**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

**FORM 10-K/A**

**AmendmentNo. 1**

**ANNUALREPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

**(MARK ONE)**

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

**For the Fiscal Year Ended April 30, 2007**

**OR**

**o**                                   TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

**For the Transition PeriodFrom                        To                        **

**COMMISSION FILE NUMBER: 000-26209**

----

****

**DITECH NETWORKS, INC.**

(ExactName of Registrant as Specified in its Charter)

| **DELAWARE**                                                     |   | **94-2935531**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or Other  Jurisdiction of  Incorporation or Organization) |   | (I.R.S. Employer  Identification No.) |

 

**825East Middlefield RoadMountain View, CA 94043(650) 623-1300**

(Address,Including Zip Code, of Registrant’s Principal Executive Offices andTelephone Number, Including Area Code)

SecuritiesRegistered Pursuant to Section 12(b) of the Act:

| **Title of Each Class**        | ** ** | **Name of  Each Exchange on Which Registered** |
|--------------------------------|------------|------------------------------------------------|
| Common Stock,  $.001 Par Value |       | The NASDAQ Stock  Market, Inc.                 |

 

----

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

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

Indicateby check mark whether the Registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. Yes x No o

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to thebest of the Registrant’s knowledge, in definitive proxy or informationincorporated by reference to Part III of this Form 10-K or anyamendment to this Form 10-K. x

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer. or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the ExchangeAct).

Large accelerated filer o            Acceleratedfiler x            Non-acceleratedfiler o

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

Theaggregate market value of voting stock held by non-affiliates of the Registrantwas approximately $166,858,667 as of October 31, 2006 based upon theclosing price on the Nasdaq Global Market reported for such date. Excludes anaggregate of 11,490,126 shares of common stock held by officers and directorsand by each person known by the registrant to own 5% or more of the outstandingcommon stock. Exclusion of shares held by any such person should not beconstrued to indicate that a determination has been made that such personpossesses the power, directly or indirectly, to direct or cause the directionof the management or policies of the registrant, or that such person iscontrolled by or under common control with the registrant.

Thenumber of shares outstanding of the Registrant’s Common Stock as of July 3,2007 was 33,200,275 shares.

**DOCUMENTS INCORPORATED BY REFERENCE**

None.

 

----

**DITECH NETWORKS,INC.FORM 10-K/AINDEX**

|                                                                                                                    | ** ** | **PAGE** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| PART III                                                                                                      |       |     |       |   |   |
| Item 10—Directors,  Executive Officers and Corporate Governance                                          |       |     | 1          |   |   |
| Item 11—Executive  Compensation                                                                          |       |     | 5          |   |   |
| Item 12—Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters |       |     | 22         |   |   |
| Item 13—Certain  Relationships and Related Transactions, and Director Independence                       |       |     | 27         |   |   |
| Item 14—Principal Accountant  Fees and Services                                                          |       |     | 28         |   |   |
| SIGNATURES                                                                                                         |       |     | 29         |   |   |

 

**Trademarks:**

Ditech and the Fern logo are registered trademarks ofDitech Networks. VQA and PeerPoint are trademarks of Ditech Networks. ThisAnnual Report on Form 10-K also includes trademarks of companiesother than Ditech.

i

----

**DITECH NETWORKS,INC.**

**EXPLANATORY NOTE**

We are filing thisamendment to our Annual Report on Form 10-K, originally filed withthe Securities and Exchange Commission on July 16, 2007, solely for thepurpose of amending and supplementing Part III of the Annual Report on Form 10-K.This amendment changes our Annual Report only by including information requiredby Part III (Items 10, 11, 12, 13 and 14). In addition, we are alsoincluding Exhibits 31.1 and 31.2 required by the filing of this amendment.

**PART III**

**Item 10—Directors,Executive Officers and Corporate Governance**

**Directors**

TheBoard of Directors presently has five members. The following are our directors’names, ages as of August 16, 2007 and term of office (annual meeting ofstockholders at which his term of office expires):

| **Name**                  | ** ** | ** ** | ** ** | **Age** | ** ** | **Term of Office** | ** ** |
|---------------------------|------------|------------|------------|---------|------------|------------------------------|------------|
| William A. Hasler         |       |       | 65         |    |       |                         | 2007       |   |   |
| Gregory M. Avis           |       |       | 48         |    |       |                         | 2008       |   |   |
| Edwin L. Harper           |       |       | 62         |    |       |                         | 2008       |   |   |
| Andrei M.  Manoliu, Ph.D. |       |       | 55         |    |       |                         | 2009       |   |   |
| David M. Sugishita        |       |       | 59         |    |       |                         | 2009       |   |   |

 

Biographical information relating to our directors isas follows:

**WilliamA. Hasler**has been a director of Ditech since May 1997.He was the Vice Chairman of Aphton Corporation, a bio-pharmaceutical companyand he served as its Co-Chief Executive Officer until February 2004. From August 1991to July 1998, Mr. Hasler was the Dean of the Haas School of Businessat the University of California at Berkeley, and from January 1984 to August 1991,Mr. Hasler served as a Vice Chairman of KPMG Peat Marwick. Mr. Hasleris a director of numerous companies, including Schwab Funds, a financialservice company, Solectron Corp., an electronics manufacturing services company(where he also serves as chairman), and Harris Stratex Networks. He received aB.A. from Pomona College and an M.B.A. from Harvard University.

**GregoryM. Avis**has been a director of Ditech since February 1997.Mr. Avis has served as a Managing Partner of Summit Partners, a venturecapital and private equity firm, since 1990 and has been a General Partnersince 1987. Mr. Avis also served as a director of IMPAC Medical Systems, adeveloper and marketer of oncology practice management systems, and severalprivately held companies. Mr. Avis received a B.A. from Williams Collegeand an M.B.A. from Harvard University.

**EdwinL. Harper**has been a director at Ditech since December 2002,has served as our Lead Independent Director since November 2003 and hasserved as our Chairman of the Board since June 2007. He also serves on theBoard of Directors of Avocent, Inc., a leading worldwide manufacturer ofkeyboard, video and mouse switching and connectivity systems for IT Managers innetwork client/server environments, Verari, Inc., a privately heldmanufacturer of high performance cluster computers, and MxLogic, Inc., aprivately held software firm that provides e-mail security software and managedservices. Mr. Harper has over 30 years experience in the high-tech fieldand has served as President and Chief Executive Officer of several companies,including Colorado Memory Systems, a computer storage company. From August 1999to June 2001, Mr. Harper served as President and Chief ExecutiveOfficer at Manufacturing Technology, Inc., a manufacturer of slicingmachine systems. Mr. Harper currently serves as the Chairman and ChiefExecutive Officer of White Cell Software, Inc., a start up providingend-point 

1

----

network security software.Mr. Harper also has extensive experience serving on several companies’Board of Directors. From 1993 to May 2002, Mr. Harper served on theBoard of Directors of Network Associates, a $1 billion network security andmanagement software company. During part of his tenure on the NetworkAssociates’ Board, Mr. Harper served as Chairman. He received a B.S. andan M.S. in electrical engineering from Colorado State University.

**AndreiM. Manoliu, Ph.D.**has been a director of Ditech since June 2000.He is currently an independent business and financial consultant to emerginggrowth companies. From September 2000 to October 2001, Dr. Manoliuserved as the Chief Executive Officer of Nanomix, Inc., a leadingnanoelectronic detection company. From 1982 through March 2000, Dr. Manoliuwas an attorney with Cooley Godward LLP, where he was a senior partner prior tohis departure. During his tenure at Cooley Godward LLP, he served as outsidecounsel to Ditech. Dr. Manoliu received a Ph.D. in Solid State Physicsfrom the University of California, Berkeley, and a J.D. from Stanford LawSchool.

**David M. Sugishita**hasserved as a director and Chairman of the Audit Committee of Ditech since February 2003.He also serves as director and non-executive Chairman of the Board, Chairman ofthe Audit Committee as well as Chairman of the Corporate Nominating &Governance Committee for Atmel Corporation. In addition, he serves as directorfor Micro Component Technology. Since 2000, Mr. Sugishita has takenvarious short-term assignments including Exective Vice President of SpecialProjects at Peregrine Systems, a global provider of enterprise software, from December 2003to July 2004, and Exective Vice President and Chief Financial Officer atSONICblue, Inc., a provider of products for electronics markets, from January 2002to April 2002. Prior to 2000, Mr. Sugishita held various seniorfinancial management positions: Synopsys, Inc. (Senior Vice President andChief Financial Officer) from 1997 to 2000; Actel (Senior Vice President andChief Financial Officer) from 1995 to 1997; Micro Component Technology (SeniorVice President and Chief Financial Officer) from 1994 to 1995; AppliedMaterials (Vice President and Corporate Controller) from 1991 to 1994; andNational Semiconductor (Vice President of Finance) from 1978 to 1991. Mr. Sugishitaholds degrees in business administration from San Jose State University (B.S.)and University of Santa Clara (M.B.A.).

**Executive Officers**

Thefollowing are our executive officers, together with their ages and biographicalinformation, as of August 16, 2007:

| **Name**            | ** ** | ** ** | ** ** | **Age** | ** ** | **Position**                                          | ** ** |
|---------------------|------------|------------|------------|---------|------------|-------------------------------------------------------|------------|
| Edwin L. Harper     |       |       | 62         |    |       | Interim,  Chief Executive Officer and Director        |       |
| William J.  Tamblyn | ** ** | ** ** | 48         |    |       | Executive  Vice President and Chief Financial Officer |       |
| Lee H. House        | ** ** | ** ** | 49         |    |       | Vice  President of Platform Engineering               |       |
| Todd G. Simpson     |       |       | 41         |    |       | Vice  President, Marketing                            |       |
| Gary D. Testa       |       |       | 40         |    |       | Vice  President, Worldwide Sales                      |       |
| Lowell B. Trangsrud |       |       | 55         |    |       | Executive Vice President  and Chief Operating Officer |       |

 

Biographical information relating to our executiveofficers and key employees is as follows:

For biographical information relating to Edwin L.Harper, see “Directors” above.

**WilliamJ. Tamblyn**joined Ditech in June 1997 as our VicePresident and Chief Financial Officer, and was promoted to Executive VicePresident in May 2004. Mr. Tamblyn was the Chief Financial Officer atConductus, Inc., a telecommunications company, from January 1994 to June 1997.He served as Chief Financial Officer at Ramtek, an imaging company, from May 1993to December 1993. Prior to May 1993, Mr. Tamblyn worked inpublic accounting, including for Coopers & Lybrand, LLP. He has a B.S.in Accounting from San Jose State University and is a certified publicaccountant.

2

----

**LeeH. House**joined Ditech in May 2002 as our VicePresident of Echo Engineering. Mr. House joined Ditech from JetstreamCommunications, where he was the Senior Director of Systems Development since May 2000.Prior to Jetstream, he was the Senior Director of DSL Product Management andBusiness Development for 3Com Corporation since 1998. From 1989 to 1998, heheld a variety of positions at IBM. During his tenure, Mr. House heldsenior management positions in research and development and product management,as well as serving in many engineering development and design roles. Mr. Housereceived both his Masters in Business Administration and his Masters inElectrical Engineering from Duke University. He also holds a BA from RhodesCollege and a BSEE from Christian Brothers University.

**ToddG. Simpson**joined Ditech in June 2005 as our VicePresident, General Manager in connection with our acquisition of JasomiNetworks, Inc., and was promoted to Vice President, Marketing, in May 2007.Prior to joining Ditech, Mr. Simpson was President and CEO from January 2005until June 2005. Prior to joining Jasomi, Mr. Simpson was a Founderand Director of Call Genie Inc., a provider of automated voice solutions forthe directory services business. From January 2001 to December 2003, Mr. Simpsonserved as CTO for Zi Corporation, a provider of embedded software for mobilephones, and where previously, in 2000, he was Vice President of Engineering.Prior to this, he founded a series of companies including Headplay Inc. andConversion Works. He holds a BSc. and PhD. in Computer Science from theUniversity of Calgary.

**GaryD. Testa**joined Ditech in February 2006 as ourVice President, Worldwide Sales from Aurora Networks, a privately held manufacturerof advanced communications systems for broadband networks where he was VicePresident of Worldwide Sales. In this position he developed successful customerrelationships resulting in a four-fold revenue growth over a two year periodand built sales teams in the US, Middle East, Asia and Europe. From 2001 to2004, Mr. Testa held the position of Sr. Vice President of Sales,Marketing and Customer Care for Gluon Networks, a venture start-up thatdeveloped a CLASS 5 softswitch solution. Prior to Gluon, he served in aseries of senior sales management positions with various telecommunicationscompanies. He holds a BS from the University of California, Irvine.

