<PAGE>   1

                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q


[X]     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934

                For the Quarterly Period Ended December 31, 2000


[ ]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
        EXCHANGE ACT OF 1934

                  For the Transition Period From _____ to _____


                         COMMISSION FILE NUMBER 0-24765


                                   hi/fn, inc.
             (Exact Name of Registrant as specified in its Charter)

<TABLE>
<S>                                                      <C>
          DELAWARE                                             33-0732700
(State or other jurisdiction of                              (IRS Employer
 Incorporation or Organization)                          Identification Number)
</TABLE>

               750 UNIVERSITY AVENUE, LOS GATOS, CALIFORNIA 95032
              (Address of principal executive offices and Zip Code)

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


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes [X]   No [ ]


The number of shares outstanding of the Registrant's Common Stock, par value
$.001 per share, was 10,114,445 at February 7, 2001.



                                       1
<PAGE>   2

                                   HIFN, INC.

                               INDEX TO FORM 10-Q



<TABLE>
<CAPTION>
<S>                                                                                <C>
PART I.        FINANCIAL INFORMATION

Item 1.        Financial Statements

               Condensed Consolidated Balance Sheets
                  as of December 31, 2000 and September 30, 2000                      3

               Condensed Consolidated Statements of Operations                        4
                  for the three months ended December 31, 2000 and 1999

               Condensed Consolidated Statements of Cash Flows                        5
                  for the three months ended December 31, 2000 and 1999

               Notes to Condensed Consolidated Financial Statements                 6-8

Item 2.        Management's Discussion and Analysis of Financial Condition
                  and Results of Operations                                        9-22



PART II.       OTHER INFORMATION

Item 1.        Legal Proceedings                                                     23

Item 6.        Exhibits and Reports on Form 8-K                                      23

Signatures                                                                           24
</TABLE>



                                       2
<PAGE>   3

PART 1 -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

                                   HIFN, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                       December 31,    September 30,
                                                                          2000             2000
                                                                       -----------     -------------
                                                                       (unaudited)
                                    ASSETS
<S>                                                                    <C>             <C>
CURRENT ASSETS:
 Cash and cash equivalents                                              $ 57,682         $ 59,688
 Short-term investments                                                   11,361            5,127
 Accounts receivable, net                                                  4,772            5,748
 Inventory                                                                 3,913            1,355
 Deferred income taxes                                                       620              620
 Prepaid expenses and other current assets                                 6,319            1,221
                                                                        --------         --------
    Total current assets                                                  84,667           73,759
                                                                        --------         --------
Property and equipment, net                                                3,098            3,268
Deferred income taxes                                                      3,132            3,132
Intangibles and other assets                                              48,733           51,320
                                                                        --------         --------
                                                                        $139,630         $131,479
                                                                        ========         ========

                           LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
 Accounts payable                                                       $  4,091         $  2,814
 Income taxes payable                                                      1,192               --
 Accrued expenses and other current liabilities                            4,628            4,447
                                                                        --------         --------
    Total current liabilities                                              9,911            7,261
                                                                        --------         --------

Long-term capital lease obligations                                           15               27
                                                                        --------         --------

STOCKHOLDERS' EQUITY:
 Common stock                                                                 10               10
 Additional paid-in capital                                              115,120          109,251
 Retained earnings                                                        14,574           14,930
                                                                        --------         --------
       Total stockholders' equity                                        129,704          124,191
                                                                        --------         --------
                                                                        $139,630         $131,479
                                                                        ========         ========
</TABLE>


     See accompanying notes to condensed consolidated financial statements.



                                       3
<PAGE>   4

                                   HIFN, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                      (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                        Three Months Ended
                                                           December 31,
                                                     -------------------------
                                                       2000             1999
                                                     --------          -------
                                                             (unaudited)

<S>                                                  <C>               <C>
Net revenues                                         $ 16,109          $10,054
Cost of revenues                                        3,648            2,163
                                                     --------          -------
Gross profit                                           12,461            7,891
                                                     --------          -------

Operating expenses:
   Research and development                             4,363            3,297
   Sales and marketing                                  2,791            1,699
   General and administrative                           2,087              779
   Amortization of intangibles and goodwill             2,799               28
                                                     --------          -------
       Total operating expenses                        12,040            5,803
                                                     --------          -------

Income from operations                                    421            2,088
Interest and other income, net                            797              967
                                                     --------          -------
Income before income taxes                              1,218            3,055

Provision for income taxes                              1,574            1,222
                                                     --------          -------

Net income (loss)                                    $   (356)         $ 1,833
                                                     ========          =======


Net income (loss) per share, basic                   $  (0.04)         $  0.21
                                                     ========          =======
Net income (loss) per share, diluted                 $  (0.04)         $  0.19
                                                     ========          =======

Weighted average shares outstanding, basic             10,096            8,737
                                                     ========          =======
Weighted average shares outstanding, diluted           10,096            9,854
                                                     ========          =======
</TABLE>


     See accompanying notes to condensed consolidated financial statements.



