HI/FN INC
10-12G/A, 1998-10-16
SEMICONDUCTORS & RELATED DEVICES
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<PAGE>   1
 
   
    AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 16, 1998
    
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
 
                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
                            ------------------------
   
                               AMENDMENT NO. 1 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(2)   Form of Third Amended and Restated Certificate of
          Incorporation of Hi/fn, Inc. (included as Annex I to the
          Information Statement).
 3.2(2)   Form of Amended and Restated Bylaws of Hi/fn, Inc. (included
          as Annex II to the Information Statement).
 4.1(3)   Form of Common Stock Certificate.
10.1(2)   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(2)   Form of Distribution Agreement.
10.5(3)   Form of Employee Benefits Allocation Agreement.
10.6(3)   Form of Tax Sharing Agreement.
10.7(2)   Form of Transitional Services Agreement.
10.8(2)   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(2)  Agreement dated as of November 13, 1997 between 750
          University, LLC and Hi/fn, Inc.
10.15(2)  1998 Employee Stock Purchase Plan of Hi/fn, Inc.
10.16(2)  Form of Director Change of Control Agreement.
10.17(3)  Form of Employee Change of Control Agreement.
27.1(1)   Financial Data Schedule.
</TABLE>
    
 
- ---------------
   
(1) Previously filed.
    
 
   
(2) Filed herewith.
    
 
   
(3) To be filed by amendment.
    
 
   
 *  The Company is seeking confidential treatment with respect to portions of
    this exhibit.
    
 
                                       ii
<PAGE>   4
 
                               [STAC LETTERHEAD]
 
                               November   , 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 intends to apply 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 November 1, 1998, you will receive as a dividend one share of Hi/fn common
stock for every [3.8946] shares of Stac common stock you hold. It is a condition
for the completion of the Distribution that Stac obtain a ruling from the
Internal Revenue Service or a favorable opinion from PricewaterhouseCoopers LLP
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, although the Stac Board of Directors may waive receipt of the
ruling or opinion as a condition to consummation of the Distribution. The
Distribution is scheduled to occur on or about November 19, 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 November 1, 1998 (the "Record Date"). As of the Record
Date, there were issued and outstanding [482,906] shares of Company Common
Stock, held by 21 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. 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
[3.8946] 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 Record 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. As of the Record Date, [858,395] 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").
    
 
     It is a condition for the completion of the Distribution that Stac obtain a
ruling from the Internal Revenue Service ("IRS") or a favorable opinion from
PricewaterhouseCoopers LLP 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"), although the Stac Board
of Directors may waive receipt of the ruling or opinion as a condition to
consummation of the Distribution. 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 November 19, 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 NOVEMBER   , 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......................     27
  Results of the Distribution...............................     28
  Material Federal Income Tax Consequences of the
     Distribution...........................................     28
  Quotation and Trading of Company Common Stock; Dividend
     Policy.................................................     29
  Conditions; Termination...................................     30
  Reasons for Furnishing the Information Statement..........     30
RELATIONSHIP BETWEEN HI/FN AND STAC AFTER THE
  DISTRIBUTION..............................................     31
REGULATORY APPROVALS........................................     33
SELECTED HISTORICAL FINANCIAL DATA..........................     34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
  AND RESULTS OF OPERATIONS.................................     35
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
FINANCIAL STATEMENTS........................................    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 [482,906] shares of the Company's
                                 common stock, $.001 par value per share (the
                                 "Company Common Stock"), held by 21
                                 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 [3.8946] shares of Stac Common Stock
                                 held by Stac stockholders on the Record Date
                                 (the "Distribution Ratio"). 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 [482,906] shares of Company Common
                                 Stock and 6,000,000 shares of Series A
                                 Preferred Stock outstanding on the Record Date,
                                 approximately [6,482,906] shares of Company
                                 Common Stock.
 
   
Record Date...................   November 1, 1998 (5:00 p.m. Eastern Standard
                                 Time).
    
 
Distribution Date.............   On or about November 19, 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
                                        3
<PAGE>   9
 
                                 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."
 
Conditions to the
Distribution..................   The Distribution is conditioned upon, among
                                 other things, declaration of the special
                                 dividend by the Board of Directors of Stac (the
                                 "Stac Board") and receipt of a ruling from the
                                 Internal Revenue Service ("IRS") or a favorable
                                 opinion from PricewaterhouseCoopers LLP 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").
                                 The Stac Board has reserved the right to waive
                                 any conditions to the Distribution or, even if
                                 the conditions to the Distribution are
                                 satisfied, to abandon, defer or modify the
                                 Distribution at any time prior to the
                                 Distribution Date. See "THE
                                 DISTRIBUTION -- Conditions; Termination."
 
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................   Stac has requested 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). The Distribution is
                                 conditioned upon receipt of a ruling or a
                                 favorable opinion of PricewaterhouseCoopers LLP
                                 as to the tax-free treatment of the
                                 Distribution prior to the Distribution Date,
                                 although the Stac Board may waive receipt of
                                 the ruling or opinion as a condition to
                                 consummation of the Distribution. 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
    
                                        4
<PAGE>   10
 
                                 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."
 
