**Table      of Contents**

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**UNITED      STATES**

**SECURITIES      AND EXCHANGE COMMISSION**

**Washington,      D.C. 20549**

**_______________**

**FORM      10-K**

** (Mark      One)**

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

**OR**

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

**_______________**

**0-24765**

**hi/fn,      inc.**

| **Delaware**                                                                  | **33-0732700**                                      |
|-------------------------------------------------------------------------------|-----------------------------------------------------|
| (State                or other jurisdiction of incorporation or organization) | (IRS                Employer Identification Number) |

**750      University Avenue, Los Gatos, California 95032**

**(408)      399-3500**

| Title                of each class                |   | Name                of each exchange on which registered |
|---------------------------------------------------|--------|----------------------------------------------------------|
| **Common                Stock, $0.001 Par Value** |   | **NASDAQ                Global Market**                  |

**None**

**_______________**

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**Table          of Contents**

**DOCUMENTS      INCORPORATED BY REFERENCE**

**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. Forward-looking statements      include our statements about business trends and future operating results      and business plans.  Many such statements can be found in the      following sections of this Report:  “Business,” Risk Factors” and“Management’s Discussion and Analysis of Financial Condition and Results of      Operations.”  Forward-looking statements often include words such as“believes,” “anticipates,” “estimates,” “expects,” “intend,” “plan,” “project,”“outlook,” ”may,” “will,” “should,” ”could,” “would,” “predict,”“potential,” “continue,” the negative of these terms and words of similar      import. Such statements are based on current expectations and are subject      to risk, uncertainties and changes in condition, significance, value and effect,      including those discussed within the section of this report entitled “Item 1A.      Risk Factors” and reports filed by hi/fn, inc. with the Securities and Exchange      Commission, specifically Forms 8-K and Form 10-Q. Such risks, uncertainties      and      changes in condition, significance, value and effect could cause our actual      results to differ significantly from those anticipated events. Although we      believe that the assumptions underlying our forward-looking statements are      reasonable, any of the assumptions could be wrong. 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.*

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**Table          of Contents**

Table      of Contents

| Part                I   |
|-------------------------|
|                    | Item                1. Business |
|                    | Item                1A. Risk Factors |
|                    | Item                1B. Unresolved Staff Comments |
|                    | 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, Related                Stockholder Matters and Issuer Purchases of Equity                Securities |
|                    | Item                6 Selected Financial Data |
|                    | Item                7. Management’s Discussion and Analysis of Financial                Condition and Results of Operations |
|                    | Item                7A. Quantitative and Qualitative Disclosure About                Market Risk |
|                    | Item                8. Financial Statements and Supplementary                Data |
|                    | REPORT              OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING              FIRM |
|                    | Item                9. Changes in and Disagreements with Accountants on                Accounting and Financial Disclosure |
|                    | Item                9A. Controls and Procedures |
|                    | Item                9B. Other Information |
| Part                III |
|                    | Item                10. Directors, Executive Officers and Corporate                Governance |
|                    | Item                11. Executive Compensation |
|                    | Item                12. Security Ownership of Certain Beneficial Owners                and Management and Related Stockholder Matters |
|                    | Item                13. Certain Relationships and Related                Transactions |
|                    | Item                14. Principal Accountant Fees and                Services |
| Part                IV  |
|                    | Item                15. Exhibits and Financial Statement                Schedules |
|                    | SIGNATURES |
|                    | INDEX                TO EXHIBITS |
|                    | EXHIBIT                10.24 |
|                    | EXHIBIT                21.1 |
|                    | EXHIBIT                23.1 |
|                    | EXHIBIT                31.1 |
|                    | EXHIBIT                31.2 |
|                    | EXHIBIT                32.1 |
|                    | EXHIBIT                32.2 |

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|   |                                                                                                          | Page |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------|

**P A R T       I**

| Item                  1.  | Business                                                                                                                                                                                            | 1  |
|---------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----|
| Item                  1A. | Risk                  Factors                                                                                                                                                                       | 11 |
| Item                  1B. | Unresolved                  Staff                  Comments                                                                                                                                         | 20 |
| Item                  2.  | Properties                                                                                                                                                                                          | 20 |
| Item                  3.  | Legal                  Proceedings                                                                                                                                                                  | 20 |
| Item                  4.  | Submission                  of Matters to a Vote of Security                  Holders                                                                                                               | 22 |

**P        A R T  I I**

| Item                  5.  | Market                  for Registrant’s Common Equity, Related Stockholder Matters and Issuer                  Purchases of Equity Securities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 23 |
|---------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----|
| Item                  6.  | Selected                  Financial                  Data                                                                                                                                                  | 25 |
| Item                  7.  | Management’s                  Discussion and Analysis of Financial Condition and Results of                  Operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 26 |
| Item                  7A. | Quantitative                  and Qualitative Disclosure About Market                  Risk                                                                                                                | 38 |
| Item                  8.  | Financial                  Statements and Supplementary                  Data                                                                                                                              | 39 |
| Item                  9.  | Changes                  in and Disagreements with Accountants on Accounting and Financial                  Disclosure                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                | 61 |
| Item                  9A. | Controls                  and                  Procedures                                                                                                                                                  | 61 |
| Item                  9B. | Other                  Information                                                                                                                                                                         | 62 |

**P        A R T  I I I**

| Item                  10. | Directors,                  Executive Officers and Corporate                  Governance                                                                                                                | 63     |
|---------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| Item                  11. | Executive                  Compensation                                                                                                                                                                 | 63     |
| Item                  12. | Security                  Ownership of Certain Beneficial Owners and                  Management                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |
|                      |   and                  Related Stockholder                  Matters                                                                                                                           | 63     |
| Item                  13. | Certain                  Relationships and Related Transactions, and Director                  Independence                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | 63     |
| Item                  14. | Principal                  Accounting Fees and                  Services                                                                                                                                | 63     |

**P        A R T  I V**

| Item                15. | Exhibits,                  Financial Statement                  Schedules                                                                                                               | 64 |
|-------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----|
| SIGNATURES              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 66 |

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**Table          of Contents**

**PART      I**

**ITEM      1. *B**USINESS***

*Unless      the context otherwise requires, we use the terms “Hifn,” “our company,” “we,”“us” and “our” in this filing to refer to hi/fn, Inc., together with its      together with its subsidiaries, Hifn Limited, Hifn Netherlands B.V. and Hifn      International and its subsidiary, Hifn (Hangzhou) Information Technologies      Co.,      Ltd. (previously known as Saian (Hangzhou) Microsystems, Co., Ltd.), together      with Hangzhou Ansai Information Technology Co., Ltd., a contractually controlled      company of Hifn International.*

**Overview**

**General**

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**Table          of Contents**

**Industry      Background**

**The      Complexity of and Need for      Network and Storage Security**

**The      Hifn Solution**

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**Table          of Contents**

**Customers**

**Products**

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**Table          of Contents**

*Network      Security *
*ASPs*

*Network      FlowThroughTM Security *
*ASPs*

*Network      Proce*
*s*
*s*
*ing ASPs*
*.*

*Compression*
* *
*ASPs*
*.*

*Express      Data Reduction (“*
*Express D*
*R*
*”)      Products.*

*Express      Data Security (“Express DS”) Products.*

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**Table          of Contents**

*Evaluation      (Reference) *
*Card*
*s.*

*Secure      Storage Sub-systems*
*. *

**Technology**

*Compression      Algorithms and Architectures.*

*Encryption,      Data Authentication and Public Key Algorithms.*

*Flow      Classification and Measurement Architectures. *

*Integrated,      High-Performance Packet Processing.*

*Pattern      Matching Architecture.*

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**Table          of Contents**

**Intellectual      Property**

**Export      Restrictions on Encryption Algorithms**

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**Table          of Contents**

**Competition**

**Research      and Development**

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**Table            of Contents**

**Sales,      Marketing & Technical Support**

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**Table          of Contents**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | **September                  30,** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|--------|
| **                     Years Ended**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | **2007**                           |   |   | **2006** |   |   | **2005** |   |
|                      Cisco Systems,                  Inc.                                                                                                         |   |                               | 53     | % |   |   | 50 | % |   |   | 49 | % |
|                      Huawei Technologies,                  Inc.                                                                                                   |   |                               | 12     | % |   |   | 13 | % |   |   | 10 | % |
|                      Quantum                  Corporation                                                                                                         |   |                               | 3      | % |   |   | 7 | % |   |   | 11 | % |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                               | 68     | % |   |   | 70 | % |   |   | 70 | % |

**Manufacturing**

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**Table          of Contents**

**Employees**

**Available      Information**

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**Table          of Contents**

**ITEM      1A. *RISK FACTORS***

*    In      future      periods, Hifn’s business, financial condition and results of operations, cash      flows and the market price of our stock may be affected by many factors,      including but not limited to the following:*

**The      Company May Have Difficulty Establishing Adequate Management, Legal, and      Financial Controls in the People’s Republic of China.**

**If      We Are Unable to Protect Our Proprietary Technology, Our Ability to Succeed      Will      be Harmed.**

**Our      Contractual Arrangement with Hangzhou Ansai Information Technology May Not      Be As      Effective as Direct Ownership.**

**If      We Are Unable To Attract Or Retain Highly Skilled Personnel At Hifn (Hangzhou)      Information Technologies Co., Ltd., Financial Condition And Results Of      Operations Could Suffer.**

**Our      Business Depends Upon The Development Of The Packet Processor      Market.**

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**Table          of Contents**

**Our      Business Depends Upon The Continued Growth of the Network Equipment and Storage      Equipment Markets And Our Penetration Of The Virtual Private Network, Storage      Networking, Network Processor and Virtual Tape Library And Nearline Storage      Markets.**

| · | Capital                spending levels; |
|--------|-----------------------------------------|

| · | Additions                to, changes in or lack of industry                standards; |
|--------|---------------------------------------------------------------------------------------|

| · | Our                ability to demonstrate the benefits of our technology to distributors,                original equipment manufacturers and end                users; |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | The                increased use of the Internet by businesses as replacements for,                or                enhancements to, their private                networks; |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | The                adoption of security as a necessary feature in storage                networking; |
|--------|------------------------------------------------------------------------------------------------------|

| · | The                adoption of compression as a necessary feature in virtual tape library                products; and |
|--------|------------------------------------------------------------------------------------------------------------------------|

| · | The                adoption of compression as a necessary feature in nearline storage                products. |
|--------|----------------------------------------------------------------------------------------------------------------|

**Because      We Depend Upon A Small Number Of Customers, If Our Sales To Any Of These      Customers Decline, Our Business, Financial Condition and Results of Operations      May Suffer.**

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**Table          of Contents**

**We      Face Risks Associated With Our Business Expansion Into The Solutions, VAR,      Secure Storage Appliances And System Integrator Channels.**

| · | The                creation and launch of the Hifn “PartnerExpress” program designed to                enable a Partner Relationship Management (“PRM”) portal for our partners                to securely interact with Hifn. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Promotional                and outbound marketing activities designed to identify, screen and                qualify                prospective partners. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Technical                and sales training of partners relative to the Hifn Express family                cards                and subsystems. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Sales                cycle and time-to-revenue issues relative to a partner-based (vs.                our                historical OEM-direct) sales model. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------|

| · | Partner                incentive activities that promote the sale of a Hifn product vs.                a                competitive offering. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------|

**Our      Operating Results May Fluctuate Significantly.**

| · | 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. |
|--------|----------------------------------------------------------------------------------------------------------|

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

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**Table          of Contents**

**We      Depend Upon Independent Manufacturers And Limited Sources Of      Supply.**

| · | 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. |
|--------|-----------------------------------------------------------------------------------------|

**We      Face Risks Associated With Acquisitions.**

| · | Difficulties                in assimilating acquired operations, technologies and                products; |
|--------|------------------------------------------------------------------------------------------------------------|

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**Table          of Contents**

| · | 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      Face Risks Associated With The Integration Of The IBM Network Processor Product      Line Into Our Business.**

**We      Face Order And Shipment Uncertainties, Which Make it Difficult to Forecast      Future Revenues Accurately and May Cause Us to Hold Too Much      Inventory.**

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

| · | Properly                identify emerging target markets and related technological                trends; |
|--------|-----------------------------------------------------------------------------------------------------------|

| · | Develop                and maintain competitive products; |
|--------|-----------------------------------------------------------|

| · | Develop                end-to-end, ubiquitous systems                solutions; |
|--------|---------------------------------------------------------------------------------|

| · | Develop,                or partner with providers of, security services                processors; |
|--------|----------------------------------------------------------------------------------------------------|

| · | Develop                both hardware and software security services                solutions; |
|--------|-----------------------------------------------------------------------------------------------|

| · | 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. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------|

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**Table          of Contents**

**Our      Markets Are Highly Competitive.**

| · | Performance; |
|--------|--------------|

| · | Price; |
|--------|--------|

| · | The                time that is required to develop a new product or enhancements to                existing                products; |
|--------|---------------------------------------------------------------------------------------------------------------------------------------|

| · | ThThe                ability to achieve product acceptance with major network and storage                equipment vendors; |
|--------|-----------------------------------------------------------------------------------------------------------------------------|

| · | The                support that exists for new network and storage                standards; |
|--------|----------------------------------------------------------------------------------------------|

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**Table          of Contents**

| · | Features                and functionality; |
|--------|--------------------------------------------|

| · | Adaptability                of products to specific                applications; |
|--------|----------------------------------------------------------------------------------|

| · | Reliability;                and |
|--------|---------------------------------|

| · | Technical                service and support as well as effective intellectual property                protection. |
|--------|--------------------------------------------------------------------------------------------------------------------|

**Our      Success Depends On Proprietary Technologies.**

**Declines      In Network And Storage Equipment Prices Could Harm Our Operating      Results.**

| · | Rapidly                changing technologies; |
|--------|-----------------------------------------------|

| · | Price-performance                enhancements; and |
|--------|----------------------------------------------------|

| · | Product                obsolescence. |
|--------|--------------------------------------|

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**Table          of Contents**

**We      Face Product Return, Product Liability And Product Defect      Risks.**

**We      Depend Upon Key Personnel.**

**The      Cyclical Nature Of The Semiconductor Industry May Harm Our      Business.**

**We      Face Risks Associated With Our International Business      Activities.**

| · | 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; |
|--------|---------------------------------------------------------|

| · | Financial                and stock market dislocations; |
|--------|---------------------------------------------------------|

| · | Military                and related activities; |
|--------|-------------------------------------------------|

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**Table            of Contents**

| · | Trade                restrictions; and |
|--------|----------------------------------------|

| · | Changes                in tariffs. |
|--------|------------------------------------|

**Our      Products Are Subject To Export Restrictions.**

**Our      Stock Price May Be Volatile.**

| · | 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. |
|--------|------------------------------------------------------------------------------------------------------------|

**If      We Determine That Our Long-Lived Assets Have Been Impaired Or That Our Goodwill      Has Been Further Impaired, Our Financial Condition and Results of Operations      May      Suffer.**

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**Table          of Contents**