**LowellB. Trangsrud**joined Ditech in July 2001 as ourVice President of Operations after his service at Compaq Computers, a computerand peripherals company, where he worked from 1995 to 2001. Mr. Trangsrudwas promoted to Executive Vice President in May 2004 and promoted to ChiefOperating Officer in May 2005. In his last position at Compaq, Mr. Trangsrudserved as Vice President of Manufacturing for High Availability SolutionsManufacturing. From 1990 to 1995, he worked for Tandem Computers, and in hislast position served as Vice President, Worldwide Supply Chain Operation. From1973 to 1990, Mr. Trangsrud worked for Sperry Corporation and Honeywell,serving in a variety of engineering and management roles. Mr. Trangsrudhas an A.A. in Electronics from North Dakota State College of Science, a B.A.in Management and a B.S. in Business Administration from the University ofPhoenix.

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

**Information Regarding the Audit Committee**

Ditech’s Board of Directors has an Audit Committee,currently composed of Mr. Hasler, Dr. Manoliu and Mr. Sugishita.

The Board of Directorsannually reviews the NASD listing standards definition of independence forAudit Committee members and has determined that all members of Ditech’s AuditCommittee are independent (as independence is currently defined in Rule 4350(d)(2)(A)(i) and(ii) of the Nasdaq listing standards). The Board of Directors hasdetermined that each of Messrs. Sugishita and Hasler qualifies as an “auditcommittee financial expert,” as defined in applicable SEC rules. The Board madea qualitative assessment of Mr. Sugishita’s level of knowledge andexperience based on a number of factors, including 

3

----

hisformal education and experience as a chief financial officer for publicreporting companies. The Board made a qualitative assessment of Mr. Hasler’slevel of knowledge and experience based on a number of factors, including hisformal education, his service as the Deanof the Haas School of Business at the University of California at Berkeley,and his experience as Vice Chairman of KPMGPeat Marwick, a large independent registered public accounting firm.

**StockholderRecommendations for Nominations of Directors**

The Corporate Governanceand Nominating Committee will consider director candidates recommended bystockholders. The Corporate Governance and Nominating Committee does not intendto alter the manner in which it evaluates candidates, including the minimumcriteria set forth above, based on whether the candidate was recommended by astockholder or not. Stockholders who wish to recommend individuals forconsideration by the Corporate Governance and Nominating Committee to becomenominees for election to the Board may do so by delivering a writtenrecommendation to the Corporate Governance and Nominating Committee at thefollowing address: Ditech Networks, Inc., 825 East Middlefield Road,Mountain View, California 94043, Attention: Director Nominations. This writtenrecommendation must be delivered by the date 120 days prior to the anniversarydate of the mailing of Ditech’s proxy statement for the last Annual Meeting ofStockholders. Submissions must include the full name of the proposed nominee, adescription of the proposed nominee’s business experience for at least theprevious five years, complete biographical information, a description of theproposed nominee’s qualifications as a director and a representation that thenominating stockholder is a beneficial or record owner of Ditech’s stock. Anysuch submission must be accompanied by the written consent of the proposednominee to be named as a nominee and to serve as a director if elected.

**Section 16(A) BeneficialOwnership Reporting Compliance**

Section 16(a) of the Securities Exchange Actof 1934 (the “1934 Act”) requires Ditech’s directors and executive officers,and persons who own more than ten percent of a registered class of Ditech’sequity securities, to file with the SEC initial reports of ownership andreports of changes in ownership of common stock and other equity securities ofDitech. Officers, directors and greater than ten percent stockholders arerequired by SEC regulation to furnish Ditech with copies of all Section 16(a) formsthey file.

To Ditech’s knowledge,based solely on a review of the copies of such reports furnished to Ditech andwritten representations that no other reports were required, during the fiscalyear ended April 30, 2007, all Section 16(a) filing requirementsapplicable to its officers, directors and greater than ten percent beneficialowners were complied with.

**Code of Ethics**

Ditech has adopted theDitech Networks, Inc. Code of Conduct and Ethics that applies to allofficers, directors and employees. A copy of the Code of Conduct and Ethicswill be sent to any person requesting a copy without charge. To request a copyof our Code of Conduct and Ethics, please contact: Investor Relations, DitechNetworks, Inc., 825 East Middlefield Road, Mountain View, CA 94303, orcall our Investor Relations Department at (650) 623-1308. If Ditech makesany substantive amendments to the Code of Conduct and Ethics or grants anywaiver from a provision of the Code to any executive officer or director,Ditech will promptly disclose the nature of the amendment or waiver on a Form 8-Kfiling, or if permitted by Nasdaq, on its website, www.ditechnetworks.com.

4

----

**Item 11—ExecutiveCompensation**

**COMPENSATIONDISCUSSION AND ANALYSIS**

***Overview of Compensation Program***

The Board of Directors hasdelegated the responsibility for executive compensation to the CompensationCommittee. The Compensation Committee of the Board currently has responsibilityfor establishing, implementing and continually monitoring adherence withDitech’s compensation philosophy. The Compensation Committee ensures that thetotal compensation paid to the executive officers is fair, reasonable andcompetitive.The Committee also provides the guidelines for other non-executivecompany employees in both equity and cash compensations on increases andlevels. Generally, the types of compensation and benefits provided to executiveofficers of Ditech are similar to those provided to executive officers of othersimilarly-situated companies. The discussion below focuses on the compensationrelating to the individuals included in the Summary Compensation Table underthe caption “Compensation of ExecutiveOfficers” below, who are referred to as our “named executive officers.”

***Compensation Philosophy and Objectives***

The CompensationCommittee’s objective in establishing our executive compensation program is toprovide executive compensation that is both successful in attracting and retainingindividuals with the skills necessary for us to achieve our long-term businessplan, as well motivate and reward those individuals who perform at or above thelevels that we expect. In order to do so the Compensation Committee establishes(1) base cash compensation necessary as compensation for services rendered, (2)a significant cash incentive component which will only be paid upon theachievement of company-specific annual, long-term and strategic goals and whichwill increase with performance exceeding those goals, and (3) equity incentivesto further align executive officers’ interests with those of the stockholders.Because we face strong competition for individuals with the skills necessary tomake the company successful, the Compensation Committee takes industry trendsinto account with respect to each of these components, and believes that it isnecessary for our executive compensation to be at or above the 50th percentile of companies with which we competefor executive talent in order for us to meet our hiring and retention goals.

***Role of Executive Officers in Compensation Decisions***

The Compensation Committeemakes all compensation decisions for the named executive officers. Our ChiefExecutive Officer annually reviews the performance of each executive officer(other than the Chief Executive Officer himself, whose performance is reviewedsolely by the Compensation Committee). Our Chief Executive Officerpresents his compensation recommendations based on management reviews,including with respect to salary adjustments and annual bonus award amounts,and equity grants to the Compensation Committee. These recommendations are justone factor that the Compensation Committee takes into account in making itscompensation decisions. Human Resources is involved in summarizing theapplicable information and provides input based solely on survey informationand trends. Other factors are discussed below. 

***Setting Executive Compensation***

In fiscal 2007 and 2008, the Compensation Committeeengaged Compensia, Inc., an executive compensation consulting firm, to conductan annual review of its total compensation program for our named executiveofficers. Compensia provides the Compensation Committee with relevant marketdata and alternatives to consider when making compensation decisions for thenamed executive officers. Compensia made specific recommendations in 2007, butprovided only update information for assessment in 2008.

5

----

Specifically, Compensia assisted the CompensationCommittee with a marketplace assessment of our named executive officers’compensation in comparison to the compensation for comparable positions withinour core and broader groups. The Compensation Committee engaged Compensia tocomplete a competitive review of our executive compensation program and to makeforward-looking recommendations regarding our ongoing executive compensationphilosophy and course of action.

In making compensation decisions, the CompensationCommittee compares each element of total compensation against a group ofpublicly-traded and privately-held companies based in Northern California witha concentration in technology and with revenues in the $50 million to $200million range. The Compensation Committee obtains this information from asurvey prepared by Radford Associates, referred to in this discussion as the“Radford Executive Survey.” The Compensation Committee uses the RadfordExecutive Survey because the Compensation Committee believes that it isprimarily these companies that are the companies against which Ditech competesfor talent. There are approximately 137 companies in the Radford ExecutiveSurvey.

For comparison purposes, Ditech’s annual revenues areapproximately 15% below the average revenues of the companies in the RadfordExecutive Survey. Because of the variance in size among the companiescomprising the Radford Executive Survey, the Compensation Committee adjustedthe compensation data for differences in company revenues. The CompensationCommittee used this information as the basis of comparison of executivecompensation between Ditech and the companies in the Radford Executive Survey.

Ditech competes with many larger companies for topexecutive-level talent. Accordingly, the Compensation Committee generally setsbase compensation for executive officers between the 50th and 60th percentiles of salaries paid to similarlysituated executive officers of the companies comprising the Radford ExecutiveSurvey. The Compensation Committee targets 50th to 75th percentile of the Radford Executive Survey fortargeted total cash compensation for our executive officers, which includessalaries and bonuses. The decisions of the Compensation Committee may varywithin these ranges, and may occasionally be outside of these ranges as theCompensation Committee deems appropriate based upon the experience level of theindividual, individual performance and relative contributions of the executiveofficer, and market factors. The Compensation Committee typically considerssalary levels annually as part of Ditech’s performance review process as wellas upon a promotion or other change in job responsibility. 

The CompensationCommittee grants stock options and other equity awards in order to assistDitech in:

·       enhancingthe link between the creation of stockholder value and long-term executiveincentive compensation;

·       providingan opportunity for increased equity ownership by executive officers; and

·       maintainingcompetitive levels of total compensation.

In addressing equity compensation, the CompensationCommittee evaluates several groups of survey information from both Compensiaand Radford. The review is based on four different Radford surveys that addressoption grants as: 1) options as a percentage of outstanding shares forcompanies from $30 million to $99 million; 2) options as a percentage ofoutstanding grants for executive officers; 3) grants based on outstandingshares, ongoing grant levels; and 4) blended ongoing grant information.Additionally, the Compensation Committee evaluated the blending of four surveysfrom Compensia related to companies with: 1) revenues from $50 million to $200million; 2) San Francisco Bay Area survey on compensation; 3) executivecompensation; and 4) a global long-term incentive survey, and considersdifferences and similarities to the Radford information as it makes decisions. 

6

----

The Compensation Committeeallocates a significant percentage of total compensation to incentives as aresult of the philosophy mentioned above. There is no pre-established policy ortarget for the allocation between either cash and non-cash or short-term andlong-term incentive compensation. Our executive officers realize income fromincentive compensation as a result of the performance of Ditech, depending onthe type of award, compared to established goals.

***2007 Executive Compensation Components***

For the fiscal year endedApril 30, 2007, the principal components of compensation for namedexecutive officers were base salary and performance-based incentivecompensation.

*Base Salary*

Ditech provides its namedexecutive officers with a base salary to provide them compensation for servicesrendered during the fiscal year. The Compensation Committee determines basesalary ranges for the named executive officers based on the factors citedabove. In determining the base salaries for fiscal 2007, the CompensationCommittee analyzed the base salary and performance-based compensation of eachexecutive officer subject to the October 2006 Radford Executive CompensationSurvey for companies with annual revenues in the $50 million to $200 millionrange based on companies throughout the country.

*Performance-BasedIncentive Compensation*

Annual target performance-based compensation forfiscal 2007 for each named executive officer, as set forth in the *Summary Compensation Table* below in the nextsection, was a percentage of the named executive officer’s base salary. TheCompensation Committee established the target performance-based compensationlevels using the principles described above. The Compensation Committee alsoestablished the 2007 Executive Bonus Plan, which determined the percentage oftarget performance-based compensation payable based on our revenue, operatingprofit and individual objectives, with a small component of discretionary bonusto take into account non-quantifiable contributions. The targetperformance-based compensation level ranged from 40% to 100% of each namedexecutive officer’s base salary, and were as follows: Mr. Montgomery, CEO—100%;Messrs Tamblyn and Trangsrud, EVPs—60%; and Mr. Aras, VP—40%. The CompensationCommittee arrived at these percentages based upon the principles describedabove and information considered from the Radford Executive Survey.