                                       4
<PAGE>   5

                                   HIFN, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                         Three Months Ended
                                                                             December 31,
                                                                      --------          --------
                                                                        2000              1999
                                                                      --------          --------
                                                                              (unaudited)
<S>                                                                   <C>               <C>
Cash flows from operating activities:
      Net income (loss)                                               $   (356)         $  1,833
      Adjustments to reconcile net income (loss)
        to net cash provided by operating activities:
        Depreciation and amortization                                      355               253
        Amortization of intangibles and goodwill                         2,799                28
        Amortization of deferred stock compensation                      1,610                --
        Tax benefit from employee stock plans                            3,681                --
      Changes in assets and liabilities:
        Accounts receivable                                                976             1,332
        Inventory                                                       (2,558)              (56)
        Prepaid expenses and other current assets                       (5,098)               17
        Other assets                                                      (212)              (27)
        Accounts payable                                                 1,277            (1,606)
        Income taxes payable                                             1,192                --
        Accrued expenses and other current liabilities                     187              (681)
                                                                      --------          --------
          Net cash provided by operating activities                      3,853             1,093
                                                                      --------          --------
Cash flows from investing activities:
      Purchase of short-term investments                                (6,234)               --
      Purchases of property and equipment                                 (185)             (160)
                                                                      --------          --------
          Net cash used in investing activities                         (6,419)             (160)
                                                                      --------          --------
Cash flows from financing activities:
      Proceeds from issuance of common stock, net                          578               104
      Payment on line of credit and capital lease obligations              (18)               --
                                                                      --------          --------
          Net cash provided by financing activities                        560               104
                                                                      --------          --------
Net increase (decrease) in cash and cash equivalents                    (2,006)            1,037
Cash and cash equivalents at beginning of period                        59,688            70,086
                                                                      --------          --------
Cash and cash equivalents at end of period                            $ 57,682          $ 71,123
                                                                      ========          ========
</TABLE>


     See accompanying notes to condensed consolidated financial statements.



                                       5
<PAGE>   6

                                   HIFN, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

NOTE 1 - BASIS OF PRESENTATION

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

        Certain reclassifications have been made to the prior year consolidated
financial statements to conform to the current year's presentation. Such
reclassifications had no effect on previously reported results of operations or
retained earnings.

        The accompanying condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission regarding interim financial reporting. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements and should be read in
conjunction with the Financial Statements and notes thereto included in the
Company's Form 10-K for period ending September 30, 2000. In the opinion of
management, the accompanying condensed consolidated financial statements contain
all adjustments, consisting only of normal recurring items, which the Company
believes is necessary for a fair statement of the Company's financial position
as of December 31, 2000 and its results of operations for the three month
periods ended December 31, 2000 and 1999, respectively. These condensed
consolidated financial statements are not necessarily indicative of the results
to be expected for the entire year.

NOTE 2 - NET INCOME (LOSS) PER SHARE

        Basic earnings per share is computed using the weighted average number
of common shares outstanding for the period, without consideration for the
dilutive impact of potential common shares that were outstanding during the
period. Diluted earnings per share is computed using the weighted average number
of common and common equivalent shares outstanding for the period. Common
equivalent shares consist of incremental common shares issuable upon the
exercise of stock options, using the treasury method, and are excluded from the
calculation of diluted net loss per share if anti-dilutive. Outstanding options
to purchase 2,628,668 shares of common stock, or 698,348 weighted average
shares, for the period ended December 31, 2000 were not included in the
computation of diluted earnings per share because their impact would be
anti-dilutive. A reconciliation of the numerators and denominators of the basic
and diluted earnings per share calculations for the three months ended December
31, 2000 and 1999 are presented below (in thousands, except per share amounts):

<TABLE>
<CAPTION>
                                                                 Three Months Ended
                                                                    December 31,
                                                              -----------------------
                                                               2000             1999
                                                              -------          ------

<S>                                                           <C>              <C>
Net income (loss)                                             $  (356)         $1,833
                                                              =======          ======

Shares used in computing net income (loss) per share:
    Basic                                                      10,096           8,737
    Dilutive effect of stock options                               --           1,117
                                                              -------          ------
    Diluted                                                    10,096           9,854
                                                              =======          ======

