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UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K



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(Mark One)

|   |  |                                                                                           
|-- |  | ------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
	15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934    
|   |  | For the fiscal year ended September 30,
	2001                                             
|or
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
	15(d)
	OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-24765

hi/fn, inc.

(Exact name of Registrant as specified in its
charter)


|                                                                |  |                                      
|--------------------------------------------------------------- |  | -------------------------------------
|Delaware                                                        |  | 33-0732700                           
|(State or other jurisdiction of
	incorporation or organization) |  | (I.R.S. Employer
	Identification No.)
|                                                               
|750 University Avenue, Los Gatos,
	California                   |  | 95032                                
|(Address of principal executive
	offices)                       |  | (Zip Code)                           

Registrants telephone number, including
area code: (408) 399-3500

Securities registered pursuant to
Section 12(b) of the Act: None

Securities registered pursuant to
Section 12(g) of the Act:

Common Stock, $0.001 Par Value


(Title of Class)


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

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

The aggregate market value of the voting stock
held by non-affiliates of the Registrant as of December 4,
2001: $84,144,137 based upon the closing price reported for such
date on the NASDAQ National Market System. For purposes of this
disclosure, shares of Common Stock held by persons who hold more
than 5% of the outstanding shares of Common Stock and shares
held by officers and directors of the Registrant have been
excluded in that such persons may be deemed to be affiliates.
This determination of affiliate status is not necessarily
conclusive.

The number of shares outstanding of the
Registrants Common Stock as of December 4, 2001, was
10,262,381.

DOCUMENTS INCORPORATED BY REFERENCE

Parts of the Proxy Statement for
Registrants 2002 Annual Meeting of Shareholders to be held
February 27, 2002 (the Proxy Statement) are
incorporated by reference into Part III of this
Form 10-K Report.



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TABLE OF CONTENTS



|              |                                                                                              |                                                                             |  |  |  |  |  | 
|------------- | -------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------- |  |  |  |  |  | 
|PART I       
|              | Item 1.Business                                                                             
|              | Item 2.Properties                                                                           
|              | Item 3.Legal Proceedings                                                                    
|              | Item 4.Submission of Matters to a Vote of Security Holders                                  
|PART II      
|              | Item 5.Market for the Registrants Common Equity and Related Stockholder Matters            
|              | Item 6.Selected Financial Data                                                              
|              | Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations
|              | Item 7A.Quantitative and Qualitative Disclosures About Market Risk                          
|              | Item 8.Financial Statements and Supplementary Data                                          
|              |                                                                                              | INDEX TO CONSOLIDATED FINANCIAL STATEMENTS                                 
|              |                                                                                              | REPORT OF INDEPENDENT ACCOUNTANTS                                          
|              |                                                                                              | CONSOLIDATED BALANCE SHEETS                                                
|              |                                                                                              | CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
|              |                                                                                              | CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (in thousands)             
|              |                                                                                              | CONSOLIDATED STATEMENTS OF CASH FLOWS                                      
|              |                                                                                              | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                 
|              | Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 
|PART III     
|              | Item 10.Directors and Executive Officers of the Registrant                                  
|              | Item 11.Executive Compensation                                                              
|              | Item 12.Security Ownership of Certain Beneficial Owners and Management                      
|              | Item 13.Certain Relationships and Related Transactions                                      
|PART IV      
|              | Item 14.Exhibits, Financial Statement Schedules and Reports on Form 8-K                     
|              | SCHEDULE II                                                                                 
|SIGNATURES   
|EXHIBIT INDEX
|EXHIBIT 23.1 



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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
STATEMENTS

With the exception of historical facts, the
statements contained in this Annual Report on Form 10-K are
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended (the Exchange Act), and are subject to the
safe harbor provisions created by such statutes. Certain
statements contained in the following Managements
Discussion and Analysis of Financial Condition and Results of
Operations, including, without limitation, statements containing
the words believes, anticipates,
estimates, expects, and words of similar
import, constitute forward-looking statements that involve risks
and uncertainties. Such statements are based on current
expectations and are subject to risk, uncertainties and changes
in condition, significance, value and effect, including those
discussed under the heading Trends and Uncertainties within the
section of this report entitled Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations and reports filed by Hifn with
the Securities and Exchange Commission, specifically Forms 8-K,
10-Q and S-8. Such risks, uncertainties and changes in
condition, significance, value and effect could cause our actual
results to differ materially from those anticipated events.
Although we believe that the assumptions underlying the
forward-looking statements are reasonable, any of the
assumptions could prove inaccurate, including, but not limited
to, statements as to our future operating results and business
plans. We disclaim any intention or obligation to update or
revise any forward-looking statements, whether as a result of
new information, future events or otherwise.




PART I




Item 1.     Business

Overview

hi/fn, inc., together with its subsidiary,
(referred to as Hifn, we, us
or our) is a flow classification and network
security specialist company supplying most major network
equipment vendors with patented technology to improve network
packet processing. Hifn designs, develops and markets
high-performance, multi-protocol packet processors 
semiconductor devices and software  designed to
enable secure, high-bandwidth network connectivity,
comprehensive differentiation of business-critical application
network traffic from other general purpose network traffic and
efficient compression, encryption/compression and public key
cryptography, providing our customers with high-performance,
interoperable implementations of a wide variety of
industry-standard networking and storage protocols. Our products
are used in networking and storage equipment such as routers,
remote access concentrators, switches, broadband access
equipment, network interface cards, firewalls and back-up
storage devices.

Hifns encryption/compression and public key
processors allow network equipment vendors to add bandwidth
enhancement and security capabilities to their products. Our
encryption/compression and public key processors provide key
algorithms used in virtual private networks (VPNs),
which enable businesses to reduce wide area networking costs by
replacing dedicated leased-lines with lower-cost IP-based
networks such as the Internet. Using VPNs, businesses can also
provide trading partners and others with secure, authenticated
access to the corporate network, increasing productivity through
improved communications. Storage equipment vendors use our
compression processor products to improve the performance and
capacity of mid- to high-end tape back-up systems.

Hifns flow classification technology
enables network equipment vendors to add unique traffic
differentiation capabilities to their products. Our flow
classification solutions provide precise details about packets
and data traversing a network and are used in deploying quality
of service (QoS) and classes of service
(CoS), which enables businesses to enhance the
effectiveness of using the public Internet network. Using QoS-
or CoS-enabled network equipment, businesses can maintain more
consistent and reliable interactions with their customers and
business partners.

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Industry Background

The need for a more effective use of and
efficient communication utilizing the public network
infrastructure in a business environment is one of the main
drivers of the extensive deployment of network-based
communications systems. The resulting increase in connectivity
has further driven the need for technology that safeguards and
manages the access to information available over these expanding
global networks.

The network computing market has undergone three
major transitions over the past decade and it is the convergence
of these transitions that contributed to the recent increase in
global connectivity. The first of these transitions was the
migration of corporate computing environments from centralized
mainframe systems to distributed client/server environments. The
ability to access and share information through client/server
technology expanded the need for connectivity beyond workgroup
local area networks (LANs) to enterprise-wide
networks spanning multiple LANs and wide area networks
(WANs). The second major transition was the
widespread adoption of the Internet for business-to-business
communications. Internet-based business applications have
expanded beyond e-mail to a broad range of business applications
and services including electronic publishing, direct to customer
transactions, product marketing, advertising and customer
support. The last of these transitions was the emergence of
consumer-to-business or e-commerce communications. The
convergence of these major transitions led to the need for
secure, managed communications and the emergence of virtual
private networks that use the public Internet infrastructure and
associated protocols and applications to share information and
services both within the enterprise and with business partners
and customers. As a result, businesses are able to share
internal information and run enterprise applications across
geographically dispersed facilities as well as enable customers,
suppliers and other business partners to inexpensively link into
their enterprise information systems. As Internet protocols and
infrastructure gain increasing and widespread acceptance for
global communication, new wide-area connectivity services such
as database access, transaction processing services, audio and
telephone services as well as video teleconferencing services
are emerging at a rapid rate. This expansion of services and
applications is further accelerating the use of networks as
global communication systems. The emergence of e-business
increased the challenges in enabling secure access to
information and applications.

The Complexity of and Need for Network
Security

Driven to provide the tremendous benefits of
connectivity and information exchange, organizations potentially
expose sensitive information and mission critical applications
to unauthorized access, both through connections to the public
Internet and from within the enterprise. In addition,
transmission of data over the Internet may also expose such data
to unauthorized interception. These risks create a critical need
for enterprises to protect their information and information
systems from unauthorized access and use. Historical methods for
securing information resources are no longer adequate to meet
the security requirements of todays global networks.
Todays distributed network environments provide multiple
points of access and multiple network resources, making it
impractical to individually secure every application and
resource on the network. Therefore, additional layers of
security at the network level are required to control access to
the network and to regulate and protect the flow of data between
network segments.

The increasing demands placed on data
communication security systems by the expansion of Internet
services and global enterprise networking is quickly outpacing
the capabilities of many traditional Internet security appliance
architectures. These demands include the need to define and
transparently enforce an integrated, enterprise-wide security
policy that can be managed centrally and implemented on a
distributed basis. An effective network security solution also
needs to be open and extensible to enable it to address the
rapidly changing requirements of the Internet and intranets,
including the addition of new security applications, such as
authentication, encryption, URL filtering, anti-virus
protection, and Java and ActiveX security services and
functions. This increased complexity, along with the higher
demand placed by ever-increasing bandwidths and the increasing
number of users has driven the creation of data communications
semiconductors specifically designed for the security task.
These high-performance security integrated circuits create the
next generation security platform for the Internet based on a
combination of protocol features, customer

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complex core logic and standards-based buses and
interfaces. This is at the core of Hifns security network
processor products.


The Hifn Solution

Hifn is a flow classification and network
security specialist company supplying most major network
equipment vendors with patented technology to improve network
packet processing. We design, develop and market
high-performance, multi-protocol packet processors 
semiconductor devices and software  designed to
enable secure, high-bandwidth network connectivity,
comprehensive differentiation of business-critical application
network traffic from other general purpose network traffic and
efficient compression, encryption/compression and public key
cryptography, providing our customers with high-performance,
interoperable implementations of a wide variety of
industry-standard networking and storage protocols. We believe
that our patented compression technology comprises the
fundamental know-how for the design and implementation of
low-cost, high-performance implementations of lossless data
compression and gives our products a strong competitive
advantage. By offering a wide range of high-performance
implementations of our patented, standards-compliant technology,
we are able to sell products to network and storage equipment
vendors that allow them to reduce development costs and get
their products to market faster.

Our patented Lempel-Ziv-Stac compression
technology (LZS) is incorporated into several
networking protocol standards, including Point-to-Point Protocol
(PPP) and the frame relay protocol, allowing network
equipment vendors to rapidly integrate proven solutions for
mitigating the costs associated with traditional private
leased-line network architectures. The Microsoft Point-to-Point
Compression (MPPC) implementation of our patents,
developed by Microsoft, is incorporated into the PPP and
Point-to-Point Tunneling Protocol (PPTP)
implementations of the Windows 95, 98, ME, NT, 2000 and XP
operating systems. We offer high-performance compression
processors that implement LZS and MPPC. We also license software
implementations of LZS and MPPC to industry-leading network
equipment vendors for use in their networking products.

In support of emerging VPN architectures, we have
led the industry by introducing the first network security
processors, integrating the critical functions of compression,
encryption and data authentication in compliance with the
Internet Protocol Security (IPSec) protocol. This
integration allows network equipment vendors to add
highly-integrated, high-performance VPN capabilities to their
routers, remote access concentrators, switches, broadband access
equipment and firewalls. Furthermore, we also license a complete
and portable software implementation of the IPSec protocol,
allowing network vendors to get to market more quickly with
their VPN implementations at a fraction of the cost of internal
software development efforts.

Businesses are increasingly dependent upon the
public Internet in conducting their normal business operations.
Unlike the traditional telecommunications network used by
businesses to communicate, the public Internet is vastly more
complex and unreliable. In addition, there is currently an
overall lack of differentiation or prioritization of
business-critical functions from general use of the Internet.
Rather, these functions are bundled together and use the same
resources throughout the public Internet. Our flow
classification solutions enable the integration of precise
differentiation and measurement of business-critical
transactions within network equipment vendors devices.
This feature allows the creation of differentiated services
within the public Internet.

Hifns line of compression processors
targeted at back-up storage applications provides storage
equipment vendors high-performance implementations of our
patented compression technology, doubling the capacity and
performance of mid- to high-end tape drive systems. The LZS
implementation of our patents is used in the Digital Linear Tape
(DLT) tape drive products from Quantum. The Adaptive
Lossless Data Compression (ALDC) implementation of
our patents, developed by IBM, is used in a variety of tape
storage products, including the Travan style of quarter-inch
cartridge tape drives.

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Customers and Products

A number of leading manufacturers of network and
storage equipment have designed products that incorporate our
products. To date, we have secured several design wins with
networking and storage equipment vendors. To qualify as a design
win, an equipment vendor must have ordered samples of our packet
processors or an evaluation board and initiated a product design
that incorporates our packet processors. During the design-in
process, we work with each customer, providing training on our
products, assisting in resolving technical questions and
providing price and delivery information to assist the customer
in getting our products into volume production. We cannot assure
that any of the design wins we have secured will result in
demand for our products. See Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations  Trends and
Uncertainties  Our Business Depends Upon The
Development Of The Packet Processor Market and
 We Face Risks Associated With Evolving Industry
Standards And Rapid Technological Change.

At September 30, 2001, we had a backlog of
semiconductor orders representing $6.9 million of products
deliverable to customers over the 6 months following the
placement of these orders. At September 30, 2000, we had a
backlog of $18.0 million. Because we quote product lead
times to customers of approximately three months, most products
shipped during a quarter are ordered during the previous
quarter. Since customers may reschedule or cancel orders,
subject to negotiated windows, orders scheduled for shipment in
a quarter may be moved to a subsequent quarter or cancelled
altogether. Therefore, backlog is not necessarily indicative of
future sales.

Hifns
products compression
processors, encryption/compression processors, public key
processors, flow classification processors and software 
provide a broad range of price/performance alternatives for the
implementation of intelligent, secure, high-performance networks
and efficient, high-performance tape storage devices. We also
offer evaluation boards to assist customers in the evaluation of
our products.

Network Bandwidth Enhancement Products.Hifns 9710, 9711 and 9751
high-performance compression processors provide essential
bandwidth-enhancement for network equipment such as routers,
remote access concentrators, broadband access equipment and
switches. These products provide flexible bus interfaces and a
variety of memory configuration options to allow customers to
tailor their uses to meet a variety of network system
requirements. We license a line of software compression
libraries that provide similar functionality to our line of
compression processor products for low-performance applications
such as modems and ISDN links. The software products are offered
in source and object code toolkits.

Network Security
Products.The Hifn 6500 public key
processor provides acceleration of the mathematical computations
involved in public key cryptography, supporting key exchange
algorithms (such as the Rivest Shamir Adelman (RSA)
public key cryptosystem as developed by RSA Data Security, Inc.
and Diffie-Hellman) as well as digital signature algorithms
(such as RSA and the Digital Signature Algorithm
(DSA)). Hifns 7711, 7751 and 7811 encryption
processors provide essential bandwidth-enhancement and security
for network equipment such as routers, remote access
concentrators, switches and firewalls. For high-performance
security requirements, Hifns 7851, 7814 and 7854
processors are the first to incorporate the Hifn Intelligent
Packet Processing (HIPP) architecture for complete
processing from 100 to 700 megabits per second. At the
multi-gigabit speed range, Hifn provides the 8154, 8065 and
8165, members of the HIPP II family of security processors.
These devices provide public key acceleration for e-commerce
secure-session handling as well as secure packet processing for
multi-gigabit speeds. For data communication applications such
as xDSL and cable modems, the Hifn 7901, 7902 and 7951
provide the industrys first complete broadband security
processors implementing support of data compression, encryption
and authentication algorithms. In addition, these devices also
include a public key math processor and a true hardware random
number generator (RNG) to support the public key
cryptography required for key generation, exchange and
authentication.

Network Flow Classification Products.Hifns MeterFlow products provide
comprehensive data to support the differentiation of
business-critical application network traffic from other
general-purpose network traffic. MeterFlow provides additional
information on the performance of these application transactions
and flows in network equipment devices to support the deployment
of Integrated and Differentiated Services.

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These functions are the key to enabling
firewalls, security, network address translation
(NAT) and port address translation (PAT)
transforms, QoS and CoS in routers, switches and network
security appliances. MeterFlow-based flow classification also
enables monitoring, metering, billing, service level agreement
(SLA) validation, and other statistics-gathering
applications.


Storage Enhancement Products.Hifns 9600, 9610 and 9732
high-performance compression processors provide a typical
doubling of capacity and performance for mid- to high-end tape
drive products.

Evaluation Boards.To facilitate the adoption of our
semiconductor devices, we design system-level boards that
resemble actual end-products or subsystems. Our evaluation
boards include basic hardware and software that enable customers
to expedite their designs by using the evaluation boards as a
reference or by incorporating portions of them into their own
designs. These boards are used as evaluation and development
vehicles for each semiconductor device designed by Hifn.

Technology

Hifns multi-protocol packet processors are
high-performance compression, encryption/compression, public key
and flow classification processors that have been designed to
meet the needs of networking and storage equipment vendors. We
believe that our patented compression technology, employed in
our compression and encryption/compression processors, gives us
a strong competitive advantage. In addition to core technologies
that we have developed, we enhance the features and
functionality of our products through the licensing of certain
technologies from third parties.

Compression Algorithms and Architectures.Hifn holds key patents that cover a
wide variety of lossless compression algorithms and their
implementations. Specific implementations of our compression
patents include the following compression algorithms: LZS,
developed by Stac; MPPC, developed by Microsoft; and ALDC,
developed by IBM. We have continued to improve the performance,
functionality and architectures of these compression techniques.
For example, semiconductor implementations of the LZS algorithm
have improved in performance by a factor of 40 in under four
years. Through the use of various architectural implementations
of our compression algorithms, we are able to provide
compression solutions over a broad price-performance spectrum.

Encryption, Data Authentication and Public Key
Algorithms.Hifn develops
high-performance implementations of industry standard encryption
algorithms (e.g., Advanced Encryption Standard
(AES), Digital Encryption Standard
(DES), Triple-DES and Alternative Rivest Chiper 4
(ARC4)) and data authentication algorithms (e.g.,
Message Digest 5 (MD5) and Secure Hash Algorithm
(SHA1)). Coupled with our patent position in
compression, we are positioned to combine compression with
encryption and data authentication as specified in the most
widely used network security protocols, such as IPSec and PPTP.
In addition, we also implement public key cryptography
algorithms which are used in a wide variety of network security
protocols. Public key cryptography algorithms implemented by us
include the RSA-compatible and Diffie-Hellman algorithms as well
as the RSA-compatible and DSA digital signature algorithms. Our
semiconductor products, including the RSA-compatible public key
cryptosystem and the ARC4 and Alternative Rivest Cipher 5
(ARC5) symmetric key encryption algorithms are
compatible with RSA Data Security, Inc.s Rivest Cipher
(RC) 4 and RC5 algorithms.

Flow Classification and Measurement
Architectures.In August 2000, we
extended our reach into the packet processing area through the
acquisition of Apptitude. We have incorporated Apptitudes
flow classification technology into a software solution for
network equipment vendors. This technology has six patents
pending that cover the ability to discover applications within
the content of network packets and flows. MeterFlow, our flow
classification technology, enables network equipment vendors to
add unique traffic differentiation capabilities to their
products. Our flow classification solutions provide precise
details about packets and data traversing a network and are used
in deploying QoS and CoS, which enables businesses to enhance
the effectiveness of using the public Internet network. Using
QoS- or CoS-enabled network equipment, businesses can maintain
more consistent and reliable interactions with their customers
and business partners. Further, use of MeterFlow technology can
enable firewalls, NAT/ PAT transforms, billing, metering,
monitoring and SLA validation applications to be
application-aware.

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Integrated, High-Performance Packet
Processing.Hifn is continuing to
develop additional packet processing functionality, including
the implementation of advanced public key encryption algorithms,
continued integration of computation-intensive security protocol
processing functions, and integration of the MeterFlow
classification capabilities. Ongoing product and technology
development is expected to increase product integration and
increase product performance in the future.

Intellectual Property

Our future success and ability to compete are
dependent, in part, upon our proprietary technology. We rely in
part on patent, trade secret, trademark, maskwork and copyright
laws to protect our intellectual property. We own 13 United
States patents and four foreign patents. We also have two
pending patent applications in Japan. The issued patents and
patent applications primarily cover various aspects of our
compression, bandwidth management and rate shaping technologies
and have expiration dates ranging from 2006 to 2017. In addition
to compression, we have six pending patent applications in the
United States, four in Europe and Asia (Japan) covering our flow
classification technology. We cannot assure that any patents
will be issued under our current or future patent applications
or that the patents issued under such patent applications will
not be invalidated, circumvented or challenged. We cannot assure
that any patents issued to us will be adequate to safeguard and
maintain our proprietary rights, to deter misappropriation or to
prevent an unauthorized third party from copying our technology,
designing around the patents we own or otherwise obtaining and
using our products, designs or other information. In addition,
we cannot assure that others will not develop technologies that
are similar or superior to our technology.

As is typical in the semiconductor industry, we
may in the future receive communications from third parties
asserting patents, mask work rights, intellectual property or
copyrights on certain of our products and technologies. Although
we are not currently a party to any material litigation
regarding intellectual property, in the event a third party were
to make a valid intellectual property claim and a license
relating to such intellectual property was not available on
commercially reasonable terms, our operating results could be
materially and adversely affected. Litigation, which could
result in substantial cost to us and diversion of our resources,
may also be necessary to enforce our patents or other
intellectual property rights or to defend against claimed
infringement of the rights of others. The failure to obtain
necessary licenses or the occurrence of litigation relating to
patent infringement or other intellectual property matters could
have a material adverse effect on our business and operating
results. We cannot assure that the steps we take to protect our
intellectual property will be adequate to prevent
misappropriation or that others will not develop competitive
technologies or products.

In addition, we claim copyright protection for
certain proprietary software and documentation. We attempt to
protect our trade secrets and other proprietary information
through agreements with our customers, suppliers, employees and
consultants, and through other security measures. Although we
intend to protect our rights vigorously, we cannot assure that
these measures will be successful. Furthermore, the laws of
certain countries in which our products are or may be
manufactured or sold may not protect our products and
intellectual property.

Export Restrictions on Encryption
Algorithms

A key element of Hifns packet processor
architecture is the encryption algorithms embedded in our
semiconductor and software products. These products are subject
to export control regulations administered by the U.S.
Department of Commerce. The regulations permit our domestic
network equipment customers to export non-military specific
products incorporating our encryption technology only after the
finished product has received a one-time technical review from
the Department of Commerce. In addition, those U.S. export
control laws prohibit the export of many products, including any
products with encryption, to a number of countries deemed
hostile by the U.S. government (currently there are nine such
countries). Furthermore, U.S. government regulations require
export licenses from the Department of State for all
military-specific products.

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U.S. export regulations have recently been
liberalized to allow for the export of most encryption hardware,
software, and technology to foreign non-government entities
after the product receives a one-time technical review from the
Commerce Department. The technical review process generally
takes 30 days from the date the government logs the
application into its computer system. In addition, the
U.S. government now allows U.S. exporters to immediately
ship products to both government and non-government end-users in
the European Union (EU) and eight other friendly
countries (EU + 8) immediately upon
submission of the required technical review paperwork. If
exports to government end-users are required to countries
outside of the EU + 8 group, an individual export
license is required from the Department of Commerce. As a result
of the recent liberalizations, our network equipment customers
may be able to effectively compete with EU competitors. However,
foreign competitors facing less stringent controls and who may
have effectively established markets for their products prior to
the relaxation of U.S. export restrictions may be able to
compete more effectively than our network equipment customers in
the global market. Furthermore, U.S. regulations are constantly
changing and we cannot assure that the liberalizing trends will
continue, that the list of products and countries for which
export approval is required, or the regulatory policies with
respect thereto, will not be revised from time to time, or that
laws limiting the domestic use of encryption will not be
enacted. The sale of our packet processors could be hindered or
harmed by the failure of our network equipment customers to
obtain the required technical reviews or by the costs of
compliance. See Sales, Marketing & Technical
Support.