In May 2006, the Compensation Committee approved the2007 Executive Bonus Plan. The Compensation Committee established financialtargets for our 2007 Executive Bonus Plan in conjunction with our fiscal 2007annual budget process. The Compensation Committee has chosen full year non-GAAPincome from operations as one of the evaluation metrics for determining paymentunder the 2007 Executive Bonus Plan. Non-GAAP income from operations isoperating profit before stock-based compensation expense. The Compensation Committee uses non-GAAPincome from operations, rather than GAAP income from operations, as it believesthat this measure is more reflective of Ditech’s core operating performance,which is what the Compensation Committee has designed the compensationstructure to reward.

7

----

Bonuseswere earned based on (a) company performance against Ditech’s 2007 OperatingPlan, (b) individual performance against established individual goals, and(c) a discretionary portion. Weighting of these components is as follows:

| *Revenue*              | * * | *40* | *%* |
|------------------------|----------|------|-----|
| *Operating  Profit(1)* | * * | *30* | *%* |
| *Individual  Goals*    | * * | *20* | *%* |
| *Discretionary Bonus*  | * * | *10* | *%* |

----

(1)          Operatingprofit is on a non-GAAP basis. It is our GAAP performance less the FAS 123Rnon-cash expense charge for the period(s).

The Compensation Committeedetermined to use these metrics, and to establish these respective weightings,to ensure that overall company performance is a key and top priority for theExecutive Team. Increased revenues mean growth, and the operating profit metricis to ensure profitability. Lastly, each executive officer also has goals thatare pertinent to his specific area or a group goal he can support. An examplewould be in the implementation of Sarbanes-Oxley for the Chief FinancialOfficer in the past years, which is a critical function but not reflected inoperating results. The individual and discretionary portions are to incentivizethe executive to add value in multiple areas, even outside the revenue andprofit areas, as may be needed.

*Revenue Component ofExecutive’s Bonus:**  *There isno pay out if actual revenue does not meet or exceed at least 80% of targetrevenue as set forth in Ditech’s 2007 Operating Plan. For every percentagepoint actual revenue exceeds 80% of target revenue as set forth in Ditech’s2007 Operating Plan, the executive will earn 3% of the portion of target bonusallocated to the revenue component.

*Operating Profit Componentof Executive’s Bonus:**  **There is*no pay outif actual operating profit does not equal or exceed at least 80% of targetoperating profit as set forth in Ditech’s 2007 Operating Plan. If actualoperating profit equals 80% of target operating profit as set forth in Ditech’s2007 Operating Plan, the executive will earn 40% of the portion of target bonusallocated to the operating profit component. Then for every percentage pointactual operating profit exceeds 80% of target operating profit as set forth inDitech’s 2007 Operating Plan, the executive will earn (a) an additional 3% ofthe portion of target bonus allocated to the operating profit component, untilactual operating profit equals target operating profit as set forth in Ditech’s2007 Operating Plan, and (b) an additional 3% of the portion of target bonusallocated to the operating profit component for actual operating profitexceeding target operating profit as set forth in Ditech’s 2007 Operating Plan.

The CompensationCommittee’s philosophy emphasizes pay for performance through a scaledstructure that recognizes the risks associated with goal setting in a volatilebusiness environment. Target revenues and operating targets require execution,and are demanding and stretch oriented. The minimum performance at 80% oftarget is to ensure a minimum level of performance before any bonus is paid,with a strong incentive to reach that 80% amount. This 80% minimum performancerecognizes that the 100% target amount is a stretch goal and attainmentinvolves a high degree of difficulty. Therefore, at a minimum level there is apartial bonus, and the better the overall company performance, the greater thebonus attainment.

*Individual Goals:**  *Individual goals were as recommended by our ChiefExecutive Officer (other than with respect to himself) and approved by theCompensation Committee.

*Caps on Bonus:**  **For*therevenue component of the payment to pay out greater than 100% of target for therevenue component, actual operating profit must equal or exceed 80% of targetoperating profit as set forth in Ditech’s 2007 Operating Plan. The total payoutfor each Executive was capped at 200% of target bonus.

8

----

***2008 Executive Compensation Components***

*Base Salary*

*TheCompensation Committee determines base salary ranges for the named executiveofficers based on the factors cited above. As an additional factor used indetermining the compensation for fiscal 2008, the Compensation Committeeanalyzed the base salary and performance-based compensation of each executiveofficer in comparison to the October 2006 Radford Executive Compensation Surveyfor companies with annual revenues in the $50 million to $200 million rangebased on companies throughout the country.*

*Performance-BasedIncentive Compensation*

In May 2007, the Compensation Committee approvedthe 2008 Executive Bonus Plan. The 2008 Executive Bonus Plan provides for thepayment of an annual cash bonus based on an individual targeted bonus amountfor each executive officer, ranging from 40% to 60% of the named executiveofficer’s base salary, the exact amount established based on the principlesdiscussed above. Mr. Montgomery was not assigned a percentage, as he haddetermined to retire. The Compensation Committee established financial targetsfor our 2008 Executive Bonus Plan in conjunction with our annual budgetprocess. Bonuses will be earned based on (a) company performance as againstDitech’s 2008 Operating Plan, again based on revenues and non-GAAP income fromoperations, (b) individual performance as against established individualgoals, and (c) a discretionary portion. Weighting of these components isthe same as for our 2007 Executive Bonus Plan.

*RevenueComponent of Executive’s Bonus:**  *Therewill be**no pay out if actual revenue does notmeet or exceed at least 80% of target revenue as set forth in Ditech’s 2008Operating Plan. For every percentage point actual revenue exceeds 80% of targetrevenue as set forth in Ditech’s 2008 Operating Plan, the executive will earn5% of the portion of target bonus allocated to the revenue component.

*OperatingProfit Component of Executive’s Bonus:**  *There will be**no pay outmade if actual operating profit does not equal or exceed at least 70% of targetoperating profit as set forth in Ditech’s 2008 Operating Plan. If actualoperating profit equals 70% of target operating profit as set forth in Ditech’s2008 Operating Plan, the executive will earn 40% of the portion of target bonusallocated to the operating profit component. For every percentage point actualoperating profit exceeds 70% of target operating profit as set forth inDitech’s 2008 Operating Plan, the executive will earn (a) an additional 2%of the portion of target bonus allocated to the operating profit component,until actual operating profit equals target operating profit as set forth inDitech’s 2008 Operating Plan, and (b) an additional 3% of the portion oftarget bonus allocated to the operating profit component for actual operatingprofit exceeding target operating profit as set forth in Ditech’s 2008Operating Plan.

*IndividualGoals:**  *Individualgoals were recommended by our Chief Executive Officer (other than with respectto himself) and approved by the Compensation Committee.

*Capson Bonus:**  *For therevenue component of the payment to pay out greater than 100% of target for therevenue component, actual operating profit must equal or exceed 70% of targetoperating profit as set forth in Ditech’s 2008 Operating Plan. The total payoutfor each Executive will be capped at 200% of target bonus.

We expect that bonus amounts, if earned, will be paidduring the fiscal quarter following the release of our earnings for theapplicable year.

The Compensation Committeeadjusted the bonus payout metrics for the 2008 year to reinforce themaximization of the attainment of the revenue targets. The CompensationCommittee still maintained the usage of a minimum attainment required beforeany payout and the concept that exceeding it provides 

9

----

greater payoutas the target amount is exceeded. However, based on the stretch nature and themanner of leveraging Ditech’s profitability, shortfalls in revenue can greatlyskew the operating profitability. Thus, the Compensation Committee determinedto lower the attainment level on the operating profit from target to 70% fromthe prior year at 80%. The Compensation Committee believed this to beappropriate as part of eliminating the cliff that was in place in 2007. TheCompensation Committee believed that lowering the minimum percentage at thesame time it removed the cliff promoted a more even and sustained effort fromexecutive officers. 

*Ownership Guidelines*

Ditech currently does notrequire our directors or executive officers to own a particular amount of ourcommon stock. The Compensation Committee is satisfied that restricted stock andoption holdings among our directors and officers are sufficient at this time toprovide motivation and to align this group’s interests with those of ourstockholders.

*Stock Option andStock Award Programs*

Historically, Ditech only granted stock options toemployees. Commencing in May 2006, the Compensation Committee and Boardreassessed our equity compensation practices. The Compensation Committeedetermined to grant both stock options and restricted stock, referred to asstock awards. This practice commenced in conjunction with our adoption of FAS123R. In practice, the Compensation Committee determined that the number ofshares subject to stock options that would ordinarily be granted would bereduced by 50% and that the number of shares subject to stock awards would be 1¤3rd of the number of shares not granted as options.The Compensation Committee determined this change in grant practices wouldenable Ditech to be more competitive with market dynamics, would be responsiveto stockholders sentiments and would reduce the impact of non-cash equitycompensation to the operations of Ditech under FAS 123R.

Generally, the Compensation Committee makes asignificant stock option grant and stock award when an executive officercommences employment. The grant and award are made within our writtenguidelines for new-hire grants, consistent with the executive officer’sposition, and as is negotiated with the executive officer. The CompensationCommittee established the guidelines based on our historical practices. Thesize of each grant is generally set at a level that the Compensation Committeedeems appropriate to create a meaningful opportunity for stock ownership basedupon the grant guidelines, the individual’s position with the company and theindividual’s potential for future responsibility and promotion. The relativeweight given to each of these factors will vary from individual to individualat the Compensation Committee’s discretion. The Compensation Committee makesadjustments as it deems reasonable to attract candidates in the competitiveenvironment in which we operate.

The Compensation Committee makes subsequent optiongrants and stock awards at varying times and in varying amounts at thediscretion of the Compensation Committee. Historically, these grants have beenmade at various times and occasionally at our annual review cycles. As ofDecember 2006, the Compensation Committee and our Board established apractice to provide replenishment grants at the first regularly scheduled Boardmeeting after November 1st of each year. TheCompensation Committee makes promotion and new hires grants generally on the 10th day of the month subsequent to the month theperson commences employment or receives a promotion. The Compensation Committeeconsiders replenishment grants for existing employees, including our executiveofficers, who have completed approximately one year of service since their lastreview. The Compensation Committee assesses each executive officer’sperformance during the prior year during the performance review process, andalso considers corporate performance when it grants replenishment options andstock awards. The Compensation Committee determines the vesting schedule andthe number of shares granted to ensure a meaningful incentive to remain inDitech’s employ. The Compensation Committee takes into account 

10

----

unvested existing optionsand awards in determining the size of subsequent grants. The stock option andstock awards will provide a return to the executive officer only if he or sheremains in our employ. With respect to stock options, they will only provide abenefit if the market price of our common stock increases over the option term.The Compensation Committee addresses grant practices by reviewing surveys fromboth Radford and Compensia for comparative purposes. The Compensation Committeelooks at averages of similar sized companies by employee position/skill levelto assess appropriate levels. Based on these inputs and the number of availablegrants and awards available, it approves grants based on these conclusions.

The exercise prices of stock options are the Nasdaqclosing price of our common stock on the effective date of the grant. Most ofthe options granted by the Compensation Committee vest at a rate of 25% atthe first year cliff, and then monthly thereafter over a total of four years ofthe ten-year option term, vesting ceases on termination of employment andexercise rights cease 90 days after termination of employment, except in thecase of death (subject to an 18 month limitation) or disability (subject to a12 month limitation). Prior to the exercise of an option, the holder has norights as a stockholder with respect to the shares subject to such option,including voting rights and the right to receive dividends or dividendequivalents. Stock awards granted have rights including voting rights, but aresubject to vesting similar to the option grants. Vesting is usuallysemi-annually, after the first year, to address any tax-related issues on theawards. Awards vest usually over a four year period.

Because we haveexperienced volatility in our business, the Compensation Committee believesthat stock option and award grants currently provide a significant incentive toour employees and executive officers.

*Retirement andOther Benefits*

*401(k) Plan*

We maintain a deferredsavings retirement plan for our U.S. employees. The deferred savings retirementplan is intended to qualify as a tax-qualified plan under Section 401 ofthe Internal Revenue Code. The deferred savings retirement plan permits Ditechto make discretionary contributions, subject to established limits and avesting schedule. To date, we have provided discretionary contributions only tomatch the first $500 per year of contributions on a dollar for dollar basis.However, if Ditech exceeds its internal operating plan by 15%, an additional $500is added in that year on a similar basis.

*Perquisites andOther Personal Benefits*

Our executive officersparticipate in the same group insurance and employee benefit plans as our othersalaried employees. At this time we do not provide any material specialbenefits or other perquisites to our executive officers.

*AccountingImplications*

*Accounting forStock-Based Compensation*

As discussed above, theCompensation Committee determined to revise its equity granting practices toinclude a portion of equity grants as stock awards, in part to reduce theaccounting impact of these equity awards.