Net income (loss) per share:
    Basic                                                     $ (0.04)         $ 0.21
                                                              =======          ======
    Diluted                                                   $ (0.04)         $ 0.19
                                                              =======          ======
</TABLE>



                                       6
<PAGE>   7

NOTE 3 - DETAILED BALANCE SHEET:

<TABLE>
<CAPTION>
                                                       December 31,     September 30,
                                                          2000              2000
                                                       -----------      ------------
                                                              (in thousands)
                                                                (unaudited)

<S>                                                    <C>              <C>
Accounts receivable:
   Trade receivables                                    $  5,141          $  6,117
   Less: allowance for doubtful accounts                    (369)             (369)
                                                        --------          --------
                                                        $  4,772          $  5,748
                                                        ========          ========

Property and equipment:
   Computer equipment                                   $  3,552          $  3,399
   Furniture and fixtures                                    718               718
   Leasehold improvements                                    724               724
   Office equipment                                          433               401
                                                        --------          --------
                                                           5,427             5,242
   Less: accumulated depreciation                         (2,329)           (1,974)
                                                        --------          --------
                                                        $  3,098          $  3,268
                                                        ========          ========

Intangibles and other assets:
   Developed and core technology                        $  3,263          $  3,263
   Workforce                                                 599               599
   Patents                                                   600               600
   Goodwill                                               47,121            47,121
   Purchased intellectual property                         1,049             1,049
   Other                                                     689               477
                                                        --------          --------
                                                          53,321            53,109
   Less: accumulated amortization                         (4,588)           (1,789)
                                                        --------          --------
                                                        $ 48,733          $ 51,320
                                                        ========          ========
Accrued expenses and other current liabilities:
   Deferred revenue                                     $  1,792          $  1,646
   Compensation and employee benefits                      1,572             1,760
   Accrued royalties                                         113               124
   Other                                                   1,151               917
                                                        --------          --------
                                                        $  4,628          $  4,447
                                                        ========          ========
</TABLE>


NOTE 4 -- APPTITUDE ACQUISITION

        In August 2000, the Company acquired all the outstanding stock of
Apptitude, Inc. ("Apptitude"), a software development company, for $20 million
in cash and 1.2 million shares of Hifn Common Stock in a transaction accounted
for under the purchase method. The purchase agreement also states that any and
all outstanding options of Apptitude will be assumed by Hifn. The results of
operations of Apptitude have been included in the condensed consolidated
statement of operations of Hifn from the date of acquisition. The purchase price
of the acquisition of $58.5 million, which included $127,000 in estimated
acquisition related costs, was used to acquire the net assets of Apptitude. The
purchase price was allocated to assets acquired and liabilities assumed based on
the book value of Apptitude's current assets, liabilities and property and
equipment, which management believes approximates their fair value, and an
independent appraisal for all other identifiable assets. The excess of the
purchase price over the net tangible and intangible assets acquired and
liabilities assumed has been allocated to goodwill.



                                       7
<PAGE>   8

NOTE 5 - LEGAL MATTERS

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



                                       8
<PAGE>   9

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

        With the exception of historical facts, the statements contained in this
discussion are forward-looking statements within the meaning of Section 27A of
the Security Act of 1933 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 that statute. Certain statements contained in the following
Management's Discussion and Analysis of Financial Condition and Results of
Operations, including, without limitation, statements containing the words
"believes," "anticipates," "estimates," "expects," and words of similar import,
constitute forward-looking statements that involve risks and uncertainties. Such
statements are based on current expectations and are subject to risk,
uncertainties and changes in condition, significance, value and effect,
including those discussed under the heading Trends and Uncertainties within the
section of this report entitled "Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations" and reports filed by Hifn with
the Securities and Exchange Commission, specifically forms 8-K, 10-K, S-3 and
S-8. Such risks, uncertainties and changes in condition, significance, value and
effect could cause our actual results to differ materially from those
anticipated events. Although we believe that the assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could prove
inaccurate, including, but not limited to, statements about our future operating
results and business plans, market acceptance of our products, retention of key
personnel, our international prospects, as well as the acquisition of Apptitude.
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.

