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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(MARK ONE)

ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Fiscal Year Ended April 30, 2009ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Transition Period
From                                    To


COMMISSION FILE NUMBER: 000-26209

LOGO

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

DELAWARE(State or Other Jurisdiction of
Incorporation or Organization)

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


825 East Middlefield Road
Mountain View, CA 94043(Address, Including Zip Code, of Registrant's Principal Executive Offices)

(650) 623-1300(Registrant's 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


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

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to
be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files). Yes o    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 o

Non-accelerated filer o (Do not check if a smaller reporting company)

Smaller reporting company ý


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 $10,714,423 as of October 31, 2008 based
upon the closing price on the Nasdaq Global Market reported for such date. Excludes an aggregate of 13,146,954 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 June 30, 2009 was 26,307,406 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 2009 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



PAGEPART IItem 1Business


1Item 1ARisk Factors


16Item 1BUnresolved Staff Comments


27Item 2Properties


27Item 3Legal Proceedings


27Item 4Submission of Matters to a Vote of Security Holders


28PART IIItem 5Market for Registrant's Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity Securities


30Item 6Selected Financial Data


32Item 7Management's Discussion and Analysis of Financial Condition and
Results of Operations


32Item 7AQuantitative and Qualitative Disclosure About Market
Risk


49Item 8Financial Statements and Supplementary Data


52Item 9Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure


84Item 9AControls and Procedures


85Item 9A(T)Controls and Procedures


85Item 9BOther Information


85PART IIIItem 10Directors, Executive Officers and Corporate
Governance


86Item 11Executive Compensation


86Item 12Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters


86Item 13Certain Relationships and Related Transactions, and Director
Independence


89Item 14Principal Accountant Fees and Services


89PART IVItem 15Exhibits and Financial Statement Schedules


90SIGNATURES


91


Trademarks:

Ditech and the Fern logo are registered trademarks of Ditech Networks. VQA, PeerPoint, mStage and toktok 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 2009
means the 12 months ended April 30, 2009.

General

Ditech Networks, Inc. is a global telecommunications equipment supplier for voice networks. We develop, produce and sell voice
quality enhancement solutions as well as voice applications solutions to telecommunication service providers worldwide. Our voice quality enhancement solutions enable service providers to deliver
consistently clear, end-to-end communications to their subscribers. We believe our new voice application platform will revolutionize modern communications by enabling carriers
to benefit from voice-enabled Web 2.0 and unified communications services.

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 2009, we
have been developing an IP platform, the Packet Voice Processor (PVP), 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. As of the end of fiscal 2009, we
had incorporated some functionality from the Jasomi platform into the PVP and have now limited research and development and marketing efforts for the Jasomi product.

Our
voice application initiative could represent a significant growth opportunity for us. In February of 2009, we announced the mStage Media Processor platform, which we are designing to
enable carriers to cost-effectively offer access to telephony and web-based applications before, during, and

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after
a phone conversation. We believe the mStage Media Processor ("mStage") is a revolutionary, propriety network-based platform for carriers that is being designed to allow the web to become part of
a voice conversation, and it is based on COTS NEBS-III compliant hardware to efficiently support a wide range of media services and media mixing. This is intended to bring carriers into
the "open mobile application" market across all of their mobile telephone offerings by allowing developers to build voice-to-web and web-to-voice
applications on the carrier grade platform. In March of 2009, we announced toktok.toktokis being designed to be a new, compelling voice-enabled
service to connect people with popular web productivity tools through one word spoken during a phone call. toktok is being designed to easily integrate web applications, social networks, Google
calendar and Gmail contacts enabling people to schedule appointments, create new tasks, conference in others, and moreall mid-conversation. The service is being designed to
instantly activate when 'toktok' is said during a phone call, eliminating the hassle and worry of dropping a call while manually checking availability or fumbling through a contact list. We also
intend to enable carriers and third-party software developers to create an unlimited number of additional applications beyond what Ditech will provide via an open development program.

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.

Mobile Voice Quality Market



While we supply voice processing products to both wireless and wireline communications networks, 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, which
is putting increased emphasis on carrier demands for additional capacity while maintaining call quality. 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 of delivering excellent voice
quality can be a reduction in churn, which is the measure of subscribers who cancel their service and move to another carrier.

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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 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.

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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.

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

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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. Revenue generated by sales of our mobile voice quality products comprised 88%, 85% and more than 95% of total revenues in fiscal 2009, 2008 and 2007,
respectively.

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The
following table summarizes our current mobile voice quality products.

Product

Description

FunctionalityBroadband 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 configurationsQuad 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 rackQuad 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 rackQuad 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 rackQuad 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.

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.



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.

Our VoIP Solutions

We design, develop and market systems that ensure service providers can provide consistently clear, 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

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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.

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 was generated from our VoIP
products. In fiscal 2009 and 2008, approximately 12% and 15% of our revenue, respectively, was generated from our VoIP products, principally our PVP product.

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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

FunctionalityPeerPoint 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
  PeeringPacket 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


Voice Services Market



Mobile phone penetration in the United States has been estimated to have surpassed 85%, and it is predicted to reach 100% within five
years. Mobile phone penetration has already been estimated to have passed 100% in several countries, due to many customers having multiple lines of service and multiple mobile communications devices.
Thus, for mobile operators, a key path to revenue growth is to up-sell value added services as opposed to adding subscribers.

Studies
also suggest that mobile data services now contribute an additional 33% to carriers' average revenue per user, up significantly from a few years earlier. These studies estimate
that smartphones, which allow users to more easily connect to web-based services, will reach a penetration level of one in three within the next few years. These studies also show that at
the same time, carriers and mobile phone vendors are creating application stores, allowing users to purchase additional applications and services, with over one billion applications having been
downloaded from Apple's iPhone store alone.

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Based
upon these data points, we believe that our voice applications initiative is a significant market opportunity. Our goal is to enable the use of speech commands to request, consume,
and share web based services and content from the mobile phone.



In the first quarter of calendar 2009, we announced that we are in early stages of delivering a platform enabling
on-demand, voice-driven, "mid-call accessible" applications and services to be delivered to customers on wireless and wireline voice networks. Our first application, which was
also announced in the first calendar quarter of 2009, toktok, is being designed to enable mobile subscribers to "use their voice as well as their thumbs" to interact with web applications/services
like social networking and instant messaging ("IM") on demand, even "on-the fly" during a telephone call. These applications can also be designed to proactively reach out to the user as
events occur. Examples of these services include: voice control of typical phone functions (i.e. three-way calling), receiving notification of events while a user is on a phone call
(i.e. "you have an appointment in 15 minutes"), and the ability to interact with social networks (i.e. "your Facebook friend is 'poking' you"). We believe its unique combination of
capabilities has the potential to open a new market for applications enabling high-value for-fee services to consumers at low cost:



This
platform comprises both proprietary hardware and software:



We
believe that the mStage Media Processor ("mStage") is a revolutionary, propriety network-based platform for mobile carriers that can allow the web to become part of a
voice conversation. mStage is based on COTS NEBS-III compliant hardware that efficiently supports Ditech-provided media services (i.e. keyword spotting, VQA) and media mixing. In
addition, mStage includes proprietary management and operating layers which provide carrier-grade reliability and manageability.

mStage
enables a Ditech-proprietary open interface designed to enable carriers and third-party software developers to create an unlimited number of additional applications. This is
intended to bring carriers into the "open mobile application" market across all of their mobile telephone offerings by allowing developers to build voice-to-web and
web-to-voice applications on the carrier grade platform.

In
addition, we are also designing our first offering to include a series of Mobile 2.0 media applications, as follows:



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These
media applications are designed to run any carrier-grade Application Server (i.e. IBM's WebSphere, BEA's WebLogic, JBOSS, etc.). We do not intend to compete against the
application server vendors; our voice service products are designed to add value on top of those products. These media applications also require an Interactive Voice Response ("IVR") system, and our
offering is designed to use any of the commercially available IVR solutions (i.e. AT&T's Watson, IBM's WebSphere Voice Server, and Nuance's Recognizer) that carriers typically already have
licensed for other applications.

The
initial product release of toktok is currently in alpha test, with beta testing expected to be completed in the first half of fiscal 2010. We expect development of the first release
of mStage to also be completed by the middle to end of fiscal 2010. We expect to begin to recognize our first revenue
from the new voice products in the latter half of fiscal 2010. We are continuing to develop new applications utilizing voice to interface with historically key-board only applications.

Customers

While we added new customers in fiscal 2009 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 22% of our total worldwide revenue in fiscal 2009 compared to 35% in fiscal 2008. We also
had two other customers that each accounted for over 10% of our revenue in fiscal 2009. The first is PT Excelcom, a wireless carrier in Indonesia, which accounted for 12% of our fiscal 2009 revenue.
The second is Qtel, a wireless carrier in Qatar, which accounted for 11% of fiscal 2009 revenue. Our next two largest customers accounted collectively for 15% of our total company revenue in fiscal
2009. 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 10 of the Notes to our Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K and our measures of profit and loss are
included in our Consolidated Financial Statements and this information is incorporated by reference here. Historically, the majority of our sales have been to customers in the U.S. These customers
accounted for approximately 46%, 63%, and 71%, of our revenue in fiscal 2009, 2008, and 2007, 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 $1.5 million and $3.1 million as of the first business
day of June
2009 and 2008, 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 collectiblity or contractual terms
when installation is provided. Backlog at June 1, 2009 and 2008 excludes $1.5 million and $6.8 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

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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 2009, 2008 and 2007, were approximately $12.6 million, $17.9 million, and $20.8 million,
respectively. The decrease in spending in fiscal 2009 was largely due to a reduction in force that was undertaken early in the third quarter of fiscal 2009, 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, 2009, we had 33 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.

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

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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 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 years and to create demand for our products. However, due to the decline in sales in fiscal 2008 and again in
fiscal 2009, 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. We intend to 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:



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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.

Our
principal competitors for stand-alone echo and voice quality products in circuit-switched networks are Dialogic Communications (formerly 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.

Our
principal competitors in the Voice Services space are not yet clear. We believe that the Voice Services market is a nascent market, and as such, there do not appear to be any other
players that would have a large overlap with the products that we are developing. Independent software vendors such as Nuance Communications and Comverse Technology as well as other technology
startups could potentially develop overlapping applications in the future. It is also possible that communications equipment vendors such as Radisys Corporation and similar media server vendors could
develop products similar to our mStage and toktok offering. A subset of the services enabled by mStage has historically been successfully demonstrated and delivered, and received strong acclaim in the
market, but was hobbled by very high cost and highly limited by prior available technologies (e.g., the Wildfire system). We believe that our innovation is designed to permit the equivalent,
and more advanced, open functionality to be delivered to customers at a very low relative cost.

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, including but not limited to the pending patent applications related to our mStage/toktok
products. Nevertheless, these measures may not be adequate to safeguard the proprietary technology underlying our voice quality products.

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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 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 Alcatel-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.

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Employees

As of April 30, 2009, we had 105 employees, 19 of whom were primarily engaged in operations, 33 in research and development, 39
in sales, marketing and technical support and 14 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.

Item 1ARisk Factors

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 60% of our
revenue in fiscal 2009 and 68% and 88% of our revenue in fiscal 2008 and 2007, respectively. Our largest customer accounted for approximately 22% of our revenue in fiscal 2009 and 35% and 64% of our
revenue in fiscal 2008 and 2007, respectively. 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, 81% of our accounts receivable balance at April 30, 2009 was from five 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. More recently, we have also experienced changes in buying patterns due to carrier transitions from their legacy
TDM/networks to VoIP networks and the impact of the world-wide economic and credit crisis. These more recent factors have directly impacted the timing and magnitude of carrier's buying
patterns, as they are closely watching their capital spending and are looking to minimize their investment in their legacy network configurations but have been slow to deploy large scale VoIP
networks. Until carrier transition strategies from their legacy TDM/networks to VoIP networks get clarified and the economic and credit markets return to a more normal state, our revenue could be more
volatile due to timing issues around large customer purchases.

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RECENT WORLDWIDE MARKET TURMOIL MAY ADVERSELY AFFECT OUR CUSTOMERS WHICH DIRECTLY IMPACTS OUR BUSINESS AND RESULTS OF OPERATIONS.

Our operations and performance depend on our customers having adequate resources to purchase our products and services. The
unprecedented turmoil in the global markets and the global economic downturn generally continues to adversely impact our customers and potential customers. These market and economic conditions have
continued to deteriorate despite government intervention globally, and may remain volatile and uncertain for the foreseeable future. Customers have altered and may continue to alter their purchasing
and payment activities in response to deterioration in their businesses, lack of credit, economic uncertainty and concern about the stability of markets in general, and these customers may reduce,
delay or terminate purchases of, and payment for, our products and services. If we are unable to adequately respond to changes in demand resulting from deteriorating market and economic conditions,
our financial condition and operating results may be materially and adversely affected.