11

----

**COMPENSATION OF EXECUTIVE OFFICERS**

**Summary ofCompensation**

The following table showsthe compensation awarded or paid to, or earned by, our Chief Executive Officer,our Chief Financial Officer and our three other most highly compensatedexecutive officers serving in such capacity at April 30, 2007. We refer tothese employees collectively as our “Named Executive Officers.”

**Summary of Compensation Table**

| **Name and Principal Position**                                 | ** ** | ** ** | ** ** | **Year** | ** ** | **Salary ($)** | ** ** | **Bonus ($)** | ** ** | **Stock  Awards  ($)(1)** | ** ** | **Option  Awards  ($)(2)** | ** ** | **Non-equity  Incentive Plan  Compensation  ($)** | ** ** | **All Other  Compensation  ($)(3)** | ** ** | **Total  Compensation  ($)** | ** ** |
|--------------------------------------------------------------------------------|------------|------------|------------|----------|------------|---------------------|------------|--------------------|------------|---------------------------|------------|----------------------------|------------|--------------------------------------------------------|------------|------------------------------------------|------------|------------------------------|------------|
| Timothy K. Montgomery*Chief Executive Officer And President*              |       |       | 2007       |     |       |                | 375,000    |               |       |                      |       |                       |       |                                                   | —     |                                     |       | 648,108                      |       |   | 169,688 |   |   |   | 5,179. |   |   |   | 1,197,975 |   |   |
| William J. Tamblyn*Executive Vice President And Chief Financial  Officer* |       |       | 2007       |     |       |                | 250,000    |               |       |                      |       |                       |       |                                                   | 4,774      |                                     |       | 390,568                      |       |   | 100,000 |   |   |   | 1,807 |   |   |   | 747,149 |   |   |
| Dr. Caglan M. Aras(4)*Former Vice President, Marketing*                   |       |       | 2007       |     |       |                | 210,000    |               |       |                      |       |                       |       |                                                   | —     |                                     |       | 305,522                      |       |   | 35,438 |   |   |   | 1,915 |   |   |   | 552,875 |   |   |
| Gary D. Testa*Vice President Worldwide  Sales*                                 |       |       | 2007       |     |       |                | 220,000    |               |       |                      | 145,372    | (5)                        |       |                                                   | —     |                                     |       | 738,631                      |       |   | — |   |   |   | 2,480 |   |   |   | 1,106,483 |   |   |
| Lowell B.  Trangsrud*Executive Vice President And Chief Operating Officer*     |       |       | 2007       |     |       |                | 250,000    |               |       |                      |       |                       |       |                                                   | 4,774      |                                     |       | 390,568                      |       |   | 100,000 |   |   |   | 3,518 |   |   |   | 748,860 |   |   |

----

(1)             The dollar amounts in this column reflect the dollaramount recognized for financial statement reporting purposes for the fiscalyear ended April 30, 2007, in accordance with FAS 123(R), disregardingestimates of forfeiture related to service-based vesting conditions, associatedwith non-option awards and including amounts from awards granted in and priorto fiscal 2007. Assumptions used in the calculation of these amounts areincluded in Note 10 to our audited financial statements for the fiscal yearended April 30, 2007 included in our Annual Report on Form 10-K.

(2)             The dollar amount in this column represent thecompensation cost for the year ended April 30, 2007 of stock option awardsgranted in and prior to fiscal 2007. These amounts have been calculated inaccordance with SFAS No. 123R, disregarding estimates of forfeiturerelated to service-base vesting conditions, and using the Black-Scholesoption-pricing model. Assumptions used in the calculation of these amounts areincluded in Note 10 to our audited financial statements for the fiscal yearended April 30, 2007 included in our Annual Report on Form 10-K.

(3)             Includes 401(K) match, group term life insurancepremiums paid by company, memberships and miscellaneous taxable compensation.

(4)             Dr. Aras ceased to be an employee of Ditech onJune 8, 2007.

(5)             Consists of sales commissions.

12

----

**Grants ofPlan-Based Awards**

The following table showsfor the fiscal year ended April 30, 2007, certain information regardinggrants of plan-based awards to the named executive officers:

**Grantsof Plan-Based Awards in Fiscal 2007**
|                     | ** ** | ** **               | ** **      | **Date of** | ** **               | **Estimated  Future Payouts  Under Non-Equity  Incentive Plan Awards** | ** **         | **All Other  Stock  Awards:  Number of  Shares of  Stock** | ** **        | **All Other  Option  Awards:  Number of  Securities  Underlying** | ** **       | **Exercise or  Base Price of  Option** | ** **                | **Grant Date  Fair  Value of  Stock  and Option** | ** **              |
|---------------------|------------|--------------------------|-----------------|------------------|--------------------------|-----------------------------------------------------------------------------|--------------------|---------------------------------------------------------------------------|-------------------|-----------------------------------------------------------------------------|------------------|-------------------------------------------------------|---------------------------|------------------------------------------------------------------|-------------------------|
| **Name**            | ** ** | ** **               | **Grant  Date** | ** **       | **Committee  Action(1)** | ** **                                                                  | **Threshold  ($)** | ** **                                                                | **Target  ($)**   | ** **                                                                  | **Maximum  ($)** | ** **                                            | **or Units  (#)(2)** | ** **                                                       | **Options  (#)(2)**     | ** ** | **Awards  ($/Sh)(3)** | ** ** | **Awards  ($)(4)** | ** ** |
| Mr. Montgomery |       | —                   |            |             | —                   |                                                                        |               |                                                                      | 0                 |                                                                        |             | 375,000                                               |                      |                                                             | 750,000                 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Mr. Tamblyn    |       | —  2/15/07  2/15/07 |            |             | —  2/5/07  2/5/07   |                                                                        |               |                                                                      | 0  —  — |                                                                        |             | 150,000  —  —                               |                      |                                                             | 300,000  —  — |   |   |   | —  —  12,500 |   |   |   | —  37,500  — |   |   |   | —  7.22  — |   |   |   | —  113,517  61,024 |   |   |
| Dr. Aras       |       | —                   |            |             | —                   |                                                                        |               |                                                                      | 0                 |                                                                        |             | 94,000                                                |                      |                                                             | 189,000                 |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Mr. Testa      |       | 2/15/07                  |            |             | 2/5/07                   |                                                                        |               |                                                                      | —            |                                                                        |             | —                                                |                      |                                                             | —                  |   |   |   | — |   |   |   | 100,000 | (5) |   |   | 7.22 |   |   |   | 287,375 |   |   |
| Mr. Trangsrud  |       | —  2/15/07  2/15/07 |            |             | —  2/5/07  2/5/07   |                                                                        |               |                                                                      | 0  —  — |                                                                        |             | 150,000  —  —                               |                      |                                                             | 300,000  —  — |   |   |   | —  —  12,500 |   |   |   | —  37,500  — |   |   |   | —  7.22  — |   |   |   | —  113,517  61,024 |   |   |
|                     |            |                          |                 |                  |                          |                                                                             |                    |                                                                           |                   |                                                                             |                  |                                                       |                           |                                                                  |                         |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)        TheCompensation Committee took action on this date, with the grants to beeffective on the grant date and, with respect to stock options, with anexercise price equal to the closing price of the common stock on the NasdaqGlobal Market on the date of grant.

(2)        Stock Awards and Option Awards were granted under the 2006 EquityIncentive Plan. Stock Awards will vest over four years, 25% of the shares veston 12/15/07, and 12.5% semi-annually over the following three years. Optionswill vest over four years, 25% of the shares vest on 12/1/07, and 1¤48 th of the shares vest each month thereafter.

(3)        Underthe terms of the 2006 Equity Incentive Plan, the exercise price of optionawards was determined based on the closing price of Ditech’s common stock asreported on the Nasdaq Global Market on the date of grant.

(4)        Theamounts shown in this column were determined as of the stock and option’s grantdate using a Black-Scholes stock option valuation model, and represent thedollar amounts that serves as the basis for stock-based compensation expensesrecognized for financial statement reporting purposes in accordance with FAS123(R). Assumptions used in the calculation of these amounts are described inNote 10 to Ditech’s audited financial statements for the fiscal year endedApril 30, 2007, included in Ditech’s Annual Report on Form 10-Kthat was filed with the SEC on July 16, 2007. All grants were made subjectto individual award agreements, the form of which was previously filed with theSEC.

(5)        Shareswill vest in full on 12/1/11, and will vest earlier upon Mr. Testaachieving certain milestones

The Compensation Committeedetermined the cash compensation and equity grants as described in the sectionentitled “Compensation Discussion and Analysis” above. In particular, readersare encouraged to read the description of the 2007 Executive Bonus Plan in thatsection to understand the non-equity incentive plan compensation targets,maximums and payouts.

13

----

**Outstanding EquityAwards at Fiscal Year—End**

The following table showsfor the fiscal year ended April 30, 2007, certain information regardingoutstanding equity awards at fiscal year end for the named executive officers.

**OutstandingEquity Awards At April 30, 2007**

| ** **          | ** ** | **Option Awards** | ** ** | **Stock Awards**                                                                  | ** ** |
|---------------------|------------|------------------------|------------|----------------------------------------------------------------------------------------|------------|
| **Name**            | ** ** | ** **             | ** ** | **Number of  Securities  Underlying  Unexercised  Options (#)  Exercisable** | ** ** | **Number of  Securities  Underlying  Unexercised  Options (#)  Unexercisable** | ** ** | **Equity  Incentive Plan  Awards:  Number of  Securities  Underlying  Unexercised  Unearned  Options (#)** | ** ** | **Option  Exercise  Price ($)** | ** ** | **Option  Expiration  Date** | ** ** | **Number of  Shares or Units  of Stock That  Have Not  Vested (#)** | ** ** | **Market  Value of  Shares or  Units of  Stock That  Have Not  Vested ($)(6)** | ** ** |
| Mr. Montgomery |       |                   | 253,888    |                                                                                   |       |   | — |   |   |   | — |   |   |   | 9.00 |   |   |   | 08/10/2009 | (2) |   |   | — |   |   |   | — |   |   |
|                     |       |                   | 125,625    |                                                                                   |       |   | — |   |   |   | — |   |   |   | 7.19 |   |   |   | 01/10/2011 | (2) |   |   | — |   |   |   | — |   |   |
|                     |       |                   | 159,375    |                                                                                   |       |   | — |   |   |   | — |   |   |   | 2.92 |   |   |   | 06/21/2012 | (1) |   |   | — |   |   |   | — |   |   |
|                     |       |                   | 58,000     |                                                                                   |       |   | — |   |   |   | — |   |   |   | 10.35 |   |   |   | 09/23/2013 | (1) |   |   | — |   |   |   | — |   |   |
|                     |       |                   | 440,000    |                                                                                   |       |   | — |   |   |   | — |   |   |   | 8.76 |   |   |   | 09/30/2013 | (1) |   |   | — |   |   |   | — |   |   |
|                     |       |                   | 335,000    |                                                                                   |       |   | — |   |   |   | — |   |   |   | 6.49 |   |   |   | 06/30/2015 | (1) |   |   | — |   |   |   | — |   |   |
| Mr. Tamblyn    |       |                   | 124,586    |                                                                                   |       |   | — |   |   |   | — |   |   |   | 9.00 |   |   |   | 08/10/2009 | (2) |   |   | 12,500 |   |   |   | 108,750 |   |   |
|                |       |                   | 125,000    |                                                                                   |       |   | — |   |   |   | — |   |   |   | 7.19 |   |   |   | 01/10/2011 | (2) |   |   | — |   |   |   | — |   |   |
|                |       |                   | 90,000     |                                                                                   |       |   | — |   |   |   | — |   |   |   | 2.92 |   |   |   | 06/21/2012 | (1) |   |   | — |   |   |   | — |   |   |
|                |       |                   | 10,000     |                                                                                   |       |   | — |   |   |   | — |   |   |   | 10.35 |   |   |   | 09/23/2013 | (1) |   |   | — |   |   |   | — |   |   |
|                |       |                   | 150,000    |                                                                                   |       |   | — |   |   |   | — |   |   |   | 8.76 |   |   |   | 09/30/2013 | (1) |   |   | — |   |   |   | — |   |   |
|                |       |                   | 125,000    |                                                                                   |       |   | — |   |   |   | — |   |   |   | 13.37 |   |   |   | 5/18/2014 | (1) |   |   | — |   |   |   | — |   |   |
|                |       |                   | 100,000    |                                                                                   |       |   | — |   |   |   | — |   |   |   | 6.49 |   |   |   | 6/30/2015 | (1) |   |   | — |   |   |   | — |   |   |
|                |       |                   | 37,500     |                                                                                   |       |   | — |   |   |   | — |   |   |   | 7.22 |   |   |   | 02/15/2017 | (1) |   |   | — |   |   |   | — |   |   |
| Dr. Aras       |       |                   | 50,000     |                                                                                   |       |   | — |   |   |   | — |   |   |   | 8.82 |   |   |   | 10/27/2013 | (1) |   |   | — |   |   |   | — |   |   |
|                     |       |                   | 100,000    |                                                                                   |       |   | — |   |   |   | — |   |   |   | 13.37 |   |   |   | 05/18/2014 | (1) |   |   | — |   |   |   | — |   |   |
|                     |       |                   | 100,000    |                                                                                   |       |   | — |   |   |   | — |   |   |   | 6.49 |   |   |   | 06/30/2015 | (1) |   |   | — |   |   |   | — |   |   |
| Mr. Testa      |       |                   | 58,333     |                                                                                   |       |   | 141,667 |   |   |   | — |   |   |   | 8.90 |   |   |   | 02/07/2016 | (3) |   |   | — |   |   |   | — |   |   |
|                |       |                   | —     |                                                                                   |       |   | 100,000 |   |   |   | 100,000 |   |   |   | 8.90 |   |   |   | 02/07/2016 | (4) |   |   | — |   |   |   | — |   |   |
|                |       |                   | 100,000    |                                                                                   |       |   | — |   |   |   | — |   |   |   | 7.22 |   |   |   | 02/15/2017 | (5) |   |   | — |   |   |   | — |   |   |
| Mr. Trangsrud  |       |                   | 126,000    |                                                                                   |       |   | — |   |   |   | — |   |   |   | 7.12 |   |   |   | 07/12/2011 | (1) |   |   | 12,500 |   |   |   | 108,750 |   |   |
|                     |       |                   | 28,900     |                                                                                   |       |   | — |   |   |   | — |   |   |   | 2.92 |   |   |   | 06/21/2012 | (1) |   |   | — |   |   |   | — |   |   |
|                     |       |                   | 150,000    |                                                                                   |       |   | — |   |   |   | — |   |   |   | 8.76 |   |   |   | 09/30/2013 | (1) |   |   | — |   |   |   | — |   |   |
|                     |       |                   | 125,000    |                                                                                   |       |   | — |   |   |   | — |   |   |   | 13.37 |   |   |   | 05/18/2014 | (1) |   |   | — |   |   |   | — |   |   |
|                     |       |                   | 100,000    |                                                                                   |       |   | — |   |   |   | — |   |   |   | 6.49 |   |   |   | 06/30/2015 | (1) |   |   | — |   |   |   | — |   |   |
|                     |       |                   | 37,500     |                                                                                   |       |   | — |   |   |   | — |   |   |   | 7.22 |   |   |   | 02/15/2017 | (1) |   |   | — |   |   |   | — |   |   |
|                     |            |                        |            |                                                                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

