HI/FN INC
10-12G/A, 1998-12-08
SEMICONDUCTORS & RELATED DEVICES
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<PAGE>   1
 
   
    AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 8, 1998
    
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
 
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
                            ------------------------
 
   
                               AMENDMENT NO. 3 TO
    
 
                                    FORM 10
                  GENERAL FORM FOR REGISTRATION OF SECURITIES
   Pursuant to Section 12(b) or 12(g) of the Securities Exchange Act of 1934
 
                            ------------------------
                                  hi/fn, inc.
             (Exact Name of Registrant as Specified in its Charter)
 
<TABLE>
<S>                                            <C>
                  DELAWARE                                      33-0732700
  (State of Incorporation or Organization)         (I.R.S. Employer Identification No.)
</TABLE>
 
                             750 UNIVERSITY AVENUE
                              LOS GATOS, CA 95302
         (Address, Including Zip Code, of Principal Executive Offices)
 
                                 (408) 399-3500
              (Registrant's Telephone Number, Including Area Code)
 
                            ------------------------
 
     Securities to be registered pursuant to Section 12(b) of the Act: None
 
       Securities to be registered pursuant to Section 12(g) of the Act:
 
                    Common Stock, par value $.001 per share
                                (Title of Class)
 
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>   2
 
                 INFORMATION REQUIRED IN REGISTRATION STATEMENT
              CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT
                              AND ITEMS OF FORM 10
 
<TABLE>
<CAPTION>
ITEM
NO.                   ITEM CAPTION                           LOCATION IN INFORMATION STATEMENT
- ----                  ------------                           ---------------------------------
<C>   <S>                                            <C>
  1.  Business.....................................  "SUMMARY"; "THE DISTRIBUTION -- Background and
                                                     Reasons for the Distribution"; "MANAGEMENT'S
                                                     DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                                                     AND RESULTS OF OPERATIONS"; "THE COMPANY" and
                                                     "BUSINESS."
  2.  Financial Information........................  "SUMMARY"; "RISK FACTORS"; "SELECTED HISTORICAL
                                                     FINANCIAL DATA"; "MANAGEMENT'S DISCUSSION AND
                                                     ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                                                     OPERATIONS" and "FINANCIAL STATEMENTS."
  3.  Properties...................................  "BUSINESS."
  4.  Security Ownership of Certain Beneficial
      Owners and Management........................  "MANAGEMENT" and "SECURITIES OWNERSHIP OF CERTAIN
                                                     BENEFICIAL OWNERS AND MANAGEMENT."
  5.  Directors and Executive Officers.............  "SUMMARY"; "RISK FACTORS" and "MANAGEMENT."
  6.  Executive Compensation.......................  "MANAGEMENT -- Executive Compensation."
  7.  Certain Relationships and Related
      Transactions.................................  "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS."
  8.  Legal Proceedings............................  "BUSINESS -- Legal Proceedings."
  9.  Market Price of and Dividends on the
      Registrant's Common Equity and Related
      Stockholder Matters..........................  "SUMMARY"; "RISK FACTORS -- Dividend Policy" and
                                                     "THE DISTRIBUTION -- Quotation and Trading of
                                                     Company Common Stock; Dividend Policy."
 10.  Recent Sales of Unregistered Securities......  "THE COMPANY" and "CERTAIN RELATIONSHIPS AND
                                                     RELATED TRANSACTIONS."
 11.  Description of Registrant's Securities to be
      Registered...................................  "DESCRIPTION OF THE COMPANY'S CAPITAL STOCK."
 12.  Indemnification of Directors and Officers....  "MANAGEMENT -- Indemnification Agreements" and
                                                     "HI/FN CERTIFICATE OF INCORPORATION AND BYLAWS."
 13.  Financial Statements and Supplementary
      Data.........................................  "SUMMARY"; "SELECTED HISTORICAL FINANCIAL DATA";
                                                     "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                                                     FINANCIAL CONDITION AND RESULTS OF OPERATIONS"
                                                     and "FINANCIAL STATEMENTS."
</TABLE>
 
                                        i
<PAGE>   3
 
<TABLE>
<CAPTION>
ITEM
NO.                   ITEM CAPTION                           LOCATION IN INFORMATION STATEMENT
- ----                  ------------                           ---------------------------------
<C>   <S>                                            <C>
 14.  Changes in and Disagreements with Accountants
      on Accounting and Financial Disclosure.......  None.
 15.  Financial Statements and Exhibits............
      (a) Financial Statements and Schedules
      (1) Financial Statements:                      "FINANCIAL STATEMENTS" and Schedule II.
      (b) Exhibits:
</TABLE>
 
   
<TABLE>
<CAPTION>
EXHIBIT
 NUMBER                           DESCRIPTION
- -------                           -----------
<S>       <C>
 3.1(1)   Form of Third Amended and Restated Certificate of
          Incorporation of Hi/fn, Inc. (included as Annex I to the
          Information Statement).
 3.2(1)   Form of Amended and Restated Bylaws of Hi/fn, Inc. (included
          as Annex II to the Information Statement).
10.1(1)   Amended and Restated 1996 Equity Incentive Plan of Hi/fn,
          Inc. (included as Annex III to the Information Statement).
10.2(2)   Assignment, Assumption and License Agreement dated as of
          November 21, 1996 between Stac, Inc. and Hi/fn, Inc.
10.3(2)   Cross License Agreement dated as of November 21, 1996
          between Stac, Inc. and Hi/fn, Inc.
10.4(1)   Form of Distribution Agreement.
10.5(2)   Form of Employee Benefits and Other Matters Allocation
          Agreement.
10.6(2)   Form of Tax Allocation and Indemnity Agreement.
10.7(2)   Form of Transitional Services Agreement.
10.8(1)   Form of Indemnification Agreement.
10.9(2)   Agreement dated as of April 1, 1994 between International
          Business Machines Corporation and Stac, Inc. (Program Patent
          License Agreement).
10.10(2)  Agreement dated as of April 1, 1994 between International
          Business Machines Corporation and Stac, Inc. (Cross License
          Agreement).
10.11(2)  License Agreement dated as of June 20, 1994 between
          Microsoft Corporation and Stac, Inc.
10.12(2)  License Agreement dated as of February 16, 1996 between
          Microsoft Corporation and Stac, Inc.
10.13(2)  License Agreement dated as of December 15, 1995 between
          Motorola, Inc. and Stac, Inc.
10.14(1)  Agreement dated as of November 13, 1997 between 750
          University, LLC and Hi/fn, Inc.
10.15(1)  1998 Employee Stock Purchase Plan of Hi/fn, Inc.
10.16(1)  Form of Director Change of Control Agreement.
10.17(2)  Form of Employee Change of Control Agreement.
10.18(2)  Promissory Note dated as of September 28, 1998 made by
          Hi/fn, Inc. in favor of Stac, Inc.
10.19(2)  Security Agreement dated as of September 28, 1998 between
          Hi/fn, Inc. and Stac, Inc.
27.1(1)   Financial Data Schedule.
</TABLE>
    
 
- ---------------
(1) Previously filed.
 
   
(2) Filed herewith.
    
   
    
 
                                       ii
<PAGE>   4
 
                               [STAC LETTERHEAD]
 
   
                               December 10, 1998
    
 
Dear Stockholder:
 
     The Board of Directors of Stac, Inc. ("Stac") has approved the distribution
(the "Distribution") to holders of Stac common stock, through a special
dividend, of all of the common stock of hi/fn, inc. ("Hi/fn") owned by Stac.
Hi/fn was organized in August 1996 to own and operate the semiconductor business
previously operated as a division of Stac. Stac transferred the semiconductor
business (along with the associated technology, assets and liabilities) to Hi/fn
on November 21, 1996.
 
     The Board of Directors of Stac believes that the Distribution is in the
best interests of Stac stockholders. The completion of the Distribution will
permit each of Hi/fn and Stac to concentrate on its core business. The Board of
Directors of Stac believes that the Distribution also will allow financial
markets to better understand and recognize the merits of the two businesses and
enhance their abilities to raise equity capital. The common stock of Stac will
continue to be listed on The Nasdaq Stock Market's Nasdaq National Market (the
"Nasdaq National Market"). Hi/fn has applied to have the shares of Hi/fn common
stock approved for quotation and trading on the Nasdaq National Market under the
symbol "HIFN."
 
   
     If you are a holder of Stac common stock of record at the close of business
on December 1, 1998, you will receive as a dividend one share of Hi/fn common
stock for every 3.9156 shares of Stac common stock you hold. On December 8,
1998, Stac received a private letter ruling from the Internal Revenue Service
confirming, among other things, that the Distribution will 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. The Distribution is
scheduled to occur on or about December 16, 1998. We expect to mail the Hi/fn
common stock certificates shortly thereafter. Stockholders of Stac on the record
date must retain their Stac stock certificates which will continue to represent
shares of Stac common stock.
    
 
     The enclosed Information Statement contains information about the
Distribution and about Hi/fn. We urge you to read it carefully. Holders of Stac
common stock are not required to take any action to participate in the
Distribution. A stockholder vote is not required in connection with this matter
and, accordingly, your proxy is not being sought.
 
     We are optimistic about the prospects for Stac and Hi/fn and appreciate
your continued support.
 
                                          Sincerely,
 
                                          Gary W. Clow
                                          Chairman of the Board and Chief
                                          Executive Officer
                                          Stac, Inc.
<PAGE>   5
 
                             INFORMATION STATEMENT
 
                                  HI/FN, INC.
                                  COMMON STOCK
 
     This Information Statement ("Information Statement") is being furnished in
connection with the distribution (the "Distribution") to holders of common
stock, par value $.001 per share ("Stac Common Stock"), of Stac, Inc., a
Delaware corporation ("Stac"), of the shares of common stock, par value $.001
per share ("Company Common Stock"), of hi/fn, inc., a Delaware corporation
("Hi/fn" or the "Company"), that are currently outstanding and owned by Stac,
pursuant to the terms of a Distribution Agreement to be entered into between
Stac and Hi/fn (the "Distribution Agreement"). Hi/fn was organized in August
1996 to own and operate Stac's semiconductor business, which previously was
operated as a division of Stac. Stac transferred the semiconductor business
(along with the associated technology, assets and liabilities) to Hi/fn on
November 21, 1996. See "RISK FACTORS"; "THE COMPANY" and "BUSINESS."
 
   
     The shares of Company Common Stock held by Stac immediately prior to the
Distribution will be distributed to holders of record of Stac Common Stock as of
the close of business on December 1, 1998 (the "Record Date"). As of the Record
Date, there were issued and outstanding 501,475 shares of Company Common Stock,
held by 26 stockholders of record including Stac, and 6,000,000 shares of the
Company's Series A Preferred Stock, par value $.001 per share (the "Series A
Preferred Stock"), all of which were held by Stac. As of December 4, 1998,
1,329,988 shares of Company Common Stock were issuable upon exercise of options
granted under the 1996 Equity Incentive Plan of Hi/fn, Inc., as amended (the
"1996 Plan"). Immediately prior to the Distribution, Stac will convert all
shares of Series A Preferred Stock into Company Common Stock, resulting in
Stac's owning 6,000,100 shares of Company Common Stock. Stac will distribute one
share of Company Common Stock for every 3.9156 shares of Stac Common Stock held
by Stac stockholders on the Record Date (the "Distribution Ratio") and will not
retain any shares of Company Common Stock following the Distribution. The
Distribution Ratio is determined by dividing, as of the Distribution Date, the
number of shares of Stac Common Stock outstanding by the number of shares of
Company Common Stock (on an as-converted basis) held by Stac. The Distribution
Ratio could change prior to the Distribution if holders of options to purchase
Stac Common Stock exercise such options prior to the Distribution. If such
option holders exercise their options prior to the Distribution, they will be
entitled to receive Company Common Stock in the Distribution. Such option
holders have the right to purchase up to 1,484,377 shares of Stac Common Stock
between the Record Date and the Distribution Date. If all such options were
exercised, the Distribution Ratio would be 4.1629. Stac will announce the final
Distribution Ratio on the Distribution Date.
    
 
   
     On December 8, 1998, Stac received a private letter ruling from the
Internal Revenue Service ("IRS") confirming, among other things, that the
Distribution will 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 (the "Code"). See "THE DISTRIBUTION -- Material Federal Income Tax
Consequences of the Distribution." The date of the Distribution (the
"Distribution Date") is scheduled to be on or about December 16, 1998. No
consideration will be paid by holders of Stac Common Stock for shares of Company
Common Stock. See "THE DISTRIBUTION -- Manner of Effecting the Distribution."
    
 
     There is no current trading market for the Company Common Stock, although a
"when issued" market may develop prior to the Distribution Date. The Company has
applied to have the shares of Company Common Stock approved for quotation and
trading on The Nasdaq Stock Market's Nasdaq National Market (the "Nasdaq
National Market") under the symbol "HIFN." See "THE DISTRIBUTION -- Quotation
and Trading of Company Common Stock; Dividend Policy."
                            ------------------------
 
 NO STOCKHOLDER APPROVAL OF THE DISTRIBUTION IS REQUIRED OR SOUGHT. WE ARE NOT
                  ASKING YOU FOR A PROXY AND YOU ARE REQUESTED
                            NOT TO SEND US A PROXY.
                            ------------------------
 
  THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
 EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
   AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
              ACCURACY OR ADEQUACY OF THIS INFORMATION STATEMENT.
                            ------------------------
 
     THIS INFORMATION STATEMENT DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
                SOLICITATION OF AN OFFER TO BUY ANY SECURITIES.
                            ------------------------
 
     Stockholders of Stac with inquiries related to the Distribution should
contact John R. Witzel, Vice President of Finance, Chief Financial Officer and
Secretary, Stac, Inc., 12636 High Bluff Drive, 4th Floor, San Diego, California
92130, telephone: (619) 794-4300; or Stac's stock transfer agent, American Stock
Transfer & Trust Company, 40 Wall Street, New York, New York 10005. American
Stock Transfer also is acting as distribution agent for the Distribution.
 
   
          THE DATE OF THIS INFORMATION STATEMENT IS DECEMBER 10, 1998.
    
<PAGE>   6
 
                             INFORMATION STATEMENT
 
                               TABLE OF CONTENTS
 
   
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
AVAILABLE INFORMATION.......................................      2
SUMMARY.....................................................      3
RISK FACTORS................................................      9
THE DISTRIBUTION............................................     23
  Background and Reasons for the Distribution...............     23
  Fairness Opinion..........................................     25
  Distribution Agent........................................     27
  Manner of Effecting the Distribution......................     28
  Results of the Distribution...............................     28
  Material Federal Income Tax Consequences of the
     Distribution...........................................     29
  Quotation and Trading of Company Common Stock; Dividend
     Policy.................................................     30
  Conditions; Termination...................................     30
  Reasons for Furnishing the Information Statement..........     31
RELATIONSHIP BETWEEN HI/FN AND STAC AFTER THE
  DISTRIBUTION..............................................     32
REGULATORY APPROVALS........................................     34
SELECTED HISTORICAL FINANCIAL DATA..........................     35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
  AND RESULTS OF OPERATIONS.................................     36
THE COMPANY.................................................     42
BUSINESS....................................................     43
MANAGEMENT..................................................     57
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............     64
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
  MANAGEMENT................................................     67
HI/FN CERTIFICATE OF INCORPORATION AND BYLAWS...............     68
DESCRIPTION OF THE COMPANY'S CAPITAL STOCK..................     69
REPORT OF INDEPENDENT ACCOUNTANTS...........................    F-1
GLOSSARY....................................................    G-1
ANNEX I -- THIRD AMENDED AND RESTATED CERTIFICATE OF
  INCORPORATION
  OF HI/FN..................................................    I-1
ANNEX II -- AMENDED AND RESTATED BYLAWS OF HI/FN............   II-1
ANNEX III -- AMENDED AND RESTATED 1996 EQUITY INCENTIVE PLAN
  OF HI/FN..................................................  III-1
ANNEX IV -- OPINION OF WARBURG DILLON READ LLC..............   IV-1
</TABLE>
    
 
                                        1
<PAGE>   7
 
                             AVAILABLE INFORMATION
 
     Hi/fn has filed a Registration Statement on Form 10 (the "Registration
Statement") with the Securities and Exchange Commission (the "Commission") under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), with
respect to the Company Common Stock. This Information Statement does not contain
all of the information set forth in the Registration Statement and the exhibits
and schedules thereto. For further information, reference is made hereby to the
Registration Statement and such exhibits and schedules. Statements contained
herein concerning any documents are not necessarily complete and, in each
instance, reference is made to the copies of such documents filed as exhibits to
the Registration Statement. Each such statement is qualified in its entirety by
such reference. Copies of these documents may be inspected without charge at the
principal office of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the Regional Offices of the Commission at Seven World Trade
Center, Suite 1300, New York, New York 10048 and at 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661, and copies of all or any part thereof may
be obtained from the Commission upon payment of the charges prescribed by the
Commission. Copies of this material also should be available through the
Internet by using the SEC EDGAR Archive, the address of which is
http://www.sec.gov.
 
     Following the Distribution, the Company will be required to comply with the
reporting requirements of the Exchange Act and will file annual, quarterly and
other reports with the Commission. The Company also will be subject to the proxy
solicitation requirements of the Exchange Act and, accordingly, will furnish
audited financial statements to its stockholders in connection with its annual
meetings of stockholders.
 
     NO PERSON IS AUTHORIZED BY STAC OR THE COMPANY TO GIVE ANY INFORMATION OR
TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS INFORMATION
STATEMENT, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED.
 
     Stac, Hi/fn, Replica and LZS are registered trademarks of Stac, Inc. or
hi/fn, inc. All other product names are trademarks of their respective owners.
                                        2
<PAGE>   8
 
                                    SUMMARY
 
     This Summary is qualified by the more detailed information and financial
statements set forth elsewhere in this Information Statement. Capitalized terms
used but not defined in this Summary are defined elsewhere in this Information
Statement. Unless the context otherwise requires, references to the Company or
Hi/fn prior to November 21, 1996 include the assets, liabilities and results of
operations of Stac's semiconductor division and references in this Information
Statement to Stac include its consolidated subsidiaries other than Hi/fn.
 
                                THE DISTRIBUTION
 
Distributing Company..........   Stac, Inc., a Delaware corporation ("Stac").
 
Distributed Company...........   hi/fn, inc., a Delaware corporation ("Hi/fn" or
                                 the "Company"). Hi/fn was organized in August
                                 1996 to own and operate Stac's semiconductor
                                 business, which previously was operated as a
                                 division of Stac. Stac transferred the
                                 semiconductor business (along with the
                                 associated technology, assets and liabilities)
                                 to the Company on November 21, 1996. See "RISK
                                 FACTORS"; "THE COMPANY" and "BUSINESS."
 
   
The Distribution and
Distribution Ratio............   As of the Record Date, there were issued and
                                 outstanding 501,475 shares of the Company's
                                 common stock, $.001 par value per share (the
                                 "Company Common Stock"), held by 26
                                 stockholders of record including Stac, and
                                 6,000,000 shares of the Company's Series A
                                 Preferred Stock, $.001 par value per share (the
                                 "Series A Preferred Stock"), all of which were
                                 held by Stac. Immediately prior to the
                                 Distribution, Stac will convert all shares of
                                 Series A Preferred Stock into Company Common
                                 Stock, resulting in Stac's owning 6,000,100
                                 shares of Company Common Stock. Stac will
                                 distribute one share of Company Common Stock
                                 for every 3.9156 shares of Stac Common Stock
                                 held by Stac stockholders on the Record Date
                                 (the "Distribution Ratio"). The Distribution
                                 Ratio could change prior to the Distribution if
                                 holders of options to purchase Stac Common
                                 Stock exercise such options prior to the
                                 Distribution. If such option holders exercise
                                 their options prior to the Distribution, they
                                 will be entitled to receive Company Common
                                 Stock in the Distribution. Such option holders
                                 have the right to purchase up to 1,484,377
                                 shares of Stac Common Stock between the Record
                                 Date and the Distribution Date. If all such
                                 options were exercised, the Distribution Ratio
                                 would be 4.1629. Stac will announce the final
                                 Distribution Ratio on the Distribution Date.
                                 Stac will not retain any shares of Company
                                 Common Stock following the Distribution.
    
 
Fractional Share Interests....   Fractional shares of Company Common Stock will
                                 not be distributed. Fractional shares of
                                 Company Common Stock will be aggregated and
                                 sold in the public market by the Distribution
                                 Agent and the aggregate net cash proceeds will
                                 be distributed ratably to those stockholders
                                 entitled to fractional interests. See "THE
                                 DISTRIBUTION -- Manner of Effecting the
                                 Distribution."
 
   
Shares to be Outstanding
Following the Distribution....   Based on 501,475 shares of Company Common Stock
                                 and 6,000,000 shares of Series A Preferred
                                 Stock outstanding on the
    
 
                                        3
<PAGE>   9
 
   
                                 Record Date, approximately 6,501,475 shares of
                                 Company Common Stock.
    
 
Record Date...................   December 1, 1998 (5:00 p.m. Eastern Standard
                                 Time).
 
   
Distribution Date.............   On or about December 16, 1998.
    
 
Mailing Date..................   Certificates representing the shares of Company
                                 Common Stock to be distributed pursuant to the
                                 Distribution will be delivered to the
                                 Distribution Agent on the Distribution Date.
                                 The Distribution Agent will mail certificates
                                 representing the shares of Company Common Stock
                                 to holders of Stac Common Stock as soon as
                                 practicable thereafter. Holders of Stac Common
                                 Stock should not send stock certificates to
                                 Stac, the Company or the Distribution Agent.
                                 See "THE DISTRIBUTION -- Manner of Effecting
                                 the Distribution."
 
   
Reasons for the
Distribution..................   The Distribution is designed to separate the
                                 semiconductor business of Hi/fn from the
                                 software business of Stac. The Distribution
                                 will result in the formation of two publicly
                                 traded companies, each of which will pursue an
                                 independent strategic path. The Stac Board
                                 believes the separation will offer both new
                                 entities the opportunity to pursue strategic
                                 objectives appropriate to different business
                                 objectives, offer each entity the financial
                                 flexibility to raise capital on a more
                                 cost-effective basis and create targeted
                                 incentives for each company's management and
                                 key employees.
    
 
Fairness Opinion..............   In connection with its approval of the
                                 Distribution, the Stac Board received an
                                 opinion from Warburg Dillon Read LLC ("WDR") to
                                 the effect that as of the date of the WDR
                                 opinion, and based on and subject to the
                                 assumptions, limitations and qualifications set
                                 forth therein, from a financial point of view,
                                 the Distribution is fair to the stockholders of
                                 Stac. See "THE DISTRIBUTION -- Fairness
                                 Opinion." The opinion of WDR is set forth in
                                 full in Annex IV hereto.
 
Business Strategy of the
Company.......................   See "BUSINESS -- Business Strategy."
 
   
Federal Income Tax
Consequences to Stac and Stac
  Stockholders................   On December 8, 1998, Stac received a letter
                                 ruling from the IRS confirming that, among
                                 other things, the Distribution will not result
                                 in recognition of taxable income or gain to
                                 Stac or its stockholders under Section 355 of
                                 the Code (except to the extent of cash received
                                 in lieu of fractional shares). See "THE
                                 DISTRIBUTION -- Material Federal Income Tax
                                 Consequences of the Distribution."
    
 
Trading Market................   There is currently no public market for the
                                 Company Common Stock. The Company has applied
                                 to have the Company Common Stock approved for
                                 quotation and trading on the Nasdaq National
                                 Market under the symbol "HIFN." See "THE
                                 DISTRIBUTION -- Quotation and Trading of the
                                 Company Common Stock; Dividend Policy" and
                                 "RISK FACTORS -- Absence of Prior Trading
                                 Market for Company Common Stock; Potential
                                 Volatility."
 
                                        4
<PAGE>   10
 
Distribution Agent and
Transfer Agent and Registrar
  for the Company Common
  Stock.......................   American Stock Transfer & Trust Company.
 
Dividends.....................   The Company's dividend policy will be
                                 established by the Board of Directors of the
                                 Company (the "Company Board") from time to time
                                 based on the financial condition and results of
                                 operations of the Company and such other
                                 business considerations as the Company Board
                                 considers relevant. The Company presently
                                 intends to retain future earnings to finance
                                 the growth and development of its business;
                                 therefore, the Company does not currently
                                 anticipate paying any cash dividends. Any
                                 future determination relating to dividend
                                 policy will be made at the discretion of the
                                 Company Board. See "RISK FACTORS -- Dividend
                                 Policy" and "THE DISTRIBUTION -- Quotation and
                                 Trading of Company Common Stock; Dividend
                                 Policy."
 
Antitakeover Provisions.......   The Third Amended and Restated Certificate of
                                 Incorporation of the Company (the "Company
                                 Certificate") and the Amended and Restated
                                 Bylaws of the Company (the "Company Bylaws") to
                                 be adopted by the Company prior to the
                                 Distribution, as well as Delaware statutory
                                 law, contain provisions that may have the
                                 effect of discouraging an acquisition of
                                 control of the Company not approved by the
                                 Company Board. Such provisions include Article
                                 IV of the Company Certificate which authorizes
                                 the Company Board to issue shares of preferred
                                 stock of the Company ("Company Preferred
                                 Stock"), in one or more series, without further
                                 action by Company stockholders, and to
                                 establish the rights and preferences (including
                                 the convertibility of such shares of Company
                                 Preferred Stock into Company Common Stock) of
                                 any series of Company Preferred Stock so
                                 issued. These provisions have been designed to
                                 enable the Company to develop its business and
                                 foster its long-term growth without disruptions
                                 caused by the threat of a takeover not deemed
                                 by the Company Board to be in the best
                                 interests of the Company and its stockholders.
                                 Such provisions also may have the effect of
                                 discouraging third parties from making
                                 proposals involving an acquisition or change of
                                 control of the Company, although such
                                 proposals, if made, might be considered
                                 desirable by a majority of the Company's
                                 stockholders. Such provisions could further
                                 have the effect of making it more difficult for
                                 third parties to cause the replacement of the
                                 current management of the Company without the
                                 concurrence of the Company Board. See "RISK
                                 FACTORS -- Effect of Antitakeover Provisions";
                                 "HI/FN CERTIFICATE OF INCORPORATION AND
                                 BYLAWS"; "DESCRIPTION OF THE COMPANY'S CAPITAL
                                 STOCK" and Annexes I and II.
 
Risk Factors..................   See "RISK FACTORS" for a discussion of factors
                                 that should be considered in connection with
                                 the Company Common Stock received in the
                                 Distribution. Such factors include: limited
                                 operating history as independent company;
                                 fluctuations in operating results, no assurance
                                 of future profitability; termination of
                                 subsidiary relationship with Stac; dependence
                                 upon development of the market for packet
                                 processors; risks associated with emerging VPN
                                 market;
 
                                        5
<PAGE>   11
 
                                 frequent product introductions and evolving
                                 industry standards, rapid technological change;
                                 intensely competitive markets; dependence on
                                 growth in demand for network and storage
                                 equipment; absence of future funding
                                 commitments, need for future capital; customer
                                 concentration; product concentration; lengthy
                                 sales cycle; erosion of average selling prices;
                                 risks associated with independent manufacturers
                                 and sole-source supply; product complexity and
                                 production defects; order and shipment
                                 uncertainties; protection and enforcement of
                                 intellectual property; dependence on key
                                 personnel and hiring of additional personnel;
                                 management of growth; risks associated with
                                 expansion of international business activities;
                                 export restrictions on encryption algorithms;
                                 risks associated with potential acquisitions;
                                 cyclicality of semiconductor industry; year
                                 2000 compliance; tax risks of the Distribution;
                                 possible conflicts with Stac after the
                                 Distribution; control by executive officers and
                                 directors; absence of prior trading market for
                                 Company Common Stock, potential volatility;
                                 effect of antitakeover provisions; shares
                                 eligible for future sale; dividend policy;
                                 dilution; and potential adverse effects of the
                                 Distribution on Stac Common Stock.
 
   
Relationship with Stac after
the Distribution..............   Stac will have no stock ownership in the
                                 Company upon consummation of the Distribution.
                                 For purposes of governing the ongoing
                                 relationship between the Company and Stac after
                                 the Distribution and to provide for an orderly
                                 transition, the Company and Stac have entered
                                 into or will enter into certain agreements.
                                 Such agreements include: (i) the Distribution
                                 Agreement providing for, among other things,
                                 the Distribution and certain indemnification
                                 obligations of each company to the other; (ii)
                                 an Employee Benefits Allocation Agreement,
                                 which provides for an allocation of liabilities
                                 for employee benefits between Stac and Hi/fn
                                 and sets forth formulas for adjustments to Stac
                                 options; (iii) a Tax Allocation and Indemnity
                                 Agreement pursuant to which the Company and
                                 Stac will agree to allocate tax liabilities
                                 that relate to periods prior to the
                                 Distribution Date; and (iii) a Transitional
                                 Services Agreement pursuant to which Stac will
                                 provide certain services to Hi/fn on a
                                 transitional basis. See "RELATIONSHIP BETWEEN
                                 HI/FN AND STAC AFTER THE DISTRIBUTION."
    
 
Policies and Procedures for
Addressing Conflicts..........   The Company and Stac intend to pursue separate
                                 and distinct business strategies to minimize
                                 potential conflicts of interest between the two
                                 companies. Nonetheless, the ongoing
                                 relationship between the Company and Stac may
                                 present conflict situations for certain
                                 directors. Certain persons will serve as
                                 directors of both the Company and Stac, and
                                 also will own (or have options or other rights
                                 to acquire) a significant number of shares of
                                 common stock in both companies. The Company and
                                 Stac will adopt appropriate policies and
                                 procedures on or prior to the Distribution Date
                                 to be followed by the Board of Directors of
                                 each company to address potential conflicts.
                                 Such procedures include requiring the persons
                                 serving as directors of both companies to
                                 abstain from voting as directors with respect
                                 to matters that present a significant conflict
                                 of interest between the companies. See "RISK
                                 FACTORS --
                                        6
<PAGE>   12
 
                                 Possible Conflicts with Stac after the
                                 Distribution"; "RELATIONSHIP BETWEEN HI/FN AND
                                 STAC AFTER THE DISTRIBUTION -- Policies and
                                 Procedures for Addressing Conflicts."
 
   
Interests of Certain Persons
in the Distribution...........   Based on their ownership of Stac Common Stock,
                                 Company Common Stock and options to acquire
                                 Company Common Stock as of the Record Date, the
                                 executive officers and directors of the Company
                                 will beneficially own an aggregate of 1,610,367
                                 shares, or approximately 22.7%, of the
                                 outstanding Company Common Stock immediately
                                 following the Distribution. See "RISK
                                 FACTORS -- Control by Executive Officers and
                                 Directors" and "SECURITIES OWNERSHIP OF CERTAIN
                                 BENEFICIAL OWNERS AND MANAGEMENT."
    
 
                                        7
<PAGE>   13
 
                             SUMMARY FINANCIAL DATA
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
     The summary financial data of the Company has been prepared from the
audited financial statements of the Company as of September 30, 1997 and 1998
and for each of the three years in the period ended September 30, 1998 as
included herein. Financial information as of September 30, 1995 and 1996 and for
the year ended September 30, 1995 has been prepared from audited financial
statements not included herein. The financial information as of and for the year
ended September 30, 1994 has been prepared from unaudited financial statements
not included herein. The financial information may not reflect the Company's
future performance or the future financial position or results of operations of
the Company, nor does it provide or reflect data as if the Company had actually
operated as a separate, stand-alone entity during the periods covered. The
summary financial data should be read in conjunction with the financial
statements and related notes and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS," included elsewhere in this
Information Statement. In the opinion of the Company's and Stac's management,
the unaudited financial statements as of and for the year ended September 30,
1994, contain all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial condition and results of operations
for these periods.
 
   
<TABLE>
<CAPTION>
                                                               YEAR ENDED SEPTEMBER 30,
                                                     ---------------------------------------------
                                                      1994     1995     1996      1997      1998
                                                     ------   ------   -------   -------   -------
<S>                                                  <C>      <C>      <C>       <C>       <C>
STATEMENT OF OPERATIONS DATA:
Revenues...........................................  $5,666   $7,342   $12,894   $14,226   $21,533
Cost of revenues...................................   2,302    2,841     5,095     4,762     6,525
                                                     ------   ------   -------   -------   -------
Gross margin.......................................   3,364    4,501     7,799     9,464    15,008
Operating expenses:
Research and development...........................     564      551     1,641     2,985     5,403
Sales and marketing................................     813    1,097     1,677     2,224     3,370
General and administrative.........................     379      492       889     1,203     2,407
                                                     ------   ------   -------   -------   -------
Operating income...................................   1,608    2,361     3,592     3,052     3,828
Interest income....................................                                   16        17
                                                     ------   ------   -------   -------   -------
Provision for income taxes.........................     661      947     1,441     1,235     1,627
                                                     ------   ------   -------   -------   -------
Net income.........................................  $  947   $1,414   $ 2,151   $ 1,833   $ 2,218
                                                     ======   ======   =======   =======   =======
Net income per share, basic(1).....................  $ 0.16   $ 0.24   $  0.36   $  0.30   $  0.35
Net income per share, diluted......................  $ 0.16   $ 0.24   $  0.36   $  0.30   $  0.33
Weighted average shares outstanding, basic.........   6,000    6,000     6,000     6,100     6,308
Weighted average shares outstanding, diluted.......   6,000    6,000     6,000     6,174     6,800
BALANCE SHEET DATA (AS OF SEPTEMBER 30,):
Cash...............................................  $   --   $   --   $    --   $   480   $ 4,084
Total assets.......................................   1,583    2,254     2,611     5,898   $16,611
Working capital (deficit)..........................    (193)    (223)     (383)    3,520     4,723
Total stockholders' equity(2)......................      --       --        --     4,622     6,952
</TABLE>
    
 
- ---------------
(1) Since the Company's Series A Preferred Stock represents a primary equity
    security, it is included in the calculation of basic net income per share.
 
(2) The balance sheets prior to September 30, 1997 reflect Hi/fn's structure
    prior to its formation as a subsidiary. Periods subsequent to September 30,
    1996 reflect the net assets contributed by Stac in establishing the Hi/fn
    subsidiary. The transfer was recorded at the historical net book value of
    the transferred assets and liabilities. In exchange for the net assets
    contributed to Hi/fn, Stac received 6,000,000 shares of Series A Preferred
    Stock and 100 shares of Company Common Stock. For all periods prior to
    fiscal 1997, net income generated by Hi/fn has been treated as if it were
    transferred to Stac in the form of dividends. No such dividend transfers
    were made for fiscal 1997 and the periods presented thereafter.
 
                                        8
<PAGE>   14
 
                                    RISK FACTORS
 
     This Information Statement contains forward-looking statements within the
meaning of the Securities Act of 1933, as amended (the "Securities Act").
Discussions containing such forward-looking statements may be found throughout
this Information Statement, including without limitation in the materials set
forth under "SUMMARY"; "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS"; "THE COMPANY" and "BUSINESS." Actual
events or results may differ materially from those discussed in the
forward-looking statements as a result of various factors, including without
limitation the risk factors set forth below and the matters set forth in this
Information Statement generally.
 
LIMITED OPERATING HISTORY AS INDEPENDENT COMPANY
 
     On August 14, 1996, the Company was incorporated by Stac, which transferred
the semiconductor business (along with the associated technology, assets and
liabilities) to the Company on November 21, 1996 in exchange for 6,000,000
shares of the Series A Preferred Stock and 100 shares of Company Common Stock.
The Company is a recently-formed entity with a limited operating history. There
can be no assurance that the Company will not encounter financial, managerial or
other difficulties as a result of its lack of operating history. In addition,
due to the anticipated increases in the Company's operating expenses,
particularly in the area of research and development, the Company's operating
results will be adversely affected if the Company's revenues and gross margins
do not increase in tandem with its increased expenses. The Company's prospects
must be considered in light of the risks, challenges and difficulties frequently
encountered by companies in their early stage of development, particularly
companies in rapidly evolving markets such as the networking and semiconductor
industries. To address these risks, the Company must, among other things,
successfully increase the scope of its operations, respond to competitive
developments, continue to attract, retain and motivate qualified personnel and
continue to commercialize products incorporating innovative technologies. There
can be no assurance that the Company will be successful in addressing these
risks and challenges.
 
FLUCTUATIONS IN OPERATING RESULTS; NO ASSURANCE OF FUTURE PROFITABILITY
 
     Fluctuations in the Company's operating results have occurred in the past
and are likely to occur in the future due to a variety of factors, any of which
may have a material adverse effect on the Company's operating results. In
particular, the Company's quarterly results of operations may vary significantly
due to general business conditions in the network, storage and semiconductor
industries, changes in demand for the network and storage equipment products of
the Company's customers, the timing and amount of orders from the Company's
customers, changes in customer mix, cancellations or delays of customer product
orders, new product introductions by the Company or its competitors,
cancellations, changes or delays of deliveries of products to the Company by its
suppliers, increases in the costs of products from the Company's suppliers,
fluctuations in product life cycles, price erosion, competition, changes in the
mix of products sold by the Company, availability of semiconductor foundry
capacity, variances in the timing and amount of nonrecurring engineering fees
and operating expenses, seasonal fluctuations in demand, intellectual property
disputes and general economic conditions. See "-- Customer Concentration." All
of the above factors are difficult for the Company to forecast, and these and
other factors could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company has at times
recognized a substantial portion of its revenues in the last month of a quarter.
Since a large portion of the Company's operating expenses, including rent,
salaries and capital lease expenses, is fixed and difficult to reduce or modify
if the Company's revenue does not meet the Company's expectations, the adverse
effect of any revenue shortfall will be magnified by the fixed nature of these
operating expenses. In addition, the Company's lengthy sales cycle limits its
ability to forecast accurately its future financial performance. As a result of
all of the foregoing, there can be no assurance that the Company will be able to
sustain profitability on a quarterly or an annual basis. Moreover, the Company
believes that period-to-period comparisons are not necessarily meaningful and
should not be relied upon as indicative of future operating results. The
Company's operating results in a future quarter or quarters are likely to fall
below the expectations of public market analysts or investors. In such event,
the price of the Company's Common Stock will likely be materially adversely
affected.
 
                                        9
<PAGE>   15
 
TERMINATION OF SUBSIDIARY RELATIONSHIP WITH STAC
 
     As a subsidiary of Stac, the Company has been able to benefit from Stac's
financial strength and extensive network of business relationships with
companies. The Company has drawn on this resource in developing its own contacts
and relationships. After completion of the Distribution, Hi/fn will be a stand-
alone company and thus will no longer be able to benefit from Stac's
relationships to the same extent that it could as a majority-owned subsidiary of
Stac. Although Stac and the Company will enter into certain intercompany
agreements in connection with the Distribution pursuant to which Stac will
continue to provide certain services to the Company, such agreements will be of
short duration (generally one year) and will require the Company to begin
promptly to replace services currently being provided by Stac. There can be no
assurance that the Company will be able to replace such services on terms at
least as favorable as those negotiated with Stac or that the termination of
Stac's relationship with the Company will not adversely affect the Company's
business, financial condition and results of operations.
 
DEPENDENCE UPON DEVELOPMENT OF THE MARKET FOR PACKET PROCESSORS
 
     The Company's future prospects are dependent upon the acceptance of packet
processors as an alternative to the Application Specific Integrated Circuit
("ASIC") components, software and general purpose microprocessors traditionally
utilized by network and storage equipment vendors. The Company's future
prospects are also dependent upon acceptance by the Company's customers of
third-party sourcing for packet processors as an alternative to in-house
development of such technology. Many of the Company's current and potential
customers have substantial technological capabilities and financial resources
and currently develop internally the ASIC components and program the general
purpose microprocessors utilized in their products. These customers may in the
future continue to utilize internally-developed ASIC components and general
purpose microprocessors or may determine to develop or acquire components,
technologies or packet processors that are similar to, or that may be
substituted for, the Company's products. The Company 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 these requirements. In addition, the Company must make
products available to such customers on a timely basis and at competitive
prices. If the Company's customers fail to accept packet processors as an
alternative, if they develop or acquire the technology to develop such
components internally rather than purchase the Company's products, or if the
Company is otherwise unable to develop strong relationships with network and
storage equipment vendors, the Company's business, financial condition and
results of operations would be materially and adversely affected.
 
RISKS ASSOCIATED WITH EMERGING VPN MARKET
 
     The Company seeks to be a leading supplier of packet processors that
implement the network security protocols necessary to support the deployment of
Virtual Private Networks ("VPNs"). The market for networking products designed
to support VPNs is still emerging, and there can be no assurance that it will
continue to grow, or that even if the market grows, the Company's products that
address this market will be successful. The Company's success in generating
significant revenue in this evolving market will depend upon, among other
things, its ability to demonstrate the benefits of its technology to potential
distributors, original equipment manufacturers ("OEMs") and end users. The
success of the Company's products designed to support VPNs will rely, to a large
degree, on the increased use of the Internet by businesses as replacements for,
or enhancements to, their private networks. There can be no assurance that
businesses will develop sufficient confidence in the Internet to deploy products
incorporating the Company's packet processors. The inability of the Company to
penetrate the VPN market or the failure of the current VPN market to grow or new
markets to develop and be receptive to the Company's products could have a
material adverse effect on the Company's business, financial condition and
results of operations. The emergence of the VPN market for the Company's
products will be affected by a number of factors beyond the Company's control.
For example, the Company's products are designed to conform to certain
standards-based network security protocols. There can be no assurance that these
protocols will be widely adopted or that competing protocols will not emerge
that will be preferred by the Company's customers.
 
                                       10
<PAGE>   16
 
FREQUENT PRODUCT INTRODUCTIONS AND EVOLVING INDUSTRY STANDARDS; RAPID
TECHNOLOGICAL CHANGE
 
     The networking, storage and semiconductor industries are characterized by
rapidly changing technology, frequent product introductions, evolving industry
standards and rapid technological change. Accordingly, the Company's future
performance depends on a number of factors, including the Company's ability to:
properly identify emerging target markets; identify emerging technological
trends within such markets; develop and maintain competitive products; enhance
its products by adding innovative features that differentiate its 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. The Company's past success has been dependent in part
upon its ability to develop products that have been selected for design into new
products ("design wins") of leading equipment manufacturers. The development of
the Company's packet processors, however, is highly complex, and from time to
time the Company has experienced delays in completing the development and
introduction of new products. No assurance can be given that the Company's
design and introduction schedules for any additions and enhancements to its
existing and future products will be met, that these products will achieve
market acceptance, that the Company will be able to sell these products at
average selling prices ("ASPs") that are favorable to the Company or that the
Company will achieve future design wins.
 
     In evaluating new product decisions, the Company must anticipate well in
advance future demand for product features and performance characteristics, as
well as available supporting technologies, manufacturing capacity, competitive
product offerings and industry standards. For instance, in response to the
emergence of VPNs as an alternative, cost-effective network architecture, the
Company has made a substantial investment in products that support the IP
Security protocol (the "IPSec protocol"). The IPSec protocol is a networking
protocol developed by the Internet Engineering Task Force (the "IETF") that
provides data integrity and confidentiality for data transmitted over the
Internet. The failure of the IPSec protocol to become an industry standard, or
the emergence or evolution of new industry standards, through either adoption by
official standards committees or widespread use by network equipment vendors,
could require the Company to redesign its products, resulting in delays in the
introduction of such products.
 
     The Company must also continue to make significant investments in research
and development in order to continue to enhance the performance and
functionality of its 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
inherently complex and require long development cycles. Such innovations must be
completed before developments in networking and storage technologies or
standards render them obsolete and must be sufficiently compelling to induce
network and storage equipment vendors to favor them over alternative
technologies. The rapid development of new competing technologies and standards
increases the risk that current or new competitors could develop products that
would reduce the competitiveness of the Company's products. Moreover, the
Company generally must incur substantial research and development costs before
the technical feasibility and commercial viability of a product line can be
ascertained. There can be no assurance that the introduction of future products
or product enhancements will be timely, that revenues from future products or
product enhancements will be sufficient to recover the development costs
associated with such products or enhancements, or that the Company will be able
to secure the financial resources necessary to fund future development. Market
acceptance of new technologies or the failure of the Company to develop and
introduce new products or enhancements directed at new industry standards could
have a material adverse effect on the Company's business, financial condition
and results of operations.
 
INTENSELY COMPETITIVE MARKETS
 
     The networking and storage markets into which the Company sells its
products are intensely competitive and are subject to frequent product
introductions with improved price-performance characteristics, rapid
technological change, unit price erosion and the continued emergence of new
industry standards. The semiconductor industry is also intensely competitive and
is characterized by rapid technological change, product obsolescence and unit
price erosion. The Company's products compete with products from companies such
as International Business Machines Corporation ("IBM"), VLSI Technology, Inc.
("VLSI"), Rainbow
                                       11
<PAGE>   17
 
Technologies, Inc. ("Rainbow"), Information Resource Engineering Inc. ("IRE")
and Analog Devices, Inc. ("Analog Devices"). In 1994, Stac entered into two
license agreements with IBM pursuant to which Stac granted IBM the right to
implement, but not sublicense, the Company's patented compression technology in
IBM hardware and software products. Stac also entered into a license agreement
with Microsoft Corporation ("Microsoft") in 1994 pursuant to which Stac granted
Microsoft the right to create software implementations of the Company's patented
compression technology in Microsoft's software products. The Company also
competes against software solutions that use general purpose microprocessors to
run encryption algorithms and the Company's software compression libraries. The
Company expects significant future competition from major domestic and
international semiconductor suppliers. Several established electronics and
semiconductor suppliers have recently entered or indicated an intent to enter
the network equipment market. The Company also may face competition from
suppliers of products based on new or emerging technologies. Furthermore, many
of the Company's existing and potential customers internally develop ASICs,
general purpose microprocessors and other devices which attempt to perform all
or a portion of the functions performed by the Company's products.
 
     A key element of the Company's packet processor architecture is the
encryption algorithms embedded in its semiconductor and software products. These
products are subject to export control restrictions administered by the U.S.
Department of Commerce, which permit the Company's network equipment customers
to export products incorporating encryption technology only with the appropriate
export license. As a result of these restrictions, foreign competitors facing
less stringent controls on their encryption products could inhibit the sale of
the Company's encryption/compression processors to network equipment customers
in the global market.
 
     Many of the Company's current and prospective competitors offer broader
product lines and have significantly greater financial, technical, manufacturing
and marketing resources than the Company. As a result, they may be able to adapt
more quickly to new or emerging technologies and changes in customer
requirements or to devote greater resources to the promotion and sale of their
products than the Company. In particular, companies such as Texas Instruments
Incorporated ("Texas Instruments"), National Semiconductor Corporation
("National Semiconductor"), Lucent Technologies Inc. ("Lucent"), Intel
Corporation ("Intel") and Motorola, Inc. ("Motorola") have proprietary
semiconductor manufacturing ability, preferred vendor status with many of the
Company's customers, extensive marketing power and name recognition, greater
financial resources than the Company and other significant advantages over the
Company. In addition, current and potential competitors may determine, for
strategic reasons, to consolidate, to lower the prices of their products or to
bundle their products with other products. Current and potential competitors
have established or may establish financial or strategic relationships among
themselves or with existing or potential customers, resellers or other third
parties. Accordingly, it is possible that new competitors or alliances among
competitors could emerge and rapidly acquire significant market share. There can
be no assurance that the Company will be able to compete successfully against
current and future competitors. Increased competition may result in price
reductions, reduced gross margins and loss of market share, any of which could
materially adversely affect the Company's business, financial condition and
results of operations.
 
     The Company believes that important competitive factors in its markets are
performance, price, length of development cycle, design wins with major network
and storage equipment vendors, support for new network and storage standards,
features and functionality, adaptability of products to specific applications,
support of product differentiation, reliability, technical service and support
and protection of products by effective utilization of intellectual property
laws. The failure of the Company to successfully develop and market products
that compete successfully with those of other suppliers in the market would have
a material adverse effect on the Company's business, financial condition and
results of operations. In addition, the Company must compete for the services of
qualified distributors and sales representatives. To the extent that the
Company's competitors offer such distributors or sales representatives more
favorable terms or a higher volume of business, such distributors or sales
representatives may decline to carry, or discontinue carrying, the Company's
products. The Company's business, financial condition and results of operations
could be adversely affected by any failure to maintain and expand its
distribution network. See "BUSINESS -- Competition."
 
                                       12
<PAGE>   18
 
DEPENDENCE ON GROWTH IN DEMAND FOR NETWORK AND STORAGE EQUIPMENT
 
     The Company's future success is in large measure dependent on continued
growth in the market for network security equipment, in particular the markets
for remote access concentrators, firewalls and server network interface cards
which are manufactured and sold by the Company's customers. In addition, the
Company's success also depends upon storage equipment vendors incorporating the
Company's packet processors into tape back-up systems. The market for these
products 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. There can be no assurance with respect to the rate or extent to
which the networking or storage equipment markets will grow, if at all, nor can
there be any assurance that the Company will not experience a decline in demand
for its products. Any decrease in the growth of the network or storage equipment
markets or decline in demand for the Company's products could have a material
adverse effect on the Company's business, financial condition and results of
operations.
 
ABSENCE OF FUTURE FUNDING COMMITMENTS; NEED FOR FUTURE CAPITAL
 
     The success of the Company's business strategy is dependent upon being able
to access equity capital markets and to obtain proceeds from borrowings on terms
financially advantageous to the Company. Currently the Company has no external
source of financing and the Company has not received any commitment with respect
to any funds needed in the future. Following the Distribution, the Company
intends to access equity capital markets and may seek other financing;
nevertheless, there can be no assurance that it will be able to do so at all or
in amounts or on terms acceptable to the Company. Failure to obtain additional
capital on acceptable terms could result in the delay or abandonment of some or
all of the Company's plans and could have a material adverse effect on the
Company. In the absence of such additional capital, there can be no assurance
that the Company will have sufficient working capital to finance future
acquisitions, to pursue business opportunities and to ensure customer, supplier
and employee credibility. Stac is not obligated to provide any additional funds
to the Company or to assist it in obtaining additional financing.
 
CUSTOMER CONCENTRATION
 
     The Company's customer base is highly concentrated. A relatively small
number of customers has accounted for a significant portion of the Company's
revenues to date, and the Company expects that this trend will continue for the
foreseeable future. The Company has been, and continues to be, substantially
dependent upon sales to Quantum Corporation ("Quantum"). For example, in fiscal
1998 and 1997, sales to Quantum accounted for 70% and 61%, respectively, of the
Company's revenues. Quantum is not under any binding obligation to order
products from the Company, and a decline in sales to that customer would have a
material adverse effect on the Company's business, financial condition and
results of operations. In fiscal 1996, two customers, Quantum and Ascend
Communications, Inc., accounted for 43% and 14% of the Company's revenues,
respectively. The Company expects that its most significant customers in future
periods could be different from its largest customers in prior periods due to a
variety of factors, including customers' deployment schedules and budget
considerations. As a result, the Company expects to experience significant
fluctuations in its results of operations on a quarterly and an annual basis.
Because limited numbers of network and storage equipment vendors account for a
majority of packet processor purchases in their respective markets, the
Company's future success will depend upon its ability to establish and maintain
relationships with these companies. Many of the Company's current and potential
customers currently develop internally the ASIC components and program the
general purpose microprocessors utilized in their products as an alternative to
using the Company's packet processors. There can be no assurance that current
customers will continue to purchase products from the Company as opposed to
developing such products internally or that the Company will be able to obtain
orders from new customers. The Company's future success will depend in
significant part upon the decision of the Company's current and prospective
customers to continue to purchase products from the Company. If orders from
current customers are cancelled, decreased or delayed, or the Company fails to
obtain significant orders from new customers, or any significant customer delays
payment or
 
                                       13
<PAGE>   19
 
fails to pay, the Company's business, financial condition and results of
operations could be materially and adversely affected.
 
     The market for network equipment that would include the Company's packet
processors, such as routers, remote access concentrators and firewalls,
currently is dominated by a few large vendors, including Cisco Systems, Inc.,
Ascend Communications, Inc., 3Com Corporation and Bay Networks, Inc. The failure
of such network equipment vendors to incorporate the Company's packet processors
into their products could have a material adverse effect on the Company's
business, financial condition and results of operations.
 
PRODUCT CONCENTRATION
 
     The Company derives substantially all of its revenue from sales of its
compression processor products that, together, accounted for 84%, 88% and 89% of
revenue in the years ended September 30, 1998 and fiscal 1997 and 1996,
respectively. The Company expects that its compression processor products will
continue to account for a significant portion of the Company's revenue for the
foreseeable future. There can be no assurance that the Company will continue to
derive revenue from its compression processor products, and a decline in revenue
from such products would have a material adverse effect on the Company's
business, financial condition and results of operation. Moreover, the Company
believes that the emergence of VPNs provides a market opportunity for the
Company's packet processor products. The Company intends to leverage its
expertise in the compression processor market to provide network equipment
products that include both compression and encryption capability. There can be
no assurance that the Company will be successful in leveraging its core
compression technologies to gain market share in the network security market.
The Company's future financial performance will depend in significant part on
the successful development, introduction and customer acceptance of new
products. See "-- New Product Development and Evolving Industry Standards;
Technological Change."
 
LENGTHY SALES CYCLE
 
     The Company sells its products to network and storage equipment vendors.
The Company's sales cycle involves test and evaluation of its products by the
potential customer, design of the customer's equipment to incorporate the
Company's products and the customer's own sales cycle. The sales cycle for the
test and evaluation of the Company's products can range from 3 to 6 months or
more with an additional 9 to 18 months or more before a customer commences
volume production of equipment which incorporates the Company's products.
Because of this lengthy sales cycle, the Company may experience a delay between
increasing expenses for research and development and sales and marketing efforts
and the generation of higher revenues, if any, from such expenditures. In
addition, the delays inherent in such lengthy sales cycle raise additional risks
of customer decisions to cancel or change product plans, which could result in
the loss of anticipated sales by the Company. Achieving a design win with a
network or storage equipment vendor provides no assurance that such network or
storage equipment vendor will ultimately ship products incorporating the
Company's packet processors. The Company's business, financial condition and
results of operations could be materially adversely affected if customers
curtail, reduce or delay orders during the Company's sales cycle or choose not
to release products employing the Company's packet processors.
 
EROSION OF AVERAGE SELLING PRICES
 
     The networking, storage and semiconductor industries have experienced rapid
erosion of ASPs due to a number of factors, including rapid technological
change, price-performance enhancements and product obsolescence. The Company may
experience substantial period-to-period fluctuations in future operating results
due to ASP erosion. The Company anticipates that ASPs will decrease in the
future in response to product introductions by competitors of the Company or
other factors, including price pressures from significant customers. Therefore,
the Company must continue to develop and introduce on a timely basis new
products that incorporate features that can be sold at higher ASPs. Failure to
achieve any or all of the foregoing could cause the Company's revenues and gross
margins to decline, which would have a material adverse effect on the Company's
business, financial condition and results of operations.
 
                                       14
<PAGE>   20
 
RISKS ASSOCIATED WITH INDEPENDENT MANUFACTURERS AND SOLE-SOURCE SUPPLY
 
     The Company subcontracts all manufacturing, assembly and test of its packet
processors. The Company currently subcontracts its semiconductor manufacturing
to Toshiba Corporation ("Toshiba"), Atmel Corporation ("Atmel") and Motorola.
These suppliers currently deliver fully assembled and tested products on a
turnkey basis. None of the Company's products currently is manufactured by more
than one supplier. The semiconductor industry is highly cyclical and, in the
past, foundry capacity has been very limited at times and may become limited in
the future. The Company depends on its suppliers to deliver sufficient
quantities of finished product to the Company in a timely manner. Since the
Company places its orders on a purchase order basis and does not have a
long-term volume purchase agreement with any of its existing suppliers, these
suppliers may allocate, and in the past have allocated, capacity to the
production of other products while reducing deliveries to the Company on short
notice. For example, in June 1995, the Company experienced delays in obtaining
an adequate supply of a now-discontinued product from one of its suppliers. As a
result, the Company switched production of the product to a new manufacturer,
resulting in a three-month delay in shipments to customers. The Company also
experienced yield and test anomalies on a different product manufactured by
another subcontractor that could have caused an interruption in customer
shipments. In this case, the manufacturer was able to correct the problem in a
timely manner and customer shipments were not affected. Any time the Company is
required to change a key supplier or foundry, the process of qualifying the new
supplier or foundry and commencing volume production involves delay and expense,
which can result in lost revenues, reduced operating margins and possible
detriment to customer relationships. Before a new manufacturer can begin
production of a semiconductor part, the Company must (i) conform its part, if
necessary, to the new manufacturer's process, (ii) create a new mask set to
manufacture the part, (iii) have the new manufacturer prepare sample parts so
the Company can verify the product specification and (iv) provide sample parts
to customers for qualification. In general, it takes from three to six months
from the time the Company begins this process with a new manufacturer before the
manufacturer can begin full-scale production of the part. There can be no
assurance that the Company will not have similar or more protracted problems in
the future with existing or new suppliers.
 
     Both Toshiba and Motorola manufacture products for the Company in plants
located in Asia. To date, the Company has not experienced any negative impact as
a result of the financial and stock market dislocations that have occurred in
the Asian financial markets. There can be no assurance, however, that present or
future dislocations or other international business risks, such as currency
exchange fluctuations or recessionary conditions, will not force the Company to
seek new suppliers of its products.
 
     The Company must place orders approximately 12 to 14 weeks in advance of
expected delivery. As a result, the Company has only a limited ability to react
to fluctuations in demand for its products, which could cause the Company to
have an excess or a shortage of inventory of a particular product. Moreover, any
failure of global semiconductor manufacturing capacity to increase in line with
demand could cause foundries to allocate available capacity to larger customers
or customers with long-term supply contracts. The inability of the Company to
obtain adequate foundry capacity at acceptable prices, or any delay or
interruption in supply, could reduce the Company's product revenues or increase
the Company's cost of revenues and could have a material adverse effect on the
Company's business, financial condition and results of operations.
 
     The Company continuously evaluates the benefits, on a product-by-product
basis, of migrating to a smaller semiconductor geometry process in order to
reduce costs, and has commenced migration of certain products to smaller
geometries. The Company believes that transitioning its products to increasingly
smaller geometries will be important for the Company to remain competitive. No
assurance can be given that future process migration will be achieved or
achieved without difficulty.
 
     In the future, the Company may change its supply arrangements to assume
more of the product manufacturing responsibilities. Such changes could include
contracting for wafer manufacturing and subcontracting for assembly and test
rather than purchasing finished product. The assumption of greater manufacturing
responsibilities involves additional risks that include not only the risks
discussed above, but also risks associated with variances in production yields,
obtaining adequate test and assembly capacity at reasonable cost and other
general risks associated with the manufacture of semiconductors. In addition,
the Company
 
                                       15
<PAGE>   21
 
also expects that it may enter into volume purchase agreements pursuant to which
the Company must commit to minimum levels of purchases and which may require
up-front investments. The inability of the Company to effectively assume greater
manufacturing responsibilities or manage volume purchase arrangements could have
a material adverse effect on the Company's business, financial condition and
results of operations. See "BUSINESS -- Manufacturing."
 
PRODUCT COMPLEXITY AND PRODUCTION DEFECTS
 
     Products as complex as those offered by the Company frequently contain
errors, defects and bugs when first introduced or as new versions are released.
The Company has in the past experienced such errors, defects and bugs. Delivery
of products with production defects or reliability, quality or compatibility
problems could significantly delay or hinder market acceptance of such products,
which could damage the Company's reputation and adversely affect the Company's
ability to retain its existing customers and to attract new customers. Moreover,
such errors, defects or bugs could cause problems, interruptions, delays or a
cessation of sales to the Company's customers. Alleviating such problems may
require significant expenditures of capital and resources by the Company. There
can be no assurance that, despite testing by the Company, its suppliers or its
customers, errors, defects or bugs will not be found in new products after
commencement of commercial production, resulting in additional development
costs, loss of, or delays in, market acceptance, diversion of technical and
other resources from the Company's other development efforts, claims by the
Company's customers or others against the Company or the loss of credibility
with the Company's current and prospective customers. Any such event would have
a material adverse effect on the Company's business, financial condition and
results of operations.
 
ORDER AND SHIPMENT UNCERTAINTIES
 
     The Company's sales generally are made pursuant to individual purchase
orders that may be canceled or deferred by customers on short notice without
significant penalty. Cancellation or deferral of product orders could result in
the Company holding excess inventory, which could have a material adverse effect
on the Company's profit margins and restrict its ability to fund its operations.
The Company recognizes revenue upon shipment of products to the customer, net of
an allowance for estimated returns. Should the Company encounter an
unanticipated level of returns, this could have a material adverse effect on the
Company's business, financial condition and results of operations.
 
PROTECTION AND ENFORCEMENT OF INTELLECTUAL PROPERTY
 
     The Company's future success and ability to compete are dependent, in part,
upon its proprietary technology. The Company relies in part on patent, trade
secret, trademark, maskwork and copyright law to protect its intellectual
property. The Company owns 12 United States patents and four foreign patents.
The Company also has two pending patent applications in Japan. The issued
patents and patent applications primarily cover various aspects of the Company's
compression technology and have expiration dates ranging from 2006 to 2013.
There can be no assurance that any patents will issue pursuant to the Company's
current or future patent applications or that the patents issued pursuant to
such patent applications will not be invalidated, circumvented or challenged,
nor can there be any assurance that infringement claims will not be made by
third parties in the future. Moreover, there can be no assurance that such
claims, if made, will not result in costly litigation or that the Company would
prevail in any such litigation or be able to license any valid and infringed
patents from third parties on commercially reasonable terms, if at all.
Litigation, regardless of the outcome, is likely to result in substantial cost
and diversion of resources to the Company. Any infringement claim or other
litigation against or by the Company could materially adversely affect the
Company's business, financial condition and results of operations.
 
     There can be no assurance that any patents issued to the Company will be
adequate to safeguard and maintain the Company's proprietary rights, to deter
misappropriation or to prevent an unauthorized third party from copying the
Company's technology, designing around the patents owned by the Company or
otherwise obtaining and using the Company's products, designs or other
information. In addition, there can be no assurance that others will not develop
technologies that are similar or superior to the Company's technology.


                                       16
<PAGE>   22
 
     Moreover, the Company claims copyright protection for certain proprietary
software and documentation. The Company attempts to protect its trade secrets
and other proprietary information through agreements with its customers,
suppliers, employees and consultants, and through other security measures.
Although the Company intends to protect its rights vigorously, there can be no
assurance that these measures will be successful. Furthermore, the laws of
certain countries in which the Company's products are or may be manufactured or
sold may not protect the Company's products and intellectual property. See
"BUSINESS -- Intellectual Property."
 
DEPENDENCE ON KEY PERSONNEL AND HIRING OF ADDITIONAL PERSONNEL
 
     The Company's success depends to a significant degree upon the continued
contributions of its key management and other personnel, many of whom would be
difficult to replace. The Company does not have employment contracts with any of
its key personnel and does not maintain any key man life insurance on any of its
personnel. In addition, the Company believes that its success depends to a
significant extent on the ability of its directors and officers to operate
effectively, both individually and as a group. Several members of the Company's
management team have joined the Company in the last 12 months. The Company may
experience difficulty in integrating members of its management team, and there
can be no assurance that the new executives will succeed in their roles in a
timely and efficient manner. The Company also must attract and retain highly
skilled managerial and other personnel. Competition for such personnel is
intense, and there can be no assurance that the Company will be successful in
attracting and retaining such personnel. The loss of the services of any key
personnel, the inability to attract or retain qualified personnel in the future
or delays in hiring required personnel, particularly engineers, could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, companies in technology industries whose
employees accept positions with competitive companies have in the past claimed
that their competitors have engaged in unfair hiring practices. There can be no
assurance that the Company will not receive such claims in the future as it
seeks to hire qualified personnel or that such claims will not result in
material litigation involving the Company. The Company could incur substantial
costs in defending itself against any such claims, regardless of their merits.
 
MANAGEMENT OF GROWTH
 
     The Company has experienced a period of rapid growth and expansion which
has placed, and continues to place, a significant strain on its resources. To
accommodate this growth, the Company will be required to implement a variety of
new and upgraded operational and financial systems, procedures and controls,
including the improvement of the accounting and other internal management
systems currently provided by Stac, all of which may require substantial
management effort. There can be no assurance that such efforts can be
accomplished successfully. In addition, this growth as well as the Company's
product development activities have necessitated an increase in the number of
the Company's employees, resulting in increased responsibilities for the
Company's management. There can be no assurance that the Company's systems,
procedures and controls will be adequate to support the Company's operations.
Any failure to improve the Company's operational, financial and management
information systems, or to hire, train, motivate or manage its employees could
have a material adverse effect on the Company's business, financial condition
and results of operations.
 
RISKS ASSOCIATED WITH EXPANSION OF INTERNATIONAL BUSINESS ACTIVITIES
 
     Substantially all of the Company's sales to date have been to customers
located in the United States, including sales to U.S.-based affiliates of
non-U.S. network equipment vendors. If the Company's international sales
increase, the Company will be subject to additional risks inherent in
international operations. All of the Company's international sales to date are
U.S. dollar-denominated. As a result, an increase in the value of the U.S.
dollar relative to foreign currencies could make the Company's products less
competitive in international markets. In addition, the Company procures a
portion of its manufacturing, assembly and test services from suppliers located
outside the United States. International business activities may be limited or
disrupted by the imposition of governmental controls, export license
requirements, restrictions on the export of
 
                                       17
<PAGE>   23
 
encryption technology, currency exchange fluctuations, political instability,
financial and stock market dislocations, trade restrictions and changes in
tariffs. Demand for the Company's products also could be adversely affected by
seasonality of international sales and economic conditions in the Company's
primary overseas markets. These international factors could have a material
adverse effect on future sales of the Company's products to international
customers and, consequently, on the Company's business, financial condition and
results of operations.
 
EXPORT RESTRICTIONS ON ENCRYPTION ALGORITHMS
 
     A key element of the Company's packet processor architecture is the
encryption algorithms embedded in its semiconductor and software products. These
products are subject to export control restrictions administered by the U.S.
Department of Commerce, which permit the Company's network equipment customers
to export products incorporating encryption technology only with the appropriate
export license. In addition, these U.S. export laws prohibit the export of
encryption products to a number of countries deemed hostile by the U.S.
government. U.S. export regulations regarding the export of encryption
technology require either a transactional export license or the granting of
Department of Commerce Commodity jurisdiction. As a result of these
restrictions, foreign competitors facing less stringent controls on their
products may be able to compete more effectively than the Company's network
equipment customers in the global market. There can be no assurance that the
U.S. government will approve any pending or future export license requests.
Further, there can be no assurance that the list of products and countries for
which export approval is required, or the regulatory policies with respect
thereto, will not be revised from time to time, or that laws limiting the
domestic use of encryption will not be enacted. Failure of the Company's network
equipment customers to obtain the required licenses or the costs of compliance
could inhibit the sale of the Company's packet processors.
 
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS
 
     As part of its business strategy, the Company has in the past and expects
to continue to review acquisition prospects that would complement its existing
product offerings, augment its market coverage or enhance its technological
capabilities, or that may otherwise offer growth opportunities. While the
Company has no current agreements or negotiations underway with respect to any
such acquisitions, the Company may make acquisitions of businesses, products or
technologies in the future. Future acquisitions by the Company, which may be
effected without stockholder approval, could result in potentially dilutive
issuances of equity securities, the incurrence of debt and contingent
liabilities and amortization expenses related to goodwill and other intangible
assets, any of which could materially adversely affect the Company's operating
results and/or the price of the Company Common Stock. Acquisitions entail
numerous risks, including difficulties in the assimilation of acquired
operations, technologies and products, diversion of management's attention to
other business concerns, risks of entering markets in which the Company has no
or limited prior experience and potential loss of key employees of acquired
organizations. No assurance can be given as to the ability of the Company to
successfully integrate any businesses, products, technologies or personnel that
might be acquired in the future, and the failure of the Company to do so could
have a material adverse effect on the Company's business, financial condition
and results of operations.
 
CYCLICALITY OF SEMICONDUCTOR INDUSTRY
 
     The semiconductor industry has historically been characterized by
significant downturns and wide fluctuations in supply and demand. From time to
time, the industry has also experienced significant fluctuations in anticipation
of changes in general economic conditions. This cyclicality has been
characterized by significant variances in product demand, production capacity
and accelerated erosion of unit ASPs. Industry-wide fluctuations in the future
could have a material adverse effect on the Company's business, financial
condition and results of operations.
 
                                       18
<PAGE>   24
 
YEAR 2000 COMPLIANCE
 
     Many existing computer systems and applications, and other control devices,
use only two digits to identify a year in the date field, without considering
the impact of the upcoming change in the century. As a result, such systems and
applications could fail or create erroneous results unless corrected so that
they can process data related to the Year 2000. The Company relies on its
systems, applications and devices in operating and monitoring all major aspects
of its business, including financial systems (such as general ledger, accounts
payable and payroll modules), customer services, networks and telecommunications
equipment and end products. The Company also relies, directly and indirectly, on
external systems of business enterprises such as customers, suppliers,
creditors, financial organizations, and of governmental entities, both domestic
and international, for accurate exchange of data. Even if the internal systems
of the Company are not materially affected by the Year 2000 issue, the Company
could be affected by disruptions in the operation of the enterprises with which
the Company interacts or Year 2000 disruptions that affect the Company's
customers. Despite the Company's efforts to address the Year 2000 impact on its
internal systems and business operations, there can be no assurance that such
impact will not result in a material disruption of its business or have a
material adverse effect on the Company's business, financial condition and
results of operations.
 
TAX RISKS OF THE DISTRIBUTION
 
   
     On December 8, 1998, Stac received a private letter ruling from the IRS
confirming, among other things, that the Distribution will not result in
recognition of taxable income or gain to Stac or its stockholders under Section
355 of the Code (except to the extent of cash received in lieu of fractional
shares). See "THE DISTRIBUTION -- Material Federal Income Tax Consequences of
the Distribution" and "-- Conditions; Termination." 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. Stac
is not aware of any facts or circumstances which would cause such
representations and assumptions to be untrue.
    
 
     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 the distributed Company Common Stock on the
Distribution Date and (ii) Stac's adjusted basis of such Company Common Stock.
In addition, under the consolidated tax return rules of the Code, each member of
Stac's consolidated group (including Hi/fn) would be severally liable for such
tax liability. This resulting tax liability would have a material adverse effect
on the cash flows, business, financial condition and results of operations of
Stac and possibly Hi/fn.
 
   
     Furthermore, if the Distribution were not to qualify under Section 355 of
the Code, each stockholder of Stac who receives shares of Company Common Stock
in the Distribution would be treated as if such stockholder had received a
taxable distribution in an amount equal to the fair market value of Company
Common Stock received, which would result in (i) a dividend to the extent of
such stockholder's pro rata share of Stac's current and accumulated earnings and
profits, (ii) a reduction in such stockholder's basis in such holder's shares of
Stac Common Stock to the extent that the amount received exceeds such
stockholder's share of earnings and profits and (iii) a gain from the deemed
sale or exchange of such shares of Stac Common Stock to the extent the amount
received exceeds both such stockholder's share of earnings and profits and such
stockholder's basis in such shares of Stac Common Stock.
    
 
   
     Under recently enacted Section 355(e), if the Distribution were considered
to be part of a plan or series of related transactions (a "Plan") in which,
after the Distribution, a 50% or greater interest in Hi/fn or Stac were acquired
by one or more persons, the IRS would claim that the Distribution was taxable at
the corporate level (although it would remain tax-free to the Stac
stockholders). Although neither Stac nor Hi/fn believes the Distribution is part
of a Plan to effect a 50% change in ownership of either Stac or Hi/fn, the IRS
has issued no guidance on the definition of a Plan and for the first two years
following the Distribution, any cumulative 50% change of ownership within the
two-year period will be rebuttably presumed to be pursuant to a Plan. See "THE
DISTRIBUTION -- Material Federal Income Tax Aspects of the Distribution."
    
 
                                       19
<PAGE>   25
 
POSSIBLE CONFLICTS WITH STAC AFTER THE DISTRIBUTION
 
     Conflicts of interest may arise between Stac and Hi/fn in a number of areas
relating to their past and ongoing relationships, including potential
competitive business activities, tax and employee benefit matters, indemnity
arrangements and the existence of certain dual management capacities of
directors who continue to serve both companies. See "RELATIONSHIP BETWEEN STAC
AND HI/FN AFTER THE DISTRIBUTION -- Policies and Procedures for Addressing
Conflicts." Currently, two individuals are members of the Board of Directors of
both Stac and Hi/fn. Directors of Stac who are also directors of Hi/fn may have
conflicts of interest with respect to matters potentially or actually involving
or affecting Stac and Hi/fn. There can be no assurance that conflicts will be
resolved without detriment to the interests of one company or the other.
Further, although neither Stac nor Hi/fn presently intends to engage in the
businesses presently conducted by the other, neither company is contractually
obligated not to do so, except for the provision in the Cross License Agreement
between Stac and Hi/fn prohibiting Stac from creating any hardware
implementations of the technology subject to the license or selling the software
subject to the license as a stand-alone product for a period of ten years from
the date of the Cross License Agreement. See "RELATIONSHIP BETWEEN STAC AND
HI/FN AFTER THE DISTRIBUTION -- Policies and Procedures for Addressing
Conflicts."
 
CONTROL BY EXECUTIVE OFFICERS AND DIRECTORS
 
   
     Based solely on their ownership of Stac Common Stock, Company Common Stock
and options to acquire Company Common Stock as of the Record Date, the executive
officers and directors of the Company will beneficially own an aggregate of
1,610,367 shares, or approximately 22.7%, of the outstanding Company Common
Stock immediately following the Distribution. See "SECURITIES OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT." Such persons will have substantial
influence over the Company and on the outcome of matters submitted to the
Company's stockholders for approval. In addition, such ownership could
discourage acquisition of Company Common Stock by potential investors, and could
have an antitakeover effect, possibly depressing the trading price of the
Company Common Stock.
    
 
ABSENCE OF PRIOR TRADING MARKET FOR COMPANY COMMON STOCK; POTENTIAL VOLATILITY
 
   
     There is no existing market for the Company Common Stock. Although the
Company has applied for quotation and trading of the Company Common Stock on the
Nasdaq National Market, no assurance can be given that an active trading market
for the Company Common Stock will develop following the Distribution or, if
developed, that any such market will be sustained. In the absence of a public
trading market, an investor may be unable to liquidate his investment in the
Company. Prices at which the Company Common Stock may trade cannot be predicted.
Nothing herein should be construed to suggest that the trading price of Stac
Common Stock at any point in time may be used as a substitute for the trading
price of Company Common Stock. The prices at which the Company Common Stock
trades will be determined by the marketplace and may be influenced by many
factors, including, among others, the success of the Company's business, the
depth and liquidity of the market for the Company Common Stock, investor
perception of the Company and its assets, the Company's dividend policy, and
general economic and market conditions. The depth and liquidity of the market
for the Company Common Stock may be affected by the aggregate beneficial
ownership by executive officers and directors of the Company of approximately
15.4% of the Company Common Stock immediately following the Distribution. See
"-- Control by Executive Officers and Directors." The prices at which the
Company Common Stock trades also may be affected by certain provisions of the
Company Certificate and the Company Bylaws, as each will be in effect following
the Distribution, which may have an antitakeover effect. See "-- Effect of
Antitakeover Provisions."
    
 
     In addition, in recent years the stock market in general, and the market
for shares of high technology, networking, storage and semiconductor companies
in particular, have experienced extreme price fluctuations, which have often
been unrelated to the operating performance of affected companies. The trading
price of the Company Common Stock is expected to be subject to extreme
fluctuations in response to both business-related issues, such as quarterly
variations in operating results, announcements of new products by the Company or
its competitors, the gain or loss of significant network or storage equipment
vendor customers,
                                       20
<PAGE>   26
 
and stock market-related influences, such as changes in analysts' estimates, the
presence or absence of short-selling of the Company Common Stock and events
affecting other companies that the market deems to be comparable to the Company.
Moreover, technology stocks have from time to time experienced extreme price and
volume fluctuations that often have been unrelated or disproportionate to the
operating performance of these companies. These broad market fluctuations may
adversely affect the market price of the Company Common Stock.
 
EFFECT OF ANTITAKEOVER PROVISIONS
 
     Certain provisions of the Company Certificate and Company Bylaws, as each
will be in effect following the Distribution, and of Delaware law could
discourage potential acquisition proposals and could delay or prevent a change
in control of the Company. Such provisions could diminish the opportunities for
a stockholder to participate in tender offers, including tender offers at a
price above the then current market value of the Company Common Stock. Such
provisions may also inhibit increases in the market price of the Company Common
Stock that could result from takeover attempts. The Company Certificate
authorizes 10,000,000 shares of undesignated Company Preferred Stock. The
Company Board, without further stockholder approval, may issue this Company
Preferred Stock with such terms as the Board of Directors may determine, which
could have the effect of delaying or preventing a change in control of the
Company. The issuance of Company Preferred Stock could also adversely affect the
voting power of the holders of Company Common Stock, including the loss of
voting control to others. Such Company Preferred Stock could be utilized to
implement, without stockholder approval, a stockholders' rights plan that could
be triggered by certain change in control transactions, which could delay or
prevent a change in control of the Company or could impede a merger,
consolidation, takeover or other business combination involving the Company, or
discourage a potential acquiror from making a tender offer or otherwise
attempting to obtain control of the Company. The Company has no current plans to
issue shares of Company Preferred Stock. The Company Bylaws and indemnification
agreements provide that the Company will indemnify officers and directors
against losses that they may incur in legal proceedings resulting from their
service to the Company. In addition, the Company's charter documents provide for
a classified Board of Directors and eliminate the right of stockholders to call
special meetings of stockholders and to take action by written consent.
Moreover, Section 203 of the Delaware General Corporation Law restricts certain
business combinations with "interested stockholders" as defined by that statute.
The provisions of the Company Certificate and of Delaware law are intended to
encourage potential acquirors to negotiate with the Company and allow the Board
the opportunity to consider alternative proposals in the interest of maximizing
stockholder value. However, such provisions may also have the effect of
discouraging acquisition proposals or delaying or preventing a change in control
of the Company, which in turn may have an adverse effect on the market price of
the Company Common Stock. See "HI/FN CERTIFICATE OF INCORPORATION AND BYLAWS."
 
SHARES ELIGIBLE FOR FUTURE SALE
 
   
     The approximately 6,000,100 shares of Company Common Stock distributed to
Stac stockholders in the Distribution will be freely transferable, except for
the shares distributed to persons who may be deemed to be "affiliates" of the
Company under the Securities Act. Such affiliates will be permitted to sell
their shares of Company Common Stock pursuant to Rule 144 under the Securities
Act immediately following the Distribution, subject to certain volume
limitations, manner of sale limitations, notice requirements and the
availability of current public information about the Company. In addition,
immediately following the Distribution, options to purchase 1,329,988 shares of
Company Common Stock will be outstanding under the 1996 Plan. See
"MANAGEMENT -- Hi/fn Equity Plans." The Company intends to file a Registration
Statement on Form S-8 with respect to such shares following the Distribution.
Consequently, shares issued pursuant to the exercise of options granted under
the 1996 Plan will be freely transferable without restriction, subject, in the
case of sales by affiliates, to compliance with Rule 144.
    
 
     The Company is unable to estimate the number of shares that may be sold in
the future by its stockholders or the effect, if any, that sales of shares by
such stockholders will have on the market price of the
 
                                       21
<PAGE>   27
 
Company Common Stock prevailing from time to time. Sales of substantial amounts
of Company Common Stock, or the prospect of such sales, could adversely affect
the market price of the Company Common Stock.
 
DIVIDEND POLICY
 
     The future payment of dividends by the Company will depend on decisions
that will be made by the Company Board from time to time based on the results of
operations and financial condition of the Company and such other business
considerations as the Company Board considers relevant. The Company presently
anticipates that it will retain all available funds for use in the operation and
expansion of its business and does not anticipate paying any dividends in the
foreseeable future. See "THE DISTRIBUTION -- Quotation and Trading of Company
Common Stock; Dividend Policy."
 
DILUTION
 
   
     Following the Distribution, the Company intends to access the capital
markets and may seek other financing through the issuance and sale of equity
securities See "-- Absence of Future Funding Commitments; Need for Further
Capital." Moreover, as of December 4, 1998, the Company had authorized options
to purchase 3,049,900 shares of Company Common Stock under the 1996 Plan,
501,375 of which had been issued upon exercise of options and 1,329,988 of which
were subject to options. Any such issuances, including the exercise of any
outstanding options, may significantly dilute the interests of the existing
holders of Company securities, including the Company Common Stock.
    
 
POTENTIAL ADVERSE EFFECTS OF DISTRIBUTION ON STAC COMMON STOCK
 
     After the Distribution, the Stac Common Stock will continue to be traded on
the Nasdaq National Market. As a result of the Distribution, the trading price
of Stac Common Stock is expected to be lower than the trading price of Stac
Common Stock prior to the Distribution to reflect the value of the Company
Common Stock distributed to holders of Stac Common Stock as of the record date.
The combined trading prices of Stac Common Stock and Company Common Stock after
the Distribution may be less than, equal to or greater than the trading prices
of Stac Common Stock prior to the Distribution. In addition, until the market
has fully analyzed the operations of Stac without the Company's assets, the
price at which the Stac Common Stock trades may fluctuate significantly.
 
                                       22
<PAGE>   28
 
                                THE DISTRIBUTION
 
BACKGROUND AND REASONS FOR THE DISTRIBUTION
 
     The Distribution is designed to separate the semiconductor business of
Hi/fn from the software business of Stac. The Distribution will result in the
formation of two publicly traded companies, each of which will pursue an
independent strategic path. The Stac Board believes the separation will offer
both new entities the opportunity to pursue strategic objectives appropriate to
different business objectives, offer each entity the financial flexibility to
raise capital on a more cost-effective basis and create targeted incentives for
each company's management and key employees. The Stac Board considered the
following in making its decision to approve the Distribution:
 
  Business and Market Rationale
 
     The Distribution will enable two companies with distinct strategic,
financial and operating goals to adopt strategies and pursue objectives
appropriate to their respective core businesses. The Distribution will allow
each entity to pursue its corporate objectives independent of the operations and
policies of the other. Following the Distribution, Stac will continue to focus
on its software business. The Company, in turn, will focus on its semiconductor
business.
 
  Access to Equity Capital
 
     The Company intends to engage in a public offering of Company Common Stock
as soon as possible following the Distribution, assuming business and market
conditions support such an offering. Stac also may elect to raise additional
capital after the Distribution. The Stac Board believes that, as independent
publicly traded entities, Stac and the Company will each have greater
flexibility in their ability to raise equity capital and will be able to more
efficiently pursue their respective capital raising strategies in both the
private and public markets.
 
     In the near term, the Company will have substantial cash needs for (i)
working capital, (ii) funding the continued expansion of its business and (iii)
maintaining sufficient cash reserves to ensure customer, supplier and employee
credibility. In order to compete with its larger, direct competitors, the
Company will need to raise additional capital to fund its growing inventory and
accounts receivable balances, fund increased technology research and
development, fund technology acquisitions and fund an increased marketing and
sales infrastructure. Stac's existing cash is not available to the Company,
except for limited debt or equity financing prior to the Distribution. Stac
intends to utilize its cash to fund its continued development, marketing and
sales efforts with respect to its Replica product line. Further, Stac
anticipates that with increasing advances in technology, it will need to fund
acquisitions of technology to be able to successfully compete in the
marketplace.
 
     The Stac Board believes that the Company's ability to raise capital will be
enhanced to the extent that the investment community can evaluate the Company on
a stand-alone basis. Market analysts are increasingly focusing their coverage on
specific types of businesses, such as semiconductor or software. As a result of
this tendency for analysts to specialize, there are few analysts that have the
industry expertise to value both the semiconductor and software components of
Stac and the Company as a combined entity. Accordingly, representative analyst
coverage for Stac has been extremely low compared to other software and
semiconductor companies. The Stac Board believes this lack of sufficient and
reliable analyst coverage significantly impairs Stac's and the Company's
abilities to raise capital efficiently and effectively.
 
  Management Focus and Employee Incentives
 
     The Distribution will enable both companies to focus on their respective
businesses. Stac's software business and the Company's semiconductor business
are sufficiently distinct in terms of technology, stage of product development
and commercialization, market focus and other factors such that it is more
advantageous for both to operate and be managed as separate entities. The
Distribution is expected to allow management and employees of each company to
focus on their respective paths of innovation in product development and
                                       23
<PAGE>   29
 
marketing, thereby enhancing the ability of each to optimize productivity and
growth. In addition, the Distribution is intended to allow each company to
provide both management and employees with targeted equity compensation
arrangements thereby optimizing the economic incentives each entity will be able
to provide its employees.
 
  Attraction and Retention of Key Employees
 
     The Company competes for talented managers and skilled employees in
California's Silicon Valley against other large, established semiconductor
companies and against venture capital-funded technology start-ups that
traditionally provide significant stock options to key employees. Given this
competition, the Stac Board believes it is critical to provide a structure that
will be attractive to employees and provide them with opportunities similar to
those offered to them by other companies in Silicon Valley. The Stac Board
believes that to attract talented and skilled employees, a company must provide
equity-based compensation in a stand-alone entity to provide opportunities for
employees and management to maximize the value of their equity interests through
their actions.
 
     To date, Stac has attempted to achieve such goals with limited success. As
an interim solution, Stac created the Company as a separate legal entity and
established the 1996 Plan. This approach established a direct link between
employee compensation and the semiconductor division's operations. However, the
Company's status as a subsidiary of Stac has limited the flexibility and
perceived independence of the Company's management to operate the Company and
its ability to maximize the value of the Company's equity. In addition, the
absence of a market for the Company's shares limits liquidity for option
holders. Without registered shares and a ready market, Company employees face
the prospect of having to pay substantial withholding tax upon exercise of
options without a ready means of obtaining cash to pay such tax.
 
     The Stac Board believes that for Stac and the Company to succeed in two
highly competitive and rapidly changing areas, they must be able to hire and
retain experts in the software and semiconductor fields. In order to do this,
they must be able to offer those employees the types of positions and
compensation incentives that stand-alone public companies can offer candidates.
Specifically, Stac and the Company must be able to offer compensation that (i)
is linked directly to the separate performance of the software and semiconductor
businesses, (ii) provides maximum liquidity to the employees and (iii) provides
operational freedom and incentive to grow the two businesses independently.
 
  Alternatives to Spin-off Transaction
 
     In December 1997, Stac retained Warburg Dillon Read LLC ("WDR") to provide
advisory services regarding the possible separation of Stac and Hi/fn. Stac also
sought WDR's advice, from a financial perspective, as to the various
alternatives available to it to obtain the financing and operational environment
necessary to enable it to maximize the likelihood of the success of its two
business units. With input from WDR, the Stac Board concluded that Stac's
corporate structure did not represent an acceptable structure for the Company to
obtain the financial resources needed to fully carry out its business plans and
that no alternative to a spin-off represented a viable option for the Company to
achieve its business objectives.
 
     In particular, the Stac Board, with input from WDR, examined the
possibility of (i) Hi/fn conducting an initial public offering of less than 100%
of its outstanding shares, (ii) the sale or merger of Hi/fn, (iii) the creation
and distribution of a tracking stock for Hi/fn and (iv) the establishment of
stock appreciation rights for employees of Hi/fn.
 
     The Board determined that these alternatives involved a variety of problems
and failed to address many of the Company's objectives. First, an initial public
offering of Hi/fn would leave Stac as a majority owner of Hi/fn. This
controlling position maintained by Stac would likely impair the attractiveness
of the Company Common Stock to prospective employees as well as investors, and
could result in a discounted valuation in the public markets due to the
perceived overhang of this large block. Second, the Stac Board believed that
Stac might not get full value in a sale or merger of Hi/fn because the market
for Hi/fn's products directed to the networking market had not yet been
established. Moreover, the sale of the Hi/fn stock by Stac could cause an
onerous tax burden for Stac. Third, the Stac Board believed that the creation of
a separate tracking stock
                                       24
<PAGE>   30
 
would, in addition to being unattractive to prospective employees and directors,
be too complex in light of the relatively small size of Hi/fn. Finally, the
creation of stock appreciation rights ("SARs") or "phantom stock" for Hi/fn
employees tied to the performance of the Hi/fn subsidiary also would not be a
viable alternative to prospective employees. In addition, upon financial
consolidation, the use of SARs or phantom stock could result in an unacceptable
level of compensation expense, which could impair the valuation of Stac and thus
Stac's access to the capital markets. Following this analysis, the Stac Board
concluded that a spin-off was the only viable alternative to enable Stac to
address its employee recruiting and financial needs and maximize stockholder
value.
 
FAIRNESS OPINION
 
     In connection with its analysis of the Distribution, the Stac Board sought
independent advice from WDR as to the advisability from a financial perspective
of completing a spin-off of the Company from Stac. Based on its analyses, WDR
determined that the Stac Board had a reasonable basis for concluding that the
spin-off would create greater value for stockholders than maintaining the
Company as a subsidiary of Stac and delivered a written opinion (the "WDR
Opinion") to the Stac Board dated July 17, 1998, to the effect that, as of the
date of the WDR Opinion and based on and subject to the assumptions, limitations
and qualifications set forth therein, from a financial point of view, the
Distribution is fair to the stockholders of Stac.
 
     THE FULL TEXT OF THE WDR OPINION IS ATTACHED AS ANNEX IV TO THIS
INFORMATION STATEMENT AND IS INCORPORATED HEREIN BY REFERENCE. REFERENCE SHOULD
BE MADE TO THE WDR OPINION FOR ASSUMPTIONS MADE, PROCEDURES FOLLOWED AND OTHER
MATTERS CONSIDERED BY WDR. THE SUMMARY OF THE WDR OPINION SET FORTH HEREIN IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE WDR OPINION.
 
     No limitations were imposed by Stac on the scope of WDR's investigation or
the procedures to be followed by WDR in rendering its opinion. In arriving at
its opinion, WDR did not ascribe a specific range of values to Stac, but rather
made its determination as to the fairness of the Distribution to the Stac
stockholders, from a financial point of view, on the basis of the financial and
comparative analyses described below. The WDR Opinion is for the use and benefit
of the Stac Board and was rendered to the Stac Board in connection with its
consideration of the Distribution. WDR was not requested to opine as to, and its
opinion does not address, Stac's underlying business decision to proceed with or
effect the Distribution.
 
     In arriving at its opinion, WDR reviewed and analyzed: (i) the terms of the
Distribution, (ii) Stac's annual report on Form 10-K for the year ended
September 30, 1997 and such other publicly available information concerning Stac
that WDR believed to be relevant to its analysis, (iii) financial and operating
information with respect to the business, operations and prospects of Stac and
the Company, furnished to WDR by Stac and the Company, (iv) a trading history of
Stac Common Stock and a comparison of that trading history with those of other
companies that WDR deemed relevant, (v) a comparison of the historical financial
results and present financial condition of Stac with those of other companies
that WDR deemed relevant and (vi) a comparison of the historical financial
results and present financial condition of the Company with those of other
companies that WDR deemed relevant. In addition, WDR had discussions with the
management of both Stac and the Company concerning the businesses, operations,
assets, financial conditions and prospects of Stac and the Company (including on
a pro forma basis) and undertook such other studies, analyses and investigations
as it deemed appropriate.
 
     In arriving at its opinion, WDR assumed and relied upon the accuracy and
completeness of the financial and other information used by it without assuming
any responsibility for independent verification of such information and further
relied upon the assurances of management of Stac that they were not aware of any
facts or circumstances that would make such information inaccurate or
misleading. With respect to the financial projections of Stac and the Company
following the Distribution, upon advice of Stac, WDR assumed that such
projections were reasonably prepared on a basis reflecting the best currently
available estimates and judgments of the management of Stac and the Company as
to the future financial performance of Stac and the Company and that Stac and
the Company will perform substantially in accordance with such projections. In
 
                                       25
<PAGE>   31
 
arriving at its opinion, WDR did not make or obtain any evaluations or
appraisals of the assets or liabilities of Stac or the Company, nor did WDR
express any opinion as to the fairness of the allocation of assets and
liabilities between the two entities. Moreover, WDR did not express any opinion
as to the commercial viability of Stac and the Company operated separately
following the Distribution. WDR has assumed that the Distribution will be a
tax-free transaction to the stockholders of Stac. The WDR Opinion necessarily is
based upon forecast financial information provided by Stac and the Company to
WDR as well as market, economic and other conditions as they exist on, and can
be evaluated as of, the date of the WDR Opinion.
 
     The process by which securities trading markets establish a market price
for any security is complex, involving the interaction of numerous factors, and
market prices will fluctuate with changes of, among other factors, the financial
condition, business and prospects of the issuer and comparable companies and
economic and financial market conditions. In addition, trading in shares of the
Company Common Stock will likely be characterized by a period of redistribution
among stockholders of Stac who receive such shares in the Distribution, which
may temporarily depress the market price of such shares during such period.
Accordingly, WDR expresses no opinion as to the prices at which shares of Stac
Common Stock or Company Common Stock actually will trade following the
consummation of the Distribution. The WDR Opinion should not be viewed as
providing any assurances that the combined market value of the shares of Stac
Common Stock after consummation of the Distribution and the shares of Company
Common Stock to be received by a stockholder of Stac pursuant to the
Distribution will be in excess of the market value of the shares of Stac Common
Stock owned by such stockholder at any time prior to announcement of
consummation of the Distribution.
 
     The following is a summary of the material financial and comparative
analyses performed by WDR and presented to the Stac Board.
 
     Comparable Company Analysis. WDR compiled financial and stock market
statistics for a number of comparable software and semiconductor companies for
both Stac and the Company. Such financial information and operating statistics
included, among other things, historical and current stock prices, certain
historical profitability margins, certain historical and projected growth rates,
market values of equity, and implied multiples of historical and estimated
earnings per share ("EPS"). For Stac, these comparable companies were divided
into: (i) back-up and disaster recovery software companies, such as Veritas
Software Corporation, Legato Systems, Inc. and Computer Associates
International, Inc. and (ii) remote control software companies, such as Symantec
Corporation. No single company or group of companies is directly comparable to
Stac's business. Based on publicly available information and various assumptions
and estimates as published by securities analysts, WDR calculated various
arithmetic and statistical comparisons, including market values and price to
earnings ratios.
 
     Among other things, the analysis indicated that the implied multiples for
the comparable companies for Stac were as follows: (i) current stock price as a
multiple of estimated calendar 1998 EPS ranged from 16.1x to 79.6x, with a
median and an average of 28.0x and 34.1x, respectively, and (ii) current stock
price as a multiple of estimated calendar 1999 EPS ranged from 13.3x to 55.7x,
with a median and an average of 23.7x and 26.0x, respectively.
 
     A separate comparable company analysis was developed for the Company. These
comparable companies consisted of semiconductor companies that supply integrated
circuits and other related products, but not necessarily products that compete
with those of the Company, to the networking equipment industry. These companies
included MMC Networks, Inc., Level One Communications, Inc., Broadcom
Corporation, Galileo Technology Ltd., VLSI, Altera Corporation and Xilinx
Corporation. Based on publicly available information and various assumptions and
estimates as published by securities analysts, WDR calculated various arithmetic
and statistical comparisons, including market values and a comparison of
technology platforms.
 
     Among other things, this analysis indicated that the implied multiples for
the comparable companies for the Company were as follows: (i) current stock
price as a multiple of estimated calendar 1998 EPS ranged from 17.6x to 134.5x,
with a median and an average of 25.7x and 45.7x, respectively, and (ii) current
stock price as a multiple of estimated calendar 1999 EPS ranged from 13.0x to
100.9x, with a median and an average of 18.6x and 31.6x, respectively.
 
                                       26
<PAGE>   32
 
     Stock Trading Analysis. WDR also analyzed Stac's historical stock price
performance on an absolute basis and compared to Stac's and the Company's
comparable companies and the Nasdaq Composite Index. WDR observed that over the
period from May 7, 1992 (Stac's Initial Public Offering date) to July 15, 1998
(the "Public Period"), the stock price of Stac decreased approximately 62% and
underperformed all of the common stocks of Stac's and the Company's comparable
companies, and the Nasdaq Composite Index. During the Public Period, the closing
stock price of Stac ranged from $1.88 to $15.00 per share.
 
     Comparable Spin-Off Transactions. Using publicly available information, WDR
analyzed data for selected spin-off transactions completed in the technology and
other relevant industries ("Selected Spin-off Transactions"). The Selected
Spin-off Transactions included, among others, Samsonite Corporation's spin-off
of Culligan Water Technologies, Inc., Sterling Software, Inc.'s spin-off of
Sterling Commerce, Inc., and WMS Industries Inc.'s spin-off of Midway Games Inc.
WDR reviewed the combined market capitalization of the spun-off company and its
former parent to the market capitalization of the parent one day prior to the
announcement of the spin-off ("Change in Market Value"). WDR then analyzed the
Change in Market Value (i) ten days after the spin-off was announced, and (ii)
one year after the spin-off was announced. WDR noted that (i) the average and
median Change in Market Value ten days after the spin-off was announced were
2.2% and 1.0%, respectively, and (ii) the average and median Change in Market
Value one year after the spin-off was announced were 66.7% and 40.9%,
respectively.
 
     The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant methods of financial and comparative analysis
and the application of those methods to the particular circumstances and,
therefore, such an opinion is not readily susceptible to summary description.
Furthermore, in arriving at its opinion, WDR did not attribute any particular
weight to any analysis or factor considered by it, but rather made qualitative
judgments as to the significance and relevance of each factor and analysis.
Accordingly, WDR believes that its analyses must be considered as a whole and
that considering any portion of such analyses and factors, without considering
all analyses and factors, could create a misleading or incomplete view of the
process underlying its opinion. In its analyses, WDR made numerous assumptions
with respect to industry performance, general business and economic conditions
and other matters, many of which are beyond the control of Stac or the Company.
Any estimates contained in these analyses are not necessarily indicative of
actual values or predictive of future results or values, which may be
significantly more or less favorable than as set forth therein. In addition,
analyses relating to the value of businesses do not purport to be appraisals or
to reflect the prices at which businesses actually may be sold.
 