Competition

The networking and storage equipment markets into
which we sell our products are intensely competitive and are
subject to frequent product introductions with improved
price-performance characteristics, rapid technological change,
unit price erosion and the continued emergence of new industry
standards. The semiconductor industry is also intensely
competitive and is characterized by rapid technological change,
product obsolescence and unit price erosion. We expect
competition to increase in the future from existing competitors
and from companies that may enter our existing or future
markets, including certain customers, with similar or substitute
solutions that may be less costly or provide better performance
or features than our products. To be successful in the future,
we must continue to respond promptly and effectively to changing
customer performance, feature and pricing requirements,
technological change and competitors innovations. We
cannot assure that we will be able to compete successfully
against current and future competitors or that competitive
pressures faced by us will not materially adversely affect our
business, financial condition and results of operations.

Our products compete with products from companies
such as Analog Devices, Inc., Safenet, Inc., International
Business Machines (IBM), Broadcom Corporation,
Motorola, Inc. and Philips Corporation. In 1994, Stac entered
into two license agreements with IBM where Stac granted IBM the
right to use, but not sublicense, our patented compression
technology in IBM hardware and software products. Stac also
entered into a license agreement with Microsoft in 1994 whereby
Stac granted Microsoft the right to use, but not sublicense, our
compression technology in their software products. Stacs
license agreement with Microsoft, however, prohibits Microsoft
from creating hardware implementations of our patents. We also
compete against software solutions that use general purpose
microprocessors to run encryption algorithms and our software
compression libraries. In addition, as noted above, our
encryption/compression and public key processors are subject to
export control restrictions administered by the U.S. Department
of Commerce, which permit our network equipment customers to
export products incorporating encryption technology only after
receiving a one-time technical review. As a result of these
regulations, sales by foreign competitors facing less stringent
controls on their encryption products could hinder or harm the
sale of our encryption/compression and public key processors to
network equipment customers in the global market. We believe
that the recent change to the U.S. export regulations will
enable us and our network equipment customers to obtain
comparable footing with our European competitors. However, we
expect significant future competition from major domestic and
international semiconductor suppliers. Several established
electronics and semiconductor suppliers have recently entered or
indicated an intent to enter the network equipment market. We
may also face competition from suppliers of products based on
new or emerging technologies. Furthermore, many

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of our existing and potential customers
internally develop ASICs, general purpose microprocessors and
other devices which attempt to perform all or a portion of the
functions performed by our products.


Many of our current and potential competitors
have longer operating histories, greater name recognition,
access to larger customer bases and significantly greater
financial, technical, marketing and other resources than us. As
a result, they may be able to adapt more quickly to new or
emerging technologies and changes in customer requirements or to
devote greater resources to the promotion and sale of their
products than us. In particular, companies such as Intel
Corporation, Lucent Technologies Inc., Motorola, National
Semiconductor Corporation and Texas Instruments Incorporated
have proprietary semiconductor manufacturing ability, preferred
vendor status with many of our customers, extensive marketing
power and name recognition, greater financial resources than us
and other significant advantages over us. In addition, current
and potential competitors may determine, for strategic reasons,
to consolidate, to lower the price of their products
substantially or to bundle their products with other products.
Current and potential competitors have established or may
establish financial or strategic relationships among themselves
or with existing or potential customers, resellers or other
third parties. Accordingly, it is possible that new competitors
or alliances among competitors could emerge and rapidly acquire
significant market share. We cannot assure that we will be able
to compete successfully against current and future competitors.
Increased competition may result in price reductions, reduced
gross margins and loss of market share, any of which could
materially adversely affect our business, financial condition
and results of operations.

We believe that important competitive factors in
our markets are price-performance characteristics, rapid
technological change, the continued emergence of new industry
standards, length of development cycles, design wins with major
network and storage equipment vendors, support for new network
and storage standards, features and functionality, adaptability
of products to specific applications, reliability, technical
service and support and protection of products by effective
utilization of intellectual property laws. Our failure to
successfully develop products that compete successfully with
those of other suppliers in the market would harm our business,
financial condition and results of operations. In addition, we
must compete for the services of qualified distributors and
sales representatives. To the extent that our competitors offer
such distributors or sales representatives more favorable terms
on a higher volume of business, such distributors or sales
representatives may decline to carry, or discontinue carrying,
our products. Our business, financial condition and results of
operations could be harmed by any failure to maintain and expand
our distribution network. See Item 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations  Trends and
Uncertainties  Our Markets Are Highly
Competitive.

Research and Development

Our success will depend to a substantial degree
upon our ability to develop and introduce in a timely fashion
new products and enhancements to our existing products that meet
changing customer requirements and emerging industry standards.
We have made, and plan to continue to make, substantial
investments in research and development. Extensive product
development input is obtained from customers and through our
participation in industry organizations and standards setting
bodies such as the Internet Engineering Task Force
(IETF).

As of September 30, 2001, our research and
development staff consisted of 79 employees. Our research
and development expenditures were $18.6 million in the
fiscal year ended September 30, 2001, $14.6 million in
the fiscal year ended September 30, 2000 and
$8.0 million in the fiscal year ended September 30,
1999, representing 43%, 33% and 19% of revenues for such
periods, respectively. Research and development expenses
primarily consist of salaries and related costs of employees
engaged in ongoing research, design and development activities,
costs of fabricating chip mask sets and subcontracting costs.
Research and development costs in fiscal 2001 and 2000 also
include amortization of deferred stock compensation related to
the acquisition of Apptitude. We perform our research and
product development activities at our facilities in Los Gatos,
California and Carlsbad, California. We seek to hire additional
skilled development engineers.

The acquisition of Apptitude in August 2000
further strengthened our development efforts, adding to our pool
of software expertise and intellectual properties. Furthermore,
we are able to expand our product base to

8



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include acceleration for firewall applications,
bandwith management, load balancing, QoS and CoS. Also in August
2000, we purchased unique patented traffic flow control
technology to further enhance the bandwith management features
of Apptitudes technology.


In April 1998, we acquired a software
implementation of the IPSec protocol from CyLAN Technologies,
Inc. As part of the acquisition, we gained expertise in the
development of software implementations of a wide range of
networking protocol functions, including IPSec and Transmission
Control Protocol/ Internet Protocol (TCP/IP).

Our future performance depends on a number of
factors, including our ability to identify emerging
technological trends in our target markets, develop and maintain
competitive products, enhance our products by adding innovative
features that differentiate our products from those of our
competitors, bring products to market on a timely basis at
competitive prices, properly identify target markets and respond
effectively to new technological changes or new product
announcements by others. In evaluating new product decisions, we
must anticipate well in advance the future demand for product
features and performance characteristics, as well as available
supporting technologies, manufacturing capacity, industry
standards and competitive product offerings. We cannot assure
that our design and introduction schedules for any additions and
enhancements to our existing and future products will be able to
be sold at prices that are favorable to us.

We must also continue to make significant
investments in research and development in order to continue
enhancing the performance and functionality of our products to
keep pace with competitive products and customer demands for
improved performance, features and functionality. The technical
innovations required for us to remain competitive are inherently
complex and require long development cycles. Such innovations
must be completed before developments in networking technologies
or standards render them obsolete and must be sufficiently
compelling to induce network and storage equipment vendors to
favor them over alternative technologies. Moreover, we must
generally incur substantial research and development costs
before the technical feasibility and commercial viability of a
product line can be ascertained.

We cannot assure that revenues from future
products or product enhancements will be sufficient to recover
the development costs associated with such products or
enhancements or that we will be able to secure the financial
resources necessary to fund future development. The failure to
successfully develop new products on a timely basis could have a
material adverse effect on our business, financial condition and
results of operations. See Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations  Trends and Uncertainties  We
Face Risks Associated With Evolving Industry Standards And Rapid
Technological Change.

Sales, Marketing & Technical
Support

We market our products through a direct sales and
marketing organization, headquartered in Los Gatos, California,
with sales offices in Massachusetts, Colorado, North Carolina
and Quebec, Canada, and through independent contract sales
representatives in the United States, Europe, Japan and other
areas. We also retain account managers to focus on individual
customer relationships. We do not have any foreign operations
and sales of our products to foreign companies, other than
product shipments to contract manufacturers of domestic
customers, have not been material. Sales representatives are
selected for their understanding of the marketplace and their
ability to provide effective field sales support for our
products. Our relationships with some of our sales
representatives have been established within the last two years,
and we are unable to predict the extent to which some of these
representatives will be successful in marketing and selling our
products.

Sales to U.S. customers account for the
substantial majority of our revenues. Due to the export controls
imposed by the U.S. government until recently on encryption
products, our shipments to international customers have been
limited to compression processors and compression software. The
recent relaxation of controls has opened new opportunities for
our products sales around the world. In early 2000, we
entered into a distribution agreement with a worldwide
electronics distribution company which we believe provides us
with the ability to respond to significant pent-up demand for
network security products around the world. We continue to
actively work with our network equipment customers and the U.S.
government to comply with U.S. export controls to facilitate the
export of our customers products which incorporate our
encryption

9



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products. We cannot assure that we will be
successful in these efforts and that competitors outside of the
U.S. will not develop encryption products to meet the needs of
our customers, thereby reducing the opportunity for us to sell
our products. See Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations  Trends and Uncertainties  Our
Products Are Subject To Export Restrictions.


Hifn has a number of marketing programs designed
to inform network and storage equipment vendors about the
capabilities and benefits of our products. Our marketing efforts
include participation in industry trade shows, technical
conferences, preparation of competitive analyses, sales
training, publication of technical and educational articles in
industry journals, maintenance of our website, advertising and
direct mail distribution of our literature.

Technical support to customers is provided
through field applications engineers and, if necessary, product
designers. Local field support is provided in person or by
telephone. We believe that providing customers with
comprehensive product service and support is critical to
maintaining a competitive position in the market and is critical
to shortening the time required to design in our products. We
work with our customers to monitor the performance of our
product designs and to provide support at each stage of customer
product development.

Manufacturing

Currently, we subcontract all semiconductor
manufacturing on a turnkey basis, with our suppliers delivering
fully assembled and tested products based on our proprietary
designs. The use of the fabless model allows us to focus
substantially all of our resources on determining customer
requirements and on the design, development and support of our
products. This model also allows us to have significantly
reduced capital requirements.

We subcontract our semiconductor manufacturing to
Atmel Corporation, Motorola and Toshiba Corporation. The
selection of these manufacturers was based on the breadth of
available technology, quality, manufacturing capacity and
support for design tools used by us. None of our products are
currently manufactured by more than one supplier. However, we
expect that in the event one of our suppliers notifies us that
it intends to cease manufacturing a product, we will have an
adequate opportunity to order sufficient quantities of the
affected products so that shipments to customers will not be
adversely affected while we qualify a new manufacturer.

At any given time, we use mainstream processes
for the manufacture of our products, avoiding dependence on the
latest process technology available. This approach reduces our
technical risks and avoids the risks related to production
capacity constraints typically associated with leading-edge
semiconductor processes. This approach allows us to focus on
providing differentiated functionality, the primary value-add in
our products. Our current main products are manufactured using
 .6, .4, .3 and .25 micron Complementary Metal Oxide
Semiconductor (CMOS) processes. Products under
development are being designed with the .18 micron CMOS
process. We believe that transitioning our products to
increasingly smaller semiconductor dimensions will be important
for us to remain competitive. We cannot assure that future
process migration will be achieved without difficulty.

We intend to continue for the foreseeable future
to rely on our subcontract manufacturers for substantially all
of our manufacturing, assembly and test requirements. All of our
subcontract manufacturers produce products for other companies.
We do not have long-term manufacturing agreements with any of
our subcontract manufacturers. Our subcontract manufacturers are
not obligated to supply products to us for any specific period,
in any specific quantity or at any specific price, except as may
be provided in a particular purchase order that has been
accepted by one of our subcontract manufacturers.

We must place orders approximately 20 to
23 weeks in advance of expected delivery. As a result, we
have only a limited ability to react to fluctuations in demand
for our products, which could cause us to have an excess or a
shortage of inventory of a particular product. Failure of
worldwide semiconductor manufacturing capacity to rise along
with a rise in demand could result in our subcontract
manufacturers allocating available capacity to customers that
are larger or have long-term supply contracts in place. Our
inability to obtain adequate foundry capacity at acceptable
prices, or any delay or interruption in supply, could reduce our

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product revenue or increase our cost of revenue
and could harm our business, financial condition and results of
operations. See Item 7. Managements Discussion
and Analysis of Financial Condition and Results of
Operations  Trends and Uncertainties  We
Depend Upon Independent Manufacturers And Limited Sources Of
Supply.


Employees

As of September 30, 2001, Hifn employed a
total of 136 full-time employees. Of the total number of
employees, 79 were employed in research and development, 29 in
sales and marketing, nine in operations and 19 in finance and
administration. Our employees are not represented by any
collective bargaining agreement and we have never experienced a
work stoppage. We believe our employee relations are good.

Our future success is heavily dependent upon our
ability to hire and retain qualified technical, marketing, sales
and management personnel. The competition for such personnel is
intense, particularly for engineering personnel with related
security, networking and integrated circuit design expertise,
and applications support personnel with networking product
design expertise. See Item 7. Managements
Discussion and Analysis of Financial Condition and Results of
Operations  Trends and Uncertainties  We
Depend Upon Key Personnel.






|        |           
|------- | ----------
|Item 2. | Properties

Hifns corporate and technical headquarters
are located in Los Gatos, California. We lease approximately
35,000 and 11,500 square feet of space in Los Gatos,
California, under leases that expire in September 2005 and
December 2007, respectively. We also lease other facilities
including 14,000 square feet of space for our design and
operations center in Carlsbad, California and small field sales
offices in Charlotte, North Carolina and Westford, Massachusetts
as well as in Monument, Colorado and Quebec, Canada.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

In October and November 1999, six purported class
action complaints were filed in the United States District Court
for the Northern District of California against Hifn and certain
of its officers and directors. These complaints were
consolidated into In re Hi/fn Sec. Litig., No. 99-04531 SI.
The consolidated complaint was filed on behalf of a class of
purchasers of Hifns stock during the period July 26,
1999 through October 7, 1999 (the class
period). The complaint seeks unspecified money damages and
alleges that Hifn and certain of its officers and directors
violated federal securities laws in connection with various
public statements made by Hifn and certain of its officers and
directors during the class period. In August 2000, the Court
dismissed the complaint as to all defendants, other than Raymond
J. Farnham and Hifn. Mr. Farnham and Hifn answered the
complaint in September 2000. Discovery has commenced. A trial
date has been tentatively scheduled for October 2002. We believe
that the allegations contained in the complaint are without
merit and intend to defend the action vigorously. Due to the
nature of the allegations, management cannot estimate the
possible loss, if any, or range of loss that may ultimately be
incurred in connection with the allegations. However, based on
the facts currently known, management does not believe that
these matters will have a material adverse effect on our
financial position.

In December 2000, a former employee of Hifn filed
suit against Hifn and one of its former employees alleging
wrongful termination, invasion of privacy, violation of Fair
Employment and Housing Act, based on sexual harassment, sexual
discrimination and retaliation, defamation, breach of the
covenant of good faith and fair dealing, negligence and
conversion. On April 16, 2001, we filed an answer to the
complaint, generally denying its allegations and asserting
various affirmative defenses. Discovery has recently commenced,
and no trial date has been set. The parties have voluntarily
agreed to participate in a mediation session in an effort to
amicably resolve the matter. In the event the matter is not
amicably resolved, we intend to defend the matter vigorously.
While the ultimate outcome of this matter cannot be determined
at this time, management does not believe that this matter will
have a material adverse effect on our financial position.

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|        |                                                     
|------- | ----------------------------------------------------
|Item 4. | Submission of Matters to a Vote of Security
	Holders

No matters were submitted to a vote of security
holders during the fourth quarter of the fiscal year covered by
this report.




PART II




Item 5.     Market
for the Registrants Common Equity and Related Stockholder
Matters

Price Range of Common Stock

Hifns Common Stock is traded on the Nasdaq
National Market under the symbol HIFN. The only
class of Hifn securities that is traded is Hifn Common Stock.
The following table lists quarterly information on the price
range of the Common Stock based on the high and low reported
closing bid prices for the Common Stock as reported on the
Nasdaq National Market for the periods indicated below:

|                                       |                |      |   |        |  |  |   |       | 
|-------------------------------------- | -------------- | ---- | - | ------ |  |  | - | ----- | 
|                                       |                | High |   | Low   
|                                       |                |      |   |       
|Fiscal Year Ended September 30,
	2001: |                |      |   |        |  |  |   |      
|                                       | First Quarter  |      | $ | 68.44  |  |  | $ | 22.94 | 
|                                       | Second Quarter |      |   | 37.75  |  |  |   | 12.50 | 
|                                       | Third Quarter  |      |   | 20.43  |  |  |   | 12.00 | 
|                                       | Fourth Quarter |      |   | 15.40  |  |  |   | 7.90  | 
|                                      
|Fiscal Year Ended September 30,
	2000: |                |      |   |        |  |  |   |      
|                                       | First Quarter  |      | $ | 112.50 |  |  | $ | 35.56 | 
|                                       | Second Quarter |      |   | 100.00 |  |  |   | 39.50 | 
|                                       | Third Quarter  |      |   | 61.44  |  |  |   | 27.56 | 
|                                       | Fourth Quarter |      |   | 74.06  |  |  |   | 42.38 | 

On December 4, 2001, the reported last sale
price of Common Stock on the Nasdaq National Market was $16.69
per share and there were approximately 349 holders of record of
our Common Stock.

Dividend Policy

We have never declared or paid any dividends on
our capital stock. We intend to retain any future earnings to
finance the growth and development of our business and do not
expect to pay any cash dividends in the foreseeable future.

12



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Item 6.     Selected
Financial Data

The following selected financial data should be
read in conjunction with the Managements Discussion
and Analysis of Financial Condition and Results of
Operations and the Consolidated Financial Statements and
Notes included elsewhere in this Annual Report on Form 10-K:

|                                             |                                             |                                          |         |         |  |         |        |         |  |         |        |        |  |   |        |       |  |   |        |       | 
|-------------------------------------------- | ------------------------------------------- | ---------------------------------------- | ------- | ------- |  | ------- | ------ | ------- |  | ------- | ------ | ------ |  | - | ------ | ----- |  | - | ------ | ----- | 
|                                             |                                             |                                         
|                                             |                                             | Year Ended September 30,                
|                                             |                                             |                                         
|                                             |                                             | 2001                                     |         | 2000(1) |  | 1999(2) |        | 1998(3) |  | 1997(3)
|                                             |                                             |                                          |         |         |  |         |        |         |  |        
|                                             |                                             |                                         
|                                             |                                             | (In thousands, except per share amounts)
|Statement of Operations Data:                |                                             |                                          |         |         |  |         |        |         |  |         |        |        |  |   |        |       |  |   |        |      
|Net revenues                                 |                                             | $                                        | 43,004  |         |  | $       | 44,838 |         |  | $       | 42,351 |        |  | $ | 21,533 |       |  | $ | 14,226 |      
|Costs and operating expenses:                |                                             |                                          |         |         |  |         |        |         |  |         |        |        |  |   |        |       |  |   |        |      
|                                             | Cost of revenues                            |                                          |         | 13,828  |  |         |        | 10,004  |  |         |        | 10,498 |  |   |        | 6,525 |  |   |        | 4,762 | 
|                                             | Research and development                    |                                          |         | 18,569  |  |         |        | 14,577  |  |         |        | 8,022  |  |   |        | 5,346 |  |   |        | 2,985 | 
|                                             | Sales and marketing                         |                                          |         | 9,462   |  |         |        | 8,172   |  |         |        | 5,963  |  |   |        | 3,370 |  |   |        | 2,224 | 
|                                             | General and administrative                  |                                          |         | 7,705   |  |         |        | 5,147   |  |         |        | 2,993  |  |   |        | 2,407 |  |   |        | 1,203 | 
|                                             | Amortization of intangibles and goodwill    |                                          |         | 11,093  |  |         |        | 1,619   |  |         |        | 113    |  |   |        | 57    |  |   |        |      | 
|                                             | Purchased in-process research & development |                                          |         |        |  |         |        | 4,085   |  |         |        |       |  |   |        |      |  |   |        |      | 
|                                             |                                             |                                          |         |         |  |         |        |         |  |         |        |        |  |   |        |       |  |   |        |      
|Income (loss) from operations                |                                             |                                          | (17,653 | )       |  |         | 1,234  |         |  |         | 14,762 |        |  |   | 3,828  |       |  |   | 3,052  |      
|Interest income (expense), net               |                                             |                                          | 2,700   |         |  |         | 4,211  |         |  |         | 1,720  |        |  |   | 17     |       |  |   | 16     |      
|Other income (expense), net                  |                                             |                                          | (64     | )       |  |         | (66    | )       |  |         | (14    | )      |  |   |       |       |  |   |       |      
|Provision for (benefit from) income taxes    |                                             |                                          | (1,660  | )       |  |         | 4,381  |         |  |         | 6,587  |        |  |   | 1,627  |       |  |   | 1,235  |      
|                                             |                                             |                                          |         |         |  |         |        |         |  |         |        |        |  |   |        |       |  |   |        |      
|Net income (loss)                            |                                             | $                                        | (13,357 | )       |  | $       | 998    |         |  | $       | 9,881  |        |  | $ | 2,218  |       |  | $ | 1,833  |      
|                                             |                                             |                                          |         |         |  |         |        |         |  |         |        |        |  |   |        |       |  |   |        |      
|Net income (loss) per share, basic           |                                             | $                                        | (1.32   | )       |  | $       | 0.11   |         |  | $       | 1.22   |        |  | $ | 0.35   |       |  | $ | 0.30   |      
|Net income (loss) per share, diluted         |                                             | $                                        | (1.32   | )       |  | $       | 0.10   |         |  | $       | 1.06   |        |  | $ | 0.33   |       |  | $ | 0.30   |      
|Weighted average shares outstanding, basic   |                                             |                                          | 10,141  |         |  |         | 9,017  |         |  |         | 8,115  |        |  |   | 6,308  |       |  |   | 6,100  |      
|Weighted average shares outstanding, diluted |                                             |                                          | 10,141  |         |  |         | 10,055 |         |  |         | 9,295  |        |  |   | 6,800  |       |  |   | 6,174  |      

|                                |  |                |         |      |  |      |         |      |  |      |        |  |  |   |        |  |  |   |       | 
|------------------------------- |  | -------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------ |  |  | - | ------ |  |  | - | ----- | 
|                                |  |               
|                                |  | September 30, 
|                                |  |               
|                                |  | 2001           |         | 2000 |  | 1999 |         | 1998 |  | 1997
|                                |  |                |         |      |  |      |         |      |  |     
|                                |  |               
|                                |  | (In thousands)
|Balance Sheet Data:             |  |                |         |      |  |      |         |      |  |      |        |  |  |   |        |  |  |   |       | 
|Cash and short-term investments |  | $              | 64,751  |      |  | $    | 64,815  |      |  | $    | 70,086 |  |  | $ | 4,084  |  |  | $ | 480   | 
|Total assets                    |  |                | 126,810 |      |  |      | 131,479 |      |  |      | 83,530 |  |  |   | 16,611 |  |  |   | 5,898 | 
|Working capital                 |  |                | 70,297  |      |  |      | 66,498  |      |  |      | 73,153 |  |  |   | 4,723  |  |  |   | 3,520 | 
|Total debt                      |  |                |        |      |  |      | 27      |      |  |      |       |  |  |   |       |  |  |   |      | 
|Total stockholders equity      |  |                | 119,835 |      |  |      | 124,191 |      |  |      | 76,049 |  |  |   | 6,952  |  |  |   | 4,622 | 



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | In August 2000, we completed our acquisition of
	Apptitude in a transaction accounted for as a purchase. The
	Statement of Operations for fiscal year ended September 30,
	2000 include the operating results of Apptitude from the date of
	acquisition.                                                                                                                                                                                                                                                                                                                                         
|   
|(2) | On March 31, 1999, we issued 1,600,000
	shares of common stock at a price of $33 per share in an equity
	offering, which raised approximately $49.2 million, net of
	offering expenses. On April 19, 1999 our underwriters
	exercised their option to purchase an additional 300,000 shares
	of our common stock, which yielded an additional
	$9.3 million in proceeds to us.                                                                                                                                                                                                                    
|   
|(3) | We operated as a division of our parent company,
	Stac, until September 30, 1996 and as a subsidiary of Stac until
	December 16, 1998. Accordingly, our selected financial data
	as of and for the fiscal year ended September 30, 1998 and 1997
	has been derived from audited financial statements not included
	herein. The financial information may not reflect our future
	performance or our future financial position or results of
	operations, nor does it provide or reflect data as if we had
	actually operated as a separate, stand-alone entity during all
	of the periods covered.