(1)    Option isimmediately exercisable and vest over four years, 25% of the shares vest nineyears prior to the expiration date, and 1/48th of the shares vest each month after the first25% vest.

(2)    Option wasimmediately exercisable and vested in variable increments. The option is now fullyvested.

(3)    Option isexercisable as it vest. Option vested 25% on 2/7/06 and the balance will vestmonthly for the next 36 months of continuous service.

(4)    Option isexercisable as it vest. Option vested 25% on 2/7/07 and the balance will vestmonthly for the next 36 months of continuous service.

(5)    Shares willvest in full on 12/1/11, and will vest earlier upon Mr. Testa achievingcertain milestones. Option is immediately exercisable.

(6)    Value based on April 30, 2007 closing price of $8.70.

**Option Exercisesand Stock Vested**

During the fiscal year ended April 30, 2007,there were no option exercises and stock which vested with respect to the namedexecutive officers.

14

----

**Potential Paymentsupon Termination or Change of Control**

***Employment Agreements and Termination of Employment and Change ofControl Arrangements***

*Employment Agreement with Mr. Montgomery.**  *In September 1998, Ditech entered into anemployment agreement with Timothy K. Montgomery, our former President and ChiefExecutive Officer, to serve as Ditech’s President and Chief Executive Officer.The employment agreement provides that if Mr. Montgomery is terminatedwithout cause, he will be paid a lump sum equal to twelve months base salary.However, if Mr. Montgomery resigns, his employment is terminated forcause, or following a change in control of Ditech, he will receive no severancebenefits.

For purposes of the agreement:

“Cause” means misconduct, including:(i) commission of any felony or any crime involving moral turpitude ordishonesty; (ii) participation in a fraud or act of dishonesty againstDitech; (iii) material breach of Ditech’s policies; (iv) intentionaldamage to Ditech’s property; (v) material breach of the agreement; or(vi) conduct that in the good faith and reasonable determination of theBoard demonstrates unacceptable job performance or gross unfitness to serve.

A “change of control” means: (a) anyreorganization, consolidation or merger of Ditech in which Ditech is not thesurviving corporation or pursuant to which shares of Ditech’s voting stockwould be converted into cash, securities or other property, in either case otherthan a merger of Ditech in which the holders of Ditech’s voting stockimmediately prior to the merger have the same proportionate ownership of votingstock of the surviving corporation immediately after the merger; (b) areverse merger in which Ditech is the surviving corporation but the shares ofDitech’s common stock outstanding immediately preceding the merger areconverted by virtue of the merger into other property, whether in the form ofsecurities, cash or otherwise; (c) the sale, lease, exchange or othertransfer (in one transaction or a series of related transactions) of all, orsubstantially all, of the assets of Ditech; (d) approval by theshareholders of Ditech of a plan or proposal for the liquidation or dissolutionof Ditech; or (e) any “person” (as defined in Sections 13(d) or14(d) of the Securities Exchange Act of 1934, as amended ( the “ExchangeAct”)) becoming the “beneficial owner” (as defined in Rule 13d-3under the Exchange Act), directly or indirectly, of 50% or more of Ditech’soutstanding voting stock.

*Retirement Agreement with Mr. Montgomery.**  *On May 8, 2007, we entered into a Transition andRetirement Agreement with Mr. Montgomery pursuant to whichMr. Montgomery would retire and cease to be Ditech’ Chief ExecutiveOfficer and President effective as of the date that Ditech Networks’ Boardof Directors appoints a new Chief Executive Officer and President. Theretirement date will be his last day of employment with Ditech. In thisagreement Mr. Montgomery has agreed to resign as a director of DitechNetworks if requested by a majority of the Board on or after his retirementdate. Mr. Montgomery retired from Ditech Networks and resigned from theBoard on August 15, 2007.

In connection with hisretirement, Ditech Networks will provide to Mr. Montgomery the followingbenefits as severance following his retirement date:

(a)          12months of continued salary (Mr. Montgomery’s annual salary was $375,000);

(b)         continuedhealth benefits for 12 months;

(c)          (i) theterm during which any vested shares subject to the option grants may beexercised shall be extended up to (but no later than) the earlier to occur of(x) the later to occur of December 31, 2008 and the dateMr. Montgomery ceases to be a member of the Board, and (y) the applicableterm of such Option Grants; and (ii) that Mr. Montgomery’s optiongrants will continue to vest on the same monthly vesting schedules in effect asof the date of his retirement, until the earlier to occur of the date theoption grants cease to be exercisable and seventeen (17) months after the dateof Mr. Montgomery’s retirement date (to the extent not fully vested) andvesting will cease on such date,*providedthat,* all such vesting will cease earlier in the event thatMr. Montgomery materially breaches the agreement entered into inconnection with his retirement or the proprietary information agreement heentered into in connection with his employment by Ditech at any time.

15

----

(d)         theexercise period for his stock options is extended to be the later to occur ofDecember 31, 2008 and the date that he ceases to provide services toDitech unless term of the options expire before that date.

*Employment Agreement with Mr. Testa.**  *In February 2006, Ditech entered into anemployment agreement with Gary Testa to serve as Ditech’s Vice President ofWorldwide Sales. His employment agreement provides that if Mr. Testa isterminated without cause or resigns with good reason in his first year ofemployment, he will receive severance benefits equal to his base salary andguaranteed bonus for the greater of six months or the period until the firstanniversary of employment, plus acceleration of a portion of the optionsgranted to him based on a formula as set forth in the agreement, and if he isterminated without cause or resigns for good reason after the first year ofemployment, severance benefits equal to six months’ base salary. AsMr. Testa completed his first year of service prior to April 30,2007, no amounts will be paid to him upon termination of his employment or achange in control.

*Change in Control Severance Benefit Plan.**  *On August 18, 2006, the Compensation Committeeadopted a Change in Control Severance Benefit Plan (the “Plan”) forMessrs. Montgomery, Tamblyn and Trangsrud (each, a “Participant”).

A Participant in the Planwill receive, if the Participant’s employment with Ditech is terminated due toan “involuntary termination without cause” or a “constructive termination” (asthose terms are defined in the Plan), in either case within one (1) monthprior to or twelve (12) months following a “change in control” (defined inthe Plan), the following benefits:

(a)   cashseverance, paid over 12 months, equal to (i) 18 months base salary in thecase of the Mr. Montgomery, and 12 months base salary in the case of eachof Messrs. Tamblyn and Trangsrud, and (ii) the pro rata portion(based upon of the amount of the fiscal year lapsed) of the expected executivebonus for the Participant for the fiscal year;

(b)   fullaccelerated stock option exercisability and vesting for all outstanding optionsto purchase Ditech common stock that were granted to the Participant on orafter September 1, 2003; and

(c)   COBRApremiums for the Participant for 12 months, or until such earlier date asthe Participant shall secure subsequent employment that shall provide theParticipant with health benefits.

For purposes of the Plan:

“Change in Control” means one of thefollowing events or a series of more than one of the following events that arerelated, wherein the stockholders of Ditech immediately before the transactiondo not retain immediately after the transaction, in substantially the sameproportions as their ownership of shares of Ditech’s voting stock immediatelybefore the transaction, direct or indirect beneficial ownership of more thanfifty percent (50%) of the total combined voting power of the outstandingvoting stock of Ditech, the resulting entity in a merger or, in the case of anasset sale, the corporation or corporations to which the assets of Ditech weretransferred:

(1)   the director indirect sale or exchange in a single or series of related transactions bythe stockholders of Ditech of more than fifty percent (50%) of the voting stockof Ditech;

(2)   a merger orconsolidation in which Ditech is a party; or

(3)   the sale,exchange, or transfer of all or substantially all of the assets of Ditech.

“Constructive Termination” means aresignation by a Participant of employment with the Company after one of thefollowing is undertaken without the Participant’s express written consent:

(1)   a substantial reduction in the Participant’s duties orresponsibilities (and not simply a change in title or, with respect toParticipants other than Mr. Montgomery, reporting relationships) in effectimmediately prior to the effective date of the Change in Control; *provided, however,* that it shall not be a“Constructive Termination” if, following the effective date of the Change inControl, either (a) Ditech is retained as a separate legal entity orbusiness unit and the Participant holds the same position in such legal entityor business unit as the Participant held before such effective date, or(b) the Participant holds a position with duties and responsibilities comparable(though not necessarily identical, in view of the relative sizes of Ditech andthe entity involved in the Change in Control) to the duties andresponsibilities 

16

----

of the Participant priorto the effective date of the Change in Control; *provided further, however,* that, in the case ofMr. Montgomery, if the reporting relationship of Mr. Montgomeryfollowing a Change in Control is not directly to the board of directors of thecorporation or corporations to which the assets of Ditech were transferred or itsultimate parent, then the termination by Mr. Montgomery of employment withDitech after such change in reporting relationship following such Change inControl without Mr. Montgomery’s express written consent shall be a“Constructive Termination”;

(2)   a reduction in the Participant’s base salary (except forsalary decreases generally applicable to Ditech’s other similarly situatedemployees);

(3)   a change in the Participant’s business location of morethan 40 miles from the business location prior to such change, except forrequired travel for Ditech’s business to an extent substantially consistentwith Participant’s prior business travel obligations;

(4)   a material breach by Ditech of any provisions of the Planor any enforceable written agreement between Ditech and the Participant, andDitech fails to rescind or cure the conduct giving rise to the eventconstituting such material breach within thirty (30) days of receipt by Ditechof written notice from the Participant informing Ditech of such material breach;or

(5)   any failure by Ditech to obtain assumption of the Plan byany successor or assign of Ditech.