     WDR is an internationally recognized investment banking and financial
advisory firm and, as part of its investment banking activities, is regularly
engaged in the evaluation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes. The Stac Board selected WDR because
of its expertise, reputation and familiarity with Stac in particular and the
software and semiconductor industries in general and because its investment
banking professionals have substantial experience in transactions similar to the
Distribution.
 
     As compensation for its services in connection with the Distribution, WDR
has a signed engagement letter from Stac which includes a fee of $750,000
payable upon the consummation of the Distribution. In addition, Stac has agreed
to reimburse WDR for its reasonable expenses incurred in connection with its
engagement and to indemnify WDR and certain related persons for certain
liabilities that may arise out of its engagement by Stac and the rendering of
the WDR Opinion.
 
     In the ordinary course of its business, WDR may actively trade in the
equity securities of Stac for its own account and for the accounts of WDR's
customers and, accordingly, may at any time hold a long or short position in
such securities.
 
DISTRIBUTION AGENT
 
     The Distribution Agent is American Stock Transfer & Trust Company, 40 Wall
Street, New York, New York 10005.
 
                                       27
<PAGE>   33
 
MANNER OF EFFECTING THE DISTRIBUTION
 
     The general terms and conditions relating to the Distribution are set forth
in the Distribution Agreement that will be executed prior to the Distribution
Date between Stac and the Company.
 
   
     As of the Record Date, the Company had 501,475 shares of Company Common
Stock outstanding, held by 26 stockholders of record including Stac. The Company
also had 6,000,000 shares of Series A Preferred Stock outstanding, all of which
were held by Stac. Immediately prior to the Distribution, Stac will convert all
shares of Series A Preferred Stock into Company Common Stock, resulting in
Stac's owning 6,000,100 shares of Company Common Stock. All of such shares will
be distributed to Stac stockholders. Stac will distribute one share of Company
Common Stock for every 3.9156 shares of Stac Common Stock held by Stac
stockholders on the Record Date (the "Distribution Ratio"). The Distribution
Ratio could change prior to the Distribution if holders of options to purchase
Stac Common Stock exercise such options prior to the Distribution. If such
option holders exercise their options prior to the Distribution, they will be
entitled to receive Company Common Stock in the Distribution. Such option
holders have the right to purchase up to 1,484,377 shares of Stac Common Stock
between the Record Date and the Distribution Date. If all of such options were
exercised, the Distribution Ratio would be 4.1629. Stac will announce the final
Distribution Ratio on the Distribution Date. Stac will effect the Distribution
on the Distribution Date by delivering all of the outstanding shares of Company
Common Stock held by Stac to the Distribution Agent on behalf of, and for
distribution to, the holders of record of Stac Common Stock as of the close of
business on the Record Date. The shares of Company Common Stock will be fully
paid and nonassessable, and the holders thereof will not be entitled to
preemptive rights. See "DESCRIPTION OF THE COMPANY'S CAPITAL STOCK." It is
expected that certificates representing shares of the Company Common Stock will
be mailed to holders of Stac Common Stock as soon as practicable after the
Distribution Date.
    
 
     HOLDERS OF STAC COMMON STOCK SHOULD NOT SEND CERTIFICATES TO THE COMPANY,
STAC OR THE DISTRIBUTION AGENT. THE DISTRIBUTION AGENT WILL MAIL THE STOCK
CERTIFICATES REPRESENTING SHARES OF COMPANY COMMON STOCK AS SOON AS PRACTICABLE
AFTER THE DISTRIBUTION DATE. STAC STOCK CERTIFICATES WILL CONTINUE TO REPRESENT
SHARES OF STAC COMMON STOCK AFTER THE DISTRIBUTION IN THE SAME AMOUNT SHOWN ON
THE CERTIFICATES.
 
     No certificates or scrip representing fractional interests in shares of the
Company Common Stock will be issued to holders of Stac Common Stock as part of
the Distribution. The Distribution Agent, acting as agent for holders of Stac
Common Stock otherwise entitled to receive in the Distribution certificates
representing fractional shares, will aggregate and sell in the open market all
fractional shares at then prevailing prices and distribute the net proceeds to
the stockholders entitled thereto. Stac will pay the fees and expenses of the
Distribution Agent in connection with such sales.
 
     No holder of Stac Common Stock will be required to pay any cash or other
consideration for the shares of Company Common Stock to be received in the
Distribution or to surrender or exchange shares of Stac Common Stock or to take
any other action in order to receive the Company Common Stock pursuant to the
Distribution.
 
RESULTS OF THE DISTRIBUTION
 
   
     After the Distribution, the Company will be a separate public company which
will continue to operate its semiconductor business. See "THE COMPANY" and
"BUSINESS." The number and identity of the holders of Company Common Stock
immediately after the Distribution will be substantially the same as the number
and identity of the holders of Company Common Stock (other than Stac) prior to
the Distribution plus the number and identity of the holders of Stac Common
Stock on the Record Date. Immediately after the Distribution, the Company
expects to have approximately 439 holders of record of the Company Common Stock
and approximately 6,501,475 shares of the Company Common Stock outstanding based
on the number of shares of Company Common Stock and Series A Preferred Stock
outstanding on the Record Date.
    
 
                                       28
<PAGE>   34
 
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
 
   
     On December 8, 1998, Stac received a private ruling from the IRS stating
that the Distribution will qualify as a tax free spin-off under Section 355 of
the Code, and that, for federal income tax purposes:
    
 
          (1) No gain or loss will be recognized by Stac upon the Distribution
     of all the outstanding stock of Hi/fn then held by Stac to the Stac
     stockholders.
 
          (2) No gain or loss will be recognized by (and no amount will be
     included in the income of) the stockholders of Stac upon receipt of the
     Company Common Stock distributed to them in the Distribution.
 
          (3) The aggregate basis of the stock of Stac and Hi/fn in the hands of
     each Stac stockholder after the Distribution will, in each instance, equal
     the aggregate basis of the Stac Common Stock held by such stockholder
     immediately before the Distribution, allocated in proportion to the fair
     market value of each.
 
          (4) The holding period of the Company Common Stock which each Stac
     stockholder receives will include the holding period of the Stac Common
     Stock with respect to which the Distribution will be made, provided the
     Stac Common Stock is held as a capital asset by such stockholder.
 
          (5) Where cash is received by a Stac stockholder in lieu of fractional
     share interests of Company Common Stock, such fractional share interests
     will be treated as having been received and disposed of by such stockholder
     in a taxable sale in which gain (or loss) will be treated as capital gain
     (or loss), provided such stock is held as a capital asset by the selling
     Stac stockholder.
 
          (6) Earnings and profits will be properly allocated between Stac and
     Hi/fn.
 
   
     It should be noted that private letter rulings, while generally binding on
the IRS, are subject to certain factual representations and assumptions. If the
factual representations and assumptions made by Stac were incorrect in any
material respect, Stac's ability to rely on the IRS ruling will be jeopardized.
However, Stac is not aware of any facts or circumstances that would cause such
representations and assumptions to be untrue.
    
 
   
     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 the distributed Company Common Stock on the
Distribution Date and (ii) Stac's adjusted basis of such Company Common Stock.
In addition, under the consolidated tax return rules of the Code, each member of
Stac's consolidated group (including Hi/fn) would be severally liable for such
tax liability. This resulting tax liability would have a material adverse effect
on the cash flows, business, financial condition and results of operations of
Stac and possibly Hi/fn.
    
 
   
     Furthermore, if the Distribution were not to qualify under Section 355 of
the Code, each stockholder of Stac who receives shares of Company Common Stock
in the Distribution would be treated as if such stockholder had received a
taxable distribution in an amount equal to the fair market value of Company
Common Stock received, which would result in (i) a dividend to the extent of
such stockholder's pro rata share of Stac's current and accumulated earnings and
profits, (ii) a reduction in such stockholder's basis in such holder's shares of
Stac Common Stock to the extent that the amount received exceeds such
stockholder's share of earnings and profits and (iii) a gain from the deemed
sale or exchange of such shares of Stac Common Stock to the extent the amount
received exceeds both such stockholder's share of earnings and profits and such
stockholder's basis in such shares of Stac Common Stock.
    
 
   
     Under recently enacted Section 355(e), if the Distribution were considered
to be part of a plan or series of related transactions (a "Plan") in which,
after the Distribution, a 50% or greater interest in Hi/fn or Stac were acquired
by one or more persons, the IRS would claim that the Distribution was taxable at
the corporate level (although it would remain tax-free to the Stac
stockholders). Although neither Stac nor Hi/fn believes the Distribution is part
of a Plan to effect a 50% change in ownership of either Stac or Hi/fn, the IRS
has issued no guidance on the definition of a Plan and for the first two years
following the Distribution, any cumulative 50% change of ownership within the
two-year period will be rebuttably presumed to be pursuant to a Plan. See "RISK
FACTORS -- Tax Risks of the Distribution."
    
 
                                       29
<PAGE>   35
 
     THE SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE DOES NOT
PURPORT TO COVER ALL FEDERAL INCOME TAX CONSEQUENCES THAT MAY APPLY TO ALL
CATEGORIES OF STOCKHOLDERS. ALL STOCKHOLDERS SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE PARTICULAR FEDERAL, FOREIGN, STATE AND LOCAL TAX
CONSEQUENCES OF THE DISTRIBUTION TO SUCH STOCKHOLDERS.
 
QUOTATION AND TRADING OF COMPANY COMMON STOCK; DIVIDEND POLICY
 
     There currently is not a public market for the Company Common Stock. Prices
at which the Company Common Stock may trade prior to the Distribution on a
"when-issued" basis or after the Distribution cannot be predicted. Until the
Company Common Stock is fully distributed and an orderly market develops, the
prices at which trading in such stock occurs may fluctuate significantly. The
prices at which the Company Common Stock trades will be determined by the
marketplace and may be influenced by many factors, including, among others, the
success of the Company's business, the depth and liquidity of the market for the
Company Common Stock, investor perception of the Company and its assets, the
Company's dividend policy, and general economic and market conditions. Such
prices also may be affected by certain provisions of the Company Certificate and
the Company Bylaws, as each will be in effect following the Distribution, which
may have an antitakeover effect. See "RISK FACTORS -- Absence of Prior Trading
Market for Company Common Stock; Potential Volatility" and "HI/FN CERTIFICATE OF
INCORPORATION AND BYLAWS."
 
     The Company intends to apply to have the Company Common Stock approved for
quotation and trading on the Nasdaq National Market. Immediately after the
Distribution, the Company expects to have approximately 450 stockholders of
record based upon the number of stockholders of record of the Company (other
than Stac) and the number of stockholders of record of Stac on the Record Date.
For certain information regarding options to purchase the Company Common Stock
that will be outstanding after the Distribution, see "MANAGEMENT -- Hi/fn Equity
Plans."
 
     Nothing herein should be construed to suggest that the trading price of
Stac Common Stock at any point in time may be used as a substitute for the
trading price of Company Common Stock. No assurance can be given that the
Company Common Stock will trade at a price per share reflecting the earnings per
share or other multiple, or other attributes, of Stac. See "RISK
FACTORS -- Absence of Prior Trading Market for Company Common Stock; Potential
Volatility."
 
     It is the Company's belief that the Company Common Stock distributed to
Stac's stockholders in the Distribution will be freely transferable, except for
securities received by persons who may be deemed to be "affiliates" of Stac
within the meaning of Rule 144 under the Securities Act, in which case such
persons may not publicly offer or sell the Company Common Stock received in
connection with the Distribution except pursuant to a registration statement
under the Securities Act or pursuant to Rule 144. There can be no assurance that
the Commission will not take a contrary view, and no ruling from the Commission
has been or will be sought. See "RISK FACTORS -- Shares Eligible for Future
Sale."
 
     The Company presently intends to retain future earnings to finance the
growth and development of its business; and, therefore, the Company does not
currently anticipate paying any cash dividends. Any future determination
relating to dividend policy will be made at the discretion of the Company Board.
Such determinations will depend on a number of factors, including the future
earnings, capital requirements, financial condition and prospects of the
Company, possible loan or financing covenant restrictions and such other factors
as the Company Board may deem relevant. See "RISK FACTORS -- Dividend Policy."
 
CONDITIONS; TERMINATION
 
   
     The Stac Board has conditioned the Distribution upon, among other things,
(i) the Company Board having been elected by the stockholders of the Company,
and the Company Certificate and the Company Bylaws, as each will be in effect
after the Distribution, having been adopted and being in effect; (ii) the
Registration Statement on Form 10 with respect to the Company Common Stock held
by Stac immediately prior to the Distribution having become effective under the
Exchange Act; (iii) receipt of any necessary consents to the Distribution from
third parties, except for those the failure of which to obtain would not have a
    
 
                                       30
<PAGE>   36
 
   
material adverse effect on the Company or Stac; (iv) no pending order,
injunction or decree preventing the consummation of the Distribution; (v)
Hi/fn's delivery to the landlord under its headquarters lease of a letter of
credit in an amount and with such other terms that Stac's guaranty of such lease
will terminate upon consummation of the Distribution; and (vi) no event having
occurred that, in the judgment of the Stac Board, would result in the
Distribution having a material adverse effect on Stac or its stockholders. The
Company believes that there are no third-party consents which if not obtained
would have a material adverse effect on the Company, Stac or the Distribution.
Any of the conditions to the Distribution may be waived in the discretion of the
Stac Board. Even if all of the above conditions are satisfied, the Stac Board
has reserved the right to abandon, defer or modify the Distribution or the other
elements of the Distribution at any time prior to the Distribution Date;
however, the Stac Board will not waive any of the conditions to the Distribution
or make any changes in the terms of the Distribution unless the Stac Board
determines that such changes would not be materially adverse to the Stac
stockholders. See "RELATIONSHIP BETWEEN HI/FN AND STAC AFTER THE
DISTRIBUTION -- Distribution Agreement."
    
 
REASONS FOR FURNISHING THE INFORMATION STATEMENT
 
     This Information Statement is being furnished by Stac solely to provide
information to Stac stockholders who will receive Company Common Stock in the
Distribution. It is not, and is not to be construed as, an inducement or
encouragement to buy or sell any securities of Stac or the Company. The
information contained in this Information Statement is believed by Stac and the
Company to be accurate as of the date set forth on the cover of this Information
Statement. Changes may occur after that date, and neither the Company nor Stac
will update the information except in the normal course of their respective
public disclosure practices.
 
                                       31
<PAGE>   37
 
                      RELATIONSHIP BETWEEN HI/FN AND STAC
                             AFTER THE DISTRIBUTION
 
     For the purpose of governing certain of the ongoing relationships between
the Company and Stac after the Distribution and to provide mechanisms for an
orderly transition, the Company and Stac have entered or will enter into various
agreements, and will adopt policies, as described in this section.
 
DISTRIBUTION AGREEMENT
 
     Prior to the Distribution Date, the Company and Stac will enter into the
Distribution Agreement, which provides for, among other things, the Distribution
and certain other agreements governing the relationship between the Company and
Stac following the Distribution. Subject to certain exceptions, the Distribution
Agreement provides for, among other things, assumptions of liabilities and
cross-indemnities designed to allocate to the Company, effective as of the
Distribution Date, financial responsibility for the liabilities arising out of
or in connection with the Hi/fn business. Other agreements to be executed in
connection with the Distribution Agreement set forth certain specific
allocations of liabilities between the Company and Stac. See "-- Employee
Benefits Allocation Agreement" "-- Tax Sharing Agreement" and "-- Transitional
Services Agreement."
 
     The Distribution Agreement also provides that by the Distribution Date, the
Company Certificate and the Company Bylaws shall be in the forms attached hereto
as Annex I and II, respectively, and that the Company and Stac will take all
actions which may be required to elect or otherwise appoint, as directors of the
Company, the persons indicated herein. See "MANAGEMENT -- Board of Directors"
and "HI/FN CERTIFICATE OF INCORPORATION AND BYLAWS."
 
     The Distribution Agreement also provides that each of the Company and Stac
will be granted access to certain records and information in the possession of
the other, and requires the retention by each of the Company and Stac for a
period of seven years following the Distribution of all such information in its
possession, and thereafter requires that each party give the other prior notice
of its intention to dispose of such information. In addition, the Distribution
Agreement provides for the allocation of shared privileges with respect to
certain information and requires each of the Company and Stac to obtain the
consent of the other prior to waiving any shared privilege.
 
     Stac has guaranteed Hi/fn's obligations under its headquarters lease. Under
the Distribution Agreement, Hi/fn has agreed to obtain and deliver to its
landlord a $2.0 million letter of credit to replace Stac's guaranty. The
guaranty provides that it will terminate when Stac no longer owns a majority
interest in Hi/fn and when Hi/fn provides the landlord with such a letter of
credit. The Distribution is conditioned on delivery of the letter of credit.
 
     The Distribution Agreement provides that, except as otherwise set forth
therein or in any related agreement, all costs and expenses incurred in
connection with the Distribution will be charged to the party for whose benefit
the expenses are incurred, with any expenses that cannot be allocated on such
basis to be split equally between the parties.
 
EMPLOYEE BENEFITS ALLOCATION AGREEMENT
 
   
     The Distribution Agreement calls for Stac and the Company to enter into an
Employee Benefits and Other Matters Allocation Agreement (the "Employee Benefits
Allocation Agreement") containing a number of provisions relating to employees
of Stac and Hi/fn. The Employee Benefits Allocation Agreement generally
contemplates that the Company will assume and retain all obligations and
liabilities with respect to Hi/fn employee plans and benefits and that Stac will
retain all obligations and liabilities with respect to Stac employee plans and
benefits.
    
 
     Pursuant to the Employee Benefits Allocation Agreement, and consistent with
the terms of The Stac Electronics 1992 Stock Option Plan, as amended (the "Stac
Stock Option Plan"), and Stac, Inc. 1992 Non-Employee Directors' Stock Option
Plan (the "Stac Directors Plan"), vested and unvested options held by employees,
officers and directors of Stac who will remain with Stac will be equitably
adjusted for the effects of
                                       32
<PAGE>   38
 
the Distribution on such options. The Stac Board intends to make an adjustment
to such options within 30 days after the Distribution to retain the intrinsic
value of such options after the Distribution. Following the Distribution, the
Stac Board intends to make an adjustment to such options based on the closing
sales price of the Stac Common Stock on the Nasdaq National Market, less the
closing sales price of Company Common Stock in when-issued trading on the Nasdaq
National Market on the Distribution Date divided by the Distribution Ratio. The
adjustment is expected to result in an increase in the number of Stac options
outstanding and a decrease in their associated exercise price. Douglas L.
Whiting, who is a director of both Stac and Hi/fn, will receive a different
adjustment to his options to purchase Stac Common Stock. Hi/fn will grant Mr.
Whiting, under the 1996 Plan, an option to purchase the number of shares of
Company Common Stock equal to the number of shares of Stac Common Stock subject
to outstanding options he holds divided by the Distribution Ratio. The exercise
price of Mr. Whiting's options to purchase Stac Common Stock will be allocated
between his options to purchase Stac Common Stock and his new options to
purchase Company Common Stock based on the ratio of the closing sales price of
Stac Common Stock to Company Common Stock (divided by the Distribution Ratio) on
the Nasdaq National Market on the Distribution Date. No adjustments will be made
to options outstanding under the 1996 Plan.
 
     The Company retains, with respect to Hi/fn employees, all responsibility
for liabilities and obligations as of the Distribution Date for medical and
dental plan coverage and for vacation and welfare plans. Stac will retain, with
respect to Stac employees, all responsibilities for all liabilities and
obligations as of the Distribution Date for medical and dental plan coverage and
for vacation and welfare plans.
 
   
TAX ALLOCATION AND INDEMNITY AGREEMENT
    
 
   
     Prior to the Distribution Date, Stac and the Company will enter into a Tax
Allocation and Indemnity Agreement defining the parties' rights and obligations
with respect to tax returns and tax liabilities, including, in particular,
federal and state income tax returns and liabilities, for taxable years and
other taxable periods ending on or before the Distribution Date. In general,
Stac will be responsible for (i) filing all federal and state income tax returns
of Stac, the Company and any of their subsidiaries for all taxable years ending
on or before the Distribution Date, and (ii) paying the taxes relating to such
returns (including any deficiencies proposed by applicable taxing authorities).
For post-Distribution periods, Stac and the Company will each be responsible for
filing its own returns and paying its own taxes relating to such returns
(including any deficiencies proposed by applicable taxing authorities). Stac and
the Company will cooperate with each other and share information in preparing
income tax returns and in dealing with other tax matters.
    
 
   
     In addition, pursuant to the Tax Allocation and Indemnity Agreement, if the
Distribution were not to constitute a tax-free spin-off under Section 355 of the
Code, then the Company or Stac, as the case may be, would be obligated to
indemnify the other party for all taxes resulting from such failure if such
failure was attributable to (a) actions of the Company or Stac after the
Distribution, or (b) the breach of certain representations with respect to the
Company or Stac made in the Tax Allocation and Indemnity Agreement. However,
under the Tax Allocation and Indemnity Agreement, if the Distribution were not
to constitute a tax-free spin-off under Section 355 of the Code, Stac would be
obligated to bear all taxes of Stac resulting from such failure if neither Stac
nor the Company (a) took actions after the Distribution which resulted in such
failure or (b) breached certain representations made in the Tax Allocation and
Indemnity Agreement.
    
 
   
     In addition, if the Distribution were not to constitute a tax-free spin-off
under Section 355 of the Code and both the Company and Stac either (a) took
actions after the Distribution which resulted in such failure, or (b) breached
certain representations made in the Tax Allocation and Indemnity Agreement, then
any taxes of Stac resulting from such failure would be divided equally between
the Company and Stac. Furthermore, if each of Stac and the Company take actions
after the Distribution resulting in the Distribution being a distribution to
which Code Section 355(e) applies (a "Disqualifying Distribution"), then
whichever party first caused the Distribution to be a Disqualifying Distribution
(i.e., Stac or the Company, as the case may be) would be obligated to bear all
taxes of Stac resulting from such failure.
    
 
     Neither the Company nor Stac will indemnify any holder of Company Common
Stock who receives shares in the Distribution for any such taxes.
 
                                       33
<PAGE>   39
 
TRANSITIONAL SERVICES AGREEMENT
 
     Prior to the Distribution Date, the Company and Stac will enter into a
Transitional Services Agreement (the "Transitional Services Agreement") pursuant
to which Stac will provide certain accounting services to Hi/fn on a
transitional basis after the Distribution. The fees for such transitional
services will be $6,500 per month plus any out-of-pocket expenses incurred by
Stac that are attributable to the work done for Hi/fn under the Transition
Services Agreement. The Company will be free to procure such services from
outside vendors or to develop in-house capabilities in order to provide such
services internally. Hi/fn will indemnify Stac and its officers, directors,
employees and agents against losses, claims or damages arising out of
allegations that the financial statements and accounting records prepared by
Hi/fn with Stac's assistance are inaccurate or incomplete. The Transitional
Services Agreement will terminate on December 31, 1999 unless extended in
writing by the parties.
 
SATISFACTION OF INTERCOMPANY BALANCES AND STAC LOAN
 
   
     On September 28, 1998, Stac paid $4.4 million to the Company, representing
payment in full for all amounts due to the Company from Stac as of September 1,
1998. The Company will pay to Stac, prior to the Distribution, the amounts due
to Stac as of October 31, 1998 and Stac will pay to the Company, on or prior to
December 31, 1998, any amounts due to the Company that are accumulated after
October 31, 1998. On September 28, 1998, Stac also loaned $5.0 million to the
Company pursuant to a short-term loan (the "Stac Loan"). The Stac Loan will
become due and payable on September 30, 1999 and may be prepaid in whole or part
without penalty. The Stac Loan bears interest at the prime rate set by Silicon
Valley Bank plus 0.5% per annum, payable quarterly. The Stac Loan is secured by
a first priority security interest in all of the Company's assets, including the
Company's intellectual property.
    
 
POLICIES AND PROCEDURES FOR ADDRESSING CONFLICTS
 
     The Company and Stac intend to pursue separate and distinct business
strategies to minimize potential conflicts of interest between the two
companies. Nonetheless, the ongoing relationships between the Company and Stac
may present conflict situations for certain directors. Certain persons will
serve as directors of both the Company and Stac, and also will own (or have
options or other rights to acquire) a significant number of shares of common
stock in both companies. The Company and Stac will adopt appropriate policies
and procedures on or prior to the Distribution Date to be followed by the Board
of Directors of each company to address potential conflicts. Such procedures
include requiring the persons serving as directors of both companies to abstain
from voting as directors with respect to matters that present a significant
conflict of interest between the companies.
 
                              REGULATORY APPROVALS
 
     The Company does not believe that any material federal or state regulatory
approvals will be necessary in connection with the Distribution.
 
                                       34
<PAGE>   40
 
                       SELECTED HISTORICAL FINANCIAL DATA
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
     The selected historical financial data of the Company has been prepared
from the audited financial statements of the Company as of September 30, 1997
and 1998 and for each of the three years in the period ended September 30, 1998
as included herein. Financial information as of September 30, 1995 and 1996 and
for the year ended September 30, 1995 has been prepared from audited financial
statements not included herein. The financial information as of and for the year
ended September 30, 1994 has been prepared from unaudited financial statements
not included herein. The financial information may not reflect the Company's
future performance or the future financial position or results of operations of
the Company, nor does it provide or reflect data as if the Company had actually
operated as a separate, stand-alone entity during the periods covered. The
summary financial data should be read in conjunction with the financial
statements and related notes and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS," included elsewhere in this
Information Statement. In the opinion of the Company's and Stac's management,
the unaudited financial statements as of and for the year ended September 30,
1994, contain all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial condition and results of operations
for these periods.
 
   
<TABLE>
<CAPTION>
                                                               YEAR ENDED SEPTEMBER 30,
                                                     ---------------------------------------------
                                                      1994     1995     1996      1997      1998
                                                     ------   ------   -------   -------   -------
<S>                                                  <C>      <C>      <C>       <C>       <C>
STATEMENT OF OPERATIONS DATA:
Revenues...........................................  $5,666   $7,342   $12,894   $14,226   $21,533
Cost of revenues...................................   2,302    2,841     5,095     4,762     6,525
                                                     ------   ------   -------   -------   -------
Gross margin.......................................   3,364    4,501     7,799     9,464    15,008
Operating expenses:
Research and development...........................     564      551     1,641     2,985     5,403
Sales and marketing................................     813    1,097     1,677     2,224     3,370
General and administrative.........................     379      492       889     1,203     2,407
                                                     ------   ------   -------   -------   -------
Operating income...................................   1,608    2,361     3,592     3,052     3,828
Interest income....................................                                   16        17
                                                     ------   ------   -------   -------   -------
Provision for income taxes.........................     661      947     1,441     1,235     1,627
                                                     ------   ------   -------   -------   -------
Net income.........................................  $  947   $1,414   $ 2,151   $ 1,833   $ 2,218
                                                     ======   ======   =======   =======   =======
Net income per share, basic(1).....................  $ 0.16   $ 0.24   $  0.36   $  0.30   $  0.35
Net income per share, diluted......................  $ 0.16   $ 0.24   $  0.36   $  0.30   $  0.33
Weighted average shares outstanding, basic.........   6,000    6,000     6,000     6,100     6,308
Weighted average shares outstanding, diluted.......   6,000    6,000     6,000     6,174     6,800
BALANCE SHEET DATA (AS OF SEPTEMBER 30,):
Cash...............................................  $   --   $   --   $    --   $   480   $ 4,084
Total assets.......................................   1,583    2,254     2,611     5,898    16,611
Working capital (deficit)..........................    (193)    (223)     (383)    3,520     4,723
Total stockholders' equity(2)......................      --       --        --     4,622     6,952
</TABLE>
    
 
- ---------------
(1) Since the Company's Series A Preferred Stock represents a primary equity
    security, it is included in the calculation of basic net income per share.
 
(2) The balance sheets prior to September 30, 1997 reflect Hi/fn's structure
    prior to its formation as a subsidiary. Periods subsequent to September 30,
    1996 reflect the net assets contributed by Stac in establishing the Hi/fn
    subsidiary. The transfer was recorded at the historical net book value of
    the transferred assets and liabilities. In exchange for the net assets
    contributed to Hi/fn, Stac received 6,000,000 shares of Series A Preferred
    Stock and 100 shares of Company Common Stock. For all periods prior to
    fiscal 1997, net income generated by Hi/fn has been treated as if it were
    transferred to Stac in the form of dividends. No such dividend transfers
    were made for fiscal 1997 and the periods presented thereafter.
 
                                       35
<PAGE>   41
 
          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS
 
OVERVIEW
 
     Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risk and
uncertainties. The Company's future results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, fluctuations in the Company's operating
results, continued new product introductions by the Company, market acceptance
of the Company's new product introductions, new product introductions by
competitors, OEM and distributor inventory levels and customer demand for the
products incorporating Hi/fn packet processors, customer concentration,
technological changes in the personal computer and communications industries,
uncertainties regarding intellectual property rights and the other factors
referred to herein including, but not limited to, the factors discussed below
under "Revenues," "Quarterly Trends and Channel Inventories," and the "Risk
Factors" discussed beginning on Page 9 of this document.
 
     Hi/fn designs, develops and markets high-performance multi-protocol packet
processors -- semiconductor devices that enable secure, high-bandwidth network
connectivity and efficient storage of business information. The Company's packet
processor products perform the computation-intensive tasks of compression and
encryption/compression, providing its customers with high-performance,
interoperable implementations of a wide variety of industry-standard networking
and storage protocols. The Company's products are used in a variety of
networking and storage equipment such as routers, remote access concentrators,
firewalls and back-up storage devices.
 
     The Company's encryption/compression packet processors allow network
equipment vendors to add bandwidth enhancement and security capabilities to
their products. The Company's encryption/compression products provide
high-performance implementations of key algorithms used in the implementation of
Virtual Private Networks ("VPNs"), which enable businesses to reduce wide area
networking costs by replacing dedicated leased lines with lower cost IP-based
networks such as the Internet. Using VPNs, businesses also can provide trading
partners and other constituents with secure, authenticated access to the
corporate network, increasing productivity through improved communications.
Storage equipment vendors use the Company's products to improve the performance
and capacity of mid- to high-end tape back-up systems.
 
RESULTS OF OPERATIONS
 
     The following table sets forth the percentage relationship of certain items
to the Company's revenues during the periods shown. Unless otherwise indicated,
references to years are to fiscal years which ended September 30.
 
<TABLE>
<CAPTION>
                                                              YEAR ENDED SEPTEMBER 30,
                                                              ------------------------
                                                              1996      1997      1998
                                                              ----      ----      ----
<S>                                                           <C>       <C>       <C>
Revenues....................................................  100%      100%      100%
Cost of revenues............................................   39        33        30
                                                              ---       ---       ---
Gross margin................................................   61        67        70
                                                              ---       ---       ---
Research and development....................................   13        21        25
Sales and marketing.........................................   13        16        16
General and administrative..................................    7         8        11
                                                              ---       ---       ---
Total operating expenses....................................   33        45        52
                                                              ---       ---       ---
Operating income............................................   28        22        18
Interest income.............................................   --        --        --
                                                              ---       ---       ---
Income before income taxes..................................   28        22        18
Provision for income taxes..................................   11         9         8
                                                              ---       ---       ---
Net income..................................................   17        13        10
                                                              ===       ===       ===
</TABLE>
 
                                       36
<PAGE>   42
 
  Comparison of Results of Operations
 
     Revenues. Revenues from sales of semiconductors and licenses of software
libraries increased 51% to $21.5 million in 1998 compared to 1997 revenues, and
increased 10% to $14.2 million in 1997 from revenues of $12.9 million in 1996.
The increase in revenues in each of 1998 and 1997 compared to the prior year was
due primarily to increased sales of the Company's data compression processors to
OEM providers of storage devices and manufacturers of high speed networking
equipment. Semiconductor sales to Quantum Corporation, an OEM producer of high
performance tape storage devices, comprised 61%, 70% and 43% of revenues in each
of 1998, 1997 and 1996 respectively.
 
     Gross Margin. Gross margins were 70% in 1998, 67% in 1997, and 61% in 1996.
The increase in gross margins in 1998 from those in 1997 was due primarily to
cost efficiencies achieved through design modifications made to compression
co-processors. The increase in gross margins in 1997 from those of 1996 was due
to shipments of higher speed data compression processors in 1997 that carry
higher gross margins than the processors shipped in 1996 and an increase in
licenses of the Company's software libraries which carry a relatively high gross
margin.
 
     Research and Development. Research and development expenses were $5.4
million for 1998, $3.0 million for 1997, and $1.6 million for 1996, an increase
of 81% in 1998 from 1997 and an increase of 82% in 1997 from 1996. The increase
in research and development costs in each successive period was due to the
Company's adding personnel and retaining outside contractors used to develop new
products which combine data compression and data encryption for the network
security markets and to develop additional products for the storage market.
 
     The Company expects its investments in research and development to increase
in coming periods as it continues to develop products targeted at meeting market
needs. However, there can be no assurance that product development programs
invested in by the Company will be successful or timely, or that products
resulting from such programs will achieve market acceptance.
 
     Sales and Marketing. Sales and marketing expenses were $3.4 million in
1998, $2.2 million in 1997, and $1.7 million in 1996. The increases in marketing
and sales expenses in 1998 over those of 1997 and in 1997 expense over those of
1996 were the result of the addition of marketing and sales personnel and
program costs intended to increase customer awareness of the Company's products.
 
     General and Administrative. General and administrative expenses were $2.4
million in 1998, $1.2 million in 1997, and $0.9 million in 1996. The increase in
1998 expenses over those of 1997 and in 1997 over those of 1996 was primarily
due to the addition of executive management personnel and increased legal and
accounting costs.
 
INCOME TAXES
 
     For all periods presented, deferred income taxes and related tax expense
have been allocated to the Company by applying the asset and liability approach
as if Hi/fn were a separate taxpayer. Under this approach, a deferred income tax
liability or asset, net of valuation allowance, is established for the expected
future consequences resulting from the differences between the financial
reporting and income tax bases of assets and liabilities and from net operating
loss and credit carryforwards. Deferred income tax expense or benefit represents
the net change during the year in the deferred income tax liability or asset.
 
     Income taxes currently payable are deemed to have been remitted by Stac on
behalf of the Company in the period that the liability arose. Income taxes
currently receivable are deemed to have been received by Stac in the period that
a refund could have been recognized by the Company, had the Company been a
separate taxpayer. Amounts due to or from the Company and Stac for income tax
payments and refunds are included in the related party receivable and payable
components of the balance sheet.
 
                                       37
<PAGE>   43
 
QUARTERLY TRENDS AND CHANNEL INVENTORIES
 
     Hi/fn's customers order semiconductor products to meet production schedules
based on forecasts of demand for their products. Additionally, OEMs contract
with third party manufacturers to build their products in large lot sizes to
achieve manufacturing efficiencies. As a result of these practices, OEM
semiconductor and finished product inventories can vary significantly depending
on actual sales, the continuation of sales trends, and the timing of contractor
manufacturing cycles with the result that demand for the Company's semiconductor
products may have cyclical increases and decreases.
 
SELECTED QUARTERLY FINANCIAL DATA
 
     The following table sets forth certain unaudited quarterly condensed
statement of operations data for each of the quarters during the year ended
September 30, 1997 and 1998. In the opinion of management, this information has
been prepared substantially on the same basis as the audited financial
statements appearing elsewhere in this Information Statement, and all necessary
adjustments, consisting only of normal recurring adjustments, have been included
in the amounts stated below to present fairly the unaudited quarterly results.
The quarterly data should be read in conjunction with the Company's audited
Financial Statements appearing elsewhere in this Information Statement. The
operating results for any quarter are not necessarily indicative of the
operating results for any future period.
 
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                DECEMBER 31,    MARCH 31,    JUNE 30,    SEPTEMBER 30,
                                    1997          1998         1998          1998
                                ------------    ---------    --------    -------------
<S>                             <C>             <C>          <C>         <C>
Revenues......................     6,265          5,236       5,012          5,020
Gross margin..................     4,163          3,674       3,534          3,637
Operating income..............     1,551          1,051         528            698
Net income....................       931            630         291            366
</TABLE>
 
<TABLE>
<CAPTION>
                                DECEMBER 31,    MARCH 31,    JUNE 30,    SEPTEMBER 30,
                                    1996          1997         1997          1997
                                ------------    ---------    --------    -------------
<S>                             <C>             <C>          <C>         <C>
Revenues......................     2,067          3,017       3,908          5,234
Gross margin..................     1,343          1,975       2,719          3,427
Operating income..............       199            605         923          1,325
Net income....................       118            361         555            799
</TABLE>
 
     The sequential decline in revenues, gross margin, operating income and net
income in the quarters ended March 31, 1998 and June 30, 1998 is primarily due
to a decline in sales to the Company's most significant customer, Quantum, and
other non-networking customers. During late 1997 and early 1998, Quantum
accumulated inventories of compression devices that Quantum used during the
quarters ended March 31, 1998 and June 30, 1998. The Company does not believe
that Quantum has purchased components from alternative sources. Although there
can be no assurance as to Quantum's future purchase levels from the Company or
as to the time that Quantum will have reduced its inventories of compression
components to a level sufficient to cause Quantum to issue renewed purchase
orders to the Company, the Company has no current reason to believe Quantum will
obtain an alternative or second source for such components. See "RISK
FACTORS -- Customer Concentration."
 
     During the quarters ended March 31, 1998, June 30, 1998 and September 30,
1998, the Company's sales to network equipment companies increased, partially
offsetting the decline in sales to Quantum. The growth of these sales reflects
initial production volumes of encryption/compression processors from selected
network equipment customers. There can be no assurances that growth of sales to
network equipment companies will continue. See "RISK FACTORS -- Risks Associated
with Emerging VPN Market."
 
                                       38
<PAGE>   44
 
LIQUIDITY AND CAPITAL RESOURCES
 
     From inception, the Company has depended upon Stac for financing its
operations and capital requirements. For the fiscal year ended September 30,
1996, the Company's net cash provided by operating activities was $3,761,000.
During the same period, $223,000 was used for the purchase of property and
equipment and $1,996,000 was remitted to Stac as dividends.
 
     In November 1996, the Company and Stac entered into an Assignment,
Assumption and Licensing Agreement which provided for the transfer of certain
assets, the assumption of certain liabilities and a cross licensing agreement of
certain intellectual properties. See "THE COMPANY -- Assignment Agreement." The
results of this agreement are reflected in the Company's financial statements.
 
     For the year ended September 30, 1997, the Company generated $2,000,000 of
cash from operations, which was comprised primarily of net income of $1,833,000
(increased for adjustments to net income). Adjustments to net income that
increased cash include $303,000 of depreciation and amortization and $566,000 of
increases in balance sheet liabilities, resulting primarily from $420,000 of
general and administrative services provided by Stac. Adjustments to net income
that reduced cash include $129,000 of benefits from the generation of deferred
tax assets and a $573,000 net increase in all other balance sheet assets.
Hi/fn's transfer of cash to Stac for centralized cash management resulted in a
net decrease to Hi/fn cash of $788,000.
 
     For the year ended September 30, 1998, the Company generated $3,131,000 of
cash from operations, which was comprised primarily of net income of $2,218,000
(increased for adjustments to net income). Adjustments to net income that
increased cash include $726,000 of depreciation and amortization and $2,451,000
of increases in balance sheet liabilities. Adjustments to net income that
reduced cash include $469,000 of benefits from the generation of deferred tax
assets and a $1,795,000 net increase in all other balance sheet assets. Stac's
transfer of cash to Hi/fn of $9,400,000 as discussed below, offset by transfers
to Stac for centralized cash management, resulted in a net increase to Hi/fn's
cash of $2,439,000.
 
     On September 28, 1998, Stac paid $4,400,000 to the Company, representing
payment in full for all amounts due to the Company from Stac as of September 1,
1998. Stac also loaned $5,000,000 to the Company pursuant to a short-term loan
described more fully below. Prior to the Distribution, the Company will pay any
amounts due to Stac as of October 31, 1998. Stac will pay to the Company on or
prior to December 31, 1998 any amounts due to the Company that are accumulated
after October 31, 1998. Amounts due to or from the Company arise from transfers
of cash to or from the Company and to or from Stac for centralized cash
management.
 
     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. See "RISK FACTORS -- Risks Associated
with Independent Manufacturers and Sole-Source Supply."
 
     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. Immediately following the
Distribution, the Company expects to have approximately $9,000,000 in cash,
including the proceeds of the $5,000,000 short-term loan from Stac (the "Stac
Loan"), to finance its operating and capital needs. The Stac Loan will become
due and payable on September 30, 1999 and may be prepaid in whole or part
without penalty. The Stac Loan bears interest at the prime rate set by Silicon
Valley Bank plus 0.5% per annum, payable quarterly. The Stac Loan is secured by
a first priority security interest in all of the Company's assets, including the
Company's intellectual property. During the first year following the
Distribution, the Company expects to enter into a revolving bank
 
                                       39
<PAGE>   45
 
credit facility and term loan. The Company intends to use its cash balances,
cash from operations and the proceeds from the credit facility and the term loan
to repay the Stac Loan and to fund its operating and capital needs for the
twelve months following the Distribution. The Company also intends to raise
equity capital within the first year following the Distribution and may enter
into a lease line for certain capital spending needs. There can be no assurance
that additional equity or debt financing will be available on terms satisfactory
to the Company, if at all.
 
YEAR 2000 COMPLIANCE
 
     Many existing computer systems and applications, and other control devices,
use only two digits to identify a year in the date field, without considering
the impact of the upcoming change in the century. As a result, such systems and
applications could fail or create erroneous results unless corrected so that
they can process data related to the Year 2000. The Company relies on its
systems, applications and devices in operating and monitoring all major aspects
of its business, including financial systems (such as general ledger, accounts
payable and payroll modules), customer services, networks and telecommunications
equipment and end products. Because a large portion of the Company's software is
obtained from its vendors on a non-custom basis, the Company believes that
upgrades for its commercial programs are currently available. The Company also
relies, directly and indirectly, on external systems of business enterprises
such as customers, suppliers, creditors, financial organizations, and of
governmental entities, both domestic and international, for accurate exchange of
data. Even if the internal systems of the Company are not materially affected by
the Year 2000 issue, the Company could be affected by disruptions in the
operation of the enterprises with which the Company interacts or Year 2000
disruptions that affect the Company's customers. The Company is in the process
of completing a thorough assessment of the impact that these matters might have
on the Company, and expects to complete its assessment prior to the end of
calendar 1998.
 
     To date, the Company's primary focus has been on its own internal systems.
The Company has completed its evaluation of Year 2000 compliance with respect to
all of its computer systems and applications. As a result of this evaluation,
the Company has determined that all business critical systems are compliant or
will be made compliant through available product upgrades. In particular, the
only critical application affected is the Windows NT 4.0 Operating System.
Microsoft has released Service Pack 4, an upgrade to Windows NT 4.0, which makes
the operating system Year 2000 compliant. The Company is currently evaluating
this upgrade and expects to implement it by December 31, 1998. The Company,
currently is also evaluating the following non-business critical applications:
MS DOS 6.22 (a laboratory PC operating system), ACP Voice Messaging (Carlsbad
location voice mail software) and FRX Drill down software (an accounting
productivity tool). The Company will upgrade these applications with existing
upgrades by December 31, 1998. Lastly, there are several Dell Systems PC
workstations shipped prior to January 1, 1997 that will require BIOS upgrades to
become fully Year 2000 compliant. The Company has not incurred, nor does it
expect to incur, material costs for the acquisition and implementation of
product upgrades to achieve Year 2000 compliance.
 
     The Company also has reviewed the products it offers to customers. None of
the software or semi-conductor products sold by the Company contain any
date-specific information, nor do they rely upon any such information for their
operation. As a result, the Company does not believe that its products will be
susceptible to Year 2000 problems.
 
     The Company has had initial communications with certain significant third
parties with which it does business to evaluate their Year 2000 compliance plans
and state of readiness and to determine the extent to which the Company's
systems may be affected by the failure of others to remedy their own Year 2000
issues. To date, the Company has received only preliminary feedback from such
parties indicating that they are in the process of implementing measures to
ensure Year 2000 compliance, and further representing that they will achieve
compliance before the close of calendar 1999. The Company has not independently
confirmed any information received from other parties with respect to the Year
2000 issues. As such, there can be no assurance that such other parties will
complete their Year 2000 conversion in a timely fashion or will not suffer a
Year 2000 business disruption that may adversely affect the Company's financial
condition and results of operations.
 
                                       40
<PAGE>   46
 
     To date, the Company has not identified any system which presents a
material risk of not being Year 2000 ready in a timely fashion or for which a
suitable alternative cannot be implemented. However, the Company may ultimately
identify systems that do present a material risk of Year 2000 disruption. Such
disruption may include, among other things, the inability to process
transactions or information, procure inventory or engage in similar normal
business activities. The failure of the Company to identify systems that require
Year 2000 conversion and that are critical to the Company's operations or the
failure of the Company or others with which the Company does business to become
Year 2000 ready in a timely manner could have a material adverse effect on the
Company's financial condition and results of operations.
 
     The Company has not yet completed the development of a comprehensive Year
2000 contingency plan. However, as part of its Year 2000 effort, the Company
regularly examines information received from external sources for date integrity
before integrating such information into the Company's internal systems. In
addition, the Company has established a plan to increase inventories of certain
products by December 1999 if the Company determines there is some risk of
interruption of supply from a third party as a result of Year 2000 compliance
issues. This would allow the Company to continue to supply product to its
customers while the third party corrects its problems. The Company has also
incorporated alternatives into its contingency plan to address the possibility
that the software upgrades described above do not fully resolve Year 2000
compliance issues. If the Company determines that its business is at material
risk of disruption due to currently unforeseen Year 2000 issue or anticipates
that its Year 2000 compliance will not be achieved in a timely fashion, the
Company will work to enhance its contingency plan.
 
     The discussion above contains certain forward-looking statements. The costs
of the Year 2000 conversion and possible risks associated with the Year 2000
issue are based on the Company's current estimates and are subject to various
uncertainties that could cause the actual results to differ materially from the
Company's expectations. Such uncertainties include, among others, the success of
the Company in identifying systems that are not Year 2000 compliant, the nature
and amount of programming required to upgrade or replace each of the affected
systems, the availability of qualified personnel, consultants and other
resources, and the success of the Year 2000 conversion efforts of others.
 
NEW PRONOUNCEMENTS
 
     In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards (FAS) No. 130, "Reporting Comprehensive Income,"
and Financial Accounting Standard (FAS) No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which will be required to be adopted by
the Company in fiscal 1999. Adoption of these statements is not expected to have
a significant impact on the Company's consolidated financial position, results
of operations or cash flows.
 
                                       41
<PAGE>   47
 
                                  THE COMPANY
 
GENERAL
 
     Stac incorporated Hi/fn as a wholly owned subsidiary of Stac on August 14,
1996. On November 21, 1996, Stac transferred its semiconductor business (along
with the associated technology, assets and liabilities) to Hi/fn in exchange for
6,000,000 shares of Series A Preferred Stock and 100 shares of Company Common
Stock pursuant to a Stock Purchase Agreement.
 
ASSIGNMENT AGREEMENT
 
     Stac effected the transfer of the semiconductor business to Hi/fn pursuant
to an Assignment, Assumption and License Agreement dated as of November 21, 1996
(the "Assignment Agreement"). The assets transferred to the Company pursuant to
the Assignment Agreement included, without limitation, $1,000,000 of available
cash, the accounts receivable and inventory of the semiconductor business,
Stac's rights under certain sales and license agreements and the fixed assets,
trademarks, patents and proprietary technology specified on schedules attached
to the Assignment Agreement. The Assignment Agreement also provided for the
assignment by Stac and the assumption by Hi/fn of the accounts payable relating
to the semiconductor business, the obligations under the sales and license
agreements assigned to Hi/fn, and current and unpaid payroll and related
benefits expenses related to former employees of Stac who became employees of
Hi/fn.
 
CROSS LICENSE AGREEMENT
 
     At the time of the transfer of the semiconductor business to Hi/fn, Stac
and Hi/fn entered into a Cross License Agreement pursuant to which Hi/fn granted
to Stac a limited, worldwide, perpetual, non-exclusive, non-transferable,
royalty-free license to the patents previously transferred by Stac to Hi/fn
pursuant to the Assignment Agreement. The Cross License Agreement permits Stac,
among other things, to use, modify, create derivative works, reproduce, license
and sublicense the technology to end users of Stac's products that incorporate
the technology licensed to Stac by Hi/fn. Stac, however, may not create hardware
implementations of the technology subject to the Cross License Agreement or
license or sell any of the software subject to the Cross License Agreement as a
stand-alone product for a period of ten years after the date of the Cross
License Agreement. Under the Cross License Agreement, Stac also sublicensed or
assigned to Hi/fn certain third-party licenses held by Stac. The parties further
agreed that for a ten-year period (i) Stac would transfer ownership to Hi/fn of
any derivative works created by Stac from the licensed technology and (ii) Hi/fn
would transfer ownership to Stac of all future commercial releases of software
implementations of the licensed technology developed by the Company.
 
                                       42
<PAGE>   48
 
                                    BUSINESS
 
OVERVIEW
 
     Hi/fn designs, develops and markets high-performance, multi-protocol packet
processors -- semiconductor devices that enable secure, high-bandwidth network
connectivity and efficient storage of business information. The Company's packet
processor products perform the computation-intensive tasks of compression and
encryption/compression, providing its customers with high-performance,
interoperable implementations of a wide variety of industry-standard networking
and storage protocols. The Company's products are used in a variety of
networking and storage equipment such as routers, remote access concentrators,
firewalls and back-up storage devices.
 
     The Company's encryption/compression packet processors allow network
equipment vendors to add bandwidth enhancement and security capabilities to
their products. The Company's encryption/compression products provide
high-performance implementations of key algorithms used in the implementation of
Virtual Private Networks ("VPNs"), which enable businesses to reduce wide area
networking costs by replacing dedicated leased lines with lower cost IP-based
networks such as the Internet. Using VPNs, businesses also can provide trading
partners and other constituents with secure, authenticated access to the
corporate network, increasing productivity through improved communications.
Storage equipment vendors use the Company's products to improve the performance
and capacity of mid- to high-end tape back-up systems.
 
INDUSTRY BACKGROUND
 
     The dramatic growth in corporations' use of Internet technology has
resulted in the ability to make information available to anyone, from anywhere
and at any time. An increasingly mobile workforce, increased telecommuting and
the need to connect branch offices, customers, suppliers and other trading
partners to the corporate network, have stressed the capabilities of existing
network and storage infrastructures. To deliver on the economic promise of
Internet technology as a business tool, the Company believes that corporations
require two critical capabilities: secure, high-bandwidth network connectivity
among geographically dispersed constituents and efficient storage of business
information.
 
  The Need for Enhanced Bandwidth and Security in Corporate Networks
 
     Data traffic over local and wide area networks ("LANs" and "WANs") is
growing at an unprecedented pace, forcing corporate network managers to upgrade
their network architectures to meet these demands. Traditional network
architectures deployed by corporations to meet these needs include leased line
connections to branch/remote offices and dial-up (e.g., analog modem and ISDN)
connections to support mobile workers and telecommuters.
 
     Private Networks -- Traditional Network Architectures. Data traffic over
corporate networks often is facilitated by the use of leased line connections,
which enable the interconnection of LANs. Typically, routers are used at each
end of such leased line connections. These interconnections often take the form
of point-to-point links, which are fully managed by the corporate network
management staff. The advantage to this approach is that the bandwidth of the
link is known, and the corporation can use up to the maximum bandwidth of the
link because it is not shared by other users. In addition, because the line is
not shared, security is assured without encryption. The primary disadvantage of
leased-line connections is the high cost of dedicated bandwidth. The cost is
also based on the distance separating the two end points of the link. For large
networks involving dedicated connections from corporate headquarters to each
remote site, such networks carry significant operating costs.
 
     With respect to the corporate data networking traffic via dial-up
connections, the remote user or telecommuter "dials" to connect his or her
workstation to the corporate network over analog modem or digital (e.g., ISDN)
lines. The costs associated with these connections are also based on the
bandwidth and the distance of the link. Moreover, corporate support for dial-up
users requires significant equipment and service because the network manager
must accommodate the appropriate number of service lines needed to support the
remote user population. Like most networking equipment, the equipment needed to
provide these services
                                       43
<PAGE>   49
 
is often complex and demands careful monitoring and management. As a result, the
service and management costs associated with supporting a large dial-up user
population can be significant.
 
     As traditional private network architectures were broadly adopted,
corporate network managers began to demand that network equipment be easier to
deploy and more cost-effective to operate. Network equipment vendors responded
to these requirements by adopting standards-based, interoperable networking
protocols and implementing compression technology that allowed data to be
reduced in size prior to transmission without losing any of the data upon
receipt ("lossless compression").
 
     Prior to the emergence of standard networking protocols, equipment used at
each of the two terminating points of leased line and dial-up connections was
provided by the same vendor due to the proprietary nature of the data networking
protocols employed. As network equipment vendors implemented standards-based,
interoperable networking protocols, corporate customers could purchase products
from a variety of vendors, thereby increasing competition among vendors and
reducing equipment costs for the customer. One of the primary networking
protocol standards deployed to support leased line connections is the
Point-to-Point Protocol ("PPP"), developed by the Internet Engineering Task
Force (the "IETF"), the organization responsible for development of network
protocols for the Internet. PPP, which is implemented at layer two of the
network protocol model, is a widely deployed standard and is embedded in most of
today's routers, remote access concentrators and personal computers.
 
     Bandwidth enhancement, through the use of lossless compression, allows
corporations to reduce the costs of leased line and dial-up connections.
Lossless compression is a feature of several standard networking protocols,
including PPP. The use of lossless compression provides the effect of an
approximate doubling of network bandwidth, thereby reducing the cost of
transmission by about half.
 
     While traditional private network architectures have become more
cost-effective over time, the ubiquity of the Internet and its standard
protocols is ushering in a new era of more cost-effective and productive access
to corporate information resources.
 
     Virtual Private Networks -- Emerging Cost-Effective Network
Architectures. Substantial economic benefits can be achieved by substituting
dedicated leased lines and long distance dial-up lines, commonly used for
connecting branch offices and mobile/remote users to the corporate network, with
"local" connections (i.e., low-toll or no-toll) to the Internet. For leased
lines, use of local Internet connections provides savings because of shorter
distance links. For dial-up lines, remote users can make local phone calls to
connect to the Internet and subsequently connect to the corporate network. The
corporate savings on dial-up access by remote users comes from two sources: the
avoidance of long distance toll charges and the "outsourcing" to Internet
service providers of the purchase, installation and management of the network
equipment. The use of the Internet also facilitates access to corporate
information resources by the users of broadband access technologies such as
cable modems and digital subscriber line services, which typically are connected
directly to the Internet.
 
     The use of Internet connections also permits companies to greatly expand
the number and types of people who can access their networks. Internet
connections can be used to connect suppliers, customers and other constituents
to the corporate network in ways that are not practical using leased lines or
dial-up links. However, when corporations use the Internet in place of leased
lines and dial-up links, the corporation must use network security protocols
incorporating encryption technology to maintain the privacy of data transmitted
over the network. Corporate networks implemented using network security
protocols are known as VPNs because they are implemented using a shared network
such as the Internet, but achieve their status as "private" through the use of
encryption technology.
 
     One example of a VPN is the Automotive Network Exchange ("ANX") project.
The ANX is being developed by the Automotive Industry Action Group, a trade
association of North American vehicle manufacturers and suppliers. The goal of
the project is to establish a VPN to improve business communications among the
North American vehicle manufacturers and their suppliers and trading partners.
The ANX network is expected to provide a dramatic reduction in the costs of
doing business among participating trading partners.
 
                                       44
<PAGE>   50
 
     Broad implementation of VPNs requires that standards-based network security
protocols be deployed in a wide variety of networking products, including
routers, remote access concentrators, switches, broadband access equipment,
network interface cards, security gateways and firewalls. The IETF has developed
a networking protocol called IP Security (the "IPSec protocol"), which is
implemented at layer three in the network protocol model. The IPSec protocol
provides bandwidth enhancement through the use of compression and data integrity
and confidentiality through the use of encryption. Encryption makes data appear
random by removing any detectable patterns. Compression searches data for
patterns and replaces them with shorter representations of the information.
Accordingly, compression must occur prior to encryption. Thus, the use of
encryption at layer three in the network model has the effect of rendering PPP
(layer two) compression ineffective. The IPSec protocol is more scalable and has
more robust security capabilities than other network security protocols, such as
the Point-to-Point Tunneling Protocol ("PPTP") developed by Microsoft. The
Company believes that the IPSec protocol, which can be deployed in both LAN and
WAN equipment, will become the most widely used protocol for the implementation
of VPNs.
 
     Implementation of network security protocols places great processing
demands on networking equipment architectures. When compared to processing of
unsecured data packets, where only a small portion of the data packet requires
processing, each byte of a secure packet must be processed using
computation-intensive algorithms, stealing processing bandwidth from other
critical network processing functions such as routing, switching and packet
filtering. Processing of secure packets involves three distinct operations:
compression for bandwidth enhancement, encryption for data privacy, and data
authentication to ensure data integrity.
 
     The traditional approach to the implementation of new network protocols has
been to provide the new capabilities in software. The processing demands of
security protocols, particularly the IPSec protocol, however, exceed the
capabilities of today's general purpose microprocessors that support unsecured
network routing and switching protocols. Software implementation of the IPSec
protocol in a router, firewall or in other network equipment often results in a
significant degradation in the performance of the equipment. These processing
demands are driving network equipment vendors to develop new protocol processing
architectures. One approach is to divide the security protocol processing
elements of compression, encryption and data authentication into separate,
interconnected processing elements where the processing for each function can be
performed either by a general purpose microprocessor, a custom-designed
Application Specific Integrated Circuit ("ASIC"), or other logic circuit.
However, the use of separate processing elements for each function results in
more complex system designs that require higher performance interconnections to
support data movements in and out of each processing element.
 
     Networking equipment vendors are responding to the VPN opportunity by
building a variety of products that integrate the IPSec protocol. The
technological challenges and the significant time-to-market pressures such
vendors face, however, have made it increasingly difficult for them to develop
internally the semiconductor devices necessary to implement the IPSec protocol
in their products. As a result, the Company expects a market to develop for
high-performance, integrated, multi-protocol packet processors that perform the
computation-intensive tasks of compression, encryption and data authentication,
that comply with industry standard network security protocols and that can be
easily integrated into vendors' systems.
 
  The Need for Efficient Storage of Corporate Data
 
     The increasing connectivity of the corporate workforce also has caused
dramatic increases in the need to share data across locations, with the need for
online data to be available at all times and at all locations. Network servers,
based on the Unix and Microsoft Windows NT operating system platforms, are
proliferating because of the need to distribute data throughout the enterprise
for access and update at the lowest levels in the organizational hierarchy.
 
     The growth in hard disk storage on network servers and user workstations
has stressed the capability of currently available back-up subsystems. While
there are a number of approaches to providing back-up, particularly for servers,
most revolve around the use of tape drives. Either stand-alone, or with multiple
drives configured in tape libraries or jukeboxes, the demand for capacity and
performance of these subsystems continues to increase. The opportunity to back
up server disk storage, an administrative operation typically
 
                                       45
<PAGE>   51
 
performed during "off hours," has dwindled. Thus, the suitability for a tape
subsystem to back up server storage is increasingly dependent on the rate at
which the tape subsystem can accept data from host systems and subsequently
write it to the media.
 
     Today's mid- to high-end tape drive architectures consist of three key
elements: (i) a host interface such as a Small Computer Systems Interface
("SCSI"), (ii) a processing element that typically includes a general-purpose
microprocessor and an ASIC for tape formatting and memory management functions,
and (iii) motor control and front-end head interface electronics. The
performance requirements of mid- to high-end tape drives require that
compression functions, which typically provide doubling of capacity and
performance, be performed by dedicated semiconductor implementations within the
tape drive electronics.
 
     Accordingly, the Company expects mid- to high-end tape back-up equipment
vendors to continue to demand high-performance, standards-based, interoperable
implementations of compression processors that can be easily integrated into
their tape drive architectures.
 
THE HI/FN SOLUTION
 
     Hi/fn designs, develops and markets high-performance, multi-protocol packet
processors -- semiconductor devices that enable secure, high-bandwidth network
connectivity and efficient storage of business information. The Company's packet
processor products perform the computation-intensive tasks of compression and
encryption/compression, providing its customers with high-performance,
interoperable implementations of a wide variety of industry-standard networking
and storage protocols. The Company believes that its patented compression
technology comprises the fundamental know-how for the design and implementation
of low-cost, high-performance implementations of lossless compression and gives
its products a decisive competitive advantage. By offering a wide range of
price-performance implementations of its patented, standards-compliant
technology, the Company is able to sell products to network and storage
equipment vendors that allow them to reduce development costs and
time-to-market.
 
     The Company's patented Lempel-Ziv-Stac compression technology ("LZS") is
incorporated into several networking protocol standards, including PPP and the
frame relay protocol, allowing network equipment vendors to rapidly integrate
proven solutions for mitigating the costs associated with traditional private
leased-line network architectures. The Microsoft Point-to-Point ("MPPC")
implementation of the Company's patents, developed by Microsoft, is incorporated
into the PPP and PPTP implementations of the Windows 95, 98 and NT operating
systems. The Company offers high-performance compression processors that
implement LZS and MPPC. The Company also licenses software implementations of
LZS and MPPC to industry-leading network equipment vendors for use in their
networking products.
 
     In support of emerging VPN architectures, the Company has produced one of
the industry's first network security processors, integrating the critical
functions of compression, encryption and data authentication in compliance with
the IPSec protocol. This integration allows network equipment vendors to add
highly-integrated, high-performance VPN capabilities to their routers, remote
access concentrators, switches, broadband access equipment and firewalls. The
Company also licenses a complete, portable software implementation of the IPSec
protocol, allowing network vendors to get to market quickly with their VPN
implementations at a fraction of the cost of internal software development
efforts.
 
     The Company's line of compression processors targeted at back-up storage
applications provides storage equipment vendors high-performance implementations
of the Company's patented compression technology, doubling the capacity and
performance of mid- to high-end tape drive systems. Hi/fn's LZS implementation
of the Company's patents is used in the market-leading DLT 4000 and DLT 7000
tape drive products from Quantum. The Adaptive Lossless Data Compression
("ALDC") implementation of the Company's patents, developed by IBM, is used in a
variety of tape storage products, including the Travan style of quarter-inch
cartridge tape drives.
 
                                       46
<PAGE>   52
 
BUSINESS STRATEGY
 
     Hi/fn's objective is to become a leading provider of high-performance,
multi-protocol packet processor products that enable its customers to provide
products with enhanced bandwidth and high-performance security capabilities. Key
elements of the Company's strategy include the following:
 
     Focus on Network Equipment Markets. Hi/fn has targeted and intends to
continue to target the network equipment market, including the markets for
remote access concentrators, routers, switches, broadband access equipment,
network interface cards and firewalls, which are characterized by intense
time-to-market pressures, demanding performance requirements and demands for
interoperable, standards-based solutions. The Company's 7711 encryption
processor, which incorporates compression, encryption and data authentication
capabilities, was designed specifically to allow the Company's network equipment
customers to add high-performance VPN capabilities to their networking products.
 
     Leverage Proprietary Compression Technology. The Company intends to
leverage its proprietary portfolio of compression technologies to establish a
leadership position in the market for integrated processors that perform the
task of compression, encryption and data authentication. The Company's core
compression technology has been adopted throughout its target markets in a wide
variety of networking and storage standards. The Company believes that its
patents provide the fundamental know-how for the design of high-performance,
cost-effective implementations of lossless compression of data.
 
     Emphasize Storage Equipment Market. The Company intends to continue to
emphasize the development of high-performance packet processor products that
serve the mid- to high-end back-up storage equipment market. In addition, the
Company intends to continue to leverage technologies developed for storage
applications in its products designed for network equipment markets because the
performance requirements of the back-up storage equipment market often exceed
the requirements of the network equipment market. For example, the Company is
developing a compression packet processor expected to perform at 100Mbytes per
second, faster than most networking products available today.
 
     Maintain Technology Leadership. Hi/fn has made and intends to continue to
make substantial investments in the technologies that form the core of its
packet processors, with the goal of providing price-performance product
alternatives and enabling broad adoption and deployment of packet processing
functionality. Hi/fn intends to continue to develop higher performance and more
fully integrated packet processing functionality. The Company also intends to
continue to leverage its engineering resources and intellectual property
portfolio to develop additional products.
 
     Contribute to Industry Standards. Hi/fn has been and intends to continue to
be an active contributor in the development of several industry standards in
networking and storage applications. The Company has participated in a wide
variety of standards groups, including American National Standards Institute,
the IETF, the Frame Relay Forum, the ADSL Forum, Quarter-Inch Cartridge Drive
Standards and others. Various implementations of the Company's patented
compression technology have been specified in a variety of networking and
storage protocols. The Company believes this is due to the wide range of
price-performance options available for integrating the Company's compression
technology into equipment vendors' products, including software implementations
and high-performance semiconductor implementations. The Company's early
involvement in these standards activities provides it with insight into and
influence over the technical directions of emerging technologies. As a result,
the Company is able to evaluate market and technical opportunities at early
stages in the market development cycle.
 
     Leverage the Fabless Semiconductor Business Model. The Company intends to
continue to subcontract all of its semiconductor manufacturing. The use of
outside manufacturing partners, a "fabless" model, allows the Company to focus
substantially all of its resources on the design, development and support of its
products. The Company believes this approach lowers technology and production
risks, reduces time-to-market and increases profitability.
 
     Strengthen and Expand Customer Relationships. Hi/fn intends to maintain a
customer-oriented approach that stresses relationships with leading network and
storage equipment vendors and emphasizes strong customer input in the product
definition process. Hi/fn has developed relationships with several leading
                                       47
<PAGE>   53
 
network and storage equipment vendors, enabling the Company to achieve design
wins in new systems at the time of initial product definition. Beyond the design
stage, Hi/fn's field applications engineering group offers full service
technical support and training. By working with customers throughout the entire
product life-cycle, the Company is able to gain insights into its customers'
future plans and needs, identify emerging industry trends and consequently
deliver high-performance, cost-effective products.
 
CUSTOMERS AND PRODUCTS
 
     A number of leading manufacturers of network and storage equipment have
designed products that incorporate the Company's products. To date, the Company
has secured several design wins with networking and storage equipment vendors.
To qualify as a design win, an equipment vendor must have ordered samples of the
Company's packet processors or an evaluation board and initiated a product
design that incorporates the Company's packet processors. During the design-in
process, the Company works with each customer, providing training on the
Company's products, assisting in resolving technical questions and providing
price and delivery information to assist the customer in getting its products
into volume production. There can be no assurance that any of the design wins
secured by the Company will result in demand for the Company's products. See
"RISK FACTORS -- Dependence Upon Development of the Market for Packet
Processors" and "-- New Product Development and Evolving Industry Standards;
Technological Change."
 
     At September 30, 1998, the Company has a backlog of semiconductor orders
representing $10.1 million of products deliverable to customers over the next 12
months. The Company quotes product lead times to customers of approximately
three months, with the result that most products shipped during a quarter were
ordered during the previous quarter. Customers may reschedule or cancel orders,
subject to negotiated windows, with the result that orders scheduled for
shipment in a quarter may be moved to a subsequent quarter or cancelled
altogether.
 
     The Company's products -- compression processors, encryption/compression
processors and software -- provide a broad range of price/performance
alternatives for the implementation of secure, high-performance networks and
efficient, high-performance tape storage devices. Hi/fn also offers evaluation
boards to assist customers in the evaluation of the Company's products.
 
     Network Bandwidth Enhancement Products. Hi/fn's 9710 and 9711
high-performance compression processors provide essential bandwidth-enhancement
for network equipment such as routers, remote access concentrators, broadband
access equipment and switches. These products provide flexible bus interfaces
and a variety of memory configuration options to allow customers to tailor their
uses to meet a variety of network system requirements. Hi/fn licenses a line of
software compression libraries that provide similar functionality to its line of
compression processor products for low-performance applications such as modems
and ISDN links. The software products are offered in source and object code
toolkits.
 
<TABLE>
<CAPTION>
        PRODUCT                       DESCRIPTION              DATE OF INTRODUCTION
        -------                       -----------              --------------------
<S>                       <C>                                  <C>
9710                      Compression processor,               September 1996
                          multi-history LZS, operating at 8
                          Mbytes/sec

9711                      Compression processor,               February 1997
                          multi-history LZS and MPPC,
                          operating at 8Mbytes/sec

LZS221                    Compression software,                November 1995
                          multi-history, LZS offered in C
                          source code and other
                          microprocessor-specific
                          implementations

MPPC                      Compression software,                July 1996
                          multi-history, MPPC, offered in C
                          source code
</TABLE>
 
                                       48
<PAGE>   54
 
     Network Security Products. Hi/fn's 7711 high-performance encryption
processor provides essential bandwidth-enhancement and security for network
equipment such as routers, remote access concentrators, switches and firewalls.
The 7711 provides a flexible bus interface and a variety of memory configuration
options to allow adaptation to meet a variety of network system requirements.
The 7711 is pin-compatible with the 9711 compression processor, providing
customers with an easy upgrade path from compression to encryption/compression.
Hi/fn also licenses a portable, source code implementation of the IPSec
protocol.
 
<TABLE>
<CAPTION>
        PRODUCT                       DESCRIPTION              DATE OF INTRODUCTION
        -------                       -----------              --------------------
<S>                       <C>                                  <C>
7711                      Encryption processor, DES/Triple-    October 1997
                          DES/RC4 encryption, LZS/MPPC
                          compression, MD5/SHA1 data
                          authentication, operating at 8
                          Mbytes/sec

7751                      Encryption processor, DES/Triple-    October 1998
                          DES/RC4 encryption, LZS/MPPC
                          compression, MD5/SHA1 data
                          authentication, operating at 8
                          Mbytes/sec, PCI 2.1 interface, DMA
                          Masker

IPSECure IPSEC            Source code toolkit, providing       May 1998
                          packet processing functions of the
                          IPSec protocol

IPSECure ISAKMP           Source code toolkit, providing key   May 1998
                          management protocol functions of
                          the IPSec protocol
</TABLE>
 
     Storage Enhancement Products. The Company's 9610 and 9732 high-performance
compression processors provide a typical doubling of capacity and performance
for mid- to high-end tape drive products.
 
<TABLE>
<CAPTION>
        PRODUCT                       DESCRIPTION              DATE OF INTRODUCTION
        -------                       -----------              --------------------
<S>                       <C>                                  <C>
9732                      Compression processor, single        June 1994
                          history LZS, operating at 32
                          Mbytes/sec

9610                      Compression processor, single        May 1997
                          history LZS, operating at 50
                          Mbytes/sec
</TABLE>
 
     Evaluation Boards. To facilitate the adoption of its semiconductor devices,
the Company designs system-level boards that resemble actual end-products or
subsystems. The Company's evaluation boards include basic hardware and software
that enable customers to expedite their designs by using the evaluation boards
as a reference or by incorporating portions of them into their own designs.
These boards are used as evaluation and development vehicles for each
semiconductor device designed by the Company.
 
TECHNOLOGY
 
     Hi/fn's multi-protocol packet processors are high-performance compression
and encryption/compression processors that have been designed to meet the needs
of networking and storage equipment vendors. The Company believes that its
patented compression technology, employed in all of its packet processors, gives
it a substantial competitive advantage. In addition to core technologies
developed by the Company, the Company has enhanced the features and
functionality of its products through the licensing of certain technologies from
third parties.
 
     Compression Algorithms and Architectures. The Company is the holder of key
patents that cover a wide variety of lossless compression algorithms and their
implementations. Specific implementations of the Company's compression patents
include the following compression algorithms: LZS, developed by Stac; MPPC,
developed by Microsoft; and ALDC, developed by IBM. The Company has continued to
improve the performance, functionality and architectures of these compression
techniques. For example, semiconductor implementations of the LZS algorithm have
improved in performance by a factor of 40 in under four years. Through the use
of various architectural implementations of its compression algorithms, the
Company is able to provide compression solutions over a broad price-performance
spectrum.
 
                                       49
<PAGE>   55
 
     Encryption and Data Authentication Algorithms. The Company develops
high-performance implementations of industry standard encryption algorithms
(e.g., DES, Triple-DES and RC4) and data authentication algorithms (e.g., MD5
and SHA1). Coupled with its patent position in compression, the Company is
positioned to combine compression with encryption and data authentication as
specified in the most widely used network security protocols, such as IPSec and
PPTP. In addition, the Company has licensed the rights to implement three
encryption algorithms of RSA Data Security in the Company's semiconductor
products, including the Rivest Shamir Adelman ("RSA") public key encryption
system and the Rivest Cipher 4 ("RC4") and Rivest Cipher 5 ("RC5") symmetric key
encryption algorithms.
 
     Integrated, High-Performance Packet Processing. The Company is continuing
to develop additional packet processing functionality, including the
implementation of public key encryption algorithms and increased integration of
computation-intensive security protocol processing functions. Performance
improvements of the Company's packet processing functions are expected to
support gigabit speeds in the future.
 
INTELLECTUAL PROPERTY
 
     The Company's future success and ability to compete are dependent, in part,
upon its proprietary technology. The Company relies in part on patent, trade
secret, trademark, maskwork and copyright law to protect its intellectual
property. The Company owns 12 United States patents and four foreign patents.
The Company also has two pending patent applications in Japan. The issued
patents and patent applications primarily cover various aspects of the Company's
compression technology and have expiration dates ranging from 2006 to 2013.
There can be no assurance that any patents will issue pursuant to the Company's
current or future patent applications or that the patents issued pursuant to
such patent applications will not be invalidated, circumvented or challenged.
There can be no assurance that any patents issued to the Company will be
adequate to safeguard and maintain the Company's proprietary rights, to deter
misappropriation or to prevent an unauthorized third party from copying the
Company's technology, designing around the patents owned by the Company or
otherwise obtaining and using the Company's products, designs or other
information. In addition, there can be no assurance that others will not develop
technologies that are similar or superior to the Company's technology.
 
     In addition, the Company claims copyright protection for certain
proprietary software and documentation. The Company attempts to protect its
trade secrets and other proprietary information through agreements with its
customers, suppliers, employees and consultants, and through other security
measures. Although the Company intends to protect its rights vigorously, there
can be no assurance that these measures will be successful. In addition, the
laws of certain countries in which the Company's products are or may be
manufactured or sold may not protect the Company's products and intellectual
property.
 
     In 1996 and 1997, the Company entered into agreements with RSA Data
Security, Inc., a subsidiary of Security Dynamics, Inc., granting the Company
the rights to implement three encryption algorithms licensed by RSA,
specifically the RSA public key encryption system and the RC4 and RC5 symmetric
key encryption algorithms.
 
     Agreements with IBM. In April 1994, Stac entered into two related patent
cross license agreements with IBM, one related to software products and the
other to hardware products. The term of each agreement continues until all of
the patents licensed under such agreement have expired.
 
     Pursuant to the software patent cross license, IBM granted Stac a
nonexclusive license under certain IBM patents for making, using and selling
software programs designed to operate with all operating systems (and their
extensions or emulations) other than IBM mainframe-type operating systems. IBM
also granted Stac the right to combine products licensed under IBM's patents
with other products and granted Stac's customers the right to use those combined
products.
 
     In exchange for the rights granted to Stac by IBM under the software patent
cross license, Stac granted IBM a nonexclusive license under certain Stac
patents for making, using and selling any software programs used in systems that
process information. Stac also granted IBM the right to combine products
licensed under Stac's patents with other products and granted certain IBM
customers the right to use those combined products.
 
                                       50
<PAGE>   56
 
     Pursuant to the hardware cross license agreement, IBM granted Stac a
nonexclusive license under certain IBM patents for making, using and selling,
and for practicing any methods involved in making or using, lossless data
compression products. The license, however, restricts Stac from incorporating
the IBM patents in the manufacture of lossless data compression products for
third parties that are based upon third-party designs for lossless data
compression. IBM also granted Stac the right to combine the hardware products
with software programs licensed under the software cross license. In addition,
IBM granted to users of Stac's licensed products an immunity from suit for use
of combinations of the licensed hardware products with software programs.
 
     In exchange for the license from IBM, and in exchange for payment of a
one-time license fee by IBM, Stac granted IBM a nonexclusive license under
certain Stac patents for making, using and selling, and for practicing any
methods involved in making or using, hardware products. The license, however,
restricts IBM from incorporating the Stac patents in the manufacture of hardware
products for third parties that are based upon third-party designs for lossless
data compression. Stac also granted IBM the right to combine the hardware
products with software programs licensed under the software cross license. In
addition, Stac granted users of IBM's licensed products an immunity from suit
for use of combinations of the licensed hardware products with software
programs.
 
     Under the terms of the software and hardware patent cross license
agreements between IBM and Stac, the Company is eligible to receive equivalent
license rights from IBM, provided that the licenses may not be further extended
to a Hi/fn subsidiary. Stac has requested that IBM enter into such license
agreements with the Company.
 
     Agreement with Motorola. In December 1995, Stac entered into a cross
license and royalty agreement with Motorola. Pursuant to this agreement,
Motorola granted Stac and Stac's subsidiaries a nonexclusive license under two
Motorola patents and one Motorola patent application for making and having made
products (both hardware and software) for data communications and using, selling
and leasing such products under Stac's trade identity. Stac is also permitted,
with certain exceptions, to grant sublicenses to software and semiconductor
device customers in accordance with a standard agreement available to Stac.
Except for the foregoing sublicensing is prohibited under the agreement.
 
     In exchange for the license under Motorola's patents, and in exchange for
certain royalties, Stac granted Motorola and Motorola's subsidiaries (i) a
nonexclusive license under five Stac patents and a foreign patent application
for (A) making and having made data communications products other than stand
alone semiconductor devices or stand alone software that were to be sold to
entities other than Motorola or Stac or their subsidiaries and (B) using,
leasing and selling products under Stac's trade identity, and (ii) a
nonexclusive license under Stac's copyrights and patents (A) to use, copy and
distribute software for integration into Motorola's products that incorporate
LZS data compression and (B) to distribute LZS data compression software for
integration with Motorola's products that incorporate LZS data compression as
long as the modifications do not change the encoding format of the unmodified
data compression software.
 
     Pursuant to the Motorola agreement, each of Stac and Motorola is required
to pay to the other an annual lump sum royalty based on projected sales, the
amount of which varied depending on the annual sales volume and the net sales
price. All royalties are subject to an overall maximum amount and terminate
after seven years. The term of the agreement continues until all of the licensed
patents have expired. Stac has assigned, and the Company has assumed, all of
Stac's rights and obligations under the Motorola agreement.
 
     Agreement with Microsoft. In February 1996, Stac entered into a license
agreement with Microsoft pursuant to which Microsoft granted Stac a nonexclusive
license to use Microsoft's implementation of the MPPC compression format (i) to
create compression software that performed data compression in accordance with
the MPPC compression format, (ii) to permit third parties to integrate
Microsoft's or Stac's MPPC software, (iii) to permit third parties to exploit
products into which MPPC software is integrated, and (iv) to perform data
compression in Stac's MPPC Software in accordance with the MPPC compression
format. As a condition of the license, Stac must distribute un-optimized
Microsoft compression software on the same terms and conditions, including
price, as those for Stac's LZS software. The term of the agreement
 
                                       51
<PAGE>   57
 
continues until all of the licensed patents have expired. Stac has assigned, and
the Company has assumed, all of Stac's rights and obligations under the
Microsoft agreement.
 
EXPORT RESTRICTIONS ON ENCRYPTION ALGORITHMS
 
     A key element of the Company's packet processor architecture is the
encryption algorithms embedded in its semiconductor and software products. These
products are subject to export control restrictions administered by the U.S.
Department of Commerce, which permit the Company's network equipment customers
to export products incorporating encryption technology only with the appropriate
export license. In addition, these U.S. export laws prohibit the export of
encryption products to a number of countries deemed hostile by the U.S.
government. U.S. export regulations regarding the export of encryption
technology require either a transactional export license or the granting of
Department of Commerce Commodity jurisdiction. As a result of this regulatory
regime, foreign competitors facing less stringent controls on their products may
be able to compete more effectively than the Company's network equipment
customers in the global market. There can be no assurance that the U.S.
government will approve any pending or future export license requests. Further,
there can be no assurance that the list of products and countries for which
export approval is required, or the regulatory policies with respect thereto,
will not be revised from time to time, or that laws limiting the domestic use of
encryption will not be enacted. Failure of the Company's network equipment
customers to obtain the required licenses or the costs of compliance could
inhibit the sale of the Company's packet processors.
 
COMPETITION
 
     The networking and storage equipment markets into which the Company sells
its products are intensely competitive and are subject to frequent product
introductions with improved price-performance characteristics, rapid
technological change, unit price erosion and the continued emergence of new
industry standards. The semiconductor industry is also intensely competitive and
is characterized by rapid technological change, product obsolescence and unit
price erosion. The Company expects competition to increase in the future from
existing competitors and from companies that may enter the Company's existing or
future markets, including certain customers, with similar or substitute
solutions that may be less costly or provide better performance or features than
the Company's products. To be successful in the future, Hi/fn must continue to
respond promptly and effectively to changing customer performance, feature and
pricing requirements, technological change and competitors' innovations. There
can be no assurance that the Company will be able to compete successfully
against current and future competitors or that competitive pressures faced by
the Company will not materially adversely affect the Company's business.
 
     The Company's products compete with products from companies such as IBM,
VLSI, Rainbow, IRE and Analog Devices. In 1994, Stac entered into two license
agreements with IBM pursuant to which Stac granted IBM the right to implement,
but not sublicense, the Company's patented compression technology in IBM
hardware and software products. Stac also entered into a license agreement with
Microsoft in 1994 pursuant to which Stac granted Microsoft the right to create
software implementations of the Company's patented compression technology in
Microsoft's software products. Stac's license agreement with Microsoft, however,
prohibits Microsoft from creating hardware implementations of the Company's
patents. The Company also competes against software solutions that use general
purpose microprocessors to run encryption algorithms and the Company's software
compression libraries. Moreover, the Company's encryption/ compression
processors are subject to export control restrictions administered by the U.S.
Department of Commerce, which permit the Company's network equipment customers
to export products incorporating encryption technology only with the appropriate
export license. As a result of these restrictions, foreign competitors facing
less stringent controls on their encryption products could inhibit the sale of
the Company's encryption/compression processors to network equipment customers
in the global market. In addition, the Company expects significant future
competition from major domestic and international semiconductor suppliers.
Several established electronics and semiconductor suppliers have recently
entered or indicated an intent to enter the network equipment market. The
Company may also face competition from suppliers of products based on new or
emerging technologies. Furthermore, many of the Company's existing and potential
 
                                       52
<PAGE>   58
 
customers internally develop ASICs, general purpose microprocessors and other
devices which attempt to perform all or a portion of the functions performed by
the Company's products.
 
     Many of Hi/fn's current and potential competitors have longer operating
histories, greater name recognition, access to larger customer bases and
significantly greater financial, technical, marketing and other resources than
the Company. As a result, they may be able to adapt more quickly to new or
emerging technologies and changes in customer requirements or to devote greater
resources to the promotion and sale of their products than the Company. In
particular, companies such as Texas Instruments, National Semiconductor, Lucent,
Intel and Motorola have proprietary semiconductor manufacturing ability,
preferred vendor status with many of the Company's customers, extensive
marketing power and name recognition, greater financial resources than the
Company and other significant advantages over the Company. In addition, current
and potential competitors may determine, for strategic reasons, to consolidate,
to lower the price of their products substantially or to bundle their products
with other products. Current and potential competitors have established or may
establish financial or strategic relationships among themselves or with existing
or potential customers, resellers or other third parties. Accordingly, it is
possible that new competitors or alliances among competitors could emerge and
rapidly acquire significant market share. There can be no assurance that the
Company will be able to compete successfully against current and future
competitors. Increased competition may result in price reductions, reduced gross
margins and loss of market share, any of which could materially adversely affect
the Company's business, financial condition and results of operations.
 
     The Company believes that important competitive factors in its markets are
performance, price, length of development cycle, design wins with major network
and storage equipment vendors, support for new network and storage standards,
features and functionality, adaptability of products to specific applications,
support of product differentiation, reliability, technical service and support
and protection of products by effective utilization of intellectual property
laws. The failure of the Company to successfully develop products that compete
successfully with those of other suppliers in the market would have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the Company must compete for the services of qualified
distributors and sales representatives. To the extent that the Company's
competitors offer such distributors or sales representatives more favorable
terms on a higher volume of business, such distributors or sales representatives
may decline to carry, or discontinue carrying, the Company's products. The
Company's business, financial condition and results of operations could be
adversely effected by any failure to maintain and expand its distribution
network. See "RISK FACTORS -- Intensely Competitive Markets."
 
RESEARCH AND DEVELOPMENT
 
     The Company's success will depend to a substantial degree upon its ability
to develop and introduce in a timely fashion new products and enhancements to
its existing products that meet changing customer requirements and emerging
industry standards. Hi/fn has made and plans to continue to make substantial
investments in research and development. Extensive product development input is
obtained from customers and through the Company's participation in industry
organizations and standards setting bodies such as the IETF.
 
     As of September 30, 1998, the Company's research and development staff
consisted of 26 employees. The Company's research and development expenditures
totaled $5.4 million during fiscal 1998 and $3.0 million in the fiscal year
ended September 30, 1997, representing 25.1% and 21.0% of revenues for such
periods, respectively. Research and development expenses primarily consist of
salaries and related costs of employees engaged in ongoing research, design and
development activities, costs of fabricating chip mask sets and subcontracting
costs. The Company performs its research and product development activities at
its facilities in San Jose, California and Carlsbad, California. The Company is
seeking to hire additional skilled development engineers.
 
     In April 1998, Hi/fn acquired a software implementation of the IPSec
protocol from CyLAN Technologies, Inc. As part of the acquisition, the Company
gained expertise in the development of software implementations of a wide range
of networking protocol functions, including IPSec and TCP/IP.
 
                                       53
<PAGE>   59
 
     The Company's future performance depends on a number of factors, including
its ability to identify emerging technological trends in its target markets,
develop and maintain competitive products, enhance its products by adding
innovative features that differentiate its products from those of its
competitors, bring products to market on a timely basis at competitive prices,
properly identify target markets and respond effectively to new technological
changes or new product announcements by others. In evaluating new product
decisions, the Company must anticipate well in advance the future demand for
product features and performance characteristics, as well as available
supporting technologies, manufacturing capacity, industry standards and
competitive product offerings. No assurance can be given that the Company's
design and introduction schedules for any additions and enhancements to its
existing and future products will be able to be sold at prices that are
favorable to the Company.
 
     The Company must also continue to make significant investments in research
and development in order to continue enhancing the performance and functionality
of its 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 inherently complex and
require long development cycles. Such innovations must be completed before
developments in networking technologies or standards render them obsolete and
must be sufficiently compelling to induce network and storage equipment vendors
to favor them over alternative technologies. Moreover, the Company must
generally incur substantial research and development costs before the technical
feasibility and commercial viability of a product line can be ascertained.
 
     There can be no assurance that revenues from future products or product
enhancements will be sufficient to recover the development costs associated with
such products or enhancements or that the Company will be able to secure the
financial resources necessary to fund future development. The failure to
successfully develop new products on a timely basis could have a material
adverse affect on the Company's business, financial condition and results of
operations. See "RISK FACTORS -- Frequent Product Introductions and Evolving
Industry Standards; Rapid Technological Change."
 
SALES, MARKETING & TECHNICAL SUPPORT
 
     The Company markets its products through a direct sales and marketing
organization, to be headquartered in Los Gatos, California following the
Distribution, with a sales office in Boston, and through independent contract
sales representatives in the United States, Europe, Japan and other areas. The
Company does not have any foreign operations and sales of its products to
foreign companies, other than product shipments to contract manufacturers of
domestic customers, have not been material. Sales representatives are selected
for their understanding of the marketplace and their ability to provide
effective field sales support for Hi/fn's products. The Company's relationships
with some of its sales representatives have been established within the last
year, and the Company is unable to predict the extent to which some of these
representatives will be successful in marketing and selling the Company's
products.
 
     Sales to U.S. customers account for the substantial majority of Hi/fn's
revenues. Due to the export controls imposed on encryption products by the U.S.
government, the Company's shipments to international customers are limited to
compression processors and compression software. The Company is actively working
with its network equipment customers and the National Security Agency to comply
with U.S. export controls to facilitate the export of the Company's customer's
products which incorporate the Company's encryption products. There can be no
assurance that the Company will be successful in these efforts and that
competitors outside of the U.S. will not develop encryption products to meet the
needs of the Company's customers, thereby reducing the opportunity for the
Company to sell its products.
 
     The Company has a number of marketing programs designed to inform network
and storage equipment vendors about the capabilities and benefits of the
Company's products. The Company's marketing efforts include participation in
industry trade shows, technical conferences, preparation of competitive
analyses, sales training, publication of technical and educational articles in
industry journals, maintenance of Hi/fn's world wide web site, advertising and
direct mail distribution of Company literature.
 
                                       54
<PAGE>   60
 
     Technical support to customers is provided through field and factory
applications engineers and, if necessary, product designers. Local field support
is provided in person or by telephone. The Company believes that providing
customers with comprehensive product service and support is critical to
maintaining a competitive position in the market and is critical to shortening
the time required to design in the Company's products. The Company works with
its customers to monitor the performance of its product designs and to provide
support at each stage of customer product development.
 
MANUFACTURING
 
     Currently, Hi/fn subcontracts all of its semiconductor manufacturing on a
turnkey basis, with the Company's suppliers delivering fully assembled and
tested products based on the Company's proprietary designs. The use of the
fabless model allows the Company to focus substantially all of its resources on
determining customer requirements and on the design and development and support
of its products. This model allows the Company to have significantly reduced
capital requirements.
 
     The Company subcontracts its semiconductor manufacturing to Toshiba
Corporation, Atmel Corporation, and Motorola. The selection of these
manufacturers was based on the breadth of available technology, quality,
manufacturing capacity and support for design tools used by the Company. None of
the Company's products is currently manufactured by more than one supplier.
However, the Company expects that in the event one of the Company's suppliers
notifies the Company that it intends to cease manufacturing a product, the
Company will have an adequate opportunity to order sufficient quantities of the
effected products so that shipments to customers will not be adversely affected
while the Company qualifies a new manufacturer.
 
     At any given time, Hi/fn uses mainstream processes for the manufacture of
its products, avoiding dependence on the latest process technology available.
This approach reduces the Company's technical risks and avoids the risks related
to production capacity constraints typically associated with leading edge
semiconductor processes. This approach allows the Company to focus on providing
differentiated functionality, the primary value-added in the Company's products.
The Company's current main products are manufactured using a .5 micron CMOS
process. Products under development are being designed for .35 micron CMOS
processes. The Company believes that transitioning its products to increasingly
smaller semiconductor geometries will be important for the Company to remain
competitive. No assurance can be given that future process migration will be
achieved without difficulty.
 
     Hi/fn intends to continue for the foreseeable future to rely on its
subcontract manufacturers and their subcontractors for substantially all of its
manufacturing, assembly and testing requirements. All of the Company's
subcontract manufacturers produce products for other companies. The Company does
not have long-term manufacturing agreements with any of its subcontract
manufacturers. The Company's subcontract manufacturers are not obligated to
supply products to the Company for any specific period, in any specific quantity
or at any specific price, except as may be provided in a particular purchase
order that has been accepted by one of its subcontract manufacturers.
 
     The Company must place orders approximately 12 to 14 weeks in advance of
expected delivery. As a result, the Company has only a limited ability to react
to fluctuations in demand for its products, which could cause the Company to
have an excess or a shortage of inventory of a particular product. Failure of
worldwide semiconductor manufacturing capacity to rise along with a rise in
demand could result in the Company's subcontract manufacturers to allocate
available capacity to customers that are larger or have long-term supply
contracts in place. The inability of the Company to obtain adequate foundry
capacity at acceptable prices, or any delay or interruption in supply, could
reduce the Company's product revenues or increase the Company's cost of revenues
and could have a material adverse effect on the Company's business, financial
condition and results of operations. See "RISK FACTORS -- Risks Associated with
Independent Manufacturers and Sole-Source Supply."
 
EMPLOYEES
 
     As of September 30, 1998, Hi/fn employed a total of 56 full-time employees
and 3 part-time contractors. Of the total number of employees, 26 were employed
in research and development, 19 in sales and marketing,
                                       55
<PAGE>   61
 
6 in operations and 5 in finance and administration. The Company's employees are
not represented by any collective bargaining agreement and the Company has never
experienced a work stoppage. The Company believes its employee relations are
good.
 
     The Company's future success is heavily dependent upon its ability to hire
and retain qualified technical, marketing, sales and management personnel. The
competition for such personnel is intense, particularly for engineering
personnel with related security, networking and integrated circuit design
expertise and for applications support personnel with networking product design
expertise. See "RISK FACTORS -- Dependence on Key Personnel and Hiring of
Additional Personnel."
 
FACILITIES
 
     The Company's corporate and technical headquarters are currently located in
Los Gatos, California. The Company leases approximately 27,000 square feet of
space in Los Gatos, California pursuant to a seven-year lease which expires in
August 2005. Stac has guaranteed Hi/fn's obligations under its headquarters
lease. Under the Distribution Agreement, Hi/fn has agreed to obtain and deliver
to its landlord a $2.0 million letter of credit to replace Stac's guaranty. The
guaranty provides that it will terminate when Stac no longer owns a majority
interest in Hi/fn and when Hi/fn provides the landlord with such a letter of
credit. The Distribution is conditioned on delivery of the letter of credit. The
Company also leases two other facilities, a satellite design center in Carlsbad,
California and a small field sales office in Westborough, Massachusetts. These
facilities occupy an aggregate of approximately 7,000 square feet.
 
LEGAL PROCEEDINGS
 
     The Company is not a party to any material legal proceedings.
 
                                       56
<PAGE>   62
 
                                   MANAGEMENT
 
BOARD OF DIRECTORS
 
   
     The Company Board currently is comprised of five directors: Raymond J.
Farnham, Robert W. Johnson, Taher Elgamal, Albert E. Sisto and Douglas L.
Whiting. The Company Certificate provides for the Company Board to be divided
into three classes of directors, with each class as nearly equal in number as
possible, serving staggered three-year terms. As a result, approximately,
one-third of the Company Board will be elected each year. The Director in Class
I is Raymond J. Farnham, whose term will expire at the 2000 Annual Meeting of
Stockholders. The directors in Class II are Robert W. Johnson and Taher Elgamal,
whose terms expire at the 2001 Annual Meeting of Stockholders. The directors in
Class III are Douglas L. Whiting and Albert E. Sisto, whose terms will expire at
the 2002 Annual Meeting of Stockholders.
    
 
     The table below indicates the name, position with the Company and age of
each director of the Company.
 
   
<TABLE>
<CAPTION>
          NAME                      POSITION WITH HI/FN             AGE
          ----                      -------------------             ---
<S>                        <C>                                      <C>
Raymond J. Farnham.......  Chairman and Chief Executive Officer     51
Douglas L. Whiting,
  Ph.D...................  Chief Technology Officer and Director    42
Robert W. Johnson,
  Ph.D...................  Director                                 48
Taher Elgamal............  Director                                 43
Albert E. Sisto..........  Director                                 49
</TABLE>
    
 
     Raymond J. Farnham has served as Chairman and Chief Executive Officer of
the Company since October 1998. From 1996 through 1998, he served as Executive
Vice President of Integrated Device Technology, Inc., a supplier of
microprocessor, logic and memory integrated circuits to communication and
computer customers worldwide. Mr. Farnham was President and Chief Executive
Officer of OPTi, a fabless semiconductor company, from 1994 through 1995. From
1972 through 1993, he had numerous management responsibilities at National
Semiconductor Corp., with his final position being President of the
Communication and Computing Group from 1991 through 1993. He received his B.S.
in Electrical Engineering from Pennsylvania State University.
 
   
     Douglas L. Whiting, Ph.D. has served as Chief Technology Officer since
October 1997 and as a director of the Company since November 1996. He also has
served as Vice President of Technology of Stac since 1985 and has served as a
director of Stac since 1983. He was President of Stac from 1984 to 1986. Dr.
Whiting received a Ph.D. in Computer Science from the California Institute of
Technology.
    
 
     Robert W. Johnson, Ph.D. has been a private investor since July 1988. From
1983 to July 1988, he was first a principal and subsequently a general partner
of Southern California Ventures, a private venture capital firm. He is a
director of Proxima Corporation and ViaSat, Inc., both publicly held technology
companies. Dr. Johnson holds undergraduate and graduate degrees from Stanford
University and Harvard University.
 
   
     Taher Elgamal, Ph.D. has served as a director of the Company since December
1998. He is the founder and Chairman of Securify, a private company providing
assessments of companies' Internet security efforts. He has served as Chairman
of Securify since March 1998. From 1995 to 1998, Dr. Elgamal held the position
of Chief Scientist of Netscape Communications Corp., a provider of Internet
software and services, where he pioneered Internet security technologies such as
SSL, the standard for web security. From 1991 to 1993, he served as Director of
Engineering at RSA Data Security, Inc., a subsidiary of Security Dynamics, where
he produced the RSA cryptographic toolkits, the industry standards for
developers of security-enabled applications and systems. Dr. Elgamal received a
Ph.D. from Stanford University.
    
