutual settlement and release whereby JDSU paid us $0.7 million and released us from our warranty
obligation. In addition, in June 2006, we completed the closure of our international optical operations. See Note 4 of Notes to the Consolidated Financial Statements.

We
have sold or abandoned all of the assets not purchased by JDSU during fiscal 2004. As a result of exiting the optical business, our Consolidated Statements of Operations reflect the
optical business

31

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as
a discontinued operation for all periods presented. See Note 4 of Notes to the Consolidated Financial Statements.

Acquisition History.In the last five fiscal years, we have completed one acquisition. In June 2005, we acquired Jasomi,
which developed and sold session border controllers that enable VoIP calls to traverse the NAT and protect networks from external attacks by admitting only authorized sessions, ensuring that reliable
VoIP service can be provided to them. The integration of our Packet Voice Processor and Jasomi's session border control technology may enable Ditech to provide a more comprehensive solution to
carriers' border service needs. Consideration for the acquisition included $14.8 million in cash, escrow payments, vested options assumed, acquisition costs, and net liabilities assumed plus
$7.0 million in non-transferable convertible notes. The payment of the full $7.0 million principal amount of the convertible notes was contingent on the retention of a
specified number of designated employees and was broken into two tranches. The conditions of the first tranche were met in June 2006 at which point $3.0 million was paid and reflected as an
adjustment to the purchase price. The second tranche of $4.0 million was paid in July 2007, after the conditions related to that tranche were met. We additionally issued shares of Ditech
restricted stock to new employees hired as part of the acquisition. See Note 5 of Notes to the Consolidated Financial Statements.

Our Customer Base.Historically, the majority of our sales have been to customers in the United States. These customers
accounted for approximately 63%, 71% and 87% of our revenue in fiscal 2008, 2007 and 2006, respectively. However, sales to some of our U.S. customers may result in our products purchased by these
customers eventually being deployed internationally, especially in the case of any original equipment manufacturer that distributes overseas. To date, the vast majority of our international sales have
been export sales and denominated in U.S. dollars. We expect that as we expand shipments of our newer voice processing products, which are targeted at GSM networks, international revenue will begin to
become a larger percentage of our overall revenue.

Our
revenue historically has come from a small number of customers. Our largest customer accounted for approximately 35% of our total revenue in fiscal 2008. Our five largest customers
accounted for approximately 68%, 88% and 88% of our revenue in fiscal 2008, 2007 and 2006, respectively. Consequently, the loss of any one of our largest customers, without an offsetting increase in
revenue from existing or new customers, would have a negative and substantial effect on our business. This customer concentration risk was evidenced in fiscal 2006 as revenue was approximately 58% of
our fiscal 2005 revenue primarily due to a lack of orders from one of our two largest fiscal 2005 customers. This caused fiscal 2006 to result in a net loss.

Critical Accounting Policies and Estimates.The preparation of our financial statements requires us to make certain estimates
and judgments that affect the reported amounts of assets, liabilities, revenue
and expenses and related disclosures. We evaluate these estimates on an ongoing basis, including those related to our revenue, allowance for bad debts, provisions for inventories, warranties and
recovery of deferred income taxes. Estimates are based on our historical experience and other assumptions that we consider reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual future results may differ from these estimates in the event that facts and
circumstances vary from our expectations. To the extent there are material differences between our ongoing estimates and the ultimate actual results, our future results of operations will be affected.
We believe that the following critical accounting policies affect the most significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue RecognitionIn applying our revenue recognition and allowance for doubtful accounts policies, the level of judgment is
generally relatively limited, as the vast majority of our revenue has been generated by a handful of customers. These customers are some of the largest wire-line and wireless carriers in
the United States and our relationships with them are documented in contracts,

32

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which
clearly highlight potential revenue recognition issues, such as passage of title and risk of loss. As of April 30, 2008, we had deferred $2.8 million of revenue. To the extent that
we have received cash for some or all of a given deferred revenue transaction, we reported it in the Consolidated Balance Sheet as a deferred revenue liability. However, to the extent that we have not
collected cash related to the deferred revenue transaction, we reflect the deferred revenue as a reduction in the corresponding account receivable balance. Of the $2.8 million of revenue
deferred as of April 30, 2008, $1.1 million related to deferrals associated primarily with installations and other product related deferrals and $1.7 million was associated with
maintenance contracts. In dealing with smaller customers, we closely evaluate the credit risk of these customers. In those cases where credit risk is deemed to be high, we either mitigate the risk by
having the customer post a letter of credit, which we can draw against on a specified date to effectively provide reasonable assurance of collection, or we defer the revenue until customer payment is
received.

InvestmentsWe consider investment securities that have maturities of more than three months at the date of purchase but
remaining maturities of less than one year, and auction rate securities, which we have historically settled on 7, 28 or 35 day auction cycles, as short-term investments. However,
when auction rate securities fail to settle at auction, which occurred in fiscal 2008, and conditions leading to their failure to auction create uncertainty as to whether they will settle in the
near-term, we classify them as long-term consistent with the contractual term of the underlying security. Long-term investment securities include any investments
with remaining maturities of one year or more and auction rate securities for which we are unable to estimate when they will settle. Short-term and long-term investments
consist primarily of corporate notes and asset backed securities. We have classified our investments as available-for-sale securities in the accompanying consolidated financial
statements. We carry available-for-sale securities at fair value, and report unrealized gains and losses as a separate component of stockholders' equity. Realized gains and
losses and declines in value judged to be other-than-temporary on available-for-sale securities, if any, are included in other income, net based on
specific identification. We include interest on securities classified as
available-for-sale in total other income. See also the discussion in "Liquidity and Capital Resources" and Item 7A for additional information on auction rate securities.

Inventory ValuationIn conjunction with our ongoing analysis of inventory valuation, we constantly monitor projected demand on
a product by product basis. Based on these projections we evaluate the levels of write-downs required for inventory on hand and inventory on order from our contract manufacturers. Although we believe
we have been reasonably successful in identifying write-downs in a timely manner, sudden changes in buying patterns from our customers, either due to a shift in product interest and/or a complete pull
back from their expected order levels has resulted in the recognition of larger than anticipated write-downs. For example, we recorded an inventory write-down for excess levels of
inventory of $5.1 million in fiscal 2008. There were no sales of previously written-down inventory in fiscal 2008. We sold $0.3 million and $0.6 million of other
previously written-down inventory in fiscal 2007 and 2006, respectively. Fiscal 2007 and 2006 sales of previously written-down inventory had a negligible impact on gross
margin, as we sold the inventory for approximately its net book value.

Cost of WarrantyAt the time that we recognize revenue, we accrue for the estimated costs of the warranty we offer on our
products. We currently offer warranties on the hardware elements of our products ranging from one to five years and warranties on the software elements of our products ranging from 90 days to
one year. The warranty generally provides that we will repair or replace any defective product and provide software bug fixes within the term of the warranty. Our accrual for the estimated warranty is
based on our historical experience and expectations of future conditions. To the extent we experience increased warranty claim activity or increased costs associated with servicing those claims, we
may revise our estimated warranty accrual to reflect these additional exposures. This would result in a decrease in gross profit. As of April 30, 2008, we had recorded $0.6 million of
accruals related to estimated future warranty costs. See Note 3 of the Notes to the Consolidated Financial Statements.

33

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GoodwillOur methodology for allocating a portion of the purchase price to goodwill in connection with the purchase of Jasomi
was determined through established valuation techniques in the high-technology communications equipment industry. Goodwill was measured as the excess of the cost of acquisition over the
sum of the amounts assigned to tangible and identifiable intangible assets acquired less liabilities assumed. During the first quarter of fiscal 2008, goodwill increased $3.8 million from
$12.6 million recorded at April 30, 2007 as we recorded the payment of the non-employee investor portion of the $4.0 million second and final tranche of convertible
notes plus accrued interest. We perform goodwill impairment tests on an annual basis, or more frequently if conditions warrant it.

Impairment of Long-lived AssetsWe continually monitor events and changes in circumstances that could indicate
that carrying amounts of long-lived assets, including intangible assets, may not be recoverable. When such events or changes in circumstances arise, we assess the recoverability of our
long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the undiscounted future cash
flows is less than the carry amount of the assets in question, we recognize an impairment loss based on the excess of the carrying amount over the fair value of the assets. Following the criteria of
SFAS 131 "Disclosure about Segments of an Enterprise and Related Information" and SFAS 142 "Goodwill and Other Intangible Assets", we view ourselves as having a single operating segment
and reporting unit and consequently have evaluated goodwill for impairment based on an evaluation of our fair value as a whole. Our quoted share price from NASDAQ is the basis for measurement of that
fair value, as our market capitalization based on share price best represents the amount at which we could be bought or sold in a current transaction between willing parties. Since the first quarter
of fiscal 2008, we have experienced a decline in our stock price and therefore our market capitalization, due in large part to the recent decline in our operating results. As a result of our stock
price's continued depressed state and uncertainty as to when our stock price would return to levels sufficient to justify the recovery of our recorded goodwill, we undertook an interim impairment
review in the third quarter of fiscal 2008. As a result of the review, we determined that the entire goodwill balance of $16.4 million was in fact impaired and therefore recorded an impairment
loss as part of our third quarter fiscal 2008 results.

We
evaluate the recoverability of our amortizable purchased intangible assets based on an estimate of the undiscounted cash flows resulting from the use of the related asset group and
its eventual disposition. The asset group represents the lowest level for which cash flows are largely independent of cash flows of other assets and liabilities. We report long-lived
assets to be disposed of at the lower of carrying amount or fair value less costs to sell. In addition to the interim review for goodwill impairment discussed above, we also performed impairment
reviews of our purchased intangibles and other long-lived assets as of January 31, 2008, which review did not indicate any impairment of these assets. Due to events that transpired
in the fourth quarter of fiscal 2008, including but not limited to a competitor's introduction of a new competitive product that
appears to have created a sudden shift in demand away from the legacy Jasomi products, we determined that an impairment had occurred and accordingly recorded a $1.3 million impairment loss in
fiscal 2008.

Accounting for Stock-based CompensationEffective May 1, 2006, we adopted the fair value recognition provisions of
SFAS 123R, using the modified prospective transition method, and therefore have not restated prior period results in our Consolidated Financial Statements. In accordance with SFAS 123R,
we recognize compensation expense, net of estimated forfeitures, for all stock-based payments (1) granted after May 1, 2006 and (2) prior to but not vested as of May 1,
2006.

Under
SFAS 123R, stock-based compensation cost is estimated at the grant date based on the award's fair value as calculated by the Black-Scholes-Merton ("Black-Scholes")
option-pricing model and is recognized as expense, net of estimated forfeitures, ratably over the requisite service period. Given our employee stock options have certain characteristics that are
significantly different from traded options and, because changes in the subjective assumptions can materially affect the estimated value, in our opinion the existing valuation models may not provide
an accurate measure of the fair

34

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value
of our employee stock options. Although we determine the fair value of employee stock options in accordance with SFAS 123R and SAB 107 using the Black-Scholes option-pricing model,
that value may not be indicative of the fair value observed between a willing buyer and a willing seller in a market transaction.

The
Black-Scholes model requires various highly judgmental assumptions including expected option life and volatility of our stock price. If any of the assumptions used in the
Black-Scholes model or the estimated forfeiture rate changes significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period.

Accounting for Income TaxesAmounts recorded for income taxes, both current and deferred, are based on estimates of the tax
consequences of our operations in the various tax jurisdictions in which we operate. Our deferred taxes are the result of temporary differences resulting from differing treatment of items such as
valuation allowances for bad debts and inventory, for tax and accounting purposes. As part of our ongoing assessment of the recoverability of our deferred tax assets, on a quarterly basis we review
the expiration dates of our net operating loss carryforwards. In addition, we complete a study on the impact of Section 382 of the Internal Revenue Code on at least a semi-annual
basis to determine whether a change in ownership may limit the value of our net operating loss carryforwards. We determined that a full valuation allowance against all of our deferred tax assets at
April 30, 2008 was required. We have considered all evidence, positive and negative, pursuant to SFAS 109, Accounting for Income Taxes" and believe that based on our recent operating
losses and uncertainty about the magnitude and timing of future operating profits, it is no longer more likely than not that our deferred tax assets will be realized.

Effective
May 1, 2007, we adopted Financial Accounting Standards Board ("FASB") Interpretation No. 48,Accounting for Uncertainties in Income
TaxesAn Interpretation of FASB Statement No. 109("FIN 48"). FIN 48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition of tax benefits, classification
on the balance sheet, interest and penalties, accounting in interim periods, disclosure, and transition. We have classified interest and penalties as a component of tax expense. As a result of the
implementation of FIN 48 effective May 1, 2007, we recognized a $0.4 million decrease in the liability for unrecognized tax benefits, which was accounted for as a decrease in the
May 1, 2007 balance of accumulated deficit. We do not expect a significant change to the liability over the next 12 months.

In
general, our effective tax rates differ from the statutory rate primarily due to stock-based compensation, research and experimentation tax credits, state taxes, tax impact of foreign
operations, and changes in the state tax rate as it relates to certain deferred tax assets specifically for California purposes only. However in fiscal 2008, the effective tax rate was also
significantly impacted by the impairment losses recorded against goodwill and other purchased intangibles and from the establishment of a valuation allowance against our net deferred tax asset
position. The state tax rate changed with respect to this deferred tax asset as a result of our filing tax returns in additional other states. The effective tax rate was (94.1)%, 38.9% and (22.9)% for
fiscal 2008, 2007, and 2006, respectively. We have completed the two year audit of our federal tax returns for fiscal 2004 and 2005 with no material findings and have begun an audit by one of the
state jurisdictions in which we do business for our fiscal 2005 filing. We are currently not under audit for any other years or in any other jurisdictions. We regularly assess the likelihood of
adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.



In September 2006, the FASB issued Statement No. 157,Fair Value Measurements("SFAS 157").
SFAS 157 defines fair value, establishes a framework and guidance regarding the methods for

35

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measuring
fair value, and expands related disclosures about those measurements. In February 2008, the FASB issued FASB Staff Position ("FSP") FAS 157-1, Application of FASB
Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under
Statement 13", which amends SFAS 157 to exclude accounting pronouncements that address fair value measurements for purposes of lease classification or measurement under SFAS
No. 13, "Accounting for Leases". In February 2008, the FASB also issued FSP FAS 157-2, "Effective Date of FASB Statement No. 157", which delays the effective date of
SFAS No. 157 until the first quarter of fiscal 2010 for all non-financial assets and non-financial liabilities, except for items that are recognized or discounted at
fair value in the financial statements on a recurring basis (at least annually). SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. We are currently assessing the impact that SFAS 157 will have on our results of operations, financial position and cash flows, upon adoption
beginning in fiscal 2009.

In
February 2007, the FASB issued Statement No. 159,The Fair Value Option for Financial Assets and Financial Liabilitiesincluding an
amendment to FAS 115("SFAS 159"). SFAS 159 allows entities to choose, at specified election dates, to measure eligible financial assets and liabilities at
fair value in situations in which they are not otherwise required to be measured at fair value. If a company elects the fair value option for an eligible item, changes in that item's fair value in
subsequent reporting periods must be recognized in current earnings. SFAS 159 also establishes presentation and disclosure requirements designed to draw comparison between entities that elect
different measurement attributes for similar assets and liabilities. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We are currently assessing the impact that
SFAS 159 will have on our results of operations, financial position and cash flows, upon adoption in fiscal 2009.

In
December 2007, the FASB issued SFAS 141R,Business Combinations("SFAS 141R"), replacing SFAS 141, "Business
Combinations". SFAS 141R revises existing accounting guidance for how an acquirer recognizes and measures in its financial statements the identifiable assets, liabilities, any noncontrolling
interests, and the goodwill acquired. SFAS 141R is effective for fiscal years beginning after December 15, 2008. The adoption of SFAS 141R will impact the accounting for business
combinations completed by us on or after adoption in fiscal 2010.

In
December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB
No. 51. SFAS No. 160 requires all entities to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial statements. Its
intention is to eliminate the diversity in practice regarding the accounting for transactions between an entity and noncontrolling interests. This Statement is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. Since we do not have any subsidiaries with noncontrolling interests, we do not expect
this statement will have a material impact on our financial condition, results of operations and cash flows upon adoption in fiscal 2010.

In
May 2008, the FASB issued Staff Position No. APB 14-1, "Accounting for Convertible Debt Instruments that May be Settled in Cash Upon Conversion."
APB 14-1 requires that the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) be
separately accounted for in a manner that reflects an issuer's nonconvertible debt borrowing rate. The resulting debt discount is amortized over the period the convertible debt is expected to be
outstanding as additional non-cash interest expense. APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. Retrospective application to all periods presented is required except for instruments that were not outstanding during any of the periods that will be
presented in the annual financial statements for the period of adoption but were outstanding during an earlier period.

36

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We
are currently evaluating the impact of the adoption of this position could have on our financial condition, results of operations and cash flows.

Results of Operations

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



|                                                                           |                                                        | Years Ended April 30,               |     
|-------------------------------------------------------------------------- | ------------------------------------------------------ | ----------------------------------- | ----
|
|Revenue                                                                    |                                                        | 100.0                               | %   
|Cost of goods sold                                                         |                                                        | 55.8                                |     
|                                                                           |                                                        |                                     |     
|                                                                           | Gross profit                                           |                                     | 44.2
|                                                                           |                                                        |                                     |     
|Operating expenses:                                                        |                                                        |                                     |     
|                                                                           | Sales and marketing                                    |                                     | 54.4
|                                                                           | Research and development                               |                                     | 51.0
|                                                                           | General and administrative                             |                                     | 26.5
|                                                                           | Amortization of purchased intangible assets            |                                     | 2.8 
|                                                                           | Impairment of goodwill and other purchased intangibles |                                     | 50.4
|                                                                           | In-process research and development                    |                                     |    
|                                                                           |                                                        |                                     |     
|                                                                           |                                                        | Total operating expenses            |     
|                                                                           |                                                        |                                     |     
|Income (loss) from continuing operations                                   |                                                        | (140.9                              | )   
|Total other income                                                         |                                                        | 1.9                                 |     
|                                                                           |                                                        |                                     |     
|Income (loss) from continuing operations before provision for income taxes |                                                        | (139.0                              | )   
|Provision for income taxes                                                 |                                                        | 130.8                               |     
|                                                                           |                                                        |                                     |     
|Income (loss) from continuing operations                                   |                                                        | (269.8                              | )   
|Discontinued operations:                                                   |                                                        |                                     |     
|                                                                           | Gain on disposition                                    |                                     |    
|                                                                           | Income tax expense from gain on disposition            |                                     |    
|                                                                           |                                                        |                                     |     
|                                                                           |                                                        | Income from discontinued operations |     
|                                                                           |                                                        |                                     |     
|Net income (loss)                                                          |                                                        | (269.8                              | )%  
|                                                                           |                                                        |                                     |     



Years ended April 30,

Increase/(Decrease)
from Prior Year2008

2007

2006

2008

2007$s in thousandsRevenue

$
35,089

$
84,004

$
54,905

$
(48,915
)
$
29,099% Change











(58.2
)%

53.0
%


The
decrease in revenue in fiscal 2008 as compared to fiscal 2007 was primarily due to a decrease in sales to our largest domestic customer, Verizon Wireless, and our largest
international customer, Orascom, with only modest offsetting increases in other domestic and international business. Verizon accounted for approximately 35% of our revenue in fiscal 2008 as compared
to 64% and 79% of the revenue in fiscal 2007 and 2006, respectively. This decline in revenue appears to be largely due to

37

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Verizon's
shifting focus away from their traditional wireless network deployments, where our product has historically been deployed, to newer 3G networks. Our second largest customer in fiscal 2008,
Intercall/West, a domestic VoIP customer, accounted for 12% of our total revenue in fiscal 2008 as compared to less than 1% in fiscal 2007. Our second largest customer in fiscal 2007, Orascom,
accounted for 11% in fiscal 2008 as compared to 14% and 3% of our revenue in fiscal 2007 and 2006, respectively. We believe that the decline in Orascom revenue in absolute dollars may be due to the
recently announced plans of its parent company to divest itself of several of its Middle Eastern holdings, including some of the larger operations, to which we had been selling. Although our Broadband
Voice Processor Flex ("BVP-Flex"), which has become the primary system purchased by our domestic customers, continues to play a key role in our revenue mix, our Quad Voice Processor
("QVP") and PVP products and service contracts have grown as a percentage of revenue during fiscal 2008 due in large part to the declining sales to Verizon.