IN PERIODS OF WORSENING ECONOMIC CONDITIONS, OUR EXPOSURE TO CREDIT RISK AND PAYMENT DELINQUENCIES ON OUR ACCOUNTS RECEIVABLE SIGNIFICANTLY INCREASES.

A substantial majority of our outstanding accounts receivables are not secured and a growing percentage of our receivables are from
international customers. In addition, our standard terms and conditions permit payment within a specified number of days following the receipt of our product. While we have procedures to monitor and
limit exposure to credit risk on our receivables, there can be no assurance such procedures will effectively limit our credit risk and avoid
losses. As economic conditions deteriorate, certain of our customers have faced and may face liquidity concerns and have delayed and may delay or may be unable to satisfy their payment obligations,
which would have a material adverse effect on our financial condition and operating results.

OUR CASH AND CASH EQUIVALENTS AND OUR SHORT AND LONG-TERM INVESTMENTS COULD BE ADVERSELY AFFECTED IF THE FINANCIAL INSTITUTIONS IN WHICH WE HOLD THESE FUNDS
FAIL.

We maintain the cash and cash equivalents and our short and long-term investments with reputable major financial
institutions. Deposits with these banks exceed the Federal Deposit Insurance Corporation ("FDIC") insurance limits. While we monitor daily the cash balances in the operating accounts and adjust the
balances as appropriate, these balances could be impacted if one or more of the financial institutions with which we deposit fails or is subject to other adverse conditions in the financial or credit
markets. To date we have experienced no loss or lack of access to our invested cash or cash equivalents (other than our auction rate securities which are classified as long-term
investments); however, we can provide no assurance that access to our invested balances will not be impacted by adverse conditions in the financial and credit markets.

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 2010, 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 fiscal 2008 was the first year in which revenue from our Packet Voice Processor (PVP) targeted at the VoIP market was greater
than 10% of our total revenue, due to the slower than

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anticipated
market transition to VoIP networks and the protracted nature of customer evaluation of our VoIP platform, sales of our PVP product have been volatile from quarter to quarter. As such,
there is no guarantee that revenue from our PVP product in any given quarter will continue to exceed 10% of our total revenue or that we will continue to be successful in selling the PVP 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 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. For example, the growth of our company is substantially
dependent on the successful commercial launch of our mStage and toktok products, which have not yet been made commercially available. If these products do not receive substantial commercial
acceptance, the ability to grow our business will be adversely impacted. In addition, although we have experienced substantial revenue from our VQA products over the last few fiscal years, there is no
guarantee that our VQA products will continue to meet the expectations of new potential customers or that customers will continue to invest heavily in traditional TDM/wireline network infrastructure.
As such, the timing of our realization of any additional revenues from the VQA platforms could be delayed or not materialize at all.

The
PVP, 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 mStage and toktok products. 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.

AS WE MODIFY OUR CORE ALGORITHMS FOR USE IN OTHER ELEMENTS OF COMMUNICATIONS NETWORKS, THERE IS NO GUARANTEE THAT WE WILL BE SUCCESSFUL IN CAPTURING MARKET SHARE OR THAT IT
WILL NOT ADVERSELY IMPACT THE SALE OF OUR EXISTING PRODUCTS.

We have begun to work with equipment providers for other elements of communications networks, most notably Bluetooth headset providers,
to license our voice algorithms for use in their devices. Although we believe that porting our algorithms to these new devices will not be a material undertaking, there is no guarantee that we will be
successful in the porting efforts or that we will gain market acceptance. In addition, as the barriers to entry related to technology embedded in Bluetooth devices are low, there is no guarantee that
our competitors, who may have more resources and/or market presence, will not enhance their offerings to compete directly with our technology. Further, there is no guarantee that if and when our
algorithms become adopted in other portions of the communications network that they will not reduce the demand for our existing voice processing platforms, which could adversely impact our revenues
and increase the risk for excess or obsolete inventory in our existing platforms.

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THERE IS NO GUARANTEE THAT OUR DEVELOPMENT EFFORTS ON OUR NEW MSTAGE PRODUCT WILL BE COMPLETED IN THE DESIRED TIME FRAME OR THAT WE WILL EXPERIENCE THE DESIRED CUSTOMER
DEMAND AND DIVERSIFICATION.

Although we have received positive feed back from the market related to our recent product announcements related to our mStage product,
there is no guarantee that we will be successful in our development efforts or that they will be completed in a timely enough manner to generate meaningful levels of revenue and capture market share
before our competitors attempt to introduce competing technology. In addition, there is no guarantee that the market will embrace the use of a voice interface to interact with web applications like
social networking and IM on-demand, during a phone call, which also could lead to actual revenue from this new product not achieving our expectations. If we fail to generate meaningful
revenue from our new products in development, we may not be able to recoup our investment in these products and, further, our ability to become profitable may be adversely impacted.

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 fiscal 2008 and fiscal 2009, 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 revenue shortfalls from investor expectations during several quarters over the
last 24 months and ultimately resulted in us experiencing declines 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.

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 RAPID TECHNOLOGICAL CHANGES IN OUR INDUSTRY.    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

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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. Acquisitions or investments could result in a number of financial consequences,
including:



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

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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, recently the down turn in business, not only from Ditech but other customers, has required one of our contract
manufacturers to scale down production and consolidate some of its operations. As a result, production of our products will now be shifted to a new plant. This change in production location, combined
with the very limited production levels that Ditech is currently projecting for this contract manufacturer, could result in longer lead times for production runs, which could be detrimental to us if
we have unexpected spikes in demand which require quick production turn around times. Further, 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.

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.

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We
face competition from two direct manufacturers of stand-alone voice processing products, Tellabs and Dialogic Communications (formerly 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.

We
believe we will face competition for our Voice Applications initiative. Independent software vendors could develop competing applications. These independent software companies have
access to the necessary technology to develop competing applications. In addition, some of these independent software vendors have more experience with voice recognition technology.

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

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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

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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, similar to what happened
in 2005. Although we were successful in that litigation, 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.

OUR STOCK REPURCHASE 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.

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.

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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, 2009, we held one A3 rated auction rate security (A3 rated ARS) and one B3 rated auction rate security (B3 rated
ARS), totaling $13.7 million of par value, both of which failed to settle at auctions. The A3 rated ARS began to fail to auction in the fourth quarter of fiscal 2008, and the B3 rated ARS with
a par value of $10.0 million has failed to settle since the second quarter of fiscal 2008. Due to the prolonged nature of the decline in value of the B3 rated auction rate security that has
failed to settle since the second quarter of fiscal 2008, the severity of the decline and no clear indication of when it might settle, we determined that the unrealized loss was no longer temporary.
Therefore, we have recognized a total of $8.9 million of impairment charges in the consolidated statement of operations since the beginning of the fourth quarter of fiscal 2008
($4.7 million in fiscal 2009). We believe that the $0.3 million decline in value that we have experienced in the A3 rated ARS as of April 30, 2009 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 condensed consolidated balance sheets. It is possible that we will incur
further declines in value in these two securities during fiscal 2010 due to changing facts related to the underlying collateral, changes in the amount and timing of cash flow streams being generated
by the securities, which play a key role in the overall valuation model, as well as changes in the overall market. In addition, in the future should we determine that these declines in value are other
than temporary, we would recognize a further impairment charge on our condensed consolidated statement of operations, which could be material. As of June 30, 2009, we continued to hold auction
rate securities with a par value of $13.7 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. In fiscal 2009, we engaged a leasing company to sublease approximately 11,200 square feet of our Mountain View headquarters which we have vacated due to reduced space needs
as a result of the cumulative affect of the reductions in force that we have completed since the second quarter of fiscal 2008. Of the remaining space occupied, approximately 61% 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 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

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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. On April 1, 2009, the parties filed a stipulated motion for dismissal of the appeal.
On April 14, 2009, the Ninth Circuit dismissed the appeal. With the dismissal of the appeal, the district court's order dismissing the third amended complaint with prejudice stands and is the
final judgment in this action.

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 was taken off calendar to allow the parties to participate in
settlement discussions. Since that time, settlement discussions have been ongoing.

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

Not Applicable.

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Executive Officers of the Registrant

The following are our executive officers, together with their ages and biographical information, as of June 30, 2009:

Name

Age

PositionTodd G. Simpson


43

Chief Executive Officer and DirectorWilliam J. Tamblyn


50

Executive Vice President and Chief Financial OfficerLowell B. Trangsrud


57

Executive Vice President and Chief Operating OfficerKarl E. Brown


39

Vice President of Marketing


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 of Jasomi Networks 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 BS.
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.

Karl Brownjoined the marketing team at Ditech Networks in 2004, and became the Vice President of Marketing in February 2008. Before
joining Ditech Networks, Mr. Brown was Senior Director of Marketing at ANDA Networks, a provider of Metro Ethernet equipment, from June 2002 to December 2005. Prior to ANDA Networks,
Mr. Brown was the Director of Product Management for Jetstream Communications, a provider of media and signaling gateways, from July 2001 to April 2002. From July
1998 to July 2001, Mr. Brown held various management roles at Nortel Networks. Prior to this, Mr. Brown held a series of positions at GTE/Verizon Wireless. Mr. Brown has a M.S.
and a B.S. in Engineering from Georgia Tech and a M.B.A. from Indiana University.

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

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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 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 2009

Fiscal 2008High

Low

High

LowFirst Quarter

$
2.90

$
1.95

$
8.99

$
7.35Second Quarter

$
1.99

$
0.72

$
7.53

$
4.40Third Quarter

$
1.30

$
0.60

$
4.98

$
2.96Fourth Quarter

$
1.17

$
0.85

$
3.36

$
2.46


Holders

According to the records of our transfer agent, there were 105 stockholders of record of Ditech's common stock at June 30, 2009.
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.

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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, 2004 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

GRAPH

4/04

4/05

4/06

4/07

4/08

4/09Ditech Networks, Inc.

$
100.00

$
78.65

$
65.51

$
60.50

$
19.82

$
6.82NASDAQ Composite

$
100.00

$
100.90

$
124.20

$
136.38

$
130.63

$
91.41NASDAQ Telecommunications

$
100.00

$
95.18

$
125.99

$
141.03

$
136.59

$
100.34


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Item 6Selected Financial Data

Not required.

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 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 transcoding 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 TDM-based 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. We have also introduced products to support carriers that are deploying voice
over internet protocol, or "VoIP," technologies which offer all the voice capabilities of our TDM-based products along with codec transcoding to meet the new challenges faced by carriers
deploying VoIP technologies. Most recently we announced our development efforts on our new toktok and mStage products, which further leverage off our expertise in voice technology enabling
on-demand, voice-driven, "mid-call accessible" applications and services to be delivered to customers on wireless and wireline voice networks. This offering is being designed
to enable phone subscribers to "use their voice as well as their thumbs" to interact with web applications/services like social networking and instant messaging ("IM") on demand, even
"on-the fly" during a telephone call.

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. Over the years since becoming public, we have experienced ebbs and flows in the level of demand from these carriers due to their level of
network expansion, adoption of new technologies in their networks and the impacts of merger and other consolidation in the industry. Of late, the downturn in business volume we have experienced seems
to have been driven by three main factors: technology transitions; budgetary constraints; and the global economic crisis.

The
technology transition has impacted us on two fronts. First and foremost, carriers have been extremely cautious to invest in legacy second generation ("2G") technology, historically
our primary source of revenue, for fear of stranding some or all of their investments by moving to the newer VoIP-based third generation technology ("3G"). The hesitancy to invest in 2G
equipment has resulted in protracted purchase cycles and smaller deployments to mitigate their perceived risks, while still addressing needed improvements in voice quality in their 2G networks. The
second impact has been felt on the 3G investment, which has been far slower to develop than was first predicted by industry experts. Instead of wholesale deployment of VoIP technologies we have
experienced a much more cautious entrance into this technology by many of the carriers with which we have historically done business, with the key by-product being that they are buying
much smaller systems than would have been expected from their historical buying pattern and in some cases even deciding to limit their

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investment
in 3G technology in lieu of even newer fourth generation technologies that are currently in development.

