**HI/FN,
      INC.**




**ALBERT
      E. SISTO EMPLOYMENT AGREEMENT**




This
      Employment Agreement (the “Agreement”) is entered into as of February 6, 2007,
      by and between Hi/fn, Inc. (the “Company”) and Albert E. Sisto (“Executive”) and
      amends and restates the employment agreement entered into as of November 9,
      2006
      by the Company and Executive (the “Interim Employment Agreement”).




1.  Duties
      and Scope of Employment .




(a)  Positions
      and Duties .
      Effective as of November 10, 2006, Executive has served as the Company’s Interim
      Chief Executive Officer. As of February 6, 2007, Executive will serve as the
      Company’s Chief Executive Officer (the “Effective Date”). Executive will report
      to the Company’s Board of Directors (the “Board”) and will continue in his role
      as Chairman of the Board. As of the Effective Date, Executive will render such
      business and professional services in the performance of his duties, consistent
      with Executive’s position within the Company, as will reasonably be assigned to
      him by the Board. The period Executive is employed by the Company under this
      Agreement is referred to herein as the “Employment Term.”




(b)  Board
      Membership .
      Executive was appointed to serve as a member of the Board prior to the Effective
      Date and was appointed Chairman of the Board effective as of November 10,
      2006. During the Employment Term, at each annual meeting of the Company’s
      stockholders at which Executive’s term as a member of the Board has otherwise
      expired, the Company will nominate Executive to serve as a member of the Board.
      Executive’s service as a member of the Board will be subject to any required
      stockholder approval. Upon the termination of Executive’s employment for any
      reason, unless otherwise requested by the Board, Executive will be deemed to
      have resigned from all positions held at the Company and its affiliates,
      including that of Chairman of the Board, voluntarily, without any further
      required action by Executive, as of the end of Executive’s employment and
      Executive, at the Board’s request, will execute any documents necessary to
      reflect his resignation.




(c)  Obligations .
      During
      the Employment Term, Executive will devote Executive’s full business efforts and
      time to the Company and will use good faith efforts to discharge Executive’s
      obligations under this Agreement to the best of Executive’s ability and in
      accordance with each of the Company’s corporate guidance and ethics guidelines,
      conflict of interests policies and code of conduct. For the duration of the
      Employment Term, Executive agrees not to actively engage in any other
      employment, occupation, or consulting activity for any direct or indirect
      remuneration without the prior approval of the Board (which approval will not
      be
      unreasonably withheld); provided, however, that Executive may, without the
      approval of the Board, serve in any capacity with any civic, educational, or
      charitable organization, provided such services do not interfere with
      Executive’s obligations to Company. Executive expects to serve as a member of
      the Board of Directors of Digital Signal Corporation, Tulip Ego Lifestyle,
      and
      Validity Sensors, Inc. and such service will not constitute a violation of
      this
      Section 1(c).




Executive
      hereby represents and warrants to the Company that Executive is not party to
      any
      contract, understanding, agreement or policy, written or otherwise, that would
      be breached by


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Executive’s
      entering into, or performing services under, this Agreement. Executive further
      represents that he has disclosed to the Company in writing all threatened,
      pending, or actual claims that are unresolved and still outstanding as of the
      Effective Date, in each case, against Executive of which he is aware, if any,
      as
      a result of his employment with his current employer (or any other previous
      employer) or his membership on any boards of directors.




(d)  Other
      Entities .
      Executive agrees to serve and will be appointed, without additional
      compensation, as an officer and director for each of the Company’s subsidiaries,
      partnerships, joint ventures, limited liability companies and other affiliates,
      including entities in which the Company has a significant investment as
      determined by the Company. As used in this Agreement, the term “affiliates” will
      include any entity controlled by, controlling, or under common control of the
      Company.




2.  At-Will
      Employment .
      Executive and the Company agree that Executive’s employment with the Company
      constitutes “at-will” employment. Executive and the Company acknowledge that
      this employment relationship may be terminated at any time, upon written notice
      to the other party, with or without good cause or for any or no cause, at the
      option either of the Company or Executive.