The
increase in revenue in fiscal 2007 compared to fiscal 2006 was driven, in part, by increased shipments to our domestic wireless customers, primarily Verizon, as they continued to
expand and update their networks. However, the largest impact on our year-over-year revenue growth was the growth in our international revenues. International revenues grew by
approximately $17.2 million, largely driven by new customers in the Middle East and Latin America regions.

In
fiscal 2008, 2007 and 2006, sales of our Broadband Voice Processor Flex (BVP-Flex) accounted for 42%, 59% and 81% of our revenue, respectively. Because the
BVP-Flex provides increased flexibility and easier installation, it has been critical in helping us to acquire and retain our key domestic strategic customers, most prominently Verizon. In
fiscal 2004, we introduced our VQA product, which includes our new voice quality features and is primarily targeted at the international GSM market. Although we expected to realize sales of VQA
products throughout fiscal 2006 based on the number of customer trials in which we were engaged, we did not realize significant growth in revenue from this product until very late in fiscal 2006 and
throughout fiscal 2007 and 2008. During fiscal 2008 and 2007, sales of our VQA product accounted for approximately 17% and 20% of our worldwide revenue, respectively. While the revenue has been slow
to materialize, we continue to believe that VQA presents material revenue opportunities, and we will therefore continue to make strategic investments in our international infrastructure and in
customer trials.

Following
the success of our BVP-Flex, revenue over the three fiscal years has been generated largely from domestic sales, which represented 63%, 71% and 87% of our fiscal
2008, 2007 and 2006 revenue, respectively. As noted in the preceding paragraph, our international growth has primarily been dependent on our success in selling VQA. Although fiscal 2007 represents our
most successful year of selling to international markets, we expect that in the coming year the international portion of our business will continue to grow as a percentage of overall sales as we
realize more sales of our VQA applications. However, we expect that our domestic customers will continue to represent the majority of our revenue for the foreseeable future.

Revenue
levels for fiscal 2009 will be dependent on our success in adding new customers domestically and internationally, the network technology and deployment plans of the North
American telecommunication service providers and the market acceptance of our Packet Voice Processor. See "Item 1A-Risk Factors" for discussions of risks related to customer
concentration and other factors, which could impact the timing and level of revenue.

See
our cautionary language in the first paragraph of "Item 1. Business" regarding forward-looking statements such as the statements made in the prior paragraphs about our
expectations regarding our future revenue, as well as statements regarding our expectations in each of the categories below.

38

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Years ended April 30,

Increase/(Decrease)
from Prior Year2008

2007

2006

2008

2007$s in thousandsCost of Goods Sold

$
19,595

$
27,140

$
16,368

$
(7,545
)
$
10,772% Change











(27.8
)%

65.8
%Gross Profit

$
15,494

$
56,864

$
38,537

$
(41,370
)
$
18,327Gross Margin %


44.2
%

67.7
%

70.2
%

(23.5) pts


(2.5) pts


Cost
of goods sold consists of direct material costs, personnel costs for test and quality assurance, costs of licensed technology incorporated into our products, post-sales
installation costs,
provisions for inventory and warranty expenses and other indirect costs. The decrease in cost of goods sold in fiscal 2008 was primarily driven by the decrease in business volume during fiscal 2008 as
compared to fiscal 2007. However, the decline in cost of goods sold was not directly proportional with the decline in revenue due largely to the fixed nature of our manufacturing costs and the
write-down of potentially excess materials. Our analysis of gross margins below discusses the factors impacting cost of goods sold in more detail.

As
noted above, gross margins were adversely impacted by our fixed manufacturing costs representing a larger percentage of our lower revenue base. In fiscal 2008, these costs represented
18.3% of revenue as compared to 7.4% in fiscal 2007. In addition, in fiscal 2008, we recorded a write-down of potentially excess inventory items totaling $5.1 million (14.5% of
revenue). These factors more than offset the positive impacts on gross margin realized from an improved customer and product mix in fiscal 2008, including an increase in the percentage of revenue
recognized from maintenance and extended warranty contracts due to the decline product shipments in fiscal 2008.

The
increase in cost of goods sold in fiscal 2007, as compared to fiscal 2006, was largely due to the increase in business volume. However, cost of goods sold did not increase in direct
proportion with the increase in revenue due to: (1) the inclusion of $0.4 million of costs associated with stock compensation charges pursuant to SFAS 123R in fiscal 2007, and
(2) the customer/product mix which was more heavily weighted to lower margin international customers and products, as well as the other factors discussed in the discussion of gross margin
below.

As
discussed above, the primary reasons for the 2.5 percentage point decline in gross margin in fiscal 2007 from fiscal 2006 were the inclusion of approximately
$0.4 million of stock compensation, due to adoption of SFAS 123R in fiscal 2007, and the customer/product mix, which was heavily impacted by an increased percentage of our revenues being
derived from lower margin international markets. Partially offsetting the negative impacts of the international revenue mix was an increase, albeit still a relatively minor percentage of our overall
revenue, in higher margin maintenance revenue. Also impacting gross margin unfavorably was an increase in the level of installation service spending to support both our international and domestic
customer growth. Partially offsetting these net negative factors on gross margin was the cessation of amortization of the technology asset established upon the sale of our core echo cancellation
technology in fiscal 2002. This resulted in a gross profit improvement of approximately $0.7 million in fiscal 2007. Fiscal 2007 gross margin also benefited from the sale of approximately
$0.3 million of previously written-down inventory and the reversal of approximately $0.4 million of warranty reserves due to the favorable resolution of a potential recall of
a defective component in one of our older products with a past customer.

We
expect gross margins in the fiscal 2009 to be in the range of 55% - 60% based on forecasted product and customer mix and the impact of continued compensation charges due to
recording stock compensation expense pursuant to SFAS 123R. Over the next several quarters, if we are successful in international deployment, we expect to experience continued pricing pressures
as we expand the distribution of our products through value-added resellers and distributors.

39

---







Years ended April 30,

Increase/(Decrease) from Prior Year2008

2007

2006

2008

2007$s in thousandsSales and Marketing Expense

$
19,103

$
24,496

$
18,233

$
(5,393
)
$
6,263% of Revenue


54.4
%

29.2
%

33.2
%

25.2 pts


(4.0) pts


Sales
and marketing expenses primarily consist of personnel costs, including commissions and costs associated with customer service, travel, trade shows and outside consulting services.
Salaries and related expense decreased $2.9 million in fiscal 2008 as compared to fiscal 2007. This decline was largely due to a reduction in force at the end of the second quarter of fiscal
2008 and reduced variable compensation levels due to lower than planned sales levels. We also saw a reduction in stock-based compensation expense of $1.1 million due to the older options
becoming fully vested in fiscal 2008 and lower levels of stock compensation being incurred on newer option grants due to the decline in the price of our stock over much of the last two fiscal years.
The other factors that impacted the decline in sales and marketing expense included tighter spending control on travel and marketing programs which resulted in an aggregate reduction of
$0.9 million in fiscal 2008 and reduced agent fees of $0.5 million due to reduced international sales in fiscal 2008.

Salary
and related expenses increased $2.3 million in fiscal 2007 compared to fiscal 2006 primarily due to incremental hiring of domestic personnel and marketing personnel to
support introduction of our VoIP product offerings, and pre- and post-sales engineers to support a greater level of installation activity and our VoIP products. Fiscal 2007
salary and related costs included stock-based compensation associated with adoption of SFAS 123R, which contributed an additional $2.5 million of the increase in spending in fiscal 2007.
The other key increases were attributable to: (1) a $0.7 million increase in agent fees associated with international sales growth; (2) a $0.4 million increase in travel
costs related to increased customer contacts related to international expansion and expansion of our PVP trials; and (3) a $0.4 million increase in amortization of field demonstration
and evaluation systems associated with the protracted nature of customer evaluations of our VQA and VoIP products.

We
expect that our sales and marketing expenses in fiscal 2009 will continue to decline from fiscal 2008 levels due to realizing a full year worth of cost reductions from the reduction
in force in mid-fiscal 2008 and from continued cost controls. These savings will likely be partially offset by increased variable compensation based on new sales targets for fiscal 2009.



Years ended April 30,

Increase/(Decrease)
from Prior Year2008

2007

2006

2008

2007$s in thousandsResearch and Development Expense

$
17,881

$
20,835

$
17,884

$
(2,954
)
$
2,951% of Revenue


51.0
%

24.8
%

32.6
%

26.2 pts


(7.8) pts


Research
and development expenses primarily consist of personnel costs, contract consultants, materials and supplies used in the development of voice processing products. The decline in
spending in fiscal 2008 was largely driven by the $1.6 million in savings realized in the latter half of the year after the reduction in force that we did at the end of the second quarter of
fiscal 2008. The other factors impacting the decline in spending were $1.1 million of reduced consulting, consumed materials and allocation of corporate overhead due to being more focused on
fine tuning our recent product introductions rather than completely new product development, which did not require as extensive an expenditure level in fiscal 2008. In addition to these savings, there
was a decline in stock-based

40

---



compensation
expense of approximately $0.8 million that was substantially offset by the cost incurred associated with the reduction in force in fiscal 2008.

The
increase in spending in fiscal 2007 was largely driven by salary and related costs which increased $1.7 million due to increases in headcount in the engineering area and merit
increases and $1.3 million associated with stock compensation charges attributable to the adoption of SFAS 123R in fiscal 2007. In addition to these increases, we experienced increases
in outside service costs to supplement headcount demands and increased deprecation expense associated with increased lab equipment to support new
product design and test and increased headcount levels totaling $0.6 million. The latter increases were substantially offset by a reduction in spending on consumable materials due to the later
stage of development of our products in fiscal 2007 as compared to fiscal 2006.

We
expect to see a further decline in our research and development spending in fiscal 2009 as we realize a full year's cost savings from the 2008 reduction in force.



Years ended April 30,

Increase/(Decrease)
from Prior Year2008

2007

2006

2008

2007$s in thousandsGeneral and Administrative Expense

$
9,285

$
8,534

$
6,568

$
751

$
1,966% of Revenue


26.5
%

10.2
%

11.9
%

16.3 pts


(1.7) pts


General
and administrative expenses primarily consist of personnel costs for corporate officers, finance and human resources personnel, as well as insurance, legal, accounting and
consulting costs. The increase in spending in fiscal 2008 was largely due to the costs associated with retirement of our former CEO during fiscal 2008 and executive search costs associated with
locating a new CEO, which aggregated $0.9 million. These increases in spending in fiscal 2008 were partially offset by a $0.2 million decline in variable compensation due to poor company
performance in fiscal 2008.

The
increase in fiscal 2007 expense was largely due to the adoption of SFAS 123R, which resulted in $1.1 million of stock compensation. The increase was also impacted by
other salary related costs, which increased due to increased headcount and annual merit increases totaling approximately $0.5 million and a $0.3 million increase in professional fees
attributable to the various legal matters that we are currently addressing.

We
expect a decrease in general and administrative expenses in fiscal 2009 due to realizing a full year's savings from the reduction in force completed in mid-fiscal 2008 as
well as other cost saving measures we expect to put in place in fiscal 2009.



In fiscal 2006, we recorded compensation expense related to the vesting of assumed stock options and the restricted stock grants made in connection with the
June 30, 2006 acquisition of Jasomi. Deferred stock-based compensation represents the intrinsic value of the unvested portion of options assumed and restricted shares granted to Jasomi
employees and is amortized to research and development expense and sales and marketing expense over the corresponding vesting periods. See Note 5 of Notes to the Consolidated Financial
Statements.

41

---



Stock-based
compensation charges included in operating expenses were as follows:

Year ended
April 30, 2006in thousandsSales and marketing

$
256Research and development


619Total

$
875


In
fiscal 2007, we adopted SFAS 123R, which replaced the above compensation charges associated with our acquisition of Jasomi and also introduced compensation charges for all
equity-based employee programs. Compensation charges related to the Jasomi acquisition are now embedded in the stock compensation charges reported in the sales and marketing and research and
development lines, discussed below.

In
fiscal 2008, 2007 and 2006, we recorded compensation expense related to the portion of convertible debentures issued to employee-stockholders, in connection with the acquisition of
Jasomi. We amortized the compensation expense to research and development expense and sales and marketing expense over the lives of the convertible debentures. The convertible debentures matured in
June 2007, and were settled in cash. See Note 5 of Notes to the Consolidated Financial Statements.

Convertible
debenture amortization included in operating expenses was as follows:

Years ended April 30,2008

2007

2006in thousandsSales and marketing

$
46

$
339

$
563Research and development


4


25


41Total

$
50

$
364

$
604




For the years ended April 30, 2008, 2007 and 2006, we recorded amortization of purchased intangible assets related to the Jasomi acquisition. We are
amortizing purchased intangible assets to operating expense over their estimated useful life which ranges from four to five years. See Note 6 of Notes to the Consolidated Financial Statements.

Years ended April 30,2008

2007

2006$s in thousandsAmortization of purchased intangible assets

$
985

$
985

$
821% of revenue


2.8
%

1.2
%

1.5
%




Since the first quarter of fiscal 2008, we have experienced a decline in our stock price and therefore our market capitalization, due in large part to the recent
decline in our operating results. As a result of our stock price's continued depressed state and uncertainty as to when our stock price would return to levels sufficient to justify the recovery of our
recorded goodwill, we undertook an interim impairment review in the third quarter of fiscal 2008. As a result of the review, we determined that the entire goodwill balance of $16.4 million,
attributable to the Jasomi acquisition, was impaired and therefore recorded an impairment loss in the third quarter of fiscal 2008. In addition, we recorded a $1.3 million impairment charge
related to the purchase intangibles related to the Jasomi acquisition.

42

---



The
impairment charge was due in large part to declining sales levels in the small customer portion of the session boarder controller market.



Year ended
April 30, 2006$s in thousandsIn-process research and development

$
700% of revenue


1.3
%


In
fiscal 2006, we incurred a charge for in-process research and development ("in process R&D") acquired as part of our acquisition of Jasomi. The amount of the purchase
price for Jasomi allocated to in-process R&D was determined through established valuation techniques common in the high-technology communications equipment industry.
In-process R&D is expensed upon acquisition because technological feasibility has not been established and no future alternative uses exist.

In
valuing in-process R&D, cash flows were based on estimates from our and Jasomi's management and from various public, financial and industry sources. We projected net
revenue to grow through calendar 2008 and decline thereafter based on the rate of technology changes in the industry, product life cycles and various projects' stages of development. We estimated cost
of goods sold and operating expenses, including research and development expenses and selling, general and administrative expenses, as a percentage of revenue based on historical averages and
forward-looking projections. We also included in the projections estimated costs to bring projects to technological feasibility and costs associated with activities undertaken to correct errors or
keep products updated (also referred to as "maintenance" research and development). We based the tax expense on statutory Federal and California tax rates.

We
based the percentage of completion of in-process projects on an averaging of (1) expenses incurred to-date compared to the total estimated development
costs for each project, (2) time incurred to-date and remaining time to complete each project and (3) milestone-based percent complete estimates. The in-process
projects pertained to general enhancements to PeerPoint software, combining of NAT and Peering capability, increasing throughput capability, enhancing the interface and developing a Denial of Service
module. The average percentage complete for the in-process projects was 56% as of the date of the acquisition. At the time of the acquisition, we estimated that these development efforts
would be completed in nine months at an estimated cost of approximately $0.7 million. As of April 30, 2008, the remaining estimated cost to complete the project is approximately
$0.4 million, primarily due to other projects taking higher priority in fiscal 2008 resulting in most of the development related to the last element of the in-process projects
slipping beyond fiscal 2008.

The
30% cost of capital used to discount estimated cash flows reflects the estimated time to complete the projects and the level of risk involved.

43

---





Stock based compensation expense recognized under SFAS 123R in fiscal 2008 and 2007 was as follows:

Years ended April 30,2008

2007in thousandsCost of Sales

$
380

$
370Sales and marketing


1,618


2,714Research and development


1,127


1,951General and administrative


1,274


1,124Total

$
4,399

$
6,159


The
overall decline in the level of stock compensation in fiscal 2008 was attributable to the timing of option grants that are subject to accounting under SFAS 123R. To the extent
that compensation related to older option grants becomes fully recognized and is replaced with compensation attributable to new option grants with lower fair values, we experience a decline in overall
stock compensation expense. For fiscal 2008, this decline in expense was partially offset by an increase in stock based compensation due to a one time charge of $0.2 million in the second
quarter of fiscal 2008 due to the modification of stock options as part of the exiting chief executive officer's retirement package, which was recorded to general and administrative expense.

We
expect stock compensation expense will begin to stabilize in the coming quarters as pre-fiscal 2007 stock option grants, which have been accounted for using the
accelerated multiple option approach, become fully amortized and stock compensation expense becomes solely attributable to post-fiscal 2006 grants which are accounted for using the
straight-line single option approach. However, stock compensation can be subject to unexpected changes due to the size and nature of option grants and the underlying price of our common
stock within a given period.



Year ended
April 30, 2008in thousandsCost of Sales

$
72Sales and marketing


309Research and development


892General and administrative


504Total

$
1,777


In
the second quarter of fiscal 2008, we incurred a charge of $1.3 million related to a reduction in force in an effort to reduce spending levels to coincide with the recent
declines we have experienced in our revenue. The reduction in force involved the closure of our Canadian research and development facility and a reduction of approximately 23% in our worldwide
headcount. The employment of all individuals impacted by the reduction in headcount was terminated and over 90% of the severance packages had been paid as of April 30, 2008. The remaining
balance relating to the outplacement services portion of the severance packages should be paid in the first half of fiscal 2009.

In
addition to the charge related to the reduction in force, we also incurred other one time benefit costs associated with the retirement package for our CEO in August 2007, which
totaled approximately $0.4 million and was included in general and administrative expense, consistent with the recurring costs associated with the CEO.

44

---







Years ended April 30,

Increase/(Decrease)
from Prior Year2008

2007

2006

2008

2007$s in thousandsTotal Other Income

$
676

$
6,689

$
4,522

$
(6,013
)
$
2,167% of Revenue


1.9
%

8.0
%

8.2
%

(6.1) pts


(0.2) pts


Total
other income consists of interest income on our invested cash and cash equivalents and investment balances, offset by other-than-temporary impairment losses
on investment securities and a nominal amount of foreign exchange losses. The decrease in total other income in fiscal 2008 was largely due to the decline in our short-term investments due
to the repurchase of approximately $41 million of our common stock in the latter part of our second quarter of fiscal 2008 and recent declines in interest rates along with the recognition of a
$4.2 million impairment loss on investment securities.

The
increase in total other income in fiscal 2007 compared to 2006 was primarily attributable to higher interest income, due to a significant improvement in the return on our invested
cash and larger average invested balances in fiscal 2007.

Our
fiscal 2009 interest income will be dependent on our cash balances and the movement of U.S. interest rates.



|                                    |  | Years ended April 30, |        | Increase/(Decrease)
from Prior Year
|----------------------------------- |  | --------------------- | ------ | -----------------------------------
|
|
|Income Taxes, Continuing Operations |  | $                     | 45,876 |                                    
|% of Revenue                        |  |                       | 130.8  | %                                  

Income
taxes consist of federal, state and foreign income taxes. The tax provision for fiscal 2008 resulted in an effective rate of (94%). This rate was largely impacted by the
establishment of a full valuation allowance against our deferred tax assets in fiscal 2008 of $59.1 million and the non-deductible impairment loss related to goodwill. The other
factors impacting the effective tax rate were modest levels of international and state taxes, which are not directly tied to our overall operating loss but rather to the level of profitability in
these tax jurisdictions.

