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

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FORM 10-K

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

(MARK ONE)

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

For the Fiscal Year Ended April 30, 2001

OR

|/ / | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ----------------------------------------------------------------------------------------

For the Transition Period From  To

COMMISSION FILE NUMBER: 000-26209

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

DELAWARE(State or Other Jurisdiction of Incorporation or Organization)

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

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825
East Middlefield Road
Mountain View, CA 94043
(650) 623-1300
(Address, Including Zip Code, of Registrant's Principal Executive Offices and
Telephone Number, Including Area Code)

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

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

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

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

The
aggregate market value of voting stock held by non-affiliates of the Registrant was approximately $154,686,562 as of July 16, 2001, based upon the closing price
on the Nasdaq National Market reported for such date. Excludes an aggregate of 8,282,627 shares of common stock held by officers and directors and by each person known by the registrant to own 5% or
more of the outstanding common stock. Exclusion of shares held by any of these persons should not be construed to indicate that such person is an affiliate of the registrant.

The
number of shares outstanding of the Registrant's Common Stock on July 16, 2001 was 29,856,764 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 annual meeting of stockholders to be held September 21, 2001, 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 COMMUNICATIONS CORPORATION  FORM 10-K    INDEX

|                                                                                               |  | PAGE
|---------------------------------------------------------------------------------------------- |  | ----
|PART I                                                                                        
|Item 1Business                                                                                |  | 1   
|Item 2Properties                                                                              |  | 12  
|Item 3Legal Proceedings                                                                       |  | 12  
|Item 4Submission of Matters to a vote of Security Holders                                     |  | 12  
|PART II                                                                                       
|Item 5Market for Registrant's Common Equity and Related Stockholder Matters                   |  | 13  
|Item 6Selected Financial Data                                                                 |  | 13  
|Item 7Management's Discussion and Analysis of Financial Condition and Results of
  Operations |  | 16  
|Item 7AQuantitative and Qualitative Disclosure About Market Risk                              |  | 31  
|Item 8Financial Statements and Supplementary Data                                             |  | 32  
|Item 9Changes in and Disagreements with Accountants on Accounting and Financial
  Disclosure  |  | 52  
|PART III                                                                                      
|Item 10Directors and Executive Officers of the Registrant                                     |  | 53  
|Item 11Executive Compensation                                                                 |  | 53  
|Item 12Security Ownership of Certain Beneficial Owners and Management                         |  | 53  
|Item 13Certain Relationships and Related Transactions                                         |  | 53  
|PART IV                                                                                       
|Item 14Exhibits, Financial Statement Schedules and Reports on Form 8-K                        |  | 54  
|SIGNATURES                                                                                     |  | 58  

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Trademarks:

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

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Ditech Communications Corporation

Part I

Item 1Business

General

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

Ditech
Communications Corporation (Ditech) is a global telecommunications equipment supplier for voice and optical networks. Our voice products are echo cancellers, which eliminate
echo, a significant problem in existing and emerging voice networks. Ditech develops and markets optical subsystems and systems communications products through its wholly-owned subsidiary, Altamar
Networks, Inc. (Altamar Networks).

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

Ditech
was originally incorporated as Phone Info., Inc. in July 1983 and subsequently changed its name to Automated Call Processing Corporation, Inc. In
March 1997, Automated Call Processing sold portions of its business and merged with its wholly-owned subsidiary, and the surviving entity was renamed Ditech Corporation. Ditech Corporation
reincorporated in Delaware in April 1999 and changed its name to Ditech Communications Corporation. Ditech develops and markets optical subsystems and systems communications products through
its subsidiary, Altamar Networks, which was formed in February 2001. The mailing address for Ditech and Altamar Networks is 825 East Middlefield Road, Mountain View, California 94043. The
Ditech general telephone number is 650-623-1300. The Altamar Networks general phone number is 650-864-1700.

Echo Cancellation Market

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

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satellite calls require echo cancellation. Delays are also introduced as intelligent processing equipment is increasingly incorporated into voice networks. Digital processing of voice signals requires
time to compress and decompress and route signals through networks. As there is a greater shift towards voice-over-packet, which is a means of packaging voice signals into
units of digital data for efficient transmission, these processing delays will continue to increase.

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

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

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

Our Echo Cancellation Solutions

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

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

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

Lower total cost of ownership.Our compact design allows us to offer echo cancellation products with more echo
canceling capacity than other commercial suppliers based on a seven-foot industry

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standard equipment rack located in service providers' central offices or remote facilities. This higher capacity (more echo cancellation capacity per rack) represents cost and space savings for
service providers. Our newest generation product also offers more efficient cabling and network equipment installation, saving service providers even more space and installation costs. Our products
are designed to allow service providers to remotely download and upgrade software via the Internet without interrupting network service or dispatching a technician to the remote site, which also
lowers the cost of ownership. Finally, our products consume less power than other solutions, resulting in greater reliability and additional cost savings for our customers.

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

Our Echo Cancellation Products

All of our echo cancellation products are designed to solve echo and other voice quality issues (background noise and voice levels) in wireline, wireless,
satellite and packet-based networks. Our echo cancellation product family includes software, stand-alone echo cancellers and system echo cancellers. We now license our echo cancellation software to
several voice-over-packet network equipment companies who incorporate this software in their voice gateways and switches. Our stand-alone echo cancellers consist of six
products. The 18T1 and 18E1 are our third generation echo cancellation products and have been deployed in significant volumes since March 1995. The Quad T1 and Quad E1 products are our fourth
generation echo cancellation products and have substantially replaced the sales of our older 18T1 and 18E1 products. Production shipment commenced for our Quad T1 and E1 products in the first quarter
of calendar year 1999. The Broadband Echo Cancellation System, or BBEC, is a system-level product that employs the Quad T1. Production shipment of our BBEC began in the second quarter of calendar year
1999. We began shipping for revenue our fifth generation echo cancellation system, the OC-3 Echo Cancellation System, in the fourth quarter of fiscal 2001. This is the industry's highest
density echo cancellation system, providing the capability to handle over 24,000 voice channels in a single seven-foot equipment bay. We also announced in fiscal 2001 the STM-1
Echo Cancellation System, the international equivalent of the OC-3 system, with the STM-1 Echo Cancellation System scheduled for beta testing near the end of the first quarter
of fiscal 2002.

Our
echo cancellation product family shares several common advantages:

Higher capacity.We believe our fifth generation echo cancellation product has a major capacity or density advantage
(ranging from 50-300%) over currently commercially available competitive products.

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

Remote software updates.With our products, the latest software updates can be downloaded remotely and incorporated
into our products without taking the echo cancellation products offline and interrupting service.

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

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

Warranty.We offer a warranty, ranging from one year to five years, on all of our echo cancellation products.

Our Echo Cancellation Products

|Product                                     |  | Description                                                                                                                                                                    |  | Functionality                                                                                                                                                                                                                                             
|------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|18T1                                        |  | Single port echo canceller for use at T1 (1.544 Mb/s) transmission rate (North American markets)                                                                               |  |  A high capacity product that cancels 220 T1 lines per seven-foot industry standard equipment rack
 Low power consumption                                                                                                                               
|18E1                                        |  | Single port echo canceller for use at E1 (2.048 Mb/s) transmission rate (international markets and North American gateway applications)                                        |  |  A high capacity product that cancels 126 E1 lines per 2.1 meter international industry standard equipment rack
 Low power consumption                                                                                                                  
|Quad T1                                     |  | Single module including four independent T1 cancellers (North American markets)                                                                                                |  |  Doubles the capacity of nearest commercially available competitive product
 Cancels 480 T1 lines per rack                                                                                                                                              
|Quad E1                                     |  | Single module including four independent E1 cancellers (international markets and North American gateway applications)                                                         |  |  Doubles the capacity of nearest commercially available competitive product
 Cancels 480 E1 lines per rack                                                                                                                                              
|Broadband Echo
 Cancellation
 System (BBEC) |  | Broadband echo cancellation system utilizing DS3 (45 Mb/s) interfaces to accommodate the growing adoption of higher speed broadband infrastructures (North American markets)   |  |  First system level echo cancellation product
 Uses two DS3s per shelf
 Reduces bulky T1 cabling and installation
 Fault tolerant architecture and autonomous alarm reporting via Ethernet to simplify fault isolation
 Cancels 336 T1 lines per rack
|OC-3 Echo
 Cancellation
 System             |  | Broadband echo cancellation system utilizing OC-3 (155 Mb/s) interfaces to accommodate the growing adoption of higher speed broadband infrastructures (North American markets) |  |  Uses 2 OC-3s per shelf.
 Reduces bulky T1 cabling and installation
 Fault tolerant architecture and autonomous alarm reporting via Ethernet to simplify fault isolation
 Cancels 1008 T1 lines per rack                                              

Optical Communications Business

Ditech designs, develops and markets a suite of optical communication subsystem and system products for telecommunications networks, through its subsidiary,
Altamar Networks. Each of these businesses, markets, and products are described below.

Our Optical Subsystem Market and Products

Market Problem Address:All optical signals lose strength and signal integrity as they travel a certain distance over a
fiber optic cable. In the legacy optical network, electrical regenerators costing hundreds of thousands of dollars were deployed to regenerate optical signals. By deploying optical amplifiers, service
providers can eliminate these expensive electrical regenerators and extend and regenerate their optical signals at a fraction of the cost. Altamar Network's products offer system

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integrators and OEMs tangible benefits, including cost savings and potential improvement in time-to-market of their systems products. The worldwide market for optical
amplifiers in 2003 is estimated by market analysts to be over $1 billion.

Subsystem Product Overview.During fiscal 2001, the principal source of revenue from our optical product line has been
our optical amplifiers, which have been shipping since the third quarter of calendar 1996. Altamar Networks' optical subsystem products include optical amplifiers, an optical telemetry system,
transponders and network management products that enable service providers to cost-effectively expand and extend the reach of fiber optic networks.

Key characteristics of our optical subsystem products include:

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

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

Built to demanding Bellcore and ITU standards.We utilize our many years of experience of building and maintaining
telephone equipment in building our optical subsystem products. These products are designed to withstand the environmental effects of temperature and vibration in central offices and remote
facilities.

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

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

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

Plug-and-play subsystems.Our products are built with on-board processing power
allowing them to be easily plugged into different system products.

Interoperable in multi-vendor environments.Our products and modules are built to industry standards so that they can
interoperate with different vendors' facilities and shelving.

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

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Warranty.We offer a warranty, ranging from one year to five years, on all of our optical communications products.

Our Optical Subsystem Products

|Product                             |  | Description                                                                                                                                                                                                         |  | Functionality                                                                                                                                                                                                                                                                                                                                                                      
|----------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Optical amplifiers
 "Star"
 "Orion" |  | Complete suite of transmit, line and receive amplifiers that are based on EDFA technology                                                                                                                           |  |  Consistent optical amplification and low noise figures, making them suitable for dense wavelength division multiplexing (DWDM) applications
 Supports higher bandwidth fiber optic channels, allowing service providers to expand bandwidth without upgrading our amplifiers                                                                                                    
|Optical Telemetry
 System (OTS)     |  | Optical and element management and facility monitoring solution that is designed with open interface architecture                                                                                                   |  |  Enables remote management and monitoring of both our products and legacy network equipment and facilities
 Management and monitoring commands are carried on a supervisory channel in the same fiber as the revenue traffic but using out-of-band wavelengths, thereby not displacing revenue-generating bandwidth
 Packaged in a compact module to minimize space requirements
|Transponder                         |  | Accepts an optical signal from a legacy laser source and re-transmits the signal at an industry standard compliant optical wavelength suitable for transmission on a wavelength division multiplexing (WDM) network |  |  Allows legacy non-International Telecommunication Union standards compliant transmission equipment to be used on WDM networks
 Packaged in a compact module that is half the size of currently commercially available competing products                                                                                                                                        

Our Optical Systems Products in Development

In March 2001, Ditech Communications Corporation announced the creation of Altamar Networks, Inc., a wholly owned subsidiary of Ditech.
Simultaneous with this announcement, Altamar Networks announced its new Titanium Optical Network System, being developed to be the industry's most integrated, scalable transport system for the
long-distance optical network. Titanium is being developed to offer carriers the industry's highest switching scalability, exceptional space and power efficiency, and
point-and-click provisioning. Altamar Networks expects to ship the Titanium product in fourth quarter of fiscal 2002. However, delays may occur due to unforeseen technical
difficulties in the development process, inability to obtain components on a timely basis, and for other reasons outside of our control.

Problem: The Industry Squeeze.The Internet unleashed an explosion of network traffic that continues to grow
exponentially. Market researchers estimate that U.S. service providers will have to expand optical backbone capacity by four times each year to keep up with this burgeoning traffic growth. At the same
time, revenues for the Internet's new data services are not rising as fast as the costs of deploying and maintaining the optical network required to carry these services. Squeezed between limited
revenues and escalating costs, service providers must find a way to lower the cost of bandwidth and speed up deployment of revenue-generating services.

The Titanium Solution.Faced with the need to expand their optical backbone network, service providers are deploying
three different classes of equipment: SONET, DWDM, and optical switches. SONET refers to legacy long-distance optical transport equipment. DWDM refers to dense wavelength

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division multiplexing architecture, which allows multiple wavelengths of light to travel over a single fiber optic connection. Market analysts estimate the North American market for these three
classes of equipment will be in excess of $17 billion in 2001 and growing more than 15% per year over the next three years. All these discrete systems consume too much space and power and are
extremely difficult to manage. The problem of a complex, multi-device architecture only grows worse when service providers attempt to scale their network infrastructures.