3.  Compensation .




(a)  Base
      Salary .
      As of
      the Effective Date, the Company will pay Executive an annual salary of $350,000
      as compensation for his services (such annual salary, as is then effective,
      to
      be referred to herein as “Base Salary”). The Base Salary will be paid
      periodically in accordance with the Company’s normal payroll practices and be
      subject to the usual, required withholdings.




(b)  Annual
      Incentive .
      Executive will be eligible to receive annual cash incentives payable for the
      achievement of performance goals established by the Board or by the Compensation
      Committee of the Board (the “Committee”). During the Employment Term, Executive’s
      target annual incentive (“Target Annual Incentive”) will equal 75% of
      Executive’s Base Salary. The actual earned annual cash incentive, if any,
      payable to Executive for any performance period will depend upon the extent
      to
      which the applicable performance goal(s) specified by the Committee are achieved
      or exceeded and will be adjusted for under- or over-performance as determined
      by
      the Committee in its sole discretion.




(c)  Performance
      Shares .




(i)  Performance
      Share Grant .
      Following the Effective Date, the Committee will grant Executive
      an award performance shares
      covering a maximum of 150,000 shares of the Company’s common stock (the
“Performance Share Grant”) under and subject to the terms, definitions and
      provisions of the Company’s Amended and Restated 1996 Equity Incentive Plan (the
“Plan”). The number of performance shares actually earned by Executive pursuant
      to the Performance Share Grant will be determined based on achievement of
      certain specified Company objectives as described herein and may be subject
      to
      further vesting requirements as set forth in clause (iii). Each
      performance share subject to the Performance Share Grant represents the right
      to
      receive one share of the Company’s common stock. No shares of Company common
      stock will be issued to Executive pursuant to the Performance Share Grant until
      the number of performance shares


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*
        Omitted
        and filed separately with the SEC pursuant to a confidential treatment
        request




actually
      earned, as determined by the Committee in its sole discretion, have otherwise vested.
      Subject to the provisions of Section 7 of this Agreement, upon Executive ceasing
      to provide services to the Company for any reason, Executive will no longer
      be
      able earn any additional performance shares pursuant to the Performance Share
      Grant and will have no right to receive any shares of Company common stock
      with
      respect to the unearned portion of the Performance Share Grant on the date
      of
      such termination.




(ii)  Revenue
      and Net Income .
      Subject
      to the vesting requirements set forth in clause (iii), Executive will be able
      to
      earn the number of performance shares based on achievement of performance goals
      as follows:




Threshold
            Revenue
            Number
                of Performance Shares0Minimum
            [*]
            30,000Target
            [*]
            37,500Maximum
            [*]
            75,000









Threshold
            GAAP
                Net Income
            Number
                of Performance Shares0Minimum
            [*]
            30,000Target
            [*]
            37,500Maximum
            [*]
            75,000




For
      purposes of the foregoing tables, the revenue targets will be based on the
      Company’s revenues for fiscal year 2007 and the net income targets will be based
      on the Company’s net income for the fourth quarter for fiscal year 2007, each as
      measured by GAAP financials as reported by the Company to the public. The number
      of performance shares to be earned for achievement of revenues and net income
      greater than minimum threshold and less than target threshold will be determined
      on a linear basis based on the number of performance shares that can be earned
      based on achievement of the minimum threshold and target threshold. Similarly,
      the number of performance shares to be earned for achievement of revenues and
      net income greater than the target threshold and less than maximum threshold
      will be determined on a linear basis based on the number of performance shares
      that can be earned based on achievement of the target threshold and maximum
      threshold. By way of example only, if revenues for fiscal year 2007 are [*]
      and net income for the fourth quarter of fiscal year 2007 is [*]**,** the
      number of performance


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*
        Omitted
        and filed separately with the SEC pursuant to a confidential treatment
        request




shares
      earned based on revenues would equal 32,250 and the number of performance shares
      earned based on net income would equal 34,500.