13



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Item 7.     Managements
Discussion and Analysis of Financial Condition and Results of
Operations

The following discussion should be read in
conjunction with the Consolidated Financial Statements and Notes
included elsewhere in this Annual Report on Form 10-K. The
results shown in this report are not necessarily indicative of
the results to be expected in any future periods. This
discussion contains forward-looking statements based on current
expectations which involve risks and uncertainties. Actual
results and the timing of certain events may differ
significantly from those projected in such forward-looking
statements due to the factors set forth in the section entitled
Trends and Uncertainties and appearing elsewhere in
this report.

Overview

hi/fn, inc., together with its subsidiary
(referred to as Hifn, we, us
or our), is a flow classification and network
security specialist company supplying most major network
equipment vendors with patented technology to improve network
packet processing. We design, develop and market
high-performance, multi-protocol packet processors 
semiconductor devices and software  designed to
enable secure, high-bandwidth network connectivity,
comprehensive differentiation of business-critical application
network traffic from other general purpose network traffic and
efficient compression, encryption/compression and public key
cryptography, providing our customers with high-performance,
interoperable implementations of a wide variety of
industry-standard networking and storage protocols. Our products
are used in networking and storage equipment such as routers,
remote access concentrators, switches, broadband access
equipment, network interface cards, firewalls and back-up
storage devices.

Hifns encryption/compression and public key
processors allow network equipment vendors to add bandwidth
enhancement and security capabilities to their products. Our
encryption/compression and public key processors provide key
algorithms used in VPNs, which enable businesses to reduce wide
area networking costs by replacing dedicated leased-lines with
lower-cost IP-based networks such as the Internet. Using VPNs,
businesses can also provide trading partners and others with
secure, authenticated access to the corporate network,
increasing productivity through improved communications. Storage
equipment vendors use our compression processor products to
improve the performance and capacity of mid-to high-end tape
back-up systems.

Hifns flow classification technology
enables network equipment vendors to add unique traffic
differentiation capabilities to their products. Our flow
classification solutions provide precise details about packets
and data traversing a network and are used in deploying quality
of service (QoS) and classes of service
(CoS), which enables businesses to enhance the
effectiveness of using the public Internet network. Using QoS-
or CoS-enabled network equipment, businesses can maintain more
consistent and reliable interactions with their customers and
business partners.

Revenues from one customer and its manufacturing
subcontractor represented 36%, 36% and 45% of our net revenues
for fiscal years ended September 30, 2001, 2000 and 1999,
respectively. Revenues from another customer and its
manufacturing subcontractors represented 17%, 35% and 38% of our
net revenues for fiscal years ended September 30, 2001,
2000 and 1999, respectively.

In August 2000, Hifn completed its acquisition of
Apptitude, a provider of embedded Internet traffic analysis
solutions through a merger of Apptitude with and into a
wholly-owned subsidiary of Hifn. The aggregate purchase
consideration was $58.5 million, $20 million in cash
and $38.5 million in stock. In exchange, we received
tangible assets and assumed liabilities as well as intangible
assets including developed and core technology, workforce and
patents. Additionally, we acquired in-process research and
development costs which were expensed at the time of the
acquisition.

Hifns quarterly and annual operating
results are affected by a wide variety of factors that could
materially and adversely affect net sales, gross margins and
operating income. These factors include the volume and timing of
orders received, changes in the mix of proprietary and second
source products sold, market acceptance of our and our
customers products, competitive pricing pressures, our
ability to introduce new products on a timely basis, the timing
and extent of research and development expenses, fluctuations in

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manufacturing yields, cyclical semiconductor
industry conditions, our access to advanced process technologies
and the timing and extent of process development costs.
Historically in the semiconductor industry, average selling
prices of products have decreased over time. If we are unable to
introduce new products with higher margins, maintain our product
mix between proprietary and second source products, or reduce
manufacturing cost to offset decreases in the prices of our
existing products, then our operating results will be adversely
affected. Our business is characterized by short-term orders and
shipment schedules, and customer orders typically can be
canceled or rescheduled without penalty to the customer. Since
most of our backlog is cancelable without penalty, we typically
plan our production and inventory levels based on internal
forecasts of customer demand. Customer demand remains highly
unpredictable and variances to the forecast can fluctuate
substantially. In addition, because of high fixed costs in the
semiconductor industry, we are limited in our ability to reduce
costs quickly in response to any revenue shortfalls. As a result
of the foregoing or other factors, we have experienced, and may
in the future experience, material adverse fluctuations in our
operating results on a quarterly or annual basis, which have in
the past, and would in the future, materially affect our
business, financial condition and results of operations.


Results of Operations

The following table sets forth certain statement
of operations data as a percentage of total revenue for the
periods indicated:

|                                         |                                             |                          |     |      |  |      |     |    |  |  |     |    | 
|---------------------------------------- | ------------------------------------------- | ------------------------ | --- | ---- |  | ---- | --- | -- |  |  | --- | -- | 
|                                         |                                             |                         
|                                         |                                             | Year Ended September 30,
|                                         |                                             |                         
|                                         |                                             | 2001                     |     | 2000 |  | 1999
|                                         |                                             |                          |     |      |  |     
|Net revenues                             |                                             |                          | 100 | %    |  |      | 100 | %  |  |  | 100 | % 
|Costs and operating expenses:            |                                             |                          |     |      |  |      |     |    |  |  |     |   
|                                         | Cost of revenues                            |                          |     | 32   |  |      |     | 22 |  |  |     | 25 | 
|                                         | Research and development                    |                          |     | 43   |  |      |     | 33 |  |  |     | 19 | 
|                                         | Sales and marketing                         |                          |     | 22   |  |      |     | 18 |  |  |     | 14 | 
|                                         | General and administrative                  |                          |     | 18   |  |      |     | 11 |  |  |     | 7  | 
|                                         | Amortization of intangibles and goodwill    |                          |     | 26   |  |      |     | 4  |  |  |     |   | 
|                                         | Purchased in-process research & development |                          |     |     |  |      |     | 9  |  |  |     |   | 
|                                         |                                             |                          |     |      |  |      |     |    |  |  |     |   
|Total operating expenses                 |                                             |                          | 141 |      |  |      | 97  |    |  |  | 65  |   
|                                         |                                             |                          |     |      |  |      |     |    |  |  |     |   
|Income from operations                   |                                             |                          | (41 | )    |  |      | 3   |    |  |  | 35  |   
|Interest and other income (expense), net |                                             |                          | 6   |      |  |      | 9   |    |  |  | 4   |   
|                                         |                                             |                          |     |      |  |      |     |    |  |  |     |   
|Income before income taxes               |                                             |                          | (35 | )    |  |      | 12  |    |  |  | 39  |   
|Provision for income taxes               |                                             |                          | (4  | )    |  |      | 10  |    |  |  | 16  |   
|                                         |                                             |                          |     |      |  |      |     |    |  |  |     |   
|Net income                               |                                             |                          | (31 | )%   |  |      | 2   | %  |  |  | 23  | % 
|                                         |                                             |                          |     |      |  |      |     |    |  |  |     |   

Years Ended September 30, 2001, 2000 and
1999

Net Revenues.Revenue from sales of semiconductors
and licenses of software libraries decreased 4% in fiscal 2001
to $43.0 million compared to $44.8 million in fiscal
2000. In fiscal 2000, revenue increased 6% compared to
$42.4 million in fiscal 1999. The decrease in revenue in
fiscal 2001 from fiscal 2000 was primarily due to a decrease in
sales of our data compression and encryption processors to
network equipment manufacturers partially offset by an increase
in license and software revenues. The increase in revenue in
fiscal 2000 from fiscal 1999 was primarily due to increasing
sales of our data compression and encryption processors to
network equipment manufacturers. Semiconductor sales to Quantum,
an original equipment manufacturer of high-performance tape
storage devices, through its manufacturing subcontractor,
comprised 36%, 36% and 45% of revenue in each of fiscal years
2001, 2000 and 1999, respectively. Semiconductor sales to
Lucent, an original equipment manufacturer of networking
equipment, through its manufacturing subcontractors, comprised
17%, 35% and 38% of revenue in fiscal years 2001, 2000 and 1999,
respectively.

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Cost of Revenues.Cost of revenues consists primarily of
semiconductors which were manufactured to our specifications by
third parties for resale by us. Cost of revenues as a percentage
of net revenues increased to 32% for fiscal 2001 from 22% for
fiscal 2000. The increase in cost of revenues as a percentage of
net revenues in fiscal 2001 primarily reflects a
$3.4 million charge during the third quarter of fiscal 2001
for excess inventory. This charge resulted from a decrease in
demand below our previous expectations. Excluding the excess
inventory charge, cost of revenues for fiscal 2001 was 24% of
net revenues. In addition to the charge there was a shift in the
revenue mix from 2000 to 2001 and an increase in overhead
expenses including supplies and facility rental costs.

Research and Development.Research and development expenses were
$18.6 million, or 43% of revenues, in fiscal 2001,
$14.6 million, or 33% of revenues, in fiscal 2000 and
$8.0 million, or 19% of revenues, in fiscal 1999. Research
and development expenses increased 27% in fiscal 2001 and 82% in
fiscal 2000. The increase in research and development costs in
each successive period was due to increases in labor, benefits,
building expenses and depreciation costs related to the addition
of research and development personnel related to the acquisition
of Apptitude in August 2000, offset by a reduction in outside
services costs for contractors previously used to develop new
products. Amortization of deferred stock compensation related to
the acquisition of Apptitude of $1.8 million and $259,000
in fiscal 2001 and 2000, respectively, also contributed to the
increase in research and development expense in each of these
fiscal years. We expect our investments in research and
development to continue to increase in coming periods on an
absolute basis as we continue to develop products targeted at
meeting market needs. However, we cannot assure that product
development programs invested in by us will be successful or
that products resulting from such programs will achieve market
acceptance.

Sales and Marketing.Sales and marketing expenses were
$9.5 million, or 22% of revenues, in fiscal 2001,
$8.2 million, or 18% of revenues, in fiscal 2000 and
$6.0 million, or 14% of revenues, in fiscal 1999. The
increase in sales and marketing expenses in each successive
fiscal year was primarily due to increased headcount and outside
services to support sales and marketing efforts.

General and Administrative.General and administrative expenses
were approximately $7.7 million, or 18% of revenues, in
fiscal 2001, $5.1 million, or 11% of revenues, in fiscal
2000 and $3.0 million, or 7% of revenues, in fiscal 1999.
The continued increase in general and administrative expenses is
mainly due to higher salaries and benefits costs as a result of
increased headcount as well as office administration and
depreciation costs. Additionally, amortization of deferred stock
compensation related to the acquisition of Apptitude of
$1.8 million and $503,000 for fiscal 2001 and 2000,
respectively, contributed to the increase. Legal and accounting
costs for the fiscal years ended 2001, 2000 and 1999 were
$604,000, $810,000 and $703,000, respectively.

Amortization of Intangibles and Goodwill.Amortization of intangibles and
goodwill of $11.1 million, or 26% of net revenues, in
fiscal 2001 and $1.6 million, or 4% of revenues, in fiscal 2000
related to the acquisition of Apptitude and other intellectual
property in August 2000.

Purchased In-Process Research and Development.Purchased in-process research and
development (IPR&D) related to the acquisition
of Apptitude in August 2000 was $4.1 million or 9% of
revenues. Purchased IPR&D related to the value assigned to
Apptitudes MeterFlow ASIC product which had not reached
technological feasibility at the time of the acquisition.

Interest and Other Income (Expense),
Net.Interest and other income
(expense), net, for fiscal 2001 were $2.6 million, or 6% of
revenues, as compared to $4.1 million, or 9% of revenues,
for fiscal 2000 and $1.7 million, or 4% of revenues, for
fiscal 1999. The decrease was primarily a result of a shift in
the investment mix from stock instruments to commercial paper
and municipal bonds, lower average cash and short-term
investments balance during fiscal 2001 as compared to fiscal
2000 as well as an overall decrease in interest rates.

Income Taxes.The
effective tax rates for fiscal 2001, 2000 and 1999 were 11%, 81%
and 40%, respectively. We recorded a benefit from income taxes
of $1.7 million in fiscal 2001 and income tax provisions of
$4.4 million in fiscal 2000 and $6.6 million in fiscal
1999. The resulting effective tax rates are primarily the

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result of the non-deductibility of certain
acquisition-related costs consisting primarily of the
amortization of intangibles and goodwill. The effective tax rate
for fiscal 2001 of 11% is below the combined statutory tax rate
of 40% due primarily to the fact that there is no tax benefit
from the accounting amortization of intangible assets and
stock-based compensation.


We recognize deferred income tax asset for the
expected future benefits attributable to the differences between
the financial reporting and income tax basis of assets and
liabilities and from net operating loss and credit
carryforwards. Deferred income tax expense or benefit represents
the net change during the year in the deferred income tax
liability or asset.

Liquidity and Capital Resources

Operating Activities.In fiscal 2001, we generated cash from
operating activities of approximately $1.3 million
comprised of net loss as adjusted for non-cash items including
amortization of intangibles and deferred stock compensation of
$15.0 million, depreciation and amortization costs of $1.7
million, tax benefit from employee stock plans of
$3.9 million and an increase in deferred income taxes of
$3.5 million as well as a decrease in accounts receivable
of $2.1 million and an increase in accrued expenses and
other current liabilities of $122,000. These adjustments were
offset mainly by increases in prepaid expenses and other current
assets of $2.4 million, other assets of $1.3 million,
inventory of $330,000 and a decrease in accounts payable of
$410,000. In fiscal 2000, we generated cash from operating
activities of approximately $14.9 million comprised of net
income as adjusted for non-cash items including purchased
in-process research and development of $4.1 million,
amortization of intangibles and deferred stock compensation of
$3.0 million, deferred income taxes of $1.9 million,
depreciation and amortization costs of $1.1 million and tax
benefit from employee stock plans of $5.2 million as well
as a decrease in accounts receivable of $1.3 million. These
adjustments were offset mainly by decreases in income taxes
payable of $1.3 million and in accrued expenses and other
liabilities of $1.7 million.

Investing Activities.Cash used in investing activities in
fiscal 2001 was $7.5 million, resulting from the purchase
of short-term investments of $5.0 million and the acquisition of
$2.5 million in property and equipment. Cash used in
investing activities in fiscal 2000 was $27.5 million,
consisting primarily of the acquisition of Apptitude and the
purchase of intellectual property aggregating
$20.5 million, the purchase of short-term investments of
$5.1 million and the acquisition of $1.8 million in
property and equipment. Our capital expenditures in fiscal 2001
reflect costs incurred in relation to the consolidation of our
northern California facilities as well as the additional
facilities in Los Gatos and Carlsbad. We expect capital
expenditures in the foreseeable future to approximate those
levels as in fiscal 1999.

Financing Activities.Cash provided by financing activities
in fiscal 2001 and fiscal 2000 of $1.2 million and
$2.1 million, respectively, reflect proceeds from the
issuance of common stock for stock option exercises and stock
purchase plan purchases slightly offset by payments on debt
obligations.

In March 1999, Hifn paid a $5.0 million loan
and paid a total of $1.5 million in transfers to our former
parent, Stac. Also during 1999, we raised approximately
$50.0 million in an equity offering. In April 1999, our
underwriters exercised their option to purchase additional
shares of our common stock, which yielded an additional
$9.3 million in proceeds to us.

We use a number of independent suppliers to
manufacture substantially all of our products. As a result, we
rely on these suppliers to allocate to us a sufficient portion
of foundry capacity to meet our needs and deliver sufficient
quantities of our products on a timely basis. These arrangements
allow us to avoid utilizing our capital resources for
manufacturing facilities and work-in-process inventory and to
focus a substantial proportion of our resources on the design,
development and marketing of our products.

We require funds to finance our working capital,
particularly accounts receivable and manufactured inventory, and
to finance investments in property and equipment. Our need to
raise capital in the future will depend on many factors
including the rate of sales growth, market acceptance of our
existing and new products, the amount and timing of research and
development expenditures, the timing and size of acquisitions

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of businesses or technologies, the timing of the
introduction of new products and the expansion of sales and
marketing efforts.


In August 2000, we completed our acquisition of
Apptitude. The purchase price of the acquisition of
$58.5 million, which included $127,000 in estimated
acquisition related costs, was used to acquire the net assets of
Apptitude. The allocation of the purchase price was as follows:

|                                                               |  |   |        |  
|-------------------------------------------------------------- |  | - | ------ | -
|Property and equipment                                         |  | $ | 205    |  
|Current and other assets                                       |  |   | 1,081  |  
|Deferred tax asset                                             |  |   | 3,905  |  
|Liabilities assumed                                            |  |   | (2,404 | )
|Goodwill                                                       |  |   | 47,121 |  
|Purchased in-process research and development                  |  |   | 4,085  |  
|Acquired developed and core technology, workforce
	and patents |  |   | 4,462  |  
|                                                               |  |   |        |  
|                                                               |  | $ | 58,455 |  
|                                                               |  |   |        |  

The goodwill, acquired developed and core
technology, workforce and patents are recorded on the balance
sheet as intangibles and other assets and are being amortized on
a straight-line basis over periods ranging from two to five
years. The purchased in-process research and development was
expensed at the time of the acquisition as a one-time charge.
However, as a result of scheduled adoption of SFAS 142 (see Note
2 of Notes to Consolidated Financial Statements), we will cease
amortization of goodwill beginning October 1, 2002.
Goodwill amortization expense aggregated $9.4 million and
$1.3 million in fiscal 2001 and 2000, respectively.

Trends and Uncertainties

In future periods, Hifns business,
financial condition and results of operations may be affected by
many factors, including but not limited to the following:



| |                                                    
| | ---------------------------------------------------
| | Our Operating Results May Fluctuate
	Significantly.

Our operating results have fluctuated
significantly in the past and we expect that they will continue
to fluctuate in the future. This fluctuation is a result of a
variety of factors including the following:



| |   |                                                                                           
| | - | ------------------------------------------------------------------------------------------
| |  | General business conditions in our markets as
	well as global economic uncertainty;       
|
| |  | Increases or reductions in demand for our
	customers products;                           
|
| |  | The timing and volume of orders we receive from
	our customers;                           
|
| |  | Cancellations or delays of customer product
	orders;                                      
|
| |  | Acquisitions or mergers involving us, our
	competitors or customers;                      
|
| |  | Any new product introductions by us or our
	competitors;                                  
|
| |  | Our suppliers increasing costs or changing the
	delivery of products to us;               
|
| |  | Increased competition or reductions in the prices
	that we are able to charge;            
|
| |  | The variety of the products that we sell as well
	as seasonal demand for our products; and
|
| |  | The availability of manufacturing capacity
	necessary to make our products.               



| |                                             
| | --------------------------------------------
| | We Depend Upon A Small Number Of
	Customers.

Quantum Corporation (Quantum),
through its manufacturing subcontractor, accounted for
approximately 36%, 36% and 45%, respectively, of our revenues in
fiscal 2001, 2000 and 1999. Lucent, through its manufacturing
subcontractors, accounted for approximately 17%, 35% and 38% of
our revenues during fiscal

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2001, 2000 and 1999, respectively. Neither
Quantum nor Lucent are under any binding obligation to order
from us. If our sales to Quantum or Lucent decline, our
business, financial condition and results of operations could
suffer. We expect that our most significant customers in the
future could be different from our largest customers today for a
number of reasons, including customers deployment
schedules and budget considerations. As a result, we believe we
may experience significant fluctuations in our results of
operations on a quarterly and an annual basis.


Limited numbers of network and storage equipment
vendors account for a majority of packet processor purchases in
their respective markets. In particular, the market for network
equipment that would include packet processors, such as routers,
remote access concentrators and firewalls, is dominated by a few
large vendors, including Cisco Systems, Inc., Lucent
Technologies Inc., Nortel Networks, Inc. and 3Com Corporation.
As a result, our future success will depend upon our ability to
establish and maintain relationships with these companies. If
these network equipment vendors do not incorporate our packet
processors into their products, our business, financial
condition and results of operations could suffer.



| |                                                                           
| | --------------------------------------------------------------------------
| | Our Business Depends Upon The Development
	Of The Packet Processor Market.

Our prospects are dependent upon the acceptance
of packet processors as an alternative to other technology
traditionally utilized by network and storage equipment vendors.
Many of our current and potential customers have substantial
technological capabilities and financial resources and currently
develop internally the application specific integrated circuit
components and program the general purpose microprocessors
utilized in their products as an alternative to our packet
processors. These customers may in the future continue to rely
on these solutions or may determine to develop or acquire
components, technologies or packet processors that are similar
to, or that may be substituted for, our products. In order to be
successful, we must anticipate market trends and the price,
performance and functionality requirements of such network and
storage equipment vendors and must successfully develop and
manufacture products that meet their requirements. In addition,
we must make products available to these large customers on a
timely basis and at competitive prices. If orders from customers
are cancelled, decreased or delayed, or if we fail to obtain
significant orders from new customers, or any significant
customer delays or fails to pay, our business, financial
condition and results of operations could suffer.



| |                                                                                                            
| | -----------------------------------------------------------------------------------------------------------
| | Our Business Depends Upon The Continued
	Growth And Our Penetration Of The Virtual Private Network
	Market.

We want to be a leading supplier of packet
processors that implement the network security protocols
necessary to support the deployment of virtual private networks.
This emerging market, which is still evolving, may not grow and
if it does continue to grow, our products may not successfully
serve this market. Our ability to generate significant revenue
in the virtual private network market will depend upon, among
other things, the following:



| |   |                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------
| |  | Our ability to demonstrate the benefits of our
	technology to distributors, original equipment manufacturers and
	end users; and
|
| |  | The increased use of the Internet by businesses
	as replacements for, or enhancements to, their private networks.               

If we are unable to penetrate the virtual private
network market, or if that market fails to develop, our
business, financial condition and results of operations could
suffer.

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| |                                                                                           
| | ------------------------------------------------------------------------------------------
| | We Face Risks Associated With Evolving
	Industry Standards And Rapid Technological Change.

The markets in which we compete are characterized
by rapidly changing technology, frequent product introductions
and evolving industry standards. Our performance depends on a
number of factors, including our ability to do the following:



| |   |                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------
| |  | Properly identify emerging target markets and
	related technological trends;                                   
|
| |  | Develop and maintain competitive products;                                                                     
|
| |  | Enhance our products by adding innovative
	features that differentiate our products from those of
	competitors;
|
| |  | Bring products to market on a timely basis at
	competitive prices; and                                         
|
| |  | Respond effectively to new technological changes
	or new product announcements by others.                      

Our past success has been dependent in part upon
our ability to develop products that have been selected for
design into new products of leading equipment manufacturers.
However, the development of our packet processors is complex
and, from time to time, we have experienced delays in completing
the development and introduction of new products. We may not be
able to adhere to our new product design and introduction
schedules and our products may not be accepted in the market at
favorable prices, if at all.

In evaluating new product decisions, we must
anticipate future demand for product features and performance
characteristics, as well as available supporting technologies,
manufacturing capacity, competitive product offerings and
industry standards. We must also continue to make significant
investments in research and development in order to continue to
enhance the performance and functionality of our products to
keep pace with competitive products and customer demands for
improved performance, features and functionality. The technical
innovations required for us to remain competitive are
complicated and require a significant amount of time and money.
We may experience substantial difficulty in introducing new
products and we may be unable to offer enhancements to existing
products on a timely or cost-effective basis, if at all. For
instance, the performance of our encryption/compression and
public key processors depends upon the integrity of our security
technology. If any significant advances in overcoming
cryptographic systems are made, then the security of our
encryption/compression and public key processors will be reduced
or eliminated unless we are able to develop further technical
innovations that adequately enhance the security of these
products. Our inability to develop and introduce new products or
enhancements directed at new industry standards could harm our
business, financial condition and results of operations.



| |                                     
| | ------------------------------------
| | Our Markets Are Highly
	Competitive.