On
the budgetary side, even before the world-wide financial crisis became clear, we began to see tighter budgetary spending on capital equipment in many regions of the world,
but most importantly with our large domestic customers. As such, spending on capital equipment appears to have been primarily targeted at equipment that could show a direct correlation with revenue
generation as opposed to our historical product offerings, which although not a direct source of revenue for carriers is critical to the overall call experience and therefore to customer satisfaction,
which in our opinion ultimately translates into call revenue. It is with this capital spending model in mind that we undertook development of our toktok and mStage products which, although leveraging
off of our core knowledge of voice technology, we believe will be our first product offering to truly be tied to an identifiable revenue stream for our carriers.

Last,
we believe that the current market conditions around the world have and could continue to create further delays in purchasing decisions both as carriers tighten their capital
investment activity due to internal budget constraints and as tighter credit hampers their ability to borrow to facilitate network expansion and/or upgrades.

Despite
the previously mentioned delays due to budget and uncertainty around network architecture, we continue to believe that in the United States our continued focus on voice quality
in the competitive wireless services landscape and the continued expansion of wireless networks, using either 2G or 3G technologies, will be key factors in adding new customers and driving
opportunities for revenue growth. The development of our VQA feature set, which was originally targeted at the international Global System for Mobile Communications ("GSM") market, 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 continued to
invest 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 carriers.

We
expect long-term opportunities for growth will occur in VoIP based network deployments as there appears to be a growing, albeit slow, trend of service providers
transitioning from traditional circuit-switched network infrastructure to VoIP. As such, between fiscal 2005 and early fiscal 2009 we have directed the majority of our research and development
spending towards the development of our Packet Voice Processor (PVP), 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. 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 from this product.

Beginning
in fiscal 2009, we began shifting our development efforts to other product offerings that leverage our expertise in voice technology. The first effort was tied to the creation
of licensed versions of our core technology for use in other elements within communications networks, such as Bluetooth headsets. More recently we have shifted the majority of our development efforts
to our recently announced mStage and toktok products, which are currently in development. While the Bluetooth opportunities are focused on moving our expertise in voice quality to the communication
interface devices at the fringe of the voice networks, mStage and toktok will enable mobile subscribers to use their voice as well as their thumbs to interact with web applications like social
networking and IM on-demand, even during a phone call. We are undertaking these new opportunities in an effort to not only diversify our product offerings but also our customer base. We
believe that these products could help generate a more predictable revenue base, which we believe is less susceptible to our customer's

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decisions
on the timing and nature of the network expansions than our legacy product offerings have experienced on a stand alone basis.

Acquisition History.Although we regularly evaluate whether there are acquisition candidates that have technologies that would
compliment our
products and core strengths, in the last five fiscal years, we have completed only one acquisition. In June 2005, we acquired Jasomi, which developed and sold session border controllers that enable
VoIP calls to traverse the network address translation, or "NAT," and protect networks from external attacks by admitting only authorized sessions, ensuring that reliable VoIP service can be provided
to them. Consideration for the acquisition totaled approximately $21.8 million. We additionally issued shares of Ditech restricted stock to new employees hired as part of the acquisition.

Our Customer Base.Historically, the majority of our sales have been to customers in the United States.
Although these customers have traditionally accounted for well over 50% of our revenue in a given period, they are becoming a smaller percentage due to the growing interest in our VQA technology in
several key international markets. Domestic customers accounted for approximately 46% of our revenue in fiscal 2009 and 63% and 71% of our revenue in fiscal 2008 and 2007, 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. Growth in international revenue, as a percentage of total review,
has been largely driven by demand from customers in South East Asia, the Middle East and Latin America. We expect our international demand to continue to be heavily influenced these markets as they
are experiencing the highest level of growth and commonly have the most need for cost effective solutions to address voice quality in their growing networks.

Our
revenue historically has come from a small number of customers. Our largest customer accounted for approximately 22% of our revenue in fiscal 2009 and 35% and 64% of our total
revenue in fiscal 2008 and 2007, respectively. Our five largest customers accounted for approximately 60% of our revenue in fiscal 2009 and 68% and 88% of our revenue in fiscal 2008 and 2007,
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 and again over the last two fiscal years as sudden delays and/or declines in purchases by our large customers resulted in
significant declines in our overall revenues and ultimately resulted in net losses for those periods.

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 revenues, allowance
for bad debts, provisions for inventories, warranties and recovery of deferred income taxes receivable. 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. If and when adjustments are required to reflect material differences arising
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 relatively long-standing customer relationships. These customers are some of the largest wire-line and wireless
carriers in the world and our relationships with them are

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documented
in contracts, which clearly highlight potential revenue recognition issues, such as passage of title and risk of loss. As of April 30, 2009, we had deferred $4.0 million of
revenue. However, only to the extent that we have received cash for a given deferred revenue transaction is the deferred revenue recorded on the Consolidated Balance Sheet. Of the $4.0 million
of total deferred revenue transactions at April 30, 2009, only $0.7 million had been collected from customers and therefore reported as deferred revenue on the Consolidated Balance
Sheet. The balance of $3.3 million related to uncollected deferred revenue transactions was reported net against the related accounts receivable balance.

Of
the $4.0 million of revenue deferred as of April 30, 2009, approximately $2.9 million was associated with installations and other product related deferrals and
$1.1 million was associated with maintenance contracts. In dealing with the remaining 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 2009, 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 Allowances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
inventory write-downs for excess levels of inventory of $2.4 million and $5.1 million in fiscal 2009 and 2008, respectively. There were no sales of previously written-down
inventory during fiscal 2009 or 2008. We did sell $0.3 million of previously written-down inventory in fiscal 2007, which had a negligible impact on gross margin, as it was sold for
approximately its net carrying 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

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claims,
we may revise our estimated warranty accrual to reflect these additional exposures. This would result in a decrease in gross profits. As of April 30, 2009, we had $0.4 million
accrued related to estimated future warranty costs. See Note 3 of the Notes to the Condensed Consolidated Financial Statements.

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. 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.
During fiscal 2009, we did record an impairment charge of approximately $0.3 million associated with certain identifiable assets that were abandoned as a result of the cumulative affects of the
reductions in force that had been implemented over the last two fiscal years.

Accounting
for Stock-based Compensation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 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. 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 and
research credit carry forwards. 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 carry forwards. We determined that a full valuation allowance against all of our deferred tax assets beginning as of 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

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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 for uncertain tax positions over the next 12 months.

We
have begun an audit by one of the state jurisdictions in which we do business for our fiscal 2005 filing. Other than this one state, 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.

Recent Accounting PronouncementsIn April 2008, the Financial Accounting Standards Board released a FASB Staff Position (FSP No.
FAS 142-3,Determination of the Useful Life of Intangible Assets). This FSP amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). The
objective of this FSP is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value
of the asset under SFAS 141(R), and other principles of GAAP. This FSP applies to all intangible assets, whether acquired in a business combination or otherwise, and shall be effective for
financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years and applied prospectively to intangible assets acquired after the
effective date. Early adoption is prohibited. Since this guidance will be applied prospectively, on adoption, there will be no impact on our current consolidated financial statements.

In
March 2008, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 161 ("SFAS 161"), "Disclosures about Derivative Instruments
and Hedging Activities." SFAS 161 requires companies with derivative instruments to disclose information that should enable financial-statement users to understand how and why a company uses
derivative instruments, how derivative instruments and related hedged items affect a company's financial position, financial performance and cash flows. SFAS 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November 15, 2008. Because SFAS 161 only requires additional disclosure and we currently do not use derivative
instrument, the adoption will not impact our consolidated financial position, results of operations or cash flows.

In
December 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141 (revised 2007) ("SFAS 141R"), "Business Combinations."
SFAS 141R will change how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. The provisions of SFAS 141R
are effective as of the beginning of 2010, with the exception of adjustments made to acquired tax contingencies. Future adjustments made to acquired tax contingencies associated with acquisitions that
closed prior to the beginning of 2010 would apply the provisions of SFAS 141R and will be evaluated based on the outcome of these matters. We do not expect the adoption of SFAS 141R to
have a material impact on our consolidated financial statements.

In
December 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 160 ("SFAS 160"), "Noncontrolling Interests in
Consolidated Financial Statements", an amendment of Accounting Research Bulletin No. 51." SFAS 160 will change the accounting and reporting for minority interests, which will be
recharacterized as noncontrolling interests and classified as a component of equity. SFAS 160 is effective for financial statements issued for fiscal years beginning after December 15,
2008. Early adoption is not permitted. Since this guidance will be

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applied
prospectively and we currently do not have any non-controlling interests, on adoption, there will be no impact our current consolidated financial statements.

In
September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 157 ("SFAS 157"), "Fair Value Measurements."
SFAS 157 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. SFAS
No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods of those fiscal years. In February 2008, the FASB released a
FASB Staff Position (FSP FAS 157-2Effective Date of FASB Statement No. 157)which delays the effective date of
SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least
annually) to fiscal years beginning after November 15, 2008. These non-financial items include assets and liabilities such as reporting units measured at fair value in a goodwill
impairment test and non-financial assets acquired and liabilities assumed in a business combination. The adoption of SFAS No. 157 as of May 1, 2008 for financial assets and
liabilities did not have a material impact on our consolidated financial position, results of operations or cash flows. See Note 3 to the Notes to Consolidated Financial Statements.

In
April 2009, the Financial Accounting Standards Board issued three related Staff Positions: (i) FSP 157-4,Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability have Significantly Decreased and Identifying Transactions That Are Not Orderly("FSP 157-4"),
(ii) SFAS 115-2 and SFAS 124-2,Recognition and Presentation of Other-Than-Temporary
Impairments("FSP 115-2 and FSP 124-2") , and (iii) SFAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, ("FSP 107 and
APB 28-1"), which will be effective for interim and
annual periods ending after June 15, 2009. FSP 157-4 provides guidance on how to determine the fair value of assets and liabilities under SFAS 157 in the current economic
environment and reemphasizes that the objective of a fair value measurement remains an exit price. If we were to conclude that there has been a significant decrease in the volume and level of activity
of the asset or liability in relation to normal market activities, quoted market values may not be representative of fair value and we may conclude that a change in valuation technique or the use of
multiple valuation techniques may be appropriate. FSP 115-2 and FSP 124-2 modify the requirements for recognizing other-than-temporarily impaired debt
securities and revise the existing impairment model for such securities, by modifying the current intent and ability indicator in determining whether a debt security is
other-than-temporarily impaired. FSP 107 and APB 28-1 enhance the disclosure of instruments under the scope of SFAS 157 for both interim and annual
periods. We are currently evaluating these Staff Positions.

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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 30,2009

2008

2007Revenue


100.0
%

100.0
%

100.0
%Cost of goods sold


60.4


55.8


32.3Gross profit


39.6


44.2


67.7Operating expenses:Sales and marketing


61.7


54.4


29.2Research and development


67.7


51.0


24.8General and administrative


36.5


26.5


10.2Amortization of purchased intangible assets


0.5


2.8


1.2Impairment of goodwill and other purchased intangibles





50.4


Total operating expenses


166.4


185.1


65.4Income (loss) from continuing operations


(126.8
)

(140.9
)

2.3Total other income (expense), net


(17.1
)

1.9


8.0Income (loss) from continuing operations before provision for income taxes


(143.9
)

(139.0
)

10.3Provision for income taxes


(0.3
)

130.8


4.0Net income (loss)


(143.6
)%

(269.8
)%

6.3
%




Years ended April 30,

Increase/(Decrease)
from Prior Year2009

2008

2007

2009

2008$s in thousandsRevenue

$
18,648

$
35,089

$
84,004

$
(16,441
)
$
(48,915
)% Change











(46.9
)%

(58.2
)%


The
decrease in revenue during fiscal 2009 compared to fiscal 2008, as well as fiscal 2008 compared to fiscal 2007, was largely due to a decrease in revenue from our largest domestic
customer, Verizon, as well as declines in the overall purchases from the next four largest customers in fiscal 2008 and 2007, without an increase in other domestic and international business to offset
these declines. In the aggregate, our top five customers in fiscal 2009 accounted for $11.1 million of revenue in fiscal 2009 as opposed to the top five customers in fiscal 2008 and 2007, which
accounted for $23.9 million and $73.5 million, respectively.

Our
largest customer in fiscal 2009, 2008 and 2007, Verizon accounted for approximately $4.1 million, $12.3 million and $53.9 million of revenues, respectively. This
decline in revenue, both in real terms and as a percentage of revenue, appears to be largely due to Verizon shifting focus away from their traditional wireless network deployments over the past 12 to
18 months, where our product has historically been installed, to newer 3G networks. The mix of customers that represent our next four largest customers has changed year over year but is
reflective of a growing trend of our international business becoming a larger percentage of our revenue base. Two customers, other than

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Verizon,
accounted for over 10% of our revenue in fiscal 2009 and 2008 and only one customer, other than Verizon, accounted for more than 10% of revenue in fiscal 2007.