The
tax provision for fiscal 2007 resulted in an effective tax rate of 39%. The effective tax rate differs from the statutory rate primarily due to stock-based compensation expense,
research and experimentation tax credits, state taxes, tax impact of foreign operations and changes in the state tax rate as it relates to certain deferred tax assets specifically for California
purposes only.

The
tax provision (benefit) for fiscal 2006 resulted in an effective tax rate of (23%). The effective tax rate for the year was adversely affected by non-deductible Jasomi
acquisition-related charges, including our inability to deduct for tax purposes (1) in-process R&D related to the acquisition of Jasomi and (2) convertible debenture
amortization, and the correction of a $1.1 million error in the balance of a deferred tax asset related to a California R&D tax credit. The error originated in the second quarter of fiscal 2005
at the time we released our valuation allowance on deferred tax assets and was corrected in the fourth quarter of fiscal 2006. After conducting a thorough analytical review on materiality, which was
brought to the attention of and discussed with the audit committee, management believes that these amounts are not material to previously reported financial statements. Those items were partially
offset by the reversal of $1.2 million of reserves on deferred tax assets primarily

45

---



associated
with a California R&D tax credit position under audit by California's Franchise Tax Board. In April 2006, we reached an agreement with the Franchise Tax Board regarding our tax credit
positions and consequently revised associated reserves.

Until
such time as we are able to reverse the valuation allowance against our deferred tax assets, we expect the effective tax rate to be at or close to 0% in fiscal 2009 associated with
minor levels of taxes for certain state and foreign jurisdictions.



Years ended April 30,

Increase/(Decrease) from Prior Year2008

2007

2006

2008

2007$s in thousandsGain on disposition

$


$


$
887

$


$
(887
)Income tax expense from gain on disposition








361





(361
)Income from discontinued operations

$


$


$
526

$


$
(526
)% of Revenue



%


%

1.0
%




(1.0) pts


In
June 2006, we came to a mutual settlement and release with JDSU, related to our sale of a large portion of the assets of our optical communications business to JDSU in fiscal 2004,
whereby JDSU paid us $0.7 million. We had recorded receivables of $0.5 million such that the net financial gain from the settlement was $0.2 million. As part of the settlement,
JDSU additionally released us from our warranty obligation, which resulted in the release of $0.5 million of our warranty liability. In addition, in June 2006, we completed the closure of our
international optical operations and, as a result, reversed our remaining $0.2 million of reserves related to the closure. Net of $0.4 million of tax expense, the transactions resulted
in a $0.5 million gain from disposal of our discontinued operations. In fiscal 2006, we completed the wind up of our optical operations, resulting in no financial impact from discontinued
operations in fiscal 2008 or 2007. See Note 4 of Notes to the Consolidated Financial Statements.

Liquidity and Capital Resources

As of April 30, 2008, we had cash and cash equivalents of $36.1 million as compared to $34.0 million at April 30, 2007 and
$35.7 million as of April 30, 2006. Additionally, we had $14.4 million of short-term investments as of April 30, 2008 compared to $100.5 million of
short-term investments as of April 30, 2007 and $100.3 million as of April 30, 2006. At April 30, 2008, we also had $15.1 million of auction rate
securities which had been classified as long-term investments, consistent with the maturities of the securities underlying the auction rate instruments, due to uncertainty as to when they
may settle. The decline in our cash and investment balances is in large part due to the $41.0 million used to repurchase our common stock in the second quarter of fiscal 2008,
$18.7 million of cash used by operations due to our operating losses during fiscal 2008 and the final $3.8 million payment under Jasomi purchase agreement.

As
of April 30, 2008, all of our short-term and long-term investments were held in corporate note and asset backed auction rate securities. The
long-term investments are tied to auction rate securities that failed to settle at auction during fiscal 2008, for which there appears to be no near-term market. Although these
securities would normally be classified as short-term, as they typically settle every 28 days, they have been reclassified to long-term pending them settling at auction.
We have continued to classify some of our auction rate securities as short-term, as we believe we have the ability and intent to successfully sell these securities within twelve months. As
of June 30, 2008, we had successfully sold 23% ($7.8 million) of the auction rate securities held as of April 30, 2008, without incurring any losses, and continued to hold
$26.4 million of auction rate securities. At the time of our

46

---



initial
investment and through the date of filing of this Annual Report, all of our auction rate securities remain AA and AAA rated. Should we be unsuccessful in migrating to more stable
short-term investments or should the issuers not refinance the auction rate securities, we could be faced with longer term liquidity issues, which could impact our ability to fund
operations beyond the next twelve to eighteen months and could impact our ability to execute on strategic acquisition opportunities.

We
have a $2 million line of credit facility with our bank, which expires in July 2009. There were no amounts outstanding under the line of credit and we were in compliance with
all the financial covenants as of April 30, 2008.

Since
our initial public offering in June 1999, we have satisfied the majority of our liquidity requirements through cash flow generated from operations since our initial public
offering, funds received upon exercise of stock options and the proceeds from our initial and follow-on public offerings in fiscal 2000.



Years ended April 30,

Increase/(Decrease) from Prior Year2008

2007

2006

2008

2007in thousandsNet Cash Provided by (Used in) Operating Activities

$
(18,643
)
$
2,475

$
14,485

$
(21,118
)
$
(12,010
)


Our
cash flow from operations generally follows our trend in net income (loss) of $(94.7) million, 5.3 million, and $(0.9) million for fiscal 2008, 2007 and 2006, respectively,
although the fiscal 2008 loss was impacted by large non-cash adjustments related to SFAS 123R compensation, unrealized losses on investment securities, the impairment charges
related to our goodwill and other intangible assets and the allowance against our deferred tax assets, which totaled $72.1 million. The use of cash by operations in fiscal 2008 was largely due
to the decline in our business, while still
maintaining an infrastructure to support our historical revenue levels. The other operating factor that impacted the use of cash by operations was a $2.1 million reduction in our accounts
payable and accrued expenses. Further impacting our cash flows from operations was a decline in deferred revenue of $2.2 million due to our having received cash payments in fiscal 2007 for
transactions for which we recognized revenue in the current period. Partially offsetting these operating uses of cash were cash inflows due to a $5.0 million reduction in our outstanding
accounts receivable balance due to collection of prior sales and the reduced level of current year sales.

The
difference in cash flow from operations in fiscal 2007 and profitability is largely due to the growth in inventory in the fourth quarter of fiscal 2007 due to lower than anticipated
revenue levels in the quarter. The improved cash flow from operations in fiscal 2006 as compared to profitability was due to a combination of reducing accounts receivable due to improved collections
and more linear sales patterns in fiscal 2006 and increasing deferred revenue due to several shipments near the end of the year which required deferral treatment, which resulted in
$15.2 million of operating cash flow.

Our
accounts receivable days sales outstanding at April 30, 2008 was approximately 62 days compared to 48 days at April 30, 2007.

We
expect to see continued modest levels of negative cash flows from operations in the coming year based on expected continued softness in revenue resulting in operating losses. However,
we expect the level of negative cash flows from operations to decline from the levels realized in fiscal 2008 as we begin to realize the savings from our reduction in force and as we continue to work
down our inventory levels.

47

---





Years ended April 30,

Increase/(Decrease) from Prior Year2008

2007

2006

2008

20076$s in thousandsNet Cash Provided by (Used in) Investing Activities

$
60,134

$
(5,973
)
$
(16,760
)
$
66,107

$
10,787


The
change in cash flows from investing activities over the years is due to a few key events. In fiscal 2008, we generated $60.1 million of cash primarily as a result of net
maturities of $66.3 million of short-term investments, a large part of the proceeds of which was used to repurchase common stock. This in-flow of cash was partially
offset by paying $3.8 million to Jasomi's former non-employee investors for principal and interest under the second tranche of the convertible notes issued in the Jasomi
acquisition. The payment of the notes held by employee-shareholders is included in cash flow from operating activities. Additionally impacting cash flows from investing activities was the purchase of
$2.3 million of equipment, primarily to support our development of the Packet Voice Processor.

In
fiscal 2007 and 2006, we used $2.7 million and $12.6 million of cash, respectively, related to the acquisition of Jasomi (See Note 5 of Notes to the Consolidated
Financial Statements) and $3.7 million and $2.6 million for the purchase of equipment in those years, respectively.

We
plan to continue to invest in capital assets related to new product features and to support our efforts to sell our VoIP products.



Years ended April 30,

Increase/(Decrease) from Prior Year2008

2007

2006

2008

2007$s in thousandsNet Cash Provided by (Used in) Financing Activities

$
(39,434
)
$
1,865

$
1,201

$
(41,299
)
$
664


The
cash flow used in financing activities in fiscal 2008 was largely due to the repurchase of over 7 million shares of our common stock. The cost of the repurchase totaled
$41.0 million. This use of cash was partially offset by funds received from stock option exercises. We repurchased no common stock in fiscal 2007 or 2006. The limited cash flow from financing
activities in fiscal 2007 and 2006 was due to the limited level of option activity during those years largely due to a large portion of the options being
out-of-the-money or only marginally in-the-money due to the decline in our stock price.



On June 13, 2007, our Board of Directors authorized the repurchase of up to $60 million of common stock under a stock repurchase program. On
August 29, 2007, we filed a tender offer to repurchase up to 9,100,000 shares, or approximately $50.0 million worth, of our common stock. In the second quarter of fiscal 2008, we
completed the repurchase of 7,410,824 shares of our common stock for an aggregate cost of $41.0 million. The repurchased shares were immediately retired and the aggregate price of the retired
shares was reflected as a reduction to stockholders' equity. The purchase price of the shares was allocated between the components of stockholders' equity in accordance with the guidance in Accounting
Principles Board Opinion No. 6, "Status of Accounting Research Bulletins."

48

---





We have no material commitments other than obligations under operating leases, particularly our facility lease, and normal purchases of inventory, capital
equipment and operating expenses, such as materials for research and development and consulting. We currently occupy approximately 61,000 square feet of space in the two buildings that form our
Mountain View, California headquarters. In September 2005, we renegotiated our Mountain View, California lease, which extended the lease term through July 31, 2011 and reduced the rent cost.

Our
contractual commitments as of April 30, 2008, by year in which they become due, are as follows:

Payments due by periodContractual Obligations (in thousands)

Total

Less than
1 year

2 to 3
years

4 to 5
years

Over 5
yearsOperating leases

$
3,485

$
1,057

$
2,152

$
276

$
Purchase commitments


3,123


3,123








Total

$
6,608

$
4,180

$
2,152

$
276

$



We
believe that we will be able to satisfy our cash requirements for at least the next twelve to eighteen months from our existing cash and short-term investments and our
$2.0 million operating line of credit with our bank. The ability to fund our operations beyond the next twelve to eighteen months will depend on the overall demand of telecommunications
providers for new capital equipment and our ability to access funds invested in auction rate securities (see risk factor in Item 1A related to auction rate securities). Should we continue to
experience significantly reduced levels of customer demand for our products compared to historical levels of purchases, we could need to find additional sources of cash during the latter part of
fiscal 2009 or be forced to further reduce our spending levels to protect our cash reserves.

Off-Balance Sheet Arrangements

As of April 30, 2008, we did not have any off-balance-sheet arrangements, as defined in Item 303 of SEC
Regulation S-K.

Item 7AQuantitative and Qualitative Disclosures About Market Risk

Our exposure to market risk due to changes in the general level of United States interest rates relates primarily to our cash equivalents and
short-term and long-term investment portfolios. Our cash, cash equivalents and short-term and long-term investments are primarily maintained at four
major financial institutions in the United States. As of April 30, 2008 and 2007, we did not hold any derivative instruments. The primary objective of our investment activities is the
preservation of principal while maximizing investment income and minimizing risk, and we attempted to achieve this by diversifying our portfolio in a variety of highly rated investment securities that
have limited terms to maturity. We do not hold any instruments for trading purposes.

Investment
securities that have maturities of more than three months at the date of purchase but current maturities of less than one year and auction rate securities which prior to the
fourth quarter of fiscal 2008 management has been able to liquidate on 7, 28 or 35 day auction cycles, are considered short-term investments. Those securities with maturities of
greater than one year, including auction rate securities that failed to settle and which based on their nature do not appear likely to settle in the near term, are classified as long-term
investments. Short and long-term investments consist primarily of auction rate securities in asset backed securities and corporate notes. Our investment securities are maintained at two
major financial institutions, are classified as available-for-sale, and are recorded on

49

---



the
accompanying Consolidated Balance Sheets at fair value. If we sell our investments prior to their maturity, we may incur a charge to operations in the period the sale took place. In fiscal 2008,
2007 and 2006, we realized no gains or losses on our investments, but we did recognize an impairment charge of $4.2 million on certain of our auction rate securities that failed to settle and
have recorded an additional $0.6 million of unrealized losses on the remaining auction rate securities as a component of accumulated other comprehensive loss.

Auction
rate securities are variable rate debt instruments with interest rates that, unless they fail to settle, are reset approximately every 7, 28 or 35 days. The underlying
securities have contractual maturities which are generally greater than ten years. The auction rate securities are classified as available for sale and are recorded at fair value. Typically, the
carrying value of auction rate securities approximates fair value due to the frequent resetting of the interest rates. As of April 30, 2008, we held two auction rate securities totaling
$10.0 million of par value, which continue to be rated AA, but failed to settle at auctions since the second quarter of fiscal 2008 and eight additional auction rate securities with a par value
of $24.3 million which failed to settle since the fourth quarter of fiscal 2008. While we continue to earn interest on these investments at the maximum contractual rate, the fair value of
certain of these auction rate securities no longer approximates par value. Accordingly, we have recorded these investments at a fair value of $29.5 million. Due to the prolonged nature of the
decline in the value of the two auction rate securities that have failed to settle since the second quarter of fiscal 2008 and no clear indication of when they might settle, we determined that the
unrealized loss was no longer temporary. Therefore, we recognized $4.2 million of impairment charge in the fourth quarter of fiscal 2008 on these two auction rate securities. We believe that
the $0.6 million decline in value that we have experienced in the remaining auction rate securities as of April 30, 2008, is a temporary event and has been accounted for as an unrealized
loss in accumulated other comprehensive loss. We have concluded that no other-than-temporary impairment losses occurred for the auction rate securities that began to fail to
settle in fourth quarter of fiscal 2008 because we believe that the decline in fair value is due to general market conditions, these investments are of high credit quality, and we have the intent and
ability to hold these investments until the anticipated recovery in fair value occurs. We will continue to analyze our auction rate securities each reporting period for impairment and may be required
to recognize an impairment charge in the statement of operations if the decline in fair value is determined to be other than temporary. The fair value of these securities has been estimated by
management based on assumptions that market participants would use in pricing the asset in a current transaction, which could change significantly based on market conditions.

Our
investment securities are not leveraged. Due to the short-term nature of our investments, they are not subject to significant fluctuations in their fair value due to
changes in interest
rates. As such, the recorded fair value of the investments at April, 2008, and 2007 approximates the fair value after assuming a hypothetical shift in the yield curve of plus or minus 50 basis points
(BPS), 100 BPS, and 150 BPS over the remaining life of the investments, which shifts are representative of the historical movements in the Federal Funds Rate. 100 BPS equals 1%.

The
following table presents our cash equivalents and short-term and long-term investments subject to interest rate risk and their related weighted average
interest rates as of April 30, 2008 and 2007 (in thousands). Carrying value approximates fair value.

April 30, 2008

April 30, 2007Carrying
Value

Average
Interest Rate

Carrying
Value

Average
Interest RateCash and cash equivalents

$
36,131

2.61
%
$
34,074

4.19
%Short-term investments


14,400

4.15
%

100,465

5.25
%Long-term investments


15,130

4.50
%

Total

$
65,661

3.38
%
$
134,539

4.98
%


50

---



In
fiscal 2008, our return on our cash and cash equivalents ranged from 1.0% to 5.3% and our average return for the year was 3.3% while our return on short-term investments
ranged from 4.1% to 5.4% and our average return for the year was 4.9%. The return on our long-term investments ranged from 4.1% to 6.0% and our average return for the year was 4.9%.

To
date, the vast majority of our sales have been denominated in U.S. dollars. As only a small amount of foreign invoices are paid in currencies other than the U.S. dollar, we consider
our foreign exchange risk to be immaterial to our consolidated financial position, results of operations or cash flows.

51

---





Item 8Financial Statements and Supplementary Data

DITECH NETWORKS, INC.        INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND OTHER DATA

|                                                           |  | Page
|---------------------------------------------------------- |  | ----
|Consolidated Financial Statements of Ditech Networks, Inc. |  |     
|Report of Independent Registered Public Accounting Firm    |  | 53  
|Consolidated Balance Sheets                                |  | 55  
|Consolidated Statements of Operations                      |  | 56  
|Consolidated Statements of Stockholders' Equity            |  | 57  
|Consolidated Statements of Cash Flows                      |  | 58  
|Notes to Consolidated Financial Statements                 |  | 59  
|Supplementary Financial Data                               |  |     
|Selected Quarterly Financial Data (unaudited)              |  | 86  
|Financial Statement Schedules                              |  |     
|Schedule II Valuation and Qualifying Accounts              |  | 86  

52

---



Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of
Ditech Networks, Inc.:

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Ditech
Networks, Inc. and its subsidiaries at April 30, 2008 and April 30, 2007, and the results of their operations and their cash flows for each of the three years in the period ended
April 30, 2008 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the
Company maintained, in all material respects, effective internal control over financial reporting as of April 30, 2008, based on criteria established inInternal
ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for
these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial
statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards
of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included 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. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk
that
a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures
as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As
discussed in Note 2 to the Consolidated Financial Statements, effective May 1, 2006, the Company changed its method of accounting for stock-based compensation.