We compete in markets that are intensely
competitive and are expected to become more competitive as
current competitors expand their product offerings and new
competitors enter the market. The markets that we compete in are
subject to frequent product introductions with improved
price-performance characteristics, rapid technological change,
and the continued emergence of new industry standards. Our
products compete with offerings from companies such as Analog
Devices, Inc., Safenet, Inc., IBM, Broadcom Corporation,
Motorola, Inc. and Philips Corporation. In 1994, Stac entered
into two license agreements with IBM in which Stac granted IBM
the right to use, but not sublicense, our patented compression
technology in IBM hardware and software products. Stac also
entered into a license agreement with Microsoft Corporation
(Microsoft) in 1994 whereby Stac granted Microsoft
the right to use, but not sublicense, our compression technology
in their software products. We expect significant future
competition from major domestic and international semiconductor
suppliers. Several established electronics and semiconductor
suppliers have recently entered, or expressed an interest to
enter, the network equipment market. We also may face
competition from suppliers of products based on new or emerging
technologies. Furthermore, many of our existing and potential
customers internally develop solutions which attempt to perform
all or a portion of the functions performed by our products.

A key element of our packet processor
architecture is our encryption technology. Until recently, in
order to export our encryption-related products, the U.S.
Department of Commerce required us to obtain a license.

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Foreign competitors that were not subject to
similar requirements have an advantage over us in their ability
to establish existing markets for their products and rapidly
respond to the requests of customers in the global market.
Although the export restriction has been liberalized, we may not
be successful in entering or competing in the foreign encryption
markets. See Our Products Are Subject To Export
Restrictions.


Many of our current and prospective competitors
offer broader product lines and have significantly greater
financial, technical, manufacturing and marketing resources than
us. As a result, they may be able to adapt more quickly to new
or emerging technologies and changes in customer requirements or
to devote greater resources to promote the sale of their
products. In particular, companies such as Intel Corporation,
Lucent Technologies Inc., Motorola, Inc., National Semiconductor
Corporation, and Texas Instruments Incorporated have a
significant advantage over us given their relationships with
many of our customers, their extensive marketing power and name
recognition and their much greater financial resources. In
addition, current and potential competitors may decide to
consolidate, lower the prices of their products or to bundle
their products with other products. Any of the above would
significantly and negatively impact our ability to compete and
obtain or maintain market share. If we are unable to
successfully compete against our competitors, our business,
results of operations and financial condition will suffer.

We believe that the important competitive factors
in our markets are the following:



| |   |                                                                                             
| | - | --------------------------------------------------------------------------------------------
| |  | Performance;                                                                                
|
| |  | Price;                                                                                      
|
| |  | The time that is required to develop a new
	product or enhancements to existing products;   
|
| |  | The ability to achieve product acceptance with
	major network and storage equipment vendors;
|
| |  | The support that exists for new network and
	storage standards;                             
|
| |  | Features and functionality;                                                                 
|
| |  | Adaptability of products to specific applications;                                          
|
| |  | Reliability; and                                                                            
|
| |  | Technical service and support as well as
	effective intellectual property protection.       

If we are unable to successfully develop and
market products that compete with those of other suppliers, our
business, financial condition and results of operations could be
harmed. In addition, we must compete for the services of
qualified distributors and sales representatives. To the extent
that our competitors offer distributors or sales representatives
more favorable terms, these distributors and sales
representatives may decline to carry, or discontinue carrying,
our products. Our business, financial condition and results of
operations could be harmed by any failure to maintain and expand
our distribution network.



| |                                                                                              
| | ---------------------------------------------------------------------------------------------
| | Our Business Depends Upon The Growth Of The
	Network Equipment And Storage Equipment Markets.

Our success is largely dependent upon continued
growth in the market for network security equipment, such as
routers, remote access concentrators, switches, broadband access
equipment, security gateways, firewalls and network interface
cards. In addition, our success depends upon storage equipment
vendors incorporating our packet processors into their systems.
The network security equipment market has in the past, and may
in the future, fluctuate significantly based upon numerous
factors, including the lack of industry standards, adoption of
alternative technologies, capital spending levels and general
economic conditions. We are unable to determine the rate or
extent to which these markets will grow, if at all. Any decrease
in the growth of the network or storage equipment market or a
decline in demand for our products could harm our business,
financial condition and results of operations.



| |                                                                
| | ---------------------------------------------------------------
| | Our Success Depends Upon Protecting Our
	Intellectual Property.

Our proprietary technology is critical to our
future success. We rely in part on patent, trade, trademark,
maskwork and copyright law to protect our intellectual property.
We own 12 United States patents and four

21



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foreign patents. We also have 2 pending patent
applications in Japan. Our issued patents and patent
applications primarily cover various aspects of our compression
technology and have expiration dates ranging from 2006 to 2013.
In addition to compression, we have six pending patent
applications in the United States, four in Europe and Asia
(Japan) covering our flow classification technology. There are 2
pending patent applications in the United States covering our
bandwidth management and rate shaping technology. Patents may
not be issued under our current or future patent applications,
and the patents issued under such patent applications could be
invalidated, circumvented or challenged. In addition, third
parties could make infringement claims against us in the future.
Such infringement claims could result in costly litigation. We
may not prevail in any such litigation or be able to license any
valid and infringed patents from third parties on commercially
reasonable terms, if at all. Regardless of the outcome, an
infringement claim would likely result in substantial cost and
diversion of our resources. Any infringement claim or other
litigation against us or by us could harm our business,
financial condition and results of operations. The patents
issued to us may not be adequate to protect our proprietary
rights, to deter misappropriation or to prevent an unauthorized
third party from copying our technology, designing around the
patents we own or otherwise obtaining and using our products,
designs or other information. In addition, others could develop
technologies that are similar or superior to our technology.


We also claim copyright protection for certain
proprietary software and documentation. We attempt to protect
our trade secrets and other proprietary information through
agreements with our customers, employees and consultants, and
through other security measures. However, our efforts may not be
successful. Furthermore, the laws of certain countries in which
our products are or may be manufactured or sold may not protect
our products and intellectual property.



| |                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------
| | The Length Of Time It Takes To Develop Our
	Products And Make A Sale To Our Customers May Impair Our
	Operating Results.

Our customers typically take a long time to
evaluate our products. In fact, it usually takes our customers 3
to 6 months or more to test our products with an additional
9 to 18 months or more before they commence significant
production of equipment incorporating our products. As a result
of this lengthy sales cycle, we may experience a delay between
increasing expenses for research and development and sales and
marketing efforts on the one hand, and the generation of higher
revenues, if any, on the other hand. In addition, the delays
inherent in such a lengthy sales cycle raise additional risks of
customer decisions to cancel or change product plans, which
could result in the loss of anticipated sales. Our business,
financial condition and results of operations could suffer if
customers reduce or delay orders or choose not to release
products using our technology.



| |                                                                         
| | ------------------------------------------------------------------------
| | We Depend Upon Independent Manufacturers
	And Limited Sources Of Supply.

We rely on subcontractors to manufacture,
assemble and test our packet processors. We currently
subcontract our semiconductor manufacturing to Atmel
Corporation, Toshiba Corporation and Motorola, Inc. Since we
depend upon independent manufacturers, we do not directly
control product delivery schedules or product quality. None of
our products are manufactured by more than one supplier. Since
the semiconductor industry is highly cyclical, foundry capacity
has been very limited at times in the past and may become
limited in the future.

We depend on our suppliers to deliver sufficient
quantities of finished product to us in a timely manner. Since
we place orders on a purchase order basis and do not have
long-term volume purchase agreements with any of our suppliers,
our suppliers may allocate production capacity to other products
while reducing deliveries to us on short notice. For example, in
June 1995, one of our suppliers delayed the delivery of one of
our products. As a result, we switched production of the product
to a new manufacturer. This caused a 3-month delay in shipments
to customers. We also experienced yield and test anomalies on a
different product manufactured by another subcontractor that
could have interrupted our customer shipments. In this case, the
manufacturer was able to correct the problem in a timely manner
and customer shipments were not affected. The delay and expense
associated with qualifying a new supplier or foundry and
commencing volume

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production can result in lost revenue, reduced
operating margins and possible harm to customer relationships.
The steps required for a new manufacturer to begin production of
a semiconductor product include:




| |   |                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------
| |  | Adapting our product design, if necessary, to the
	new manufacturers process;                      
|
| |  | Creating a new mask set to manufacture the
	product;                                                
|
| |  | Having the new manufacturer prepare sample
	products so we can verify the product specification; and
|
| |  | Providing sample products to customers for
	qualification.                                          

In general, it takes from 3 to 6 months for
a new manufacturer to begin full-scale production of one of our
products. We could have similar or more protracted problems in
the future with existing or new suppliers.

Both Toshiba Corporation and Motorola, Inc.
manufacture products for us in plants located in Asia. To date,
the financial and stock market dislocations that have occurred
in the Asian financial markets in the past have not harmed our
business. However, present or future dislocations or other
international business risks, such as currency exchange
fluctuations or recessions, could force us to seek new
suppliers. We must place orders approximately 20 to 23 weeks in
advance of expected delivery. This limits our ability to react
to fluctuations in demand for our products, and could cause us
to have an excess or a shortage of inventory of a particular
product. In addition, if global semiconductor manufacturing
capacity fails to increase in line with demand, foundries could
allocate available capacity to larger customers or customers
with long-term supply contracts. If we cannot obtain adequate
foundry capacity at acceptable prices, or our supply is
interrupted or delayed, our product revenues could decrease or
our cost of revenues could increase. This could harm our
business, financial condition and results of operations.

We regularly consider using smaller semiconductor
dimensions for each of our products in order to reduce costs. We
have begun to decrease the dimensions in our new product
designs, and believe that we must do so to remain competitive.
We may have difficulty decreasing the dimensions of our
products. In the future, we may change our supply arrangements
to assume more product manufacturing responsibilities. We may
subcontract for wafer manufacturing, assembly and test rather
than purchase finished products. However, there are additional
risks associated with manufacturing, including variances in
production yields, the ability to obtain adequate test and
assembly capacity at reasonable cost and other general risks
associated with the manufacture of semiconductors. We may also
enter into volume purchase agreements that would require us to
commit to minimum levels of purchases and which may require
up-front investments. If we fail to effectively assume greater
manufacturing responsibilities or manage volume purchase
arrangements, our business, financial condition and results of
operations will suffer.

Network And
Storage Equipment Prices Typically Decrease.

Average selling prices in the networking, storage
and semiconductor industries have rapidly declined due to many
factors, including:



| |   |                                    
| | - | -----------------------------------
| |  | Rapidly changing technologies;     
|
| |  | Price-performance enhancements; and
|
| |  | Product obsolescence.              

The decline in the average selling prices of our
products may cause substantial fluctuations in our operating
results. We anticipate that the average selling prices of our
products will decrease in the future due to product
introductions by our competitors, price pressures from
significant customers and other factors. Therefore, we must
continue to develop and introduce new products that incorporate
features which we can sell at higher prices. If we fail to do
so, our revenues and gross margins could decline, which would
harm our business, financial condition and results of operations.

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| |                                                                     
| | --------------------------------------------------------------------
| | We Face Product Return, Product Liability
	And Product Defect Risks.

Complex products such as ours frequently contain
errors, defects and bugs when first introduced or as new
versions are released. We have discovered such errors, defects
and bugs in the past. Delivery of products with production
defects or reliability, quality or compatibility problems could
hinder market acceptance of our products. This could damage our
reputation and harm our ability to attract and retain customers.
Errors, defects or bugs could also cause interruptions, delays
or a cessation of sales to our customers. We would have to
expend significant capital and resources to remedy these
problems. Errors, defects or bugs could be discovered in our new
products after we begin commercial production of them, despite
testing by us and our suppliers and customers. This could result
in additional development costs, loss of, or delays in, market
acceptance, diversion of technical and other resources from our
other development efforts, claims by our customers or others
against us or the loss of credibility with our current and
prospective customers. Any such event would harm our business,
financial condition and results of operations.



| |                                           
| | ------------------------------------------
| | We Face Order And Shipment
	Uncertainties.

We generally make our sales under individual
purchase orders that may be canceled or deferred by customers on
short notice without significant penalty, if any. Cancellation
or deferral of product orders could cause us to hold excess
inventory, which could harm our profit margins and restrict our
ability to fund our operations. We recognize revenue upon
shipment of products to our customers, net of an allowance for
estimated returns. An unanticipated level of returns could harm
our business, financial condition and results of operations.



| |                                                             
| | ------------------------------------------------------------
| | Business Interruptions Could Adversely
	Affect Our Business.

Our operations are vulnerable to interruption by
fire, earthquake, power loss, telecommunications failure, acts
of terrorism and other events beyond our control. Our facilities
and the facilities of our subcontractors in the State of
California have in the past and may again in the future be
subject to electrical black outs as a consequence of a shortage
of available electrical power. In the event these blackouts
resume or increase in severity, they could disrupt the operation
of our facilities and the affected facilities of our
subcontractors and such disruptions could have an adverse effect
on our results of operations.



| |                              
| | -----------------------------
| | We Depend Upon Key Personnel.

Our success greatly depends on the continued
contributions of our key management and other personnel, many of
whom would be difficult to replace. We do not have employment
contracts with any of our key personnel, nor do we maintain any
key man life insurance on any of our personnel. Several members
of our management team have joined us in the last
12 months. It may be difficult for us to integrate new
members of our management team. We must also attract and retain
experienced and highly skilled engineering, sales and marketing
and managerial personnel. Competition for such personnel is
intense in the geographic areas and market segments in which we
compete, and we may not be successful in hiring and retaining
such people. If we lose the services of any key personnel, or
cannot attract or retain qualified personnel, particularly
engineers, our business, financial condition and results of
operations could suffer. In addition, companies in technology
industries whose employees accept positions with competitors
have in the past claimed that their competitors have engaged in
unfair competition or hiring practices. We could receive such
claims in the future as we seek to hire qualified personnel.
These claims could result in material litigation. We could incur
substantial costs in defending against any such claims,
regardless of their merits.



| |                                             
| | --------------------------------------------
| | Our Rapid Growth May Strain Our
	Operations.

We have experienced a period of rapid growth and
expansion which has placed, and continues to place, a
significant strain on our resources. To accommodate this growth,
in fiscal 2000, we implemented a variety of new and upgraded
operational and financial systems, procedures and controls,
including the improvement of the retained accounting and other
internal management systems which were provided by Stac. This
required and may continue to require substantial management
effort, and our efforts to do so may not continue to be

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successful. In addition, we have had to hire
additional employees to accommodate this growth and our product
development activities. This has resulted in increased
responsibilities for our management. Our systems, procedures and
controls may not be adequate to support our operations. If we
fail to improve our operational, financial and management
information systems, or to hire, train, motivate or manage our
employees, our business, financial condition and results of
operations could suffer.




| |                                                  
| | -------------------------------------------------
| | Our Products Are Subject To Export
	Restrictions.

The encryption algorithms embedded in our
products are a key element of our packet processor architecture.
These products are subject to U.S. Department of Commerce
export control restrictions. Our network equipment customers may
only export products incorporating encryption technology if they
obtain a one-time technical review. These U.S. export laws
also prohibit the export of encryption products to a number of
countries deemed by the U.S. to be hostile. Many foreign
countries also restrict exports to many of these countries
deemed to be terrorist-supporting states by the
U.S. government. Because the restrictions on exports of
encryption products have been liberalized, we, along with our
network equipment customers have an opportunity to effectively
compete with our foreign competitors. The existence of these
restrictions until recently may have enabled foreign competitors
facing less stringent controls on their products to become more
established and, therefore, more competitive in the global
market than our network equipment customers. In addition, the
list of products and countries for which export approval is
required, and the regulatory policies with respect thereto,
could be revised, and laws limiting the domestic use of
encryption could be enacted. While the U.S. government now
allows U.S. companies to assume that exports to non-government
end-users will be approved within 30 days of official
registration with the Department of Commerce, the sale of our
packet processors could be harmed by the failure of our network
equipment customers to obtain the required approvals or by the
costs of compliance.



| |                                                                      
| | ---------------------------------------------------------------------
| | We Face Risks Associated With Our
	International Business Activities.

We sell most of our products to customers in the
United States. If our international sales increase, particularly
in light of decreased export restrictions, we may encounter
risks inherent in international operations. All of our
international sales to date are denominated in
U.S. dollars. As a result, if the value of the
U.S. dollar increases relative to foreign currencies, our
products could become less competitive in international markets.
We also obtain some of our manufacturing, assembly and test
services from suppliers located outside the United States.
International business activities could be limited or disrupted
by any of the following:



| |   |                                              
| | - | ---------------------------------------------
| |  | The imposition of governmental controls;     
|
| |  | Export license/technical review requirements;
|
| |  | Restrictions on the export of technology;    
|
| |  | Currency exchange fluctuations;              
|
| |  | Political instability;                       
|
| |  | Financial and stock market dislocations;     
|
| |  | Military and related activities;             
|
| |  | Trade restrictions; and                      
|
| |  | Changes in tariffs.                          

Demand for our products also could be harmed by
seasonality of international sales and economic conditions in
our primary overseas markets. These international factors could
harm future sales of our products to international customers and
our business, financial condition and results of operations in
general.

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| |                                             
| | --------------------------------------------
| | We Face Risks Associated With
	Acquisitions.

We continually evaluate strategic acquisitions of
businesses and technologies that would complement our product
offerings or enhance our market coverage or technological
capabilities. While we are not currently negotiating any
acquisitions, we may make additional acquisitions in the future.
Future acquisitions could be effected without stockholder
approval, and could cause us to dilute shareholder equity, incur
debt and contingent liabilities and amortize acquisition
expenses related to goodwill and other intangible assets, any of
which could harm our operating results and/or the price of our
Common Stock. Acquisitions entail numerous risks, including:



| |   |                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Difficulties in assimilating acquired operations,
	technologies and products, in particular, if we fail to
	successfully integrate the acquisition of Apptitude, the
	anticipated benefits of this transaction will not occur;
|
| |  | Diversion of managements attention from
	other business concerns;                                                                                                                                                            
|
| |  | Risks of entering markets in which we have little
	or no prior experience; and                                                                                                                                                
|
| |  | Loss of key employees of acquired organizations.                                                                                                                                                                              

We may not be able to successfully integrate
businesses, products, technologies or personnel that we acquire.
If we fail to do so, our business, financial condition and
results of operations could suffer.



| |                                                                      
| | ---------------------------------------------------------------------
| | The Cyclicality Of The Semiconductor
	Industry May Harm Our Business.

The semiconductor industry has experienced
significant downturns and wide fluctuations in supply and
demand. The industry has also experienced significant
fluctuations in anticipation of changes in general economic
conditions. This has caused significant variances in product
demand, production capacity and rapid erosion of average selling
prices. Industry-wide fluctuations in the future could harm our
business, financial condition and results of operations.



| |                                  
| | ---------------------------------
| | Our Stock Price May Be
	Volatile.

The market price of our Common Stock has
fluctuated in the past and is likely to fluctuate in the future.
In addition, the securities markets have experienced significant
price and volume fluctuations and the market prices of the
securities of technology-related companies including networking,
storage and semiconductor companies have been especially
volatile. Such fluctuations can result from:



| |   |                                                                              
| | - | -----------------------------------------------------------------------------
| |  | Quarterly variations in operating results;                                   
|
| |  | Announcements of new products by us or our
	competitors;                     
|
| |  | The gain or loss of significant customers;                                   
|
| |  | Changes in analysts estimates;                                              
|
| |  | Short-selling of our Common Stock; and                                       
|
| |  | Events affecting other companies that investors
	deem to be comparable to us.



| |                                                                       
| | ----------------------------------------------------------------------
| | We Are Currently Engaged in Several
	Securities Class-Action Lawsuits.

In October and November 1999, six purported class
action complaints were filed in the United States District Court
for the Northern District of California against Hifn and certain
of its officers and directors. These complaints were
consolidated into In re Hi/fn Sec. Litig.,
No. 99-04531 SI. The consolidated complaint was filed
on behalf of a class of purchasers of Hifns stock during
the period July 26, 1999 through October 7, 1999 (the
class period). The complaint seeks unspecified money
damages and alleges that Hifn and certain of its officers and
directors violated federal securities laws in connection with
various public statements made by Hifn and certain of its
officers and directors during the class period. In August 2000,
the Court dismissed the complaint as to all defendants, other
than Raymond J. Farnham and Hifn. Mr. Farnham

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and Hifn answered the complaint in September
2000. Discovery has commenced. A trial date has been tentatively
scheduled for October 2002. We believe that the allegations
contained in the complaint are without merit and intend to
defend the action vigorously. Due to the nature of the
allegations, management cannot estimate the possible loss, if
any, or range of loss that may ultimately be incurred in
connection with the allegations. However, based on the facts
currently known, management does not believe that these matters
will have a material adverse effect on our financial position.


In December 2000, a former employee of Hifn filed
suit against Hifn and one of its former employees alleging
wrongful termination, invasion of privacy, violation of Fair
Employment and Housing Act, based on sexual harassment, sexual
discrimination and retaliation, defamation, breach of the
covenant of good faith and fair dealing, negligence and
conversion. On April 16, 2001, we filed an answer to the
complaint, generally denying its allegations and asserting
various affirmative defenses. Discovery has recently commenced,
and no trial date has been set. The parties have voluntarily
agreed to participate in a mediation session in an effort to
amicably resolve the matter. In the event the matter is not
amicably resolved, we intend to defend the matter vigorously.
While the ultimate outcome of this matter cannot be determined
at this time, management does not believe that this matter will
have a material adverse effect on our financial position.

Recent Accounting Pronouncements

In June 2001, the FASB issued SFAS No. 141,
Business Combinations (SFAS 141)
and SFAS No. 142, Goodwill and Other Intangible
Assets (SFAS 142). SFAS 141 will
apply to all business combinations that we enter into after
June 30, 2001, and eliminates the pooling-of-interests
method of accounting. SFAS 142 is effective for fiscal
years beginning after December 15, 2001. Under the new
Statements, goodwill and intangible assets deemed to have
indefinite lives will no longer be amortized but will be subject
to annual impairment tests in accordance with the Statements.
Other intangible assets will continue to be amortized over their
useful lives. In addition, the Statements include provisions
upon adoption for the reclassification of certain existing
recognized intangibles as goodwill, reassessment of the useful
lives of existing recognized intangibles, reclassification of
certain intangibles out of previously reported goodwill and the
testing for impairment of existing goodwill and other
intangibles. We are required to adopt these Statements for
accounting for goodwill and other intangible assets beginning
October 1, 2002 at which time the Company will cease
amortization of goodwill. Goodwill amortization expense
aggregated $9.4 million and $1.3 million in fiscal 2001 and
2000, respectively. As of September 30, 2001, we have not
determined the effect the adoption of these Statements and we
intend to continue to perform an impairment analysis of the
remaining goodwill through the end of fiscal year 2002. Upon
adoption on October 1, 2002, we will perform the required
impairment tests of goodwill and has not yet determined the
effect of these tests on our earnings and financial position.

In August 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS 144).
SFAS 144 supersedes SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, and provides further guidance regarding
the accounting and disclosure of long-lived assets. We are
required to adopt SFAS 144 effective October 1, 2002,
and have not yet determined the impact, if any, of adoption.






|         |                                                            
|-------- | -----------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
	About Market Risk



| |                   
| | ------------------
| | Interest Rate Risk

We do not use derivative financial instruments in
our investment portfolio. Our investment portfolio is generally
comprised of commercial paper and municipal bonds. We place
investments in instruments that meet high credit quality
standards. These securities are subject to interest rate risk,
and could decline in value if interest rates fluctuate. Due to
the short duration and conservative nature of our investment
portfolio, we do not expect any material loss with respect to
our investment portfolio. A 10% move in interest rates as of
September 30, 2001 would have an immaterial effect on our
pre-tax earnings and the carrying value of our investments over
the next fiscal year.

27



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| |                                     
| | ------------------------------------
| | Foreign Currency Exchange Rate
	Risk

All of our sales, cost of manufacturing and
marketing are transacted in U.S. dollars. Accordingly, our
results of operations are not subject to foreign exchange rate
fluctuations. Gains and losses from such fluctuations have not
been incurred by us to date.