**ITEM      1B. *UNRESOLVED STAFF      COMMENTS***

**ITEM      2. *PROPERTIES***

*Domestic      Locations*

| **                   Location**                | **Owned****or                Leased** | **Expiration****Date**                                    | **Square****Footage** |
|---------------------------------------------------------------|---------------------------------------|-----------------------------------------------------------|-----------------------|
|                    Los Gatos, California       | Leased                                | December                2007September                2009 | 31,400                |
|                    Carlsbad, California        | Leased                                | August                2009June                2010        | 17,300                |
|                    Poway, California           | Leased                                | August                2009                                | 3,200                 |
|                    Framingham, Massachusetts   | Leased                                | November                2011                              | 4,200                 |
|                    Morrisville, North Carolina | Leased                                | April                2009                                 | 11,300                |
|                                                          |                                  |                                                      | **67,400**            |

*International      Locations*

| **                   Location**                               | **Owned****or                Leased** | **Expiration****Date**                                                                                | **Square****Footage** |
|------------------------------------------------------------------------------|---------------------------------------|-------------------------------------------------------------------------------------------------------|-----------------------|
|                    Hangzhou, People’s Republic of China | Leased                                | November                2007March                2008May                2008March                2009 | 17,800                |
|                                                                         |                                  |                                                                                                  | **17,800**            |

**ITEM      3. *LEGAL PROCEEDINGS***

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**Table          of Contents**

***EXECUTIVE      OFFICERS***

| **                   Name**                   | **Age** | **Position                With the Company**                                                       | **Years****With                the Company** |
|--------------------------------------------------------------|---------|----------------------------------------------------------------------------------------------------|----------------------------------------------|
|                      Albert E. Sisto          | 58      | Chairman                  and Chief Executive Officer                                              | <1                                        |
|                      William R. Walker        | 66      | Vice                  President of Finance, Chief Financial Officer and                  Secretary | 9                                            |
|                      Russell S. Dietz         | 44      | Vice                  President and Chief Technical Officer                                        | 7                                            |
|                      Dr. Jiebing Wang, Ph. D  | 40      | Vice                  President of Engineering                                                     | 3                                            |
|                      John E. G. Matze         | 49      | Vice                  President of Business Development                                            | <1                                        |
|                      Michael D Goldgof        | 42      | Vice                  President of Product Marketing                                               | <1                                        |
|                      Douglas L. Whiting, Ph.D | 51      | Chief                  Scientist and Director                                                      | 11                                           |

*Albert      E. Sisto,*

*William      R. Walker *

*Russell      S. Dietz*

*Jiebing      Wang*

*John      E.G. Matze*

*Michael      D. Goldgof*
* *

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**Table          of Contents**

*Douglas      L. Whiting, Ph.D.,*

**ITEM      4. *SUBMISSION OF MATTERS TO A VOTE OF SECURITY      HOLDERS* **

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**Table          of Contents**

**PART      II**

**ITEM        5.*MARKET FOR  REGISTRANT’S COMMON EQUITY,        RELATED STOCKHOLDER MATTERS AND ISSUER **PURCHASES        OF EQUITY SECURITIES*****

**Market      Information**

|                                                                          |   | **High** |   |   | **Low** |   |
|-------------------------------------------------------------------------------|--------|----------|--------|--------|---------|--------|
| **                   Fiscal Year Ended September 30, 2007:**   |   |     |   |   |    |   |
|                          Fourth Quarter    |   | $        | 8.59   |   |    | $      | 6.01 |   |
|                          Third Quarter     |   |     | 6.83   |   |    |   | 5.74 |   |
|                          Second Quarter    |   |     | 6.75   |   |    |   | 5.29 |   |
|                          First Quarter     |   |     | 5.34   |   |    |   | 4.61 |   |
|                                                                          |   |     |   |   |    |   |   |   |
| **                     Fiscal Year Ended September 30, 2006:** |   |     |   |   |    |   |   |   |
|                          Fourth Quarter         |   | $        | 6.24   |   |    | $      | 4.64 |   |
|                          Third Quarter          |   |     | 8.02   |   |    |   | 5.28 |   |
|                          Second Quarter         |   |     | 7.88   |   |    |   | 5.70 |   |
|                          First Quarter     |   |     | 5.94   |   |    |   | 5.26 |   |

**Holders**

**Dividends**

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**Table          of Contents**

**Securities      Authorized for Issuance Under Equity Compensation Plans**

| **                   Plan Category**                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | **Number                of Shares to be Issued upon Exercise of Stock                Options** |   | **Weighted                Average Exercise Price per share** |   | **Shares                Available for Future Issuance (excluding shares reflected in the                first                column)** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------|--------|--------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------|--------|
|                    Equity compensation plans                       approved by security                holders                                                       |   | 2,313,040                                                                                      | (1)    | $                9.97                                        |   | 1,430,682                                                                                                                              | (2)    |
|                    Equity compensation plans                       not approved by security holders                                                                                                                                                                                                                                                                                                                                                |   | 1,456,371                                                                                      | (3)    | 7.74                                                         |   | 163,084                                                                                                                                |   |
|                    Total                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | 3,769,411                                                                                      |   | $                9.11                                        |   | 1,593,766                                                                                                                              |   |

| (1) | Relates                to options under the Amended and Restated 1996 Equity Incentive Plan                (the                “1996 Plan”). The 1996 Plan has 5,449,900 shares of the Company’s Common                Stock reserved for issuance pursuant to nonqualified and incentive                stock                options and restricted stock                awards. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Includes                456,021 shares of the Company’s common stock available for issuance under                the Company’s 1998 Employee Stock Purchase Plan (the “ESPP”) as of                September 30, 2007, of which 36,493 were issued in connection with                the                purchase on October 31, 2007. In December 1998, the Company adopted                the                ESPP through which qualified employees of the Company may participate                in                stock ownership of the Company. Shares of Common Stock reserved for                issuance under the ESPP total 1,400,000. 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. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | Relates                to options under the 2001 Nonstatutory Stock Option Plan (the “2001                Plan”). The 2001 Plan has 2,000,000 shares of the Company’s Common Stock                reserved for issuance.  In connection with the acquisition of                Apptitude, Inc., the Company assumed the Apptitude Plan, which had                a total                of 687,142 shares of common stock reserved for issuance. Options                assumed                under the Apptitude Plan that were subsequently cancelled were not                eligible for reissuance. The Apptitude Plan expired on October 25,                2005                and, therefore, has no effect on the number of options available                for                grant. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Purchase      of Equity Securities by the Issuer**

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**Table          of Contents**

**ITEM      6. *SELECTED FINANCIAL DATA***

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | **September 30,**                                  |    |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------|---------|
| **Years                Ended**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | **2007**                                                |    |   | **2006** |   |   | **2005** |   |   | **2004** |   |   | **2003** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | (in                thousands, except per share amounts) |    |
| **Statement                of Operations Data:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                                                    |    |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                                    |    |   |   |   |   |   |   |   |   |   |   |   |   |
|                      Net                  revenues                                                                                  |   | $                                                       | 42,967  |   |   | $ | 43,764 |   |   | $ | 46,394 |   |   | $ | 42,142 |   |   | $ | 20,480 |   |
|                      Costs and operating expenses:                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                                                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost                  of                  revenues                                                                                                                          |   |                                                    | 14,232  |   |   |   | 15,507 |   |   |   | 14,798 |   |   |   | 11,957 |   |   |   | 6,567 |   |
| Research                  and                  development                                                                                                                  |   |                                                    | 12,925  |   |   |   | 20,983 |   |   |   | 21,721 |   |   |   | 22,418 |   |   |   | 20,329 |   |
| Sales                  and                  marketing                                                                                                                       |   |                                                    | 8,312   |   |   |   | 7,382 |   |   |   | 7,515 |   |   |   | 7,324 |   |   |   | 7,211 |   |
| General                  and                  administrative                                                                                                                |   |                                                    | 8,558   |   |   |   | 6,984 |   |   |   | 5,332 |   |   |   | 4,492 |   |   |   | 3,862 |   |
| Amortization                  of                  intangibles                                                                                                               |   |                                                    | 3,038   |   |   |   | 3,161 |   |   |   | 3,296 |   |   |   | 3,062 |   |   |   | 1,319 |   |
|                          Impairment of                  assets                                                                           |   |                                                    | — |   |   |   | 292 |   |   |   | — |   |   |   | — |   |   |   | 3,919 |   |
| Purchased                  in-process research and development                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                                                    | 159     |   |   |   | — |   |   |   | — |   |   |   | 4,230 |   |   |   | — |   |
|                      Loss from                  operations                                                                          |   |                                                    | (4,257  | ) |   |   | (10,545 | ) |   |   | (6,268 | ) |   |   | (11,341 | ) |   |   | (22,727 | ) |
| Interest                  income,                  net                                                                                                                      |   |                                                    | 1,981   |   |   |   | 1,916 |   |   |   | 1,193 |   |   |   | 525 |   |   |   | 566 |   |
| Other                  expense,                  net                                                                                                                        |   |                                                    | (81     | ) |   |   | (54 | ) |   |   | (51 | ) |   |   | (52 | ) |   |   | (22 | ) |
| Provision                  for (benefit from) income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                                                    | 184     |   |   |   | 41 |   |   |   | 90 |   |   |   | — |   |   |   | (1,842 | )  |
|                      Net                  loss                                                                                      |   | $                                                       | (2,541  | ) |   | $ | (8,724 | ) |   | $ | (5,216 | ) |   | $ | (10,868 | ) |   | $ | (20,341 | ) |
|                       Net loss per share, basic and                  diluted                                                                                                                                                                      |   | $                                                       | (0.18   | ) |   | $ | (0.63 | ) |   | $ | (0.38 | ) |   | $ | (0.84 | ) |   | $ | (1.89 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                                                    |    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                      Weighted average shares outstanding, basic and                  diluted                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                                                    | 14,092  |   |   |   | 13,769 |   |   |   | 13,887 |   |   |   | 12,993 |   |   |   | 10,741 |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | **September 30,**            |    |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|---------|
| **Years                    Ended**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | **2007**                          |    |   | **2006** |   |   | **2005** |   |   | **2004** |   |   | **2003** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | (in                    thousands) |    |
| **Balance                    Sheet Data:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                              |    |   |   |   |   |   |   |   |   |   |   |   |   |
|    Cash                      and short-term                      investments                                                                             |   | $                                 | 35,322  |   |   | $ | 38,777 |   |   | $ | 44,440 |   |   | $ | 50,032 |   |   | $ | 43,074 |   |
|    Total                      assets                                                                                                                     |   |                              | 58,966  |   |   |   | 57,476 |   |   |   | 66,451 |   |   |   | 76,242 |   |   |   | 52,821 |   |
|    Working                      capital                                                                                                                  |   |                              | 41,655  |   |   |   | 40,199 |   |   |   | 42,755 |   |   |   | 46,711 |   |   |   | 35,465 |   |
|    Total                      debt                                                                                                                       |   |                              | — |   |   |   | — |   |   |   | — |   |   |   | — |   |   |   | — |   |
|    Total                      stockholders’                      equity                                                                            |   |                              | 53,448  |   |   |   | 50,685 |   |   |   | 56,756 |   |   |   | 64,229 |   |   |   | 41,117 |   |

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**Table          of Contents**

**ITEM      7.*MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL      CONDITION AND RESULTS OF***
***OPERATIONS***

*Management’s      Discussion and Analysis of Financial Conditions and Results of Operations      (“MD&A”) is designed to provide our shareholders with informative financial      disclosures and present an accurate view of our financial position and operating      results. Also included, is a narrative from the perspective of our management      on      our financial condition, results of operations, liquidity and other important      factors that may affect our future results.*

*In      accordance with Section 404 of the Sarbanes-Oxley Act of 2002, our management      evaluated the effectiveness of internal control over financial reporting. Based      upon that evaluation, management concluded that the company’s internal control      over financial reporting was effective as of September 30, 2007.      PricewaterhouseCoopers LLP, an independent registered public accounting firm,      has audited management’s assessment of internal control over financial reporting      as of September 30, 2007, as stated in their report which is included under      “Item 8, Financial Statements and Supplementary Data.”*

*The      following discussion should be read in conjunction with the “Item 8,      Consolidated Financial Statements and Supplementary Data” 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 "Item 1A, Risk      Factors” and appearing elsewhere in this report. See “Cautionary Statement      Regarding Forward-Looking Statements” in Part I of this Annual Report on Form      10-K.*

**Overview**

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**Table          of Contents**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | **September                30,** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|
| **                   Years Ended**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | **2007**                         |   |   | **2006** |   |   | **2005** |   |
|                    Cisco Systems,                Inc.                                                                                                         |   |                             | 53     | % |   |   | 50 | % |   |   | 49 | % |
|                    Huawei Technologies,                Inc.                                                                                                   |   |                             | 12     | % |   |   | 13 | % |   |   | 10 | % |
|                    Quantum                Corporation                                                                                                         |   |                             | 3      | % |   |   | 7 | % |   |   | 11 | % |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                             | 68     | % |   |   | 70 | % |   |   | 70 | % |

**Restructuring      Charges**

----

**Table          of Contents**

*Involuntary      Termination Cost*

|                                                              |   | **Expense****Accrued****June                30, 2006** |   |   | **Adjustments** |   |   | **Paid                as of****September                30, 2006** |   |   | **Balance****September                30, 2006** |   |
|-------------------------------------------------------------------|--------|--------------------------------------------------------|--------|--------|-----------------|--------|--------|--------------------------------------------------------------------|--------|--------|--------------------------------------------------|--------|
|                                                              |   | (in                thousands)                          |   |
|                    Cost of revenues                |   | $                                                      | 64     |   |            | $      | (6     | )                                                                  |   | $      | 53                                               |   |   | $ | 5 |   |
|                    Research and development        |   |                                                   | 471    |   |            |   | (17    | )                                                                  |   |   | 454                                              |   |   |   | - |   |
|                    Sales and marketing             |   |                                                   | 59     |   |            |   | -      |                                                               |   |   | 59                                               |   |   |   | - |   |
|     General                and administrative |   |                                                   | 24     |   |            |   | -      |                                                               |   |   | 24                                               |   |   |   | - |   |
| Total                                                             |   | $                                                      | 618    |   |            | $      | (23    | )                                                                  |   | $      | 590                                              |   |   | $ | 5 |   |

*Impairment      Of Long-lived Assets*
*.  *

*Non-recurring      Engineering Expense Recovery.  *

*Termination        Of Operating Lease.  *

*Net          Restructuring Cost.  *

**Critical      Accounting Policies **

**Revenue      recognition. **

----

**Table          of Contents**

**Inventories.**

**Valuation      of long-lived and intangible assets and goodwill. **

**Allowance      for doubtful accounts receivable. **

**Accounting      for income taxes. **

**Litigation.      **

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**Table          of Contents**