(iii)  Any
      performance shares earned pursuant to clause (ii) will vest as to 50% of such
      performance shares on the last calendar day of fiscal year 2008 and 50% of
      such
      performance shares on the last calendar day of fiscal year 2009, subject, in
      each case, to Executive’s continued service to the Company through each
      applicable vesting date.




(iv)  If
      a
      Change of Control occurs while Executive is employed with the Company prior
      to
      the last calendar day of fiscal year 2007, then in lieu of earning any
      performance shares pursuant to clause (ii), Executive will be able to earn
      (and
      such performance shares will be vest immediately prior to the consummation
      of
      such transaction) the number of performance shares based on the value of such
      Change of Control as follows:




Threshold
            Deal
                Price Per Share
            Number
                of Performance Shares0Minimum
            [*]
            60,000Base
            [*]
            75,000Target
            [*]
            150,000




The
      number of performance shares to be earned for achievement of a deal price per
      share of common stock greater than minimum threshold and less than base
      threshold will be determined on a linear basis based on the number of
      performance shares that can be earned based on achievement of the minimum
      threshold and base threshold. Similarly, the number of performance shares to
      be
      earned for achievement of deal price per share of common stock greater than
      the
      base threshold and less than target threshold will be determined on a linear
      basis based on the number of performance shares that can be earned based on
      achievement of the base threshold and target threshold. By way of example only,
      if the Company should experience a Change of Control while Executive is employed
      with the Company prior to the last calendar day of fiscal year 2007 and the
      deal
      price per share of common stock is [*], then Executive would earn 125,000
      performance shares. Any performance shares subject to the Performance Share
      Grant not earned pursuant to this clause (iv) will immediately terminate upon
      the consummation of the Change of Control and Executive will have no further
      right to receive any shares of Company common stock with respect
      thereto.




(d)  Equity
      Awards under Interim Employment Agreement .
      The
      option to purchase 225,000 shares of Company common stock described in Section
      3(c)(i) of the Interim Employment Agreement, as well as the award of 75,000
      shares of restricted stock described in Section 3(c)(ii) of the Interim
      Employment Agreement, will be subject to accelerated vesting in accordance
      with
      Section 7(b) and will otherwise continue to be governed by the terms and
      conditions of such awards, including, without limitation, the original vesting
      schedules for such awards.


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(e)  Sign-on
      Bonus .
      Within
      thirty (30) days of the Effective Date, Executive will receive a signing bonus
      equal to $50,000.




4.  Employee
      Benefits .




(a)  Generally .
      Executive will be eligible to participate in accordance with the terms of all
      Company employee benefit plans, policies and arrangements that are applicable
      to
      other executive officers of the Company, as such plans, policies and
      arrangements may exist from time to time.




(b)  Vacation .
      Executive will be entitled to paid vacation of four (4) weeks per year in
      accordance with Company policy for other senior executive officers, with the
      timing and duration of specific vacations mutually and reasonably agreed to
      by
      the parties hereto.




5.  Expenses .
      The
      Company will reimburse Executive for reasonable travel, entertainment and other
      expenses incurred by Executive in the furtherance of the performance of
      Executive’s duties hereunder, in accordance with the Company’s expense
      reimbursement policy as in effect from time to time.




6.  Termination
      of Employment .
      In the
      event Executive’s employment with the Company terminates for any reason,
      Executive will be entitled to any (a) unpaid Base Salary accrued up to the
      effective date of termination; (b) unpaid, but earned and accrued annual
      incentive for any completed fiscal year as of his termination of employment;
      (c) pay for accrued but unused vacation; (d) benefits or compensation
      as provided under the terms of any employee benefit and compensation agreements
      or plans applicable to Executive (e) unreimbursed business expenses
      required to be reimbursed to Executive; and (f) rights to indemnification
      Executive may have under the Company’s Articles of Incorporation, Bylaws, the
      Agreement, or separate indemnification agreement, as applicable.