Although
we have experienced a consistent number of customers representing greater than 10% of our revenues during fiscal 2009 and 2008, the overall dollar magnitude of the revenue from
these customers continues to trend down as buying decisions continue to be slow to materialize and are generally for more conservative amounts than buying patterns experienced in fiscal 2006 and 2007.
We believe that this protracted buying process and the smaller ordering levels are a function of tighter capital spending budgets and tighter credit markets, as well as uncertainty in the technical
direction that companies are
looking to take. This indecision around future network design appears to have made carriers leery to invest heavily in legacy circuit switched technology due to the risk of stranding investments upon
conversion to newer network technologies such as VoIP. However, on the VoIP side we are experiencing carriers moving into the VoIP space in a more conservative manner than was expected by industry
analysts, resulting in deployments at a fraction of the size that we are accustomed to seeing for circuit switched network deployments. Although our initial VoIP product was designed for large scale
deployments and therefore was not easily adaptable to meet the smaller scale deployments that most carriers wanted to undertake, we have recently completed development of a smaller scale version of
PVP product, which we began to ship in the fourth quarter of fiscal 2009 and we hope will more closely meet current market demands.

Geographically,
our domestic revenue for fiscal 2009 totaled 46% of total worldwide revenue as compared to 63% and 71% realized in fiscal 2008 and 2007, respectively. The decrease in the
domestic portion of our revenue both in real terms and as a percentage of total revenue was primarily driven by the decline in Verizon purchasing activity. Our international revenue has primarily been
dependent on our success in selling VQA. Although we continue to believe that there are meaningful domestic and international revenue opportunities, we continue to experience slower than anticipated
purchasing cycles from our existing and prospective customers, which has resulted in volatility in the level of revenue from quarter to quarter. We plan to continue to invest in customer trials to
attempt to capture the world-wide revenue opportunities that exist for us.

We
expect that sales of our TDM-based BVP-Flex and QVP products will continue to represent the majority of our revenue in the foreseeable future, as carriers
continue to be cautious in their deployment strategies of VoIP based communications networks. Revenue levels for fiscal 2010 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, the market acceptance of our Packet Voice Processor, and the timing and market
acceptance of our toktok/mStage products. 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.



Years ended April 30,

Increase/(Decrease)
from Prior Year2009

2008

2007

2009

2008$s in thousandsCost of goods sold

$
11,272

$
19,595

$
27,140

$
(8,323
)
$
(7,545
)% Change











(42.5
)%

(27.8
)%Gross Profit

$
7,376

$
15,494

$
56,864

$
(8,118
)
$
(41,370
)Gross Margin %


39.6
%

44.2
%

67.7
%

(4.6) pts


(23.5) pts


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Cost
of goods sold consists of direct material costs, personnel costs for test, configuration 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 2009 as compared to fiscal 2008, well
as fiscal 2008 as compared to fiscal
2007 was primarily driven by the decrease in business volume. Our analysis of gross margin below discusses the other factors driving changes in cost of goods sold.

Our
gross margin percentage decreased during fiscal 2009, as compared to fiscal 2008, largely due to the non-product costs included in cost of goods sold, such as
manufacturing and post sales installation costs, representing a larger percentage of our revenue. Certain of these costs are relatively fixed in nature and although we did experience a decline in
these costs in real terms due to tighter cost control and the reductions in force over the last two years, as revenue levels declined in fiscal 2009 these costs become a larger percentage of revenue
and therefore adversely impacted our gross margin by approximately eight percentage points. Partially offsetting the adverse movement in margin in fiscal 2009 was a decline in the provision of excess
inventory, in both real terms and as a percentage of revenue, from $5.1 million in fiscal 2008 to $2.4 million in fiscal 2009, or a two percentage point improvement in gross margin. In
addition, the product and customer mix in fiscal 2009 improved slightly from that experienced in fiscal 2008, which further offset the impacts of the non-product costs.

Gross
margins in fiscal 2008 as compared to fiscal 2007 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 of product shipments in fiscal 2008.

All
other things being equal, we expect that if our revenue levels increase, gross margin percentages should improve from the current levels as the continued under absorption of
manufacturing overheads will become a smaller percentage of a larger revenue base, resulting in improved margins. However, we could experience further pricing pressures as we expand the distribution
of our products internationally through value-added resellers and distributors, which could cause our gross margins to decrease.



Years ended April 30,

Increase/(Decrease)
from Prior Year2009

2008

2007

2009

2008$s in thousandsSales and Marketing Expense

$
11,511

$
19,103

$
24,496

$
(7,592
)
$
(5,393
)% of Revenue


61.7
%

54.4
%

29.2
%

7.3 pts


25.2 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.
The decline in sales and marketing spending in fiscal 2009, as compare to fiscal 2008, was largely due to reductions in salaries and related expenses associated with the reductions in force that were
affected in the latter half of fiscal 2008 and again in fiscal 2009, which resulted in approximately $3.6 million in reduced spending in fiscal 2009. In conjunction with the reduced headcount
and tighter overall cost control over variable spending we experienced $2.1 million in reduced spending for travel and related costs and costs associated with marketing programs and trade
shows. We also experienced a decline in sales and marketing variable compensation due to the reduction in sales levels in fiscal 2009. Lastly, we

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experienced
a decline in stock-based compensation of $1.2 million. See the discussion regarding the changes in stock-based compensation, below.

The
decline in sales and marketing in fiscal 2008 as compared to fiscal 2007 was due in part to declines in salaries and related expense which decreased $2.9 million. 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.

We
expect that our sales and marketing expenses in fiscal 2010 will continue to decline from fiscal 2009 levels due to realizing a full year's worth of cost reductions from the reduction
in force in
mid-fiscal 2009 and from continued cost controls. These savings will likely be partially offset by increased variable compensation based on new sales targets for fiscal 2010.



Years ended April 30,

Increase/(Decrease)
from Prior Year2009

2008

2007

2009

2008$s in thousandsResearch and Development Expense

$
12,633

$
17,881

$
20,835

$
(5,248
)
$
(2,954
)% of Revenue


67.7
%

51.0
%

24.8
%

16.7 pts


26.2 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
fiscal 2009 research and development spending was largely due to a $3.5 million savings in payroll and related spending due to the reductions in force that have been implemented since the
middle of fiscal 2008. As a result of the reduction in headcount over the last two fiscal years, we have also experienced a decline in allocated common costs due to lower space consumption and use of
other support services of $0.7 million and reduced travel and related costs of $0.2 million. Lastly, we experienced a decline in stock compensation of $0.8 million. See the
discussion regarding the changes in stock compensation, below.

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

We
expect to see a further decline in our research and development spending in fiscal 2010 as we realize a full year's cost savings from the 2009 reduction in force.

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Years ended April 30,

Increase/(Decrease)
from Prior Year2009

2008

2007

2009

2008$s in thousandsGeneral and Administrative Expense

$
6,807

$
9,285

$
8,534

$
(2,478
)
$
751% of Revenue


36.5
%

26.5
%

10.2
%

10.0 pts


16.3 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 decline in spending in fiscal 2009 is largely due to $0.9 million of reduced costs associated with the change in CEO that occurred in fiscal 2008. We also experienced a
reduction of $0.4 million associated with payroll savings due to the reductions in force that were implemented over the last two fiscal years and a $0.6 million reduction in professional
services due to favorable developments in our outstanding legal matters and reduced accounting fees related to our 2008 adoption of FIN 48. Lastly, we experienced a decline in stock-based
compensation of $0.5 million. See the discussion regarding the changes in stock-based compensation, below.

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.

We
expect general and administrative expenses in fiscal 2010 to be flat to modestly down due to realizing a full year's savings from the reduction in force completed in
mid-fiscal 2009 as well as other cost saving measures we expect to put in place in fiscal 2010. However, one of our
stockholders has recently announced his intention to conduct a proxy solicitation to elect himself and one other person proposed by him as directors of Ditech Networks, which could result in a hostile
proxy contest that would result in additional general and administrative expenses.



In fiscal 2008 and 2007, 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, as such there was no compensation expense associated with the convertible debentures subsequent to
fiscal 2008. See Note 4 of Notes to the Consolidated Financial Statements.

Convertible
debenture amortization included in operating expenses was as follows:

Years ended April 30,2008

2007$s in thousandsSales and marketing

$
46

$
339Research and development


4


25Total

$
50

$
364




For the years ended April 30, 2009, 2008 and 2007, 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. The reduction

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in
amortization of purchased intangible assets was due to the impairment of these assets at the end of fiscal 2008. See Note 5 of Notes to the Consolidated Financial Statements.

Years ended April 30,2009

2008

2007$s in thousandsAmortization of purchased intangible assets

$
97

$
985

$
985% of revenue


0.5
%

2.8
%

1.2
%




Beginning in the first quarter of fiscal 2008, we experienced a decline in our stock price and therefore our market capitalization, due
in large part to the 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. There were no further impairment charges in fiscal 2009.

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



Stock-based compensation expense recognized under SFAS 123R in fiscal 2009, 2008 and 2007 was as follows:

Years ended April 30,2009

2008

2007Ss in thousandsCost of goods sold

$
258

$
380

$
370Sales and marketing


439


1,618


2,714Research and development


339


1,127


1,951General and administrative


731


1,274


1,124Total

$
1,767

$
4,399

$
6,159


The
decline in stock based compensation over the last two fiscal years is due to two key factors. First and foremost is the reduction in options outstanding and therefore stock
compensation linked to the reductions in force that occurred since the end of the second quarter of fiscal 2008. The second key element of the decline is linked to the timing of option grants that are
subject to accounting under SFAS 123R. As compensation related to older options, which were granted at higher fair values per share due to the stock price at the time of grant, become fully
amortized, they are being replaced by newer option grants which are being issued at lower fair values due to the decline in our stock price. We expect to continue to experience a declining level of
expense related to stock compensation.

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Year ended April 302009

2008$s in thousandsCost of goods sold

$
31

$
72Sales and marketing


324


309Research and development


614


892General and administrative


602


504Total

$
1,571

$
1,777


In
fiscal 2009, we incurred a charge of $1.6 million related to the reductions in force and related charges, undertaken in the second and third quarters of fiscal 2009, in an
effort to reduce spending levels to coincide with the more recent declines we had experienced in our revenue. These reductions in force resulted in a 21% reduction in headcount during fiscal 2009. As
a result of the cumulative reductions in force since the second quarter of fiscal 2008, the charges for fiscal 2009 included the estimated costs to vacate approximately 20% of the space in our
Mountain View headquarters and the cost associated with abandoning certain idled fixed assets, resulting in charges of $0.5 million and $0.3 million, respectively. The space vacated is
currently being marketed for sublease. All severance payments associated with the fiscal 2009 reductions in force have been paid. The only costs remaining to be paid as of April 30, 2009 are
estimated outplacement costs for the reductions in force totaling less than $0.1 million and the balance of the loss on sublease of the vacated space in the Mountain View headquarters of
$0.4 million.

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 declines we
had 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. During
fiscal 2009, approximately $64,000 related to accrued outplacement services associated with the fiscal 2008 reductions in force lapsed without being used and was therefore reversed to the same
financial lines to which it was originally recorded in fiscal 2008. All other costs associated with the fiscal 2008 reduction in force have been incurred.

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.



Years ended April 30,

Increase/(Decrease)
from Prior Year2009

2008

2007

2009

2008$s in thousandsTotal Other Income (Expense), Net

$
(3,186
)
$
676

$
6,689

$
(3,862
)
$
(6,013
)% of Revenue


(17.1
)%

1.9
%

8.0
%

(19.0) pts


(6.1) pts


Total
other income (expense), net 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 (expense), net in fiscal 2009 was largely due to a decline in our
invested cash balances and declining average interest rates during fiscal 2009, as well as the further impairment loss on one of our investment securities recognized in fiscal 2009 of
$4.7 million. The decrease in total other income in

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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.

Our
fiscal 2010 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 Year2009

2008

2007

2009

2008$s in thousandsIncome Taxes

$
(62
)
$
45,876

$
3,385

$
(45,938
)
$
42,491% of Revenue


(0.3
)%

130.8
%

4.0
%

(131.1) pts


126.8 pts


Income
taxes consist of federal, state and foreign income taxes. The tax benefit for fiscal 2009 resulted in an effective rate of less than 1%. This rate was largely impacted by the
continued recording of full valuation allowances against the future tax benefits from the net operating losses generated during the year. 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 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.

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 2010 associated with
minor levels of taxes for certain state and foreign jurisdictions.