Altamar
Networks' Titanium integrates the key functionality of SONET, DWDM and optical switching into a single system, thereby eliminating the cost and complexity of deploying and
managing different optical networking devices. While competitors have adopted similar integration strategies, Ditech believes that Altamar Network's Titanium best addresses the most critical problem
in the long-distance optical network: the need for more switching capacity. With DWDM providing the capability of transmitting 160 wavelengths of light along a single fiber optic
connection, the problem of raw fiber bandwidth capacity has been resolved. The key problem that remains is how to route and switch the tens of thousands of wavelengths of light flowing through the
optical backbone network. Currently, the highest capacity optical switch on the market only provides 1000 ports (capable of switching 1000 wavelengths of light), and switch vendors have not yet
defined a cost-effective means of scaling their products to meet the demands of the market. Designed with a unique optical-to-electrical switching architecture and
utilizing state-of-the-art optical components, Titanium is being designed to offer a solution of outstanding integration, scalability, and
cost-effectiveness.

Customers

Echo cancellation customers.The principal customers for our stand-alone and system echo cancellation products are
wireline, wireless, and cellular service providers. The principal customers for our echo
cancellation software are packet-based voice gateway and switch companies. During fiscal 2001, 2000, and 1999, approximately 86%, 92%, and 94%, respectively, of the Company's revenues came from the
sale of echo cancellation products. We have more than 85 echo cancellation product customers, including the major North American long distance companies, WorldCom, Sprint, and Qwest Communications.
Our echo cancellation software customers include Cisco, Alcatel, Nortel and Sonus Networks. Revenues from echo cancellation sales remain highly concentrated. In fiscal 2001, our largest customer,
Qwest Communications, accounted for 47% of our total company revenue. Our four next largest customers accounted collectively for 24%of our total
company revenue.

Optical communications subsystems customers.The customers for our optical communications subsystems are primarily
network equipment companies and service providers. Ditech grew its customer base from seven in fiscal 2000 to over 20 in fiscal 2001. During fiscal 2001, 2000, and 1999, approximately 14%, 8%, and 6%,
respectively, of our revenue came from the sale of optical communications subsystems products. Our optical revenue is also quite highly concentrated, as our top 5 customers generated over 81% of total
optical revenue in fiscal 2001, with Lucent Technologies our largest optical customer in fiscal 2001.

Optical systems customers.As the Titanium system product is still being developed and has not shipped, there are no
revenue-generating customers for this product at this time. Targeted customers for this product are the North American long-distance telephone companies, some of which are customers of our
echo cancellation products.

Backlog.Our backlog was approximately $5.2 million and $23.2 million as of June 1, 2001 and 2000,
respectively. We include in our backlog only orders confirmed with a purchase order for products to be shipped within 120 days to customers with approved credit status. Because of the generally
short cycle between order and shipment, and occasional customer changes in delivery schedules, we do not believe that our backlog as of any particular date is necessarily indicative of actual net
sales for any future period.

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We
market our products, both domestically and internationally; geographic information is set forth in Note 9 of the Notes to our Consolidated Financial Statements included in
this Annual Report on Form 10-K. Historically the majority of our sales have been to customers in the U.S. These customers accounted for approximately 83%, 88%, and 87% of our
revenue in fiscal 2001, fiscal 2000, and fiscal 1999 respectively. Substantially all of our long-lived assets are located in the U.S. See "Item 7Management's Discussion
and Analysis of Financial Condition and Results of OperationsFuture Growth and Operating Results Subject to Risk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 international operations.

Research and Development

We have engineering departments dedicated to and focused on developing next generation echo cancellation and optical networking products. Our research and
development expenses for fiscal 2001, 2000, and 1999 were approximately $34.4 million,$8.6 million, and $3.9 million,
respectively. In fiscal 2001, the increase in our research and development expenses was related to both adding new hardware and software engineers and expanding the scope of product development for
both echo cancellation and optical networking products, particularly our development of the Titanium system product. The number of employees in our research and development departments grew
significantly in fiscal 2001, primarily due to our acquisition of Atmosphere Networks in July 2000. See "Acquisitions" below. We believe that recruiting and retaining qualified engineering
personnel will be essential to our continued success.

Manufacturing

We operate as a "virtual" manufacturing organization by relying on contract manufacturers to assemble our echo cancellation and optical communications
products. We perform only final test functions for our echo cancellation products and both final assembly and test functions for our optical products. We are ISO 9001 certified and require that our
contract manufacturers have ISO 9002 registration as a condition of qualification. Our stringent incoming inspection procedures for critical optical components include analysis and monitoring of the
performance characteristics of critical optical components and sub-assemblies. Our raw materials are procured from outside suppliers through our contract manufacturers. In procuring
digital signal processors for our echo cancellation products, we and our contract manufacturers rely on Texas Instruments as our sole supplier. Our future success will depend in significant part on
our ability to obtain optical and echo cancellation components on time, at reasonable prices, and in sufficient quantities to meet demand. For example, in the third quarter of fiscal 2001, scheduled
shipments of new OC-3 echo cancellation products were delayed due to difficulty in obtaining required parts from a supplier on a timely basis, which significantly impacted that quarter's
revenues and results of operations.

Sales and Marketing

In fiscal 2001, we have substantially expanded our direct sales force and sales engineer force in the United States and internationally, increasing the number
of employees in these functions by 23% from the level at the end of fiscal 2000. We have also expanded our network of value added resellers, distributors, and sales agents that sell our products
internationally. We have entered into several new agreements with original equipment manufacturers (OEMs) for both our echo cancellation and optical communications products and are actively exploring
the possibility of entering into others.

In
fiscal 2001, we implemented an international public relations program for the first time, complementing our strategy to increase international sales. We also expanded and enhanced
our web site marketing program, making this an effective marketing and sales tool. In addition, in fiscal 2001, we designed and built a new trade show booth for Altamar Networks, and expanded the
current Ditech

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trade show booth. Our trade show participation has expanded both domestically and internationally during fiscal 2001.

In
fiscal 2001, we added to our product verification team whose charter is to ensure that we meet customers' expectations.

Acquisitions

Our strategy is to increase new product development through internal staffing and acquisitions, when potential acquisitions provide the Company with a critical
new product and a decided time-to-market advantage.

On
February 1, 2000, we completed our first acquisition by purchasing substantially all of the assets and hiring all the key employees of Telinnovation Corporation, a leading
developer of voice enhancement and echo cancellation technology. On July 25, 2000, we completed our second acquisition by acquiring Atmosphere Networks, Inc., an optical networking
company, and certain of its key employees. With this acquisition, we believe we added key optical networking expertise to our Titanium system development team. We believe adding these additional
engineering resources and expertise will shorten our time-to-market for the Titanium product.

We
will continue to look to acquire companies that meet the criteria defined above. Acquisitions involve numerous risks, which are more fully discussed in
"Item 7Management's Discussion and Analysis of Financial Condition and Results of OperationsFuture Growth and Operating Results Subject to Risk."

Competition

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



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

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

9

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

Altamar
Networks' principal competitors in the optical networking system products include Tellium, Ciena, Nortel, Lucent, and Sycamore Networks. In addition, new companies building
optical switching systems could emerge as competitors to Altamar Networks. The traditional market leaders are Nortel and Lucent, but in the last few years, companies like Ciena and Sycamore have been
successful in selling their more integrated solutions. We believe that Altamar Networks' Titanium product will be differentiated from all of these products based upon its superior scalability (can
switch and route more optical signals) and integration (fewer discrete racks of equipment).

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

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

Patents and Intellectual Property Rights

Our success will depend, in part, on our ability to protect our intellectual property. We rely primarily on patent, copyright, trademark and trade secret laws,
as well as nondisclosure agreements and other methods to protect our proprietary technologies and processes. Nevertheless, such measures may not be adequate to safeguard the proprietary technology
underlying our echo cancellation and optical communications products. In November 1998, we acquired the echo cancellation technology that we previously licensed from Telinnovation. As of
April 30, 2001, we had five issued and three patent applications pending, and one allowed but not yet issued. These patents, relating to optical communications products, expire between 2014 and
2016. No patents may issue as a result of our current or future patent applications. If they do issue, any patent claims allowed may not be sufficiently broad to protect our technology. In addition,
any existing or future patents may be challenged, invalidated or circumvented, and any right granted thereunder may not provide meaningful protection to us. The failure of any patents to provide
protection to our technology would make it easier for our competitors to offer similar products.

We
generally enter into confidentiality agreements with our employees and strategic partners, and generally control access to and distribution of our documentation and other
proprietary information.

10

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

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

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

Employees

As of April 30, 2001, we employed 210 persons, 41 of whom were primarily engaged in operations, 77 in research and development, 70 in sales, marketing
and technical support, and 22 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.

11

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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. The
term of the lease expires on June 30, 2006. We also lease a research and development facility in Melbourne, Australia, of approximately 6,300 square feet with a lease term of four years, which
expires on April 16, 2005. We believe that the space under the combined leases is adequate to meet our needs for at least the next twelve months.

Item 3Legal Proceedings

None.

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

Not Applicable.

12

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Part II

Item 5Market for Registrant's Common Equity and Related Stockholder Matters

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

|                                                      |  | Fiscal 2000 |        | Fiscal 2001
|----------------------------------------------------- |  | ----------- | ------ | -----------
|
|First Quarter (Beginning June 9, 1999 in Fiscal 2000) |  | $           | 13.13  |            
|Second Quarter                                        |  | $           | 45.47  |            
|Third Quarter                                         |  | $           | 91.38  |            
|Fourth Quarter                                        |  | $           | 127.44 |            

We
have never paid any cash dividends on our common stock and currently expect to retain future earnings, if any, for use in the operation and expansion of our business and do not
anticipate paying any cash dividends for the foreseeable future. In addition, our credit agreement with BankBoston prohibits us from paying dividends without the lender's written consent. At
April 30, 2001, there were approximately 198 stockholders of record of Ditech's common stock.

Item 6Selected Financial Data

The consolidated statement of operations data for the years ended April 30, 1999, 2000 and 2001, and the consolidated balance sheet data as of
April 30, 2000 and 2001, have been derived from the audited consolidated financial statements of Ditech included elsewhere in this Annual Report on Form 10-K. The
consolidated statement of operations data for the years ended April 30, 1997 and 1998 and the consolidated balance sheet data as of April 30, 1997, 1998 and 1999, have been derived from
audited consolidated financial statements not included in this Annual Report on Form 10-K. The data set forth below should be read in conjunction with the consolidated financial
statements of Ditech,

13

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including the notes thereto, and with "Item 7Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this
Form 10-K.

|                                                                            |                                                   | Years Ended April 30,                                          
|--------------------------------------------------------------------------- | ------------------------------------------------- | ---------------------------------------------------------------
|
|
|Consolidated Statement of Operations Data:                                  |                                                   |                                                                
|Revenue                                                                     |                                                   | $                                                              
|Cost of goods sold                                                          |                                                   |                                                                
|                                                                            |                                                   |                                                                
|                                                                            | Gross profit                                      |                                                                
|                                                                            |                                                   |                                                                
|Operating Expenses:                                                         |                                                   |                                                                
|                                                                            | Sales and marketing                               |                                                                
|                                                                            | Research and development                          |                                                                
|                                                                            | General and administrative                        |                                                                
|                                                                            | Purchased research and development                |                                                                
|                                                                            | Amortization of goodwill and purchased technology |                                                                
|                                                                            |                                                   |                                                                
|                                                                            |                                                   | Total operating expenses                                       
|                                                                            |                                                   |                                                                
|Income from operations                                                      |                                                   |                                                                
|Other income (expense), net                                                 |                                                   |                                                                
|                                                                            |                                                   |                                                                
|Income from continuing operations before income taxes                       |                                                   |                                                                
|Provision for income taxes                                                  |                                                   |                                                                
|                                                                            |                                                   |                                                                
|Income from continuing operations                                           |                                                   |                                                                
|Discontinued operations:                                                    |                                                   |                                                                
|                                                                            | Loss from operations (a)                          |                                                                
|                                                                            | Gain on disposal (a)                              |                                                                
|                                                                            |                                                   |                                                                
|Net income                                                                  |                                                   |                                                                
|Accretion of mandatorily redeemable preferred stock to redemption value (b) |                                                   |                                                                
|                                                                            |                                                   |                                                                
|Net income (loss) attributable to common stockholders (b)                   |                                                   | $                                                              
|                                                                            |                                                   |                                                                
|Per share data:                                                             |                                                   |                                                                
|                                                                            | Basic (a)                                         |                                                                
|                                                                            |                                                   | Net income (loss) per share attributable to common stockholders
|                                                                            |                                                   |                                                                
|                                                                            | Diluted (a)                                       |                                                                
|                                                                            |                                                   | Net income (loss) per share attributable to common stockholders
|                                                                            |                                                   |                                                                
|Number of shares used in per share calculations (e):                        |                                                   |                                                                
|                                                                            | Basic                                             |                                                                
|                                                                            |                                                   |                                                                
|                                                                            | Diluted                                           |                                                                
|                                                                            |                                                   |                                                                

14

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|                                     |  | April 30,
|------------------------------------ |  | ---------
|
|
|Consolidated Balance Sheet Data:     |  |          
|Cash and cash equivalents            |  | $        
|Total assets                         |  |          
|Long-term debt                       |  |          
|Redeemable preferred stock           |  |          
|Total stockholders' equity (deficit) |  |          

---

15

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

The following discussion and analysis should be read in conjunction with "Selected Financial Data" and our Consolidated Financial
Statements and Notes thereto included elsewhere in this Annual Report on Form 10-K. The discussion in this Annual Report on Form 10-K contains forward-looking
statements that involve risks and uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results could differ materially from those discussed
here.