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Item 8.     Financial
Statements and Supplementary Data




INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                               |                                                                                                                    |      |  |       | 
|------------------------------ | ------------------------------------------------------------------------------------------------------------------ | ---- |  | ----- | 
|                               |                                                                                                                    | Page
|                               |                                                                                                                    |     
|Financial Statements:          |                                                                                                                    |      |  |      
|                              
|                               | Report of Independent Accountants                                                                                  |      |  | 30    | 
|                              
|                               | Consolidated Balance Sheets as of
	September 30, 2001 and 2000                                                     |      |  | 31    | 
|                              
|                               | Consolidated Statements of Operations
	for the years ended September 30, 2001, 2000 and 1999                       |      |  | 32    | 
|                              
|                               | Consolidated Statements of Stockholders
	Equity
	for the years ended September 30, 2001, 2000 and 1999            |      |  | 33    | 
|                              
|                               | Consolidated Statements of Cash Flows
	for the years ended September 30, 2001, 2000 and 1999                       |      |  | 34    | 
|                              
|                               | Notes to Consolidated Financial Statements                                                                         |      |  | 35-47 | 
|                              
|Financial Statement Schedules: |                                                                                                                    |      |  |      
|                              
|                               | Schedule II Valuation and Qualifying
	Accounts and Reserves
	for the years ended September 30, 2001, 2000 and 1999 |      |  | 53    | 

29



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REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
hi/fn, inc.

In our opinion, the consolidated financial
statements listed in the accompanying index present fairly, in
all material respects, the financial position of hi/fn, inc. and
its subsidiary at September 30, 2001 and 2000, and the
results of their operations and their cash flows for each of the
three years in the period ended September 30, 2001 in
conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the
financial statement schedules listed in the accompanying index
present fairly, in all material respects, the information set
forth therein when read in conjunction with the related
consolidated financial statements. These financial statements
and financial statement schedules are the responsibility of the
Companys management; our responsibility is to express an
opinion on these financial statements and financial statement
schedules based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally
accepted in the United States of America, which require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

PRICEWATERHOUSECOOPERS LLP

San Jose, California

October 17, 2001 except as to Note 14,


which is as of November 15, 2001


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##### Table of Contents



HIFN, INC.






CONSOLIDATED BALANCE SHEETS


(in thousands, except share and per share amounts)


|                                                     |                                                                                                                          |                            |         |         |         |   |         |         |         | 
|---------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------ | -------------------------- | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                     |                                                                                                                          |                           
|                                                     |                                                                                                                          | September 30,             
|                                                     |                                                                                                                          |                           
|                                                     |                                                                                                                          | 2001                       |         | 2000   
|                                                     |                                                                                                                          |                            |         |        
|ASSETS                                              
|CURRENT ASSETS:                                      |                                                                                                                          |                            |         |         |         |   |         |        
|                                                     | Cash and cash equivalents                                                                                                |                            | $       | 54,600  |         |   | $       | 59,688  |        
|                                                     | Short-term investments                                                                                                   |                            |         | 10,151  |         |   |         | 5,127   |        
|                                                     | Accounts receivable, net of allowance for
	doubtful accounts of $171 and $369, respectively                              |                            |         | 3,814   |         |   |         | 5,748   |        
|                                                     | Inventory                                                                                                                |                            |         | 1,685   |         |   |         | 1,355   |        
|                                                     | Deferred income taxes                                                                                                    |                            |         | 3,424   |         |   |         | 620     |        
|                                                     | Prepaid expenses and other current assets                                                                                |                            |         | 3,598   |         |   |         | 1,221   |        
|                                                     |                                                                                                                          |                            |         |         |         |   |         |        
|                                                     |                                                                                                                          | Total current assets       |         |         | 77,272  |   |         |         | 73,759  | 
|                                                     |                                                                                                                          |                            |         |         |         |   |         |        
|Property and equipment, net                          |                                                                                                                          |                            | 4,111   |         |         |   | 3,268   |        
|Deferred income taxes                                |                                                                                                                          |                            | 3,836   |         |         |   | 3,132   |        
|Intangible assets, net                               |                                                                                                                          |                            | 40,049  |         |         |   | 51,125  |        
|Other assets                                         |                                                                                                                          |                            | 1,542   |         |         |   | 195     |        
|                                                     |                                                                                                                          |                            |         |         |         |   |         |        
|                                                     |                                                                                                                          | $                          | 126,810 |         |         | $ | 131,479 |        
|                                                     |                                                                                                                          |                            |         |         |         |   |         |        
|                                                    
|LIABILITIES AND STOCKHOLDERS
	EQUITY               
|CURRENT LIABILITIES:                                 |                                                                                                                          |                            |         |         |         |   |         |        
|                                                     | Accounts payable                                                                                                         |                            | $       | 2,404   |         |   | $       | 2,814   |        
|                                                     | Accrued expenses and other current liabilities                                                                           |                            |         | 4,571   |         |   |         | 4,447   |        
|                                                     |                                                                                                                          |                            |         |         |         |   |         |        
|                                                     |                                                                                                                          | Total current liabilities  |         |         | 6,975   |   |         |         | 7,261   | 
|                                                     |                                                                                                                          |                            |         |         |         |   |         |        
|Long-term capital lease obligations                  |                                                                                                                          |                            |        |         |         |   | 27      |        
|                                                     |                                                                                                                          |                            |         |         |         |   |         |        
|Commitments and contingencies (Note 11 and Note
	12) |                                                                                                                          |                            |         |         |         |   |         |        
|                                                    
|STOCKHOLDERS EQUITY:                                |                                                                                                                          |                            |         |         |         |   |         |        
|                                                     | Convertible preferred stock, $0.001 par value;
	10,000,000 shares authorized; none issued and outstanding                |                            |         |        |         |   |         |        |        
|                                                     | Common stock, $0.001 par value; 100,000,000
	shares authorized; 10,184,000 and 10,007,000 shares issued and
	outstanding |                            |         | 10      |         |   |         | 10      |        
|                                                     | Additional paid-in capital                                                                                               |                            |         | 121,670 |         |   |         | 116,711 |        
|                                                     | Deferred stock compensation                                                                                              |                            |         | (3,418  | )       |   |         | (7,460  | )      
|                                                     | Retained earnings                                                                                                        |                            |         | 1,573   |         |   |         | 14,930  |        
|                                                     |                                                                                                                          |                            |         |         |         |   |         |        
|                                                     |                                                                                                                          | Total stockholders equity |         |         | 119,835 |   |         |         | 124,191 | 
|                                                     |                                                                                                                          |                            |         |         |         |   |         |        
|                                                     |                                                                                                                          | $                          | 126,810 |         |         | $ | 131,479 |        
|                                                     |                                                                                                                          |                            |         |         |         |   |         |        

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

31



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##### Table of Contents



HIFN, INC.






CONSOLIDATED STATEMENTS OF
OPERATIONS


(in thousands, except per share data)


|                                                       |                                                 |                                    |         |        |        |      |       |        |        |   |        |        |        | 
|------------------------------------------------------ | ----------------------------------------------- | ---------------------------------- | ------- | ------ | ------ | ---- | ----- | ------ | ------ | - | ------ | ------ | ------ | 
|                                                       |                                                 |                                   
|                                                       |                                                 | Year Ended September 30,          
|                                                       |                                                 |                                   
|                                                       |                                                 | 2001                               |         | 2000   |        | 1999
|                                                       |                                                 |                                    |         |        |        |     
|Net revenues:                                          |                                                 |                                    |         |        |        |      |       |        |        |   |        |       
|                                                       | Processors                                      |                                    | $       | 36,492 |        |      | $     | 40,235 |        |   | $      | 38,558 |       
|                                                       | Software licenses and other                     |                                    |         | 6,512  |        |      |       | 4,603  |        |   |        | 3,793  |       
|                                                       |                                                 |                                    |         |        |        |      |       |        |        |   |        |       
|                                                       |                                                 | Total net revenues                 |         |        | 43,004 |      |       |        | 44,838 |   |        |        | 42,351 | 
|                                                       |                                                 |                                    |         |        |        |      |       |        |        |   |        |       
|Costs and operating expenses:                          |                                                 |                                    |         |        |        |      |       |        |        |   |        |       
|                                                       | Cost of revenues  processors                   |                                    |         | 13,681 |        |      |       | 9,622  |        |   |        | 9,859  |       
|                                                       | Cost of revenues  software licenses
	and other |                                    |         | 147    |        |      |       | 382    |        |   |        | 639    |       
|                                                       | Research and development                        |                                    |         | 18,569 |        |      |       | 14,577 |        |   |        | 8,022  |       
|                                                       | Sales and marketing                             |                                    |         | 9,462  |        |      |       | 8,172  |        |   |        | 5,963  |       
|                                                       | General and administrative                      |                                    |         | 7,705  |        |      |       | 5,147  |        |   |        | 2,993  |       
|                                                       | Amortization of intangibles and goodwill        |                                    |         | 11,093 |        |      |       | 1,619  |        |   |        | 113    |       
|                                                       | Purchased in-process research & development     |                                    |         |       |        |      |       | 4,085  |        |   |        |       |       
|                                                       |                                                 |                                    |         |        |        |      |       |        |        |   |        |       
|                                                       |                                                 | Total costs and operating expenses |         |        | 60,657 |      |       |        | 43,604 |   |        |        | 27,589 | 
|                                                       |                                                 |                                    |         |        |        |      |       |        |        |   |        |       
|Income (loss) from operations                          |                                                 |                                    | (17,653 | )      |        |      | 1,234 |        |        |   | 14,762 |       
|Interest income                                        |                                                 |                                    | 2,715   |        |        |      | 4,216 |        |        |   | 1,934  |       
|Interest expense                                       |                                                 |                                    | (15     | )      |        |      | (5    | )      |        |   | (214   | )     
|Other expense, net                                     |                                                 |                                    | (64     | )      |        |      | (66   | )      |        |   | (14    | )     
|                                                       |                                                 |                                    |         |        |        |      |       |        |        |   |        |       
|Income (loss) before income taxes                      |                                                 |                                    | (15,017 | )      |        |      | 5,379 |        |        |   | 16,468 |       
|Provision for (benefit from) income taxes              |                                                 |                                    | (1,660  | )      |        |      | 4,381 |        |        |   | 6,587  |       
|                                                       |                                                 |                                    |         |        |        |      |       |        |        |   |        |       
|Net income (loss)                                      |                                                 | $                                  | (13,357 | )      |        | $    | 998   |        |        | $ | 9,881  |       
|                                                       |                                                 |                                    |         |        |        |      |       |        |        |   |        |       
|Net income (loss) per share:                           |                                                 |                                    |         |        |        |      |       |        |        |   |        |       
|                                                       | Basic                                           |                                    | $       | (1.32  | )      |      | $     | 0.11   |        |   | $      | 1.22   |       
|                                                       |                                                 |                                    |         |        |        |      |       |        |        |   |        |       
|                                                       | Diluted                                         |                                    | $       | (1.32  | )      |      | $     | 0.10   |        |   | $      | 1.06   |       
|                                                       |                                                 |                                    |         |        |        |      |       |        |        |   |        |       
|Shares used in computing net income
	(loss) per share: |                                                 |                                    |         |        |        |      |       |        |        |   |        |       
|                                                       | Basic                                           |                                    |         | 10,141 |        |      |       | 9,017  |        |   |        | 8,115  |       
|                                                       |                                                 |                                    |         |        |        |      |       |        |        |   |        |       
|                                                       | Diluted                                         |                                    |         | 10,141 |        |      |       | 10,055 |        |   |        | 9,295  |       
|                                                       |                                                 |                                    |         |        |        |      |       |        |        |   |        |       

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

32



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##### Table of Contents



HIFN, INC.






CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY


(in thousands)


|                              |                                                                               |                 |       |              |   |          |   |            |   |              |        |             |  |               |    |          |  |        |        |        |   |   |      |     |  |   |         |        |   |   |        |         |   |   |         |         |  
|----------------------------- | ----------------------------------------------------------------------------- | --------------- | ----- | ------------ | - | -------- | - | ---------- | - | ------------ | ------ | ----------- |  | ------------- | -- | -------- |  | ------ | ------ | ------ | - | - | ---- | --- |  | - | ------- | ------ | - | - | ------ | ------- | - | - | ------- | ------- | -
|                              |                                                                               |                 |       |              |   |          |   | Note       |   |              |        |             |  |              
|                              |                                                                               | Preferred Stock |       | Common Stock |   | Deferred |   | Receivable |   | Additional   |        |             |  | Total        
|                              |                                                                               |                 |       |              |   | Stock    |   | from       |   | Paid-In      |        | Retained    |  | Stockholders
|                              |                                                                               | Shares          |       | Amount       |   | Shares   |   | Amount     |   | Compensation |        | Stockholder |  | Capital       |    | Earnings |  | Equity
|                              |                                                                               |                 |       |              |   |          |   |            |   |              |        |             |  |               |    |          |  |       
|Balance at September 30, 1998 |                                                                               |                 | 6,000 |              |   | $        | 6 |            |   |              | 483    |             |  | $             |   |          |  | $      |       |        |   | $ | (100 | )   |  | $ | 2,995   |        |   | $ | 4,051  |         |   | $ | 6,952   |        
|                              | Conversion of convertible preferred stock to
	common stock                    |                 |       | (6,000       | ) |          |   | (6         | ) |              |        | 6,000       |  |               |    | 6        |  |        |        |       |   |   |      |    |  |   |         |       |   |   |        |        |   |   |         |        |  
|                              | Issuance of common stock upon initial public
	offering, net of issuance costs |                 |       |             |   |          |   |           |   |              |        | 1,900       |  |               |    | 2        |  |        |        |       |   |   |      |    |  |   |         | 58,534 |   |   |        |        |   |   |         | 58,536  |  
|                              | Payment on note receivable from stockholder                                   |                 |       |             |   |          |   |           |   |              |        |            |  |               |    |         |  |        |        |       |   |   |      | 100 |  |   |         |       |   |   |        |        |   |   |         | 100     |  
|                              | Issuance of common stock upon exercise of options                             |                 |       |             |   |          |   |           |   |              |        | 304         |  |               |    | 1        |  |        |        |       |   |   |      |    |  |   |         | 372    |   |   |        |        |   |   |         | 373     |  
|                              | Deferred stock compensation                                                   |                 |       |             |   |          |   |           |   |              |        |            |  |               |    |         |  |        |        | (239   | ) |   |      |    |  |   |         | 239    |   |   |        |        |   |   |         |        |  
|                              | Amortization of deferred stock compensation                                   |                 |       |             |   |          |   |           |   |              |        |            |  |               |    |         |  |        |        | 31     |   |   |      |    |  |   |         |       |   |   |        |        |   |   |         | 31      |  
|                              | Issuance of common stock under employee stock
	purchase plan                  |                 |       |             |   |          |   |           |   |              |        | 12          |  |               |    |         |  |        |        |       |   |   |      |    |  |   |         | 176    |   |   |        |        |   |   |         | 176     |  
|                              | Net income                                                                    |                 |       |             |   |          |   |           |   |              |        |            |  |               |    |         |  |        |        |       |   |   |      |    |  |   |         |       |   |   |        | 9,881   |   |   |         | 9,881   |  
|                              |                                                                               |                 |       |              |   |          |   |            |   |              |        |             |  |               |    |          |  |        |        |        |   |   |      |     |  |   |         |        |   |   |        |         |   |   |         |        
|Balance at September 30, 1999 |                                                                               |                 |      |              |   |          |  |            |   |              | 8,699  |             |  |               | 9  |          |  |        | (208   | )      |   |   |     |     |  |   | 62,316  |        |   |   | 13,932 |         |   |   | 76,049  |        
|                              | Issuance of common stock upon exercise of options                             |                 |       |             |   |          |   |           |   |              |        | 315         |  |               |    |         |  |        |        |       |   |   |      |    |  |   |         | 1,611  |   |   |        |        |   |   |         | 1,611   |  
|                              | Purchase of Apptitude, Inc.                                                   |                 |       |             |   |          |   |           |   |              |        | 972         |  |               |    | 1        |  |        |        |       |   |   |      |    |  |   |         | 38,328 |   |   |        |        |   |   |         | 38,329  |  
|                              | Deferred stock compensation                                                   |                 |       |             |   |          |   |           |   |              |        |            |  |               |    |         |  |        |        | (8,620 | ) |   |      |    |  |   |         | 8,620  |   |   |        |        |   |   |         |        |  
|                              | Amortization of deferred stock compensation                                   |                 |       |             |   |          |   |           |   |              |        |            |  |               |    |         |  |        |        | 1,368  |   |   |      |    |  |   |         |       |   |   |        |        |   |   |         | 1,368   |  
|                              | Issuance of common stock under employee stock
	purchase plan                  |                 |       |             |   |          |   |           |   |              |        | 21          |  |               |    |         |  |        |        |       |   |   |      |    |  |   |         | 625    |   |   |        |        |   |   |         | 625     |  
|                              | Tax benefit from employee stock plans                                         |                 |       |             |   |          |   |           |   |              |        |            |  |               |    |         |  |        |        |       |   |   |      |    |  |   |         | 5,211  |   |   |        |        |   |   |         | 5,211   |  
|                              | Net income                                                                    |                 |       |             |   |          |   |           |   |              |        |            |  |               |    |         |  |        |        |       |   |   |      |    |  |   |         |       |   |   |        | 998     |   |   |         | 998     |  
|                              |                                                                               |                 |       |              |   |          |   |            |   |              |        |             |  |               |    |          |  |        |        |        |   |   |      |     |  |   |         |        |   |   |        |         |   |   |         |        
|Balance at September 30, 2000 |                                                                               |                 |      |              |   |          |  |            |   |              | 10,007 |             |  |               | 10 |          |  |        | (7,460 | )      |   |   |     |     |  |   | 116,711 |        |   |   | 14,930 |         |   |   | 124,191 |        
|                              | Issuance of common stock upon exercise of options                             |                 |       |             |   |          |   |           |   |              |        | 134         |  |               |    |         |  |        |        |       |   |   |      |    |  |   |         | 421    |   |   |        |        |   |   |         | 421     |  
|                              | Amortization of deferred stock compensation                                   |                 |       |             |   |          |   |           |   |              |        |            |  |               |    |         |  |        |        | 3,865  |   |   |      |    |  |   |         |       |   |   |        |        |   |   |         | 3,865   |  
|                              | Reduction in deferred stock compensation due to
	terminations                 |                 |       |             |   |          |   |           |   |              |        |            |  |               |    |         |  |        |        | 177    |   |   |      |    |  |   |         | (177   | ) |   |        |        |   |   |         |        |  
|                              | Issuance of common stock under employee stock
	purchase plan                  |                 |       |             |   |          |   |           |   |              |        | 43          |  |               |    |         |  |        |        |       |   |   |      |    |  |   |         | 845    |   |   |        |        |   |   |         | 845     |  
|                              | Tax benefit from employee stock plans                                         |                 |       |             |   |          |   |           |   |              |        |            |  |               |    |         |  |        |        |       |   |   |      |    |  |   |         | 3,870  |   |   |        |        |   |   |         | 3,870   |  
|                              | Net loss                                                                      |                 |       |             |   |          |   |           |   |              |        |            |  |               |    |         |  |        |        |       |   |   |      |    |  |   |         |       |   |   |        | (13,357 | ) |   |         | (13,357 | )
|                              |                                                                               |                 |       |              |   |          |   |            |   |              |        |             |  |               |    |          |  |        |        |        |   |   |      |     |  |   |         |        |   |   |        |         |   |   |         |        
|Balance at September 30, 2001 |                                                                               |                 |      |              |   | $        |  |            |   |              | 10,184 |             |  | $             | 10 |          |  | $      | (3,418 | )      |   | $ |     |     |  | $ | 121,670 |        |   | $ | 1,573  |         |   | $ | 119,835 |        
|                              |                                                                               |                 |       |              |   |          |   |            |   |              |        |             |  |               |    |          |  |        |        |        |   |   |      |     |  |   |         |        |   |   |        |         |   |   |         |        

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

33



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##### Table of Contents



HIFN, INC.






CONSOLIDATED STATEMENTS OF CASH
FLOWS


(in thousands)


|                                                      |                                                                                           |                                                          |                                                      |         |        |        |         |         |        |         |        |        |        |        | 
|----------------------------------------------------- | ----------------------------------------------------------------------------------------- | -------------------------------------------------------- | ---------------------------------------------------- | ------- | ------ | ------ | ------- | ------- | ------ | ------- | ------ | ------ | ------ | ------ | 
|                                                      |                                                                                           |                                                         
|                                                      |                                                                                           | Year Ended September 30,                                
|                                                      |                                                                                           |                                                         
|                                                      |                                                                                           | 2001                                                     |                                                      | 2000    |        | 1999  
|                                                      |                                                                                           |                                                          |                                                      |         |        |       
|Cash flows from operating activities:                 |                                                                                           |                                                          |                                                      |         |        |        |         |         |        |         |        |       
|                                                      | Net income (loss)                                                                         |                                                          | $                                                    | (13,357 | )      |        | $       | 998     |        |         | $      | 9,881  |       
|                                                      | Adjustments to reconcile net income
	(loss) to net cash provided by operating activities: |                                                          |                                                      |         |        |        |         |         |        |         |        |        |       
|                                                      |                                                                                           | Depreciation and amortization of property and
	equipment |                                                      |         | 1,674  |        |         |         | 1,116  |         |        |        | 813    |       
|                                                      |                                                                                           | Amortization of intangibles and goodwill                 |                                                      |         | 11,093 |        |         |         | 1,619  |         |        |        | 113    |       
|                                                      |                                                                                           | Amortization of deferred stock compensation              |                                                      |         | 3,865  |        |         |         | 1,368  |         |        |        | 31     |       
|                                                      |                                                                                           | Change in allowance for doubtful accounts                |                                                      |         | (198   | )      |         |         | 118    |         |        |        | 51     |       
|                                                      |                                                                                           | Purchased in-process research and development            |                                                      |         |       |        |         |         | 4,085  |         |        |        |       |       
|                                                      |                                                                                           | Deferred income taxes                                    |                                                      |         | (3,508 | )      |         |         | 1,930  |         |        |        | (828   | )     
|                                                      |                                                                                           | Tax benefit from employee stock plans                    |                                                      |         | 3,870  |        |         |         | 5,211  |         |        |        |       |       
|                                                      |                                                                                           | Loss on disposal of fixed assets                         |                                                      |         |       |        |         |         |       |         |        |        | 236    |       
|                                                      |                                                                                           | Gain on sale of marketable securities                    |                                                      |         |       |        |         |         |       |         |        |        | (27    | )     
|                                                      | Changes in assets and liabilities:                                                        |                                                          |                                                      |         |        |        |         |         |        |         |        |        |       
|                                                      |                                                                                           | Accounts receivable                                      |                                                      |         | 2,132  |        |         |         | 1,301  |         |        |        | (3,646 | )     
|                                                      |                                                                                           | Inventory                                                |                                                      |         | (330   | )      |         |         | 288    |         |        |        | (1,403 | )     
|                                                      |                                                                                           | Prepaid expenses and other current assets                |                                                      |         | (2,377 | )      |         |         | (476   | )       |        |        | (386   | )     
|                                                      |                                                                                           | Other assets                                             |                                                      |         | (1,324 | )      |         |         | (18    | )       |        |        | (130   | )     
|                                                      |                                                                                           | Accounts payable                                         |                                                      |         | (410   | )      |         |         | 352    |         |        |        | 851    |       
|                                                      |                                                                                           | Income taxes payable                                     |                                                      |         |       |        |         |         | (1,300 | )       |        |        | 1,300  |       
|                                                      |                                                                                           | Accrued expenses and other current liabilities           |                                                      |         | 122    |        |         |         | (1,666 | )       |        |        | 2,179  |       
|                                                      |                                                                                           |                                                          |                                                      |         |        |        |         |         |        |         |        |       
|                                                      |                                                                                           |                                                          | Net cash provided by operating activities            |         |        | 1,252  |         |         |        | 14,926  |        |        |        | 9,035  | 
|                                                      |                                                                                           |                                                          |                                                      |         |        |        |         |         |        |         |        |       
|Cash flows from investing activities:                 |                                                                                           |                                                          |                                                      |         |        |        |         |         |        |         |        |       
|                                                      | Net sales (purchases) of short-term
	investments                                          |                                                          |                                                      | (5,024  | )      |        |         | (5,127  | )      |         |        | 6,000  |       
|                                                      | Acquisition of Apptitude, net of cash and cash
	equivalents                               |                                                          |                                                      |        |        |        |         | (19,484 | )      |         |        |       |       
|                                                      | Purchase of intellectual property                                                         |                                                          |                                                      |        |        |        |         | (1,049  | )      |         |        |       |       
|                                                      | Purchases of property and equipment                                                       |                                                          |                                                      | (2,517  | )      |        |         | (1,790  | )      |         |        | (1,710 | )     
|                                                      |                                                                                           |                                                          |                                                      |         |        |        |         |         |        |         |        |       
|                                                      |                                                                                           |                                                          | Net cash provided by (used in) investing
	activities |         |        | (7,541 | )       |         |        | (27,450 | )      |        |        | 4,290  | 
|                                                      |                                                                                           |                                                          |                                                      |         |        |        |         |         |        |         |        |       
|Cash flows from financing activities:                 |                                                                                           |                                                          |                                                      |         |        |        |         |         |        |         |        |       
|                                                      | Proceeds from issuance of common stock, net                                               |                                                          |                                                      | 1,266   |        |        |         | 2,236   |        |         |        | 59,085 |       
|                                                      | Payment on line of credit and capital lease
	obligations                                  |                                                          |                                                      | (65     | )      |        |         | (110    | )      |         |        |       |       
|                                                      | Payment on note payable to related party                                                  |                                                          |                                                      |        |        |        |         |        |        |         |        | (5,000 | )     
|                                                      | Payment on note receivable from stockholder                                               |                                                          |                                                      |        |        |        |         |        |        |         |        | 100    |       
|                                                      | Transfer of funds to related party, net                                                   |                                                          |                                                      |        |        |        |         |        |        |         |        | (1,508 | )     
|                                                      |                                                                                           |                                                          |                                                      |         |        |        |         |         |        |         |        |       
|                                                      |                                                                                           |                                                          | Net cash provided by financing activities            |         |        | 1,201  |         |         |        | 2,126   |        |        |        | 52,677 | 
|                                                      |                                                                                           |                                                          |                                                      |         |        |        |         |         |        |         |        |       
|Net increase (decrease) in cash and cash
	equivalents |                                                                                           |                                                          | (5,088                                               | )       |        |        | (10,398 | )       |        |         | 66,002 |       
|Cash and cash equivalents at beginning of period      |                                                                                           |                                                          | 59,688                                               |         |        |        | 70,086  |         |        |         | 4,084  |       
|                                                      |                                                                                           |                                                          |                                                      |         |        |        |         |         |        |         |        |       
|Cash and cash equivalents at end of period            |                                                                                           | $                                                        | 54,600                                               |         |        | $      | 59,688  |         |        | $       | 70,086 |       
|                                                      |                                                                                           |                                                          |                                                      |         |        |        |         |         |        |         |        |       
|Supplemental cash flow information (Note 6)           |                                                                                           |                                                          |                                                      |         |        |        |         |         |        |         |        |       

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

34



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##### Table of Contents



HIFN, INC.






NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


Note 1  The Company

hi/fn, inc. (the Company or
Hifn) is a flow classification and network security
specialist company supplying most major network equipment
vendors with patented technology to improve network packet
processing. The Company designs, develops and markets
high-performance, multi-protocol packet processors 
semiconductor devices and software. The Companys products
are used in networking and storage equipment such as routers,
remote access concentrators, switches, broadband access
equipment, network interface cards, firewalls and back-up
storage devices. Operations and revenues to date have been
generated primarily from sales in the United States.

On March 25, 1999, the Company completed its
initial public offering, raising approximately
$49.2 million, net of offering expenses, followed by an
additional $9.3 million when the Companys
underwriters exercised their option to purchase additional
shares of the Companys Common Stock on April 19, 1999.

Note 2  Summary of Significant
Accounting Policies



| |                      
| | ---------------------
| | Basis of Presentation

The consolidated financial statements include the
accounts of the Company and its subsidiary, Apptitude
Acquisition Corporation. All significant intercompany accounts
and transactions have been eliminated. The preparation of
financial statements in conformity with generally accepted
accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and reported
amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.



| |                          
| | -------------------------
| | Cash and Cash Equivalents

The Company considers all highly liquid
investments purchased with an original maturity of three months
or less to be cash equivalents. These investments consist of
money-market funds and commercial paper, which are readily
convertible to cash and are stated at cost, which approximates
market.



| |                       
| | ----------------------
| | Short-Term Investments

The Companys short-term investments consist
of funds on deposit with liquid asset managers that were
invested principally in municipal bonds. The carrying amount of
these investments approximated fair value due to the short
maturities or demand nature of the investments. At
September 30, 2001, all short-term investments were
classified as available-for-sale and carried at fair value.
Unrealized gains or losses at September 30, 2001 were not
material.



| |                             
| | ----------------------------
| | Concentration of Credit Risk

Financial instruments, which potentially subject
the Company to credit risk, consist principally of cash and cash
equivalents and trade accounts receivable. The Company places
its temporary cash investments in money market funds and
commercial paper with high credit quality financial institutions.

Substantially all of the Companys customers
are original equipment manufacturers (OEMs) or the
manufacturing subcontractors of OEMs, which results in
concentrated credit risk with respect to the Companys
trade receivables. At September 30, 2001 and 2000 one
customer accounted for 75% and 30%, respectively, of the total
accounts receivable balance. At September 30, 2000, another
customer accounted for 28% of the total accounts receivable
balance. Management believes that its credit policies
substantially mitigate such concentrated credit risk. Bad debt
expenses were not significant in fiscal 2001, 2000 and 1999.

35



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##### Table of Contents



HIFN, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)



| |                                     
| | ------------------------------------
| | Fair Value of Financial
	Instruments

The Companys financial instruments,
including cash, cash equivalents, short-term investments,
accounts receivable, accounts payable and capital lease
obligations are carried at cost, which approximates their fair
value because of the short-term maturity of these instruments.
The Company does not hold or issue financial instruments for
trading purposes.



| |          
| | ---------
| | Inventory

Inventory is stated at the lower of cost
(determined on a first-in, first-out cost method) or market. The
Company provides for obsolete, slow moving or excess inventories
in the period when obsolescence or inventory in excess of
expected demand is first identified. Inventories are comprised
solely of finished goods, which are manufactured by third party
foundries for resale by the Company.



| |                  
| | -----------------
| | Long-Lived Assets

The Company reviews long-lived assets for
impairment whenever events or changes in circumstances indicate
that the carrying amounts of long-lived assets may not be
recoverable. The Company assesses the impairment of its
long-lived assets based on estimates of future cash flows,
undiscounted and without interest charges, expected to result
from the use of those assets and their eventual disposition. If
the sum of the future cash flows is less than the carrying
amounts of those assets, the Company recognizes an impairment
loss based on the excess of the carrying amounts over the fair
value of such assets.



| |                       
| | ----------------------
| | Property and Equipment

Property and equipment are stated at cost.
Depreciation is computed using the straight-line method with the
estimated useful lives of the assets ranging from three to five
years. Amortization of leasehold improvements is computed using
the straight-line method over the shorter of the remaining lease
term or the estimated useful life of the related improvements.
Repair and maintenance costs are expensed as incurred.



| |                                          
| | -----------------------------------------
| | Goodwill and Purchased Intangible
	Assets

Goodwill and purchased intangible assets are
carried at cost less accumulated amortization. Amortization is
computed using the straight-line method over the economic lives
of the respective assets, generally two to five years.



| |                    
| | -------------------
| | Revenue Recognition

The Company derives revenue from the sale of
processors and software license fees. Customers comprise
primarily of OEMs and, to a lesser extent, distributors.

Revenue from the sale of processors is recognized
upon shipment when persuasive evidence of an arrangement exists,
the price is fixed or determined and collection of the resulting
receivables is reasonably assured. Revenue from processors sold
to distributors under agreements allowing certain rights of
return is deferred until the distributor sells the product to a
third party.

Software license revenue is generally recognized
when a signed agreement or other persuasive evidence of an
arrangement exists, vendor-specific objective evidence exists to
allocate a portion of the total fee to any undelivered elements
of the arrangement, the software has been shipped or
electronically delivered, the license fee is fixed and
determinable and collection of resulting receivables is
reasonably assured. Returns, including exchange rights for
unsold licenses, are estimated based on historical experience
and are deferred until the return rights expires.

36



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##### Table of Contents



HIFN, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

The Company receives software license revenue
from OEMs that sublicense Company software shipped with their
products. The OEM sublicense agreements are generally valid for
a term of one year and include rights to unspecified future
upgrades and maintenance during the term of the agreement.
License fees under these agreements are recognized ratably over
the term of the agreement. Revenues from sublicenses sold in
excess of the specified volume in the original license agreement
are recognized when they are reported as sold to end customers
by the OEM.

In instances where significant customization and
modifications are made to software delivered to customers, the
Company accounts for such arrangements in accordance with
Statement of Position 81-1, Accounting for
Performance and Construction Type Contracts.



| |                                
| | -------------------------------
| | Research and Development
	Costs

Expenditures for research and development are
charged to expense as incurred. Under Statement of Financial
Accounting Standards No. 86, Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise
Marketed, certain software development costs are
capitalized after technological feasibility has been
established. Development costs incurred in the period from
achievement of technological feasibility, which the Company
defines as the establishment of a working model, until the
general availability of such software to customers, has been
short, and therefore software development costs qualifying for
capitalization have been insignificant. Accordingly, the Company
has not capitalized any software development costs as of
September 30, 2001 or 2000.



| |                         
| | ------------------------
| | Stock-Based Compensation

The Company accounts for its employee and stock
option plans and employee stock purchase plans in accordance
with provisions of the Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to
Employees (APB 25) and Financial
Accounting Standards Board Interpretation No. 44,
Accounting for Certain Transactions Involving Stock
Compensation. Additional pro forma disclosures as required
under Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for
Stock-Based Compensation (SFAS 123) are
presented in Note 8.



| |             
| | ------------
| | Income Taxes

Deferred tax assets and liabilities are
recognized for the expected tax consequences of temporary
differences between the income tax bases of assets and
liabilities and the amounts reported for financial reporting
purposes for all periods presented (see Note 9). Valuation
allowances are established when necessary to reduce deferred tax
assets when management estimates, based on available objective
evidence, that it is more likely than not that the benefit will
not be realizable as a deferred tax asset.



| |                     
| | --------------------
| | Comprehensive Income

Effective October 1, 1998, the Company
adopted the provision of SFAS No. 130, Reporting
Comprehensive Income (SFAS 130). SFAS 130
establishes standards for reporting comprehensive income and its
components in financial statements. Comprehensive income, as
defined, includes all changes in equity during a period from
non-owner sources. To date, the Company has not had any
components of other comprehensive income.



| |                                  
| | ---------------------------------
| | Recent Accounting
	Pronouncements

In June 2001, the FASB issued SFAS No. 141,
Business Combinations (SFAS 141)
and SFAS No. 142, Goodwill and Other Intangible
Assets (SFAS 142). SFAS 141 will
apply to all business combinations that the Company enters into
after June 30, 2001, and eliminates the pooling-of-interests

37



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##### Table of Contents



HIFN, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

method of accounting. SFAS 142 is effective
for fiscal years beginning after December 15, 2001. Under
the new Statements, goodwill and intangible assets deemed to
have indefinite lives will no longer be amortized but will be
subject to annual impairment tests in accordance with the
Statements. Other intangible assets will continue to be
amortized over their useful lives. In addition, the Statements
include provisions upon adoption for the reclassification of
certain existing recognized intangibles as goodwill,
reassessment of the useful lives of existing recognized
intangibles, reclassification of certain intangibles out of
previously reported goodwill and the testing for impairment of
existing goodwill and other intangibles. The Company is required
to adopt these Statements for accounting for goodwill and other
intangible assets beginning October 1, 2002 at which time
the Company will cease amortization of goodwill. Goodwill
amortization expense aggregated $9.4 million and
$1.3 million is fiscal 2001 and 2000, respectively. As of
September 30, 2001, the Company has not determined the
effect the adoption of these Statements and intends to continue
to perform an impairment analysis of the remaining goodwill
through the end of fiscal year 2002. Upon adoption on
October 1, 2002, the Company will perform the required
impairment tests of goodwill and has not yet determined the
effect of these tests on the earnings and financial position of
the Company.

In August 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS 144).
SFAS 144 supersedes SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, and provides further guidance regarding
the accounting and disclosure of long-lived assets. The Company
is required to adopt SFAS 144 effective October 1,
2002, and has not yet determined the impact, if any, of adoption.

Note 3  Acquisitions

In August 2000, the Company acquired all the
outstanding stock of Apptitude, Inc. (Apptitude), a
software development company, for $20 million in cash and
1.2 million shares of the Companys Common Stock in a
transaction accounted for under the purchase method. All
outstanding options of Apptitude were also assumed by the
Company. The results of operations of Apptitude have been
included in the consolidated statement of operations of the
Company from the date of acquisition. The purchase price of the
acquisition of $58.5 million, which included $127,000 in
estimated acquisition related costs, was used to acquire the net
assets of Apptitude. The purchase price was allocated to assets
acquired and liabilities assumed based on their estimated fair
value and an independent appraisal for all other identifiable
assets. The excess of the purchase price over the net tangible
and intangible assets acquired and liabilities assumed has been
allocated to goodwill. The allocation of the purchase price was
as follows (in thousands):

|                                                               |  |   |        |  
|-------------------------------------------------------------- |  | - | ------ | -
|Property and equipment                                         |  | $ | 205    |  
|Current and other assets                                       |  |   | 1,081  |  
|Deferred tax asset                                             |  |   | 3,905  |  
|Liabilities assumed                                            |  |   | (2,404 | )
|Goodwill                                                       |  |   | 47,121 |  
|Purchased in-process research and development                  |  |   | 4,085  |  
|Acquired developed and core technology, workforce
	and patents |  |   | 4,462  |  
|                                                               |  |   |        |  
|                                                               |  | $ | 58,455 |  
|                                                               |  |   |        |  

The goodwill, acquired developed and core
technology, workforce and patents are recorded on the balance
sheet as intangibles and other assets and are being amortized on
a straight-line basis over periods ranging from two to five
years. The amount allocated to purchased in-process research and
development was determined based on established valuation
methods and was expensed at the time of the acquisition as a
one-time charge because technological feasibility had not been
established.

38



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##### Table of Contents



HIFN, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

The Company also provided for the issuance of
456,612 additional shares of its Common Stock relating to stock
options granted to Apptitude employees for retention purposes.
Deferred stock compensation of $8.3 million related to
options assumed by the Company was recognized during the fourth
quarter of fiscal 2000 and is amortized over a period of
6 months to four years.

The following table represents unaudited proforma
information assuming that the acquisition took place at the
beginning of the periods presented (in thousands, except per
share data):

|                                 |  |                     |        |      |  |   |        |  
|-------------------------------- |  | ------------------- | ------ | ---- |  | - | ------ | -
|                                 |  |                    
|                                 |  | Twelve Months Ended
|                                 |  | September 30,      
|                                 |  |                    
|                                 |  | 2000                |        | 1999
|                                 |  |                     |        |     
|                                 |  |                    
|                                 |  | (Unaudited)        
|Net sales                        |  | $                   | 46,836 |      |  | $ | 46,604 |  
|Net loss                         |  |                     | (8,579 | )    |  |   | (8,168 | )
|Basic and diluted loss per share |  | $                   | (0.95  | )    |  | $ | (0.90  | )

Note 4  Balance Sheet Details

|                                                |                                    |               |        |         |   |   |        |        |  
|----------------------------------------------- | ---------------------------------- | ------------- | ------ | ------- | - | - | ------ | ------ | -
|                                                |                                    |              
|                                                |                                    | September 30,
|                                                |                                    |              
|                                                |                                    | 2001          |        | 2000   
|                                                |                                    |               |        |        
|Prepaid expenses and other current assets:      |                                    |               |        |         |   |   |        |       
|                                                | Prepaid income taxes               |               | $      | 2,420   |   |   | $      | 458    |  
|                                                | Other                              |               |        | 1,178   |   |   |        | 763    |  
|                                                |                                    |               |        |         |   |   |        |       
|                                                |                                    | $             | 3,598  |         |   | $ | 1,221  |       
|                                                |                                    |               |        |         |   |   |        |       
|Property and equipment:                         |                                    |               |        |         |   |   |        |       
|                                                | Computer equipment                 |               | $      | 4,833   |   |   | $      | 3,399  |  
|                                                | Furniture and fixtures             |               |        | 1,158   |   |   |        | 718    |  
|                                                | Leasehold improvements             |               |        | 1,188   |   |   |        | 724    |  
|                                                | Office equipment                   |               |        | 580     |   |   |        | 401    |  
|                                                |                                    |               |        |         |   |   |        |       
|                                                |                                    |               | 7,759  |         |   |   | 5,242  |       
|                                                | Less: accumulated depreciation     |               |        | (3,648  | ) |   |        | (1,974 | )
|                                                |                                    |               |        |         |   |   |        |       
|                                                |                                    | $             | 4,111  |         |   | $ | 3,268  |       
|                                                |                                    |               |        |         |   |   |        |       
|Intangible assets:                              |                                    |               |        |         |   |   |        |       
|                                                | Developed and core technology      |               | $      | 3,263   |   |   | $      | 3,263  |  
|                                                | Workforce                          |               |        | 599     |   |   |        | 599    |  
|                                                | Patents                            |               |        | 600     |   |   |        | 600    |  
|                                                | Goodwill                           |               |        | 47,121  |   |   |        | 47,121 |  
|                                                | Purchased intellectual property    |               |        | 1,049   |   |   |        | 1,049  |  
|                                                |                                    |               |        |         |   |   |        |       
|                                                |                                    |               | 52,632 |         |   |   | 52,632 |       
|                                                | Less: accumulated amortization     |               |        | (12,583 | ) |   |        | (1,507 | )
|                                                |                                    |               |        |         |   |   |        |       
|                                                |                                    | $             | 40,049 |         |   | $ | 51,125 |       
|                                                |                                    |               |        |         |   |   |        |       
|Accrued expenses and other current liabilities: |                                    |               |        |         |   |   |        |       
|                                                | Deferred revenue                   |               | $      | 2,433   |   |   | $      | 1,646  |  
|                                                | Compensation and employee benefits |               |        | 1,005   |   |   |        | 1,760  |  
|                                                | Accrued royalties                  |               |        |        |   |   |        | 124    |  
|                                                | Other                              |               |        | 1,133   |   |   |        | 917    |  
|                                                |                                    |               |        |         |   |   |        |       
|                                                |                                    | $             | 4,571  |         |   | $ | 4,447  |       
|                                                |                                    |               |        |         |   |   |        |       

39



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##### Table of Contents



HIFN, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Note 5  Net Income (Loss) Per
Share

Basic earnings per share is computed by dividing
net income (loss) available to common stockholders by the
weighted average number of common shares outstanding during the
period. Weighted average shares exclude shares subject to
repurchase by the Company. Diluted earnings per share gives
effect to all dilutive potential common shares outstanding
during the period including stock options, using the treasury
method, and convertible preferred stock, using the if-converted
method. In computing diluted earnings per share, the average
stock price for the period is used in determining the number of
shares assumed to be purchased from the exercise of stock
options.

Following is a reconciliation of the calculation
of basic and diluted earnings per share for the periods
presented below (in thousands, except for per share amounts):

|                                                       |                                  |                          |         |        |   |      |     |        |  |   |       |       | 
|------------------------------------------------------ | -------------------------------- | ------------------------ | ------- | ------ | - | ---- | --- | ------ |  | - | ----- | ----- | 
|                                                       |                                  |                         
|                                                       |                                  | Year Ended September 30,
|                                                       |                                  |                         
|                                                       |                                  | 2001                     |         | 2000   |   | 1999
|                                                       |                                  |                          |         |        |   |     
|Net income (loss)                                      |                                  | $                        | (13,357 | )      |   | $    | 998 |        |  | $ | 9,881 |      
|                                                       |                                  |                          |         |        |   |      |     |        |  |   |       |      
|Shares used in computing net income (loss) per
	share: |                                  |                          |         |        |   |      |     |        |  |   |       |      
|                                                       | Basic                            |                          |         | 10,141 |   |      |     | 9,017  |  |   |       | 8,115 | 
|                                                       | Dilutive effect of stock options |                          |         |       |   |      |     | 1,038  |  |   |       | 1,180 | 
|                                                       |                                  |                          |         |        |   |      |     |        |  |   |       |      
|                                                       | Diluted                          |                          |         | 10,141 |   |      |     | 10,055 |  |   |       | 9,295 | 
|                                                       |                                  |                          |         |        |   |      |     |        |  |   |       |      
|Net income (loss) per share:                           |                                  |                          |         |        |   |      |     |        |  |   |       |      
|                                                       | Basic                            |                          | $       | (1.32  | ) |      | $   | 0.11   |  |   | $     | 1.22  | 
|                                                       | Diluted                          |                          | $       | (1.32  | ) |      | $   | 0.10   |  |   | $     | 1.06  | 

Options to purchase 3,521,688 and 789,249 shares
of Common Stock at a weighted average exercise prices of $26.77
and $54.32 per share were outstanding at September 30, 2001
and 2000, respectively, but were not included in the computation
of diluted net loss per share because their impact would be
anti-dilutive. Anti-dilutive options outstanding at
September 30, 1999 were not material.

Note 6  Supplemental Cash Flow
Information

(amounts in thousands)

|                                                           |                                                            |                          |   |       |  |      |   |        |  |  |   |       | 
|---------------------------------------------------------- | ---------------------------------------------------------- | ------------------------ | - | ----- |  | ---- | - | ------ |  |  | - | ----- | 
|                                                           |                                                            |                         
|                                                           |                                                            | Year Ended September 30,
|                                                           |                                                            |                         
|                                                           |                                                            | 2001                     |   | 2000  |  | 1999
|                                                           |                                                            |                          |   |       |  |     
|Supplemental cash flow information:                        |                                                            |                          |   |       |  |      |   |        |  |  |   |      
|                                                           | Cash paid during the year for interest                     |                          | $ | 15    |  |      | $ | 5      |  |  | $ | 214   | 
|                                                           | Cash paid for during the year for income taxes             |                          |   | 1,424 |  |      |   |       |  |  |   | 5,528 | 
|                                                           | Cash received during the year from refund of
	income taxes |                          |   | 1,375 |  |      |   |       |  |  |   |      | 
|                                                          
|Supplemental non-cash investing and financing
	activities: |                                                            |                          |   |       |  |      |   |        |  |  |   |      
|                                                           | Conversion of convertible preferred stock to
	common stock |                          |   |      |  |      |   |       |  |  |   | 2,620 | 
|                                                           | Common stock issued upon acquisition of Apptitude          |                          |   |      |  |      |   | 38,456 |  |  |   |      | 

Note 7  Convertible Preferred
Stock

During 1998, the Company issued 6,000,000 shares
of voting, participating, convertible Series A Preferred
Stock (Series A Preferred Stock) and
100 shares of the Companys Common Stock to Stac in
exchange for the net assets contributed. The transfer was
recorded at the historical net book value of the

40



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HIFN, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

transferred assets and liabilities of $2,620,000.
Each share of Series A Preferred Stock was converted by
Stac into one share of the Companys Common Stock in
connection with the spin-off.

Note 8  Stock Options and Employee
Benefits



| |                           
| | --------------------------
| | Employee Stock Option Plan

The 1996 Equity Incentive Plan (the 1996
Plan) had 3,949,900 shares of the Companys Common
Stock reserved for issuance pursuant to nonqualified and
incentive stock options and restricted stock awards. The 1996
Plan is administered by the Board of Directors of the Company or
its designees and provides generally that nonqualified stock
options and restricted stock may be awarded at a price not less
than 85% of the fair market value of the stock at the date of
the award. Incentive stock options must be awarded at a price
not less than 100% of the fair market value of the stock at the
date of the award, or 110% of fair market value for awards to
more than 10% stockholders. Options granted under the 1996 Plan
may have a term of up to 10 years. Options typically vest
at a rate of 25% of the total grant per year over a four-year
period. However, the Company may, at its discretion, implement a
different vesting schedule with respect to any new stock option
grant. As a result of early exercise features as provided for by
the 1996 Plan, options granted are immediately exercisable
subject to the Companys repurchase rights which expire as
options vest.

In connection with the acquisition of Apptitude,
the Company assumed the stock option plan of Apptitude (the
Apptitude Plan). A total of 687,142 shares of the
Companys Common Stock were reserved for issuance under the
Apptitude Plan. Options assumed under the Apptitude Plan that
are subsequently cancelled are not eligible for reissuance and,
accordingly, have no effect on the number of options available
for grant.

In February 2001, the Board of Directors of the
Company adopted the 2001 NonStatutory Stock Option Plan (the
2001 Plan) whereby 1,500,000 shares of the
Companys Common Stock were reserved for issuance pursuant
to nonqualified stock options. The 2001 Plan is administered by
the Companys Board of Directors or its designees and
provides generally that nonqualified stock options granted under
the 2001 Plan may have a maximum life of 10 years. The
terms and conditions of each stock option grant under the 2001
Plan are determined by a committee of the Board of Directors and
are set forth in agreements between the recipient and the
Company. As of September 30, 2001, options to purchase an
aggregate of 706,000 shares were granted under the 2001 Plan.