Liquidity and Capital Resources

As of April 30, 2009, 2008 and 2007, we had cash and cash equivalents and investments totaling $43.0 million,
$65.6 million and $134.5 million, respectively. As of April 30, 2009, we had cash and cash equivalents of $38.6 million as compared to $36.1 million at
April 30, 2008 and $34.0 million as of April 30, 2007. As of April 30, 2009, we had no short-term investments as compared to $14.4 million and
$100.5 million as of April 30, 2008 and 2007, respectively. At April 30, 2009 and 2008, we also had $4.4 million and $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 over the last two years is in large part due to the $41.0 million used to repurchase our common stock in the second quarter of fiscal 2008 and
$17.4 million and $18.7 million of cash used by operations due to our operating losses during fiscal 2009 and 2008, respectively.

As
of April 30, 2009, all of our short-term and long-term investments were held in corporate notes and asset backed auction rate securities. The
long-term investments are tied to auction rate securities that failed to settle at auction beginning in 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. As of June 30,

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2009,
we continued to hold auction rate securities with a par value of $13.7 million. 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, 2009.

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



Years ended April 30,

Increase/(Decrease)
from Prior Year2009

2008

2007

2009

2008in thousandsNet Cash Provided by (Used in) Operating Activities

$
(17,359
)
$
(18,643
)
$
2,475

$
1,284

$
(21,118
)


The
trend in our cash flows from operations is generally reflective of the downturn in revenue that we have experienced over the last two fiscal years. Although we have attempted to
reduce our operating expenses by means of reductions in our workforce and tighter control over discretionary spending during the last two years, the resulting savings in cash outflows have not been
sufficient to offset the reduction in cash inflows from collection of declining product revenue. Through our efforts to reduce our spending on operating expenses, we believe that as we are exiting
fiscal 2009 we have been able to create an environment in which our legacy business in the TDM and VoIP communications equipment are operating at near cash flow break even and that the level of cash
used in operations is primarily linked to the investments we are making in our new toktok and mStage product offerings.

Our
accounts receivable days sales outstanding at April 30, 2009 was approximately 79 days compared to 62 days at April 30, 2008.

We
expect to see continued modest levels of negative cash flows from operations in the coming year based on expected continued softness in revenue, while continuing to invest in the
launch of our new toktok and mStage products. However, we expect the level of negative cash flows from operations to decline from the levels realized in fiscal 2009 and 2008 as we realize the savings
from our reductions in force over the last two years and as we continue to work down our inventory levels.



Years ended April 30,

Increase/(Decrease)
from Prior Year2009

2008

2007

2009

2008$s in thousandsNet Cash Provided by (Used in) Investing Activities

$
19,638

$
60,134

$
(5,973
)
$
(40,496
)
$
66,107


The
change in cash flows from investing activities over the years is due to a few key events. In fiscal 2009, we generated $19.6 million of cash primarily as a result of the
retirement of $20.7 million

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of
short-term investments. This in-flow of cash was partially offset by cash used to purchase $0.9 million of equipment, primarily in support of our research and
development efforts.

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.

We
plan to continue to invest in modest levels of capital assets primarily in support of our new product development efforts.



Years ended April 30,

Increase/(Decrease)
from Prior Year2009

2008

2007

2009

2008$s in thousandsNet Cash Provided by (Used in) Financing Activities

$
176

$
(39,434
)
$
1,865

$
39,610

$
(41,299
)


The
limited cash flow from financing activities in fiscal 2009 and 2007 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.

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 2009 or 2007.

We
would expect that cash flows from financing activities will continue to reflect negligible levels of stock option exercises due to the current price of our stock. We currently do not
plan to do any further stock repurchases in an effort to conserve cash.



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."



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

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through
July 31, 2011 and reduced the rent cost. We have engaged a leasing company to sublease approximately 11,200 square feet of our Mountain View headquarters, which we vacated due to
reduced space needs as a result of the cumulative effect of the reductions in force that we have completed since the second quarter of fiscal 2008.

Our
contractual commitments as of April 30, 2009, 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

$
2,429

$
1,058

$
1,371

$


$
Purchase commitments


1,585


1,585








Total

$
4,014

$
2,643

$
1,371

$


$



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 2010 or be forced to further reduce our spending levels to protect our cash reserves.

Off-Balance Sheet Arrangements

As of April 30, 2009, 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, 2009 and 2008, 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 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 2009, 2008 and 2007, we realized no gains or losses on our investments, but we did recognize
an impairment charge of $4.7 million and $4.2 million in fiscal 2009 and 2008, respectively on certain of our auction

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rate
securities that failed to settle. In addition, we have recorded a cumulative unrealized loss of $0.3 million as of April 30, 2009 on the remaining auction rate security 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, 2009 and 2008, we held one auction rate security totaling
$10.0 million of par value, which had an original rating at the time we purchased them of AA but is currently rated B3 (B3 rated ARS) and has failed to settle at auctions since the second
quarter of fiscal 2008. As of April 30, 2009, we held one additional auction rate security with a par value of $3.7 million (eight additional auction rate securities with a par value of
$24.3 million as of April 30, 2008) which continues to be rated A3 (A3 rated ARS) but 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 these auction rate securities no longer approximates
par value. Accordingly, we have recorded these investments at a fair value of $4.5 million as of April 30, 2009 ($29.5 million as of April 30, 2008). Due to the prolonged
nature and the severity of the decline in the value of the B3 rated ARS that has failed to settle since the second quarter of fiscal 2008 and no clear indication of when it might settle, we determined
that the unrealized loss was no longer temporary. Therefore, we have recognized $4.7 million and a $4.2 million of impairment charges in fiscal 2009 and the fourth quarter of fiscal
2008, respectively, on this auction rate security. We believe that the $0.3 million decline in value that we have experienced in the A3 rated ARS as of April 30, 2009, 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 A3 rated ARS 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, this investment is of high credit
quality, and we have the intent and ability to hold this investment 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, including our ARS (the interest rates of which reset every 7 to 35 days),
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 30, 2009 and 2008
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%.

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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, 2009 and 2008 (in thousands). Carrying value approximates fair value.

April 30, 2009

April 30, 2008Carrying Value

Average Interest Rate

Carrying Value

Average Interest RateCash and cash equivalents

$
38,586


0.65
%
$
36,131


2.61
%Short-term investments






%

14,400


4.15
%Long-term investments


4,448


2.83
%

15,130


4.50Total

$
43,034


0.88
%
$
65,661


3.38
%


In
fiscal 2009, our return on our cash and cash equivalents ranged from 0.1% to 2.9% and our average return for the year was 1.7% while our return on short-term investments
ranged from 3.2% to 5.6% and our average return for the year was 4.5%. The return on our long-term investments ranged from 2.4% to 5.4% and our average return for the year was 3.8%.

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.

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Item 8Financial Statements and Supplementary Data

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



PageConsolidated Financial Statements of Ditech Networks, Inc.Report of Independent Registered Public Accounting Firm

53Report of Independent Registered Public Accounting Firm

54Consolidated Balance Sheets

55Consolidated Statements of Operations

56Consolidated Statements of Stockholders' Equity

57Consolidated Statements of Cash Flows

58Notes to Consolidated Financial Statements

59Supplementary Financial DataSelected Quarterly Financial Data (unaudited)

84Financial Statement ScheduleSchedule II Valuation and Qualifying Accounts

84


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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders
Ditech Networks, Inc.
Mountain View, California

We
have audited the accompanying consolidated balance sheet of Ditech Networks, Inc. and its subsidiaries ("the Company") as of April 30, 2009 and the related consolidated
statements of operations, stockholders' equity, and cash flows for the year then ended. Our audit also included the financial statement schedule listed in the Index to this Annual Report on
Form 10-K at Part II Item 8 as of and for the year ended April 30, 2009. These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these consolidated financial statements and financial statement schedule based on our audit.

We
conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Ditech Networks, Inc. and its
subsidiaries as of April 30, 2009, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, the related financial statement schedule, as of and for the year ended April 30, 2009, when considered in relation to the consolidated financial
statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

/s/BURR, PILGER & MAYER LLP

San
Jose, California
July 1, 2009

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Report of Independent Registered Public Accounting Firm

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

In our opinion, the consolidated balance sheet as of April 30, 2008 and the related consolidated statements of operations, stockholders' equity and cash
flows for each of two years in the period ended April 30, 2008 present fairly, in all material respects, the financial position of Ditech Networks, Inc. and its subsidiaries at
April 30, 2008, and the results of their operations and their cash flows for each of the two 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 for each of the two years in the period ended April 30, 2008 presents fairly, in all
material respects, the information set forth therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements
and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/PRICEWATERHOUSECOOPERS LLP

San
Jose, California
July 10, 2008

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

April 30,2009

2008ASSETSCurrent assets:Cash and cash equivalents

$
38,586

$
36,131Short-term investments





14,400Accounts receivable, net of allowance for doubtful accounts of $289 and $315 at April 30, 2009 and 2008, respectively


4,487


5,294Inventories


11,624


13,692Other current assets


568


665Total current assets


55,265


70,182Long-term investments


4,448


15,130Property and equipment, net


3,895


5,493Purchased intangibles, net


42


139Other assets


186


186Total assets

$
63,836

$
91,130LIABILITIESCurrent liabilities:Accounts payable

$
1,817

$
2,130Accrued and other liabilities


3,484


5,070Deferred revenue


731


1,274Income taxes payable


83


229Total current liabilities


6,115


8,703Long term accrued expenses


285


377Total liabilities


6,400


9,080Commitments and contingencies (Note 6)STOCKHOLDERS' EQUITYPreferred stock, $0.001 par value: 5,000 shares authorized and none issued and outstanding at April 30, 2009 and 2008





Common stock, $0.001 par value: 200,000 shares authorized and 26,257 and 26,090 shares issued and outstanding at April 30, 2009 and 2008,
respectively


26


26Additional paid-in capital


265,185


263,254Accumulated deficit


(207,446
)

(180,650
)Accumulated other comprehensive loss


(329
)

(580
)Total stockholders' equity


57,436


82,050Total liabilities and stockholders' equity

$
63,836

$
91,130


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

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

Years ended April 30,2009

2008

2007RevenueProduct revenue

$
14,313

$
28,904

$
76,964Service revenue


4,335


6,185


7,040Total revenue


18,648


35,089


84,004Cost of goods sold(1)Cost of product revenue


10,506


18,542


25,915Cost of service revenue


766


1,053


1,225Total cost of goods sold


11,272


19,595


27,140Gross profit


7,376


15,494


56,864Operating expenses:Sales and marketing(1)


11,511


19,103


24,496Research and development(1)


12,633


17,881


20,835General and administrative(1)


6,807


9,285


8,534Amortization of purchased intangible assets


97


985


985Impairment of goodwill and other purchased intangibles





17,693


Total operating expenses


31,048


64,947


54,850Operating income (loss)


(23,672
)

(49,453
)

2,014Other income (expense), net:Interest income


1,550


4,837


6,707Other expense, net


(4,736
)

(4,161
)

(18
)Total other income (expense), net


(3,186
)

676


6,689Income (loss) before provision for (benefit from) income taxes


(26,858
)

(48,777
)

8,703Provision for (benefit from) income taxes


(62
)

45,876


3,385Net income (loss)

$
(26,796
)
$
(94,653
)
$
5,318Per share dataBasicNet income (loss)

$
(1.03
)
$
(3.29
)
$
0.16DilutedNet income (loss)

$
(1.03
)
$
(3.29
)
$
0.16Number of shares used in per share calculations:Basic


26,082


28,805


32,579Diluted


26,082


28,805


34,020


---

Cost of goods sold

$
258

$
380

$
370Sales and marketing


439


1,618


2,714Research and development


339


1,127


1,951General and administrative


731


1,274


1,124


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

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

Common Stock







Accumulated
Other
Comprehensive
Income (Loss)Additional
Paid-In
Capital

Accumulated
Deficit

Deferred Stock
CompensationShares

Amount

TotalBalances, April 30, 2006


32,375

$
32

$
292,373

$
(91,684
)
$
(2,137
)
$
(3
)
$
198,581Issuance of common stock under employee stock plans


376





1,865











1,865Restricted stock issued


293

















Reclassification upon adoption of FAS123R








(2,137
)




2,137





Stock-based compensation expense under FAS123R








6,178











6,178Comprehensive income:Unrealized gain on available for sale investment securities

















3


3Net income











5,318








5,318Total comprehensive income




















5,321Balances, April 30, 2007


33,044


32


298,279


(86,366
)