**Results      of Operations**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | **September                30,** |    |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|---------|
| **Years                Ended**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | **2007**                         |    |   | **2006** |   |   | **2005** |   |
| Net                revenues:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                             |    |   |   |   |   |   |   |
|                      Processors                                                                                                                                                                                                |   |                             | 94      | % |   |   | 92 | % |   |   | 91 | % |
|                      Software licenses and other                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                             | 6       |   |   |   | 8 |   |   |   | 9 |   |
|                                  Total net                  revenues                                                                                               |   |                             | 100     |   |   |   | 100 |   |   |   | 100 |   |
|                      Costs and operating expenses:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                             |    |   |   |   |   |   |   |   |   |   |
|                      Cost of revenues -                  processors                                                                                                                                                                      |   |                             | 32      |   |   |   | 34 |   |   |   | 31 |   |
|                      Cost of revenues - software licenses and                  other                                                                                                                                                     |   |                             | 1       |   |   |   | 1 |   |   |   | 1 |   |
|                      Research and                  development                                                                                                                                                                           |   |                             | 30      |   |   |   | 48 |   |   |   | 47 |   |
|                      Sales and                  marketing                                                                                                                                                                                |   |                             | 19      |   |   |   | 17 |   |   |   | 16 |   |
|                      General and                  administrative                                                                                                                                                                         |   |                             | 20      |   |   |   | 16 |   |   |   | 11 |   |
|                      Amortization of                  intangibles                                                                                                                                                                        |   |                             | 7       |   |   |   | 7 |   |   |   | 7 |   |
|                      Impairment of                  assets                                                                                                                                                                               |   |                             | — |   |   |   | 1 |   |   |   | — |   |
|                      Purchased in-process research and                  development                                                                                                                                                 |   |                             | — |   |   |   | — |   |   |   | — |   |
|                      Total costs and operating                  expenses                                                                                                                                                       |   |                             | 109     |   |   |   | 124 |   |   |   | 113 |   |
|                      Loss from                  operations                                                                                                                                                                     |   |                             | (9      | ) |   |   | (24 | ) |   |   | (13 | ) |
|                      Interest and other income,                  net                                                                                                                                                           |   |                             | 4       |   |   |   | 4 |   |   |   | 2 |   |
|                      Loss before income                  taxes                                                                                                                                                                 |   |                             | (5      | ) |   |   | (20 | ) |   |   | (11 | ) |
|                      Provision for income                  taxes                                                                                                                                                               |   |                             | — |   |   |   | — |   |   |   | — |   |
|                      Net                  loss                                                                                                                                                                                 |   |                             | (5      | )% |   |   | (20 | )% |   |   | (11 | )% |

*Net      Revenues.*

|                                                            |   |   | **September                  30,**            |
|-----------------------------------------------------------------|--------|--------|-----------------------------------------------|
| **   **                                          |   |   | **2007**                                      |   |  **2006** |   | **2005** |   | **2007                  vs.****2006****Change** |   |  **2006                  vs.****2005****Change** |
|                      **Years Ended**             |   |   |                                          |   | **%                  of net revenues** |   |   |   | **%                  of net revenues** |   |   |   | **%                  of net revenues** |   |   |
|                                                            |   |   |  ($                  in thousands)  |
|                      Processors             |   |   | $                                             | 40,191 |   |   | 94% |   | $ | 40,262 |   |   | 92% |   | $ | 42,055 |   |   | 91% |   |   |  — |   |   |  (4)% |
|                      Software licenses and other |   |   |                                          | 2,776 |   |   | 6% |   |   | 3,502 |   |   | 8% |   |   | 4,339 |   |   | 9% |   |   | (21)% |   |   | (19)% |
|                                                            |   |   | $                                             | 42,967 |   |   | 100% |   | $ | 43,764 |   |   | 100% |   | $ | 46,394 |   |   | 100% |   |   |                     (2)% |   |   |                     6% |

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**Table          of Contents**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | **September                30,** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|
| **Years                Ended**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | **2007**                         |   |   | **2006** |   |   | **2005** |   |
|                      Cisco Systems,                  Inc.                                                                                                              |   |                             | 53     | % |   |   | 50 | % |   |   | 49 | % |
|                      Huawei Technologies,                  Inc.                                                                                                        |   |                             | 12     | % |   |   | 13 | % |   |   | 10 | % |
|                      Quantum                  Corporation                                                                                                              |   |                             | 3      | % |   |   | 7 | % |   |   | 11 | % |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                             | 68     | % |   |   | 70 | % |   |   | 70 | % |

*Cost      of Revenues.*

|                                                            |   |   | **September                  30,**                                                                                                                                          |
|-----------------------------------------------------------------|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                  |   |   | **2007**                                                                                                                                                                    |   |  **2006** |   | **2005** |   | **2007                  vs.****2006****Change** |   |  **2006                  vs.****2005****Change** |
|                      **Years Ended**             |   |   |                                                                                                                                                                        |   | **%                  of****revenue                  category** |   |   |   | **%                    of****revenue                    category** |   |   |   | **%                    of****revenue                    category** |   |   |
|                                                            |   |   |  ($                  in thousands)                       |
|                      Processors             |   |   | $                                                                                                                                                                           | 13,903 |   |   | 35% |   | $ | 15,001 |   |   | 37% |   | $ | 14,246 |   |   | 34% |   |   | (7)% |   |   |  5% |
|                      Software licenses and other |   |   |                                                                                                                                                                        | 329 |   |   | 12% |   |   | 506 |   |   | 14% |   |   | 552 |   |   | 13% |   |   | (35)% |   |   | (8)% |
|                                                            |   |   | $                                                                                                                                                                           | 14,232 |   |   | 33% |   | $ | 15,507 |   |   | 35% |   | $ | 14,798 |   |   | 32% |   |   |                     (8)% |   |   |                     5% |

*Research      and Development.*

|                                                                    |   | **September                30,**  |   |
|-------------------------------------------------------------------------|--------|-----------------------------------|--------|
| **Years                Ended**                                          |   | **2007**                          |   |   | **2006** |   |   | **2005** |   |   | **2007                vs. 2006****Change** |   |   | **2006                vs. 2005****Change** |   |
|                                                                    |   | ($                  in thousands) |   |
|                      Research & development expenses |   | $                                 | 12,925 |   |   | $ | 20,983 |   |   | $ | 21,721 |   |   |   | (38)% |   |   |   | (3)% |   |
|                      As a percentage of net revenues     |   |                              | 30%    |   |   |   | 48% |   |   |   | 47% |   |   |   |   |   |   |   |   |   |

----

**Table          of Contents**

*Sales      and Marketing.*

|                                                                |   | **September                30,**  |   |
|---------------------------------------------------------------------|--------|-----------------------------------|--------|
| **Years                Ended**                                      |   | **2007**                          |   |   | **2006** |   |   | **2005** |   |   | **2007                vs. 2006 Change** |   |   | **2006                vs. 2005****Change** |   |
|                                                                |   | ($                  in thousands) |   |
|                      Sales & marketing expenses  |   | $                                 | 8,312  |   |   | $ | 7,382 |   |   | $ | 7,515 |   |   |   | 13% |   |   |   | (2)% |   |
|                      As a percentage of net revenues |   |                              | 19%    |   |   |   | 17% |   |   |   | 16% |   |   |   |   |   |   |   |   |   |

*General      and Administrative.*

|                                                                            |   | **September                30,**  |   |
|---------------------------------------------------------------------------------|--------|-----------------------------------|--------|
| **Years                Ended**                                                  |   | **2007**                          |   |   | **2006** |   |   | **2005** |   |   | **2007                vs. 2006 Change** |   |   | **2006                vs. 2005****Change** |   |
|                                                                            |   | ($                  in thousands) |   |
|                      General & administrative expenses       |   | $                                 | 8,558  |   |   | $ | 6,984 |   |   | $ | 5,332 |   |   |   | 23% |   |   |   | 31% |   |
|                      As a percentage of net revenues   |   |                              | 20%    |   |   |   | 16% |   |   |   | 11% |   |   |   |   |   |   |   |   |   |

----

**Table          of Contents**

*Amortization      of Intangibles.*

|                                                                   |   | **September                30,**  |   |
|------------------------------------------------------------------------|--------|-----------------------------------|--------|
| **Years                Ended**                                         |   | **2007**                          |   |   | **2006** |   |   | **2005** |   |   | **2007                vs. 2006 Change** |   |   | **2006                vs. 2005****Change** |   |
|                                                                   |   | ($                  in thousands) |   |
|                      Amortization of intangibles   |   | $                                 | 3,038  |   |   | $ | 3,161 |   |   | $ | 3,296 |   |   |   | (4)% |   |   |   | (4)% |   |
|                      As a percentage of net revenues    |   |                              | 7%     |   |   |   | 7% |   |   |   | 7% |   |   |   |   |   |   |   |   |   |

*Purchased      In-Process Research and Development.*

|                                                                                                            |   | **September                  30,**  |                        |
|-----------------------------------------------------------------------------------------------------------------|--------|-------------------------------------|-----------------------------|
| **Years                  Ended**                                                                                |   | **2007**                            |                        |   | **2006** |   |   | **2005** |   |   | **2007                  vs. 2006 Change** |   |   | **2006                  vs. 2005****Change** |   |
|                                                                                                            |   | ($                    in thousands) |                        |
|                          Purchased in-process research and                      development |   | $                                   | 159                         |   |   | $ | — |   |   | $ | — |   |   |   | N/A |   |   |   | N/A |   |
|                        As a percentage of net revenues                                           |   |                                | Less                than 1% |   |   |   | — |   |   |   | — |   |   |   |   |   |   |   |   |   |

*Impairment      of      Assets*

|                                                                                     |   | **September                  30,**  |    |
|------------------------------------------------------------------------------------------|--------|-------------------------------------|---------|
| **Years                  Ended**                                                         |   | **2007**                            |    |   | **2006** |   |   | **2005** |   |   | **2007                  vs. 2006 Change** |   |   | **2006                  vs. 2005****Change** |   |
|                                                                                     |   | ($                    in thousands) |    |
|                        Impairment of assets      |   | $                                   | — |   |   | $ | 292 |   |   | $ | — |   |   |   | N/A |   |   |   | N/A |   |
|                        As a percentage of net revenues                    |   |                                | — |   |   |   | 1% |   |   |   | — |   |   |   |   |   |   |   |   |   |

----

**Table          of Contents**

*Interest      and Other Income, Net*

|                                                                                         |   | **September                30,**  |   |
|----------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
| **Years                Ended**                                                               |   | **2007**                          |   |   | **2006** |   |   | **2005** |   |   | **2007                vs. 2006 Change** |   |   | **2006                vs. 2005****Change** |   |
|                                                                                         |   | ($                  in thousands) |   |
|                      Interest income                                          |   | $                                 | 1,981  |   |   | $ | 1,927 |   |   | $ | 1,264 |   |   |   | 3% |   |   |   | 52% |   |
|                      Interest expense                                         |   |                              | (4     | ) |   |   | (11 | ) |   |   | (71 | ) |   |   | (64)% |   |   |   | 85% |   |
|                      Other expense, net                                       |   |                              | (77    | ) |   |   | (54 | ) |   |   | (51 | ) |   |   | 43% |   |   |   | (6)% |   |
|                          Interest & other income, net |   | $                                 | 1,900  |   |   | $ | 1,862 |   |   | $ | 1,142 |   |   |   | 2% |   |   |   | 63% |   |
|                      As a percentage of net revenues                          |   |                              | 4%     |   |   |   | 4% |   |   |   | 2% |   |   |   |   |   |   |   |   |   |

*Income      Taxes.*

|                                                                                                                                                                                                                                                                                                                                                                      |   | **September                30,**  |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
| **Years                Ended**                                                                                                                                                                                                                                                                                                                                            |   | **2007**                          |   |   | **2006** |   |   | **2005** |   |   | **2007                vs. 2006 Change** |   |   | **2006                vs. 2005****Change** |   |
|                                                                                                                                                                                                                                                                                                                                                                      |   | ($                  in thousands) |   |
|                      Provision for income                  taxes                                                |   | $                                 | 184    |   |   | $ | 41 |   |   | $ | 90 |   |   |   | 349% |   |   |   | (54)% |   |
|                      As a percentage of net revenues                                                                                                                                                                                                                                                                                                       |   | Less                  than 1%     |   |   | Less                  than 1% |   |   | Less                  than 1% |   |   |   |   |   |   |   |   |   |

**Liquidity      and Capital Resources**

|                                                                                                               |   | **September                  30,** |
|--------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|
| **Years Ended**                                                                                               |   | **2007**                           |   |   | **2006** |   |   | **2005** |   |
|                                                                                                               |   | ($                  in thousands)  |
|                        Net cash used in operating activities                                        |   | $                                  | (1,816 | ) |   | $ | (5,490 | ) |   | $ | (1,479 | ) |
|                        Net cash (used in) provided by investing activities                          |   |                               | (4,611 | ) |   |   | 1,328 |   |   |   | 10,807 |   |
|                        Net cash provided by (used in) financing activities                          |   |                               | 3,039 |   |   |   | 1,420 |   |   |   | (2,965 | ) |
|                            Net increase (decrease) in cash and cash equivalents |   | $                                  | (3,388 | ) |   | $ | (2,742 | ) |   | $ | 6,363 |   |

*Operating      Activities*

----

**Table          of Contents**

*Investing      Activities*

*Financing      Activitie*
*s.*

----

**Table          of Contents**

*Common      Stock Repurchase.*

**Contractual      Obligations**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                          |   | **Payments                Due By Period**             |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------|--------|-------------------------------------------------------|--------|
| **Contractual                Obligations**                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | **Total**                     |   | **Less                than****1                year** |   | **1                - 3****years** |   | **3                - 5****years** |   | **More                than 5 years** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | (in                thousands) |   |
|                      Operating lease                  commitments                                                                       |   | $                             | 3,349  |                                                  | $      | 1,569 |   | $ | 1,644 |   | $ | 136 |   | $ | — |   |
|                      Inventory                  purchases                                                                               |   |                          | 1,421  |                                                  |   | 1,421 |   |   | — |   |   | — |   |   | — |   |
|                      Non-recurring engineering                  expense                                                                 |   |                          | 103    |                                                  |   | 103 |   |   | — |   |   | — |   |   | — |   |
|                          Totals                                                                                                         |   | $                             | 4,873  |                                                  | $      | 3,093 |   | $ | 1,644 |   | $ | 136 |   | $ | — |   |

**Guarantees**

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**Table          of Contents**

*Product      Warranties*

**Off-Balance      Sheet Arrangements**

**Recent      Accounting Pronouncements**

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**Table          of Contents**

**ITEM      7A.*QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT      MARKET RISK***

*Interest      Rate Risk.*

*Foreign      Currency Exchange Rate Risk. *

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**Table          of Contents**

**ITEM      8.**

***FINANCIAL      STATEMENTS AND      SUPPLEMENTARY DATA***

**INDEX      TO CONSOLIDATED FINANCIAL STATEMENTS**

| **Financial                Statements:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | Page    |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------|
|                      Report of Independent Registered Public Accounting Firm                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | 40                     |
| Consolidated                  Balance Sheets as of September 30, 2007 and                  2006                                                                                                                                           | 41                     |
| Consolidated                  Statements of Operations for the years ended September 30, 2007,                  2006 and                  2005                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | 42                     |
| Consolidated                  Statements of Stockholders’ Equity for the years ended September 30,                  2007, 2006 and 2005                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 43                     |
| Consolidated                  Statements of Cash Flows for the years ended September 30, 2007, 2006                  and 2005                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          | 44                     |
| Notes                  to Consolidated Financial                  Statements                                                                                                                                                              | 45                     |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |                   |
| **Financial                  Statement Schedule:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |                   |
| Schedule                  II Valuation and Qualifying Accounts for the years ended September                  30,                  2007, 2006 and 2005                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | 67                     |