 
   
     Albert E. Sisto has served as a director of the Company since December
1998. Since November, 1997, he has been Chief Operating Officer of RSA Data
Security, a provider of encryption technology and a subsidiary of Security
Dynamics. From September 1994 to October 1997, Mr. Sisto was Chairman, President
and CEO of Documagix, a software developer of document imaging software. Mr.
Sisto is a director of Jetfax, Inc., Insignia Solutions plc and Tekgraf, Inc.,
all publicly traded technology companies, and also is a director of nCiphor and
Trintech Group Ltd. Mr. Sisto holds a B.E. degree from the Stevens Institute of
Technology.
    
 
                                       57
<PAGE>   63
 
COMMITTEES OF THE BOARD OF DIRECTORS
 
   
     AUDIT COMMITTEE. The Company has an Audit Committee comprised of Messrs.
Johnson and Sisto. The Audit Committee will review the annual audits of the
Company's independent public accountants, review and evaluate internal
accounting controls, recommend the selection of the Company's independent public
accountants, review and pass upon (or ratify) related party transactions, and
conduct such reviews and examinations as it deems necessary with respect to the
practices and policies of, and the relationship between, the Company and its
independent public accountants.
    
 
   
     COMPENSATION COMMITTEE. The Company has a Compensation Committee comprised
of Messrs. Sisto and Elgamal. The Compensation Committee will review salaries,
bonuses and stock options of senior officers of the Company, and administer the
Company's executive compensation policies and stock option plans.
    
 
COMPENSATION OF THE BOARD OF DIRECTORS
 
     Each non-employee director of the Company will receive $4,000 per year for
serving on the Company Board and an additional $1,000 for each meeting attended
(other than committee meetings). An additional $500 will be paid to any
non-employee director who serves on the Compensation Committee or the Audit
Committee. Each director is eligible to receive stock options pursuant to the
1996 Plan. See "-- Hi/fn Equity Plans; 1996 Equity Incentive Plan." Directors
also will receive reimbursement for travel expenses incurred in connection with
their duties as directors.
 
EXECUTIVE OFFICERS
 
     Set forth below are the names, positions and ages of the individuals who
will become executive officers of the Company upon consummation of the
Distribution:
 
   
<TABLE>
<CAPTION>
               NAME                          POSITION WITH HI/FN              AGE
               ----                          -------------------              ---
<S>                                 <C>                                       <C>
Raymond J. Farnham................  Chairman and Chief Executive Officer      51
William R. Walker.................  Vice President of Finance, Chief          57
                                    Financial Officer and Corporate
                                    Secretary
Stephen A. Farnow, Ph.D...........  Vice President of Operations              49
Robert C. Harrah..................  Vice President of Sales                   53
Robert A. Monsour.................  Vice President of Marketing               43
Douglas L. Whiting, Ph.D..........  Chief Technology Officer and Director     42
</TABLE>
    
 
     Raymond J. Farnham has served as Chairman and Chief Executive Officer of
the Company since October 1998. From 1996 through 1998, he served as Executive
Vice President of Integrated Device Technology, Inc., a supplier of
microprocessor, logic and memory integrated circuits to communication and
computer customers worldwide. Mr. Farnham was President and Chief Executive
Officer of OPTi, a fabless semiconductor company from 1994 through 1995. From
1972 through 1993, he had numerous management responsibilities at National
Semiconductor Corp., with his final position being President of the
Communication and Computing Group from 1991 through 1993. He received his B.S.
in Electrical Engineering from Pennsylvania State University.
 
     William R. Walker has served as Vice President and Chief Financial Officer
of the Company since November 1997. He was the Company's Acting Chief Executive
Officer and Acting President from July 1998 through October 1998. From 1996 to
1997, Mr. Walker was Vice President, Chief Financial Officer and Secretary at
MMC Networks, Inc., a networking company. From 1984 to 1996, Mr. Walker held the
position of Senior Vice President and Chief Financial Officer at Zilog, Inc., a
semiconductor supplier. Mr. Walker has a B.S. in Economics from University of
Wisconsin and an M.B.A. from University of Maryland, and he is a certified
public accountant.
 
     Stephen A. Farnow, Ph.D. has served as Vice President of Operations at the
Company since 1996. From 1990 through 1996, he worked as an independent
consultant in the area of general management with an
 
                                       58
<PAGE>   64
 
emphasis on setting up or re-engineering operations functions. From 1986 through
1990, he was Vice President of Operations at Weitek Corp., a semiconductor
supplier. He received a B.S. in Physics from UCLA and Ph.D. from Stanford
University.
 
   
     Robert C. Harrah has served as Vice President of Sales of the Company since
December 1998. During the second half of 1998, Mr. Harrah was Vice President of
Sales at Oki Semiconductor. From 1995 to 1998, Mr. Harrah served as Vice
President of Worldwide Sales for the Peripheral Technology Solutions Group at
Adaptec, Inc. From 1988 to 1995, Mr. Harrah held marketing management and sales
management positions at Symbios Inc. Mr. Harrah received his B.S. degree from
Notre Dame in Belmont, California and his M.P.A. from Golden Gate University in
San Francisco, California.
    
 
     Robert A. Monsour has served as Vice President of Marketing of the Company
since August 1997. He also served as Vice President of Sales from August 1997
through April 1998. From 1996 to 1997, he worked as an independent consultant in
the area of high-technology marketing. From 1993 to 1996, Mr. Monsour, a co-
founder of Stac, held the position of Vice President of Business Development
there. He was also Vice President of Product Development from 1990 to 1993. From
1988 to 1990 he was Vice President of Marketing at Stac. Mr. Monsour has a
B.A.S. and M.A.S. in Computer Systems from Florida Atlantic University and holds
an M.B.A. from UCLA.
 
     Douglas L. Whiting, Ph.D. has served as Chief Technology Officer of the
Company since October 1997 and as a director of the Company since November 1996.
He also has served as Vice President of Technology of Stac since 1985 and has
served as a director of Stac since 1983. He was President of Stac from 1984 to
1986. Dr. Whiting received a Ph.D. in Computer Science from the California
Institute of Technology.
 
EXECUTIVE COMPENSATION
 
     The following table sets forth certain information concerning compensation
for the fiscal year ended September 30, 1998 and 1997 received by the Chief
Executive Officer and the four other most highly compensated executive officers
at September 30, 1998 (the "Named Executive Officers").
 
                           SUMMARY COMPENSATION TABLE
 
   
<TABLE>
<CAPTION>
                                                                                     LONG-TERM
                                                 ANNUAL COMPENSATION            COMPENSATION AWARDS
                                           -------------------------------    ------------------------
                                                                                            NUMBER OF
                                                                              RESTRICTED    SECURITIES
                                           FISCAL                               STOCK       UNDERLYING
       NAME AND PRINCIPAL POSITION          YEAR     SALARY($)    BONUS($)    AWARDS($)     OPTIONS(#)
       ---------------------------         ------    ---------    --------    ----------    ----------
<S>                                        <C>       <C>          <C>         <C>           <C>
Arthur J. Collmeyer(1)...................   1998      133,382      33,384          0               0
  Former President and Chief Executive      1997      150,000      30,000          0         300,000
     Officer
Stephen A. Farnow,.......................   1998      132,853      27,183          0               0
  Vice President of Operations              1997      100,000      12,600          0          72,000
William R. Walker(2).....................   1998      128,333      17,850          0         100,000
  Vice President of Finance, Chief          1997            0           0          0               0
  Financial Officer and Corporate
     Secretary
Douglas L. Whiting.......................   1998      140,000      25,918          0               0
  Chief Technology Officer and Director     1997            0           0          0               0
Robert A. Monsour(3).....................   1998      154,808      69,334          0               0
  Vice President of Marketing               1997       17,885       2,910          0          97,500
</TABLE>
    
 
- ---------------
(1) Mr. Collmeyer served as President and Chief Executive Officer of the Company
    until July 2, 1998.
 
(2) Mr. Walker joined the Company in November 1997 at an annual salary rate of
    $140,000.
 
(3) Mr. Monsour's 1998 bonus includes $50,000 for reimbursement of relocation
    expenses.
 
                                       59
<PAGE>   65
 
                           STOCK OPTION GRANTS TABLE
 
     The following table sets forth certain information with respect to options
to purchase Company Common Stock granted during the year ended September 30,
1998 to each of the Named Executive Officers. The Company does not have any
outstanding stock appreciation rights.
 
   
<TABLE>
<CAPTION>
                                                                                       POTENTIAL REALIZABLE
                                                                                         VALUE AT ASSUMED
                         NUMBER OF         % OF                                        ANNUAL RATES OF STOCK
                         SECURITIES   TOTAL OPTIONS                                   PRICE APPRECIATION FOR
                         UNDERLYING     GRANTED TO      EXERCISE OR                       OPTION TERM(1)
                          OPTIONS      EMPLOYEES IN    BASE PRICE PER   EXPIRATION    -----------------------
         NAME            GRANTED(#)   FISCAL YEAR(%)    SHARE($/SH)        DATE           5%          10%
         ----            ----------   --------------   --------------   ----------    ----------   ----------
<S>                      <C>          <C>              <C>              <C>           <C>          <C>
William R. Walker......   100,000          25.8%           $2.00         11/03/07      $125,780     $318,740
</TABLE>
    
 
- ---------------
(1) The potential realizable values are based on an assumption that the stock
    price of the Company Common Stock will appreciate at the annual rate shown
    (compounded annually) from the date of grant until the end of the option
    term. These values do not take into account amounts required to be paid as
    income taxes under the Code and any applicable state laws or option
    provisions providing for termination of an option following termination of
    employment, non-transferability or vesting. These amounts are calculated
    based on the requirements promulgated by the Commission and do not reflect
    the Company's estimate of future stock price growth of the shares of the
    Company Common Stock.
 
            OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUE TABLE
 
     The following table sets forth certain information with respect to the
exercise of options to purchase Company Common Stock during the year ended
September 30, 1998, and the unexercised options held and the value thereof at
that date, for each of the Named Executive Officers.
 
   
<TABLE>
<CAPTION>
                                                           NUMBER OF SHARES UNDERLYING               VALUE OF UNEXERCISED
                                                           UNEXERCISED OPTIONS HELD AT              IN-THE-MONEY OPTIONS AT
                          SHARES                                SEPTEMBER 30, 1998                   SEPTEMBER 30, 1998(1)
                        ACQUIRED ON       VALUE        ------------------------------------   -----------------------------------
         NAME           EXERCISE(#)   REALIZED($)(2)   EXERCISEABLE(#)    UNEXERCISEABLE(#)   EXERCISEABLE($)   UNEXERCISEABLE($)
         ----           -----------   --------------   ----------------   -----------------   ---------------   -----------------
<S>                     <C>           <C>              <C>                <C>                 <C>               <C>
Arthur J. Collmeyer...         0            0                 0                     0                0                     0
Stephen A. Farnow.....         0            0                 0                36,000                0                86,400
William R. Walker.....    50,000            0                 0                50,000                0                50,000
Douglas L. Whiting....         0            0                 0                     0                0                     0
Robert A. Monsour.....    56,250            0                 0                48,750                0               117,000
</TABLE>
    
 
- ---------------
 
(1) Calculated by determining the difference between the fair market value of
    the securities underlying the options at September 30, 1998 ($3.00 per share
    as determined by the Company Board) and the exercise price of the options.
 
(2) Mr. Walker and Mr. Monsour exercised options pursuant to an early-exercise
    feature at an exercise price equal to fair market value.
 
HI/FN EQUITY PLANS
 
  1996 Equity Incentive Plan
 
   
     The Company's Amended and Restated 1996 Equity Incentive Plan (the "1996
Plan") was adopted by the Company Board and approved by Stac as the sole
stockholder in November 1996. The 1996 Plan was recently amended by the Company
Board to, among other things, increase the number of Company Common Stock shares
reserved for issuance pursuant to the 1996 Plan to 3,049,900. As of December 4,
1998, 501,375 shares had been issued upon exercise of stock options granted
under the 1996 Plan, 1,329,988 shares were subject to options granted under the
1996 Plan and 1,218,537 shares were available for future grants. Mr. Whiting
will receive options to purchase 71,509 shares of Company Common Stock under the
1996 Plan as an adjustment to options to purchase Stac Common Stock that he
currently holds. See "RELATIONSHIP BETWEEN HI/FN AND STAC AFTER THE
DISTRIBUTION -- Employee Benefits Allocation Agreement." Unless terminated
sooner, the 1996 Plan will terminate automatically in November 2006.
    
 
                                       60
<PAGE>   66
 
     The 1996 Plan provides for the grant of (i) incentive stock options, within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended
("Section 422"), to employees of the Company, (ii) nonstatutory stock options,
(iii) stock bonuses, (iv) stock purchase rights ("SPRs"), and (v) stock
appreciation rights (collectively, "Stock Awards") to employees, directors and
consultants of the Company, provided that incentive stock options and stock
appreciation rights appurtenant thereto may be granted to employees of the
Company. Unless terminated sooner, the 1996 Plan will terminate automatically in
November 2006.
 
     The 1996 Plan may be administered by the Company Board or a committee of
the Company Board (as applicable, the "Administrator"). The Administrator has
the power to determine the terms of Stock Awards granted, including the exercise
price, the number of shares subject to each Stock Award, the exercisability
thereof, and the form of consideration payable upon such exercise. In addition,
the Administrator has the authority to amend, suspend or terminate the 1996
Plan, provided that no such action may affect any share of Company Common Stock
previously issued and sold or any Stock Award previously granted under the 1996
Plan.
 
     In the case of options, the exercise price of all incentive stock options
granted under the 1996 Plan must be at least equal to the fair market value of
the Company Common Stock on the date of grant and the term of such incentive
stock option must not exceed ten years. The exercise price of nonstatutory stock
options granted under the 1996 Plan is determined by the Administrator. With
respect to any participant who owns stock possessing more than 10% of the voting
power of all classes of the Company's outstanding capital stock, the exercise
price of any incentive stock option granted must be at least equal 110% of the
fair market value on the grant date and the term of such incentive stock option
must not exceed five years. The term of all other options granted under the 1996
Plan shall be stated in the option agreement. Options granted under the 1996
Plan must generally be exercised within three months after the end of optionee's
continuous status as an employee, or consultant of the Company, or within 12
months after such optionee's termination by disability, or within 18 months
after such optionee's termination by death, but in no event later than the
expiration of the option's term. The Administrator may include a re-load option
as part of any option agreement. The reload option shall be for the number of
shares surrendered as part of an exercise price of the option, shall have an
expiration date which is the same as the expiration date of the original option,
and shall have an exercise price on the date of exercise of the original option
as set forth above.
 
     The 1996 Plan provides that each non-employee director shall automatically
be granted a nonstatutory stock option to purchase 10,000 shares of Company
Common Stock (the "First Option") on the date that such person first becomes a
non-employee director. In addition to the First Option, each non-employee
director shall automatically be granted an option to purchase 2,000 shares (a
"Subsequent Option") on the date of the Company's annual meeting of stockholders
if on such date he or she has served on the Board for at least six months. Each
First Option and Subsequent Option shall have a term of 10 years. The shares
subject to the First Option shall vest as to 20% of the optioned stock one year
from the date of grant, and 1/60 of the optioned stock shall vest each month
thereafter, provided the person continues to serve as a director on such dates.
The shares subject to the Subsequent Option shall vest as to 100% of the
optioned stock on the one-year anniversary of the date of grant thereafter,
provided the person continues to serve as a director on such date. The exercise
price of each First Option and each Subsequent Option shall be 100% of the fair
market value per share of the Common Stock.
 
     In the case of stock bonuses and SPRs, the Administrator may provide that
the Company be granted a repurchase option exercisable upon the voluntary or
involuntary termination of the purchaser's employment or consulting relationship
with the Company for any reason (including death or disability). The purchase
price for shares repurchased pursuant to the repurchase option shall be
determined by the Administrator. The repurchase option shall lapse at a rate
determined by the Administrator.
 
     The 1996 Plan authorizes three types of stock appreciation rights: tandem
stock appreciation rights, concurrent stock appreciation rights and independent
stock appreciation rights. The Administrator has the sole discretion and
authority to grant stock appreciation rights. Tandem stock appreciation rights
are granted appurtenant to an option and require the holder to elect between the
exercise of the option or the stock
 
                                       61
<PAGE>   67
 
appreciation right. The appreciation of the tandem stock purchase right is
payable in cash (or, if provided for in the agreement, in shares) in an amount
not to exceed the fair market value on the date the option is surrendered over
the aggregate exercise price payable. Concurrent stock appreciation rights are
granted appurtenant to an option and are exercised automatically upon exercise
of the option. The appreciation of the concurrent stock appreciation right is
payable in cash (or, if provided for in the agreement, in shares) in an amount
equal aggregate fair market value on the date of exercise of the option over the
aggregate exercise price paid for the shares. Independent Stock Appreciation
Rights are denominated in share equivalents. The appreciation of the independent
stock appreciation right is payable in cash (or, if provided for in the
agreement, in shares) in an amount not to exceed the fair market value on the
date the stock appreciation right is surrendered over the fair market value on
the date the stock appreciation right is granted.
 
     Stock Awards granted under the 1996 Plan are generally not transferable by
the optionee, and each Stock Award is exercisable during the lifetime of the
optionee only by such optionee. The 1996 Plan also provides that in the event of
a merger of the Company with or into another corporation, or a sale of
substantially all of the Company's assets, each Stock Award shall be assumed or
an equivalent award substituted for by the successor corporation. If the
outstanding Stock Awards are not assumed or substituted for by the successor
corporation, the Stock Award shall terminate.
 
  1998 Employee Stock Purchase Plan
 
     The Company's 1998 Employee Stock Purchase Plan (the "1998 Purchase Plan")
is expected to be adopted by the Company Board and approved by the Company's
stockholders in October 1998. A total of 400,000 shares of Company Common Stock
have been reserved for issuance under the 1998 Purchase Plan. As of the date of
this Information Statement, no shares have been issued under the 1998 Purchase
Plan.
 
     The 1998 Purchase Plan, which is intended to qualify under Section 423 of
the Code, provides for successive six-month offering periods. The offering
periods generally start on the first trading day on or after May 1 and November
1 of each year, except for the first such offering period which commences on the
first day of regular way trading of Company Common Stock on the Nasdaq National
Market and ends on the last trading day on or before April 30, 1999.
 
     Employees are eligible to participate if they are customarily employed by
the Company or any participating subsidiary for at least 20 hours per week and
more than five months in any calendar year. However, any employee who (i)
immediately after grant owns stock possessing 5% or more of the total combined
voting power or value of all classes of the capital stock of the Company or (ii)
whose right to purchase stock under all employee stock purchase plans of the
Company accrues at a rate that exceeds $25,000 worth of stock for each calendar
year may be not be granted an option to purchase stock under the 1998 Purchase
Plan. The 1998 Purchase Plan permits participants to purchase Company Common
Stock through payroll deductions of up to 15% of the participant's
"compensation." Compensation is defined as the participant's base straight time
gross earnings and commissions, but exclusive of payments for overtime, bonuses,
shift premium, incentive compensation or any other compensation. The maximum
number of shares a participant may purchase during a single offering period is
5,000 shares.
 
     Amounts deducted and accumulated by the participant are used to purchase
shares of Company Common Stock at the end of each offering period. The price of
stock purchased under the 1998 Purchase Plan is 85% of the lower of the fair
market value of the Company Common Stock at the beginning or end of the offering
period. Participants may end their participation at any time during an offering
period, and they will be paid their payroll deductions to date. Participation
ends automatically upon termination of employment with the Company.
 
     Rights granted under the 1998 Purchase Plan are not transferable by a
participant other than by will, the laws of descent and distribution, or as
otherwise provided under the 1998 Purchase Plan. The 1998 Purchase Plan provides
that, in the event of a merger of the Company with or into another corporation
or a sale of substantially all of the Company's assets, each outstanding option
may be assumed or substituted for by the successor corporation. If the successor
corporation refuses to assume or substitute for the outstanding options, the
offering period then in progress will be shortened and a new exercise date will
be set.
                                       62
<PAGE>   68
 
     The Company Board may at any time and for any reason amend or terminate the
1998 Purchase Plan. With certain limited exceptions, no such action may
adversely affect any outstanding rights to purchase stock under the 1998
Purchase Plan, provided that the Company Board may terminate an offering period
on any exercise date if the Company Board determines that the termination of the
1998 Purchase Plan is in the best interests of the Company and its stockholders.
Notwithstanding anything to the contrary, the Company Board may in its sole
discretion amend the 1998 Purchase Plan to the extent necessary and desirable to
avoid unfavorable financial accounting consequences by altering the purchase
price for any offering period, shortening any offering period or allocating
remaining shares among the participants. The 1998 Purchase Plan will terminate
in August 2008 unless sooner terminated by the Company.
 
INDEMNIFICATION AGREEMENTS
 
     The Company has entered, or will enter, into indemnification agreements
with its directors and executive officers (each, an "Indemnified Person") prior
to the Distribution. An Indemnified Person is specifically indemnified and held
harmless under such agreements for costs and expenses, including without
limitation, damages, judgments, amounts paid in settlement, reasonable costs of
investigation, reasonable attorneys' fees, costs of investigative, judicial or
administrative proceedings or appeals, costs or attachment of similar bonds,
fines, penalties, and excise taxes assessed with respect to employee benefit
plans actually and reasonably incurred in connection with a threatened, pending
or completed claim, action, suit or proceeding by reason of the fact that (i) he
is or was a director, officer, employee and/or agent of the Company, or (ii) he
is or was serving as a director, officer, employee, trustee and/or agent of
another corporation or entity at the request of the Company. To qualify for
indemnification, the claim must not be (i) based solely upon an Indemnified
Person's gaining in fact any personal profit or advantage to which he was not
legally entitled, (ii) an accounting for profits made from the purchase or sale
of securities pursuant to Section 16(b) of the Exchange Act or (iii) based
solely upon knowingly fraudulent, deliberately dishonest, or willful misconduct
on the part of the Indemnified Person. The Company will indemnify the
Indemnified Person to the extent that (i) the Indemnified Person gives the
Company prompt written notice of any claim, (ii) the Indemnified Person has not
already received payment pursuant to collectible insurance policies and (iii)
indemnification is not unlawful.
 
     Under such indemnification agreements, the Company will advance costs and
expenses incurred by the Indemnified Person in advance of the final disposition
of an action, suit or proceeding if he undertakes to repay amounts advanced if
it is ultimately determined by a court of competent jurisdiction that he is not
entitled to be indemnified by the Company. The Company will advance costs and
expenses related to defending or investigating an action, suit or proceeding
unless a determination is made that (i) the Indemnified Person did not act in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Company, (ii) the Indemnified Person intentionally
breached his duty to the Company or its stockholders or (iii) with respect to
any criminal action or proceeding, the Indemnified Person had reasonable cause
to believe his conduct was unlawful. Such determination will be made by a
majority vote of a quorum of the Company Board consisting of directors not a
party to the suit, action or proceeding, by a written opinion of independent
legal counsel, by the stockholders or by a final, nonappealable adjudication in
a court of competent jurisdiction. If the Company advances costs and expenses of
any action, suit or proceeding, the Company reserves the right to assume the
defense of such action, suit or proceeding upon written notice to the
Indemnified Person of its intention to do so. After delivery of such notice, the
Company shall not be liable for any costs or expenses incurred by the
Indemnified Person in retaining separate counsel unless (i) the employment of
separate counsel was previously authorized by the Company, (ii) the Indemnified
Person reasonably concludes that joint representation would entail a conflict of
interest or (iii) the Company shall not, in fact, have employed counsel to
assume the defense of such action, suit or proceeding. The indemnification
provisions and provisions for advancing expenses in such agreements are
expressly not exclusive of any other rights of indemnification or advancement of
expenses pursuant to the Delaware General Corporation Law (the "DGCL"), the
Company Certificate or the Company Bylaws.
 
                                       63
<PAGE>   69
 
CHANGE OF CONTROL ARRANGEMENTS
 
   
     Prior to the Distribution, the Company will enter into a Change of Control
Agreement with each of Raymond J. Farnham, the Company's Chairman and Chief
Executive Officer, William R. Walker, the Company's Vice President of Finance
and Chief Financial Officer, Stephen A. Farnow, the Company's Vice President of
Operations, Robert A. Monsour, the Company's Vice President of Marketing and
Mark Birman, the Company's Director of IC Design. Pursuant to each such
agreement, if, within 12 months following a change of control, the executive
officer is (i) terminated by the Company or successor Company, other than for
acts of dishonesty, conviction of a felony or willful misconduct, or (ii)
constructively terminated as a result of a material dimunition in salary, a
material change in responsibility or a change in work location of more than 30
miles from the then current job location (each an "Involuntary Termination"),
then he receives accelerated vesting (and/or a lapse of the Company's repurchase
option) with respect to 50% of the unvested options (and/or stock purchase
rights) held at the time of the Involuntary Termination; provided, however, that
the Company's agreement with Mr. Farnham provides that he will receive
accelerated vesting with respect to 100% of the unvested options held by him at
the time of Involuntary Termination. For purposes of each such agreement, a
change of control is defined as: (i) the consummation of a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent more than 50% of
the total voting power represented by the voting securities of the surviving
entity outstanding immediately after such merger or consolidation; (ii) the
consummation of a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company of all or substantially all of the
Company's assets; or (iii) any "person" (as such term is used in Sections 13(d)
and 14(d) of the Exchange Act) becoming the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the
Company representing 25% or more of the total voting power represented by the
Company's then outstanding securities.
    
 
   
     Prior to the Distribution, the Company will enter into a Change of Control
Agreement with each of its directors other than Mr. Farnham pursuant to which,
upon a change of control of the Company, such directors will receive accelerated
vesting (and/or a lapse of the Company's repurchase option) with respect to all
unvested options, warrants or rights to purchase shares of the Company's Common
Stock held at the time of such change of a control. For purposes of each such
agreement, a change of control is defined as: (i) the consummation of a merger
or consolidation of the Company with any other corporation, other than a merger
or consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent more than 50% of
the total voting power represented by the voting securities of the surviving
entity outstanding immediately after such merger or consolidation; (ii) the
consummation of a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company of all or substantially all of the
Company's assets; or (iii) any "person" (as such term is used in Sections 13(d)
and 14(d) of the Exchange Act) becoming the "beneficial owner" (as defined in
Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the
Company representing 25% or more of the total voting power represented by the
Company's then outstanding securities.
    
 
                 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
TRANSACTIONS WITH STAC
 
     Stac incorporated Hi/fn as a wholly owned subsidiary of Stac on August 14,
1996. On November 21, 1996, Stac transferred its semiconductor business (along
with the associated technology, assets and liabilities) to the Company pursuant
to an Assignment, Assumption and License Agreement (the "Assignment Agreement")
in exchange for 6,000,000 shares of Series A Preferred Stock and 100 shares of
Company Common Stock issued by the Company to Stac pursuant to a Stock Purchase
Agreement.
 
     The assets transferred to the Company pursuant to the Assignment Agreement
included, without limitation, $1,000,000 of available cash, the accounts
receivable and inventory of the semiconductor business, Stac's rights under
certain sales and license agreements, and the fixed assets, trademarks, patents
and
 
                                       64
<PAGE>   70
 
proprietary technology specified on schedules attached to the Assignment
Agreement. The Assignment Agreement also provided for the assignment by Stac and
the assumption by the Company of the accounts payable relating to the
semiconductor business, the obligations under the sales and license agreements
assigned to the Company, and current and unpaid payroll and related benefits
expenses related to former employees of Stac who became employees of the
Company.
 
     At the time of the transfer of the semiconductor business to the Company,
Stac and the Company also entered into a Cross License Agreement pursuant to
which the Company granted Stac a limited, worldwide, perpetual, non-exclusive,
non-transferable, royalty-free license to the patents previously transferred by
Stac to the Company pursuant to the Assignment Agreement. The Cross License
Agreement permits Stac, among other things, to use, modify, create derivative
works, reproduce, license and sublicense the technology to end users of Stac's
products that incorporate the technology licensed to Stac by the Company. Stac,
however, may not create hardware implementations of the technology subject to
the Cross License Agreement or license or sell any of the software subject to
the Cross License Agreement as a stand-alone product for a period of ten years
after the date of the Cross License Agreement. Under the Cross License
Agreement, Stac also sublicensed or assigned to the Company certain third-party
licenses held by Stac. The parties further agreed that for a ten year period (i)
Stac would transfer ownership to the Company of any derivative works created by
Stac from the licensed technology and (ii) the Company would transfer ownership
to Stac of all future commercial releases of software implementations of the
licensed technology developed by the Company.
 
     Prior to the Distribution Date, the Company and Stac will enter into a
Distribution Agreement, Employee Benefits Allocation Agreement, Tax Sharing
Agreement and Transitional Services Agreement, which provide for, among other
things, the Distribution and certain other agreements governing the relationship
between the Company and Stac following the Distribution.
 
     Subject to certain exceptions, the Distribution Agreement provides for,
among other things, assumptions of liabilities and cross-indemnities designed to
allocate to the Company, effective as of the Distribution Date, financial
responsibility for the liabilities arising out of or in connection with the
Company's business. Stac has guaranteed Hi/fn's obligations under its
headquarters lease. Under the Distribution Agreement, Hi/fn has agreed to obtain
and deliver to its landlord a $2.0 million letter of credit to replace Stac's
guaranty. The guaranty provides that it will terminate when Stac no longer owns
a majority interest in Hi/fn and when Hi/fn provides the landlord with such a
letter of credit. The Distribution is conditioned on delivery of the letter of
credit. The Distribution Agreement also provides that, except as otherwise set
forth therein or in any related agreement, all costs and expenses incurred in
connection with the Distribution will be charged to the party for whose benefit
the expenses are incurred, with any expenses that cannot be allocated on such
basis to be split equally between the parties.
 
     The Employee Benefits Allocation Agreement generally contemplates that the
Company will assume and retain all obligations and liabilities with respect to
Hi/fn employee plans and benefits and that Stac will retain all obligations and
liabilities with respect to Stac employee plans and benefits. The Employee
Benefits Allocation Agreement also provides that the Company will assume and
retain, with respect to Hi/fn employees, all responsibility for liabilities and
obligations as of the Distribution Date for medical and dental plan coverage and
for vacation and welfare plans. Stac will retain, with respect to Stac
employees, all responsibilities for all liabilities and obligations as of the
Distribution Date for medical and dental plan coverage and for vacation and
welfare plans.
 
   
     The Tax Allocation and Indemnity Agreement defines the parties' rights and
obligations with respect to tax returns and tax liabilities, including, in
particular, federal and state income tax returns and liabilities, for taxable
years and other taxable periods ending on or before the Distribution date. In
general, Stac will be responsible for (i) filing all federal and state income
tax returns of Stac, the Company and any of their subsidiaries for all taxable
years ending on or before the Distribution Date, and (ii) paying the taxes
relating to such returns (including any deficiencies proposed by applicable
taxing authorities). For post-Distribution periods, Stac and the Company will
each be responsible for filing its own returns and paying its own taxes relating
to such returns (including any deficiencies proposed by applicable taxing
authorities).
    
 
                                       65
<PAGE>   71
 
     The Company and Stac will also enter into a Transitional Services Agreement
pursuant to which Stac will provide certain accounting services to the Company
on a transitional basis after the Distribution. The fees for such transitional
services will be based on rates designed to reflect the actual costs (including
indirect costs) of providing such services. The Company will be free to procure
such services from outside vendors or to develop in-house capabilities in order
to provide such services internally. The Transitional Services Agreement will
terminate on December 31, 1999 unless extended in writing by the parties.
 
     On September 28, 1998, Stac paid $4.4 million to the Company, representing
payment in full for all amounts due to the Company from Stac as of September 1,
1998. The Company will pay to Stac prior to the Distribution any amounts due to
Stac as of October 31, 1998 and Stac will pay to the Company on or prior to
December 31, 1998 any amounts due to the Company that are accumulated after
October 31, 1998. On September 28, 1998, Stac also loaned $5.0 million to the
Company pursuant to a short-term loan (the "Stac Loan"). The Stac Loan will
become due and payable on September 30, 1999 and may be prepaid in whole or part
without penalty. The Stac Loan bears interest at the prime rate set by Silicon
Valley Bank plus 0.5% per annum, payable quarterly. The Stac Loan is secured by
a first priority security interest in all of the Company's assets, including the
Company's intellectual property.
 
LOANS TO OFFICERS
 
     On December 31, 1997, the Company made a loan to William R. Walker, the
Company's Vice President and Chief Financial Officer, in the aggregate principal
amount of $100,000 and bearing interest at the rate of 6.00% per annum, in order
to fund the exercise price of stock options held by him. The loan is evidenced
by a full recourse promissory note, which matures on the earlier to occur of (i)
November 3, 2001, or (ii) the date on which Mr. Walker ceases to be an employee,
director or consultant of the Company. The promissory note is secured by a
pledge of 50,000 shares of Company Common Stock owned by Mr. Walker and
currently held in escrow. The entire principal amount and accrued interest on
the loan to Mr. Walker remains outstanding as of the date of this Information
Statement.
 
SALE OF SECURITIES
 
     Arthur J. Collmeyer purchased 75,000 shares of Company Common Stock at $.60
per share pursuant to an offer of employment with the Company dated October 16,
1996. The Company sold the shares to Mr. Collmeyer, an accredited investor,
pursuant to an exemption from registration under Section 4(2) of the Securities
Act.
 
INDEMNIFICATION AGREEMENTS
 
     The Company has entered, or will enter, into indemnification agreements
with each of its directors and executive officers prior to the Distribution. See
"MANAGEMENT -- Indemnification Agreements."
 
                                       66
<PAGE>   72
 
        SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
   
     The following table sets forth the number of shares of Company Common Stock
expected to be beneficially owned immediately following the Distribution by (i)
the Named Executive Officers and directors of the Company, (ii) all of the
Company's executive officers and directors as a group and (iii) all other
stockholders known by Stac to own beneficially more than five percent of the
Company Common Stock, based upon the expected beneficial ownership by such
persons of Stac Common Stock, Company Common Stock and options to acquire
Company Common Stock as of December 1, 1998. A list of the individuals who are
expected to be executive officers of the Company immediately following the
Distribution is set forth under the heading "MANAGEMENT." Except as otherwise
indicated, each individual named is expected to have sole investment and voting
power with respect to the securities shown.
    
 
   
<TABLE>
<CAPTION>
                                               AMOUNT AND
                                               NATURE OF       PERCENT
                                               BENEFICIAL    BENEFICIALLY
             NAME AND ADDRESS(1)               OWNERSHIP        OWNED
             -------------------               ----------    ------------
<S>                                            <C>           <C>
Microsoft Corporation........................    627,944          9.7%
One Microsoft Way
Redmond, WA 98052-6399
Idanta Partners..............................    536,579          8.3%
Gary W. Clow(2)..............................    383,573          5.9%
Robert W. Johnson(3).........................    451,278          6.9%
Douglas L. Whiting(4)........................    407,563          6.2%
Arthur J. Collmeyer..........................    225,000          3.5%
Stephen A. Farnow............................     42,250            *
Robert A. Monsour............................     56,250            *
William R. Walker............................     50,000            *
Taher Elgamal................................          0        *
Albert E. Sisto..............................          0        *
All directors and officers as a group (9
  persons)...................................  1,007,341         15.4%
</TABLE>
    
 
- ---------------
 *  Less than 1%
 
   
(1) This table is based upon information supplied by officers, directors and
    principal stockholders and Schedules 13D and 13G, if any, filed with the
    Commission with regard to Stac Common Stock. Unless otherwise indicated in
    the footnotes to this table and subject to community property and marital
    property laws where applicable, each of the stockholders named in this table
    has sole voting and investment power with respect to the shares indicated as
    beneficially owned. Applicable percentages are based on 6,501,475 shares
    outstanding on December 1, 1998, adjusted as required by rules promulgated
    by the Commission.
    
 
   
(2) Includes 25,565 shares held by the Christina Clow Trust, of which Mr. Clow
    serves as a trustee, and 25,539 shares held by the Andrew Clow Trust, of
    which Mr. Clow is a trustee. Mr. Clow disclaims beneficial ownership of
    these shares.
    
 
   
(3) Includes 449,235 shares held by the Robert W. Johnson Revocable Trust, of
    which Dr. Johnson is Trustee.
    
 
   
(4) Includes 353,079 shares held by the Whiting Family Trust, of which Mr.
    Whiting serves as Trustee and 54,484 shares issuable upon exercise of
    options to purchase Company Common Stock that will be issued to Mr. Whiting
    in connection with the Distribution and that will be exercisable within 60
    days of December 1, 1998.
    
 
                                       67
<PAGE>   73
 
                 HI/FN CERTIFICATE OF INCORPORATION AND BYLAWS
 
     The following is a summary of the Company Certificate and the Company
Bylaws, as each will be in effect following the Distribution, and is qualified
in its entirety by reference to the complete text of the Company Certificate as
set forth in Annex I hereto, and the Company Bylaws as set forth in Annex II
hereto.
 
AUTHORIZED STOCK
 
     The Company Certificate provides that the Company is authorized to issue
110,000,000 shares of stock, consisting of 100,000,000 shares of Company Common
Stock and 10,000,000 shares of Company Preferred Stock (together with the
Company Common Stock, "Company Stock"). Shares of Company Preferred Stock may be
issued from time to time, in one or more series, each of which series shall have
such voting powers, designations, preferences and rights, and the
qualifications, limitations or restrictions relating thereto, as shall be
authorized by the Company Board. See "DESCRIPTION OF THE COMPANY'S CAPITAL
STOCK."
 
DIRECTORS
 
     The Company Certificate provides that the number of directors shall be
fixed exclusively by one or more resolutions adopted by the Company Board.
Presently, the Company Board has two members. At the time of the Distribution,
the Company expects that the Company Board will be comprised of five members.
The Company Bylaws provide that, except as otherwise provided by law or the
Company Certificate, a quorum of the Company Board for the transaction of
business shall consist of a majority of the entire Board of Directors, except
with respect to indemnification of directors, officers and agents of the
Company, for which a quorum shall be one-third of the number of directors
comprising the Company Board. The act of a majority of the directors present at
any meeting at which there is a quorum shall be the act of the Board of
Directors. The Company Certificate do not provide for cumulative voting in the
election of directors to the Company Board. The Company Bylaws will provide that
vacancies and any newly-created directorships resulting from an increase in the
authorized number of directors may be filled by a majority of the directors then
in office, though less than a quorum, or by a sole remaining director.
 
LIABILITY FOR MONETARY DAMAGES
 
     The Company Certificate provides that no director will be personally liable
to the Company or its stockholders for monetary damages for breach of fiduciary
duty as a director, other than liability for breach of the duty of loyalty to
the Company or its stockholders, acts or omissions not in good faith,
intentional misconduct, a knowing violation of law, certain unlawful dividends,
stock repurchases or redemptions or any transaction from which the director
derived an improper personal benefit. Any repeal or modification of such
provision by the stockholders of the Company will not adversely affect any right
or protection of a director existing at the time of such repeal or modification
with respect to acts or omissions occurring prior to such repeal or
modification.
 
ANTITAKEOVER EFFECT OF AUTHORIZED BUT UNDESIGNATED PREFERRED STOCK
 
     As described above, the Company Board is authorized to provide for the
issuance of shares of Company Preferred Stock, in one or more series, and to fix
by resolution of the Company Board and to the extent permitted by the DGCL, the
terms and conditions of each such series. The Company believes that the
availability of Company Preferred Stock will provide the Company with increased
flexibility in structuring possible future financings and acquisitions and in
meeting other corporate needs which might arise from time to time. Authorized
but unissued shares of Company Preferred Stock, as well as authorized but
unissued shares of Company Common Stock, will be available for issuance without
further action by Company stockholders, unless such action is required by
applicable law or the rules of any stock exchange or automated quotation system
on which any class of Company Stock may then be listed for trading.
 
     Although the Company Board has no present intention of doing so, it will be
able to issue a series of Company Preferred Stock that could, depending on its
terms, either impede or facilitate the completion of a merger, tender offer or
other takeover attempt. For instance, such new shares might impede a business
                                       68
<PAGE>   74
 
combination by including class voting rights which would enable the holder to
block such transaction or facilitate a business combination by including voting
rights which would provide a required percentage vote of stockholders. The
Company Board will make any determination to issue such shares based on its
judgment as to the best interests of the Company and its then existing
stockholders. The Company Board, in so acting, will be able to issue Company
Preferred Stock having terms which would discourage an acquisition attempt or
other transaction that some or a majority of the stockholders might believe to
be in their best interests or in which stockholders might receive a premium for
their stock over the then market price of such stock.
 
INDEMNIFICATION AND ADVANCEMENT OF EXPENSES
 
     The Company Certificate and Bylaws will provide for the indemnification of
present and former directors, officers, employees and agents of the Company and
persons serving as directors, officers, employees or agents of another
corporation or entity at the request of the Company (each, an "Indemnified
Party") to the fullest extent permitted by the DGCL. Indemnified Parties are
specifically indemnified in the Company Bylaws (the "Indemnification
Provisions") for expenses, including attorneys' fees, court costs, witness fees,
judgments, fines and amounts paid in settlement actually and reasonably incurred
by an Indemnified Party in connection with a threatened, pending or completed
action, suit or proceeding (whether civil, criminal, administrative or
investigative) by reason of the fact that he is or was a director or officer of
the Company or is or was serving as a director, officer, employee or agent of
another corporation or entity at the request of the Company. Such Indemnified
Party must have acted in good faith and in a manner he reasonably believed to be
in or not opposed to the best interests of the subject corporation and, with
respect to any criminal action or proceeding, must have had no reasonable cause
to believe his conduct was unlawful.
 
     The Indemnification Provisions and provisions for advancing expenses in the
Company Bylaws are expressly not exclusive of any other rights of
indemnification or advancement of expenses pursuant to any agreement, vote of
the stockholders or disinterested directors or pursuant to judicial direction.
The Company is authorized to purchase insurance on behalf of an Indemnified
Party for liabilities incurred, whether or not the Company would have the power
or obligation to indemnify him pursuant to the Company Certificate, the Company
Bylaws or the DGCL.
 
     In addition, the Company has entered, or will enter, into indemnification
agreements with each of its directors and executive officers pursuant to which
such persons are indemnified for costs and expenses actually and reasonably
incurred by such persons in connection with a threatened, pending or completed
claim arising out of service as a director, officer, employee, trustee and/or
agent of the Company or another entity at the request of the Company. See
"MANAGEMENT -- Indemnification Agreements."
 
AMENDMENT OF THE COMPANY CERTIFICATE AND BYLAWS
 
     The DGCL provides that approval of a majority of the stockholders entitled
to vote thereon is required to amend the Company Certificate. In addition, the
Company Certificate requires the approval of at least 66 2/3% of the voting
power of stockholders entitled to vote thereon to amend the provisions of the
Company Certificate regarding management, directors, indemnification and
amendments to the Company Certificate. A bylaw may be amended or repealed, or a
new bylaw adopted, by (i) the affirmative vote of the holders of at least
66 2/3% of the stock entitled to vote thereon or (ii) a majority of the entire
Company Board.
 
                   DESCRIPTION OF THE COMPANY'S CAPITAL STOCK
 
     Following the Distribution, the authorized capital stock of the Company
will consist of 100,000,000 shares of Company Common Stock, $.001 par value, and
10,000,000 shares of Company Preferred Stock, $.001 par value. The description
set forth below is incomplete and is qualified by reference to the Company's
Third Amended and Restated Certificate of Incorporation (the "Company
Certificate") and Amended and Restated Bylaws (the "Company Bylaws"), which are
set forth in Annex I and Annex II hereto, respectively.
 
                                       69
<PAGE>   75
 
COMMON STOCK
 
     The holders of Company Common Stock are entitled to one vote for each share
held of record on all matters submitted to a vote of the stockholders. Except as
otherwise provided by law, the holders of Company Common Stock vote together
with the holders of Company Preferred Stock as one class. Subject to the rights
of holders of any shares of Company Preferred Stock which may at the time be
outstanding, holders of Company Common Stock will be entitled to such dividends
as the Company Board may declare out of funds legally available therefor. See
"RISK FACTORS -- Dividend Policy." Subject to the prior rights of creditors and
holders of any Company Preferred Stock which may be outstanding from time to
time, the holders of Company Common Stock are entitled, in the event of
liquidation, dissolution or winding up of the Company, to share pro rata in the
distribution of all remaining assets. The Company Common Stock is not liable for
any calls or assessments and is not convertible into any other securities. In
addition, there are no redemption or sinking fund provisions applicable to the
Company Common Stock.
 
PREFERRED STOCK
 
     The Company Certificate provides that the Company Board is authorized to
provide for the issuance of shares of Company Preferred Stock, from time to
time, in one or more series. Prior to the issuance of shares in each series, the
Company Board is required by the Company Certificate and the DGCL to adopt
resolutions and file a Certificate of Designations, Preferences and Relative,
Participating, Optional and Other Special Rights of Preferred Stock and
Qualifications, Limitations and Restrictions Thereof (the "Certificate of
Designation") with the Secretary of State of Delaware, fixing for each such
series the designations, preferences and relative, participating, optional or
other special rights applicable to the shares to be included in any such series
and any qualifications, limitations or restrictions thereon, including, but not
limited to, dividend rights, dividend rate or rates, conversion rights, voting
rights, rights and terms of redemption (including sinking fund provisions), the
redemption price or prices, and the liquidation preferences as are permitted by
Delaware law.
 
DISTRIBUTION AGENT; TRANSFER AGENT AND REGISTRAR
 
     The Distribution Agent and Transfer Agent and Registrar for the Company
Common Stock and Company Preferred Stock is American Stock Transfer & Trust
Company.
 
CERTAIN CHARTER AND BYLAW PROVISIONS AND DELAWARE LAW
 
     After the Distribution, certain provisions of the Company Certificate and
Company Bylaws could discourage potential acquisition proposals and could delay
or prevent a change in control of the Company. The Company Certificate provides,
among other things, for a classified Company Board and eliminates the right of
stockholders to take action by written consent. The issuance of Company
Preferred Stock authorized in the Company Certificate could have the effect of
delaying or preventing a change in control of the Company. Such Company
Preferred Stock could be utilized to implement, without stockholder approval, a
stockholders' right plan that could be triggered by certain change in control
transactions, which could delay or prevent a change in control of the Company or
could impede a merger, consolidation, takeover or other business combination
involving the Company. The issuance of Company Preferred Stock with voting and
conversion rights may adversely affect the voting power of the holders of
Company Common Stock, including the loss of voting control to others. The
Company has no current plans to issue shares of Company Preferred Stock.
 
     In addition, the Company Bylaws provide, among other things, that special
meetings of the stockholders of the Company may be called only by the Company
Board, the Chairman of the Company Board, the President of the Company or by any
person or persons holding shares representing at least 10% of the outstanding
capital stock of the Company. The Company Bylaws also establish procedures,
including advance notice procedures with regard to the nomination, other than by
or at the direction of the Company Board, of candidates for election as
directors.
 
     The Company is subject to the provisions of Section 203 of the DGCL, an
antitakeover law. In general, the statute prohibits a publicly held Delaware
corporation from entering into a "business combination" with an
                                       70
<PAGE>   76
 
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. For purposes of Section
203, a "business combination" includes a merger, asset sale or transaction
resulting in a financial benefit to the interested stockholder, and an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years prior, did own) 15% or more of the
Company's voting capital stock.
 
     The provisions of the Company Certificate, Company Bylaws and Delaware law
are intended to encourage potential acquirors to negotiate with the Company and
allow the Company Board the opportunity to consider alternative proposals in the
interest of maximizing stockholder value. Such provisions, however, may also
have the effect of discouraging acquisition proposals or delaying or preventing
a change in control of the Company, which may have an adverse effect on the
market price of the Company Common Stock.
 
                                       71
<PAGE>   77
 
                       REPORT OF INDEPENDENT ACCOUNTANTS
 
To the Board of Directors and Stockholders
of hi/fn, inc.
 
     In our opinion, the accompanying balance sheet and the related statements
of operations, of cash flows and of changes in stockholders' equity present
fairly, in all material respects, the financial position of hi/fn, inc., a
subsidiary of Stac, Inc., at September 30, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
September 30, 1998, in conformity with generally accepted accounting principles.
In addition, in our opinion, the financial statement schedule appearing on page
F-15 presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related financial statements. These
financial statements and financial statement schedule are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
 
PRICEWATERHOUSECOOPERS LLP
 
San Diego, California
October 23, 1998
 
                                       F-1
<PAGE>   78
 
                                  HI/FN, INC.
 
                                 BALANCE SHEET
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                SEPTEMBER 30,
                                                              -----------------
                                                               1997      1998
                                                              ------    -------
<S>                                                           <C>       <C>
Current assets:
  Cash and cash equivalents.................................  $  480    $ 4,084
  Marketable securities.....................................      --      5,973
  Accounts receivable, net..................................   1,823      3,125
  Due from parent...........................................   1,507         --
  Inventories...............................................     409        165
  Deferred income taxes.....................................     385        720
  Prepaid expenses and other current assets.................     192        315
                                                              ------    -------
          Total current assets..............................   4,796     14,382
  Property and equipment, net...............................     959      1,615
  Deferred income taxes.....................................      95        229
  Other assets..............................................      48        385
                                                              ------    -------
                                                              $5,898    $16,611
                                                              ======    =======
 
                     LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................  $  660    $ 1,610
  Due to parent.............................................      --      6,508
  Accrued expenses and other current liabilities............     616      1,541
                                                              ------    -------
          Total current liabilities.........................   1,276      9,659
                                                              ------    -------
Commitments and contingencies (Note 8 and Note 11)
Stockholders' equity:
  Preferred stock, .001 par value; 10,000,000 shares
     authorized; 6,000,000 shares issued and outstanding....       6          6
  Common stock, .001 par value; 100,000,000 shares
     authorized; 280,799 and 483,014 shares issued and
     outstanding at September 30, 1997 and 1998,
     respectively...........................................      --         --
  Paid-in capital...........................................   2,783      2,995
  Note receivable from stockholder..........................      --       (100)
  Retained earnings.........................................   1,833      4,051
                                                              ------    -------
Total stockholders' equity..................................   4,622      6,952
                                                              ------    -------
                                                              $5,898    $16,611
                                                              ======    =======
</TABLE>
 
                See accompanying notes to financial statements.
                                       F-2
<PAGE>   79
 
                                  HI/FN, INC.
 
                            STATEMENT OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                YEAR ENDED SEPTEMBER 30,
                                                              -----------------------------
                                                               1996       1997       1998
                                                              -------    -------    -------
<S>                                                           <C>        <C>        <C>
Revenues....................................................  $12,894    $14,226    $21,533
Cost of revenues............................................    5,095      4,762      6,525
                                                              -------    -------    -------
Gross margin................................................    7,799      9,464     15,008
                                                              -------    -------    -------
Operating expenses:
Research and development....................................    1,641      2,985      5,403
Sales and marketing.........................................    1,677      2,224      3,370
General and administrative..................................      889      1,203      2,407
                                                              -------    -------    -------
Total operating expenses....................................    4,207      6,412     11,180
                                                              -------    -------    -------
Operating income............................................    3,592      3,052      3,828
Interest income.............................................       --         16         17
                                                              -------    -------    -------
Income before income taxes..................................    3,592      3,068      3,845
Provision for income taxes..................................    1,441      1,235      1,627
                                                              -------    -------    -------
Net income..................................................  $ 2,151    $ 1,833    $ 2,218
                                                              =======    =======    =======
 
Net income per share, basic.................................  $   .36    $   .30    $   .35
                                                              =======    =======    =======
Net income per share, diluted...............................  $   .36    $   .30    $   .33
                                                              =======    =======    =======
Weighted average shares outstanding, basic..................    6,000      6,100      6,308
                                                              =======    =======    =======
Weighted average shares outstanding, diluted................    6,000      6,174      6,800
                                                              =======    =======    =======
</TABLE>
 
                See accompanying notes to financial statements.
                                       F-3
<PAGE>   80
 
                                  HI/FN, INC.
 
                            STATEMENT OF CASH FLOWS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                  YEAR ENDED SEPTEMBER 30,
                                                                -----------------------------
                                                                 1996       1997       1998
                                                                -------    -------    -------
<S>                                                             <C>        <C>        <C>
Cash flows from operating activities:
  Net income................................................    $ 2,151    $ 1,833    $ 2,218
  Adjustments required to reconcile net income to net cash
     provided by operating activities:
     Depreciation and amortization..........................         68        303        726
     Benefit from deferred income taxes.....................       (190)      (129)      (469)
     Changes in assets and liabilities:
     Accounts receivable....................................        546       (642)    (1,302)
     Inventories............................................       (554)       299        244
     Prepaid expenses and other current assets..............         (5)      (186)      (123)
     Other assets...........................................          1        (44)      (614)
     Accounts payable.......................................        409         60        950
     Due to parent for general and administrative
       allocations..........................................        889        420        576
     Accrued expenses and other current liabilities.........        446         86        925
                                                                -------    -------    -------
          Net cash provided by operating activities.........      3,761      2,000      3,131
                                                                -------    -------    -------
Cash flows from investing activities:
  Purchases of marketable securities........................         --         --     (5,973)
  Purchases of property and equipment.......................       (223)      (901)    (1,105)
                                                                -------    -------    -------
          Net cash used by investing activities.............       (223)      (901)    (7,078)
                                                                -------    -------    -------
Cash flows from financing activities:
  Issuance of common stock..................................         --        169        112
  Proceeds of loan from parent..............................         --         --      5,000
  Net transfer of funds from (to) parent....................     (1,542)      (788)     2,439
  Dividends to Parent Company...............................     (1,996)        --         --
                                                                -------    -------    -------
          Net cash provided (used) by financing
            activities......................................     (3,538)      (619)     7,551
                                                                -------    -------    -------
Net increase in cash and cash equivalents...................         --        480      3,604
Cash and cash equivalents at beginning of year..............         --         --        480
                                                                -------    -------    -------
Cash and cash equivalents at end of period..................    $    --    $   480    $ 4,084
                                                                =======    =======    =======
Supplemental non-cash financing activities:
  Issuance of preferred stock for net assets contributed....    $    --    $ 2,620    $    --
                                                                =======    =======    =======
  Settlement of interdivisional accounts....................    $  (155)   $    --    $    --
                                                                =======    =======    =======
</TABLE>
 
                See accompanying notes to financial statements.
                                       F-4
<PAGE>   81
 
                                  HI/FN, INC.
 
                  STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                         COMMON STOCK     PREFERRED STOCK
                                       ----------------   ----------------   PAID-IN    RETAINED
                                       SHARES   AMOUNT    SHARES   AMOUNT    CAPITAL    EARNINGS    TOTAL
                                       ------   -------   ------   -------   --------   --------   -------
<S>                                    <C>      <C>       <C>      <C>       <C>        <C>        <C>
Balance at September 30, 1995........      --        --      --        --         --         --         --
Dividends to Parent Company..........      --        --      --        --         --     (2,151)    (2,151)
Net income...........................      --        --      --        --         --      2,151      2,151
                                       ------   -------   -----    ------     ------    -------    -------
Balance at September 30, 1996........      --        --      --        --         --         --         --
Issuance of preferred stock..........      --        --   6,000         6      2,614         --      2,620
Issuance of common stock.............      75        --      --        --         45         --         45
Issuance of common stock upon
  exercise of options................     206        --      --        --        124         --        124
Net income...........................      --        --      --        --         --      1,833      1,833
                                       ------   -------   -----    ------     ------    -------    -------
Balance at September 30, 1997........     281        --   6,000         6      2,783      1,833      4,622
Issuance of common stock upon
  exercise of options................     202        --      --        --        212         --        212
Note receivable from stockholder.....      --        --      --        --       (100)        --       (100)
Net income...........................      --        --      --        --         --      2,218      2,218
                                       ------   -------   -----    ------     ------    -------    -------
Balance at September 30, 1998........     483   $    --   6,000    $    6     $2,895    $ 4,051    $ 6,952
                                       ======   =======   =====    ======     ======    =======    =======
</TABLE>
 
                See accompanying notes to financial statements.
                                       F-5
<PAGE>   82
 
                                  HI/FN, INC.
 
                         NOTES TO FINANCIAL STATEMENTS
     (TABLE AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS.)
 
NOTE 1 -- BASIS OF PRESENTATION
 
     The accompanying financial statements present the carved-out balance sheet,
statements of operations, of cash flows, and of changes in stockholders' equity
for hi/fn, inc. ("Hi/fn" or "the Company"), a majority owned semiconductor
products subsidiary of Stac, Inc. ("Stac" or "the Parent"). Management expects
to separate Hi/fn and Stac into two independent, publicly-traded companies. In
connection with the separation, Stac plans to distribute as a dividend to its
stockholders the shares of Hi/fn common stock owned by the Parent (the
"Distribution"). The Distribution is designed to separate two distinct
businesses with significant differences in their markets, products, investment
needs, employee retention and compensation plans and plans for growth. Stac's
Board of Directors believes that the separation into two independent companies
will enhance the ability of each to focus on strategic initiatives and new
business opportunities, improve cost structures and operating efficiencies and
create incentives that are more attractive and appropriate for the recruitment
and retention of key employees. As a consequence, Stac believes that investors
will be able to evaluate better the merits of the two groups of businesses and
their future prospects.
 
     For the fiscal year ended September 30, 1996, Hi/fn conducted business as a
division of Stac. For the fiscal years ended September 30, 1997 and 1998, Hi/fn
conducted business as a majority-owned subsidiary of Stac. Financial statements
have not been previously prepared for Hi/fn. These financial statements have
been prepared from the historical accounting records of Stac.
 
     The balance sheet reflects the net assets contributed by Stac in
establishing the Hi/fn subsidiary. The transfer was recorded at the historical
net book value of the transferred assets and liabilities of $2,620,000. In
exchange for the net assets contributed to Hi/fn, Stac received 6,000,000 shares
of Series A Preferred Stock and 100 shares of common stock (Note 6). For
purposes of preparing these financial statements it was assumed that the net
income generated from Hi/fn's operations was remitted in dividends back to Stac
for all periods prior to fiscal 1997. Additionally, for periods prior to
September 1998, Hi/fn participated with Stac in centralized cash management. In
general, the cash funding requirements of Hi/fn were met by, and all cash
generated by the business was transferred to, Stac. Cash balances at September
30, 1997 represent cash amounts in Hi/fn accounts that had yet to be liquidated
by payment obligations, or transferred to Stac. Cash balances at September 30,
1998 reflect a short-term loan of $5,000,000 by Stac to Hi/fn as well as the
settlement of intercompany accounts. Related party receivables and payables are
a result of these cash management practices, as well as allocations of general
and administrative costs as discussed below.
 
     Amounts shown on the statement of operations are based on specific
identification of the costs directly associated with Hi/fn's business for all
components except for general and administrative costs and income tax expense.
For all periods prior to fiscal 1997, allocations of general and administrative
costs are based on management's estimates of the underlying level of effort
required to manage and support Hi/fn's activity. For periods including and
subsequent to fiscal 1997, general and administrative allocations are based on
specific identification of costs directly associated with Hi/fn's business, in
addition to allocations of (i) costs for administrative functions and services
performed on behalf of the Company by staff groups within Stac (ii) a portion of
Stac's management expense and (iii) certain general corporate expenses of Stac.
These allocated expenses primarily represent the costs of services required by
Hi/fn for accounting, management information systems, human resources,
warehouse, executive and professional fees. For the years ended September 30,
1997 and 1998, general and administrative allocations totaled $420,000 and
$576,000, respectively. As more fully described in Notes 2 and 5, current and
deferred income taxes and related tax expense have been allocated to Hi/fn as if
it were a separate taxpayer for all periods presented.
 
     All of the allocations and estimates in the financial statements are based
on assumptions that the management of Stac and Hi/fn believe are reasonable
under the circumstances; however, these allocations and estimates are not
necessarily indicative of the costs and expenses that would have resulted if
Hi/fn had been operated as a separate entity.
                                       F-6
<PAGE>   83
                                  HI/FN, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
     (TABLE AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS.)
 
NOTE 2 -- DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES:
 
  Overview
 
     Hi/fn designs, develops and markets high-performance, multi-protocol packet
processors -- semiconductor devices that enable secure, high-bandwidth network
connectivity and efficient storage of business information. The Company's packet
processor products perform the computation-intensive tasks of compression and
encryption/compression, providing its customers with high-performance,
interoperable implementations of a wide variety of industry-standard networking
and storage protocols. The Company's products are used in a variety of
networking and storage equipment such as routers, remote access concentrators,
firewalls and back-up storage devices.
 
  Financial Statement Preparation
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
 
  Revenue Recognition
 
     Revenue from the sale of semiconductors and board products is recognized
upon shipment, net of an allowance for estimated returns. Revenue from periodic
software license and maintenance agreements is generally recognized ratably over
the respective license periods.
 
  Marketable Securities
 
     The Company's marketable securities are comprised of funds on deposit with
a liquid asset manager that have been invested principally in commercial paper.
The carrying amount of these investments approximates fair value due to the
short maturities or demand nature of the investments. At September 30, 1998, all
marketable securities are classified as available-for-sale and carried at fair
value. Unrealized gains or losses at September 30, 1998 are not material.
 
  Inventories
 
     Inventories are stated at the lower of cost, determined using the first-in,
first-out method, or market. Inventories are comprised solely of finished goods,
which are manufactured by third party foundries for resale by the Company.
 
  Property and Equipment
 
     Property and equipment are stated at cost. Additions to property and
equipment, including significant betterments and renewals, are capitalized.
Maintenance and repair costs are charged to expense as incurred. Depreciation is
computed using the straight-line method over estimated useful lives of three to
five years and totaled $68,000, $303,000 and $449,000 in fiscal 1996, 1997, and
1998, respectively. Leasehold improvements are amortized over the shorter of the
asset life or lease term.
 
  Long-lived Assets
 
     The Company investigates potential impairments of long-lived assets on an
exception basis, when events or changes in circumstances have made recovery of
an asset's carrying value unlikely. An impairment loss is
 
                                       F-7
<PAGE>   84
                                  HI/FN, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
     (TABLE AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS.)
 
recognized when the sum of the expected future net cash flows is less than the
carrying amount of the asset. No such impairment losses have been recorded by
the Company.
 
  Research and Development
 
     Expenditures for research and development are charged to expense as
incurred; however, development costs for software to be licensed or sold that
are incurred from the time technological feasibility is established until the
product is ready for general release to customers are capitalized and reported
at the lower of cost or net realizable value. Through September 30, 1998, no
significant amounts were expended subsequent to reaching technological
feasibility.
 
  Stock-based Compensation
 
     The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method and provides pro forma
disclosures of net income and earnings per share as if the fair value-based
method had been applied in measuring compensation expense.
 
  Income Taxes
 
     The taxable income of the Company is included in the consolidated tax
return of the Parent. Income taxes are computed on a stand-alone basis as if the
Company were a separate taxpayer for all periods presented. Income taxes
currently payable are deemed to have been remitted by Stac on behalf of the
Company in the period that the liability arose. Amounts due to Stac for income
tax payments are included in the related party components of the balance sheet.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected more likely than not to be realized.
 
  Earnings Per Share
 
     Basic earnings per share ("EPS") is calculated by dividing net income by
the weighted average number of common shares outstanding for the period, without
consideration of the dilutive impact of potential common shares ("dilutive
securities") that were outstanding during the period. Diluted EPS is computed by
dividing net income by the weighted average number of common shares outstanding
for the period, increased by dilutive securities that were outstanding during
the period. Shares subject to repurchase by the Company are considered
contingently issuable based on continued employment and are therefore treated as
potential common shares for the purposes of this calculation. Since the
Company's Series A Preferred Stock (Note 6) represents a primary equity
security, it is included in the calculation of basic earnings per share. Net
income remains the same for the calculations of basic EPS and diluted EPS. A
reconciliation of the numerators and denominators of the basic and diluted EPS
calculations for the years ended September 30, 1997 and 1998, respectively, is
presented below. Earnings per share for the year ended September 30, 1996 has
been presented on a comparable basis to the capital structure that came into
existence in fiscal 1997 in a manner similar to that as used for stock splits.
 
YEAR ENDED SEPTEMBER 30, 1997
 
<TABLE>
<CAPTION>
                                                                        PER-SHARE
                                             NET INCOME     SHARES       AMOUNT
                                             ----------     ------      ---------
<S>                                          <C>           <C>          <C>
Net Income.................................    $1,833
Basic EPS..................................                6,100,000      $0.30
Dilutive Securities........................                   74,000
                                                           ---------
Diluted EPS................................                6,174,000      $0.30
                                                           =========
</TABLE>
 
                                       F-8
<PAGE>   85
                                  HI/FN, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
     (TABLE AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS.)
 
YEAR ENDED SEPTEMBER 30, 1998
 
<TABLE>
<CAPTION>
                                                                        PER-SHARE
                                             NET INCOME     SHARES       AMOUNT
                                             ----------     ------      ---------
<S>                                          <C>           <C>          <C>
Net Income.................................    $2,218
Basic EPS..................................                6,308,000      $0.35
Dilutive Securities........................                  492,000
                                                           ---------
Diluted EPS................................                6,800,000      $0.33
                                                           =========
</TABLE>
 
  New pronouncements
 
     In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards (FAS) No. 130, "Reporting Comprehensive Income,"
and Financial Accounting Standard (FAS) No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which will be required to be adopted by
the Company in fiscal 1999. Adoption of these statements is not expected to have
a significant impact on the Company's financial position, results of operations
or cash flows.
 
NOTE 3 -- CYLAN ACQUISITION:
 
     In April 1998, the Company acquired the outstanding stock of CyLAN
Technologies, Inc., a software development company, for $340,000 in cash in a
transaction accounted for under the purchase method. The purchase agreement
calls for the Company to make royalty payments on sales made over a three-year
period that incorporate the acquired technology. Minimum royalties over this
term amount to $450,000, subject to the continued employment at Hi/fn of a
former CyLAN shareholder. In conjunction with the acquisition, the Company
recorded the purchase price of $340,000 as capitalized software, which is being
amortized on a straight-line basis over a three year period. Pro forma data has
not been presented as such results would not differ materially from the
historical results presented.
 
NOTE 4 -- COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS:
 
<TABLE>
<CAPTION>
                                                              SEPTEMBER 30,
                                                             ----------------
                                                              1997      1998
                                                             ------    ------
<S>                                                          <C>       <C>
Accounts receivable:
  Trade receivables........................................  $1,873    $3,325
  Less allowance for doubtful accounts.....................     (50)     (200)
                                                             ------    ------
                                                             $1,823    $3,125
                                                             ======    ======
</TABLE>
 
                                       F-9
<PAGE>   86
                                  HI/FN, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
     (TABLE AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS.)
 
     Substantially all of the Company's customers are OEM's, which results in
concentrated credit risk with respect to the Company's trade receivables. At
September 30, 1997, and 1998, one customer accounted for 78% and 52%
respectively, of the accounts receivable balance. Management believes that its
credit policies substantially mitigate such concentrated credit risk. Bad debt
expenses were not significant in fiscal 1996, 1997 and 1998.
 
<TABLE>
<CAPTION>
                                                                YEAR ENDED
                                                              SEPTEMBER 30,
                                                             ----------------
                                                              1997      1998
                                                             ------    ------
<S>                                                          <C>       <C>
Property and equipment:
  Computer equipment.......................................  $1,093    $1,445
  Furniture and fixtures...................................     172       419
  Leasehold improvements...................................      81       346
  Office equipment.........................................      43       287
                                                             ------    ------
                                                              1,389     2,497
  Less accumulated depreciation............................    (430)     (882)
                                                             ------    ------
                                                             $  959    $1,615
                                                             ======    ======
Accrued expenses and other current liabilities:
  Deferred revenue.........................................  $  323    $  697
  Compensation and employee benefits.......................     288       489
  Accrued royalties........................................               175
  Other....................................................       5       180
                                                             ------    ------
                                                             $  616    $1,541
                                                             ======    ======
</TABLE>
 
NOTE 5 -- INCOME TAXES:
 
     The results of the Company's operations were included in Stac's
consolidated tax returns. The allocation of tax items is discussed in Note 2.
 
     The provision (benefit) for income taxes is comprised of the following:
 
<TABLE>
<CAPTION>
                                                    YEAR ENDED SEPTEMBER 30,
                                                   --------------------------
                                                    1996      1997      1998
                                                   ------    ------    ------
<S>                                                <C>       <C>       <C>
Current tax expense:
  Federal......................................    $1,386    $1,159    $1,676
  State........................................       245       205       420
                                                   ------    ------    ------
                                                    1,631     1,364    $2,096
                                                   ------    ------    ------
Deferred tax (benefit):
  Federal......................................      (162)     (109)     (411)
  State........................................       (28)      (20)      (58)
                                                   ------    ------    ------
                                                     (190)     (129)     (469)
                                                   ------    ------    ------
                                                   $1,441    $1,235    $1,627
                                                   ======    ======    ======
</TABLE>
 
                                      F-10
<PAGE>   87
                                  HI/FN, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
     (TABLE AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS.)
 
     The principal components of deferred income tax assets are as follows:
 
<TABLE>
<CAPTION>
                                                              SEPTEMBER 30,
                                                              --------------
                                                              1997     1998
                                                              -----    -----
<S>                                                           <C>      <C>
Revenue recognition.........................................  $260     $339
Inventory valuation accounts................................    82      166
Depreciation and amortization...............................    95      148
Accrued severance...........................................    --      122
Bad debts allowance.........................................    20       84
Other.......................................................    23       90
                                                              ----     ----
                                                              $480     $949
                                                              ====     ====
</TABLE>
 
     A reconciliation of the amount computed by applying the statutory federal
income tax rate to income before income taxes to the provision for income taxes
follows:
 
<TABLE>
<CAPTION>
                                                    YEAR ENDED SEPTEMBER 30,
                                                   --------------------------
                                                    1996      1997      1998
                                                   ------    ------    ------
<S>                                                <C>       <C>       <C>
Amount computed at statutory Federal rate of
  34%............................................  $1,221    $1,043    $1,307
State income taxes, net of Federal benefit.......     216       184       235
Expenses not deductible for tax purposes.........       4         8        85
                                                   ------    ------    ------
                                                   $1,441    $1,235    $1,627
                                                   ======    ======    ======
</TABLE>
 
NOTE 6 -- PREFERRED STOCK:
 
     The Company has issued 6,000,000 shares of voting, participating,
convertible Series A Preferred Stock ("Series A Preferred Stock") and 100 shares
of common stock to Stac in exchange for the net assets contributed. The transfer
was recorded at the historical net book value of the transferred assets and
liabilities of $2,620,000. Each share may be converted, at the option of the
holder, into one share of common stock. The Series A Preferred Stock is entitled
to dividends, if and when declared by the Board of Directors, of $0.12 per
share, per annum. Series A Preferred Stock dividends must be declared prior to
the declaration of dividends on the Company's common stock, and the Series A
Preferred Stock participates fully thereafter with any common stock dividends.
Through September 30, 1998, no such dividends have been declared.
 
NOTE 7 -- STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS:
 
  1996 Equity Incentive Plan
 
     During fiscal 1997, Hi/fn adopted the 1996 Equity Incentive Plan (the "1996
Plan") whereby 1,949,900 shares of Hi/fn common stock have been reserved for
issuance pursuant to nonqualified and incentive stock options and restricted
stock awards. The 1996 Plan is administered by the Board of Directors of Hi/fn
or its designees and provides generally that nonqualified stock options and
restricted stock may be awarded at a price not less than 85% of the fair market
value of the stock at the date of the award. Incentive stock options must be
awarded at a price not less than 100% of the fair market value of the stock at
the date of the award, or 110% of fair market value for awards to more than 10%
stockholders. Options granted under the 1996 Plan may have a term of up to 10
years. Options typically vest at a rate of 25% of the total grant per year over
a four-year period. However, the Company may, at its discretion, implement a
different vesting schedule with respect to any new stock option grant. As a
result of early exercise features as provided for by the 1996 Plan, options
granted are immediately exercisable subject to the Company's repurchase rights
which expire as options vest.
 
                                      F-11
<PAGE>   88
                                  HI/FN, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
     (TABLE AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS.)
 
     Information for stock option activities is summarized below:
 
<TABLE>
<CAPTION>
                                                          OPTIONS OUTSTANDING
                                                      ---------------------------
                                                                     WEIGHTED-
                                                                      AVERAGE
                                                       SHARES      EXERCISE PRICE
                                                      ---------    --------------
<S>                                                   <C>          <C>
Balance at September 30, 1996.......................         --           --
  Options granted...................................  1,112,000        $0.69
  Options exercised.................................   (205,699)       $0.60
  Options canceled..................................    (29,438)       $0.60
                                                      ---------
Balance at September 30, 1997.......................    876,863        $0.81
  Options granted...................................    388,000        $2.29
  Options exercised.................................   (202,315)       $1.05
  Options canceled..................................   (187,361)       $0.60
                                                      ---------
Balance at September 30, 1998.......................    875,187        $1.46
                                                      =========
</TABLE>
 
     The following is a summary of stock options outstanding:
 
<TABLE>
<CAPTION>
                                                     OPTIONS OUTSTANDING
                                            --------------------------------------
                                                          WEIGHTED-
                                                           AVERAGE       WEIGHTED-
                                                          REMAINING       AVERAGE
                                                         CONTRACTUAL     EXERCISE
                                             NUMBER      LIFE (YEARS)      PRICE
                                            ---------    ------------    ---------
<S>                                         <C>          <C>             <C>
AT SEPTEMBER 30, 1997
Price Range
$0.60.....................................    702,863        9.36          $0.60
$1.20.....................................     70,000        9.86          $1.20
$2.00.....................................    104,000        9.93          $2.00
                                            ---------
                                              876,863        9.47          $0.81
                                            =========
AT SEPTEMBER 30, 1998
Price Range
$0.60.....................................    398,187        8.38          $0.60
$1.20-$2.00...............................    235,500        8.98          $1.88
$2.25-$3.00...............................    241,500        9.51          $2.47
                                            ---------
                                              875,187        8.85          $1.46
                                            =========
</TABLE>
 
                                      F-12
<PAGE>   89
                                  HI/FN, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
     (TABLE AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS.)
 
     The following is a summary of stock options that are vested and
exercisable, and are accordingly not subject to the Company's repurchase rights:
 
<TABLE>
<CAPTION>
                                                         OPTIONS VESTED AND
                                                            EXERCISABLE
                                                        --------------------
                                                                   WEIGHTED-
                                                                    AVERAGE
                                                                   EXERCISE
                                                        NUMBER       PRICE
                                                        -------    ---------
<S>                                                     <C>        <C>
AT SEPTEMBER 30, 1997
Price Range
$0.60.................................................   20,900      $0.60
                                                        =======
AT SEPTEMBER 30, 1998
Price Range
$0.60-$2.00...........................................  129,833      $0.89
                                                        =======
</TABLE>
 
  Pro Forma Disclosure
 
     The Company applies the intrinsic value method in accounting for its stock
based compensation. No compensation expense has been recognized for stock option
grants, which are fixed in nature, as the options have been granted at fair
value as determined by the Company's Board of Directors. Had compensation cost
for the Company's stock based compensation awards issued during fiscal 1997 and
1998 been determined based on the fair value at the grant date, the Company's
net income and net income per share would have been reduced to the pro forma
amounts indicated below:
 
<TABLE>
<CAPTION>
                                                      YEAR ENDED       YEAR ENDED
                                                     SEPTEMBER 30,   SEPTEMBER 30,
                                                         1997             1998
                                                     -------------   --------------
<S>                                                  <C>             <C>
Net income:
As reported........................................     $1,833           $2,218
                                                        ======           ======
Pro forma..........................................     $1,683           $1,981
                                                        ======           ======
Net income per share, basic:
As reported........................................     $  .30           $  .35
                                                        ======           ======
Pro forma..........................................     $  .28           $  .32
                                                        ======           ======
Net income per share, diluted:
As reported........................................     $ 0.30           $  .33
                                                        ======           ======
Pro forma..........................................     $ 0.27           $  .30
                                                        ======           ======
</TABLE>
 
     The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants during the year ended September 30, 1997: dividend
yield of 0.0%, risk free interest rate of 6.46%, expected volatility of 250%,
and expected life of 1.5 years; and for the year ended September 30, 1998:
dividend yield of 0.0%, risk free interest rate of 5,48%, expected volatility of
64%, and expected life of .58 years.
 
                                      F-13
<PAGE>   90
                                  HI/FN, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
     (TABLE AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS.)
 
NOTE 8 -- COMMITMENTS:
 
     The Company occupies its facilities under several non-cancelable operating
leases that expire at various dates through August 2005, and which contain
renewal options. Future minimum lease payments are as follows:
 
<TABLE>
<CAPTION>
                                      AMOUNT
                                      ------
<S>                                   <C>
  1999..............................  $1,026
  2000..............................     844
  2001..............................     799
  2002..............................     838
Thereafter..........................   2,588
                                      ------
                                      $6,095
                                      ======
</TABLE>
 
     Rent expense under operating leases was approximately $50,000, $113,000,
and $467,000 in fiscal 1996, 1997, and 1998, respectively. Certain facility
leases provide for scheduled rent increases. The total lease commitment for such
leases is being charged ratably to operations.
 
NOTE 9 -- SIGNIFICANT CUSTOMERS:
 
     A significant portion of the Company's revenues has been derived from sales
to major OEM's. Two customers accounted for 43% and 14% of fiscal 1996 revenues,
respectively. One customer accounted for 70% of fiscal 1997 revenues. One
customer accounted for 61% of fiscal 1998 revenues.
 
NOTE 10 -- RELATED PARTY TRANSACTIONS:
 
     On September 30, 1998 Stac loaned the Company $5,000,000. The note matures
on September 30, 1999 and carries an interest rate of an index rate plus 0.5%.
The loan is secured by a first priority security interest in all of the
Company's assets, including the Company's intellectual property. The index rate
is defined as the prime rate for Silicon Valley Bank, and was 8.5% on September
30, 1998.
 
NOTE 11 -- CONTINGENCIES:
 
     Various claims arising in the course of business, seeking monetary damages
and other relief, are pending. The amount of the liability, if any, from such
claims cannot be determined with certainty. However, in the opinion of
management, the ultimate liability for such claims will not have a material
adverse effect on the Company's financial position, results of operations or
cash flows.
 
                                      F-14
<PAGE>   91
 
                                  HI/FN, INC.
 
                                  SCHEDULE II
 
                 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                  FOR THE THREE YEARS ENDED SEPTEMBER 30, 1998
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                       ADDITIONS
                                          BALANCE AT   CHARGED TO     ADDITIONS
                                          BEGINNING    COSTS AND      CHARGED TO                   BALANCE AT
                                          OF PERIOD     EXPENSES    OTHER ACCOUNTS   DEDUCTIONS   END OF PERIOD
                                          ----------   ----------   --------------   ----------   -------------
<S>                                       <C>          <C>          <C>              <C>          <C>
DEDUCTED FROM ACCOUNTS RECEIVABLE
Allowance for doubtful accounts:
  Year ended September 30, 1996(a)......     193            --           (34)           --             159
  Year ended September 30, 1997.........     159          (109)           --            --              50
  Year ended September 30, 1998.........      50           150            --            --             200
 
DEDUCTED FROM INVENTORY
Reserve for inventory obsolescence:
  Year ended September 30, 1996(a)......     123            --           265            --             388
  Year ended September 30, 1997.........     388          (183)           --            --             205
  Year ended September 30, 1998.........     205           190            --            --             395
</TABLE>
 
- ---------------
(a) Activity represents changes in period end allocations of consolidated
balances.
 
                                      F-15
<PAGE>   92
 
                                    GLOSSARY
 
     ALDC (Adaptive Lossless Data Compression) -- A compression method invented
by IBM, for which patents are owned by Hi/fn.
 
     Analog Modem -- A communications device used for sending and receiving data
over "normal" telephone lines. These devices use analog signals to transmit and
receive data.
 
     ASIC (Application Specific Integrated Circuit) -- A logic circuit designed
for a specific usage and implemented in an integrated circuit.
 
     Broadband Access Products -- Network equipment that provides access to a
network infrastructure using high-bandwidth network interfaces, for example
cable modems and digital subscriber line products.
 
     Bus -- The set of wires used to interconnect the signals from one
semiconductor device to one or more other devices, either on the same circuit
board or through a connector to another circuit board.
 
     Cable Modem -- A device used typically in a home for connecting a computer
system to the Internet via the cable television network. Such devices typically
offer significantly higher data transmission rates than available from analog
modems.
 
     Compression -- The process of eliminating redundant information from a set
of data, while maintaining complete data integrity such that the compressed data
can be decompressed and returned to its original form.
 
     Data Authentication -- A method of processing data prior to transmission
over a communication link such that on receipt of the data, the recipient can
detect whether or not the data was altered during transmission.
 
     DES (Data Encryption Standard) -- A standard promulgated by the Federal
Information Processing Society (FIPS) that defines a method for processing data
such that it becomes indecipherable to anyone other than the person who holds
the digital data stream, or key, with which it was encrypted. The maximum key
length supported by DES is 56 bits.
 
     Digital Subscriber Line (DSL) -- A type of communication link offered by
telecommunications service providers that provides digital transmission for
voice and data, typically between a home/office and a corporate network, where
the data transmission rates available are significantly greater than those
available from analog modems.
 
     DLT (Digital Linear Tape) -- A type of tape drive manufactured by Quantum
Corporation that provides storage of digital data on magnetic tape. The data is
stored on linear tracks on the tape.
 
     Encryption -- The process of making data indecipherable to anyone other
than the holds the key with which it was enciphered.
 
     Firewall -- A technology used for preventing unwanted inbound or outbound
data at the boundary of a computer network based on a set of rules programmed by
the firewall administrator.
 
     IETF (Internet Engineering Task Force) -- A volunteer organization that
develops architectures practices and protocols for the continued development of
the Internet and its related technologies.
 
     IPSec (IP Security) -- A network security protocol developed by the IETF,
which provides for confidentiality and integrity of data transmitted over a
computer network using the Internet Protocol.
 
     IP (Internet Protocol) -- The fundamental communication protocol used by
computers attached to the global information network known as the Internet. IP
can also be referred to as the layer 3 protocol, or network layer protocol of
the Internet.
 
     IPPCP (IP Payload Compression Protocol) -- An IETF-developed protocol used
in conjunction with IP that allows the payload of each IP data packet to be
compressed prior to transmission and decompressed upon receipt thereby enhancing
network bandwidth.
 
                                       G-1
<PAGE>   93
 
     ISDN (Integrated Services Digital Network) -- A service offered by
telecommunications service providers that provides digital transmission for
voice and data, typically between a home/office and a corporate network.
 
     LAN (Local Area Network) -- Typically a network consisting of a set of
computers at a common location (office, building, campus, etc.) interconnected
using a common type of wiring and a common networking protocol.
 
     Lossless Data Compression -- A method of processing digital information to
remove redundant data, thereby reducing it in size for subsequent transmission
or storage. Such a method must also have a corresponding method of processing
the "reduced" data in such a way as to return it to its original, uncompressed
state without any loss of information.
 
     LZS (Lempel-Ziv-Stac) -- A compression method, invented and patented by
Stac.
 
     Mask set -- The tooling required in the fabrication process for
semiconductor products. Such tooling typically takes the form of one "mask" for
each layer of the manufacturing process, where each layer defines where specific
materials are used in each layer of the product.
 
     Mbytes/sec (Megabytes per second) -- A rate of data transfer from one
system to another.
 
     Megabyte -- Typically, one million bytes, but sometimes the quantity 1024
times 1024.
 
     MD5 (Message Digest 5) -- A data processing algorithm invented by Ron
Rivest and designed to compute, with great probability, a unique "fingerprint"
for a particular set of data. This type of algorithm is often used in networking
protocols to ensure that transmitted data is not tampered with in transit. This
is done by computing a "fingerprint" for a set of data, sending the data along
with the "fingerprint", after which the receiver can recalculate and verify the
received.
 
     MPPC (Microsoft Point-to-Point Compression) -- A compression method
invented by Microsoft, for which patents are owned by Hi/fn.
 
     Network Interface Card -- A printed circuit card or semiconductor that
provides for the connection of a computer system or other device to a local area
network.
 
     PPP (Point-to-Point Protocol) -- An IETF-developed protocol operating at
what is known as the data link layer, or layer 2, and used for the establishment
of a connection from one computer to another over a wide area network.
 
     PPTP (Point-to-Point Tunneling Protocol) -- A Microsoft-developed protocol,
based on certain aspects of PPP, that was designed to provide confidentiality of
the data transmitted between two computers over a wide area network.
 
     RC4/RC5 (Rivest Cipher 4 and Rivest Cipher 5) -- Developed by Ron Rivest of
the Massachusetts Institute of Technology (MIT), these are symmetric key
encryption algorithms, meaning that the same key is used to encrypt a set of
data as is used to decrypt it.
 
     Remote Access Concentrator -- A networking device, which aggregates, or
concentrates, multiple bi-directional communication links into a single, larger
link. These devices are typically used to provide dial-up access to a corporate
network or to the Internet.
 
     Router -- A networking device that is responsible for processing incoming
and outgoing data packets, typically Internet Protocol packets, and determining
where to "route" the data packet on its journey to its final destination.
 
     RSA (Rivest Shamir Adelman) -- The initials of the 3 inventors of the RSA
public key encryption system and co-founders of RSA Data Security.
 
     SCSI (Small Computer Systems Interface) -- An interface typically used for
connecting storage devices such as tape drives and disk drives to computer
systems.
 
                                       G-2
<PAGE>   94
 
     SHA1 (Secure Hash Algorithm) -- A data processing algorithm designed to
compute, with great probability, a unique "fingerprint" for a particular set of
data. This type of algorithm is often used in networking protocols to ensure
that transmitted data is not tampered with in transit. This is done by computing
a "fingerprint" for a set of data, sending the data along with the
"fingerprint", after which the receiver can recalculate and verify the received.
 
     Tape Drive -- An electro-mechanical computer peripheral with integrated
electronics that enables the storage of computer data on removable magnetic
media.
 
     TCP (Transmission Control Protocol) -- Along with IP, the next most
fundamental network protocol used for communication of data over the Internet.
Internet applications such as web browsers are known as TCP applications.
 
     Travan -- A tape drive standard, developed by 3M, which uses tape media
that is one quarter-inch in width.
 
     Triple-DES (Triple Data Encryption Standard) -- Based on the DES encryption
algorithm, Triple-DES involves processing a set of data three times using DES. A
method for processing data such that it becomes indecipherable to anyone other
than the person who holds the digital data stream, or key, with which it was
encrypted. The maximum key length supported by Triple-DES is 168 bits.
 
     VPN (Virtual Private Network) -- A network of interconnected computers, all
sharing the same network infrastructure, where the privacy of the communication
between any two computers on the network is maintained through the use of
network security, or encryption, protocols.
 
     WAN (Wide Area Network) -- A network of interconnected computers or LANs
where they are interconnected using a network infrastructure provided by a
service provider such as an telecommunications company or an Internet Service
Provider.
 
                                       G-3
<PAGE>   95
 
                                                                        ANNEX I
                           THIRD AMENDED AND RESTATED
                          CERTIFICATE OF INCORPORATION
                                       OF
                                  HI/FN, INC.
                             A DELAWARE CORPORATION
 
     hi/fn, inc., a corporation organized and existing under the General
Corporation Law of the State of Delaware
 
     DOES HEREBY CERTIFY:
 
     FIRST: This corporation's original Certificate of Incorporation was filed
with the Secretary of State of the State of Delaware on August 14, 1996; this
corporation's Amended and Restated Certificate of Incorporation was filed with
the Secretary of State of the State of Delaware on August 29, 1996; this
corporation's Second Amended and Restated Certificate of Incorporation was filed
with the Secretary of State of the State of Delaware on November 12, 1996.
 
     SECOND: The Third Amended and Restated Certificate of Incorporation of
hi/fn, inc., in the form set forth below, has been duly adopted in accordance
with the provisions of Sections 228, 242, and 245 of the Delaware General
Corporation Law by the directors and the stockholders of the corporation.
 
     THIRD: The text of this corporation's Certificate of Incorporation, as
amended, is hereby amended and restated in its entirety as follows:
 
                                   ARTICLE I
 
     The name of this corporation is hi/fn, inc.
 
                                   ARTICLE II
 
     The address of the registered office of this corporation in the State of
Delaware is 1209 Orange Street, Wilmington, County of New Castle, Delaware
19801. The name of its registered agent at such address is The Corporation Trust
Company.
 
                                  ARTICLE III
 
     The nature of the business or purposes to be conducted or promoted is to
engage in any lawful act or activity for which corporations may be organized
under the Delaware General Corporation Law.
 
                                   ARTICLE IV
 
     A. This corporation is authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock." The total number
of shares which the corporation is authorized to issue is one hundred ten
million (110,000,000) shares. One hundred million (100,000,000) shares shall be
Common Stock, each having a par value of one-tenth of one cent ($.001). Ten
million (10,000,000) shares shall be Preferred Stock, each having a par value of
one-tenth of one cent ($.001).
 
     B. The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is hereby authorized, by filing a certificate (a
"Preferred Stock Designation") pursuant to the Delaware General Corporation Law,
to fix or alter from time to time the designation, powers, preferences and
rights of the shares of each such series and the qualifications, limitations or
restrictions of any wholly unissued series of Preferred Stock, and to establish
from time to time the number of shares constituting any such series or any of
them; and to increase or decrease the number of shares of any series subsequent
to the issuance of shares of that
 
                                       I-1
<PAGE>   96
 
series, but not below the number of shares of such series then outstanding. In
case the number of shares of any series shall be decreased in accordance with
the foregoing sentence, the shares constituting such decrease shall resume the
status that they had prior to the adoption of the resolution originally fixing
the number of shares of such series.
 
                                   ARTICLE V
 
     For the management of the business and for the conduct of the affairs of
the corporation, and in further definition, limitation and regulation of the
powers of the corporation, of its directors and of its stockholders or any class
thereof, as the case may be, it is further provided that:
 
     A.
 
          (1) The management of the business and the conduct of the affairs of
     the corporation shall be vested in its Board of Directors. The number of
     directors which shall constitute the whole Board of Directors shall be
     fixed exclusively by one or more resolutions adopted by the Board of
     Directors. The Board of Directors shall be divided into three classes
     designated as Class I, Class II, and Class III, respectively. Directors
     shall be assigned to each class in accordance with a resolution or
     resolutions adopted by the Board of Directors. At the first annual meeting
     of stockholders following the date hereof, the term of office of the Class
     I directors shall expire and Class I directors shall be elected for a full
     term of three years. At the second annual meeting of stockholders following
     the date hereof, the term of office of the Class II directors shall expire
     and Class II directors shall be elected for a full term of three years. At
     the third annual meeting of stockholders following the date hereof, the
     term of office of the Class III directors shall expire and Class III
     directors shall be elected for a full term of three years. At each
     succeeding annual meeting of stockholders, directors shall be elected for a
     full term of three years to succeed the directors of the class whose terms
     expire at such annual meeting.
 
          (2) Notwithstanding the foregoing provisions of this Article, each
     director shall serve until his successor is duly elected and qualified or
     until his death, resignation or removal.
 
          (3) Subject to the rights of the holders of any series of Preferred
     Stock, the Board of Directors or any individual director may be removed
     from office at any time (i) with cause by the affirmative vote of the
     holders of a majority of the voting power of all the then-outstanding
     shares of voting stock of the corporation, entitled to vote at an election
     of directors (the "Voting Stock") or (ii) without cause by the affirmative
     vote of the holders of at least sixty-six and two-thirds percent (66 2/3%)
     of the voting power of all the then-outstanding shares of the Voting Stock.
 
          (4) Subject to the rights of the holders of any series of Preferred
     Stock, any vacancies on the Board of Directors resulting from death,
     resignation, disqualification, removal or other causes and any newly
     created directorships resulting from any increase in the number of
     directors, shall, unless the Board of Directors determines by resolution
     that any such vacancies or newly created directorships shall be filled by
     the stockholders, except as otherwise provided by law, be filled only by
     the affirmative vote of a majority of the directors then in office, even
     though less than a quorum of the Board of Directors, and not by the
     stockholders. Any director elected in accordance with the preceding
     sentence shall hold office for the remainder of the full term of the
     director for which the vacancy was created or occurred and until such
     director's successor shall have been elected and qualified.
 
     B.
 
          (1) Subject to paragraph (h) of Section 43 of the Bylaws, the Bylaws
     may be altered or amended or new Bylaws adopted by the affirmative vote of
     at least sixty-six and two-thirds percent (66 2/3%) of the voting power of
     all of the then-outstanding shares of the Voting Stock. The Board of
     Directors shall also have the power to adopt, amend, or repeal Bylaws.
 
          (2) The directors of the corporation need not be elected by written
     ballot unless the Bylaws so provide.
 
                                       I-2
<PAGE>   97
 
          (3) At any time following the first distribution of Common Stock of
     the corporation pursuant to a registration statement on Form 10 declared
     effective by the Securities and Exchange Commission under the Securities
     Exchange Act of 1934, as amended, no action shall be taken by the
     stockholders of the corporation except at an annual or special meeting of
     stockholders called in accordance with the Bylaws.
 
          (4) Special meetings of the stockholders of the corporation may be
     called, for any purpose or purposes, by (i) the Chairman of the Board of
     Directors, (ii) the Chief Executive Officer, (iii) the Board of Directors
     pursuant to a resolution adopted by a majority of the total number of
     authorized directors (whether or not there exist any vacancies in
     previously authorized directorships at the time any such resolution is
     presented to the Board of Directors for adoption) or (iv) by the holders of
     the shares entitled to cast not less than ten percent (10%) of the votes at
     the meeting, and shall be held at such place, on such date, and at such
     time as the Board of Directors shall fix.
 
          (5) Advance notice of stockholder nominations for the election of
     directors and of business to be brought by stockholders before any meeting
     of the stockholders of the corporation shall be given in the manner
     provided in the Bylaws of the corporation.
 
                                   ARTICLE VI
 
     A. A director of the corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for any breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived an improper
personal benefit. If the Delaware General Corporation Law is amended after
approval by the stockholders of this Article to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
liability of a director shall be eliminated or limited to the fullest extent
permitted by the Delaware General corporation Law, as so amended.
 
     B. Any repeal or modification of this Article VI shall be prospective and
shall not affect the rights under this Article VI in effect at the time of the
alleged occurrence of any act or omission to act giving rise to liability or
indemnification.
 
                                  ARTICLE VII
 
     A. The corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, except as provided in paragraph B of this
Article VII, and all rights conferred upon the stockholders herein are granted
subject to this reservation.
 
     B. Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the Voting Stock required by law, this Certificate
of Incorporation or any Preferred Stock Designation, the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66 2/3%) of the voting
power of all of the then-outstanding shares of the Voting Stock, voting together
as a single class, shall be required to alter, amend or repeal Articles V, VI
and VII.
 
                                       I-3
<PAGE>   98
 
     IN WITNESS WHEREOF, this Third Amended and Restated Certificate of
Incorporation has been subscribed this        day of             , 1998 by the
undersigned who affirms that the statements made herein are true and correct.
 
                                          HI/FN, INC.
 
                                          By:
                                          --------------------------------------
                                          [Name & Title]
 
                                       I-4
<PAGE>   99
 
                                                                        ANNEX II
 
                                     BYLAWS
 
                                       OF
 
                                   HI/FN, INC.
 
                             (A DELAWARE CORPORATION)
 
 



                                     II-1
<PAGE>   100
 
                                     BYLAWS
                                       OF
                                   HI/FN, INC.
                             (A DELAWARE CORPORATION)

                                    ARTICLE I
 
                                     OFFICERS
 
     SECTION 1. Registered Office. The registered office of the corporation in
the State of Delaware shall be in the City of Wilmington, County of New Castle.
 
     SECTION 2. Other Offices. The corporation shall also have and maintain an
office or principal place of business at such place as may be fixed by the Board
of Directors, and may also have offices at such other places, both within and
without the State of Delaware as the Board of Directors may from time to time
determine or the business of the corporation may require.
 
                                   ARTICLE II
 
                                 CORPORATE SEAL
 
     SECTION 3. Corporate Seal. The corporate seal shall consist of a die
bearing the name of the corporation and the inscription, "Corporate
Seal-Delaware." Said seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
 
                                  ARTICLE III
 
                             STOCKHOLDERS' MEETINGS
 
     SECTION 4. Place of Meetings. Meetings of the stockholders of the
corporation shall be held at such place, either within or without the State of
Delaware, as may be designated from time to time by the Board of Directors, or,
if not so designated, then at the office of the corporation required to be
maintained pursuant to Section 2 hereof.
 
     SECTION 5. Annual Meeting.
 
          (a)  The annual meeting of the stockholders of the corporation, for
     the purpose of election of directors and for such other business as may
     lawfully come before it, shall be held on such date and at such time as may
     be designated from time to time by the Board of Directors.
 