41



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##### Table of Contents



HIFN, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

The following table summarizes the activity and
related information under 1996 Plan, the Apptitude Plan and the
2001 Plan:

|                              |                              |                   |           |             |   |                     |           |           |   |   |       |       | 
|----------------------------- | ---------------------------- | ----------------- | --------- | ----------- | - | ------------------- | --------- | --------- | - | - | ----- | ----- | 
|                              |                              |                   |           |             |   | Weighted Average   
|                              |                              |                   |           |             |   | Exercise Price (per
|                              |                              | Options Available |           | Options     |   | share) of Options  
|                              |                              | for Grant         |           | Outstanding |   | Outstanding        
|                              |                              |                   |           |             |   |                    
|Balance at September 30, 1998 |                              |                   | 666,699   |             |   |                     | 875,187   |           |   | $ | 1.46  |      
|                              | Additional shares authorized |                   |           | 1,100,000   |   |                     |           |           |   |   |       |       | 
|                              | Options granted              |                   |           | (1,158,875  | ) |                     |           | 1,158,875 |   |   |       | 26.50 | 
|                              | Options exercised            |                   |           |            |   |                     |           | (304,230  | ) |   |       | 1.23  | 
|                              | Options cancelled            |                   |           | 71,438      |   |                     |           | (71,438   | ) |   |       | 11.13 | 
|                              |                              |                   |           |             |   |                     |           |           |   |   |       |      
|Balance at September 30, 1999 |                              |                   | 679,262   |             |   |                     | 1,658,394 |           |   |   | 18.57 |      
|                              | Additional shares authorized |                   |           | 425,000     |   |                     |           |           |   |   |       |       | 
|                              | Additional shares reserved   |                   |           | 687,142     |   |                     |           |           |   |   |       | 25.22 | 
|                              | Options granted              |                   |           | (2,017,142  | ) |                     |           | 2,017,142 |   |   |       | 36.96 | 
|                              | Options exercised            |                   |           |            |   |                     |           | (314,248  | ) |   |       | 5.12  | 
|                              | Options cancelled            |                   |           | 603,681     |   |                     |           | (609,536  | ) |   |       | 32.28 | 
|                              |                              |                   |           |             |   |                     |           |           |   |   |       |      
|Balance at September 30, 2000 |                              |                   | 377,943   |             |   |                     | 2,751,752 |           |   |   | 30.55 |      
|                              | Additional shares authorized |                   |           | 1,975,000   |   |                     |           |           |   |   |       |       | 
|                              | Options granted              |                   |           | (1,583,423  | ) |                     |           | 1,583,423 |   |   |       | 19.90 | 
|                              | Options exercised            |                   |           |            |   |                     |           | (134,322  | ) |   |       | 3.14  | 
|                              | Options cancelled            |                   |           | 664,394     |   |                     |           | (679,165  | ) |   |       | 30.74 | 
|                              |                              |                   |           |             |   |                     |           |           |   |   |       |      
|Balance at September 30, 2001 |                              |                   | 1,433,914 |             |   |                     | 3,521,688 |           |   |   | 26.77 |      
|                              |                              |                   |           |             |   |                     |           |           |   |   |       |      

The following table summarizes options
outstanding at September 30, 2001 and related weighted
average exercise prices and lives as follows:

|                         |  |                                     |           |                                |  |                  |      |          |  |                  |        |  |  |  |           |  |  |   |        | 
|------------------------ |  | ----------------------------------- | --------- | ------------------------------ |  | ---------------- | ---- | -------- |  | ---------------- | ------ |  |  |  | --------- |  |  | - | ------ | 
|                         |  |                                     |           |                                |  |                 
|                         |  | Options Outstanding and Exercisable |           |                               
|                         |  |                                     |           | Options Vested and Exercisable
|                         |  |                                     |           | Weighted Average               |  |                  |      |         
|                         |  |                                     |           | Remaining Life                 |  | Weighted Average |      |          |  | Weighted Average
|Range of Exercise Prices |  | Quantity                            |           | (in years)                     |  | Exercise Price   |      | Quantity |  | Exercise Price  
|                         |  |                                     |           |                                |  |                  |      |          |  |                 
|$  0.60 - $  5.00        |  |                                     | 562,126   |                                |  |                  | 6.73 |          |  | $                | 3.21   |  |  |  | 460,349   |  |  | $ | 3.02   | 
|$  5.74 - $ 12.10        |  |                                     | 201,561   |                                |  |                  | 9.32 |          |  | $                | 10.47  |  |  |  | 47,701    |  |  | $ | 6.91   | 
|$ 13.93 - $ 14.69        |  |                                     | 661,000   |                                |  |                  | 9.45 |          |  | $                | 14.62  |  |  |  |          |  |  | $ |       | 
|$ 14.81 - $ 16.90        |  |                                     | 389,700   |                                |  |                  | 9.54 |          |  | $                | 16.09  |  |  |  |          |  |  | $ |       | 
|$ 17.02 - $ 29.69        |  |                                     | 299,687   |                                |  |                  | 8.76 |          |  | $                | 27.99  |  |  |  | 84,224    |  |  | $ | 29.52  | 
|$ 31.44 - $ 33.50        |  |                                     | 373,711   |                                |  |                  | 8.88 |          |  | $                | 33.30  |  |  |  | 92,795    |  |  | $ | 33.45  | 
|$ 33.75 - $ 42.56        |  |                                     | 378,186   |                                |  |                  | 8.11 |          |  | $                | 40.69  |  |  |  | 175,417   |  |  | $ | 40.34  | 
|$ 43.25 - $ 45.81        |  |                                     | 349,250   |                                |  |                  | 9.04 |          |  | $                | 43.56  |  |  |  | 99,251    |  |  | $ | 43.60  | 
|$ 46.44 - $137.63        |  |                                     | 297,593   |                                |  |                  | 8.47 |          |  | $                | 72.98  |  |  |  | 111,927   |  |  | $ | 76.95  | 
|$142.50 - $142.50        |  |                                     | 8,874     |                                |  |                  | 7.94 |          |  | $                | 142.50 |  |  |  | 5,873     |  |  | $ | 142.50 | 
|                         |  |                                     |           |                                |  |                  |      |          |  |                  |        |  |  |  |           |  |  |   |        | 
|$  0.60 - $142.50        |  |                                     | 3,521,688 |                                |  |                  | 8.63 |          |  | $                | 26.77  |  |  |  | 1,077,537 |  |  | $ | 26.14  | 
|                         |  |                                     |           |                                |  |                  |      |          |  |                  |        |  |  |  |           |  |  |   |        | 

The weighted average fair value of options
granted during 2001, 2000 and 1999 were $17.79, $41.17 and
$15.71, respectively. The fair value of each stock award is
estimated on the date of grant using the Black-

42



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##### Table of Contents



HIFN, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

Scholes model with the following assumptions used
for grants during 2001, 2000 and 1999: annual dividend yield of
0.0% for all periods; risk-free annual interest rates of 4.66%,
6.27% and 5.05%, respectively; a weighted average expected stock
award term of 4.0 years for all periods; and an expected
volatility factor of 70%, 80% and 80%, respectively.



| |                             
| | ----------------------------
| | Employee Stock Purchase Plan

In December 1998, the Company adopted an employee
stock purchase plan (the ESPP) through which
qualified employees of the Company may participate in stock
ownership of the Company. Shares of Common Stock reserved for
the ESPP total 400,000. The price of shares purchased under the
ESPP is the lower of 85% of the fair market value of the shares
on the first day of each semi-annual offering period, or 85% of
the fair market value of the shares on the last day of the
semi-annual offering period. Pursuant to the ESPP, 43,175 and
21,050 shares were issued during fiscal 2001 and 2000,
respectively, at weighted average prices of $19.58 and $29.70
per share, respectively.

The fair value of shares issued during fiscal
2001, 2000 and 1999 were $29.58, $16.03 and $10.66,
respectively. The fair value of each stock award is estimated on
the date of grant using the Black-Scholes model with the
following assumptions used for grants during fiscal 2001, 2000
and 1999: annual dividend yield of 0.0% for all periods;
risk-free annual interest rates of 4.66%, 5.99% and 5.05%;
weighted average expected stock award term of 0.50,
0.50 years and 0.41 years; and an expected volatility
factor of 70%, 80% and 80%.

For the fiscal years ended September 30,
2001 and 2001, the Company received $3.9 million and
$5.2 million, respectively, in tax benefit from the
exercise of non-qualified options and on the disposition of
stock acquired with incentive stock options or through the
employee stock purchase plan.



| |                            
| | ---------------------------
| | Deferred Stock Compensation

In connection with certain employee stock option
grants made during the fiscal year ended September 30,
2000, the Company recognized deferred stock compensation of
$303,000 (excluding the acquisition of Apptitude). Additionally,
during fiscal 2000, the Company recognized deferred stock
compensation of $8.3 million in connection with the
acquisition of Apptitude as disclosed in Note 3. Also in
connection with certain employee stock option grants made during
the fiscal year ended September 30, 1999, the Company
recognized deferred stock compensation of $239,000. Deferred
stock compensation is being amortized on the straight-line basis
over the vesting period of the related options, ranging from six
months to four years. Amortization of deferred stock
compensation of $3.9 million and $1.4 million was
recorded during the fiscal years ended September 30, 2001
and 2000, respectively. Future compensation charges are subject
to reduction for any employee who terminates prior to expiration
of such employees option vesting period.

43



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##### Table of Contents



HIFN, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)



| |                       
| | ----------------------
| | Fair Value Disclosures

Had compensation expense for the Companys
stock-based compensation plans been determined based on the
method prescribed by SFAS 123, the Companys net
income (loss) and net income (loss) per share would have been as
follows (in thousands, except per share information):

|                             |             |                          |   |         |       |      |   |        |       |   |   |       |      | 
|---------------------------- | ----------- | ------------------------ | - | ------- | ----- | ---- | - | ------ | ----- | - | - | ----- | ---- | 
|                             |             |                         
|                             |             | Year Ended September 30,
|                             |             |                         
|                             |             | 2001                     |   | 2000    |       | 1999
|                             |             |                          |   |         |       |     
|Net income (loss):           |             |                          |   |         |       |      |   |        |       |   |   |      
|                             | As reported |                          | $ | (13,357 | )     |      | $ | 998    |       |   | $ | 9,881 |     
|                             | Pro forma   |                          |   | (23,613 | )     |      |   | (5,915 | )     |   |   | 8,375 |     
|Net income (loss) per share: |             |                          |   |         |       |      |   |        |       |   |   |      
|                             | As reported |                          |   |         |       |      |   |        |       |   |   |       |     
|                             |             | Basic                    |   | $       | (1.32 | )    |   | $      | 0.11  |   |   | $     | 1.22 | 
|                             |             | Diluted                  |   |         | (1.32 | )    |   |        | 0.10  |   |   |       | 1.06 | 
|                             | Pro forma   |                          |   |         |       |      |   |        |       |   |   |       |     
|                             |             | Basic                    |   |         | (2.33 | )    |   |        | (0.66 | ) |   |       | 1.03 | 
|                             |             | Diluted                  |   |         | (2.33 | )    |   |        | (0.66 | ) |   |       | 0.90 | 



| |                     
| | --------------------
| | Employee 401(k) Plan

The Company has a plan to provide retirement
benefits for eligible employees, known as the Hifn 401(k) Plan
(the Plan). As allowed under Section 401(k) of the
Internal Revenue Code, the Plan provides tax deferred salary
reductions for eligible employees. Participants in the Plan may
make salary deferrals of up to 25% of the eligible annual
salary, subject to the maximum limitation allowed by the
Internal Revenue Code.

Note 9  Income Taxes

The Company accounts for income taxes under an
asset and liability approach that requires recognition of
deferred tax assets and liabilities for the expected future tax
consequences of events that have been recognized in the
Companys financial statements or income tax returns.

The components of the provision for income taxes
were as follows (in thousands):

|                                          |         |                          |        |        |   |      |       |       |  |   |       |       |  
|----------------------------------------- | ------- | ------------------------ | ------ | ------ | - | ---- | ----- | ----- |  | - | ----- | ----- | -
|                                          |         |                         
|                                          |         | Year Ended September 30,
|                                          |         |                         
|                                          |         | 2001                     |        | 2000   |   | 1999
|                                          |         |                          |        |        |   |     
|Current:                                  |         |                          |        |        |   |      |       |       |  |   |       |      
|                                          | Federal |                          | $      | 1,475  |   |      | $     | 2,130 |  |   | $     | 5,784 |  
|                                          | State   |                          |        | 310    |   |      |       | 168   |  |   |       | 1,631 |  
|                                          | Foreign |                          |        | 63     |   |      |       | 108   |  |   |       |      |  
|                                          |         |                          |        |        |   |      |       |       |  |   |       |      
|                                          |         |                          | 1,848  |        |   |      | 2,406 |       |  |   | 7,415 |      
|                                          |         |                          |        |        |   |      |       |       |  |   |       |      
|Deferred:                                 |         |                          |        |        |   |      |       |       |  |   |       |      
|                                          | Federal |                          |        | (2,393 | ) |      |       | 1,641 |  |   |       | (707  | )
|                                          | State   |                          |        | (1,115 | ) |      |       | 334   |  |   |       | (121  | )
|                                          |         |                          |        |        |   |      |       |       |  |   |       |      
|                                          |         |                          | (3,508 | )      |   |      | 1,975 |       |  |   | (828  | )    
|                                          |         |                          |        |        |   |      |       |       |  |   |       |      
|Provision for (benefit from) income taxes |         | $                        | (1,660 | )      |   | $    | 4,381 |       |  | $ | 6,587 |      
|                                          |         |                          |        |        |   |      |       |       |  |   |       |      

44



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##### Table of Contents



HIFN, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

The components of deferred taxes are as follows
(in thousands):

|                                         |  |               |       |      |  |   |        |  
|---------------------------------------- |  | ------------- | ----- | ---- |  | - | ------ | -
|                                         |  |              
|                                         |  | September 30,
|                                         |  |              
|                                         |  | 2001          |       | 2000
|                                         |  |               |       |     
|Net operating loss                       |  | $             | 2,727 |      |  | $ | 4,142  |  
|Property and equipment                   |  |               | 352   |      |  |   | (4     | )
|Inventory valuation accounts             |  |               | 1,690 |      |  |   | 152    |  
|Sales and receivables reserves           |  |               | 116   |      |  |   | 17     |  
|Accruals and reserves                    |  |               | 1,618 |      |  |   | 371    |  
|Research and development credit          |  |               | 1,334 |      |  |   | 656    |  
|Amortization of intangibles and goodwill |  |               | (577  | )    |  |   | (1,699 | )
|Other                                    |  |               |      |      |  |   | 117    |  
|                                         |  |               |       |      |  |   |        |  
|                                         |  | $             | 7,260 |      |  | $ | 3,752  |  
|                                         |  |               |       |      |  |   |        |  

As of September 30, 2001, the Company had
approximately $7.9 million of federal and
$400,000 million of state net operating loss carryforwards
available to offset future taxable income. The Company also had
approximately $600,000 of federal and $700,000 million of
state research and development tax credit carryforwards. These
tax attributes expire in varying amounts between 2004 and 2020.
Because of cumulative ownership changes, these tax attributes
are subject to an annual utilization limitation under
Sections 382 and 383 of the Internal Revenue Code. At
September 30, 2001, the Company may utilize approximately
$4.5 million of the net operating losses annually to offset
future taxable income. After the net operating losses are
utilized, the Company may utilize approximately
$1.5 million of the credits annually to offset income tax.

The provision for income taxes differs from the
amount computed by applying the U.S. statutory federal rate to
income before extraordinary item as a result of the following
(in thousands):

|                                                     |  |                          |        |      |  |      |       |  |  |   |       | 
|---------------------------------------------------- |  | ------------------------ | ------ | ---- |  | ---- | ----- |  |  | - | ----- | 
|                                                     |  |                         
|                                                     |  | Year Ended September 30,
|                                                     |  |                         
|                                                     |  | 2001                     |        | 2000 |  | 1999
|                                                     |  |                          |        |      |  |     
|Tax at statutory rate                                |  | $                        | (5,084 | )    |  | $    | 1,829 |  |  | $ | 5,599 | 
|State taxes                                          |  |                          | (805   | )    |  |      | 539   |  |  |   | 1,031 | 
|Nondeductible intangible amortization and
	write-off |  |                          | 3,204  |      |  |      | 1,905 |  |  |   |      | 
|Stock compensation                                   |  |                          | 1,310  |      |  |      | 465   |  |  |   | 11    | 
|Other                                                |  |                          | (285   | )    |  |      | 357   |  |  |   | 54    | 
|                                                     |  |                          |        |      |  |      |       |  |  |   |       | 
|                                                     |  | $                        | (1,660 | )    |  | $    | 4,381 |  |  | $ | 6,587 | 
|                                                     |  |                          |        |      |  |      |       |  |  |   |       | 

Note 10  Segment
Reporting

Effective October 1, 1998, the Company
adopted the provisions of SFAS No. 131, Disclosures
about Segments of an Enterprise and Related Information
(SFAS 131). SFAS 131 supersedes SFAS
No. 14, Financial Reporting for Segments of a
Business Enterprise, replacing the Industry
Segment approach with the Management approach.
The management approach designates the internal organization
that is used by management for making operating decisions and
assessing performance as the source of the Companys
reportable segments. SFAS 131 also requires disclosures
about products and services, geographic areas, and major
customers. The Company operates in one industry segment
comprising the design, development and marketing of
high-performance, multi-protocol packet processors 
semiconductor devices. The Company operates in one geographic
area, being the U.S. The adoption of SFAS 131 did not
affect the results of the Companys operations or financial
position.

45



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HIFN, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)



| |                
| | ---------------
| | Major Customers

Revenues from one customer, through its
manufacturing subcontractor, represented 36%, 36% and 45% of the
Companys net revenues for the fiscal years ended
September 30, 2001, 2000 and 1999, respectively. Revenues
from another customer, through its manufacturing subcontractor,
represented 17%, 35% and 38% of the Companys net revenues
for fiscal years ended September 30, 2001, 2000 and 1999,
respectively.

Note 11  Commitments



| |       
| | ------
| | Leases

The Company occupies its facilities under several
non-cancelable operating leases that expire at various dates
through December 2007, and which contain renewal options. Future
minimum lease payments for operating leases are as follows (in
thousands):

|                                 |                              |           |       |        | 
|-------------------------------- | ---------------------------- | --------- | ----- | ------ | 
|                                 |                              | Operating
|                                 |                              | Leases   
|                                 |                              |          
|Fiscal year ending September 30, |                              |           |       |       
|2002                             |                              | $         | 3,070 |       
|2003                             |                              |           | 3,058 |       
|2004                             |                              |           | 2,685 |       
|2005                             |                              |           | 2,146 |       
|Thereafter                       |                              |           | 2,005 |       
|                                 |                              |           |       |       
|                                 | Total minimum lease payments |           | $     | 12,964 | 
|                                 |                              |           |       |       

Total rental expense under operating leases was
$2.9 million, $1.5 million and $1.1 million for
fiscal years ended September 30, 2001, 2000 and 1999,
respectively. The Company recorded sub-lease income of $274,000
and $439,000 during fiscal years ended September 30, 2001
and 2000, respectively.

Note 12  Litigation

In October and November 1999, six purported class
action complaints were filed in the United States District Court
for the Northern District of California against the Company and
certain of its officers and directors. These complaints were
consolidated into In re Hi/fn Sec. Litig., No. 99-04531 SI.
The consolidated complaint was filed on behalf of a class of
purchasers of the Companys stock during the period
July 26, 1999 through October 7, 1999 (the class
period). The complaint seeks unspecified money damages and
alleges that the Company and certain of its officers and
directors violated federal securities laws in connection with
various public statements made by the Company and certain of its
officers and directors during the class period. In August 2000,
the Court dismissed the complaint as to all defendants, other
than Raymond J. Farnham and the Company. Mr. Farnham
and the Company answered the complaint in September 2000.
Discovery has commenced. A trial date has been tentatively
scheduled for October 2002. The Company believes that the
allegations contained in the complaint are without merit and
intends to defend the action vigorously. Due to the nature of
the allegations, management cannot estimate the possible loss,
if any, or range of loss that may ultimately be incurred in
connection with the allegations. However, based on the facts
currently known, management does not believe that these matters
will have a material adverse effect on the financial position of
the Company.

In December 2000, a former employee of the
Company filed suit against the Company and one of its former
employees alleging wrongful termination, invasion of privacy,
violation of Fair Employment and Housing Act, based on sexual
harassment, sexual discrimination and retaliation, defamation,
breach of the covenant of good faith and fair dealing,
negligence and conversion. On April 16, 2001, the Company
filed an

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HIFN, INC.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

answer to the complaint, generally denying its
allegations and asserting various affirmative defenses.
Discovery has recently commenced, and no trial date has been
set. The parties have voluntarily agreed to participate in a
mediation session in an effort to amicably resolve the matter.
In the event the matter is not amicably resolved, the Company
intends to defend the matter vigorously. While the ultimate
outcome of this matter cannot be determined at this time,
management does not believe that this matter will have a
material adverse effect on the financial position of the Company.

Note 13  Supplementary Financial
Data



| |                                   
| | ----------------------------------
| | Quarterly Information
	(unaudited)

(in thousands, except per share
amounts)


|                                     |  |                    |        |         |  |          |        |             |  |   |        |   |  |   |        |  
|------------------------------------ |  | ------------------ | ------ | ------- |  | -------- | ------ | ----------- |  | - | ------ | - |  | - | ------ | -
|                                     |  |                   
|                                     |  | Three Months Ended
|                                     |  |                   
|                                     |  | September 30       |        | June 30 |  | March 31 |        | December 31
|                                     |  |                    |        |         |  |          |        |            
|Fiscal 2001:                         |  |                    |        |         |  |          |        |             |  |   |        |   |  |   |        |  
|Net revenues                         |  | $                  | 6,492  |         |  | $        | 6,575  |             |  | $ | 13,828 |   |  | $ | 16,109 |  
|Total costs and operating expenses   |  |                    | 12,461 |         |  |          | 16,830 |             |  |   | 15,678 |   |  |   | 15,688 |  
|Net income (loss)                    |  |                    | (4,395 | )       |  |          | (6,884 | )           |  |   | (1,722 | ) |  |   | (356   | )
|Net income (loss) per share, basic   |  |                    | (0.43  | )       |  |          | (0.68  | )           |  |   | (0.17  | ) |  |   | (0.04  | )
|Net income (loss) per share, diluted |  |                    | (0.43  | )       |  |          | (0.68  | )           |  |   | (0.17  | ) |  |   | (0.04  | )
|Fiscal 2000:                         |  |                    |        |         |  |          |        |             |  |   |        |   |  |   |        |  
|Net revenues                         |  | $                  | 14,335 |         |  | $        | 12,319 |             |  | $ | 8,130  |   |  | $ | 10,054 |  
|Total costs and operating expenses   |  |                    | 16,998 |         |  |          | 9,525  |             |  |   | 9,115  |   |  |   | 7,966  |  
|Net income (loss)                    |  |                    | (3,195 | )       |  |          | 2,330  |             |  |   | 30     |   |  |   | 1,833  |  
|Net income (loss) per share, basic   |  |                    | (0.33  | )       |  |          | 0.26   |             |  |   | 0.00   |   |  |   | 0.21   |  
|Net income (loss) per share, diluted |  |                    | (0.33  | )       |  |          | 0.24   |             |  |   | 0.00   |   |  |   | 0.19   |  

Note 14  Subsequent Event



| |                                 
| | --------------------------------
| | Voluntary Stock Option
	Exchange

On November 15, 2001, the Company extended a
voluntary stock option exchange offer to its eligible employees.
Participating employees have the opportunity to cancel options
granted since January 29, 1999 through January 8, 2001
in exchange for new options to be granted on a specified future
date, which will be at least six months and one day following
the date when the Company cancels the old options.

The number of shares subject to the new options
will depend on the date of grant of shares subject to the old
options. For every old option to buy three shares of common
stock that was granted between January 29, 1999 and
January 14, 2000, a new option will be granted to buy two
shares of common stock. For every old option to buy four shares
of common stock that was granted between January 15, 2000
and January 8, 2001, a new option will be granted to buy
three shares of common stock. Participating employees will be
required to cancel every old stock option granted during the six
month period prior to implementation of the option exchange
program and will be entitled to receive an equal number of
shares subject to the new options.