Notwithstanding the foregoing, a resignation shall notbe deemed a Constructive Termination unless (x) the Participant providesDitech with written notice (the ***“Constructive Termination Notice”***) that the Participantbelieves that an event described above has occurred, (y) the ConstructiveTermination Notice is given within three (3) months of the date the eventoccurred, and (z) Ditech does not rescind or cure the conduct giving riseto the event described in this Section 2(f) within fifteen (15) daysof receipt by Ditech of the Constructive Termination Notice.

“Involuntary Termination Without Cause”means an involuntary termination of employment by Ditech other than for one ofthe following reasons:

(1)   the Participant’s violation of any material provision ofDitech’s standard agreement relating to proprietary rights;

(2)   the Participant participates in any act of theft ordishonesty; or

(3)   the Participant participates in any immoral or illegal actwhich has had or could reasonably be expected to have or had a detrimentaleffect on the business or reputation of Ditech; or

(4)   any material failure by the Participant to use reasonableefforts to perform reasonably requested tasks after written notice and areasonable opportunity to comply with such notice.

In order to be eligible for benefits under the Plan,the Participant must execute a general release of claims against Ditech. ThePlan provides that Ditech may reduce the amount of severance payable under thePlan by the amount, if any, payable to an individually negotiated

*Stock Option Plans.**  *Under the terms of our stock option plans, if stockoptions are not assumed in connection with a change in control of Ditech, thenthe stock options will vest in full and then terminate at the closing of thechange in control.

*Summary of Benefits.**  *The following tables describe the potential paymentsand benefits upon employment termination or change in control for our namedexecutive officers, as if their employment had terminated as of April 30,2007 and as if a change in control had occurred on April 30, 2007, asapplicable, based on the assumptions described above with respect to eachindividual and each compensation component. The table assumes full payment ofthe COBRA premiums.

17

----

**TimothyK. Montgomery**

| **Compensation and Benefits** | ** ** | ** ** | ** ** | **No Change in   Control  Termination  without Cause ($)** | ** ** | **Change in Control  Termination  without Cause ($)** | ** ** |
|-----------------------------------------|------------|------------|------------|-------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| Base Salary                             |       |       | 375,000    |                                                                                |       |                                                                      | 562,500    |   |   |
| COBRA Premium                           |       |       |       |                                                                                |       |                                                                      | 8,903      |   |   |
| Vesting  Acceleration(1)                |       |       |       |                                                                                |       |                                                                      | 323,902    |   |   |

----

(1)          Equalsthe difference between the exercise price and the fair market value of theshares subject to the option.

**WilliamJ. Tamblyn**

| **Compensation and Benefits** | ** ** | ** ** | ** ** | **Change in Control Termination  without Cause ($)** | ** ** |
|-----------------------------------------|------------|------------|------------|-------------------------------------------------------------------------------|------------|
| Base Salary                             |       |       | 250,000    |                                                                          |       |
| COBRA Premium                           |       |       | 8,903      |                                                                          |       |
| Vesting Acceleration(1)                 |       |       | 260,938    |                                                                          |       |

----

(1)          Equalsthe difference between the exercise price and the fair market value of theshares subject to the option.

**LowellB. Trangsrud**

| **Compensation and Benefits** | ** ** | ** ** | ** ** | **Change in Control and  Termination without Cause ($)** | ** ** |
|-----------------------------------------|------------|------------|------------|----------------------------------------------------------------------------------------|------------|
| Base Salary                             |       |       | 250,000    |                                                                                   |       |
| COBRA Premium                           |       |       | 8,903      |                                                                                   |       |
| Vesting Acceleration(1)                 |       |       | 260,938    |                                                                                   |       |

----

(1)          Equalsthe difference between the exercise price and the fair market value of theshares subject to the option.

**GaryD. Testa**

| **Compensation and Benefits** | ** ** | ** ** | ** ** | **Change in Control and Termination  without Cause ($)** | ** ** |
|-----------------------------------------|------------|------------|------------|----------------------------------------------------------------------------------------|------------|
| Vesting  Acceleration(1)                |       |       | 148,000    |                                                                                   |       |
|                                         |            |            |            |                                                                                        |            |  |  |

----

(1)          Equals the differencebetween the exercise price and the fair market value of the shares subject tothe option.

All other rights that theNamed Executive Officers previously had with respect to a termination or changein control had expired or were no longer in effect at the beginning of fiscal2007.

18

----

**Compensation ofDirectors**

The following table showsfor the fiscal year ended April 30, 2007, certain information with respectto the compensation of all non-employee directors of Ditech:

**DirectorCompensation in Fiscal 2007**

| **Name**                  | ** ** | ** ** | ** ** | **Fees earned or paid in cash  ($)** | ** ** | **Options Awards ($)  (1)** | ** ** | **Total ($)** | ** ** |
|---------------------------|------------|------------|------------|---------------------------------------------------------------|------------|---------------------------------------|------------|--------------------|------------|
| Gregory M. Avis           |       |       | 24,750     |                                                          |       |                                  | 50,985     |               |       |   | 75,735 |   |   |
| Edwin L. Harper           |       |       | 30,500     |                                                          |       |                                  | 54,576     |               |       |   | 85,076 |   |   |
| William A. Hasler         |       |       | 30,750     |                                                          |       |                                  | 50,985     |               |       |   | 81,735 |   |   |
| Andrei M.  Manoliu, Ph.D. |       |       | 26,250     |                                                          |       |                                  | 50,985     |               |       |   | 77,235 |   |   |
| David M. Sugishita        |       |       | 31,875     |                                                          |       |                                  | 55,999     |               |       |   | 87,874 |   |   |

----

(1)          The amounts shown inthis column represent the dollar amounts recognized for financial statementreporting purposes for the fiscal year ended April 30, 2007, in accordancewith FAS 123(R), disregarding the estimate of forfeiture related toservice-based vesting conditions, and thus include amounts from awards grantedin and prior to 2006. Assumptions used in the calculation of these amounts aredescribed in Note 10 to our audited financial statements for the fiscal yearended April 30, 2007, included in our Annual Report on Form 10-Kthat was filed with the SEC on July 16 , 2007. All grants were madesubject to individual award agreements, the form of which was previously filedwith the SEC.

The following options were outstanding as ofApril 30, 2007: Mr. Avis: 50,000; Mr. Harper: 90,000;Mr. Hasler: 50,000; Dr. Manoliu: 40,000; and Mr. Sugishita:67,500.

Thefollowing table sets forth each grant of options to Ditech’s non-employeedirectors during fiscal 2007 under the 1999 Non-Employee Directors’ StockOption Plan, as amended (“Directors’ Plan”), together with the exercise priceper share and grant fair value of each award computed in accordance with FAS123(R) using the Black-Scholes model.

| **Name**                  | ** ** | ** ** | ** ** | **Options Granted  in Fiscal 2007** | ** ** | **Grant Date** | ** ** | **Exercise Price Per  Share ($)** | ** ** | **Grant Date Fair Value  of Option Award ($)** | ** ** |
|---------------------------|------------|------------|------------|----------------------------------------------------|------------|---------------------|------------|--------------------------------------------------|------------|------------------------------------------------------------------------------|------------|
| Gregory M. Avis           |       |       | 10,000     |                                               |       |                | 9/15/06    |                                             |       |                                                                         | 8.30       |   |   |   | 50,985 |   |   |
| Edwin L. Harper           |       |       | 10,000     |                                               |       |                | 9/15/06    |                                             |       |                                                                         | 8.30       |   |   |   | 50,985 |   |   |
| William A. Hasler         |       |       | 10,000     |                                               |       |                | 9/15/06    |                                             |       |                                                                         | 8.30       |   |   |   | 50,985 |   |   |
| Andrei M.  Manoliu, Ph.D. |       |       | 10,000     |                                               |       |                | 9/15/06    |                                             |       |                                                                         | 8.30       |   |   |   | 50,985 |   |   |
| David M. Sugishita        |       |       | 10,000     |                                               |       |                | 9/15/06    |                                             |       |                                                                         | 8.30       |   |   |   | 50,985 |   |   |

 

19

----

*Standard Cash CompensationArrangements With Outside Directors.**  *During fiscal 2007, the standard amounts of cashcompensation for our non-employee was as set forth in the table below. InJune 2007, the Board, upon the recommendation of the Corporate Governanceand Nominating Committee, increased the cash compensation paid to outsidedirectors, effective as of the first day of fiscal 2008, as set forth in the tablebelow. Additionally, directors are entitled to be reimbursed for certainexpenses in connection with attendance at board and committee meetings.

| ** **                                    | ** ** | **During  Fiscal 2007** | ** ** | **Effective  May 1, 2008** | ** ** |
|-----------------------------------------------|------------|------------------------------|------------|--------------------------------------|------------|
| *Annual  Retainer:*                           |       |                         |       |                                 |       |   |   |   |   |
| Board Members                                 |       |                         | $          | 16,000                               |       |   |   | $ | 25,000 |   |   |
| Lead Independent  Director (additional)       |       |                         | —     |                                 |       |   | $ | 15,000 |   |   |
| Audit Committee  Chairperson                  |       |                         | $          | 5,000                                |       |   |   | $ | 7,500 |   |   |
| Compensation  Committee Chairperson           |       |                         | $          | 2,500                                |       |   |   | $ | 5,000 |   |   |
| Corporate  Governance and Nominating          |       |                         |       |                                 |       |   |   |   |   |
| Committee  Chairperson                        |       |                         | 2,500      |                                 |       |   | $ | 5,000 |   |   |
| *Meeting Fees:*                               |       |                         |       |                                 |       |   |   |   |   |
| Board of Directors                            |       |                         |       |                                 |       |   |   |   |   |
| Annual offsite  regular meeting               |       |                         | $          | 2,500                                |       |   |   | $ | 2,500 |   |   |
| Regular meeting                               |       |                         | $          | 1,000                                |       |   |   | $ | 1,000 |   |   |
| Special  (telephonic)                         |       |                         | $          | 250                                  |       |   |   | $ | 500 |   |   |
| Audit Committee                               |       |                         |       |                                 |       |   |   |   |   |
| Regular meeting                               |       |                         | $          | 2,500                                |       |   |   | $ | 2,500 |   |   |
| Special (in  person)                          |       |                         | $          | 1,000                                |       |   |   | $ | 1,000 |   |   |
| Special  (telephonic)                         |       |                         | $          | 500                                  |       |   |   | $ | 750 |   |   |
| Compensation Committee                        |       |                         |       |                                 |       |   |   |   |   |
| Regular meeting                               |       |                         | $          | 2,000                                |       |   |   | $ | 2,000 |   |   |
| Special                                       |       |                         | $          | 500                                  |       |   |   | $ | 750 |   |   |
| Corporate Governance and Nominating Committee |       |                         |       |                                 |       |   |   |   |   |
| Regular meeting                               |       |                         | $          | 2,000                                |       |   |   | $ | 2,000 |   |   |
| Special                                       |       |                         | $          | 500                                  |       |   |   | $ | 750 |   |   |

 

*Equity Compensation forOutside Directors.**  *Pursuantto the Directors’ Plan, upon initial appointment, each non-employee director isautomatically granted an option to purchase 35,000 shares of Ditech’s CommonStock, which is subject to annual vesting over a four-year period from the dateof grant. In addition, each non-employee director will automatically be granteda fully-vested option to purchase 10,000 shares of Ditech’s Common Stockimmediately following each annual meeting of stockholders; provided, that suchperson has served as a non-employee director of Ditech for at least six monthsas of the date of the applicable annual meeting of stockholders. These optionsare granted at 100% of the fair market value of the Common Stock on the date ofgrant and have a five-year term. Pursuant to the Directors’ Plan, the initialgrants and the annual grants are non-discretionary and are grantedautomatically, without any further action by Ditech, the Board or thestockholders.

**CompensationCommittee Interlocks and Insider Participation**

During fiscal year 2007,the Compensation Committee was composed of three members:Messrs. Avis, Hasler and Harper. No member of the CompensationCommittee was or has ever been an officer or employee of Ditech or itssubsidiaries. No member of the Compensation Committee serves as an executiveofficer of another entity that has as a member of the board of directors orcompensation 

20

----

committeeof the other entity one or more executive officers of Ditech. OnAugust 15, 2007, the Board appointed Mr. Harper Interim ChiefExecutive Officer of Ditech and simultaneously removed him as a member andchairman of the Compensation Committee.