          (b)  At an annual meeting of the stockholders, only such business
     shall be conducted as shall have been properly brought before the meeting.
     To be properly brought before an annual meeting, business must be: (A)
     specified in the notice of meeting (or any supplement thereto) given by or
     at the direction of the Board of Directors, (B) otherwise properly brought
     before the meeting by or at the direction of the Board of Directors, or (C)
     otherwise properly brought before the meeting by a stockholder. For
     business to be properly brought before an annual meeting by a stockholder,
     the stockholder must have given timely notice thereof in writing to the
     Secretary of the corporation. To be timely, a stockholder's notice must be
     delivered to or mailed and received at the principal executive offices of
     the corporation not less than one hundred twenty (120) calendar days in
     advance of the date of the corporation's proxy statement released to
     stockholders in connection with the preceding year's annual meeting;
     provided, however, that in the event that no annual meeting was held in the
     previous year or the date of the annual meeting has been changed by more
     than thirty (30) days from the date contemplated at the time of the
     previous year's proxy statement, notice by the stockholder to be timely
     must be so received a reasonable time before the solicitation is made. A
     stockholder's notice to the Secretary shall set forth as to each matter the
     stockholder proposes to bring before the annual meeting: (i) a brief
     description of the business desired to be brought before the annual meeting
     and the reasons for conducting such business at the annual
 
                                      II-2
<PAGE>   101
 
     meeting, (ii) the name and address, as they appear on the corporation's
     books, of the stockholder proposing such business, (iii) the class and
     number of shares of the corporation which are beneficially owned by the
     stockholder, (iv) any material interest of the stockholder in such business
     and (v) any other information that is required to be provided by the
     stockholder pursuant to Regulation 14A under the Securities Exchange Act of
     1934, as amended (the "1934 Act"), in his capacity as a proponent to a
     stockholder proposal. Notwithstanding the foregoing, in order to include
     information with respect to a stockholder proposal in the proxy statement
     and form of proxy for a stockholder's meeting, stockholders must provide
     notice as required by the regulations promulgated under the 1934 Act.
     Notwithstanding anything in these Bylaws to the contrary, no business shall
     be conducted at any annual meeting except in accordance with the procedures
     set forth in this paragraph (b). The chairman of the annual meeting shall,
     if the facts warrant, determine and declare at the meeting that business
     was not properly brought before the meeting and in accordance with the
     provisions of this paragraph (b), and, if he should so determine, he shall
     so declare at the meeting that any such business not properly brought
     before the meeting shall not be transacted.
 
          (c)  Only persons nominated in accordance with the procedures set
     forth in this paragraph (c) shall be eligible for election as directors.
     Nominations of persons for election to the Board of Directors of the
     corporation may be made at a meeting of stockholders by or at the direction
     of the Board of Directors or by any stockholder of the corporation entitled
     to vote in the election of directors at the meeting who complies with the
     notice procedures set forth in this paragraph (c). Such nominations, other
     than those made by or at the direction of the Board of Directors, shall be
     made pursuant to timely notice in writing to the Secretary of the
     corporation in accordance with the provisions of paragraph (b) of this
     Section 5. Such stockholder's notice shall set forth (i) as to each person,
     if any, whom the stockholder proposes to nominate for election or
     re-election as a director: (A) the name, age, business address and
     residence address of such person, (B) the principal occupation or
     employment of such person, (C) the class and number of shares of the
     corporation which are beneficially owned by such person, (D) a description
     of all arrangements or understandings between the stockholder and each
     nominee and any other person or persons (naming such person or persons)
     pursuant to which the nominations are to be made by the stockholder, and
     (E) any other information relating to such person that is required to be
     disclosed in solicitations of proxies for election of directors, or is
     otherwise required, in each case pursuant to Regulation 14A under the 1934
     Act (including without limitation such person's written consent to being
     named in the proxy statement, if any, as a nominee and to serving as a
     director if elected); and (ii) as to such stockholder giving notice, the
     information required to be provided pursuant to paragraph (b) of this
     Section 5. At the request of the Board of Directors, any person nominated
     by a stockholder for election as a director shall furnish to the Secretary
     of the corporation that information required to be set forth in the
     stockholder's notice of nomination which pertains to the nominee. No person
     shall be eligible for election as a director of the corporation unless
     nominated in accordance with the procedures set forth in this paragraph
     (c). The chairman of the meeting shall, if the facts warrant, determine and
     declare at the meeting that a nomination was not made in accordance with
     the procedures prescribed by these Bylaws, and if he should so determine,
     he shall so declare at the meeting, and the defective nomination shall be
     disregarded.
 
     SECTION 6. Special Meetings.
 
          (a) Special meetings of the stockholders of the corporation may be
     called, for any purpose or purposes, by (i) the Chairman of the Board of
     Directors, (ii) the Chief Executive Officer, (iii) the Board of Directors
     pursuant to a resolution adopted by a majority of the total number of
     authorized directors (whether or not there exist any vacancies in
     previously authorized directorships at the time any such resolution is
     presented to the Board of Directors for adoption) or (iv) by the holders of
     shares entitled to cast not less than ten percent (10%) of the votes at the
     meeting, and shall be held at such place, on such date, and at such time as
     the Board of Directors, shall fix.
 
          (b) If a special meeting is called by any person or persons other than
     the Board of Directors, the request shall be in writing, specifying the
     general nature of the business proposed to be transacted, and shall be
     delivered personally or sent by registered mail or by telegraphic or other
     facsimile transmission to
                                      II-3
<PAGE>   102
 
     the Chairman of the Board of Directors, the Chief Executive Officer, or the
     Secretary of the corporation. No business may be transacted at such special
     meeting otherwise than specified in such notice. The Board of Directors
     shall determine the time and place of such special meeting, which shall be
     held not less than thirty-five (35) nor more than one hundred twenty (120)
     days after the date of the receipt of the request. Upon determination of
     the time and place of the meeting, the officer receiving the request shall
     cause notice to be given to the stockholders entitled to vote, in
     accordance with the provisions of Section 7 of these Bylaws. If the notice
     is not given within sixty (60) days after the receipt of the request, the
     person or persons requesting the meeting may set the time and place of the
     meeting and give the notice. Nothing contained in this paragraph (b) shall
     be construed as limiting, fixing, or affecting the time when a meeting of
     stockholders called by action of the Board of Directors may be held.
 
     SECTION 7. Notice of Meetings. Except as otherwise provided by law or the
Certificate of Incorporation, written notice of each meeting of stockholders
shall be given not less than ten (10) nor more than sixty (60) days before the
date of the meeting to each stockholder entitled to vote at such meeting, such
notice to specify the place, date and hour and purpose or purposes of the
meeting. Notice of the time, place and purpose of any meeting of stockholders
may be waived in writing, signed by the person entitled to notice thereof,
either before or after such meeting, and will be waived by any stockholder by
his attendance thereat in person or by proxy, except when the stockholder
attends a meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened. Any stockholder so waiving notice of such meeting shall be
bound by the proceedings of any such meeting in all respects as if due notice
thereof had been given.
 
     SECTION 8. Quorum. At all meetings of stockholders, except where otherwise
provided by statute or by the Certificate of Incorporation, or by these Bylaws,
the presence, in person or by proxy duly authorized, of the holders of a
majority of the outstanding shares of stock entitled to vote shall constitute a
quorum for the transaction of business. In the absence of a quorum, any meeting
of stockholders may be adjourned, from time to time, either by the chairman of
the meeting or by vote of the holders of a majority of the shares represented
thereat, but no other business shall be transacted at such meeting. The
stockholders present at a duly called or convened meeting, at which a quorum is
present, may continue to transact business until adjournment, notwithstanding
the withdrawal of enough stockholders to leave less than a quorum. Except as
otherwise provided by law, the Certificate of Incorporation or these Bylaws, all
action taken by the holders of a majority of the vote cast, excluding
abstentions, at any meeting at which a quorum is present shall be valid and
binding upon the corporation; provided, however, that directors shall be elected
by a plurality of the votes of the shares present in person or represented by
proxy at the meeting and entitled to vote on the election of directors. Where a
separate vote by a class or classes or series is required, except where
otherwise provided by the statute or by the Certificate of Incorporation or
these Bylaws, a majority of the outstanding shares of such class or classes or
series, present in person or represented by proxy, shall constitute a quorum
entitled to take action with respect to that vote on that matter and, except
where otherwise provided by the statute or by the Certificate of Incorporation
or these Bylaws, the affirmative vote of the majority (plurality, in the case of
the election of directors) of the votes cast, including abstentions, by the
holders of shares of such class or classes or series shall be the act of such
class or classes or series.
 
     SECTION 9. Adjournment and Notice of Adjourned Meetings. Any meeting of
stockholders, whether annual or special, may be adjourned from time to time
either by the chairman of the meeting or by the vote of a majority of the shares
casting votes, excluding abstentions. When a meeting is adjourned to another
time or place, notice need not be given of the adjourned meeting if the time and
place thereof are announced at the meeting at which the adjournment is taken. At
the adjourned meeting, the corporation may transact any business which might
have been transacted at the original meeting. If the adjournment is for more
than thirty (30) days or if after the adjournment a new record date is fixed for
the adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
 
     SECTION 10. Voting Rights. For the purpose of determining those
stockholders entitled to vote at any meeting of the stockholders, except as
otherwise provided by law, only persons in whose names shares stand on the stock
records of the corporation on the record date, as provided in Section 12 of
these Bylaws, shall be entitled to vote at any meeting of stockholders. Every
person entitled to vote shall have the right to do so either
                                      II-4
<PAGE>   103
 
in person or by an agent or agents authorized by a proxy granted in accordance
with Delaware law. An agent so appointed need not be a stockholder. No proxy
shall be voted after three (3) years from its date of creation unless the proxy
provides for a longer period.
 
     SECTION 11. Joint Owners of Stock. If shares or other securities having
voting power stand of record in the names of two (2) or more persons, whether
fiduciaries, members of a partnership, joint tenants, tenants in common, tenants
by the entirety, or otherwise, or if two (2) or more persons have the same
fiduciary relationship respecting the same shares, unless the Secretary is given
written notice to the contrary and is furnished with a copy of the instrument or
order appointing them or creating the relationship wherein it is so provided,
their acts with respect to voting shall have the following effect: (a) if only
one (1) votes, his act binds all; (b) if more than one (1) votes, the act of the
majority so voting binds all; (c) if more than one (1) votes, but the vote is
evenly split on any particular matter, each faction may vote the securities in
question proportionally, or may apply to the Delaware Court of Chancery for
relief as provided in the General Corporation Law of Delaware, Section 217(b).
If the instrument filed with the Secretary shows that any such tenancy is held
in unequal interests, a majority or even-split for the purpose of subsection (c)
shall be a majority or even-split in interest.
 
     SECTION 12. List of Stockholders. The Secretary shall prepare and make, at
least ten (10) days before every meeting of stockholders, a complete list of the
stockholders entitled to vote at said meeting, arranged in alphabetical order,
showing the address of each stockholder and the number of shares registered in
the name of each stockholder. Such list shall be open to the examination of any
stockholder, for any purpose germane to the meeting, during ordinary business
hours, for a period of at least ten (10) days prior to the meeting, either at a
place within the city where the meeting is to be held, which place shall be
specified in the notice of the meeting, or, if not specified, at the place where
the meeting is to be held. The list shall be produced and kept at the time and
place of meeting during the whole time thereof and may be inspected by any
stockholder who is present.
 
     SECTION 13. Action Without Meeting. No action shall be taken by the
stockholders except at an annual or special meeting of stockholders called in
accordance with these Bylaws, and no action shall be taken by the stockholders
by written consent.
 
     SECTION 14. Organization.
 
          (a) At every meeting of stockholders, the Chairman of the Board of
     Directors, or, if a Chairman has not been appointed or is absent, the Vice
     Chairman of the Board of Directors, or, if a Chairman has not been
     appointed or is absent and a Vice Chairman has not been appointed or is
     absent, the Chief Executive Officer, or, if a Chairman has not been
     appointed or is absent and a Vice Chairman has not been appointed or is
     absent and a Chief Executive Officer has not been appointed or is absent,
     the President, or, if all of such officers are absent, a chairman of the
     meeting chosen by a majority in interest of the stockholders entitled to
     vote, present in person or by proxy, shall preside over the meeting. The
     Secretary, or, in his absence, an Assistant Secretary directed to do so by
     the presiding officer, shall act as secretary of the meeting.
 
          (b) The Board of Directors of the corporation shall be entitled to
     make such rules or regulations for the conduct of meetings of stockholders
     as it shall deem necessary, appropriate or convenient. Subject to such
     rules and regulations of the Board of Directors, if any, the chairman of
     the meeting shall have the right and authority to prescribe such rules,
     regulations and procedures and to do all such acts as, in the judgment of
     such chairman, are necessary, appropriate or convenient for the proper
     conduct of the meeting, including, without limitation, establishing an
     agenda or order of business for the meeting, rules and procedures for
     maintaining order at the meeting and the safety of those present,
     limitations on participation in such meeting to stockholders of record of
     the corporation and their duly authorized and constituted proxies and such
     other persons as the chairman shall permit, restrictions on entry to the
     meeting after the time fixed for the commencement thereof, limitations on
     the time allotted to questions or comments by participants and regulation
     of the opening and closing of the polls for balloting on matters which are
     to be voted on by ballot. Unless and to the extent determined by the Board
     of Directors
 
                                      II-5
<PAGE>   104
 
     or the chairman of the meeting, meetings of stockholders shall not be
     required to be held in accordance with rules of parliamentary procedure.
 
                                   ARTICLE IV
 
                                   DIRECTORS
 
     SECTION 15. Number and Term of Office. The number of directors of the
corporation shall be set at five (5). This number may be changed, within the
limits specified above, by a duly adopted amendment to the Certificate of
Incorporation or by an amendment to this Bylaw duly adopted by the vote or
written consent of the holders of a majority of the stock issued and outstanding
and entitled to vote or by resolution of a majority of the Board of Directors,
except as may be otherwise specifically provided by statute or by the
Certificate of Incorporation. No reduction of the authorized number of directors
shall have the effect of removing any director before that director's term of
office expires. If for any cause, the directors shall not have been elected at
an annual meeting, they may be elected as soon thereafter as convenient at a
special meeting of the stockholders called for that purpose in the manner
provided in these Bylaws.
 
     SECTION 16. Powers. The powers of the corporation shall be exercised, its
business conducted and its property controlled by the Board of Directors, except
as may be otherwise provided by statute or by the Certificate of Incorporation.
 
     SECTION 17. Election of Directors. The Board of Directors shall be divided
into three classes designated as Class I, Class II, and Class III, respectively.
Directors shall be assigned to each class in accordance with a resolution or
resolutions adopted by the Board of Directors. At the first annual meeting of
stockholders following the date hereof, the term of office of the Class I
directors shall expire and Class I directors shall be elected for a full term of
three years. At the second annual meeting of stockholders following the date
hereof, the term of office of the Class II directors shall expire and Class II
directors shall be elected for a full term of three years. At the third annual
meeting of stockholders following the date hereof, the term of office of the
Class III directors shall expire and Class III directors shall be elected for a
full term of three years. At each succeeding annual meeting of stockholders,
directors shall be elected for a full term of three years to succeed the
directors of the class whose terms expire at such annual meeting.
Notwithstanding the foregoing provisions of this Section 17, each director shall
serve until his successor is duly elected and qualified or until his death,
resignation or removal. No decrease in the number of directors constituting the
Board of Directors shall shorten the term of any incumbent director.
 
     SECTION 18. Vacancies. Unless otherwise provided in the Certificate of
Incorporation, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of directors, shall
unless the Board of Directors determines by resolution that any such vacancies
or newly created directorships shall be filled by stockholders, be filled only
by the affirmative vote of a majority of the directors then in office, even
though less than a quorum of the Board of Directors. Any director elected in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the director for which the vacancy was created or occurred and
until such director's successor shall have been elected and qualified. A vacancy
in the Board of Directors shall be deemed to exist under this Bylaw in the case
of the death, removal or resignation of any director.
 
     SECTION 19. Resignation. Any director may resign at any time by delivering
his written resignation to the Secretary, such resignation to specify whether it
will be effective at a particular time, upon receipt by the Secretary or at the
pleasure of the Board of Directors. If no such specification is made, it shall
be deemed effective at the pleasure of the Board of Directors. When one or more
directors shall resign from the Board of Directors, effective at a future date,
a majority of the directors then in office, including those who have so
resigned, shall have power to fill such vacancy or vacancies, the vote thereon
to take effect when such resignation or resignations shall become effective, and
each Director so chosen shall hold office for the unexpired portion of the term
of the Director whose place shall be vacated and until his successor shall have
been duly elected and qualified.
 
                                      II-6
<PAGE>   105
 
     SECTION 20. Removal. Subject to the rights of the holders of any series of
Preferred Stock, the Board of Directors or any individual director may be
removed from office at any time (i) with cause by the affirmative vote of the
holders of a majority of the voting power of all the then-outstanding shares of
voting stock of the corporation, entitled to vote at an election of directors
(the "Voting Stock") or (ii) without cause by the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66 2/3%) of the voting
power of all the then-outstanding shares of the Voting Stock.
 
     SECTION 21. Meetings.
 
          (a) Annual Meetings. The annual meeting of the Board of Directors
     shall be held immediately before or after the annual meeting of
     stockholders and at the place where such meeting is held. No notice of an
     annual meeting of the Board of Directors shall be necessary and such
     meeting shall be held for the purpose of electing officers and transacting
     such other business as may lawfully come before it.
 
          (b) Regular Meetings. Except as hereinafter otherwise provided,
     regular meetings of the Board of Directors shall be held in the office of
     the corporation required to be maintained pursuant to Section 2 hereof.
     Unless otherwise restricted by the Certificate of Incorporation, regular
     meetings of the Board of Directors may also be held at any place within or
     without the State of Delaware which has been designated by resolution of
     the Board of Directors or the written consent of all directors.
 
          (c) Special Meetings. Unless otherwise restricted by the Certificate
     of Incorporation, special meetings of the Board of Directors may be held at
     any time and place within or without the State of Delaware whenever called
     by the Chairman of the Board, the President or any two of the directors
 
          (d) Telephone Meetings. Any member of the Board of Directors, or of
     any committee thereof, may participate in a meeting by means of conference
     telephone or similar communications equipment by means of which all persons
     participating in the meeting can hear each other, and participation in a
     meeting by such means shall constitute presence in person at such meeting.
 
          (e) Notice of Meetings. Notice of the time and place of all special
     meetings of the Board of Directors shall be orally or in writing, by
     telephone, facsimile, telegraph or telex, during normal business hours, at
     least twenty-four (24) hours before the date and time of the meeting, or
     sent in writing to each director by first class mail, charges prepaid, at
     least three (3) days before the date of the meeting. Notice of any meeting
     may be waived in writing at any time before or after the meeting and will
     be waived by any director by attendance thereat, except when the director
     attends the meeting for the express purpose of objecting, at the beginning
     of the meeting, to the transaction of any business because the meeting is
     not lawfully called or convened.
 
          (f) Waiver of Notice. The transaction of all business at any meeting
     of the Board of Directors, or any committee thereof, however called or
     noticed, or wherever held, shall be as valid as though had at a meeting
     duly held after regular call and notice, if a quorum be present and if,
     either before or after the meeting, each of the directors not present shall
     sign a written waiver of notice. All such waivers shall be filed with the
     corporate records or made a part of the minutes of the meeting.
 
     SECTION 22. Quorum and Voting.
 
          (a) Unless the Certificate of Incorporation requires a greater number
     and except with respect to indemnification questions arising under Section
     43 hereof, for which a quorum shall be one-third of the exact number of
     directors fixed from time to time in accordance with the Certificate of
     Incorporation, a quorum of the Board of Directors shall consist of a
     majority of the exact number of directors fixed from time to time by the
     Board of Directors in accordance with the Certificate of Incorporation;
     provided, however, at any meeting whether a quorum be present or otherwise,
     a majority of the directors present may adjourn from time to time until the
     time fixed for the next regular meeting of the Board of Directors, without
     notice other than by announcement at the meeting.
 
          (b) At each meeting of the Board of Directors at which a quorum is
     present, all questions and business shall be determined by the affirmative
     vote of a majority of the directors present, unless a different vote be
     required by law, the Certificate of Incorporation or these Bylaws.
                                      II-7
<PAGE>   106
 
     SECTION 23. Action Without Meeting. Unless otherwise restricted by the
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and such writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
 
     SECTION 24. Fees and Compensation. Directors shall be entitled to such
compensation for their services as may be approved by the Board of Directors,
including, if so approved, by resolution of the Board of Directors, a fixed sum
and expenses of attendance, if any, for attendance at each regular or special
meeting of the Board of Directors and at any meeting of a committee of the Board
of Directors. Nothing herein contained shall be construed to preclude any
director from serving the corporation in any other capacity as an officer,
agent, employee, or otherwise and receiving compensation therefor.
 
     SECTION 25. Committees.
 
          (a) Executive Committee. The Board of Directors may by resolution
     passed by a majority of the whole Board of Directors appoint an Executive
     Committee to consist of one (1) or more members of the Board of Directors.
     The Executive Committee, to the extent permitted by law and provided in the
     resolution of the Board of Directors shall have and may exercise all the
     powers and authority of the Board of Directors in the management of the
     business and affairs of the corporation, including without limitation the
     power or authority to declare a dividend, to authorize the issuance of
     stock and to adopt a certificate of ownership and merger, and may authorize
     the seal of the corporation to be affixed to all papers which may require
     it; but no such committee shall have the power or authority in reference to
     amending the Certificate of Incorporation (except that a committee may, to
     the extent authorized in the resolution or resolutions providing for the
     issuance of shares of stock adopted by the Board of Directors fix the
     designations and any of the preferences or rights of such shares relating
     to dividends, redemption, dissolution, any distribution of assets of the
     corporation or the conversion into, or the exchange of such shares for,
     shares of any other class or classes or any other series of the same or any
     other class or classes of stock of the corporation or fix the number of
     shares of any series of stock or authorize the increase or decrease of the
     shares of any series), adopting an agreement of merger or consolidation,
     recommending to the stockholders the sale, lease or exchange of all or
     substantially all of the corporation's property and assets, recommending to
     the stockholders a dissolution of the corporation or a revocation of a
     dissolution, or amending the bylaws of the corporation.
 
          (b) Other Committees. The Board of Directors may, by resolution passed
     by a majority of the whole Board of Directors, from time to time appoint an
     audit committee, nominating committee and such other committees as may be
     permitted by law. Such other committees appointed by the Board of Directors
     shall consist of one (1) or more members of the Board of Directors and
     shall have such powers and perform such duties as may be prescribed by the
     resolution or resolutions creating such committees, but in no event shall
     such committee have the powers denied to the Executive Committee in these
     Bylaws.
 
          (c) Term. Each member of a committee of the Board of Directors shall
     serve a term on the committee coexistent with such member's term on the
     Board of Directors. The Board of Directors, subject to the provisions of
     subsections (a) or (b) of this Bylaw may at any time increase or decrease
     the number of members of a committee or terminate the existence of a
     committee. The membership of a committee member shall terminate on the date
     of his death or voluntary resignation from the committee or from the Board
     of Directors. The Board of Directors may at any time for any reason remove
     any individual committee member and the Board of Directors may fill any
     committee vacancy created by death, resignation, removal or increase in the
     number of members of the committee. The Board of Directors may designate
     one or more directors as alternate members of any committee, who may
     replace any absent or disqualified member at any meeting of the committee,
     and, in addition, in the absence or disqualification of any member of a
     committee, the member or members thereof present at any meeting and not
     disqualified from voting, whether or not he or they constitute a quorum,
     may unanimously
 
                                      II-8
<PAGE>   107
 
     appoint another member of the Board of Directors to act at the meeting in
     the place of any such absent or disqualified member.
 
          (d) Meetings. Unless the Board of Directors shall otherwise provide,
     regular meetings of the Executive Committee or any other committee
     appointed pursuant to this Section 25 shall be held at such times and
     places as are determined by the Board of Directors, or by any such
     committee, and when notice thereof has been given to each member of such
     committee, no further notice of such regular meetings need be given
     thereafter. Special meetings of any such committee may be held at any place
     which has been determined from time to time by such committee, and may be
     called by any director who is a member of such committee, upon written
     notice to the members of such committee of the time and place of such
     special meeting given in the manner provided for the giving of written
     notice to members of the Board of Directors of the time and place of
     special meetings of the Board of Directors. Notice of any special meeting
     of any committee may be waived in writing at any time before or after the
     meeting and will be waived by any director by attendance thereat, except
     when the director attends such special meeting for the express purpose of
     objecting, at the beginning of the meeting, to the transaction of any
     business because the meeting is not lawfully called or convened. A majority
     of the authorized number of members of any such committee shall constitute
     a quorum for the transaction of business, and the act of a majority of
     those present at any meeting at which a quorum is present shall be the act
     of such committee.
 
     SECTION 26. Organization. At every meeting of the directors, the Chairman
of the Board of Directors, or, if a Chairman has not been appointed or is
absent, the Vice Chairman of the Board of Directors, or, if a Chairman has not
been appointed or is absent and a Vice Chairman has not been appointed or is
absent, the Chief Executive Officer, or, if a Chairman has not been appointed or
is absent and a Vice Chairman has not been appointed or is absent and a Chief
Executive Officer has not been appointed or is absent, the President, or, if all
of such officers are absent, a chairman of the meeting chosen by a majority of
the directors present, shall preside over the meeting. The Secretary, or in his
absence, an Assistant Secretary directed to do so by the presiding officer,
shall act as secretary of the meeting.
 
                                   ARTICLE V
 
                                    OFFICERS
 
     SECTION 27. Officers Designated. The officers of the corporation shall
include, if and when designated by the Board of Directors, the Chairman of the
Board of Directors, the Chief Executive Officer, the Vice Chairman of the Board
of Directors, the President, one or more Vice Presidents, the Secretary, the
Chief Financial Officer, the Treasurer, the Controller, all of whom shall be
elected at the annual organizational meeting of the Board of Directors. The
Board of Directors may also appoint one or more Assistant Secretaries, Assistant
Treasurers, Assistant Controllers and such other officers and agents with such
powers and duties as it shall deem necessary. The Board of Directors may assign
such additional titles to one or more of the officers as it shall deem
appropriate. Any one person may hold any number of offices of the corporation at
any one time unless specifically prohibited therefrom by law. The salaries and
other compensation of the officers of the corporation shall be fixed by or in
the manner designated by the Board of Directors.
 
     SECTION 28. Tenure and Duties of Officers.
 
          (a) General. All officers shall hold office at the pleasure of the
     Board of Directors and until their successors shall have been duly elected
     and qualified, unless sooner removed. Any officer elected or appointed by
     the Board of Directors may be removed at any time by the Board of
     Directors. If the office of any officer becomes vacant for any reason, the
     vacancy may be filled by the Board of Directors.
 
          (b) Duties of Chairman of the Board of Directors. The Chairman of the
     Board of Directors, when present, shall preside at all meetings of the
     stockholders and the Board of Directors. The Chairman of the Board of
     Directors shall perform other duties commonly incident to his office and
     shall also perform such other duties and have such other powers as the
     Board of Directors shall designate from time to time. If there is no Chief
     Executive Officer or President, then the Chairman of the Board of Directors
     shall also
 
                                      II-9
<PAGE>   108
 
     serve as the Chief Executive Officer of the corporation and shall have the
     powers and duties prescribed in paragraph (c) of this Section 28.
 
          (c) Duties of Chief Executive Officer. The Chief Executive Officer
     shall preside at all meetings of the stockholders and at all meetings of
     the Board of Directors, unless the Chairman of the Board of Directors has
     been appointed and is present or, in the absence of the Chairman of the
     Board of Directors, the Vice Chairman of the Board of Directors has been
     appointed and is present. The Chief Executive Officer shall be the chief
     executive officer of the corporation and shall, subject to the control of
     the Board of Directors, have general supervision, direction and control of
     the business and officers of the corporation. The Chief Executive Officer
     shall also perform such other duties and have such other powers as the
     Board of Directors shall designate from time to time.
 
          (d) Duties of Vice Chairman of the Board of Directors. The Vice
     Chairman of the Board of Directors shall preside at all meetings of the
     stockholders and the Board of Directors, unless the Chairman of the Board
     of Directors has been appointed and is present. The Vice Chairman of the
     Board of Directors shall perform other duties commonly incident to his
     office and shall also perform such other duties and have such other powers
     as the Board of Directors shall designate from time to time.
 
          (e) Duties of President. The President shall preside at all meetings
     of the stockholders and at all meetings of the Board of Directors, unless
     the Chairman of the Board of Directors has been appointed and is present
     or, in the absence of the Chairman of the Board of Directors, the Vice
     Chairman of the Board has been appointed and is present or, in the absence
     of the Chairman and Vice Chairman of the Board of Directors, the Chief
     Executive Officer has been appointed and is present. If there is no Chief
     Executive Officer, then the President shall also serve as the Chief
     Executive Officer of the corporation and shall have the powers and duties
     prescribed in paragraph (c) of this Section 28. The President shall perform
     other duties commonly incident to his office and shall also perform such
     other duties and have such other powers as the Board of Directors shall
     designate from time to time.
 
          (f) Duties of Vice Presidents. The Vice Presidents may assume and
     perform the duties of the President in the absence or disability of the
     President or whenever the office of President is vacant. The Vice
     Presidents shall perform other duties commonly incident to their office and
     shall also perform such other duties and have such other powers as the
     Board of Directors or the President shall designate from time to time.
 
          (g) Duties of Secretary. The Secretary shall attend all meetings of
     the stockholders and of the Board of Directors and shall record all acts
     and proceedings thereof in the minute book of the corporation. The
     Secretary shall give notice in conformity with these Bylaws of all meetings
     of the stockholders and of all meetings of the Board of Directors and any
     committee thereof requiring notice. The Secretary shall perform all other
     duties given him in these Bylaws and other duties commonly incident to his
     office and shall also perform such other duties and have such other powers
     as the Board of Directors shall designate from time to time. The President
     may direct any Assistant Secretary to assume and perform the duties of the
     Secretary in the absence or disability of the Secretary, and each Assistant
     Secretary shall perform other duties commonly incident to his office and
     shall also perform such other duties and have such other powers as the
     Board of Directors or the President shall designate from time to time.
 
          (h) Duties of Chief Financial Officer. The Chief Financial Officer
     shall keep or cause to be kept the books of account of the corporation in a
     thorough and proper manner and shall render statements of the financial
     affairs of the corporation in such form and as often as required by the
     Board of Directors or the President. The Chief Financial Officer, subject
     to the order of the Board of Directors, shall have the custody of all funds
     and securities of the corporation. The Chief Financial Officer shall
     perform other duties commonly incident to his office and shall also perform
     such other duties and have such other powers as the Board of Directors or
     the President shall designate from time to time. The President may direct
     the Treasurer or any Assistant Treasurer, or the Controller or any
     Assistant Controller to assume and perform the duties of the Chief
     Financial Officer in the absence or disability of the Chief Financial
     Officer, and each Treasurer and Assistant Treasurer and each Controller and
     Assistant Controller shall
                                      II-10
<PAGE>   109
 
     perform other duties commonly incident to his office and shall also perform
     such other duties and have such other powers as the Board of Directors or
     the Chief Executive Officer shall designate from time to time.
 
     SECTION 29. Delegation of Authority. The Board of Directors may from time
to time delegate the powers or duties of any officer to any other officer or
agent, notwithstanding any provision hereof.
 
     SECTION 30. Resignations. Any officer may resign at any time by giving
written notice to the Board of Directors or to the President or to the
Secretary. Any such resignation shall be effective when received by the person
or persons to whom such notice is given, unless a later time is specified
therein, in which event the resignation shall become effective at such later
time. Unless otherwise specified in such notice, the acceptance of any such
resignation shall not be necessary to make it effective. Any resignation shall
be without prejudice to the rights, if any, of the corporation under any
contract with the resigning officer.
 
     SECTION 31. Removal. Any officer may be removed from office at any time,
either with or without cause, by the affirmative vote of a majority of the
directors in office at the time, or by the unanimous written consent of the
directors in office at the time, or by any committee or superior officers upon
whom such power of removal may have been conferred by the Board of Directors.
 
                                   ARTICLE VI
 
    EXECUTION OF CORPORATE INSTRUMENTS AND VOTING OF SECURITIES OWNED BY THE
                                  CORPORATION
 
     SECTION 32. Execution of Corporate Instruments. The Board of Directors may,
in its discretion, determine the method and designate the signatory officer or
officers, or other person or persons, to execute on behalf of the corporation
any corporate instrument or document, or to sign on behalf of the corporation
the corporate name without limitation, or to enter into contracts on behalf of
the corporation, except where otherwise provided by law or these Bylaws, and
such execution or signature shall be binding upon the corporation.
 
     Unless otherwise specifically determined by the Board of Directors or
otherwise required by law, promissory notes, deeds of trust, mortgages and other
evidences of indebtedness of the corporation, and other corporate instruments or
documents requiring the corporate seal, and certificates of shares of stock
owned by the corporation, shall be executed, signed or endorsed by the Chairman
of the Board of Directors, or the President or any Vice President, and by the
Secretary or Treasurer or any Assistant Secretary or Assistant Treasurer. All
other instruments and documents requiring the corporate signature, but not
requiring the corporate seal, may be executed as aforesaid or in such other
manner as may be directed by the Board of Directors.
 
     All checks and drafts drawn on banks or other depositories on funds to the
credit of the corporation or in special accounts of the corporation shall be
signed by such person or persons as the Board of Directors shall authorize so to
do.
 
     Unless authorized or ratified by the Board of Directors or within the
agency power of an officer, no officer, agent or employee shall have any power
or authority to bind the corporation by any contract or engagement or to pledge
its credit or to render it liable for any purpose or for any amount.
 
     SECTION 33. Voting of Securities Owned by the Corporation. All stock and
other securities of other corporations owned or held by the corporation for
itself, or for other parties in any capacity, shall be voted, and all proxies
with respect thereto shall be executed, by the person authorized so to do by
resolution of the Board of Directors, or, in the absence of such authorization,
by the Chairman of the Board of Directors, the Chief Executive Officer, the
President, or any Vice President.
 
                                      II-11
<PAGE>   110
 
                                  ARTICLE VII
 
                                SHARES OF STOCK
 
     SECTION 34. Form and Execution of Certificates. Certificates for the shares
of stock of the corporation shall be in such form as is consistent with the
Certificate of Incorporation and applicable law. Every holder of stock in the
corporation shall be entitled to have a certificate signed by or in the name of
the corporation by the Chairman of the Board of Directors, or the President or
any Vice President and by the Treasurer or Assistant Treasurer or the Secretary
or Assistant Secretary, certifying the number of shares owned by him in the
corporation. Any or all of the signatures on the certificate may be facsimiles.
In case any officer, transfer agent, or registrar who has signed or whose
facsimile signature has been placed upon a certificate shall have ceased to be
such officer, transfer agent, or registrar before such certificate is issued, it
may be issued with the same effect as if he were such officer, transfer agent,
or registrar at the date of issue. Each certificate shall state upon the face or
back thereof, in full or in summary, all of the powers, designations,
preferences, and rights, and the limitations or restrictions of the shares
authorized to be issued or shall, except as otherwise required by law, set forth
on the face or back a statement that the corporation will furnish without charge
to each stockholder who so requests the powers, designations, preferences and
relative, participating, optional, or other special rights of each class of
stock or series thereof and the qualifications, limitations or restrictions of
such preferences and/or rights. Within a reasonable time after the issuance or
transfer of uncertificated stock, the corporation shall send to the registered
owner thereof a written notice containing the information required to be set
forth or stated on certificates pursuant to this section or otherwise required
by law or with respect to this section a statement that the corporation will
furnish without charge to each stockholder who so requests the powers,
designations, preferences and relative participating, optional or other special
rights of each class of stock or series thereof and the qualifications,
limitations or restrictions of such preferences and/or rights. Except as
otherwise expressly provided by law, the rights and obligations of the holders
of certificates representing stock of the same class and series shall be
identical.
 
     SECTION 35. Lost Certificates. A new certificate or certificates shall be
issued in place of any certificate or certificates theretofore issued by the
corporation alleged to have been lost, stolen, or destroyed, upon the making of
an affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen, or destroyed. The corporation may require, as a condition
precedent to the issuance of a new certificate or certificates, the owner of
such lost, stolen, or destroyed certificate or certificates, or his legal
representative, to advertise the same in such manner as it shall require or to
give the corporation a surety bond in such form and amount as it may direct as
indemnity against any claim that may be made against the corporation with
respect to the certificate alleged to have been lost, stolen, or destroyed.
 
     SECTION 36. Transfers.
 
          (a) Transfers of record of shares of stock of the corporation shall be
     made only upon its books by the holders thereof, in person or by attorney
     duly authorized, and upon the surrender of a properly endorsed certificate
     or certificates for a like number of shares.
 
          (b) The corporation shall have power to enter into and perform any
     agreement with any number of stockholders of any one or more classes of
     stock of the corporation to restrict the transfer of shares of stock of the
     corporation of any one or more classes owned by such stockholders in any
     manner not prohibited by the General Corporation Law of Delaware.
 
     SECTION 37. Fixing Record Dates.
 
          (a) In order that the corporation may determine the stockholders
     entitled to notice of or to vote at any meeting of stockholders or any
     adjournment thereof, the Board of Directors may fix, in advance, a record
     date, which record date shall not precede the date upon which the
     resolution fixing the record date is adopted by the Board of Directors, and
     which record date shall not be more than sixty (60) nor less than ten (10)
     days before the date of such meeting. If no record date is fixed by the
     Board of Directors, the record date for determining stockholders entitled
     to notice of or to vote at a meeting of stockholders shall be at the close
     of business on the day next preceding the day on which notice is given, or
     if notice is waived, at the close of business on the day next preceding the
     day on which the meeting is held. A
                                      II-12
<PAGE>   111
 
     determination of stockholders of record entitled to notice of or to vote at
     a meeting of stockholders shall apply to any adjournment of the meeting;
     provided, however, that the Board of Directors may fix a new record date
     for the adjourned meeting.
 
          (b) In order that the corporation may determine the stockholders
     entitled to receive payment of any dividend or other distribution or
     allotment of any rights or the stockholders entitled to exercise any rights
     in respect of any change, conversion or exchange of stock, or for the
     purpose of any other lawful action, the Board of Directors may fix, in
     advance, a record date, which record date shall not precede the date upon
     which the resolution fixing the record date is adopted, and which record
     date shall be not more than sixty (60) days prior to such action. If no
     record date is fixed, the record date for determining stockholders for any
     such purpose shall be at the close of business on the day on which the
     Board of Directors adopts the resolution relating thereto.
 
     SECTION 38. Registered Stockholders. The corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and shall not be
bound to recognize any equitable or other claim to or interest in such share or
shares on the part of any other person whether or not it shall have express or
other notice thereof, except as otherwise provided by the laws of Delaware.
 
                                  ARTICLE VIII
 
                      OTHER SECURITIES OF THE CORPORATION
 
     SECTION 39. Execution of Other Securities. All bonds, debentures and other
corporate securities of the corporation, other than stock certificates (covered
in Section 34), may be signed by the Chairman of the Board of Directors, the
President or any Vice President, or such other person as may be authorized by
the Board of Directors, and the corporate seal impressed thereon or a facsimile
of such seal imprinted thereon and attested by the signature of the Secretary or
an Assistant Secretary, or the Chief Financial Officer or Treasurer or an
Assistant Treasurer; provided, however, that where any such bond, debenture or
other corporate security shall be authenticated by the manual signature, or
where permissible facsimile signature, of a trustee under an indenture pursuant
to which such bond, debenture or other corporate security shall be issued, the
signatures of the persons signing and attesting the corporate seal on such bond,
debenture or other corporate security may be the imprinted facsimile of the
signatures of such persons. Interest coupons appertaining to any such bond,
debenture or other corporate security, authenticated by a trustee as aforesaid,
shall be signed by the Treasurer or an Assistant Treasurer of the corporation or
such other person as may be authorized by the Board of Directors, or bear
imprinted thereon the facsimile signature of such person. In case any officer
who shall have signed or attested any bond, debenture or other corporate
security, or whose facsimile signature shall appear thereon or on any such
interest coupon, shall have ceased to be such officer before the bond, debenture
or other corporate security so signed or attested shall have been delivered,
such bond, debenture or other corporate security nevertheless may be adopted by
the corporation and issued and delivered as though the person who signed the
same or whose facsimile signature shall have been used thereon had not ceased to
be such officer of the corporation.
 
                                   ARTICLE IX
 
                                   DIVIDENDS
 
     SECTION 40. Declaration of Dividends. Dividends upon the capital stock of
the corporation, subject to the provisions of the Certificate of Incorporation,
if any, may be declared by the Board of Directors pursuant to law at any regular
or special meeting. Dividends may be paid in cash, in property, or in shares of
the capital stock, subject to the provisions of the Certificate of
Incorporation.
 
     SECTION 41. Dividend Reserve. Before payment of any dividend, there may be
set aside out of any funds of the corporation available for dividends such sum
or sums as the Board of Directors from time to time, in their absolute
discretion, think proper as a reserve or reserves to meet contingencies, or for
equalizing
 
                                      II-13
<PAGE>   112
 
dividends, or for repairing or maintaining any property of the corporation, or
for such other purpose as the Board of Directors shall think conducive to the
interests of the corporation, and the Board of Directors may modify or abolish
any such reserve in the manner in which it was created.
 
                                   ARTICLE X
 
                                  FISCAL YEAR
 
     SECTION 42. Fiscal Year. The fiscal year of the corporation shall be fixed
by resolution of the Board of Directors.
 
                                   ARTICLE XI
 
                                INDEMNIFICATION
 
     SECTION 43. Indemnification Of Directors, Executive Officers, Other
Officers, Employees And Other Agents.
 
          (a) Directors and Executive Officers. The corporation shall indemnify
     its directors and executive officers (for the purposes of this Article XI,
     "executive officers" shall have the meaning defined in Rule 3b-7
     promulgated under the 1934 Act) to the fullest extent not prohibited by the
     Delaware General Corporation Law; provided, however, that the corporation
     may modify the extent of such indemnification by individual contracts with
     its directors and executive officers; and, provided, further, that the
     corporation shall not be required to indemnify any director or executive
     officer in connection with any proceeding (or part thereof) initiated by
     such person unless (i) such indemnification is expressly required to be
     made by law, (ii) the proceeding was authorized by the Board of Directors
     of the corporation, (iii) such indemnification is provided by the
     corporation, in its sole discretion, pursuant to the powers vested in the
     corporation under the Delaware General Corporation Law or (iv) such
     indemnification is required to be made under subsection (d).
 
          (b) Other Officers, Employees and Other Agents. The corporation shall
     have power to indemnify its other officers, employees and other agents as
     set forth in the Delaware General Corporation Law.
 
          (c) Expenses. The corporation shall advance to any person who was or
     is a party or is threatened to be made a party to any threatened, pending
     or completed action, suit or proceeding, whether civil, criminal,
     administrative or investigative, by reason of the fact that he is or was a
     director or executive officer, of the corporation, or is or was serving at
     the request of the corporation as a director or executive officer of
     another corporation, partnership, joint venture, trust or other enterprise,
     prior to the final disposition of the proceeding, promptly following
     request therefor, all expenses incurred by any director or executive
     officer in connection with such proceeding upon receipt of an undertaking
     by or on behalf of such person to repay said amounts if it should be
     determined ultimately that such person is not entitled to be indemnified
     under this Bylaw or otherwise.
 
     Notwithstanding the foregoing, unless otherwise determined pursuant to
     paragraph (e) of this Bylaw, no advance shall be made by the corporation to
     an executive officer of the corporation (except by reason of the fact that
     such executive officer is or was a director of the corporation in which
     event this paragraph shall not apply) in any action, suit or proceeding,
     whether civil, criminal, administrative or investigative, if a
     determination is reasonably and promptly made (i) by the Board of Directors
     by a majority vote of a quorum consisting of directors who were not parties
     to the proceeding, or (ii) if such quorum is not obtainable, or, even if
     obtainable, a quorum of disinterested directors so directs, by independent
     legal counsel in a written opinion, that the facts known to the
     decision-making party at the time such determination is made demonstrate
     clearly and convincingly that such person acted in bad faith or in a manner
     that such person did not believe to be in or not opposed to the best
     interests of the corporation.
 
          (d) Enforcement. Without the necessity of entering into an express
     contract, all rights to indemnification and advances to directors and
     executive officers under this Bylaw shall be deemed to be
 
                                      II-14
<PAGE>   113
 
     contractual rights and be effective to the same extent and as if provided
     for in a contract between the corporation and the director or executive
     officer. Any right to indemnification or advances granted by this Bylaw to
     a director or executive officer shall be enforceable by or on behalf of the
     person holding such right in any court of competent jurisdiction if (i) the
     claim for indemnification or advances is denied, in whole or in part, or
     (ii) no disposition of such claim is made within ninety (90) days of
     request therefor. The claimant in such enforcement action, if successful in
     whole or in part, shall be entitled to be paid also the expense of
     prosecuting his claim. In connection with any claim for indemnification,
     the corporation shall be entitled to raise as a defense to any such action
     that the claimant has not met the standards of conduct that make it
     permissible under the Delaware General Corporation Law for the corporation
     to indemnify the claimant for the amount claimed. In connection with any
     claim by an executive officer of the corporation (except in any action,
     suit or proceeding, whether civil, criminal, administrative or
     investigative, by reason of the fact that such executive officer is or was
     a director of the corporation) for advances, the corporation shall be
     entitled to raise a defense as to any such action clear and convincing
     evidence that such person acted in bad faith or in a manner that such
     person did not believe to be in or not opposed to the best interests of the
     corporation, or with respect to any criminal action or proceeding that such
     person acted without reasonable cause to believe that his conduct was
     lawful. Neither the failure of the corporation (including its Board of
     Directors, independent legal counsel or its stockholders) to have made a
     determination prior to the commencement of such action that indemnification
     of the claimant is proper in the circumstances because he has met the
     applicable standard of conduct set forth in the Delaware General
     Corporation Law, nor an actual determination by the corporation (including
     its Board of Directors, independent legal counsel or its stockholders) that
     the claimant has not met such applicable standard of conduct, shall be a
     defense to the action or create a presumption that claimant has not met the
     applicable standard of conduct.
 
          (e) Non-Exclusivity of Rights. The rights conferred on any person by
     this Bylaw shall not be exclusive of any other right which such person may
     have or hereafter acquire under any statute, provision of the Certificate
     of Incorporation, Bylaws, agreement, vote of stockholders or disinterested
     directors or otherwise, both as to action in his official capacity and as
     to action in another capacity while holding office. The corporation is
     specifically authorized to enter into individual contracts with any or all
     of its directors, officers, employees or agents respecting indemnification
     and advances, to the fullest extent not prohibited by the Delaware General
     Corporation Law.
 
          (f) Survival of Rights. The rights conferred on any person by this
     Bylaw shall continue as to a person who has ceased to be a director,
     officer, employee or other agent and shall inure to the benefit of the
     heirs, executors and administrators of such a person.
 
          (g) Insurance. To the fullest extent permitted by the Delaware General
     Corporation Law, the corporation, upon approval by the Board of Directors,
     may purchase insurance on behalf of any person required or permitted to be
     indemnified pursuant to this Bylaw.
 
          (h) Amendments. Any repeal or modification of this Bylaw shall only be
     prospective and shall not affect the rights under this Bylaw in effect at
     the time of the alleged occurrence of any action or omission to act that is
     the cause of any proceeding against any agent of the corporation.
 
          (i) Saving Clause. If this Bylaw or any portion hereof shall be
     invalidated on any ground by any court of competent jurisdiction, then the
     corporation shall nevertheless indemnify each director and executive
     officer to the full extent not prohibited by any applicable portion of this
     Bylaw that shall not have been invalidated, or by any other applicable law.
 
          (j) Certain Definitions. For the purposes of this Bylaw, the following
     definitions shall apply:
 
             (i) The term "proceeding" shall be broadly construed and shall
        include, without limitation, the investigation, preparation,
        prosecution, defense, settlement, arbitration and appeal of, and the
        giving of testimony in, any threatened, pending or completed action,
        suit or proceeding, whether civil, criminal, administrative or
        investigative.
 
                                      II-15
<PAGE>   114
 
             (ii) The term "expenses" shall be broadly construed and shall
        include, without limitation, court costs, attorneys' fees, witness fees,
        fines, amounts paid in settlement or judgment and any other costs and
        expenses of any nature or kind incurred in connection with any
        proceeding.
 
             (iii) The term the "corporation" shall include, in addition to the
        resulting corporation, any constituent corporation (including any
        constituent of a constituent) absorbed in a consolidation or merger
        which, if its separate existence had continued, would have had power and
        authority to indemnify its directors, officers, and employees or agents,
        so that any person who is or was a director, officer, employee or agent
        of such constituent corporation, or is or was serving at the request of
        such constituent corporation as a director, officer, employee or agent
        of another corporation, partnership, joint venture, trust or other
        enterprise, shall stand in the same position under the provisions of
        this Bylaw with respect to the resulting or surviving corporation as he
        would have with respect to such constituent corporation if its separate
        existence had continued.
 
             (iv) References to a "director," "executive officer," "officer,"
        "employee," or "agent" of the corporation shall include, without
        limitation, situations where such person is serving at the request of
        the corporation as, respectively, a director, executive officer,
        officer, employee, trustee or agent of another corporation, partnership,
        joint venture, trust or other enterprise.
 
             (v) References to "other enterprises" shall include employee
        benefit plans; references to "fines" shall include any excise taxes
        assessed on a person with respect to an employee benefit plan; and
        references to "serving at the request of the corporation" shall include
        any service as a director, officer, employee or agent of the corporation
        which imposes duties on, or involves services by, such director,
        officer, employee, or agent with respect to an employee benefit plan,
        its participants, or beneficiaries; and a person who acted in good faith
        and in a manner he reasonably believed to be in the interest of the
        participants and beneficiaries of an employee benefit plan shall be
        deemed to have acted in a manner "not opposed to the best interests of
        the corporation" as referred to in this Bylaw.
 
                                  ARTICLE XII
 
                                    NOTICES
 
     SECTION 44. Notices.
 
          (a) Notice to Stockholders. Whenever, under any provisions of these
     Bylaws, notice is required to be given to any stockholder, it shall be
     given in writing, timely and duly deposited in the United States mail,
     postage prepaid, and addressed to his last known post office address as
     shown by the stock record of the corporation or its transfer agent.
 
          (b) Notice to Directors. Any notice required to be given to any
     director may be given by the method stated in subsection (a), or by
     facsimile, telex or telegram, except that such notice other than one which
     is delivered personally shall be sent to such address as such director
     shall have filed in writing with the Secretary, or, in the absence of such
     filing, to the last known post office address of such director.
 
          (c) Affidavit of Mailing. An affidavit of mailing, executed by a duly
     authorized and competent employee of the corporation or its transfer agent
     appointed with respect to the class of stock affected, specifying the name
     and address or the names and addresses of the stockholder or stockholders,
     or director or directors, to whom any such notice or notices was or were
     given, and the time and method of giving the same, shall in the absence of
     fraud, be prima facie evidence of the facts therein contained.
 
          (d) Time Notices Deemed Given. All notices given by mail, as above
     provided, shall be deemed to have been given as at the time of mailing, and
     all notices given by facsimile, telex or telegram shall be deemed to have
     been given as of the sending time recorded at time of transmission.
 
          (e) Methods of Notice. It shall not be necessary that the same method
     of giving notice be employed in respect of all directors, but one
     permissible method may be employed in respect of any one or more, and any
     other permissible method or methods may be employed in respect of any other
     or others.
 
                                      II-16
<PAGE>   115
 
          (f) Failure to Receive Notice. The period or limitation of time within
     which any stockholder may exercise any option or right, or enjoy any
     privilege or benefit, or be required to act, or within which any director
     may exercise any power or right, or enjoy any privilege, pursuant to any
     notice sent him in the manner above provided, shall not be affected or
     extended in any manner by the failure of such stockholder or such director
     to receive such notice.
 
          (g) Notice to Person With Whom Communication is Unlawful. Whenever
     notice is required to be given, under any provision of law or of the
     Certificate of Incorporation or Bylaws of the corporation, to any person
     with whom communication is unlawful, the giving of such notice to such
     person shall not be required and there shall be no duty to apply to any
     governmental authority or agency for a license or permit to give such
     notice to such person. Any action or meeting which shall be taken or held
     without notice to any such person with whom communication is unlawful shall
     have the same force and effect as if such notice had been duly given. In
     the event that the action taken by the corporation is such as to require
     the filing of a certificate under any provision of the Delaware General
     Corporation Law, the certificate shall state, if such is the fact and if
     notice is required, that notice was given to all persons entitled to
     receive notice except such persons with whom communication is unlawful.
 
          (h) Notice to Person with Undeliverable Address. Whenever notice is
     required to be given, under any provision of law or the Certificate of
     Incorporation or Bylaws of the corporation, to any stockholder to whom (i)
     notice of two consecutive annual meetings, and all notices of meetings or
     of the taking of action by written consent without a meeting to such person
     during the period between such two consecutive annual meetings, or (ii)
     all, and at least two, payments (if sent by first class mail) of dividends
     or interest on securities during a twelve-month period, have been mailed
     addressed to such person at his address as shown on the records of the
     corporation and have been returned undeliverable, the giving of such notice
     to such person shall not be required. Any action or meeting which shall be
     taken or held without notice to such person shall have the same force and
     effect as if such notice had been duly given. If any such person shall
     deliver to the corporation a written notice setting forth his then current
     address, the requirement that notice be given to such person shall be
     reinstated. In the event that the action taken by the corporation is such
     as to require the filing of a certificate under any provision of the
     Delaware General Corporation Law, the certificate need not state that
     notice was not given to persons to whom notice was not required to be given
     pursuant to this paragraph.
 
                                  ARTICLE XIII
 
                                   AMENDMENTS
 
     SECTION 45. Amendments. Subject to paragraph (h) of Section 43 of these
Bylaws, the Bylaws may be amended or repealed and new Bylaws adopted by (a) the
affirmative vote of at least sixty-six and two-thirds percent (66 2/3%) of the
voting power of all of the then-outstanding shares of the Voting Stock or (b)
the Board of Directors.
 
                                  ARTICLE XIV
 
                               LOANS TO OFFICERS
 
     SECTION 46. Loans to Officers. The corporation may lend money to, or
guarantee any obligation of, or otherwise assist any officer or other employee
of the corporation or of its subsidiaries, including any officer or employee who
is a Director of the corporation or its subsidiaries, whenever, in the judgment
of the Board of Directors, such loan, guarantee or assistance may reasonably be
expected to benefit the corporation. The loan, guarantee or other assistance may
be with or without interest and may be unsecured, or secured in such manner as
the Board of Directors shall approve, including, without limitation, a pledge of
shares of stock of the corporation. Nothing in these Bylaws shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of the corporation at
common law or under any statute.
 
                                      II-17
<PAGE>   116
 
                                   ARTICLE XV
 
                                 MISCELLANEOUS
 
     SECTION 47. Annual Report.
 
          (a) Subject to the provisions of paragraph (b) of this Bylaw, the
     Board of Directors shall cause an annual report to be sent to each
     stockholder of the corporation not later than one hundred twenty (120) days
     after the close of the corporation's fiscal year. Such report shall include
     a balance sheet as of the end of such fiscal year and an income statement
     and statement of changes in financial position for such fiscal year,
     accompanied by any report thereon of independent accounts or, if there is
     no such report, the certificate of an authorized officer of the corporation
     that such statements were prepared without audit from the books and records
     of the corporation. When there are more than 100 stockholders of record of
     the corporation's shares, as determined by the General Corporation Law of
     Delaware, additional information as required by the 1934 Act shall also be
     contained in such report. Such report shall be sent to stockholders at
     least fifteen (15) days prior to the next annual meeting of stockholders
     after the end of the fiscal year to which it relates.
 
          (b) If and so long as there are fewer than 100 holders of record of
     the corporation's shares, the requirement of sending of an annual report to
     the stockholders of the corporation is hereby expressly waived.
 
                                      II-18
<PAGE>   117
 
                                                                       ANNEX III
 
                                  HI/FN, INC.
 
                           1996 EQUITY INCENTIVE PLAN
   
                           ADOPTED NOVEMBER 21, 1996
    
 
   
              (AS AMENDED AND RESTATED EFFECTIVE DECEMBER 7, 1998)
    
 
     1. Purposes
 
          (a) The purpose of the Plan is to provide a means by which selected
     Employees and Directors of and Consultants to the Company, and its
     Affiliates, may be given an opportunity to benefit from increases in value
     of the stock of the Company through the granting of (i) Incentive Stock
     Options, (ii) Nonstatutory Stock Options, (iii) stock bonuses, (iv) rights
     to purchase restricted stock, and (v) stock appreciation rights, all as
     defined below.
 
          (b) The Company, by means of the Plan, seeks to retain the services of
     persons who are now Employees or Directors of or Consultants to the Company
     or its Affiliates, to secure and retain the services of new Employees,
     Directors and Consultants, and to provide incentives for such persons to
     exert maximum efforts for the success of the Company and its Affiliates.
 
          (c) The Company intends that the Stock Awards issued under the Plan
     shall, in the discretion of the Board or any Committee to which
     responsibility for administration of the Plan has been delegated pursuant
     to subsection 3(c), be either (i) Options granted pursuant to Section 6
     hereof, including Incentive Stock Options and Nonstatutory Stock Options,
     (ii) stock bonuses or rights to purchase restricted stock granted pursuant
     to Section 7 hereof, or (iii) stock appreciation rights granted pursuant to
     Section 8 hereof. All Options shall be separately designated Incentive
     Stock Options or Nonstatutory Stock Options at the time of grant, and in
     such form as issued pursuant to Section 6, and a separate certificate or
     certificates will be issued for shares purchased on exercise of each type
     of Option.
 
     2. Definitions
 
          (a) "Administrator" means the Board or any of its Committees as shall
     be administering the Plan, in accordance with Section 3 of the Plan.
 
          (b) "Affiliate" means any parent corporation or subsidiary
     corporation, whether now or hereafter existing, as those terms are defined
     in Sections 424(e) and (f) respectively, of the Code.
 
          (c) "Applicable Laws" means the requirements relating to the
     administration of stock plans under U.S. state corporate laws, U.S. federal
     and state securities laws, the Code, any stock exchange or quotation system
     on which the Common Stock is listed or quoted and the applicable laws of
     any foreign country or jurisdiction where Stock Awards are, or will be,
     granted under the Plan.
 
          (d) "Board" means the Board of Directors of the Company.
 
          (e) "Code" means the Internal Revenue Code of 1986, as amended.
 
          (f) "Committee" means a committee appointed by the Board in accordance
     with Section 3 of the Plan.
 
          (g) "Common Stock" means the common stock of the Company.
 
          (h) "Company" means hi/fn, inc., a Delaware corporation.
 
          (i) "Concurrent Stock Appreciation Right" or "Concurrent Right" means
     a right granted pursuant to subsection 9(c)(ii) of the Plan.
 
          (j) "Consultant" means any person, including an advisor, engaged by
     the Company or an Affiliate to render consulting services; provided,
     however that a Consultant shall not include a Director.
 
                                      III-1
<PAGE>   118
 
          (k) "Continuous Status as an Employee, Director or Consultant" means
     that the service of an individual to the Company, whether as an Employee,
     Director or Consultant, is not interrupted or terminated.
 
          (l) "Director" means a member of the Board.
 
          (m) "Disability" means total and permanent disability as defined in
     Section 22(e)(3) of the Code.
 
          (n) "Employee" means any person, including Officers and Directors,
     employed by the Company or any Affiliate of the Company. An individual's
     continuous status as an Employee shall not be deemed to be interrupted or
     terminated in the case of (i) any leave of absence approved by the Company
     or (ii) transfers between locations of the Company or between the Company
     and its Affiliates, or any successor. For purposes of Incentive Stock
     Options, no such leave may exceed ninety days, unless reemployment upon
     expiration of such leave is guaranteed by statute or contract. If
     reemployment upon expiration of a leave of absence approved by the Company
     is not so guaranteed, on the 181st day of such leave any Incentive Stock
     Option held by the Optionee shall cease to be treated as an Incentive Stock
     Option and shall be treated for tax purposes as a Nonstatutory Stock
     Option. Neither service as a Director nor payment of a director's fee by
     the Company shall be sufficient to constitute "employment" by the Company.
 
          (o) "Exchange Act" means the Securities Exchange Act of 1934, as
     amended.
 
          (p) "Fair Market Value" means, as of any date, the value of Common
     Stock determined as follows:
 
             (i) If the Common Stock is listed on any established stock exchange
        or a national market system, including without limitation the Nasdaq
        National Market or The Nasdaq SmallCap Market of The Nasdaq Stock
        Market, its Fair Market Value shall be the closing sales price for such
        stock (or the closing bid, if no sales were reported) as quoted on such
        exchange or system for the last market trading day prior to the time of
        determination, as reported in The Wall Street Journal or such other
        source as the Administrator deems reliable;
 
             (ii) If the Common Stock is regularly quoted by a recognized
        securities dealer but selling prices are not reported, the Fair Market
        Value of a share of Common Stock shall be the mean between the high bid
        and low asked prices for the Common Stock on the last market trading day
        prior to the day of determination, as reported in The Wall Street
        Journal or such other source as the Administrator deems reliable; or
 
             (iii) In the absence of an established market for the Common Stock,
        the Fair Market Value shall be determined in good faith by the
        Administrator.
 
          (q) "Incentive Stock Option" means an Option intended to qualify as an
     incentive stock option within the meaning of Section 422 of the Code and
     the regulations promulgated thereunder.
 
          (r) "Independent Stock Appreciation Right" or "Independent Right"
     means a right granted pursuant to subsection 9(c)(iii) of the Plan.
 
          (s) "Inside Director" means a Director who is an Employee.
 
          (t) "Nonstatutory Stock Option" means an Option not intended to
     qualify as an Incentive Stock Option.
 
          (u) "Officer" means a person who is an officer of the Company within
     the meaning of Section 16 of the Exchange Act and the rules and regulations
     promulgated thereunder.
 
          (v) "Option" means a stock option granted pursuant to the Plan.
 
          (w) "Option Agreement" means a written agreement between the Company
     and an Optionee evidencing the terms and conditions of an individual Option
     grant. Each Option Agreement shall be subject to the terms and conditions
     of the Plan.
 
          (x) "Optionee" means a person who holds an outstanding Option.
                                      III-2
<PAGE>   119
 
          (y) "Option Exchange Program" means a program whereby outstanding
     Options are surrendered in exchange for Options with a lower exercise
     price.
 
          (z) "Outside Director" means a Director who is not an Employee.
 
          (aa) "Plan" means this hi/fn, inc. 1996 Equity Incentive Plan.
 
          (bb) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any
     successor to Rule 16b-3, as in effect when discretion is being exercised
     with respect to the Plan.
 
          (cc) "Stock Appreciation Right" means any of the various types of
     rights which may be granted under Section 9 of the Plan.
 
          (dd) "Stock Award" means any right granted under the Plan, including
     any Option, any stock bonus, any right to purchase restricted stock, and
     any Stock Appreciation Right.
 
          (ee) "Stock Award Agreement" means a written agreement between the
     Company and a holder of a Stock Award evidencing the terms and conditions
     of an individual Stock Award grant. Each Stock Award Agreement shall be
     subject to the terms and conditions of the Plan.
 
          (ff) "Tandem Stock Appreciation Right" or "Tandem Right" means a right
     granted pursuant to subsection 9(c)(i) of the Plan.
 
     3. Administration
 
          (a) Procedure.
 
             (i) Multiple Administrative Bodies. The Plan may be administered by
        different Committees with respect to different groups of Employees,
        Directors or Consultants.
 
             (ii) Section 162(m). To the extent that the Administrator
        determines it to be desirable to qualify transactions hereunder as
        "performance-based compensation" within the meaning of Section 162(m) of
        the Code, the transactions contemplated hereunder shall be administered
        by a Committee of two or more "outside directors" within the meaning of
        Section 162(m) of the Code.
 
             (iii) Rule 16b-3. Except as provided in Section 8, to the extent
        that the Administrator determines it to be desirable to qualify
        transactions hereunder as exempt under Rule 16b-3, the transactions
        contemplated hereunder shall be structured to satisfy the requirements
        for exemption under Rule 16b-3.
 
             (iv) Other Administration. Other than as provided above, the Plan
        shall be administered by (A) the Board or (B) a Committee, which
        committee shall be constituted to satisfy Applicable Laws.
 
          (b) Powers of the Administrator. Subject to the provisions of the
     Plan, and in the case of a Committee, subject to the specific duties
     delegated by the Board to such Committee, the Administrator shall have the
     authority, in its discretion:
 
             (i) to determine the Fair Market Value;
 
             (ii) to select the Employees, Directors and Consultants to whom
        Stock Awards may be granted hereunder;
 
             (iii) to determine the number of shares of Common Stock to be
        covered by each Stock Award granted hereunder;
 
             (iv) to approve forms of agreement for use under the Plan;
 
             (v) to determine the terms and conditions, not inconsistent with
        the terms of the Plan, of any Stock Award granted hereunder. Such terms
        and conditions include, but are not limited to, the exercise price, the
        time or times when Stock Awards may be exercised (which may be based on
        performance criteria), any vesting acceleration or waiver of forfeiture
        restrictions, and any restriction
 
                                      III-3
<PAGE>   120
 
        or limitation regarding any Stock Award or the shares of Common Stock
        relating thereto, based in each case on such factors as the
        Administrator, in its sole discretion, shall determine;
 
             (vi) to reduce the exercise price of any Stock Award to the then
        current Fair Market Value if the Fair Market Value of the Common Stock
        covered by such Stock Award shall have declined since the date the Stock
        Award was granted;
 
             (vii) to institute an Option Exchange Program;
 
             (viii) to construe and interpret the terms of the Plan and awards
        granted pursuant to the Plan;
 
             (ix) to prescribe, amend and rescind rules and regulations relating
        to the Plan, including rules and regulations relating to sub-plans
        established for the purpose of qualifying for preferred tax treatment
        under foreign tax laws;
 
             (x) to modify or amend each Stock Award (subject to Section 15(c)
        of the Plan);
 
             (xi) to allow holders of Stock Awards to satisfy withholding tax
        obligations by electing to have the Company withhold from the shares to
        be issued upon exercise of a Stock Award that number of shares having a
        Fair Market Value equal to the amount required to be withheld. The Fair
        Market Value of the shares to be withheld shall be determined on the
        date that the amount of tax to be withheld is to be determined. All
        elections by a holder of a Stock Award to have shares withheld for this
        purpose shall be made in such form and under such conditions as the
        Administrator may deem necessary or advisable;
 
             (xii) to authorize any person to execute on behalf of the Company
        any instrument required to effect the grant of Stock Award previously
        granted by the Administrator;
 
             (xiii) to make all other determinations deemed necessary or
        advisable for administering the Plan.
 
          (c) Effect of Administrator's Decision. The Administrator's decisions,
     determinations and interpretations shall be final and binding on all
     holders of Stock Awards.
 
     4. Shares Subject to the Plan
 
   
          (a) Subject to the provisions of the Plan relating to adjustments upon
     changes in stock, the stock that may be issued pursuant to all Stock Awards
     under this Plan shall not exceed in the aggregate three million forty-nine
     thousand nine hundred (3,049,900) shares of the Company's Common Stock. If
     any Stock Award shall for any reason expire or otherwise terminate, in
     whole or in part, without having been exercised in full, or is surrendered
     pursuant to an Option Exchange Program, the stock not acquired under such
     Stock Award shall revert to and again become available for issuance under
     the Plan. Shares subject to Stock Appreciation Rights exercised in
     accordance with Section 9 of the Plan shall not be available for subsequent
     issuance under the Plan.
    
 
          (b) The stock subject to the Plan may be unissued shares or reacquired
     shares, bought on the market or otherwise.
 
     5. Eligibility
 
          (a) Incentive Stock Options and Stock Appreciation Rights appurtenant
     thereto may be granted only to Employees. Stock Awards other than Incentive
     Stock Options and Stock Appreciation Rights appurtenant thereto may be
     granted only to Employees, Directors or Consultants.
 
     6. Discretionary Option Provisions
 
     Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. The provisions of separate
Options need not be identical, but each Option shall include (through
 
                                      III-4
<PAGE>   121
 
incorporation of provisions hereof by reference in the Option or otherwise) the
substance of each of the following provisions:
 
          (a) Option Designation. Each Option shall be designated in the Option
     Agreement as either an Incentive Stock Option or a Nonstatutory Stock
     Option. However, notwithstanding such designation, to the extent that the
     aggregate Fair Market Value of the shares with respect to which Incentive
     Stock Options are exercisable for the first time by the Optionee during any
     calendar year (under all plans of the Company and any Affiliate) exceeds
     $100,000, such Options shall be treated as Nonstatutory Stock Options. For
     purposes of this Section 6(a), Incentive Stock Options shall be taken into
     account in the order in which they were granted. The Fair Market Value of
     the shares shall be determined as of the time the Option with respect to
     such shares is granted.
 
          (b) Share Limitations. The following limitations shall apply to grants
     of Options:
 
             (i) No Employee, Director or Consultant shall be granted, in any
        fiscal year of the Company, Options to purchase more than 1,000,000
        shares.
 
                (A) In connection with his or her initial service, an Employee,
           Director or Consultant may be granted Options to purchase up to an
           additional 1,000,000 shares which shall not count against the limit
           set forth in subsection (i) above.
 
                (B) The foregoing limitations shall be adjusted proportionately
           in connection with any change in the Company's capitalization as
           described in Section 14.
 
                (C) If an Option is cancelled in the same fiscal year of the
           Company in which it was granted (other than in connection with a
           transaction described in Section 14), the cancelled Option will be
           counted against the limits set forth in subsections (A) and (B)
           above. For this purpose, if the exercise price of an Option is
           reduced, the transaction will be treated as a cancellation of the
           Option and the grant of a new Option.
 
          (c) Term. The term of each Option shall be stated in the Option
     Agreement. In the case of an Incentive Stock Option, the term shall be ten
     (10) years from the date of grant or such shorter term as may be provided
     in the Option Agreement. Moreover, in the case of an Incentive Stock Option
     granted to an Optionee who, at the time the Incentive Stock Option is
     granted, owns stock representing more than ten percent (10%) of the total
     combined voting power of all classes of stock of the Company or any
     Affiliate, the term of the Incentive Stock Option shall be five (5) years
     from the date of grant or such shorter term as may be provided in the
     Option Agreement.
 
          (d) Price. The per share exercise price for the stock to be issued
     pursuant to exercise of an Option shall be determined by the Administrator,
     subject to the following:
 
             (i) In the case of an Incentive Stock Option
 
                (A) granted to an Employee who, at the time the Incentive Stock
           Option is granted, owns stock representing more than ten percent
           (10%) of the voting power of all classes of stock of the Company or
           any Affiliate, the per share exercise price shall be no less than
           110% of the Fair Market Value per share on the date of grant.
 
                (B) granted to any Employee other than an Employee described in
           paragraph (A) immediately above, the per share exercise price shall
           be no less than 100% of the Fair Market Value per share on the date
           of grant.
 
             (ii) In the case of a Nonstatutory Stock Option, the per share
        exercise price shall be determined by the Administrator. In the case of
        a Nonstatutory Stock Option intended to qualify as "performance-based
        compensation" within the meaning of Section 162(m) of the Code, the per
        share exercise price shall be no less than 100% of the Fair Market Value
        per share on the date of grant.
 
                                      III-5
<PAGE>   122
 
             (iii) Notwithstanding the foregoing, Options may be granted with a
        per share exercise price of less than 100% of the Fair Market Value per
        share on the date of grant pursuant to a merger or other corporate
        transaction.
 
          (e) Consideration. The Administrator shall determine the acceptable
     form of consideration for exercising an Option, including the method of
     payment. In the case of an Incentive Stock Option, the Administrator shall
     determine the acceptable form of consideration at the time of grant. Such
     consideration may consist entirely of:
 
             (i) cash;
 
             (ii) check;
 
             (iii) promissory note;
 
             (iv) other shares which (A) in the case of shares acquired upon
        exercise of an option, have been owned by the Optionee for more than six
        months on the date of surrender, and (B) have a Fair Market Value on the
        date of surrender equal to the aggregate exercise price of the shares as
        to which said Option shall be exercised;
 
             (v) consideration received by the Company under a cashless exercise
        program implemented by the Company in connection with the Plan;
 
             (vi) a reduction in the amount of any Company liability to the
        Optionee, including any liability attributable to the Optionee's
        participation in any Company-sponsored deferred compensation program or
        arrangement;
 
             (vii) any combination of the foregoing methods of payment; or
 
             (viii) such other consideration and method of payment for the
        issuance of shares to the extent permitted by Applicable Laws.
 
          (f) Transferability. Unless otherwise provided by the Administrator,
     an Option shall not be transferable except by will or the laws of descent
     and distribution or pursuant to a qualified domestic relations order, and
     shall be exercisable during the lifetime of the person to whom the Option
     is granted only by such person. Notwithstanding the foregoing, the person
     to whom the Option is granted may, by delivering written notice to the
     Company, in a form satisfactory to the Company, designate a third party
     who, in the event of the death of the Optionee, shall thereafter be
     entitled to exercise the Option. If the Administrator makes an Option
     transferable, such Option shall contain such additional terms and
     conditions as the Administrator deems appropriate.
 
          (g) Vesting. The total number of shares of stock subject to an Option
     may, but need not, be allotted in periodic installments (which may, but
     need not, be equal). The Option Agreement may provide that from time to
     time during each of such installment periods, the Option may become
     exercisable ("vest") with respect to some or all of the shares allotted to
     that period, and may be exercised with respect to some or all of the shares
     allotted to such period and/or any prior period as to which the Option
     became vested but was not fully exercised.
 
          (h) Termination of Employment or Relationship as a Director or
     Consultant. In the event an Optionee's Continuous Status as an Employee,
     Director or Consultant terminates (other than upon the Optionee's death or
     Disability), the Optionee may exercise his or her Option (to the extent
     that the Optionee was entitled to exercise it as of the date of
     termination) but only within such period of time ending on the earlier of
     (i) the date three (3) months after the termination of the Optionee's
     Continuous Status as an Employee, Director or Consultant (or such longer or
     shorter period specified in the Option Agreement), or (ii) the expiration
     of the term of the Option as set forth in the Option Agreement. If, after
     termination, the Optionee does not exercise his or her Option within the
     time specified in the Option Agreement, the Option shall terminate, and the
     shares covered by such Option shall revert to and again become available
     for issuance under the Plan.
 
                                      III-6
<PAGE>   123
 
          An Optionee's Option Agreement may also provide that if the exercise
     of the Option following the termination of the Optionee's Continuous Status
     as an Employee, Director, or Consultant (other than upon the Optionee's
     death or Disability) would result in liability under Section 16(b) of the
     Exchange Act, then the Option shall terminate on the earlier of (i) the
     expiration of the term of the Option set forth in the Option Agreement, or
     (ii) the tenth (10th) day after the last date on which such exercise would
     result in such liability under Section 16(b) of the Exchange Act. Finally,
     an Optionee's Option Agreement may also provide that if the exercise of the
     Option following the termination of the Optionee's Continuous Status as an
     Employee, Director or Consultant (other than upon the Optionee's death or
     Disability) would be prohibited at any time solely because the issuance of
     shares would violate the registration requirements under the Act, then the
     Option shall terminate on the earlier of (i) the expiration of the term of
     the Option set forth in the first paragraph of this subsection 6(f), or
     (ii) the expiration of a period of three (3) months after the termination
     of the Optionee's Continuous Status as an Employee, Director or Consultant
     during which the exercise of the Option would not be in violation of such
     registration requirements.
 
          (i) Disability of Optionee. In the event an Optionee's Continuous
     Status as an Employee, Director or Consultant terminates as a result of the
     Optionee's Disability, the Optionee may exercise his or her Option (to the
     extent that the Optionee was entitled to exercise it as of the date of
     termination), but only within such period of time ending on the earlier of
     (i) the date twelve (12) months following such termination (or such longer
     or shorter period specified in the Option Agreement), or (ii) the
     expiration of the term of the Option as set forth in the Option Agreement.
     If, at the date of termination, the Optionee is not entitled to exercise
     his or her entire Option, the shares covered by the unexercisable portion
     of the Option shall revert to and again become available for issuance under
     the Plan. If, after termination, the Optionee does not exercise his or her
     Option within the time specified herein, the Option shall terminate, and
     the shares covered by such Option shall revert to and again become
     available for issuance under the Plan.
 
          (j) Death of Optionee. In the event of the death of an Optionee
     during, or within a period specified in the Option Agreement after the
     termination of, the Optionee's Continuous Status as an Employee, Director
     or Consultant, the Option may be exercised (to the extent the Optionee was
     entitled to exercise the Option as of the date of death) by the Optionee's
     estate, by a person who acquired the right to exercise the Option by
     bequest or inheritance or by a person designated to exercise the Option
     upon the Optionee's death pursuant to subsection 6(g), but only within the
     period ending on the earlier of (i) the date eighteen (18) months following
     the date of death (or such longer or shorter period specified in the Option
     Agreement), or (ii) the expiration of the term of such Option as set forth
     in the Option Agreement. If, at the time of death, the Optionee was not
     entitled to exercise his or her entire Option, the shares covered by the
     unexercisable portion of the Option shall revert to and again become
     available for issuance under the Plan. If, after death, the Option is not
     exercised within the time specified herein, the Option shall terminate, and
     the shares covered by such Option shall revert to and again become
     available for issuance under the Plan.
 
          (k) Early Exercise. The Option may, but need not, include a provision
     whereby the Optionee may elect at any time while an Employee, Director or
     Consultant to exercise the Option as to any part or all of the shares
     subject to the Option prior to the full vesting of the Option. Any unvested
     shares so purchased shall be subject to a repurchase right in favor of the
     Company, with the repurchase price to be equal to the original purchase
     price of the stock, or to any other restriction the Administrator
     determines to be appropriate.
 
          (l) Re-Load Options. Without in any way limiting the authority of the
     Administrator to make or not to make grants of Options hereunder, the
     Administrator shall have the authority (but not an obligation) to include
     as part of any Option Agreement a provision entitling the Optionee to a
     further Option (a "Re-Load Option") in the event the Optionee exercises the
     Option evidenced by the Option agreement, in whole or in part, by
     surrendering other shares of Common Stock in accordance with this Plan and
     the terms and conditions of the Option Agreement. Any such Re-Load Option
     (i) shall be for a number of shares equal to the number of shares
     surrendered as part or all of the exercise price of such Option;
                                      III-7
<PAGE>   124
 
     (ii) shall have an expiration date which is the same as the expiration date
     of the Option the exercise of which gave rise to such Re-Load Option; and
     (iii) shall have an exercise price on the date of exercise of the Original
     Option which complies with Section 6(d).
 
          Any such Re-Load Option may be an Incentive Stock Option or a
     Nonstatutory Stock Option, as the Administrator may designate at the time
     of the grant of the original Option; provided, however, that the
     designation of any Re-Load Option as an Incentive Stock Option shall be
     subject to the one hundred thousand dollar ($100,000) annual limitation on
     exercisability of Incentive Stock Options described in Section 6(a) of the
     Plan and in Section 422(d) of the Code. There shall be no Re-Load Options
     on a Re-Load Option. Any such Re-Load Option shall be subject to the
     availability of sufficient shares under subsection 4(a) and shall be
     subject to such other terms and conditions as the Administrator may
     determine which are not inconsistent with the express provisions of the
     Plan regarding the terms of Options.
 
     7. Formula Option Provisions. All grants of Options to Outside Directors
pursuant to this Section shall be automatic and nondiscretionary and shall be
made strictly in accordance with the following provisions:
 
          (a) All Options granted pursuant to this Section shall be Nonstatutory
     Stock Options and, except as otherwise provided herein, shall be subject to
     the other terms and conditions of the Plan.
 
          (b) No person shall have any discretion to select which Outside
     Directors shall be granted Options under this Section or to determine the
     number of shares to be covered by such Options.
 
          (c) Each person who first becomes an Outside Director following the
     effective date of the distribution of the Company's Common Stock held by
     Stac, Inc., a Delaware corporation and parent company of the Company,
     pursuant to a registration statement on Form 10 filed with the Securities
     and Exchange Commission shall be automatically granted an Option to
     purchase 10,000 shares (the "First Option") or the date on which such
     person first becomes an Outside Director, whether through election by the
     stockholders of the Company or appointment by the Board to fill a vacancy;
     provided, however, that an Inside Director who ceases to be an Inside
     Director but who remains a Director shall not receive a First Option.
 
          (d) Each Outside Director shall be automatically granted an Option to
     purchase 2,000 shares (a "Subsequent Option") on the date of the annual
     meeting of the stockholders of the Company (beginning in 1999), if as of
     such date, he or she shall have served on the Board for at least the
     preceding six (6) months.
 
          (e) Notwithstanding the provisions of subsections (c) and (d) hereof,
     any exercise of an Option granted before the Company has obtained
     stockholder approval of the Plan in accordance with Section 16 hereof shall
     be conditioned upon obtaining such stockholder approval of the Plan in
     accordance with Section 16 hereof.
 
          (f) The terms of each Option granted pursuant to this Section shall be
     as follows:
 
             (i) the term of the Option shall be ten (10) years.
 
             (ii) the exercise price per share shall be 100% of the Fair Market
        Value per share on the date of grant of the Option.
 
             (iii) subject to Section 14 hereof, the First Option shall vest and
        become exercisable as to 20% of the shares subject to the Option on the
        first anniversary of its date of grant, and as to 1/60th of the shares
        subject to the Option each full month thereafter, provided that the
        Optionee continues to serve as a Director on such dates.
 
             (iv) subject to Section 14 hereof, the Subsequent Option shall vest
        and become exercisable as to 100% of the shares subject to the Option
        the anniversary of its date of grant, provided that the Optionee
        continues to serve as a Director on such date.
 
                                      III-8
<PAGE>   125
 
     8. Terms of Stock Bonuses and Purchases of Restricted Stock
 
     Each stock bonus or restricted stock purchase agreement shall be in such
form and shall contain such terms and conditions as the Administrator shall deem
appropriate. The terms and conditions of stock bonus or restricted stock
purchase agreements may change from time to time, and the terms and conditions
of separate agreements need not be identical, but each stock bonus or restricted
stock purchase agreement shall include (through incorporation of provisions
hereof by reference in the agreement or otherwise) the substance of each of the
following provisions as appropriate:
 
          (a) Purchase Price. The purchase price under each restricted stock
     purchase agreement shall be such amount as the Administrator shall
     determine and designate in such agreement. Notwithstanding the foregoing,
     the Administrator may determine that eligible participants in the Plan may
     be awarded stock pursuant to a stock bonus agreement in consideration for
     past services actually rendered to the Company or for its benefit.
 
          (b) Transferability. Unless otherwise provided by the Administrator,
     no rights under a stock bonus or restricted stock purchase agreement shall
     be transferable except by will or the laws of descent and distribution or
     pursuant to a qualified domestic relations order, provided, however that
     any stock awarded under such agreement remains subject to the terms of the
     applicable agreement. If the Administrator makes a stock bonus or right to
     purchase stock transferable, such stock bonus or right to purchase stock
     shall contain such additional terms and conditions as the Administrator
     deems appropriate.
 
          (c) Consideration. The purchase price of stock acquired pursuant to a
     stock purchase agreement shall be paid either: (i) in cash at the time of
     purchase; (ii) at the discretion of the Administrator, according to a
     deferred payment or other arrangement with the person to whom the stock is
     sold; or (iii) in any other form of legal consideration that may be
     acceptable to the Administrator in its discretion. Notwithstanding the
     foregoing, the Administrator to which administration of the Plan has been
     delegated may award stock pursuant to a stock bonus agreement in
     consideration for past services actually rendered to the Company or for its
     benefit.
 
          (d) Vesting. Shares of stock sold or awarded under the Plan may, but
     need not, be subject to a repurchase option in favor of the Company in
     accordance with a vesting schedule to be determined by the Administrator.
 
          (e) Termination of Employment or Relationship as a Director or
     Consultant. In the event an individual's Continuous Status as an Employee,
     Director or Consultant terminates, the Company may repurchase or otherwise
     reacquire any or all of the shares of stock held by that person which have
     not vested as of the date of termination under the terms of the stock bonus
     or restricted stock purchase agreement between the Company and such person.
 
          (f) Share Limitations. The following limitations shall apply to grants
     of stock bonuses and/or stock purchase right:
 
             (i) No Employee, Director or Consultant shall be granted, in any
        fiscal year of the Company, stock bonuses and/or stock purchase right to
        purchase more than 1,000,000 shares.
 
                (A) In connection with his or her initial service, an Employee,
           Director or Consultant may be granted a stock bonus and/or stock
           purchase right to purchase up to an additional 1,000,000 shares which
           shall not count against the limit set forth in subsection (i) above.
 
                (B) The foregoing limitations shall be adjusted proportionately
           in connection with any change in the Company's capitalization as
           described in Section 14.
 
                (C) If a stock bonus and/or stock purchase right is cancelled in
           the same fiscal year of the Company in which it was granted (other
           than in connection with a transaction described in Section 14), the
           cancelled stock bonus and/or restricted stock will be counted against
           the limits set forth in subsections (A) and (B) above. For this
           purpose, if the exercise price of a stock
 
                                      III-9
<PAGE>   126
 
           purchase right is reduced, the transaction will be treated as a
           cancellation of the stock purchase right and the grant of a new stock
           purchase right.
 
     9. Stock Appreciation Rights
 
          (a) The Administrator shall have full power and authority, exercisable
     in its sole discretion, to grant Stock Appreciation Rights under the Plan
     to Employees or Directors of or Consultants to, the Company or its
     Affiliates. To exercise any outstanding Stock Appreciation Right, the
     holder must provide written notice of exercise to the Company in compliance
     with the provisions of the Stock Award Agreement evidencing such right. If
     a Stock Appreciation Right is granted to an individual who is at the time
     subject to Section 16(b) of the Exchange Act (a "Section 16(b) Insider"),
     the Stock Award Agreement of grant shall incorporate all the terms and
     conditions at the time necessary to assure that the subsequent exercise of
     such right shall qualify for the safe-harbor exemption from short-swing
     profit liability provided by Rule 16b-3 promulgated under the Exchange Act
     (or any successor rule or regulation). No limitation shall exist on the
     aggregate amount of cash payments the Company may make under the Plan in
     connection with the exercise of a Stock Appreciation Rights.
 
          (b) Unless otherwise provided by the Administrator, no Stock
     Appreciation Right shall be transferable except by will or the laws of
     descent and distribution or pursuant to a qualified domestic relations
     order, provided, however, the cash or stock awarded under such agreement
     remains subject to the terms of the Stock Appreciation Right. If the
     Administrator makes a Stock Appreciation Right transferable, such Stock
     Appreciation Right shall contain such additional terms and conditions as
     the Administrator deems appropriate.
 
          (c) Three types of Stock Appreciation Rights shall be authorized for
     issuance under the Plan:
 
             (i) Tandem Stock Appreciation Rights. Tandem Stock Appreciation
        Rights will be granted appurtenant to an Option, and shall, except as
        specifically set forth in this Section 8, be subject to the same terms
        and conditions applicable to the particular Option grant to which it
        pertains. Tandem Stock Appreciation Rights will require the holder to
        elect between the exercise of the underlying Option for shares of stock
        and the surrender, in whole or in part, of such Option for an
        appreciation distribution. The appreciation distribution payable on the
        exercised Tandem Right shall be in cash (or, if so provided, in an
        equivalent number of shares of stock based on Fair Market Value on the
        date of the Option surrender) in an amount up to the excess of (A) the
        Fair Market Value (on the date of the Option surrender) of the number of
        shares of stock covered by that portion of the surrendered Option in
        which the Optionee is vested over (B) the aggregate exercise price
        payable for such vested shares.
 
             (ii) Concurrent Stock Appreciation Rights. Concurrent Rights will
        be granted appurtenant to an Option and may apply to all or any portion
        of the shares of stock subject to the underlying Option and shall,
        except as specifically set forth in this Section 8, be subject to the
        same terms and conditions applicable to the particular Option grant to
        which it pertains. A Concurrent Right shall be exercised automatically
        at the same time the underlying Option is exercised with respect to the
        particular shares of stock to which the Concurrent Right pertains. The
        appreciation distribution payable on an exercised Concurrent Right shall
        be in cash (or, if so provided, in an equivalent number of shares of
        stock based on Fair Market Value on the date of the exercise of the
        Concurrent Right) in an amount equal to such portion as shall be
        determined by the Administrator at the time of the grant of the excess
        of (A) the aggregate Fair Market Value (on the date of the exercise of
        the Concurrent Right) of the vested shares of stock purchased under the
        underlying Option which have Concurrent Rights appurtenant to them over
        (B) the aggregate exercise price paid for such shares.
 
             (iii) Independent Stock Appreciation Rights. Independent Rights
        will be granted independently of any Option and shall, except as
        specifically set forth in this Section 8, be subject to the same terms
        and conditions applicable to Nonstatutory Stock Options as set forth in
        Section 6. They shall be denominated in share equivalents. The
        appreciation distribution payable on the exercised Independent Right
        shall be not greater than an amount equal to the excess of (A) the
        aggregate Fair
 
                                     III-10
<PAGE>   127
 
        Market Value (on the date of the exercise of the Independent Right) of a
        number of shares of Company stock equal to the number of share
        equivalents in which the holder is vested under such Independent Right,
        and with respect to which the holder is exercising the Independent Right
        on such date, over (B) the aggregate Fair Market Value (on the date of
        the grant of the Independent Right) of such number of shares of Company
        stock. The appreciation distribution payable on the exercised
        Independent Right shall be in cash or, if so provided, in an equivalent
        number of shares of stock based on Fair Market Value on the date of the
        exercise of the Independent Right.
 
          (d) Share Limitations. The following limitations shall apply to grants
     of Stock Appreciation Rights:
 
             (i) No Employee, Director or Consultant shall be granted, in any
        fiscal year of the Company, Stock Appreciation Rights to purchase more
        than 1,000,000 shares.
 
                (A) In connection with his or her initial service, an Employee,
           Director or Consultant may be granted Stock Appreciation Rights to
           purchase up to an additional 1,000,000 shares which shall not count
           against the limit set forth in subsection (i) above.
 
                (B) The foregoing limitations shall be adjusted proportionately
           in connection with any change in the Company's capitalization as
           described in Section 14.
 
                (C) If a Stock Appreciation Right is cancelled in the same
           fiscal year of the Company in which it was granted (other than in
           connection with a transaction described in Section 14), the cancelled
           Stock Appreciation Right will be counted against the limits set forth
           in subsections (A) and (B) above. For this purpose, if the exercise
           price of a Stock Appreciation Right is reduced, the transaction will
           be treated as a cancellation of the Stock Appreciation Right and the
           grant of a new Stock Appreciation Right.
 
     10. Cancellation and Re-Grant of Options
 
     The Administrator shall have the authority to effect, at any time and from
time to time, (i) the repricing of any outstanding Options and/or any Stock
Appreciation Rights under the Plan and/or (ii) with the consent of the affected
holders of Options and/or Stock Appreciation Rights, the cancellation of any
outstanding Options and/or any Stock Appreciation Rights under the Plan and the
grant in substitution therefor of new Options and/or Stock Appreciation Rights
under the Plan covering the same or different numbers of shares of stock.
 
     11. Covenants of the Company
 
          (a) During the terms of the Stock Awards, the Company shall keep
     available at all times the number of shares of stock required to satisfy
     such Stock Awards.
 
          (b) The Company shall seek to obtain from each regulatory commission
     or agency having jurisdiction over the Plan such authority as may be
     required to issue and sell shares of stock upon exercise of the Stock
     Award; provided, however, that this undertaking shall not require the
     Company to register under the Securities Act of 1933, as amended (the
     "Securities Act") either the Plan, any Stock Award or any stock issued or
     issuable pursuant to any such Stock Award. If, after reasonable efforts,
     the Company is unable to obtain from any such regulatory commission or
     agency the authority which counsel for the Company deems necessary for the
     lawful issuance and sale of stock under the Plan, the Company shall be
     relieved from any liability for failure to, issue and sell stock upon
     exercise of such Stock Awards unless and until such authority is obtained.
 
     12. Use of Proceeds from Stock
 
          (a) Proceeds from the sale of stock pursuant to Stock Awards shall
     constitute general funds of the Company.
 
                                     III-11
<PAGE>   128
 
     13. Miscellaneous
 
          (a) Neither an Employee, Director or Consultant nor any person to whom
     a Stock Award is transferred under subsection 6(f), 8(b), or 9(b) shall be
     deemed to be the holder of, or to have any of the rights of a holder with
     respect to, any shares subject to such Stock Award unless and until such
     person has satisfied all requirements for exercise of the Stock Award
     pursuant to its terms.
 
          (b) Throughout the term of any Stock Award, the Company shall deliver
     to the holder of such Stock Award, not later than one hundred twenty (120)
     days after the close of each of the Company's fiscal years during the term
     of such Stock Award, a balance sheet and an income statement. This Section
     shall not apply when issuance is limited to key employees whose duties in
     connection with the Company assure them access to equivalent information.
 
          (c) Nothing in the Plan or any instrument executed or Stock Award
     granted pursuant thereto shall confer upon any Employee, Director,
     Consultant or other holder of Stock Awards any right to continue in the
     employ of the Company or any Affiliate (or to continue acting as a Director
     or Consultant) or shall affect the right of the Company or any Affiliate to
     terminate the employment of any Employee with or without cause, to remove
     any Director as provided in the Company's Bylaws and the provisions of the
     General Corporation Law of the State of Delaware or to terminate the
     relationship of any Consultant in accordance with the terms of that
     Consultant's agreement with the Company or Affiliate to which such
     Consultant is providing services.
 
          (d) The Company may require any person to whom a Stock Award is
     granted, or any person to whom a Stock Award is transferred pursuant to
     subsection 6(g), 7(b) or 8(b), as a condition of exercising or acquiring
     stock under any Stock Award, to give written assurances satisfactory to the
     Company, if any, that are necessary to ensure compliance with federal
     securities laws. These requirements, and any assurances given pursuant to
     such requirements, shall be inoperative if (i) the issuance of the shares
     upon the exercise or acquisition of stock under the Stock Award has been
     registered under a then currently effective registration statement under
     the Securities Act, or (ii) as to any particular requirement, a
     determination is made by counsel for the Company that such requirement need
     not be met in the circumstances under the then applicable securities laws.
 
          (e) To the extent provided by the terms of a Stock Award Agreement,
     the person to whom a Stock Award is granted may satisfy any federal, state
     or local tax withholding obligation relating to the exercise or acquisition
     of stock under a Stock Award by any of the following means or by a
     combination of such means: (i) tendering a cash payment; (ii) authorizing
     the Company to withhold shares from the shares of the Common Stock
     otherwise issuable to the participant as a result of the exercise or
     acquisition of stock under the Stock Award; or (iii) delivering to the
     Company owned and unencumbered shares of the Common Stock.
 
     14. Adjustments upon changes in stock
 
          (a) If any change is made in the stock subject to the Plan, or subject
     to any Stock Award, without the receipt of consideration by the Company
     (through merger, consolidation, reorganization, recapitalization,
     reincorporation, stock dividend, dividend in property other than cash,
     stock split, liquidating dividend, combination of shares, exchange of
     shares, change in corporate structure or other transaction not involving
     the receipt of consideration by the Company), the Plan will be
     appropriately adjusted in the class(es) and maximum number of shares
     subject to the Plan pursuant to subsection 4(a), and the outstanding Stock
     Awards will be appropriately adjusted in the class(es) and number of shares
     and price per share of stock subject to such outstanding Stock Awards. (The
     conversion of any convertible securities of the Company shall not be
     treated as a "transaction not involving the receipt of consideration by the
     Company".)
 
          (b) In the event of: (i) a merger or consolidation in which the
     Company is not the surviving corporation or (ii) a reverse merger in which
     the Company is the surviving corporation but the shares of the Company's
     Common Stock outstanding immediately preceding the merger are converted by
     virtue of the merger into other property, whether in the form of
     securities, cash or otherwise, then to the extent not
                                     III-12
<PAGE>   129
 
     prohibited by applicable law: (A) any surviving corporation or an Affiliate
     of such surviving corporation shall assume any Stock Awards outstanding
     under the Plan or shall substitute similar Stock Awards for those
     outstanding under the Plan, or (B) such Stock Awards shall continue in full
     force and effect. In the event any surviving corporation and its Affiliates
     refuse to assume such Stock Awards, or to substitute similar Stock Awards
     for those outstanding under the Plan, then such Stock Awards shall
     terminate if not exercised prior to such event.
 
          (c) In the event of a dissolution or liquidation of the Company, any
     Stock Awards outstanding under the Plan shall terminate if not exercised
     prior to such event.
 
     15. Amendment of the plan and stock awards
 
          (a) Amendment and Termination. The Board may at any time amend, alter,
     suspend or terminate the Plan. Unless sooner terminated, the Plan shall
     terminate on November 20, 2006, which shall be within ten (10) years from
     the date the Plan is adopted by the Board or approved by the stockholders
     of the Company, whichever is earlier. No Stock Awards may be granted under
     the Plan while the Plan is suspended or after it is terminated.
 
          (b) Stockholder Approval. The Company shall obtain stockholder
     approval of any Plan amendment to the extent necessary and desirable to
     comply with Applicable Laws.
 
          (c) Effect of Amendment or Termination. No amendment, alteration,
     suspension or termination of the Plan shall impair the rights of any
     Optionee, unless mutually agreed otherwise between the Optionee and the
     Administrator, which agreement must be in writing and signed by the
     Optionee and the Company. Termination of the Plan shall not affect the
     Administrator's ability to exercise the powers granted to it hereunder with
     respect to Options granted under the Plan prior to the date of such
     termination:
 
     16. Effective Date of Plan
 
     The Plan shall become effective as determined by the Board, but no Stock
Awards granted under the Plan shall be exercised unless and until the Plan has
been approved by the stockholders of the Company, which approval shall be within
twelve (12) months before or after the date the Plan is adopted by the Board,
and, if required, an appropriate permit has been issued by the Commissioner of
Corporations of the State of California.
 
                                     III-13
<PAGE>   130
 
                                                                        ANNEX IV
 
                                 July 17, 1998
 
Board of Directors
Stac, Inc.
12636 High Bluff Drive
San Diego, CA 92130
 
Members of the Board of Directors:
 
     We have acted as financial advisor to Stac, Inc., a Delaware corporation
("Stac"), in connection with the proposed distribution (the "Distribution") to
the holders of Stac common stock, par value $.001 per share (the "Stac Common
Stock"), of all of the outstanding shares of common stock, par value $.001 per
share ("Company Common Stock"), of hi/fn, inc., a Delaware corporation ("Hi/fn"
or the "Company"), owned by Stac, pursuant to the terms of a Distribution
Agreement to be entered into between Stac and Hi/fn (the "Distribution
Agreement"). We are advised that Hi/fn was organized in August 1996 to own and
operate Stac's semiconductor business, which previously was operated as a
division of Stac. Stac transferred the semiconductor business (along with the
associated technology, assets and liabilities) to Hi/fn on November 21, 1996. We
have been advised that the purposes of the Distribution are as set forth in the
Information Statement included in the Form 10 filed with the Securities and
Exchange Commission (the "Information Statement") and to be sent to holders of
Stac Common stock. The Distribution is described more fully in the Information
Statement. You have requested our opinion as to whether the Distribution is
fair, from a financial point of view, to the holders of Stac Common Stock.
 