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**Table          of Contents**

**Report        of Independent Registered Public Accounting        Firm**

*Internal Control - Integrated Framework*

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**Table              of Contents**

| **HIFN,                INC.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| **CONSOLIDATED                BALANCE SHEETS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
| ($                in thousands, except share and per share amounts)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | **September                30,** |   |
| **                   Years Ended**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | **2007** |   |   | **2006** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |
| **ASSETS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |   |   |
| **                     Current Assets**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |   |   |   |   |   |   |   |
|                          Cash and cash                  equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   | $ | 17,049 |   |   |   | $ | 20,437 |   |
|                          Short-term                  investments                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |   |   | 18,273 |   |   |   |   | 18,340 |   |
|                          Accounts receivable, net of allowance for                  doubtful                             accounts of $114 and $107,                  respectively                                                                                                                                                                                                                                                                                                                         |   |   |   | 7,450 |   |   |   |   | 4,614 |   |
|                      Inventories                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |   | 2,784 |   |   |   |   | 2,028 |   |
|                          Prepaid expenses and other current                  assets                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |   | 1,617 |   |   |   |   | 1,571 |   |
|                              Total current                  assets                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |   | 47,173 |   |   |   |   | 46,990 |   |
| **                     Property and equipment,                  net**                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   |   | 1,982 |   |   |   |   | 2,356 |   |
| **                     Goodwill and i****ntangible assets,                  net**                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |   | 7,453 |   |   |   |   | 6,881 |   |
| **                     Other                  assets**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |   |   | 2,358 |   |   |   |   | 1,249 |   |
| **                         Total Assets**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |   | 58,966 |   |   |   |   | 57,476 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |
| **LIABILITIES                  AND STOCKHOLDERS’ EQUITY**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |   |   |   |   |   |   |
| **                     Current Liabilities**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |   |   |   |   |   |   |   |   |
|                          Accounts                  payable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   | $ | 1,467 |   |   |   | $ | 1,672 |   |
|                          Accrued expenses and other current                  liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |   | 4,051 |   |   |   |   | 5,119 |   |
|                              Total current                  liabilities                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |   | 5,518 |   |   |   |   | 6,791 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |   |   |   |   |   |   |
|                      Commitments and contingencies (Note 11)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |   |   |   |   |   |   |
| **                     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;                             15,277,000 and 14,599,000 shares issued; and 14,557,000                  and                             13,906,000 outstanding,                  respectively                                                                                                             |   |   |   | 15 |   |   |   |   | 14 |   |
|                          Additional paid-in                  capital                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   |   | 171,573 |   |   |   |   | 166,100 |   |
|                          Accumulated other comprehensive income                  (loss)                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |   |   | 3 |   |   |   |   | (1 | ) |
|                          Accumulated                  deficit                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |   | (113,716 | ) |   |   |   | (111,175 | ) |
|                          Treasury stock, 720,000 and 693,000 outstanding shares, respectively,                  at                  cost                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |   | (4,427 | ) |   |   |   | (4,253 | ) |
|                               Total stockholders’                  equity                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |   | 53,448 |   |   |   |   | 50,685 |   |
| **                              Total Liabilities and Stockholders’ Equity**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   | $ | 58,966 |   |   |   | $ | 57,476 |   |

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**Table          of Contents**

| **HIFN,                INC.****CONSOLIDATED                STATEMENTS OF OPERATIONS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | **September                30,** |   |
| **                   Years Ended**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | **2007** |   |   | **2006** |   |   | **2005** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | ($                in thousands, except per share amounts) |   |
| **                     Net revenues:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   |   |   |   |   |   |   |   |
| Processors                                                                                                                                                                                    |   | $ | 40,191 |   |   | $ | 40,262 |   |   | $ | 42,055 |   |
| Software                  licenses and                  other                                                                                                                                      |   |   | 2,776 |   |   |   | 3,502 |   |   |   | 4,339 |   |
| Total                  net                  revenues                                                                                                                                                         |   |   | 42,967 |   |   |   | 43,764 |   |   |   | 46,394 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |   |   |   |   |   |   |   |   |   |   |   |
| **                     Costs and operating expenses:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost                  of revenues -                  processors                                                                                                                                    |   |   | 13,903 |   |   |   | 15,001 |   |   |   | 14,246 |   |
| Cost                  of revenues - software licenses and                  other                                                                                                                   |   |   | 329 |   |   |   | 506 |   |   |   | 552 |   |
| Research                  and                  development                                                                                                                                         |   |   | 12,925 |   |   |   | 20,983 |   |   |   | 21,721 |   |
| Sales                  and                  marketing                                                                                                                                              |   |   | 8,312 |   |   |   | 7,382 |   |   |   | 7,515 |   |
| General                  and                  administrative                                                                                                                                       |   |   | 8,558 |   |   |   | 6,984 |   |   |   | 5,332 |   |
| Amortization                  of                  intangibles                                                                                                                                      |   |   | 3,038 |   |   |   | 3,161 |   |   |   | 3,296 |   |
| Impairment                  of                  assets                                                                                                                                             |   |   | — |   |   |   | 292 |   |   |   | — |   |
| Purchased                  in-process research and development                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   | 159 |   |   |   | — |   |   |   | — |   |
| Total                  costs and operating                  expenses                                                                                                                                              |   |   | 47,224 |   |   |   | 54,309 |   |   |   | 52,662 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |   |   |   |   |   |   |   |   |   |   |   |
| **                     Loss from                  operations**                                                                                             |   |   | (4,257 | ) |   |   | (10,545 | ) |   |   | (6,268 | ) |
| Interest                  income                                                                                                                                                                   |   |   | 1,981 |   |   |   | 1,927 |   |   |   | 1,264 |   |
| Interest                  expense                                                                                                                                                                  |   |   | (4 | ) |   |   | (11 | ) |   |   | (71 | ) |
| Other                  expense,                  net                                                                                                                                               |   |   | (77 | ) |   |   | (54 | ) |   |   | (51 | ) |
| **                     Loss before income                  taxes**                                                                                         |   |   | (2,357 | ) |   |   | (8,683 | ) |   |   | (5,126 | ) |
| Provision                  for income                  taxes                                                                                                                                  |   |   | 184 |   |   |   | 41 |   |   |   | 90 |   |
| **                     Net                  loss                                                                                        **                 |   | $ | (2,541 | ) |   | $ | (8,724 | ) |   | $ | (5,216 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |   |   |   |   |   |   |   |   |   |   |   |
|                      Net loss per share:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic and                  diluted                                                                                                                                                            |   | $ | (0.18 | ) |   | $ | (0.63 | ) |   | $ | (0.38 | ) |
|                      Shares used in computing net loss per share:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                  and                  diluted                                                                                                                                           |   |   | 14,092 |   |   |   | 13,769 |   |   |   | 13,887 |   |

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**Table          of Contents**

| **HIFN,                INC.**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| **CONSOLIDATED                STATEMENTS OF CASH FLOWS**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | **September                30,** |   |
| **                   Years Ended**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | **2007** |   |   | **2006** |   |   | **2005** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | ($                in thousands) |   |
| **                     Cash flows from operating activities:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   |   |   |   |   |   |   |   |
|                      Net                  loss                                                                                                                                                                                                                                                                       |   | $ | (2,541 | ) |   | $ | (8,724 | ) |   | $ | (5,216 | ) |
|                      Adjustments to reconcile net loss to net cash used in                  operating activities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |   |   |   |   |   |   |   |   |   |   |   |
|                      Depreciation and                  amortization                                                                                                                                                                                                                                                                      |   |   | 1,732 |   |   |   | 1,832 |   |   |   | 1,544 |   |
|                      Loss on disposal of fixed                  assets                                                                                                                                                                                                                                                                   |   |   | — |   |   |   | 38 |   |   |   | — |   |
|                      Amortization of intangible                  assets                                                                                                                                                                                                                                                                  |   |   | 3,038 |   |   |   | 3,161 |   |   |   | 3,296 |   |
|                      Asset                  impairment                                                                                                                                                                                                                                                                                   |   |   | — |   |   |   | 292 |   |   |   | — |   |
|                      Stock-based compensation                  expense                                                                                                                                                                                                                                                                   |   |   | 2,261 |   |   |   | 977 |   |   |   | — |   |
|                      Provision for (benefit from) excess and obsolete                  inventory                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |   | (107 | ) |   |   | 950 |   |   |   | — |   |
|                      Purchased in-process research and development                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |   | 159 |   |   |   | — |   |   |   | — |   |
|                      Allowance for doubtful                  accounts                                                                                                                                                                                                                                                                    |   |   | 7 |   |   |   | 3 |   |   |   | — |   |
|                      Changes in assets and liabilities, net of                  acquisition:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |   |   |   |   |   |   |   |   |   |   |   |
|                      Accounts                  receivable                                                                                                                                                                                                                                                                                |   |   | (2,837 | ) |   |   | 454 |   |   |   | 582 |   |
|                      Inventories                                                                                                                                                                                                                                                                                                         |   |   | (648 | ) |   |   | (842 | ) |   |   | (85 | ) |
|                      Prepaid expenses and other current                  assets                                                                                                                                                                                                                                                          |   |   | (46 | ) |   |   | (768 | ) |   |   | 185 |   |
|                      Other                  assets                                                                                                                                                                                                                                                                                       |   |   | (1,334 | ) |   |   | (178 | ) |   |   | (163 | ) |
|                      Accounts                  payable                                                                                                                                                                                                                                                                                   |   |   | (282 | ) |   |   | 148 |   |   |   | (1,884 | ) |
|                      Accrued expenses and other current                  liabilities                                                                                                                                                                                                                                                     |   |   | (1,218 | ) |   |   | (2,833 | ) |   |   | 262 |   |
| Net                  cash used in operating                  activities                                                                                                                                                                                                                                                                                                |   |   | (1,816 | ) |   |   | (5,490 | ) |   |   | (1,479 | ) |
| **                     Cash flows from investing activities:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   |   |   |   |   |   |   |   |   |   |   |
| Sales                  and maturities of short-term                  investments                                                                                                                                                                                                                                                                        |   |   | 34,468 |   |   |   | 25,959 |   |   |   | 41,948 |   |
| Purchases                  of short-term                  investments                                                                                                                                                                                                                                                                                   |   |   | (34,397 | ) |   |   | (23,001 | ) |   |   | (29,981 | ) |
| Cash                  paid to acquire Siafu, net of cash                  acquired                                                                                                                                                                                                                                                                      |   |   | (4,250 | ) |   |   | — |   |   |   | — |   |
| Purchases                  of property and                  equipment                                                                                                                                                                                                                                                                                   |   |   | (582 | ) |   |   | (1,630 | ) |   |   | (1,160 | ) |
|                          Funds in Escrow relating to the                  Siafu acquisition                                                                                                                                                                                                                                                        |   |   | 150 |   |   |   | — |   |   |   | — |   |
| Net                  cash (used in) provided by investing activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   | (4,611 | ) |   |   | 1,328 |   |   |   | 10,807 |   |
| **                     Cash flows from financing activities:**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   |   |   |   |   |   |   |   |   |   |   |
|                          Proceeds from issuance of common stock for stock option                  exercises                             and employee stock purchase plan,                  net                                                                               |   |   | 3,213 |   |   |   | 1,639 |   |   |   | 1,984 |   |
|                          Repurchase of common stock, at                  cost                                                                                                                                                                                                                                        |   |   | (174 | ) |   |   | — |   |   |   | (4,253 | ) |
|                          Installment payments on acquisition of software                  licenses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |   | — |   |   |   | (219 | ) |   |   | (696 | ) |
|                                 Net cash provided by (used in) financing activities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   | 3,039 |   |   |   | 1,420 |   |   |   | (2,965 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |
| **                     Net increase (decrease) in cash and cash                  equivalents**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   | (3,388 | ) |   |   | (2,742 | ) |   |   | 6,363 |   |
| **                     Cash and cash equivalents at beginning of                  period**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |   | 20,437 |   |   |   | 23,179 |   |   |   | 16,816 |   |
| **                     Cash and cash equivalents at end of                  period**                                                                                                                                                                                                                       |   | $ | 17,049 |   |   | $ | 20,437 |   |   | $ | 23,179 |   |

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**Table          of Contents**

| **HIFN,                INC.****CONSOLIDATED                STATEMENTS OF STOCKHOLDERS’EQUITY** |
|------------------------------------------------------------------------------------------------------|