211,945Cumulative effect of adjustment related to adoption of FIN 48











369








369Adjusted balances. April 30, 2007


33,044


32


298,279


(85,997
)







212,314Issuance of common stock under employee stock plans


447


1


1,572











1,573Restricted stock issued


10

















Repurchase of common stock


(7,411
)

(7
)

(40,996
)










(41,003
)Stock-based compensation expense under FAS123R








4,399











4,399Comprehensive loss:Unrealized loss on available for sale investment securities

















(580
)

(580
)Net loss











(94,653
)







(94,653
)Total comprehensive loss




















(95,233
)Balances, April 30, 2008


26,090


26


263,254


(180,650
)




(580
)

82,050Issuance of common stock under employee stock plans


125





176











176Restricted stock issued


42

















Stock-based compensation expense under FAS123R








1,755











1,755Comprehensive loss:Unrealized gain (loss) on available for sale investment securities

















251


251Net loss











(26,796
)







(26,796
)Total comprehensive loss




















(26,545
)Balances, April 30, 2009


26,257

$
26

$
265,185

$
(207,446
)
$


$
(329
)
$
57,436


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

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

Years ended April 30,2009

2008

2007Cash flows from operating activities:Net income (loss)

$
(26,796
)
$
(94,653
)
$
5,318Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:Depreciation and amortization


2,339


2,530


2,716Provision for doubtful accounts








67Loss on disposal of property and equipment


14


125


Loss on disposal of property and equipment related to restructuring


262





Deferred income taxes





45,827


2,947Stock-based compensation expense


1,767


4,399


6,159Payment of employee-investor portion of convertible debentures





(610
)

(408
)Amortization of purchased intangibles


97


985


985Amortization of employee-investor portion of convertible debentures





50


364Impairment of goodwill and other purchased intangibles





17,694


Impairment on investment securities


4,757


4,148


Changes in assets and liabilities:Accounts receivable


807


5,030


(5,115
)Inventories


1,977


(339
)

(5,013
)Other current assets


97


597


684Income taxes


(146
)

(205
)

332Accounts payable


(313
)

(529
)

1,083Accrued and other liabilities


(1,678
)

(1,542
)

(117
)Deferred revenue


(543
)

(2,150
)

(7,527
)Net cash provided by (used in) operating activities


(17,359
)

(18,643
)

2,475Cash flows from investing activities:Purchases of property and equipment


(938
)

(2,295
)

(3,689
)Purchase of available for sale investments


(83
)

(16,586
)

(49,200
)Sales and maturities of available for sale investments


20,659


82,801


49,060Proceeds from sale of discontinued optical business








698Acquisition of Jasomi, net of cash received





(3,786
)

(2,724
)Additions to other assets








(118
)Net cash provided by (used in) investing activities


19,638


60,134


(5,973
)Cash flows from financing activities:Repurchase of common stock





(41,006
)

Proceeds from employee stock plan issuances


176


1,572


1,865Net cash provided by (used in) financing activities


176


(39,434
)

1,865Net increase (decrease) in cash and cash equivalents


2,455


2,057


(1,633
)Cash and cash equivalents, beginning of year


36,131


34,074


35,707Cash and cash equivalents, end of year

$
38,586

$
36,131

$
34,074


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

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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.



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. When a sale involves multiple elements, such as sales of products that include services, the entire fee from the arrangement is allocated to each respective element based on its relative
fair value and recognized when revenue recognition criteria for each element are met. Fair value for each element is established based on the sales price charged when the same element is sold
separately.

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.

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Cost of goods sold is comprised primarily of costs 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. The Company's deposits are generally in excess of federally insured amounts.



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 since 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. 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 2009, the Company realized no gains or losses on its investments.

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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 its cost-basis, the financial condition of the issuer and the Company's 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 value. 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. Although goodwill is not amortized, in fiscal 2008 the Company
recognized an impairment charge equal to the recorded value of the goodwill generated as part of the Jasomi Networks acquisition. See the impairment of long-lived assets accounting policy,
below.



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

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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 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 22%, 35% and 64% of revenue in fiscal 2009, 2008 and 2007, respectively.
The second largest customer in fiscal 2009, an international wireless customer, accounted for 12% of revenue in fiscal 2009, 2% of revenue in fiscal 2008 and less than 1% of revenue in fiscal 2007.
The second largest customer in fiscal 2008, a domestic VoIP service provider, accounted for 7% of revenue in fiscal 2009 as compared to 12% in fiscal 2008 and less than 1% of revenue in fiscal 2007.
The second largest customer in fiscal 2007, an international customer, accounted for 6% of revenue in fiscal 2009 as compared to 11% of revenue in fiscal 2008 and 14% of net revenue in fiscal 2007.
Net revenue from customers outside the United States, which was primarily denominated in U.S. dollars, was 54%, 37%, and 29% in fiscal 2009, 2008 and 2007, respectively. The Company's gross accounts
receivable were concentrated with five customers at April 30, 2009 (representing 20%, 18%, 17%, 13% and 13% of receivables) and three customers at April 30, 2008 (representing 46%, 16%
and 13% 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.

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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.



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 began establishing a full valuation allowance
against its deferred tax assets. The valuation allowances created in fiscal 2009 and 2008 were $10.0 million and $59.1 million, respectively.

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) and have not been material.



Comprehensive income (loss) for fiscal 2009, 2008 and 2007 was ($26.5) million, ($95.2) million and $5.3 million, respectively,
and included the impact of unrealized gains and losses on available for sale investment securities, net of tax.



The Company expenses all advertising costs as incurred and the amounts were not material for any of the periods presented.



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

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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 4). Diluted loss per share for the years ended April 30, 2009 and 2008 is calculated excluding the effects of all potentially dilutive securities, as their effect would be
anti-dilutive.

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 30,2009

2008

2007Historical net income (loss):Net income (loss)

$
(26,796
)
$
(94,653
)
$
5,318Basic income (loss) per share:Weighted average shares of common stock outstanding


26,148


28,805


32,579Less stock subject to repurchase


66





Shares used in calculation of basic income (loss) per share


26,082


28,805


32,579Net income (loss) per share

$
(1.03
)
$
(3.29
)
$
0.16Diluted income (loss) per share:Shares used in calculation of basic income (loss) per share


26,082


28,805


32,579Dilutive effect of stock plans








994Dilutive effect of convertible debentures








447Shares used in calculation of diluted income (loss) per share


26,082


28,805


34,020Net income (loss) per share

$
(1.03
)
$
(3.29
)
$
0.16


The
computation of diluted net income (loss) per share excluded the following number of shares underlying options, as their effect was anti-dilutive: 6,001,000 shares in
fiscal 2009, 6,772,000 shares in fiscal 2008 and 3,752,000 shares in fiscal 2007.



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.

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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, 2009, 2008 and 2007 reflect 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, 2009, 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.

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. Upon adoption
of SFAS 123R, a contra-equity balance of $2.1 million in "Deferred stock compensation" on the Consolidated Balance Sheet, associated with these grants, was reversed to "Additional
paid-in capital" as of May 1, 2006.

Stock-based
compensation expense recognized during the years ended April 30, 2009 and 2008 totaled approximately $1.8 million and $4.4 million, respectively.
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. 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.



In April 2008, the Financial Accounting Standards Board released a FASB Staff Position (FSP No. FAS 142-3, Determination of the Useful Life of Intangible
Assets). This FSP amends the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life

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of
a recognized intangible asset under SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS 142). The objective of this FSP is to improve the consistency between the useful life of
a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141(R), and other principles of GAAP. This FSP
applies to all intangible assets, whether acquired in a business combination or otherwise, and shall be effective for financial statements issued for fiscal years beginning after December 15,
2008, and interim periods within those fiscal years and applied prospectively to intangible assets acquired after the effective date. Early adoption is prohibited. Since this guidance will be applied
prospectively, on adoption, there will be no impact on the Company's current consolidated financial statements.

In
March 2008, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 161 ("SFAS 161"), "Disclosures about Derivative Instruments
and Hedging Activities." SFAS 161 requires companies with derivative instruments to disclose information that should enable financial-statement users to understand how and why a company uses
derivative instruments, how derivative instruments and related hedged items affect a company's financial position, financial performance and cash flows. SFAS 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November 15, 2008. Because SFAS 161 only requires additional disclosure and the Company currently does not use
derivative instrument, the adoption will not impact the Company's consolidated financial position, results of operations or cash flows.

In
December 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 141 (revised 2007) ("SFAS 141R"), "Business Combinations."
SFAS 141R will change how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. The provisions of SFAS 141R
are effective as of the beginning of 2009, with the exception of adjustments made to acquired tax contingencies. Future adjustments made to acquired tax contingencies associated with acquisitions that
closed prior to the beginning of 2009 would apply the provisions of SFAS 141R and will be evaluated based on the outcome of these matters. The Company does not expect the adoption of
SFAS 141R to have a material impact on the Company's consolidated financial statements.

In
December 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 160 ("SFAS 160"), "Noncontrolling Interests in
Consolidated Financial Statements", an amendment of Accounting Research Bulletin No. 51." SFAS 160 will change the
accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS 160 is effective for financial
statements issued for fiscal years beginning after December 15, 2008. Early adoption is not permitted. Since this guidance will be applied prospectively and the Company currently does not have
any non-controlling interests, on adoption, there will be no impact on the Company's current consolidated financial statements.

In
September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 157 ("SFAS 157"), "Fair Value Measurements."
SFAS 157 defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair value measurements. SFAS
No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods of those fiscal years. In February 2008, the FASB released a
FASB Staff Position (FSP FAS 157-2Effective Date of FASB Statement No. 157)which delays the effective date of
SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least
annually) to fiscal years beginning after November 15, 2008. These non-financial items include assets and liabilities such as reporting units measured at fair value in a goodwill
impairment test and non-financial assets acquired and liabilities assumed in a business combination. The adoption of SFAS No. 157 as of May 1, 2008 for financial assets and
liabilities did not have a material impact on the Company's consolidated financial position, results of operations or cash flows. See Note 3 to the Notes to Consolidated Financial Statements.

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In April 2009, the Financial Accounting Standards Board issued three related Staff Positions: (i) FSP 157-4, Determining Fair Value When the Volume and Level
of Activity for the Asset or Liability have Significantly Decreased and Identifying Transactions That Are Not
Orderly("FSP 157-4"), (ii) SFAS 115-2 and SFAS 124-2,Recognition and Presentation of
Other-Than-Temporary Impairments("FSP 115-2 and FSP 124-2") , and (iii) SFAS 107-1 and
APB 28-1,Interim Disclosures about Fair Value of Financial Instruments, ("FSP 107 and APB 28-1"), which will be
effective for interim and annual periods ending after June 15, 2009. FSP 157-4 provides guidance on how to determine the fair value of assets and liabilities under SFAS 157
in the current economic environment and reemphasizes that the objective of a fair value measurement remains an exit price. If the Company were to conclude that there has been a significant decrease in
the volume and level of activity of the asset or liability in relation to normal market activities, quoted market values may not be representative of fair value and the Company may conclude that a
change in valuation technique or the use of multiple valuation techniques may be appropriate. FSP 115-2 and FSP 124-2 modify the requirements for recognizing
other-than-temporarily impaired debt securities and revise the existing impairment model for such securities, by modifying the current intent and ability indicator in
determining whether a debt security is other-than-temporarily impaired. FSP 107 and APB 28-1 enhance the disclosure of instruments under the scope of
SFAS 157 for both interim and annual periods. The Company is currently evaluating these Staff Positions.

3.     BALANCE SHEET ACCOUNTS

Inventories:    Inventories comprised (in thousands):

April 30,2009

2008Raw Materials

$
229

$
716Work in process





27Finished Goods


11,395


12,949Total

$
11,624

$
13,692


In
fiscal 2009 and 2008, the Company recorded provisions for excess inventory totaling $2.4 million and $5.1 million, respectively. The provision in fiscal 2009 was largely
driven by the impacts of new technical developments in the Company's PVP product, which changed the demand for certain components in the Company's new smaller configured system, and a change in the
international market's network configurations from E1 interfaces to faster STM interfaces , which drove a sudden change in demand for the type of voice product that these international customers would
deploy in the future, The provision in fiscal 2008 was largely due to a decline in sales during fiscal 2008 and expectations about revenue levels in fiscal 2009. In fiscal 2009, 2008 and 2007, the
Company sold $0, $0 and $337,000, respectively, of previously written-down inventory at approximately net book values.

Stock-based
compensation included in ending inventory at April 30, 2009 and 2008 was not material.