     In connection with our review of the Distribution, and in arriving at our
opinion, we have, among other things:
 
          (i) reviewed the publicly available consolidated financial statements
     of Stac for recent years and interim periods to date and certain other
     relevant financial and operating data of Stac available from public sources
     or provided to us by Stac;
 
          (ii) reviewed the consolidated pro forma financial statements of Hi/fn
     and Stac provided to us by Stac;
 
          (iii) reviewed certain internal financial and operating information,
     including certain projections, relating to Stac and Hi/fn, provided to us
     by Stac;
 
          (iv) discussed the business, financial condition and prospects of Stac
     and Hi/fn with certain officers of Stac and certain members of management
     of the business to be operated by Hi/fn;
 
          (v) reviewed the terms of the Distribution;
 
          (vi) reviewed certain publicly available transactions we deemed
     comparable to the Distribution;
 
          (vii) reviewed certain public information of certain companies we
     deemed appropriate in analyzing Stac and Hi/fn;
 
          (viii) reviewed the historical market prices and trading activity for
     the common shares of Stac;
 
          (ix) reviewed the historical market prices and trading activity for
     equity securities of publicly-traded companies engaged in businesses that
     we believed to be generally relevant to an analysis of those of Stac and
     Hi/fn;
 
          (x) reviewed Stac's financial and strategic objectives as described to
     us by the management of Stac;
 
          (xi) reviewed the Information Statement; and
 
          (xii) performed such other analyses and examinations and considered
     such other information, financial studies, analyses and investigations and
     financial, economic and market data as we deemed relevant.
 
                                      IV-1
<PAGE>   131
 
     We have not assumed responsibility for independent verification of any
information, whether publicly available or furnished to us, concerning Stac or
Hi/fn, including, without limitation, any financial information, forecasts or
projections, considered in connection with the rendering of our opinion.
Accordingly, for purposes of our opinion, we have assumed and relied upon the
accuracy and completeness of all such information and we have not conducted a
physical inspection of any of the properties or assets, and have not prepared or
obtained any independent evaluation or appraisal of any of the assets or
liabilities, of Stac or Hi/fn. With respect to the financial forecasts and
projections made available to us and used in our analysis, we have assumed that
they have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the management of Stac as to the matters
covered thereby and in rendering our opinion we express no view as to the
reasonableness of such forecasts and projections or the assumptions on which
they are based. Our opinion is necessarily based upon economic market and other
conditions as in effect on, and the information made available to us as of, the
date hereof.
 
     In connection with our opinion, we have assumed that the Distribution will
be consummated on the terms and subject to the conditions described in the
Information Statement. In addition, we have, with your consent, assumed that the
Distribution will be tax free to Stac and the holders of Stac Common Stock. We
have also assumed that all necessary governmental and regulatory approvals and
consents of third parties will be obtained on terms and conditions that will not
have a material adverse effect on Stac or Hi/fn. Finally, we make no forecast
and render no opinion as to the trading price of the securities of Stac or Hi/fn
following announcement of the completion of the Distribution, or at any time
thereafter.
 
     Warburg Dillon Read LLC ("WDR") will receive a fee for its financial
advisory services rendered in connection with the currently contemplated
Distribution, which fee is payable upon completion of the Distribution. In
addition, Stac has agreed to reimburse WDR for its reasonable expenses incurred
in connection with its engagement and to indemnify WDR and certain related
persons for certain liabilities that may arise out of its engagement by Stac and
the rendering of the WDR Opinion. This opinion is for the use and benefit of the
Board of Directors of Stac. This letter is not intended to be and does not
constitute a recommendation to any current or prospective stockholders of Stac
or Hi/fn as to any action or investment decisions which may be taken by such
stockholders with respect to shares owned or to be received by them.
 
     Based upon and subject to the foregoing, it is our opinion as investment
bankers that, as of the date hereof, the Distribution is fair, from a financial
point of view, to the holders of Stac Common Stock.
 
                                          Very truly yours,
 
                                          WARBURG DILLON READ LLC
 
                                      IV-2
<PAGE>   132
 
                                   SIGNATURES
 
     Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the Registrant has duly caused this Form 10 to be signed on its behalf
by the undersigned, thereunto duly authorized.
 
                                          HI/FN, INC.
 
   
Dated: December 7, 1998                   By:     /s/ WILLIAM R. WALKER
    
                                            ------------------------------------
 
                                          Name: William R. Walker
                                          Its:    Vice President, Chief
                                                  Financial Officer and
                                                  Corporate Secretary

<PAGE>   1
                                                                    EXHIBIT 10.2


                  ASSIGNMENT, ASSUMPTION AND LICENSE AGREEMENT

        This ASSIGNMENT AND ASSUMPTION AGREEMENT ("AGREEMENT") is entered into
as of this 21st day of November, 1996 among Stac, Inc., a Delaware corporation
("TRANSFEROR"), and Hi/fn Inc., a Delaware corporation ("TRANSFEREE").

        WHEREAS, Transferor wishes to transfer, assign and delegate (i) all of
its right, title and interest in and to certain of its assets and properties, as
listed on Exhibit A attached hereto and incorporated herein to this Agreement by
this reference, including without limitation all claims, rights, privileges and
similar interests, whenever accruing, inuring to the benefit of or held by
Transferor with respect thereto (the "ASSETS"), and (ii) all of its duties and
obligations under certain of its liabilities and obligations, as listed on
Exhibit B attached hereto and incorporated herein to this Agreement by this
reference (the "LIABILITIES"), and the Transferee wishes to accept such
transfer, assignment and delegation, on the terms set forth in this Agreement;

        WHEREAS, Transferor wishes to license certain technologies to Transferee
and Transferee wishes to accept such licenses, subject to the terms hereof; and

        WHEREAS, concurrently herewith the parties hereto are entering into
Cross License Agreement and a Stock Purchase Agreement (collectively, the
"Related Agreements").

        NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and conditions set forth below, and for other good and valuable
consideration, the receipt of which is hereby acknowledged, the parties to this
Agreement agree as follows:

1.      TRANSFER OF ASSETS.

        Transferor hereby grants, sells, conveys, transfers, assigns, releases
and delivers to Transferee all of the Assets, as listed on Exhibit A attached
hereto, to have and hold the same unto itself, its successors and assigns
forever, and Transferee hereby accepts such grant, sale, conveyance, etc.

2.      ASSUMPTION OF LIABILITIES.

        Transferor hereby transfers, assigns and delegates to Transferee all of
the Liabilities, as listed on Exhibit B, and Transferee hereby accepts such
transfer, assignment and delegation and assumes and undertakes to become liable
for such Liabilities and agrees to faithfully pay, perform and discharge such
Liabilities when due.


         
<PAGE>   2



3.      LICENSES.

        Transferor and Transferee shall concurrently with the execution of this
Agreement enter into a Cross License Agreement substantially in the form
attached hereto as Exhibit C.

4.      FURTHER ASSURANCES.

        It is the intent of the parties that all of the Assets and Liabilities
be transferred, assigned and delegated to the Transferee as aforesaid. Each
party agrees to execute, acknowledge and deliver any further deeds, assignments,
conveyances and other assurances, documents and instruments of transfer and take
such other actions consistent with the foregoing as may be necessary to carry
out the intent of this Agreement.

5.      INDEMNIFICATION.

        (a)    INDEMNIFICATION BY TRANSFEREE. Notwithstanding any investigation
of the business, financial condition, prospects, properties or assets of
Transferee by or on behalf of Transferor prior to the date hereof, and in
addition to any and all other rights of Transferor under this Agreement,
Transferee shall indemnify, defend and hold harmless Transferor and each of
Transferor's officers, directors, employees, control persons, advisors,
affiliates and agents (collectively, the "Indemnified Parties"), from and
against any and all losses, damages, liabilities, expenses, costs, assessments
and taxes (including, without limitation, interest, penalties and attorneys'
fees and expenses reasonably incurred) ("Damages"), and pay each Indemnified
Party on demand the full amount of any and all Damages that such party may pay
or become obligated to pay, arising out of or relating to any of the following:

               (i)    The breach in any respect (if not qualified) of any
representation or warranty of Transferee or of any obligation, agreement or
covenant of Transferee contained in or made pursuant to this Agreement, the
Related Agreements or any other agreement, certificate or other document made or
delivered by Transferee at the Closing pursuant to this Agreement;

               (ii)   Any of the Liabilities listed on Exhibit B and assumed by
Transferee; and/or

               (iii)  Any of the Assets listed on Exhibit A and assumed by
Transferee hereunder.

        All claims under this Section 5(a) shall be made at the time and in the
manner provided for in Section 5(b).


<PAGE>   3




        (b)    INDEMNIFICATION PROCEDURE. Written notice of any claim for 
indemnification under Section 5(a) shall be sent to the Transferee promptly
following receipt by an Indemnified Party of notice of the occurrence of any
event or the commencement of any action for which indemnification may be sought
under this Section 5 (but the omission to so notify the Transferee, will not
relieve Transferee from any liability that it may have to any Indemnified
Party), and the indemnification provided for in this Section 5 shall terminate
with respect to claims with respect to which written notice has not been sent to
the Transferee, on or prior to the first anniversary of the this Agreement.
Transferee shall not, without the prior express written consent of Transferor,
settle or compromise or consent to the entry of any judgment in any pending or
threatened claim, action, suit or proceeding in respect of which indemnification
may be sought hereunder without the prior written consent of Transferor.

6.      MISCELLANEOUS.

        This Agreement may be executed in any number of counterparts, all of
which together shall be deemed to one and the same instrument. This Agreement
shall be interpreted under the laws of the State of California as applied to
contracts entered into and performed entirely among California residents.


<PAGE>   4




        IN WITNESS WHEREOF, this Agreement has been duly executed on behalf of
the parties hereto as of the date first written above.

TRANSFEROR:

STAC, INC., a Delaware corporation



By:     /s/JOHN R. WITZEL
   ----------------------------------------
    John R. Witzel
    Vice President of Finance




TRANSFEREE:

HI/FN INC., Delaware corporation


By: /s/ ARTHUR J. COLLMEYER
   ----------------------------------------
     Arthur J. Collmeyer
     President and Chief Executive Officer


<PAGE>   5




                                    EXHIBIT A

                                     ASSETS

CASH:

Immediately payable funds of $1,000,000.

ACCOUNTS RECEIVABLES:

All currently outstanding accounts receivables relating to sales for by
Transferor of products related to the "Semiconductors," "Software" or
"Inventory" listed below.

THE "FIXED ASSETS":

Fixed Assets shall not include furniture or leasehold improvements at the
Transferor's offices located at 12636 High Bluff Drive, San Diego, California.
Notwithstanding the foregoing, in addition to the property listed below,
Transferee shall be assigned all equipment owned by Transferor and presently
used by Transferee exclusively for the testing and development of
semiconductors.


<TABLE>
<CAPTION>
<S>            <C>                                 <C>
LOCATION       ASSET #                             ITEM/DESCRIPTION
- --------       -------                             ----------------
301.00
               013173                              Micron Millenia
               004306                              CPU
               012028                              Micron Millenia
               012029                              Micron Monitor
               013174                              Micron Monitor
               05611                               Samsung SyncMaster3

302
               012106                              SAG Electronics
               011388                              ZEOS Pantera
               011386                              NEC MultiSync 5D
               012105                              MAG Innovision
               011387                              NEC CD Reader

303
               011447                              CPU
               012166                              Micron Millenia
               004844                              Macintosh Monitor
               011443                              ViewSonic 15E
               011444                              U View
               012169                              Micron Monitor
               010875                              Mac Quadro 700
</TABLE>


                                       A-1


<PAGE>   6

<TABLE>
<CAPTION>
<S>            <C>                                 <C>
LOCATION       ASSET #                             ITEM/DESCRIPTION
- --------       -------                             ----------------

304
               004692                              CPU
               10116                               ViewSonic 15G

305
               011378                              CPU
               011374                              17" Monitor
               011373                              17" Monitor
               011377                              Microcom Deskport
               011408                              NEC CD Reader

306
               011465                              CPU
               011466                              ViewSonic 7

307
               011322                              CPU
               011321                              ViewSonic 15G

308
               011343                              Gateway 2000
               012165                              Micron Millenia
               011344                              Monitor
               012170                              Micron Monitor
               01627                               14-4 Practical Periphial

309
               10126                               CPU
               004870                              ViewSonic 15G
               011335                              Toshiba Laptop T4500C

310
               011479                              CPU
               011595                              ViewSonic 15E
               no #                                NEC CD Reader
               011317                              Canon P125-D Calculator
               011477                              Okidata Printer

311
               Chip Room

312
               012167                              Micron Millenia
               011355                              ZEOS Pantera
               012168                              Micron Monitor
               011352                              Monitor

</TABLE>

                                       A-2


<PAGE>   7


<TABLE>
<CAPTION>
<S>            <C>                                 <C>
LOCATION       ASSET #                             ITEM/DESCRIPTION
- --------       -------                             ----------------

313
               012152                              Micron Millenia
               012153                              Micron Millenia
               011353                              Gateway 2000
               012150                              Micron Monitor
               012151                              Micron Monitor
               011354                              Monitor

314
               004454                              Compaq Prolinea
               004464                              Monitor

315
               011383                              Gateway 2000
               011424                              Macintosh Quadra 700
               011389                              Ambra
               011421                              CPU
               011384                              ViewSonic 7
               011423                              Macintosh Monitor
               011449                              Sony Trinitron
               011314                              Samsung SyncMaster3
               no #                                Sony CD Reader

316
               011313                              Canon L700 Fax
               011312                              HP Deskjet 560C
               011311                              HP LaserJet 4M
               011796                              CPU
               011795                              Sony Trinitron
               011316                              IBM Typewriter

317
               011461                              3M Overhead Projector
               011294                              Samsung TV
               011293                              Samsung VCR

318

               no #                                Epson LX-800
               011428                              Panasonic KX-P1191
               011407                              CPU
               011406                              CPU
               011318                              CPU
               011422                              CPU
               011415                              CPU
               011445                              CPU
               011419                              CPU
               011427                              CPU
               011420                              CPU
               010792                              Macintosh Quadra 840AV
</TABLE>

                                       A-3


<PAGE>   8

<TABLE>
<CAPTION>
<S>            <C>                                 <C>
LOCATION       ASSET #                             ITEM/DESCRIPTION
- --------       -------                             ----------------

               004830                              Macintosh II
               004928                              Macintosh Classic Monitor
               011405                              Samsung SyncMaster3
               011404                              Samsung SyncMaster3
               011362                              Samsung SyncMaster3
               011418                              Samsung SyncMaster3
               011414                              Samsung SyncMaster3
               011390                              Dell Monitor
               010874                              Macintosh Monitor
               011425                              Macintosh Performa 400
               011433                              Hayes Accura Fax
               011430                              Iwatsu Oscilloscope
               011508                              Scope Wagon
               011497                              US Robotics Sportster
               011434                              Teltone TLS-4
               011429                              HP Logic Analyzer
               011507                              HP Analyzer cart
               *H01221*                            Asante EN/SC
               011512                              UVP EPROM Eraser
               011511                              Hozan HS-600 Spotheater
               011510                              GC Auto temp

320
               011712                              Canon 6650 II Copier
               011399                              ZEOS 4.8.6
               011398                              Samsung SyncMaster3
               011400                              Philips CDD 522
               011401                              HP ScanJet Iic

323
               011299                              Canon 1020 Copier

</TABLE>

                                       A-4


<PAGE>   9


THE "SOFTWARE":

The source code, object code and development environment, to the extent they may
be assigned under end user licenses from vendors of third party products for all
versions of the following software programs:

MPPC-C - Compression software 
LZS221-C - Compression software 
LZS221-86 - Compression software 
LZS221-386 - Compression software 
LZS221-68 - Compression software 
LZS221-960 - Compression software 
LZS221-PPP - Compression software
LZS321-C - Compression software
MUM - Encryption software

THE "SEMICONDUCTORS":

The maskwork copyrights, net lists, development tools, masks, board layouts,
schematics and other tools owned by Stac or that may be assigned under end user
licenses from vendors and used to make, have made, develop, and support the
following Stac products or works-in-process in all versions and packages:

9703 - Compression chip 
9704 - Compression chip 
9705/9705A - Compression chip
9706/9706A - Compression chip 
9410 - Compression chip 
Arsenic - PC adapter board
Platinum - Compression chip 
9732 - Compression chip 
9710 - Compression chip 
9711 - Compression chip 
2106 - PC adapter board 
XT-8 - PC adapter board 
AT-16 - PC adapter board 
MC-16 - PC adapter board 
9705EVK - PC adapter board 
9706EVK - PC adapter board 
9703EVK - PC adapter board 
Zirconium - PC adapter board 
9707 - ECC chip

                                       A-5


<PAGE>   10



9810 - Tape formatter chip 
9820/9820A - Tape formatter chip 
9802/9802A - Memory & ECC chip 
9803 - Memory & ECC chip 
Zinc - PC adapter board 
Potassium - PC adapter board 
Radium - PC adapter board 
Jupiter - Interface chip 
Pearl - Plug & Play chip 
Synergy - Encryption chip 
Sunburst - Compression chip

THE "INVENTORY":

All current inventory relating to the Semiconductors.

At October 31, 1996, the inventory and related reserve for obsolescence for the
Semiconductors transferred to Transferee were as follows:

IC Chips             $1,241,873.11

Obsolescence         $400,840.35

Hi/fn will be assigned the above book value related to the Semiconductors as
well as any Semiconductors not represented by the above (i.e. Semiconductors not
carried on the books due to write-offs or their being development parts).

THE "TOOLS":

The following Tools and other related programs or utilities (other than the
standard desktop software environment which are addressed elsewhere herein),
owned by Transferor or that may be assigned under end user licenses from
vendors, used to develop, test or produce the Semiconductors or Software:

stacsim - Chip simulator 
optimize - Chip gate optimizer 
wire2net - Chip netlist generator 
fsmc - State machine compiler 
txtpack - Compression tester 
dparse - Decompression tester 
thdl tools - HDL language compiler 
lzsdemo - Demo utility
lzstest - Test utility 
bench - Test utility

                                       A-6


<PAGE>   11



THE "ASSIGNED TRADEMARKS":

                     STATUS RECORDED AS OF NOVEMBER 15, 1996

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
PROSECUTION STATUS                  TRADEMARK             FILED         SER. NO./PRIORITY         COUNTRY
- -----------------------------------------------------------------------------------------------------------
<S>                                 <C>                   <C>           <C>                       <C>
REGISTERED 4/25/95                  LZS                   7/30/93       74/419,959                US
1,891,659                                                                                         9
- -----------------------------------------------------------------------------------------------------------
REGISTERED 7/15/94                  LZS (FRANCE)          1/28/94       94/503,778                FRANCE
94/503778                                                                                         9
- -----------------------------------------------------------------------------------------------------------
SUSPENDED 7/17/96                   COMCRYPTION           2/5/96        75/053,339                US
PENDING DISPOSITION OF                                                                            9
USSN 75/041,168 AND
75/041,169
APPLN PENDING;
- -----------------------------------------------------------------------------------------------------------
APPLN PENDING;                      COMCRYPTION           8/5/96        8-087707                  JAPAN
                                    (JAPAN)                                                       9
- -----------------------------------------------------------------------------------------------------------
APPLN PENDING;                      HI/FN                 9/3/96        75/159,409                US
                                                                                                  9
- -----------------------------------------------------------------------------------------------------------
</TABLE>

THE "ASSIGNED PATENTS":

                    STATUS RECORDED AS OF NOVEMBER 15, 1996
<TABLE>
<CAPTION>

- -----------------------------------------------------------------------------------------------------------
PROSECUTION STATUS                  TITLE                 FILED         SER. NO./PRIORITY         COUNTRY
- -----------------------------------------------------------------------------------------------------------
<S>                                 <C>                   <C>           <C>                       <C>

ISSUED 3/26/91 U.S. PAT.            WRITE OPERATION       8/26/88       237,394                      US
NO. 4,996,690;                      WITH GATING
MAINTENANCE FEES DUE                CAPABILITY
8/26/98; AND 8/26/02
- -----------------------------------------------------------------------------------------------------------
ISSUED 5/29/90 U.S. PAT.            DIGITAL PHASE         12/6/88       281,305                      US
NO. 4,930,142; MAINT. FEE           LOCK LOOP
DUE 11/29/97 AND 11/29/01
- -----------------------------------------------------------------------------------------------------------
ISSUED 5/14/91 U.S. PAT.            DATA                  1/13/89       297,152                      US
NO. 5,016,009 MAINT.                COMPRESSION
FEES DUE 11/14/98; AND              APPARATUS AND
11/14/02                            METHOD
- -----------------------------------------------------------------------------------------------------------
ISSUED 3/26/91 U.S. PAT.            CIP: DATA             10/6/89       418,034 BASED ON USSN        US
NO. 5,003,307; MAINT.               COMPRESSION                         297,152 1/13/89
FEES DUE 9/26/98; AND               APPARATUS WITH
9/26/02                             SHIFT REGISTER
                                    SEARCH MEANS
- -----------------------------------------------------------------------------------------------------------
ASSOC TO CONDUCT                    DATA                  1/12/90       2-6057; BASED ON USSN        JAPAN
INTERVIEW                           COMPRESSION                         297,152 AND 418,034
W/EXAMINER, STATUS                  APPARATUS WITH
CHECK SET FOR 9/11/96;              SHIFT REGISTER
APPEAL NO. 7-9744:
- -----------------------------------------------------------------------------------------------------------
</TABLE>

                                       A-7


<PAGE>   12


<TABLE>
<CAPTION>

- -----------------------------------------------------------------------------------------------------------
PROSECUTION STATUS                  TITLE                 FILED         SER. NO./PRIORITY         COUNTRY
- -----------------------------------------------------------------------------------------------------------
<S>                                 <C>                   <C>           <C>                       <C>

AWAITING                            SEARCH MEANS
EXAMINATION;
ASSOCIATE FILED
AMENDMENT AND
APPEAL BRIEF 10/19/95;
ASSOCIATE TO FILE
AMENDMENT DUE
5/31/95;
INTERVIEW SHOULD
OCCUR MID JULY '95;
ASSOCIATE INSTRUCTED 
4/21 RE NOTICE OF 
APPEAL DUE 5/1/95; 
RESPONSE TO OFFICE
ACTION AND DIVISIONAL 
APPLICATION FILED 
7/11/94; ASSOCIATE 
INSTRUCTED 6/26/94 TO
RESPOND TO OFFICE 
ACTION DUE 7/11/94; 
REQUEST FOR 
EXAMINATION FILED
- -----------------------------------------------------------------------------------------------------------
STATUS CHECK SET FOR                DATA                  7/11/94       6-159042                     JAPAN
9/11/96; PER ASSOC                  COMPRESSION                         DIVISION OF 2-6057
5/17/96: EXAMINER WILL              APPARATUS WITH
ISSUE OA AFTER                      SHIFT REGISTER
DECISION ON APPEAL IN               SEARCH MEANS
PARENT, HAS PROVIDED
REFS TO BE CITED AND
WILL REVIEW DRAFT
AMENDMENT
BEFOREHAND;
ASSOCIATE INSTRUCTED
3/10/96 RE RESPONSE TO
OFFICE ACTION DUE
3/14/96; REQUEST FOR
EXAMINATION FILED
WITH APPLICATION
7/11/94;
- -----------------------------------------------------------------------------------------------------------
U.S. PATENT NO.                     DATA                  11/27/90      07/619,295                   US
5,126,739; ISSUED 6/30/92;          COMPRESSION
MAINT. FEES DUE                     APPARATUS AND
12/30/95; 12/30/99; and             METHOD                              BASED ON 297,152
12/30/03
- -----------------------------------------------------------------------------------------------------------
U.S. PATENT NO. 5,146,221           DATA                  11/27/90      07/619,291                   US
ISSUED SEPTEMBER 8,                 COMPRESSION
1992; MAINT. FEES DUE               APPARATUS AND
3/8/96; 3/8/00 and 3/8/04           METHOD                              BASED ON 297,152
- -----------------------------------------------------------------------------------------------------------
</TABLE>

                                       A-8


<PAGE>   13



<TABLE>
<CAPTION>

- -----------------------------------------------------------------------------------------------------------
PROSECUTION STATUS                  TITLE                 FILED         SER. NO./PRIORITY        COUNTRY
- -----------------------------------------------------------------------------------------------------------
<S>                                 <C>                   <C>           <C>                      <C>

PATENT NO. 5,414,850                SYSTEM FOR            8/23/91       07/748,978                  US
ISSUED 5/9/95;                      TRANSPARENTLY
                                    COMPRESSING
MAINT. FEES DUE 11/9/98;            DATA FILES IN A
11/9/02; & 11/9/06                  COMPUTER SYSTEM
- -----------------------------------------------------------------------------------------------------------
CERT. OF CORRECTION                 DATA                  5/9/94        08/240,960                  US
REC'D; PATENT NO.                   COMPRESSION                         FWC BASED ON
5,414,425 ISSUED 5/9/95;            APPARATUS AND                       08/023,874
                                    METHOD

MAINT. FEES DUE 11/9/98;
11/9/02; AND 11/9/06;
- -----------------------------------------------------------------------------------------------------------
PATENT NO. 5,532,694                HLZS                  7/7/95        08/499,230                  US
ISSUED 7/2/96;                                                          FWC BASED ON
MAINTENANCE FEES DUE                                                    07/927,343
1/2/00; 1/2/04 AND 1/2/08;
- -----------------------------------------------------------------------------------------------------------
STATUS CHECK SET FOR                HLZS                  8/10/93       5-198670                    JAPAN
9/11/96; ASSOCIATED
INSTRUCTED 3/10 & 12 RE
RESPONSE TO OFFICE
ACTION DUE 3/14/96; REQ.
EXAM FILED 12/17/93;
PUBLISHED 8/12/94
UNDER PUB. NO. 6-224778
- -----------------------------------------------------------------------------------------------------------
PATENT NO. 5,463,390                FWC: DATA             7/21/94       08/279,714                  US
ISSUED 10/31/95;                    COMPRESSION                         BASED ON 192,949
MAINTENANCE FEES DUE                APPARATUS AND
4/30/99; 4/30/03 AND                METHOD
4/30/07

ISSUE FEE/DRAWINGS
DUE 9/12/95 FILED 8/2/95;
DRWGS ORDERED 6/22/95;

IDS AND TERMINAL
DISCLAIMER FILED
1/24/95; FILING RECEIPT
RECEIVED
- -----------------------------------------------------------------------------------------------------------
PATENT NO. 5,506,580                FWC: DATA             12/6/94       08/350,389                  US
ISSUED 4/9/96;                      COMPRESSION
                                    APPARATUS AND                       BASED ON 08/008,450
MAINT. FEES DUE 10/9/99;            METHOD
10/9/03 AND 10/9/07;
- -----------------------------------------------------------------------------------------------------------
U.S. PATENT NO. 4,701,745           DATA                  3/3/86        835,793                     US
ISSUED 10/20/87;CPA                 COMPRESSION
INSTRUCTED 2/6 TO PAY               SYSTEM                              BASED ON GB 8505790
MAINT. FEE DUE 4/20/95                                                  FILED 3/6/85
MAINTENANCE FEES DUE
4/20/95 AND 4/20/99
- -----------------------------------------------------------------------------------------------------------
BELGIAN PATENT NO.                  DATA                  3/6/86        904,359                     BELGIUM
904359 ISSUED 3/6/86;               COMPRESSION
- -----------------------------------------------------------------------------------------------------------
</TABLE>

                                       A-9


<PAGE>   14


<TABLE>
<CAPTION>

- -----------------------------------------------------------------------------------------------------------
PROSECUTION STATUS                  TITLE                 FILED         SER. NO./PRIORITY         COUNTRY
- -----------------------------------------------------------------------------------------------------------
<S>                                 <C>                   <C>           <C>                       <C>

1/12/94:                            SYSTEM

PATENT NO. 36 06 869                DATA                  3/6/86        P 36 06 869.1        GERMANY
ISSUED 6/29/94;                     COMPRESSION
ANNUITIES DUE 3/31/95;              SYSTEM
ASSOCIATE INSTRUCTED
8/10 TO PAY GRANT FEE
DUE 9/6/94;

U.K. PATENT NO. 2,172,127           DATA                  3/6/85        2172127                      U.K.
                                    COMPRESSION
                                    SYSTEM

FILING RECEIPT                      HIGH-SPEED            12/29/95      08/580,636                   US
RECEIVED; FOREIGN                   PRIVATE KEY
DEADLINE 12/29/96;                  STREAM
                                    ENCRYPTION
</TABLE>

THE "SALES REPRESENTATIVE AGREEMENTS":

The following sales representative agreements to the extent they may be
assigned:

<TABLE>
<CAPTION>
REP                          AREA COVERED                                                     DATE
- -----------------------------------------------------------------------------------------------------------
<S>                         <C>                                                              <C>    

Action Sales                 Michigan, Indiana                                                8/5/93

Brooks Tech Group            No. California, Nevada (except Clark Cty)                        1/25/92

ES Chase                     Washington, Oregon and Idaho                                     6/1/92

Gibb Tech Sales              No. Dakota, So. Dakota, Kansas, Nebraska, Minnesota, Iowa,       9/24/92
                             Missouri, No. Wisconsin, So. Illinois

Lyons Corp.                  Ohio, Kentucky, W. Virginia, W. Pennsylvania                     8/6/93

Micro-Tex                    So. Wisconsin, No. Illinois                                      9/24/92

MillBern                     Massachusetts, Vermont, Maine, Rhode Island, New Hampshire       11/27/91

Novus Group                  Georgia, Alabama, Mississippi, Tennessee, No. & So. Carolina     11/21/93

Oasis Sales                  Arizona, New Mexico, Clark Cty NV                                12/3/91

Parallax                     No. New Jersey, So. New York                                     7/22/92

QXI                          Florida                                                          9/24/92

SC Cubed                     So. California                                                   10/22/91

TAI                          Virginia, Delaware, Maryland, E. Pennsylvania, So. New Jersey    6/25/92

Thorson Rocky Mountain       Montana, Wyoming, Colorado, Utah                                 11/12/91

West Associates              Texas, Oklahoma, Arkansas, Louisiana                             11/1/95

Amega Technology             Rep/Disty for United Kingdom                                     11/1/93

Metronik                     Rep/Disty for Germany                                            Contract??
</TABLE>

                                      A-10





<PAGE>   15

<TABLE>
<CAPTION>
REP                           AREA COVERED                                                           DATE
- -------------------------------------------------------------------------------------------------------------------
<S>                           <C>                                                                    <C>
Inno Micro                    Rep/Disty for Japan                                                    5/9/90

Memec                         Rep/Disty for Taiwan, Korea, Singapore, Hong Kong, China,              9/1/92
                              Thailand, Viet Nam, Philippines, Indonesia, Malaysia

Veltek Australia              Rep/Disty for Australia & New Zealand                                  1/27/95

Prime Source                  Rep/Disty for So. Africa                                               1/5/96

C88-AS                        Rep/Disty for Denmark                                                  3/11/96

Acsis                         Rep for Italy                                                          4/23/93

ElectroSource                 Rep for Canada                                                         1/25/93

Acal                          Rep/Disty for Netherlands                                              4/20/93

Valtrie Marketing             Canada Distributor                                                     5/8/94

Iridium Data                  Rep/Disty for Israel                                                   11/96
- -------------------------------------------------------------------------------------------------------------------
</TABLE>

THE "LICENSE AGREEMENTS":

                     CLOSED ONE TIME LZS LICENSE AGREEMENTS

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
CUSTOMER                         PRODUCT                          VERSION               SIGNED
- --------------------------------------------------------------------------------------------------
<S>                              <C>                              <C>                   <C>
3COM Corp.                       LZS221-C/LZS221-68               3.0                   9-Mar-93

3M                               1988 Technology                                        1-Jun-88

ACC                              LZS221-C                         3.0/4.0               1-Mar-95

Adtran                           LZS221-C/68                      4.0/3.0               7-Mar-95

Alf Co., Ltd. (CTC)              LZS221-86                        3.0                   10-Dec-92

Alloy Computer Products          DCS221                                                 10-Jul-89

Antlow Computers                 LZS221-C                         3.0                   15-May-96

Arcada Software                  LZS-C/86/68/386                                        21-Oct-94

Archive Corp.                    DCS221                                                 10-Oct-90

Ascend                           LZS221-68 & 960                  3.0/3.0               28-Jul-94

Ascom Timeplex                   LZS221-C                         3.0                   29-Sep-95

Cabletron Systems                LZS221-C                                               4-May-93

Central Point Software           DCS221                                                 16-Feb-90

Central Point Software           DCS221-68                                              21-Nov-91

Central Point Software           LZS221-86                        3.0                   31-Aug-92

Cheyenne                         LZS221-86                        3.0                   25-Sep-95

Cisco                            LZS221-68                        3.0                   15-Sep-94

CMS Enhancements, Inc.           DCS221                                                 31-May-90
- --------------------------------------------------------------------------------------------------
</TABLE>



                                      A-11
<PAGE>   16

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
CUSTOMER                           PRODUCT              VERSION               SIGNED
- ----------------------------------------------------------------------------------------
<S>                                <C>                  <C>                   <C>
Colorado Memory Systems            DCS221                                      11-Jun-90

Colorado Memory Systems            DCS221-386             1.0                  26-Sep-94

Colorado Memory Systems            LZS221-86                                   12-Jul-93

CORE International                 RS3T/DCS221                                 4-Oct-89

Cosystems, Inc.                    LZS221-C               3.0                  1-Apr-95

Develcon                           LZS221-C               3.0                  13-Jul-94

Equifax Marketing                  DCS221                                      12-Jul-90

Equifax Marketing                  DCS221-VAX                                  20-May-91

Everex Systems, Inc.               DCS221                                      24-May-90

Farallon Computing                 LZS221-68              3.0                  24-Feb-95

Ferranti International             No Info

Fifth Generation Systems           RS3T ECC                                    4-Nov-92

Flowpoint                          LZS221-C               3.0                  21-Nov-95

Fujitsu                            LZS221-C               3.0/4.0              10-Mar-95

Furukawa                           LZS221-C               4.0                  27-Feb-95

Gandalf Canada LTD                 LZS221-960             4.0                  1-Jun-95

Go Corp.                           LZS221-C                                    1-Jun-93

Helix                              HLZS                                        28-Mar-96

IBM                                LZS221-C               3.0                  10-May-96

Irwin Magnetics                    C Source QIC122        3.0                  25-Nov-91

Kokusai Electric Co Ltd.           LZS221-C               3.0                   1-Feb-95

Kyocera                            LZS221-68              3.0                  27-Sep-95

LDS Family History Dept.           LZS221-86                                   13-Sep-93

Loral Space Info Sys               DCS221-386                                  19-Dec-94

Microcom                           DCS221-68                                   6-Sep-91

Morningstar Tech                   LZS221-C               3.0                  19-Aug-94

Mountain Computer                  DCS221                                      7-Jul-89

NetCS Inform. GmbH                 LZS221-C               3.0                  6-Jul-94

Netronix                           DCS221                                      27-Feb-91

Network Dynamics                   LZS221-68              3.0                  26-Oct-96

Northern Telecom                   LZS221-68              3.0

Nova Drive                         LZS221-86              decomp only          26-Jul-95

Perle System Ltd                   LZS221-C               3.0                  26-Mar-96
- ----------------------------------------------------------------------------------------
</TABLE>



                                      A-12
<PAGE>   17
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
CUSTOMER                       PRODUCT                     VERSION            SIGNED
- ------------------------------------------------------------------------------------------
<S>                            <C>                         <C>                <C>
PG Soft                        LZS221-86                     3.0              1-Apr-96

Quest Development Corp.        DCS221                                         28-Feb-90

Racal Datacomm                 LZS221-C                      3.0              1-Sep-95

Retix                          DCS221-68                                      6-Aug-91

Retix                          LZS221-960                    4.0              31-Jan-95

Ritan Communications           LZS221-C                      3.0              25-Sep-95

Shiva                          LZS221-C/68/86                4.0/3.0/3.0      2-Feb-95

Sierra On-Line                 LZS221-C/DCS221-386                            3-Dec-93

Soliton Systems(Japan)         LZS221-C                      3.0              30-Nov-94

Spider Island Software         LZS221-C                      3.0              29-Apr-95

Spry/CompuServe                LZS221-86                     2.0              14-Jun-95

Stampede                       LZS221-C                      3.0              5-Sep-95

Sun Microsystems               LZS221-C                      3.0              12-Dec-95

Synaptel S.A.                  LZS221-C                      3.0              13-Mar-96

Sytron Corporation             1987 Technology                                11-Jun-87

Sytron Corporation             DCS221                                         8-May-90

Tallgrass Technologies         DCS221                                         24-Jul-89

Tallgrass Technologies         2.02 DCS221-86                                 15-Feb-91

Tallgrass Technologies         DCS221-386                                     25-Jul-91

Tecmar                         DCS221                                         20-Jul-90

Telebit                        LZS221-68                     3.0              21-Nov-94

Telenetworks                   LZS221-C                      3.0              17-Jun-96

Traveling Software             LZS221-86 Custom                               21-Dec-92

TVS Electronics                DCS221                                         11-Jul-90

UniQ                           LZS221-C                      3.0              26-Oct-94

Vogon International LTD        LZS221-86                     2.0              21-Jun-95

Wangtek                        DCS221                                         14-Feb-89

Xyplex                         LZS221-68                     3.0              20-Sep-94

Zeta Communications            LZS221-C                      3.0              10-Jan-96

Zytel                          LZS221-C                      3.0              10-Nov-95

Progressive Systems            LZS221-C                      3.0              27-Sep-96

Bay Networks                   LZS221-C                      3.0              10-Oct-96

Securicor 3Net Ltd             LZS221-C                      3.0              10-Oct-96
- ------------------------------------------------------------------------------------------
</TABLE>



                                      A-13
<PAGE>   18
                        CLOSED ROYALTY LICENSE AGREEMENTS

<TABLE>
<CAPTION>
CUSTOMER                           PRODUCT                   VERSION               SIGNED
- --------------------------------------------------------------------------------------------
<S>                                <C>                       <C>                  <C>
Advanced Computer Comm             LZS221-68                   3.0                20-Aug-92

Agfa                               LZS221-68                   3.0                18-Apr-94

Almond Seed S/W                    LZS221-C                    3.0                14-Jul-95

Cheyenne Software                  LZS221-86                                      15-May-92

Conware                            LZS221-960                  3.0                1-Mar-95

Cristie Electronics                RS3T                                           19-Oct-93

Cristie Electronics Ltd.           LZS221-86                                      5-Jan-93

Dynatech                           LZS221-68                   3.0                27-Mar-95

Eastern Research                   LZS221-68                   3.0                14-Nov-94

Eicon Technology                   DCS221-68                                      1-Jun-92

Electronic Data Sys                DCS221-386                                     22-Feb-95

Golden Triangle                    DCS221-68                                      17-Oct-92

IDE Assoc                          LZS21-960                   3.0                9-Sep-94

ISC                                LZS221-86                   3.0                28-Jul-94

LAN Support Grp                    DSC-386/LZS-C                                  6-Jun-94

Memotec                            LZS-960 & LZS-68            4.0/2.0            25-Apr-95

MSR Development                    DCS221-386                                     8-Oct-93

Netronix                           LZS221-86                                      4-Nov-92

Network Express                    LZS221-86                   3.0                11-Nov-94

Newport Systems                    LZS221-86                   3.0                22-Aug-94

Niwot                              LZS221-86/C                 3.0/3.0            23-Jun-95

Olicom A/S (Denmark)               DCS221-386, LZS221-86                          10-Jan-94

Pinacl Communication               LZS221-86                   3.0                3-Feb-95

Qualstar                           LZS221-86                                      1-Feb-93

RAD Networks                       LZS221-86                   3.0                12-Oct-94

Roadway                            LZS221-C                    ?                  25-Jul-94

Rockwell Network Sys.              LZS221-86                   3.0                28-Feb-95

Sable Technology                   LZS221-86                   3.0                29-Sep-94

Scorpion Logic                     LZS221-C                    4.0                24-Nov-94

Skyline Tech                       LZS221-68                   2.0                1-Feb-95
- --------------------------------------------------------------------------------------------
</TABLE>



                                      A-14
<PAGE>   19

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
CUSTOMER                                  PRODUCT                      VERSION           SIGNED
- ---------------------------------------------------------------------------------------------------
<S>                                       <C>                          <C>               <C>
TRT Phillips                              LZS221-68                    3.0               9-Oct-95

West Publishing Company                   LZS221-86                                      6-Jan-93

Workbit                                   LZS221-86                    3.0               10-Jul-92
- ---------------------------------------------------------------------------------------------------
</TABLE>

                      CLOSED V4 ROYALTY LICENSE AGREEMENTS

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
CUSTOMER                                  PRODUCT                      VERSION           SIGNED
- ---------------------------------------------------------------------------------------------------
<S>                                       <C>                          <C>               <C>
Cisco                                     LZS-C/MPPC-C                 4.0               1-Sep-95

3Com                                      LZS-C/68                     custom            29-Sep-95

Command Software Systems                  DCS-386                      1.0               1-Dec-95

US Robotics                               LZS-C/MPPC-C                 4.0               1-Dec-95

Megatest                                  LZS-C                        4.0               6-Dec-95

Global Village Communication, UK          LZS-C                        4.0               22-Dec-95

Flowpoint                                 LZS-C                        4.0               1-Feb-96

Seiko                                     LZS-68                       3.0               8-Mar-96

Sybase                                    LZS-C                        4.0               22-Mar-96

Sierra Online                             LZS-68                       3.0               1-Apr-96

Proteon                                   LZS-C/68                     4.0/5.0           8-May-96

IBM                                       LZS-C/68                     4.0/5.0           11-Jun-96

QUICK Corp                                LZS-C                        4.0               1-Jul-96

AT&T Paradyne                             LZS-68                       3.0               22-Jul-96

Nortel                                    LZS-C                        4.0               13-Aug-96

Shiva                                     LZS-68/960, MPPC-C, Mum      5.0/4.0/4.0/1.0   27-Aug-96

Hitachi                                   LZS-C                        4.0               11-Sep-96

Develcon                                  LZS-C (Modified)             4.0               19-Sep-96

Compuserve                                LZS-C/MPPC-C                 4.0/4.0           30-Sep-96

RND                                       LZS221-960                   4.0               29-Aug-96

ZyXEL                                     LZS221-68                    5.0               1-Oct-96
- ---------------------------------------------------------------------------------------------------
</TABLE>



                                      A-15
<PAGE>   20

                    CLOSED MOTOROLA PATENT LICENSE AGREEMENTS

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
CUSTOMER                                  PRODUCT                      VERSION           SIGNED
- ---------------------------------------------------------------------------------------------------
<S>                                       <C>                          <C>               <C>
Sun Microsystems                          MOTCOMP                      na                08-Mar-96

3Com                                      MOTCOMP                      na                31-Jan-96

Flowpoint                                 MOTCOMP                      na                23-Apr-96
- ---------------------------------------------------------------------------------------------------
</TABLE>

                                OTHER AGREEMENTS

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
CUSTOMER                                  PRODUCT                      VERSION           SIGNED
- ---------------------------------------------------------------------------------------------------
<S>                                       <C>                          <C>               <C>
Microsoft Corp.                           MPPC                         All               16-Feb-96
- ---------------------------------------------------------------------------------------------------
</TABLE>



                                      A-16
<PAGE>   21




                                    EXHIBIT B

                                   LIABILITIES

Transferee shall perform all obligations of the Transferor under the "Sales
Representative Agreements" and the "License Agreements" listed on Exhibit A.

Transferee shall assume all current accounts payable related to the development,
distribution, marketing or sales of products related to the "Software," the
"Semiconductors," the "Tools," or the "Inventory."

Transferee shall assume all current and unpaid payroll and related benefits
expenses related to former employees of Transferor who become employees of
Transferee.


                                       B-1







<PAGE>   1

                                                                    EXHIBIT 10.3
                                    EXHIBIT C

                             CROSS LICENSE AGREEMENT

        THIS CROSS LICENSE AGREEMENT (the "License Agreement") is made and
entered into concurrent with, and effective as of, the effective date (the
"Effective Date") of the Assignment, Assumption, and License Agreement (the
"Assignment Agreement") by and between STAC, INC. a Delaware Corporation
("Transferor" or "Parent"), and HI/FN INC., a Delaware corporation ("Transferee"
or "Sub").

        WHEREAS, pursuant to the Agreement, Parent has assigned, and Sub has
assumed, certain assets, rights, obligations, and liabilities; and

        WHEREAS, Sub wishes to license certain intellectual property rights in
the assigned technologies back to Parent and Parent wishes to accept such
licenses; and

        WHEREAS, Parent wishes to license certain technologies to Sub and Sub
wishes to accept such licenses;

        NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and conditions set forth below, the parties hereby agree as follows:

1.      DEFINITIONS

        1.1 CONFIDENTIAL INFORMATION means any and all confidential and
proprietary information (whether technical or non-technical), including trade
secrets, techniques, sketches, drawings, models, inventions, Know-how,
processes, apparatus, equipment, algorithms, software programs, software source
documents, and formulae related to the current, future and proposed products and
services of either party, and includes, without limitation, each party's
respective information concerning research, experimental work, development,
design details and specifications, engineering, financial information,
procurement requirements, purchasing, manufacturing, customer lists, employee
lists, business forecasts, sales and merchandising, and marketing plans and
information identified by the disclosing party as Confidential Information,
whether in oral, written, graphic or electronic form. If disclosed in oral form,
such Confidential Information must be reduced to writing and marked as
Confidential Information within thirty (30) days following disclosure.

        1.2 DERIVATIVE WORK means any correction, enhancement, alteration,
improvement, revision, modification, translation, port, abridgment,
condensation, or expansion of the Software.

        1.3 END USER means a licensee of the Software, who acquires the Software
for its own ordinary and customary business purposes or for personal use, and
not for further resale or distribution.

        1.4 EXCLUDED FIELD means the hardware implementation of any of the
Technology or the licensing or sale of the Software as a stand-alone product
during the ten (10) years following

                                      C-1
<PAGE>   2

the Effective Date, after which Parent shall have no Excluded Field
restrictions. Notwithstanding the above, the loading of Software into Read-Only
Memory (ROM) or other memory units shall not be deemed to be part of the
Excluded Field.

        1.5 INTELLECTUAL PROPERTY RIGHT means any patent, copyright, trade name,
trademark, trade secret, know-how, or any other intellectual property right or
proprietary information or technology, whether registered or unregistered.

        1.6 KNOW-HOW means the trade secret techniques, inventions, practices,
methods, knowledge, skill, experience, test data and cost data relating to the
Software.

        1.7 PATENTS means the existing patents and patent applications related
to the Technology, as listed on Attachment A ("Patents") and such patents
obtained and patent applications filed by Sub relating to the Patents during the
term of this License Agreement and improvements thereto, including without
limitation, all foreign counterparts, all substitutions, extensions, reissues,
renewals, divisions, provisionals, continuations and continuations in part
relating to such Patents and their foreign counterparts.

        1.8 SOFTWARE means those computer programs in both source and object
code form, as listed on Attachment B ("Software"), the related Know-how and all
Derivative Works thereof, and any future enhancements, updates or new versions
delivered to Parent by Sub pursuant to Section 5 ("Delivery of Future Versions
to Parent; Software Support").

        1.9 TRADEMARKS means certain specific trademarks, trade names, logos and
similar identifying marks used in connection with the promotion and marketing of
the parties and their products as listed below:

                (a) PARENT TRADEMARKS means Stac and the Stac logo.

                (b) SUB TRADEMARKS means Comcryption, LZS, Mum and Hi/fn which
are owned by Sub.

        1.10 TECHNOLOGY means all technology licensed under this License
Agreement, including the Patents, Software, all Derivative Works, and all
associated documentation.

        1.11 PARENT'S PRODUCT(S) means all software and hardware products, and
their successor products, developed, marketed and sold or licensed by Parent or
by its contractors, affiliates or other third parties. During the ten years
following the Effective Date, Parent's Products shall not include standalone
software libraries which implement the Technology for integration into the
products of third parties.

2.      LICENSE GRANTS FROM SUB TO PARENT.

        2.1 LICENSE TO TECHNOLOGY. Subject to the terms and conditions hereof,
Sub hereby grants to Parent a non-exclusive, nontransferable, worldwide,
perpetual, irrevocable, royalty-free license, except in the Excluded Field, to
use, modify, reproduce, create Derivative Works, 


                                      C-2
<PAGE>   3
display, perform, distribute, license and sublicense the Technology in order to
use, have used, import, make, have made, sell, offer to sell, distribute,
license and sublicense, both directly and through third parties and through
multiple tiers of distribution, Parent's Products which incorporate or which
otherwise use all or any portion of the Technology.

        2.2 LICENSE TO SUB TRADEMARKS. Subject to the terms and conditions
hereof, Sub hereby grants to Parent a nonexclusive, worldwide, royalty-free
license to use the Sub Trademarks in connection with the marketing of Parent's
Products embodying the Technology. Parent acknowledges and agrees that Sub is
the owner of the Sub Trademarks, that any use of the Sub Trademarks by Parent
shall inure to the benefit of Sub, and that Parent shall take no action
inconsistent with the preservation of Sub's ownership interests in the Sub
Trademarks. Sub is familiar with the quality of Parent's Products and approves
the use of the Sub Trademarks in connection with the marketing of such Parent's
Products which are of the same quality.

        2.3 RESTRICTIONS. Parent acknowledges that the Software contains
Confidential Information and agrees that it will not, nor will it permit a third
party to, decompile, disassemble, reverse engineer or otherwise manipulate
Software which is delivered to such third parties solely in object code form in
order to derive the Know-how embedded therein. In the event that Parent
sublicenses Intellectual Property Rights to a third party, the sublicensor shall
execute an agreement with its sublicensee that contains provisions at least as
protective as those contained in this License Agreement.

3.      LICENSE GRANTS FROM PARENT TO SUB

        3.1 IBM HARDWARE AND SOFTWARE PATENT LICENSES. Parent hereby grants Sub
a sublicense under all of the licenses granted by IBM to Parent pursuant to the
Agreements between Parent and IBM Corporation, each dated April 1, 1994 (the
"IBM Hardware Patent License" and the "IBM Software Patent License,"
collectively the "IBM Patent Licenses," copies of which are attached to this
Agreement as Attachments C-1 and C-2, respectively), pursuant to Section 3.1 of
the IBM Hardware Patent License and Section 3.1 of the IBM Software Patent
License. Sub acknowledges and agrees that the foregoing sublicense will
terminate on the date Sub no longer is a "Subsidiary" of Parent as that term is
defined in the IBM Patent Licenses, and that upon the occurrence of such a
termination, Sub shall be solely responsible for obtaining equivalent license
rights directly from IBM pursuant to Section 3.2 of the IBM Hardware Patent
License and Section 3.2 of the IBM Software Patent License to the extent Sub is
eligible for such licenses in accordance with the terms of the IBM Patent
Licenses.

        3.2 MOTOROLA PATENT LICENSES. Sub shall have the license rights provided
to Subsidiaries of Parent and their successors under the license agreement with
Motorola, Inc. dated December 15, 1995 (the "Motorola Patent License," a copy of
which is attached to this Agreement as Attachment D). Sub acknowledges and
agrees that the foregoing license rights will terminate on the date Sub no
longer is a "Subsidiary" of Parent as that term is defined in the Motorola
Patent License, and that upon the occurrence of such a termination, Sub shall be
solely responsible for obtaining equivalent license rights directly from
Motorola pursuant to Section 7.5 or Section 7.6 of the Motorola Patent License.


                                      C-3
<PAGE>   4

        3.3 LICENSE TO PARENT TRADEMARKS. Subject to the terms and conditions
hereof Parent hereby grants to Sub a non-exclusive, worldwide, royalty-free
license to use the Parent Trademarks in connection with Sub's marketing and
commercial activities related to Sub's Products embodying the Technology Sub
acknowledges and agrees that Parent is the owner of the Parent Trademarks that
any use of the Parent Trademarks by Sub shall mure to the benefit of Parent, and
that Sub shall take no action inconsistent with the preservation of Parent's
ownership interests in the Parent Trademarks. Parent is familiar with the
quality of Sub's Products and approves the use of the Parent Trademarks in
connection with the marketing of such Products which are of the same quality.
The term of the license granted in this Section 3.3 ("License to Parent
Trademarks") shall be for one year from the date Sub is no longer a Subsidiary
of Parent.

4.      DELIVERY OF DERIVATIVE WORKS TO SUB. To the extent that any Derivative
Works are created by Parent during the ten (10) years following the Effective
Date, Parent hereby agrees to deliver to Sub from time to time, as reasonably
requested by Sub, all such Derivative Works, in whatever form and medium such
Derivative Works are embodied, including, but not limited to, source code for
the Software (and all associated documentation necessary to make use of such
source code), flowcharts, schematics, mask works and net lists.

5.      DELIVERY OF FUTURE VERSIONS TO PARENT; SOFTWARE SUPPORT. For ten (10)
years from the Effective Date (the "Delivery Period"), Sub shall have an ongoing
obligation to deliver to Parent all future commercial releases ("Future
Versions") of the Software (including all generally available updates,
enhancements, and error corrections) as they are released to Sub's OEMs, VARs,
resellers and End Users. Upon request from Parent, Sub shall deliver to Parent
any interim releases of the Software (e.g. any Alpha, Beta, or test versions).
Sub shall, during the Delivery Period, provide Parent at no cost with the same
level of technical support Sub provides to its Software licensees.

6.      PROPRIETARY RIGHTS.

        6.1 OWNERSHIP BY SUB. Parent acknowledges that the Technology is
proprietary to Sub and that Sub retains exclusive ownership of the Technology
and Sub Trademarks. Parent will take all reasonable measures to protect Sub's
Intellectual Property Rights in the Technology and the Sub Trademarks, including
such assistance and measures as are reasonably requested by Sub from time to
time.

        6.2 OWNERSHIP OF DERIVATIVE WORKS. Sub shall retain ownership of all
Derivative Works deliverable to it under Section 5 ("Delivery of Future Versions
to Parent; Software Support"). Parent agrees to include in any agreements with
its licensees of the Technology, provisions which would insure that the
ownership of Derivative Works shall remain in, or be assigned to, Sub. In order
to effectuate the intentions of this Section 6.2 ("Ownership of Derivative
Works"), Parent hereby irrevocably transfers and assigns any and all rights
Parent may have in or with respect to the Derivative Works. To the extent Parent
cannot assign such rights, Parent hereby waives and agrees never to assert such
rights against Sub or any of Sub's licensees. If Parent has any right to any
Derivative Works that cannot be assigned to Sub or waived by Parent, Parent
unconditionally and irrevocably grants to Sub, during the term of such


                                      C-4
<PAGE>   5

rights, a fully-paid, perpetual, irrevocable, worldwide, nonexclusive, license
to use, have used, make, have made, sell, offer to sell, distribute, license and
sublicense, both directly and through third parties, products which incorporate,
are based upon, or which otherwise use all or any portion of the Derivative
Works, and to use, reproduce, make derivative works of and distribute, license
and sublicense both directly and through third parties, any Derivative Works. In
addition, Parent agrees to obtain such assignment, waiver, covenant not to
assert such rights, or license from any subsidiary, subcontractor, related
entities, or employee who creates, either in whole or part, any Derivative
Works.

        6.3 MAINTENANCE OF INTELLECTUAL PROPERTY. Sub agrees to take all
commercially reasonable efforts to secure and preserve all Intellectual Property
Rights in the Technology. Such efforts shall include, but not be limited to, the
filing and prosecution of all applicable patent applications related to the
Technology, and the payment of all fees required thereunder. Sub shall control
the prosecution of all patent applications, but shall periodically confer with
Parent's patent counsel and Parent's designated technical manager regarding such
applications. Sub will be solely responsible for all costs associated with the
prosecution, issuance and maintenance of all such patent applications and all
patents issuing therefrom. In the event that Sub elects to abandon, withdraw or
discontinue such a patent application or patent issuing therefrom, Sub shall
notify Parent with sufficient time for Parent to intervene so that Parent may
preserve such rights. In the event of Parent's intervention, Parent shall have
the right to undertake and control such action or maintain such patent at its
own expense through patent counsel of its choosing, and Sub, at Parent's
expense, shall fully cooperate with Parent in the prosecution of all such patent
applications and the maintenance of such patents.

        6.4. INFRINGEMENT NOTIFICATION. If Parent learns of a third party
infringement of any Intellectual Property Right related to the Technology, it
shall notify Sub of such fact. Sub shall have the right to assume control of the
action at its sole expense; however, if the suit implicates (or has the
potential to implicate) Parent's right to enjoy the benefit of the licenses
granted under this License Agreement, Parent may participate in such action at
its own expense. If Sub declines to pursue the action, Parent may control the
action at its expense, provided that Sub may also participate in such action at
its own expense. Parent shall provide Sub with notice of all pending or
threatened litigation regarding the Technology as of the Effective Date.

        6.5 INFRINGEMENT ENFORCEMENT. Both parties agree to cooperate fully with
each other in any enforcement action, and to confer with each other on the
disposition and prosecution of claims against third parties for infringement of
Intellectual Property Rights in the Technology. In the event that the non-suing
party is named as a party plaintiff or joined to the action, such party can
agree to be represented by the other party's attorneys at the other party's cost
or may retain its own attorney at its own expense (but without affecting which
party controls the action).

        6.6 COOPERATION BY PARENT. Parent agrees to extend reasonable efforts in
cooperation with Sub in the procurement and maintenance of Sub's rights in the
Technology and to sign all papers which Sub may deem necessary and desirable for
vesting Sub with such rights throughout the world, including litigation of
applicable Patents, copyrights and other proceedings. Sub shall reimburse Parent
for all costs and expenses actually incurred in the course of such cooperation.


                                      C-5
<PAGE>   6

In the event that Sub is unable for any reason whatsoever to secure a signature
on behalf of Parent to any document it believes is reasonably required in order
to apply for or execute any Patent, copyright or other application with respect
to the Technology, Parent hereby irrevocably designates and appoints Sub and its
duly authorized officers and agents as Parent's agents and its attorneys-in-fact
to act for and in its behalf and instead of it, to execute and file any such
application and to do all other lawfully permitted acts to further the
prosecution and issuance of Patents, copyrights or other rights therein with the
same legal force and effect as if executed by Parent.

        6.7 LEGENDING. Each party agrees to protect the ownership interests in
the Technology to the fullest extent possible, and to legend all products
embodying the Technology so as to ensure such protection. Such legending shall
include, but not be limited to, (i) the marking of all products (or if such
marking is impracticable, by marking the materials accompanying such products)
embodying the Patents with the work "Patent" or "Pat." together the number of
each patent applicable to the product, so as to comply with the provisions of 35
U.S.C. 287(a); (ii) the marking of all products and associated documentation
embodying copyrighted works of the Technology with valid copyright notices
containing the name of the work, the word "Copyright" or the (C) symbol, the
date of first publication, the name of the copyright owner, and the phrase "all
rights reserved"; and (iii) the legending of all Confidential Information with
proprietary rights egends no less protective that those used to protect that
party's own Confidential Information. Neither party shall alter or remove any
proprietary rights legends on or in the Technology or the media containing it.

        6.8 GOVERNMENT RESTRICTED RIGHTS. Each party agrees that in order to
protect the Intellectual Property Rights in the Technology in transactions with
the U.S. government, all licenses with the U.S. government regarding the
Technology shall include terms that are consistent with the following language:

                The [product] is a "commercial item," as such term is defined at
        48 C.F.R. 2.101 (OCT 1995), consisting of "commercial computer software"
        and "commercial computer software documentation" as such terms are used
        in 48 C.F.R. 12.212 (SEPT 1995) and is provided to the Government (i)
        for acquisition by or on behalf of civilian agencies, consistent with
        the policy set forth in 48 C.F.R. 12.212; or (ii) for acquisition by or
        on behalf of units of the Department of Defense, consistent with the
        policies set forth in 48 C.F.R. 227.7202-1 (JUN 1995) and 227.7202-3
        (JUN 1995).

        Each party will take all reasonable steps in making proposals and
agreements with governments other than the United States which involve the
Technology to ensure that the proprietary rights in such Software and User
Documentation receive the maximum protection available from such governments for
such Technology.

7.      CONFIDENTIALITY.

        7.1. PROTECTION OF CONFIDENTIALITY. Each party hereto will maintain in
confidence all Confidential Information disclosed by the other party hereto.
Neither party will use, disclose or


                                      C-6
<PAGE>   7

grant use of such Confidential Information except as expressly authorized by
this License Agreement. Each party will use at least the same standard of care
as it uses to protect its own confidential information of a similar nature to
ensure that its employees, agents or consultants do not disclose or make any
unauthorized use of such Confidential Information, and each party represents
that such standard of care is at least that customarily employed in the industry
to protect the confidentiality of such information. Notwithstanding the
foregoing each party shall require its employees and consultants, if such
employee or consultant has not already done so, to sign confidentiality and
nondisclosure agreements with such party consistent with the confidentiality
requirements set forth herein. Each party will promptly notify the other upon
discovery of any unauthorized use or disclosure of the Confidential Information.

        7.2. EXCEPTIONS. The obligations of confidentiality contained in Section
7.1 ("Protection of Confidentiality") will not apply to the extent that it can
be established by the receiving party that such Confidential Information:

                (a) was already known to the receiving party, other than under
an obligation of confidentiality, at the time of disclosure by the other party;

                (b) was generally available to the public or otherwise part of
the public domain at the time of its disclosure to the other party;

                (c) became generally available to the public or otherwise part
of the public domain after its disclosure and other than through any act or
omission of the receiving party in breach of this License Agreement;

                (d) was disclosed to the receiving party, other than under an
obligation of confidentiality, by a third party who had no obligation to the
other party not to disclose such information to others.

        7.3. AUTHORIZED DISCLOSURE. Each party may disclose Confidential
Information to manufacturing sublicensees provided that such disclosure is made
pursuant to a nondisclosure agreement which contains provisions at least as
protective of the other party's interests as those contained in this Section 7
("Confidentiality"). Each party may disclose the Confidential Information to the
extent such disclosure is reasonably necessary in filing or prosecuting patent
applications, prosecuting or defending litigation or complying with applicable
governmental regulations, provided that if such party is required to make any
such disclosure of the Confidential Information it will to the extent
practicable give reasonable advance notice to the other party of such disclosure
requirement and, except to the extent inappropriate in the case of patent
applications, will use its best efforts to secure confidential treatment of such
information required to be disclosed. The parties acknowledge that the sale of
products embodying the Technology may necessarily disclose Confidential
Information of the parties and the parties agree to use commercially reasonable
efforts to limit such disclosure

        7.4 SURVIVAL OF CONFIDENTIALITY OBLIGATIONS. This Section 7
("Confidentiality") shall survive any termination of this License Agreement.


                                      C-7
<PAGE>   8

8.      DISCLAIMER OF WARRANTY. THE TECHNOLOGY LICENSED UNDER THIS LICENSE
AGREEMENT IS PROVIDED STRICTLY ON AN "AS IS" BASIS AND WITHOUT WARRANTY OF ANY
SORT. BOTH PARENT AND SUB EXPRESSLY DISCLAIM ALL WARRANTIES EXPRESSED OR IMPLIED
BY ANY COUNTRY OR JURISDICTION, RELATING TO THE TECHNOLOGY, AND FURTHER
EXPRESSLY EXCLUDE ANY WARRANTY OF NON-INFRINGEMENT, FITNESS FOR A PARTICULAR
PURPOSE OR MERCHANTABILITY.

9.      INDEMNITY. Subject to the limitations set forth below, Sub shall defend
Parent with respect to all claims, suits, proceedings, losses, liabilities,
damages, costs and expenses (including without limitation Parent's reasonable
attorneys' fees) made against or incurred by Parent as a result of any claim
arising at any time that the Technology infringes any Intellectual Property
rights of any third party; provided, however, that Parent (i) promptly notifies
Sub in writing of such claim, suit or proceeding (ii) gives Sub the right to
control and direct investigation, preparation, defense and settlement of any
claim, suit or proceeding; and (iii) gives assistance and full cooperation for
the defense of same. Sub shall pay any resulting damages, costs and expenses
finally awarded to a third party, but Sub is not liable for such amounts or for
settlements incurred by Parent without Sub's written authorization. If such
claim, suit or proceeding has occurred or, in Sub's opinion, is likely to occur,
Sub may, at its election and expense, obtain for Parent the right to continue to
make use of any or all licenses granted under this License Agreement.

10.     LIMITATION OF LIABILITY. NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR
ANY LOSS OF USE, INTERRUPTION OF BUSINESS, COST OF PROCUREMENT OF SUBSTITUTE
GOODS, TECHNOLOGY OR SERVICES OR ANY INDIRECT, SPECIAL, INCIDENTAL, OR
CONSEQUENTIAL DAMAGES OF ANY KIND (INCLUDING LOST PROFITS) REGARDLESS OF THE
FORM OF ACTION WHETHER IN CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT PRODUCT
LIABILITY OR ANY OTHER LEGAL OR EQUITABLE THEORY EVEN IF EITHER PARTY HAS BEEN
ADVISED BY THE OTHER OF THE POSSIBILITY OF SUCH DAMAGES.

11.     TERM AND TERMINATION.

        11.1 TERM. The Term of this License Agreement shall be perpetual, unless
terminated earlier, pursuant to Section 11.2 ("Termination") or unless the term
of any specific provision of the License Agreement is designated as being
otherwise.

        11.2 TERMINATION. This License Agreement may be terminated, upon sixty
(60) days written notice of material breach by either party, if such material
breach has not been cured within such sixty (60) day period.

        11.3 EFFECT OF INSOLVENCY. If a voluntary or involuntary petition is
commenced by or against Sub under any bankruptcy statute, or Sub becomes
insolvent, or any substantial part of Sub's property becomes subject to any
levy, seizure, assignment, application or sale for or by any creditor or
governmental agency, or a receiver should be appointed for Sub, all rights and


                                      C-8
<PAGE>   9

licenses herein granted to Parent shall continue. In that connection, the
parties acknowledge that the licenses granted under this License Agreement are
licenses of "intellectual property" for purposes of section 365(n) of the U.S.
Bankruptcy Code, and Parent hereby retains its elections under such section.

        11.4 RIGHTS UPON TERMINATION.

                (a) TERMINATION BY PARENT. Upon termination by Parent, the
parties' mutual obligations under Section 4 ("Delivery of Derivative Works to
Sub") and Section 5 ("Delivery of Future Versions to Parent; Software Support")
shall terminate. Parent shall retain all rights granted in Section 2 ("License
Grants from Sub to Parent") with respect to all Technology licensed to Parent as
of the date of the termination, but shall have no rights with respect to any
Future Versions of the Software. Parent shall retain the right to use the Sub
Trademarks in connection with the disposition of any remaining products already
in the distribution channel or inventory, and thereafter shall cease use of the
Sub Trademarks.

                (b) TERMINATION BY SUB. Upon termination by Sub, the parties'
mutual obligations under Section 4 ("Delivery of Derivative Works to Sub") and
Section 5 ("Delivery of Future Versions to Parent; Software Support") shall
terminate. Parent's rights granted in Section 2 ("License Grants from Sub to
Parent") with respect to all Technology licensed to Parent as of the date of the
termination shall continue to the extent that Parent shall have the right to
complete and sell any work in progress that makes use of the Technology and to
dispose of any products already in its distribution channels or inventory.
Parent shall also have the right to retain and use a reasonable number of copies
of the Software and any associated Confidential Information in order to fulfill
its maintenance and support obligations to its OEMs, resellers, and End Users,
but shall return or certify the destruction of any additional copies thereof.

        11.5 SURVIVAL. The provisions of Sections 6 ("Proprietary Rights"), 7
("Confidentiality"), 8 ("Disclaimer of Warranty"), 9 ("Indemnity"), 10
("Limitation of Liability"), and 12 ("General Provisions") shall survive the
termination of this License Agreement by either party for any reason.

12.     GENERAL PROVISIONS.

        12.1 GOVERNING LAW. This License Agreement shall be governed in all
respects by the laws of the United States of America and the State of
California, excluding the application of its conflict of laws rules.

        12.2 NOTICES. All notices or reports permitted or required under this
License Agreement shall be in writing and shall be delivered by personal
delivery, telegram, telex, telecopier, facsimile transmission or by certified or
registered mail, return receipt requested, and shall be deemed given upon
personal delivery, five (5) days after deposit in the mail, or upon
acknowledgment of receipt of electronic transmission. Notices shall be sent to
the signatory of this License Agreement at the address set forth at the end of
this License Agreement or such other address as either party may specify in
writing.


                                      C-9
<PAGE>   10

        12.3 WAIVER. The failure of either party to require performance by the
other party of any provision hereof shall not affect the full right to require
such performance at any time thereafter; nor shall the waiver by either party of
a breach of any provision hereof be taken or held to be a waiver of the
provision itself.

        12.4 SEVERABILITY. In the event that any provision of this License
Agreement shall be unenforceable or invalid under any applicable law or be so
held by applicable court decision, such unenforceability or invalidity shall not
render this License Agreement unenforceable or invalid as a whole, and, in such
event, such provision shall be changed and interpreted so as to best accomplish
the objectives of such unenforceable or invalid provision within the limits of
applicable law or applicable court decisions.

        12.5 WARRANTY. Each party warrants that it has full power to enter into
and perform this License Agreement, and the person signing this License
Agreement on its behalf has been duly authorized and empowered to enter in this
License Agreement, understands it and agrees to be bound by it.

        12.6 HEADINGS. The section headings appearing in this License Agreement
are inserted only as a matter of convenience and in no way define, limit,
construe or describe the scope or extent of such section, or in any way affect
this License Agreement.

        12.7 CONFIDENTIALITY OF AGREEMENT. Neither party will disclose any terms
or the existence of this License Agreement, except pursuant to a mutually
agreeable press release or as otherwise required by law.

        12.8 ASSIGNMENT. Neither party shall assign any rights or obligations
arising under this License Agreement without the prior written consent of the
other. Subject to the above restriction on assignment, this License Agreement
shall inure to the benefit of and bind the successors and assigns of the
parties.

        12.9 ENTIRE AGREEMENT; CONFLICT. This License Agreement and the
Attachments hereto constitute the entire agreement between the parties with
respect to the subject matter hereof. This License Agreement supersedes, and the
terms of this License Agreement govern, any prior or collateral agreements with
respect to the subject matter hereof with the exception of the Assignment
Agreement and any prior confidentiality agreements between the parties. This
License Agreement may only be changed by mutual agreement of authorized
representatives of parties in writing. In the event of any conflict between the
Assignment Agreement and this License Agreement, the License Agreement shall
govern.

        12.10 INJUNCTIVE RELIEF. It is understood and agreed that,
notwithstanding any other provision of this License Agreement, breach of the
provisions of this License Agreement regarding the protection of Confidential
Information will cause irreparable damage for which recovery of money damages
would be inadequate, and that either party shall therefore be entitled to obtain
timely injunctive relief to protect its rights under this License Agreement, in
addition to any and all remedies available at law.


                                      C-10
<PAGE>   11

        IN WITNESS WHEREOF, the undersigned have caused this License Agreement
to be executed by their respective authorized representatives. This License
Agreement may be executed in counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the same original.

<TABLE>
<CAPTION>
STAC, INC.                                     HI/FN, INC.
<S>                                            <C>
/s/ JOHN R. WITZEL                             /s/ ARTHUR J. COLLMEYER
- --------------------------------               --------------------------------
Authorized Signature                           Authorized Signature


John R. Witzel                                 Arthur J. Collmeyer
- --------------------------------               --------------------------------
Printed Name                                   Printed Name


Vice President, Finance                        President
- --------------------------------               --------------------------------
Title                                          Title

11/21/96                                       11/21/96
- --------------------------------               --------------------------------
Date                                           Date
</TABLE>


                                      C-11
<PAGE>   12
<TABLE>
<CAPTION>
                                  ATTACHMENT A
- -------------------------------------------------------------------------------------------------------------------
                                                                                       SER.NO
PROSECUTION STATUS                          TITLE                  FILED               PRIORITY         COUNTRY
- -------------------------------------------------------------------------------------------------------------------
<S>                                 <C>                         <C>                   <C>                <C>    
ISSUED 3/26/91 U.S. PAT. NO.        WRITE OPERATION WITH         8/26/88               237,394             US
4,996,690;                          GATING CAPABILITY

MAINTENANCE FEES DUE
8/26/98; AND 8/26/02

- -------------------------------------------------------------------------------------------------------------------
ISSUED 5/29/90 U.S. PAT. NO.        DIGITAL PHASE LOCK           12/6/88               281,305              US
4,930,142; MAINT. FEE DUE           LOOP
11/29/97 AND 11/29/01

- -------------------------------------------------------------------------------------------------------------------
ISSUED 5/14/91 U.S. PAT. NO.        DATA COMPRESSION             1/13/89               297,152              US
5,016,009                           APPARATUS AND
                                    METHOD

MAINT. FEES DUE 11/14/98;
AND 11/14/02

- -------------------------------------------------------------------------------------------------------------------
ISSUED 3/26/91 U.S. PAT. NO.        CIP: DATA COMPRESSION        10/6/89               418,034 BASED        US
5,003,307;                          APPARATUS WITH SHIFT                               ON USSN 297,152
                                    REGISTER SEARCH                                    1/13/89
MAINT. FEES DUE 9/26/98;            MEANS
AND 9/26/02

- -------------------------------------------------------------------------------------------------------------------
ASSOC TO CONDUCT                    DATA COMPRESSION             1/12/90               2-6057; BASED        JAPAN
INTERVIEW W/EXAMINER,               APPARATUS WITH SHIFT                               ON USSN 297,152
STATUS CHECK SET FOR                REGISTER SEARCH                                    AND 418,034
9/11/96;                            MEANS

APPEAL NO. 7-9744:
A WAITING EXAMINATION;

ASSOCIATE FILED
AMENDMENT AND APPEAL
BRIEF 10/19/95;

ASSOCIATE TO FILE
AMENDMENT DUE 5/31/95;

INTERVIEW SHOULD OCCUR
MID JULY '95;

ASSOCIATE INSTRUCTED 4/21
RE NOTICE OF APPEAL DUE
5/1/95;

RESPONSE TO OFFICE
ACTION AND DIVISIONAL
APPLICATION FILED 7/11/94;
- -------------------------------------------------------------------------------------------------------------------
</TABLE>


                                      C-12
<PAGE>   13

<TABLE>
<CAPTION>
                                  ATTACHMENT A
- -------------------------------------------------------------------------------------------------------------------
                                                                                       SER.NO
PROSECUTION STATUS                          TITLE                  FILED               PRIORITY         COUNTRY
- -------------------------------------------------------------------------------------------------------------------
<S>                                 <C>                         <C>                   <C>                <C>    
ASSOCIATE INSTRUCTED
6/26/94 TO RESPOND TO
OFFICE ACTION DUE 7/11/94;

REQUEST FOR EXAMINATION
FILED

- -------------------------------------------------------------------------------------------------------------------
STATUS CHECK SET FOR                DATA COMPRESSION            7/11/94               6-159042           JAPAN
9/11/96;                            APPARATUS WITH SHIFT
                                    REGISTER SEARCH                                   DIVISION OF 2-
PER ASSOC 5/17/96:                  MEANS                                             6057
EXAMINER WILL ISSUE OA
AFTER DECISION ON APPEAL
IN PARENT, HAS PROVIDED
REFS TO BE CITED AND WILL
REVIEW DRAFT
AMENDMENT BEFOREHAND;

ASSOCIATE INSTRUCTED
3/10/96 RE RESPONSE TO
OFFICE ACTION DUE 3/14/96;

REQUEST FOR EXAMINATION
FILED WITH APPLICATION
7/11/94;

- -------------------------------------------------------------------------------------------------------------------
U.S.PATENT NO. 5,126,739;           DATA COMPRESSION            11/27/90              07/619,295        US
ISSUED 6/30/92; MAINT. FEES         APPARATUS AND
DUE 12/30/95;                       METHOD                                            BASED ON
                                                                                      297,152

12/30/99; and 12/30/03

- -------------------------------------------------------------------------------------------------------------------
U.S.PATENT NO. 5,146,221            DATA COMPRESSION            11/27/90              07/619,291        US
ISSUED SEPTEMBER 8, 1992;           APPARATUS AND
MAINT. FEES DUE 3/8/96;             METHOD                                            BASED ON
3/8/00 and 3/8/04                                                                     297,152

- -------------------------------------------------------------------------------------------------------------------
PATENT NO. 5,414,850 ISSUED         SYSTEM FOR                  8/23/91               07/748,978        US
5/9/95;                             TRANSPARENTLY
                                    COMPRESSING DATA
MAINT. FEES DUE 11/9/98;            FILES IN A COMPUTER
11/9/02; & 11/9/06                  SYSTEM
- -------------------------------------------------------------------------------------------------------------------
</TABLE>


                                      C-13
<PAGE>   14

<TABLE>
<CAPTION>
                                  ATTACHMENT A
- -------------------------------------------------------------------------------------------------------------------
                                                                                       SER.NO
PROSECUTION STATUS                          TITLE                  FILED               PRIORITY         COUNTRY
- -------------------------------------------------------------------------------------------------------------------
<S>                                 <C>                         <C>                   <C>                <C>    
CERT. OF CORRECTION                 DATA COMPRESSION            5/9/94                08/240,960         US
REC'D; PATENTS NO. 5,414,425        APPARATUS AND                
ISSUED 5/9/95;                      METHOD                                            FWC BASED ON
                                                                                      08/023,874
MAINT. FEES DUE 11/9/98;
11/9/02: AND 11/9/06

- -------------------------------------------------------------------------------------------------------------------
PATENT NO. 5,532,694 ISSUED         HLZS                        7/7/95                08/499,230         US
7/2/96,

MAINTENANCE FEES DUE                                                                  FWC BASED ON
1/2/00; 1/2/04 AND 1/2/08;                                                            07/927,343

- -------------------------------------------------------------------------------------------------------------------
STATUS CHECK SET FOR                HLZS                        8/10/93               5-198670           JAPAN
9/11/96;

ASSOCIATED INSTRUCTED
3/10 & 12 RE RESPONSE TO
OFFICE ACTION DUE 3/14/96:

REQ. EXAM FILED 12/17/93:

PUBLISHED 8/12/94 UNDER
PUB. NO. 6-224778

- -------------------------------------------------------------------------------------------------------------------
PATENT NO. 5,463,390 ISSUED         FWC: DATA                   7/21/94               08/279.714         US
10/31/95; MAINTENANCE FEES          COMPRESSION
DUE 1/30/99; 4/30/03 AND            APPARATUS AND                                     BASED ON
4/30/07                             METHOD                                            192,949

ISSUE FEE/DRAWINGS DUE
9/12/95 FILED 8/2/95;

DRWGS ORDERED 6/22/95;

IDS AND TERMINAL
DISCLAIMER FILED 1/24/95;

FILING RECEIPT RECEIVED
- -------------------------------------------------------------------------------------------------------------------
</TABLE>


                                      C-14
<PAGE>   15
                                  ATTACHMENT A

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
                                                                             SER.NO.
PROSECUTION STATUS                 TITLE                    FILED            PRIORITY          COUNTRY
- ---------------------------------------------------------------------------------------------------------
<S>                                <C>                      <C>              <C>               <C>
PATENT NO. 5,506,580 ISSUED        FWC: DATA                12/6/94          08/350,389        US
4/9/96;                            COMPRESSION
                                   APPARATUS AND                             BASED ON
MAINT. FEES DUE 10/9/99;           METHOD                                    08/008,450
10/9/03 AND 10/9/07;

- ---------------------------------------------------------------------------------------------------------
U.S. PATENT NO. 4,701,745          DATA COMPRESSION         3/3/86           835,793           US
ISSUED 10/20/87;CPA                SYSTEM
INSTRUCTED 2/6 TO PAY                                                        BASED ON GB
MAINT. FEE DUE 4/20/95                                                       8505790 FILED
                                                                             3/6/85

MAINTENANCE FEES DUE
4/20/95 AND 4/20/99

- ---------------------------------------------------------------------------------------------------------
BELGIAN PATENT NO. 904359          DATA COMPRESSION         3/6/86           904,359           BELGIUM
ISSUED 3/6/86; 1/12/94:            SYSTEM

- ---------------------------------------------------------------------------------------------------------
PATENT NO. 36 06 869 ISSUED        DATA COMPRESSION         3/6/86           P 36 06 869.1     GERMANY
6/29/94; ANNUITIES DUE             SYSTEM
3/31/95;

ASSOCIATE INSTRUCTED 8/10
TO PAY GRANT FEE DUE
9/6/94;

- ---------------------------------------------------------------------------------------------------------
U.K. PATENT NO. 2,172,127          DATA COMPRESSION         3/6/85           2172127           U.K.
                                   SYSTEM

- ---------------------------------------------------------------------------------------------------------
FILING RECEIPT RECEIVED;           HIGH-SPEED PRIVATE       12/29/95         08/580,636        US
FOREIGN DEADLINE 12/29/96;         KEY STREAM
                                   ENCRYPTION
- ---------------------------------------------------------------------------------------------------------
</TABLE>



                                      C-15
<PAGE>   16

                                  ATTACHMENT B

                                  ("SOFTWARE")

The following compression software is included within the definition of
"Software" for all purposes under this License Agreement:

MPPC221-C

LZS221-C

LZS221-86

LZS221-396

LZS221-68

LZS221-960

LZS221-PPP

LZS321-C

The following encryption software is included within the definition of
"Software" for all purposes under this License Agreement:

Spruce

Mum


                                      C-16
<PAGE>   17

                                 ATTACHMENT C-1

                           IBM HARDWARE PATENT LICENSE



                                      C-17
<PAGE>   18

                                 ATTACHMENT C-2

                           IBM SOFTWARE PATENT LICENSE


                                      C-18
<PAGE>   19

                                  ATTACHMENT D

                             MOTOROLA PATENT LICENSE


                                      C-19

<PAGE>   1
                                                                    EXHIBIT 10.5


                  EMPLOYEE BENEFITS & OTHER EMPLOYMENT MATTERS
                              ALLOCATION AGREEMENT

        THIS EMPLOYEE BENEFITS & OTHER EMPLOYMENT MATTERS ALLOCATION AGREEMENT
(this "Agreement") is made and entered into as of December 7, 1998, by and
between STAC, INC., a Delaware corporation ("Stac"), and HI/FN, INC., a Delaware
corporation ("Hi/fn," and collectively with Stac, the "Parties"), effective as
of the Distribution Date (as hereinafter defined).

                                 R E C I T A L S

        WHEREAS, subject to certain conditions, Stac intends to spin off its

semiconductor business by distributing to Stac stockholders a special dividend
(the "Distribution") of one share of Hi/fn Common Stock for every ______ shares
of Stac Common Stock held as of the close of business on the Record Date (the
"Distribution Ratio"); and

        WHEREAS, in connection with such spin-off, Stac and Hi/fn have entered
into a Distribution Agreement of even date herewith (the "Distribution
Agreement"); and

        WHEREAS, pursuant to the aforesaid Distribution Agreement, Stac and
Hi/fn have agreed to enter into an agreement allocating responsibilities with
respect to employee compensation, benefits and certain other employment matters
pursuant to the terms and conditions set forth herein.

        NOW, THEREFORE, in consideration of the mutual covenants contained
herein, and other valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, Stac and Hi/fn agree as follows:

                                   ARTICLE I.

                                   DEFINITIONS

        Section 1.01. Definitions. As used in this Agreement, the following
terms shall have the meanings indicated below:

        COBRA: Code Section 4980B and ERISA Sections 601 through 608,
establishing employer requirements for continuation of health care benefits for
the benefit of certain current and former employees or dependents thereof.

        Code: the Internal Revenue Code of 1986, as amended, or any successor
legislation.

        Commission: the Securities and Exchange Commission.

        Distribution: the spin-off of Hi/fn pursuant to the Distribution
Agreement.

        Distribution Agreement: the agreement described in the second recital of
this Agreement.


<PAGE>   2
        Distribution Date: the date on which the Distribution occurs.

        Employee: any individual who is in one of the following categories: a
Stac Employee, a Stac Terminee, a Hi/fn Employee or a Hi/fn Terminee.

        Employer: Stac or Hi/fn, as the context indicates.

        Employer Common Stock: Stac Common Stock in the case of Stac Employees
and Stac Terminees and Hi/fn Common Stock in the case of Hi/fn Employees and
Hi/fn Terminees.

        Employer Stock Option Plan: a plan which provides for awards of
additional compensation to eligible Employees in the form of nonqualified or
incentive options to purchase Employer Common Stock, including without
limitation, the Stac Director Option Plan, the Stac Stock Option Plan and the
Hi/fn Equity Plan.

        ERISA: the Employee Retirement Income Security Act of 1974, as amended,
or any successor legislation.

        Hi/fn: Hi/fn, inc., a Delaware corporation, or any of its direct or
indirect subsidiaries.

        Hi/fn Common Stock: the common stock, par value $.001 per share, of
Hi/fn.

        Hi/fn Employee: any individual who is or becomes an employee of Hi/fn on
or after the Distribution Date. It also includes any director of Stac who
resigns from the Stac Board of Directors before the Distribution and
concurrently or within 90 days thereof is elected to the Hi/fn Board of
Directors.

        Hi/fn Equity Plan: the Hi/fn, Inc. 1996 Equity Incentive Plan.

        Hi/fn Individual: any individual who (i) is a Hi/fn Employee, (ii) is a
Hi/fn Terminee, or (iii) is a dependent or beneficiary of any individual
described in clause (i) or (ii).

        Hi/fn Medical/Dental Plans: any Medical/Dental Plans maintained by Hi/fn
for or providing benefits to Hi/fn Individuals.

        Hi/fn Profit Sharing Plan: the Profit Sharing Plan to be established by
Hi/fn in accordance with Section 2.02(b).

        Hi/fn Qualified Beneficiary: any Hi/fn Individual (or dependent thereof)
who, on or before the Distribution Date, was a Qualified Beneficiary under any
Hi/fn Medical/Dental Plan.

        Hi/fn Stock Option: an option to purchase Hi/fn Common Stock pursuant to
the Hi/fn Equity Plan.

        Hi/fn Stock Value: the last sales price per share of Hi/fn Common Stock
(traded on a "when-issued" basis) on the Distribution Date.


                                       2
<PAGE>   3
        Hi/fn Terminee: any individual who was formerly employed by Hi/fn who
terminated employment prior to the Distribution Date.

        HMO: any health maintenance organization organized under 42 U.S.C. Sec.
300e-9, or a state health maintenance organization statute that provides medical
services for Stac Individuals or Hi/fn Individuals under any Plan.

        IRS: the Internal Revenue Service.

        Medical/Dental Plan: a Welfare Plan providing health benefits to
Employees and their dependents.

        Nasdaq National Market: The Nasdaq Stock Market's Nasdaq National
Market.

        Plan: any plan, policy, arrangement, contract or agreement providing
compensation benefits for any group of Employees or former Employees or
individual Employee or former Employee, or the dependents or beneficiaries of
any such Employee or former Employee, whether formal or informal or written or
unwritten, and including, without limitation, any means, whether or not legally
required, pursuant to which any benefit is provided by an Employer to any
Employee or former Employee or the beneficiaries of any such Employee or former
Employee, adopted or entered into by a Party prior to, or upon the Distribution.
The term "Plan" as used in this Agreement does not include any contract,
agreement or understanding entered into by Stac or Hi/fn relating to settlement
of actual or potential Employee related litigation claims.

        Qualified Beneficiary: an individual (or dependent thereof) who either
(1) experiences a "qualifying event" (as that term is defined in Code Section
4980B(f)(3) and ERISA Section 603) while a participant in any Medical/Dental
Plan, or (2) becomes a "qualified beneficiary" (as that term is defined in Code
Section 4980B(g)(1) and ERISA 607(3)) under any Medical/Dental Plan.

        Record Date: December 1, 1998.

        Service Credit: the period taken into account under any Plan for
purposes of determining length of service or plan participation to satisfy
eligibility, vesting, benefit accrual and similar requirements under such Plan.

        Stac: Stac, Inc., a Delaware corporation, or any of its direct or
indirect subsidiaries.

        Stac Common Stock: the common stock, par value $.001 per share, of Stac,
Inc., a Delaware corporation.

        Stac Director Option: an option to purchase Stac Common Stock pursuant
to the Stac Director Option Plan.

        Stac Director Option Plan: The Stac, Inc. 1992 Non-Employee Directors'
Stock Option Plan to be continued by Stac following the Distribution pursuant to
Section 2.03(b).


                                       3
<PAGE>   4
        Stac Employee: any individual who immediately prior to the Distribution
was a Stac Employee and who is an employee or director of Stac immediately
following the Distribution.

        Stac Individual: any individual who is (i) a Stac Employee, (ii) a Stac
Terminee, or (iii) a dependent or beneficiary of any individual specified in
clause (i) or (ii).

        Stac Medical/Dental Plans: any Medical/Dental Plans maintained for or
providing benefits to Stac Individuals.

        Stac Profit Sharing Plan: the Stac Profit Sharing and 401(k) Plan.

        Stac Qualified Beneficiary: a Qualified Beneficiary who, immediately
following the Distribution, is not a Hi/fn Qualified Beneficiary and who,
immediately prior to the Distribution, was a Qualified Beneficiary under any
Stac Medical/Dental Plan.

        Stac Stock Option: an option to purchase Stac Common Stock pursuant to
the Stac Stock Option Plan.

        Stac Stock Option Plan: The Stac Electronics 1992 Stock Option Plan and
Stock Option Plan to be continued by Stac following the Distribution pursuant to
Section 2.03(a).

        Stac Stock Post-Distribution Value: the last sales price per share of
Stac Common Stock on the Nasdaq National Market on the Distribution Date, less
the Hi/fn Stock Value divided by the Distribution Ratio.

        Stac Stock Value: the last sales price per share of Stac Common Stock on
the Nasdaq National Market on the Distribution Date.

        Stac Terminee: any individual who was formerly employed by Stac who
terminated such employment prior to the Distribution Date.

        Stock Option: a nonqualified or incentive option to purchase Employer
Common Stock under an Employer Stock Option Plan.

        Welfare Plan: any Plan which provides medical, health, disability,
accident, life insurance, death, dental or any other welfare benefit, including,
without limitation, any post-employment benefit, but excluding vacation benefits
covered under Section 2.05.

        Section 1.02. Other Terms. Any capitalized terms used herein but not
defined herein shall have the meaning set forth in the Distribution Agreement.

        Section 1.03. Certain Constructions. References to the singular in this
Agreement shall refer to the plural and vice-versa and references to the
masculine shall refer to the feminine and vice-versa.

        Section 1.04. Sections. References to a "Section" are, unless otherwise
specified, to one of the Sections of this Agreement.


                                       4
<PAGE>   5
        Section 1.05. Survival. Obligations described in this Agreement shall
remain in full force and effect and shall survive the Distribution Date.

                                   ARTICLE II.

                                EMPLOYEE BENEFITS

        Section 2.01. Employment.

                (a)     Allocation of Responsibilities on Distribution Date. On
the Distribution Date, except to the extent retained or assumed by Stac under
this Agreement or any other agreement relating to the Distribution, Hi/fn shall
retain or assume, as the case may be, responsibility as employer for the Hi/fn
Employees. On the Distribution Date, except to the extent retained or assumed by
Hi/fn under this Agreement or any other agreement relating to the Distribution,
Stac shall retain or assume, as the case may be, responsibility as employer for
the Stac Employees. The assumption or retention of responsibility as employer by
Stac or Hi/fn described in this Section 2.01 shall not, of itself, constitute a
severance or a termination of employment under any Plan which provides for
severance benefits nor shall it constitute a change of control of Stac or Hi/fn
for purposes of any Plan.

                (b)     Assumption of Liabilities on Distribution Date: Except
as specifically provided in this Agreement, or as otherwise agreed by the
Parties:

                        (i)     Immediately following the Distribution, Hi/fn
shall assume or retain, as the case may be, all benefit obligations and all
related rights in connection with any Plan with respect to the Hi/fn Employees
and Hi/fn Terminees and Stac shall have no further liability with respect
thereto.

                        (ii)    Stac shall assume or retain, as the case may be,
all benefit obligations and all related rights in connection with any Plan and
with respect to the Stac Employees and Stac Terminees, and Hi/fn shall have no
further liability with respect thereto.

                (c)     Service Credits. In connection with the Distribution and
for purposes of determining Service Credits under any Plans, Stac shall credit
each Stac Employee and Hi/fn shall credit each Hi/fn Employee with such
Employee's Service Credits and original hire date as reflected in the Stac
records or Hi/fn records, as applicable, as of the Distribution Date. Such
Service Credits and hire date shall continue to be maintained as described
herein for as long as the Employee does not terminate employment or as otherwise
may be required by applicable law or any applicable Plan.

        Section 2.02. Profit Sharing and 401(k) Plans.

                (a)     Stac Profit Sharing Plan. Effective as of the
Distribution Date, Stac and Hi/fn shall take, or cause to be taken, all action
necessary and appropriate to terminate the participation of the Hi/fn Employees
in the Stac Profit Sharing Plan.

                (b)     Establishment of Hi/fn Profit Sharing Plan. On or prior
to January 1, 1999, Hi/fn shall take, or cause to be taken, all action necessary
and appropriate to establish and 


                                       5
<PAGE>   6
administer a Profit Sharing Plan, hereafter referred to as the Hi/fn Profit
Sharing Plan, which shall contain such terms and conditions as Hi/fn may
determine, provided, however, that all Hi/fn Employees who were participating in
the Stac Profit Sharing Plan shall be eligible to participate in the Hi/fn
Profit Sharing Plan and, the Hi/fn Profit Sharing Plan shall at a minimum
provide for the benefits protected under Section 411(d)(6) of the Code that were
provided under the Stac Profit Sharing Plan. The Hi/fn Profit Sharing Plan shall
be intended to qualify for tax-favored treatment under Sections 401(a) and
401(k) of the Code and to comply with the requirements of ERISA.

                (c)     Transfer and Acceptance of Account Balances. As soon as
practicable after January 1, 1999 but not later than January 29, 1999 (the
"Transfer Date"), and subject to Hi/fn's compliance with Section 2.02(e), Stac
shall cause the trustees of the Stac Profit Sharing Plan to transfer to the
trustees or other funding agent of the Hi/fn Profit Sharing Plan the amounts (in
cash, securities, other property or a combination thereof) representing the
account balances of all Hi/fn Individuals to be allocated to the account
balances of such individuals under the Hi/fn Profit Sharing Plan. Such transfer
shall comply with Section 414(1) of the Code and the requirements of ERISA and
the regulations promulgated thereunder. Hi/fn shall cause the trustees or other
funding agent of the Hi/fn Profit Sharing Plan to accept the plan-to-plan
transfer from the Stac Profit Sharing Plan trustees, and to credit the accounts
of such Hi/fn Employees under the Hi/fn Profit Sharing Plan with amounts
transferred on their behalf.

                (d)     Stac to Provide Information. Stac shall provide Hi/fn,
as soon as practicable after the Distribution Date (with the cooperation of
Hi/fn to the extent that relevant information is in the possession of Hi/fn, and
in accordance with Section 5.02), with a list of Hi/fn Individuals who, to the
best knowledge of Stac, were participants in or otherwise entitled to benefits
under the Stac Profit Sharing Plan on the Distribution Date, together with a
listing of each participant's Service Credits under such Plan and a listing of
each such Hi/fn Individual's account balance thereunder. Stac shall, as soon as
practicable prior to or on the Transfer Date and in accordance with Section
5.02, provide Hi/fn with such additional information in the possession of Stac
(and not already in the possession of Hi/fn) as may be reasonably requested by
Hi/fn and necessary for Hi/fn to receive the plan-to-plan transfer under Section
2.02(c) and to administer effectively the Hi/fn Profit Sharing Plan thereafter.

                (e)     Regulatory Filings. Hi/fn and Stac shall, in connection
with the plan-to-plan transfer described in Section 2.02(c), cooperate in making
any and all appropriate filings required by the Commission or the IRS, or
required under the Code or ERISA or any applicable securities laws and the
regulations thereunder, and take all such action as may be necessary and
appropriate to cause such plan-to-plan transfer to take place. Further, prior to
making the plan-to-plan transfer under Section 2.02(c) Hi/fn shall either
provide a favorable IRS determination letter that the Hi/fn Profit Sharing Plan,
as adopted, satisfies the requirements for qualification under Section 401(a) of
the Code, or an opinion letter satisfactory to Stac, from Hi/fn's legal counsel
that the Hi/fn Profit Sharing Plan, as adopted, satisfies in form the
requirements for qualification under Section 401(a) of the Code. Stac shall make
any amendment and take any actions necessary to ensure that the Stac Profit
Sharing Plan satisfies the requirements for qualification under Section 401(a)
of the Code at the time of the Transfer Date.


                                       6
<PAGE>   7
                (f)     Account Balances of Stac Employees. Stac shall retain
sole responsibility for all liabilities and obligations under the Stac Profit
Sharing Plan with respect to Stac Individuals, and Hi/fn shall have no liability
or obligation with respect thereto. Hi/fn shall assume or retain, sole
responsibility for all liabilities and obligations under the Hi/fn Profit
Sharing Plan with respect to Hi/fn Individuals, and Stac shall have no liability
or obligation with respect thereto.