Overview

Ditech designs, develops and markets equipment used in building and expanding telecommunications networks. Our products fall into two categories, echo
cancellation equipment and equipment that enables and facilitates communications over fiber optic networks. To date, the vast majority of our revenue has been derived from sales of our echo
cancellation products. We began sales of our fifth generation echo cancellation products in the fourth quarter of fiscal 2001. We began sales of our first optical communications product in
September 1996.

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

In
November 1998, we acquired the echo cancellation technology that we previously licensed from Telinnovation. We acquired this technology for a total purchase price of 333,332
shares of our common stock, valued at $740,000, and cash of $2.96 million. We paid royalties to Telinnovation on the sales of our products incorporating this technology until we paid the
$2.96 million cash portion of the purchase price with proceeds of our initial public offering in June 1999. The purchased technology is being amortized over a period of five years.

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

On
July 25, 2000, we completed our acquisition of Atmosphere Networks Inc. in exchange for a total of 841,897 shares of common stock and assumption of outstanding
options with an aggregate value of $73.4 million, and $7.9 million of cash. Acquisition costs totaled approximately $680,000. The acquisition was accounted for as a purchase. The total
value of the acquisition of approximately $82 million comprises approximately $15.0 million in net assets, $1.5 million associated with the value of the established workforce and
$65.4 million of goodwill. The goodwill and established workforce costs were capitalized and are being amortized over their estimated lives of four years.

We
generally recognize product revenue when persuasive evidence of a definitive agreement exists, upon shipment to the customer, upon fulfillment of acceptance terms, if any, when no
significant contractual obligations remain outstanding, the fee is fixed or determinable, and collection is reasonably

16

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assured. We offer a warranty, ranging from one year to five years, on all of our products. The warranty generally provides that we will repair or replace any defective product within one year to five
years from the invoice date. We accrue for warranty costs at the time we recognize product revenue, based on our experience.

To
date, the vast majority of our revenue has been derived from sales of our echo cancellation products. We derived approximately 86.0%, 91.6% and 93.7% of our revenue from the sale
of our echo cancellation products in fiscal 2001, fiscal 2000, and fiscal 1999, respectively. We expect that a substantial majority of our revenue will continue to come from sales of our echo
cancellation products in fiscal 2002.

We
have established a direct sales force that sells to our customers in the U.S. and internationally. We also intend to expand the use of sales agents, systems integrators, original
equipment manufacturers and distributors to sell and market our products internationally.

In
addition, we have an agreement with an original equipment manufacturer for distribution of our optical communications products and are exploring the possibility of entering into
others. We generally expect that margins will be higher on our newer products than on our more established products, and that margins on our new products will decline as competition from competing
products becomes more
intense. In addition, we expect that gross margins on products that we sell through original equipment manufacturers will generally be less than gross margins on direct sales. Gross margins in any one
period may not be indicative of gross margins for future periods.

Historically
the majority of our sales have been to customers in the U.S. These customers accounted for approximately 83%, 88%, and 87% of our revenue in fiscal 2001, fiscal 2000, and
fiscal 1999 respectively. However, sales to some of our customers in the U.S. may result in our products eventually being deployed internationally, especially in the case of any original equipment
manufacturer that distributes overseas. To date, substantially all of our international sales have been export sales and denominated in U.S. dollars.

Our
revenue historically has come from a small number of customers. Our five largest customers accounted for over 70%, 75%, and 65% in fiscal 2001, fiscal 2000, and fiscal 1999
respectively. Qwest/LCI accounted for 47% of our revenue in fiscal 2001, 57% in fiscal 2000, and 42% in fiscal 1999.

We
entered into an agreement to license certain of our optical technology to Antec Corporation for $1.9 million, all of which was recognized as revenue in the second quarter of
fiscal 2000. In addition, we receive royalties on a per unit basis.

17

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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 30,1999

2000

2001Revenue

100.0
%
100.0
%
100.0
%Cost of goods sold

46.8

29.9

31.6Gross profit

53.2

70.1

68.4Operating expenses:Sales and marketing

22.7

8.0

11.4Research and development

15.2

7.3

28.2General and administrative

9.5

3.7

5.5Purchased research and development



7.4

Amortization of goodwill and other intangible assets



1.6

16.5Total operating expenses

47.4

28.0

61.6Income from operations

5.8

42.1

6.7Other income (expense), net

(2.0
)
1.3

4.0Income before provision for income taxes

3.8

43.4

10.7Provision for income taxes

1.6

17.8

9.0Net Income

2.2

25.6

1.7


Fiscal Years ended April 30, 2001 and 2000

Revenue.Revenue increased to $121.7 million in fiscal 2001 from $116.9 million in fiscal 2000. The
primary reason for this increase was the 74% growth in sales of our optical amplifiers and subsystems products as we continued to win new customers and introduce new products in fiscal 2001. Our echo
cancellation products remained the primary source of Company revenue, at 86% in fiscal 2001; however, we experienced significant decreases in echo product revenues in the second half of fiscal 2001 as
Ditech was impacted by the slowdown in capital spending in the telecommunications industry. Our series of fourth generation echo cancellation products were the main contributors to the echo
cancellation revenue stream in fiscal 2001. We also introduced in fiscal 2001, and shipped in volume in the fourth quarter, our fifth-generation and highest density echo cancellation product, the
OC-3 echo cancellation system. Geographically, our fiscal 2001 revenue remained primarily domestic, at 83% of total worldwide revenue; however, domestic revenue decreased from 88% in
fiscal 2000 as we experienced significant growth in export sales to China (38% increase) and Latin America (over 200% increase) in fiscal 2001. The slowdown in capital spending in the
telecommunications industry we experienced in the latter half of fiscal 2001 has continued, and continues to have a substantial effect on our revenues.

Cost of Goods Sold.Cost of goods sold consists of direct material costs, personnel costs for test and quality
assurance, costs of licensed technology incorporated into our products, provisions for inventory and warranty expenses and other indirect costs. Cost of goods sold increased to $38.5 million in
fiscal 2001 from $34.9 million in fiscal 2000. The increase in fiscal 2001 is primarily due to hiring in operations, higher levels of sales, a change in the shipment mix toward higher cost
optical products, and indirect cost increases such as rent expenses and inventory charges. Those increases more than offset our ongoing trend of reducing the cost of purchased inventory.

18

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Gross Profit.Gross margin decreased to 68.4% in fiscal 2001 from 70.1% in fiscal 2000. The primary factors causing
this decrease, in addition to the increases in cost of goods sold, are changes in the sales
mix between echo cancellation and optical products toward lower margin optical products. Also, within the optical products family, sales were more concentrated in lower margin products in fiscal 2001.
Average selling prices also declined in fiscal 2001, in particular for our echo cancellation products, putting additional pressure on margins.

Sales and Marketing.Sales and marketing expenses primarily consist of personnel costs including commissions and costs
associated with customer service, travel, trade shows, communications and outside consulting services. Sales and marketing expenses increased to $13.8 million in fiscal 2001 from
$9.4 million in fiscal 2000. The primary causes for the increase were increases in personnel and related costs, including travel, to support expansion of our customer service functions and
marketing efforts for products both domestically and internationally, including the formation of new direct and OEM channels partnerships. We plan to continue to increase our expenditures in sales and
marketing both in real terms and as a percentage of sales in order to broaden distribution of our products both domestically and internationally.

Research and Development.Research and development expenses primarily consist of personnel costs, contract consultants,
equipment and supplies used in the development of echo cancellation and optical communications products, as well as amortization of deferred stock compensation associated with our acquisitions of
Telinnovation and Atmosphere Networks. Research and development expenses increased to $34.4 million in fiscal 2001 from $8.6 million in fiscal 2000. The increase is primarily related to
increased personnel and related costs and increased materials and consulting costs associated with both our echo cancellation products and optical communications products. Personnel and related costs
were up $7.3 million due mostly to hiring, including the engineers who had been part of Atmosphere Networks. We increased spending on materials, product development and test, and consulting
services by $6.5 million in fiscal 2001 for our echo cancellation efforts, primarily on OC-3 and STM-1 products, as well as in the optical communications and networking
products labs. In addition, amortization of deferred stock compensation increased by $9.6 million to $11.5 million in fiscal 2001 related to the acquisitions of Telinnovation
($7.6 million in fiscal 2001, $1.9 million in fiscal 2000) and Atmosphere Networks ($3.9 million in fiscal 2001, since being acquired on July 25, 2000). We expect research
and development expenses to continue to grow in future periods, both in real terms and as a percentage of sales, as we plan to hire additional engineers, enhance our current products, and develop new
products.

General and Administrative.General and administrative expenses primarily consist of personnel costs for corporate
officers and finance and human resources personnel, and legal, accounting and consulting costs. General and administrative expenses increased to $6.7 million in fiscal 2001 from
$4.3 million in fiscal 2000. The increase was primarily due to increased costs, including costs of personnel, to support the continuing development of the company.

Amortization of Goodwill and Other Intangible Assets.In fiscal 2001, we recorded expense of $20.1 million, an
increase of $18.3 million from fiscal 2000, for amortization of acquisition-related intangible assets, including goodwill, purchased technology and an established workforce. These assets were
acquired as part of the acquisitions of Telinnovation, in the fourth quarter of fiscal 2000, and of Atmosphere Networks, in the first quarter of fiscal 2001. The basis for the allocation and expected
amortization periods are detailed in Note 3 to the Consolidated Financial Statements.

Other Income (Expense).Other income (expense) consists of interest income on our invested cash and cash equivalent
balances, offset by interest expense attributable to our capital leases. Other income increased to $4.9 million in fiscal 2001 from $1.5 million in fiscal 2000. The improvement was
primarily attributable to increased interest income on funds invested from our initial and follow-on public offerings completed in fiscal 2000, and cash from operations. Despite a lower
interest rate environment

19

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in fiscal 2001, our larger average balances invested in fiscal 2001 contributed to an increase in interest income earned over that earned in fiscal 2000.

Income Taxes.Income taxes consist of federal, state, and foreign income taxes. The effective tax rate in fiscal 2001
was 83.9% as compared to 40.9% in fiscal 2000. The principal reason for the higher tax rate in fiscal 2001 is due to certain non-deductible costs associated with our acquisitions,
including purchased technology and the amortization of goodwill and other acquisition-related intangible assets. Those factors, which contributed to a higher effective tax rate in fiscal 2001, were
partially offset by the effect of having earned greater tax-exempt interest income in fiscal 2001.

Fiscal Years Ended, April 30, 2000 and 1999

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

Cost of Goods Sold.Cost of goods sold consists of direct material costs, personnel costs for test and quality
assurance, costs of licensed technology incorporated into our products, provisions for inventory and warranty expenses and other indirect costs. Cost of goods sold increased to $34.9 million in
fiscal 2000 from $11.9 million in fiscal 1999. The primary reason for the increase was costs associated with the increased unit sales of our fourth generation echo cancellation products.

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

Sales and Marketing.Sales and marketing expenses primarily consist of personnel costs including commissions and costs
associated with customer service, travel, trade shows and outside consulting services. Sales and marketing expenses increased to $9.4 million in fiscal 2000 from $5.8 million in fiscal
1999. The primary cause for the increase was increases in personnel and related costs, including travel, to support expansion of our customer service functions and marketing efforts for our products
both domestically and internationally, including the formation of new direct and OEM channels partnerships.

Research and Development.Research and development expenses primarily consist of personnel costs, contract consultants,
and equipment and supplies used in the development of echo cancellation and optical communications products. Research and development expense increased to $8.6 million in fiscal 2000 from
$3.9 million in fiscal 1999. The increase is primarily related to increased personnel and related costs and increased materials and consulting costs associated with both our echo cancellation
products and optical communications products. In addition, research and development spending increased due to the inclusion of a full quarter of stock compensation attributable to the acquisition of
Telinnovation ($1.9 million), which closed on February 1, 2000.

General and Administrative.General and administrative expenses primarily consist of personnel costs for corporate
officers and finance and human resources personnel, and legal, accounting and consulting costs. General and administrative expenses increased to $4.3 million in fiscal 2000 from

20

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$2.4 million in fiscal 1999. The increase was primarily due to amortization of deferred compensation in connection with stock options granted in fiscal 1999, increased legal, accounting and
reporting costs and insurance premiums for directors and officers insurance as a result of becoming a public company and increased legal costs associated with an arbitration matter which was resolved
in our favor. General and administrative costs also increased due to incremental bad debt provisions in fiscal 2000 attributable to growth in our accounts receivable.

Purchased Research and Development.In fiscal 2000, we expensed $8.7 million for purchased research and
development. This research and development was acquired as part of the acquisition of Telinnovation. The amount allocated to purchase research and development was determined through established
valuation techniques in the high-technology communications industry. It is reasonably possible that the development of this technology could fail because of either prohibitive cost,
inability to perform the required efforts to complete the technology or other factors outside of our control such as a change in the market for the resulting developed products. In addition, at such
time that the project is completed it is reasonably possible that the completed products do not receive market acceptance or that we are unable to produce and market the products cost effectively.

Amortization of Goodwill and Purchased Technology.In fiscal 2000, we amortized a total of $1.9 million for
goodwill and purchased technology. Goodwill and purchased technology assets, valued at $37.1 million were purchased as part of the acquisition of Telinnovation and are being amortized to
expense over five years.

Other Income (Expense).Other income (expense) consists of interest income on our invested cash and cash equivalent
balances, offset by interest expense attributable to our outstanding debt and capital leases. Other income increased to $1.5 million in fiscal 2000 from an expense of $500,000 in fiscal 1999.
The improvement was primarily attributable to increased interest income on funds invested from our public offerings and reduction in interest expense due to the retirement of our outstanding debt in
the first quarter of fiscal 2000.