OVERVIEW

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

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

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



                                       9
<PAGE>   10

RESULTS OF OPERATIONS

        The following table sets forth the percentage relationship of certain
items to the Company's revenue during the periods shown:


<TABLE>
<CAPTION>
                                                            Three Months Ended
                                                               December 31,
                                                           --------------------
                                                           2000            1999
                                                           ----            ----

<S>                                                         <C>             <C>
Net revenues                                                100%            100%
Cost of revenues ................................            23              21
                                                           ----            ----
Gross profit ....................................            77              79
                                                           ----            ----
Operating expenses:
   Research and development .....................            28              33
   Sales and marketing ..........................            17              17
   General and administrative ...................            13               8
   Amortization of intangibles and goodwill .....            17              --
                                                           ----            ----
Total operating expenses ........................            75              58
                                                           ----            ----
Income from operations ..........................             3              21
Interest and other income, net ..................             5               9
                                                           ----            ----
Income before income taxes ......................             8              30
Provision for income taxes ......................            10              12
                                                           ----            ----
Net income (loss) ...............................            (2)%            18%
                                                           ====            ====
</TABLE>


        Net Revenues. Net revenues increased 60.2% to $16.1 million for the
quarter ended December 31, 2000 from $10.1 million for the quarter ended
December 31, 1999. The increase in revenues was primarily due to increased sales
of Hifn's data compression and encryption processors to network equipment
manufacturers coupled with revenues and royalties related to classification
software acquired from Apptitude. Semiconductor sales to Quantum Corporation, an
original equipment manufacturer ("OEM") of high-performance tape storage
devices, through its manufacturing subcontractor, comprised 34% of revenues for
the quarter ended December 31, 2000 and 33% of revenues for the quarter ended
December 31, 1999. Semiconductor sales to Lucent, an OEM producer of networking
equipment, through its manufacturing subcontractors, comprised 25% and 42% of
revenues for the quarter ended December 31, 2000 and 1999, respectively.

        Gross Margin. Cost of revenues consists primarily of semiconductors
which were manufactured to the Company's specifications by third parties for
resale by the Company. Gross margin decreased slightly to 77.4% for the quarter
ended December 31, 2000 from the 78.5% for the quarter ended December 31, 1999
primarily due to a shift in the revenue mix.

        Research and Development. The cost of product development consists
primarily of salaries, employee benefits, overhead, outside contractors and
non-recurring engineering fees. Such research and development expenses were
approximately $4.4 million and $3.3 million for the quarters ended December 31,
2000 and 1999, respectively. The increase was due primarily to the addition of
personnel, including engineers acquired from Apptitude in August 2000, to
develop new products which combine data compression, data encryption and flow
classification for the network security markets and to develop additional
products for the storage market. In addition, amortization of deferred stock
compensation related to the acquisition of Apptitude in the amount of $465,000
also contributed to the increase in research and development expense in the
three months ended December 31, 2000 as compared to the same period ended
December 31, 1999.

        Sales and Marketing. Sales and marketing expenses consist primarily of
salaries, commissions and benefits of sales, marketing and support personnel as
well as consulting, advertising, promotion and overhead expenses. Such expenses
were approximately $2.8 million and $1.7 million for the three month periods
ended December 31, 2000 and 1999, respectively. The increase primarily reflects
additional personnel costs mainly as a result of increased headcount as well as
increased commission costs associated with the increase in revenues.



                                       10
<PAGE>   11

        General and Administrative. General and administrative expenses are
comprised primarily of salaries for administrative and corporate services
personnel, legal and other professional fees. Such expenses were $2.1 million
and $779,000 for the three month periods ended December 31, 2000 and 1999,
respectively. The increase was primarily due to amortization of deferred stock
compensation related to the acquisition of Apptitude of $949,000 and increased
salaries and benefit costs related to increased headcount.

        Amortization of Intangibles and Goodwill. Amortization of intangibles
and goodwill for the three months ended December 31, 2000 of $2.8 million was a
result of the acquisition of Apptitude and other intellectual property in August
2000 as well as other acquired technology in April 1998.

        Interest and Other Income, net. Net interest and other income was
$797,000 for the three month periods ended December 31, 2000 and $967,000 for
the three month period ended December 31, 1999. The decrease in interest and
other income for the three month periods ended December 31, 2000 compared to the
same period in 1999 was mainly due to slightly lower average cash balance during
the first quarter of 2000 due primarily to cash paid for the acquisition of
Apptitude in August 2000 of $20.0 million.

        Income Taxes. The effective income tax rate for three month periods
ended December 31, 2000 was 129% as compared to 40% for the same period in
1999. The increase in the effective rate reflects the non-deductibility of
certain acquisition related charges.

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


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


        The goodwill, acquired developed and core technology, workforce and
patents are recorded on the balance sheet as intangibles and other assets and
will be amortized on a straight-line basis over periods ranging from two to five
years. The purchased in-process research and development was expensed at the
time of the acquisition as a one-time charge.