As
discussed in Note 11 to the Consolidated Financial Statements, effective May 1, 2007, the Company changed its method for accounting for uncertain tax positions.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

53

---



Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/PRICEWATERHOUSECOOPERS LLP

San Jose, California
July 10, 2008

54

---





DITECH NETWORKS, INC.        CONSOLIDATED BALANCE SHEETS        (in thousands, except per share data)

|                                                                                                                                                       |                                                                                                                       | April 30,                  |         
|------------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------- | -------------------------- | --------
|
|ASSETS                                                                                                                                                 |                                                                                                                       |                            |         
|Current assets:                                                                                                                                        |                                                                                                                       |                            |         
|                                                                                                                                                       | Cash and cash equivalents                                                                                             |                            | $       
|                                                                                                                                                       | Short-term investments                                                                                                |                            |         
|                                                                                                                                                       | Accounts receivable, net of allowance for doubtful accounts of $315 and $373 at April 30, 2008 and 2007, respectively |                            |         
|                                                                                                                                                       | Inventories                                                                                                           |                            |         
|                                                                                                                                                       | Deferred income taxes                                                                                                 |                            |         
|                                                                                                                                                       | Other current assets                                                                                                  |                            |         
|                                                                                                                                                       |                                                                                                                       |                            |         
|                                                                                                                                                       |                                                                                                                       | Total current assets       |         
|Long-term investments                                                                                                                                  |                                                                                                                       |                            | 15,130  
|Property and equipment, net                                                                                                                            |                                                                                                                       |                            | 5,493   
|Goodwill                                                                                                                                               |                                                                                                                       |                            |        
|Purchased intangibles, net                                                                                                                             |                                                                                                                       |                            | 139     
|Deferred income taxes                                                                                                                                  |                                                                                                                       |                            |        
|Other assets                                                                                                                                           |                                                                                                                       |                            | 186     
|                                                                                                                                                       |                                                                                                                       |                            |         
|                                                                                                                                                       |                                                                                                                       | Total assets               |         
|                                                                                                                                                       |                                                                                                                       |                            |         
|LIABILITIES                                                                                                                                            |                                                                                                                       |                            |         
|Current liabilities:                                                                                                                                   |                                                                                                                       |                            |         
|                                                                                                                                                       | Accounts payable                                                                                                      |                            | $       
|                                                                                                                                                       | Accrued and other liabilities                                                                                         |                            |         
|                                                                                                                                                       | Deferred revenue                                                                                                      |                            |         
|                                                                                                                                                       | Income taxes payable                                                                                                  |                            |         
|                                                                                                                                                       |                                                                                                                       |                            |         
|                                                                                                                                                       |                                                                                                                       | Total current liabilities  |         
|                                                                                                                                                       |                                                                                                                       |                            |         
|Long term accrued expenses                                                                                                                             |                                                                                                                       |                            | 377     
|Commitments and contingencies (Note 7)                                                                                                                 |                                                                                                                       |                            |         
|STOCKHOLDERS' EQUITY                                                                                                                                   |                                                                                                                       |                            |         
|Preferred stock, $0.001 par value: 5,000 shares authorized and none issued and outstanding at April 30, 2008 and 2007                                  |                                                                                                                       |                            |        
|Common stock, $0.001 par value: 200,000 shares authorized and 26,090 and 33,044 shares issued and outstanding at April 30, 2008 and 2007, respectively |                                                                                                                       |                            | 26      
|Additional paid-in capital                                                                                                                             |                                                                                                                       |                            | 263,254 
|Accumulated deficit                                                                                                                                    |                                                                                                                       |                            | (180,650
|Accumulated other comprehensive loss                                                                                                                   |                                                                                                                       |                            | (580    
|                                                                                                                                                       |                                                                                                                       |                            |         
|                                                                                                                                                       |                                                                                                                       | Total stockholders' equity |         
|                                                                                                                                                       |                                                                                                                       |                            |         
|                                                                                                                                                       | Total liabilities and stockholders' equity                                                                            |                            | $       
|                                                                                                                                                       |                                                                                                                       |                            |         

The
accompanying notes are an integral part of these consolidated financial statements

55

---





DITECH NETWORKS, INC.        CONSOLIDATED STATEMENTS OF OPERATIONS        (in thousands, except per share data)

|                                                                           |                                                        | Years ended April 30,                        |                  
|-------------------------------------------------------------------------- | ------------------------------------------------------ | -------------------------------------------- | -----------------
|
|Revenue                                                                    |                                                        |                                              |                  
|                                                                           | Product revenue                                        |                                              | $                
|                                                                           | Service revenue                                        |                                              |                  
|                                                                           |                                                        |                                              |                  
|                                                                           |                                                        | Total revenue                                |                  
|                                                                           |                                                        |                                              |                  
|Cost of goods sold(1)                                                      |                                                        |                                              |                  
|                                                                           | Cost of product revenue                                |                                              |                  
|                                                                           | Cost of service revenue                                |                                              |                  
|                                                                           |                                                        |                                              |                  
|                                                                           |                                                        | Total cost of goods sold                     |                  
|                                                                           |                                                        |                                              |                  
|                                                                           | Gross profit                                           |                                              |                  
|                                                                           |                                                        |                                              |                  
|Operating expenses:                                                        |                                                        |                                              |                  
|                                                                           | Sales and marketing(1)                                 |                                              |                  
|                                                                           | Research and development(1)                            |                                              |                  
|                                                                           | General and administrative(1)                          |                                              |                  
|                                                                           | Amortization of purchased intangible assets            |                                              |                  
|                                                                           | Impairment of goodwill and other purchased intangibles |                                              |                  
|                                                                           | In-process research and development                    |                                              |                  
|                                                                           |                                                        |                                              |                  
|                                                                           |                                                        | Total operating expenses                     |                  
|                                                                           |                                                        |                                              |                  
|Income (loss) from continuing operations                                   |                                                        |                                              | (49,453          
|                                                                           |                                                        |                                              |                  
|Other income (expense):                                                    |                                                        |                                              |                  
|                                                                           | Interest income                                        |                                              |                  
|                                                                           | Other expense, net                                     |                                              |                  
|                                                                           |                                                        |                                              |                  
|                                                                           |                                                        | Total other income                           |                  
|                                                                           |                                                        |                                              |                  
|Income (loss) from continuing operations before provision for income taxes |                                                        |                                              | (48,777          
|Provision for income taxes                                                 |                                                        |                                              | 45,876           
|                                                                           |                                                        |                                              |                  
|Income (loss) from continuing operations                                   |                                                        |                                              | (94,653          
|Discontinued operations:                                                   |                                                        |                                              |                  
|                                                                           | Gain on disposition                                    |                                              |                  
|                                                                           | Income tax expense from gain on disposition            |                                              |                  
|                                                                           |                                                        |                                              |                  
|                                                                           |                                                        | Income from discontinued operations          |                  
|                                                                           |                                                        |                                              |                  
|Net income (loss)                                                          |                                                        | $                                            | (94,653          
|                                                                           |                                                        |                                              |                  
|Per share data                                                             |                                                        |                                              |                  
|                                                                           | Basic                                                  |                                              |                  
|                                                                           |                                                        | Net income (loss) from continuing operations |                  
|                                                                           |                                                        | Net income from discontinued operations      |                  
|                                                                           |                                                        |                                              |                  
|                                                                           |                                                        |                                              | Net income (loss)
|                                                                           |                                                        |                                              |                  
|                                                                           | Diluted                                                |                                              |                  
|                                                                           |                                                        | Net income (loss) from continuing operations |                  
|                                                                           |                                                        | Net income from discontinued operations      |                  
|                                                                           |                                                        |                                              |                  
|                                                                           |                                                        |                                              | Net income (loss)
|                                                                           |                                                        |                                              |                  
|Number of shares used in per share calculations:                           |                                                        |                                              |                  
|                                                                           | Basic                                                  |                                              |                  
|                                                                           |                                                        |                                              |                  
|                                                                           | Diluted                                                |                                              |                  
|                                                                           |                                                        |                                              |                  

---

Cost of Sales

$
380

$
370

$
Sales and marketing


1,618


2,714


256Research and development


1,127


1,951


619General and administrative


1,274


1,124





The accompanying notes are an integral part of these consolidated financial statements

56

---





DITECH NETWORKS, INC.        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY        (in thousands)

|                                                              |                                                             | Common Stock               |   |   |    |   |   |         |   | Accumulated
Other
Comprehensive
Income (Loss) |          |         |  
|------------------------------------------------------------- | ----------------------------------------------------------- | -------------------------- | - | - | -- | - | - | ------- | - | --------------------------------------------- | -------- | ------- | -
|
|
|Balances, April 30, 2005                                      |                                                             | 31,998                     |   | $ | 32 |   | $ | 288,080 |   | $                                             | (90,801  | )       | $
|Issuance of common stock under employee stock plans           |                                                             | 256                        |   |   |   |   |   | 1,201   |   |                                               |         |         |  
|Assumed unvested options in Jasomi acquisition                |                                                             |                           |   |   |   |   |   | 689     |   |                                               |         |         |  
|Assumed vested options in Jasomi acquisition                  |                                                             |                           |   |   |   |   |   | 483     |   |                                               |         |         |  
|Restricted stock issued                                       |                                                             | 121                        |   |   |   |   |   | 2,552   |   |                                               |         |         |  
|Amortization of stock-based compensation                      |                                                             |                           |   |   |   |   |   | (37     | ) |                                               |         |         |  
|Reversal of deferred compensation due to terminations         |                                                             |                           |   |   |   |   |   | (192    | ) |                                               |         |         |  
|Tax benefit from exercise of stock options                    |                                                             |                           |   |   |   |   |   | 190     |   |                                               |         |         |  
|Reclassification of deferred tax asset                        |                                                             |                           |   |   |   |   |   | (593    | ) |                                               |         |         |  
|Comprehensive loss:                                           |                                                             |                            |   |   |    |   |   |         |   |                                               |          |         |  
|                                                              | Unrealized gain on available for sale investment securities |                            |  |   |    |  |   |         |  |                                               |          |        |  
|                                                              | Net loss                                                    |                            |  |   |    |  |   |         |  |                                               |          | (883    | )
|                                                              |                                                             |                            |   |   |    |   |   |         |   |                                               |          |         |  
|                                                              |                                                             | Total comprehensive loss   |   |   |    |   |   |         |   |                                               |          |         |  
|                                                              |                                                             |                            |   |   |    |   |   |         |   |                                               |          |         |  
|Balances, April 30, 2006                                      |                                                             | 32,375                     |   |   | 32 |   |   | 292,373 |   |                                               | (91,684  | )       |  
|Issuance of common stock under employee stock plans           |                                                             | 376                        |   |   |   |   |   | 1,865   |   |                                               |         |         |  
|Restricted stock issued                                       |                                                             | 293                        |   |   |   |   |   |        |   |                                               |         |         |  
|Reclassification upon adoption of FAS123R                     |                                                             |                           |   |   |   |   |   | (2,137  | ) |                                               |         |         |  
|Stock-based compensation expense under FAS123R                |                                                             |                           |   |   |   |   |   | 6,178   |   |                                               |         |         |  
|Comprehensive income:                                         |                                                             |                            |   |   |    |   |   |         |   |                                               |          |         |  
|                                                              | Unrealized gain on available for sale investment securities |                            |  |   |    |  |   |         |  |                                               |          |        |  
|                                                              | Net income                                                  |                            |  |   |    |  |   |         |  |                                               |          | 5,318   |  
|                                                              |                                                             |                            |   |   |    |   |   |         |   |                                               |          |         |  
|                                                              |                                                             | Total comprehensive income |   |   |    |   |   |         |   |                                               |          |         |  
|                                                              |                                                             |                            |   |   |    |   |   |         |   |                                               |          |         |  
|Balances, April 30, 2007                                      |                                                             | 33,044                     |   |   | 32 |   |   | 298,279 |   |                                               | (86,366  | )       |  
|Cumulative effect of adjustment related to adoption of FIN 48 |                                                             |                           |   |   |   |   |   |        |   |                                               | 369      |         |  
|                                                              |                                                             |                            |   |   |    |   |   |         |   |                                               |          |         |  
|Adjusted balances. April 30, 2007                             |                                                             | 33,044                     |   |   | 32 |   |   | 298,279 |   |                                               | (85,997  | )       |  
|Issuance of common stock under employee stock plans           |                                                             | 447                        |   |   | 1  |   |   | 1,572   |   |                                               |         |         |  
|Restricted stock issued                                       |                                                             | 10                         |   |   |   |   |   |        |   |                                               |         |         |  
|Repurchase of common stock                                    |                                                             | (7,411                     | ) |   | (7 | ) |   | (40,996 | ) |                                               |         |         |  
|Stock-based compensation expense under FAS123R                |                                                             |                           |   |   |   |   |   | 4,399   |   |                                               |         |         |  
|Comprehensive loss:                                           |                                                             |                            |   |   |    |   |   |         |   |                                               |          |         |  
|                                                              | Unrealized loss on available for sale investment securities |                            |  |   |    |  |   |         |  |                                               |          |        |  
|                                                              | Net loss                                                    |                            |  |   |    |  |   |         |  |                                               |          | (94,653 | )
|                                                              |                                                             |                            |   |   |    |   |   |         |   |                                               |          |         |  
|                                                              |                                                             | Total comprehensive loss   |   |   |    |   |   |         |   |                                               |          |         |  
|                                                              |                                                             |                            |   |   |    |   |   |         |   |                                               |          |         |  
|Balances, April 30, 2008                                      |                                                             | 26,090                     |   | $ | 26 |   | $ | 263,254 |   | $                                             | (180,650 | )       | $
|                                                              |                                                             |                            |   |   |    |   |   |         |   |                                               |          |         |  

The accompanying notes are an integral part of these consolidated financial statements

57

---





DITECH NETWORKS, INC.        CONSOLIDATED STATEMENTS OF CASH FLOWS        (in thousands)

|                                                     |                                                                                                    | Years ended April 30,                                               |                              
|---------------------------------------------------- | -------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------- | -----------------------------
|
|Cash flows from operating activities:                |                                                                                                    |                                                                     |                              
|                                                     | Net income (loss)                                                                                  |                                                                     | $                            
|                                                     | Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |                                                                     |                              
|                                                     |                                                                                                    | Non-cash effect of discontinued operations                          |                              
|                                                     |                                                                                                    | Depreciation and amortization                                       |                              
|                                                     |                                                                                                    | Provision for doubtful accounts                                     |                              
|                                                     |                                                                                                    | Loss on disposal of property and equipment                          |                              
|                                                     |                                                                                                    | Tax benefit from exercise of stock options                          |                              
|                                                     |                                                                                                    | Deferred income taxes                                               |                              
|                                                     |                                                                                                    | Amortization of deferred stock compensation                         |                              
|                                                     |                                                                                                    | Stock-based compensation expense                                    |                              
|                                                     |                                                                                                    | Payment of employee-investor portion of convertible debentures      |                              
|                                                     |                                                                                                    | Amortization of purchased intangibles                               |                              
|                                                     |                                                                                                    | Amortization of employee-investor portion of convertible debentures |                              
|                                                     |                                                                                                    | Amortization of Jasomi contingent consideration                     |                              
|                                                     |                                                                                                    | In-process research and development                                 |                              
|                                                     |                                                                                                    | Impairment of goodwill and other purchased intangibles              |                              
|                                                     |                                                                                                    | Impairment on investment securities                                 |                              
|                                                     |                                                                                                    | Other                                                               |                              
|                                                     |                                                                                                    | Changes in assets and liabilities:                                  |                              
|                                                     |                                                                                                    |                                                                     | Accounts receivable          
|                                                     |                                                                                                    |                                                                     | Inventories                  
|                                                     |                                                                                                    |                                                                     | Other current assets         
|                                                     |                                                                                                    |                                                                     | Income taxes                 
|                                                     |                                                                                                    |                                                                     | Accounts payable             
|                                                     |                                                                                                    |                                                                     | Accrued and other liabilities
|                                                     |                                                                                                    |                                                                     | Deferred revenue             
|                                                     |                                                                                                    |                                                                     |                              
|                                                     |                                                                                                    |                                                                     |                              
|                                                     |                                                                                                    |                                                                     |                              
|Cash flows from investing activities:                |                                                                                                    |                                                                     |                              
|                                                     |                                                                                                    | Purchases of property and equipment                                 |                              
|                                                     |                                                                                                    | Purchase of available for sale investments                          |                              
|                                                     |                                                                                                    | Sales and maturities of available for sale investments              |                              
|                                                     |                                                                                                    | Proceeds from sale of discontinued optical business                 |                              
|                                                     |                                                                                                    | Acquisition of Jasomi, net of cash received                         |                              
|                                                     |                                                                                                    | Additions to other assets                                           |                              
|                                                     |                                                                                                    |                                                                     |                              
|                                                     |                                                                                                    |                                                                     |                              
|                                                     |                                                                                                    |                                                                     |                              
|Cash flows from financing activities:                |                                                                                                    |                                                                     |                              
|                                                     |                                                                                                    | Repurchase of common stock                                          |                              
|                                                     |                                                                                                    | Proceeds from employee stock plan issuances                         |                              
|                                                     |                                                                                                    |                                                                     |                              
|                                                     |                                                                                                    |                                                                     |                              
|                                                     |                                                                                                    |                                                                     |                              
|Net increase (decrease) in cash and cash equivalents |                                                                                                    |                                                                     | 2,057                        
|Cash and cash equivalents, beginning of year         |                                                                                                    |                                                                     | 34,074                       
|                                                     |                                                                                                    |                                                                     |                              
|Cash and cash equivalents, end of year               |                                                                                                    | $                                                                   | 36,131                       
|                                                     |                                                                                                    |                                                                     |                              

The accompanying notes are an integral part of these consolidated financial statements

58

---





DITECH NETWORKS, INC.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.     ORGANIZATION AND NATURE OF BUSINESS

Ditech Networks, Inc. (the "Company" or "Ditech") designs, develops and markets telecommunications equipment for use in wireline, wireless, satellite and
IP telecommunications networks. The Company's products enhance and monitor voice quality and provide security in the delivery of voice services. The Company has established a direct sales force that
sells its products in the U.S. and internationally. In addition, the Company is expanding its use of value added resellers and distributors in an effort to broaden its sales channels, and this
expanded use of value added resellers and distributors has occurred primarily in the Company's international markets.

2.     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



The consolidated financial statements include the accounts of the Company and all of its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.

In
May 2003, the Company announced its intention to exit the optical communications portion of its business. In July 2003, the Company executed a sale of a substantial portion of the
assets used in the optical business. As a result, the optical business has been presented as a discontinued operation in the Consolidated Statements of Operations for all periods presented. See
Note 4 for a further discussion of the discontinued operations.



The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America 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.



The Company generally recognizes product revenue, including shipping charges, when: persuasive evidence of a definitive agreement exists; shipment to the customer
has occurred; title and all risks and rewards of ownership have passed to the customer; acceptance terms, if any have been fulfilled; no significant contractual obligations remain outstanding; the fee
is fixed or determinable; and collection is reasonably assured. Revenue associated with service contracts is deferred and recognized ratably over the term of the contract.

In
the event that a shipment transaction does not meet all of the criteria for revenue recognition it is recorded as deferred revenue in the Consolidated Balance Sheet. To the extent
that the Company has received cash for some or all of a given deferred revenue transaction, the Company reports it in the Consolidated Balance Sheet as deferred revenue. However, to the extent that
the Company has not collected cash related to the deferred revenue transaction, the Company reflects the deferred revenue as a reduction in the corresponding account receivable balance.

The
Company records transaction-based taxes including, but not limited to, sales, use, value added, and excise taxes, on a net basis in its consolidated statements of operations.

59

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Cost of goods sold is comprised primarily of material, labor including stock-based compensation, overhead, shipping costs, warranty and inventory write-downs.



The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company
evaluates the trends in customers' payment patterns, including review of specific delinquent accounts, changes in business conditions and external communications available about customers to estimate
the level of allowance that is needed to address potential losses that the Company may incur due to the customer's inability to pay. Accounts are considered delinquent or past due, if they have not
been paid within the terms provided on the invoice. Delinquent account balances are written off after management has determined that the likelihood of collection is not probable.



The Company currently offers a hardware warranty on all of its products with terms generally ranging from two to five years and software warranty with terms
generally ranging from ninety days to one year. The warranty generally provides that the Company will repair or replace any defective product and provide software bug fixes within the warranty period.
A provision for the estimated future cost of warranty is made at the time product revenue is recognized, based on the Company's experience and expectations of future conditions.



Research and development costs include salaries and salary-related expenses, outside consulting, facilities, consumable materials and allocated corporate costs,
which are expensed as incurred.



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



Investment securities that have maturities of more than three months at the date of purchase but current maturities of less than one year, and auction rate
securities which management typically has settled on 7, 28 or 35 day auction cycles, are considered short-term investments. Long-term investment securities include any
investments with remaining maturities of one year or more and auction rate securities that failed to settle during fiscal 2008, for which conditions leading to their failure to auction create
uncertainty that they will settle in the near-term. Short- and long-term investments consist primarily of corporate notes and asset backed securities, which are rated AA or
higher. The Company's investment securities are maintained at two major financial institutions, are classified as available-for-sale, and are recorded on the Consolidated
Balance Sheets at fair value, with unrealized gains and losses included in accumulated other comprehensive income (loss), a component of stockholders' equity, net of tax. If the Company sells its
investments prior to their maturity, it may record a realized gain or loss in the period the sale took place. In fiscal 2008, the Company realized no gains or losses on its investments.

60

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The
Company evaluates its investments periodically for possible other-than-temporary impairment by reviewing factors such as the length of time and the extent to
which the fair value has been below cost-basis, the financial condition of the issuer and our ability to hold the investment for a period of time, which may be sufficient for anticipated
recovery of the market value. To the extent that the historical cost of the available for sale security exceeds the estimated fair market value, and the decline in value is deemed to be
other-than-temporary, an impairment charge is recorded in the Consolidated Statement of Operations.



Carrying amounts of certain of the Company's financial instruments, including cash and cash equivalents, accounts receivable, and accounts payable, are considered
to approximate fair value based on their short time to maturity.



Inventories are stated at the lower of standard cost or market. Standard cost approximates cost as 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 are stated at cost and are depreciated using the straight-line method over their estimated useful lives, which differ by asset
category:



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.