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

Stock-Based Compensation

We recorded deferred compensation of $1,320,000 as of April 30, 1999, as a result of stock options granted in fiscal 1999. We are amortizing the
deferred compensation over the corresponding vesting period of the stock options. We amortized approximately $322,000, $330,000 and $91,000 of the deferred compensation in fiscal 2001, fiscal 2000,
and fiscal 1999 respectively.

Associated
with the acquisition of Telinnovation in February 2000, we recorded $23 million of deferred compensation related to 400,000 restricted shares granted to the
Telinnovation employees. These restricted shares are tied to the employees' continuing employment with Ditech. The deferred compensation is being amortized as research and development expense over the
three-year vesting period of the restricted shares. We amortized approximately $7.7 million and $1.9 million of this deferred compensation in fiscal 2001, and fiscal 2000,
respectively.

Associated
with the acquisition of Atmosphere on July 25, 2000, we recorded $2.4 million of deferred compensation related to unvested options assumed in the acquisition.
Adjustments were recorded, due to option cancellations upon termination of employment, which reduced that amount to approximately $1.7 million. This deferred compensation is being amortized to
research and development expense over the remaining terms of the original twenty-four month vesting period of the

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options. In connection with the acquisition of Atmosphere we issued nonqualified stock options for approximately 750,000 shares of our common stock at a price equal to a 50% discount from the market
value of the stock on its grant date of August 1, 2000. The discount was recorded as deferred compensation of $17.3 million in August 2000. Adjustments were recorded, due to
option cancellations upon termination of employment, which reduced that amount to approximately $14.6 million. This deferred compensation is being amortized to research and development expense
over the remaining term of the original forty-eight month vesting period of the options. The Atmosphere-related deferred compensation expense totaled approximately $3.9 million in fiscal 2001.

Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments at fair value. The adoption of SFAS 133 as of May 1, 2001 did not have a material impact on our
consolidated financial position, results of operations, or cash flows.

In
December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes certain of the SEC's
views in applying generally accepted accounting principles to revenue recognition in financial statements. The Company adopted SAB 101 in the fourth quarter of fiscal 2001. The adoption of SAB 101 did
not have a material impact on our consolidated financial position, results of operations, or cash flows.

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

On
June 29, 2001, the FASB voted in favor of FASB Statement No. 142 (SFAS 142), "Goodwill and Other Intangible Assets." The FASB expects to release
SFAS 142 in the last half of July 2001. SFAS 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Upon adoption of
SFAS 142, goodwill will be tested annually and whenever events or circumstances occur indicating that goodwill might be impaired. Amortization of goodwill, including goodwill recorded in past
business combinations, will cease. We are required to adopt SFAS 142 May 1, 2002, with the
option of earlier adoption in the first quarter of fiscal 2002. We have not yet determined what the impact of SFAS 142 will be on our consolidated financial position, results of operations or
cash flows.

Liquidity and Capital Resources

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

Operating
activities generated $715,000 in cash from operations in fiscal 1999, primarily due to increased operating profits, increases in accounts payable, income taxes payable and
deferred revenue, partially offset by an increase in inventories, accounts receivable and other current assets. In fiscal 2000 we generated $34.3 million in cash from operations, primarily due
to increased operating profits,

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increases in accounts payable, accrued expenses and deferred revenue, partially offset by an increase in accounts receivable, inventories and other current assets. In fiscal 2001 we generated
$28.7 million in cash from operations, primarily due to operating profits, after including the impact of non-cash items, and to a lesser extent due to a reduction in accounts
receivable. These net sources of cash were partially offset by net uses of cash for increases in inventory and other current assets and reductions in accounts payable, and deferred revenue balances.

Investing
activities used $1.3 million in cash in fiscal 1999 primarily for purchases of property and equipment. Investing activities used $5.3 million in fiscal 2000,
with $3.0 million used to purchase our echo technology from Telinnovation, and the balance primarily going to purchases of equipment. In fiscal 2001, investing activities used
$6.1 million, mostly toward the purchase of property and equipment, offset somewhat by a net source of cash of $542,000 resulting from our purchase the net assets of Atmosphere Networks in
July 2000.

Financing
activities generated $298,000 of cash in fiscal 1999, primarily from the exercise of stock options partially offset by the principal repayments on the term debt and capital
leases. In fiscal 2000 we generated $56.5 million of cash from financing, primarily from the net proceeds from our initial public offering in June 1999 and our secondary offering in
October 1999, partially offset by the redemption of Series A preferred stock, retirement of long term debt, and principal payments on our capital leases. In fiscal 2001 we used
$1.1 million in financing activities, primarily due to the retirement in the second quarter of approximately $4.4 million in notes payable and capital lease obligations assumed in the
Atmosphere acquisition, partially offset by approximately $3.3 million from issuance of stock under our stock option plans and employee stock purchase plans.

As
of April 30, 2001, we had cash and cash equivalents of $110.1 million as compared to $88.6 million at April 30, 2000. In addition, we have a line of
credit to borrow up to $4.0 million. This line of credit expires in August 2001. At April 30, 2001, borrowings of $4.0 million were available and no borrowings were
outstanding under this line of credit. We have started discussions with the bank to potentially renew the line of credit.

We
have no material commitments other than obligations under operating leases, particularly our facility leases. See Note 5 of the Notes to our Consolidated Financial
Statements. We currently occupy approximately 61,000 square feet in the two buildings that form our Mountain View headquarters. This facility lease expires in June 2006. We also lease a
research and development facility in Melbourne, Australia, of approximately 6,300 square feet with a lease term of four years which expires in April 2005. We believe that the space under the
combined leases is adequate to meet our needs for at least the next twelve months.

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

Impact of European Monetary Conversion

We are aware of the issues associated with the changes in Europe resulting from the formation of a European economic and monetary union, or EMU. One change
resulting from this union required EMU member states to irrevocably fix their respective currencies to a new currency, the euro, as of January 1, 1999, at which date the euro became a
functional legal currency of these countries. Through December 31, 2001, business in the EMU member states is being conducted in both the existing national currency, such as the French franc or
the Deutsche mark, and the euro. As a result, companies operating or conducting business in EMU member states need to ensure that their financial and other software systems are capable of processing
transactions and properly handing these currencies, including the euro. The euro currency will be put into circulation on January 1, 2002, for a short period of dual circulation with existing
national currencies, until the national currencies of EMU member states will be withdrawn from use by February 28, 2002.

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Based
on our assessment to date, we do not expect the conversion to the euro to have a material impact on our internal systems or our product sales. To date we have experienced
limited sales activities in the European economies, substantially all of which have been in U.S. dollars. We will take appropriate corrective action based on the results of our ongoing assessment.

Future Growth and Operating Results Subject to Risk

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

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

Our
revenue historically has come from a small number of customers. A customer may stop buying our products or significantly reduce its orders for our products for a number of
reasons, including the acquisition of a customer by another company or a delay in a scheduled product introduction. If this happens, our revenue could be greatly reduced, which would materially and
adversely affect our business. Our five largest customers accounted for over 70%, 75%, 65% of our revenue in fiscal 2001, fiscal 2000, and fiscal 1999, respectively. Qwest accounted for 47%, 57%, 42%,
of our revenue in fiscal 2001, fiscal 2000, and fiscal 1999, respectively. As an example of this risk, MCI accounted for $7.6 million, or more than 50%, of our revenue in fiscal 1997, but only
$1.4 million, or approximately 11%, of our revenue in fiscal 1998. This reduction began shortly before the acquisition of MCI by Worldcom. More recently, in the third quarter of fiscal 2001,
delays in scheduled shipments of new OC-3 echo cancellation products to Qwest resulted in Qwest revenues declining to 12% of total revenue in that fiscal quarter versus their recent
purchase history that averaged over 40% of total revenue in fiscal 2000, fiscal 1999 and fiscal 1998.

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

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

OUR
REVENUE MAY VARY FROM PERIOD TO PERIOD.

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



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

Revenue
can vary period to period if planned dates of new product introductions are missed and the product release occurs in a later quarter. As an example of this risk, in
October 2000, we announced our OC-3 echo cancellation system, which was expected to be available for commercial shipment in the third quarter of fiscal 2001. We experienced delays
in the scheduled shipping of the OC-3 product, contributing to a revenue shortfall in the third quarter of fiscal 2001. The OC-3 echo cancellation system products were released
and shipped commercially in volume in the fourth quarter of fiscal 2001.

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

OUR
EXPENSES MAY VARY FROM PERIOD TO PERIOD.

Many
of our expenses do not vary with our revenue. Factors that could cause our expenses to fluctuate from period to period include:



If
we incur such additional expenses in a quarter in which we do not experience increased revenue, our profitability would be adversely affected and we may even incur losses for that
quarter, as we experienced in the third and fourth quarters of fiscal 2001.

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

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

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

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



However,
we may not be able to successfully produce or market our new products in commercial quantities, complete product development when anticipated, or increase sales. These risks
are of particular concern when a new generation product is introduced. As a result, while we believe we will achieve our product introduction dates, they may be delayed. In fiscal 2001, sales of our
fourth generation echo cancellers and our broadband system have generated the majority of our revenue growth. Production shipments of our fifth generation echo cancellation system, the
OC-3, began in the fourth quarter of fiscal 2001, and we believe we will generate substantial revenues from this product in FY 2002. We expect the international version of the product, the
STM-1, to be ready for testing near the end of the first quarter of fiscal 2002 with production shipments expected in the second quarter of fiscal 2002.

Shipments
of our optical amplifiers began in the third quarter of calendar 1996 and accounted for substantially all of our revenue for optical communications products to date. In
fiscal 2001, we introduced and shipped Quasar and Orion products, our latest generation of optical amplifier subsystems products.

In
the past, we experienced an unforeseen delay in the development of one of our products due to the need to design around a part that did not function as anticipated and also when
the first version of one of our optical communications products did not fully meet customer requirements. We have in the past experienced, and in the future may experience, similar unforeseen delays
in the development of our new products. We must devote a substantial amount of resources in order to develop and achieve commercial acceptance of our new echo cancellation and optical communications
and optical systems products. We may not be able to address evolving demands in these markets in a timely or effective way. Even if we do, customers in these markets may purchase or otherwise
implement competing products.

We
plan to ship our new optical system product, Titanium, in the fourth quarter of fiscal 2002, but we only anticipate nominal revenues from this product in fiscal 2002. However,
delays may occur due to unforeseen technical difficulties in the development process, inability to obtain components on a timely basis, and for other reasons outside of our control. Delays in shipping
Titanium would adversely affect revenues in the subsequent year.

CUSTOMERS
MAY DELAY ORDERS FOR OUR EXISTING PRODUCTS IN ANTICIPATION OF NEW PRODUCTS, WHICH WOULD DECREASE OUR REVENUES.

Our
customers may delay orders for our existing products in anticipation of the release of our or our competitors' new products. Further, if our or our competitors' new products
substantially replace the functionality of our existing products, our existing products may become obsolete, and we could be forced to sell them at reduced prices or even at a loss.

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

To
date, the vast majority of our revenue has been derived from sales of our echo cancellation products. If we are not able to develop substantial revenue from sales of our optical
communications products, our ability to grow our business may be substantially impaired. We derived approximately 86%, 92% and 94% of our revenue from the sale of our echo cancellation products in
fiscal 2001, fiscal 2000, and fiscal 1999, respectively. We expect that a substantial majority of our revenue will continue to come from sales of our echo cancellation products for the foreseeable
future.

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

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

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

In
our echo cancellation business, we face competition from our two major direct competitors, Tellabs and Lucent. We also face competition from switch manufacturers who may install
echo cancellation inside their voice switches. Two major voice switch manufacturers, Lucent and Nortel Networks, have announced new voice switches where echo cancellation will be incorporated within
their switches. Furthermore, several next generation voice switch manufacturers, including Cisco and Sonus Networks, have announced packet-based voice switches where echo cancellation will be
incorporated within their switches. Ditech does provide echo cancellation software that can work within these voice switches, but
a widespread acceptance of these new voice switches could present a competitive threat to Ditech if the net result was the elimination of demand for Ditech's echo cancellation system products.

In
our nascent optical systems business, new technology breakthroughs by our competitors may impact acceptance of our product in the market and future revenues.

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

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

During
the last seventeen months, we completed the acquisitions of Telinnovation and Atmosphere. We believe the Telinnovation acquisition provides us with expanded opportunities in
the newly developing voice over the Internet and packet-based markets where echo cancellation will be an

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important issue. We believe the Atmosphere acquisition provides us with expanded opportunities in the rapidly growing optical communications market. However, our ability to successfully execute in
these new markets is greatly dependent on our ability to retain the key personnel from Telinnovation and Atmosphere. Although we believe that we have provided significant incentives directly linked to
continued employment, there is no guarantee that these key employees will remain in our employment until after we have successfully penetrated these markets.

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

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

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

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

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

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



WE
MAY NOT BE ABLE TO RESPOND QUICKLY AND EFFECTIVELY TO THESE RAPID CHANGES. The emerging nature of these products and their rapid evolution will require us to continually improve
the performance, features and reliability of our products, particularly in response to competitive product offerings. We may not be able to respond quickly and effectively to these developments. The
introduction or market acceptance of products incorporating superior technologies or the emergence of alternative technologies and new industry standards could render our existing
products, as well as our products currently under development, obsolete and unmarketable. In addition, we may have only a limited amount of time to penetrate certain markets, and we may not be
successful

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in achieving widespread acceptance of our products before competitors offer products and services similar or superior to our products. We may fail to anticipate or respond on a
cost-effective and timely basis to technological developments, changes in industry standards or end user requirements. We may also experience significant delays in product development or
introduction. In addition, we may fail to release new products or to upgrade or enhance existing products on a timely basis.