|                                                                                                                                                                                                                                                                                                                                                                         | **Common** **Shares**        |          | **Common                Stock** |    | **Additional                Paid-In Capital** |    | **Accumulated                Other Compre-hensive Income/ (Loss)** |     | **Accumulated                Deficit** |    |  **Treasury                Stock** |    | **Total** |     |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------|---------------|---------------------------------|--------------|-----------------------------------------------|--------------|-------------------------------------------------------------------------|---------------|----------------------------------------|--------------|-----------------------------------------|--------------|-----------|---------------|
|                                                                                                                                                                                                                                                                                                                                                                              | ($                  in thousands) |          |
|                                                                                                                                                                                                                                                                                                                                                                              |                              |          |                            |         |                                          |         |                                                                    |          |                                   |         |                                    |         |      |          |   |   |   |   |   |   |   |
| **Balance                  at September 30, 2004**                                                                                                                                                                                                                                                                                                                                |                              | 13,868        |                            | $            | 14                                            |         | $                                                                  | 161,500       |                                   | $            | (50                                     | )            | $         | (97,235       | ) | $ | — |   | $ | 64,229 |   |
|                                                                                                                                                                                                                                                                                                                                                                              |                              |          |                            |         |                                          |         |                                                                    |          |                                   |         |                                    |         |      |          |   |   |   |   |   |   |   |
| Net                  loss                                                                                                                                                                                                                                                                                                                                                         |                              | —       |                            |         | —                                       |         |                                                                    | —       |                                   |         | —                                 |         |      | (5,216        | ) |   | — |   |   | (5,216 | ) |
| Unrealized                  gain on financial instruments                                                                                                                                                                                                                                                                                                                         |                              | —       |                            |         | —                                       |         |                                                                    | —       |                                   |         | 12                                      |         |      | —       |   |   | — |   |   | 12 |   |
| Comprehensive                  loss                                                                                                                                                                                                                                                                                                                                               |                              | —       |                            |         | —                                       |         |                                                                    | —       |                                   |         | —                                 |         |      | —       |   |   | — |   |   | (5,204 | ) |
| Repurchase                  of common stock, at cost                                                                                                                                                                                                                                                                                                                              |                              | (693          | )                               |         | —                                       |         |                                                                    | —       |                                   |         | —                                 |         |      | —       |   |   | (4,253 | ) |   | (4,253 | ) |
| Issuance                  of common stock upon exercise of options                                                                                                                                                                                                                                                                                                                |                              | 161           |                            |         |  —                                 |         |                                                                    | 962           |                                   |         |  —                           |         |      |  — |   |   |  — |   |   | 962 |   |
| Issuance                  of common stock under employee stock purchase                  plan                                                                                                                                                                                                                                                                                |                              | 186           |                            |         |  —                                 |         |                                                                    | 1,022         |                                   |         |  —                           |         |      |  — |   |   |  — |   |   | 1,022 |   |
| **Balance                  at September 30, 2005**                                                                                                                                                                                                                                                                                                                                |                              | 13,522        |                            |         | 14                                            |         |                                                                    | 163,484       |                                   |         | (38                                     | )            |      | (102,451      | ) |   | (4,253 | ) |   | 56,756 |   |
|                                                                                                                                                                                                                                                                                                                                                                              |                              |          |                            |         |                                          |         |                                                                    |          |                                   |         |                                    |         |      |          |   |   |   |   |   |   |   |
| Net                  loss                                                                                                                                                                                                                                                                                                                                                         |                              | —       |                            |         | —                                       |         |                                                                    | —       |                                   |         | —                                 |         |      | (8,724        | ) |   | — |   |   | (8,724 | ) |
| Unrealized                  gain on financial     Instruments                                                                                                                                                                                                                                                                                            |                              |  — |                            |         |  —                                 |         |                                                                    |  — |                                   |         | 37                                      |         |      |  — |   |   |  — |   |   | 37 |   |
| Comprehensive                  loss                                                                                                                                  |                              | —       |                            |         | —                                       |         |                                                                    | —       |                                   |         | —                                 |         |      | —       |   |   | — |   |   | (8,687 | ) |
| Stock-based                  compensation                                                                                                                                                                                                                                                                                                                                         |                              | —       |                            |         | —                                       |         |                                                                    | 977           |                                   |         | —                                 |         |      | —       |   |   | — |   |   | 977 |   |
| Issuance                  of common stock upon    exercise                  of                  options                                          |                              | 176           |                            |         |  —                                 |         |                                                                    | 705           |                                   |         |  —                           |         |      |  — |   |   |  — |   |   | 705 |   |
| Issuance                  of common stock under    employee                  stock purchase plan                                                                                                                                                                                                                                                              |                              | 208           |                            |         |  —                                 |         |                                                                    | 934           |                                   |         |  —                           |         |      |  — |   |   |  — |   |   | 934 |   |
| **Balance                  at September 30, 2006**                                                                                                                                                                                                                                                                                                                                |                              | 13,906        |                            |         | 14                                            |         |                                                                    | 166,100       |                                   |         | (1                                      | )            |      | (111,175      | ) |   | (4,253 | ) |   | 50,685 |   |
|                                                                                                                                                                                                                                                                                                                                                                              |                              |          |                            |         |                                          |         |                                                                    |          |                                   |         |                                    |         |      |          |   |   |   |   |   |   |   |
| Net                  loss                                                                                                                                                                                                                                                                                                                                                         |                              | —       |                            |         | —                                       |         |                                                                    | —       |                                   |         | —                                 |         |      | (2,541        | ) |   | — |   |   | (2,541 | ) |
| Unrealized                  gain on financial     Instruments                                                                                                                                                                                                                                                                                            |                              |  — |                            |         |  —                                 |         |                                                                    |  — |                                   |         | 4                                       |         |      |  — |   |   |  — |   |   | 4 |   |
| Comprehensive                  loss                                                                                                                                  |                              | —       |                            |         | —                                       |         |                                                                    | —       |                                   |         | —                                 |         |      | —       |   |   | — |   |   | (2,537 | ) |
| Stock-based                  compensation                                                                                                                                                                                                                                                                                                                                         |                              | —       |                            |         | —                                       |         |                                                                    | 2,261         |                                   |         | —                                 |         |      | —       |   |   | — |   |   | 2,261 |   |
| Repurchase                  of common stock, at cost                                                                                                                                                                                                                                                                                                                              |                              | (27           | )                               |         | —                                       |         |                                                                    | —       |                                   |         | —                                 |         |      | —       |   |   | (174 | ) |   | (174 | ) |
| Issuance                  of common stock upon    exercise                  of                  options                                          |                              | 554           |                            |         | 1                                             |         |                                                                    | 2,675         |                                   |         |  —                           |         |      |  — |   |   |  — |   |   | 2,676 |   |
| Issuance                  of common stock under    employee                  stock purchase plan                                                                                                                                                                                                                                                              |                              | 124           |                            |         |  —                                 |         |                                                                    | 537           |                                   |         |  —                           |         |      |  — |   |   |  — |   |   | 537 |   |
| **Balance                  at September 30, 2007**                                                                                                                                                                                                                                                                                                                                |                              | 14,557        |                            | $            | 15                                            |         | $                                                                       | 171,573       |                                   | $            | 3                                       |         | $         | (113,716      | ) | $ | (4,427 | ) | $ | 53,448 |   |
|                                                                                                                                                                                                                                                                                                                                                                              |                              |          |                            |         |                                          |         |                                                                    |          |                                   |         |                                    |         |      |          |   |   |   |   |   |   |   |

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**Table          of Contents**

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

**NOTE      1 — THE COMPANY**

**NOTE      2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

**Basis      of Presentation**

**Restructuring      Charges**

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**Table          of Contents**

*Involuntary      Termination Cost*

|                                                         |   | **Expense****Accrued****June                30, 2006** |   |   | **Adjustments** |   |   | **Paid                as of****September                30, 2006** |   |   | **Balance****September                30, 2006** |   |
|--------------------------------------------------------------|--------|--------------------------------------------------------|--------|--------|-----------------|--------|--------|--------------------------------------------------------------------|--------|--------|--------------------------------------------------|--------|
|                                                         |   | (in                thousands)                          |   |
|                    Cost of revenues           |   | $                                                      | 64     |   |            | $      | (6     | )                                                                  |   | $      | 53                                               |   |   | $ | 5 |    |
|                    Research and development   |   |                                                   | 471    |   |            |   | (17    | )                                                                  |   |   | 454                                              |   |   |   | - |   |
|                    Sales and marketing        |   |                                                   | 59     |   |            |   | -      |                                                               |   |   | 59                                               |   |   |   | - |   |
|                    General and administrative |   |                                                   | 24     |   |            |   | -      |                                                               |   |   | 24                                               |   |   |   | - |   |
| Total                                                        |   | $                                                      | 618    |   |            | $      | (23    | )                                                                  |   | $      | 590                                              |   |   | $ | 5 |   |

*Impairment      Of Long-lived Assets*
*.  *

*Non-recurring        Engineering Expense Recovery.  *

*Termination        Of Operating Lease.  *

*Net        Restructuring Cost.  *

**Cash      and Cash Equivalents**

**Short-Term      Investments**

**Concentration      of Credit Risk**

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**Table          of Contents**

**Concentration      of Suppliers**

**Fair      Value of Financial Instruments**

**Inventories**

**Property      and Equipment**

**Long-Lived      Assets and Goodwill**

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**Table          of Contents**

**Revenue      Recognition**

**Research      and Development Costs**

**Stock-Based      Compensation**

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**Table          of Contents**

**Income      Taxes**

**Foreign      Currency Translation**

**Comprehensive      Income (Loss)**

**Recent      Accounting Pronouncements**

**NOTE      3 — ACQUISITIONS**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |   |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
|                      Developed and core                  technology                                                                                                                                                  |   | $      | 3,214  |   |
|                      Other intellectual property                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |   | 455    |   |
|                      Purchased in-process research and                  development                                                                                                                                  |   |   | 159    |   |
|                      Net tangible                  assets                                                                                                                                                            |   |   | 26     |   |
|                      Goodwill                                                                                                                                                                                        |   |   | 396    |   |

|   |   |   | $ | 4,250 |   |
|--------|--------|--------|---|-------|--------|

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**Table          of Contents**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |   |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
|                      Developed and core                  technology                                                                                                                                  |   | $      | 1,788  |   |
|                      Workforce                                                                                                                                                                       |   |   | 52     |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | $      | 1,840  |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |   |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|
|                      Developed and core                  technology                                                                                                                                                  |   | $      | 11,769 |   |
|                      Contract                  backlog                                                                                                                                                               |   |   | 649    |   |
|                      Fixed                  assets                                                                                                                                                                   |   |   | 48     |   |
|                      Inventory                                                                                                                                                                                       |   |   | 67     |   |
|                      Purchased in-process research and                  development                                                                                                                                  |   |   | 3,337  |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | $      | 15,870 |   |

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**Table          of Contents**

**NOTE      4 — BALANCE SHEET DETAILS**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | **September                30,** |    |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|---------|
| **Years                Ended**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   | **2007**                         |    |   | **2006** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | ($                in thousands)  |    |
|                      Property and equipment:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   |                             |    |   |   |   |
|                      Computer equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | $                                | 8,465   |   |   | $ | 7,932 |   |
|                      Furniture and fixtures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                             | 912     |   |   |   | 1,068 |   |
|                      Leasehold improvements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                             | 789     |   |   |   | 778 |   |
|                      Office equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                             | 906     |   |   |   | 911 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                             | 11,072  |   |   |   | 10,689 |   |
|                      Less: accumulated depreciation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                             | (9,090  | ) |   |   | (8,333 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | $                                | 1,982   |   |   | $ | 2,356 |   |
|                      Intangible assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                             |    |   |   |   |   |   |
|                      Developed and core technology                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | $                                | 16,771  |   |   | $ | 13557 |   |
|                      Less: accumulated amortization                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                             | (10,743 | ) |   |   | (7,705 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                             | 6,028   |   |   |   | 5,852 |   |
|                      Goodwill                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |                             | 1,425   |   |   |   | 1,029 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | $                                | 7,453   |   |   | $ | 6,881 |   |
|                               Included                  in Goodwill is an addition of $396,000 relating to the Siafu acquisition                  in July 2007 (see Note 3). Certain reclassifications have been                  made to the                  prior year intangible assets and accumulated   amortization, by                  excluding fully amortized assets, to conform to the current year’s                  presentation. Such reclassifications had no effect on previously                  reported                  results of operations or retained earnings.                              The estimated future amortization expense related to intangible                  assets as                  of  September 30, 2007 is as follows: |   |
|                      Fiscal year ending September 30,                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                             |    |   |   |   |   |   |   |   |   |
| 2008                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | $                                | 2,997   |   |   |   |   |   |   |   |   |   |
| 2009                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                             | 1,231   |   |   |   |   |   |   |   |   |   |
| 2010                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                             | 643     |   |   |   |   |   |   |   |   |   |
| 2011                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                             | 642     |   |   |   |   |   |   |   |   |   |
| 2012                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |                             | 515     |   |   |   |   |   |   |   |   |   |
|      Total                  estimated                  amortization                                                                                                                                                                                                                                                                                                                                                                                                                                |   | $                                | 6,028   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                             |    |   |   |   |   |   |
|                      Other assets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |                             |    |   |   |   |   |   |
|                      Design tools and other licensed intellectual                  property                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | $                                | 2,000   |   |   | $ | 916 |   |
|                      Refundable deposits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                             | 358     |   |   |   | 333 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | $                                | 2,358   |   |   | $ | 1,249 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |                             |    |   |   |   |   |   |
|                      Accrued expenses and other current liabilities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   |                             |    |   |   |   |   |   |
|                      Accrued vacant facility lease cost                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | $                                | 713     |   |   | $ | 1,560 |   |
|                      Accrued non-recurring engineering services and costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                             | 104     |   |   |   | 510 |   |
|                      Compensation and employee benefits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   |                             | 1,606   |   |   |   | 1,964 |   |
|                      Deferred income and revenue                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                             | 1,004   |   |   |   | 641 |   |
|                      Income taxes payable                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |                             | 9       |   |   |   | 30 |   |
|                      Other                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                             | 615     |   |   |   | 414 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | $                                | 4,051   |   |   | $ | 5,119 |   |

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**Table          of Contents**

**NOTE      5 — SHORT-TERM INVESTMENTS**

|                     **Years Ended**                                                                                                                                                                       |                                                                                                                                                                                                                              | **September                  30, 2007** |       |       | **September                  30, 2006**     |                       |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------|------------|------------|-----------------------------------------------------------------|----------------------------|
|                                                                                                                                                                                                                          |                                                                                                                                                                                                                              |                                    |       |       |                                                            |  **Unrealized**  |   |   |   |   |   |  **Unrealized** |   |   |   |   |   |
|                                                                                                                                                                                                                          |                                                                                                                                                                                                                              |   **Cost**                    | ** ** | ** ** | **Gross****Gains**                                              | ** **                 | ** ** | **Gross****Losses** | ** ** | ** ** | **  Fair                  Value** |   |   |   **Cost** |   |   | **Gross****Gains** |   |   | **Gross****Losses** |   |   |   **Fair                  Value** |   |
|                                                                                                                                                                                                                          |  ($                  in thousands)                                |
|                        Corporate                    securities                         |                                                                                                                                                                                                                              | $                                       | 5,975      |       |                                                            | $                          | — |   |   | $ | — |   |   | $ | 5,975 |   |   | $ | 5,461 |   |   | $ | — |   |   | $ | (8 | ) |   | $ | 5,453 |   |
|                        Money market securities                                                                                                                                                                 |                                                                                                                                                                                                                              |                                    | 25,729     |       |                                                            |                       | 4 |   |   |   | — |   |   |   | 25,733 |   |   |   | 31,964 |   |   |   | 7 |   |   |   | — |   |   |   | 31,971 |   |
|                        Total available-for-sale securities                                                                                                                                                     |                                                                                                                                                                                                                              | $                                       | 31,704     |       |                                                            | $                          | 4 |   |   | $ | — |   |   | $ | 31,708 |   |   | $ | 37,425 |   |   | $ | 7 |   |   | $ | (8 | ) |   | $ | 37,424 |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | **September                30,** |    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|---------|
| **Years                Ended**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | **2007**                         |    |   | **2006** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | (in                thousands)    |    |
|                      Included in:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |                             |    |   |   |   |
|                      Cash and cash                  equivalents                                                                                                            |   | $                                | 13,435  |   |   | $ | 19,084 |   |
|                      Short-term                  investments                                                                                                               |   |                             | 18,273  |   |   |   | 18,340 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | $                                | 31,708  |   |   | $ | 37,424 |   |
|                      Contractual maturities:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                             |    |   |   |   |   |   |
|                      Due in less than one                  year                                                                                                            |   | $                                | 31,708  |   |   | $ | 36,444 |   |
|                      Due from one to two                  years                                                                                                            |   |                             | — |   |   |   | 980 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | $                                | 31,708  |   |   | $ | 37,424 |   |

**NOTE      6 — NET LOSS PER SHARE**

|                                                                             |   | **September                30,** |      |
|----------------------------------------------------------------------------------|--------|----------------------------------|-----------|
| **Years                Ended**                                                   |   | **2007**                         |      |   | **2006** |   |   | **2005** |   |
|                                                                             |   |                             |      |   |   |   |   |   |   |
|                      Outstanding options to purchase common stock |   |                             | 3,769,411 |   |   |   | 3,539,998 |   |   |   | 4,161,531 |   |

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**Table          of Contents**