The Company's methodology for allocating a portion of the purchase price to goodwill in connection with the purchase of Jasomi Networks, Inc. ("Jasomi")
was based on established valuation techniques in the high-technology communications equipment industry. Goodwill was measured as the excess of the cost of acquisition over the sum of the
amounts assigned to tangible and identifiable intangible assets acquired less liabilities assumed. Goodwill is not amortized.



The Company continually monitors events and changes in circumstances that could indicate that carrying amounts of long-lived assets, including
intangible assets, may not be recoverable. When such events or changes in circumstances arise, the Company assesses the recoverability of its long-lived assets by determining whether the
carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the undiscounted future cash flows is less than the carrying amount of the assets in
question, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets. Following the criteria of SFAS 131 "Disclosure about Segments
of an Enterprise and Related Information" and SFAS 142 "Goodwill and Other Intangible Assets", the Company views itself as having a single operating segment and reporting unit and consequently
has evaluated its goodwill for impairment based on an evaluation of the fair value of

61

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the
Company as a whole. The Company's quoted share price from NASDAQ is the basis for measurement of that fair value, as the Company's market capitalization based on share price best represents the
amount at which the Company could be bought or sold in a current transaction between willing parties. Since the first quarter of fiscal 2008, the Company has experienced a decline in its stock price
and therefore its market capitalization, due in large part to the recent decline in the Company's operating results. As a result of the continued depressed state of the Company's stock price and
uncertainty as to when its stock price will return to levels sufficient to justify the recovery of its recorded goodwill, the Company undertook an interim impairment review in the third quarter of
fiscal 2008. As a result of the review, the Company determined that the entire goodwill balance of $16.4 million attributable to the Jasomi acquisition was impaired and accordingly recorded an
impairment charge for this amount.

The
Company evaluates the recoverability of its amortizable purchased intangible assets based on an estimate of undiscounted future cash flows resulting from the use of the related asset
group and its eventual disposition. The asset group represents the lowest level for which cash flows are largely independent of cash flows of other assets and liabilities. Measurement of an impairment
loss for long-lived assets that the Company expects to hold and use is based on the difference between the fair value and carrying value of the asset. Long-lived assets to be
disposed of are reported at the lower of carrying amount or fair value less costs to sell. The Company performed an interim review of its purchased intangibles and other long-lived assets
as of January 31, 2008, which review did not indicate any impairment of these assets. The Company updated the interim review as of April 30, 2008. Due to events that transpired in the
fourth quarter of fiscal 2008, including but not limited to a competitor's introduction of a new competitive product that appears to have created a sudden shift in demand away from the legacy Jasomi
products, the Company determined that an impairment had occurred and accordingly recorded a $1.3 million impairment loss in fiscal 2008. The impairment charge was based on a comparison of the
carrying amounts of the assets to their estimated fair values. The Company estimated the fair value of the assets based on the discounted value of estimated future cash flows over the estimated
remaining life of the assets using a discount rate of 19%.



The Company's products are concentrated in the telecommunications equipment industry, which is highly competitive and rapidly changing. Revenue from the Company's
products is concentrated with a relatively limited number of customers. One customer accounted for 35%, 64% and 79% of revenue in fiscal 2008, 2007 and 2006, respectively. The second largest customer
in fiscal 2008, a domestic VoIP customer, accounted for 12% of revenue in fiscal 2008 and less than 1% of revenue in fiscal 2007. The second largest customer in fiscal 2007 and 2006, an international
customer, accounted for 14% and 3% of net revenue, respectively, but only 11% of revenue in fiscal 2008. Net revenue from customers outside the United States, which was primarily denominated in U.S.
dollars, was 37%, 29%, and 13% in fiscal 2008, 2007 and 2006, respectively. The Company's gross accounts receivable were concentrated with three customers at April 30, 2008 (representing 46%,
16% and 13% of receivables) and two customers at April 30, 2007 (representing 34% and 27% of receivables). 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 on the expected collectibility of accounts receivable.

A
significant component of one of the Company's products is purchased from a sole supplier. If the Company were 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 the assembly of the majority of the Company's
products. The Company may experience delays if it were to shift production to an alternative supplier.

62

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The provision for income tax comprises the Company's current tax liability and the change in deferred tax assets and liabilities. Deferred income taxes reflect
the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Valuation allowances are
recorded to reduce deferred tax assets to the amount that will more likely than not be realized. The Company regularly examines factors that could impact the realization of such deferred tax assets
(e.g. ongoing operating losses or limitation to net operating loss and research credit utilization as a result of changes of ownership pursuant to Internal Revenue Code Section 382). In
the fourth quarter of fiscal 2008, the Company determined that factors existed that raised sufficient doubt as to the recovery of its recorded deferred tax assets and therefore established a full
valuation allowance against its deferred tax assets totaling $59.1 million.

The
Company's income tax calculations are based on application of the respective U.S. federal, state or foreign tax laws. The Company's tax filings, however, are subject to audit by the
respective tax authorities. Accordingly, the Company recognizes tax liabilities based on its estimates of whether, and the extent to which, additional taxes will be due when such estimates are
more-likely-than-not to be sustained. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. To the extent
the final tax liabilities are different than the amounts originally accrued, the increases or decreases are recorded as income tax expense or benefit in the Consolidated Statement of Operations.



The functional currency of all of the Company's foreign subsidiaries is the U.S. dollar. Translation adjustments resulting from remeasuring the foreign currency
denominated financial statements of subsidiaries into the U.S. dollar are included in operations. Gains or losses resulting from transactions denominated in currency other than the functional currency
are recorded in net income (loss).



Comprehensive income (loss) for fiscal 2008, 2007 and 2006 was ($95.2) million, $5.3 million, and ($840,000) and included the impact of unrealized gains
and losses on available for sale investment securities, net of tax.



Basic net income (loss) 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 net income per share is calculated based on the weighted average number of shares of common stock and potentially dilutive
securities outstanding, including the dilutive effect of stock options, using the treasury stock method, and common stock subject to repurchase. Under the treasury stock method, the amount that the
employee must pay for exercising stock options, the amount of compensation cost for future services that the Company has not yet recognized, and the amount of tax benefit that would be recorded in
additional paid-in capital when the award becomes deductible are assumed to be used to repurchase shares. Also included in diluted shares for the year ended April 30, 2007 is the
weighted average effect of the potential conversion to common
stock of $4.0 million of convertible notes issued as part of the Jasomi Networks, Inc. ("Jasomi") acquisition. As of April 30, 2007, these notes could have either matured or
converted into the Company's common stock at the election of the holder. At April 30, 2007, the notes potentially converted into a maximum of 447,000 shares of common stock (See also
Note 5). Diluted loss per share for the years ended April 30, 2008 and 2006 is calculated excluding the effects of all potentially dilutive securities, as their effect would be
anti-dilutive.

63

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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):

|                                 |                                                     | Years Ended April 30, |        
|-------------------------------- | --------------------------------------------------- | --------------------- | -------
|
|Historical net income (loss):    |                                                     |                       |        
|                                 | Income (loss) from continuing operations            |                       | $      
|                                 | Income (loss) from discontinued operations          |                       |        
|                                 |                                                     |                       |        
|Net income (loss)                |                                                     | $                     | (94,653
|                                 |                                                     |                       |        
|Basic income (loss) per share:   |                                                     |                       |        
|                                 | Weighted average shares of common stock outstanding |                       |        
|                                 | Less stock subject to repurchase                    |                       |        
|                                 |                                                     |                       |        
|                                 | Shares used in calculation of basic per share       |                       |        
|                                 |                                                     |                       |        
|                                 | Income (loss) from continuing operations            |                       | $      
|                                 | Income from discontinued operations                 |                       |        
|                                 |                                                     |                       |        
|                                 | Net income (loss) per share                         |                       | $      
|                                 |                                                     |                       |        
|Diluted income (loss) per share: |                                                     |                       |        
|                                 | Shares used in calculation of basic per share       |                       |        
|                                 | Shares subject to repurchase                        |                       |        
|                                 | Dilutive effect of stock plans                      |                       |        
|                                 | Dilutive effect of convertible debentures           |                       |        
|                                 |                                                     |                       |        
|                                 | Shares used in calculation of diluted per share     |                       |        
|                                 |                                                     |                       |        
|                                 | Income (loss) from continuing operations            |                       | $      
|                                 | Income from discontinued operations                 |                       |        
|                                 |                                                     |                       |        
|                                 | Net income (loss) per share                         |                       | $      
|                                 |                                                     |                       |        

The
computation of diluted net income (loss) per share excluded the following number of shares underlying options, as their effect was anti-dilutive: 6,772,000 shares in
fiscal 2008, 3,752,000 shares in fiscal 2007 and 1,521,000 shares in fiscal 2006. Included in the fiscal 2006 anti-dilutive shares are the weighted average effects of the potential
conversion to common stock of $7.0 million of convertible notes issued as part of the Jasomi acquisition that could have either matured or converted into Ditech common stock at the election of
the holder. As of April 30, 2006, the notes potentially converted into a maximum of 782,139 shares of common stock (See also Note 5).



On May 1, 2006, the Company adopted Statement of Financial Accounting Standard No. 123 (revised 2004), Share-Based Payment, ("SFAS 123R")
which requires the measurement and recognition of compensation expense for all stock-based payment awards made to employees and directors including employee stock options, restricted stock, restricted
stock units ("RSUs") and employee stock purchases under the Company's Employee Stock Purchase Plan based on estimated fair values. SFAS 123R supersedes the previous accounting under Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"), as allowed under Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS 123"). In March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107 ("SAB 107") relating to SFAS 123R. The
Company has applied the provisions of SAB 107 in conjunction with its adoption of SFAS 123R.

64

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The
Company adopted SFAS 123R using the modified prospective transition method, which requires the application of the accounting standard as of May 1, 2006, the first day
of the Company's fiscal year 2007. The Company's Consolidated Financial Statements as of and for the years ended April 30, 2008 and 2007 reflect the impact of SFAS 123R. In accordance
with the modified prospective transition method, the Company's Consolidated Financial Statements for periods prior to fiscal 2007 have not been restated to reflect, and do not include, the impact of
SFAS 123R.

SFAS 123R
requires companies to estimate the fair value of stock-based payment awards on the date of grant using an option-pricing model. The Company uses the Black-Scholes
option-pricing model to determine the fair-value of stock based awards under SFAS 123R, consistent with that used for pro forma disclosures under SFAS 123. The value of the
portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company's Consolidated Statement of Operations.

Stock-based
compensation expense recognized in the Company's Consolidated Statements of Operations for the years ended April 30, 2008 and 2007 included compensation expense for
stock-based payment awards granted prior to, but not yet vested as of, April 30, 2006 based on the grant date fair value estimated in accordance with the provisions of SFAS 123 and
compensation expense for the stock-based payment awards granted subsequent to April 30, 2006 based on the grant date fair value estimated in accordance with the provisions of SFAS 123R.
In conjunction with the adoption of SFAS 123R, the Company changed its accounting policy of attributing the fair value of stock-based compensation to expense from the accelerated
multiple-option approach, to the straight-line single-option approach. Compensation expense for all stock-based payment awards expected to vest that were granted on or prior to
April 30, 2006 will continue to be recognized using the accelerated attribution method. Compensation expense for all stock-based payment awards expected to vest that were granted or modified
subsequent to April 30, 2006 is recognized on a straight-line basis. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those estimates. In the Company's pro forma information required under SFAS 123 for the periods prior to fiscal 2007, the Company accounted
for forfeitures as they occurred.

Prior
to the adoption of SFAS 123R, the Company accounted for grants of equity instruments to employees using the intrinsic value method described in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and complied with the disclosure provisions of SFAS 123. Accordingly, compensation cost for stock options
recorded in the Company's Consolidated Statement of Operations was measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an
employee was required to pay to acquire the stock and was recognized over the vesting period of the related shares. The Company recorded $3.2 million of deferred stock-based compensation
expense associated with unvested stock options assumed as part of the Company's acquisition of Jasomi and a restricted stock plan offered to former Jasomi employees hired by the Company. In fiscal
2006, the Company recorded $875,000 of stock-based compensation expense related to the assumed unvested stock options and restricted stock plan.

Stock-based
compensation expense recognized during the year ended April 30, 2008 totaled approximately $4.4 million. Stock-based compensation expense during fiscal 2007
totaled approximately $6.2 million ($3.9 million net of taxes), or approximately a $0.12 per share decrease to basic and diluted net income per common share, and consisted of stock
option, restricted stock unit and restricted stock expense. A contra-equity balance of $2.1 million in "Deferred stock compensation" on the Consolidated Balance Sheet was reversed, upon the
adoption of SFAS 123R, to "Additional paid-in capital" as of May 1, 2006.

Prior
to the adoption of SFAS 123R, the Company presented all tax benefits of deductions resulting from the exercise of stock options as an operating cash flow, in accordance with
Emerging Issues Task Force ("EITF") Issue No. 00-15,Classification in the Statement of Cash Flows of the Income

65

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Tax Benefit Received by a Company upon Exercise of a Nonqualified Employee Stock Option. SFAS 123R requires the Company to reflect the tax savings resulting from tax
deductions in excess of expense reflected in its financial statements as a financing cash flow.

If
the Company had applied the fair value recognition provisions of SFAS 123, the Company's net income (loss) for the year ended April 30, 2006 would have been adjusted to
the pro forma amounts indicated in the following table (in thousands, except per share amounts):

Year ended April 30, 2006Net loss as reported

$
(883
)Add: Stock-based compensation expense included in reported net loss, net of applicable tax effects


518Deduct: Stock-based compensation determined under the fair value method for all stock awards, net of applicable taxes


(5,640
)Pro forma net loss

$
(6,005
)Basic net loss per share:As reported

$
(0.03
)Pro forma

$
(0.19
)Diluted net loss per share:As reported

$
(0.03
)Pro forma

$
(0.19
)




In September 2006, the FASB issued Statement No. 157,Fair Value Measurements("SFAS 157").
SFAS 157 defines fair value, establishes a framework and guidance regarding the methods for measuring fair value, and expands related disclosures about those measurements. In February 2008, the
FASB issued FASB Staff Position ("FSP") FAS 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair
Value Measurements for Purposes of Lease Classification or Measurement under Statement 13", which amends SFAS 157 to exclude accounting pronouncements that address fair value measurements for
purposes of lease classification or measurement under SFAS No. 13, "Accounting for Leases". In
February 2008, the FASB also issued FSP FAS 157-2, "Effective Date of FASB Statement No. 157", which delays the effective date of SFAS No. 157 until the first quarter
of fiscal 2010 for all non-financial assets and non-financial liabilities, except for items that are recognized or discounted at fair value in the financial statements on a
recurring basis (at least annually). SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal
years. The Company is currently assessing the impact that SFAS 157 will have on its results of operations, financial position and cash flows, upon adoption beginning in fiscal 2009.

In
February 2007, the FASB issued Statement No. 159,The Fair Value Option for Financial Assets and Financial Liabilitiesincluding an
amendment to FAS 115("SFAS 159"). SFAS 159 allows entities to choose, at specified election dates, to measure eligible financial assets and liabilities at
fair value in situations in which they are not otherwise required to be measured at fair value. If a company elects the fair value option for an eligible item, changes in that item's fair value in
subsequent reporting periods must be recognized in current earnings. SFAS 159 also establishes presentation and disclosure requirements designed to draw comparison between entities that elect
different measurement attributes for similar assets and liabilities. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the
impact that SFAS 159 will have on its results of operations, financial position and cash flows, upon adoption in fiscal 2009.

66

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In
December 2007, the FASB issued SFAS 141R,Business Combinations("SFAS 141R"), replacing SFAS 141, "Business
Combinations". SFAS 141R revises existing accounting guidance for how an acquirer recognizes and measures in its financial statements the identifiable assets, liabilities, any noncontrolling
interests, and the goodwill acquired. SFAS 141R is effective for fiscal years beginning after December 15, 2008. SFAS 141R will impact the accounting for business combinations
completed by the Company on or after adoption in fiscal 2010.

In
December 2007, the FASB issued SFAS No. 160,Noncontrolling Interests in Consolidated Financial Statementsan amendment of ARB
No. 51("SFAS 160"). SFAS 160 requires all entities to report noncontrolling (minority) interests in subsidiaries as equity in the consolidated financial
statements. Its intention is to eliminate the diversity in practice regarding the accounting for transactions between an entity and noncontrolling interests. This Statement is effective for fiscal
years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. Since the Company does not have any subsidiaries with
noncontrolling interests, the Company does not expect this statement will have a material impact on its financial condition, results of operations and cash flows upon adoption in fiscal 2010.

In
May 2008, the FASB issued Staff Position No. APB 14-1, "Accounting for Convertible Debt Instruments that May be Settled in Cash Upon Conversion."
APB 14-1 requires
that the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) be separately accounted for in a manner that
reflects an issuer's nonconvertible debt borrowing rate. The resulting debt discount is amortized over the period the convertible debt is expected to be outstanding as additional non-cash
interest expense. APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years.
Retrospective application to all periods presented is required except for instruments that were not outstanding during any of the periods that will be presented in the annual financial statements for
the period of adoption but were outstanding during an earlier period. The Company is currently evaluating the impact of the adoption of this position could have on its financial condition, results of
operations and cash flows.

3.     BALANCE SHEET ACCOUNTS

Inventories:    Inventories comprised (in thousands):

April 30,2008

2007Raw Materials

$
716

$
1,626Work in process


27


Finished Goods


12,949


11,727Total

$
13,692

$
13,353


In
fiscal 2008, the Company recorded a provision for excess inventory totaling $5.1 million due to decline in sales during fiscal 2008 and expectations about revenue levels in
fiscal 2009. In fiscal 2008,
2007 and 2006, the Company sold $0, $337,000 and $634,000, respectively, of previously written-down inventory at approximately net book values.

67

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Investments:    The following table summarizes the Company's investments as of April 30, 2008 (in thousands):

Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair ValueCorporate notes

$
10,725

$


$
(580
)
$
10,145Asset backed securities


23,533





(4,148
)

19,385Total

$
34,258

$


$
(4,728
)
$
29,530


The
following table summarizes the Company's investments as of April 30, 2007 (in thousands):

Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair ValueCorporate notes

$
86,490

$


$


$
86,490Asset backed securities


13,975







$
13,975Total

$
100,465

$


$


$
100,465


Included
in corporate notes and asset backed securities are auction rate securities with a par value of $34.3 million and $39.8 million at April 30, 2008 and 2007,
respectively. For the years ended April 30, 2008, 2007 and 2006, no gains or losses were realized on the sale of short-term and long-term investments. As of
April 30, 2008 and 2007, net unrealized holding losses of $580,000 and $0 were included in accumulated other comprehensive loss in the accompanying Consolidated Balance Sheets, net of any
related tax effect and an "other than temporary" impairment of $4.2 million was recognized in the Consolidated Statement of Operations in fiscal 2008 for two auction rate instruments that have
failed to settle at auction since the second quarter of fiscal 2008 and no impairment charges were recognized in fiscal 2007. Subsequent to April 30, 2008, the ratings of the bond issuers,
AMBAC and MBIA, were downgraded, which had an impact on certain of the Company's auction rate securities' ratings. These events did not have a material impact on the Company's valuation of these
securities as of April 30, 2008.

Auction
rate securities, which have failed to settle at auction and for which management does not have a clear near-term exit strategy are included in long-term
investments based on uncertainty as to when they will next settle and on the term of the security underlying the auction rate security. Otherwise they are included in the less than one year category.
These securities are variable rate debt instruments, which bear interest rates that reset approximately every 7, 28 or 35 days. The underlying securities have contractual maturities which are
generally greater than ten years and are primarily issued by municipalities. Typically, the carrying value of auction rate securities
approximates fair value due to the frequent resetting of the interest rates. At April 30, 2008, $15.1 million of auction rate securities were classified as long-term
investments, consistent with the maturities of the securities underlying the auction rate instruments, due to uncertainty as to when they may settle.