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

IF
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 depend in large part on continued development and expansion of voice and data communications networks. Development of communications networks is driven in part by the
growth of competitive service providers that emerged as a result of the Telecommunications Act of 1996 and privatization of the telecommunications industry on a global scale. We are subject to risks
of growth constraints due to our current and planned dependence on emerging competitive and privatized overseas service providers. These potential customers may be constrained for a number of reasons,
including their limited capital resources, changes in regulation and consolidation. Ditech has experienced recently, as have other companies in our sector, an unexpected slowdown in infrastructure
spending by its customers. This recent trend of lower capital spending in the telecommunications industry contributed to the decline in our revenues in the second half of fiscal 2001.

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

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

SOME
OF THE KEY COMPONENTS USED IN OUR PRODUCTS MAY HAVE INSUFFICIENT SUPPLY TO MEET THE TOTAL MARKET DEMAND AND ANY UNFULFILLED DEMAND WE EXPERIENCE MAY REDUCE OR DELAY OUR EXPECTED
PRODUCT SHIPMENTS AND REVENUES.

We
may not be as successful as some of the larger manufacturers we compete with in securing our desired purchase quantities of scarce components. If we are unable to procure our
planned quantities of material from all prospective suppliers, and if we cannot use alternative components, we could experience revenue delays or reductions and potential harm to customer
relationships. An example of this risk occurred in the third quarter of fiscal 2001 as two vendors supplying us with components used in our OC-3 product did not meet our total demand,
which contributed to our revenue shortfall in that quarter.

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

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

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

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

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

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

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

We
rely on a combination of patents, trade secrets, copyright and trademark laws, nondisclosure agreements and other contractual provisions and technical measures to protect our
intellectual property rights. Nevertheless, such measures may not be adequate to safeguard the technology underlying our echo cancellation and optical communications products. In addition, employees,
consultants and others who participate in the development of our products may breach their agreements with us regarding our intellectual property, and we may not have adequate remedies for any such
breach. In addition, we may

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not be able to effectively protect our intellectual property rights in certain countries. We may, for a variety of reasons, decide not to file for patent, copyright or trademark protection outside of
the
United States. We also realize that our trade secrets may become known through other means not currently foreseen by us. Notwithstanding our efforts to protect our intellectual property, our
competitors may be able to develop products that are equal or superior to our products without infringing on any of our intellectual property rights.

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

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

ACQUISITIONS
AND INVESTMENTS MAY ADVERSELY AFFECT OUR BUSINESS.

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



Furthermore,
acquisitions involve numerous operational risks, including:



Item 7AQuantitative and Qualitative Disclosures About Market Risk

Our exposure to market risk for changes in interest rates relates primarily to our investment portfolio. We do not use derivative financial instruments and our
investment portfolio only includes highly liquid instruments. As a result of the short-term duration of the financial instruments in our investment portfolio, we do not believe that our
financial instruments are materially sensitive to changes in interest rates. Our cash and cash equivalents as of April 30, 2001 of $110.1 million all have maturities of 35 days or
less and bear an average interest rate of 3.7%. The estimated fair value of our cash and cash equivalents approximates the principal amounts of the underlying securities based on the short maturities
of these financial instruments.

To
date, all of our sales are denominated in US dollars. As only a small amount of foreign bills are paid in currencies other than the US dollar, our foreign exchange risk is
considered immaterial to our consolidated financial position, results of operations or cash flows.

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Item 8Financial Statements and Supplementary Data

DITECH COMMUNICATIONS CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                          |  | Page
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|Report of Independent Accountants                         |  | 33  
|Consolidated Balance Sheets                               |  | 34  
|Consolidated Statements of Operations                     |  | 35  
|Consolidated Statements of Stockholders' Equity (Deficit) |  | 36  
|Consolidated Statements of Cash Flows                     |  | 37  
|Notes to Consolidated Financial Statements                |  | 38  
|Supplementary Financial Data (unaudited)                  |  | 52  

32

---



REPORT OF INDEPENDENT ACCOUNTANTS

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

In
our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows present fairly, in all material
respects, the financial position of Ditech Communications Corporation and its subsidiaries at April 30, 2000 and 2001, and the results of their operations and their cash flows for each of the
three years in the period ended April 30, 2001, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing
standards generally accepted in the United States of America, which require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.

/s/
PricewaterhouseCoopers LLP

May 23,
2001
San Jose, California.

33

---



DITECH COMMUNICATIONS CORPORATION        CONSOLIDATED BALANCE SHEETS        (in thousands)

|                                                                                                                                                       |                                                                                                                       | April 30,                  |        
|------------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------- | -------------------------- | -------
|
|
|ASSETS                                                                                                                                                 |                                                                                                                      
|Current assets:                                                                                                                                        |                                                                                                                       |                            |        
|                                                                                                                                                       | Cash and cash equivalents                                                                                             |                            | $      
|                                                                                                                                                       | Accounts receivable, net of allowance for doubtful accounts of $400 and $597 at April 30, 2000 and 2001, respectively |                            |        
|                                                                                                                                                       | Inventories                                                                                                           |                            |        
|                                                                                                                                                       | Other current assets                                                                                                  |                            |        
|                                                                                                                                                       | Income taxes receivable                                                                                               |                            |        
|                                                                                                                                                       | Deferred income taxes                                                                                                 |                            |        
|                                                                                                                                                       |                                                                                                                       |                            |        
|                                                                                                                                                       |                                                                                                                       | Total current assets       |        
|Property and equipment, net                                                                                                                            |                                                                                                                       |                            | 2,680  
|Purchased technology, net                                                                                                                              |                                                                                                                       |                            | 24,617 
|Goodwill, net                                                                                                                                          |                                                                                                                       |                            | 10,790 
|Deferred income taxes                                                                                                                                  |                                                                                                                       |                            | 4,703  
|Other assets                                                                                                                                           |                                                                                                                       |                            | 3,198  
|                                                                                                                                                       |                                                                                                                       |                            |        
|                                                                                                                                                       |                                                                                                                       | Total assets               |        
|                                                                                                                                                       |                                                                                                                       |                            |        
|LIABILITIES                                                                                                                                            |                                                                                                                      
|Current liabilities:                                                                                                                                   |                                                                                                                       |                            |        
|                                                                                                                                                       | Accounts payable                                                                                                      |                            | $      
|                                                                                                                                                       | Accrued expenses                                                                                                      |                            |        
|                                                                                                                                                       | Deferred revenue                                                                                                      |                            |        
|                                                                                                                                                       | Income taxes payable                                                                                                  |                            |        
|                                                                                                                                                       | Obligations under capital lease, current portion                                                                      |                            |        
|                                                                                                                                                       |                                                                                                                       |                            |        
|                                                                                                                                                       |                                                                                                                       | Total current liabilities  |        
|Obligations under capital lease, net of current portion                                                                                                |                                                                                                                       |                            | 21     
|                                                                                                                                                       |                                                                                                                       |                            |        
|                                                                                                                                                       |                                                                                                                       | Total liabilities          |        
|                                                                                                                                                       |                                                                                                                       |                            |        
|Commitments and contingencies (Note 5)                                                                                                                 |                                                                                                                       |                            |        
|STOCKHOLDERS' EQUITY                                                                                                                                   |                                                                                                                      
|Common stock, $0.001 par value: 200,000 shares authorized and 28,274 and 29,725 shares issued and outstanding at April 30, 2000 and 2001, respectively |                                                                                                                       |                            | 28     
|Additional paid-in capital                                                                                                                             |                                                                                                                       |                            | 171,119
|Retained earnings                                                                                                                                      |                                                                                                                       |                            | 4,363  
|Deferred stock compensation                                                                                                                            |                                                                                                                       |                            | (21,937
|                                                                                                                                                       |                                                                                                                       |                            |        
|                                                                                                                                                       |                                                                                                                       | Total stockholders' equity |        
|                                                                                                                                                       |                                                                                                                       |                            |        
|                                                                                                                                                       | Total liabilities and stockholders' equity                                                                            |                            | $      
|                                                                                                                                                       |                                                                                                                       |                            |        

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

34

---

DITECH COMMUNICATIONS CORPORATION        CONSOLIDATED STATEMENTS OF OPERATIONS        (in thousands, except per share data)

|                                                                        |                                                      | Years ended April 30,        |       
|----------------------------------------------------------------------- | ---------------------------------------------------- | ---------------------------- | ------
|
|                                                                        |                                                      |                              |       
|Revenue                                                                 |                                                      | $                            | 25,364
|Cost of goods sold                                                      |                                                      |                              | 11,858
|                                                                        |                                                      |                              |       
|                                                                        | Gross profit                                         |                              |       
|                                                                        |                                                      |                              |       
|Operating expenses:                                                     |                                                      |                              |       
|                                                                        | Sales and marketing                                  |                              |       
|                                                                        | Research and development                             |                              |       
|                                                                        | General and administrative                           |                              |       
|                                                                        | Purchased research and development                   |                              |       
|                                                                        | Amortization of goodwill and other intangible assets |                              |       
|                                                                        |                                                      |                              |       
|                                                                        |                                                      | Total operating expenses     |       
|                                                                        |                                                      |                              |       
|Income from operations                                                  |                                                      |                              | 1,488 
|                                                                        |                                                      |                              |       
|Other income (expense):                                                 |                                                      |                              |       
|                                                                        | Interest income                                      |                              |       
|                                                                        | Interest expense                                     |                              |       
|                                                                        |                                                      |                              |       
|                                                                        |                                                      | Total other income (expense) |       
|                                                                        |                                                      |                              |       
|Income before provision for income taxes                                |                                                      |                              | 988   
|Provision for income taxes                                              |                                                      |                              | 413   
|                                                                        |                                                      |                              |       
|Net income                                                              |                                                      |                              | 575   
|Accretion of mandatorily redeemable preferred stock to redemption value |                                                      |                              | 1,497 
|                                                                        |                                                      |                              |       
|Net income (loss) attributable to common stockholders                   |                                                      | $                            | (922  
|                                                                        |                                                      |                              |       
|Net income (loss) per share attributable to common stockholders:        |                                                      |                              |       
|                                                                        | Basic                                                |                              | $     
|                                                                        |                                                      |                              |       
|                                                                        | Diluted                                              |                              | $     
|                                                                        |                                                      |                              |       
|Number of shares used in per share calculations:                        |                                                      |                              |       
|                                                                        | Basic                                                |                              |       
|                                                                        |                                                      |                              |       
|                                                                        | Diluted                                              |                              |       
|                                                                        |                                                      |                              |       

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

35

---



DITECH COMMUNICATIONS CORPORATION        CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)        (in thousands)

|                                                                          |  | Common Stock |   |   |    | Retained
Earnings
(Accumulated
Deficit) |   |         |   |   |        
|------------------------------------------------------------------------- |  | ------------ | - | - | -- | --------------------------------------- | - | ------- | - | - | -------
|
|
|
|Balances, April 30, 1998                                                  |  | 6,160        |   | $ | 6  |                                         | $ | 72      |   | $ | (24,135
|Issuance of stock under employee stock plans                              |  | 2,698        |   |   | 2  |                                         |   | 909     |   |   |       
|Issuance of common stock                                                  |  | 334          |   |   | 1  |                                         |   | 739     |   |   |       
|Repurchase of common stock                                                |  | (4           | ) |   |   |                                         |   | (2      | ) |   |       
|Accretion for dividend on Series A and B redeemable preferred stock       |  |             |   |   |   |                                         |   |        |   |   | (1,497 
|Redemption of Series C preferred stock                                    |  |             |   |   |   |                                         |   |        |   |   | (147   
|Tax benefit of employee stock transactions                                |  |             |   |   |   |                                         |   | 43      |   |   |       
|Deferred compensation on issuance of stock options                        |  |             |   |   |   |                                         |   | 1,320   |   |   |       
|Amortization of deferred stock compensation                               |  |             |   |   |   |                                         |   |        |   |   |       
|Net income                                                                |  |             |   |   |   |                                         |   |        |   |   | 575    
|                                                                          |  |              |   |   |    |                                         |   |         |   |   |        
|Balances, April 30, 1999                                                  |  | 9,188        |   |   | 9  |                                         |   | 3,081   |   |   | (25,204
|Issuance of stock under employee stock plans                              |  | 651          |   |   | 1  |                                         |   | 690     |   |   |       
|Issuance of common stock, net of issuance costs                           |  | 8,900        |   |   | 9  |                                         |   | 82,376  |   |   |       
|Repurchase of common stock                                                |  | (11          | ) |   |   |                                         |   | (4      | ) |   |       
|Accretion for divided on Series A and Series B redeemable preferred stock |  |             |   |   |   |                                         |   |        |   |   | (99    
|Redemption of Series A preferred stock                                    |  |             |   |   |   |                                         |   |        |   |   | (337   
|Conversion of Series B preferred stock                                    |  | 8,346        |   |   | 8  |                                         |   | 6,033   |   |   |       
|Issuance of common stock in purchase acquisition                          |  | 1,200        |   |   | 1  |                                         |   | 68,849  |   |   |       
|Tax benefit of employee stock transactions                                |  |             |   |   |   |                                         |   | 9,995   |   |   |       
|Deferred compensation on issuance of stock options to consultants         |  |             |   |   |   |                                         |   | 99      |   |   |       
|Amortization of deferred stock compensation                               |  |             |   |   |   |                                         |   |        |   |   |       
|Net income                                                                |  |             |   |   |   |                                         |   |        |   |   | 30,003 
|                                                                          |  |              |   |   |    |                                         |   |         |   |   |        
|Balances, April 30, 2000                                                  |  | 28,274       |   |   | 28 |                                         |   | 171,119 |   |   | 4,363  
|Issuance of stock under employee stock plans                              |  | 640          |   |   | 1  |                                         |   | 3,338   |   |   |       
|Repurchase of common stock                                                |  | (31          | ) |   |   |                                         |   | (13     | ) |   |       
|Issuance of common stock in purchase acquisition                          |  | 842          |   |   | 1  |                                         |   | 75,098  |   |   |       
|Deferred compensation on issuance of stock options                        |  |             |   |   |   |                                         |   | 14,591  |   |   |       
|Tax benefit of employee stock transactions                                |  |             |   |   |   |                                         |   | 6,550   |   |   |       
|Amortization of deferred stock compensation                               |  |             |   |   |   |                                         |   |        |   |   |       
|Net income                                                                |  |             |   |   |   |                                         |   |        |   |   | 2,096  
|                                                                          |  |              |   |   |    |                                         |   |         |   |   |        
|Balances, April 30, 2001                                                  |  | 29,725       |   | $ | 30 |                                         | $ | 270,683 |   | $ | 6,459  
|                                                                          |  |              |   |   |    |                                         |   |         |   |   |        