        Section 2.03. Stock Plans.

                (a)     Stac Stock Option Plan. Stac shall continue the Stac
Stock Option Plan. All options granted under the Stac Stock Option Plan will
continue to be denominated in Stac Common Stock and except as provided in
Section 2.03(d)(iv), subject to the terms and conditions of the Stac Stock
Option Plan and any option agreement entered into in connection therewith. Stac
shall continue to reserve those shares already reserved under the Stac Stock
Option Plan. Additionally, Stac, after the Distribution Date, will cause to be
reserved any additional shares identified for reservation thereunder to the
extent authorized by the stockholders of Stac.

                (b)     Stac Director Option Plan. Stac shall continue the Stac
Director Option Plan. All options granted under the Stac Director Option Plan
will continue to be denominated in Stac Common Stock and except as provided in
Section 2.03(d)(iv), subject to the terms and conditions of the Stac Director
Option Plan and any option agreement entered into in connection therewith. Stac
shall continue to reserve those shares already reserved under the Stac Director
Option Plan. Additionally, Stac, after the Distribution, will cause to be
reserved any additional shares identified for reservation thereunder to the
extent authorized by the stockholders.

                (c)     Hi/fn Equity Plan. Hi/fn shall continue the Hi/fn Equity
Plan. All options granted under the Hi/fn Equity Plan will continue to be
denominated in Hi/fn Common Stock and subject to the terms and conditions of the
Hi/fn Equity Plan and any option agreement entered into in connection therewith.
Hi/fn shall continue to reserve those shares already reserved under the Hi/fn
Equity Plan. Additionally, Hi/fn, after the Distribution, will cause to be
reserved any additional shares identified for reservation thereunder to the
extent authorized by the stockholders.

                (d)     Effect of the Distribution on Awards Made Prior to the
Distribution Date.

                        (i)     Treatment of Stac Options: Stac Stock Options
and Stac Director Options, whether vested or unvested, held by Stac Employees
shall remain in effect following the Distribution/ provided, however, that the
option exercise price shall be equitably adjusted in accordance with Section
2.03(d)(iii) to reflect the Distribution.

                        (ii)    Treatment of Hi/fn Options: Hi/fn Stock Options
and Hi/fn Director Options, whether vested or unvested, held by Hi/fn Employees
shall remain in effect following the Distribution. The Hi/fn Options will not be
adjusted in connection with the Distribution.


                                       7
<PAGE>   8
                        (iii)   Adjustment of Stac Stock Options: The number of
options and the option exercise price of Stac Stock Options and Stac Director
Options, shall be adjusted to reflect the Distribution. After the Distribution
Date the Option exercise price of each Stac Stock Option and Stac Director
Option shall equal the product of (A) the Stac Stock Post-Distribution Value and
(B) the quotient obtained by dividing the per share exercise price of the Stac
Option by the Stac Stock Value, rounded to the nearest whole cent. After the
Distribution Date the number of shares of Stac Common Stock subject to each Stac
Stock Option and Stac Director Option shall equal the product of (x) the number
of shares Stac Common Stock subject to such Stac Stock Option or Stac Director
Option and (y) the quotient obtained by dividing the Stac Stock Value by the
Stac Stock Post Distribution Value.

                        (iv)    Whiting Options: Subject to the terms of this
Agreement, on the Distribution Date, Hi/fn shall grant to Douglas L. Whiting (so
long as he is a director of both Stac and Hi/fn on such date), a Hi/fn Option,
with respect to the Stac Options held by him as set forth on Exhibit A, in
substantially the form attached hereto as Exhibit B (each, a "Whiting Option").
Each Whiting Option shall provide for the purchase of a number of shares of
Hi/fn Common Stock equal to the quotient of the number of shares of Stac Common
Stock subject to a particular Stac Option held by him divided by the
Distribution Ratio, and then rounded down to the nearest whole share. The per
share exercise price of each Whiting Option shall equal the Hi/fn Stock Value
minus the Adjusted Hi/fn Per Share Spread. The Adjusted Hi/fn Per Share Spread
shall equal the Hi/fn Aggregate Spread divided by the number of shares subject
to the Whiting Option calculated above. The Hi/fn Aggregate Spread equals the
product of the Stac Spread and a fraction the numerator of which is the Hi/fn
Stock Value divided by the Distribution Ratio and the denominator of which is
the Stac Stock Value. The Stac Spread equals the number of shares subject to the
Stac Option listed on Exhibit A multiplied by the difference between the Stac
Stock Value and the Stac Exercise Price. The vesting provisions, term and other
provisions of each Whiting Option shall be the same as those in effect with
respect to the applicable corresponding Stac Option on the Distribution Date.
The per share exercise price of each Stac Option held by Mr. Whiting listed on
Exhibit A shall be adjusted as of the Distribution Date to equal the Stac Stock
Post-Distribution Value minus the Adjusted Stac Per Share Spread. The Adjusted
Stac Per Share Spread shall equal the Stac Aggregate Spread divided by the
number of shares subject to the Stac Option. The Stac Aggregate Spread equals
the product of the Stac Spread (as defined above) and a fraction the numerator
of which is the Stac Stock Post-Distribution Value and the denominator of which
is the Stac Stock Value. The vesting provisions, term and other provisions of
each Whiting Option shall be the same as those in effect with respect to the
applicable corresponding Stac Option on the Distribution Date. The vesting
provisions, term and other provisions of each such Stac Option shall be the same
as those in effect immediately prior to the Close of the Distribution Date.

                        (v)     Limitation on Adjustments: To the extent that
any adjustment or limitation of this Section 2.03(d) is inconsistent with the
intended tax or accounting treatment of the Distribution or any option, it shall
not apply, and Stac and Hi/fn shall mutually agree on an alternative adjustment.

        Section 2.04. Medical/Dental Plans.


                                       8
<PAGE>   9
                (a)     Liability for Claims.

                        (i)     Except as otherwise provided herein, as of the
Distribution Date, Stac shall assume or retain and shall be responsible for, or
cause its insurance carriers or HMOs to be responsible for, all liabilities and
obligations related to claims asserted or incurred or premiums owed with respect
to any Stac Individuals under any Stac Medical/Dental Plan, and Hi/fn shall have
no liability or obligation with respect thereto.

                        (ii)    Except as otherwise provided herein, as of the
Distribution Date, Hi/fn shall assume or retain and shall be responsible for, or
cause its insurance carriers or HMOs to be responsible for, all liabilities and
obligations related to claims asserted or incurred or premiums owed with respect
to all Hi/fn Individuals under the Hi/fn Medical/Dental Plan, and Stac shall
have no liability or obligation with respect thereto.

                (b)     Continuation Coverage Administration. As of the
Distribution Date, Stac shall assume or retain and shall be solely responsible
for, or cause its insurance carriers or HMOs to be responsible for, providing
and administering the continuation coverage required by COBRA as it relates to
any Stac Qualified Beneficiary, and Hi/fn shall have no liability or obligation
with respect thereto.

                (c)     Continuation Coverage Claims. As of the Distribution
Date, Hi/fn shall assume or retain and shall be responsible for, or cause its
insurance carriers or HMOs to be responsible for, all liabilities and
obligations in connection with claims asserted or incurred or premiums owed
through the Distribution Date under any Stac Medical/Dental Plan in respect of
any Hi/fn Qualified Beneficiary and claims asserted or incurred or premiums owed
after the Distribution Date under any Stac Medical/Dental Plan in respect of any
Hi/fn Qualified Beneficiary, and Stac shall have no liability or obligation with
respect thereto.

        Section 2.05. Vacation and Sick Pay Liabilities. Stac shall retain or
assume all accrued liabilities (whether vested or unvested, and whether funded
or unfunded) for vacation and sick leave in respect of all Stac Employees as of
the Distribution Date. Hi/fn shall retain or assume all accrued liabilities
(whether vested or unvested, and whether funded or unfunded) for vacation and
sick leave in respect of all Hi/fn Employees as of the Distribution Date. Hi/fn
shall be solely responsible for the payment to Hi/fn Employees of vacation or
sick leave accrued after the Distribution Date, and Stac shall be solely
responsible for the payment to Stac Employees of vacation or sick leave accrued
after the Distribution Date.

        Section 2.06. Preservation of Right to Amend or Terminate Plans. Except
as otherwise expressly provided in this Article II, no provisions of this
Agreement, including, without limitation, the agreement of Stac or Hi/fn to make
a contribution or payment to or under any Plan herein referred to for any
period, shall be construed as a limitation on the right of Stac or Hi/fn to
amend such Plan or terminate its participation therein which Stac or Hi/fn would
otherwise have under the terms of such Plan or otherwise, and no provision of
this Agreement shall be construed to create a right in any employee or former
employee, or dependent or beneficiary of such employee or former employee under
a Plan which such person would not otherwise have under the terms of the Plan
itself; provided, however, that neither Party shall amend any Plan to the 


                                       9
<PAGE>   10
extent that such amendment would have the effect of increasing the liabilities
of the other Party under any Plan of the other Party, without such other Party's
consent.

        Section 2.07. Payroll Reporting and Withholding.

                (a)     Form W-2 Reporting. Hi/fn and Stac may adopt the
"alternative procedure" for preparing and filing IRS Forms W-2 (Wage and Tax
Statements), as described in Section 5 of Revenue Procedure 84-77, 1984-2 IRS
Cumulative Bulletin 753 ("Rev. Proc. 84-77"). Under this procedure Hi/fn as the
successor employer shall provide all required Forms W-2 to all Hi/fn Employees
and Stac Employees who join Hi/fn on or after the Distribution Date reflecting
all wages paid and taxes withheld by both Stac as the predecessor and Hi/fn as
the successor employer for the entire year during which the Distribution takes
place. Stac shall provide all required Forms W-2 to all other Stac Employees
reflecting all wages and taxes paid and withheld by Stac before and after the
Distribution Date. Stac and Hi/fn shall be responsible for filing IRS Forms 941
for their respective Employees.

                (b)     Forms W-4 and W-5. Hi/fn and Stac may adopt the
alternative procedure of Rev. Proc. 84-77 for purposes of filing IRS Forms W-4
(Employee's Withholding Allowance Certificate) and W-5 (Earned Income Credit
Advance Payment Certificate). Under this procedure Stac shall provide to Hi/fn
as the successor employer all IRS Forms W-4 and W-5 on file with respect to each
Hi/fn Employee, and Hi/fn will honor these forms until such time, if any, that
such Hi/fn Employee submits a revised form.

                (c)     Garnishments, Tax Levies, Child Support Orders, and Wage
Assignments. With respect to Employees with garnishments, tax levies, child
support orders, and wage assignments in effect with Stac on the Distribution
Date, Hi/fn as the successor employer with respect to each Hi/fn Employee shall
honor such payroll deduction authorizations and will continue to make payroll
deductions and payments to the authorized payee, as specified by the court or
governmental order which was filed with Stac.

                (d)     Authorizations for Payroll Deductions. Unless otherwise
prohibited by this or another agreement entered into in connection with the
Distribution, or by a Plan document, with respect to all Stac Employees to be
transferred to Hi/fn on the Distribution Date who have authorizations for
payroll deductions in effect with Stac on the Distribution Date, Hi/fn as the
successor employer will honor such payroll deduction authorizations relating to
each Hi/fn Employee, and shall not require that such Hi/fn Employee submit a new
authorization to the extent that the type of deduction by Hi/fn does not differ
in amount or form from that made by Stac. Such deduction types include, without
limitation, contributions to any Plan; scheduled loan repayments to the relevant
Profit Sharing Plan or to an employee credit union; and direct deposit of
payroll, bonus advances, union dues, employee relocation loans, and other types
of authorized company receivables usually collectible through payroll
deductions.


                                       10
<PAGE>   11
                                  ARTICLE III.

                               EMPLOYMENT MATTERS

        Notwithstanding any other provision of this Agreement or any other
Agreement between Hi/fn and Stac to the contrary, Hi/fn and Stac understand and
agree that:

        Section 3.01. Separate Employers. On and after the Distribution Date and
the separation of Employees into their respective companies, Hi/fn and Stac will
be separate and independent employers.

        Section 3.02. Employment Policies and Practices. Subject to the
provisions of ERISA and except as limited by applicable law or agreement, Hi/fn
and Stac may adopt, continue, modify or terminate such employment policies,
compensation practices, retirement plans, welfare benefit plans, and other
employee benefit plans of any kind or description, as each may determine, in its
sole discretion, are necessary or appropriate.

        Section 3.03. Special Matters.

                (a)     Reimbursement. Stac and Hi/fn acknowledge that Stac, on
the one hand, and Hi/fn, on the other hand, may incur costs and expenses,
including, but not limited to, contributions to Plans, administrative costs
associated with the plan-to-plan transfer under Section 2.02(c) and the payment
of insurance premiums arising from or related to any of the Plans which are, as
set forth in this Agreement, the responsibility of the other Party hereto.
Accordingly, Stac and Hi/fn shall reimburse each other, as soon as practicable,
but in any event within thirty (30) days of receipt from the other Party of
appropriate verification, for all such costs and expenses.

                (b)     Payments to Stac. To the extent that Stac makes any
payment for, or takes responsibility for future payment of, any liability or
obligation which exists as of the Distribution Date and is assumed by Hi/fn
pursuant to this Agreement (any such payment, a "Liability Payment"), not later
than thirty (30) days after receipt of an invoice from Stac of such Liability
Payment, Hi/fn shall make a payment to Stac equal to the amount of such
Liability Payment.

        Section 3.04. Notice of Claims. Without limitation to the scope and
application to each Party in the performance of its duties under Sections 3.03,
each Party will notify in writing and consult with the other Party prior to
making any settlement of an employee claim in such settlement reasonably could
result in any prejudice to such other Party arising from the settlement.

        Section 3.05. Assumption of Unemployment Tax Rates. Changes in state
unemployment tax experience from that of Stac as of the Distribution Date shall
be handled as follows. In the event an option exists to allocate to Hi/fn state
unemployment tax experience of Stac, the Stac experience shall be transferred to
Hi/fn if this results in the lowest aggregate unemployment tax costs for both
Stac and Hi/fn combined, and the Stac experience shall be retained by Stac if
this results in the lowest aggregate unemployment tax costs for Stac and Hi/fn
combined.


                                       11
<PAGE>   12
        Section 3.06. Employees on Leave of Absence. After the Distribution
Date, Hi/fn shall assume responsibility, if any, as employer for all Hi/fn
Employees returning from an approved leave of absence. After the Distribution
Date, Stac shall assume responsibility, if any, as employer for all Stac
Employees returning from an approved leave of absence.

        Section 3.07. No Third Party Beneficiary Rights.

                (a)     Neither this Agreement nor any other intercompany
agreement between Hi/fn and Stac is intended to nor does it create any third
party contractual or other common law rights. No person shall be deemed a
third-party beneficiary of the agreements between Hi/fn and Stac.

                (b)     Nothing contained in this Agreement shall confer upon
any Employee any right with respect to continuance of employment by either
Party, nor shall anything herein interfere with the right of either party to
terminate the employment of any Employee at any time, with or without cause, or
restrict a Party in the exercise of its independent business judgment in
modifying any of the terms and conditions of the employment of an Employee,
except as provided by applicable law.

                (c)     No provision of this Agreement shall create any third
party beneficiary rights in any Employee or any beneficiary or dependent thereof
with respect to the compensation, terms and conditions of employment and
benefits that may be provided to any Employee by either Party or under any
benefit plan which a Party may maintain.

        Section 3.08. Attorney/Client Privilege. The provisions herein requiring
either Party to this Agreement to cooperate shall not be deemed to be a waiver
of the attorney/client privilege for either Party nor shall it require either
Party to waive its attorney/client privilege.

                                   ARTICLE IV.

                                     DEFAULT

        Section 4.01. Default. If either Party materially defaults hereunder,
the non-defaulting Party shall be entitled to all remedies provided by law or
equity (including reasonable attorneys' fees and costs of suit incurred).

        Section 4.02. Force Majeure. Hi/fn and Stac shall incur no liability to
each other due to a default under the terms and conditions of this Agreement
resulting from fire, flood, war, strike, lock-out, work stoppage or slow-down,
labor disturbances, power failure, major equipment breakdowns, construction
delays, accident, riots, acts of God, acts of United States' enemies, laws,
orders or at the insistence or result of any governmental authority or any other
delay beyond each other's reasonable control.


                                       12
<PAGE>   13
                                   ARTICLE V.

                                  MISCELLANEOUS

        Section 5.01. Relationship of Parties. Nothing in this Agreement shall
be deemed or construed by the Parties or any third party as creating the
relationship of principal and agent, partnership or joint venture between the
Parties, it being understood and agreed that no provision contained herein, and
no act of the Parties, shall be deemed to create any relationship between the
Parties other than the relationship set forth herein.

        Section 5.02. Access to Information, Cooperation. Stac and Hi/fn and
their authorized agents shall be given reasonable access to and may take copies
of all information relating to the subjects of this Agreement (to the extent
permitted by federal and state confidentiality laws) in the custody of the other
Party, including any agent, contractor, subcontractor, agent or any other person
or entity under the contract of such Party. The Parties shall provide one
another with such information within the scope of this Agreement as is
reasonably necessary to administer each Party's Plans. The Parties shall
cooperate with each other to minimize the disruption caused by any such access
and providing of information.

        Section 5.03. Assignment. Neither Party shall, without the prior written
consent of the other, have the right to assign any rights or delegate any
obligations under this Agreement.

        Section 5.04. Headings. The headings used in this Agreement are inserted
only for the purpose of convenience and reference, and in no way define or limit
the scope or intent of any provision or part hereof.

        Section 5.05. Severability of Provisions. Neither Stac nor Hi/fn intend
to violate statutory or common law by executing this Agreement. If any section,
sentence, paragraph, clause or combination of provisions in this Agreement is in
violation of any law, such sections, sentences, paragraphs, clauses or
combinations shall be inoperative and the remainder of this Agreement shall
remain in full force and effect and shall be binding upon the Parties.

        Section 5.06. Parties Bound. This Agreement shall inure to the benefit
of and be binding upon the Parties hereto and their respective successors and
permitted assigns. Nothing herein, expressed or implied, shall be construed to
give any other person any legal or equitable rights hereunder.

        Section 5.07. Notices. All notices, consents, approvals and other
communications given or made pursuant hereto shall be in writing and shall be
deemed to have been duly given when delivered personally or by overnight courier
or three days after being mailed by registered or certified mail (postage
prepaid, return receipt requested) to the named representatives of the Parties
at the following addresses for at such other address for a Party as shall be
specified by like notice, except that notices of changes of address shall be
effective upon receipt):


                                       13
<PAGE>   14
                (a)     To Stac:

                        Stac, Inc.
                        12636 High Bluff Drive, 4th Floor
                        San Diego, CA 92130
                        Attention:  Cliff Flowers

                (b)     To Hi/fn:

                        Hi/fn, Inc.
                        2105 Hamilton Ave., Suite 230
                        San Jose, CA 95125
                        Attention:  William Walker

Hi/fn and Stac agree that, upon the request of either Party, the requested Party
will give copies of all of its notices, consents, approvals and other
communications hereunder to any lender to the requesting Party or other person
specified by such requesting Party.

        Section 5.08. Further Action. Hi/fn and Stac each shall cooperate in
good faith and take such steps and execute such papers as may be reasonably
requested by the other Party to implement the terms and provisions of this
Agreement.

        Section 5.09. Waiver. Hi/fn and Stac each agree that the waiver of any
default under any term or condition of this Agreement shall not constitute a
waiver of any subsequent default or nullify the effectiveness of that term or
condition.

        Section 5.10. Governing Law. Unless otherwise preempted by Federal law,
all controversies and disputes arising out of or under this Agreement shall be
determined pursuant to the laws of the State of California, regardless of the
laws that might be applied under applicable principles of conflicts of laws.

        Section 5.11. Entire Agreement. This Agreement and the Distribution
Agreement constitute the entire understanding between the Parties hereto, and
supersede all prior written or oral communications, relating to the subject
matter covered by said agreements. To the extent that the terms of this
Agreement and similar terms of the Distribution Agreement are in conflict, the
interpretation given to the conflicting terms of the Distribution Agreement
shall govern the interpretation and performance of this Agreement. No amendment,
modification, extension or failure to enforce any condition of this Agreement by
either Party shall be deemed a waiver of any of its rights herein. This
Agreement shall not be amended except by a writing executed by the Parties.

        Section 5.12. Dispute Resolution. Any dispute arising under this
Agreement shall be resolved by binding arbitration in the manner contemplated by
Section 8.13 of the Distribution Agreement, including the attorneys fees
provisions referred to therein.

        IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
date first above written.


                                       14
<PAGE>   15
                                       STAC, INC., a Delaware corporation



                                       By:______________________________________
                                       Name:____________________________________
                                       Title:___________________________________


                                       HI/FN, INC., a Delaware corporation



                                       By:______________________________________
                                       Name:____________________________________
                                       Title:___________________________________


                                       15

<PAGE>   1
                                                                    EXHIBIT 10.6


                     TAX ALLOCATION AND INDEMNITY AGREEMENT


               TAX ALLOCATION AND INDEMNITY AGREEMENT, dated as of __________,
1998, among Stac, Inc., a Delaware corporation (the "Company"), and hi/fn, inc.,
a Delaware corporation ("Hi/fn").

               WHEREAS, the Company, Hi/fn and the Company's other subsidiaries
have joined in filing consolidated federal income tax returns and certain
consolidated, combined or unitary state income tax returns;

               WHEREAS, pursuant to a Distribution Agreement dated as of
_______________, 1998 among the Company and Hi/fn (the "Distribution
Agreement"), the Company will distribute to the holders of its common stock the
shares of common stock of Hi/fn held by the Company in a transaction intended to
qualify for tax-free treatment under Code Section 355 (the "Spin-off");

               WHEREAS, pursuant to the Spin-off, Hi/fn will leave the Stac 
Pre-Spin-off Group (as defined herein); and

               WHEREAS, the parties hereto wish to provide for (i) the
allocation of, and indemnification against, certain liabilities for Taxes, (ii)
the preparation and filing of Tax Returns on a basis consistent with prior
practice and the payment of Taxes with respect thereto, and (iii) certain
related matters;

               NOW THEREFORE, in consideration of their mutual promises, the
parties hereby agree as follows:

               1.     DEFINITIONS.

               When used herein the following terms shall have the following
meanings:

               "Affiliate" -- with respect to any corporation (the "given
corporation"), each person, corporation, partnership or other entity that
directly or indirectly, through one or more intermediaries, controls, is
controlled by, or is under common control with, the given corporation. For
purposes of this definition, "control" means the possession, directly or
indirectly, of 50% or more of the voting power or value of outstanding voting
interests.

               "Affiliated Group" -- an affiliated group of corporations within
the meaning of Code Section 1504(a) for the Taxable Period or, for purposes of
any state income tax matters, any consolidated, combined or unitary group of
corporations within the meaning of the corresponding provisions of tax law for
the state in question.

               "After-Tax Basis" -- with respect to any liability indemnified
hereunder, the actual amount of any payment to be made with respect to such
liability, after giving effect to any tax cost incurred by the recipient arising
out of the receipt of such payment (unless such receipt is treated as other than
the receipt of taxable income), and reducing such payment by the value of, any
and all Federal, state or other Tax Benefits attributable to the full payment of
the indemnified liability, which value shall be determined on an assumed basis
by multiplying the amount of any applicable 




                                       1
<PAGE>   2

deduction, credit, offset or other tax item by the applicable highest marginal
rate of taxation in effect for the period for which the adjustment is made.

               "Closing Date" -- the date on which the Spin-off is effected by
the Company.

               "Code" -- the Internal Revenue Code of 1986, as amended, or any
successor thereto, as in effect for the Taxable Year in question.

               "Combined Jurisdiction" -- for any Taxable Period, any state,
local or foreign jurisdiction in which the Company or a Company Affiliate is
included in a consolidated, combined, unitary or similar return with the Company
or any Company Affiliate for state, local or foreign Income Tax purposes.

               "Company"-- as defined in the preamble to this Agreement.

               "Effective Time" -- the time at which the Spin-off becomes 
effective.

               "Final Determination" -- (i) a decision, judgment, decree, or
other order by a court of competent jurisdiction, which has become final and
unappealable; (ii) a closing agreement or accepted offer in compromise under
Code Sections 7121 or 7122, or comparable agreements under the laws of other
jurisdictions; or (iii) any other final settlement with the IRS or other Taxing
Authority, or (iv) the expiration of an applicable statute of limitations.

               "Hi/fn" -- as defined in the preamble to this Agreement.

               "Hi/fn Group" -- Hi/fn and each corporation that would be a
member of an Affiliated Group with respect to which Hi/fn is the common parent
on the day after the Closing Date.

               "Hi/fn Member" -- a corporation that would be a member of the 
Hi/fn Group.

               "Income Tax(es)" -- with respect to any corporation or group of
corporations, any and all Taxes based upon or measured by net income (regardless
of whether denominated as an "income tax," a "franchise tax" or otherwise),
imposed by any Taxing Authority, together with any related interest, penalties
or other additions thereto.

               "Information Return(s)" -- any and all returns, reports,
estimates, information statements, declarations or other filings (other than Tax
Returns) required to be filed or supplied to any Tax Authority by any
corporation with respect to the Tax Liabilities of any other person or entity.

               "IRS" -- the U.S. Internal Revenue Service.

               "IRS Ruling" -- The letter ruling issued by the IRS in response 
to the Ruling Request.

               "Neutral Auditors" -- means a firm of nationally recognized
independent accountants who shall not have had a material relationship with the
Company or its Affiliates, or 



                                       2
<PAGE>   3

Hi/fn or its Affiliates, within the two (2) years preceding the date of the
notice of a dispute given pursuant to Section 7(p).

               "Other Tax(es)" -- with respect to any corporation or Affiliated
Group, any and all Taxes, other than Income Taxes, together with any related
interest, penalties or other additions thereto.

               "Overdue Rate" -- a rate of interest per annum that fluctuates
with the Federal short-term rate established from time to time pursuant to Code
Section 6621.

               "Post-Closing Straddle Period" -- with respect to any Straddle
Period, the period beginning on the day after the Closing Date and ending on the
last day of such Taxable Year.

               "Post-Closing Taxable Period" -- a Taxable Year that ends after 
the Closing Date.

               "Pre-Closing Straddle Period" -- with respect to any Straddle
Period, the period beginning on the first day of such Taxable Year and ending on
the close of business on the Closing Date.

               "Pre-Closing Taxable Period" -- a Taxable Year that ends on or
before the Closing Date.

               "Representative" -- with respect to any person or entity, any of
such person's or entity's directors, officers, employees, agents, consultants,
accountants, attorneys and other advisors.

               "Ruling Request" -- the private letter ruling request filed by
the Company with the IRS, as supplemented and amended from time to time, with
respect to certain federal Income Tax matters relating to the Spin-off and other
related matters.

               "Separate Jurisdiction" -- for any Taxable Period, any state,
local or foreign jurisdiction that is not a Combined Jurisdiction.

               "Spin-off" -- as defined in the Preamble.

               "Stac Pre-Spin-Off Group" -- the Company and each corporation
that joined with the Company in filing a consolidated federal income tax return
for any Pre-Closing Taxable Period. For purposes of this Agreement, the Stac
Pre-Spin-Off Group shall terminate at the close of the Closing Date. To the
extent applicable to any state income tax matters, the "Stac Pre-Spin-Off Group"
shall include all corporations joining in the filing of a consolidated, combined
or unitary income tax return for the state in question.

               "Stac Pre-Spin-off Member" -- a corporation that was a member of
the Stac Pre-Spin-Off Group at the close of the Closing Date.

               "Stac Post-Spin-off Group" -- the Company and each corporation
that joins with the Company in filing a consolidated federal income tax return
for any Post-Closing Taxable 




                                       3
<PAGE>   4

Period. For purposes of this Agreement, the Stac Post-Spin-off Group shall exist
from and after the day after the Closing Date. To the extent applicable to any
state income tax matters, the "Stac Post-Spin-off Group" shall include all
corporations joining in the filing of a consolidated, unitary or combined income
tax return for the state in question.

               "Stac Post-Spin-off Member" -- a corporation that was a Stac
Pre-Spin-off Member and, for purposes of this Agreement, is a member of the Stac
Post-Spin-off Group on the day after the Closing Date.

               "Straddle Period" -- any Taxable Year beginning before and ending
after the close of business on the Closing Date.

               "Tax(es)" -- any net income, gross income, gross receipts, sales,
use, excise, franchise, transfer, payroll, premium, property or windfall profits
tax, alternative or add-on minimum tax, or other tax, fee or assessment,
together with any interest and any penalty, addition to tax or additional amount
imposed by any Taxing Authority, whether any such tax is imposed directly or
through withholding.

               "Taxable Period" -- a Pre-Closing Taxable Period, a Post-Closing
Taxable Period, or a Straddle Period.

               "Taxable Year" -- a taxable year (which may be shorter than a
full calendar or fiscal year), year of assessment or similar period with respect
to which any Tax may be imposed.

               "Tax Benefit(s)" -- (i) in the case of an Income Tax for which a
consolidated Federal, or a consolidated, combined or unitary state or other, Tax
Return is filed, the amount by which the Tax liability of the Affiliated Group
or other relevant group of corporations is actually reduced on a "with and
without" basis (by deduction, entitlement to refund, credit, offset or
otherwise, whether available in the current Taxable Year, as an adjustment to
taxable income in any other Taxable Year or as a carryforward or carryback, and
including the effect on other Income or Other Taxes of such reduction), plus any
interest received with respect to any related Tax refund, and (ii) in the case
of any other Tax, the amount by which the Tax liability of a corporation is
actually reduced on a "with and without" basis (by deduction, entitlement to
refund, credit, offset or otherwise, whether available in the current taxable
year, as an adjustment to taxable income in any other Taxable Year or as a
carryforward or carryback, and including the effect on other Income or Other
Taxes of such reduction), plus any interest received with respect to any related
Tax refund.

               "Taxing Authority" -- the IRS and any other domestic or foreign
governmental authority responsible for the administration of any Tax.

               "Tax Practices" -- the most recently applied policies, procedures
and practices employed by the Stac Pre-Spin-Off Group in the preparation and
filing of, and positions taken on, any Tax Returns of the Company or any Company
Affiliate for any Pre-Closing Taxable Period.



                                       4
<PAGE>   5

               "Tax Return(s)" -- all returns, reports, estimates, information
statements, declarations and other filings relating to, or required to be filed
by any taxpayer in connection with, its liability for, or its payment or receipt
of any refund of, any Tax.

               "Tax Treatment" -- as defined in Section 3(c) hereto.

               2.     OBLIGATIONS, RESPONSIBILITIES AND RIGHTS OF THE COMPANY
AND HI/FN.

                      (a)    Preparation and Filing of Tax Returns.

                             (i)    By the Company.  The Company shall prepare
and timely file (or cause to be prepared and timely filed):

                                    (A)     on behalf of the Stac Pre-Spin-Off 
Group and all Stac Pre-Spin-off Members, all Income Tax Returns for all
Pre-Closing Taxable Periods;

                                    (B)     on behalf of all Stac Post-Spin-off
Members on a separate or group basis, all Other Tax and Information Returns for
all Pre-Closing Taxable Periods; and

                                    (C)     on behalf of the Stac Post-Spin-off
Group and all Stac Post-Spin-off Members, all Tax and Information Returns for
all Straddle Periods and Post-Closing Taxable Periods (including in any such
Returns filed on a consolidated, combined or unitary basis, to the extent
required by law, that include the operations of Hi/fn of any Hi/fn Member for
any Pre-Closing Taxable Periods or Straddle Periods (or any portion of a
Straddle Period) with respect to such corporations).

                             (ii)   By Hi/fn.  Except to the extent specifically
provided in Section 2(a)(i), Hi/fn shall prepare and timely file (or cause to be
prepared and timely filed) on behalf of the Hi/fn Group, all Hi/fn Members, and
any group of less than all Hi/fn Members, all Tax and Information Returns for
all Taxable Periods required to be filed after the Closing Date.

                      (b)    Provision of Filing Information.  Hi/fn (or the 
Company, as the case may be) shall cooperate and assist the Company (or Hi/fn)
in the preparation and filing of all Tax Returns subject to Section 2(a) and
submit to the Company (or Hi/fn) (x) all necessary filing information in a
manner consistent with past Tax Practices and (y) all other information
reasonably requested by the Company (or Hi/fn) in connection with the
preparation of such Tax Returns promptly after such request. It is expressly
understood and agreed that the Company's (or Hi/fn's) ability to discharge its
Tax Return preparation and filing responsibilities is contingent upon Hi/fn (or
the Company) providing the Company (or Hi/fn) with all cooperation, assistance
and information reasonably necessary or requested for the filing of such Income
Tax Returns and that Hi/fn (or the Company) shall indemnify the Company (or
Hi/fn) against any and all liability for Tax Increases (as defined below), and
the Company's (or Hi/fn's) indemnification obligations of Section 3 shall not
apply, if, and to the extent that, Taxes are increased as a result of material
inaccuracies in such information or of failures to provide such information and
assistance (with the amount of such resulting increase in Taxes referred to as
the "Tax Increase").



                                       5
<PAGE>   6

                      (c)    Taxable Year.  Hi/fn and the Company agree that, to
the extent permitted by applicable law, (i) the Taxable Year of the Hi/fn
Members included in the consolidated Federal Income Tax Return of the Stac
Pre-Spin-Off Group for the Stac Pre-Spin-Off Group Taxable Year that includes
the Closing Date (and all corresponding consolidated, combined or unitary state,
local or other Income Tax Returns of the Stac Pre-Spin-Off Group) shall end at
the close of the Closing Date, and (ii) the Hi/fn Group and each Hi/fn Member
shall begin a new Taxable Year for purposes of such Federal, state, local or
other Income Taxes on the day after the Closing Date. The parties further agree
that, to the extent permitted by applicable law, all Federal, state, local or
other Tax and Information Returns shall be filed consistently with this
position.

                      (d)    Advance Review of Tax Returns.  At least thirty 
(30) days prior to the filing of any Federal Income Tax Return (including
amendments thereto) that includes a Hi/fn Member, and at least fifteen (15) days
prior to the filing of any Tax Return other than any Federal Income Tax Return
(including amendments thereto) that includes a Hi/fn Member, the Company shall
provide Hi/fn with the portion of such Tax Return related to the Hi/fn Member.
In the case of each Tax Return subject to the conformity requirements of Section
2(e) and filed pursuant to Section 2(a)(ii), Hi/fn shall provide the Company
with copies of any such Tax Return at least thirty (30) days prior to the filing
thereof (including amendments thereto). Hi/fn and its Representatives (or the
Company and its Representatives, as the case may be) shall have the right to
review all related work papers prior to the filing of any such Tax Return. The
Company (or Hi/fn, as the case may be) shall consult with Hi/fn (or the Company)
regarding its comments with respect to such Tax Returns and shall in good faith
(A) consult with Hi/fn (or the Company) in an effort to resolve any differences
with respect to the preparation and accuracy of such Tax Returns and their
consistency with past Tax Practices and (B) consider Hi/fn's (or the Company's)
recommendations for alternative positions with respect to items reflected on
such Tax Returns; provided, however, that the Company (or Hi/fn) shall not be
required to consider any such recommendation if the result thereof would
adversely affect the Taxes of the Stac Post-Spin-off Group or any Stac
Post-Spin-off Member (or the Hi/fn Group or any Hi/fn Member) for any
Post-Closing Taxable Period and may condition the acceptance of any such
recommendation upon the receipt of appropriate indemnification from Hi/fn (the
Company) for any increases in Taxes that may result from the adoption of the
relevant alternative position.

                      (e)    Consistent Positions on Tax Returns. The Company 
(or Hi/fn, as the case may be) shall prepare all Tax Returns filed pursuant to
Section 2(a) for all Taxable Years ended on or before December 31, 1998 in a
manner consistent with past Tax Practices except as otherwise required by
changes in applicable law or material underlying facts.

                      (f)    Allocation of Straddle Period Taxes.  If required
to effect the purposes of this Agreement, Taxes shall be allocated between the
Pre- and Post-Closing Straddle Periods, by the Company in a reasonable manner,
subject to the following rules:

                             (i)    To the extent not impractical, on the basis
of the actual operations and taxable income for each such period, determined by
closing the books of the entity at the close of business on the Closing Date; or



                                       6
<PAGE>   7

                             (ii) To the extent that an allocation based on a
closing of the books is impractical, the Company may use any reasonable method
or methods, including allocations based on (x) allocations of taxable income,
loss, gain, deduction and credits made for the entity for Federal Income Tax
purposes, (y) rounding to the next nearest accounting period-end, and (z) the
actual number of days in the Pre- and Post-Closing Straddle Periods in
proportion to the number of days in the entire Straddle Period.

                      (g) Payment of Taxes. The Company shall pay (i) all Taxes
shown to be due and payable on all Tax Returns filed by the Company pursuant to
Section 2(a)(i) hereof (other than any Income Taxes of Hi/fn Members for
Separate Jurisdictions for all Pre-Closing Taxable Periods), and (ii) subject to
Section 3(b) and 3(c), all additions to Taxes payable by the Company under
clause (i) of this Section 2(g) that result from a Final Determination. Hi/fn
shall pay (w) all Taxes shown to be due and payable on all Tax Returns filed by
Hi/fn pursuant to Section 2(a)(ii) hereof, (x) all Income Taxes of Hi/fn Members
for Separate Jurisdictions for all Pre-Closing Taxable Periods, (y) all
additions to Taxes payable under clauses (w) or (x) of this Section 2(g) that
result from a Final Determination, and (z) to the extent provided in Section
3(c), all additional Taxes of the Company, the Stac Pre-Spin-Off Group, any Stac
Pre-Spin-off Member, the Stac Post-Spin-off Group or any Stac Post-Spin-off
Member.

                      (h)    Amendments to Tax Returns.  The Company (or Hi/fn, 
as the case may be) shall be entitled to amend Tax Returns filed by the Company
(or Hi/fn) pursuant to Section 2(a); provided, however, that Hi/fn (or the
Company, solely with respect to Income Taxes of Hi/fn Members for Separate
Jurisdictions) shall not amend for any reason whatsoever any Tax Return of the
Company or any Stac Post-Spin-off Member (or Hi/fn, the Hi/fn Group or any Hi/fn
Member) for any Pre-Closing Taxable Period or any Post-Closing Taxable Period
ended on or before December 31, 1998, except (A) pursuant to the settlement or
other resolution of a contest subject to Section 6 or (B) with the Company's (or
Hi/fn's) written consent (which consent shall not be unreasonably withheld or
delayed); provided, however, that such prohibition shall not extend to the
correction of mathematical or material factual errors or other adjustments
necessary to conform such Tax Returns to applicable law or past Tax Practices.

                      (i) Refunds of Taxes. The Company shall be entitled to any
refund of any and all Taxes for which the Company shall have the payment
obligation under the first sentence of Section 2(g). Hi/fn shall be entitled to
any refund of any and all Taxes for which Hi/fn shall have the payment
obligation under the second sentence of Section 2(g). Except as otherwise
provided in this Agreement, if the Company or any Stac Post-Spin-off Member (or
Hi/fn or any Hi/fn Member, as the case may be) receives a Tax refund to which
Hi/fn or any Hi/fn Member (or the Company or any Stac Post-Spin-off Member) is
entitled pursuant to this Agreement, the Company (or Hi/fn) shall pay (in
accordance with Section 4) the amount of such refund (including any interest
received thereon) to Hi/fn (or the Company) promptly after receipt thereof.

                      (j) Carrybacks. Hi/fn shall notify the Company promptly of
the existence of any items of deduction, loss or credit arising in a
Post-Closing Taxable Year that are required to be carried back to a Taxable
Period of the Stac Pre-Spin-Off Group or any Stac Pre-Spin-off Member (other
than to a separate Tax Return of a member of the Hi/fn Group). Hi/fn hereby
expressly agrees (on its behalf and on behalf of all Hi/fn Members and
successors thereto) that the Company or any member of the Stac Post-Spin-off
Group may retain any cash refund or 



                                       7
<PAGE>   8

reduction of a Tax liability or any other Tax Benefit obtained by the Company or
any member of the Stac Post-Spin-off Group (other than a member of the Hi/fn
Group) as a result of any carryback without compensation to Hi/fn or any Hi/fn
Member. Notwithstanding Section 2(e), Hi/fn and the Company agree that Hi/fn
should elect to carry forward all such items that affect the Company or any
member of the Stac Post-Spin-off Group to the extent permitted under applicable
law.

                      (k)    NOL, ITC and AMT Credit Benefits.  If any Hi/fn 
Members have attributable to them, under applicable Federal and state Income Tax
law, any net operating loss carryforwards, investment tax credit carryforwards
and alternative minimum tax credit carryforwards (the "Carryforwards"), the
parties hereto agree that the Hi/fn Group and the Hi/fn Members shall be
exclusively entitled to use and benefit from the Carryforwards without
compensation to the Stac Pre-Spin-Off Group, any Stac Pre-Spin-off Member, the
Stac Post-Spin-off Group or any Stac Post-Spin-off Group Member. Hi/fn further
agrees that it shall have no recourse against the Stac Pre-Spin-Off Group, any
Stac Pre-Spin-off Member, the Stac Post-Spin-off Group or any Stac Post-Spin-off
Member regardless of (a) what amount of such Carryforwards are or will be
available to the Hi/fn Group and the Hi/fn Members in Post-Closing Taxable Years
and (b) whether the Carryforwards shall be subject to any limitation imposed as
a result of the application of Code Sections 382 and 383, the Treasury
regulations thereunder or other applicable law. The Company hereby agrees to
take any action or make any election reasonably required to permit Hi/fn and the
Hi/fn Members to utilize the Carryforwards; provided, however, that no such
action or election shall be required if it would adversely affect in any way the
Income Tax liabilities of the Stac Post-Spin-off Group or any Stac Post-Spin-off
Member for any Taxable Year. The parties also hereby agree that the provisions
of this Section 2(k) shall apply with respect to any similar carryforwards
available under applicable state, local or foreign Income Tax law.

                      (l)    Information and Other Tax Returns.  Any party 
required to file any Information or other Tax Return pursuant to this Section 2
shall pay any related fees or charges (including any such fees or charges that
shall thereafter become due and payable with respect to such Information or
other Tax Return) and shall indemnify and hold the other party harmless against
any related interest and penalties, as well as any such fees or charges which
are assessed against such party as the result of a failure by the party
responsible for such failure to file any Information Return in a timely and
accurate manner.

               3.     INDEMNIFICATION.

                      (a)    By the Company.

                             (i)    Taxes.  Subject to Sections 2(b), 3(b) and
3(c), the Company shall indemnify and hold Hi/fn and the Hi/fn Members harmless
(on an After-Tax Basis) against any and all Taxes for which the Company has the
payment obligation under the first sentence of Section 2(g).

                             (ii)   Member Liability.  Subject to Sections 2(b),
3(b) and 3(c), the Company shall indemnify and hold Hi/fn and the Hi/fn Members
harmless (on an After-Tax Basis) against each and every liability for Taxes of
the Stac Pre-Spin-Off Group under Treas. Reg. 



                                       8
<PAGE>   9

Section 1.1502-6 or any similar law, rule or regulation administered by any
Taxing Authority, together with any related interest, penalties and other
additions.

                      (b)    By Hi/fn.

                             (i)    Taxes.  Hi/fn shall indemnify and hold the
Stac Post-Spin-off Group and the Stac Post-Spin-off Members harmless (on an
After-Tax Basis) against the Taxes for which Hi/fn has the payment obligation
under the second sentence of Section 2(g).

                             (ii)   Post-Closing Transactions.  Notwithstanding
any contrary provision in this Agreement or in the Distribution Agreement, Hi/fn
shall indemnify and hold the Stac Post-Spin-off Group and the Stac Post-Spin-off
Members harmless (on an After-Tax Basis) against any Taxes imposed on or against
the Stac Pre-Spin-Off Group or the Stac Post-Spin-off Group (including any Stac
Pre-Spin-off Member or Stac Post-Spin-off Member) that are attributable to, or
arise from, transactions or events which take place outside the ordinary course
of business of Hi/fn and the Hi/fn Members and which occur after the Spin-off
becomes effective and prior to the close of the Closing Date.

                      (c)    Assumed Tax Treatments.

                             (i)    The  parties  expressly  agree for all  
purposes to treat the Spin-off as a tax-free distribution under Code Section 355
in accordance with (x) the IRS Ruling and Ruling Request or (y) an opinion of
independent accountants as described in Section _____ of the Distribution
Agreement (the "Tax Treatment"). Each party hereto also expressly agrees not to
take (and to cause each of its Affiliates not to take) any action (except where
such action is required by law) that is inconsistent with the treatment of the
Spin-off and all related transactions in accordance with the Tax Treatment and
to take (and to cause each of its Affiliates to take) any and all actions
reasonably available to such party (or Affiliate) to support and defend the Tax
Treatment.

                             (ii)   Notwithstanding anything to the contrary in
Sections 2(g), 3(a) or 3(b):

                                    a.      If  there  is a Final  Determination
               that results in the disallowance, in whole or in part, of the Tax
               Treatment, and there has been no material breach of Section
               3(c)(i) and no Stac Post-Spin-off Member or Hi/fn Member has
               taken actions after the Spin-off which result in such
               disallowance, then any liability of the Company for Taxes as a
               result of such disallowance shall be borne solely by the Company.

                                    b.      Subject to the  following  sentence,
               if there is a Final Determination that results in the
               disallowance, in whole or in part, of the Tax Treatment, and one
               or more Stac Post Spin-off Members and one or more Hi/fn Members
               have materially breached Section 3(c)(i) or taken actions after
               the Spin-off which result in such disallowance, then any
               liability of the Company for 



                                       9
<PAGE>   10
                Taxes as a result of such disallowance shall be divided equally
                between the Company and Hi/fn. Notwithstanding the foregoing, if
                (A) there is a Final Determination that results in the
                disallowance, in whole or in part, of the Tax Treatment, (B)
                such disallowance is caused, in whole or in part, by the
                application of Section 355(e) (or any successor statute) (in
                which case the Spin-off shall constitute a "Disqualifying
                Distribution"), and (C) prior to the Final Determination, each
                of one or more Stac Post Spin-off Members, on the one hand, and
                one or more Hi/fn Members, on the other hand, have taken actions
                after the Spin-off which result in the Distribution constituting
                a Disqualifying Distribution, then any liability of the Company
                for Taxes as a result of the application of Section 355(e) shall
                be borne solely by either (X) Hi/fn, in the event the first
                actions after the Spin-off which caused the Spin-off to
                constitute a Disqualifying Distribution were taken or caused
                by one or more Hi/fn Members, or (Y) the Company, in the
                event the first Disqualifying Distribution after the Spin-off
                was taken or caused by one or more Stac Post Spin-off Members.

                                    c.      If  there  is a Final  Determination
               that results in the disallowance, in whole or in part, of the Tax
               Treatment, and any Hi/fn Member (and no Stac Post-Spin-off
               Member) has materially breached Section 3(c)(i) or has taken any
               action after the Spin-off which results in such disallowance,
               then Hi/fn shall indemnify and hold each Stac Post-Spin-off
               Member harmless for any Taxes which would not have occurred but
               for such disallowance.

                                    d.      If  there  is a Final  Determination
               that results in the disallowance, in whole or in part, of the Tax
               Treatment, and any Stac Post-Spin-off Member (and no Hi/fn
               Member) has materially breached Section 3(c)(i) or has taken any
               action after the Spin-off which results in such disallowance,
               then the Company shall indemnify and hold each Hi/fn Member
               harmless for any Taxes which would not have occurred but for such
               disallowance.

               Any such claim for indemnification shall otherwise be handled in
the manner specified under this Section 3, but shall not affect in any manner
the provisions of Sections 5 and 6 with respect to cooperation and control of
contests and audits.

                      (d)    Indemnification Procedure.  Hi/fn (or the Company,
as the case may be) shall notify the Company (or Hi/fn) of any Taxes paid by the
Hi/fn Group or any Hi/fn Member (or the Stac Post-Spin-off Group or any Stac
Post-Spin-off Member) which are subject to indemnification under this Section 3;
provided, however, that no Tax liability of $10,000 or less in the aggregate
shall in any event be indemnified hereunder. To the extent not otherwise
provided in this Section 3, any other notification contemplated by this Section
3(d) shall include a detailed calculation (including, if applicable, separate
allocations of such Taxes between Pre- and Post-Closing Taxable Periods and
supporting work papers) and a brief explanation of the basis for 



                                       10
<PAGE>   11

indemnification hereunder. Whenever a notification described in this Section
3(d) is given, the notified party shall pay the amount requested in such notice
to the notifying party in accordance with Section 4, but only to the extent that
the notified party agrees with such request. To the extent the notified party
disagrees with such request, it shall, within 20 days, so notify the notifying
party, whereupon the parties shall use their best efforts to resolve any such
disagreement. If such a dispute cannot be so resolved, resolution of the dispute
shall be governed by Section 7(p) hereof. To the extent not otherwise provided
for in this Section 3 or in Section 4, any payment made after such 20-day period
shall include interest at the Overdue Rate from the date such payment would have
been made under Section 4 based upon the original notice given by the notifying
party.

                      (e)    Loss of Tax Benefits.  Appropriate payments shall
be made between the parties to take account of subsequent losses of, or changes
in, any Tax Benefit that has been taken into account for purposes of determining
the After-Tax Basis of any indemnification payment.

               4.     METHOD, TIMING AND CHARACTER OF PAYMENTS REQUIRED BY THIS
AGREEMENT.

                      (a)    Payment Procedures.  The Company and Hi/fn hereby 
agree to the following quarterly monitoring, notification and payment system
with respect to all amounts that shall become due and payable hereunder between
the parties: (i) the Company's Tax Department shall maintain a current
accounting for all amounts due and payable by the Company, Hi/fn or their
respective subsidiaries pursuant to this Agreement, (ii) Hi/fn shall notify the
Company in writing of any amounts that shall become due to it or its
subsidiaries hereunder on or before the 20th calendar day of the third month of
each quarterly period, (iii) on or before the last business day of the third
month of each quarterly period, the Company shall prepare and distribute to
Hi/fn a comprehensive quarterly report of all amounts that have become due
hereunder to either party or their subsidiaries (including any amounts known by
the Company to be due to Hi/fn or its subsidiaries even if not subject to a
written notification in accordance with clause (ii) above), (iv) the net amount
due between the Company and its subsidiaries on the one hand and Hi/fn and its
subsidiaries on the other hand as of such quarter-end (including any amounts
remaining unpaid, plus interest thereof, from prior periods) shall become
payable on the 10th calendar day of the first month of the following quarter
(or, if such day is not a business day, the next business day thereafter). The
parties hereby agree to consult with each other in good faith to resolve any
differences with respect to such quarterly reports and payments. The Company's
(or the Hi/fn's) failure to prepare or distribute any report under this Section
4(a) shall not relieve or defer the Company's (or Hi/fn's) obligation to pay any
amounts the Company (or Hi/fn) may owe to Hi/fn (or the Company) hereunder.

                      (b)    Payment in Immediately Available Funds; Interest.
All payments made pursuant to this Agreement shall be made in immediately
available funds. Except as otherwise provided herein, any payment not made on
the date when payable under Section 4(a) or otherwise hereunder shall thereafter
bear interest at the Overdue Rate.

                      (c) Characterization of Payments. Any payment (other than
interest thereon) made hereunder by the Company to Hi/fn or by Hi/fn to the
Company shall be treated by 



                                       11
<PAGE>   12

all parties for all purposes as a non-taxable intercompany settlement of
liabilities existing immediately before the Spin-off or, to the extent
appropriate, as a non-taxable dividend distribution or capital contribution.

               5.     COOPERATION; DOCUMENT RETENTION; CONFIDENTIALITY.

                      (a)    Provision of Cooperation, Documents and Other
Information. Upon reasonable request by a requesting party, the Company and
Hi/fn shall promptly provide (and shall cause their respective Affiliates to
provide) such requesting party with such cooperation and assistance, documents,
and other information, without charge, as may be necessary or reasonably helpful
in connection with (i) the preparation and filing of any original or amended Tax
Return, (ii) the conduct of any audit or other examination or any judicial or
administrative proceeding involving to any extent Taxes or Tax Returns within
the scope of this Agreement, or (iii) the verification by a party of an amount
payable hereunder to, or receivable hereunder from, another party. Such
cooperation and assistance shall include, without limitation: (w) the provision
on demand of books, records, Tax Returns, documentation or other information
relating to any relevant Tax Return; (x) the execution of any document that may
be necessary or reasonably helpful in connection with the filing of any Tax
Return by the Stac Pre-Spin-Off Group, a Stac Pre-Spin-off Member, the Stac
Post-Spin-off Group, a Stac Post-Spin-off Member, the Hi/fn Group or a Hi/fn
Member, or in connection with any audit, proceeding, suit or action of the type
generally referred to in the preceding sentence, including, without limitation,
the execution of powers of attorney and extensions of applicable statutes of
limitations, with respect to Tax Returns which the Company may be obligated to
file on behalf of Hi/fn Members pursuant to Section 2(a); (y) the prompt and
timely filing of appropriate claims for refund; and (z) the use of reasonable
best efforts to obtain any documentation from a governmental authority or a
third party that may be necessary or helpful in connection with the foregoing.
Each party shall make its employees and facilities available on a mutually
convenient basis to facilitate such cooperation.

                      (b)    Retention of Books and Records.  The Company, each
Stac Post-Spin-off Member, Hi/fn and each Hi/fn Member shall retain or cause to
be retained all Tax Returns, and all books, records, schedules, workpapers, and
other documents relating thereto, until the expiration of the later of (i) all
applicable statutes of limitations (including any waivers or extensions
thereof), and (ii) any retention period required by law or pursuant to any
record retention agreement. The parties hereto shall notify each other in
writing of any waivers, extensions or expirations of applicable statutes of
limitations, and shall provide at least thirty (30) days prior written notice of
any intended destruction of the documents referred to in the preceding sentence.
A party giving such a notification shall not dispose of any of the foregoing
materials without first obtaining the written approval (which may not be
unreasonably withheld) of the notified party.

                      (c)    Status and Other Information Regarding Audits and 
Litigation. The Company (or Hi/fn, as the case may be) shall use reasonable best
efforts to keep Hi/fn (or the Company) advised, as to the status of Tax audits
and litigation involving any issue relating to any Taxes, Tax Returns or Tax
Benefits subject to indemnification under this Agreement. To the extent relating
to any such issue, the Company (or Hi/fn) shall promptly furnish Hi/fn (or the
Company) copies of any inquiries or requests for information from any Taxing
Authority or any 



                                       12
<PAGE>   13

other administrative, judicial or other governmental authority, as well as
copies of any revenue agent's report or similar report, notice of proposed
adjustment or notice of deficiency.

                      (d)    Confidentiality of Documents and Information.  
Except as required by law or with the prior written consent of the other party,
all Tax Returns, documents, schedules, work papers and similar items and all
information contained therein, which Tax Returns and other materials are within
the scope of this Agreement, shall be kept confidential by the parties hereto
and their Representatives, shall not be disclosed to any other person or entity
and shall be used only for the purposes provided herein.

               6.     CONTESTS AND AUDITS.

                      (a)    Notification of Audits or Disputes.  Upon the 
receipt by the Company or any Stac Post-Spin-off Member (or Hi/fn or any Hi/fn
Member, as the case may be) of notice of any pending or threatened Tax audit or
assessment which may affect the liability for Taxes that are subject to
indemnification hereunder, the Company (or Hi/fn) shall promptly notify Hi/fn
(or the Company) in writing of the receipt of such notice.

                      (b)    Control and Settlement.

                             (i)    By The Company.  The Company shall have the
right to control, and to represent the interests of all affected taxpayers in,
any Tax audit or administrative, judicial or other proceeding relating, in whole
or in part, to any Pre-Closing Taxable Period or any other Taxable Period for
which the Company is responsible, in whole or in part, for Taxes under Sections
2(g) and 3, and to employ counsel of its choice at its expense; provided,
however, that, with respect to such issues that may impact Hi/fn or any Hi/fn
Member for any Post-Closing Taxable Period or for which Hi/fn may be responsible
in part under Sections 2(g) and 3, the Company shall (i) afford Hi/fn full
opportunity to observe at any such proceedings and to review any submissions
related to such issues, (ii) in good faith consult with Hi/fn regarding its
comments with respect to such proceedings and submissions in an effort to
resolve any differences with respect to the Company's positions with regard to
such issues, (iii) in good faith consider Hi/fn's recommendations for
alternative positions with respect to such issues, and (iv) advise Hi/fn of the
reasons for rejecting any such alternative position. In the event of any
disagreement regarding the proceedings, the Company shall have the ultimate
control of the contest and any settlement or other resolution thereof.

                             (ii)   By Hi/fn:  Hi/fn shall have the right to
control, and to represent the interests of all affected taxpayers in, any Tax
audit or administrative, judicial or other proceeding relating solely to any
Post-Closing Taxable Period of the Hi/fn Group or any Hi/fn Member, or relating
to any other Taxable Period for which Hi/fn is solely responsible for Taxes
under Sections 2(g) and 3, and to employ counsel of its choice at its expense;
provided, however, that Hi/fn shall (i) afford the Company full opportunity to
observe at any such proceedings and to review any submissions related thereto
and (ii) not agree to settle any such proceeding in a manner that could
reasonably have a material and adverse effect on (A) any indemnification
obligation of the Company hereunder, (B) any Tax liability of the Stac
Pre-Spin-Off Group or any Stac Pre-Spin-off Member for any Pre-Closing Taxable
Period or (C) any Tax liability of the Stac Post-Spin-off Group or any Stac
Post-Spin-off Member for any Post-Closing 



                                       13
<PAGE>   14

Taxable Period, without the prior written consent of the Company, which consent
shall not be unreasonably withheld.

                      (c) Delivery of Powers of Attorney. Hi/fn (and, to the
extent necessary, its subsidiaries) shall execute and deliver to the Company,
promptly upon request, such powers of attorney authorizing the Company to extend
statutes of limitations, receive refunds and take such other actions that the
Company reasonably considers to be appropriate in exercising its control rights
pursuant to this Section 6.

               7.     MISCELLANEOUS.

                      (a)    Effectiveness.  This Agreement shall be effective
from and after the Closing Date and shall survive until the expiration of any
applicable statute of limitations.

                      (b)    Entire Agreement.  This Agreement contains the
entire agreement among the parties hereto with respect to the subject matter
hereof.

                      (c)    Guarantees of Performance.  The Company and Hi/fn 
hereby guarantee the complete and prompt performance by the members of their
respective Affiliated Groups of all of their obligations and undertakings
pursuant to this Agreement. If, subsequent to the Effective Time, either the
Company or Hi/fn shall be acquired by another entity such that 50% or more of
its common stock is in common control, such acquirer shall, by making such
acquisition, simultaneously agree to jointly and severally guarantee the
complete and prompt performance by the acquired corporation and any Affiliate of
the acquired corporation of all of their obligations and undertakings pursuant
to this Agreement.

                      (d)    Severability.  In case any one or more of the 
provisions contained in this Agreement should be invalid, illegal or
unenforceable, the enforceability of the remaining provisions hereof shall not
in any way be affected or impaired thereby. It is hereby stipulated and declared
to be the intention of the parties that they would have executed the remaining
terms, provisions, covenants and restrictions hereof without including any of
such which may hereafter be declared invalid, void or unenforceable. In the
event that any such term, provision, covenant or restriction is hereafter held
to be invalid, void or unenforceable, the parties hereto agree to use their best
efforts to find and employ an alternate means to achieve the same or
substantially the same result as that contemplated by such term, provision,
covenant or restriction.

                      (e)    Indulgences, etc.  Neither the failure nor any 
delay on the part of any party hereto to exercise any right under this Agreement
shall operate as a waiver thereof, nor shall any single or partial exercise of
any right preclude any other or further exercise of the same or any other right,
nor shall any waiver of any right with respect to any occurrence be construed as
a waiver of such right with respect to any other occurrence.

                      (f)    Governing Law.  This Agreement shall be governed
by and construed in accordance with the internal laws of the State of California
without regard to the conflict of law principles thereof, except with respect to
matters of law concerning the internal corporate affairs of any corporate entity
which is a party to or subject of this Agreement, and as 



                                       14
<PAGE>   15

to those matters the law of the jurisdiction under which the respective entity
derives its powers shall govern.

                      (g) Notices. All notices, requests, demands and other
communications required or permitted under this Agreement shall be made in the
manner provided in Section [___] of the Transitional Services Agreement of even
date herewith between the Company and Hi/fn (the "Transitional Services
Agreement").

                      (h)    Modification or Amendment.  This Agreement may be
amended at any time by written agreement executed and delivered by duly
authorized officers of Hi/fn and the Company.

                      (i)    Successors and Assigns.  Except by operation of law
or in connection with the sale of all or substantially all the assets of a party
hereto, a party's rights and obligations under this Agreement may not be
assigned without the prior written consent of the other party. All of the
provisions of this Agreement shall be binding upon and inure to the benefit of
the parties and their respective successors and permitted assigns.

                      (j)    No Third-Party Beneficiaries.  This Agreement is 
solely for the benefit of the parties to this Agreement and their respective
Affiliates and should not be deemed to confer upon third parties any remedy,
claim, liability, reimbursement, claim of action or other right in excess of
those existing without this Agreement.

                      (k)    Other.  This Agreement may be executed in any 
number of counterparts, each such counterpart being deemed to be an original
instrument, and all of such counterparts shall together constitute one and the
same instrument. The section numbers and captions herein are for convenience of
reference only, do not constitute part of this Agreement and shall not be deemed
to limit or otherwise affect any of the provisions hereof.

                      (l) Predecessors and Successors. To the extent necessary
to give effect to the purposes of this Agreement, any reference to any
corporation, Affiliated Group or member of an Affiliated Group shall also
include any predecessors or successors thereto, by operation of law or
otherwise.

                      (m)    Effect of Transitional Services Agreement.  At any
time when the Company is providing tax planning and compliance services to Hi/fn
under the Transitional Services Agreement, the rights and obligations of the
Company and Hi/fn under the advance review, consultation, notice and cooperation
provisions of Sections 2(c), 2(d), 5(a), 5(c), 6(a), 6(b) and 7(g) shall be
suspended. Such rights and obligations shall be immediately reinstated upon the
termination of the Transitional Services Agreement or upon written notice from
Hi/fn to such effect. In performing any such services, the Company shall act as
an agent and/or independent contractor of Hi/fn and shall have no personal
liability with respect to any Taxes related thereto other than as expressly
provided herein or in the Transitional Services Agreement.

                      (n)    Tax Elections.  Nothing in this Agreement is 
intended to change or otherwise affect any previous tax election made by or on
behalf of the Stac Pre-Spin-Off Group. The Company, as common parent of the Stac
Pre-Spin-Off Group, shall continue to have sole 



                                       15
<PAGE>   16

discretion to make any and all elections with respect to all members of the Stac
Pre-Spin-Off Group for all Taxable Periods for which it is obligated to file Tax
or Information Returns under Section 2(a)(i).

                      (o) Injunctions. The parties acknowledge that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with its specific terms or were otherwise
breached. The parties hereto shall be entitled to an injunction or injunctions
to prevent breaches hereto and to enforce specifically the terms and provisions
hereof in any court having jurisdiction; such remedy shall be in addition to any
other remedy available at law or in equity.

                      (p)    Dispute Resolution.  The Company and Hi/fn shall 
endeavor in good faith to resolve any dispute under this Agreement, including
without limitation instances where the parties are required to reach mutual
agreement. If such a dispute cannot be so resolved, then either party may
deliver to the other a written notice detailing such party's objections. If the
Company and Hi/fn are unable to resolve the dispute within fifteen (15) days of
the receipt of such notice, then either party shall have the right to refer the
dispute for resolution to Neutral Auditors selected by the Company and Hi/fn
within ten (10) days after the expiration of such fifteen (15) day period. If
the Company and Hi/fn are unable to agree on the Neutral Auditors, then Hi/fn
and the Company shall each have the right to request the American Arbitration
Association to appoint the Neutral Auditors. Each party agrees to execute, if
requested by the Neutral Auditors, a reasonable engagement letter. All fees and
expenses relating to the work, if any, to be performed by the Neutral Auditors
shall be borne equally by the Company and Hi/fn. The Neutral Auditors shall act
as an arbitrator to determine, based solely on presentations by the Company and
Hi/fn, and not by independent review, only those issues still in dispute. The
Neutral Auditors' determination shall be made within thirty (30) days of such
firm's selection, shall be set forth in a written statement delivered to the
Company and Hi/fn, and shall be final, binding and conclusive.

                      (q)    Further Assurances.  Subject to the provisions 
hereof, the parties hereto shall make, execute, acknowledge and deliver such
other instruments and documents, and take all such other actions, as may be
reasonably required in order to effectuate the purposes of this Agreement and to
consummate the transactions contemplated hereby. Subject to the provisions
hereof, each party shall, in connection with entering into this Agreement,
performing its obligations hereunder and taking any and all actions relating
hereto, comply with all applicable laws, regulations, orders and decrees, obtain
all required consents and approvals and make all required filings with any
governmental agency, other regulatory or administrative agency, commission or
similar authority and promptly provide the other party with all such information
as it may reasonably request in order to be able to comply with the provisions
of this sentence.

                      (r) Setoff. Except as provided in Section 4(a), all
payments to be made by any party under this Agreement shall be made without
setoff, counterclaim or withholding, all of which are expressly waived.

                      (s) Costs and Expenses. Unless otherwise specifically
provided herein, each party agrees to pay its own costs and expenses resulting
from the fulfillment of its respective obligations hereunder.


                                       16
<PAGE>   17

                      (t) Rules of Construction. Any ambiguities herein shall be
resolved without regard to which party drafted this Agreement.



                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]


                                       17
<PAGE>   18
               IN WITNESS WHEREOF, the parties hereto have executed this
Agreement, or have caused this Agreement to be duly executed on their respective
behalf by their respective officers thereunto duly authorized, as of the day and
year above written.

                                                   STAC, INC.
                                                   a Delaware corporation


                                                   By:
                                                      --------------------------
                                                   Name:
                                                        ------------------------
                                                   Title:
                                                         -----------------------


                                                   HI/FN, INC.,
                                                   a Delaware corporation


                                                   By:
                                                      --------------------------
                                                   Name:
                                                        ------------------------
                                                   Title:
                                                         -----------------------



                                      S-1

<PAGE>   1
                                                                    EXHIBIT 10.7

                         TRANSITIONAL SERVICES AGREEMENT

        This Transitional Services Agreement (this "Agreement") is made as of
this __ day of November 1998 between Stac, Inc., a Delaware corporation
("Stac"), and hi/fn, inc., a Delaware corporation ("Hi/fn").

                                    RECITALS

        WHEREAS, pursuant to a Distribution Agreement dated as of November __,
1998, (the "Distribution Agreement") between Stac and Hi/fn, Stac will separate
its software business and its semiconductor business (the "Spin-off") by way of
a special dividend by Stac to the stockholders of record of Stac's common stock,
consisting of the distribution on an approximately 1-for-4 basis, of all of the
outstanding shares of Hi/fn Common Stock held by Stac (following the conversion,
at Stac's election, of 6,000,000 shares of Series A Preferred Stock, par value
$.001 per share, of Hi/fn into 6,000,000 shares of Hi/fn Common Stock) (the
"Distribution"); and

        WHEREAS, a condition of the closing of the transactions contemplated by
the Distribution Agreement is that Stac and Hi/fn enter into, among other
things, a transitional services agreement pursuant to which Stac shall provide
certain accounting services to Hi/fn.

                                    AGREEMENT

        NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants hereinafter set forth, and intending to be legally bound
hereby, the parties agree as follows:

        1. ACCOUNTING SERVICES. Stac agrees to use its employees and assets to
provide to Hi/fn the accounting services currently provided by Stac to Hi/fn,
which are listed on Exhibit A hereto (the "Accounting Services"). Stac shall
have no obligation to perform the accounting services currently provided by
Hi/fn personnel, which also are described on Exhibit A hereto. The monthly
charge for the Accounting Services from and after the date hereof shall be
$6,500.00. Such amount shall be prepaid through December 31, 1999 by Hi/fn prior
to the Distribution. If the term of this Agreement is extended past December 31,
1999 pursuant to Section 4 hereof, Stac shall invoice Hi/fn monthly for
Accounting Services performed during the prior month (beginning January 1,
2000), and Hi/fn shall pay Stac for such services not later than ten (10) days
from the receipt of invoice. Hi/fn may decline any or all of the Accounting
Services at any time in its sole discretion; provided that the monthly charge
for services will not be reduced below $6,500 (i) unless Hi/fn has given Stac at
least 30 days notice of its decision to decline all services (in which case no
monthly charge will be due) or (ii) unless otherwise agreed by the parties in
writing.

        Hi/fn expressly acknowledges and agrees that (i) Stac and its officers,
directors, employees, agents and counsel shall not be responsible for the
contents of Hi/fn financial statements generated by Stac or for their
preparation in accordance with generally accepted accounting principles, (ii)
the contents and accuracy of Hi/fn's financial statements shall be solely the
responsibility of Hi/fn and (iii) Stac's responsibility shall be only to process
transactions and journal entries as instructed by Hi/fn and to generate the
resulting financial statements. Hi/fn understands and agrees that it shall be
responsible for all planning and reporting to its various constituencies,
including, but not limited to its board of directors, stockholders, employees,
the Securities and Exchange Commission, the Internal Revenue 

<PAGE>   2

Service, the California Franchise Tax Board, other federal and state regulatory
agencies, other taxing authorities and any corresponding or other foreign
entities.

        2. OUTSIDE SERVICES. In the event that the providing party is required
to retain outside consultant/contractor assistance to perform any of the
services hereunder, the providing party shall first obtain the consent of the
other party to such retention and the other party shall pay directly the fees of
such consultant/contractor. The providing party shall not be held responsible
for the performance of such consultant/contractor services and the other party
assumes the risk thereof.

        3. CONTRACTUAL RELATIONSHIP. The relationship between Stac and Hi/fn
under this Agreement shall be that of principal and agent in respect of the
services to be performed hereunder. In no event is the relationship of the
parties intended to be that of employer and employee and in no event is either
party to be deemed or purported to be the partner or joint venturer of the other
for any purpose whatsoever.

        4. TERM. The term of this Agreement shall expire on December 31, 1999;
provided, however, that each party shall have the right, Hi/fn upon thirty (30)
days advance notice to Stac, and Stac upon six (6) months advance notice to
Hi/fn, to terminate all or part of the services it performs hereunder. This
Agreement may be extended on a month-to-month basis following December 31, 1999
upon mutual agreement of the parties. Upon the termination of all services,
payment therefor and payment of all consultants/contractors, this Agreement
shall terminate and any payments due the other party shall be immediately
payable.

        5. LIMITATION OF LIABILITY. Stac shall not have any liability whatsoever
to Hi/fn or to any third party for any loss, liability, damage, cost or
deficiency (collectively, "Losses"), or for any claim for Losses, including,
without limitation, Losses or claims for personal injury, death or property
damage, warranty, tort or products liability, resulting from, caused by or
arising out of Stac's performance under this Agreement except for claims arising
out of the negligence or willful default or breach of Stac hereunder. In no
event shall Stac have liability to Hi/fn or to any third party for indirect,
special or consequential damages or loss of profits (except with respect to its
willful default or breach), or for punitive damages for any reason whatsoever.

        6. INDEMNIFICATION. Hi/fn agrees to indemnify, protect, defend and hold
harmless Stac (for purposes of this Section 6 "Stac" shall include the officers,
directors, employees, agents and counsel of Stac), from and against any and all
losses, claims, damages, expenses or liabilities, including the fees of not more
than one counsel to Stac, arising out of or based upon allegations that
financial statements or other accounting records prepared by Hi/fn with Stac's
assistance pursuant to this Agreement contain inaccuracies or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading.

        7. NOTICES. All notices and other communications hereunder shall be in
writing and shall be delivered by hand or mailed by registered or certified mail
(return receipt requested) to the parties at the following addresses (or at such
other addresses for a party as shall be specified by like notice) and shall be
deemed given on the date on which such notice is received:



                                       2
<PAGE>   3
               To Stac:

                      Stac, Inc.
                      12636 High Bluff Drive, 4th Floor
                      San Diego, CA 92130
                      Attention:  Cliff Flowers

               To Hi/fn:

                      Hi/fn, Inc.
                      2105 Hamilton Ave., Suite 230
                      San Jose, CA 95125
                      Attention:  William Walker

        8. ASSIGNMENT. This Agreement and all of the provisions hereof shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns but neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any party hereto
without the prior written consent of the other party (other than to an
affiliate). Any purported assignment in violation of the provisions hereof shall
be void.

        9. GOVERNING LAW. This Agreement shall be governed by the laws of the
State of California (regardless of the laws that might otherwise govern under
applicable California conflict of laws principles) as to all matters, including
but not limited to matters of validity, construction, effect, performance and
remedies.

        10. COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.

        11. INTERPRETATION. The article and section headings contained in this
Agreement are solely for the purpose of reference, are not part of the agreement
of the parties and shall not in any way affect the meaning or interpretation of
this Agreement.

        12. SEVERANCE. In the event that any provision of this Agreement is
declared illegal, invalid or unenforceable or contrary to law, it shall not
affect any other provision in the Agreement.

        13. ENTIRE AGREEMENT. This Agreement and the Distribution Agreement
embody the entire agreement and understanding of the parties hereto in respect
of the subject matter hereof. This Agreement supersedes all prior agreements and
understandings between the parties with respect to the transactions contemplated
hereby.

        14. DISPUTES. Any disputes arising under this Agreement shall be
resolved by binding arbitration in the manner contemplated by Section 8.13 of
the Distribution Agreement, including the attorneys' fees provision referenced
therein.

                  [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]



                                       3
<PAGE>   4

        IN WITNESS WHEREOF, each of Stac and Hi/fn has caused this Agreement to
be executed by its duly authorized officer as of the date first above written.


                                   STAC, INC.


                                     By:_______________________________________
                                     Name:_____________________________________
                                     Title:_____________________________________



                                     HI/FN, INC.


                                     By:_______________________________________
                                     Name:_____________________________________
                                     Title:_____________________________________


                                       4
<PAGE>   5

                                    EXHIBIT A

The following work is currently performed by Hi/fn personnel and will continue
to be done by them or such other persons as Hi/fn appoints.

1)  Purchasing - preparation of purchase orders for all hi/fn product materials
    and services, receipt of orders, verification of receipt vs. purchase orders
    and other duties associated with purchasing function.

2)  Inventory - ordering, shipping, maintenance and control of physical
    inventory including periodic counts and reconciliation, in conjunction with
    Stac accounting personnel, of any differences.

3)  Property, plant and equipment - ordering, delivery and maintenance, tagging
    and tracking, input into asset accounting system and recording monthly
    depreciation expense. Also responsible for conducting physical inventories
    as needed, and reconciling the fixed asset accounting system to the general
    ledger.

4)  Accounts Payable - matching of invoices against supporting documents, coding
    of account distribution, obtaining approvals and other preparation of data
    for input into accounts payable system, printing of checks, responding to
    vendor calls, reconciliation of accounts payable ledger, signing checks and
    other duties associated with the accounts payable function.

5)  Payroll - preparation of payroll input for delivery to Stac personnel,
    including hours worked, distribution of hours, time-off information and any
    special or bonus pay information. Beginning February 1, 1999 assume
    responsibility for payroll input, tax filings and deposits.

6)  Order entry and invoicing - entry of sales orders into sales order entry
    system, tracking of orders, preparation of picking tickets and shipping
    documents, sales reconciliation, returns processing, responding to customer
    calls re orders and shipments and other duties associated with the sales
    accounting function.

7)  Journal entries - preparation of journal entries other than payroll journal
    entries which are prepared by Stac. Includes journal entries that adjust
    reserves, allowances, revenue recognition, accruals for expenses, prepaid
    amortization and other journal entries.

8)  SEC reports - prepare and file all SEC filings, answer SEC questions and
    comments. Preparation may require adjustment of standard internal reports
    provided by Stac to comply with SEC requirements.

9)  Audits and reviews - plan, schedule and control annual audit and quarterly
    reviews by outside independent auditors.

10) Accounting systems maintenance - in addition to the monthly $6,500 fee to
    Stac for accounting services, pay to outside vendors or reimburse Stac for
    any costs associated with licensing and maintaining the accounting software
    for Hi/fn's use.

11) Credit check and approval-request credit references, D&B reports and make
    decisions as to level of credit to be granted to new customers.

                                       5
<PAGE>   6

12) Option/stock accounting-track all option/stock/ESPP activity, reconcile with
    transfer agent, perform valuation and run reports necessary for quarterly
    reporting.

The following work is currently performed by Stac personnel and will continue to
be done by them during the term of this agreement or by such other persons as
Stac appoints, unless Hi/fn takes on performance of a function or service
directly.

1)  Payroll - input of payroll data provided by Hi/fn, processing of payroll,
    delivery of checks or automatic deposits, preparation of payroll tax
    returns, preparation of payroll general ledger entries and other duties
    associated with payroll not performed by Hi/fn as described above. After
    February 1, Hi/fn will input their own payroll and be responsible for all
    tax filings and other deposits, and Stac will only do the related journal
    entries.

2)  Cash - reconciliation of Hi/fn cash accounts, management of Hi/fn cash in
    the manner currently done through BT Alex Brown, preparation and delivery of
    cash investment reports as previously done and other duties associated with
    accounting for cash.

3)  Accounts Receivable - collection of and deposit of Hi/fn trade accounts
    receivable including collection calls and other duties normally associated
    with the accounts receivable function and not performed by Hi/fn as
    described above.

4)  Inventory - maintenance of accounting records in detail currently
    maintained, reconciliation of differences between book and physical counts
    with Hi/fn personnel.

5)  General ledger accounts -, preparation and entry of payroll journal entries.

6)  Reports - run reports currently run by Stac for Hi/fn including those listed
    below. Provide Hi/fn personnel access to reporting modules for purpose of
    designing and running own reports.

    Income Statement
    Balance Sheet
    Departmental expense reports

7)  Closing schedules - on a best efforts basis, provide reports listed above by
    the 7th workday following the end of each month.

8)  SEC reports - provide historical (defined as "pre-spinoff") information in
    addition to normal reports as reasonably requested by Hi/fn for Hi/fn's
    preparation of SEC filings.

9)  Audits and reviews - provide historical information as requested by
    independent accounts for annual audit and quarterly reviews.

10) Access and turnover - provide Hi/fn personnel with access to accounting
    systems as authorized by Hi/fn's CFO, assist Hi/fn personnel as reasonably
    necessary to turn over accounting records and know-how in order for Hi/fn or
    their appointees to take over the Stac provided accounting functions.

                                       6
<PAGE>   7

11) Accounting systems maintenance - maintain accounting systems software in
    working order and maintain backups of accounting data.


                                       7

<PAGE>   1
                                                                    EXHIBIT 10.9



                                AGREEMENT dated as of April 1, 1994 between
                                INTERNATIONAL BUSINESS MACHINES CORPORATION,
                                a New York corporation (hereinafter called IBM),
                                and STAC ELECTRONICS, INC., a California 
                                corporation (hereinafter called STAC).

        Each of the parties has the right (as GRANTOR herein) to grant licenses
to the other party (as GRANTEE herein) under certain patents and desires to
acquire a nonexclusive license under such patents of the other party.

        Each of the parties expects to continue research and development which
will produce further patents and each party may require a nonexclusive license
under such patents of the other party.

        In consideration of the premises and mutual covenants herein contained,
IBM and STAC agree as follows:

Section 1. Definitions

1.1     "Information Handling System" shall mean any instrumentality or
aggregate of instrumentalities primarily designed to compute, classify, process,
transmit, receive, retrieve, originate, switch, store, display, manifest,
measure, detect, record, reproduce, handle or utilize any form of information,


<PAGE>   2
intelligence or data for business, scientific, control or other purposes.

1.2     "IHS Product" shall mean:

1.2.1   one or more Information Handling Systems;

1.2.2   any instrumentality or aggregate of instrumentalities designed for
        incorporation into an Information Handling System;

1.2.3   one or more IHS Programs; or

1.2.4   any combination of the foregoing.

1.3     "IHS Program" shall mean a plurality of instructions capable of being
executed by an Information Handling System, whether or not such instructions are
in a machine-readable form and regardless of the medium in which such "IHS
Program" is stored, i.e. disk, tape, Read Only Memory, etc.

1.4     "STAC Program" shall mean an IHS Program which is capable of, and
primarily designed for, being executed by a Personal System Product.

1.5     "IBM Licensed Patents" shall mean all patents, including utility models
and including design patents and registrations for type fonts (but not including
any other design patents or




                                      -2-
<PAGE>   3
registrations), issued or issuing on patent applications entitled to an
effective filing date prior to April 1, 1999, under which patents or the
applications therefor IBM or any of its Subsidiaries now has the right to grant
licenses to STAC of or within the scope granted herein without such grant or the
exercise of rights thereunder resulting in the payment of royalties or other
consideration by IBM or its Subsidiaries to third parties (except for payments
between IBM and Subsidiaries of IBM, and payments to third parties for
inventions made by said third parties while employed by IBM or any of its
Subsidiaries). The term "IBM Licensed Patents" shall also include said patent
applications and any patent reissuing on any of the aforesaid patents.

1.6     "IBM Licensed Products" shall mean IHS Programs.

1.7     "STAC Licensed Patents" shall mean all patents, including utility models
and including design patents and registrations for type fonts (but not including
any other design patents or registrations), issued or issuing on patent
applications entitled to an effective filing date prior to April 1, 1999, under
which patents or the applications therefor STAC or any of its Subsidiaries now
has the right to grant licenses to IBM of or within the scope granted herein
without such grant or the

                                      -3-
<PAGE>   4
exercise of rights thereunder resulting in the payment of royalties or other
consideration by STAC or its Subsidiaries to third parties (except for payments
between STAC and Subsidiaries of STAC, and payments to third parties for
inventions made by said third parties while employed by STAC or any of its
Subsidiaries). The term "STAC Licensed Patents" shall also include said patent
applications and any patent reissuing on any of the aforesaid patents.

1.8     "STAC Licensed Products" shall mean STAC Programs.

1.9     "Subsidiary" shall mean a corporation, company or other entity:

1.9.1   more than fifty percent (50%) of whose outstanding shares or securities
        (representing the right to vote for the election of directors or other
        managing authority) are, now or hereafter, owned or controlled, directly
        or indirectly, by a party hereto, but such corporation, company or other
        entity shall be deemed to be a Subsidiary only so long as such ownership
        or control exists; or

1.9.2   which does not have outstanding shares or securities, as may be the case
        in a partnership, joint venture or unincorporated association, but more
        than fifty percent



                                      -4-
<PAGE>   5
        (50%) of whose ownership interest representing the right to make the
        decisions for such corporation, company or other entity is, now or
        hereafter, owned or controlled, directly or indirectly, by a party
        hereto, but such corporation, company or other entity shall be deemed to
        be a Subsidiary only so long as such ownership or control exists.

1.10    "Licensed Patents" shall mean IBM Licensed Patents and STAC Licensed
Patents.

1.11    "Licensed Products" shall mean IBM Licensed Products and STAC Licensed
Products.

1.12    "Personal System Product" shall mean an IHS Product which does not
include one or more general or special purpose processing units primarily
designed for operating under any of the following IBM operating systems or
emulations or follow-on extensions thereof: VM, MVS, VSE, System 360, System
370, System 390 and OS/400.

Section 2. Licenses

2.1     IBM, on behalf of itself and its Subsidiaries, grants to STAC a
worldwide, fully paid-up, nonexclusive license under the


                                      -5-
<PAGE>   6
IBM Licensed Patents to make, use, lease, license, sell and otherwise transfer
STAC Licensed Products and to combine such STAC Licensed Products with IHS
Products; provided, however, that such license shall not be construed to cover
the manufacture, lease, sale or other transfer of any IHS Product per use which
forms a part of such combination unless otherwise licensed hereunder.

In the event that neither IBM nor any of its Subsidiaries has the right to grant
a license under any particular IBM Licensed Patent of the scope set forth above
in this Section 2.1, then the license granted herein under said IBM Licensed
Patent shall be o the broadest scope which IBM or any of its Subsidiaries has
the right to grant within the scope set forth above.

2.2     STAC, on behalf of itself and its Subsidiaries, grants to IBM a
worldwide, fully paid-up, nonexclusive license under the STAC Licensed Patents
to make, use, lease, license, sell and otherwise transfer IBM Licensed Products
and to combine such IBM Licensed Products with IHS Products; provided, however,
that such license shall not be construed to cover the manufacture, lease, sale
or other transfer of any IHS Product per use which forms a part of such
combination unless otherwise licensed hereunder.


                                      -6-
<PAGE>   7
In the event that neither STAC nor any of its Subsidiaries has the right to
grant a license under any particular STAC Licensed Patent of the scope set forth
above in this Section 2.2, then the license granted herein under said STAC
Licensed Patent shall be of the broadest scope which STAC or any of its
Subsidiaries has the right to grant within the scope set forth above.

2.3     IBM, on behalf of itself and its Subsidiaries, hereby grants to STAC's
customers a worldwide, fully paid-up, nonexclusive license under only those IBM
Licensed Patents having claims that would be infringed by the combination of
STAC Licensed Products with IHS Products and only for the formation of
combinations of STAC Licensed Products with IHS Products, irrespective of the
source of the IHS Products; provided, however, that such license shall not be
construed to cover the manufacture, lease, sale or other transfer of any IHS
Product per use which forms a part of such combination.

2.4     STAC, on behalf of itself and its Subsidiaries, hereby grants to IBM's
customers (excluding Microsoft Corporation or any of its Subsidiaries) a
worldwide, fully paid-up, nonexclusive license under only those STAC Licensed
Patents having claims that would be infringed by the combination of IBM Licensed
Products with IHS Products and only for the formation of combinations of



                                      -7-


<PAGE>   8

IBM Licensed Products with IHS Products, irrespective of the source of the IHS
Products; provided, however, that such license shall not be construed to cover
the manufacture, lease, sale or other transfer of any IHS Product per use which
forms a part of such combination.

2.5     Except as provided in Sections 2.3 and 2.4, no license or immunity is
granted by either party hereto either directly or by implication, estoppel or
otherwise to any third parties acquiring items from either party for the
combination of items licensed hereunder with other items or for the use of such
combination. Notwithstanding any other provision of this Agreement, IBM shall
have no right or power to grant to Microsoft Corporation or any of its
Subsidiaries any license, whether express or implied, under any STAC Licensed
Patents. The foregoing limitation shall apply to any transaction between IBM (or
its Subsidiaries) and Microsoft Corporation (or its Subsidiaries) involving IBM
products which include compression/decompression functions and which would have
the effect of, or be equivalent to, conveying to Microsoft Corporation (or its
Subsidiaries) a license under any STAC Licensed Patents. Any such products
licensed to Microsoft Corporation (or its Subsidiaries) shall be considered IBM
Licensed Products only to the extent that STAC has granted to Microsoft
Corporation a license under the STAC Licensed Patents.





                                      -8-
<PAGE>   9

2.6     Except as provided in Section 3, neither party shall have the right to
grant sublicenses to others.

Section 3. Extension of License to Subsidiaries

3.1     The licenses granted herein shall include the right of the parties
hereto to sublicense their respective Subsidiaries and the right of such
sublicensed Subsidiaries to sublicense other Subsidiaries. Each sublicensed
Subsidiary shall be bound by the terms and conditions of this Agreement. If a
Subsidiary ceases to be a Subsidiary and holds any patents under which a party
hereto is licensed, such licenses will continue for the life of such patents.
Any sublicense granted to a Subsidiary shall terminate on the date such
Subsidiary ceases to be a Subsidiary.

3.2     In the event a sublicensed Subsidiary of one party hereto is an
Operating Subsidiary (as hereinafter defined) at the time it ceases to be a
Subsidiary, and, with the written approval of said one party, requests in
writing, within one hundred and eighty (180) days after ceasing to be a
Subsidiary, a license agreement with the other party hereto upon terms and
conditions substantially identical with the terms and conditions of this
Agreement, as granted to said one party, (except as hereinafter provided) the
other party hereto agrees that it will enter into such license agreement
forthwith. An Operating Subsidiary shall



                                      -9-
<PAGE>   10
be any Subsidiary of one party hereto which at the time it ceases to be a
Subsidiary has all of the following:

3.2.1   a line of marketable products;

3.2.2   patents or other intellectual property relating to the line of
        marketable products;

3.2.3   tangible assets at least equivalent in value to the lesser of
        twenty-five million U.S. dollars ($25,000,000) or twenty percent (20%)
        of the total tangible assets of the party of which it was formerly a
        Subsidiary; and

3.2.4   at the time of entry into such license agreement, it is not a
        corporation, company or other entity:

3.2.4.1 more than fifty percent (50%) of whose outstanding shares or securities
        (representing the right to vote for the election of directors or other
        managing authority) are; or

3.2.4.2 which does not have outstanding shares or securities, as may be the case
        in a partnership, joint venture or unincorporated association, but more
        than fifty percent (50%) of whose ownership interest representing the
        right to make the decisions for such corporation, company or other
        entity is; 

        owned or controlled, directly or indirectly, by a third party.



                                      -10-
<PAGE>   11
        Any such agreement with an Operating Subsidiary shall differ from this
        Agreement in the following respects:

3.2.5   this Section 3.2 and Sections 4 and shall be omitted;

3.2.6   the name of the Operating Subsidiary shall be substituted for the name
        of the party hereto of which it was formerly a Subsidiary; and

3.2.7   in the event that such Operating Subsidiary is or becomes organized
        under the laws of a country different from that of the party hereto of
        which it was formerly a Subsidiary, such license agreement shall contain
        such additional terms and conditions (other than royalty provisions) as
        may exist in patent license agreements between the other party hereto
        and other entities organized under the laws of the same country.

Section 4. Release

4.1     Each party, on behalf of itself and its Subsidiaries which are
Subsidiaries as of the date of this Agreement, hereby irrevocably releases the
other party, its Subsidiaries which are Subsidiaries as of the date of this
Agreement, and its and their respective customers, mediate and immediate, from
any and all claims of infringement of any of its Licensed Patents, which claims
have been made or which might be made at any time, with



                                      -11-
<PAGE>   12
respect to any item manufactured, used, leased, sold or otherwise transferred by
the other party or its Subsidiaries before the effective date of this Agreement,
and with respect to any method practiced in the manufacture or use of such item,
to the extent that such item or method would have been licensed hereunder had it
been manufactured, used, leased, sold or otherwise transferred or practiced by
the other party after the date of this Agreement. The release contained herein
shall not apply to any person other than those specified in this Section 4.1 and
shall not apply to manufacture by any person other than a party to this
Agreement or its Subsidiary.

Section 5. Other License Rights

5.1     It is recognized that the parties hereto or their respective
Subsidiaries may, as of the date set forth above, have the right to grant
licenses under one or more patents of any country, including utility models and
including design patents and registrations for type fonts (but not including any
other design patents or registrations), issuing on patent applications entitled
to an effective filing date prior to April 1, 1999, but that such grant or the
exercise of rights thereunder will result in payment of royalties or other
consideration by GRANTOR or its Subsidiaries to third parties. Each party (as
GRANTOR herein) agrees that, upon written request, it will grant to the other


                                      -12-
<PAGE>   13
party to the extent and subject to the terms and conditions under which it then
has the right to do so, a license of the broadest scope which GRANTOR has the
right to grant at any time but of no greater scope than the scope of the
licenses granted herein with respect to any such patent. Such license shall be
granted under a separate agreement, upon payment of the same royalty or other
consideration as that which GRANTOR or any of its Subsidiaries is obligated to
pay to a third party because of the grant of such license or the exercise of
rights thereunder.

5.2     Upon written request by a party, the other party will inform the
requesting party of those patents or patent applications coming within the scope
of Section 5.1 promptly after receipt of such request.

Section 6. Term of Agreement

6.1     The term of this Agreement shall be from the date hereof until the
expiration of the last to expire of the Licensed Patents, unless terminated
pursuant to Section 6.3.

6.2     In the event that more than fifty percent (50%) of the outstanding
shares or securities (representing the right to vote for the election of
directors or other managing authority) of one party hereto hereafter become
owned or controlled, directly or


                                      -13-
<PAGE>   14
indirectly, by a third party, said one party shall promptly give notice of such
acquisition to the other party. If said one party does not have outstanding
shares or securities, such acquisition shall be deemed to occur if more than
fifty percent (50%) of its ownership interest representing the right to make
decisions for said party is acquired by said third party. All rights granted
hereunder to said one party together with any sublicenses theretofore granted by
said one party shall terminate on a termination date one hundred and eighty
(180) days after the date of such acquisition.

        In the event of such acquisition,

6.2.1   all licenses granted herein to said other party under any patents
        issuing on patent applications having an effective filing date
        subsequent to said termination date and under said patent applications
        shall terminate; and

6.2.2   said one party shall be entitled, upon request made within one hundred
        and eighty (180) days after the date of such acquisition to a
        nontransferable, nonexclusive, royalty free license under said other
        party's Licensed Patents (including the right to sublicense its
        Subsidiaries) to make, use, lease and sell only products of the same
        type manufactured and marketed by said one party within the licenses
        granted in this Agreement prior to such



                                      -14-
<PAGE>   15

        acquisition, except that any such license agreement shall differ from
        this Agreement in the following respects:

6.2.2.1 the license grant to said one party in Section 2.1 or 2.2, as the case
        may be, shall be limited in amount to annual sales equal to the sales of
        Licensed Products (IBM Licensed Products if IBM is said party or STAC
        Licensed Products if STAC is said party) by said one party and its
        sublicensed Subsidiaries which are included in such acquisition in the
        consecutive twelve-month period that immediately precedes the date of
        such acquisition plus forty million dollars ($40,000,000.); and

6.2.2.2 the license grant to said one party in Section 2.1 or 2.2, as the case
        may be, shall include a grant of a royalty bearing license to said one
        party by said other party for all other sales of said one party's
        Licensed Products (as defined in this Agreement) under said party's
        Licensed Patents (as defined in this Agreement) under said other party's
        then standard licensing practice and on such standard terms and
        conditions as said other party is offering comparable royalty bearing
        licenses at the time such a license agreement is requested.








                                      -15-
<PAGE>   16

6.3     This Agreement, and all licenses granted hereunder, shall be
irrevocable, except that STAC may terminate this Agreement only within 30 days
after 12 months after delivery by STAC to IBM of Licensed Programs, Related
Materials and Development Environment under the License Agreement between the
parties (Number P94124) and only to the extent IBM has not provided STAC with
written notice of the commencement of the Delivery Period under such License
Agreement. In order for such termination to be effective, STAC must inform IBM,
in writing, within the 30 day period specified above, of its intention to
terminate this Agreement, in which case such termination will be effective 60
days after receipt of such written notice. All Licensed Products of either party
made to completion, licensed, sold, or otherwise transferred prior to the
effective date of termination shall continue to be licensed under the other
party's Licensed Patents irrespective of the termination of this Agreement.

Section 7. Warranty

7.1     Each party represents and warrants that it has the full right and power
to grant the licenses and release set forth in Sections 2 and 4 and that there
are no outstanding agreements, assignments or encumbrances inconsistent with the
provisions of said Sections or with any other provision of this Agreement. Each
party (as a GRANTOR) further represents and warrants that



                                      -16-
<PAGE>   17

prior to the execution of this Agreement it has informed the other party of any
patent originating from inventions made by employees of GRANTOR or its
Subsidiaries, which patent is now owned by GRANTOR or its Subsidiaries and which
patent, owing to prior arrangements with third parties, does not, or will not,
qualify as its Licensed Patent, under which licenses are granted of the full
scope set forth in Section 2. Neither party makes any other representations or
warranties, express or implied, nor does either party assume any liability in
respect of any infringement of patents or other rights of third parties owing to
the other party's operation under the license herein granted.

Section 8. Communications

8.1     Any notice or other communication required or permitted to be made or
given to either party hereto pursuant to this Agreement shall be sent to such
party by registered airmail (except that registered or certified mail may be
used where delivery is in the same country as mailing), postage prepaid,
addressed to it at its address set forth below, or to such other address as it
shall designate by written notice given to the other party, and shall be deemed
to have been made or given on the date of mailing. The addresses are as follows:



                                      -17-
<PAGE>   18

8.1.1   For IBM,

        IBM Director of Licensing
        International Business Machines Corporation
        208 Harbor Drive
        Stamford, CT 06904

8.1.2   For STAC,

        John Witzel, Vice President
        STAC Electronics, Inc
        5993 Avenida Encinas
        Carlsbad, California 92008

        with copies to:

        Gary Clow, President
        STAC Electronics, Inc
        5993 Avenida Encinas
        Carlsbad, California 92008

        and

        Robert Steinberg, Esq.
        IRELL & MANELLA 
        1800 Avenue of the Stars, Suite 900 
        Los Angeles, CA
        90067-4276

Section 9. Assignments

9.1     Neither party shall assign, or grant any right in conflict with the
rights granted under this Agreement under, any of its patents, or the
applications therefor, which qualify as Licensed Patents, or any of its patents
or the applications therefor or rights which are subject to the other party's
rights pursuant to Section 5, unless such assignment or grant is made subject to
the terms and conditions of this Agreement. Subject to the provisions of Section
3, neither party shall assign under any circumstances any of its rights or
privileges hereunder without



                                      -18-
<PAGE>   19

the prior written consent of the other party, such consent not to be
unreasonably withheld. Notwithstanding the foregoing, each party may withhold
its consent for any reason in the event the other party attempts to sell,
barter, trade, or otherwise assign in gross its rights under this Agreement or
if the other party is in bankruptcy. Any attempted assignment in derogation of
the foregoing shall be void, ab initio. In the event that either party consents
to an assignment of the other's rights under this Agreement, such assigned
rights shall be limited in scope similar to the limitations set forth in
Sections 6.2.2 and 6.2.2.1 relating to acquisition, i.e. to products of the same
type and with an annual sales limit as specified in Section 6.2.2.1

The parties recognize that the terms of this Agreement reflect the unique patent
licensing needs of the parties hereto, including, but not limited to, the scope
of the license, the definition of the STAC Licensed Products and IBM Licensed
Products and the projected needs under each other's patents. Therefore, the
parties hereto acknowledge that this Agreement is personal to each of them and
is not assumable or assignable by either party in bankruptcy without the consent
of the other (Bankruptcy Code Section 365(c)(1)).