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Property and Equipment:    Property and equipment comprised (in thousands):

April 30,2008

2007Furniture and fixtures

$
1,686

$
1,904Equipment


13,850


14,223Leasehold improvements


1,509


1,634Computer software


3,983


4,82821,028


22,589Less: accumulated depreciation and amortization


(15,535
)

(16,808
)Total

$
5,493

$
5,781


Accrued and Other Liabilities:    Accrued and other liabilities comprised (in thousands):

April 30,2008

2007Accrued employee related

$
2,708

$
4,837Accrued warranty


550


754Accrued professional fees


485


307Accrued restructuring costs


240


Other accrued expenses


1,087


1,250Total

$
5,070

$
7,148


Warranty Accrual.The Company provides for future warranty costs upon shipment of its products. The specific terms and
conditions of those warranties may vary depending on the product sold, the customer and the country in which it does business. However, the Company's hardware warranties generally start from the
shipment date and continue for a period of two to five years while the software warranty is generally ninety days to one year.

Because
the Company's products are manufactured to a standardized specification and products are internally tested to these specifications prior to shipment, the Company historically has
experienced minimal warranty costs. Factors that affect the Company's warranty liability include the number of installed units, historical experience and management's judgment regarding anticipated
rates of warranty claims and cost per claim. The Company assesses the adequacy of its recorded warranty liabilities every quarter and makes adjustments to the liability, if necessary. In fiscal 2007,
the Company reversed approximately $395,000 due to the favorable resolution of a potential recall of a defective component in one of the Company's older products sold to a past customer. In fiscal
2008, the adjustment to warranty accrual reflected improved warranty history for the Company's products over the last year.

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Changes
in the warranty accrual, which is included as a component of "Accrued and other liabilities" on the Consolidated Balance Sheet, were as follows (in thousands):

Year ended April 30,2008

2007Balance as of the beginning of the fiscal period

$
754

$
1,157Provision for warranties issued during the fiscal period


83


103Warranty costs incurred during the fiscal period


(69
)

(111
)Other adjustments to the liability (including changes in estimates for pre-existing warranties) during fiscal period


(218
)

(395
)Balance as of the end of the fiscal period

$
550

$
754


Reduction in Force.In the second quarter of fiscal 2008, the Company undertook a reduction in force in an effort to
streamline its operations and reduce costs. The reduction in the workforce totaled approximately 23% of the workforce and the closure of its research and development operations in Canada. As a result
of these actions, the Company recorded a charge of approximately $1.3 million attributable to severance benefits and costs associated with the closure of the Canadian office, including $250,000
attributable to the loss on abandonment of the Canadian facility lease and losses on assets abandoned at that location, including but not limited to leasehold improvements, all of which cost have been
incurred in fiscal 2008 and the related accrual has been fully utilized. The balance of the $1.3 million charge, or approximately $1.0 million, was attributable to severance and related
benefits, of which amount $914,000 had been paid as of April 30, 2008, with the balance relating to the outplacement services and severance packages, which should be paid no later than in the
first half of
fiscal 2009. All individuals impacted by the reduction in headcount were notified of the termination of their employment as of October 31, 2007.

4.     DISCONTINUED OPERATIONS

On July 16, 2003, the Company completed the primary step in the planned exit of its optical communications business through the sale of a large portion of
the assets of its optical communications business to JDSU, pursuant to an Asset Purchase Agreement (the "Purchase Agreement"). The assets sold consisted primarily of inventory, certain specified
optical-related equipment and intellectual property rights. As a result of exiting the optical business, the Company's Consolidated Statements of Operations reflect the optical business as a
discontinued operation for all periods presented.

In
June 2006, the Company completed the final elements of its exit of the optical business. First, the Company came to a mutual settlement and release with JDSU whereby JDSU paid Ditech
$718,000. The Company had recorded receivables of $534,000 such that the net gain from the settlement was $184,000. As part of the settlement, JDSU additionally released the Company from its warranty
obligation, which resulted in the release of $514,000 of its warranty accrual. In addition, in June 2006, the Company completed the closure of its final international optical operations and, as a
result, reversed its remaining $189,000 of reserves related to contingencies associated with the closure of those operations. Net of $361,000 of tax expense, the transactions resulted in a $526,000
gain from disposal of the Company's discontinued operations. As the resolution of these contingencies occurred before the Company filed its annual report for fiscal 2006, they were reflected as a
subsequent event in the fiscal 2006 financial statements.

70

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The
following table shows the components of the gain from the disposal of the Company's discontinued operations (in thousands):

Year ended
April 30,
2006Proceeds from sale

$
184Less: Net book value of assets sold


Transaction costs


Gain on sale


184Costs to exit remainder of optical business


(703
)Income from disposition


887Income tax expense (benefit)


361Net income (loss) from disposition

$
526


5.     BUSINESS COMBINATION

On June 30, 2005, the Company acquired privately-held Jasomi Networks, Inc. ("Jasomi"). Jasomi developed and sold session border
controllers, which enables VoIP calls to traverse the network address translation (NAT) and protects networks from external attacks by admitting only authorized sessions, ensuring that reliable VoIP
service can be provided to them. The combination of Ditech's Packet Voice Processor and Jasomi's session border control technology may enable Ditech to provide a comprehensive solution to VoIP
carriers' border service needs.

The
acquisition consideration paid totaled $14.8 million and included a cash payment of $10.4 million that was paid at closing, an additional $2.0 million in cash
that was placed in escrow, with the remainder consisting of the assumption of vested stock options, acquisition costs and net liabilities assumed. The escrowed cash was to be available to satisfy any
claims for indemnification that Ditech may make for certain breaches of representations, warranties and covenants set forth in the acquisition agreements. Upon the second anniversary of the
acquisition, the full $2.0 million was release from escrow and remitted to the Jasomi shareholders. In addition, further acquisition consideration not yet recorded included $7.0 million
in non-transferable convertible notes, divided into two tranches with principal amounts of $3.0 million and $4.0 million, respectively. As the holders of the notes did not
elect
to covert any of the balances on their maturities, the Company paid the $3.0 million on the first anniversary of the acquisition and the $4.0 million on the second anniversary. Both
tranches were paid along with accrued interest at the rate of 5%. As the payment of these convertible notes was contingent on the retention of a specified number of designated employees. In accordance
with Statement of Financial Accounting Standards No. 141 (SFAS 141), the Company did not record the $7.0 million as acquisition consideration related to these note until they were
paid, as at the closing date of the acquisition the Company believed the retention of the designated employees was not assured beyond a reasonable doubt. The portion of the notes that was issued to
employee-stockholders, totaling $947,000, plus interest was amortized as compensation expense over the life of each note. In fiscal 2008, 2007 and 2006, the Company recorded $50,000, $364,000 and
$604,000, respectively, of compensation expense related to the notes.

Ditech
also (1) assumed Jasomi unvested stock options outstanding on the date of the closing, which converted into options to buy 112,343 shares of the Company's common stock, and
(2) issued to Jasomi employees restricted stock and restricted stock units for an aggregate of 393,212 shares of the Company's common stock. The intrinsic value of the unvested options assumed
and restricted shares granted to Jasomi employees were initially recorded as deferred stock-based compensation and were being amortized as compensation expense over the remaining respective vesting
periods. Upon adoption of SFAS 123R on May 1, 2006, the unamortized deferred compensation balance was reversed

71

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against
additional paid-in capital. The restricted stock has a three year vesting schedule while the unvested options assumed typically have a ten year term and a four year vesting period.
In fiscal 2006, the Company recognized $875,000 of compensation expense related to assumed but unvested options and the restricted stock plan.

The
78,768 vested stock options assumed, at an intrinsic value of $483,000, were recorded as part of the purchase consideration.

The
Company allocated the purchase price to in-process research and development ("in-process R&D"), goodwill and identified intangibles through established
valuation techniques in the high-technology communications equipment industry. In-process R&D was expensed at the time of the acquisition because technological feasibility was
not established and no future alternative use existed.

In
valuing in-process R&D, cash flow projections were based on estimates from Ditech and Jasomi management and from various public, financial and industry sources. The
Company expected net revenue to grow through calendar 2008 and decline thereafter based on the rate of technology changes in the industry, product life cycles and various projects' stages of
development. The Company estimated cost of goods sold and operating expenses, including research and development expenses and selling, general and administrative expenses, as a percentage of revenue
based on historical averages and forward-looking projections. The Company also included in the projections estimated costs to bring projects to technological feasibility and costs associated with
activities
undertaken to correct errors or keep products updated (also referred to as "maintenance" research and development). The Company based tax expense on statutory Federal and California tax rates.

The
Company based the percentage of completion of in-process projects on an averaging of (1) expenses incurred to-date compared to the total estimated
development costs for each project, (2) time incurred to-date and remaining time to complete each project and (3) milestone-based percent complete estimates. The
in-process projects pertained to general enhancements to PeerPoint software, combining of NAT and Peering capability, increasing throughput capability, enhancing the interface and
developing a Denial of Service module. The average percentage complete for the in-process projects was 56% as of the date of the acquisition. At the time of the acquisition, it was
estimated that these development efforts would be completed in nine months at an estimated cost of approximately $740,000.

6.     GOODWILL AND PURCHASED INTANGIBLES

The carrying value of intangible assets acquired in the Jasomi business combination is as follows (in thousands):

April 30, 2008Gross
Value

Accumulated
Amortization

Impairment

Net ValuePurchased Intangible AssetsCore technology

$
2,900

$
(2,054
)
$
(763
)
$
83Customer relationships


1,100


(624
)

(429
)

47Trade name and trademarks


200


(113
)

(78
)

9Goodwill


16,423





(16,423
)

Total

$
20,623

$
(2,791
)
$
(17,693
)
$
139


72

---



|
|

April 30, 2007Gross
Value

Accumulated
Amortization

Impairment

Net ValuePurchased Intangible AssetsCore technology

$
2,900

$
(1,330
)
$


$
1,570Customer relationships


1,100


(403
)




697Trade name and trademarks


200


(73
)




127Goodwill


12,637








12,637Total

$
16,837

$
(1,806
)
$


$
15,031


In
fiscal 2008 and 2007, the goodwill attributable to the Jasomi acquisition increased by $3.8 million and $2.7 million, respectively. The increases were associated with
the payment of the convertible notes payable. In fiscal 2008, the Company recorded an impairment loss of $16.4 million against the full recorded goodwill balance and a $1.3 million
impairment loss against the other purchased intangible assets associated with the Jasomi acquisition.

In
fiscal 2008, 2007 and 2006, the Company recorded $985,000, $985,000 and $821,000, respectively, of amortization of Jasomi acquisition-related intangible assets.

Estimated
future amortization expense of purchased intangible assets as of April 30, 2008 is as follows (in thousands):

Years ending
April 30,2009

$
972010


382011


42012 and thereafter


$
139


Other
intangible assets included as a component of Other Assets, comprised (in thousands):

April 30, 2008

April 30, 2007Gross
Value

Accumulated
Amortization

Net Value

Gross
Value

Accumulated
Amortization

Net ValueSoftware licenses

$
3,359

$
(3,359
)
$


$
3,359

$
(3,287
)
$
72


Amortization
expense related to software licenses was $72,000, $287,000 and $761,000 in fiscal 2008, 2007 and 2006, respectively.

7.     COMMITMENTS AND CONTINGENCIES



The Company leases its principal office facilities in Mountain View, California under a non-cancelable operating lease expiring on July 31,
2011. As part of the extension of the Mountain View, California lease term in September 2005, the landlord provided $442,000 for tenant improvements. This amount was recorded in accrued and other
liabilities and is being amortized over the remaining term of the lease as a reduction in rent expense. The Company is responsible for taxes, insurance and maintenance expenses related to the leased
facilities. The Company also has less significant operating leases on other offices and certain office equipment.

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At
April 30, 2008, future minimum payments under the leases are as follows (in thousands):

Years ending April 30,2009

$
1,0572010


1,0582011


1,0942012


276Thereafter


$
3,485


Rent
expense under all leases for the years ended April 30, 2008, 2007 and 2006, was $1.6 million, $1.5 million and $1.6 million, respectively.



In July 2007, the Company renewed its $2.0 million operating line of credit with its bank. The renewed line of credit, which expires on July 31,
2008, carries the same basic terms as the original line of credit and financial covenants related to minimum effective tangible net worth and cash and cash equivalent and short-term
investment balances. Advances under the line bear interest at the rate of prime plus 0.25%. As of April 30, 2008, the Company had no borrowings outstanding under the line of credit and was in
compliance with the financial covenants.

Guarantees and Indemnifications.As is customary in the Company's industry, and as required by law in the U.S. and certain
other jurisdictions, certain of the Company's contracts provide remedies to its customers, such as defense, settlement, or payment of judgment for intellectual property claims related to the use of
the Company's products. From time to time, the Company indemnifies customers against combinations of losses, expenses, or liabilities arising from various trigger events related to the sale and the
use of the Company's products and services. In addition, from time to time the Company also provides protection to customers against claims related to undiscovered liabilities, additional product
liability or environmental obligations. In the Company's experience, claims made under such indemnifications are rare.

As
permitted or required under Delaware law and to the maximum extent allowable under that law, the Company has certain obligations to indemnify its current and former officers and
directors for certain events or occurrences while the officer or director is, or was serving at the Company's request in such capacity. These indemnification obligations are valid as long as the
director or officer acted in good faith and in a manner that a person reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was unlawful. The maximum potential amount of future payments the Company could be required to make under these indemnification
obligations is unlimited; however, the Company has a director and officer insurance policy that limits the Company's exposure and enables the Company to recover a portion of any future amounts paid.
As a result of the Company's insurance policy coverage, the Company believes the estimated fair value of these indemnification obligations is minimal.



Beginning on June 14, 2005, several purported class action lawsuits were filed in the United States District Court for the Northern District of California,
purportedly on behalf of a class of investors who purchased Ditech's stock between August 25, 2004 and May 26, 2005. The complaints allege claims under Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 against Ditech and its Chief Executive Officer and Chief Financial Officer in connection with alleged misrepresentations concerning

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VQA
orders and the potential effect on Ditech of the merger between Sprint and Nextel, seeking monetary damages. All of the lawsuits were consolidated into a single action entitled In re Ditech Communications Corp. Securities
Litigation,No. C 05-02406-JSW, and a consolidated amended complaint was
filed on February 2, 2006. The defendants moved to dismiss the complaint, and by order dated August 10, 2006, the court granted the defendants' motion and dismissed the complaint with
leave to amend. The plaintiffs filed their Second Amended Complaint on September 11, 2006. The defendants again moved to dismiss, and by order dated March 22, 2007, the court dismissed
the Second Amended Complaint with leave to amend. The plaintiffs filed their Third Amended Complaint on April 23, 2007. On May 14, 2007, the defendants again moved to dismiss. By order
dated October 11, 2007, the court dismissed the third amended complaint with prejudice. On November 8, 2007, plaintiffs filed a notice of appeal to the Ninth U.S. Circuit Court of
Appeals. The appeal has been fully briefed. No date for oral argument of the appeal has been set.

On
August 23, 2006, August 25, 2006 and November 3, 2006, three actions were filed in United States District Court for the Northern District of California (Case Nos.
C06-05157, C06-05242, and C06-6877) purportedly as derivative actions on behalf of the Company against certain of the Company's current and former officers and
directors alleging that between 1999 and 2001 certain stock option grants were backdated; that these options were not properly accounted for; and that as a result false and misleading financial
statements were filed. These three actions have been consolidated under case number C06-05157. On December 1, 2006, a fourth derivative complaint making similar allegations against
many of the same defendants was filed in California Superior Court for the County of Santa Clara (Case No.106-CV-075695). On April 19, 2007, the California Superior
Court granted the Company's motion to stay the state court action pending the outcome of the federal consolidated actions.

The
defendants named in the derivative actions are Timothy Montgomery, Gregory Avis, Edwin Harper, William Hasler, Andrei Manoliu, David Sugishita, William Tamblyn, Caglan Aras, Toni
Bellin, Robert DeVincenzi, James Grady, Lee House, Serge Stepanoff, Gary Testa, Lowell Trangsrud, Kenneth Jones, Pong Lim, Glenda Dubsky, Ian Wright, and Peter Chung. These derivative complaints raise
claims under Section 10(b) and 10b-5 of the Securities Exchange Act, Section 14(a) of the Securities Act, and California Corporations Code Section 25403, as well as
common law claims for breach of fiduciary duty, unjust enrichment, waste of corporate assets, gross mismanagement, constructive fraud, and abuse of control. The plaintiffs seek remedies including
money damages, disgorgement of profits, accounting, rescission, and punitive damages. With respect to the consolidated
federal actions, the plaintiffs filed an amended consolidated complaint on March 2, 2007, adding new allegations regarding another stock option grant. On April 2, 2007, the Company moved
to dismiss the amended complaint based on plaintiffs' failure to make a demand on the board before bringing suit. On the same d ay, the individual defendants moved to dismiss the amended complaint for
failure to state a claim. On July 16, 2007, the Court granted the individual defendants' motion to dismiss without prejudice. On September 21, 2007, plaintiffs filed a second amended
complaint. On November 30, 2007, the Company moved to dismiss the complaint for failure to make a demand on the board of directors and for lack of standing. On the same day, the individual
defendants moved to dismiss the complaint for failure to state a claim upon which relief may be granted. A hearing on these motions was held on February 8, 2008. On March 26, 2008, the
Court granted the individual defendants' motion to dismiss without prejudice, ordering plaintiffs to file any amended complaint by April 25, 2008. Plaintiffs did not file an amended complaint.
On April 25, 2008, plaintiffs purported to make a shareholder demand on Ditech's board of directors, demanding that Ditech's board investigate and remedy the alleged stock option manipulation
and insider trading. On May 12, 2008, defendants filed a motion for dismissal with prejudice based, in part, on plaintiffs' failure to comply with the Court's March 26, 2008 Order. That
motion is set for hearing on August 1, 2008.

75

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These
actions are in their preliminary stages; no discovery has taken place and no trial date has been set.

The
Company cannot predict the outcome of the lawsuits at this time and has hence made no provisions for potential losses from these lawsuits.

8.     SALE OF ECHO CANCELLATION TECHNOLOGY

On April 16, 2002, the Company sold its echo cancellation and voice enhancement software technology, the associated product licenses and all of the related
assets to Texas Instruments for an aggregate price of $26.8 million. In connection with the sale, Ditech received, at no cost, a license from Texas Instruments and Telogy Networks, Inc.,
a wholly owned subsidiary of Texas Instruments, to use the existing echo cancellation and voice enhancement software and any enhancements in Ditech's products for a period of four years. A value of
$3.0 million was assigned to this four year license period, which value was amortized to cost of goods sold over the four year term ending in April 2006. After the initial four-year
royalty-free period ending in April 2006, the Company (1) extended the royalty-free period for certain legacy digital signal processors ("DSPs") purchased from TI
through December 31, 2007 primarily to support Ditech's remaining warranty obligation for its end-of-life products and (2) negotiated new pricing based on the
purchase of DSP bundled with the echo software for the Company's current products.

9.     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, 2008, no preferred stock was outstanding.

In
March 2001, the Company's Board of Directors adopted a Preferred Share Purchase Rights Plan designed to enable Ditech stockholders to realize the full value of their investment and to
provide for fair and equal treatment for all Ditech stockholders in the event that an unsolicited attempt is made to acquire Ditech. Under the Plan, stockholders will receive one right to purchase
one-thousandth of a share of newly designated Series A Junior Participating Preferred Stock of Ditech at an initial exercise price of $75.00 for each outstanding share of Ditech
common stock held at the close of business on April 16, 2001 or issued thereafter. The rights expire on March 25, 2011.

10.   STOCKHOLDERS' EQUITY

Employee Equity Plans



In March and April 1999, the Board adopted, and the stockholders approved, the Company's 1999 Employee Stock Purchase Plan (the "Purchase Plan") under which an
aggregate of 1,816,666 shares of common stock have been reserved as of April 30, 2008. Employees who participate in the one-year offering period can have up to 15% of their earnings
withheld for the purchase of up to a maximum of 700 shares per six-month purchase period pursuant to the Purchase Plan. The amount withheld will then be used to purchase shares of 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 the offering or end date of the purchase period. In fiscal 2008, 2007 and 2006, 144,398, 159,361 and 131,665 shares, respectively, were purchased under the Purchase Plan. As of
April 30, 2008, 323,959 shares remain available for issuance under the Purchase Plan.