LIQUIDITY AND CAPITAL RESOURCES

        Net cash provided by operating activities was $3.9 million and $1.1
million for the three month periods ended December 31, 2000 and 1999,
respectively. During the three months ended December 31, 2000, the net cash
provided by operating activities resulted from net loss as adjusted for non-cash
items including amortization of intangibles and deferred stock compensation of
$4.4 million, depreciation and amortization costs of $355,000 and tax benefit
from employee stock plans of $3.7 million as well as a decrease in accounts
receivable of $1.0 million and increases in accounts payable, accrued expenses
and other current liabilities of $1.5 million and income taxes payable of $1.2
million. These adjustments were offset by increases in inventory and prepaid
expenses and other assets of $2.6 million and $5.3 million, respectively. During
the three months ended December 31, 1999, the net cash provided by operating
activities was attributed to net income from operations, depreciation and
amortization charges of $281,000, an increase in inventory of $56,000 and
decreases in accounts receivable of $1.3 million, prepaid expenses and other
assets of $17,000, accounts payable of $1.6 million and accrued expenses and
other liabilities of $681,000.



                                       11
<PAGE>   12
        Net cash used in investing activities was $6.4 million and $160,000 for
the three month periods ended December 31, 2000 and 1999, respectively. Net cash
used in investing activities for both periods related to the purchase of
property and equipment and, for the period ended December 31, 2000, the purchase
of short-term investments of $6.2 million.

        Net cash provided by financing activities was $560,000 and $104,000 for
the three month periods ended December 31, 2000 and 1999, respectively. The net
cash provided by financing activities for both periods was primarily
attributable to proceeds from issuance of common stock slightly offset, for the
period ended December 31, 2000, by payments on capital lease obligations.

        The Company uses a number of independent suppliers to manufacture
substantially all of its products. As a result, the Company relies on these
suppliers to allocate to the Company a sufficient portion of foundry capacity to
meet the Company's needs and deliver sufficient quantities of the Company's
products on a timely basis. These arrangements allow the Company to avoid
utilizing its capital resources for manufacturing facilities and work-in-process
inventory and to focus substantially all of its resources on the design,
development and marketing of its products.

        The Company requires substantial working capital to fund its business,
particularly to finance accounts receivable and inventory, and for investments
in property and equipment. The Company's need to raise capital in the future
will depend on many factors including the rate of sales growth, market
acceptance of the Company's existing and new products, the amount and timing of
research and development expenditures, the timing and size of acquisitions of
businesses or technologies, the timing of the introduction of new products and
the expansion of sales and marketing efforts.

MARKET RISK DISCLOSURE

        Interest Rate Risk -- The Company does not use derivative financial
instruments in its investment portfolio. The Company's investment portfolio is
generally comprised of commercial paper and municipal bonds. The Company places
investments in instruments that meet high credit quality standards. These
securities are subject to interest rate risk, and could decline in value if
interest rates fluctuate. Due to the short duration and conservative nature of
the Company's investment portfolio, the Company does not expect any material
loss with respect to its investment portfolio. A 10% move in interest rates at
December 31, 2000 would have an immaterial effect on the Company's pre-tax
earnings and the carrying value of its investments over the next fiscal year.

        Foreign Currency Exchange Rate Risk -- All of the Company's sales, cost
of manufacturing and marketing are transacted in US dollars. Accordingly, the
Company's results of operations are not subject to foreign exchange rate
fluctuations. Gains and losses from such fluctuations have not been incurred by
the Company to date.

RECENT ACCOUNTING PRONOUNCEMENTS

        In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivatives and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. In July 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133." SFAS No. 137 deferred the effective date of SFAS No.
133 until fiscal years beginning after June 15, 2000. We have adopted SFAS 133
and do not have derivative or hedging activities to date.

        In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements."
SAB 101 summarizes certain of the Staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. We have
adopted SAB 101 and such adoption did not have a material effect on our results
of operations.



                                       12
<PAGE>   13

TRENDS AND UNCERTAINTIES

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

WE HAVE A LIMITED OPERATING HISTORY AS AN INDEPENDENT COMPANY.

        On August 14, 1996, we were incorporated by Stac, Inc. ("Stac") which
transferred its semiconductor business to us in exchange for shares of our
Preferred Stock and Common Stock. Because we are a relatively new company with a
limited operating history, we may experience financial and other difficulties as
we attempt to grow our business. For example, to expand our business we are
increasing our research and development and other operating expenses. This
increase in expenses will negatively affect our financial performance unless we
are able to sustain and grow revenues. If we are not able to evolve and expand
our business, we may not remain profitable and therefore may not be able to
sustain a viable business.

OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY.