**NOTE      7 — SUPPLEMENTAL CASH FLOW INFORMATION**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | **September                30,** |    |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|---------|
| **Years                Ended**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   | **2007**                         |    |   | **2006** |   |   | **2005** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | ($                in thousands)  |    |
|                      Supplemental cash flow information:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |                             |    |   |   |   |   |   |   |
| Cash                  paid during the year for                  interest                                                                                     |   | $                                | 4       |   |   | $ | 11 |   |   | $ | 76 |   |
| Cash                  paid during the year for income                  taxes                                                                                 |   |                             | 243     |   |   |   | 136 |   |   |   | 71 |   |
| Cash                  received during the year from refund of income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                             | — |   |   |   | — |   |   |   | 64 |   |

**NOTE      8 — STOCK OPTIONS AND EMPLOYEE BENEFITS**

**Employee      Stock Option Plan**

*Accelerated      Vesting of Stock Options.*

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**Table          of Contents**

|                                                                                                                                                                                                                                                                                                                                                                 |   | **Options****Available****for                Grant**                |       |   | **Outstanding                Options /****Quantity** |   |      | **Weighted****Average****Exercise****Price****(per                share)** |   | **Weighted                Average Contractual****Term****(in                years)** |   | **Aggregate                Intrinsic****Value** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------|------------|--------|------------------------------------------------------|--------|-----------|----------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------------|--------|-------------------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                 |   | ($                in thousands, except per share amounts and years) |       |
| Balance                  at September 30, 2004                                                                                                                                                                                                                                                                                                                       |   |                                                                | 1,207,800  |   |                                                 |   | 4,159,770 |                                                                       |   | $                                                                                    | 11.13  |                                            |   |   |   |   |
| Options                  granted                                                                                |   |                                                                | (549,600   | )      |                                                 |   | 549,600   |                                                                       |   |                                                                                 | 7.50   |                                            |   |   |   |   |
| Options                  exercised                                                                              |   |                                                                | —    |   |                                                 |   | (161,293  | )                                                                          |   |                                                                                 | 5.96   |                                            |   |   | $ | 315 |   |
| Options                  cancelled                                                                              |   |                                                                | 358,611    |   |                                                 |   | (386,546  | )                                                                          |   |                                                                                 | 15.00  |                                            |   |   |   |   |   |
| Balance                  at September 30, 2005                                                                                                                                                                                                                                                                                                                       |   |                                                                | 1,016,811  |   |                                                 |   | 4,161,531 |                                                                       |   |                                                                                 | 10.50  |                                            |   |   |   |   |   |
| Additional                  shared                  authorized                                                  |   |                                                                | 500,000    |   |                                                 |   |      |                                                                       |   |                                                                                 |   |                                            |   |   |   |   |   |
| Options                  granted                                                                                |   |                                                                | (414,500   | )      |                                                 |   | 414,500   |                                                                       |   |                                                                                 | 6.67   |                                            |   |   |   |   |   |
| Options                  exercised                                                                              |   |                                                                | —    |   |                                                 |   | (175,876  | )                                                                          |   |                                                                                 | 4.00   |                                            |   |   |   | 419 |   |
| Options                  cancelled                                                                              |   |                                                                | 818,548    |   |                                                 |   | (860,157  | )                                                                          |   |                                                                                 | 11.67  |                                            |   |   |   |   |   |
| Balance                  at September 30, 2006                                                                                                                                                                                                                                                                                                                       |   |                                                                | 1,920,859  |   |                                                 |   | 3,539,998 |                                                                       |   |                                                                                 | 10.09  |                                            |   |   |   |   |   |
| Options                  granted                                                                                |   |                                                                | (1,528,000 | )      |                                                 |   | 1,528,000 |                                                                       |   |                                                                                 | 5.32   |                                            |   |   |   |   |   |
| Options                  exercised                                                                              |   |                                                                | —    |   |                                                 |   | (553,701  | )                                                                          |   |                                                                                 | 4.83   |                                            |   |   |   | 1,516 |   |
| Options                  cancelled                                                                              |   |                                                                | 744,886    |   |                                                 |   | (744,886  | )                                                                          |   |                                                                                 | 9.17   |                                            |   |   |   |   |   |
| Balance                  at September 30, 2007                                                                                                                                                                                                                                                                                                                       |   |                                                                | 1,137,745  |   |                                                 |   | 3,769,411 |                                                                       |   |                                                                                 | 9.11   |                                            |   |   |   |   |   |
|                                                                                                                                                                                                                                                                                                                                                                 |   |                                                                |       |   |                                                 |   |      |                                                                       |   |                                                                                 |   |                                            |   |   |   |   |   |
| Fully                  vested and expected to vest at September 30, 2007                                                                                                                                                                                                                                                                                             |   |                                                                |       |   |                                                 |   | 3,644,043 |                                                                       |   | $                                                                                    | 9.22   |                                            | 6.02   |   | $ | 5,769 |   |
| Fully                  vested and exercisable at September 30, 2007                                                                                                                                                                                                                                                                                                  |   |                                                                |       |   |                                                 |   | 2,601,295 |                                                                       |   | $                                                                                    | 10.57  |                                            | 4.77   |   | $ | 3,328 |   |

|                                                                                                                                                                                                                                                                                                                                                                | **Options                  Outstanding and Exercisable** |   | **Options                  Vested and Exercisable**                       |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------|--------|---------------------------------------------------------------------------|
| **Range                of****Exercise                Prices**                                                                                                                                                                                                                                                                                                       | **Quantity**                                             |   | **Weighted****Average****Remaining****Life****(in                years)** |   |  **Weighted****Average****Exercise****Price** |   | **Quantity** |   | **Weighted****Average****Exercise****Price** |
|                                                                                                                                                                                                                                                                                                                                                                |                                                     |   |                                                                      |   |   |   |   |   |   |
| $                   2.00  -   $4.85                                                                                                                                                                                                                                                                                              | 437,340                                                  |   |                    6.55                                    |   | $                                  4.23 |   | 267,339 |   | $                                   3.85 |
|  4.90                 -     5.00                                                                                                                       | 118,287                                                  |   |                    1.38                                    |   | 4.99 |   | 118,287 |   | 4.99 |
|  5.09                 -     5.10                                                                                                                       | 418,777                                                  |   |                    8.85                                    |   | 5.10 |   | 94,253 |   | 5.10 |
|  5.11                 -     6.13                                                                                                                       | 588,020                                                  |   |                    6.58                                    |   | 5.78 |   | 351,868 |   | 5.66 |
|  6.21                 -     6.66                                                                                                                       | 400,418                                                  |   |                    6.78                                    |   | 6.49 |   | 197,401 |   | 6.59 |
|  6.67                 -     7.68                                                                                                                       | 386,626                                                  |   |                    7.72                                    |   | 6.88 |   | 211,804 |   | 6.98 |
|  7.83 -                  10.52                                                                                 | 636,087                                                  |   |                    6.25                                    |   | 9.42 |   | 576,487 |   | 9.56 |
|   10.59                 -   14.98                                                          | 406,385                                                  |   |                    3.78                                    |   | 13.06 |   | 406,385 |   | 13.06 |
|   15.74                 -                  69.88                                                | 362,471                                                  |   |                    3.48                                    |   | 21.84 |   | 362,471 |   | 21.84 |
|                  125.50  - 125.50                                                                                                                                                                                                                                                                                                               | 15,000                                                   |   |                    0.07                                    |   | 125.50 |   | 15,000 |   | 125.50 |
|  2.00 -                125.50                                                                                            | 3,769,411                                                |   |                    6.12                                    |   | $                                  9.11 |   | 2,601,295 |   | $                                 10.57 |

----

**Table          of Contents**

*Performance-Based      Share Awards*

|                                                            |   | **Shares** |     |   | **Weighted                Average****Fair                Value****Per                Share** |   |
|-----------------------------------------------------------------|--------|------------|----------|--------|----------------------------------------------------------------------------------------------|--------|
|                    Balance at September 30, 2006 |   |       | —  |   |                                                                                         | $      | — |   |
|                      Options Granted             |   |       | 300,000  |   |                                                                                         |   | 5.52 |   |
|                      Options Exercised           |   |       | (75,000  | )      |                                                                                         |   | 4.85 |   |
|                      Options Forfeited/Cancelled |   |       | (113,381 | )      |                                                                                         |   | 5.45 |   |
|                    Balance at September 30, 2007 |   |       | 111,619  |   |                                                                                         | $      | 6.04 |   |

**Employee      Stock Purchase Plan**

**Stock-Based      Compensation under SFAS 123(R)**

|                    **Years Ended**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | **September                  30, 2007** |   |   | **September                  30,                  2006** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------------|--------|--------|----------------------------------------------------------|--------|
|                      Cost of                  revenues                                                                                                                     |   | $                                       | 31     |   |                                                     | $      | 9 |   |
|                      Research and                  development                                                                                                             |   |                                    | 864    |   |                                                     |   | 455 |   |
|                      Sales and                  marketing                                                                                                                  |   |                                    | 374    |   |                                                     |   | 172 |   |
|                      General and                  administrative                                                                                                           |   |                                    | 992    |   |                                                     |   | 341 |   |
| Total                  stock-based compensation                  expense                                                                                                                                                |   | $                                       | 2,261  |   |                                                     | $      | 977 |   |

----

**Table          of Contents**

*Valuation      Assumptions*

|                                                                                                                                                                                                                                                                                                                                                                                                                           |   | **September                30,** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|
| **Years                Ended **                                                                                                                                                                                                                                                                                                                                                                                           |   | **2007**                         |   | **2006** |   | **2005** |
|                                                                                                                                                                                                                                                                                                                                                                                                                           |   | **Stock****Options**             |   | **Purchase****Plan** |   | **Stock****Options** |   | **Purchase****Plan** |   | **Stock****Options** |   | **Purchase****Plan** |
|                      Weighted average fair                  value                                                            |   | $3.15                            |   | $1.46 |   | $3.86 |   | $1.43 |   | $3.63 |   | $2.14 |
|                      Estimated                  life                                                                    |   | 5.77                  years      |   | 0.49                  years |   | 5.44                  years |   | 0.49                  years |   | 3.24                  years |   | 0.49                  years |
|                      Risk-free interest                  rate                                                           |   | 4.56%                            |   | 4.39% |   | 4.41% |   | 4.73% |   | 3.61% |   | 2.72% |
|                      Expected stock price                  volatility                                                        |   | 53.0%                            |   | 37.6% |   | 62.4% |   | 33.6% |   | 59.1% |   | 41.5% |
|                      Dividend                  yield                                                                         |   | 0.00%                            |   | 0.00% |   | 0.00% |   | 0.00% |   | 0.00% |   | 0.00% |

**Pro      Forma Information under SFAS 123 for Periods Prior to Fiscal      2006**

|     **Year                Ended**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | **September                30, 2005** |    |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|---------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                                  |    |
|                      Net loss excluding stock-based compensation                  expense                                                                                                             |   | $                                     | (5,216  | ) |
|                      Stock-based compensation                  expense                                                                                                                                |   |                                  | (10,682 | )  |
|                          Net loss including stock-based compensation                  expense                                                                                                    |   | $                                     | (15,898 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |                                  |    |   |
|                      Basic and diluted net loss per share excluding stock-based compensation                  expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   | $                                     | (0.38   | ) |
|                      Stock-based compensation expense per                  share                                                                                                                      |   | $                                     | (0.76   | ) |
|                          Basic and diluted net loss per share including stock-based                  compensation expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | $                                     | (1.14   | ) |

**Stock      Repurchase Program**

**Deferred      Stock-Based Compensation**

----

**Table          of Contents**

**Employee      401(k) Plan**

**NOTE      9 — INCOME TAXES**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | **September                30,** |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|
| **Years                Ended**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | **2007**                         |   |   | **2006** |   |   | **2005** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | (in                thousands)    |   |
|                      United                  States                                                                                                 |   | $                                | (2,314 | ) |   | $ | (9,016 | ) |   | $ | (5,222 | ) |
|                      Foreign                                                                                                                        |   |                             | (43    | ) |   |   | 333 |   |   |   | 96 |   |
|                          Loss before income                  taxes                                                                                  |   | $                                | (2,357 | ) |   | $ | (8,683 | ) |   | $ | (5,126 | ) |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |  **September                  30,** |    |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------------|---------|
|     **Years                Ended**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | ** 2007**                           |    |   | **2006** | ** ** | ** ** | **2005** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | (in                  thousands)          |    |
| Current:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                                     |    |   |   |   |   |   |   |
|                        Federal                                                                                                                            |   | $                                        | — |   |   | $ | — |   |   | $ | — |   |
|                        State                                                                                                                              |   |                                     | 1       |   |   |   | — |   |   |   | — |   |
|                        Foreign                                                                                                                            |   |                                     | 183     |   |   |   | 41 |   |   |   | 90 |   |
|                            Provision for income                    taxes                                                                                  |   | $                                        | 184     |   |   | $ | 41 |   |   | $ | 90 |   |

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | **September                30,** |    |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|---------|
|    **Years                Ended**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | **2007**                         |    |   | **2006** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | (in                thousands)    |    |
|                      Net operating                  loss                                                                                                                        |   | $                                | 26,361  |   |   | $ | 27,144 |   |
|                      Property and                  equipment                                                                                                                    |   |                             | 126     |   |   |   | (36 | ) |
|                      Inventory valuation                  accounts                                                                                                              |   |                             | 360     |   |   |   | 417 |   |
|                      Accruals and                  reserves                                                                                                                     |   |                             | 1,034   |   |   |   | 1,435 |   |
|                      Research and development                  credit                                                                                                           |   |                             | 8,384   |   |   |   | 8,089 |   |
|                      Amortization of                  intangibles                                                                                                               |   |                             | 6,180   |   |   |   | 5,932 |   |
|                          Total deferred tax                  asset                                                                                                         |   |                             | 42,445  |   |   |   | 42,981 |   |
|                      Valuation                  allowance                                                                                                                       |   |                             | (42,445 | ) |   |   | (42,981 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | $                                | — |   |   | $ | — |   |

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**Table          of Contents**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | **September                30,** |   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|
| **Years                Ended**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | **2007**                         |   |   | **2006** |   |   | **2005** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | (in                thousands)    |   |
|                      Tax at federal statutory                  rate                                                                                                |   | $                                | (801   | ) |   | $ | (3,118 | ) |   | $ | (1,775 | ) |
|                      State taxes, net of federal tax                  benefit                                                                                      |   |                             | 1      |   |   |   | — |   |   |   | — |   |
|                      Research and development                  credits                                                                                             |   |                             | (187   | ) |   |   | (202 | ) |   |   | (742 | ) |
|                      Deferred tax benefits not                  recognized                                                                                         |   |                             | 967    |   |   |   | 3,282 |   |   |   | 2,594 |   |
|                      Foreign                  taxes                                                                                                                |   |                             | 183    |   |   |   | 41 |   |   |   | 90 |   |
|                      Other                                                                                                                                         |   |                             | 21     |   |   |   | 38 |   |   |   | (77 | ) |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | $                                | 184    |   |   | $ | 41 |   |   | $ | 90 |   |