76

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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 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. The Company has reserved a total of 4,856,082 shares of common stock for issuance under the 1998
Stock Option Plan, under terms similar to those of the 1997 Stock Option Plan.

During
fiscal 2000, the Company adopted two non-statutory stock option plans, the 1999 Non-Officer Equity Incentive Plan and the 2000 Non-Qualified
Stock Plan, 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. 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 option shares one year after the grant date, and thereafter, ratably over 36 months. As of April 30, 2008, no
shares were subject to repurchase.

On
July 25, 2000, the Company purchased the net assets of Atmosphere Networks, and assumed all outstanding stock options that had been granted under the Atmosphere Networks 1997
Stock Plan (the "Atmosphere Plan"). The option shares under the Atmosphere Plan were converted into 122,236 options to purchase the Company's common stock. The calculation of the conversion of option
shares was determined using the approximate fair market values of the Atmosphere Networks and the Company's common stock prices within a one-week period up to the date of the acquisition.
After July 25, 2000, no new options are permitted to be granted under the Atmosphere Plan. The options granted under this plan are substantially consistent with the terms of options granted
under the Company's stock option plans.

In
August 2000, the Board of Directors adopted the 2000 Non-Qualified Stock Plan. A total of 5,000,000 shares were reserved under this plan as of April 30, 2006. The
terms of options granted under this plan are substantially consistent with options granted under the 1997 and 1998 plans. In September 2006, the Board of Directors amended the 2000
Non-Qualified Stock Plan and re-named it the 2006 Equity Incentive Plan, as described below. The 2006 Equity Incentive Plan allows for the grant of other types of equity
awards, including restricted stock and restricted stock units.

On
June 30, 2005, the Company acquired Jasomi and assumed all outstanding stock options that had been granted under the Jasomi Networks 2001 Stock Plan (the "Jasomi Plan"). The
options under the Jasomi Plan were converted into 191,111 options to purchase the Company's common stock. The calculation of the conversion of options was determined using the approximate fair market
values of the Jasomi and the Company's common stock prices within a one-week period up to the date of the acquisition. After June 30, 2005, no new options are permitted to be
granted under the Jasomi Plan. The options granted under this plan are substantially consistent with the terms of options granted under the Company's stock option plans.

In
connection with the acquisition of Jasomi on June 30, 2005, the Board of Directors adopted the 2005 New Recruit Stock Plan. This plan allows for up to 500,000 shares of
restricted stock and restricted stock units to be granted to newly hired employees. The Jasomi Canada employees hired by the Company received shares with a vesting schedule of 1/3 of the shares
vesting on the first anniversary of the acquisition date, and the remaining vesting in eight (8) successive equal quarterly

77

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installments
over the two (2)-year period measured from the first anniversary of the closing date. As of April 30, 2008, 219,071 shares remain available for issuance under the 2005
New Recruit Stock Plan.

In
November 2005, the Board also adopted the 2005 New Recruit Stock Option Plan. A total of 200,000 shares were approved for issuance as non-qualified stock options to new
hired employees only. The terms of the plan are substantially consistent with the non-qualified stock options granted under the Company's other stock option plans, except that the plan
does not allow the early exercise of stock options. In February 2006, another 300,000 shares were approved and added to the reserve in connection with the hiring of the new vice president of worldwide
sales. As of April 30, 2008, 500,000 shares have been reserved under the plan.

In
September 2006, the Board of Directors amended the 2000 Non-Qualified Stock Plan and re-named it the 2006 Equity Incentive Plan, reserving an additional
2,000,000 shares. As a result of the increase, a total of 7,000,000 shares have been reserved under this plan as of April 30, 2008. The terms of non-statutory options granted under
this plan are substantially consistent with non-statutory options granted under the 2000 plan. However, the new plan allows for the grant of other types of equity awards, including
restricted stock and restricted stock units. Restricted stock and restricted stock units generally vest over four years with 25% vesting after the first year and the remaining shares vesting ratably
every six months thereafter.

All
options under the option plans described above have a ten-year term.



In March 1999, the Company adopted the 1999 Non-Employee Directors' Stock Option Plan. Under this stock option plan an aggregate of 650,000 shares
have been reserved as of April 30, 2008. Options granted under the plan have a 5-year term. Currently, one-time initial automatic grants of 35,000 shares each are made
upon a director's initial appointment and are subject to annual vesting over a four-year period. Annual automatic grants of 10,000 shares each are made on the date of each annual meeting
of stockholders to each incumbent director (provided they have served as a director for at least six months) and are fully vested at the grant date.

78

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Activity
under the stock plans referenced above was as follows (in thousands, except life and exercise price amounts):

|                         |                                                       |       |        | Outstanding Options
|------------------------ | ----------------------------------------------------- | ----- | ------ | -------------------
|
|Balances, April 30, 2005 |                                                       | 2,408 |        | 4,802              
|                         | Reservation of shares                                 |       | 1,000  |                    
|                         | Restricted stock and restricted stock units issued    |       | (369   | )                  
|                         | Assumed outstanding options                           |       |       |                    
|                         | Options granted                                       |       | (2,272 | )                  
|                         | Options exercised                                     |       |       |                    
|                         | Options forfeited                                     |       | 119    |                    
|                         | Options expired                                       |       | 82     |                    
|                         |                                                       |       |        |                    
|Balances, April 30, 2006 |                                                       | 968   |        | 6,928              
|                         | Reservation of shares                                 |       | 2,000  |                    
|                         | Restricted stock and restricted stock units issued    |       | (292   | )                  
|                         | Restricted stock and restricted stock units forfeited |       | 74     |                    
|                         | Options granted                                       |       | (837   | )                  
|                         | Options exercised                                     |       |       |                    
|                         | Options forfeited                                     |       | 258    |                    
|                         | Options expired                                       |       | 267    |                    
|                         |                                                       |       |        |                    
|Balances, April 30, 2007 |                                                       | 2,438 |        | 7,023              
|                         | Restricted stock and restricted stock units issued    |       | (53    | )                  
|                         | Restricted stock and restricted stock units forfeited |       | 140    |                    
|                         | Options granted                                       |       | (1,743 | )                  
|                         | Options exercised                                     |       |       |                    
|                         | Options forfeited                                     |       | 891    |                    
|                         | Options expired                                       |       | 507    |                    
|                         |                                                       |       |        |                    
|Balances, April 30, 2008 |                                                       | 2,180 |        | 7,060              
|                         |                                                       |       |        |                    

---

The
aggregate intrinsic value of stock options exercised in fiscal 2008, 2007 and 2006 was $554,000, $791,000 and $608,000, respectively.

The
summary of options vested and exercisable at April 30, 2008 comprised (in thousands, except term and exercise price):

|                                          |  | Number of
Shares |  | Weighted
Average
Exercise Price |      | Aggregate
Intrinsic
Value |   | Weighted
Average
Remaining
Contractual
Term
|----------------------------------------- |  | ---------------- |  | ------------------------------- | ---- | ------------------------- | - | -------------------------------------------
|Fully vested and expected to vest options |  | 6,702            |  | $                               | 7.26 |                           | $ | 176                                        
|Options exercisable                       |  | 5,098            |  | $                               | 8.01 |                           | $ | 170                                        

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The
summary of unvested restricted stock awards for fiscal 2008 comprised (in thousands, except life):

|                                           |  | Number of
Shares |   | Weighted Average
Grant Date Fair
Value
|------------------------------------------ |  | ---------------- | - | --------------------------------------
|Nonvested restricted stock, April 30, 2007 |  | 227              |   | $                                     
|Restricted stock issued                    |  | 41               |   | $                                     
|Restricted stock vested                    |  | (56              | ) | $                                     
|Restricted stock forfeited                 |  | (88              | ) | $                                     
|                                           |  |                  |   |                                       
|Nonvested restricted stock, April 30, 2008 |  | 124              |   | $                                     
|                                           |  |                  |   |                                       

The
aggregate intrinsic value of vested and expected to vest restricted stock units, which had a weighted average remaining contractual term of 0.8 years, was $49,000 at
April 30, 2008. No restricted stock units were exercisable as of April 30, 2008. For the years ended April 30, 2008 and 2007, the total fair value of shares vested was
$3.1 million and $0.5 million, respectively.

As
of April 30, 2008, approximately $6.0 million of total unrecognized compensation cost related to stock options and restricted stock/RSUs is expected to be recognized
over a weighted-average period of 2.8 years for options and 2.6 years for restricted stock and restricted stock units.

The
key assumptions used in the fair value model and the resulting estimates of weighted-average fair value per share used to record stock-based compensation in fiscal 2008 and 2007
under SFAS 123R and for proforma disclosures under SFAS 123 in fiscal 2006 for options granted and for employee stock purchases under the ESPP during these periods are as follows:

Years ended April 30,2008

2007

2006Stock options:Dividend yield(1)








Volatility factor(2)


0.62


0.69


0.82Risk-free interest rate(3)


3.4
%

4.5
%

4.1
%Expected life (years)(4)


4.3


4.9


4.0Weighted average fair value of options granted during the period

$
2.11

$
4.48

$
4.22Employee stock purchase plan:(5)Dividend yield(1)








Volatility factor(2)


.53


.46


0.93Risk-free interest rate(3)


3.3
%

5.0
%

4.5
%Expected life (years)(4)


.97


.71


0.50Weighted average fair value of employee stock purchases during the period

$
1.25

$
2.24

$
3.14Restricted stock and restricted stock units:Weighted average fair value of restricted stock and RSUs granted during the period

$
6.17

$
7.37

$
6.49


---

80

---



Stock Repurchase Program

On June 13, 2007, the Company announced that its Board of Directors had authorized a $60 million stock repurchase program, a portion of which was to
be accomplished in a Dutch Auction Tender Offer. On August 29, 2007, the Company filed a tender offer to repurchase up to 9,100,000 shares, or approximately $50.0 million worth, of the
Company's common stock. In the second quarter of fiscal 2008, the Company completed the repurchase of 7,410,824 shares of its common stock for an aggregate cost of $41.0 million. The shares
repurchased by the Company were immediately retired and the aggregate price of the retired shares was reflected as a reduction to stockholders' equity. There is no expiration date with respect to the
remainder of the stock repurchase program.

The
aggregate purchase price of the shares of the Company's common stock repurchased was reflected as a reduction to stockholders' equity. In accordance with Accounting Principles Board
Opinion No. 6, "Status of Accounting Research Bulletins," the Company allocated the purchase price of the
repurchased shares as an increase in accumulated deficit and a reduction in common stock and additional paid-in capital.

11.   INCOME TAXES

The provision for income taxes reflected in the Consolidated Statements of Operations for the years ended April 30:

2008

2007

2006in thousandsCurrent:Federal

$


$
315

$
4State


(12
)

119


(1,171
)Foreign


61


4


71Total Current

$
49

$
438

$
(1,096
)Deferred:Federal

$
37,958

$
2,854

$
168State


7,869


93


1,190Total Deferred


45,827


2,947


1,358Total

$
45,876

$
3,385

$
262


81

---



The
components of the Company's deferred tax assets consisted of:

April 30,2008

2007in thousandsDeferred tax assets (liabilities):Uniform capitalization

$
3,124

$
1,728Depreciation


219


385Inventory reserves


3,428


1,341Other reserves and accruals


3,276


1,474Stock-based compensation under SFAS 123R


3,402


2,171Purchased technology, goodwill and other intangibles


1,604


1,117Tax credits


10,458


9,894Net operating losses


33,563


27,718Total deferred tax assets


59,074


45,828Valuation allowance


(59,074
)

Net deferred tax assets

$


$
45,828


Due
to continued losses from operations and uncertainty as to the magnitude and timing of future operating profits, the Company recorded a full valuation allowance against its deferred
tax assets in fiscal 2008. As of April 30, 2007, the Company had no valuation allowance against its deferred tax assets.

As
of April 30, 2008, the Company has federal and state tax net operating loss carryforwards of approximately $88.4 million and $69.8 million, respectively. If not
utilized, the federal net operating loss carryforwards will begin to expire in fiscal 2016, and the state net operating loss carry forwards will begin to expire in fiscal 2012. As of April 30,
2008, the Company had federal and state tax credit carryforwards of approximately $6.9 million and $5.2 million, respectively.

The
Company's effective tax rate differs from the U.S. federal statutory income tax rate for the years ended April 30, principally due to the following:

2008

2007

2006Tax provision at federal statutory rate

35.0
%
35.0
%
35.0
%State taxes, net of federal benefit

4.4

6.0

5.7Non-deductible in-process R&D and other acquisition related amortization





(46.3
)Other permanent differences

0.3

4.3

(7.1
)Correction of California R&D tax credit error





(100.3
)True-up adjustments to deferred tax assets





(11.4
)Reversal of reserves associated with California R&D tax credit position





101.5Research Credit

1.6

(11.1
)Impairment of goodwill

(13.3
)Valuation allowance

(121.2
)


Other

(0.9
)
4.7

Effective tax rate

(94.1
)%
38.9
%
(22.9
)%


The
tax provision for fiscal 2008 resulted in an effective tax rate of (94%). The effective rate for the year was adversely impacted by the non-deductible impairment charge
related to goodwill and other

82

---



purchased
intangible assets of $17.7 million and the establishment of a full valuation allowance of $59.1 million against the Company's deferred tax assets.

The
tax provision for fiscal 2007 resulted in an effective tax rate of 39%. The effective tax rate differs from the statutory rate primarily due to stock-based compensation expense,
research and experimentation tax credits, state taxes, tax impact of foreign operations and changes in the state tax rate as it relates to certain deferred tax assets specifically for California
purposes only.

The
tax provision for fiscal 2006 resulted in an effective tax rate of (23%). The effective tax rate for the year was adversely affected by non-deductible Jasomi
acquisition-related charges, including the Company's inability to deduct for tax purposes (1) in-process R&D related to the acquisition of Jasomi and (2) convertible
debenture amortization, and the correction of a $1.1 million error in the balance of a deferred tax asset related to a California R&D tax credit. The error originated in the second quarter of
fiscal 2005 at the time the Company released its valuation allowance on deferred tax assets and was corrected in the fourth quarter of fiscal 2006. After conducting a thorough analytical review on
materiality, which was brought to the attention of and discussed with the audit committee, management believed that such amounts are not material to previously reported financial statements. Those
items were partially offset by the reversal of $1.2 million of reserves on deferred tax assets primarily associated with a California R&D tax credit position under audit by California's
Franchise Tax Board. In April 2006, the Company reached an agreement with the Franchise Tax Board regarding its tax credit positions and consequently revised associated reserves. The agreement did not
result in the assessment of additional tax.

The
Company's income taxes payable for federal, state, and foreign purposes have been reduced by the tax benefits from employee stock options. The Company receives an income tax benefit
calculated as the difference between the fair market value of the stock issued at the time of exercise and the option price, tax effected. The net tax benefits from employee stock option transactions
were $0.2 million for fiscal 2006, and were reflected as an increase to additional paid-in capital in the Consolidated Balance Sheet only for 2006. The Company did not record a
benefit to the Consolidated Statements of Shareholders' Equity for fiscal 2008 and 2007 as a result of electing to use FAS 109 ordering with respect to reduction to the current tax provision.
Accordingly, the net operating losses carryforward from pre-2007 years were utilized first to offset the current taxes payable prior to the impact of current year tax benefits from
employee stock options.

Effective
May 1, 2007, the Company adopted FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"). This interpretation clarifies the
criteria for recognizing income tax benefits under FASB Statement No. 109, "Accounting for Income Taxes", and requires additional disclosures about uncertain tax positions. Under FIN 48,
the financial statement recognition of the benefit for a tax position is dependent upon the benefit being
more-likely-than-not to be sustainable upon audit by the applicable taxing authority. If this threshold is met, the tax benefit is then measured and recognized at
the largest amount that is greater than 50 percent likely of being realized upon ultimate settlement. The cumulative affect of adopting FIN 48 at May 1, 2007 was a decrease in the
liability for uncertain tax positions and the opening accumulated deficit balance of $369,000.

83

---



The
following is a roll forward of the Company's total gross unrecognized tax benefits for fiscal 2008 (in thousands)

Balance as of May 1, 2007

$
270,983Tax positions related to current year:Additions for tax positions related to R&D credits


174,612Additions for Foreign Taxes


146,405Tax positions related to prior year:Reductions for tax positions related to State Taxes


(43,264
)Reductions for tax positions related to Foreign Taxes


(25,340
)Balance as of April 30, 2008

$
523,396


The
unrecognized tax benefits of $523,000 include $141,000 of uncertain tax positions that would impact the Company's effective tax rate if recognized. In accordance with FIN 48,
the Company recognizes interest and penalties related to unrecognized tax benefits as a component of income taxes. Interest and penalties included in the statement of operations related to uncertain
tax positions is immaterial for the fiscal year ended April 30, 2008. The Company does not anticipate that the amount of liability for uncertain tax positions existing at April 30, 2008
will change significantly within the next 12 months.

The
Company files income tax returns in the U.S. and various foreign jurisdictions. Most U.S. and foreign jurisdictions have 3 to 10 year periods during which the appropriate
taxing authorities may commence an audit. The examination of the Company's U.S. federal tax filings for fiscal 2004 and 2005 was completed in the fourth quarter of fiscal 2008 with no material
findings and the Company is beginning a review with one of the state jurisdiction in which it operates for the fiscal 2005 filing. The Company is not currently under examination by any other state or
foreign jurisdictions.

12.   REPORTABLE SEGMENTS AND GEOGRAPHIC INFORMATION

The Company currently operates in a single segment, voice quality products.

The
Company's revenue from external customers by geographic region, based on shipment destination, was as follows (in thousands):

Years Ending April 30,2008

2007

2006USA

$
22,268

$
59,806

$
47,992Asia Pacific


3,883


960


983Canada


3,365


2,233


2,056Latin America


872


4,905


595Middle East/Africa


3,807


15,329


1,519Europe


894


771


1,760Total

$
35,089

$
84,004

$
54,905


84

---



The
Company's long lived assets by geographic region were as follows (in thousands):

As of April 30,2008

2007USA

$
5,484

$
5,379Canada





395Rest of World


9


7Total

$
5,493

$
5,781


13.   PROFIT SHARING PLAN

The Company maintains a 401(k) profit sharing plan for all eligible employees. Employees may contribute to the Plan based on statutory limits. Any Company
contributions are at the discretion of the Board of Directors. The Company made contributions to the Plan during fiscal 2008, 2007, and 2006 of $57,000, $68,000 and $58,000, respectively.

14.   SUPPLEMENTAL CASH FLOW INFORMATION

Years ended April 30,2008

2007

2006in thousandsOperating:Interest paid

$


$


$
Income taxes paid


549


93


191


15.   SUBSEQUENT EVENTS

On June 10, 2008, the Company extended its $2.0 million line of credit with its bank until July 31, 2009. The extended line of credit carries
substantially the same terms and conditions as the existing line of credit.

85

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SUPPLEMENTARY FINANCIAL DATA (unaudited)

|                       |                   | Fiscal 2008 |        | Fiscal 2007
|---------------------- | ----------------- | ----------- | ------ | -----------
|
|
|Revenue                |                   | $           | 14,022 |            
|Gross profit           |                   | $           | 9,339  |            
|Net income (loss)      |                   | $           | (1,003 | )          
|Basic per share data   |                   |             |        |            
|                       | Net income (loss) |             | $      | (0.03      
|Diluted per share data |                   |             |        |            
|                       | Net income (loss) |             | $      | (0.03      

---

Schedule II  Valuation and Qualifying Accounts  (in thousands)

|                          |                                           | Balance at
Beginning of Year |   | Additions |  | Deductions |        | Balance at
End of Year
|------------------------- | ----------------------------------------- | ---------------------------- | - | --------- |  | ---------- | ------ | ----------------------
|Year ended April 30, 2006 |                                           |                              |   |           |  |            |        |                       
|                          | Allowance for doubtful accounts           |                              | $ | 344       |  | $          | 28     |                       
|Year ended April 30, 2007 |                                           |                              |   |           |  |            |        |                       
|                          | Allowance for doubtful accounts           |                              | $ | 306       |  | $          | 80     |                       
|Year ended April 30, 2008 |                                           |                              |   |           |  |            |        |                       
|                          | Allowance for doubtful accounts           |                              | $ | 373       |  | $          |       |                       
|                          | Deferred tax asset valuation allowance(1) |                              | $ |          |  | $          | 59,073 |                       

---

Item 9Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not Applicable.