**CompensationCommittee Report(1)**

The Compensation Committee of the Board of Ditech hasreviewed and discussed with management the information contained in theCompensation Discussion and Analysis and, based upon the review anddiscussions, recommended to the Board of Directors that the CompensationDiscussion and Analysis be included in this Annual Report on Form 10-K.

|   | COMPENSATION COMMITTEE:      |
|--------|------------------------------|
|   | Edwin L. Harper  (Chairman)* |
|   | Gregory M. Avis              |
|   | William A. Hasler            |

----

*                    OnAugust 15, 2007, the Board appointed Mr. Harper Interim ChiefExecutive Officer of Ditech and simultaneously removed him as a member andchairman of the Compensation Committee.

(1)          The material in thisreport is not “soliciting material,” is not deemed “filed” with the SEC, and isnot to be incorporated by reference into any filing of Ditech under theSecurities Act of 1933 or the Securities Exchange Act of 1934 Act, whether madebefore or after the date hereof and irrespective of any general incorporationlanguage contained in such filing.

21

----

**Item 12—Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters**

**Certain BeneficialOwners and Management**

Thefollowing table sets forth certain information regarding the ownership of ourcommon stock as of July 31, 2007 by: (1) each director; (2) eachof the executive officers named in the Summary Compensation Table; (3) allour executive officers and directors as a group; and (4) all those knownby us to be beneficial owners of more than five percent of our common stock, ifany. We do not have any class of equity securities outstanding other than ourcommon stock.

| ** **                                                                          | ** ** | **Beneficial Ownership(1)** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| **Name and Address of Beneficial Owner**                   | ** ** | ** **                       | ** ** | **Number of Shares** | ** ** | **Percent of Total** | ** ** |
| FMR Corp., et  al(2)                                                                |       |                             | 3,234,000  |   |   |   | 9.73 |   |   |
| Dimensional Fund  Advisors LP(3)                                                    |       |                             | 2,480,062  |   |   |   | 7.46 |   |   |
| ICM Asset  Management, Inc.(4)                                                 |       |                             | 2,399,437  |   |   |   | 7.22 |   |   |
| Barclays Global  Investors, NA.(5)                                                  |       |                             | 2,390,351  |   |   |   | 7.19 |   |   |
| Riley Investment  Management LLC(6)                                                 |       |                             | 2,246,182  |   |   |   | 6.76 |   |   |
| Lloyd I.  Miller, III(7)                                                       |       |                             | 1,672,669  |   |   |   | 5.03 |   |   |
| CCM Master  Qualified Fund, Ltd.(8)                                                 |       |                             | 1,669,542  |   |   |   | 5.02 |   |   |
| Timothy K.  Montgomery(9)                                                           |       |                             | 1,547,459  |   |   |   | 4.47 |   |   |
| William J.  Tamblyn(10)                                                             |       |                             | 843,728    |   |   |   | 2.48 |   |   |
| Lowell B.  Trangsrud(11)                                                            |       |                             | 587,480    |   |   |   | 1.74 |   |   |
| Lee H. House(12)                                                                    |       |                             | 318,639    |   |   |   |   | * |   |
| Gary D. Testa(13)                                                                   |       |                             | 179,167    |   |   |   |   | * |   |
| Dr. Caglan  M. Aras(14)                                                        |       |                             | 162,061    |   |   |   |   | * |   |
| William A.  Hasler(15)                                                              |       |                             | 99,640     |   |   |   |   | * |   |
| Edwin L.  Harper(16)                                                                |       |                             | 90,000     |   |   |   |   | * |   |
| David M.  Sugishita(17)                                                             |       |                             | 67,500     |   |   |   |   | * |   |
| Dr. Andrei  M. Manoliu(18)                                                     |       |                             | 56,000     |   |   |   |   | * |   |
| Gregory M.  Avis(19)                                                                |       |                             | 50,000     |   |   |   |   | * |   |
| All current directors  and executive officers as a group (11 persons)(20) |       |                             | 3,984,384  |   |   |   | 10.81 |   |   |
|                                                                                     |            |                                  |            |  |  |  |  |  |  |  |  |

----

                 * Represents beneficial ownership of less thanone percent of the outstanding shares of common stock.

       (1) This table is based upon information supplied by officers anddirectors and upon information gathered by Ditech about principal stockholdersknown to us based on a Schedule 13G or 13D filed with the Securities andExchange Commission (the “SEC”). Unless otherwise indicated in the footnotes tothis table and subject to community property laws where applicable, we believethat each of the stockholders named in this table has sole voting andinvestment power with respect to the shares indicated as beneficially owned. Applicablepercentages are based on 33,232,969 shares outstanding on July 31, 2007,adjusted as required by rules promulgated by the SEC. All shares of commonstock subject to options currently exercisable or exercisable within 60 daysafter July 31, 2007 are deemed to be outstanding for the purpose ofcomputing the percentage of ownership of the person holding such options, butare not deemed to be outstanding for computing the percentage of ownership ofany other person.

       (2) Based on a Schedule 13G/A reporting beneficial ownership as of December 31,2006. Fidelity Management & Research Company (“Fidelity”), awholly-owned subsidiary of FMR Corp., is the beneficial owner of the shares asa result of acting as investment adviser to Fidelity Low Priced Stock Fund (“Fund”),which owned all of the shares. Edward C. Johnson 3d, Chairman of FMRCorp., and 

22

----

FMR Corp., through itscontrol of Fidelity and the Fund each has sole power to dispose of the sharesowned by the Fund. Neither FMR Corp. nor Edward C. Johnson 3d has the solepower to vote or direct the voting of the shares owned directly by the Fund,which power resides with the Fund’s Boards of Trustees. The address of FMRCorp., Fidelity and the Fund is 82 Devonshire Street, Boston,Massachusetts 02109.

       (3) Based on a Schedule 13G/A reporting beneficial ownership as of December 31,2006. Dimensional Fund Advisors LP (“Dimensional”) is a registered investmentadviser who furnishes investment advice to four investment companies registeredunder the Investment Company Act of 1940, and serves as investment manager tocertain other commingled group trusts and separate accounts. Dimensionalpossesses investment and/or voting power over the Stock. The investmentcompanies, trusts, and accounts have the right to receive or the power todirect the receipt of dividends from, or the proceeds from the sale of, theStock. Dimensional disclaims beneficial ownership of the Stock. The principalbusiness office of Dimensional Fund Advisors LP is located at 1299 OceanAvenue, Santa Monica, CA 90401.

       (4) Based on a Schedule 13G reporting beneficial ownership as of December 31,2006. ICM Asset Management, Inc. (“ICM”) is a registered investmentadviser whose clients have the right to receive or the power to direct thereceipt of dividends from, or the proceeds from the sale of, the Stock. JamesM. Simmons is the President and controlling shareholder of ICM Asset Management, Inc.ICM and Mr. Simmons have shared dispositive power with respect to all ofthe shares, and shared voting power with respect to 1,027,312 of the shares.The principal business office of ICM and Mr. Simmons is located at601 W. Main Avenue, Suite 600, Spokane, WA 99201.

       (5) Based on a Schedule 13G reporting beneficial ownership as of December 31,2006. Represents shares held by Barclays Global Investors, NA and affiliatedentities, over which sole dispositive power is held and over 2,263,685 sharesof which sole voting power is held. The principal business office of BarclaysGlobal Investors, NA is located at 45 Fremont Street, San Francisco, CA 94105.

       (6) Based on a Schedule 13D/A reporting beneficial ownership as of June 4,2007. Riley Investment Management, LLC. (“RIM”), is the beneficial owner of theshares as a result of acting as investment manager to Riley Investment PartnersMaster Fund, L.P. (“Fund”), which owns all of the shares. Bryant Riley is thesole manager of RIM. With respect to 2,082,849 shares, RIM, the Fund and Mr. Rileyeach have sole power to dispose of the shares and sole voting power. Each ofRIM and Mr. Riley has sole voting power and dispositive power over 163,333shares held by Mr. Riley as an investment advisory client to RIM. RIM hasshared voting power and dispositive power over 244,638 shares owned by itsinvestment advisory clients. Although Mr. Riley controls RIM’s voting andinvestment decisions for its investment advisory clients, RIM and Mr. Rileydisclaim beneficial ownership of these shares. B. Riley and Co. Inc. (“BRC”)has sole voting and dispositive power over 50,000 shares of Common Stock. AlthoughMr. Riley is the Chairman and controlling shareholder of BRC, Mr. Rileydisclaims beneficial ownership of these shares. The address of RIM, the Fund,BRC and Bryant Riley is 11100 Santa Monica Blvd. Suite 810, Los Angeles,CA 90025.

       (7) Based on a Schedule 13G reporting beneficial ownership as of July 10,2007. Represents shares held by Lloyd I Miller, III and affiliatedentities, over 788,524 shares of which sole voting or dispositive power is heldand over 884,145 shares of which shared voting or dispositive power is held.The principal business office of Lloyd I. Miller, III is located at 4550Gordon Drive, Naples, FL 64102.

       (8) Based on a Schedule 13G reporting beneficial ownership as of January 29,2007. Coghill Capital Management, LLC. (“CCM”), is the beneficial owner of theshares as a result of acting as investment manager to CCM Master QualifiedFund, Ltd. (“Fund”), which owns all of the shares. Clint D. Coghillis the Managing Member of CCM. CCM, the Fund, and Mr. Coghill have sharedpower to dispose of the shares and shared voting power. CCM, the Fund, and Mr. Coghilldisclaim 

23

----

beneficial ownershipexcept to the extent of their pecuniary interest. The address of CCM, the Fundand Clint D. Coghill is One North Wacker Drive—Suite 4350, Chicago, IL60606.

       (9) Includes 1,371,888 shares issuable upon the exercise of optionsexercisable within 60 days after July 31, 2007. Also includes 23,180shares held by Mr. Montgomery’s spouse as custodian for his children.

(10) Includes 762,086 shares issuable upon the exercise of optionsexercisable within 60 days after July 31, 2007.

(11) Includes 567,400 shares issuable upon the exercise of optionsexercisable within 60 days after July 31, 2007.

(12) Includes 307,510 shares issuable upon the exercise of optionsexercisable within 60 days after July 31, 2007.

(13) Includes 179,167 shares issuable upon the exercise of optionsexercisable within 60 days after July 31, 2007.

(14) Includes 158,127 shares issuable upon the exercise of optionsexercisable within 60 days after July 31, 2007.

(15) Includes 50,000 shares issuable upon the exercise of optionsexercisable within 60 days after July 31, 2007.

(16) Includes 90,000 shares issuable upon the exercise of optionsexercisable within 60 days after July 31, 2007.

(17) Includes 67,500 shares issuable upon the exercise of optionsexercisable within 60 days after July 31, 2007.

(18) Includes 40,000 shares issuable upon the exercise of optionsexercisable within 60 days after July 31, 2007. Total number ofshares includes: 10,000 shares held by the Manoliu/Neimat Living Trust; 3,000shares held by Dr. Manoliu in an individual retirement account and 1,000in a qualified retirement plan; and 2,000 shares held in a qualified retirementplan by Marie-Anne Neimat, Dr. Manoliu’s wife.

(19) Includes 50,000 shares issuable upon the exercise of optionsexercisable within 60 days after July 31, 2007

(20) Includes 3,544,212 shares issuable upon theexercise of stock options and vesting of restricted stock units within 60 daysafter July 31, 2007. See footnotes 9 through 19 above.

24

----

**Equity CompensationPlan Information**

Thefollowing table provides certain information with respect to all of our equitycompensation plans and grants made outside of any plans in effect as of April 30,2007:

| **Plan Category**                                         | ** ** | ** ** | ** ** | **Number of Securities  to be Issued Upon  Exercise of  Outstanding Options,  Warrants and Rights(a)** | ** ** | **Weighted-average  Exercise Price of  Outstanding Options,  Warrants, and Rights(b)** | ** ** | **Number of Securities  Remaining Available for  Future Issuance Under  Equity Compensation Plans  (excluding securities  reflected in column (a))(c)** | ** ** |
|----------------------------------------------------------------|------------|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity  Compensation Plans Approved by Security Holders(1)     |       |       | 5,864,711  |                                                                                                                                                |       |                                                                                                            | $          | 7.87                                                                                                                                                                                                                |       |   |   | 2,617,826 |   |   |
| Equity  Compensation Plans Not Approved by Security Holders(2) |       |       | 1,264,728  |                                                                                                                                                |       |                                                                                                            | $          | 8.02                                                                                                                                                                                                                |       |   |   | 286,774 |   |   |
| Total                                                          |       |       | 7,129,439  |                                                                                                                                                |       |                                                                                                            | $          | 7.90                                                                                                                                                                                                                |       |   |   | 2,904,600 |   |   |

----

(1)          Consists of Ditech’s2006 Equity Incentive Plan, 1999 Employee Stock Purchase Plan, 1999Non-Employee Directors’ Stock Option Plan, 1998 Stock Option Plan, and 1997Stock Option Plan. With respect to the 1999 Employee Stock Purchase Plan,468,357 shares available for issuance are included in column (c) in thereserve. Excluded are 172,975 shares of unvested Restricted Stock Awards. Noamounts with respect to the 1999 Employee Stock Purchase Plan are included incolumns (a) or (b).