**NOTE      10 — SEGMENT AND GEOGRAPHIC INFORMATION**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | **September                30,** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|
| **Years                Ended**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | **2007**                         |   |   | **2006** |   |   | **2005** |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | (in                thousands)    |   |
| North                America:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |   |                             |   |   |   |   |   |   |   |
|                          United                  States                                                                                   |   | $                                | 17,841 |   |   | $ | 16,655 |   |   | $ | 16,177 |   |
|                          Other                                                                                                            |   |                             | 799    |   |   |   | 1,082 |   |   |   | 2,194 |   |
|                              Total North America                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |                             | 18,640 |   |   |   | 17,737 |   |   |   | 18,371 |   |
|                      Asia:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                             |   |   |   |   |   |   |   |   |   |   |
|                          Hong                  Kong                                                                                       |   |                             | 18,660 |   |   |   | 18,138 |   |   |   | 18,819 |   |
|                          Malaysia                                                                                                         |   |                             | 1,424  |   |   |   | 1,411 |   |   |   | 2,398 |   |
|                          Singapore                                                                                                        |   |                             | 284    |   |   |   | 1,429 |   |   |   | 2,505 |   |
|                          Japan                                                                                                            |   |                             | 1,155  |   |   |   | 1,796 |   |   |   | 1,442 |   |
|                          Thailand                                                                                                         |   |                             | 547    |   |   |   | 1,039 |   |   |   | 1,058 |   |
|                          Taiwan                                                                                                           |   |                             | 69     |   |   |   | 134 |   |   |   | 86 |   |
|                          Other                                                                                                            |   |                             | 15     |   |   |   | 39 |   |   |   | 4 |   |
|                              Total                  Asia                                                                                  |   |                             | 22,154 |   |   |   | 23,986 |   |   |   | 26,312 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                             |   |   |   |   |   |   |   |   |   |   |
|                      Europe and                  other                                                                                              |   |                             | 2,173  |   |   |   | 2,041 |   |   |   | 1,711 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |                             |   |   |   |   |   |   |   |   |   |   |
|                              Total                                                                                                        |   | $                                | 42,967 |   |   | $ | 43,764 |   |   | $ | 46,394 |   |

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**Table          of Contents**

**Major      Customers**

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   | **September                  30,** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|--------|
| **Years                  Ended**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | **2007**                           |   |   | **2006** |   |   | **2005** |   |
|                        Cisco Systems,                    Inc.                                                                                                              |   |                               | 53     | % |   |   | 50 | % |   |   | 49 | % |
|                        Huawei Technologies,                    Inc.                                                                                                        |   |                               | 12     | % |   |   | 13 | % |   |   | 10 | % |
|                        Quantum                    Corporation                                                                                                              |   |                               | 3      | % |   |   | 7 | % |   |   | 11 | % |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |                               | 68     | % |   |   | 70 | % |   |   | 70 | % |

**Property      and Equipment**

**NOTE      11 — COMMITMENTS AND CONTINGENCIES**

**Contractual      Obligations**

|                                                                                                                                                                                                                                                                                                                                                                                                                         |   | **Operating****Lease****Commitments** |   |   | **Inventory****Purchases** |   |    | **Non-recurring****Engineering****Expenses** |   |   | **Total****Contractual****Obligations** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|--------|----------------------------|--------|---------|----------------------------------------------|--------|--------|-----------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                         |   | (in                thousands)         |   |
| Fiscal                year ending September 30,                                                                                                                                                                                                                                                                                                                                                                              |   |                                  |   |   |                       |   |    |                                         |   |   |                                    |   |
|                      2008                                                               |   | $                                     | 1,569  |   |                       | $      | 1,421   |                                         |   | $      | 103                                     |   |   | $ | 3,093 |   |
|                      2009                                                               |   |                                  | 1,214  |   |                       |   | — |                                         |   |   | —                                 |   |   |   | 1,214 |   |
|                      2010                                                               |   |                                  | 430    |   |                       |   | — |                                         |   |   | —                                 |   |   |   | 430 |   |
|                      2011                                                               |   |                                  | 116    |   |                       |   | — |                                         |   |   | —                                 |   |   |   | 116 |   |
|                      2012                                                               |   |                                  | 20     |   |                       |   | — |                                         |   |   | —                                 |   |   |   | 20 |   |
|                                                                                                                                                                                                                                                                                                                                                                                                                         |   | $                                     | 3,349  |   |                       | $      | 1,421   |                                         |   | $      | 103                                     |   |   | $ | 4,873 |   |

**Guarantees**

----

**Table          of Contents**

*Product      Warranties*

----

**Table          of Contents**

**SELECTED      UNAUDITED QUARTERLY FINANCIAL DATA**

|                                                                                              | **Three                Months Ended**                     |   |                                                                     |    |                       |
|---------------------------------------------------------------------------------------------------|-----------------------------------------------------------|--------|--------------------------------------------------------------------------|---------|----------------------------|
|                                                                                              | **December                31**                            |   | **March                31**                                              |    | **June                30** |   | **September                30** |   |   | **Total** |   |
|                                                                                              | (in                  thousands, except per share amounts) |   |
| **                     Fiscal 2007:**                                              |                                                      |   |                                                                     |    |                       |   |   |   |   |   |   |   |   |   |   |
|                          Net revenues                          |                                                      | $      | 9,269                                                                    |    |                       | $ | 11,029 |   |   | $ | 11,671 |   |   | $ | 10,998 |   |   | $ | 42,967 |   |
|                          Total costs and operating expenses    |                                                      |   | 12,524                                                                   |    |                       |   | 12,210 |   |   |   | 11,654 |   |   |   | 10,836 |   |   |   | 47,224 |   |
|                          Net income (loss)                     |                                                      |   | (2,702                                                                   | )       |                       |   | (707 | ) |   |   | 284 |   |   |   | 584 |   |   |   | (2,541 | ) |
|                          Net income (loss) per share           |                                                      |   |              |    |                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                          Basic             |                                                      |   | (0.19                                                                    |  ) |                       |   | (0.05  | ) |   |   | 0.02  |   |   |   | 0.04  |   |   |   | (0.18 | )  |
|                          Diluted           |                                                      |   | (0.19                                                                    | )  |                       |   | (0.05  | ) |   |   | 0.02  |   |   |   | 0.04  |   |   |   | (0.18 | ) |
|                                                                                              |                                                      |   |                                                                     |    |                       |   |
| **Fiscal                2006:**                                                                   |                                                      |   |                                                                     |    |                       |   |   |   |   |   |   |   |
|                          Net revenues                          |                                                      | $      | 10,672                                                                   |    |                       | $ | 11,719 |   |   | $ | 12,252 |   |   | $ | 9,121 |   |   | $ | 43,764 |   |
|                          Total costs and operating expenses    |                                                      |   | 12,826                                                                   |    |                       |   | 14,676 |   |   |   | 14,867 |   |   |   | 11,940 |   |   |   | 54,309 |   |
|                          Net loss                              |                                                      |   | (1,662                                                                   | )       |                       |   | (2,510 | ) |   |   | (2,211 | ) |   |   | (2,341 | ) |   |   | (8,724 | ) |
|                          Net loss per share, basic and diluted |                                                      |   | (0.12                                                                    | )       |                       |   | (0.18 | ) |   |   | (0.16 | ) |   |   | (0.17 | ) |   |   | (0.63 | ) |

**ITEM      9. *CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON      ACCOUNTING AND FINANCIAL***

***DISCLOSURE***

**ITEM      9A.*CONTROLS AND PROCEDURES***

*      Evaluation of disclosure controls and procedures.*

*Management’s Report on Internal Control Over Financial Reporting.*

|   | (i) | pertain                to maintenance of records that, in reasonable detail, accurately                and                fairly reflect the transactions and dispositions of the assets of                the                company; |
|--------|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**Table          of Contents**

|   | (ii) | provide                reasonable assurance that transactions are recorded as necessary                to permit                preparation of financial statements in accordance with generally                accepted                accounting principles, and that receipts and expenditures of the                company                are being made                only in accordance with                authorizations of management and directors of the company;                and |
|--------|------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|   | (iii) | provide                  reasonable assurance that                  unauthorized acquisition, use or disposition of the company’s assets that                  could have a material effect on financial statements would be prevented                  or                  detected on a timely                  basis. |
|--------|-------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Internal Control —Integrated Framework *

*Attestation Report of the Registered Public Accounting Firm*

*Changes      in internal control over      financial reporting.*

**ITEM      9B.*OTHER INFORMATION***

----

**Table          of Contents**

**PART      III**

**ITEM      10. *DIRECTORS**,**EXECUTIVE OFFICERS**AND CORPORATE GOVERNANCE***

*Election of      Directors*

**ITEM      11.*EXECUTIVE COMPENSATION***

*Executive Officer      Compensation*

**ITEM      12. *SECURITY OWNERSHIP OF CERTAIN BENEFICIAL      OWNERS AND MANAGEMENT AND RELATED***

*** STOCKHOLDER      MATTERS***

*Security Ownership      of Certain Beneficial Owners and Management*

**ITEM      13.*CERTAIN RELATIONSHIPS AND RELATED      TRANSACTIONS**, AND DIRECTOR INDEPENDENCE***

* Certain      Transactions*

**ITEM      14.*PRINCIPAL ACCOUNT**ING**FEES AND      SERVICES***

*Ratification of      Appointment of Independent Registered Public Accounting      Firm*

----

**Table          of Contents**

**PART      IV**

**Item      15. *EXHIBITS**,**FINANCIAL STATEMENT      SCHEDULES***

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

|   | 1. | **Financial                Statements**-                See Item                8 above. |
|--------|----|------------------------------------------------------------------------------------------|

|   | 2. | **Financial                Statement                Schedule**                -                See Schedule II. |
|--------|----|-----------------------------------------------------------------------------------------------------------------|

|   | 3. | **Exhibits**- The exhibits listed in the accompanying “Index to Exhibits” are                filed as part of this Annual Report on Form                10-K. |
|--------|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                      |       |                                                                                                                                                                                          |       | **Incorporated                  by Reference**   |       |                              |
|-------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------|
| ** Exhibit                  Number** | ** ** | ** Exhibit**                                                                                                                                                                             | ** ** | **Form **                                             | ** ** | **File                No. ** | ** ** | **Exhibit ** | ** ** | **Filing                Date ** | ** ** | ** Filed                  Herewith** |
| 2.1                                       |       | Acquisition                  of Assets of Siafu Software, LLC, by and between hi/fn, Inc. and                  Siafu                  Software, LLC.                                          |       | 8-K                                                        |       | 0-24765                           |   | 99.1 |   | 07/26/2007 |   |   |
| 3.1                                       |       | Form                  of Third Amended and Restated Certificate of Incorporation of hi/fn,                  inc.                                                                              |       | 10-12G                                                     |       | 0-24765                           |   | 3.1 |   | 08/08/1998 |   |   |
| 3.2                                       |       | Amended                  and Restated Bylaws of hi/fn, inc.                                                                                                                                   |       | 10-12G                                                     |       | 0-24765                           |   | 3.2 |   | 08/08/1998 |   |   |
|                                      |       |                                                                                                                                                                                          |       |                                                       |       |                              |   |   |   |   |   |   |
| 10.1                                      |       | Assignment,                  Assumption and License Agreement dated as of November 21, 1996                  between                  Stac, Inc. and hi/fn, inc.                              |       | 10-12G                                                     |       | 0-24765                           |   | 10.2 |   | 08/08/1998 |   |   |
| 10.2                                      |       | Cross                  License Agreement dated as of November 21, 1996 between Stac, Inc.                  and                  hi/fn, inc.                                                   |       | 10-12G                                                     |       | 0-24765                           |   | 10.3 |   | 08/08/1998 |   |   |
| 10.3                                      |       | Agreement                  dated as of April 1, 1994 between International Business Machines                  Corporation and Stac, Inc. (Program Patent License                  Agreement). |       | 10-12G                                                     |       | 0-24765                           |   | 10.9 |   | 08/08/1998 |   |   |
| 10.4                                      |       | Agreement                  dated as of April 1, 1994 between International Business Machines                  Corporation and Stac, Inc. (Cross License Agreement).                           |       | 10-12G                                                     |       | 0-24765                           |   | 10.10 |   | 08/08/1998 |   |   |
| 10.5                                      |       | License                  Agreement dated as of June 20, 1994 between Microsoft Corporation                  and                  Stac, Inc.                                                   |       | 10-12G                                                     |       | 0-24765                           |   | 10.11 |   | 08/08/1998 |   |   |
| 10.6                                      |       | License                  Agreement dated as of February 16, 1996 between Microsoft Corporation                  and Stac, Inc.                                                           |       | 10-12G                                                     |       | 0-24765                           |   | 10.12 |   | 08/08/1998 |   |   |
| 10.7                                      |       | License                  Agreement dated as of December 15, 1995 between Motorola, Inc.                  and Stac,                  Inc.                                                      |       | 10-12G                                                     |       | 0-24765                           |   | 10.13 |   | 08/08/1998 |   |   |
| 10.8                                      |       | Amended                  and Restated 1996 Equity Incentive Plan of hi/fn, inc.                                                                                                               |       | S-8                                                        |       | 333-135984                        |   | 99.1 |   | 07/24/2006 |   |   |
| 10.9                                      |       | Amended                  and Restated 1998 Employee Stock Purchase Plan of hi/fn,                  inc.                                                                                       |       | S-8                                                        |       | 333-135987                        |   | 99.1 |   | 07/24/2006 |   |   |
| 10.10                                     |       | 2001                  Nonstatutory Stock Option Plan of hi/fn, inc.                                                                                                                           |       | 10-Q                                                       |       | 0-24765                           |   | 10.1 |   | 05/01/2001 |   |   |
| 10.11                                     |       | Agreement                  dated as of April 6, 2001 between Sally Spencer and hi/fn,                  inc.                                                                                   |       | 10-Q                                                       |       | 0-24765                           |   | 10.2 |   | 05/01/2001 |   |   |
| 10.12                                     |       | Agreement                  dated May 6, 2005 between POI-Carlsbad, Inc. and hi/fn,                  inc.                                                                                      |       | 10-Q                                                       |       | 0-24765                           |   | 10.4 |   | 08/03/2005 |   |   |
| 10.13                                     |       | Agreement                  dated July 20, 2005 between 750 University, LLC and hi/fn,                  inc.                                                                                   |       | 10-Q                                                       |       | 0-24765                           |   | 10.5 |   | 08/03/2005 |   |   |
| 10.14                                     |       | Agreement                  dated July 25, 2006 between Ocean Point Tech Centre and hi/fn,                  inc.                                                                               |       | 10-K                                                       |       | 0-24765                           |   | 10.32 |   | 12/12/2006 |   |   |
| 10.15                                     |       | Agreement                  dated September 19, 2006 between Rreef America Reit III-Z1 LC and                  hi/fn,                  inc.                                                    |       | 10-K                                                       |       | 0-24765                           |   | 10.31 |   | 12/12/2006 |   |   |
| 10.16                                     |       | Form                  of Director Change of Control Agreement.                                                                                                                                |       | 10-12G                                                     |       | 0-24765                           |   | 10.16 |   | 08/08/1998 |   |   |