Item 9AControls and Procedures

Limitations of Disclosure Controls and Procedures and Internal Control Over Financial Reporting

It should be noted that a control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of
the control system are met. For example,

86

---



controls
can be circumvented by a person's individual acts, by collusion of two or more people or by management override of the control. Because a cost-effective control system can only
provide reasonable assurance that the objectives of the control system are met, misstatements due to error or fraud may occur and not be detected.

Disclosure Controls and Procedures

Ditech Networks, Inc. maintains disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that are designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange
Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), as appropriate, to allow timely decisions regarding required financial disclosure. In
connection with the preparation of this Annual Report on Form 10-K, we carried out an evaluation under the supervision and with the participation of our management, including our
CEO and CFO, as of April 30, 2008 of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon this evaluation, our CEO and CFO concluded that as of
April 30, 2008, our disclosure controls and procedures were effective.

Management's Report on Internal Control over Financial Reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act
Rules 13a-15(f) and 15d-15(f), for Ditech. Under supervision and with the participation of our management, including Todd Simpson, our principal executive officer, and
William Tamblyn, our principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of April 30, 2008. In making this
assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal ControlIntegrated
Framework.Our management has concluded that, as of April 30, 2008, our internal control over financial reporting was effective based on these criteria.

The
effectiveness of our internal control over financial reporting as of April 30, 2008 has been audited by PricewaterhouseCoopers LLP, our independent registered public
accounting firm, as stated in their report, which is included at the beginning of Item 8 herein.

Change in Internal Control over Financial Reporting

There has been no change in internal control over financial reporting in the quarter ended April 30, 2008 that has materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.

Item 9A(T)Controls and Procedures

Not applicable.

Item 9BOther Information

None.

87

---



Part III

Item 10Directors, Executive Officers and Corporate Governance

Directors.Information concerning our Directors, including with respect to procedures by which security holders may recommend
nominees to our Board of Directors and with respect to the composition of our Audit Committee, is incorporated herein by reference to the section entitled "Proposal 1Election of
Directors" contained in our definitive Proxy Statement with respect to our Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission not later than August 28, 2008
in connection with the solicitation of proxies for the Company's 2008 Annual Meeting of Stockholders (the "Proxy Statement").

Executive Officers.Information concerning our Executive Officers is set forth under the section entitled "Executive Officers
of the Registrant" in Part I of this Annual Report on Form 10-K.

Section 16(a) Beneficial Ownership Reporting Compliance.Information concerning compliance with Section 16(a)
of the Securities Act of 1934 is set forth in the section entitled "Section 16(a) Beneficial Ownership Reporting Compliance" contained in our Proxy Statement and is incorporated herein by
reference.

Code of Business Conduct and Ethics.The information required by this Item with respect to our code of conduct and ethics is
incorporated herein by reference from the section captioned "Proposal 1Election of DirectorsCode of Business Conduct and Ethics" contained in the Proxy Statement.

Item 11Executive Compensation

The information required by this Item is set forth in the Proxy Statement under the captions "Executive Compensation and Related Information," including under
"Compensation Discussion and Analysis," "Compensation of Directors" and "Compensation of Executive Officers" and "Compensation Committee Interlocks and Insider Participation" and "Compensation
Committee Report." Such information is incorporated herein by reference.

Item 12Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this Item with respect to security ownership of beneficial owners and management is set forth in the Proxy Statement under the
caption, "Security Ownership of Certain Beneficial Owners and Management." Such information is incorporated herein by reference.

88

---



Equity Compensation Plan Information

The following table provides certain information with respect to all of our equity compensation plans and grants made outside of any plans in effect as of
April 30, 2008:

|Plan Category                                                 |  | Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights(a) |  | Weighted-average
Exercise Price of
Outstanding Options,
Warrants, and Rights(b) |      | Number of Securities
Remaining Available for
Future Issuance Under
Equity Compensation Plans
(excluding securities
reflected in column (a))(c)
|------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------- | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------
|Equity Compensation Plans Approved by Security Holders(1)     |  | 6,370,627                                                                                      |  | $                                                                               | 7.01 |                                                                                                                                               
|Equity Compensation Plans Not Approved by Security Holders(2) |  | 708,526                                                                                        |  | $                                                                               | 8.23 |                                                                                                                                               
|                                                              |  |                                                                                                |  |                                                                                 |      |                                                                                                                                               
|Total                                                         |  | 7,079,153                                                                                      |  | $                                                                               | 7.13 |                                                                                                                                               
|                                                              |  |                                                                                                |  |                                                                                 |      |                                                                                                                                               

---

Description of Equity Compensation Plans Adopted Without the Approval of Stockholders

The following equity compensation plans of Ditech were in effect as of April 30, 2008 and were adopted without the approval of our stockholders: the 1999
Non-Officer Equity Incentive Plan, the 2005 New Recruit Stock Plan, and the 2005 New Recruit Stock Option Plan.

1999 Non-officer Equity Incentive Plan

The material features of Ditech's 1999 Non-Officer Equity Incentive Plan (the "1999 Plan") are outlined below:

General

The 1999 Plan provides for the grant of nonstatutory stock options, stock bonuses and rights to purchase restricted stock (collectively "awards"). To date, we
have granted only stock options under the 1999 Plan. An aggregate of 1,000,000 shares of Common Stock is reserved for issuance under the 1999 Plan.

Eligibility

Employees and consultants of both Ditech and our affiliates who are not officers or directors of Ditech or any of our affiliates are eligible to receive all types
of awards under the 1999 Plan, except that officers who have not been previously employed by Ditech are eligible to receive awards if the

89

---



award
is granted as an inducement essential to such officers entering into an employment contract with Ditech.

Term of Awards

Exercise Price; Payment.The exercise price of nonstatutory options may not be less than 85% of the fair market value of the
stock on the date of grant. The purchase price of restricted stock purchase awards may not be less than 85% of the fair market value of the stock on the date of grant. Stock bonuses may be awarded in
consideration for past services actually rendered to Ditech or our affiliates.

The
exercise price of options and restricted stock purchase awards granted under the 1999 Plan must be paid either in cash at the time the option is exercised (or at the time the
restricted stock is purchased) or, at the discretion of the Board, (i) pursuant to a deferred payment arrangement or (ii) in any other form of legal consideration acceptable to the
Board. The exercise price of options may also be paid, at the discretion of the Board, by delivery of other shares of our Common Stock.

Award Vesting.Awards granted under the 1999 Plan may become exercisable (in the case of options) or released from a
repurchase option in favor of Ditech (in the case of stock bonuses and restricted stock purchase awards) in cumulative increments ("vest") as determined by the Board. The Board has the power to
accelerate the time during which an option or a restricted stock purchase award may vest or be exercised. In addition, options granted under the 1999 Plan may permit exercise prior to vesting, but in
such event the participant may be required to enter into an early exercise stock purchase agreement that allows Ditech to repurchase unvested shares, generally at their exercise price, should the
participant's service terminate before vesting.

Term.The maximum term of options granted under the 1999 Plan is 10 years. Options under the 1999 Plan generally
terminate three months after termination of the participant's service, subject to extension in certain circumstances. Ditech generally may repurchase shares that have been issued pursuant to
stock bonuses or restricted stock purchase awards granted under the 1999 Plan but have not yet vested as of the date the participant terminates his or her service with Ditech.

Effect of Certain Corporate Transactions.In the event of (i) a dissolution or liquidation of Ditech or
(ii) certain specified types of merger, consolidation or similar transactions (collectively, a "corporate transaction"), any surviving or acquiring corporation may assume options outstanding
under the Option Plan or may substitute similar options. If any surviving or acquiring corporation does not assume such options or substitute similar options, then with respect to options held by
optionholders whose service with Ditech or an affiliate has not terminated as of the effective date of the corporate transaction, the vesting of such options (and, if applicable, the time during which
such options may be exercised) will be accelerated in full and the options will terminate if not exercised at or prior to such effective date.

2005 New Recruit Stock Plan

In connection with our acquisition of Jasomi Networks on June 30, 2005, the Board of Directors adopted the 2005 New Recruit Stock Plan. The 2005 New
Recruit Stock Plan does not require approval by our stockholders due to its qualification under the "inducement grant exception" provided by Rule 4350(i)(1)(A)(iv) of the NASD Marketplace
Rules. The 2005 New Recruit Stock Plan provides for the grant of restricted stock awards and restricted stock unit awards to newly-hired employees as an inducement for those individuals to enter into
an employment relationship with Ditech or its affiliates. For purposes of the 2005 New Recruit Stock Option Plan, eligible employees includes only those individuals newly hired by Ditech or its
affiliates, so long as those persons either (i) were not previously employed or serving as a director of Ditech or its affiliates, or (ii) entered into an employment relationship with us
following abona fideperiod of non-employment. The aggregate number of shares of common stock that may be issued pursuant to restricted
stock awards and restricted stock unit awards under the 2005 New Recruit Stock Plan is 500,000 shares. Jasomi Networks employees hired by

90

---



Ditech
received grants of restricted stock or restricted stock units that vested with respect to 1/3 of the shares subject to their award on the first anniversary of the grant date, and with respect
to the balance of the shares in a series of eight (8) successive equal quarterly installments over the two year period measured from the first anniversary of the grant date. All grants under
the 2005 New Recruit Stock Plan to eligible employees must be approved either by a majority of "independent directors" within the meaning of Rule 4200 of the NASD Marketplace Rules, or by our
Compensation Committee.

2005 New Recruit Stock Option Plan

In November 2005, the Board adopted the 2005 New Recruit Stock Option Plan. The 2005 New Recruit Stock Option Plan does not require approval by our stockholders
due to its qualification under
the "inducement grant exception" provided by Rule 4350(i)(1)(A)(iv) of the NASD Marketplace Rules. The 2005 New Recruit Stock Option Plan provides for the grant of nonstatutory stock options to
newly-hired employees as an inducement for those individuals to enter into an employment relationship with Ditech or its affiliates. For purposes of the 2005 New Recruit Stock Option Plan, eligible
employees includes only those individuals newly hired by Ditech or its affiliates, so long as those persons either (i) were not previously employed or serving as a director of Ditech or its
affiliates, or (ii) entered into an employment relationship with us following abona fideperiod of non-employment. The aggregate
number of shares of common stock that may be issued pursuant to nonstatutory stock options under the 2005 New Recruit Stock Option Plan is 500,000 shares. Such number includes the 300,000 shares added
to the reserve in connection with the hiring of a new Vice President of Worldwide Sales in February 2006. All grants under the 2005 New Recruit Stock Plan to eligible employees must be approved either
by a majority of "independent directors" within the meaning of Rule 4200 of the NASD Marketplace Rules, or by our Compensation Committee.

Item 13Certain Relationships and Related Transactions, and Director Independence

The information required by this Item with respect to related party transactions is set forth in the Proxy Statement under the heading "Certain Relationships and
Related Party Transactions." Such information is incorporated herein by reference.

The
information required by this Item with respect to the independence of our Directors is set forth in the Proxy Statement in the section entitled
"Proposal 1Election of Directors." Such information is incorporated herein by reference.

Item 14Principal Accountant Fees and Services

The information required by this Item is set forth in the Proxy Statement under the Proposal entitled "Ratification of Selection of Independent Registered Public
Accounting Firm." Such information is incorporated herein by reference.

91

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Part IV

Item 15Exhibits and Financial Statement Schedules

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

(1)Financial Statements

Reference is made to the Index to Consolidated Financial Statements of Ditech Networks, Inc. under Item 8 in Part II of this
Form 10-K, which is incorporated by reference here.

(2)Financial Statement Schedule

Reference is made to the Index to Consolidated Financial Statements of Ditech Networks, Inc. under Item 8 in Part II of this
Form 10-K, which is incorporated by reference here.

(3)Exhibits

See the Exhibit Index which follows the signature page of this Annual Report on Form 10-K, which is incorporated herein by reference.

92

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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.

|              |  |     |  | DITECH NETWORKS, INC.                                                            
|------------- |  | --- |  | ---------------------------------------------------------------------------------
|July 10, 2008 |  | By: |  | /s/TODD G. SIMPSON, PHDTodd G. Simpson, PhD President and Chief Executive Officer

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.

|Signatures                                      |  | Title                                                                                             |  | Date         
|----------------------------------------------- |  | ------------------------------------------------------------------------------------------------- |  | -------------
|                                                |  |                                                                                                   |  |              
|/s/TODD G. SIMPSON, PHDTodd G. Simpson, PhD     |  | President, Chief Executive Officer, and Director
(principal executive officer)                    |  | July 10, 2008
|/s/WILLIAM J. TAMBLYNWilliam J. Tamblyn         |  | Executive Vice President and
Chief Financial Officer
(principal financial and accounting officer) |  | July 10, 2008
|/s/GREGORY M. AVISGregory M. Avis               |  | Director                                                                                          |  | July 10, 2008
|/s/FRANCIS A. DRAMIS, JRFrancis A. Dramis, Jr.  |  | Director                                                                                          |  | July 10, 2008
|/s/EDWIN L. HARPEREdwin L. Harper               |  | Chairman of the Board of Directors                                                                |  | July 10, 2008
|/s/WILLIAM A. HASLERWilliam A. Hasler           |  | Director                                                                                          |  | July 10, 2008
|/s/ANDREI M. MANOLIU, PHDAndrei M. Manoliu, PhD |  | Director                                                                                          |  | July 10, 2008
|/s/DAVID M. SUGISHITADavid M. Sugishita         |  | Director                                                                                          |  | July 10, 2008

93

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Exhibit Index

|Exhibit      |  | Description of document                                                                                                                                                                                    
|------------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1(1)       |  | Asset Purchase Agreement, dated as of April 16, 2002, by and between Ditech and Texas Instruments                                                                                                          
|2.2(2)       |  | Asset Purchase Agreement, dated as of July 16, 2003, by and between Ditech and JDSU.                                                                                                                       
|2.3(29)      |  | Agreement and Plan of Merger, dated as of June 6, 2005, among Ditech, Spitfire Acquisition Corp., Jasomi Networks, Inc., Jasomi Networks (Canada), Inc., Daniel Freedman, Cullen Jennings and Todd
Simpson.
|3.1(4)       |  | Restated Certificate of Incorporation of Ditech                                                                                                                                                            
|3.2(5)       |  | Bylaws of Ditech, as amended and restated on March 28, 2002                                                                                                                                                
|4.1          |  | Reference is made to Exhibits 3.1 and 3.2                                                                                                                                                                  
|4.2(7)       |  | Specimen Stock Certificate                                                                                                                                                                                 
|4.3(6)       |  | Rights Agreement, dated as of March 26, 2001 among Ditech Communications Corporation and Wells Fargo Bank Minnesota, N.A.                                                                                  
|4.4(6)       |  | Form of Rights Certificate                                                                                                                                                                                 
|10.1(7)      |  | Lease Agreement, dated August 18, 1998, between Ditech and Lincoln-Whitehall Pacific, LLC, as amended January 25, 1999                                                                                     
|10.2(7)(8)   |  | 1997 Stock Option Plan                                                                                                                                                                                     
|10.3(8)(18)  |  | 1998 Amended and Restated Stock Option Plan                                                                                                                                                                
|10.4(8)(15)  |  | 1999 Employee Stock Purchase Plan                                                                                                                                                                          
|10.5(8)(24)  |  | 1999 Non-Employee Directors' Stock Option Plan, as amended                                                                                                                                                 
|10.6(7)(8)   |  | Employment Agreement, dated October 3, 1997, as amended September 15, 1998, between Ditech and Timothy Montgomery                                                                                          
|10.7(8)(14)  |  | 1999 Non-Officer Equity Incentive Plan                                                                                                                                                                     
|10.8(8)(10)  |  | Employment Letter, dated as of September 24, 2007, between Ditech Networks, Inc. and Todd G. Simpson.                                                                                                      
|10.9(8)(11)  |  | Employment Letter, dated as of August 16, 2007, between Ditech Networks, Inc. and Edwin Harper.                                                                                                            
|10.11(8)(20) |  | Jasomi Networks, Inc. 2001 Stock Plan                                                                                                                                                                      
|10.13(8)     |  | Cash Compensation Arrangements with Executive Officers                                                                                                                                                     
|10.14(8)     |  | Cash Compensation Arrangements with Non-Employee Directors                                                                                                                                                 
|10.15(8)(27) |  | 2005 New Recruit Stock Plan                                                                                                                                                                                
|10.16(7)(8)  |  | Form of Indemnity Agreement to be entered between Ditech and each of its current executive officers and directors                                                                                          
|10.18(7)     |  | Stock Purchase Agreement, dated as of September 15, 1997 between Ditech and William Hasler                                                                                                                 
|10.19(7)(8)  |  | Form of option agreement under the 1997 Stock Option Plan                                                                                                                                                  
|10.20(7)(8)  |  | Form of option agreement under the 1998 Stock Option Plan                                                                                                                                                  
|10.22(8)(21) |  | 2005 New Recruit Stock Option Plan                                                                                                                                                                         
|10.23(8)(26) |  | Form of Stock Option Agreement under the 2005 New Recruit Stock Option Plan                                                                                                                                
|10.26(3)     |  | Second Lease Amendment, dated February 15, 2000, between Ditech and Middlefield-Bernardo Associates LLC                                                                                                    
|10.27(25)    |  | Fourth Amendment to Lease Agreement dated July 31, 2005, between Middlefield II LLC and Ditech                                                                                                             
|10.28(8)(12) |  | 2000 Non-Qualified Stock Option Plan                                                                                                                                                                       
|10.31(1)(9)  |  | Software License Agreement, dated as of April 16, 2002, by and between Ditech and Telogy                                                                                                                   
|10.32(9)(16) |  | Amendment No. 1 to Telogy Software License between Ditech Communications Corporation and Texas Instruments Incorporated, dated May 21, 2003                                                                
|10.34.(8)    |  | Severance Agreement, dated April 28, 2008, between Gary Testa and Ditech Networks, Inc.                                                                                                                    
|10.35(8)(19) |  | Form of option agreement under the 1999 Non-Employee Directors' Stock Option Plan                                                                                                                          

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|10.36(8)(21)  |  | Offer Letter, executed February 4, 2006, between Ditech and Gary Testa                                                           
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------
|10.37(28)(35) |  | Amendment No. 2 to TELOGY SOFTWARE LICENSE AGREEMENT between Ditech Communications Corporation and Texas Instruments Incorporated
|10.38(8)(30)  |  | 2006 Equity Incentive Plan                                                                                                       
|10.39(8)(10)  |  | Amended and Restated Change In Control Severance Benefit Plan                                                                    
|10.40(8)(32)  |  | Form of Stock Option Agreement to be Used for Grants of Stock Options Under the Ditech Networks, Inc. 2006 Equity Incentive Plan 
|10.41(8)(33)  |  | 2006 Equity Incentive Plan Restricted Stock Award Agreement                                                                      
|10.42(8)(33)  |  | 2006 Equity Incentive Plan Restricted Stock Unit Award Agreement                                                                 
|10.43(8)(34)  |  | Transition and Retirement Agreement, dated May 8, 2007, between Timothy K. Montgomery and Ditech Networks, Inc.                  
|10.44(8)(22)  |  | Amendment to Relocation Arrangement with Gary Testa, dated May 16, 2007                                                          
|10.45(8)(22)  |  | Relocation Arrangement with Todd Simpson, dated May 9, 2007                                                                      
|21.1          |  | Subsidiaries of Ditech Networks, Inc.                                                                                            
|23.1          |  | Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm                                             
|31.1          |  | Certification by Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                               
|31.2          |  | Certification by Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                               
|32.1          |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                          

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