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

        -       General business conditions in our markets as well as global
                economic uncertainty;

        -       Increases or reductions in demand for our customers' products;

        -       The timing and volume of orders we receive from our customers;

        -       Cancellations or delays of customer product orders;

        -       Any new product introductions by us or our competitors;

        -       Our suppliers increasing costs or changing the delivery of
                products to us;

        -       Increased competition or reductions in the prices that we are
                able to charge;

        -       The variety of the products that we sell as well as seasonal
                demand for our products; and

        -       The availability of manufacturing capacity necessary to make our
                products.

WE DEPEND UPON A SMALL NUMBER OF CUSTOMERS.

        Quantum Corporation ("Quantum"), through its manufacturing
subcontractor, accounted for approximately 34%, 36% and 45% of our revenues in
the three months ended December 31, 2000 and in fiscal years 2000 and 1999,
respectively. Lucent, through its manufacturing subcontractors, accounted for
approximately 25%, 35% and 38% of our revenues during the three months ended
December 31, 2000 and fiscal years 2000 and 1999, respectively. Neither Quantum
nor Lucent are under any binding obligation to order from us. If our sales to
Quantum or Lucent decline, our business, financial condition and results of
operations could suffer. We expect that our most significant customers in the
future could be different from our largest customers today for a number of
reasons, including customers' deployment schedules and budget considerations. As
a result, we believe we may experience significant fluctuations in our results
of operations on a quarterly and an annual basis.

        Limited numbers of network and storage equipment vendors account for a
majority of packet processor purchases in their respective markets. In
particular, the market for network equipment that would include packet
processors, such as routers, remote access concentrators and firewalls, is
dominated by a few large vendors, including Cisco Systems, Inc., Lucent
Technologies Inc., Nortel Networks, Inc. and 3Com Corporation. As a result,



                                       13
<PAGE>   14


our future success will depend upon our ability to establish and maintain
relationships with these companies. If these network equipment vendors do not
incorporate our packet processors into their products, our business, financial
condition and results of operations could suffer.

OUR BUSINESS DEPENDS UPON THE DEVELOPMENT OF THE PACKET PROCESSOR MARKET.

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

OUR BUSINESS DEPENDS UPON THE CONTINUED GROWTH AND OUR PENETRATION OF THE
VIRTUAL PRIVATE NETWORK MARKET.


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

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

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

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

WE FACE RISKS ASSOCIATED WITH EVOLVING INDUSTRY STANDARDS AND RAPID
TECHNOLOGICAL CHANGE.

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

        -       Properly identify emerging target markets and related
                technological trends;

        -       Develop and maintain competitive products;

        -       Enhance our products by adding innovative features that
                differentiate our products from those of competitors;

        -       Bring products to market on a timely basis at competitive
                prices; and

        -       Respond effectively to new technological changes or new product
                announcements by others.



                                       14
<PAGE>   15

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

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

OUR MARKETS ARE HIGHLY COMPETITIVE.

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

        A key element of our packet processor architecture is our encryption
technology. Until recently, in order to export our encryption-related products,
the U.S. Department of Commerce required us to obtain a license. Foreign
competitors that were not subject to similar requirements have an advantage over
us in their ability to establish existing markets for their products and rapidly
respond to the requests of customers in the global market. Although the export
restriction has been liberalized, the Company may not be successful in entering
or competing the foreign encryption markets. See "Our Products Are Subject To
Export Restrictions."

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



                                       15
<PAGE>   16


would significantly and negatively impact our ability to compete and obtain or
maintain market share. If we are unable to successfully compete against our
competitors, our business, results of operations and financial condition will
suffer.

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

        -       Performance;

        -       Price;

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

        -       The ability to achieve product acceptance with major network and
                storage equipment vendors;

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

        -       Features and functionality;

        -       Adaptability of products to specific applications;

        -       Reliability; and

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

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

OUR BUSINESS DEPENDS UPON THE GROWTH OF THE NETWORK EQUIPMENT AND STORAGE
EQUIPMENT MARKETS.

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

OUR SUCCESS DEPENDS UPON PROTECTING OUR INTELLECTUAL PROPERTY.