The new options will have the same vesting
schedule as the old options and will be immediately exercisable
as to vested shares when granted. The exercise price of these
new options will be set at the fair market value of the
Companys common stock as of the new grant date, which is
currently expected to occur on June 18, 2002. The exchange
offer began on November 15, 2001, and is expected to end on
December 17, 2001. Employees holding a total of
approximately 1,708,380 shares subject to the old options are
eligible to participate in this exchange. The current exercise
prices of those eligible options range from $5.74 to $142.50.

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Item 9.     Changes
in and Disagreements With Accountants on Accounting and
Financial Disclosure

Not applicable.




PART III




Item 10.     Directors
and Executive Officers of the Registrant

Certain information required by this item is
incorporated by reference from the Companys Proxy
Statement for the fiscal year ended September 30, 2001. The
following table sets forth certain information concerning the
executive officers and directors of Hifn as of
September 30, 2001:

|                          |  |     |    |          |  |                                                                  
|------------------------- |  | --- | -- | -------- |  | -----------------------------------------------------------------
|Name                      |  | Age |    | Position
|                          |  |     |    |         
|Christopher G. Kenber     |  |     | 57 |          |  | Chairman, President and Chief Executive Officer                  
|William R. Walker         |  |     | 60 |          |  | Vice President of Finance, Chief Financial
	Officer and Secretary
|Russell S. Dietz          |  |     | 38 |          |  | Vice President and Chief Technical Officer                       
|Douglas J. Felder         |  |     | 60 |          |  | Vice President of Sales                                          
|Douglas K. Makishima      |  |     | 34 |          |  | Vice President of Marketing                                      
|John E. Metzger           |  |     | 43 |          |  | Vice President of Engineering                                    
|Douglas L. Whiting, Ph.D. |  |     | 45 |          |  | Chief Scientist and Director                                     
|Raymond J. Farnham        |  |     | 54 |          |  | Director                                                         
|Taher Elgamal(1)(2)       |  |     | 46 |          |  | Director                                                         
|Robert W. Johnson(1)      |  |     | 52 |          |  | Director                                                         
|Albert E. Sisto(1)(2)     |  |     | 52 |          |  | Director                                                         



---



|    |                                      
|--- | -------------------------------------
|(1) | Member of the Audit Committee.       
|   
|(2) | Member of the Compensation Committee.

Christopher G. Kenberis Hifns Chairman, President and
Chief Executive Officer. He joined Hifn from Apptitude, Inc.
where he was President and Chief Executive Officer since 1998.
Mr. Kenber has held a number of CEO positions with
companies in the high-technology area as well as consulting to
several venture capital funds. Prior to his tenure with
Apptitude, he was the CEO of Aonix Inc., a developer of
object-oriented software tools. Previously, Mr. Kenber was
Executive Vice President of Ingres Corporation, and a Senior
Vice President at MICOM Systems. Mr. Kenber spent
17 years at IBM Corporation, where he held multiple sales
and marketing positions. Mr. Kenber has a degree in
Psychology and Philosophy from Oxford University.

William R. Walkerhas served as Vice President, Chief
Financial Officer and Secretary of Hifn since November 1997. He
was Hifns Acting Chief Executive Officer and Acting
President from July 1998 through October 1998. From 1996 to
1997, Mr. Walker was Vice President, Chief Financial
Officer and Secretary at MMC Networks, Inc., a networking
company. From 1984 to 1996, Mr. Walker held the position of
Senior Vice President and Chief Financial Officer at Zilog,
Inc., a semiconductor supplier. Mr. Walker has a B.S. in
Economics from the University of Wisconsin and an M.B.A. from
the University of Maryland, and is a certified public accountant.

Russell S. Dietz,Vice President and Chief Technology Officer, is the primary
architect of the MeterFlow and MeterWorks technology. Prior to
joining Hifn, Mr. Dietz was Chief Technical Officer of
Apptitude, Inc. Mr. Dietz was a founding partner of
Technically Elite Concepts, which merged into Technically Elite,
Inc. in 1995. From 1984 through 1988, Mr. Dietz held
various technical positions at Magnavox Electronic Systems and
Digital Equipment Corporation. Mr. Dietz is an active member of
the Internet and Engineering Task Force (IETF).

Douglas J. Felder,Vice President of Sales, was previously Vice President of
Business Development at Apptitude, Inc. From 1994 to 1997,
Mr. Felder was Vice President of Business Development at
NetLabs, a

48



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##### Table of Contents



provider of network management software, and then
at Seagate Software after NetLabs was acquired by Seagate
Technology. Mr. Felder also held Vice President positions
in sales and marketing at Chi Systems, a software consulting
group, and Zitel Corporation, which purchased Intels
Memory Systems Division. For the seven years prior Mr. Felder
was President and owner of Data Communications and Systems
Group, a distributor of data communications equipment.
Mr. Felder received his B.S. in Business Administration
from San Jose State University.


Douglas K.
Makishima,Vice President of
Marketing, has over 15 years of experience in the
networking, communications and PC industries. From 1999 to 2001,
Mr. Makishima was Vice President of Marketing and Sales for
ParkerVision, a wireless communications integrated circuit
(IC) company. From 1990 through 1999, he held senior
management positions with Nortel Networks, Bay Networks, AMD and
Adaptec, where he managed the marketing and development of
advanced networking and storage products. During his engineering
career, Mr. Makishima developed patented storage IC
technology. Mr. Makishima has actively participated on
several IEEE and ANSI committees focused on networking,
communications and storage standards. He is currently a voting
member of the IEEE 802.11 Wireless Networking standards
committee. He holds a B.S. in Electrical Engineering from the
University of California, and an M.B.A. from Santa Clara
University.

John E. Metzger,Vice President of Engineering, has extensive engineering
experience as well as a focus in the network management field.
Prior to joining Hifn, Mr. Metzger was Vice President of
Engineering of Apptitude, Inc. Mr. Metzger was the co-founder,
CTO and Vice President of Software Decisions, Inc., which was
purchased by Ungermann-Bass (UB) in 1985. After seven years
with UB, he successfully contributed to the restart of Network
Computing, Inc., as Vice President of Development, which was
acquired by Seagate Software in 1995. He brings in-depth
knowledge of product architecture, development, integration and
strategic direction. Mr. Metzger holds a B.S. in Computer
and Communication Science from the University of Michigan.

Douglas L. Whiting, Ph.D.,is a founder of the Company and is
currently Chief Scientist. He previously served as Chief
Technology Officer of the Company from August 1998 through
August 2000 and as a director of the Company since November
1996. He also has served as Vice President of Technology of Stac
from 1985 to 1998 and has served as a director of Stac since
1983. He was President of Stac from 1984 to 1986.
Dr. Whiting received his B.S. in Applied Science and M.S.
and Ph.D. in Computer Science from the California Institute of
Technology.

Raymond J. Farnhamhas served a director of Hifn since
October 1998 and served as Chairman of the Board of Directors
and President and Chief Executive Officer until August 2000.
From 1996 through 1998, he served as Executive Vice President of
Integrated Device Technology, Inc., a supplier of
microprocessor, logic and memory integrated circuits to
communication and computer customers worldwide. Mr. Farnham
was President and Chief Executive Officer of OPTi, a fabless
semiconductor company from 1994 through 1995. From 1972 through
1993, he had numerous management responsibilities at National
Semiconductor Corp., with his final position being President of
the Communication and Computing Group from 1991 through 1993. He
received a B.S. in Electrical Engineering from Pennsylvania
State University.

Taher Elgamal, Ph.D.has served as a director of Hifn since
December 1998. He has also served as president of
Kroll-OGara since January 1999. Dr. Elgamal is the
founder and Chairman of Securify, a private company providing
assessments of companies Internet security efforts and a
subsidiary of Kroll-OGara. He served as Chairman and Chief
Executive Officer of Securify from March 1998 to January 1999.
From 1995 to 1998, Dr. Elgamal held the position of Chief
Scientist of Netscape Communications Corp., a provider of
Internet software and services, where he pioneered Internet
security technologies such as SSL, the standard for web
security. From 1991 to 1993, he served as Director of
Engineering at RSA Data Security, Inc., a provider of encryption
technology and a subsidiary of Security Dynamics Technologies,
Inc., where he produced the RSA cryptographic toolkits, the
industry standards for developers of security-enabled
applications and systems. Dr. Elgamal received a Ph.D. from
Stanford University.

Robert W. Johnsonhas been a director of Hifn since
December 1998. He has worked in the venture capital industry
since 1980, and has acted as an independent investor since 1988.
He currently serves as

49



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##### Table of Contents



director of Previo and ViaSat, Inc.,
publicly-held companies that manufacture satellite-based
communications systems and data management and system recovery
software. Mr. Johnson holds B.S. and M.S. degrees in Electrical
Engineering from Stanford University and M.B.A. and D.B.A.
degrees from Harvard Business School.


Albert E. Sistohas
served as a director of Hifn since December 1998. Since June
1999 he has been President and Chief Executive Officer of
Phoenix Technology, a provider of Internet platform-enabling
software where he also currently serves as Chairman. From
November 1997 to June 1999, he was Chief Operating Officer of
RSA Data Security, Inc., a provider of encryption technology and
a subsidiary of Security Dynamics Technologies, Inc. From
September 1994 to October 1997, Mr. Sisto was Chairman,
President and CEO of Documagix, a software developer of document
imaging software. Mr. Sisto is a director of Insignia
Solutions plc, efax.com, inSilicon and Tekgraf, Inc., all
publicly traded technology companies. Mr. Sisto holds a
B.E. degree from the Stevens Institute of Technology.




Item 11.     Executive
Compensation

The information required by this item is
incorporated by reference from Hifns Proxy Statement for
the fiscal year ended September 30, 2001 which we will file
with the Securities and Exchange Commission within 120 days
after the end of the fiscal year covered by this report.




Item 12.     Security
Ownership of Certain Beneficial Owners and
Management

The information required by this item is
incorporated by reference from Hifns Proxy Statement for
the fiscal year ended September 30, 2001.




Item 13.     Certain
Relationships and Related Transactions

The information required by this item is
incorporated by reference from Hifns Proxy Statement for
the fiscal year ended September 30, 2001.

50



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##### Table of Contents






PART IV




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

(a) The following documents are filed as a
part of this Report:



| |                                                             
| | ------------------------------------------------------------
| | 1.     Financial
	Statements See Item 8 above.             
|
| | 2.     Financial
	Statement Schedule See Item 14(d)
	below.
|
| | 3.     Exhibits                                             

|        |          |         |  |                                                                                                                                             
|------- | -------- | ------- |  | --------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |          |        
|Number  |          | Exhibit
|        |          |        
|        | 3.1*     |         |  | Form of Third Amended and Restated Certificate of
	Incorporation of hi/fn, inc.                                                             
|        | 3.2*     |         |  | Amended and Restated Bylaws of hi/fn, inc.                                                                                                  
|        | 10.1*    |         |  | Amended and Restated 1996 Equity Incentive Plan
	of hi/fn, inc.                                                                             
|        | 10.2*    |         |  | Assignment, Assumption and License Agreement
	dated as of November 21, 1996 between Stac, Inc. and hi/fn,
	inc.                             
|        | 10.3*    |         |  | Cross License Agreement dated as of
	November 21, 1996 between Stac, Inc. and hi/fn, inc.                                                   
|        | 10.4*    |         |  | Form of Distribution Agreement.                                                                                                             
|        | 10.5*    |         |  | Form of Employee Benefits and Other Matters
	Allocation Agreement.                                                                          
|        | 10.6*    |         |  | Form of Tax Allocation and Indemnity Agreement.                                                                                             
|        | 10.7*    |         |  | Form of Transitional Services Agreement.                                                                                                    
|        | 10.8*    |         |  | Form of Indemnification Agreement.                                                                                                          
|        | 10.9*    |         |  | Agreement dated as of April 1, 1994 between
	International Business Machines Corporation and Stac, Inc.
	(Program Patent License Agreement).
|        | 10.10*   |         |  | Agreement dated as of April 1, 1994 between
	International Business Machines Corporation and Stac, Inc.
	(Cross License Agreement).         
|        | 10.11*   |         |  | License Agreement dated as of June 20, 1994
	between Microsoft Corporation and Stac, Inc.                                                   
|        | 10.12*   |         |  | License Agreement dated as of February 16,
	1996 between Microsoft Corporation and Stac, Inc.                                               
|        | 10.13*   |         |  | License Agreement dated as of December 15,
	1995 between Motorola, Inc. and Stac, Inc.                                                      
|        | 10.14*   |         |  | Agreement dated as of November 13, 1997
	between 750 University, LLC and hi/fn, inc.                                                        
|        | 10.15*   |         |  | 1998 Employee Stock Purchase Plan of hi/fn, inc.                                                                                            
|        | 10.16*   |         |  | Form of Director Change of Control Agreement.                                                                                               
|        | 10.17*   |         |  | Form of Employee Change of Control Agreement.                                                                                               
|        | 10.18*   |         |  | Promissory Note dated as of September 28,
	1998 made by hi/fn, inc. in favor of Stac, Inc.                                                  
|        | 10.19*   |         |  | Security Agreement dated as of September 28,
	1998 between Stac, Inc. and hi/fn, inc.                                                       
|        | 10.20**  |         |  | Agreement and Plan of Reorganization, dated
	May 12, 2000 between hi/fn, inc. and Apptitude, Inc. and
	amendments thereto.                  
|        | 10.21*** |         |  | Apptitude, Inc. 1995 Stock Option Plan.                                                                                                     
|        | 10.22   |         |  | Agreement dated as of October 23, 2000
	between Spieker Properties, L.P. and hi/fn, inc.                                                    
|        | 10.23   |         |  | Agreement dated as of October 24, 2000
	between Sally Spencer and hi/fn, inc.                                                               
|        | 10.24  |         |  | Agreement dated as of April 6, 2001 between
	Sally Spencer and hi/fn, inc.                                                                  
|        | 10.25 |         |  | 2001 Nonstatutory Stock Option Plan of hi/fn, inc.                                                                                          
|        | 23.1     |         |  | Consent of PricewaterhouseCoopers LLP,
	independent accountants.                                                                            
|        | 24.1     |         |  | Power of Attorney (see page 53).                                                                                                            



---



|  |                                                                                                                                                     
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------
|* | Incorporated by reference from Registrants
	Registration Statement on Form 10 (File No. 0-24765)
	filed with the SEC on August 7, 1998, as amended.

51



---



##### Table of Contents





|   |                                                                                                                                           
|-- | ------------------------------------------------------------------------------------------------------------------------------------------
|** | Incorporated by reference from the exhibits to
	Registrants Report on Form 8-K (File
	No. 0-24765) filed with the SEC on August 25, 2000.



|    |                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------
|*** | Incorporated by reference from Registrants
	Registration Statement on Form S-8 (File
	No. 333-48232) filed with the SEC on October 19, 2000.



|  |                                                                                                                              
|- | -----------------------------------------------------------------------------------------------------------------------------
| | Incorporated by reference from Registrants
	Report on Form 10-K (File No. 0-24765) filed with the
	SEC on December 26, 2000.



|   |                                                                                                                        
|-- | -----------------------------------------------------------------------------------------------------------------------
| | Incorporated by reference from Registrants
	Report on Form 10-Q (File No. 0-24765) filed with the
	SEC on May 1, 2001.



|    |                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Incorporated by reference from Registrants
	Report on Form 10-Q (File No. 0-24765) and
	Registration Statement on Form S-8 (File
	No. 333-61070) filed with the SEC on May 1, 2001 and
	May 16, 2001, respectively.

(b) Reports on Form 8-K: None.

(c) Exhibits: See Item 14(a)
above.

(d) Financial Statement Schedules

|                                             |  |  |    | 
|-------------------------------------------- |  |  | -- | 
|Schedule II  Valuation
	Qualifying Accounts |  |  | 53 | 

52



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##### Table of Contents






SCHEDULE II

HIFN, INC.

VALUATION AND QUALIFYING ACCOUNTS AND
RESERVES

For the Three Years Ended September 30,
2001


(in thousands)


|                                  |                               |            |  |            |  |            |  |            |  |            |  |     |  |  |  |      |   |  |  |     | 
|--------------------------------- | ----------------------------- | ---------- |  | ---------- |  | ---------- |  | ---------- |  | ---------- |  | --- |  |  |  | ---- | - |  |  | --- | 
|                                  |                               |            |  | Additions  |  | Additions  |  |            |  |           
|                                  |                               | Balance at |  | Charged to |  | Charged to |  |            |  | Balance at
|                                  |                               | Beginning  |  | Costs and  |  | Other      |  |            |  | End of    
|                                  |                               | of Period  |  | Expenses   |  | Accounts   |  | Deductions |  | Period    
|                                  |                               |            |  |            |  |            |  |            |  |           
|Deducted from accounts receivable |                               |            |  |            |  |            |  |            |  |            |  |     |  |  |  |      |   |  |  |    
|Allowance for doubtful accounts:  |                               |            |  |            |  |            |  |            |  |            |  |     |  |  |  |      |   |  |  |    
|                                  | Year ended September 30, 1999 |            |  | 200        |  |            |  | 75         |  |            |  |    |  |  |  | (24  | ) |  |  | 251 | 
|                                  | Year ended September 30, 2000 |            |  | 251        |  |            |  | 37         |  |            |  | 105 |  |  |  | (24  | ) |  |  | 369 | 
|                                  | Year ended September 30, 2001 |            |  | 369        |  |            |  | 309        |  |            |  |    |  |  |  | (507 | ) |  |  | 171 | 

53



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##### Table of Contents






SIGNATURES

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



| |                                                                                                
| | -----------------------------------------------------------------------------------------------
| | HI/FN, INC.                                                                                    
|
| | /s/ CHRISTOPHER G. KENBER 
	 _________________________________________ 
	 Christopher G. Kenber
| | Chairman, President and Chief Executive
	Officer                                               

Dated: December 10, 2001

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each
person whose signature appears below constitutes and appoints
Christopher G. Kenber and William R. Walker, jointly and
severally, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any
amendments to this Report on Form 10-K, and to file the
same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said
attorneys-in-fact, or his substitute or substitutes, may do or
cause to be done by virtue hereof.

Pursuant to the requirements of the Securities
Exchange Act of 1934, this Report has been signed below by the
following persons in the capacities and on December 10,
2001.

|                                                 |  |                                                                                                              
|------------------------------------------------ |  | -------------------------------------------------------------------------------------------------------------
|Signature                                        |  | Title                                                                                                        
|                                                 |  |                                                                                                              
|/s/ CHRISTOPHER G. KENBER(Christopher G. Kenber) |  | Chairman, President and Chief Executive Officer
	(Principal Executive Officer)                               
|                                                
|/s/ WILLIAM R. WALKER(William R. Walker)         |  | Vice President, Finance,
	Chief Financial Officer and Secretary
	(Principal Financial and Accounting Officer)
|                                                
|/s/ DOUGLAS L. WHITING(Douglas L. Whiting)       |  | Chief Scientist and Director                                                                                 
|                                                
|/s/ TAHER ELGAMAL(Taher Elgamal)                 |  | Director                                                                                                     
|                                                
|/s/ RAYMOND J. FARNHAM(Raymond J. Farnham)       |  | Director                                                                                                     
|                                                
|/s/ ROBERT W. JOHNSON(Robert W. Johnson)         |  | Director                                                                                                     
|                                                
|/s/ ALBERT E. SISTO(Albert E. Sisto)             |  | Director                                                                                                     

54



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##### Table of Contents






EXHIBIT INDEX

|        |       |         |  |                                                                                                                                             
|------- | ----- | ------- |  | --------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |        
|Number  |       | Exhibit
|        |       |        
|        | 3.1*  |         |  | Form of Third Amended and Restated Certificate of
	Incorporation of hi/fn, inc.                                                             
|        | 3.2*  |         |  | Amended and Restated Bylaws of hi/fn, inc.                                                                                                  
|        | 10.1* |         |  | Amended and Restated 1996 Equity Incentive Plan
	of hi/fn, inc.                                                                             
|        | 10.2* |         |  | Assignment, Assumption and License Agreement
	dated as of November 21, 1996 between Stac, Inc. and hi/fn,
	inc.                             
|        | 10.3* |         |  | Cross License Agreement dated as of
	November 21, 1996 between Stac, Inc. and hi/fn, inc.                                                   
|        | 10.4* |         |  | Form of Distribution Agreement.                                                                                                             
|        | 10.5* |         |  | Form of Employee Benefits and Other Matters
	Allocation Agreement.                                                                          
|        | 10.6* |         |  | Form of Tax Allocation and Indemnity Agreement.                                                                                             
|        | 10.7* |         |  | Form of Transitional Services Agreement.                                                                                                    
|        | 10.8* |         |  | Form of Indemnification Agreement.                                                                                                          
|        | 10.9* |         |  | Agreement dated as of April 1, 1994 between
	International Business Machines Corporation and Stac, Inc.
	(Program Patent License Agreement).
|        | 10.10 | *       |  | Agreement dated as of April 1, 1994 between
	International Business Machines Corporation and Stac, Inc.
	(Cross License Agreement).         
|        | 10.11 | *       |  | License Agreement dated as of June 20, 1994
	between Microsoft Corporation and Stac, Inc.                                                   
|        | 10.12 | *       |  | License Agreement dated as of February 16,
	1996 between Microsoft Corporation and Stac, Inc.                                               
|        | 10.13 | *       |  | License Agreement dated as of December 15,
	1995 between Motorola, Inc. and Stac, Inc.                                                      
|        | 10.14 | *       |  | Agreement dated as of November 13, 1997
	between 750 University, LLC and hi/fn, inc.                                                        
|        | 10.15 | *       |  | 1998 Employee Stock Purchase Plan of hi/fn, inc.                                                                                            
|        | 10.16 | *       |  | Form of Director Change of Control Agreement.                                                                                               
|        | 10.17 | *       |  | Form of Employee Change of Control Agreement.                                                                                               
|        | 10.18 | *       |  | Promissory Note dated as of September 28,
	1998 made by hi/fn, inc. in favor of Stac, Inc.                                                  
|        | 10.19 | *       |  | Security Agreement dated as of September 28,
	1998 between Stac, Inc. and hi/fn, inc.                                                       
|        | 10.20 | **      |  | Agreement and Plan of Reorganization, dated
	May 12, 2000 between hi/fn, inc. and Apptitude, Inc. and
	amendments thereto.                  
|        | 10.21 | ***     |  | Apptitude, Inc. 1995 Stock Option Plan.                                                                                                     
|        | 10.22 |        |  | Agreement dated as of October 23, 2000
	between Spieker Properties, L.P. and hi/fn, inc.                                                    
|        | 10.23 |        |  | Agreement dated as of October 24, 2000
	between Sally Spencer and hi/fn, inc.                                                               
|        | 10.24 |       |  | Agreement dated as of April 6, 2001 between
	Sally Spencer and hi/fn, inc.                                                                  
|        | 10.25 |      |  | 2001 Nonstatutory Stock Option Plan of hi/fn, inc.                                                                                          
|        | 23.1  |         |  | Consent of PricewaterhouseCoopers LLP,
	independent accountants.                                                                            
|        | 24.1  |         |  | Power of Attorney (see page 53).                                                                                                            



---



|    |                                                                                                                                                     
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------
|*   | Incorporated by reference from Registrants
	Registration Statement on Form 10 (File No. 0-24765)
	filed with the SEC on August 7, 1998, as amended.
|   
|**  | Incorporated by reference from the exhibits to
	Registrants Report on Form 8-K (File
	No. 0-24765) filed with the SEC on August 25, 2000.          
|   
|*** | Incorporated by reference from Registrants
	Registration Statement on Form S-8 (File
	No. 333-48232) filed with the SEC on October 19, 2000.       



|  |                                                                                                                              
|- | -----------------------------------------------------------------------------------------------------------------------------
| | Incorporated by reference from Registrants
	Report on Form 10-K (File No. 0-24765) filed with the
	SEC on December 26, 2000.

55



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##### Table of Contents





|    |                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  | Incorporated by reference from Registrants
	Report on Form 10-Q (File No. 0-24765) filed with the
	SEC on May 1, 2001.                                                                                             
|   
| | Incorporated by reference from Registrants
	Report on Form 10-Q (File No. 0-24765) and
	Registration Statement on Form S-8 (File No. 333-61070)
	filed with the SEC on May 1, 2001 and May 16, 2001,
	respectively.

56