----

**Table          of Contents**

| 10.17        |   | Form                of Employee Change of Control Agreement.                                                                                                                                                            |   | 10-12G |   | 0-24765 |   | 10.17  |   | 08/08/1998 |   |   |
|--------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|---------|--------|--------|--------|------------|--------|--------|
| 10.18        |   | Form                of Severance and Change of Control Agreement by and between hi/fn,                inc.                and William R. Walker.                                                                        |   | 8-K    |   | 0-24765 |   | 10.2   |   | 05/16/2005 |   |   |
| 10.19        |   | Form                of Severance and Change of Control Agreement by and between the Company                and each of Douglas L. Whiting, Thomas Moore, Russell Dietz, and                Kamran                Malik. |   | 8-K    |   | 0-24765 |   | 10.3   |   | 05/16/2005 |   |   |
| 10.20        |   | Employment                Agreement dated November 16, 2006 between Albert E. Sisto and hi/fn,                inc.                                                                                                      |   | 10-K   |   | 0-24765 |   | 10.33  |   | 12/12/2006 |   |   |
| 10.21        |   | Severance                and Release Agreement dated November 16, 2006 between Christopher                G.                Kenber and hi/fn, inc.                                                                      |   | 10-K   |   | 0-24765 |   | 10.34  |   | 12/12/2006 |   |   |
| 10.22        |   | Consulting                Agreement dated November 16, 2006 between Christopher G. Kenber and                hi/fn,                inc.                                                                                 |   | 10-K   |   | 0-24765 |   | 10.35  |   | 12/12/2006 |   |   |
| 10.23† |   | Employment                Agreement dated February 6, 2007 between Albert E. Sisto and hi/fn,                inc.                                                                                                       |   | 10-Q   |   | 0-24765 |   | 10.38  |   | 05/05/2007 |   |   |
| 10.24† |   | Employment                Agreement dated July 19, 2007 between John Matze and hi/fn,                inc.                                                                                                               |   |   |   |    |   |   |   |       |   | X      |
|         |   |                                                                                                                                                                                                                    |   |   |   |    |   |   |   |       |   |   |
| 21.1         |   | Subsidiaries                of the Registrant                                                                                                                                                                           |   |   |   |    |   |   |   |       |   | X      |
| 23.1         |   | Consent                of PricewaterhouseCoopers LLP, independent registered public accounting                firm.                                                                                                     |   |   |   |    |   |   |   |       |   | X      |
|         |   |                                                                                                                                                                                                                    |   |   |   |    |   |   |   |       |   | X      |
| 31.1         |   | Certification                of Chief Executive Officer pursuant to Rule 13A-14(a) or                15D-14(a)                                                                                                          |   |   |   |    |   |   |   |       |   | X      |
| 31.2         |   | Certification                of Chief Financial Officer pursuant to Rule 13A-14(a) or                15D-14(a)                                                                                                          |   |   |   |    |   |   |   |       |   | X      |
| 32.1         |   | Certification                of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as                adopted                pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                         |   |   |   |    |   |   |   |       |   | X      |
| 32.2         |   | Certification                of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as                adopted                pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                         |   |   |   |    |   |   |   |       |   | X      |

| (b) | Exhibits:                See Item 15(a)                above. |
|-----|---------------------------------------------------------------|

| (c) | Financial                Statement Schedule                    Schedule                II - Valuation and Qualifying                Accounts |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**Table          of Contents**

**SIGNATURES**

|                                    |   | hi/fn,                inc                        |   |
|-----------------------------------------|--------|--------------------------------------------------|--------|
|                                    |   |                                             |   |
| Dated:                November 14, 2007 |   | /s/                ALBERT E. SISTO               |   |
|                                    |   | Albert                E. Sisto                   |   |
|                                    |   | Chairman,                Chief Executive Officer |   |

| Signature                                     |   | Title                                                                     |   | Date                             |
|-----------------------------------------------|--------|---------------------------------------------------------------------------|--------|----------------------------------|
|                                          |   |                                                                      |   |                             |
| /s/                ALBERT E. SISTO            |   | Chairman,                Chief Executive Officer                          |   | November                14, 2007 |
| (Albert                E. Sisto)              |   | (principal                executive officer)                              |   |                             |
|                                          |   |                                                                      |   |                             |
| /s/                WILLIAM R. WALKER          |   | Vice                President, Finance, Chief Financial Officer           |   | November                14, 2007 |
| (William                R. Walker)            |   | and                Secretary (principal financial and accounting officer) |   |                             |
|                                          |   |                                                                      |   |                             |
| /s/                DOUGLAS L. WHITING         |   | Chief                Scientist, Director                                  |   | November                14, 2007 |
| (Douglas                L. Whiting)           |   |                                                                      |   |                             |
|                                          |   |                                                                      |   |                             |
| /s/                DENNIS DeCOSTE             |   | Director                                                                  |   | November                14, 2007 |
| (Dennis                DeCoste)               |   |                                                                      |   |                             |
|                                          |   |                                                                      |   |                             |
| /s/                TAHER ELGAMAL              |   | Director                                                                  |   | November                14, 2007 |
| (Taher                Elgamal)                |   |                                                                      |   |                             |
|                                          |   |                                                                      |   |                             |
| /s/                ROBERT W. JOHNSON          |   | Director                                                                  |   | November                14, 2007 |
| (Robert                W. Johnson)            |   |                                                                      |   |                             |
|                                          |   |                                                                      |   |                             |
| /s/                THOMAS  LAWRENCE |   | Director                                                                  |   | November                14, 2007 |
| (Thomas                Lawrence)              |   |                                                                      |   |                             |

----

**Table          of Contents**

|                                                                                                                                                                                                                                                                                                                                                                                                                              |   | **Balance                at beginning of period** |   |   | **Additions                charged to****costs                and expenses** |    |   | **Deductions** |   |    | **Balance                at end****of                 period** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------|--------|--------|------------------------------------------------------------------------------|---------|--------|----------------|--------|---------|---------------------------------------------------------------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                              |   |                                              |   |   |                                                                         |    |   |           |   |    |                                                                |   |
| **Deducted                from accounts receivable**                                                                                                                                                                                                                                                                                                                                                                              |   |                                              |   |   |                                                                         |    |   |           |   |    |                                                                |   |
| Allowance                for doubtful accounts:                                                                                                                                                                                                                                                                                                                                                                                   |   |                                              |   |   |                                                                         |    |   |           |   |    |                                                                |   |
| Year                  ended September 30,                  2007                                                            |   | $                                            | 107    |   |                                                                         |  $ | 7      |           |   | $  | -                                                                   |   |   | $  | 114 |   |
| Year                  ended September 30,                  2006                                                            |   |                                              | 104    |   |                                                                         |    | 3      |           |   |    | -                                                                   |   |   |   | 107 |   |
| Year                  ended September 30,                  2005                                                            |   |                                              | 259    |   |                                                                         |    | -      |           |   |    | (155                                                                | )      |   |   | 104 |   |

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**Table          of Contents**

**INDEX      TO EXHIBITS**

|                                    |       |                                                                                                                                                                                    |       | **Incoporated                by Reference** |       |                            |
|-----------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------|------------|---------------------------------|
| ** Exhibit                Number** | ** ** | ** Exhibit**                                                                                                                                                                       | ** ** | **Form **                              | ** ** | **File              No. ** | ** ** | **Exhibit ** | ** ** | **Filing              Date ** | ** ** | ** Filed                Herewith** |
| 2.1                                     |       | Acquisition                of Assets of Siafu Software, LLC, by and between hi/fn, Inc. and                Siafu                Software, LLC.                                          |       | 8-K                                         |       | 0-24765                         |   | 99.1 |   | 07/26/2007 |   |   |
| 3.1                                     |       | Form                of Third Amended and Restated Certificate of Incorporation of hi/fn,                inc.                                                                            |       | 10-12G                                      |       | 0-24765                         |   | 3.1 |   | 08/08/1998 |   |   |
| 3.2                                     |       | Amended                and Restated Bylaws of hi/fn, inc.                                                                                                                               |       | 10-12G                                      |       | 0-24765                         |   | 3.2 |   | 08/08/1998 |   |   |
|                                    |       |                                                                                                                                                                                    |       |                                        |       |                            |   |   |   |   |   |   |
| 10.1                                    |       | Assignment,                Assumption and License Agreement dated as of November 21, 1996 between                Stac, Inc. and hi/fn, inc.                                             |       | 10-12G                                      |       | 0-24765                         |   | 10.2 |   | 08/08/1998 |   |   |
| 10.2                                    |       | Cross                License Agreement dated as of November 21, 1996 between Stac, Inc.                and                hi/fn, inc.                                                   |       | 10-12G                                      |       | 0-24765                         |   | 10.3 |   | 08/08/1998 |   |   |
| 10.3                                    |       | Agreement                dated as of April 1, 1994 between International Business Machines                Corporation and Stac, Inc. (Program Patent License                Agreement). |       | 10-12G                                      |       | 0-24765                         |   | 10.9 |   | 08/08/1998 |   |   |
| 10.4                                    |       | Agreement                dated as of April 1, 1994 between International Business Machines                Corporation and Stac, Inc. (Cross License Agreement).                         |       | 10-12G                                      |       | 0-24765                         |   | 10.10 |   | 08/08/1998 |   |   |
| 10.5                                    |       | License                Agreement dated as of June 20, 1994 between Microsoft Corporation                and                Stac, Inc.                                                   |       | 10-12G                                      |       | 0-24765                         |   | 10.11 |   | 08/08/1998 |   |   |
| 10.6                                    |       | License                Agreement dated as of February 16, 1996 between Microsoft Corporation                and Stac, Inc.                                                         |       | 10-12G                                      |       | 0-24765                         |   | 10.12 |   | 08/08/1998 |   |   |
| 10.7                                    |       | License                Agreement dated as of December 15, 1995 between Motorola, Inc. and                Stac,                Inc.                                                      |       | 10-12G                                      |       | 0-24765                         |   | 10.13 |   | 08/08/1998 |   |   |
| 10.8                                    |       | Amended                and Restated 1996 Equity Incentive Plan of hi/fn, inc.                                                                                                           |       | S-8                                         |       | 333-135984                      |   | 99.1 |   | 07/24/2006 |   |   |
| 10.9                                    |       | Amended                and Restated 1998 Employee Stock Purchase Plan of hi/fn,                inc.                                                                                     |       | S-8                                         |       | 333-135987                      |   | 99.1 |   | 07/24/2006 |   |   |
| 10.10                                   |       | 2001                Nonstatutory Stock Option Plan of hi/fn, inc.                                                                                                                       |       | 10-Q                                        |       | 0-24765                         |   | 10.1 |   | 05/01/2001 |   |   |
| 10.11                                   |       | Agreement                dated as of April 6, 2001 between Sally Spencer and hi/fn,                inc.                                                                                 |       | 10-Q                                        |       | 0-24765                         |   | 10.2 |   | 05/01/2001 |   |   |
| 10.12                                   |       | Agreement                dated May 6, 2005 between POI-Carlsbad, Inc. and hi/fn,                inc.                                                                                    |       | 10-Q                                        |       | 0-24765                         |   | 10.4 |   | 08/03/2005 |   |   |
| 10.13                                   |       | Agreement                dated July 20, 2005 between 750 University, LLC and hi/fn,                inc.                                                                                 |       | 10-Q                                        |       | 0-24765                         |   | 10.5 |   | 08/03/2005 |   |   |
| 10.14                                   |       | Agreement                dated July 25, 2006 between Ocean Point Tech Centre and hi/fn,                inc.                                                                             |       | 10-K                                        |       | 0-24765                         |   | 10.32 |   | 12/12/2006 |   |   |
| 10.15                                   |       | Agreement                dated September 19, 2006 between Rreef America Reit III-Z1 LC and                hi/fn,                inc.                                                    |       | 10-K                                        |       | 0-24765                         |   | 10.31 |   | 12/12/2006 |   |   |
| 10.16                                   |       | Form                of Director Change of Control Agreement.                                                                                                                            |       | 10-12G                                      |       | 0-24765                         |   | 10.16 |   | 08/08/1998 |   |   |

| 10.17 |   | Form                of Employee Change of Control Agreement.                                                                                                                                                            |   | 10-12G |   | 0-24765 |   | 10.17 |   | 08/08/1998 |   |   |
|-------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|---------|--------|-------|--------|------------|--------|--------|
| 10.18 |   | Form                of Severance and Change of Control Agreement by and between hi/fn,                inc.                and William R. Walker.                                                                        |   | 8-K    |   | 0-24765 |   | 10.2  |   | 05/16/2005 |   |   |
| 10.19 |   | Form                of Severance and Change of Control Agreement by and between the Company                and each of Douglas L. Whiting, Thomas Moore, Russell Dietz, and                Kamran                Malik. |   | 8-K    |   | 0-24765 |   | 10.3  |   | 05/16/2005 |   |   |
| 10.20 |   | Employment                Agreement dated November 16, 2006 between Albert E. Sisto and hi/fn,                inc.                                                                                                      |   | 10-K   |   | 0-24765 |   | 10.33 |   | 12/12/2006 |   |   |
| 10.21 |   | Severance                and Release Agreement dated November 16, 2006 between Christopher                G.                Kenber and hi/fn, inc.                                                                      |   | 10-K   |   | 0-24765 |   | 10.34 |   | 12/12/2006 |   |   |

----

**Table            of Contents**

| 10.22        |   | Consulting                Agreement dated November 16, 2006 between Christopher G. Kenber and                hi/fn,                inc.                                                         |   | 10-K   |   | 0-24765 |   | 10.35  |   | 12/12/2006 |   |   |
|--------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|--------|---------|--------|--------|--------|------------|--------|--------|
| 10.23† |   | Employment                Agreement dated February 6, 2007 between Albert E. Sisto and hi/fn,                inc.                                                                               |   | 10-Q   |   | 0-24765 |   | 10.38  |   | 05/05/2007 |   |   |
| 10.24† |   | Employment                Agreement dated July 19, 2007 between John Matze and hi/fn,                inc.                                                                                       |   |   |   |    |   |   |   |       |   | X      |
|         |   |                                                                                                                                                                                            |   |   |   |    |   |   |   |       |   |   |
| 21.1         |   | Subsidiaries                of the Registrant                                                                                                                                                   |   |   |   |    |   |   |   |       |   | X      |
| 23.1         |   | Consent                of PricewaterhouseCoopers LLP, independent registered public accounting                firm.                                                                             |   |   |   |    |   |   |   |       |   | X      |
|         |   |                                                                                                                                                                                            |   |   |   |    |   |   |   |       |   | X      |
| 31.1         |   | Certification                of Chief Executive Officer pursuant to Rule 13A-14(a) or                15D-14(a)                                                                                  |   |   |   |    |   |   |   |       |   | X      |
| 31.2         |   | Certification                of Chief Financial Officer pursuant to Rule 13A-14(a) or                15D-14(a)                                                                                  |   |   |   |    |   |   |   |       |   | X      |
| 32.1         |   | Certification                of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as                adopted                pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |   |   |   |    |   |   |   |       |   | X      |
| 32.2         |   | Certification                of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as                adopted                pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |   |   |   |    |   |   |   |       |   | X      |

----