        Our proprietary technology is critical to our future success. We rely in
part on patent, trade, trademark, maskwork and copyright law to protect our
intellectual property. We own 12 United States patents and four foreign patents.
We also have 2 pending patent applications in Japan. Our issued patents and
patent applications primarily cover various aspects of our compression
technology and have expiration dates ranging from 2006 to 2013. In addition to
compression, we have six pending patent applications in the United States, four
in Europe and Asia (Japan) covering our flow classification technology. There
are 2 pending patent applications in the United States covering our bandwidth
management and rate shaping technology. Patents may not be issued under our
current or future patent applications, and the patents issued under such patent
applications could be invalidated, circumvented or challenged. In addition,
third parties could make infringement claims against us in the future. Such
infringement claims could result in costly litigation. We may not prevail in any
such litigation or be able to license any valid and



                                       16
<PAGE>   17

infringed patents from third parties on commercially reasonable terms, if at
all. Regardless of the outcome, an infringement claim would likely result in
substantial cost and diversion of our resources. Any infringement claim or other
litigation against us or by us could harm our business, financial condition and
results of operations. The patents issued to us may not be adequate to protect
our proprietary rights, to deter misappropriation or to prevent an unauthorized
third party from copying our technology, designing around the patents we own or
otherwise obtaining and using our products, designs or other information. In
addition, others could develop technologies that are similar or superior to our
technology.

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

THE LENGTH OF TIME IT TAKES TO DEVELOP OUR PRODUCTS AND MAKE A SALE TO OUR
CUSTOMERS MAY IMPAIR OUR OPERATING RESULTS.

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

WE DEPEND UPON INDEPENDENT MANUFACTURERS AND LIMITED SOURCES OF SUPPLY.

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

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

        -       Adapting our product design, if necessary, to the new
                manufacturer's process;

        -       Creating a new mask set to manufacture the product;

        -       Having the new manufacturer prepare sample products so we can
                verify the product specification; and

        -       Providing sample products to customers for qualification.



                                       17
<PAGE>   18

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

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

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

NETWORK AND STORAGE EQUIPMENT PRICES TYPICALLY DECREASE.

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

        -       Rapidly changing technologies;

        -       Price-performance enhancements; and

        -       Product obsolescence.

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

WE FACE PRODUCT RETURN, PRODUCT LIABILITY AND PRODUCT DEFECT RISKS.

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



                                       18
<PAGE>   19

current and prospective customers. Any such event would harm our business,
financial condition and results of operations.

WE FACE ORDER AND SHIPMENT UNCERTAINTIES.

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

BUSINESS INTERRUPTIONS COULD ADVERSELY AFFECT OUR BUSINESS.

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

WE DEPEND UPON KEY PERSONNEL.

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

OUR RAPID GROWTH MAY STRAIN OUR OPERATIONS.

        We have experienced a period of rapid growth and expansion which has
placed, and continues to place, a significant strain on our resources. To
accommodate this growth, in fiscal 2000, we implemented a variety of new and
upgraded operational and financial systems, procedures and controls, including
the improvement of the retained accounting and other internal management systems
which were provided by Stac. This required and may continue to require
substantial management effort, and our efforts to do so may not continue to be
successful. In addition, we have had to hire additional employees to accommodate
this growth and our product development activities. This has resulted in
increased responsibilities for our management. Our systems, procedures and
controls may not be adequate to support our operations. If we fail to improve
our operational, financial and management information systems, or to hire,
train, motivate or manage our employees, our business, financial condition and
results of operations could suffer.

OUR PRODUCTS ARE SUBJECT TO EXPORT RESTRICTIONS.

        The encryption algorithms embedded in our products are a key element of
our packet processor architecture. These products are subject to U.S. Department
of Commerce export control restrictions. Our network equipment customers may
only export products incorporating encryption technology if they obtain a
one-time technical review.



                                       19
<PAGE>   20

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

WE FACE RISKS ASSOCIATED WITH OUR INTERNATIONAL BUSINESS ACTIVITIES.

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

        -       The imposition of governmental controls;

        -       Export license/technical review requirements;

        -       Restrictions on the export of technology;

        -       Currency exchange fluctuations;

        -       Political instability;

        -       Financial and stock market dislocations;

        -       Trade restrictions; and

        -       Changes in tariffs.

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

WE FACE RISKS ASSOCIATED WITH ACQUISITIONS.

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

        -       Difficulties in assimilating acquired operations, technologies
                and products, in particular, if we fail to successfully
                integrate the acquisition of Apptitude, the anticipated benefits
                of this transaction will not occur;



                                       20
<PAGE>   21

        -       Diversion of management's attention from other business
                concerns;

        -       Risks of entering markets in which we have little or no prior
                experience; and

        -       Loss of key employees of acquired organizations.

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

        In addition, if we are a party to a transaction or series of
transactions that result in 50% or more of our outstanding stock being
transferred to one or more persons, the IRS may claim that our spin-off from
Stac was a taxable event to Stac and its stockholders. Under the Tax Allocation
and Indemnity Agreement that we entered into with Stac, we may be obligated to
pay the taxes of Stac if we caused the spin-off to be a taxable event. Our cash
flows, business, financial condition and results of operations would suffer if
we became liable for any such tax liability. See "We Face Certain Risks as a
Result of our Spin-Off from Stac."