(2)          Consistsof Ditech’s 1999 Non-Officer Equity Incentive Plan, the 2005 New Recruit StockPlan, and the 2005 New Recruit Stock Option Plan, and options assumed inconnection with the Atmosphere Networks, Inc. acquisition in July 2000(623 shares) and the Jasomi acquisition in June of 2005 (83,250).Stockholder approval was not required for the assumption of such options.Excluded are 53,717 shares of unvested Restricted Stock Awards.

**Description ofEquity Compensation Plans Adopted Without the Approval of Stockholders**

The following equitycompensation plans of Ditech were in effect as of April 30, 2007 and wereadopted without the approval of our stockholders: the 1999 Non-Officer EquityIncentive Plan, the 2005 New Recruit Stock Plan, and the 2005 New Recruit StockOption Plan.

**1999 Non-officerEquity Incentive Plan**

The material features ofDitech’s 1999 Non-Officer Equity Incentive Plan (the “1999 Plan”) are outlinedbelow:

*General*

The 1999 Plan provides forthe grant of nonstatutory stock options, stock bonuses and rights to purchaserestricted stock (collectively “awards”). To date, we have granted only stockoptions under the 1999 Plan. An aggregate of 1,000,000 shares of Common Stockis reserved for issuance under the 1999 Plan.

*Eligibility*

Employees and consultantsof both Ditech and our affiliates who are not officers or directors of Ditechor any of our affiliates are eligible to receive all types of awards under the1999 Plan, except that officers who have not been previously employed by Ditechare eligible to receive awards if the award is granted as an inducementessential to such officers entering into an employment contract with Ditech.

25

----

*Term of Awards*

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

The exercise price ofoptions and restricted stock purchase awards granted under the 1999 Plan mustbe paid either in cash at the time the option is exercised (or at the time therestricted stock is purchased) or, at the discretion of the Board, (i) pursuantto a deferred payment arrangement or (ii) in any other form of legalconsideration acceptable to the Board. The exercise price of options may alsobe paid, at the discretion of the Board, by delivery of other shares of ourCommon Stock.

*Award Vesting.**  *Awards granted under the 1999 Planmay become exercisable (in the case of options) or released from a repurchaseoption in favor of Ditech (in the case of stock bonuses and restricted stockpurchase awards) in cumulative increments (“vest”) as determined by the Board.The Board has the power to accelerate the time during which an option or arestricted stock purchase award may vest or be exercised. In addition, optionsgranted under the 1999 Plan may permit exercise prior to vesting, but in suchevent the participant may be required to enter into an early exercise stockpurchase agreement that allows Ditech to repurchase unvested shares, generallyat their exercise price, should the participant’s service terminate beforevesting.

*Term.**  *The maximum term of options grantedunder the 1999 Plan is 10 years. Options under the 1999 Plan generallyterminate three months after termination of the participant’s service, subjectto extension in certain circumstances. Ditech generally may repurchase sharesthat have been issued pursuant to stock bonuses or restricted stock purchaseawards granted under the 1999 Plan but have not yet vested as of the date theparticipant terminates his or her service with Ditech.

*Effect of CertainCorporate Transactions.**  *In the event of (i) a dissolution or liquidationof Ditech or (ii) certain specified types of merger, consolidation orsimilar transactions (collectively, a “corporate transaction”), any survivingor acquiring corporation may assume options outstanding under the Option Planor may substitute similar options. If any surviving or acquiring corporationdoes not assume such options or substitute similar options, then with respectto options held by optionholders whose service with Ditech or an affiliate has notterminated as of the effective date of the corporate transaction, the vestingof such options (and, if applicable, the time during which such options may beexercised) will be accelerated in full and the options will terminate if notexercised at or prior to such effective date.

**2005 New Recruit Stock Plan**

In connection with ouracquisition of Jasomi Networks on June 30, 2005, the Board of Directorsadopted the 2005 New Recruit Stock Plan. The 2005 New Recruit Stock Plan doesnot require approval by our stockholders due to its qualification under the “inducementgrant exception” provided by Rule 4350(i)(1)(A)(iv) of the NASDMarketplace Rules. The 2005 New Recruit Stock Plan provides for the grant ofrestricted stock awards and restricted stock unit awards to newly-hiredemployees as an inducement for those individuals to enter into an employmentrelationship with Ditech or its affiliates. For purposes of the 2005 NewRecruit Stock Option Plan, eligible employees includes only those individualsnewly hired by Ditech or its affiliates, so long as those persons either (i) werenot previously employed or serving as a director of Ditech or its affiliates,or (ii) entered into an employment relationship with us following a *bona fide* period of non-employment. The aggregatenumber of shares of common stock that may be issued pursuant to restrictedstock awards and restricted stock unit awards under the 2005 New Recruit StockPlan is 500,000 shares. Jasomi Networks employees hired by Ditech receivedgrants of restricted stock or restricted stock units that vested with respectto 1/3 of the shares subject to their award on the first anniversary of thegrant date, and with respect to the balance of the shares in a series of eight (8) successiveequal quarterly installments over the two year period measured from the first 

26

----

anniversaryof the grant date. All grants under the 2005 New Recruit Stock Plan to eligibleemployees must be approved either by a majority of “independent directors”within the meaning of Rule 4200 of the NASD Marketplace Rules, or by ourCompensation Committee.

**2005 New Recruit Stock Option Plan**

In November 2005, theBoard adopted the 2005 New Recruit Stock Option Plan. The 2005 New RecruitStock Option Plan does not require approval by our stockholders due to itsqualification under the “inducement grant exception” provided by Rule 4350(i)(1)(A)(iv) ofthe NASD Marketplace Rules. The 2005 New Recruit Stock Option Plan provides forthe grant of nonstatutory stock options to newly-hired employees as an inducementfor those individuals to enter into an employment relationship with Ditech orits affiliates. For purposes of the 2005 New Recruit Stock Option Plan,eligible employees includes only those individuals newly hired by Ditech or itsaffiliates, so long as those persons either (i) were not previouslyemployed or serving as a director of Ditech or its affiliates, or (ii) enteredinto an employment relationship with us following a *bona fide* period of non-employment. The aggregate number ofshares of common stock that may be issued pursuant to nonstatutory stockoptions under the 2005 New Recruit Stock Option Plan is 500,000 shares. Suchnumber includes the 300,000 shares added to the reserve in connection with thehiring of a new Vice President of Worldwide Sales in February 2006. Allgrants under the 2005 New Recruit Stock Plan to eligible employees must beapproved either by a majority of “independent directors” within the meaning of Rule 4200of the NASD Marketplace Rules, or by our Compensation Committee.

**Item 13—CertainRelationships and Related Transactions, and Director Independence**

**CertainRelationships and Related Transactions**

Ditech has entered intoindemnity agreements with certain officers and directors which provide, amongother things, that Ditech will indemnify such officer or director, under thecircumstances and to the extent provided for therein, for expenses, damages,judgments, fines and settlements he or she may be required to pay in actions orproceedings which he or she is or may be made a party by reason of his or herposition as a director, officer or other agent of Ditech, and otherwise to thefullest extent permitted under Delaware law and Ditech’s By-laws.

**Policies andProcedures For Review of Related Party Transactions**

Pursuant to the charter ofour Audit Committee, unless previously approved by another independentcommittee of our Board of Directors, our Audit Committee reviews and, ifdetermined appropriate, approves all related person transactions. It ismanagement’s responsibility to bring related person transactions to theattention of the members of the Audit Committee.

Our Code of Conduct andEthics provides that our employees, including our officers and directors,should avoid conflicts of interest that occur when their personal interests mayinterfere in any way with the performance of their duties or the best interestsof Ditech. Our Code of Conduct and Ethics also addresses specific types ofrelated person transactions and how they should be addressed. All of ouremployees, including our officers and directors, are expected and required toadhere to the Code of Conduct and Ethics. If an officer or director has anyquestions regarding whether a potential transaction would be in violation ofthe Code of Conduct and Ethics, they are required to bring this to theattention of our Compliance Officer or General Counsel. If the potentialtransaction is a related person transaction, it would be recognized as such andbrought to the Audit Committee for pre-approval.

Further, each of ourofficers and directors is knowledgeable regarding the requirements of obtainingapproval of related person transactions and is responsible for identifying anyrelated-person transaction involving such officer or director or his or heraffiliates and immediate family members and seeking approval from our AuditCommittee before he or she or, with respect to immediate family members, any oftheir affiliates, may engage in the transaction.

27

----

Our Audit Committee willtake into account all relevant factors when determining whether to approve ordisapprove of any related person transaction.

**Independence of TheBoard of Directors**

As required under the National Association of Securities Dealers, Inc.(“NASD”) listing standards, a majority of the members of a listedcompany’s Board of Directors must qualify as “independent,” as affirmativelydetermined by the Board of Directors. The Board consults with Ditech’s counselto ensure that the Board’s determinations are consistent with all relevantsecurities and other laws and regulations regarding the definition of “independent,”including those set forth in pertinent listing standards of the NASD, as ineffect time to time.

Consistent with theseconsiderations, after review of all relevant transactions or relationships betweeneach director, or any of his family members, and Ditech, its senior managementand its independent registered public accounting firm, the Board affirmativelyhas determined that all of Ditech’s directors are independent directors withinthe meaning of the applicable NASD listing standards, except for Mr. Montgomery,Ditech’s former President and Chief Executive Officer. On August 15, 2007,Mr. Harper became Ditech’s Interim Chief Executive Officer and ceased tobe independent.

**Item 14—PrincipalAccountant Fees and Services**

**PrincipalAccountant Fees and Services**

Thefollowing table represents aggregate fees billed to Ditech Networks for fiscalyears ended April 30, 2007 and April 30, 2006 byPricewaterhouseCoopers LLP for professional services rendered. 

| ** **                                                      | ** ** | **Fiscal Year  Ended** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                      | ** ** | **2007**                    | ** ** | **2006** | ** ** |
| ** **                                                      | ** ** | **(in thousands)**     | ** ** |
| Audit Fees                                                      |       | $                           | 775        |   | $ | 616 |   |
| Audit-related Fees                                              |       | —                      |       | — |   |
| Tax Fees                                                        |       | —                      |       | 10 |   |
| All Other Fees  (specifically describe all other fees incurred) |       | —                      |       | — |   |
| Total Fees                                                      |       | $                           | 775        |   | $ | 626 |   |

 

The audit-related feesconsist of the review of Ditech’s S-8 filings.

The tax fees consist ofprimarily tax compliance services.

All fees described abovewere approved by the Audit Committee.

**Pre-ApprovalPolicies and Procedures**

The Audit Committee has adopted a policy and proceduresfor the pre-approval of audit and non-audit services rendered by ourindependent registered public accounting firm, PricewaterhouseCoopers LLP. Thepolicy generally pre-approves specified services in the defined categories ofaudit and audit-related services, and tax services up to specified amounts.Pre-approval may also be given as part of the Audit Committee’s approval of thescope of the engagement of the independent registered public accounting firm oron an individual explicit case-by-case basis before the independent registeredpublic accounting firm is engaged to provide each service. The pre-approval ofservices may be delegated to one or more of the Audit Committee’s members, butthe decision must be reported to the full Audit Committee at its next scheduledmeeting. The Audit Committee has determined that the rendering of the servicesother than audit services by PricewaterhouseCoopers LLP is compatible withmaintaining the principal accountant’s independence, within these definedcategories of audit related and tax services.

28

----

**SIGNATURES**

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

|                      |   | DITECH NETWORKS, INC.                                         |
|----------------------|--------|--------------------------------------------------------------------|
| August 28, 2007 | By:    | /s/  EDWIN L. HARPER                                               |
|                 |   | Edwin L. Harper                                                    |
|                 |   | *Chairman  of the Board and Interim  Chief Executive Officer* |

 

29

----

**Exhibit Index**

**ToAmendment No. 1 to Annual Report on Form 10-K/A**

| Exhibit | ** ** | ** **                                                                                                    | ** ** | **Description of document** |
|---------|------------|---------------------------------------------------------------------------------------------------------------|------------|-----------------------------|
| 31.1    |       | Certification by Chief  Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| 31.2    |       | Certification by Chief Financial Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 |

 

----