7.  Severance .




(a)  Termination
      Without Cause or Resignation for Good Reason other than in Connection with
      a
      Change of Control .
      If
      Executive’s employment is terminated by the Company without Cause or if
      Executive resigns for Good Reason, and the termination is not in Connection
      with
      a Change of Control, then, subject to Executive signing and not revoking a
      separation agreement and release of claims in a form acceptable to the Company,
      Executive will receive (i) continued payment of his Base Salary for eighteen
      (18) months in accordance with the Company’s normal payroll policies, and (ii)
      reimbursement for premiums paid for continued health benefits for Executive
      (and
      any eligible dependents) under the Company’s health plans for eighteen (18)
      months, payable when such premiums are due (provided Executive validly elects
      to
      continue coverage under applicable law).




(b)  Termination
      Without Cause or Resignation for Good Reason in Connection with a Change of
      Control .
      If
      Executive’s employment is terminated by the Company without Cause or if
      Executive resigns for Good Reason, and the termination is in Connection with
      a
      Change of Control, then, subject to Executive signing and not revoking a
      separation agreement and release of claims in a form acceptable to the Company,
      Executive will receive: (i) continued payment of his


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Base
      Salary for twenty-four (24) months in accordance with the Company’s normal
      payroll policies, (ii) full accelerated vesting with respect to Executive’s then
      outstanding unvested equity awards, and (iii) reimbursement for premiums paid
      for continued health benefits for Executive (and any eligible dependents) under
      the Company’s health plans for eighteen (18) months, payable when such premiums
      are due (provided Executive validly elects to continue coverage under applicable
      law).




8.  Definitions .




(a)  Cause .
      For
      purposes of this Agreement, “Cause” means:




(i)  A
      failure
      by Executive to substantially perform Executive’s duties as an employee, other
      than a failure resulting from the Executive’s complete or partial incapacity due
      to physical or mental illness or impairment;




(ii)  A
      willful
      act by Executive that constitutes misconduct;




(iii)  Circumstances
      where Executive intentionally or negligently imparts material confidential
      information relating to the Company or its business to competitors or to other
      third parties other than in the course of carrying out Executive’s
      duties;




(iv)  A
      material violation by Executive of a federal or state law or regulation
      applicable to the business of the Company;




(v)  A
      willful
      violation of a material Company employment policy or the Company’s insider
      trading policy;




(vi)  Any
      act
      or omission by Executive constituting dishonesty (other than a good faith
      expense account dispute) or fraud, with respect to the Company or any of its
      affiliates, or any other misconduct which is injurious to the financial
      condition of the Company or any of its affiliates or is injurious to the
      business reputation of the Company or any of its affiliates;




(vii)  Executive’s
      failure to cooperate with the Company in connection with any actions, suits,
      claims, disputes or grievances against the Company or any of its officers,
      directors, employees, shareholders, affiliates, divisions, subsidiaries,
      predecessor and successor corporations, and assigns, whether or not such
      cooperation would be adverse to Executive’s own interest; or




(viii)  Executive’s
      conviction or plea of guilty or no contest to a felony.




(b)  Change
      of Control .
      For
      purposes of this Agreement, “Change of Control” will mean the occurrence of any
      of the following events:




(i) The
      sale,
      lease, conveyance or other disposition of all or substantially all of the
      Company’s assets to any “person” (as such term is used in Section 13(d) of the
      Securities


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Exchange
      Act of 1934, as amended (the “Exchange Act”)), entity or group of persons acting
      in concert;




(ii) Any
      person or group of persons becoming the “beneficial owner” (as defined in Rule
      13d-3 under the Exchange Act), directly or indirectly, of securities of the
      Company representing 50% or more of the total voting power represented by the
      Company’s then outstanding voting securities;




(iii) A
      merger
      or consolidation of the Company with any other corporation, other than a merger
      or consolidation that would result in the voting securities of the Company
      outstanding immediately prior thereto continuing to represent (either by
      remaining outstanding or by being converted into voting securities of the
      surviving entity or its controlling entity) at least 50% of the total voting
      power represented by the voting securities of the Company or such surviving
      entity (or its controlling entity) outstanding immediately after such merger
      or
      consolidation; or




(iv)  A
      contest
      for the election or removal of members of the Board that results in the removal
      from the Board of at least 50% of the incumbent members of the
      Board.