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

36

---

DITECH COMMUNICATIONS CORPORATION        CONSOLIDATED STATEMENTS OF CASH FLOWS        (in thousands)

|                                                     |                                                                                   | Years ended April 30,                                |                                                    
|---------------------------------------------------- | --------------------------------------------------------------------------------- | ---------------------------------------------------- | ---------------------------------------------------
|
|Cash flows from operating activities:                |                                                                                   |                                                      |                                                    
|                                                     | Net income                                                                        |                                                      | $                                                  
|                                                     | Adjustments to reconcile net income to net cash provided by operating activities: |                                                      |                                                    
|                                                     |                                                                                   | Depreciation and amortization                        |                                                    
|                                                     |                                                                                   | Increase in provision for doubtful accounts          |                                                    
|                                                     |                                                                                   | Loss (gain) on disposal of property and equipment    |                                                    
|                                                     |                                                                                   | Tax benefit of employee stock transactions           |                                                    
|                                                     |                                                                                   | Deferred income taxes                                |                                                    
|                                                     |                                                                                   | Amortization of deferred stock compensation          |                                                    
|                                                     |                                                                                   | Amortization of goodwill and other intangible assets |                                                    
|                                                     |                                                                                   | Purchased research and development                   |                                                    
|                                                     |                                                                                   | Change in assets and liabilities:                    |                                                    
|                                                     |                                                                                   |                                                      | Accounts receivable                                
|                                                     |                                                                                   |                                                      | Inventories                                        
|                                                     |                                                                                   |                                                      | Other current assets                               
|                                                     |                                                                                   |                                                      | Income taxes                                       
|                                                     |                                                                                   |                                                      | Accounts payable                                   
|                                                     |                                                                                   |                                                      | Accrued expenses and other                         
|                                                     |                                                                                   |                                                      | Deferred revenue                                   
|                                                     |                                                                                   |                                                      |                                                    
|                                                     |                                                                                   |                                                      |                                                    
|                                                     |                                                                                   |                                                      |                                                    
|Cash flows from investing activities:                |                                                                                   |                                                      |                                                    
|                                                     |                                                                                   | Purchases of property and equipment                  |                                                    
|                                                     |                                                                                   | Additions to other assets                            |                                                    
|                                                     |                                                                                   | Net cash received in purchase acquisitions           |                                                    
|                                                     |                                                                                   |                                                      |                                                    
|                                                     |                                                                                   |                                                      | Net cash used in investing activities              
|                                                     |                                                                                   |                                                      |                                                    
|Cash flows from financing activities:                |                                                                                   |                                                      |                                                    
|                                                     |                                                                                   | Repurchase of common stock                           |                                                    
|                                                     |                                                                                   | Principal payments on note payable                   |                                                    
|                                                     |                                                                                   | Principal payments under capital lease obligations   |                                                    
|                                                     |                                                                                   | Redemption of Series A preferred stock               |                                                    
|                                                     |                                                                                   | Proceeds from issuance of common stock               |                                                    
|                                                     |                                                                                   | Proceeds from employee stock plan issuances          |                                                    
|                                                     |                                                                                   |                                                      |                                                    
|                                                     |                                                                                   |                                                      | Net cash provided by (used in) financing activities
|                                                     |                                                                                   |                                                      |                                                    
|Net increase (decrease) in cash and cash equivalents |                                                                                   |                                                      | (319                                               
|Cash and cash equivalents, beginning of year         |                                                                                   |                                                      | 3,433                                              
|                                                     |                                                                                   |                                                      |                                                    
|Cash and cash equivalents, end of year               |                                                                                   | $                                                    | 3,114                                              
|                                                     |                                                                                   |                                                      |                                                    

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

37

---



DITECH COMMUNICATIONS CORPORATION        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  ORGANIZATION AND NATURE OF BUSINESS

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

2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



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



Certain items in prior years' consolidated financial statements have been reclassified to conform to classifications used in the current year.



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 when persuasive evidence of a definitive agreement exists, upon shipment to the customer, upon fulfillment of
acceptance terms, if any, when no significant contractual obligations remain outstanding, the fee is fixed or determinable, and collection is reasonably assured.



We offer a warranty, ranging from one year to five years, on all of our products. The warranty generally provides that we will repair or replace any defective
product within one year to five years from the invoice date. A provision for the estimated future cost of warranty is made at the time we recognize product revenue, based on our experience.



Research and development costs are expensed as incurred.



The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Management believes
that the financial institutions in which it

38

---

maintains such deposits are financially sound and, accordingly, minimal credit risk exists with respect to these deposits. Cash and cash equivalents are held by four major U.S. financial institutions.



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 upon comparable market information available at the respective balance sheet dates.



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



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



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

Amortization
expense for purchased technology associated with the Telinnovation acquisition (see Note 3) was $1.3 million and $5.2 million in fiscal 2000 and
fiscal 2001, respectively. Amortization expense for goodwill associated with Telinnovation and goodwill and other intangible assets associated with the Atmosphere Networks acquisition (see
Note 3) was $0.6 million and $14.9 million in fiscal 2000 and fiscal 2001, respectively.



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



The Company's products are concentrated in the telecommunications component industry, which is highly competitive and rapidly changing. Revenues for the
Company's products are concentrated with a relatively limited number of customers. One customer accounted for 42%, 57% and 47% of net revenues for the years ended April 30, 1999, 2000 and 2001,
respectively. Net revenues from customers outside the United States, which were denominated in U.S. dollars, were 13%, 12% and 17% in fiscal 1999, 2000, and 2001, respectively. The Company's accounts
receivable were concentrated with two customers at April 30, 2000, (representing 57% and 12% of receivables) and two customers at April 30, 2001 (43%, and 15% of receivables,
respectively). The Company performs ongoing credit evaluations of

39

---

its customers' financial condition and generally requires no collateral from its customers. The Company maintains an allowance for doubtful accounts receivable based upon the expected collectibility
of accounts receivable.

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



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



There was no material difference between the Company's net income and its total comprehensive income for fiscal 1999, 2000, and 2001.



Statement of Financial Accounting Standards No. 123, "Accounting for Stock-based Compensation," ("SFAS 123"), encourages, but does not require,
companies to record compensation cost for stock-based compensation plans at fair value. The Company accounts 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" and complies with the disclosure provisions of SFAS 123. Accordingly, compensation cost for stock
options is 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 must pay to acquire the stock and is recognized over
the vesting period of the related shares.



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

40

---

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 30,1999

2000

2001Historical net income (loss) per share, basic and diluted:Basic:Net income

$
575

$
30,003

$
2,096Less accretion on mandatorily redeemable preferred stock


1,497


99


Net income (loss) attributable to common stockholders

$
(922
)
$
29,904

$
2,096Weighted average shares of common stock outstanding


8,088


24,417


29,253Less stock subject to repurchase


(956
)

(912
)

(1,108
)Shares used in calculation of basic per share numbers


7,132


23,505


28,145Net income (loss) per share

$
(0.13
)
$
1.27

$
0.07Diluted:Net income

$
575

$
30,003

$
2,096Less accretion on mandatorily redeemable preferred stock


1,497


99


Net income (loss) attributable to common stockholders

$
(922
)
$
29,904

$
2,096Shares used in calculation of basic per share numbers


7,132


23,505


28,145Shares subject to repurchase





912


1,108Assumed conversion of Series B preferred





894


Dilutive effect of stock options





1,705


1,259Shares used in calculation of diluted per share numbers


7,132


27,016


30,512Net income (loss) per share

$
(0.13
)
$
1.11

$
0.07


The
computation of diluted net income (loss) per share excluded the following number of options, on a weighted average basis, as their effect was
anti-dilutive: 1,010,189 in fiscal 1999; 47,047 in fiscal 2000; and 1,552,904 in fiscal 2001.



In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133 ("SFAS 133"), "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the balance sheet and measure those instruments at fair value. The adoption of SFAS 133 on May 1, 2001, did not have a material impact on our consolidated
financial position, results of operations or cash flows.

In
December 1999, the SEC issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101 summarizes certain of the SEC's
views in applying generally accepted accounting principles to revenue recognition in financial statements. The Company adopted SAB 101 in the fourth quarter of fiscal 2001. The adoption of SAB101 did
not have a material impact on our consolidated financial position, results of operations or cash flows.

41

---

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

On
June 29, 2001, the FASB voted in favor of FASB Statement No. 142 (SFAS 142), "Goodwill and Other Intangible Assets." The FASB expects to release
SFAS 142 in the last half of July 2001. SFAS 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Upon adoption of
SFAS 142, goodwill will be tested annually and whenever events or circumstances occur indicating that goodwill might be impaired. Amortization of goodwill, including goodwill recorded in past
business combinations, will cease. The Company is required to adopt SFAS 142 May 1, 2002, with the option of earlier adoption in the first quarter of fiscal 2002. The Company has not yet
determined what the impact of SFAS 142 will be on the Company's consolidated financial position, results of operations or cash flows.

3.  ACQUISITIONS

In the last seventeen months, the Company has completed two business acquisitions, which were accounted for as purchases. The consolidated financial statements
include the operating results of each business from the date of acquisition.

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

The
total value of the acquisition of approximately $69 million was accounted for in three discrete components. The first, approximately $9 million related to purchased
research and development, was written off in the fourth quarter of fiscal 2000. Next, approximately $37 million related to developed technology and goodwill was capitalized and is being
amortized to expense over its estimated life of five years. The remaining $23 million relates to restricted shares, the cost of which was recorded as deferred stock compensation and is being
charged as research and development expense over the three-year vesting period of the shares. Expenses for purchased technology, developed technology, goodwill and deferred stock
compensation totaled $12.9 million and $15.1 million, in fiscal 2000 and fiscal 2001, respectively.

On
July 25, 2000, the Company completed the acquisition of privately-held Atmosphere Networks, Inc. of Campbell, California in exchange for 841,897 shares of
common stock and assumption of outstanding options, with an aggregate value of $73.4 million, and $7.9 million of cash. Acquisition costs totaled approximately $680,000. Atmosphere
Networks was an emerging provider of optical networking products, enabling carriers to combine various types of traffic (voice, data and video) onto an optical network.

42

---

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

Net assets acquired

$
15,040Established workforce


1,500Goodwill


65,405Total purchase price

$
81,945


In
August 2000, Ditech also granted to the employees hired in the Atmosphere acquisition, non-qualified stock options vesting over a four-year period,
for approximately 750,000 shares of Ditech common stock at a price representing a 50% discount from market on the date of grant. As a result, the Company recorded deferred stock compensation of
approximately $17.3 million in August 2000, which was reduced to $14.6 million, for option cancellations upon termination of employment. The deferred stock compensation is being
amortized to expense ratably over the options' four-year vesting period. The cost allocated to intangible assets for the acquired workforce and goodwill is being amortized to expense over
their estimated useful lives of four years. Amortization expense for stock compensation and intangible assets associated with the Atmosphere acquisition of approximately $16.5 was recorded in fiscal
2001.

The
following unaudited pro forma financial information reflects the results of operations for the years ended April 30, 2000, and April 30, 2001, as if the acquisitions
had occurred on May 1, 1999. The pro forma results of operations for the year ended April 30, 2000, include results of operations of Telinnovation, and Atmosphere Networks, including
amortization of goodwill, other intangibles, and deferred stock compensation and the elimination of intercompany transactions between the Company and Telinnovation. The pro forma results of operations
for the year ended April 30, 2001, include results of operations of Atmosphere Networks, including amortization of goodwill, other intangibles, and deferred stock compensation for the periods
presented. These pro forma results have been prepared
for comparative purposes only and are indicative of what operating results would have been had the acquisitions actually taken place on May 1, 1999, and may not be indicative of future
operating results (in thousands, except per share amounts).

Year Ended April 30,2000

2001(unaudited)Pro forma financial information:Net Revenues

$
120,152

$
123,260Income (loss) from operations

$
2,434

$
(1,348
)Net loss attributable to common stockholders

$
(4,442
)
$
(5,227
)Net loss per share attributable to common stockholders:Basic

$
(0.18
)
$
(0.18
)Diluted

$
(0.18
)
$
(0.18
)Weighted average shares:Basic


24,946


28,341Diluted


24,946


28,341


43

---

4.  BALANCE SHEET ACCOUNTS



Inventories comprised (in thousands):

April 30,2000

2001Raw materials

$
1,717

$
7,345Work in progress


849


668Finished goods


4,030


7,510Total

$
6,596

$
15,523




Property and equipment comprised (in thousands):

April 30,2000

2001Furniture and fixtures

$
339

$
1,351Equipment


3,067


8,051Leasehold improvements


114


682Computer software


620


1,4834,140


11,567Less: accumulated depreciation and amortization


(1,460
)

(3,593
)Total

$
2,680

$
7,974


Included
in property and equipment are assets under capital leases of $209,000 at April 30, 2000, and 2001, with related accumulated amortization of $86,000 and $126,000,
respectively.