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Investments:    The following table summarizes the Company's investments as of April 30, 2009 (in thousands):

Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair ValueCorporate notes

$
3,700

$


$
(329
)
$
3,371Asset backed securities


9,975





(8,898
)

1,077Total

$
13,675

$


$
(9,227
)
$
4,448


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


Included
in corporate notes and asset backed securities are auction rate securities with a par value of $13.7 million and $34.3 million at April 30, 2009 and 2008,
respectively. For the years ended April 30, 2009, 2008 and 2007, no gains or losses were realized on the sale of short-term and long-term investments. As of
April 30, 2009 and 2008, net unrealized holding losses of $329,000 and $580,000 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 $4.7 million and $4.2 million was recognized in the Consolidated Statement of Operations in fiscal 2009 and 2008,
respectively 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.

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, 2009, $4.4 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.

SFAS
No. 157 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. As a
basis for considering such assumptions, SFAS No. 157 establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1)
observable inputs such as quoted prices in active markets; (Level 2) inputs other than the quoted prices in active markets that are observable either directly or indirectly; and
(Level 3) unobservable inputs in which there is little or no market data,
which requires the Company to develop its own assumptions. This hierarchy requires the Company to use observable market data, when available, and to minimize the use of unobservable inputs when
determining fair value. On a recurring basis, the Company measures certain financial assets and liabilities at fair value, including its short-term and long-term investments.

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When
available, the Company uses quoted market prices to determine fair value of certain of its cash and cash equivalents including money market funds; such items are classified in
Level 1 of the fair value hierarchy. At April 30, 2009, there were no active markets for these auction rate securities or comparable securities due to current market conditions.
Therefore, until such a market becomes active, the Company is determining their fair value based on expected discounted cash flows. Such items are classified in Level 3 of the fair value
hierarchy.

The
following table presents for each of the fair value hierarchy levels, the assets and liabilities that are measured at fair value on a recurring basis as of April 30, 2009 (in
thousands):

Fair Value

Level 1

Level 2

Level 3AssetsMoney market funds

$
34,226

$
34,226

$


$
Auction rate securities


4,448








4,448Total

$
38,674

$
34,226

$


$
4,448


The
following table presents the changes in the Level 3 fair value category for the year ended April 30, 2009 (in thousands):

Net Realized/Unrealized
Gains (Losses) included inMay 1,
2008

Earnings

Other
Comprehensive
Loss

Purchases, Sales,
Issuances and
(Settlements)

Transfers in
and/or (out)
of Level 3

April 30,
2009AssetsAuction rate securities

$
29,530

$
(4,758
)
$
251

$
(20,575
)



$
4,448


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

April 30,2009

2008Furniture and fixtures

$
1,572

$
1,686Equipment


14,282


13,850Leasehold improvements


1,513


1,509Computer software


4,073


3,98321,440


21,028Less: accumulated depreciation and amortization


(17,545
)

(15,535
)Total

$
3,895

$
5,493


Depreciation
expense totaled $2.3 million, $2.4 million and $2.6 million for fiscal 2009, 2008 and 2007, respectively.

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

April 30,2009

2008Accrued employee compensation

$
1,590

$
2,708Accrued warranty


389


550Accrued professional fees


53


485Accrued restructuring costs


430


240Other accrued expenses


1,022


1,087Total

$
3,484

$
5,070


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 2009
and 2008, the adjustment to the warranty accrual reflected improved warranty history for the Company's products over the last two years as well as the favorable resolution of certain specific warranty
matters.

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 30,2009

2008Balance as of the beginning of the fiscal period

$
550

$
754Provision for warranties issued during the fiscal period


225


83Warranty costs incurred during the fiscal period


(160
)

(69
)Other adjustments to the liability (including changes in estimates for pre-existing warranties) during fiscal period


(226
)

(218
)Balance as of the end of the fiscal period

$
389

$
550




At the beginning of both the second and third quarters of fiscal 2009, the Company undertook reductions in force in an attempt to
reduce its operating expenses. The combined reduction in force represented approximately 21% of the Company's workforce as of April 30, 2008. As a result of the reductions in headcount that
have occurred since the second quarter of fiscal 2009, the Company determined that it no longer needed approximately 20% of its Mountain View headquarters and has undertaken to sublease that space for
some or all of the remainder of the lease term. In addition, certain fixed assets have been idled due to the reduction in employees. As there is no current plan to utilize these assets, the Company
has decided to sell or scrap the assets. As a result of these actions, the Company recorded charges in fiscal 2009 totaling approximately $1.6 million. Of the $1.6 million recorded in
fiscal 2009, $0.8 million was related to severance and related benefits for the impacted

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employees
and the balance of $0.8 million was related to the estimated $0.5 million loss from subleasing the space vacated in September 2008 and $0.3 million related to the
estimated loss on abandonment of idled fixed assets. All individuals impacted by the reductions in headcount were notified of the termination prior to the end of the period in which their severance
costs were recorded. As of April 30, 2009, 94% of the $0.8 million aggregate severance related costs had been paid. The remaining severance related costs, which primarily relate to
outplacement services and COBRA, will be paid over the next six months.

At
the end of the second quarter of fiscal 2008, the Company undertook a restructuring of certain of its operations in an effort to streamline its operations and reduce costs. The
restructuring included a reduction in the workforce of approximately 23% and the closure of its research operations in Canada. As a result of these actions the Company recorded a restructuring charge
of approximately $1.3 million attributable to severance benefits paid and accrued 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. Of the $1.3 million total restructuring charge, $1.0 million was attributable to severance and
related benefits. In fiscal 2009, approximately $64,000 of
estimated outplacement benefit accrual related to this reduction in force expired unused and was reversed back to the same financial lines to which it was originally recorded. All individuals impacted
by the reduction in headcount were notified of the termination of their employment as of October 31, 2007.

Reduction
in force costs for the years ended April 30, 2009 and 2008 were as follows (in thousands):

Year ended
April 30,2009

2008Cost of goods sold

$
31

$
72Sales and marketing


324


309Research and development


614


892General and administrative


602


504Total

$
1,571

$
1,777


4.     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
aggregate acquisition consideration paid totaled $14.8 million, which included cash paid of $12.4 million. The remainder consisted of the assumption of vested stock
options, acquisition costs and net liabilities assumed. In addition, further acquisition consideration of $7.0 million in non-transferable convertible notes was given. As the
holders of the notes did not elect to covert any of the balances on their maturities, the Company paid $3.0 million on the first anniversary of the acquisition and the $4.0 million on
the second anniversary, in full payment of these convertible notes. 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 notes until they were paid, as at the closing

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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 and 2007, the Company recorded $50,000 and $364,000, respectively, of compensation
expense related to the notes. There was no compensation expense associated with these notes in fiscal 2009.

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 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.

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.

5.     GOODWILL AND PURCHASED INTANGIBLES

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

April 30, 2009Gross
Value

Accumulated
Amortization

Impairment

Net ValuePurchased Intangible AssetsCore technology

$
2,900

$
(2,125
)
$
(763
)
$
12Customer relationships


1,100


(646
)

(429
)

25Trade name and trademarks


200


(117
)

(78
)

5Total

$
4,200

$
(2,888
)
$
(1,270
)
$
42




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


In
fiscal 2008, the goodwill attributable to the Jasomi acquisition increased by $3.8 million. The increase was 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

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$1.3 million
impairment loss against the other purchased intangible assets associated with the Jasomi acquisition.

In
fiscal 2009, 2008 and 2007, the Company recorded $97,000, $985,000 and $985,000, respectively, of amortization of Jasomi acquisition-related intangible assets.

Estimated
future amortization expense of purchased intangible assets as of April 30, 2009 is as follows (in thousands):

Years ending
April 30,2010

$
382011


42012 and thereafter


$
42


6.     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. As a result of the impacts of the reductions in force
that began in fiscal 2008, in fiscal 2009 the Company abandoned approximately 11,000 square feet of its Mountain View, California headquarters and is in the process of attempting to sublease the space
for the remainder of the contractual lease term. An estimated sublease loss was recorded as part of the reduction in force liability, see Note 3.

At
April 30, 2009, future minimum payments under the Company's operating leases are as follows (in thousands):

Years ending
April 30,2010

$
1,0582011


1,0952012


276Thereafter


$
2,429


Rent
expense under all leases for the years ended April 30, 2009, 2008 and 2007, was $1.2 million, $1.6 million and $1.5 million, respectively.



In the first quarter of fiscal 2009, the Company renewed its $2.0 million operating line of credit with its bank, which expires
on July 31, 2009. As of January 31, 2009, the Company had no borrowings outstanding under the line of credit but was not in compliance with the loan covenant related to minimum tangible
net worth. In February 2009, the Company completed a modification of the line of credit which included the establishment of new financial covenants and a waiver of the covenant

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violation
as of January 31, 2009. Advances under the modified line of credit bear interest at LIBOR + 4.7%. The modified line requires the Company to maintain certain financial
covenants including but not limited to: minimum tangible net worth of $52 million plus 50% of all proceeds from the sale of subordinated debt or equity securities on or after January 31,
2009 and 50% of all positive net income generated after January 31, 2009.The Company was in compliance with all financial covenants at April 30, 2009.



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 Voice Quality Assurance ("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 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, plaintiffs filed a notice of appeal to the Ninth U.S.
Circuit Court of Appeals. On April 1, 2009, the parties filed a stipulated motion for dismissal of the appeal. On April 14, 2009, the

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Ninth
Circuit dismissed the appeal. With the dismissal of the appeal, the district court's order dismissing the third amended complaint with prejudice stands and is the final judgment in this action.

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 was taken off calendar to allow the parties to participate in
settlement discussions. Since that time, settlement discussions have been ongoing.

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

7.     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.

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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.

8.     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, 2009. 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 2009, 2008 and 2007, 114,452, 144,398 and 159,361 shares, respectively, were purchased
under the Purchase Plan. As of April 30, 2009, 209,507 shares remain available for issuance under the Purchase Plan.



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 2009, options available for grant of approximately 1,458,000 shares
expired under the provisions of the 1998 Stock Option Plan and no further option grants can be made under this 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, 2009, 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

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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 installments over the two (2)-year period
measured from the first anniversary of the closing date. As of April 30, 2009, 221,021 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, 2009, 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, 2009. 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, 2009. Options granted under the plan have a 5-year term. Currently, one-time initial automatic grants of

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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.

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

Outstanding OptionsShares Available
For Grant(1)

Number
of Shares

Weighted Average
Exercise PriceBalances, April 30, 2006


968


6,928

$
7.95Reservation of shares


2,000Restricted stock and restricted stock units issued


(292
)Restricted stock and restricted stock units forfeited


74Options granted


(837
)

837

$
7.41Options exercised





(217
)
$
4.33Options forfeited


258


(258
)
$
8.55Options expired


267


(267
)
$
10.08Balances, April 30, 2007


2,438


7,023

$
7.90Restricted stock and restricted stock units issued


(53
)Restricted stock and restricted stock units forfeited


140Options granted


(1,743
)

1,743

$
4.08Options exercised





(303
)
$
3.12Options forfeited


891


(896
)
$
7.17Options expired


507


(507
)
$
9.63Balances, April 30, 2008


2,180


7,060

$
7.13Reservation of shares


Restricted stock and restricted stock units issued


(94
)Restricted stock and restricted stock units forfeited


55Options granted


(1,080
)

1,080

$
1.43Options exercised





(10
)
$
0.57Options forfeited


365


(365
)
$
4.52Options expired


2,727


(2,727
)
$
7.70Plan shares expired


(1,458
)

Balances, April 30, 2009


2,695


5,038

$
5.80


---

The
aggregate intrinsic value of stock options exercised in fiscal 2009, 2008 and 2007 was $15,000, $554,000 and $791,000, respectively.

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The
summary of options vested and exercisable at April 30, 2009 comprised (in thousands, except term and exercise price):

Number of
Shares

Weighted
Average
Exercise Price

Aggregate
Intrinsic
Value

Weighted
Average
Remaining
Contractual
TermFully vested and expected to vest options


4,729

$
6.01

$
94


6.21Options exercisable


3,057

$
7.65

$
30


4.78


The
summary of unvested restricted stock awards for fiscal 2009 comprised (in thousands, except grant date fair value):

Number of
Shares

Weighted Average
Grant Date Fair
ValueNonvested restricted stock, April 30, 2008


124

$
6.98Restricted stock issued


72

$
2.30Restricted stock vested


(36
)
$
7.04Restricted stock forfeited


(42
)
$
6.24Nonvested restricted stock, April 30, 2009


118

$
4.38


The
aggregate intrinsic value of vested and expected to vest restricted stock units, which had a weighted average remaining contractual term of 1.6 years, was $6,000 at
April 30, 2009. No restricted stock units were exercisable as of April 30, 2009. For the years ended April 30, 2009, 2008 and 2007, the total fair value of shares vested was
$0.2 million, $3.1 million and $0.5 million, respectively.