THE CYCLICALITY OF THE SEMICONDUCTOR INDUSTRY MAY HARM OUR BUSINESS.

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

WE FACE CERTAIN RISKS AS A RESULT OF OUR SPIN-OFF FROM STAC.

        On December 8, 1998, Stac received a private letter ruling from the
Internal Revenue Service ("IRS") stating, among other things, that the
distribution of our Common Stock held by Stac on December 16, 1998 to Stac
stockholders would not result in recognition of taxable income or gain to Stac
or its stockholders under Section 355 of the Internal Revenue Code of 1986, as
amended ("Code") (except to the extent of cash received in lieu of fractional
shares). A tax ruling, while generally binding upon the IRS, is subject to
certain factual representations and assumptions. If the factual representations
and assumptions made by Stac were incorrect in a material respect, the rights of
taxpayers to rely on a tax ruling or Stac's ability to rely on the tax opinion
would be jeopardized.

        If the distribution were not to constitute a tax-free spin-off, then
Stac would be treated as recognizing a taxable gain equal to the difference
between (i) the fair market value of our Common Stock that was distributed to
Stac stockholders on December 16, 1998 and (ii) Stac's adjusted basis of such
Common Stock. In addition, under the consolidated tax return rules of the Code,
each member of Stac's consolidated group (including Hifn) would be severally
liable for such tax liability. Furthermore, in connection with the spin-off we
entered into a Tax Allocation and Indemnity Agreement with Stac whereby each of
us agreed that if either party took actions after the spin-off that caused
Section 355(e) of the Code to apply to Hifn's Common Stock, then whichever party
first caused Section 355(e) of the Code to apply to Hifn's Common Stock would be
obligated to bear all taxes of Stac resulting from such action. Under recently
enacted Section 355(e) of the Code, if the spin-off was considered to be part of
a plan or series of related transactions (a "Plan") in which, after the
spin-off, a 50% or greater interest in Hifn or Stac were acquired by one or more
persons, the IRS would claim that the spin-off was taxable at the corporate
level. Although neither we nor Stac believes the spin-off is part of a Plan to
effect a 50% change in ownership of either Hifn or Stac, the IRS has issued no
guidance on the definition of a Plan and for the first two years following the
spin-off, any cumulative 50% change of ownership within the two-year period will
be rebuttably presumed to be the result of a Plan. Our cash flows, business,
financial condition and results of operations would suffer if we became liable
for any such tax liability.



                                       21
<PAGE>   22

OUR STOCK PRICE MAY BE VOLATILE.

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

        -       Quarterly variations in operating results;

        -       Announcements of new products by us or our competitors;

        -       The gain or loss of significant customers;

        -       Changes in analysts' estimates;

        -       Short-selling of our Common Stock; and

        -       Events affecting other companies that investors deem to be
                comparable to us.

WE ARE CURRENTLY ENGAGED IN A SECURITIES CLASS-ACTION LAWSUIT.

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


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        Interest Rate Risk -- The Company does not use derivative financial
instruments in its investment portfolio. The Company's investment portfolio is
generally comprised of commercial paper. The Company places investments in
instruments that meet high credit quality standards. These securities are
subject to interest rate risk, and could decline in value if interest rates
fluctuate. Due to the short duration and conservative nature of the Company's
investment portfolio, the Company does not expect any material loss with respect
to its investment portfolio. A 10% move in interest rates at December 31, 2000
would not have a material effect on the Company's pre-tax earnings and the
carrying value of its investments over the next fiscal year.

        Foreign Currency Exchange Rate Risk -- All of the Company's sales, cost
of manufacturing and marketing are transacted in US dollars. Accordingly, the
Company's results of operations are not subject to foreign exchange rate
fluctuations. Gains and losses from such fluctuations have not been incurred by
the Company to date.



                                       22
<PAGE>   23

PART II - OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS

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

ITEM 2. CHANGES IN SECURITIES

        None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

        None.

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

        None.

ITEM 5. OTHER INFORMATION

        None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

        (a)     Exhibits

                None.

        (b)     Reports on Form 8-K

                None.



                                       23
<PAGE>   24

                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                                       hi/fn, inc.
                                       (Registrant)

Date: February 9, 2001                 By: /s/ WILLIAM R. WALKER
                                           -------------------------------------
                                       William R. Walker
                                       Vice President, Finance, Chief Financial
                                       Officer and Secretary (principal
                                       financial and accounting officer)