Accrued expenses comprised (in thousands):

April 30,2000

2001Accrued employee compensation

$
2,425

$
4,435Accrued professional services


108


96Accrued warranty


905


1,109Other accrued expenses


790


1,464Total

$
4,228

$
7,104


5.  COMMITMENTS AND CONTINGENCIES



The Company leases its principal office facilities in Mountain View, California under a non-cancelable operating lease expiring in
June 2006. The Company is responsible for taxes, insurance and maintenance expenses related to the leased facilities. Presently, there is no option for renewal of the lease on our Mountain View
facilities. The Company also leases a research and development facility in Melbourne, Australia, of approximately 6,300 square feet plus parking with a lease term on

44

---

the building of four years. The Company is responsible for its share of taxes and maintenance. The Melbourne lease presently has no renewal option and expires in April, 2005. The Company also has
operating leases on furniture and equipment. Additionally, the Company has equipment leased under capital leases with future minimum payments.

At
April 30, 2001, future minimum payments under the leases are as follows (in thousands):

Years ended April 30,

Operating

Capital2002

$
2,023

$
232003


2,009


2004


1,942


2005


1,992


2006


1,967


2007 and thereafter


329


$
10,262


23Less amount representing interest





1$
22


Rent
expense under all leases for the years ended April 30, 1999, 2000, and 2001, was $728,000, $1,276,000 and $2,357,000, respectively.



The Company has a line of credit to borrow up to $4.0 million. This line of credit expires in August 2001. At April 30, 2001,
$4.0 million was available and no borrowings were outstanding under this line of credit. The Company has started discussions to potentially renew the line of credit.



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

6.  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, 2001, no preferred stock was outstanding.

In
March 1997, the Company issued 17,250,000 shares of Series A redeemable preferred stock and 6,259,718 shares of Series B redeemable preferred stock, in
conjunction with the recapitalization of the Company. In June 1999, after completion of our initial public offering, all shares of Series A redeemable preferred stock were retired in
exchange for cash generated from our initial public offering and all shares of Series B redeemable preferred stock were converted into common stock at the stated exchange ratio.

45

---

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. The rights expire on March 25, 2011.

7.  STOCKHOLDERS' EQUITY (DEFICIT)



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



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



In March and April 1999, and in September 2000, the Board adopted, and the stockholders approved, the Company's 1999 Employee Stock
Purchase Plan (the "Purchase Plan") covering an aggregate of 416,666 shares of common stock. Employees who participate in an offering period can have up to 10% of their earnings withheld pursuant to
the Purchase Plan. The amount withheld will then be used to purchase shares of the common stock on specified dates determined by the Board. The price of common stock purchased under the Purchase Plan
will be equal to 85% of the lower of the fair market value of the common stock on the commencement date of each offering period or on the specified purchase date. No shares were purchased under this
Plan during fiscal 1999. In fiscal 2000 and 2001, shares purchased under the plan totaled 67,958 and 132,298 shares, respectively.



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. In March and April 1999, the Company increased the number of shares reserved
for issuance under the 1998 Stock Option Plan. The Company has reserved a total of 2,856,082 shares of common stock for issuance under the 1998 Stock Option Plan, under terms similar to those of the
1997 Stock Option Plan. During fiscal 2000, the Company adopted two non-statutory stock option plans 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.

46

---



On
July 25, 2000, the Company purchased the net assets of Atmosphere Networks, and assumed all outstanding stock options that had been granted under the Atmosphere Networks
1997 Stock Plan (the "Atmosphere Plan"). The option shares under the Atmosphere Plan were converted into 122,236 options to purchase Ditech common stock. The calculation of the conversion of option
shares was determined using the approximate fair market values of the Atmosphere Networks and Ditech 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
Ditech's stock option plans.

In
August 2000, the Board of Directors adopted the 2000 Non-Qualified Stock Plan, with a reserve of 750,000 shares. Additional share increases were approved in
fiscal 2001, resulting in a reserve balance of 2,500,000 shares under this stock option plan as of April 30, 2001. The terms of non-statutory options granted under this plan are
substantially consistent with non-statutory options granted under the 1997 and 1998 plans.

All
options under all option plans described above are immediately exercisable and have a ten-year term. Shares issued through early option exercises are subject to the
Company's right of repurchase at the original exercise price. The number of shares subject to repurchase generally decreases by 25% of the option shares one year after the grant date, and thereafter,
ratably over 36 months. As of April 30, 2001, 301,273 shares were subject to repurchase.

In
March 1999, the Company adopted the 1999 Non-Employee Directors' Stock Option Plan, and reserved 200,000 shares for issuance under the plan. On
September 22, 2000, shareholders approved a proposal to increase the reserve so that 300,000 shares are reserved under this plan as of April 30, 2001. Options granted under the plan have
a 5-year term and are fully vested at the date of grant.

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

|                         |                          |       |        | Outstanding Options
|------------------------ | ------------------------ | ----- | ------ | -------------------
|
|Balances, April 30, 1998 |                          | 566   |        | 3,132              
|                         | Reservation of shares    |       | 2,056  |                    
|                         | Reserved shares canceled |       | (190   | )                  
|                         | Options granted          |       | (1,406 | )                  
|                         | Options exercised        |       |       |                    
|                         | Options canceled         |       | 88     |                    
|                         |                          |       |        |                    
|Balances, April 30, 1999 |                          | 1,114 |        | 1,728              
|                         | Reservation of shares    |       | 1,350  |                    
|                         | Options granted          |       | (1,744 | )                  
|                         | Options exercised        |       |       |                    
|                         | Options canceled         |       | 177    |                    
|                         |                          |       |        |                    
|Balances, April 30, 2000 |                          | 897   |        | 2,641              
|                         | Reservation of shares    |       | 3,600  |                    
|                         | Options granted          |       | (3,996 | )                  
|                         | Options assumed          |       |       |                    
|                         | Options exercised        |       |       |                    
|                         | Options canceled         |       | 262    |                    
|                         |                          |       |        |                    
|Balances, April 30, 2001 |                          | 763   |        | 5,958              
|                         |                          |       |        |                    

47

---

Options
outstanding at April 30, 2001 (in thousands, except per share amounts):

|                |  |  |       |  |   |       |  |      | Options Exercisable at
April 30, 2001
|--------------- |  |  | ----- |  | - | ----- |  | ---- | -------------------------------------
|
|
|$ 0.41 - $ 4.88 |  |  | 573   |  | $ | 3.17  |  | 7.72 |                                      
|$ 5.50 - $ 7.19 |  |  | 2,482 |  | $ | 7.15  |  | 9.65 |                                      
|$ 8.41 - $18.07 |  |  | 818   |  | $ | 9.38  |  | 8.79 |                                      
|$22.50 - $42.15 |  |  | 1,090 |  | $ | 25.43 |  | 8.54 |                                      
|$48.94 - $85.75 |  |  | 995   |  | $ | 69.10 |  | 8.95 |                                      
|                |  |  |       |  |   |       |  |      |                                      
|$ 0.41 - $85.75 |  |  | 5,958 |  | $ | 20.76 |  | 9.03 |                                      
|                |  |  |       |  |   |       |  |      |                                      

The
estimated weighted average fair value of options granted during fiscal years 1999, 2000 and 2001 was, $0.60, $28.74 and $21.59 per share, respectively. The estimated weighted
average fair value of shares granted under the Employee Stock Purchase Plan was $3.51 in fiscal 2000 and $7.44 in fiscal 2001. The Company applies Accounting Principles Board Opinion No. 25 and
related Interpretations in accounting for its stock option plans. If compensation cost for the Company's stock option plan had been determined based on the fair value at the grant dates for awards
under those plans consistent with the method of SFAS 123, the Company's net income for the years ended April 30, 1999, 2000 and 2001 would have been reduced to the pro forma amounts
indicated in the following table (in thousands, except per share amounts):

|                                                                         |             | April 30, |    
|------------------------------------------------------------------------ | ----------- | --------- | ---
|
|Income before provision for income taxes, as reported                    |             | $         | 988
|Less: net expense per SFAS 123                                           |             |           | 128
|                                                                         |             |           |    
|Pro forma income (loss) before provision for income taxes                |             |           | 860
|Less: pro forma provision (benefit) for income taxes                     |             |           | 362
|                                                                         |             |           |    
|Pro forma net income (loss)                                              |             | $         | 498
|                                                                         |             |           |    
|Net Income as reported                                                   |             | $         | 575
|                                                                         |             |           |    
|Diluted net income (loss) attributable to common stockholders per share: |             |           |    
|                                                                         | Pro forma   |           | $  
|                                                                         |             |           |    
|                                                                         | As reported |           | $  
|                                                                         |             |           |    

The
fair value of options granted under the Company's stock plans during fiscal 1999, 2000 and 2001 was estimated on the date of grant using the Black-Scholes option pricing model.
The model utilized the multiple option approach with the following weighted average assumptions used: no dividend yield, expected volatility is zero based on private company status in fiscal 1999,
130% in fiscal 2000, and 135% in fiscal 2001, risk-free interest rates of 4.74%, 6.28% and 5.29% in fiscal 1999, 2000 and 2001, respectively, and expected lives of four years for the
option plans and 6 months for the Employee Stock Purchase Plan. Forfeitures are recognized as they occur.

During
fiscal 1999, the Company granted options to certain employees under the 1997 Stock Plan and 1998 Stock Option Plan with exercise prices below the deemed fair market value of
the Company's common stock at the date of grant. In accordance with the requirements of APB 25, the Company has recorded deferred compensation for the difference between the exercise price of the
stock options and the fair market value of the Company's shares at the date of grant. This deferred compensation is

48

---

being amortized to expense over the period during which the options become exercisable, generally four years. At April 30, 1999, the Company had recorded deferred compensation related to these
options in the total amount of $1,320,000, of which $91,000, $330,000 and $322,000 had been amortized to expense during 1999, 2000 and 2001, respectively.

In
connection with the acquisition of Atmosphere Networks, the Company issued nonqualified stock options for approximately 750,000 shares of our common stock at a price equal to a 50%
discount from the market value of the stock on its grant date of August 1, 2000. The discount was recorded as deferred compensation of $17.3 million in August 2000 and
adjustments, due to option cancellations upon termination of employment, reduced that amount to approximately $14.6 million. This deferred compensation is being amortized to compensation
expense over the remaining term of the original forty-eight month vesting period of the options. In fiscal 2001, $3.0 million of this deferred compensation had been amortized to compensation
expense.

8.  INCOME TAXES

The provision for income taxes reflected in the statements for the years ended April 30, 1999, 2000, and 2001, was as follows (in thousands):

|          |         | 1999           |       | 2000 |      | 2001 |       
|--------- | ------- | -------------- | ----- | ---- | ---- | ---- | ------
|Current:  |         |                |       |      |      |      |       
|          | Federal |                | $     | 590  |      | $    | 21,454
|          | Foreign |                |       |     |      |      |      
|          | State   |                |       | 12   |      |      | 5,282 
|          |         |                |       |      |      |      |       
|          |         | Total current  |       |      | 602  |      |       
|          |         |                |       |      |      |      |       
|Deferred: |         |                |       |      |      |      |       
|          | Federal |                |       | (258 | )    |      | (5,190
|          | State   |                |       | 69   |      |      | (781  
|          |         |                |       |      |      |      |       
|          |         | Total deferred |       |      | (189 | )    |       
|          |         |                |       |      |      |      |       
|          |         |                | Total |      | $    | 413  |       
|          |         |                |       |      |      |      |       

The
deferred income tax provision reflects the tax effect of changes in the amounts of temporary differences during each year ended April 30, 1999, 2000 and 2001.

As
of April 30, 2000 and 2001, the Company's deferred tax assets consisted of (in thousands):

2000

2001Deferred tax asset (liability):Uniform capitalization

$
283

$
445Depreciation


(231
)

(269
)Inventory reserves and other, net


1,691


3,752Purchased technology, goodwill and other intangibles


4,799


10,033Research and development tax credit





470Net operating loss





7,993Total

$
6,542

$
22,424


As
of April 30, 2001, the Company has tax net operating loss carry-forwards for tax purposes of approximately $19,735,000 and tax credit carry-forwards of $470,000. These net operating loss
carry-forwards start expiring in 2004 and the tax credit carry-forwards start expiring in 2019.

49

---

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

|                                                          |       | 1999 |      | 2000 |      | 2001  |     
|--------------------------------------------------------- | ----- | ---- | ---- | ---- | ---- | ----- | ----
|Tax provision at federal statutory rate                   |       | 34.0 | %    | 35.0 | %    | 35.0  | %   
|State taxes, net of federal benefit                       |       | 6.1  | %    | 6.7  | %    | 9.2   | %   
|Research and development credits                          |       |     |      |     |      | (3.9  | )%  
|Non-deductible goodwill and other intangible amortization |       | 0.0  | %    | 0.0  | %    | 45.5  | %   
|Tax-exempt interest income                                |       | 0.0  | %    | (0.9 | )%   | (10.8 | )%  
|Other, primarily non-deductible expenses                  |       | 1.7  | %    | 0.1  | %    | 8.9   | %   
|                                                          |       |      |      |      |      |       |     
|                                                          | Total |      | 41.8 | %    | 40.9 | %     | 83.9
|                                                          |       |      |      |      |      |       |     

9.  REPORTABLE SEGMENTS AND GEOGRAPHIC INFORMATION

The Company applies the Financial Accounting Standards Board's Statement of Financial Accounting Standard No. 131 "Disclosures about Segments of an
Enterprise and Related Information," (SFAS 131). Under SFAS 131, the Company is required to use a "management" approach to reporting its segments. The management approach requires the
internal organization used by management for making operating decisions and assessing performance be used as the source of the Company's segments.