As
of April 30, 2009, approximately $3.0 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 2.2 years for options and 1.6 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 2009, 2008 and
2007 under

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SFAS 123R
for options granted and for employee stock purchases under the ESPP during these periods are as follows:

Years ended April 30,2009

2008

2007Stock options:Dividend yield(1)








Volatility factor(2)


0.65


0.62


0.69Risk-free interest rate(3)


2.5
%

3.4
%

4.5
%Expected life (years)(4)


4.6


4.3


4.9Weighted average fair value of options granted during the period

$
0.76

$
2.11

$
4.48Employee stock purchase plan:(5)Dividend yield(1)








Volatility factor(2)


0.84


.53


.46Risk-free interest rate(3)


0.8
%

3.3
%

5.0
%Expected life (years)(4)


0.8


.97


.71Weighted average fair value of employee stock purchases during the period

$
0.59

$
1.25

$
2.24Restricted stock and restricted stock units:Weighted average fair value of restricted stock and RSUs granted during the period

$
2.30

$
6.17

$
7.37


---

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 a reduction in common stock and additional paid-in
capital.

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9.     INCOME TAXES

The provision for (benefit from) income taxes reflected in the Consolidated Statements of Operations for the years ended April 30 was as follows:

2009

2008

2007in thousandsCurrent:Federal

$
(80
)
$


$
315State


69


(12
)

119Foreign


(51
)

61


4Total Current

$
(62
)
$
49

$
438Deferred:Federal

$


$
37,958

$
2,854State





7,869


93Total Deferred





45,827


2,947Total

$
(62
)
$
45,876

$
3,385


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

April 30,2009

2008in thousandsDeferred tax assets (liabilities):Uniform capitalization

$
4,306

$
3,124Depreciation


(77
)

219Inventory reserves


4,410


3,428Other reserves and accruals


5,081


3,276Stock-based compensation under SFAS 123R


2,718


3,402Purchased technology, goodwill and other intangibles


1,103


1,604Tax credits


11,000


10,458Net operating losses


40,520


33,563Total deferred tax assets


69,061


59,074Valuation allowance


(69,061
)

(59,074
)Net deferred tax assets

$


$



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 beginning in fiscal 2008.

As
of April 30, 2009, the Company has federal and state tax net operating loss carryforwards of approximately $103.3 million and $84.7 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 2014. As of April 30,
2009, the Company had federal and state tax credit carryforwards of approximately $7.2 million and $5.8 million, respectively.

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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:

2009

2008

2007Tax provision at federal statutory rate


35.0
%

35.0
%

35.0
%State taxes, net of federal benefit


4.4


4.4


6.0Other permanent differences


0.3


0.3


4.3Research Credit


2.0


1.6


(11.1
)Impairment of goodwill





(13.3
)Valuation allowance


(37.1
)

(121.2
)

Other


(4.4
)

(0.9
)

4.7Effective tax rate


0.2
%

(94.1
)%

38.9
%


The
tax provision for fiscal 2009 resulted in an effective tax rate of 0.2%. This effective tax rate reflects the continued establishment of a full valuation allowance against the
Company's deferred tax assets. As a result, the effective tax rate is primarily related to state and foreign jurisdictions in which the Company has on going tax obligations.

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 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
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.

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The
following is a roll forward of the Company's total gross unrecognized tax benefits for fiscal 2009 and 2008 (in thousands)

Years ended April 30,2009

2008Balance as of May 1

$
523

$
271Tax positions related to current year:Additions for tax positions related to R&D credits


129


174Additions for Foreign Taxes





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


(75
)

(43
)Reductions for tax positions related to Foreign Taxes


(192
)

(25
)Balance as of April 30

$
385

$
523


As
of April 30, 2009, the unrecognized tax benefits of $385,000 include $72,000 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 years ended April 30, 2009 and 2008. The Company does not anticipate that the amount of liability for uncertain tax
positions existing at April 30, 2009 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 taxing
authorities may commence an audit. The Company is currently not under review by any taxing jurisdiction.

10.   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 Ended April 30,2009

2008

2007USA

$
8,555

$
22,268

$
59,806Asia Pacific


4,265


3,883


960Canada


1,006


3,365


2,233Latin America


1,105


872


4,905Middle East/Africa


3,107


3,807


15,329Europe


610


894


771Total

$
18,648

$
35,089

$
84,004


Substantially
all the Company's long lived assets are located in the United States.

11.   PROFIT SHARING PLAN

The Company maintains a 401(k) profit sharing plan for all eligible employees. Employees may contribute to the Plan based on statutory limits. Any Company
contributions are at the discretion of the Board of Directors. The Company made contributions to the Plan during fiscal 2009, 2008 and 2007 of $38,000, $57,000 and $68,000, respectively.

12. SUPPLEMENTAL CASH FLOW INFORMATION

Years ended April 30,2009

2008

2007in thousandsIncome taxes paid


85


549


93


83

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SUPPLEMENTARY FINANCIAL DATA (unaudited)

Fiscal 2009

Fiscal 2008First
Quarter

Second
Quarter

Third
Quarter

Fourth
Quarter(3)

First
Quarter

Second
Quarter

Third
Quarter(1)

Fourth
Quarter(2)(in thousands, except per share data)Revenue

$
4,532

$
4,122

$
4,899

$
5,095

$
14,022

$
6,637

$
6,684

$
7,746Gross profit

$
2,163

$
1,993

$
2,439

$
782

$
9,339

$
2,226

$
3,718

$
211Net loss

$
(7,026
)
$
(6,964
)
$
(3,790
)
$
(9,016
)
$
(1,003
)
$
(5,413
)
$
(19,670
)
$
(68,567
)Basic per share dataNet loss

$
(0.27
)
$
(0.27
)
$
(0.15
)
$
(0.35
)
$
(0.03
)
$
(0.18
)
$
(0.76
)
$
(2.64
)Diluted per share dataNet loss

$
(0.27
)
$
(0.27
)
$
(0.15
)
$
(0.35
)
$
(0.03
)
$
(0.18
)
$
(0.76
)
$
(2.64
)


---

Schedule II  Valuation and Qualifying Accounts  (in thousands)

Balance at
Beginning of Year

Additions

Deductions

Balance at
End of YearYear ended April 30, 2007Allowance for doubtful accounts

$
306

$
80

$
(13
)
$
373Year ended April 30, 2008Allowance for doubtful accounts

$
373

$


$
(58
)
$
315Deferred tax asset valuation allowance(1)

$


$
59,074

$


$
59,074Year ended April 30, 2009Allowance for doubtful accounts

$
315

$


$
(26
)
$
289Deferred tax asset valuation allowance(1)

$
59,074

$
9,987

$


$
69,061


---

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

Not Applicable.

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Item 9AControls and Procedures

Not Applicable.

Item 9A(T)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, 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, 2009 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, 2009, 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, 2009.
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, 2009, our internal control over financial reporting was effective based on
these criteria.

This
annual report does not include an attestation report of the company's registered public accounting firm regarding internal control over financial reporting. Management's report was
not subject to attestation by the company's registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management's
report in this annual report.

Change in Internal Control over Financial Reporting

There has been no change in internal control over financial reporting in the quarter ended April 30, 2009 that has materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Item 9BOther Information

None.

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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, 2009 in connection with the solicitation of proxies for the Ditech Networks'
2009 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 of Directors" and "Compensation of Executive Officers." 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.

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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, 2009:

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)


4,654,784

$
5.61


1,837,915Equity Compensation Plans Not Approved by Security Holders(2)


389,060

$
8.06


1,066,513Total


5,043,844

$
5.80


2,904,428


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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, 2009 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

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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 option holders 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

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awards
under the 2005 New Recruit Stock Plan is 500,000 shares. Jasomi Networks employees hired by 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.

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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.

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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 1, 2009

By:

/s/ TODD G. SIMPSON, PHD Todd 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, PHD Todd G. Simpson, PhD

President, Chief Executive Officer, and Director
(principal executive officer)

July 1, 2009/s/ WILLIAM J. TAMBLYN William J. Tamblyn

Executive Vice President and
Chief Financial Officer
(principal financial and accounting officer)

July 1, 2009/s/ GREGORY M. AVIS Gregory M. Avis

Director

June 30, 2009/s/ FRANCIS A. DRAMIS, JR Francis A. Dramis, Jr.

Director

June 30, 2009/s/ EDWIN L. HARPER Edwin L. Harper

Chairman of the Board of Directors

June 30, 2009/s/ WILLIAM A. HASLER William A. Hasler

Director

June 30, 2009/s/ ANDREI M. MANOLIU, PHD Andrei M. Manoliu, PhD

Director

July 1, 2009/s/ DAVID M. SUGISHITA David M. Sugishita

Director

July 1, 2009


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Exhibit Index

Exhibit

Description of document2.1(1)

Asset Purchase Agreement, dated as of April 16, 2002, by and between Ditech and Texas Instruments2.2(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 Ditech3.2(5)

Bylaws of Ditech, as amended and restated on March 28, 20024.1

Reference is made to Exhibits 3.1 and 3.24.2(7)

Specimen Stock Certificate4.3(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 Certificate10.1(7)

Lease Agreement, dated August 18, 1998, between Ditech and Lincoln-Whitehall Pacific, LLC, as amended January 25, 199910.2(7)(8)

1997 Stock Option Plan10.3(8)(18)

1998 Amended and Restated Stock Option Plan10.4(8)(15)

1999 Employee Stock Purchase Plan10.5(8)(24)

1999 Non-Employee Directors' Stock Option Plan, as amended10.6(7)(8)

Employment Agreement, dated October 3, 1997, as amended September 15, 1998, between Ditech and Timothy Montgomery10.7(8)(14)

1999 Non-Officer Equity Incentive Plan10.8(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 Plan10.13(8)(17)

Cash Compensation Arrangements with Executive Officers10.14(8)(23)

Cash Compensation Arrangements with Non-Employee Directors10.15(8)(27)

2005 New Recruit Stock Plan10.16(7)(8)

Form of Indemnity Agreement to be entered between Ditech and each of its current executive officers and directors10.18(7)

Stock Purchase Agreement, dated as of September 15, 1997 between Ditech and William Hasler10.19(7)(8)

Form of option agreement under the 1997 Stock Option Plan10.20(7)(8)

Form of option agreement under the 1998 Stock Option Plan10.22(8)(21)

2005 New Recruit Stock Option Plan10.23(8)(26)

Form of Stock Option Agreement under the 2005 New Recruit Stock Option Plan10.26(3)

Second Lease Amendment, dated February 15, 2000, between Ditech and Middlefield-Bernardo Associates LLC10.27(25)

Fourth Amendment to Lease Agreement dated July 31, 2005, between Middlefield II LLC and Ditech10.28(8)(12)

2000 Non-Qualified Stock Option Plan10.31(1)(9)

Software License Agreement, dated as of April 16, 2002, by and between Ditech and Telogy10.32(9)(16)

Amendment No. 1 to Telogy Software License between Ditech Communications Corporation and Texas Instruments Incorporated, dated May 21, 2003


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Exhibit

Description of document10.34.(8)(23)

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 Plan10.36(8)(21)

Offer Letter, executed February 4, 2006, between Ditech and Gary Testa10.37(28)(35)

Amendment No. 2 to TELOGY SOFTWARE LICENSE AGREEMENT between Ditech Communications Corporation and Texas Instruments Incorporated10.38(8)(30)

2006 Equity Incentive Plan10.39(8)(10)

Amended and Restated Change In Control Severance Benefit Plan10.40(8)(32)

Form of Stock Option Agreement to be Used for Grants of Stock Options Under the Ditech Networks, Inc. 2006 Equity Incentive Plan10.41(8)(33)

2006 Equity Incentive Plan Restricted Stock Award Agreement10.42(8)(33)

2006 Equity Incentive Plan Restricted Stock Unit Award Agreement10.43(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, 200710.45(8)(22)

Relocation Arrangement with Todd Simpson, dated May 9, 200710.46(8)(31)

Amendment to Letter Agreement dated December 15, 2008 between Ditech Networks, Inc. and Todd Simpson10.47(8)(31)

Amended and Restated Change In Control Severance Benefit Plan21.1

Subsidiaries of Ditech Networks, Inc.23.1

Consent of Burr, Pilger & Mayer LLP, Independent Registered Public Accounting Firm23.2

Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm31.1

Certification by Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2

Certification by Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


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