(c)  Good
      Reason .
      For
      purposes of this Agreement, “Good Reason” means (without Executive’s
      consent):




(i)  A
      material reduction in Executive’s title, authority, status, or responsibilities,
      unless Executive is provided with a comparable position (i.e. a position of
      equal or greater organizational level, duties, authority, compensation and
      status);




(ii)  The
      reduction of Executive’s aggregate Base Salary and Target Annual Incentive as in
      effect immediately prior to such reduction (other than a reduction applicable
      to
      executives generally); or




(iii)  A
      relocation of Executive’s principal place of employment by more than fifty (50)
      miles.




(d)  In
      Connection with a Change of Control .
      For
      purposes of this Agreement, a termination of Executive’s employment with the
      Company is “in Connection with a Change of Control” if Executive’s employment is
      terminated within twelve (12) months following a Change of Control.




9.  Indemnification .
      Subject
      to applicable law, Executive will be provided indemnification to the maximum
      extent permitted by the Company’s Articles of Incorporation or Bylaws,
      including, if applicable, any directors and officers insurance policies, with
      such indemnification to be on terms determined by the Board or any of its
      committees, but on terms no less favorable than provided to any other Company
      executive officer or director and subject to the terms of any separate written
      indemnification agreement.




10.  Confidential
      Information .
      As a
      condition of employment with the Company, Executive will execute the Company’s
      standard form of Proprietary Information
      and Inventions Agreement (the
“Confidential Information Agreement”).


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11.  Assignment .
      This
      Agreement will be binding upon and inure to the benefit of (a) the heirs,
      executors and legal representatives of Executive upon Executive’s death, and
      (b) any successor of the Company. Any such successor of the Company will be
      deemed substituted for the Company under the terms of this Agreement for all
      purposes. For this purpose, “successor” means any person, firm, corporation, or
      other business entity which at any time, whether by purchase, merger, or
      otherwise, directly or indirectly acquires all or substantially all of the
      assets or business of the Company. None of the rights of Executive to receive
      any form of compensation payable pursuant to this Agreement may be assigned
      or
      transferred except by will or the laws of descent and distribution. Any other
      attempted assignment, transfer, conveyance, or other disposition of Executive’s
      right to compensation or other benefits will be null and void.




12.  Notices .
      All
      notices, requests, demands and other communications called for hereunder will
      be
      in writing and will be deemed given (a) on the date of delivery if
      delivered personally; (b) one (1) day after being sent overnight by a
      well-established commercial overnight service, or (c) four (4) days after
      being mailed by registered or certified mail, return receipt requested, prepaid
      and addressed to the parties or their successors at the following addresses,
      or
      at such other addresses as the parties may later designate in
      writing:




If
      to the
      Company:





Attn :
      Chairman of the Compensation Committee


c/o
      Corporate Secretary


750
      University Avenue


Los
      Gatos, CA 95032




If
      to
      Executive:




at
      the
      last residential address known by the Company.




13.  Severability .
      If any
      provision hereof becomes or is declared by a court of competent jurisdiction
      to
      be illegal, unenforceable, or void, this Agreement will continue in full force
      and effect without said provision.