In
accordance with the provisions of SFAS 131, the Company has two reportable segments, categorized by product type: echo cancellation products and optical communications
products. Echo cancellation products include software, stand-alone echo cancellers and system echo cancellers. Optical communications products include optical amplifiers, optical telemetry management
and monitoring systems and optical transponders. The Company has no inter-segment revenue.

The
Company's management makes decisions and allocates resources to the two operating segments based on the gross profits for each segment. The Company does not allocate operating
expenses or assets to segments, as management does not use this information to measure the performance of, or to allocate resources to, the echo cancellation and optical communications segments.
Accordingly, the Company has presented only revenue and gross profit by segment.

Segment
information (in thousands):

|                          |                      | Echo Cancellation
Products |   | Optical Communications
Products |  | Total
|------------------------- | -------------------- | -------------------------- | - | ------------------------------- |  | -----
|Year ended April 30, 1999 |                      |                            |   |                                 |  |      
|                          | Segment revenue      |                            | $ | 23,766                          |  | $    
|                          | Segment gross profit |                            | $ | 12,693                          |  | $    
|Year ended April 30, 2000 |                      |                            |   |                                 |  |      
|                          | Segment revenue      |                            | $ | 107,162                         |  | $    
|                          | Segment gross profit |                            | $ | 74,912                          |  | $    
|Year ended April 30, 2001 |                      |                            |   |                                 |  |      
|                          | Segment revenue      |                            | $ | 104,683                         |  | $    
|                          | Segment gross profit |                            | $ | 73,652                          |  | $    

50

---

Geographic
information (in thousands):

|              |       | Years ended April 30,
|------------- | ----- | ---------------------
|
|
|USA           |       | $                    
|China         |       |                      
|Latin America |       |                      
|Rest of World |       |                      
|              |       |                      
|              | Total |                      
|              |       |                      

10. PROFIT SHARING PLAN

The Company maintains a 401(k) profit sharing plan for all eligible employees. Employees may contribute to the Plan based on statutory limits. Any Company
contributions are at the discretion of the Board of Directors. The Company made no contributions to the Plan during the year ended April 30, 1999. For the years ended April 30, 2000, and
April 30 2001, the Company contributed $24,000 and $46,375, respectively, to the plan.

11. SUPPLEMENTAL CASH FLOW INFORMATION

(in thousands)

|                                                                 |  | Years ended April 30,
|---------------------------------------------------------------- |  | ---------------------
|
|
|Operating:                                                       |  |                      
|Interest paid                                                    |  | $                    
|Income taxes paid                                                |  |                      
|Noncash financing and investing activities:                      |  |                      
|Accretion of preferred stock                                     |  |                      
|Acquisition of assets under capital leases                       |  |                      
|Redemption of Series C preferred stock                           |  |                      
|Deferred stock compensation                                      |  |                      
|Purchase of technology rights for common stock                   |  |                      
|Purchase method acquisition for common stock                     |  |                      
|Conversion of Series B preferred stock                           |  |                      
|Compensation associated with stock options issued to consultants |  |                      

51

---

SUPPLEMENTARY FINANCIAL DATA (unaudited)

(in thousands, except per share data)

|                                                                           |  | Fiscal 2000 |       | Fiscal 2001 |  
|-------------------------------------------------------------------------- |  | ----------- | ----- | ----------- | -
|
|
|Revenue                                                                    |  | $           | 9,771 |             | $
|Gross profit                                                               |  | $           | 5,632 |             | $
|Net income (loss) attributable to common stockholders                      |  | $           | 940   |             | $
|Basic net income (loss) per share attributable to common stockholders(f)   |  | $           | 0.06  |             | $
|Diluted net income (loss) per share attributable to common stockholders(f) |  | $           | 0.04  |             | $

---

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

None.

52

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Part III

Item 10Directors and Executive Officers of the Registrant

The information required by this Item 10 is incorporated by reference to the information contained in the Proxy Statement to be filed no later than
August 28, 2001 in connection with the solicitation of proxies for the Company's Annual Meeting of Stockholders to be held September 21, 2001 (the "Proxy Statement") under the captions
"Proposal No. 1Election of Directors," "Section 16(a) Beneficial Ownership Reporting Compliance," and "Executive Officers of Ditech."

Item 11Executive Compensation

The information required by this Item 11 is incorporated by reference to the information contained in the Proxy Statement under the captions "Executive
Compensation," "Compensation Committee Interlocks and Insider Participation," and "Employment Agreements."

Item 12Security Ownership of Certain Beneficial Owners and Management

The information required by this Item 12 is incorporated by reference to the information contained in the Proxy Statement under the caption "Security
Ownership of Certain Beneficial Owners and Management."

Item 13Certain Relationships and Related Transactions

The information required by this Item 13 is incorporated by reference to the information contained in the Proxy Statement under the caption "Certain
Relationships and Related Transactions."

53

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Part IV

Item 14Exhibits, Financial Statement Schedules and Reports on Form 8-K

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





Schedule II  Valuation and Qualifying Accounts  (in thousands)

|                          |                                             | Balance at
Beginning of Year |   | Additions |  | Deductions |       | Balance at
End of Year
|------------------------- | ------------------------------------------- | ---------------------------- | - | --------- |  | ---------- | ----- | ----------------------
|Year ended April 30, 1999 |                                             |                              |   |           |  |            |       |                       
|                          | Allowance for doubtful accounts             |                              | $ | 30        |  | $          | 70    |                       
|                          | Provision for excess and obsolete inventory |                              | $ | 238       |  | $          | 797   |                       
|Year ended April 30, 2000 |                                             |                              |   |           |  |            |       |                       
|                          | Allowance for doubtful accounts             |                              | $ | 100       |  | $          | 300   |                       
|                          | Provision for excess and obsolete inventory |                              | $ | 642       |  | $          | 2,702 |                       
|Year ended April 30, 2001 |                                             |                              |   |           |  |            |       |                       
|                          | Allowance for doubtful accounts             |                              | $ | 400       |  | $          | 255   |                       
|                          | Provision for excess and obsolete inventory |                              | $ | 1,640     |  | $          | 2,042 |                       
|                          |                                             |                              |   |           |  |            |       |                       

REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE

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

Our
audits of the consolidated financial statements referred to in our report dated May 23, 2001, appearing on page 33 of this Annual Report on Form 10-K also included
an audit of the financial statement schedule listed in Item 14(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material
respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

/s/
PricewaterhouseCoopers LLP

San
Jose, California
May 23, 2001

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|Exhibit    |  | Description of document                                                                                                                                                                                                                                                         
|---------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.1(1)     |  | Agreement and Plan of Merger and Reorganization, dated June 21, 2000, among Ditech Communications Corporation, a Delaware corporation, Oxygen Acquisition Corporation, a Delaware corporation, and Atmosphere Networks,
 Inc., a Delaware corporation.                          
|2.2(2)     |  | Amendment To Agreement And Plan Of Merger And Reorganization, dated as of July 25, 2000, by and among Ditech Communications Corporation, a Delaware corporation, Oxygen Acquisition Corporation, a Delaware corporation, and Atmosphere Networks,
 Inc., a Delaware corporation.
|3.1(3)     |  | Restated Certificate of Incorporation of Ditech                                                                                                                                                                                                                                 
|3.2(4)     |  | Bylaws of Ditech                                                                                                                                                                                                                                                                
|3.3(5)     |  | Certificate of Designation of Series A Junior Participating Preferred Stock.                                                                                                                                                                                                    
|4.1        |  | Reference is made to Exhibits 3.1, 3.2 and 3.3                                                                                                                                                                                                                                  
|4.2(6)     |  | Specimen Stock Certificate                                                                                                                                                                                                                                                      
|4.3(5)     |  | Rights Agreement, dated as of March 26, 2001 among Ditech Communications Corporation and Wells Fargo Bank Minnesota, N.A.                                                                                                                                                       
|4.4(5)     |  | Form of Rights Certificate                                                                                                                                                                                                                                                      
|4.5(6)     |  | Amended and Restated Registration Agreement, dated March 19, 1999, between Ditech and certain investors                                                                                                                                                                         
|10.1(6)    |  | Lease Agreement, dated August 31, 1998, between Ditech and Lincoln-Whitehall Pacific, LLC, as amended January 25, 1999                                                                                                                                                          
|10.2(6)(7) |  | 1997 Stock Option Plan                                                                                                                                                                                                                                                          
|10.3(6)(7) |  | 1998 Amended and Restated Stock Option Plan                                                                                                                                                                                                                                     
|10.4(6)(7) |  | 1999 Employee Stock Purchase Plan                                                                                                                                                                                                                                               
|10.5(6)    |  | 1999 Non-Employee Directors' Stock Option Plan                                                                                                                                                                                                                                  
|10.6(6)(7) |  | Employment Agreement, dated September 1998, between Ditech and Timothy Montgomery                                                                                                                                                                                               
|10.7(6)(7) |  | Employment Agreement, dated September 14, 1998, between Ditech and Pong Lim                                                                                                                                                                                                     
|10.8(6)(7) |  | Employment Agreement, dated November 4, 1998, between Ditech and Toni Bellin                                                                                                                                                                                                    
|10.9(6)    |  | Credit Agreement, dated August 20, 1997, between Ditech and BankBoston, N.A.                                                                                                                                                                                                    
|10.10(6)   |  | First Amendment to the Credit Agreement, dated August 13, 1998, between Ditech and BankBoston, N.A.                                                                                                                                                                             
|10.11(6)   |  | Second Amendment to the Credit Agreement, dated December 18, 1998, between Ditech and BankBoston, N.A.                                                                                                                                                                          
|10.11.1(8) |  | Third Amendment to Credit Agreement, dated August 13, 1999, between Ditech and BankBoston, N.A.                                                                                                                                                                                 

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|10.11.2(3)   |  | Fourth Amendment to Credit Agreement, dated August 18, 2000, between Ditech and Fleet National Bank (f/k/a BankBoston, N.A.)                                                                                   
|------------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.12(6)     |  | Security Agreement, dated August 20, 1997, between Ditech and BankBoston, N.A.                                                                                                                                 
|10.13(6)     |  | Intellectual Property Security Agreement, dated August 20, 1997, between Ditech and BankBoston, N.A.                                                                                                           
|10.14(6)     |  | Master Amendment and Lease Schedule, dated December 15, 1998, between Ditech and BancBoston Leasing Inc.                                                                                                       
|10.15(6)(9)  |  | Invention Purchase Agreement, dated November 15, 1998, between Ditech and Telinnovation                                                                                                                        
|10.16(6)(7)  |  | Form of Indemnity Agreement to be entered between Ditech and its executive officers and directors                                                                                                              
|10.17(6)(7)  |  | Employment Agreement dated April 27, 1999, between Ditech and Marc Schwager                                                                                                                                    
|10.18(6)     |  | Stock Purchase Agreement, dated as of September 15, 1997 between Ditech and William Hasler                                                                                                                     
|10.19(6)(7)  |  | Form of option agreement under the 1997 Stock Option Plan                                                                                                                                                      
|10.20(6)(7)  |  | Form of option agreement under the 1998 Stock Option Plan                                                                                                                                                      
|10.21(9)(10) |  | Patent License Agreement, dated as of August 13, 1999, between Ditech and Antec Corporation                                                                                                                    
|10.22(11)    |  | Asset Purchase Agreement, dated as of December 8, 1999 among Ditech Communications Corporation, Telinnovation, Telinnovation Corporation and Telinnovation Service Corporation, Charles Davis and David Shvarts
|10.23(11)    |  | Asset Purchase Agreement, dated as of December 8, 1999 among Ditech Communications Corporation, and Richard Hardy                                                                                              
|10.24(1)     |  | Employment Agreement, dated January 31, 2000, between Ditech and Ian Wright                                                                                                                                    
|10.25(12)    |  | 1999 Non-Officer Equity Incentive Plan                                                                                                                                                                         
|10.26(1)     |  | Lease Amendment, dated February 15, 2000, between Ditech and Middlefield-Bernardo Associates LLC                                                                                                               
|10.27(1)     |  | Stock Option Plan for Ian Wright-outside of the 1998 Stock Option Plan                                                                                                                                         
|10.28(7)(13) |  | 2000 Non-Qualified Stock Option Plan                                                                                                                                                                           
|21.1         |  | Subsidiaries of Ditech Communications Corporation                                                                                                                                                              
|23.1         |  | Consent of PricewaterhouseCoopers LLP                                                                                                                                                                          

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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.

|July 24, 2001 |  | DITECH COMMUNICATIONS CORPORATION
|------------- |  | ---------------------------------
|              |  | By:                              

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/TIMOTHY K. MONTGOMERYTimothy K. Montgomery |  | President, Chief Executive Officer and Chairman of the Board of Directors (principal executive officer) |  | July 24, 2001
|/s/WILLIAM J. TAMBLYNWilliam J. Tamblyn       |  | Vice President and Chief Financial Officer (principal financial and accounting officer)                 |  | July 24, 2001
|/s/GREGORY M. AVISGregory M. Avis             |  | Director                                                                                                |  | July 24, 2001
|/s/PETER Y. CHUNGPeter Y. Chung               |  | Director                                                                                                |  | July 24, 2001
|/s/WILLIAM A. HASLERWilliam A. Hasler         |  | Director                                                                                                |  | July 24, 2001
|Kenneth E. Jones                              |  | Director                                                                                                |  |              
|/s/GEORGE J. TURNERGeorge J. Turner           |  | Director                                                                                                |  | July 24, 2001
|/s/ANDREI M. MANOLIUAndrei M. Manoliu         |  | Director                                                                                                |  | July 24, 2001

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