                                      -19-
<PAGE>   20

Section 10. Know-How and Trade Secrets

10.1    No license or other right is granted herein to either party, directly or
by implication, estoppel or otherwise, with respect to any trade secrets or
know-how, and no such license or other right shall arise from the consummation
of this Agreement or from any acts, statements or dealings leading to such
consummation. Except as specifically provided herein, neither party is required
hereunder to furnish or disclose to the other any technical or other
information.

Section 11. Applicable Law

11.1    This Agreement shall be construed, and the legal relations between the
parties hereto shall be determined, in accordance with the law of the State of
New York.

Section 12. Miscellaneous

12.1    Nothing contained in this Agreement shall be construed as a warranty or
representation by either party as to the validity or scope of any of its
Licensed Patents and either party is free to contest in any proceeding said
validity or scope.

12.2    Nothing contained in this Agreement shall be construed as conferring any
right to use in advertising, publicity, or other promotional activities any
name, trade name, trademark, or other



                                      -20-
<PAGE>   21

designation of either party hereto (including any contraction, abbreviation or
simulation of any of the foregoing); and each party hereto agrees not to use or
refer to this Agreement or any provision thereof in any promotional activity
associated with apparatus licensed hereunder, without the express written
approval of the other party.

12.3    Nothing contained in this Agreement shall be construed as conferring on
either party any license or other right to copy the exterior design of the
products of the other party.

12.4    Nothing contained in this Agreement shall be construed as conferring any
rights by implication, estoppel or otherwise, to or under copyrights or mask
work or similar rights, or with respect to IHS Programs under any form of
statutory protection now existing or hereafter enacted, in any country or
countries, wherein the copying of an IHS Program is a requisite of infringement
under such form of protection.

12.5    Nothing contained in this Agreement shall be construed as limiting the
rights which the parties have outside the scope of the licenses granted
hereunder, or restricting the right of either party or any of its Subsidiaries
to make, have made, use,


                                      -21-
<PAGE>   22

lease, sell or otherwise dispose of any particular product or products not
herein licensed.

12.6    Each party shall, upon request from the other party sufficiently
identifying any patent or patent application, inform the other party as to the
extent to which said patent is subject to the licenses and rights granted
hereunder. If such licenses or rights under said patent or patent application
are restricted in scope, copies of all pertinent provisions of any contract or
other arrangement creating such restrictions shall, upon request, be furnished
to the party making such request, unless such disclosure is prevented by such
contract, and in that event a statement of the nature of such restriction will
be provided.

12.7    Neither of the parties hereto, nor any of their respective Subsidiaries
shall be required hereunder to file any patent application, or to secure any
patent or patent rights, or to maintain any patent in force, or to provide
copies of patent applications to the other party or its Subsidiaries, or to
disclose any inventions described or claimed in such patent applications.

12.8    Neither party shall have any obligation hereunder to institute any
action or suit against third parties for



                                      -22-
<PAGE>   23
infringement of any of its Licensed Patents or to defend any action or suit
brought by a third party which challenges or concerns the validity of any of its
Licensed Patents. In addition, neither party shall have any right to institute
any action or suit against third parties for infringement of any of the other
party's Licensed Patents.

12.9    Licensed Products leased, sold or otherwise transferred by a party
hereto or its sublicensed Subsidiary shall be considered to be licensed under
any Licensed Patent which at any time covers such Licensed Products,
notwithstanding that the Licensed Product has been re-leased, re-sold or
re-transferred by any entity in the same or another country.

12.10   This Agreement will not be binding upon the parties until it has been
signed hereinbelow by or on behalf of each party, in which event it shall be
effective as of the date first above written. No amendment or modification
hereof shall be valid or binding upon the parties unless made in writing and
signed as aforesaid. This Agreement and any other agreements specifically
referred to herein embody the entire understanding of the parties with respect
to the subject matter hereof and merges all prior discussions between them, and
neither of the parties shall be bound by any conditions, definitions,
warranties, understandings



                                      -23-
<PAGE>   24
or representations with respect to the subject matter hereof other than as
expressly provided herein.

12.11   If any Section of this Agreement is found by competent authority to be
invalid, illegal or unenforceable in any respect for any reason, the validity,
legality and enforceability of any such Section in every other respect and the
remainder of this Agreement shall continue in effect so long as the Agreement
still expresses the intent of the parties. If the intent of the parties cannot
be preserved, this Agreement shall be either renegotiated or terminated.

12.12   Both parties to this Agreement recognize that, for the term of the
licenses granted hereunder, there are continuing licensing obligations on the
part of both parties. They therefore acknowledge that, upon the filing of a
bankruptcy petition naming either party to this Agreement as the debtor, this
Agreement is and shall remain an executory contract under Section 365 of the
Bankruptcy Code.

12.13   The headings of the several Sections are inserted for convenience of
reference only and are not intended to be a part of or to affect the meaning or
interpretation of this Agreement.



                                      -24-
<PAGE>   25

        IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly signed as of the date first above written.

                                            INTERNATIONAL BUSINESS
                                            MACHINES CORPORATION



Witness: /s/ FRANCIS W. CASEY               By  /s/ M.C. PHELPS, JR.
        -------------------------              -------------------------------
         Francis W. Casey                           M.C. Phelps, Jr.
                                                    Vice President


                                            STAC ELECTRONICS, INC.


                                             
Witness: /s/ JOHN R. WITZEL                 By  /s/ GARY CLOW
        -------------------------              -------------------------------
         John R. Witzel                             Gary Clow
         V.P. Finance & Operations                  President


                                      -25-
<PAGE>   26

        IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly signed as of the date first above written.

                                            INTERNATIONAL BUSINESS
                                            MACHINES CORPORATION



Witness: /s/ FRANCIS W. CASEY               By  /s/ M.C. PHELPS, JR.
        -------------------------              -------------------------------
        Francis W. Casey                            M.C. Phelps, Jr.
                                                    Vice President


                                            STAC ELECTRONICS, INC.


                                             
Witness: /s/ ROBERT MONSOUR                 By  /s/ GARY CLOW
        -------------------------              -------------------------------
         Robert Monsour                             Gary Clow
                                                    President


                                      -25-

<PAGE>   1
                                                                   EXHIBIT 10.10

                                   AGREEMENT dated as of April 1, 1994
                                   between INTERNATIONAL BUSINESS
                                   MACHINES CORPORATION, A New York
                                   corporation (hereinafter called 
                                   IBM), and STAC ELECTRONICS, INC., a
                                   California corporation (hereinafter
                                   called STAC).

        Each of the parties has granted to the other party licenses under
certain of its patents for making, using and selling certain IHS Programs as
specified in a license agreement between the parties of even date herewith
(hereinafter referred to as the "Program Patent License Agreement").

        Each of the parties has the right (as GRANTOR herein) to grant
additional licenses to the other party (as GRANTEE herein) under certain patents
for making, using and selling additional products and desires to acquire a
nonexclusive license under such patents of the other party for making, using and
selling additional products.

        Each of the parties expects to continue research and development which
will produce further patents and each party may require a nonexclusive license
under such patents of the other party.

        In consideration of the premises and mutual covenants herein contained,
IBM and STAC agree as follows:

Section 1.     Definitions

1.1     "Information Handling System" shall mean any instrumentality or
aggregate of instrumentalities primarily designed to compute, classify, process,
transmit, receive, retrieve, originate, switch, store, display, manifest,
measure, detect, record, reproduce, handle or utilize any form of information,
intelligence or data for business, scientific, control or other purposes.
<PAGE>   2
1.2     "IHS Hardware Product" shall mean:

1.2.1   one or more Information Handling Systems;

1.2.2   any instrumentality or aggregate of instrumentalities designed for
        incorporation into an Information Handling System; or

1.2.3   any combination of the foregoing.

1.3     "IHS Program" shall mean a plurality of instructions capable of being
executed by an Information Handling System, whether or not such instructions are
in a machine-readable form and regardless of the medium in which such "IHS
Program" is stored, i.e. disk, tape, Read Only Memory, etc.

1.4     "STAC Program" shall mean an IHS Program which is capable of, and
primarily designed for, being executed by a Personal System Product.

1.5     "IBM Licensed Patent Claims" shall mean all claims of all patents,
including utility models and including design patents and registrations for type
fonts (but not including any other design patents or registrations), other than
claims claiming methods for manufacturing integrated circuits, issued or issuing
on patent applications entitled to an effective filing date prior to April 1,
1999, under which patents or the applications therefore IBM or any of its
Subsidiaries now has the right to grant licenses to STAC of or within the scope
granted herein without such grant or the exercise of rights thereunder resulting
in the payment of royalties or other consideration by IBM or its Subsidiaries to
third parties (except for payments between IBM and Subsidiaries of IBM, and
payments to third parties for inventions made by said third parties while
employed by IBM or any of its Subsidiaries). The term "IBM Licensed Patent
Claims"


                                      -2-
<PAGE>   3
shall also include the claims of said patent applications and any patent
reissuing on any of the aforesaid patents, other than claims claiming methods
for manufacturing integrated circuits.

1.6     "IBM Licensed Products" shall mean IHS Hardware Products, except that
those portions of IHS Hardware Products made for a third party which
incorporates said third party's design for Lossless Data Compression and/or
Lossless Data Decompression shall not be considered IBM Licensed Products.

1.7     "STAC Licensed Patent Claims" shall mean all claims of all patents,
including utility models and including design patents and registrations for type
fonts (but not including any other design patents or registrations), issued or
issuing on patent applications entitled to an effective filing date prior to
April 1, 1999, under which patents or the applications therefor STAC or any of
its Subsidiaries now has the right to grant licenses to IBM of or within the
scope granted herein without such grant or the exercise of rights thereunder
resulting in the payment of royalties or other consideration by STAC or its
Subsidiaries to third parties (except for payments between STAC and Subsidiaries
of STAC, and payments to third parties for inventions made by said third parties
while employed by STAC or any of its Subsidiaries). The term "STAC Licensed
Patent Claims" shall also include said patent applications and any patent
reissuing on any of the aforesaid patents.

1.8     "STAC Licensed Products" shall mean Lossless Data Compression Products,
except that those portions of Lossless Data Compression Products made for a
third party which incorporate said third party's design for Lossless Data
Compression and/or


                                      -3-
<PAGE>   4
Lossless Data Decompression shall not be considered STAC Licensed Products.

1.9     "Subsidiary" shall mean a corporation, company or other entity:

1.9.1   more than fifty percent (50%) of whose outstanding shares or securities
        (representing the right to vote for the election of directors or other
        managing authority) are, now or hereafter, owned or controlled, directly
        or indirectly, by a party hereto, but such corporation, company or other
        entity shall be deemed to be a Subsidiary only so long as such ownership
        or control exists; or

1.9.2   which does not have outstanding shares or securities, as may be the case
        in a partnership, joint venture or unincorporated association, but more
        than fifty percent (50%) of whose ownership interest representing the
        right to make the decisions for such corporation, company or other
        entity is, now or hereafter, owned or controlled, directly or
        indirectly, by a party hereto, but such corporation, company or other
        entity shall be deemed to be a Subsidiary only so long as such ownership
        or control exists.

1.10    "Licensed Patent Claims" shall mean IBM Licensed Patent Claims and STAC
Licensed Patent Claims.

1.11    "Personal System Product" shall mean an IHS Product which does not
include one or more general or special purpose processing units primarily
designed for operating under any of the following IBM operating systems or
emulations or follow-on extensions thereof: VM, MVS, VSE, System 360, System
370, System 390 and OS/400.


                                      -4-
<PAGE>   5
1.12    "Lossless Data Compression" shall mean a reducing process by which a
contiguous string of digital data is reduced to a shorter string of digital data
in a manner intended to permit the recovery, upon application of a recovery
process of all of the data so reduced, i.e., without loss of any of the data
subject to such reducing process.

1.13    "Lossless Data Decompression" shall mean a recovery process by which a
string of digital data that was subjected to Lossless Data Compression is
recovered in its entirety, i.e., without loss of any of the data subject to such
Lossless Data Compression.

1.14    "Lossless Data Compression Product" shall mean an integrated circuit 
chip primarily designed for performing Lossless Data Compression and/or Lossless
Data Decompression on digital data. Lossless Data Compression Product shall
include only those portions of an integrated circuit chip that contribute to the
function of Lossless Data Compression and/or Lossless Data Decompression and
only those portions of ancillary circuitry on the same chip that perform
interfacing to other system components; such components include, but are not
limited to, memory, processor units, and other peripheral circuits. Such
ancillary circuitry includes register circuits and memory control circuits, but
does not include circuitry which performs functions wherein some of the digital
data is lost and not recovered following compression and decompression
processes.

Section 2.     Licenses

2.1     Subject to the provisions of 2.3, each party (as GRANTOR herein), on
behalf of itself and its Subsidiaries, grants to the other party (as GRANTEE
herein) a worldwide, irrevocable, fully


                                      -5-
<PAGE>   6
paid-up, nonexclusive license under GRANTOR's Licensed Patent Claims:

2.1.1   to make, use, lease, sell and otherwise transfer GRANTEE's Licensed
        Products and to practice any method or process involved in the
        manufacture or use thereof;

2.1.2   in the case of IBM, to combine IBM Licensed Products with IHS Programs
        licensed pursuant to the Program Patent License Agreement for the
        duration of said Program Patent License Agreement;

2.1.3   in the case of STAC, to combine STAC Licensed Products with STAC
        Programs licensed pursuant to the Program Patent License Agreement for
        the duration of said Program Patent License Agreement; and

2.1.4   to have made GRANTEE'S Licensed Products by another manufacturer for the
        use, lease, sale or other transfer by GRANTOR, only when all of the
        following conditions are met:

2.1.4.1 the designs, specifications and working drawings for the manufacture of 
        said GRANTEE'S Licensed Products are furnished by, and originate with,
        GRANTEE (or with GRANTEE's contractor, whether or not said contractor is
        also said other manufacturer, provided that any patents and patent
        applications, based upon inventions made in the course of the contract,
        which cover any of GRANTEE's Licensed Product or any portion thereof
        which is the subject of the contract, are licensable by GRANTEE to
        GRANTOR hereunder). and

2.1.4.2 said designs, specifications and working drawings are in sufficient 
        detail that no additional designing by the manufacturer is required
        other than adaptation to the production processes and standards normally
        used by the manufacturer which changes the characteristics of GRANTEE's
        Licensed Products only to a negligible extent.


                                      -6-
<PAGE>   7
        GRANTEE shall be deemed to have authorized said other manufacturer to
        make GRANTEE's Licensed Products under the license granted to GRANTEE in
        this Section 2.1.4 when both the aforesaid conditions are fulfilled, in
        the absence of a written agreement to the contrary between GRANTEE and
        said other manufacturer. Upon written request, GRANTEE shall inform
        GRANTOR whether, and if so to what extent, any manufacturer identified
        by GRANTOR is operating under the licensed granted to GRANTEE in this
        Section 2.1.4.

In the event that neither GRANTOR nor any of its Subsidiaries has the right to
grant a license under any particular Licensed Patent Claim of the scope set
forth above in this Section 2, then the license granted herein under said
Licensed Patent Claim shall be of the broadest scope which GRANTOR or any of its
Subsidiaries has the right to grant within the scope set forth above.

2.2     Each party (as GRANTOR herein), on behalf of itself and its
Subsidiaries, hereby grants to the users of the other's licensed products
manufactured, leased, sold or otherwise transferred by the other party (as
GRANTEE herein) or its sublicensed Subsidiaries, an immunity from suit under
GRANTOR's Licensed Patent Claims for the formation and use of any combination of
GRANTEE's Licensed Products with IHS Programs, whether or not the IHS Programs
are furnished by GRANTEE; provided, however, that such immunity shall not be 
construed to cover any apparatus or any IHS Program per se.

2.3     Except as provided in Sections 2.2, no license or immunity is granted by
either party hereto either directly or by implication, estoppel or otherwise to
any third parties acquiring items from either party for the combination of items
licensed hereunder with other items or for the use of such combination.


                                      -7-
<PAGE>   8
2.4     Except as provided in Section 3, neither party shall have the right to
grant sublicenses to others.

Section 3.     Extension of License to Subsidiaries

3.1     The licenses granted herein shall include the right of the parties 
hereto to sublicense their respective Subsidiaries and the right of such
sublicensed Subsidiaries to sublicense other Subsidiaries. Each sublicensed
Subsidiary shall be bound by the terms and conditions of this Agreement. If a
Subsidiary ceases to be a Subsidiary and holds any patents under which a party
hereto is licensed, such licenses will continue for the life of such patents.
Any sublicense granted to a Subsidiary shall terminate on the date such
Subsidiary ceases to be a Subsidiary.

3.2     In the event a sublicensed Subsidiary of one party hereto is an
Operating Subsidiary (as hereinafter defined) at the time it ceases to be a
Subsidiary, and, with the written approval of said one party, requests in
writing, within one hundred and eighty (180) days after ceasing to be a
Subsidiary, a license agreement with the other party hereto upon terms and
conditions substantially identical with the terms and conditions of this
Agreement, as granted to said one party, (except as hereinafter provided) the
other party hereto agrees that it will enter into such license agreement
forthwith. An Operating Subsidiary shall be any Subsidiary of one party hereto
which at the time it ceases to be a Subsidiary has all of the following:

3.2.1   a line of marketable products;

3.2.2   patents or other intellectual property relating to the line of
        marketable products;

3.2.3   tangible assets at least equivalent in value to the lesser of
        twenty-five million U.S. dollars ($25,000,000) or twenty percent (20%)
        of the total tangible assets of the


                                      -8-
<PAGE>   9
        party of which it was formerly a Subsidiary; and

3.2.4   at the time of entry into such license agreement, it is not a
        corporation, company or other entity:

3.2.4.1 more than fifty percent (50%) of whose outstanding shares or securities
        (representing the right to vote for the election of directors or other
        managing authority) are; or

3.2.4.2 which does not have outstanding shares or securities, as may be the case
        in a partnership, joint venture or unincorporated association, but more
        than fifty percent (50%) of whose ownership interest representing the
        right to make the decisions for such corporation, company or other
        entity is; owned or controlled, directly or indirectly, by a third
        party.

Any such agreement with an Operating Subsidiary shall differ from this Agreement
in the following respects:

3.2.5   this Section 3.2 and Sections 4 and shall be omitted;

3.2.6   the name of the Operating Subsidiary shall be substituted for the name
        of the party hereto of which it was formerly a Subsidiary; and

3.2.7   in the event that such Operating Subsidiary is or becomes organized
        under the laws of a country different from that of the party hereto of
        which it was formerly a Subsidiary, such license agreement shall contain
        such additional terms and conditions (other than royalty provisions) as
        may exist in patent license agreements between the other party hereto
        and other entities organized under the laws of the same country.


                                      -9-
<PAGE>   10
Section 4.     Release

4.1     Each party, on behalf of itself and its Subsidiaries which are
Subsidiaries as of the date of this Agreement, hereby irrevocably releases the
other party, its Subsidiaries which are Subsidiaries as of the date of this
Agreement, and its and their respective customers, mediate and immediate, from
any and all claims of infringement of any of its Licensed Patent Claims, which
claims have been made or which might be made at any time, with respect to any
item manufactured, used, leased, sold or otherwise transferred by the other
party or its Subsidiaries before the effective date of this Agreement, and with
respect to any method practiced in the manufacture or use of such item, to the
extent that such item or method would have been licensed hereunder had it been
manufactured, used, leased, sold or otherwise transferred or practiced by the
other party after the date of this Agreement. The release contained herein shall
not apply to any person other than those specified in this Section 4.1 and shall
not apply to manufacture by any person other than a party to this Agreement or
its Subsidiary.

Section 5.     Other License Rights

5.1     It is recognized that the parties hereto or their respective
Subsidiaries may, as of the date set forth above, have the right to grant
licenses under one or more patents of any country, including utility models and
including design patents and registrations for type fonts (but not including any
other design patents or registrations), issuing on patent applications entitled
to an effective filing date prior to April 1, 1999, but that such grant or the
exercise of rights thereunder will result in payment of royalties or other
consideration by GRANTOR or its Subsidiaries to third parties. Each party (as
GRANTOR herein) agrees that, upon written request, it will grant to the other


                                      -10-
<PAGE>   11
party to the extent and subject to the terms and conditions under which it then
has the right to do so, a license of the broadest scope which GRANTOR has the
right to grant at any time but of no greater scope than the scope of the
licenses granted herein with respect to any such patent. Such license shall be
granted under a separate agreement, upon payment of the same royalty or other
consideration as that which GRANTOR or any of its Subsidiaries is obligated to
pay to a third party because of the grant of such license or the exercise of
rights thereunder.

5.2     Upon written request by a party, the other party will inform the
requesting party of those patents or patent applications coming within the scope
of Section 5.1 promptly after receipt of such request.

Section 6.     Term of Agreement

6.1     The term of this Agreement shall be from the date hereof until the
expiration of the last to expire of the Licensed Patent Claims.

6.2     In the event that more than fifty percent (50%) of the outstanding
shares or securities (representing the right to vote for the election of
directors or other managing authority) of one party hereto hereafter become
owned or controlled, directly or indirectly, by a third party, said one party
shall promptly give notice of such acquisition to the other party. If said one
party does not have outstanding shares or securities, such acquisition shall be
deemed to occur if more than fifty percent (50%) of its ownership interest
representing the right to make decisions for said party is acquired by said
third party. All rights granted hereunder to said one party together with any
sublicenses theretofore granted by said one party shall terminate on a


                                      -11-
<PAGE>   12
termination date one hundred and eighty (180) days after the date of such
acquisition.

        In the event of such acquisition,

6.2.1   all licenses granted herein to said other party under any patents
        issuing on patent applications having an effective filing date
        subsequent to said termination date and under said patent applications
        shall terminate; and

6.2.2   said one party shall be entitled, upon request made within one hundred
        and eighty (180) days after the date of such acquisition to a
        nontransferable, nonexclusive, royalty free license under said other
        party's Licensed Patent Claims (including the right to sublicense its
        Subsidiaries) to make, use, lease and sell only products of the same
        type manufactured and marketed by said one party within the licenses
        granted in this Agreement prior to such acquisition, except that any
        such license agreement shall differ from this Agreement in the following
        respects:

6.2.2.1 the license grant to said one party in Section 2.1 shall be limited in
        amount to annual sales equal to the sales of licensed products (IBM
        Licensed Products if IBM is said party or STAC Licensed Products if STAC
        is said party) by said one party and its sublicensed Subsidiaries which
        are included in such acquisition in the consecutive twelve-month period
        that immediately precedes the date of such acquisition plus eight
        million dollars ($8,000,000.); provided, however, in the event that at
        the time of acquisition this Agreement and the Program Patent License
        Agreement are owned by said one party, the cumulative limitation on
        annual sales for both license agreements shall be sales in the
        consecutive twelve-month period that immediately



                                      -12-
<PAGE>   13
        precedes the date of such acquisition plus forty-eight million dollars 
        ($48,000,000.); and

6.2.2.2 the license grant to said one party in Section 2.1 shall include a
        grant of a royalty bearing license to said one party by said other party
        for all other sales of said one party's Licensed Products (as defined in
        this Agreement) under said party's Licensed Patent Claims (as defined in
        this Agreement) under said other party's then standard licensing
        practice and on such standard terms and conditions as said other party
        is offering comparable royalty bearing licenses at the time such a
        license agreement is requested.

Section 7.     Warranty

7.1     Each party represents and warrants that it has the full right and power
to grant the licenses and release set forth in Sections 2 and 4 and that there
are no outstanding agreements, assignments or encumbrances inconsistent with the
provisions of said Sections or with any other provision of this Agreement. Each
party (as a GRANTOR) further represents and warrants that prior to the execution
of this Agreement it has informed the other party of any patent originating from
inventions made by employees of GRANTOR or its Subsidiaries, which patent is now
owned by GRANTOR or its Subsidiaries and which patent, owing to prior
arrangements with third parties, does not, or will not, qualify as its Licensed
Patent Claim, under which licenses are granted of the full scope set forth in
Section 2. Neither party makes any other representations or warranties, express
or implied, nor does either party assume any liability in respect of any
infringement of patents or other rights of third parties owing to the other
party's operation under the license herein granted.


                                      

                                      -13-
<PAGE>   14
Section 8.     Communications

8.1     Any notice or other communication required or permitted to be made or
given to either party hereto pursuant to this Agreement shall be sent to such
party by registered airmail (except that registered or certified mail may be
used where delivery is in the same country as mailing), postage prepaid,
addressed to it at its address set forth below, or to such other address as it
shall designate by written notice given to the other party, and shall be deemed
to have been made or given on the date of mailing. The addresses are as follows:

8.1.1   For IBM,

        IBM Director of Licensing
        International Business Machines Corporation
        208 Harbor Drive
        Stamford, CT 06904

8.1.2   For STAC,

        John Witzel, Vice President
        STAC Electronics, Inc
        5993 Avenida Encinas
        Carlsbad, California 92008

        with copies to:

        Gary Clow, President
        STAC Electronics, Inc
        5993 Avenida Encinas
        Carlsbad, California 92008

        and

        Robert Steinberg, Esq.
        IRELL & MANELLA 
        1800 Avenue of the Stars, Suite 900 
        Los Angeles, CA 90067-4276

Section 9.     Assignments

9.1     Neither party shall assign, or grant any right in conflict


                                      -14-
<PAGE>   15
with the rights granted under this Agreement under, any of its patents, or the
applications therefor, which qualify as Licensed Patent Claims, or any of its
patents or the applications therefor or rights which are subject to the other
party's rights pursuant to Section 5, unless such assignment or grant is made
subject to the terms and conditions of this Agreement. Subject to the provisions
of Section 3, neither party shall assign under any circumstances any of its
rights or privileges hereunder without the prior written consent of the other
party. Any attempted assignment in derogation of the foregoing shall be void, ab
initio.

The parties recognize that the terms of this Agreement reflect the unique patent
licensing needs of the parties hereto, including, but not limited to, the scope
of the license, the definition of the STAC Licensed Products and IDM Licensed
Products and the projected needs under each other's patents. Therefore, the
parties hereto acknowledge that this Agreement is personal to each of them and
is not assumable or assignable by either party in bankruptcy without the consent
of the other (Bankruptcy Code Section 365(c)(1)).

Section 10.    Know-How and Trade Secrets

10.1    No license or other right is granted herein to either party,


                                      -15-
<PAGE>   16
directly or by implication, estoppel or otherwise, with respect to any trade
secrets or know-how, and no such license or other right shall arise from the
consummation of this Agreement or from any acts, statements or dealings leading
to such consummation. Except as specifically provided herein, neither party is
required hereunder to furnish or disclose to the other any technical or other
information.

Section 11.    Payment

11.1    As additional consideration for the license, immunities, release and
other rights granted to IBM herein, IBM shall pay to STAC the total sum of
one million, two hundred thousand dollars ($1,200,000.00) by June 1, 1994.

Section 12.    Miscellaneous

12.1    Nothing contained in this Agreement shall be construed as a warranty or
representation by either party as to the validity or scope of any of its
Licensed Patent Claims and either party is free to contest in any proceeding
said validity or scope.

12.2    Nothing contained in this Agreement shall be construed as conferring any
right to use in advertising, publicity, or other promotional activities any
name, trade name, trademark, or other designation of either party hereto
(including any contraction,


                                      -16-
<PAGE>   17
abbreviation or simulation of any of the foregoing); and each party hereto
agrees not to use or refer to this Agreement or any provision thereof in any
promotional activity associated with apparatus licensed hereunder, without the
express written approval of the other party.

12.3    Nothing contained in this Agreement shall be construed as conferring on
either party any license or other right to copy the exterior design of the
products of the other party.

12.4    Nothing contained in this Agreement shall be construed as conferring any
rights by implication, estoppel or otherwise, to or under copyrights or mask
work or similar rights, or with respect to IHS Programs under any form of
statutory protection now existing or hereafter enacted, in any country or
countries, wherein the copying of an IHS Program is a requisite of infringement
under such form of protection.

12.5    Nothing contained in this Agreement shall be construed as limiting the
rights which the parties have outside the scope of the licenses granted
hereunder, or restricting the right of either party or any of its Subsidiaries
to make, have made, use, lease, sell or otherwise dispose of any particular
product or products not herein licensed.


                                      -17-
<PAGE>   18
12.6    Each party shall, upon request from the other party sufficiently
identifying any patent or patent application, inform the other party as to the
extent to which said patent is subject to the licenses and rights granted
hereunder. If such licenses or rights under said patent or patent application
are restricted in scope, copies of all pertinent provisions of any contract or
other arrangement creating such restrictions shall, upon request, be furnished
to the party making such request, unless such disclosure is prevented by such
contract, and in that event a statement of the nature of such restriction will
be provided.

12.7    Neither of the parties hereto, nor any of their respective Subsidiaries
shall be required hereunder to file any patent application, or to secure any
patent or patent rights, or to maintain any patent in force, or to provide
copies of patent applications to the other party or its Subsidiaries, or to
disclose any inventions described or claimed in such patent applications.

12.8    Neither party shall have any obligation hereunder to institute any 
action or suit against third parties for infringement of any of its Licensed
Patent Claims or to defend any action or suit brought by a third party which
challenges or concerns the validity of any of its Licensed Patent Claims. In


                                      -18-
<PAGE>   19
addition, neither party shall have any right to institute any action or suit
against third parties for infringement of any of the other party's Licensed
Patent Claims.

12.9    GRANTEE's Licensed Products leased, sold or otherwise transferred by a
party or its sublicensed Subsidiary shall be considered to be licensed under any
GRANTOR Licensed Patent Claim which at any time covers such GRANTEE Licensed
Products, notwithstanding that the GRANTEE Licensed Product has been released,
re-sold or re-transferred by any entity in the same or another country.

12.10    This Agreement will not be binding upon the parties until it has been
signed hereinbelow by or on behalf of each party, in which event it shall be
effective as of the date first above written. No amendment or modification
hereof shall be valid or binding upon the parties unless made in writing and
signed as aforesaid. This Agreement and any other agreements specifically
referred to herein embody the entire understanding of the parties with respect
to the subject matter hereof and merges all prior discussions between them, and
neither of the parties shall be bound by any conditions, definitions,
warranties, understandings or representations with respect to the subject matter
hereof other than as expressly provided herein.


                                      -19-
<PAGE>   20
12.11   If any Section of this Agreement is found by competent authority to be
invalid, illegal or unenforceable in any respect for any reason, the validity,
legality and enforceability of any such Section in every other respect and the
remainder of this Agreement shall continue in effect so long as the Agreement
still expresses the intent of the parties. If the intent of the parties cannot
be preserved, this Agreement shall be either renegotiated or terminated.

12.12   Both parties to this Agreement recognize that, for the term of the
licenses granted hereunder, there are continuing licensing obligations on the
part of both parties. They therefore acknowledge that, upon the filing of a
bankruptcy petition naming either party to this Agreement as the debtor, this
Agreement is and shall remain an executory contract under Section 365 of the
Bankruptcy Code.

12.13   The headings of the several Sections are inserted for convenience of
reference only and are not intended to be a part of or to affect the meaning or
interpretation of this Agreement.

12.14   This Agreement shall be construed, and the legal relations between the
parties hereto shall be determined, in accordance with the law of the State of
New York.


                                      -20-
<PAGE>   21
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
signed as of the date first above written.

                                         INTERNATIONAL BUSINESS
                                         MACHINES CORPORATION

Witness:                                 By: /s/ M.C. PHELPS, JR.
                                             --------------------------
/s/  FRANCIS W. CASEY                            M.C. Phelps, Jr.
- -----------------------                          Vice President
     Francis W. Casey

                                         STAC ELECTRONICS, INC.

                                         By: /s/ ROBERT MONSOUR
Witness:                                     --------------------------
                                                 Robert Monsour
/s/  JOHN R. WITZEL                              Vice President,
- -----------------------                          Business Development
     John R. Witzel



                                      -21-

<PAGE>   1
                                                                   EXHIBIT 10.11

                                                                    CONFIDENTIAL

                                LICENSE AGREEMENT

        THIS LICENSE AGREEMENT (the "Agreement") is made as of the 20th day of
June, 1994, by and between Stac Electronics, a California corporation having its
main office and place of business at 5993 Avenida Encinas, Carlsbad, California
92008 ("Stac") and Microsoft Corporation having its main office and place of
business at One Microsoft Way, Redmond, WA 98052-6399 ("Microsoft").

                                    RECITALS

        1. Stac is the owner of the Stac Patents herein defined which embody
certain algorithms and techniques that allow lossless compression and
decompression of data. Microsoft is the owner of the Microsoft Developer
Information herein defined and the Microsoft Patents herein defined which embody
certain algorithms and techniques that allow lossless compression and
decompression of data.

        2. Stac and Microsoft are parties to that certain Settlement Agreement
of even date herewith ("Settlement Agreement") which provides for the execution,
delivery and performance of this Agreement.

        NOW, THEREFORE, in consideration of the premises and mutual covenants
and agreements herein contained, and subject to the terms and conditions set
forth herein, the parties hereto agree as follows:

1.      DEFINITIONS

        1.1 "MICROSOFT COMPRESSION INTERFACES" means the set of detailed rules,
designs, specifications, application programming interfaces, and other
information that (a) may be used for and are reasonably required by Stac for
interfacing between a Stac lossless data compression software system or program
and any Microsoft operating system in a form sufficient to enable such
compression software system or program to become installable and workable under
the Microsoft operating system, and (b) are either (i) related to preloading a
compression software system or program in MS-DOS, (ii) related to interfacing a
compression software system with Chicago, or (iii) made available by Microsoft
to any third party software developers.

        1.2 "DOUBLESPACE" means the algorithms, processes, data formats and
other information relating to the lossless data compression and decompression
technology included in the commercially available version of the Microsoft
Products known as MS-DOS 6.0 and MS-DOS 6.2.

                                        1


<PAGE>   2
                                                                    CONFIDENTIAL

        1.3 "DRIVESPACE" means the algorithms, processes, data formats and other
information relating to the lossless data compression and decompression
technology included in the commercially available version of the Microsoft
Product known as MS-DOS 6.22.

        1.4 "EFFECTIVE DATE" means the date of this Agreement.

        1.5 "INTELLECTUAL PROPERTY RIGHTS" means all applicable copyrights,
patents, trade secrets, inventions, processes and know-how.

        1.6 "MICROSOFT LICENSED PRODUCT" means any Microsoft Products made,
used, sold, or otherwise disposed of by or for Microsoft that are covered by one
or more claims of the Stac Patents and/or the Other Stac Patents. Microsoft
Licensed Products do not include "private label" products (i.e., products with a
source designation different than Microsoft) or other products sold without a
designation that Microsoft is the source of the product.

        1.7 "MICROSOFT DEVELOPER INFORMATION" means manuals, development tools,
application programming interfaces, format specifications and other materials
and information, including but not limited to Microsoft Compression Interfaces,
that are made available by Microsoft to third-party software developers (in
written and machine readable format as available) for the development of
products that interoperate with Microsoft Products.

        1.8 "MICROSOFT PATENTS" means the claims directed specifically to the
Technical Field contained in any and all patents, issued or issuing on patent
applications entitled to an effective filing date prior to June 20, 1999, under
which patents or the applications therefor Microsoft has the right to grant
licenses to Stac, including any and all reissues, reexaminations, divisional,
continuation and continuation in part applications (including inventor's
certificates and utility models and similar forms of legal protection of any
country). A patent claim directed toward a method or apparatus that can be
equally applied to a lossless data compression/decompression system as well as a
system that does not include lossless data compression/decompression shall not
be deemed to fall within the Technical Field solely because it can be used with
or applied to lossless data compression/decompression.

        1.9 "MICROSOFT PRODUCTS" means any and all computer software products
developed by or for Microsoft, including but not limited to MS-DOS, Windows,
Windows for Workgroups, Windows NT, Chicago, Daytona and Cairo, in which
Microsoft owns or has licensed the Intellectual Property Rights.

        1.10 "NET REVENUES" means all sums actually received by Microsoft from
sales and licenses of Microsoft Licensed Products, less product returns,
discounts, freight and

                                        2


<PAGE>   3
                                                                    CONFIDENTIAL

shipping allowances, and all applicable taxes and other governmental levies,
including sales and use taxes and export fees.

        1.11 "STAC PATENTS" means the claims in U.S. patent numbers 5,016,009
and 4,701,745 and claims directed specifically to the Technical Field contained
in any and all patents, issued or issuing on patent applications entitled to an
effective filing date prior to June 20, 1999, under which patents or the
applications therefor Stac has the right to grant licenses to Microsoft,
including any and all reissues, reexaminations, divisional, continuation and
continuation in part applications (including inventor's certificates and utility
models and similar forms of legal protection of any country). A patent claim
directed toward a method or apparatus that can be equally applied to a lossless
data compression/decompression system as well as a system that does not include
lossless data compression/decompression shall not be deemed to fall within the
Technical Field solely because it can be used with or applied to lossless data
compression/decompression.

        1.12 "STAC PRODUCTS" means any and all computer software products
developed by or for Stac, including but not limited to the product called
Stacker, in which Stac owns or has licensed the Intellectual Property Rights.

        1.13 "OTHER STAC PATENTS" means the patent claims that are not
considered to be "Stac Patents" contained in any and all patents issued or
issuing on patent applications entitled to an effective filing date prior to
June 20, 1999 under which patents therefor Stac has the right to grant licenses
to Microsoft.

        1.14 "STAC LICENSED PRODUCTS" means any Stac Products made, used, sold
or otherwise disposed of by or for Stac that are covered by one or more claims
of the Microsoft Patents. Stac Licensed Products do not include "private label"
products (i.e., products with a source designation different than Stac) or other
products sold without a designation that Stac is the source of the product.

        1.15 "TECHNICAL FIELD" means (i) lossless data compression and/or
decompression technology, (ii) data formats for lossless data
compression/decompression, (iii) file and data management related to lossless
data compression/decompression methods and apparatuses, including but not
limited to storage and retrieval of losslessly compressed data, disk
defragmentation, disk analysis and repair, cache management, preload, and file
installation.

2.      GRANT OF LICENSE TO MICROSOFT

        2.1 GRANT OF LICENSE TO STAC PATENTS. Subject to the terms and
conditions hereof including the consideration provided for in Section 2.5.1
below, Stac hereby grants to Microsoft during the Term of this Agreement a
worldwide, non-exclusive, non-

                                        3


<PAGE>   4
                                                                    CONFIDENTIAL

transferable, non-sublicensable (except as provided in Section 2.4.2), fully
paid-up, license under the Stac Patents, to make, have made, use, sell and have
sold Microsoft Licensed Products.

        2.2 GRANT OF LICENSE TO OTHER STAC PATENTS. Subject to the terms and
conditions hereof including the consideration provided for in Section 2.5.2
below, Stac hereby grants to Microsoft a worldwide, non-exclusive,
non-transferable, non-sublicensable (except as provided in Section 2.4.2),
royalty-bearing, license under the Other Stac Patents to make, have made, use,
sell and have sold Microsoft Licensed Products.

        2.3 GRANT OF CONVERSION LICENSE. To the extent any such license is
required, and only to the extent required, Stac hereby grants to Microsoft a
worldwide, non-exclusive, non-transferable, non-sublicensable, royalty-free
license under any Stac Intellectual Property Rights necessary for enabling
Microsoft to include a conversion mechanism in Microsoft Products for converting
users' data compressed by the retail releases of Stacker up to and including
version 4.0 into data compressed by Microsoft Products, and to distribute such
conversion mechanism through its normal business channels and to authorize users
to use such conversion mechanisms.

        2.4 RESERVATION OF RIGHTS

                2.4.1 NO FOUNDRY RIGHTS. Without limiting the restrictions on
"private labelling" as provided in Section 1.6 above, Sections 2.1 and 2.2 shall
not be interpreted as granting any rights to Microsoft to manufacture third
party products, wherein such products are designed by the third party without
substantial input of Microsoft and such products are essentially sold only to
that designing third party.

                2.4.2 SUBLICENSE RIGHTS. The licenses granted under Sections 2.1
and 2.2 shall provide Microsoft with the rights to sublicense third parties to
manufacture, replicate, distribute, license, sell, use or otherwise engage in
commercial activity authorized by Microsoft with respect to the Microsoft
Licensed Products. Nothing in this Section 2.4.2. shall be interpreted to
provide to Microsoft any implied or express license to sublicense to third
parties Stac Patents and/or Other Stac Patents separate from the Microsoft
Licensed Products.

        2.5 CONSIDERATION.

                2.5.1 LICENSE FEE FOR STAC PATENTS. Whether or not Microsoft
elects to make, have made, use, sell and/or have sold Microsoft Licensed
Products, Microsoft agrees to pay Stac a fully paid-up license fee of
forty-three million dollars ($43 million). The forty-three million dollars
($43 million) shall be paid by Microsoft to Stac in forty-three (43) consecutive
monthly payments of one million dollars ($1 million). Each


                                        4
<PAGE>   5
                                                                    CONFIDENTIAL

payment shall be paid by the tenth (10th) calendar day of each month with the
initial payment due on July 10, 1994, and subsequent payments due by the tenth
(10th) day of each succeeding month, the final payment being due by January 10,
1998. All payments shall be made in U.S. dollars by check or wire transfer, in
the case of a wire transfer to a bank account designated by Stac. Microsoft's
obligation to make the payments provided for under this Section 2.5.1 is secured
by a pledge of shares of Series A Preferred Stock of Stac pursuant to that
certain Stock Pledge and Security Agreement between Stac and Microsoft dated of
even date herewith.


                2.5.1.1 The occurrence of any one or more of the following
events shall constitute an "Event of Default" hereunder:

                (a) Nonpayment of any payment due under Section 2.5.1 within 15
days after Stac gives Microsoft written notice of such nonpayment or default.

                (b) A material breach of any of the license terms provided in
Section 2.

                2.5.1.2 If any Event of Default described in Section 2.5.1.1
occurs, the entire amount that remains payable under Section 2.5.1 shall
immediately become due and payable without any election or action on the part of
Stac. Interest shall accrue from the due date of any payment installment at six
percent (6%) per annum, compounded quarterly. If six percent (6%) is adjudicated
as being usurious, then the maximum permissible percentage shall apply.
Microsoft hereby expressly waives any presentment, demand, protest, notice and
right to trial by jury in connection with the payment obligation provided in
Section 2.5.1, now or hereafter required by applicable law, and agrees to pay
all reasonable costs and expenses of collection, including without limitation
reasonable attorneys' fees. In addition to any and all other remedies. Microsoft
agrees that, if any Event of Default described in Section 2.5.1.1 occurs, Stac
shall be entitled to immediately seek and obtain a temporary restraining order,
preliminary and permanent injunction and any other form of relief against
Microsoft, causing Microsoft to stop making, using and/or selling any Microsoft
Licensed Products, and in connection therewith, Stac shall be excused from
posting anything more than a nominal bond and from making any additional showing
of irreparable injury.

        2.5.2 ROYALTY FEES FOR OTHER STAC PATENTS. For each Other Stac Patent
used in Microsoft Licensed Products covered by one or more Other Stac Patents,
Microsoft agrees to pay to Stac, within thirty (30) days of first commercial
shipment of the first such Microsoft Licensed Product, a prepaid royalty of two
hundred fifty dollars ($250,000) which shall be applied to royalty payments by
Microsoft to Stac of two percent (2%) of the first fifty million dollars
($50,000 million) of Net Revenues and one percent (1%) of Net Revenues over
fifty million dollars ($50 million) generated from the sales of such Microsoft
Licensed Products covered by such Other Stac Patent.






                                        5
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                                                                    CONFIDENTIAL

In the event that Microsoft has already paid license fees to Stac under this
Section 2.5.2 for a Microsoft Licensed Product, no additional license fees shall
be due hereunder for additional Other Stac Patents covering the same Microsoft
Licensed Product.

                2.5.2.1 MOST FAVORED NATION STATUS. Should Stac enter into
another royalty-bearing license with a third party under the Other Stac Patents,
with substantially the same license conditions as set forth in this Agreement
for the Other Stac Patents in paragraphs 2.2 and 2.5.2, which has a royalty rate
more favorable than the one set forth herein, taking into account any other
consideration provided ("Favored Royalty Rate"), then Stac shall have thirty
(30) days to inform Microsoft of the existence of such an arrangement and
Microsoft shall be entitled to the same Favored Royalty Rate from the date such
royalty-bearing license was executed. Microsoft shall have the right to request
and conduct confidential, independent audits of third party licenses as provided
in the following paragraph.

        Stac shall maintain complete and accurate records of its license
agreements to support and document the consideration exchanged and royalties
payable in connection with the license granted under any Other Stac Patents.
Such records shall be retained for a period of at least three (3) years after
execution of the license agreement. Stac shall, upon written request, during
normal business hours, but no more frequently than one time per year, provide
access to such records to an independent accounting firm chosen and compensated
by Microsoft, for purposes of the audit. Such accounting firm shall be required
to sign a reasonable agreement with Stac protecting Stac's confidential
information and shall be authorized by Stac to report to Microsoft only the
terms of the consideration exchanged and royalties payable under the license
agreements examined. In the event that any such audit shall uncover a more
favorable royalty rate under the license agreement that was not passed onto
Microsoft, Stac shall reimburse Microsoft for the cost of any audit, and
royalties to be reimbursed to Microsoft due to the differing royalty rates, with
interest thereon at six percent (6%) per annum within ten (10) calendar days of
notice of such unreported royalty rate.

                2.5.2.2 PAYMENT OF ROYALTIES. Microsoft shall promptly pay to
Stac, within thirty (30) days after the conclusion of each calendar quarter the
amount of royalties accruing to Stac during such calendar quarter. Payment of
royalties to Stac shall be accompanied by a detailed basis for determining the
amount of such payment, including but not limited to, the number of units sold,
the price for each unit, and the applicable royalty for each unit.

                2.5.2.3 AUDIT. Microsoft shall maintain complete and accurate
accounting records, in accordance with sound accounting practices, to support
and document revenue received and royalties payable in connection with the
license granted in Section 2.2 above. Such records shall be retained for a
period of at least three (3) years after the royalties to which such records
relate have accrued and been paid.

                                        6


<PAGE>   7
                                                                    CONFIDENTIAL
Microsoft shall, upon written request, during normal business hours, but no more
frequently than one time per year, provide access to such records to an
independent accounting firm chosen and compensated by Stac, for purposes of the
audit. Such accounting firm shall be required to sign a reasonable agreement
with Microsoft protecting Microsoft's confidential information and shall be
authorized by Microsoft to report to Stac only the amount of royalties due and
payable for the period examined. In the event that any such audit shall uncover
a short fall of royalty payments due to Stac of 5% or more, Microsoft shall
reimburse Stac for the cost of any audit, and the short fall in royalties due,
with interest thereon at six percent (6%) per annum within ten (10) calendar
days of notice of such shortfall.


        2.5.3  THIRD PARTY ROYALTIES. Notwithstanding the provisions of Section
2.5.1 and 2.5.2, in the event that Microsoft sells Microsoft Licensed Products
that are covered by one or more claims of a Stac Patent or Other Stac Patent
under which Stac has an ongoing royalty obligation to a third party, then
Microsoft agrees (i) to use such patent in full compliance with any agreement
between Stac and the third party and, notwithstanding anything contained in this
Section 2 to the contrary, (ii) to pay to Stac royalties with respect to sales
of such Microsoft Licensed Products at the same royalty rate payable by Stac to
such third party to the extent such royalty exceeds any royalty that is
otherwise payable by Microsoft to Stac with respect to such Microsoft Licensed
Products. Upon written request, Stac agrees to advise Microsoft in writing of
any Stac Patents or Other Stac Patents which are subject to ongoing royalty
obligations to a third party.

        2.5.4  TERMINATION OF ROYALTY PAYMENTS.

                2.5.4.1 In the event that either U.S. Patent No. 5,016,009 or
4,701,745 is declared invalid or rendered unenforceable, after a final judgment
or reexamination and exhaustion of all appeals therefrom, any remaining
Microsoft payments due under Section 2.5.1 shall be reduced by ten percent (10%)
for each patent so declared invalid or rendered unenforceable as of the time of
such final judgement or reexamination and exhaustion of all appeals.

                2.5.4.2 In the event that any claim contained in an Other Stac
Patent licensed to Microsoft pursuant to Section 2.2 is declared invalid or
rendered unenforceable, after final judgement or reexamination and exhaustion of
all appeals therefrom, any Microsoft royalty payments due pursuant to Section
2.5.2 with respect to such claim shall terminate effective as of the time of
such final judgement or reexamination and exhaustion of all appeals.

        2.5.5  TAXES. All license fees and other amounts to be paid by Microsoft
herein are exclusive of any federal, state, municipal or other governmental
taxes, including income, franchise, sales, use, value added, property, excise or
similar tax, now or






                                        7
<PAGE>   8
                                                                    CONFIDENTIAL
hereafter imposed on Stac. Such charges shall be the responsibility of Stac and
may not be passed on to Microsoft. In the event taxes are required to be
withheld on payments made hereunder by any U.S. (state or federal) or foreign
government. Microsoft shall deduct such taxes from the amount owed Stac and pay
them to the appropriate taxing authority. Microsoft shall in turn promptly
secure and deliver to Stac an official receipt for any taxes withheld. Microsoft
will use reasonable efforts to minimize such taxes to the extent permissible
under applicable law.

3.      GRANT OF LICENSES TO STAC

        3.1  GRANT OF MICROSOFT PATENT LICENSE. Subject to the terms and
conditions hereof, Microsoft hereby grants to Stac during the term of this
Agreement a worldwide, non-exclusive, non-transferable, non-sublicensable
(except as provided in the last sentence of this paragraph), royalty-free,
license under the Microsoft Patents, to make, have made, use, sell and have sold
Stac Licensed Products. This license shall provide Stac with the rights to
sublicense third parties to manufacture, replicate, distribute, license, sell,
use or otherwise engage in commercial activity authorized by Stac with respect
to the Stac Licensed Products. Nothing in this Section 3.1 shall be interpreted
to provide to Stac any implied or express license to sublicense to third parties
Microsoft Patents separate from the Stac Licensed Products.

        3.2  GRANT OF MICROSOFT DEVELOPER INFORMATION LICENSE. Subject to the
terms and conditions hereof, Microsoft hereby grants to Stac a worldwide,
non-exclusive, non-transferable, non-sublicensable, payment bearing (in
accordance with Section 3.2.1) license to utilize the Microsoft Developer
Information provided under Section 5 to make, have made, use, sell and have sold
Stac Licensed Products that utilize such Microsoft Developer Information.

                3.2.1 PAYMENT (IF ANY) OF MICROSOFT DEVELOPER INFORMATION FEES.
Only to the extent that Microsoft requires third parties to pay fees for its
licenses to the Microsoft Developer Information, Stac shall pay to Microsoft
substantially the same fees for such Microsoft Developer Information as charged
to other Named Accounts (defined below).

        3.3 GRANT OF CONVERSION LICENSE. To the extent any such license is
required, and only to the extent required, Microsoft hereby grants to Stac a
worldwide, non-exclusive, non-transferable, non-sublicensable, royalty-free
license under any Microsoft Intellectual Property Rights necessary for enabling
Stac to include a conversion mechanism in Stac Products for converting users'
data compressed by either DoubleSpace or DriveSpace into data compressed by such
Stac Products, and to distribute such conversion mechanism through its normal
business channels, and to authorize users to use such conversion mechanisms.


                                        8


<PAGE>   9
                                                                    CONFIDENTIAL

        3.4    RESERVATION OF RIGHTS.

                3.4.1 NO FOUNDRY RIGHTS. Without limiting the restrictions on
"private labelling" as provided in Section 1.14, Sections 3.1, 3.2 and 3.3 shall
not be interpreted as granting any rights to Stac to manufacture for third
parties products, wherein such products are designed by the third party without
substantial input of Stac and such products are essentially sold only to that
designing third party.

        3.5    CONSIDERATION.

                3.5.1 The foregoing licenses from Microsoft to Stac are hereby
granted as partial consideration for the licenses granted by Stac to Microsoft
pursuant to Sections 2.1, 2.2 and 2.3 above, and Stac shall have no obligation
to make any direct or indirect monetary payments to Microsoft for the right to
practice the licenses granted by Microsoft.

                3.5.2 In addition to the foregoing licenses granted from
Microsoft to Stac (Section 3.1, 3.2 and 3.3), that have been provided as partial
consideration for the licenses granted by Stac to Microsoft, Microsoft also
agrees to use DoubleSpace as its standard data compression technology for
compressing previously uncompressed hard disks in the initial retail release of
the operating system currently called Chicago and in the initial retail release
of MS-DOS 7.0 (when and if such product becomes commercially available).
Microsoft's commitment to utilize DoubleSpace as described above shall be (A)
for a period of twelve (12) months from the general commercial release of
Chicago or until the commercial availability of the next major release (e.g.,
version 4.0 to 4.1) of Chicago, whichever occurs later, and (B) for MS-DOS 7.0,
twelve (12) months from the general commercial release of MS-DOS 7.0 or until
the commercial availability of the next major release of MS-DOS 7 (e.g., version
7.0 to 7.1), whichever occurs later. This Section 3.5.2 shall not preclude
Microsoft from (i) supporting compressed hard disks created using DriveSpace
from MS-DOS 6.22, (ii) using DriveSpace or other compression technology in
products other than Chicago and MS-DOS 7.0 or (iii) replacing DoubleSpace in
Chicago or MS-DOS 7.0 during the restricted period if required to do so due to a
claim of patent infringement by a third party. Microsoft's agreement to utilize
DoubleSpace as described herein in Chicago and MS-DOS 7.0 for the periods set
forth in this Section is based on Stac accepting reduced monetary compensation
for the licenses granted by Stac to Microsoft herein.

                3.5.3 Notwithstanding the provisions of Section 3.5.1, in the
event that Stac sells Stac Licensed Products that are covered by one or more
claims of a Microsoft Patent under which Microsoft has an ongoing royalty
obligation to a third party, then Stac agrees (i) to use such patent in full
compliance with any agreement between Microsoft and the third party and,
notwithstanding anything contained in this Section 3 to the contrary, (ii) to
pay to Microsoft royalties with respect to sales of such Stac Licensed 

                                        9


<PAGE>   10
                                                                    CONFIDENTIAL

Products at the same royalty rate payable by Microsoft to such third party. Upon
written request, Microsoft agrees to advise Stac in writing of any Microsoft
Patents which are subject to ongoing royalty obligations to a third party.


                3.5.4 For a period of three (3) years after the Effective Date.
Microsoft agrees not to make commercially available any Microsoft Product which
has the sole function of performing real-time lossless data compression and
decompression on a hard disk (e.g., such as Stacker).

        3.6 AGREEMENT TO NEGOTIATE FUTURE LICENSES. Microsoft agrees to
negotiate in good faith with Stac regarding the grant of additional licenses
under Microsoft patents that are not included in the definition for Microsoft
Patents. Notwithstanding the foregoing, Stac acknowledges that Microsoft may
elect not to license certain strategic patents to any third party.

4.      PATENT MARKING

        4.1 Commencing on the Effective Date, each party, unless advised
otherwise by the other party, shall provide the appropriate patent notices with
respect to Stac Licensed Products and Microsoft Licensed Products, as
applicable, in accordance with this Agreement. Such products shall be marked
with the word "Patent" or the abbreviation "Pat." together with the number of
each patent which is applicable to the product, or when, from the character of
the article, this cannot be done, by fixing to it, or to the package where one
or more of them is contained, a label containing a like notice, or when this is
impracticable by reference in the product manual. Said marking or label shall be
in compliance with 35 U.S.C. Section 287(a).

        4.2 Should either party believe that the other is not marking its
products licensed hereunder in accordance with Section 4.1, it will so notify
the other party and the notified party will make reasonable efforts to correct
any defect at the next reasonable opportunity (e.g., at the time the product is
next revised).

5.      MOST FAVORED DEVELOPER RELATIONSHIP

        The provisions of this Section 5 shall extend until June 20, 1999 and
thereupon expire.

        5.1 DEVELOPER INFORMATION ACCESS. Microsoft acknowledges that it has
relationships with third parties who are "Named Accounts" to whom it assigns
technical evangelists and provides Microsoft Developer Information and developer
versions (beta versions) of its operating system products (including, but not
limited to MS-DOS, Windows, Windows for Workgroups, Windows NT, and Chicago) and
related development tools. Starting from the Effective Date of this Agreement,
and until June

                                       10


<PAGE>   11
                                                                    CONFIDENTIAL


20, 1999, Microsoft shall designate Stac as a Named Account and provide
information and beta versions to Stac in a form and in a time frame no less
favorable than other Named Accounts.

        5.2   CHICAGO BETA ACCESS. Notwithstanding Section 5.1, Microsoft agrees
to provide Stac with the Chicago beta developer kit (known as M6) within ten
(10) days after the later of (i) the Effective Date and (ii) the release of M6
to Named Accounts. Additionally, Microsoft agrees to provide Stac with the
opportunity to have a Stac Product, subject to reasonable quality testing by
Microsoft, included with other third party products which will be made available
to beta testers of the Chicago beta known as M7. Stac will also be eligible to
participate in Microsoft's "First Wave" and other comparable programs for
earlier adopters of Microsoft technology, with Microsoft's approval of Stac's
entry into such programs not to be unreasonably withheld.

        5.3   TECHNICAL LIAISON.

                5.3.1 Microsoft shall appoint a Microsoft employee to act as the
technical liaison for Microsoft ("Microsoft Technical Liaison"), having
authority to provide information and answers to Stac's suggestions, questions
and similar requests that he/she may be asked to provide to Stac, in a timely
manner so that Stac's development of Stac Products may be accomplished without
unreasonable delays. Stac shall also have reasonable access to other employees
of Microsoft for the purpose of asking questions and obtaining follow-up
information concerning the Microsoft Developer Information.

                5.3.2 The Microsoft Technical Liaison with a similarly appointed
Stac technical liaison will establish a meeting schedule, as mutually agreed
upon by the parties, the first meeting to occur within twenty (20) days after
the Effective Date, to discuss issues concerning technical, marketing and other
areas raised by either party. Each party shall designate their respective
technical liaisons and notify the other party within twenty (20) days of the
Effective Date.

        5.4    BUSINESS LIAISON.

                5.4.1 Microsoft shall appoint a Microsoft employee to act as the
business liaison for Microsoft ("Microsoft Business Liaison"), having authority
to provide information and answers regarding potential future business
opportunities for the mutual benefit of the two parties. Stac shall also have
reasonable access to other employees of Microsoft for the purpose of asking
questions and obtaining follow-up information concerning such business
opportunities.

                5.4.2 The Microsoft Business Liaison with a similarly appointed
Stac business liaison will establish a quarterly meeting schedule as practical
to occur in conjunction with meetings of Stac's Board of Directors, the first
meeting to occur within

                                       11


<PAGE>   12
                                                                    CONFIDENTIAL


forty-five (45) days after the Effective Date, to discuss future potential
business opportunities as raised by either party. Each party shall designate
their respective business liaisons and notify the other party within twenty (20)
days of the Effective Date.

6.      CONFIDENTIALITY

        6.1 CONFIDENTIALITY. During the term of this Agreement, Stac and
Microsoft both agree that the terms of this Agreement, any information regarding
Microsoft's or Stac's research and development and all information revealed to
Stac by Microsoft or by Microsoft to Stac in connection with this Agreement, and
designated in writing as confidential, shall be treated as proprietary and shall
be kept confidential. Stac and Microsoft shall take all reasonable steps to keep
such information confidential. Except as permitted by this Agreement or required
by law, Stac and Microsoft will not disclose such confidential information to
any third party.

        6.2 EXCEPTIONS. The obligations of confidentiality contained in Section
6.1 will not apply to the extent that it can be established by a party by
competent proof that such confidential information:

                (a) was already known to such party, other than under an
obligation of confidentiality, at the time of disclosure;

                (b) was generally available to the public or otherwise part of
the public domain at the time of its disclosure to such party (provided,
however, that a combination of features individually in the public domain shall
not fall within this exception unless the fact of such combination is also in
the public domain);

                (c) became generally available to the public or otherwise part
of the public domain after its disclosure and other than through any act or
omission of such party in breach of this Agreement;

                (d) was disclosed to such party, other than under an obligation
of confidentiality, by a third party who had no obligation to the other party
not to disclose such information to others;

                (e) is authorized for release in writing by the disclosing
party; or

                (f) is developed by such party completely independently of any
such received confidential information.

        6.3 TERMS OF AGREEMENT. The business terms of this Agreement shall be
entirely confidential, other than with respect to disclosures required to be
made to

                                       12


<PAGE>   13
                                                                    CONFIDENTIAL


regulatory agencies (such as the S.E.C. or the Internal Revenue Service) or as a
result of court process.

7.      REPRESENTATIONS AND WARRANTIES

        7.1 MUTUAL. Each party hereby represents and warrants:

                (a) CORPORATE POWER. Such party is duly organized and validly
existing under the laws of the state of its incorporation and has full corporate
power and authority to enter into this Agreement and to carry out the provisions
hereof.

                (b) DUE AUTHORIZATION. Such party is duly authorized to execute
and deliver this Agreement and to perform its obligations hereunder.

                (c) BINDING AGREEMENT. This Agreement is a legal and valid
obligation binding upon it and enforceable in accordance with its terms. The
execution, delivery and performance of this Agreement by such party does not
conflict with any agreement, instrument or understanding, oral or written, to
which it is a party or by which it may be bound, nor violate any law or
regulation of any court, governmental body or administrative or other agency
having jurisdiction over it.

8.      TERM; TERMINATION

        8.1 TERM. This Agreement shall become effective on the Effective Date,
and continue in effect, unless sooner terminated as elsewhere provided in this
Agreement, until the last to expire of the Stac Patents, the Other Stac Patents
and the Microsoft Patents ("Term of this Agreement").

        8.2 TERMINATION.

                (a) Either party may terminate this Agreement upon written
notice to the other party in accordance with Section 11.3 in the event of any
default in the payment of any money due hereunder or any material breach of this
Agreement by either party hereto, if the party receiving such notice fails to
cure such breach within thirty (30) days after notice by the non-breaching
party. Such termination shall be effective at the end of such thirty (30) days.
Waiver of any such default or material breach by either party hereto shall not
be construed as limiting any right of termination for a subsequent default or
material breach.

                (b) Either party may terminate the licenses granted to the other
party under this Agreement (subject to any rights the other party may have as a
licensee of intellectual property under the U.S. Bankruptcy Code) immediately
upon the other party's (i) becoming insolvent, (ii) commencing or having
commenced against it (without

                                       13


<PAGE>   14
                                                                    CONFIDENTIAL

dismissal within 60 days), any bankruptcy, insolvency, liquidation,
reorganization or similar proceeding under any U.S. or foreign law, (iii) making
an assignment for the benefit of its creditors, (iv) admitting in writing its
inability to satisfy its debts in the ordinary course of business, or (v) taking
an action resulting in or directed to ceasing, on a permanent basis, its
business or relevant operations.

        8.3 EFFECT OF TERMINATION. Upon completion of the Term of this Agreement
or any other termination of this Agreement, each party shall immediately, at its
own expense, return to or destroy all confidential information of the other
party in its possession. The termination of this Agreement shall in no event
relieve Microsoft of its obligation to make the payments provided under Sections
2.5.1 and 2.5.2 (and the related subsections thereto).

9.      PROPRIETARY RIGHTS

        9.1 STAC OWNERSHIP. Microsoft acknowledges and agrees that the only
rights transferring between the parties pursuant to this Agreement are license
rights specifically granted herein. Nothing in this Agreement is intended to
transfer title to any Stac Intellectual Property Rights or to take away from
Stac its ownership rights in the Stac Patents or the Other Stac Patents.

        9.2 MICROSOFT OWNERSHIP. Stac acknowledges and agrees that the only
rights transferring between the parties pursuant to this Agreement are license
rights specifically granted herein. Nothing in this Agreement is intended to
transfer title to any Microsoft Intellectual Property Rights or to take away
from Microsoft its ownership rights in the Microsoft Patents.

10.     LIMITATION OF LIABILITY

        10.1 DISCLAIMER OF WARRANTIES. EXCEPT AS EXPRESSLY PROVIDED HEREIN, EACH
PARTY HEREBY EXPRESSLY DISCLAIMS ANY AND ALL WARRANTIES OF ANY KIND OR NATURE,
WHETHER EXPRESS OR IMPLIED, RELATING TO THE STAC PATENTS, THE OTHER STAC
PATENTS, THE MICROSOFT PATENTS OR THE MICROSOFT DEVELOPER INFORMATION. EXCEPT AS
EXPRESSLY PROVIDED HEREIN, EACH PARTY FURTHER HEREBY EXPRESSLY DISCLAIMS ANY
EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE, OR THAT THE PRACTICE OF THE STAC PATENTS, THE OTHER STAC PATENTS, THE
MICROSOFT PATENTS OR MICROSOFT DEVELOPER INFORMATION, OR THE MANUFACTURING USE
OR SALE OF PRODUCTS WHICH INCORPORATE THE SUBJECT MATTER OF THE STAC PATENTS,
THE OTHER STAC PATENTS, THE MICROSOFT PATENTS OR THE MICROSOFT DEVELOPER
INFORMATION WILL NOT INFRINGE ANY PATENT, COPYRIGHT, TRADEMARK, OR OTHER 

                                       14


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                                                                    CONFIDENTIAL


RIGHTS OF THIRD PARTIES. Nothing contained in this Agreement shall be construed
as either a warranty or representation by either party as to the validity or
scope of the Stac Patents, the Other Stac Patents, the Microsoft Patents or the
Microsoft Developer Information. Neither party assumes any liability in respect
of any infringement of any patent or other right of third parties due to the
activities of the other party under this Agreement.

11.     MISCELLANEOUS

        11.1 WAIVER. A party's failure at any time to require the other party's
performance of any obligation under this Agreement shall not affect such party's
right to require subsequent performance of that obligation. Any waiver of any
breach of any provision of this Agreement shall not be construed as a waiver of
any continuing or succeeding breach of such provision, waiver or modification of
the provision itself or a waiver or any modification of any right under this
Agreement.

        11.2 NONASSIGNMENT. Except as provided in this Paragraph 11.2, the
rights and licenses granted herein are nonassignable. Any attempted assignment
of the rights or delegation of the obligations under this Agreement shall be
void without the prior written consent of the nonassigning or nondelegating
party (which may be withheld in the sole discretion of such party), except in
connection with the sale of all or substantially all of a party's assets (by
merger or otherwise). In the case of any permitted assignment under this
Paragraph, this Agreement and the relevant provisions shall be binding upon, and
inure to the benefit of, the successors, executors, representatives,
administrators and assigns of the parties hereto.

        11.3 NOTICES. All notices and other communications hereunder will be in
writing and will be deemed given if delivered personally or by facsimile
transmission (receipt verified), telexed, or sent by express courier service, to
the parties at the following addresses (or at such other address for a party as
will be specified by like notice; provided, that notices of a change of address
will be effective only upon receipt thereof):

        If to Stac:
        (two copies)

               STAC ELECTRONICS
               5993 Avenida Encinas
               Carlsbad, California 92008
               Telecopy: (619) 431-0880

               One copy marked "Attention: President" and the other marked
               "Attention: Chief Financial Officer"

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<PAGE>   16
                                                                    CONFIDENTIAL



        If to Microsoft:
        (two copies)

               MICROSOFT CORPORATION
               One Microsoft Way
               Redmond, Washington 98052-6399

               One copy marked "Attention: Treasurer," Telecopy: (206) 936-2625;
\              and the other marked "Attention: Law and Corporate Affairs," 
               Telecopy: (206) 869-1327

        11.4 SURVIVAL. Sections 1, 2.5.1, 2.5.2, 6, 7, 8, 9, 10, and 11 (and the
related subsections thereto) shall survive any termination of this Agreement
pursuant to Section 8. Sections 3 and 5 (and the related subsections thereto)
shall survive the termination of this Agreement pursuant to Section 8, unless
this Agreement is terminated as a result of Stac's breach and failure to cure.
Sections 2.1 and 2.3 (and the related subsections thereto) shall survive the
termination of this Agreement pursuant to Section 8, unless this Agreement is
terminated as a result of Microsoft's breach and failure to cure.

        11.5 SEVERABILITY. Whenever possible, each provision of the Agreement
will be interpreted in such manner as to be effective and valid under applicable
law, but if any provision of the Agreement is held to be prohibited by or
invalid under applicable law, such provision will be ineffective only to the
extent of such prohibition or invalidity, without invalidating the remainder of
the Agreement.

        11.6 GOVERNING LAW. Any and all disputes, controversies or claims
arising from or relating to the terms, conditions and/or provisions of this
Agreement, including, without limitation, any and all such disputes,
controversies or claims involving the interpretation and construction of this
Agreement, shall be resolved by reference to and in accordance with the laws of
the State of California as applied to contracts made and to be performed
entirely within the State of California. Any and all litigation regarding
disputes, controversies or claims arising from or relating to the terms,
conditions and/or provisions of this Agreement, including, without limitation,
any and all such disputes, controversies or claims involving or relating to the
interpretation and construction of this Agreement, shall be brought and
maintained in the federal or state courts, as appropriate depending on the
nature of the subject matter of such litigation, located within the County of
Los Angeles, California. The parties hereby expressly consent to the exclusive
jurisdiction of such courts with respect to any and all such litigation.

        11.7 SECTION HEADINGS. The heading to Sections and this Agreement are to
facilitate reference only and do not form a part of this Agreement, and shall
not in any way affect the interpretation hereof.

                                       16


<PAGE>   17
                                                                    CONFIDENTIAL

        11.8 ENTIRE AGREEMENT. The terms and conditions contained herein,
together with the Settlement Agreement and the Stock Pledge and Security
Agreement, constitute the complete, final and exclusive Agreement between the
parties, and supersede all previous agreements and understandings, whether oral
or written, between the parties hereto with respect to the subject matter
hereof. No modification, alteration, addition or change in the term hereof shall
be binding on either party hereto unless reduced to writing and duly executed by
the parties in the same manner as the execution of this Agreement.

        11.9 FORCE MAJEURE. Neither party will have any liability to the other
for a failure to perform under this Agreement, other than Microsoft's obligation
to pay money pursuant to Section 2.5.1 and 2.5.2, caused by circumstances over
which such party has no control, including, without limitation, strikes, floods,
riots or civil unrest, governmental actions, earthquakes, so long as the
affected party takes actions that are reasonable under the circumstances to
limit the delay in performance caused by such event.

        11.10 ATTORNEY'S FEES TO PREVAILING PARTY. In the event of any
litigation or other proceedings (including proceedings in bankruptcy) concerning
or related to this Agreement, the prevailing party, solely as between Stac and
Microsoft, shall be entitled to recover its reasonable attorneys' fees and
expenses incurred in connection with such proceedings.

        IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized representatives on the day and year first
above written.

MICROSOFT CORPORATION                   STAC ELECTRONICS


By:/s/ GREGORY B. MAFFEI                By: /s/ ROBERT A. MONSOUR
   ---------------------                    --------------------------------
   Gregory B. Maffei,                       Robert A. Monsour,
   Treasurer                                Vice President, Business Development

                                       17

<PAGE>   1

                                                                  EXHIBIT 10.12

                                LICENSE AGREEMENT

        THIS LICENSE AGREEMENT (the "Agreement") is made and entered into this
16th day of February, 1996("Effective Date"), by and between MICROSOFT
CORPORATION, a Washington corporation ("Microsoft"), with its principal offices
located at One Microsoft Way, Redmond, Washington 98052 and STAC,INC., a
California corporation ("Stac"), with its principle offices located at 12636
High Bluff Drive, Suite 400, San Diego, California 92130-2093.

                                    RECITALS

        WHEREAS, Stac is the owner of certain patents relating to lossless data
compression and decompression;

        WHEREAS, pursuant to a License Agreement dated June 20, 1994 (the
"Patent Agreement"), Stac has previously granted Microsoft certain license
rights to make, use and sell Microsoft computer software products which embody
certain patents owned by Stac;

        WHEREAS, Microsoft has developed a data compression and decompression
format known as "Microsoft Point-to-Point Compression" products;

        WHEREAS, Microsoft has developed certain software that performs data
compression and decompression in accordance with MPPC;

        WHEREAS, Stac desires to license to third parties Microsoft's MPPC-based
software or Stac software based on MPPC;

        NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, the parties hereby agree as follows:

                                    AGREEMENT

1.      DEFINITIONS. For purposes of this Agreement, the following terms,
        whenever initially capitalized, shall have the following meanings;

        (a)    "SPECIFICATION" shall mean the specification developed by
               Microsoft for the "Microsoft Point-to-Point Compression"
               technology attached hereto as Exhibit A (entitled "Microsoft PPP
               Data Compression"), and any modifications and additions to the
               specification. The Specification includes a description of the
               mechanism for negotiating and transporting compressed data
               packets using the MPPC Compression Format (defined below).

<PAGE>   2

        (b)    "MICROSOFT MPPC SOFTWARE" shall mean the Microsoft developed
               compression software which implements the MPPC Compression Format
               (defined below) and which is more fully described in the Exhibit
               B. "OPTIMIZED MICROSOFT MPPC SOFTWARE" shall mean the Microsoft
               MPPC Software which has been modified and optimized by Microsoft
               to run more efficiently, while Microsoft "UN-OPTIMIZED MICROSOFT
               MPPC SOFTWARE" shall mean the Microsoft MPPC Software as
               delivered to Stac by Microsoft on September 28, 1995 which has
               not been so modified and optimized.

        (c)    "STAC MPPC SOFTWARE" shall mean the Stac developed compression
               software that performs data compression in accordance with the
               MPPC Compression Format.

        (d)    "MPPC COMPRESSION FORMAT" shall mean the compression encoding
               format defined in the Specification as the encoding format for
               MPPC.

        (e)    "LZS SOFTWARE" shall mean that certain Stac developed software
               known as "LZS221-C" software as more fully described in Exhibit C
               attached hereto.

        (f)    "INTELLECTUAL PROPERTY RIGHTS" shall mean copyrights, patents,
               trade secrets, inventions, processes, know-how, or any other
               intellectual property rights.

        (g)    "OBJECT CODE" shall mean machine executable code in binary
               format.

        (h)    "SOURCE CODE" shall mean software in human-readable, high-level
               language or assembly language form, from which Object Code can be
               generated when compiled or assembled.

2.      LICENSE GRANT TO STAC FOR MPPC SOFTWARE.

        (a)    DELIVERY AND LICENSE GRANT FOR MICROSOFT MPPC SOFTWARE. On or
               before the Effective Date, Microsoft shall deliver to Stac one
               (1) copy of the Optimized Microsoft MPPC Software in both Source
               Code and Object Code forms. Stac acknowledges Microsoft delivered
               the Un-optimized Microsoft MPPC Software on September 28, 1995 in
               Source and Object Code forms. Effective upon such delivery and
               for the remainder of the term of this Agreement, Microsoft hereby
               grants to Stac, under all applicable Intellectual Property
               Rights, the following royalty-free, non-exclusive,
               non-transferable, worldwide license rights:

               (i)    To use, copy, modify, and create derivative works of the
                      Microsoft MPPC Software (including any updates or upgrades
                      delivered to Stac hereunder) in order to create the Stac
                      MPPC Software;


                                       2
<PAGE>   3

               (ii) To grant third parties the right to integrate into their
products ("MPPC Enabled Products") either (A) any Microsoft MPPC Software
(including any updates or upgrades delivered to Stac hereunder) which is
incorporated into Stac MPPC Software, or (B) Microsoft MPPC Software (including
any updates or upgrades delivered to Stac hereunder), or (C) Stac MPPC Software;

               (iii) To grant third parties the right to make, use copy,
distribute (directly or indirectly), license or sell, rent, or lease copies of
MPPC Enabled Products for the purpose of exchanging compressed data with any
product that implements the MPPC Compression Format.

               (iv) Microsoft hereby grants to Stac the right, under applicable
Microsoft patents, to perform data compression in the Stac MPPC Software in
accordance with the MPPC Compression Format.

All rights not expressly granted are expressly reserved by Microsoft.

        (b) DELIVERY AND LICENSE GRANT FOR TESTING TOOL. As soon as possible
after the Effective Date, Microsoft shall deliver the most current version (in
Object Code form) of the software tool described in the attached Exhibit D
("Test Tool") which will be used to verify and test the compliance of the Stac
MPPC Software with the Performance and Compatibility Standards required by
Section 3 of this Agreement. Microsoft will also provide Stac with any updated
versions of the Tool used by Microsoft during the term of this Agreement to
verify and test compliance of the Stac MPPC Software with the Performance and
Compatibility Standards. Microsoft hereby grants Stac a license to use the Test
Tool, in Object Code form, for the sole purpose of verifying and testing the
Stac MPPC Software for compliance with the Performance and Compatibility
Standards.

All rights not expressly granted are expressly reserved by Microsoft.

        (c)    LICENSE RESTRICTIONS AND CONDITIONS.

               (i) Stac shall market, distribute, and license the Un-optimized
MPPC Software on the same terms and conditions as it licenses it un-optimized
LZS Software, including without limitation, price. In connection with the
foregoing, Stac shall distribute and license the Un-optimized Microsoft MPPC
Software pursuant to distributor and end user license agreements which shall
conform substantially to the license agreements under which it licenses its LZS
Software.

               (ii) Stac will not remove any copyright, trademark or patent
notices that appear on, or are contained in, the Microsoft MPPC Software as
delivered to Stac. Stac shall cause to appear on the title page of each volume
of the Microsoft MPPC Software documentation distributed by Stac (if any), and
at any other location where any copyright, patent or trademark notice appears,
the Microsoft and third party copyright, patent or trademark notices that appear
in the release of the Microsft MPPC Software provided by


                                       3
<PAGE>   4

Microsoft. Stac shall contractually obligate any third parties to which it
grants rights to distribute the Microsoft MPPC Software to comply with the
foregoing.

               (iii) Stac may use third party contractors or consultants to
exercise the rights granted hereunder. In the event Stac utilizes a contractor
or consultant as described above. Stac shall execute written agreements with
such contractor or consultant sufficient to enable Stac and the contractor or
consultant to comply with the terms of this Agreement.

3.      STAC MPPC SOFTWARE.

        (a) INITIAL DEVELOPMENT OF STAC MPPC SOFTWARE. Stac shall develop and
deliver a beta version of the Stac MPPC Software to Microsoft within thirty (30)
days of Microsoft's delivery of the Optimized Microsoft MPPC Software to Stac.
Microsoft shall evaluate the Stac MPPC Software to determine whether it meets
the Performance Standards and Compatibility Standards described in the attached
Exhibit E. Microsoft shall notify Stac in writing of any failure(s) of the Stac
MPPC Software to meet the Performance Standards and Compatibility Standards,
within thirty (30) days of Microsoft's receipt of the beta version of the Stac
MPPC Software. Stac shall correct any such failure(s) and resubmit the Software
to Microsoft for re-evaluation within sixty (60) days of the end of Microsoft's
thirty day notification period. In the event the corrected version of the Stac
MPPC Software does not meet the Performance Standards and Compatibility
Standards or Stac does not deliver the corrected version within the sixty (60)
day period, Microsoft shall automatically have the rights set forth in Section
3(f), subject to paragraph (b) below.

        (b) ONE-TIME PERFORMANCE EXCEPTION. In the event the initial version of
Stac MPPC Software (including any corrections made during a permitted correction
period as provided in paragraph (a) above) delivered to Microsoft fails to meet
the Performance Standards by twenty percent or less, Stac shall have the right
to distribute that version of the Stac MPPC Software as permitted in Section 2.
Stac shall use reasonable efforts to improve the performance of such initial
version in the event Stac distributes it to third parties. However, in the event
Microsoft makes any updates or upgrades to the MPPC Compression Format and/or
Microsoft MPPC Software, Stac shall achieve complete compliance with the
Performance Standards (as well as the Compatibility Standards). If Stac fails to
do so, Microsoft shall automatically have the rights set forth in Section 3(f)
below.

        (c) FURTHER DEVELOPMENT OF STAC MPPC SOFTWARE. Following Microsoft's
confirmation that the initial Stac MPPC Software meets the Performance Standards
and Compatibility Standards as set forth in (a) above and subject to (b) above,
Stac shall maintain such Performance Standards and Compatibility Standards with
any updates or upgrades Microsoft makes to the MPPC Compression Format and/or
Microsoft MPPC Software. Microsoft will provide the applicable updated or
upgraded Source Code and Object Code of Microsoft MPPC Software (in beta (and
pre-beta if the code is sufficiently complete and stable) and final forms) and
any other materials reasonably


                                       4
<PAGE>   5

necessary to assist Stac in achieving such Standards, as soon as such software
and materials are available. Stac shall deliver the updated Source and Object
Code of Stac MPPC Software to Microsoft in beta and final release forms as soon
as possible upon completion of such releases. Stac shall use commercially
reasonable efforts to release the updated Stac MPPC Software in final form
simultaneously with Microsoft's release of the corresponding version of Windows
NT. In the event Stac does not release the final version of Stac.


                                       5
<PAGE>   6

MPPC Software compatible with an update or upgrade to Windows NT or such version
of Stac MPPC Software does not meet the Performance and Compatibility Standards
by the later of (i) four (4) months from Microsoft's initial beta release of an
update or upgrade or (ii) the commercial release of such Windows NT update or
upgrade, Microsoft shall automatically have the rights set forth in Section
3(f).


        (d) DISTRIBUTION LICENSE. Upon completion Stac shall provide Microsoft
with Stac MPPC Software, in Source and Object Code forms including accompanying
documentation for Microsoft's distribution to third parties for use by third
parties in creating products compatible with the MPPC Compression Format.
Microsoft shall license the Stac MPPC Software under terms and conditions
described in the attached Exhibit E (Microsoft will provide Stac with a copy of
any such agreements in their final, fully executed form within a reasonable time
following execution). In the event Microsoft desires to materially change any of
the terms and conditions in Exhibit F, Microsoft shall notify Stac of the
requested change and Stac shall have ten (10) business days to approve or
disapprove the change, provided Stac shall not unreasonably withhold its
acceptance. If Stac fails to approve or disapprove a given change within the ten
day period, the change shall be deemed approved. In the event Microsoft enters
into an agreement with a third party that contains a material change to a term
in Exhibit F which Stac has not accepted, such change shall not be binding on
Stac.

        (e) SPECIFICATION. Stac and Microsoft hereby agree and acknowledge that
each party shall have the right to reproduce and distribute the Specification to
any third party. Stac may submit the Specification to the Internet Engineering
Task Force (IETF) for adoption as a standard, provided Microsoft has approved in
advance the terms and conditions under which the IETF would adopt the
Specification, including the licensing of any intellectual property rights.

        (f) CONTINGENT LICENSE TO MICROSOFT MPPC SOFTWARE AND STAC MPPC
SOFTWARE. In the event (i) Stac fails to meet the Performance and Compatibility
Standards as set forth in (a) or (b) above, or (ii) no longer offers or
announces its intent to discontinue offering Microsoft MPPC Software or Stac
MPPC Software to third parties, or (iii) Stac is in material breach of any
provision of this Agreement (and fails to cure such breach within 30 days of
notice), then Stac shall be deemed to have granted to Microsoft, under all
applicable Stac Intellectual Property Rights, a perpetual, irrevocable,
royalty-free (as to Microsoft), non-exclusive, worldwide license to: (1) make,
use, modify, and create derivative works of the Stac MPPC Software for the
purpose of enhancing the compression functionality of the MPPC Compression
Format of the Stac MPPC Software and maintaining compatibility between the Stac
MPPC Software and Windows and Windows NT (hereafter, "Microsoft Modifications"),
but not to add any new functionality to the MPPC Compression Format that is
covered by a Stac patent, (2) licensing third parties to make, have made, use,
and sell the Microsoft MPPC Software in conjunction with their products under
the terms and conditions described in the attached Exhibit F (Microsoft will
provide Stac with a copy of any such agreements in their final, fully executed
form within a reasonable time following execution), (3) license and distribute
the Stac MPPC Software (including Microsoft Modifications) under terms and


                                       6
<PAGE>   7

conditions described in the attached Exhibit F (Microsoft will provide Stac with
a copy of any such agreements in their final, fully executed form within a
reasonable time following execution). In the event Microsoft desires to
materially change any of the terms and conditions in Exhibit F, Microsoft shall
notify Stac of the requested change and Stac shall have ten (10) business days
to approve or disapprove the change, provided Stac shall not unreasonably
withhold its acceptance. If Stac fails to approve or disapprove a given change
within the ten day period, the change shall be deemed approved. In the event
Microsoft enters into an agreement with a third party that contains a material
change to a term in Exhibit F which Stac has not accepted, such change shall not
be binding on Stac.

Microsoft may use third party contractors or consultants to exercise the rights
granted hereunder. In the event Microsoft utilizes a contractor or consultant as
described above, Microsoft shall execute written agreements with such contractor
or consultant sufficient to enable Microsoft and the contractor or consultant to
comply with the terms of this Agreement. All rights not expressly granted are
expressly reserved by Stac.

        (g) CONTINGENT LICENSE BACK TO STAC. In the event the license to
Microsoft set forth in paragraph 3(f) above becomes effective, Microsoft shall
be deemed to have granted to Stac, under all applicable Intellectual Property
Rights, a perpetual, irrevocable, royalty free, non-exclusive, worldwide license
to make, use, reproduce, distribute (directly or indirectly), and sell, rent or
lease copies of the Microsoft Modifications in conjunction with Stac MPPC
Software. Microsoft shall deliver all Microsoft Modifications to Stac, in Source
and Object Code forms, as soon as it delivers such Modifications to other third
parties. All rights not expressly granted are expressly reserved by Microsoft.

        (h) INCORPORATION OF LZS. Upon Stac's request, Microsoft will evaluate
the possibility of integrating LZS into Windows NT. If, in Microsoft's judgment,
it is commercially reasonable to include LZS support in Windows NT, the parties
shall negotiate in good faith the terms and conditions for distribution of LZS
in Windows NT.

4.      REPRESENTATIONS AND WARRANTIES.

        (a) CORPORATE POWER. Each party hereby represents and warrants that it
is duly organized and validly existing under the laws of the state of its
incorporation and has full corporate power and authority to enter into this
Agreement and to carry out the provisions hereof.

        (b) DUE AUTHORIZATION. Each party hereby represents and warrants that it
is duly authorized to execute and deliver this Agreement and to perform its
obligations hereunder.


                                       7
<PAGE>   8

        (c) BINDING AGREEMENT. Each party hereby represents and warrants that
this Agreement is a legal and valid obligation binding upon it and enforceable
with its terms. The execution, delivery and performance of this Agreement by
such party does not conflict with any agreement, instrument or understanding,
oral or written, to which it is a party or by which it may be bound, nor violate
any law or regulation of any court, governmental body or administrative or other
agency having jurisdiction over it.

        (d) MICROSOFT MPPC SOFTWARE. Microsoft hereby represents and warrants
that the Microsoft MPPC Software and Microsoft Modifications as developed by
Microsoft do not infringe the copyright or trademark rights of any third parties
and, to the best of Microsoft's knowledge, do not infringe the patent rights of
any third party.

        (e) STAC MPPC SOFTWARE. Stac hereby represents and warrants that the
Stac MPPC Software as developed by Stac does not infringe the copyright or
trademark rights of any third parties and, to the best of Stac's knowledge, does
not infringe the patent rights of any third party.

5.      INDEMNIFICATION. The parties agree to indemnify, defend, and hold each 
other and their successors, officers, directors and employees harmless from any
and all actions, causes of action, claims, demands, costs, liabilities, expenses
(including, without limitation, attorneys' fees) and damages arising out of or
in connection with any claim which, if true, would be a breach of the
representations set forth in Section 4 of this Agreement. If any action shall be
brought against either party (the "Claimant") in respect to which indemnity may
be sought from the other party (the "Non-Claiming Party") pursuant to the
provisions of this Section, the Claimant shall promptly notify the Non-Claiming
Party in writing, specifying the nature of the action and the total monetary
amount sought or other such relief as is sought therein. The Claimant shall
cooperate with the Non-Claiming Party at the Non-Claiming Party's expense in all
reasonable respects in connection with the defense of any such action. The
Non-Claiming Party may, upon written notice thereof to Claimant, undertake to
conduct all proceedings or negotiations in connection therewith, assume the
defense thereof, and if it so undertakes, it shall also undertake all other
required steps or proceedings to settle or defend any such action; including the
employment of counsel which shall be reasonably satisfactory to Claimant, and
payment of all expenses. Claimant, at its own expense, shall have the right to
employ separate counsel and participate in the defense thereof. The Non-Claiming
Party shall reimburse Claimant upon demand for any payments made or loss
suffered by it at any time after the date hereof, based upon (i) the final
judgment of any court of competent jurisdiction, or (ii) pursuant to a bona fide
compromise or settlement of claims, demands, or actions as agreed to by the
Non-Claiming Party, in respect to any damages to which the foregoing relates.

6.      DISCLAIMER; LIMITATION OF LIABILITY. EXCEPT AS OTHERWISE PROVIDED UNDER
THIS AGREEMENT, THE SOFTWARE LICENSED BY EACH PARTY TO THE OTHER PURSUANT TO
THIS AGREEMENT IS PROVIDED "AS IS" WITHOUT WARRANTY OF ANY KIND. ANY
REPRESENTATIONS OR WARRANTIES MADE BY EITHER PARTY TO ITS CUSTOMERS, EXPRESS OR


                                       8
<PAGE>   9
IMPLIED BY LAW OR OTHERWISE, REGARDING INTELLECTUAL PROPERTY ARE THE SOLE
RESPONSIBILITY OF SUCH PARTY. EACH DISCLAIMS ALL OTHER WARRANTIES, EITHER
EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO IMPLIED WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE. IN NO EVENT SHALL EITHER
PARTY BE LIABLE FOR ANY DAMAGES WHATSOEVER (INCLUDING WITHOUT LIMITATION,
CONSEQUENTIAL, INCIDENTAL, INDIRECT, DIRECT, ECONOMIC, PUNITIVE, LOSS OF
BUSINESS PROFITS, BUSINESS INTERRUPTION, LOSS OF BUSINESS INFORMATION, OR OTHER
PECUNIARY LOSS) EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES.

7.      TERM AND TERMINATION.

        (a) TERM. This Agreement shall be effective as of the Effective Date and
shall continue in force until the last to expire of any Stac patent rights
applicable to MPPC Compression Format, or until earlier terminated in accordance
with Section 7(b).

        (b) TERMINATION. In the event that a party commits any of the following
events of default, the non-defaulting party may terminate this Agreement:

               (i) if either party materially fails to perform or comply with
this Agreement or any provision hereof, including without limitation failure to
promptly file required reports or pay any amount(s) due hereunder;

               (ii) if either party admits in writing its inability to pay its
debts as they mature, or makes an assignment for the benefit of creditors; or

               (iii) if a petition under any bankruptcy act, receivership
statute, or the like, as they now exist, or as they may be amended, is filed by
either party; or if such a petition is filed by any third party, or an
application for a receiver of either party is made by anyone and such petition
or application is not resolved favorably to such party within sixty (60) days.

Termination shall be effective thirty (30) days after written notice of
termination to either party if such party's defaults have not been cured within
such thirty (30) day period. The rights and remedies of the defaulting party
provided in this Section shall not be exclusive and are in addition to any other
rights and remedies provided by law or this Agreement.

        (c) RIGHTS AND OBLIGATIONS FOLLOWING TERMINATION.

               (i) BY MICROSOFT. In the event that Microsoft terminates this
Agreement pursuant to Section 7(b) above, Stac shall immediately: (A) cease all
reproduction, distribution and use of the Microsoft MPPC Software (except as
licensed by Stac from Microsoft as part of and pursuant to an end user license
agreement for the Windows NT product that is available via Microsoft's normal
distribution channels), (B) return all


                                       9
<PAGE>   10

copies of Microsoft MPPC software which have been delivered to it by Microsoft
under this Agreement, and (C) deliver a list of every third party to whom Stac
owes a support obligation who has licensed the Microsoft MPPC Software and/or
Stac MPPC Software as of the date of termination. From and after such
termination, Stac shall not use internally nor employ the Microsoft MPPC
Software. Existing license agreements with third parties for the MPPC Software
entered into by Stac prior to the termination of this Agreement shall not be
affected by such termination.

               (ii) SURVIVAL. Sections 1, 3(d), 3(f), 3(g), 5, 6, 7(c), 8, 9,
and 10 shall survive any termination or expiration of this Agreement. In the
event Stac terminates this Agreement pursuant to Section 7(b) above, Section 2
shall also survive for the balance of the term of the Agreement.

8.      CONFIDENTIALITY.

        (a) Each party expressly undertakes to retain in confidence the terms
and conditions of this Agreement, and all other non-public information and
know-how disclosed to the each other that has been designated as proprietary
and/or confidential or that, by the nature of the circumstances surrounding the
disclosure, ought in good faith to be treated as proprietary and/or confidential
(the "Confidential Information"), and will make no use of such information and
know-how except under the terms and during the existence of this Agreement;
provided that each party may disclose the terms and conditions of this Agreement
to its immediate legal and financial consultants as required in the ordinary
course of that party's business. Each party shall use its best efforts to
protect the Confidential Information, which precautions shall be at least as
great as the precautions it takes to protect its own confidential information.
Each party may disclose Confidential Information only to its employees on a
"need-to-know" basis. Each party may disclose Confidential Information as
required by government or judicial order, provided each party gives the other
party prompt notice of such order and complies with any protective order (or
equivalent) imposed on such disclosure. Each party shall notify the other party
promptly upon the discovery of any unauthorized use or disclosure of
Confidential Information, and will cooperate with the other party in every
reasonable way to assist the other party in regaining possession of such
Confidential Information and to prevent future unauthorized use or disclosures.

        (b) Confidential Information shall not include that information defined
as Confidential Information above which: (i) entered the public domain without
the receiving party's breach of any obligation owed to the disclosing party
under this Agreement by the disclosing party, (ii) became known to the receiving
party prior to the disclosure of such information, (iii) became known to the
receiving party from a source other than the disclosing party other than by the
breach of an obligation of confidentially owed under this Agreement, (iv) was
disclosed to a thirty party without any obligation of confidence, or (v) was
independently developed by the receiving party.


                                       10
<PAGE>   11

        (c) Each party acknowledges that monetary damages may not be a
sufficient remedy for unauthorized disclosure or use of Confidential Information
and that each party may seek, without waiving any other rights or remedies, such
injunctive or equitable relief as may be deemed proper by a court of competent
jurisdiction.

        (d) The terms of confidentiality under this Agreement shall not be
construed to limit either party's right to independently develop or acquire
products without use of the other party's Confidential Information. Further,
either party shall be free to use for any purpose the residuals resulting from
access to or work with such Confidential Information, provided that such party
shall maintain the confidentiality of the Confidential Information as provided
herein, except to the extent that disclosure is inherent from selling, licensing
or otherwise disposing of a product using or incorporating such residuals. The
term "residuals" means information in non-tangible form, which may be retained
by persons who have had access to the Confidential Information, including ideas,
concepts, know-how or techniques contained therein. Neither party shall have any
obligation to limit or restrict the assignment of such persons or to pay
royalties for any work resulting from the use of residuals or the sale of
products using or incorporating residuals. However, the foregoing shall not be
deemed to grant to either party a license under the other party's copyrights or
patents.

9.      ATTORNEYS' FEES. If either party employs attorneys to enforce any rights
arising out of or relating to this Agreement, the prevailing party shall be
entitled to recover its reasonable attorneys' fees, costs and other expenses.

10.     NO FRANCHISE. Neither this Agreement, nor any terms and conditions
contained herein, shall be construed as creating a partnership, joint venture or
agency relationship or as granting a franchise as defined in the Washington
Franchise Investment Protection Act, RCW 19.100, as amended, or 16 CFR Section
436.2(a).

11.     NOTICES AND REQUESTS. All notices, authorizations, and requests in
connection with this Agreement shall be in writing and will be deemed given if
delivered personally or by facsimile transmission (receipt verified), telexed,
sent by U.S. mails, postage prepaid, certified or registered, return receipt
requested, or sent by express courier service, to the parties at the following
addresses (or to such other address as the party to receive the notice or
request so designates by written notice to the other):

STAC (TWO COPIES):       STAC, INC.
                         12636 High Bluff Drive, Suite 400
                         San Diego, California 92130-2093
                         Fax: (619) 794-4572

                         One copy marked "Attention: President" and the other
                         marked "Attention: Vice President, Finance"

MICROSOFT (TWO COPIES):  MICROSOFT CORPORATION
                         One Microsoft Way


                                       11
<PAGE>   12

                         Redmond, WA 98052-6399

                         One copy marked "Attention: Sr. Vice President,
                         Business Systems" (Fax: (206) 936-2625) and the other
                         marked "Attention: Law and Corporate Affairs" (Fax:
                         (206) 869-7409).

12.     ASSIGNMENT. Except as provided in this Section 12, the rights and
licenses granted herein are non-assignable. Any attempted assignment of the
rights or delegation of the obligations under this Agreement shall be void
without the prior written consent of the non-assigning or non-delegating party
(which may be withheld in the sole discretion of such party), except in
connection with the sale of all or substantially all of a party's assets (by
merger or otherwise). In the case of any permitted assignment under this Section
12, this Agreement and the relevant provisions hereof shall be binding upon, and
inure to the benefit of, the successors, executors, representatives,
administrators and assigns of the parties hereto. Notwithstanding the foregoing,
Stac may "spin off" a Stac business unit into a separate corporate entity
("NewCo"), and provided NewCo assumes all the Stac obligations and has all
necessary rights and authority to (including all necessary rights under present
and future Stac patents) provide to Microsoft all the rights described in this
Agreement, Stac may assign all of its rights and obligations relating to this
Agreement to such NewCo.