14.  Arbitration . The
      Parties agree that any and all disputes arising out of the terms of this
      Agreement, their interpretation, and any of the matters herein released, will
      be
      subject to arbitration in Santa Clara County before JAMS, pursuant to its
      Employment Arbitration Rules & Procedures (“JAMS Rules”). The Arbitrator
      will administer and conduct any arbitration in accordance with California law,
      including the California Code of Civil Procedure, and the Arbitrator will apply
      substantive and procedural California law to any dispute or claim, without
      reference to any conflict-of-law provisions of any jurisdiction. To the extent
      that the JAMS rules conflict with California law, California law will take
      precedence. The Arbitrator may grant injunctions and other relief in such
      disputes. The decision of the Arbitrator will be final, conclusive, and binding
      on the parties to the arbitration. The Parties agree that the prevailing party
      in any arbitration will be entitled to injunctive relief in any court of
      competent jurisdiction to enforce the arbitration award. The
      Arbitrator will award attorneys’ fees and costs to the prevailing party, except
      as prohibited by law. T he
      Parties hereby agree to waive their right to have any dispute between them
      resolved in a court of law by a


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judge
      or
      jury .
      This
      paragraph will not prevent either party from seeking injunctive relief (or
      any
      other provisional remedy) from any court having jurisdiction over the Parties
      and the subject matter of their dispute relating to Executive’s obligations
      under this Agreement and the Confidential Information Agreement.




15.  Integration .
      This
      Agreement, together with the Confidential Information Agreement and the standard
      forms of equity award grant that describe Executive’s outstanding equity awards,
      represents the entire agreement and understanding between the parties as to
      the
      subject matter herein and supersedes all prior or contemporaneous agreements
      (including, but not limited to the Interim Employment Agreement) whether written
      or oral. No waiver, alteration, or modification of any of the provisions of
      this
      Agreement will be binding unless in a writing and signed by duly authorized
      representatives of the parties hereto. In entering into this Agreement, no
      party
      has relied on or made any representation, warranty, inducement, promise, or
      understanding that is not in this Agreement. To the extent that any provisions
      of this Agreement conflict with those of any other agreement to be signed upon
      Executive’s hire, the terms in this Agreement will prevail.




16.  Waiver
      of Breach .
      The
      waiver of a breach of any term or provision of this Agreement, which must be
      in
      writing, will not operate as or be construed to be a waiver of any other
      previous or subsequent breach of this Agreement.




17.  Survival .
      The
      Confidential Information Agreement will survive the termination of this
      Agreement.




18.  Headings .
      All
      captions and Section headings used in this Agreement are for convenient
      reference only and do not form a part of this Agreement.




19.  Tax
      Withholding .
      All
      payments made pursuant to this Agreement will be subject to withholding of
      applicable taxes.




20.  Governing
      Law .
      This
      Agreement will be governed by the laws of the state of California without regard
      to its conflict of laws provisions.




21.  Code
      Section 409A .
      The
      Company and the Executive agree to work together in good faith to consider
      amendments to this Agreement necessary or appropriate to avoid imposition of
      any
      additional tax or income recognition prior to actual payment to Executive under
      Internal Revenue Code Section 409A and any temporary or final Treasury
      Regulations and Internal Revenue Service guidance thereunder.




22.  Acknowledgment .
      Executive acknowledges that he has had the opportunity to discuss this matter
      with and obtain advice from his private attorney, has had sufficient time to,
      and has carefully read and fully understands all the provisions of this
      Agreement, and is knowingly and voluntarily entering into this
      Agreement.




23.  Counterparts .
      This
      Agreement may be executed in counterparts, and each counterpart will have the
      same force and effect as an original and will constitute an effective, binding
      agreement on the part of each of the undersigned.


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IN
      WITNESS WHEREOF, each of the parties has executed this Agreement, in the case
      of
      the Company by a duly authorized officer, as of the day and year written
      below.






COMPANY:HI/FN,
                  INC.Date:
                  February 6, 2007William
                  R. Walker
                Vice
                  President of Finance, Chief Financial Officer
                and
                  SecretaryEXECUTIVE:Date:
                  February 6, 2007ALBERT
                  E. SISTO



























































**[SIGNATURE
      PAGE TO ALBERT E. SISTO EMPLOYMENT AGREEMENT]**




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