                                       12
<PAGE>   13

13.     SEVERABILITY. Whenever possible, each provision of this Agreement will
be interpreted in such manner as to be effective and valid under applicable law,
but if any provision of the Agreement is held to be prohibited by or invalid
under applicable law, such provision will be ineffective only to the extent of
such prohibition or invalidity, without invalidating the remainder of the
Agreement.

14.     ENTIRE AGREEMENT. This Agreement does not constitute an offer by either
party and it shall not be effective until signed by both parties. Upon execution
by both parties, this Agreement, together with the Patent Agreement, shall
constitute the entire agreement between the parties with respect to the subject
matter thereof and merge all prior and contemporaneous communications. They
shall not be modified except by a written agreement signed on behalf of Stac and
Microsoft by their respective duly authorized representatives. Unless agreed to
in a separate writing signed by both parties, any statement appearing as a
restrictive endorsement on a check or other document which purports to modify a
right, obligation or liability of either party shall be of no force and effect.

15.     WAIVER. No waiver of any breach of any provision of this Agreement shall
constitute a waiver of any prior, concurrent or subsequent breach of the same or
any other provisions hereof, and no waiver shall be effective unless made in
writing and signed by an authorized representative of the waiving party.


                                       13
<PAGE>   14

16.     SECTION HEADINGS. The section headings used in this Agreement and the
attached Exhibits are intended for convenience only and shall not be deemed to
supersede or modify any provisions.

        IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date set forth above. All signed copies of this Agreement shall be deemed
originals.

MICROSOFT CORPORATION                           STAC, INC.

/s/  [SIG]                                      /s/ JOHN R. WITZEL
- ---------------------------                     -----------------------------
By                                              By

/s/ John Balgunas                               John R. Witzel
- ---------------------------                     -----------------------------
Name (Print)                                    Name (Print)

Business Manager                                Vice President, Finance
- ---------------------------                     -----------------------------
Title                                            Title

2/19/96                                          Feb 16, 1996
- ---------------------------                     -----------------------------
Date                                             Date


                                       14
<PAGE>   15

                                    EXHIBIT A

                         MICROSOFT PPP DATA COMPRESSION

                                 JUNE 22, 1995


                                       15
<PAGE>   16
<TABLE>


<S>                                                                                  <C>
Introduction........................................................................

Microsoft PPC Compression Protocol..................................................
        Introduction................................................................
        Configuration Option Format.................................................
               Description..........................................................
        MPPC Packets................................................................
               Padding..............................................................
               Reliability and Sequencing...........................................
               Data Expansion.......................................................
               Packet Format........................................................
        Description of Compressor and Encoding......................................
               Literal Encoding.....................................................
               Copy Tuple Encoding..................................................
        Synchronization.............................................................
Microsoft Implementation of Stac LZS Compression over a Point-to-Point Link.........
        Introduction................................................................
        Microsoft Windows Implementation of Configuration Option Negotiation........
        Modifications to Stac LZS Configuration Option..............................
        Microsoft Coherency.........................................................
        Synchronization.............................................................
        References..................................................................
</TABLE>


                                       16
<PAGE>   17

INTRODUCTION

This document describes Microsoft PPP Data Compression related specifications.
There are two main parts to this document.

1.      Microsoft Point-to-Point Compression (MPPC) Protocol. This is supported
        by Windows 95 and Windows NT family of products.

2.      Microsoft Implementation of Stac LZS Compression over a Point-to-Point
        link. This is supported by Windows 95 product.


                                       17
<PAGE>   18

MICROSOFT PPC COMPRESSION PROTOCOL

INTRODUCTION

The Point-to-Point Protocol (PPP) [1] provides a standard method for
transporting multi-protocol datagrams over point-to-point links. The PPP
Compression Control Protocol [2] provides a method to negotiate and utilize
compression protocols over PPP encapsulated links. This document describes the
use of the Microsoft Point to Point Compression protocol (also referred to as
MPPC in the document) for compressing PPP encapsulated packets.

The Microsoft Point to Point Compression scheme is a means of representing
arbitrary Point to Point Protocol (PPP) packets in a compressed form. MPPC is
lossless, because translating into and out of MPPC causes no loss of
information. MPPC is real-time because it favors speed of compression and
decompression over achieving maximum compression, and it has the ability to
compress on-the-fly.

The MPPC scheme uses an LZ based algorithm with a sliding window history buffer.

The MPPC scheme keeps a continuous history so that after 8K of data has been
transmitted compressed there is always 8K of history to use for compressing,
except when the history is flushed.

The MPPC scheme requires only 8+8=16K of space for send and receive channels.
This makes the scheme suitable for servers supporting large number of PPP
clients.

The MPPC scheme allows for encryption to be incorporated within the same packet
encapsulation. Detailed information of encryption over PPP links is not
available at this time.


                                       18
<PAGE>   19

CONFIGURATION OPTION FORMAT

DESCRIPTION

The CCP Configuration Option negotiates the use of MCCP on the link. By default
or ultimate disagreement, no compression is used.

A summary of the MCCP Configuration Option format is shown below. The fields are
transmitted from left to right.


0                   1                   2                     3

0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 
- ----------------------------------------------------------------
Type                  Length                      Supported Bits
- ----------------------------------------------------------------
Supported Bits
- ----------------------------------------------------------------


Type

        18

Length

        6

Supported Bits

This field is 4 octets, most significant octet first. The sixth bit in the least
significant octet set to 1 indicates desire to negotiate MPPC. The fifth bit in
the least significant octet set to 1 indicates desire to negotiate encryption.
The lower 2 octets of this field are reserved.


                                       19
<PAGE>   20

MPPC PACKETS

Before any MPPC packets may be communicated, PPP must reach the Network-Layer
Protocol phase, and the CCP Control Protocol must reach the Opened state.

Exactly one MPPC datagram is encapsulated in the PPP Information field, where
the PPP Protocol field indicates type hex 00FD (compressed datagram).

The maximum length of the MPPC datagram transmitted over a PPP link is the same
as the maximum length of the Information field of a PPP encapsulated packet.

Only packets with PPP Protocol numbers in the range hex 0021 to hex 00FA are
compressed. Other PPP packets are always sent uncompressed.

        PADDING

The MPPC packets require the negotiation of the Self-Describing-Padding
Configuration Option [3] at LCP Link Establishment.

        RELIABILITY AND SEQUENCING

The MPPC scheme does not require a reliable link. Instead, it relies on a 12 bit
coherency count in each packet to keep the history buffers synchronized. If the
history buffers do not remain synchronized a Compress-Reject packet will be sent
to resynchronize the history buffer.

MPPC expects the packets to be delivered in sequence, otherwise history buffer
re-synchronization will not occur.

MPPC MAY be used over a reliable link, as described in "PPP Reliable
Transmission" [4], but this typically just adds unnecessary overhead since the
coherency count is all that is needed.

        DATA EXPANSION

Any packet which is expanded is sent uncompressed.


                                       20
<PAGE>   21

        PACKET FORMAT

0                   1                   2                   3
- ----------------------------------------------------------------
0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1
- ----------------------------------------------------------------
     PPP Protocol              A  B C D    Coherency Count
- ----------------------------------------------------------------
     Compressed Data...
- ----------------------------------------------------------------

PPP Protocol

The PPP Protocol field is described in the Point-to-Point Protocol Encapsulation
[1].

When the MPPC compression protocol is successfully negotiated by the PPP
Compression Control Protocol [2], the value is hex OOFD. This value MAY be
compressed when Protocol-Field Compression is negotiated.

Bit A

This bit indicates that the history buffer has just been flushed before this
packet was generated. Thus, this packet can ALWAYS be decompressed because it is
not based on any previous history. This bit is typically sent to inform the peer
that it has flushed it's history buffer and that the peer can accept this packet
and resynchronize. This bit is referred to as FLUSHED bit in this document.

Bit B

This bit indicates that the packet was moved to the front of the history buffer
typically because there was no room at the end of the history buffer. This bit
is used to tell the decompressor to set it's current position in the history
buffer back to the beginning.

Bit C

This bit is used to indicate that the packet is compressed. Packets may be
compressed, encrypted, or both compressed and encrypted.

Bit D

This bit is used to indicate that the packet is encrypted.

Coherency Count

The coherency count is used to assure that the packets are sent in proper order
and that no packet has been dropped. This count is always increased by 1 and
NEVER decreases or goes back. When all bits are 1, the count returns to 0.

Compressed Data

The compressed data begins with the protocol field. For example, an IP packet
may contain 0021 followed by an IP header. The compressor will first try to
compress the 0021 protocol field and then move on to the IP header.


                                       21

<PAGE>   22

If the packet contains header compression, the MPPC compressor is applied AFTER
header compression is performed and MUST be applied to the compressed header as
well. For example, if a packet contained the protocl 002d for a compressed
TCP/IP header, the compressor would first attempt to compress hex 002d and then
it would attempt to compress the compressed Van-Jacobsen TCP/IP header.

DESCRIPTION OF COMPRESSOR AND ENCODING

The compressor runs through the length of the frame producing as output a
Literal (byte to be sent uncompressed) or a [Offset, Length of Match] Copy
tuple, where Offset is the number of bytes before in the history where the match
lies and Length of Match is the number of bytes to copy form the location
indicated by Offset.

For example, consider the following string:

0         1         2         3         4
012345678901234568790123456789012345678901234567890
for whom the bell tolls, the bell tolls for thee.

The compressor would produce:

        For whom the bell tolls, [16,15] [40,4] [36,4]e.

The Literal and Copy tuple tokens are then encoded according to the MPPC
encoding scheme. 22


                                       22
<PAGE>   23

        LITERAL ENCODING

Literals are bytes sent uncompressed. If the value of the Literal is below hex
80, it is encoded with its value itself. If the Literal has value greater than
hex 7F it is sent as bits 10 followed by the lower 7 bits of the Literal.

Examples:

Literal hex 56 is shipped as 01010110

Literal hex E7 is shipped as 101100111

        COPY TUPLE ENCODING

Copy tuples represent compressed data. A tuple has two elements, the Offset and
Length of match. The Offset is encoded before the Length of Match.

OFFSET ENCODING

Offset values less than 64 are encoded as bits 1111 followed by the lower 6 bits
of the value.

Offset values between 64 and 320 are encoded as bits 1110 followed by the lower
8 bits of the computation (value - 64).

Offset values 320 or greater are encoded as bits 110 followed by the lower 13
bits of the computation (value - 320).

Examples

Offset value of 3 is encoded as:    1111 000011

Offset value of 128 is encoded as:  1110 01000000

Offset value of 1024 is encoded as: 110 0001011000000

LENGTH OF MATCH ENCODING

Length of 3 is encoded with bit 0.

Length values from 4 to 7 are encoded as 10 followed by lower 2 bits of the
value.

Length values from 8 to 15 are encoded as 110 followed by lower 3 bits of the
value.

Length values from 16 to 31 are encoded as 1110 followed by lower 4 bits of the
value.

Length values from 32 to 63 are encoded as 11110 followed by lower 5 bits of the
value.

Length values from 64 to 127 are encoded as 111110 followed by lower 6 bits of
the value.

Length values from 128 to 255 are encoded as 1111110 followed by lower 7 bits of
the value.

Length values from 256 to 511 are encoded as 11111110 followed by lower 8 bits
of the value.

Length values from 512 to 1023 are encoded as 111111110 followed by lower 9 bits
of the value.


                                       23
<PAGE>   24

Length values from 1024 to 2047 are encoded as 1111111110 followed by lower 10
bits of the value.

Length values from 2048 to 4095 are encoded as 11111111110 followed by lower 11
bits of the value.

Length values from 4096 to 8191 are encoded as 111111111110 followed by lower 12
bits of the value.

The largest Length value that can be encoded is 8191.

Examples

Length of 15 is encoded as:                 110 111

Length of 120 is encoded as:                        111110 111000

Length of 4097 is encoded as:               111111111110 000000000001

SYNCHRONIZATION

Packets may be lost during transfer. If the decompressor maintained coherency
count does not match the coherency count received in the compressed packet, the
decompressor drops the packet and sends a CCP Reset-Request packet. The
compressor on receiving this packet flushes the history buffer and sets the
FLUSHED bit in the next frame it sends. The decompressor on receiving a packet
with its FLUSHED bit set, flushes its history buffer and sets its coherency
count to the one shipped by the compressor in that packet. Thus synchronization
is acheived without a Reset-Ack packet.


                                       24
<PAGE>   25

MICROSOFT IMPLEMENTATION OF STAC LZS COMPRESSION OVER A POINT-TO-POINT LINK

INTRODUCTION

The Windows 95 Point-to-Point Protocol (PPP) [1] driver supports two compression
algorithms: Microsoft Point-to-Point Compression (Microsoft PPC) and Stac(R)
LZS(TM) compression.

The compression algorithms are negotiated using the PPP Compression Control
Protocol (CCP) [2] which provides a method to negotiate and utilize compression
protocols over PPP encapsulated links.

The Stac LZS data compression algorithm for PPP links is described in a draft
IETF RFC [5]

This document describes the implementation and use of the Stac LZS compression
protocol in Microsoft Windows 95. It is provided to allow vendors to
interoperate with Windows 95 so it focuses on the differences between the
existing Stac RFC and the Windows 95 implementation. The reader is encouraged to
reference the Stac RFC before reading this document.

Microsoft uses the compression algorithm described in the Stac RFC but uses a
different coherency mechanism for guaranteeing that the compressor and
decompressor are synchronized.

Microsoft Point-to-Point Compression protocol is described earlier in this
document.


                                       25
<PAGE>   26

MICROSOFT WINDOWS IMPLEMENTATION OF CONFIGURATION OPTION NEGOTIATION

CCP Configuration Options allow negotiation of compression algorithms and their
parameters. CCP uses the same Configuration Option format defined for LCP [1],
with a separate set of Options.

Configuration Options, in this protocol, indicate algorithms that the receiver
is willing or able to use to decompress data sent by the sender. Microsoft
Windows 95 will offer to decompress option 18 (Microsoft PPC) and option 17
(Stac LZS). Microsoft Windows NT 3.5x will offer to decompress option 18 only.

If multiple options are offered, Windows will send a Configure-Reject to reject
all but the first supported option - Microsoft PPC or Stac LZS - offered by the
peer. Windows will not validate the values in the option until a new
Configure-Request with only the single preferred option is received.

When a Configure-Request with a single recognized option is received, Windows
will validate the values in the request. If the values in the request are not
acceptable, a Configure-NAK will be sent with the option modified appropriately.
The Configure-NAK will contain only those options that will be acceptable. A new
Configure-Request should be sent with only the single preferred option, adjusted
as specified in the Configure-Nak.

Windows 95 can negotiate different compression options for compression and
decompression. However, Windows 95 will terminate the compression protocol if it
fails to negotiate either compression or decompression. For example: it is
acceptable to have Stac LZS in one direction and Microsoft PPC in the other
direction but it is not acceptable to have Stac LZS in one direction and no
compression in the other direction.


                                       26
<PAGE>   27

MODIFICATIONS TO STAC LZS CONFIGURATION OPTION

The CCP Stac LZS Configuration Option negotiates the use of Stac LZS on the
link. By default or ultimate disagreement, no compression is used.

A summary of the Stac LZS Configuration Option format is shown below. The fields
are transmitted from left to right.

0                   1                   2                   3
- ---------------------------------------------------------------
0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1
- ---------------------------------------------------------------
  Type              Length              History Count
- ---------------------------------------------------------------
    Check Mode
- --------------------
Type

        17

Length

        5

History Count

The History Count field is two octets, most significant octet first, and
specifies the maximum number of Compression Histories.

The value 0 indicates that the implementation expects the peer to reset the
Compression History at the beginning of every packet.

The value 1 is used to indicate that only one history is maintained.

Other valid values range from 2 to 65535. The peer is not required to send as
many histories as the implementation indicates that it can accept.

Windows 95 uses a history count of 1.

Check Mode

The Check Mode indicates support of LCB, CRC, Sequence checking or Microsoft
coherency

        0 None (default)
        1 LCB
        2 CRC
        3 Sequence Number
        4 Microsoft Coherency (Microsoft implementations only support this
option)


                                       27
<PAGE>   28

MICROSOFT COHERENCY

When Check Mode 4 (Microsoft Coherency) is negotiated, the packet format is
different from the format described in the Stac RFC [5]. The format is described
below.

0                   1                   2                   3
0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1 2 3 4 5 6 7 8 9 0 1
- ---------------------------------------------------------------
         PPP Protocol          A  B C D Coherency Count
- ---------------------------------------------------------------
        Compressed Data...
- ---------------------------------------------------------------

PPP Protocol

The PPP Protocol field is described in the Point-to-Point Protocol Encapsulation
[1].

When a compression protocol is successfully negotiated by the PPP Compression
Control Protocol [2], the value is hex 00FD. This value MAY be compressed when
Protocol-Field-Compression is negotiated.

Bit A - PACKET_FLUSHED

This bit indicates that the history buffer has just been flushed before this
packet was generated. Thus, this packet can ALWAYS be decompressed because it is
not based on any previous history. This bit is typically sent to inform the peer
that it has flushed it's history buffer and that the peer can accept this packet
and resynchronize.

Bit B

This bit is not used with Stac LZS compression.

Bit C - PACKET_COMPRESSED

This bit is used to indicate that the packet is compressed.

Bit D

This bit is not used with Stac LZS compression.

Coherency Count

The coherency count is used to assure that the packets are sent in proper order
and that no packet has been dropped. This count is always increased by 1 and
NEVER decreases or goes back. When all bits are 1, the count returns to 0.

The coherency count is 12 bits so the decompressor must handle the rollover
case.

Compressed Data

The compressed data begins with the protocol field. For example, an IP packet
may contain 0021 followed by an IP header. The compressor will first try to
compress the 0021 protocol field and then move on to the IP header.


                                       28
<PAGE>   29

SYNCHRONIZATION

Packets may be lost during transfer. If the decompressor maintained coherency
count does not match the coherency count received in the compressed packet or if
the decompressor detects that a received packet is corrupted, the decompressor
drops the packet and sends a CCP Reset-Request packet. The compressor on
receiving this packet flushes the history buffer and sets the PACKET_FLUSHED bit
in the next frame it sends. The decompressor on receiving a packet with its
PACKET_FLUSHED bit set, flushes its history buffer and sets its coherency count
to the one shipped by the compressor in that packet. Thus synchronization is
achieved without a Reset-Ack packet.


                                       29
<PAGE>   30

REFERENCES

[1] Simpson, W., Editor, "The Point-to-Point Protocol (PPP)", STD 51, RFC 1661,
Daydreamer, July 1994.

[2] Rand. D "The PPP Compression Control Protocol (CCP)" work in progress.

[3] Simpson. W.A., "PPPLCP Extensions", work in progress.

[4] Rand, D., "PPP Reliable Transmission", RFC 1663, Novell, July 1994.

[5] Lutz, R., "Stac LZS Compression", Stac Electronics, Sept 1994.


                                       30
<PAGE>   31

                                    EXHIBIT B

                                  MPPC SOFTWARE

There are two files of interest: compress.h and compress.c

There are five functions in the compression library:

//* compress()
//
// Function: Main compression function.
//
// Parameters:
//
// IN CurrentBuffer -> points to NDIS_WAN_PACKET with data to compress
// OUT CompOutBuffer -> points to NDIS_WAN_PACKET to compress data to 
// IN CurrentLength -> points to Length of data to compress
// IN context ->connection compress context
//
// Returns: Compression result bits one or more of PACKET_FLUSHED,
//          PACKET_AT_FRONT, PACKET_COMPRESSED
//
// UCHAR
   compress (
        UCHAR *CurrentBuffer,
        UCHAR *CompOutBuffer,
        ULONG *CurrentLength,
        SendContext *context);

//* decompress()
//
// Function: de-compression function.
//
// Parameters: IN inbuf -> points to data to be uncompressed
// IN inlen ->length of data
// IN start -> flag indicating whether to start with a clean history buffer 

// OUT output->decompressed data
// OUT outlen->length of decompressed data
// IN context->connection decompress context
//
// Returns: TRUE if decompress was successful
//          FALSE if it wasnt
//
int
decompress(
   UCHAR *inbuf,
   int inlen,
   int start,
   UCHAR **output,
   int *outlen,
   RecvContext *context);

//*getcontextsizes()


                                       31
<PAGE>   32
//


                                       32
<PAGE>   33

// Function: Returns size of send and receive context blocks
//
// Parameters: OUT send -> sizeof(SendContext)
// OUT recv -> sizeof(RecvContext) //
//
// Returns: Nothing 
//
void
getcontextsizes (long *, long *);

//* initsendcontext()
//
// Function: Initialize SendContext block
//
// Parameters: IN context -> connection compress context
//
// Returns: Nothing
//
void
initsendcontext (SendContext *);

//* initrecvcontext()
//
// Function: Initialize RecvContext block
//
// Parameters: IN context -> connection decompress context
//
// Returns: Nothing 
//
void initrecvcontext (RecvContext *);

                                       33
<PAGE>   34
                                    EXHIBIT C

                                  LZS SOFTWARE

The following files comprise the Stac LZS221-C version 4 software library:

Example.C
LZS.H
LZSC.C
LZSD.C
LZSMEM.C

                                       34


<PAGE>   35

                                   EXHIBIT D

                                   TEST TOOL

THE TEST TOOL DELIVERED BY MICROSOFT TO STAC ON FEBRUARY 2, 1996

                                       35


<PAGE>   36

                                    EXHIBIT E

                     PERFORMANCE AND COMPATIBILITY STANDARDS
                                  ---------------------------------------

For the purposes of the performance and compatibility standards set forth below,
the "CORPUS SUITE" is defined as the following set of files, which exist at
Internet address "ftp.cpsc.ucalgary.ca/pub/projects/text.compression.corpus" as
of January 12, 1996:
<TABLE>
<CAPTION>

Filename              Size in KB
                      (1024 bytes)
- --------              ------------
<S>                   <C>
bib                   109
book1                 751
book2                 597
geo                   100
news                  369
obj1                  21
obj2                  242
paper1                52
paper2                81
paper3                46
paper4                13
paper5                12
paper6                38
pic                   502
progc                 39
prog1                 70
progp                 49
trans                 92
</TABLE>

All files are dated May 8, 1990.

With respect to the performance and compatibility standards set forth below, the
standards shall be evaluated on an Intel Pentium processor running in 32-bit
mode. Both the Stac MPPC Software and the Microsoft MPPC Software shall be
compiled using Microsoft's most current version of its commercially released C
compiler.

PERFORMANCE

Stac MPPC Software shall compress and decompress the data in ninety percent
(90%) of the files in the Corpus Suite as fast as or faster than Microsoft MPPC
Software compresses or decompresses the same files.

                                       36


<PAGE>   37
COMPATIBILITY

Stac MPPC Software shall compress the data in each of the files in the Corpus
Suite such that the Microsoft MPPC Software, when used for decompression of the
compressed file, produces the same original data in the file. Furthermore, such
Stac MPPC Software shall decompress the data in each of the files in the Corpus
Suite compressed by the Microsoft MPPC Software to produce the same original
data in the file.

                                       37


<PAGE>   38
                                    EXHIBIT F

           DISTRIBUTION AGREEMENT TERMS (PRICING MAY BE ADJUSTED FROM
                 TIME TO TIME BY STAC, UPON NOTICE TO MICROSOFT)

                                LICENSE AGREEMENT

        This License Agreement (the "Agreement") is made and entered into as of
_________, 199 _____, a ________ corporation, with its principal place of
business at ____________________

        A. Stac, Inc., a California corporation, with its principal place of
business at 12636 High Bluff Drive, San Diego, California 92130 ("Stac"), has
developed certain software programs (as defined below, the "Software"); Licensee
desires to license such Software for integration with its products (as defined
below the "Licensee's Products") which are to be resold by Licensee; Microsoft
has the right from Stac to grant the certain limited license rights granted
below to Licensee on the terms and conditions of this Agreement;

        B. Therefore, Microsoft desires to grant certain limited license rights
to Licensee to reproduce and distribute such Software on the terms and
conditions contained in this Agreement.

        NOW THEREFORE, based on the above premises and in consideration of the
mutual covenants and agreements contained herein, the parties agree as follows:

1. Definitions. As used herein, the following terms shall have the respective
meanings set forth below:

        1.1 "Software" shall mean the software and documentation described in
        Exhibit A together with any released Corrections (as defined below) of
        such version.

        1.2 "Corrections" shall mean subsequently commercially released versions
        of the Software that Stac or Microsoft, in their sole discretion, has
        released with its version number designation increased by hundredths,
        but not tenths or greater.

        1.3 "End User" shall mean a person, entity, or group of entities under
        common control that licenses Software integrated with Licensee's
        Products solely for its own internal use without any right to further
        distribute or sublicense the Software.

        1.4 "IP Rights" shall mean only those intellectual property rights,
        including copyrights, patents, trade secrets, trademarks, and other
        proprietary rights owned by Stac or Microsoft and that are specifically
        embodied in the Software.

        1.5 "Licensee's Products" shall mean only those products listed on
        Exhibit B hereto.

        1.6 "Upgrade" shall mean subsequently commercially released versions of
        the Software that Stac or Microsoft, in their sole discretion, has
        released with its version number designation increased by tenths right
        of the decimal point, but not whole integers left of the decimal point.

                                       38


<PAGE>   39

        1.7 "Unit" is one Licensee's Product that includes one copy of the
        Software.

2.      Grant of License and Deliverable Items

        2.1 License to Licensee. Microsoft hereby grants to Licensee for the
        term of this Agreement a non-exclusive, non-transferable, limited
        license to the IP Rights for the sole purpose of reproducing and having
        reproduced and distributing and having distributed object code only
        compilations of the Software for pre-sale integration with Licensee's
        Products by Licensee.

        2.2 Restrictions. Licensee acknowledges and agrees that this Agreement
        in no way shall be construed to provide to Licensee (a) an express or
        implied license to modify, alter, improve, decompile, disassemble or
        reverse engineer the Software except to change the names of functions
        within the Software, as necessary, to integrate with Licensee's
        Products, or (b) an express or implied license to any of the IP Rights
        other than as expressly set forth in this Agreement, or (c) an express
        or implied license to create any hardware implementations of the IP
        Rights. The limited modifications allowed in 2.2 (a) above expressly
        exclude changes to the compression format and changes for speed
        optimization of the Software compression and/or decompression.

        2.3. Deliverable Items. Upon execution of this Agreement, Microsoft
        shall deliver to Licensee the Software and items listed as Other
        Deliverable Items in Exhibit A hereto. Further, Stac or Microsoft shall
        deliver to Licensee, for no additional License Fee, any Corrections and
        Upgrades that are made commercially available during the term of this
        Agreement.

3.      License Fee and License Fee Verification

        3.1 Amount of License Fee. In consideration for the license granted
        pursuant to this Agreement, Licensee agrees and hereby undertakes to pay
        to Stac a non-refundable License Fee according to the License Fee
        schedule in Exhibit C.

        3.2 Miscellaneous Charges. The License Fees payable under this Agreement
        do not include any taxes that are now or hereafter enacted which are
        applicable to the Software sold under this Agreement, or shipping and
        other charges associated with disseminating the Software, excluding,
        however, income taxes on profits which may be levied against Stac. All
        applicable taxes, shipping and other charges are the responsibility of
        Licensee and Licensee agrees to pay Stac where Stac is obligated to
        collect or pay same.

        3.3 Payment of License Fee. Payments of License Fees are due according
        to the License Fee Payment Schedule in Exhibit C hereto. All License Fee
        payments specified in Section 3.1 shall be paid in United States dollars
        by wire transfer of immediately available funds within as directed by
        Stac or by Licensee's check which shall be drawn upon a United States
        bank.

                                       39


<PAGE>   40

        3.4 License Fee Reports. Within thirty (30) days after the end of each
        annual term of this Agreement, Licensee shall furnish to Stac an
        accounting of all sales of Licensee's Products, including total amounts
        of Units sold and Average Selling Price for each of Licensee's Products.
        Licensee shall also pay Stac any additional amount of License Fees owed
        for the annual term just ended, beyond the amount of License Fees paid
        at the beginning of the annual term just ended, based on the actual
        Units sold and the actual Average Selling Price for Licensee's Products
        during the term, as calculated in accordance with the Current License
        Fees Schedule set forth in Exhibit C for the annual term just ended.
        Such payment of an additional amount of License Fees, if any, shall be
        provided within the thirty (30) days after the end of the annual term
        just ended, together with a written statement of the accounting of all
        sales of Licensee's Products, certified by an authorized representative
        of Licensee, and concerning the computation of License Fees payable to
        Stac with respect to such accounting. Such written statement shall be
        provided whether or not any additional amount of Licensee Fees is owed,
        and shall include the actual total Units sold and actual Average Selling
        Price for each of Licensee's Products. Each such certified statement
        shall contain information in sufficient detail to verify the accuracy of
        each License Fee payment due, or to verify the accuracy of the fact that
        no additional License Fees payment is due.

        3.5 License Fee Verification. Upon the reasonable request of Stac,
        Licensee shall permit access to its books and records by an independent
        accounting firm selected by Stac and approved by Licensee, which
        approval shall not be unreasonably withheld, for the sole purpose of
        verifying and reporting to Stac regarding the calculation of License
        Fees payable hereunder ("Audit"). The cost for such Audit shall be paid
        by Stac unless a discrepancy of five percent (5%) or more is uncovered,
        in which case Licensee shall pay the cost for the Audit. Such audits
        shall not occur more than once in any twelve month period.

4. Injunctive Relief. License agrees that in the event of a breach or alleged
breach of Section 2 that Stac shall not have an adequate remedy at law,
including monetary damages, and that Stac shall consequently be entitled to seek
a temporary restraining order, injunction, or other form of equitable relief
against the continuance of such breach, in addition to any and all remedies to
which Stac shall be entitled.

5. Export. Licensee acknowledges that any export of products, and all technical
data related thereto, is subject to regulation under United States laws,
including but not limited to the Export Administration Act of 1979 and
regulations issued thereunder. Licensee therefore agrees to: (a) comply with
applicable export or asset control laws of the United States and regulations
applicable to such exports; (b) comply, and take all permissible measures to
insure its customers' compliance with, the provisions of said license(s),
including record keeping requirements; and (c) refrain from selling or otherwise
distributing products or related data in violation of such laws, regulations, or
licenses.

6. Product Marking, In addition to the consideration in Section 3.1 above, when
referring to the Software integrated with Licensee's Product, Licensee must use
the trademark(s) and logo(s) in Exhibit D (the "Trademarks"), in accordance with
Microsoft's current trademark use guidelines (referenced in Exhibit D), in
Licensee's marketing and sales literature, advertising, product documentation
and other communications. Neither Stac nor Microsoft shall be responsible or
liable for the accuracy of Licensee's statements in such communications. In
order

                                       40


<PAGE>   41

to properly maintain Microsoft's goodwill in the Trademarks, prior to marketing
Licensee's Product(s), Licensee agrees to provide Microsoft with a reasonable
opportunity to verify that Licensee's Product(s) marketing and sales literature,
advertising, product documentation and other communications where Microsoft's
trademark(s) or logo(s) are used meets Microsoft's compatibility and quality
standards.

7. Technical Support. Licensee shall be responsible for all technical support,
including End User technical support, related to the Software integrated with
Licensee's Products.

8.      Proprietary Rights

        8.1 Title. All right, title, and interest to the IP Rights shall remain
        with Stac or Microsoft, as applicable, and Licensee obtains only a
        limited license to reproduce the Software and documentation subject to
        all of the terms and conditions hereof. Licensee hereby acknowledges
        that the Software contains valuable proprietary and confidential
        information developed or acquired by Stac and/or Microsoft through the
        expenditure and investment of a great deal of time and resources,
        including without limitation valuable algorithms, concepts and
        innovations.

        8.2 IP Rights Notices. Licensee shall ensure that Stac's and Microsoft's
        copyright, trademark, and patent notices, which may be updated from time
        to time, are prominently displayed on all copies of the Software and
        documentation. All notices of Stac's and Microsoft's patents shall be
        made in accordance with 35 U.S.C. Sec 287. Licensee shall not remove or
        obscure any copyright, trademark, patent or other proprietary rights
        notice already present on any of the Software or documentation.

9.      Patents and Copyrights Indemnification

        9.1 Subject to Section 9.4 below, Stac will defend or settle at its
        expense and will pay the costs and damages awarded against Licensee in
        any action brought against Licensee on the basis that the Software
        infringes a United States patent or copyright, provided that Licensee
        (i) promptly notifies Stac in writing of such action, (ii) provides Stac
        with all reasonable assistance for the defense or settlement of such
        action, (iii) grants to Stac sole authority and control for the defense
        or settlement of such action, and (iv) fully observes all the terms and
        conditions of this Agreement.

        9.2 If a final injunction is obtained against Licensee in such action on
        the basis that the Software infringes a United States patent or
        copyright, Stac will, at Stac's option and expense, either (i) procure
        for Licensee the right to continue using the Software, (ii) replace or
        modify the infringing portion of the Software so that it becomes
        non-infringing, or (iii) refund any License Fees paid by Licensee to
        Stac with respect to Units against which the injunction is obtained.

                                       41


<PAGE>   42

        9.3 Stac shall not have any liability to Licensee for, and Licensee
        shall defend and hold Stac harmless against any expense, judgment or
        loss arising from any claim of patent or copyright infringement based on
        (i) the reproduction, manufacture, use, sale or offer for sale of
        anything other than a current unaltered release of the Software, (ii)
        any modifications made to the Software, or (iii) combinations of the
        Software by Licensee with any product or technology which, without such
        combination, such claim would not have been brought.

        9.4 In no event shall Stac's total liability to Licensee under this
        paragraph exceed the License Fees paid to Stac by Licensee during the
        term of the agreement.

        9.5 The use of this Software may require a license from Motorola. A
        license agreement for the right to use Motorola patents may be obtained
        through Stac or directly from Motorola.

10.     WARRANTIES AND LIMITATIONS OF LIABILITY

        10.1 Warranty of Title. Stac warrants that it has good title to the
        Software and has the right to license the use of the Software free of
        any known proprietary rights of any other party or any other known
        encumbrance whatsoever.

        10.2   DISCLAIMER OF WARRANTY. THE ITEMS AND SERVICES FURNISHED UNDER OR
        IN CONNECTION WITH THIS AGREEMENT ARE PROVIDED, IN THEIR CURRENT STATE,
        AND NEITHER MICROSOFT NOR STAC MAKE ANY WARRANTIES OR COVENANTS, OTHER
        THAN THOSE SET OUT ABOVE, EXPRESS OR IMPLIED BY OPERATION OF LAW OR
        OTHERWISE, INCLUDING BUT NOT LIMITED TO ANY IMPLIED WARRANTIES OF
        MERCHANTABILITY OR FITNESS FOR A PARTICULAR USE. ANY ADDITIONAL OR OTHER
        CLAIMS, REPRESENTATIONS OR WARRANTIES BY LICENSEE TO ITS CUSTOMERS
        (EXPRESS OR IMPLIED BY LAW OR OTHERWISE) ARE THE RESPONSIBILITY OF
        LICENSEE. LICENSEE HAS NO RIGHT OR AUTHORITY TO MAKE ANY AGREEMENT,
        STATEMENT, REPRESENTATION, WARRANTY OR OTHER COMMITMENT ON BEHALF OF
        MICROSOFT OR STAC NOR TO INCUR ANY LIABILITY OR OBLIGATION, EXPRESS OR
        IMPLIED, ON BEHALF OF MICROSOFT OR STAC.

        10.3   LIMITATION OF LIABILITY. EXCEPT AS PROVIDED IN SECTION 9 ABOVE,
        IN NO EVENT SHALL MICROSOFT OR STAC OR THEIR SUPPLIERS BE LIABLE FOR ANY
        DAMAGES WHATSOEVER (INCLUDING WITHOUT LIMITATION, DAMAGES FOR LOSS OF
        BUSINESS PROFITS, BUSINESS INTERRUPTION, LOSS OF BUSINESS INFORMATION,
        OTHER PECUNIARY LOSS, OR CONSEQUENTIAL DAMAGES) ARISING OUT OF THE USE
        OF OR INABILITY TO USE THE SOFTWARE, EVEN IF MICROSOFT OR STAC HAVE BEEN
        ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.

11.     TERM AND TERMINATION

        11.1 Term. This Agreement shall become effective as of the Effective
        Date hereof and shall continue in force for the term specified in
        Exhibit E, unless earlier terminated in accordance with this Section 11.

                                       42


<PAGE>   43

        11.2 Termination. The license granted by this Agreement shall be
        terminated, immediately and without notice, except as specifically
        provided herein, upon the occurrence of any of the following:

               (a) Expiration of the term specified herein, in accordance with
               the terms of this Agreement.

               (b) At Stac's or Microsoft's option, upon thirty (30) days
               written notice of termination, in the event of Licensee's
               commission of an event of default as defined in section 11.3
               hereof. Such termination shall become effective unless the
               defaulting party shall cure all aspects of the default and so
               notify the terminating party of the cure in writing within said
               thirty (30) day period.

        11.3 Events of Default. Licensee shall be considered to have committed
        an event of default by any of the following, giving rise to a right on
        the part of either Stac or Microsoft to terminate the License in
        accordance with the provisions of this Section 11:

               (a) Licensee attempts to use, modify, copy, license, or convey
               the Software in any manner contrary to the terms of this
               Agreement or in any manner which impairs, alters, or lessens
               Stac's proprietary rights in the Software in any way.

               (b) Licensee fails or neglects to perform or observe any of its
               existing or future obligations under this agreement, including,
               without limitation, the timely payment of any sums due Stac.

               (c) A petition in bankruptcy is filed by or against Licensee,
               which is not released within 90 days of filing; if a receiver,
               trustee in bankruptcy, or similar officer is appointed to take
               charge of all or part of Licensee's property; or Licensee is
               adjudicated a bankrupt.

               (d) If an audit pursuant to Section 3.5 above reveals that
               Licensee has underpaid License Fees due Stac under this
               Agreement, Licensee shall within considered in default pursuant
               to Section 11.2 and Licensee shall within twenty (20) days pay to
               Stac the amount of the underpaid License Fees and the costs, if
               due, of the License Fee audit.

        11.4 Effect of Termination. Licensee agrees that immediately upon the
        termination of this Agreement, pursuant to any of the provisions of
        Section 11 herein, it shall immediately destroy all copies of the
        Software not then incorporated in Licensee's Product(s) and certify that
        fact to Stac. Licensee further agrees that in the event of termination
        through its default, all fees or charges due Stac shall immediately
        become due and payable. Upon termination of the license granted under
        this Agreement, Stac's obligations hereunder shall cease, however, End
        Users with valid licenses to the Software integrated with Licensee's
        Products entered into prior to the effective date of termination shall
        retain their rights to use the Software.

12.     General Provisions

                                       43


<PAGE>   44

        12.1 Assignment. Licensee shall not assign any of its rights under this
        Agreement nor delegate its duties hereunder to another person or legal
        entity without the prior written consent of Microsoft and Stac, which
        consent may be withheld for any reason. This Agreement shall inure to
        the benefit of and be binding upon the parties hereto, their respective
        trustees, successors, permitted assigns and legal representatives.

        12.2 Non-Waiver. A failure of any party hereto to exercise any right
        given to it hereunder, or to insist upon strict compliance by another
        party of any obligation hereunder, shall not constitute a waiver of the
        first party's right to exercise such a right, or to exact compliance
        with the terms hereof. Moreover, waiver by any party of a particular
        default by another party shall not be deemed a continuing waiver so as
        to impair the aggrieved party's rights in respect to any subsequent
        default of the same or a different nature.

        12.3 Survival. Upon the termination of this Agreement for any reason,
        the following Sections shall remain in full force and effect: 1, 2.2, 3,
        4, 5, 7, 8, 9, 10, 11 and Section 12 except for 12.1 and 12.5.

        12.4 Governing Law. The parties agree that the laws of the State of
        California shall govern the interpretation and enforcement of this
        Agreement, without giving effect to that State's choice of law rules.

        12.5 Notices. All notices or other communications that shall or may be
        given pursuant to this Agreement, shall be in writing, in English, shall
        be sent by certified or registered mail with postage prepaid, return
        receipt requested, by facsimile, telex or cable communication, or by
        hand delivery. Such communications shall be deemed given and received
        upon dispatch, if sent by facsimile, telex, or cable communication; or
        upon delivery if hand delivered; or within five (5) days of mailing, if
        sent by certified or registered mail, and shall be addressed to the
        parties as set forth above on the first page of this Agreement, or to
        such other addresses as the parties may designate in writing from time
        to time.

        12.6 Attorney's Fees to Prevailing Party. In the event of any litigation
        or other proceedings (including proceedings in bankruptcy) concerning or
        related to this Agreement, the prevailing party, solely as between Stac
        or Microsoft and Licensee, shall be entitled to recover its actual
        attorneys' fees and expenses incurred in connection with such
        proceedings.

        12.7 Entire Agreement. This Agreement contains the full understanding of
        the parties and supersedes all prior agreements and understandings,
        written or oral, between the parties with respect to the subject matter
        hereof; and there are no representations, warranties, agreements or
        understandings other than those expressly contained herein. No
        alteration, modification, variation or waiver of this Agreement, or any
        of the provisions hereof shall be effective unless executed by both
        parties in writing. All exhibits attached hereto and referred to herein
        are hereby incorporated by reference and made a part hereof.

        12.8 Confidentiality. Except as required by regulatory agencies or as
        ordered disclosed pursuant to judicial or other lawful governmental
        action, and then only to the extent so required or ordered, the terms
        of, but not the existence of, this Agreement and the required
        information disclosed in Section 3 herein shall be held in confidence by
        Stac, Microsoft and Licensee.

                                       44


<PAGE>   45

        12.9 Captions. The captions that head certain sections and paragraphs in
        this Agreement are inserted only as a matter of convenience, and in no
        way define, limit, or extend or interpret the scope of this Agreement or
        of any particular Section.

        IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed on the dates indicated below.

MICROSOFT CORPORATION                          ________________________
("LICENSEE")

By: ___________________________________        By:
________________________________

Its: ___________________________               Its: ______________________

Dated: ______, 199_                            Dated: _____, 199_.

                                       45


<PAGE>   46

                                    EXHIBIT A

SOFTWARE

Product Name: ________________________

The files listed below comprise the Software:

- ----------------------------------------

- ----------------------------------------

- ----------------------------------------

- ----------------------------------------

- ----------------------------------------

- ----------------------------------------

OTHER DELIVERABLE ITEMS

- ----------------------------------------

- ----------------------------------------

- ----------------------------------------

- ----------------------------------------

- ----------------------------------------

- ----------------------------------------

- ----------------------------------------

- ----------------------------------------


                                       46


<PAGE>   47




                                    EXHIBIT B

LICENSEE'S PRODUCTS

Licensee's license to reproduce, use and distribute the Software is only in
conjunction with the products and equipment listed below which are made, used,
sold and distributed by Licensee:

<TABLE>
<CAPTION>

                         Average                         Annual Units
                      Selling Price
               ----------------------------    ---------------------------------
Product Name
               < $50 < $250 < $1000 > $1000    < 1K < 10K < 100K < 1000K > 1000K
- -------------------------------------------    ---------------------------------
<S>            <C>   <C>    <C>       <C>      <C>  <C>   <C>    <C>     <C>
















Total Volume all Products
Average ASP all Products
</TABLE>

                                       47


<PAGE>   48

                                    EXHIBIT C

LICENSE FEE

License Fees shall be payable for Units according to the following Current
License Fee Schedule:
<TABLE>
<CAPTION>
Total                      Average Selling Price (ASP)
Units               < $50     < $250    < $1,000    > $1,000
- -----               -----     ------    --------    --------
<S>                 <C>       <C>       <C>         <C>
< 1K                $ 5K      $10K      $15K        $20K
< 10K               $12K      $25K      $37K        $50K
< 100K              $25K      $45K      $60K        $75K
< 1000K             $50K      $70K      $90K        $95K
> 1000K             $80K      $85K        --          --
</TABLE>

The Average Selling Price (ASP) of Licensee's Products is the average forecasted
selling price for all Units of Licensee's Product during the period of this
Agreement.

The Total Units is the volume of Units forecasted for shipment during the period
of this Agreement.

If multiple products are listed in Exhibit B, then the License Fee payable shall
be calculated as follows: The Units are the sum of the Units for each of
Licensee's Products; the ASP is the average of the ASP for each Licensee's
Product listed.

In the case that compression is an option for Licensee's Products, the ASP is
the ASP of the option together with its host platform.

The Current License Fee Schedule above shall be updated annually at the time of
renewal of this Agreement by Stac's then current License Fee schedule, which
shall not have an amount of increase in License Fees of more than 10 percent
from the Current License Fee Schedule. Such updated License Fee Schedule shall
become the Current License Fee Schedule for the subsequent renewal term of this
Agreement.

LICENSE FEE PAYMENT SCHEDULE

Payment of the License Fee for the initial term of this Agreement shall be made
within thirty (30) days of the Effective Date of this Agreement. Payment of
License Fees for renewal periods of this Agreement as provided for in Exhibit E
shall be made within thirty (30) days following each subsequent annual renewal
date of this Agreement.



                                       48


<PAGE>   49

                                    EXHIBIT D

Microsoft's MPPC logo is shown below. The Microsoft MPPC Logo Use Guidelines are
contained in a separate manual provided with this Agreement.

                                       49


<PAGE>   50

                                    EXHIBIT E

TERM

THE TERM OF THIS AGREEMENT SHALL BE FOR ONE YEAR FROM ITS EFFECTIVE DATE AND
SHALL BE RENEWABLE FOR SUBSEQUENT ONE YEAR PERIODS UPON PAYMENT OF THE LICENSE
FEE FOR THE RENEWED TERM ACCORDING TO EXHIBIT C OF THIS AGREEMENT, AND WRITTEN
SUBMISSION OF A CURRENT EXHIBIT B. ANY CHANGES TO THE CURRENT EXHIBIT B MUST BE
AGREED TO BY STAC IN WRITING.

                                       50

<PAGE>   1

                                                                   EXHIBIT 10.13


                                LICENSE AGREEMENT

THIS AGREEMENT is entered into on this 15th day of December 1995, 1995, by and
between Motorola, Inc. a Delaware corporation having an office at 1303 East
Algonquin Road, Schaumburg, Illinois 60196 (hereinafter called "MOTOROLA"), and
Stac, Inc., a California corporation having an office at 12636 High Bluff Drive,
Suite 400, San Diego, California 92130-2093 (hereinafter called "STAC").

WHEREAS, MOTOROLA owns and has, or may have, rights in certain patents issued,
and applications for patents pending, in various countries of the world as to
which STAC desires to acquire licenses as hereinafter provided, and

WHEREAS, STAC owns and has, or may have, rights in certain patents issued, and
applications for patents pending, in various countries of the world as to which
MOTOROLA desires to acquire licenses as hereinafter provided,

NOW THEREFORE, in consideration of the mutual covenants and conditions
hereinafter set forth, it is agreed as follows:


Section 1 -- DEFINITIONS

1.1  SUBSIDIARY(IES) means any legal entity, more than fifty percent (50%) of
whose outstanding shares or securities representing the right to vote for the
election of directors or other managing authority are, now or hereafter, owned
or controlled, directly or indirectly by that party (but only so long as such
conditions exist).

1.2  LZS DATA COMPRESSION means any lossless data compression algorithm made
commercially available by STAC and which STAC has the rights to license others
to make, use, sell, offer for sale, copy and create derivative works therefor.




                                      -1-
                       MOTOROLA CONFIDENTIAL PROPRIETARY
<PAGE>   2

1.3  CZL DATA COMPRESSION means a MOTOROLA developed version of the Ziv-Lempel
77 lossless data compression algorithm.

1.4  DATA COMMUNICATION APPLICATIONS means the use of any product for the
primary function of communications, such product having one or more interfaces
to a public or private network.

1.5  STAC PATENTS means U.S. Patent Nos. 4,701,745; 5,016,009; 5,146,221;
5,126,739, and 5,463,390, and any patent issuing from European Patent
Application Number EP 0 582 907 A2 and including all divisions, continuations,
continuations-in-part, reissues, renewals, and extensions, and any foreign or
domestic counterparts claiming priority therefrom.

1.6  MOTOROLA PATENTS shall mean U.S. Patent Nos. 5,130,993 and 5,245,614, any
patent issuing from U.S. Patent Application No. 08/156,857 and including all
divisions, continuations, continuations-in-part, reissues, renewals, and
extensions, and any foreign or domestic counterparts claiming priority
therefrom.

1.7  STAC COPYRIGHTS means copyrights owned by STAC in the United States and
throughout the world in LZS DATA COMPRESSION algorithms, and in source code and
object code versions of software implementing LZS DATA COMPRESSION algorithms.

1.8  CHIPSETS means one or more semiconductor devices which, alone or
collectively, are utilized to implement the function of lossless data
compression.

1.9  MERCHANT CHIPSETS means CHIPSETS offered for sale, sold or otherwise
transferred as CHIPSETS, and not as incorporated in a larger product, to
entities other than MOTOROLA and STAC or their SUBSIDIARIES.

1.10 MERCHANT SOFTWARE means software having lossless data compression as its
primary and predominant function that is offered




                                      -2-
                       MOTOROLA CONFIDENTIAL PROPRIETARY
<PAGE>   3

for sale, sold, or otherwise transferred as a software-only product, and not as
incorporated in a larger product, to entities other than MOTOROLA and STAC or
their SUBSIDIARIES.

1.11 LICENSED MOTOROLA PRODUCT(S) means all products made by, or manufactured
for, MOTOROLA or its SUBSIDIARIES that infringe the STAC PATENTS; provided,
however, that LICENSED MOTOROLA PRODUCTS shall not include MERCHANT CHIPSETS,
MERCHANT SOFTWARE or LICENSED MOTOROLALZS PRODUCTS.

1.12 LICENSED MOTOROLA LZS PRODUCTS means all products that incorporate LZS DATA
COMPRESSION, including products that embody enhancements to LZS DATA COMPRESSION
developed by MOTOROLA; provided, however, that LICENSED MOTOROLA LZS PRODUCTS
shall not include CHIPSETS, LICENSED MOTOROLA PRODUCTS or MERCHANT SOFTWARE.

1.13 LICENSED STAC PRODUCT(S) means all products that infringe or cause to be
infringed by purchasers, the MOTOROLA PATENTS. LICENSED STAC PRODUCT(S) shall
not include software directly incorporated into computer operating systems
software sold by Microsoft Corporation or software sold on media containing
other software sold by Microsoft Corporation, but shall include software sold by
STAC on separate media under the trade identity of STAC or its SUBSIDIARY(IES).

1.14 LICENSED STAC LZS MOTOROLA ENHANCED PRODUCT(S) means all software made by,
or manufactured for, STAC or its SUBSIDIARIES having lossless data compression
as its primary function which: 1) embodies enhancements to LZS DATA COMPRESSION
developed by MOTOROLA; 2) is incorporated in a LICENSED MOTOROLA LZS PRODUCT;
and 3) is delivered to STAC in source code form.

1.15 EFFECTIVE DATE means the date of last signature hereto as such date is
entered on the first page hereof.


Section 2 -- RELEASES



                                      -3-
                       MOTOROLA CONFIDENTIAL PROPRIETARY
<PAGE>   4

2.1  STAC and its SUBSIDIARY(IES) hereby release, acquit and forever discharge
MOTOROLA (and those SUBSIDIARY(IES) affiliated with MOTOROLA on the EFFECTIVE
DATE of this Agreement) and their respective distributors, dealers, customers
and users from any and all claims or liability for infringement or alleged
infringement of any STAC PATENTS, by the use, lease, sale or other disposition
of MOTOROLA products prior to the EFFECTIVE DATE.

2.2  MOTOROLA and its SUBSIDIARY(IES) hereby release, acquit and forever
discharge STAC (and those SUBSIDIARY(IES) affiliated with STAC on the EFFECTIVE
DATE of this Agreement) and their respective distributors, dealers, customers
and users from any and all claims or liability for infringement or alleged
infringement of any MOTOROLA PATENTS, by the use, lease, sale or other
disposition of STAC products prior to the EFFECTIVE DATE.


Section 3 -- GRANTS

3.1  STAC hereby grants to MOTOROLA and its SUBSIDIARY(IES), for the lives of
the STAC PATENTS, a non-exclusive, non-transferable royalty bearing license
throughout the world under the STAC PATENTS for DATA COMMUNICATION APPLICATIONS
only, without the right to sub-license:

     3.1.1 to make and to have made LICENSED MOTOROLA PRODUCTS and LICENSED
     MOTOROLA LZS PRODUCTS, and

     3.1.2 with respect to LICENSED MOTOROLA PRODUCTS and LICENSED MOTOROLA LZS
     PRODUCTS so made and have made, to use, lease, sell, or otherwise dispose
     of such LICENSED MOTOROLA PRODUCTS and LICENSED MOTOROLA LZS PRODUCTS under
     the trade identity of MOTOROLA or its SUBSIDIARY(IES).




                                      -4-
                       MOTOROLA CONFIDENTIAL PROPRIETARY
<PAGE>   5

3.2  STAC grants to MOTOROLA and its SUBSIDIARY(IES) a world-wide,
non-exclusive, non-transferable, royalty bearing license under the STAC PATENTS
and STAC COPYRIGHTS to use, copy, and distribute, object code only compilations
LZS DATA COMPRESSION software for pre-sale integration with LICENSED MOTOROLA
LZS PRODUCTS. STAC further grants to MOTOROLA and its SUBSIDIARY(IES) a
world-wide, non-exclusive, non-transferable, royalty bearing license under the
STAC PATENTS and the STAC COPYRIGHTS to create, use, copy and distribute
modified object code only compilations of LZS DATA COMPRESSION software for
pre-sale integration with LICENSED MOTOROLA LZS PRODUCTS, provided that such
modified compilations of LZS DATA COMPRESSION software do not change the
encoding format of the unmodified compilations of LZS DATA COMPRESSION software.

3.3  MOTOROLA grants to STAC and its SUBSIDIARY(IES) a non-exclusive,
non-transferable, royalty bearing license throughout the world under the
MOTOROLA PATENTS for DATA COMMUNICATION APPLICATIONS only, without the right to
sublicense:

     3.3.1 to make and have made LICENSED STAC PRODUCTS and LICENSED STAC LZS
     MOTOROLA ENHANCED PRODUCTS; and

     3.3.2 with respect to LICENSED STAC PRODUCTS and LICENSED STAC LZS MOTOROLA
     ENHANCED PRODUCTS so made and have made, to use, lease, sell, or otherwise
     dispose of such LICENSED STAC PRODUCTS and LICENSED STAC LZS MOTOROLA
     ENHANCED PRODUCTS under the trade identity of STAC or its SUBSIDIARY(IES).


Section 4 -- PAYMENTS

4.1  STAC shall pay to MOTOROLA a royalty in accordance with Schedule A for each
LICENSED STAC PRODUCT sold.

     4.1.1 If at any time during the execution of this AGREEMENT MOTOROLA enters
     into an agreement with respect to the




                                      -5-
                       MOTOROLA CONFIDENTIAL PROPRIETARY
<PAGE>   6

     MOTOROLA PATENTS on substantially similar terms to this AGREEMENT, and
     providing for a more favorable royalty rate, STAC shall thereafter be
     entitled to such royalty rate for LICENSED STAC PRODUCTS. MOTOROLA shall
     notify STAC of that more favorable royalty rate within thirty (30) days of
     execution of such subsequent agreement.

4.2  STAC shall pay to MOTOROLA for each LICENSED STAC LZS MOTOROLA ENHANCED
PRODUCT a royalty of 30% of the net selling price for each LICENSED STAC LZS
MOTOROLA ENHANCED PRODUCT sold. The net selling price for each LICENSED STAC LZS
MOTOROLA ENHANCED PRODUCT shall be based on the net selling price for the
software only, and shall not be based on any selling price of any STAC product
incorporating such LICENSED STAC LZS MOTOROLA ENHANCED PRODUCT.

4.3  MOTOROLA shall pay the royalty determined in accordance with Schedule A to
STAC for each LICENSED MOTOROLA PRODUCT sold.

4.4  MOTOROLA shall pay the royalty determined in accordance with Schedule B for
each LICENSED MOTOROLA LZS PRODUCT sold.

     4.4.1 If at any time after the execution of this agreement, STAC enters
     into an agreement with respect to LZS DATA COMPRESSION on substantially
     similar terms to this AGREEMENT, and providing for a more favorable royalty
     rate, MOTOROLA shall thereafter be entitled to such royalty rate for
     LICENSED MOTOROLA LZS PRODUCTS. STAC shall notify MOTOROLA of that more
     favorable royalty rate within thirty (30) days of execution of such
     subsequent agreement.

     4.4.2 Royalties payable by MOTOROLA to STAC hereunder for LICENSED MOTOROLA
     LZS PRODUCTS which transfer information from one point to another point by
     means of electromagnetic waves in free space shall not exceed $200,000.00
     (TWO HUNDRED THOUSAND DOLLARS) per year. Royalties payable by MOTOROLA to
     STAC hereunder for all other LICENSED MOTOROLA LZS PRODUCTS



                                      -6-
                       MOTOROLA CONFIDENTIAL PROPRIETARY
<PAGE>   7

     shall not exceed $200,000.00 (TWO HUNDRED THOUSAND DOLLARS) per year.

4.5  Within thirty (30) days following execution of this AGREEMENT, and on each
anniversary of this AGREEMENT, a responsible official of each party shall
estimate for the immediately following year, in writing, an election as to the
number of LICENSED MOTOROLA PRODUCTS or LICENSED STAC PRODUCTS it will sell,
lease, or otherwise dispose of for that year, and shall indicate the approximate
average selling price for said LICENSED MOTOROLA PRODUCTS or LICENSED STAC
PRODUCTS, and shall pay the amount indicated in accordance with Schedule A,
TABLE I. Within thirty (30) days following each anniversary of this AGREEMENT,
each party shall make royalty payments to the other pursuant to Schedule A,
TABLE II on the number of LICENSED MOTOROLA PRODUCTS or LICENSED STAC PRODUCTS
it sold, leased or otherwise disposed of in the previous year in excess of the
number of LICENSED MOTOROLA PRODUCTS or LICENSED STAC PRODUCTS previously
estimated for such previous year.

4.6  Within thirty (30) days following execution of this AGREEMENT, and on each
anniversary of this AGREEMENT, a responsible official of MOTOROLA shall estimate
for the immediately following year, in writing, an election as to the number of
LICENSED MOTOROLA LZS PRODUCTS that MOTOROLA will sell, lease, or otherwise
dispose of for that year, and shall indicate the approximate average selling
price for said LICENSED MOTOROLA LZS PRODUCTS, and shall pay the amount
indicated in accordance with the Current License Fee Schedule in accordance with
the terms of Exhibit B. Within thirty (30) days following each anniversary of
this AGREEMENT, MOTOROLA shall make an additional royalty payment, if any, to
STAC representing the royalty owing beyond the royalty paid at the beginning of
the previous year for that year, according to the Current License Fee Schedule
for that year, based on the average selling price and number of LICENSED
MOTOROLA LZS PRODUCTS it actually sold, leased or otherwise disposed of in the
previous year.




                                      -7-
                       MOTOROLA CONFIDENTIAL PROPRIETARY




<PAGE>   8

4.7  Any payment hereunder which shall be delayed for more than thirty (30) days
beyond the due date shall be subject to an interest charge of one (1) percent
per month on the unpaid balance payable in United States currency until paid.
The foregoing payment of interest shall not affect either party's right to
terminate this agreement.

4.8  With respect to the royalty and reporting set forth in this Section 4, each
party shall keep full, clear and accurate records with respect to LICENSED
MOTOROLA PRODUCTS, LICENSED MOTOROLA LZS PRODUCTS, LICENSED STAC PRODUCTS, or
LICENSED STAC LZS MOTOROLA ENHANCED PRODUCTS sold, leased or otherwise disposed
of. These records shall be retained for a period of three (3) years from date of
reporting and payment notwithstanding the expiration or other termination of
this AGREEMENT. Each party shall have the right through a mutually agreed upon
independent certified public accountant and at its expense, to examine and
audit, not more than once a year, and during normal business hours, all such
records and such other records and accounts as may under recognized accounting
practices contain information bearing upon the amount of royalty payable to the
other under this AGREEMENT. Such independent accountant shall report to the
parties only as to the amount of royalties payable under this AGREEMENT. Prompt
payment shall be made to compensate for any underpayments disclosed by such
examination or audit.

4.9  Each party shall bear all taxes imposed on it with respect to the payments
received under this Section, provided, however, that if so required by
applicable law, the other party may withhold the amount of taxes levied on
payments to be made pursuant to this Agreement, and shall promptly make payment
of the withheld amount to the appropriate tax authorities and shall transmit to
the other official tax receipts or other evidence issued by said appropriate tax
authorities sufficient to enable MOTOROLA to support a claim for tax credit in
respect to such withheld taxes so paid.




                                      -8-
                       MOTOROLA CONFIDENTIAL PROPRIETARY
<PAGE>   9

4.10 All sums due MOTOROLA are payable in United States dollars and shall be
paid by wire transfer to the following MOTOROLA bank account unless otherwise
directed:

        The Bank of Boston
        100 Federal Street
        Boston, Massachusetts
        Account: 531-31430
        Account Name: Motorola, Inc.
        Federal Fund ID: 011000390

4.11 All sums due STAC are payable in United States dollars and shall be paid by
wire transfer to the following STAC bank account unless otherwise directed:

        Silicon Valley Bank
        2240 North First Street
        San Jose, CA 95131
        Account Number: 06001645-75
        Account Name: Stac Electronics
        ABA Transfer Number: 1211-4039-9

4.12 Royalties payable by STAC to MOTOROLA hereunder shall not exceed
$1,000,000.00 during the term of this agreement.

4.13 Royalties payable by MOTOROLA to STAC hereunder for LICENSED MOTOROLA
PRODUCTS which transfer information from one point to another point by means of
electromagnetic waves in free space shall not exceed $1,000,000.00 during the
term of this agreement. Royalties payable by MOTOROLA to STAC hereunder for all
other LICENSED MOTOROLA PRODUCTS shall not exceed $1,000,000.00 during the term
of this AGREEMENT.

4.14 The obligation to pay royalties in Sections 4.1 and 4.3 by either party
except for royalties accrued during the first seven years of this agreement
shall end seven years from the EFFECTIVE DATE.




                                      -9-
                       MOTOROLA CONFIDENTIAL PROPRIETARY




<PAGE>   10

4.15 At MOTOROLA's option, MOTOROLA may eliminate the payment provisions of
Section 4.1 and 4.3 herein by paying to STAC on or before September 30, 1996,
the amount of $1,000,000.00, less any royalties already paid by MOTOROLA to STAC
pursuant to Section 4.3, plus any royalties already paid by STAC to MOTOROLA
pursuant to Section 4.1. Such amount represents a total net payment of the sum
of the limits on royalties to be paid by each party to the other party under the
provisions of Sections 4.12 and 4.13.


Section 5 -- SUSPENSION OF LICENSE

If at any time during the term of this Agreement any third party holding at
least a 20% ownership interest in STAC or any SUBSIDIARY of STAC, any supplier
to STAC, any user of LICENSED STAC PRODUCT(S) or LICENSED STAC LZS MOTOROLA
ENHANCED PRODUCT(S) or any other third party (hereinafter, collectively "Third
Party Claimant") asserts a patent essential to any standard of a recognized
engineering association, such as the ITU-C, Frame Relay Forum, or the IETF,
(hereinafter "ESSENTIAL PATENTS") against any MOTOROLA product and also asserts
that MOTOROLA is prevented from asserting claims under any MOTOROLA PATENTS
against such Third Party Claimant as a result of the licenses granted to STAC in
this AGREEMENT, then the licenses granted to STAC shall immediately be suspended
as to any products not generally offered for sale by the Third Party Claimant
within thirty (30) days of the date of written notice by MOTOROLA to STAC of
such assertions by such Third Party Claimant. The suspension of the licenses
granted to STAC shall be effective only if and so long as MOTOROLA actively
negotiates and/or defends such claim and only to the extent necessary to obviate
the assertions made by the Third Party Claimant to the effect that MOTOROLA is
prevented from asserting claims under MOTOROLA PATENTS because of this
AGREEMENT. MOTOROLA agrees to institute no legal action against either STAC or
the Third Party Claimant with respect to licensed product sold to Third Party
Claimant by STAC for the period of thirty (30) days following the Notice of
Suspension, during which thirty (30) days STAC may continue



                                      -10-
                       MOTOROLA CONFIDENTIAL PROPRIETARY




<PAGE>   11

to operate as if the licenses were not suspended. After such thirty (30) day
period, no product sold, leased or otherwise disposed of by STAC to such Third
Party Claimant and no copy of software made by or for such Third Party Claimant
under authority granted by STAC shall be deemed to be a LICENSED STAC PRODUCT.
Such a suspension of the licenses granted to STAC shall remain in effect until
such time as MOTOROLA no longer actively negotiates and/or defends any assertion
of an ESSENTIAL PATENT by the Third Party Claimant or to the extent the
suspension is unnecessary for MOTOROLA to obviate any assertion made by the
Third Party Claimant to the effect that MOTOROLA is prevented from asserting
claims under MOTOROLA PATENTS because of this AGREEMENT.


Section 6 -- SUBLICENSES

6.1  STAC may grant sublicenses to its CHIPSET and software customers for the
MOTOROLA PATENTS on terms and conditions in conformance with the terms and
conditions contained in the exemplary license agreement attached hereto as
Exhibit C (hereinafter "INDUSTRY AGREEMENT"), as the MOTOROLA PATENTS are
defined in the INDUSTRY AGREEMENT; provided, however, that STAC may not grant
any sublicenses to the MOTOROLA PATENTS (as defined in the INDUSTRY AGREEMENT)
to Microsoft Corporation, Apple Computer, IBM, Digital Equipment Corporation 
and Santa Cruz Operations.

6.2  Should STAC so desire, STAC shall be permitted to propose to MOTOROLA
modifications to the terms and conditions of the INDUSTRY AGREEMENT. STAC shall
propose such modifications by sending, by registered mail, return receipt
requested, to the address listed hereinafter in Section 10.11.1. MOTOROLA shall
either approve or deny such modifications within thirty (30) days of MOTOROLA's
receipt of STAC's proposed modifications. Failure by MOTOROLA to approve or deny
STAC's proposed modifications shall be deemed an approval of the proposed
modifications. Once any modifications have been approved by MOTOROLA, STAC will
be free to use an INDUSTRY AGREEMENT




                                      -11-
                       MOTOROLA CONFIDENTIAL PROPRIETARY




<PAGE>   12

containing such modifications to use in accordance with granting sublicenses
pursuant to Section 6.1.

6.3  Schedule A of the INDUSTRY AGREEMENT sets forth the amount of royalties to
be paid by each sublicensee and the INDUSTRY AGREEMENT sets forth the timing and
manner of payments. As provided in the INDUSTRY AGREEMENT, royalties paid by
each sublicensee shall be paid directly to MOTOROLA. STAC shall use its best
efforts to ensure that all sublicensees pay the required royalty amounts to
MOTOROLA when due. If a sublicensee fails to pay the required royalties when
due, then the sublicense to that sublicensee shall, after reasonable notice to
the sublicensee, be immediately suspended.

6.4  Payments for royalties due MOTOROLA on account of any sublicenses shall be
discounted to STAC's benefit from the Schedule A attached to this AGREEMENT by
FIFTY PERCENT (50%) for the first year of each sublicensee's INDUSTRY AGREEMENT,
FORTY PERCENT (40%) for the second year of each sublicensee's INDUSTRY
AGREEMENT, and THIRTY PERCENT (30%) for the third and each subsequent year of
each sublicensee's INDUSTRY AGREEMENT. STAC may modify the royalties set forth
on Schedule A of the INDUSTRY AGREEMENT in its sole discretion and without prior
approval from MOTOROLA, so long as those royalties are not less than that listed
in Exhibit A of this AGREEMENT less the aforementioned discount. Within thirty
days of MOTOROLA's receipt of royalties from a STAC sublicensee pursuant to an
INDUSTRY AGREEMENT, MOTOROLA shall pay STAC the difference between: 1) the
royalties paid to MOTOROLA by the sublicensee, and 2) the amount that would be
due from the sublicensee using Schedule A of this AGREEMENT reduced in
accordance with the aforementioned discount.

6.5  Pursuant to the INDUSTRY AGREEMENT, STAC shall have the ability to perform
an audit of each sublicensee once each year in order to verify that the
sublicensee's payment of royalties is correct. During each year of this
AGREEMENT subsequent to the first year of this AGREEMENT, MOTOROLA may request
that STAC perform an audit of a reasonable number of sublicensees pursuant to
the audit provisions of




                                      -12-
                       MOTOROLA CONFIDENTIAL PROPRIETARY





<PAGE>   13

the INDUSTRY AGREEMENT. However, in no event shall STAC be required by MOTOROLA
to perform any audits in any one year of this AGREEMENT in excess of the lower
of 1) ten percent (10%) of the STAC sublicensees, or 2) any number of STAC
sublicensees representing twenty percent (20%) of the dollar sales volume
(determined by unit volume multiplied by selling price) of all of STAC
sublicensees. Nevertheless, MOTOROLA may require STAC to perform at least one
audit per year.


Section 7 -- TERM AND ASSIGNABILITY

7.1  The term of this Agreement shall be from the EFFECTIVE DATE through the
entire unexpired term of the last to expire of STAC PATENTS and MOTOROLA PATENTS
licensed or subject to license herein.

7.2  Any royalty obligation of MOTOROLA or its SUBSIDIARY(IES) shall not extend
beyond the expiration of the last of the STAC PATENTS licensed herein.

7.3  Any royalty obligation of STAC or its SUBSIDIARY(IES) shall not extend
beyond the expiration of the last of the MOTOROLA PATENTS licensed herein.

7.4  In the event that MOTOROLA sells a MOTOROLA business unit or SUBSIDIARY
that utilizes the STAC PATENTS, STAC agrees to enter into a separate agreement
with that business unit or SUBSIDIARY wherein STAC will grant the same licenses
under Sections 3.1 and 3.2 above pursuant to the same royalty terms provided
herein, except that the provisions of Sections 4.4.2 and 4.13 shall not apply.

7.5  In the event that STAC sells a STAC business unit or SUBSIDIARY to an
entity other than Microsoft Corporation, that utilizes, or has customers that
utilize, the MOTOROLA PATENTS, MOTOROLA agrees to enter into a separate
agreement with that business unit or SUBSIDIARY wherein MOTOROLA will grant the
same license under Section 3.3 above



                                      -13-
                       MOTOROLA CONFIDENTIAL PROPRIETARY


<PAGE>   14

pursuant to the same royalty terms provided herein, except that the provisions
of Section 4.12 above shall not apply.

7.6  In the event that STAC sells a STAC business unit or SUBSIDIARY to an
entity other than Microsoft Corporation, that utilizes, or has customers that
utilize, the MOTOROLA PATENTS, and STAC determines that only the STAC business
unit or SUBSIDIARY or its customers require rights to the MOTOROLA PATENTS
granted in this AGREEMENT, STAC may assign all of its rights and obligations to
the MOTOROLA PATENTS to such STAC business unit or SUBSIDIARY, including but not
limited to the provisions of Section 4.12. For the purposes of calculating the
amounts paid by such STAC business unit or SUBSIDIARY determined by Section
4.12, all prior payments made by STAC pursuant to this AGREEMENT shall be
included.

7.7  In the event that MOTOROLA enters into a joint development or partnership
agreement with an original equipment manufacturer, STAC agrees to enter into a
separate agreement with that original equipment manufacturer wherein STAC will
grant the same licenses under Sections 3.1 and 3.2 above pursuant to the same
royalty terms provided herein, except that the provisions of Sections 4.4.2 and
4.13 above shall not apply. No royalty shall be due pursuant to this AGREEMENT
for products sold by such original equipment manufacturer pursuant to such a
separate agreement; royalties for such products shall be due pursuant to such
separate agreement.

7.8  In the event that STAC enters into a joint development or partnership
agreement with an original equipment manufacturer, MOTOROLA agrees to enter into
a separate agreement with that original equipment manufacturer wherein MOTOROLA
will grant the same licenses under Section 3.3 above pursuant to the same
royalty terms provided herein, except that the provisions of Section 4.12 above
shall not apply. No royalty shall be due pursuant to this AGREEMENT for products
sold by such original equipment manufacturer pursuant to such a separate
agreement; royalties for such products shall be due pursuant to such separate
agreement.



                                      -14-
                       MOTOROLA CONFIDENTIAL PROPRIETARY

<PAGE>   15

Section 8 -- WARRANTIES

8.1  Each party warrants that it has all rights necessary to grant the releases,
rights and licenses granted herein.

8.2  Each party warrants that any of its SUBSIDIARY(IES) licensed hereunder
shall undertake all obligations contained herein as if such SUBSIDIARY(IES) were
directly named as a party to this Agreement.


Section 9 -- PUBLICITY

9.1  Nothing in this Agreement shall be construed as conferring upon either
party the right to include in advertising, packaging or other commercial
activity any reference to the other party, its trademarks, trade names, service
marks, or other trade identity in a manner likely to cause confusion.

9.2  Either party may disclose the existence of this Agreement, but shall
otherwise keep the terms of this Agreement confidential and shall not now or
hereafter divulge any part thereof to any third party except:

9.2.1 with the prior written consent of the other party; or

9.2.2 to any governmental body having jurisdiction to request and to read the
same; or

9.2.3 as otherwise may be required by law or legal processes; or

9.2.4 to legal counsel representing either party; or

9.2.5 to its SUBSIDIARY(IES) provided that such divulging party shall impose
equivalent confidentiality obligations on the recipient in writing prior to such
divulgence.




                                      -15-
                       MOTOROLA CONFIDENTIAL PROPRIETARY
<PAGE>   16

9.3  STAC agrees to include the text of Exhibit D in its multichannel data
compression data sheets and in its licenses for LZS DATA COMPRESSION software.

9.4  MOTOROLA agrees to use the STAC LZS logo, as specified in Exhibit E, on the
packaging and documentation of any products which use the STAC LZS DATA
COMPRESSION technology.


Section 10 -- MISCELLANEOUS PROVISIONS

10.1 Nothing contained in this Agreement shall be construed as:

10.1.1 restricting the right of either party or any of its SUBSIDIARY(IES) to
make, use, sell, lease or otherwise dispose of any particular product or
products not herein licensed;

10.1.2 conferring any license or other right, by implication, estoppel or
otherwise, under any patent application, patent or patent right, except as
herein expressly granted herein;

10.1.3 conferring any license or right with respect to any trademark, trade or
brand name, a corporate name of either party or any of their respective
SUBSIDIARY(IES), or any other name or mark, or contraction, abbreviation or
simulation thereof;

10.1.4 imposing on either party any obligation to institute any suit or action
for infringement of any patent, or to defend any suit or action brought by a
third party which challenges or concerns the validity of any patent licensed
under this Agreement;

10.1.5 a warranty or representation by either party that any manufacture, use,
sale, lease or other disposition of its products or services will be free from
infringement of any patent other than the patents licensed herein;




                                      -16-
                       MOTOROLA CONFIDENTIAL PROPRIETARY
<PAGE>   17

10.1.6 imposing on either party any obligation to file any patent application or
to secure any patent or maintain any patent in force; or

10.1.7 an obligation on either party to furnish any manufacturing or technical
information under this Agreement except as the same is specifically provided for
herein.

10.2 No express or implied waiver by either of the parties to this Agreement of
any breach of any term, condition or obligation of this Agreement by the other
party shall be construed as a waiver of any subsequent breach of that term,
condition or obligation or of any other term, condition or obligation of this
Agreement of the same or of a different nature.

10.3 Anything contained in this Agreement to the contrary notwithstanding, the
obligations of the parties hereto shall be subject to all laws, both present and
future, of any Government having jurisdiction over either party hereto, and to
orders or regulations of any such Government, or any department, agency, or
court thereof, and acts of war, acts of public enemies, strikes, or other labor
disturbances, fires, floods, acts of God, or any causes of like or different
kind beyond the control of the parties, and the parties hereto shall be excused
from any failure to perform any obligation hereunder to the extent such failure
is caused by any such law, order, regulation, or contingency but only so long as
said law, order, regulation or contingency continues.

10.4 This Agreement is the result of negotiation between the parties and,
accordingly, shall not be construed for or against either party regardless of
which party drafted this Agreement or any portion thereof.

10.5 Nothing in this Agreement shall be construed as creating a partnership,
joint venture, or other formal business organization of any kind.




                                      -17-
                       MOTOROLA CONFIDENTIAL PROPRIETARY
<PAGE>   18

10.6 In no event shall either party be liable to the other party by reason of
this Agreement or any breach or termination of this Agreement for any loss of
prospective profits or incidental or special or consequential damages.

10.7 The captions used in this Agreement are for convenience only, and are not
to be used in interpreting the obligations of the parties under this Agreement.

10.8 This Agreement and the performance of the parties hereunder shall be
construed in accordance with and governed by the laws of the State of Illinois,
United States of America.

10.9 If any term, clause, or provision of this Agreement shall be judged to be
invalid, the validity of any other term, clause, or provision shall not be
affected; and such invalid term, clause, or provision shall be deemed deleted
from this Agreement.

10.10 This Agreement sets forth the entire Agreement and understanding between
the parties as to the subject matter hereof and merges all prior discussions
between them, and neither of the parties shall be bound by any conditions,
definitions, warranties, understandings or representations with respect to such
subject matter other than as expressly provided herein or as duly set forth on
or subsequent to the date hereof in writing and signed by a proper and duly
authorized official of the party to be bound thereby.

10.11 All notices required or permitted to be given hereunder shall be in
writing and shall be valid and sufficient if dispatched by registered mail,
postage prepaid, in any post office in the United States, addressed as follows:

10.11.1 If to MOTOROLA:

        Motorola Inc.




                                      -18-
                       MOTOROLA CONFIDENTIAL PROPRIETARY
<PAGE>   19

        1303 East Algonquin Road
        Schaumburg, Illinois 60196

        Attention: Vice President for
                   Patents, Trademarks & Licensing

10.11.2 If to STAC:

        Stac, Inc.
        12636 High Bluff Drive, Suite 400
        San Diego, California 92130-2093

        Attention: Vice President, Finance

10.12.3 The date of receipt of such a notice shall be the date for the
commencement of the running of the period provided for in such notice, or the
date at which such notice takes effect, as the case may be.

IN WITNESS WHEREOF, each party hereto has caused this Agreement to be executed
in duplicate by its duly authorized representative:

Motorola, Inc.                          Stac, Inc.


By:    [SIG]                            By:    [SIG]  
    ---------------------------------       ------------------------------------
Title: VP & GM Network                  Title: Vice President, Finance
       Systems Division




                                      -19-
                       MOTOROLA CONFIDENTIAL PROPRIETARY
<PAGE>   20
                                   SCHEDULE A

           For each year of this AGREEMENT, a party who shall pay a license fee
shall pay the amount from TABLE I according to forecasted NET SALES PRICE and
ANNUAL VOLUME. NET SALES PRICE is the averaged forecasted selling price for all
LICENSED MOTOROLA PRODUCTS or LICENSED STAC PRODUCTS, as applicable, sold during
the year, and ANNUAL VOLUME is the number of LICENSED MOTOROLA PRODUCTS or
LICENSED STAC PRODUCTS, as applicable, forecasted for shipment during the year.
In the case of LICENSED MOTOROLA PRODUCTS or LICENSED STAC PRODUCTS where data
compression is sold as an option, the NET SALES PRICE is the selling price of
the option together with the host product or host platform having the option. If
the actual sales for the party during the year exceed the forecasted volume for
which a royalty was paid at the beginning of the year, royalties are payable in
accordance with TABLE II. If no sales are anticipated for the year, then no
license fee is due. However, if any sales are made during a year, the minimum
royalty due is $20,000.00.

                          TABLE I: ANNUAL LICENSE FEE

<TABLE>
<CAPTION>
=====================================================================================================
                                                        NET SALES PRICE

Annual Volume                  <$50                 <$250               <$1000               >$1000
- -----------------------------------------------------------------------------------------------------
<S>                            <C>                  <C>                 <C>                  <C>    
10,000 or less                 $20,000              $20,000             $25,000              $40,000

100,000 or less                $40,000              $50,000             $85,000              $165,000

1,000,000 or less              $105,000             $205,000            $410,000             $825,000

For annual volumes in excess of 1,000,000 units, no annual royalty is charged
and, instead, the following per unit royalty is assessed:

                               $0.125               $0.25               $0.50                $1.00
=====================================================================================================
</TABLE>

                                    TABLE II:

                           PER UNIT ROYALTY FOR UNITS

                      IN EXCESS OF VOLUME BAND UPPER LIMIT.

<TABLE>
<CAPTION>
=====================================================================================================
                                                        NET SALES PRICE

Annual Volume                  <$50                 <$250               <$1000               >$1000
- -----------------------------------------------------------------------------------------------------
<S>                            <C>                  <C>                 <C>                  <C>  
10,000 or less                 $0.50                $1.00               $2.00                $4.00

100,000 or less                $0.25                $0.50               $1.00                $2.00

1,000,000 or less              $0.125               $0.25               $0.50                $1.00

=====================================================================================================
</TABLE>



                                      -20-

                       MOTOROLA CONFIDENTIAL PROPRIETARY
<PAGE>   21

                                   SCHEDULE B

                                    LZS Terms

Royalties for each LICENSED MOTOROLA LZS PRODUCT shall be payable according to
the following Current License Fee Schedule:

<TABLE>
<CAPTION>
     Total               Average Selling Price (ASP)
     Units          <$50      <$250     <$1000    >$1000   
     <S>            <C>       <C>       <C>       <C>
     < 1K           $ 5K      $10K      $15K      $20K
     < 10K          $12K      $25K      $37K      $50K
     <100K          $25K      $45K      $60K      $75K
     <1000K         $50K      $70K      $90K      $95K
     >1000K         $80K      $85K       --        --
</TABLE>


The Average Selling Price (ASP) of LICENSED MOTOROLA LZS PRODUCTS is the average
forcasted selling price for all LICENSED MOTOROLA LZS PRODUCTS during the
applicable year. The Total Units is the volume of LICENSED MOTOROLA LZS PRODUCTS
forecasted for shipment during the applicable year. If LICENSED MOTOROLA LZS
PRODUCTS comprises multiple products, Total Units is the sum of all LICENSED
MOTOROLA LZS PRODUCTS and the ASP is the average of the ASP for each of the
products comprising LICENSED MOTOROLA LZS PRODUCTS.

In the case of LICENSED MOTOROLA LZS PRODUCTS where data compression is sold as
an option, the ASP is the ASP of the option together with the host product or
host platform having the option.

If multiple compression libraries (e.g., separate versions of LZS DATA
COMPRESSION software for different platforms, or software for one or other
platforms that embodies enhancements to LZS DATA COMPRESSION developed by
MOTOROLA) are used, then the royalty payable shall be calculated as follows: The
royalty for each individual library is calculated separately using the
procedures described above. The total License Fee will be the sun of 1) the
largest License Fee plus 2) half of the sum of all other License Fees.

The Current License Fee Schedule above shall be updated on the anniversary of
this AGREEMENT by STAC's then Current License Fee Schedule, which shall not have
an amount of increase in royalties of more that ten percent (10%) from the
Current License Fee Schedule for the prior applicable year. Such updated License
Fee Schedule shall




                                      -21-
                       MOTOROLA CONFIDENTIAL PROPRIETARY

<PAGE>   22

become the Current License Fee Schedule for the subsequent year of this
AGREEMENT.




                                      -22-
                       MOTOROLA CONFIDENTIAL PROPRIETARY
<PAGE>   23

                                    EXHIBIT C

                               INDUSTRY AGREEMENT




                                      -23-
                       MOTOROLA CONFIDENTIAL PROPRIETARY
<PAGE>   24

                            PATENT LICENSE AGREEMENT


THIS AGREEMENT is entered into on this ___ day of _________ by and between Stac,
Inc., a California corporation having an office at 12636 High Bluff Drive, Suite
400, San Diego, California 92130-2093 (hereinafter called "STAC"), and
__________, hereinafter called "LICENSEE").

WHEREAS, MOTOROLA (defined below) owns and has, or may have, rights in certain
patents issued, and applications for patents pending, in various countries of
the world under which LICENSEE desires to acquire licenses as hereinafter
provided, and

WHEREAS, STAC has certain rights to grant sublicenses under certain patent
rights held by MOTOROLA,

NOW THEREFORE, in consideration of the mutual covenants and conditions
hereinafter set forth, it is agreed as follows:


Section 1 -- DEFINITIONS
- -----------------------

1.1  SUBSIDIARY(IES) means any legal entity, more than fifty percent (50%) of
whose outstanding shares or securities representing the right to vote for the
election of directors or other managing authority are, now or hereafter, owned
or controlled, directly or indirectly by that party (but only so long as such
conditions exist).

1.2  MOTOROLA means Motorola, Inc., a Delaware corporation having an office at
1303 E. Algonquin Road, Schaumburg, Illinois 60196.

1.3  MOTOROLA PATENTS shall mean U.S. Patent Nos. 5,130,993 and 5,245,614, any
patent issuing from U.S. Patent Application No. 08/156,857 and including all
divisions, continuations, continuations-in-part, reissues, renewals, and
extensions, and any counterparts claiming priority therefrom, for any of the
aforementioned.

1.4  CHIPSETS means one or more semiconductor devices which alone, or
collectively, implement the function of data compression.

1.5. EQUIPMENT means routers, bridges, multiplexers, frame relay and other
frame/packet access devices, modems operating over a



                                        1
<PAGE>   25

telephone network, data service units, and ISDN terminal adapters other than
CHIPSETS, or a combination of software and routers, bridges, multiplexers, frame
relay and other frame/packet access devices, modems operating over a telephone
network, data service units, and ISDN terminal adapters, other than CHIPSETS,
which, alone or collectively, include a function of data compression and include
a function of data communication with one or more interfaces to a public or
private network.

1.6  LICENSED EQUIPMENT means EQUIPMENT infringing one or more of the MOTOROLA
PATENTS which is identified by LICENSEE on the form of Exhibit B.

1.7  LICENSED SOFTWARE means software infringing one or more of the MOTOROLA
PATENTS which is identified by LICENSEE on the form of Exhibit B.

1.8  LICENSED PRODUCTS means LICENSED EQUIPMENT and LICENSED SOFTWARE.


Section 2 -- GRANTS

2.1  STAC hereby grants to LICENSEE and its SUBSIDIARY(IES), for the lives of
the MOTOROLA PATENTS, a non-exclusive, non-transferable license throughout the
world under MOTOROLA PATENTS without the right to sub-license, to make and have
made, LICENSED EQUIPMENT, and to use, lease, sell, or otherwise dispose of such
LICENSED EQUIPMENT.

2.2  STAC on behalf of MOTOROLA hereby releases, acquits and forever discharges
LICENSEE and its SUBSIDIARY(IES) and their respective distributors, dealers,
customers and users from any and all claims or liability for infringement of the
MOTOROLA PATENTS by the use, lease, sale or other disposition of LICENSED
PRODUCTS prior to the EFFECTIVE DATE.


Section 3 -- PAYMENTS

3.1  In consideration for the license grants of Section 2.1, LICENSEE agrees to
pay to MOTOROLA the license fees in accordance with Schedule A. based on
LICENSED PRODUCTS identified by LICENSEE on the form of Exhibit B.



                                        2
<PAGE>   26

3.2  In consideration for the release of Section 2.2, LICENSEE agrees to pay to
MOTOROLA on the date of signing this AGREEMENT the amount representing royalties
based on LICENSED PRODUCTS sold. prior to date of signing of this Agreement, in
accordance with Schedule A. For the purpose of calculating such amount, all
LICENSED PRODUCTS sold prior to the signing of this AGREEMENT shall be
identified on the form of Exhibit B for each year prior to the signing of this
AGREEMENT, beginning on July 14, 1992. If, however, the AGREEMENT is signed on
or before January 31, 1996, LICENSEE need only identify on the form of Exhibit B
all LICENSED PRODUCTS sold since September 1, 1995, and pay the amount based
only on that LICENSED PRODUCT then identified on the form of Exhibit B.

3.3  Within thirty (30) days of executing this AGREEMENT, and on each
anniversary of this AGREEMENT, a responsible official of LICENSEE shall in good
faith estimate for the current year in writing to STAC and MOTOROLA an
approximate number of LICENSED PRODUCTS to be sold for that year, identify such
on the form of Exhibit B, and shall make a royalty payment to MOTOROLA (for
itself and all of its SUBSIDIARY(IES) based upon Schedule A, Table I as to the
number of LICENSED PRODUCTS sold, leased or otherwise disposed of by LICENSEE as
identified on the form of Exhibit B. Within thirty (30) days following the
anniversary of this AGREEMENT, LICENSEE shall certify in writing, incorporating
the form of Exhibit B, either that the number of LICENSED PRODUCTS sold, leased
or otherwise disposed of in the previous year did not exceed the estimated
number, or LICENSEE shall certify in writing that the number of LICENSED
PRODUCTS sold, leased or otherwise disposed of in the previous year exceeded the
estimate, and shall pay to MOTOROLA a royalty for the number of LICENSED
PRODUCTS sold in excess of the estimate for the previous year in accordance with
Schedule A, Table II.

3.4  Any payment hereunder which shall be delayed for more than thirty (30) days
beyond the due date shall be subject to an interest charge of one (1) percent
per month on the unpaid balance payable in United States currency until paid.
The foregoing payment of interest shall not affect either party's right to
terminate in accordance with Section 6.

3.5  With respect to the royalty and reporting set forth in this Section 3,
LICENSEE shall keep full, clear and accurate records with respect to LICENSED
PRODUCTS sold, leased or otherwise disposed



                                        3
<PAGE>   27

of. These records shall be retained for a period of three (3) years from the
date of reporting and payment notwithstanding the expiration or other
termination of this AGREEMENT. STAC shall have the right through a mutually
agreed upon independent certified public accountant and at its expense, to
examine and audit, not more than once a year, and during normal business hours,
all such records and such other records and accounts as may under recognized
accounting practices contain information bearing upon the amount of royalty
payable by LICENSEE to MOTOROLA under this AGREEMENT. Prompt adjustment shall be
made to compensate for any errors and/or omissions disclosed by such examination
or audit.

3.6  MOTOROLA shall bear all taxes imposed on it with respect to the payments of
this Section, provided, however, that if so required by applicable law, LICENSEE
shall withhold the amount of taxes levied on payments to be made by LICENSEE
pursuant to this AGREEMENT, and shall promptly make payment of the withheld
amount to the appropriate tax authorities and shall transmit to MOTOROLA
official tax receipts or other evidence issued by said appropriate tax
authorities sufficient to enable MOTOROLA to support a claim for tax credit in
respect to such withheld taxes so paid by LICENSEE.

3.7  No royalty shall be payable on LICENSED PRODUCTS sold after the seventh
full year from the date of execution of this AGREEMENT.

3.8  MOTOROLA may increase the royalties shown in Table I by not more than
ten percent (10%) each year.


Section 4 -- SUSPENSION OF LICENSE

If at any time during the term of this AGREEMENT, LICENSEE asserts a patent
against any MOTOROLA product and also asserts that MOTOROLA is prevented from
asserting claims under any MOTOROLA PATENTS against LICENSEE as a result of the
licenses granted to STAC in this AGREEMENT, then the licenses granted to
LICENSEE shall immediately be suspended. The suspension of the licenses granted
to LICENSEE shall be effective only if and so long as MOTOROLA actively
negotiates and/or defends such claim and only to the extent necessary to obviate
the assertions made by LICENSEE to the effect that MOTOROLA is prevented from
asserting claims under MOTOROLA PATENTS because of this AGREEMENT.



                                        4
<PAGE>   28

Section 5 -- WIRE TRANSFER

5.1  All sums due MOTOROLA are payable in United States dollars and shall be
paid by wire transfer to the following MOTOROLA bank account unless otherwise
directed:

        The Bank of Boston
        100 Federal Street
        Boston, Massachusetts
        Account: 531-31430
        Account Name: Motorola, Inc.
        Federal Fund ID: 011000390

Section 6 -- TERM, TERMINATION, AND ASSIGNABILITY

6.1  The term of this AGREEMENT shall be from the EFFECTIVE DATE through the
entire unexpired term of the last to expire MOTOROLA PATENTS licensed or subject
to license herein, unless earlier terminated as hereinafter provided.

6.2  In the event of any breach of this AGREEMENT by either party hereto
(including LICENSEE's obligation to make payments under Section 3), if such
breach is not corrected within forty-five (45) days after written notice to the
breaching party describing such breach, this AGREEMENT may be terminated
forthwith by further written notice to that effect from the party noticing the
breach. In the event of termination of this AGREEMENT pursuant to this Section
6.2, the licenses and rights granted to or for the benefit of LICENSEE and its
SUBSIDIARY(IES) under the MOTOROLA PATENTS shall terminate as of the date
termination takes effect.

6.3  This AGREEMENT is personal to each of the parties hereto; and either party
shall have the right to terminate this AGREEMENT by giving written notice of
termination to the other party at any time upon or after: 1) the filing by the
other party of a petition in bankruptcy or insolvency; 2) any adjudication that
the other party is bankrupt or insolvent; 3) the filing by the other party under
any law relating to bankruptcy or insolvency; 4) the appointment of a receiver
for all or substantially all of the property of the other party; 5) the making
by the other party of any assignment or attempted assignment of this AGREEMENT
for the benefit of



                                        5
<PAGE>   29

creditors; 6) any admission or statement by the other party that it is bankrupt
or insolvent; or 7) the institution of any proceedings for the liquidation or
winding up of the other party's business or for the termination of its corporate
charter. In the event of termination of this AGREEMENT pursuant to this Section
6.3 the licenses and rights granted to or for the benefit of LICENSEE and its
SUBSIDIARY(IES) under the MOTOROLA PATENTS shall terminate as of the date
termination takes effect.

6.4  The rights or privileges provided for in this AGREEMENT as to LICENSED
EQUIPMENT may be assigned or transferred by either party only with the prior
written consent of the other party, which consent will not be unreasonably
withheld, and with the authorization or approval of any governmental authority
as then may be required.


Section 7 -- WARRANTIES

7.1  STAC warrants that it has all rights necessary to grant the rights and
licenses granted in this AGREEMENT.

7.2  Each party warrants that any of its SUBSIDIARY(IES) licensed hereunder
shall undertake all obligations contained herein as if such SUBSIDIARY(IES) were
directly named as a party to this AGREEMENT.


Section 8 -- PUBLICITY

8.1  Nothing in this AGREEMENT shall be construed as conferring upon either
party the right to include in advertising, packaging or other commercial
activity any reference to the other party or MOTOROLA, its trademarks, trade
names, service marks, or other trade identity in a manner likely to cause
confusion.

8.2  Either party may disclose the existence of this AGREEMENT, but shall
otherwise keep the terms of this AGREEMENT confidential and shall not now or
hereafter divulge any part thereof to any third party except with the prior
written consent of the other party; to any governmental body having jurisdiction
to request and to read the same; as otherwise may be required by law or legal
processes; to legal counsel representing either party; or to its SUBSIDIARY(IES)
provided that such divulging party shall impose equivalent.



                                        6
<PAGE>   30

confidentiality obligations on the recipient in writing prior to such
divulgence.


Section 9 -- MISCELLANEOUS PROVISIONS

9.1  Nothing contained in this AGREEMENT shall be construed as:

9.1.1 restricting the right of either party or any of its SUBSIDIARY(IES) to
make, use, sell, lease or otherwise dispose of any particular product or
products not herein licensed;

9.1.2 conferring any license or other right, by implication, estoppel or
otherwise, under any patent application, patent or patent right, except as
herein expressly granted herein;

9.1.3 conferring any license or right with respect to any trademark, trade or
brand name, a corporate name of either party or any of their respective
SUBSIDIARY(IES), or any other name or mark, or contraction, abbreviation or
simulation thereof;

9.1.4 imposing on either party any obligation to institute any suit or action
for infringement of any patent, or to defend any suit or action brought by a
third party which challenges or concerns the validity of any patent licensed
under this AGREEMENT;

9.1.5 a warranty or representation by either party that any manufacture, use,
sale, lease or other disposition of its products or services will be free from
infringement of any patent other than the patents licensed herein;

9.1.6 imposing on either party any obligation to file any patent application or
to secure any patent or maintain any patent in force; or

9.1.7 an obligation on either party to furnish any manufacturing or technical
information under this AGREEMENT except as the same is specifically provided for
herein.

9.2  No express or implied waiver by either of the parties to this AGREEMENT of
any breach of any term, condition or obligation of this Agreement by the other
party shall be construed as a waiver of any subsequent breach of that term,
condition or obligation or of any



                                        7
<PAGE>   31

other term, condition or obligation of this AGREEMENT of the same or of a
different nature.

9.3  Anything contained in this AGREEMENT to the contrary notwithstanding, the
obligations of the parties hereto shall be subject to all laws, both present and
future, of any Government having jurisdiction over either party hereto, and to
orders or regulations of any such Government, or any department, agency, or
court thereof, and acts of war, acts of public enemies, strikes, or other labor
disturbances, fires, floods, acts of God, or any causes of like or different
kind beyond the control of the parties, and the parties hereto shall be excused
from any failure to perform any obligation hereunder to the extent such failure
is caused by any such law, order, regulation, or contingency but only so long as
said law, order, regulation or contingency continues.

9.4  Nothing in this AGREEMENT shall be co