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 re-
                                        5
<PAGE>   11
 
   
                                 ceived 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; 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 Sharing 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
                                        6
<PAGE>   12
 
                                 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 -- 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
                                           shares, or approximately      %, 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, 1996 and 1997
and for each of the three years in the period ended September 30, 1997 and the
unaudited financial statements as of June 30, 1998 and for the nine months ended
June 30, 1997 and 1998 included herein. Financial information as of September
30, 1993 and 1994 and for each of the two years in the period 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 September 30, 1993 and 1994, as of June
30, 1998, for the years ended September 30, 1993 and 1994 and for the nine
months ended June 30, 1997 and 1998 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>
                                                                                       NINE MONTHS
                                                YEAR ENDED SEPTEMBER 30,              ENDED JUNE 30,
                                      --------------------------------------------   ----------------
                                       1993     1994     1995     1996      1997      1997     1998
                                      ------   ------   ------   -------   -------   ------   -------
<S>                                   <C>      <C>      <C>      <C>       <C>       <C>      <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................  $5,472   $5,666   $7,342   $12,894   $14,226   $8,991   $16,513
Cost of revenues....................   2,116    2,302    2,841     5,095     4,762    2,955     5,142
                                      ------   ------   ------   -------   -------   ------   -------
Gross margin........................   3,356    3,364    4,501     7,799     9,464    6,036    11,371
Operating expenses:
Research and development............   1,008      564      551     1,641     2,985    1,873     4,066
Sales and marketing.................   1,222      813    1,097     1,677     2,224    1,585     2,438
General and administrative..........     447      379      492       889     1,203      851     1,737
                                      ------   ------   ------   -------   -------   ------   -------
Operating income....................     679    1,608    2,361     3,592     3,052    1,727     3,130
Interest income.....................                                            16        7        14
                                      ------   ------   ------   -------   -------   ------   -------
Provision for income taxes..........     275      661      947     1,441     1,235      699     1,292
                                      ------   ------   ------   -------   -------   ------   -------
Net income..........................  $  404   $  947   $1,414   $ 2,151   $ 1,833   $1,035   $ 1,852
                                      ======   ======   ======   =======   =======   ======   =======
Net income per share, basic(1)......  $ 0.07   $ 0.16   $ 0.24   $  0.36   $  0.30   $ 0.17   $  0.29
Net income per share, diluted.......  $ 0.07   $ 0.16   $ 0.24   $  0.36   $  0.30   $ 0.17   $  0.27
Weighted average shares outstanding,
  basic.............................   6,000    6,000    6,000     6,000     6,100    6,075     6,282
Weighted average shares outstanding,
  diluted...........................   6,000    6,000    6,000     6,000     6,174    6,075     6,782
BALANCE SHEET DATA:
Cash................................  $   --   $   --   $   --   $    --   $   480            $    69
Total assets........................   1,172    1,583    2,254     2,611     5,898              8,773
Working capital (deficit)...........    (143)    (193)    (223)     (383)    3,520              4,770
Total stockholders' equity(2).......      --       --       --        --     4,622              6,682
</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
1997, sales to Quantum accounted for 70% 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. In fiscal 1995, two customers,
Quantum and Exabyte Corporation, accounted for 35% and 19% of the Company's
revenues, respectively. For the nine months ended June 30, 1998, Quantum
accounted for 64% of revenues. 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
 
                                       13
<PAGE>   19
 
obtain significant orders from new customers, or any significant customer delays
payment or 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 87%, 88%, 89% and
75% of revenue in the nine months ended June 30, 1998 and fiscal 1997, 1996 and
1995, 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 such 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
currently is conducting a search for a new Chief Executive Officer, and expects
one to take office prior to the Distribution. 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
 
                                       17
<PAGE>   23
 
disrupted by the imposition of governmental controls, export license
requirements, restrictions on the export of 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
 
     The declaration of the Distribution dividend by the Stac Board is
conditioned upon, among other things, the receipt of a ruling from the IRS or a
favorable opinion from PricewaterhouseCoopers LLP as to the tax-free nature of
the Distribution, although the Stac Board may waive receipt of the ruling or the
opinion as a condition to consummation of the Distribution. See "THE
DISTRIBUTION -- Material Federal Income Tax Consequences of the Distribution"
and "-- Conditions; Termination." While a ruling has been requested, the IRS has
not yet issued a ruling and there can be no assurance that the IRS will issue a
ruling prior to the Distribution or at all.
 
     A tax ruling, while generally binding upon the IRS, is subject to certain
factual representations and assumptions. A tax opinion, in addition to being
subject to the accuracy of the same representations and assumptions as a tax
ruling, is not binding on the IRS and merely reflects the best judgment of the
author. If such factual representations and assumptions 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. 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
          shares, or approximately      %, 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
     % 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        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, the Company has authorized options to purchase 1,949,900
shares of Company Common Stock under the 1996 Plan,         of which have been
issued to date upon exercise of options and         of which were subject to
options outstanding on the Record Date. 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 certain 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. For Stac, these 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.
    
 
     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.
 
   
     Stock Trading Analysis. WDR also analyzed Stac's historical stock price
performance on an absolute basis and compared to its comparable companies. The
analysis indicated that the market price of Stac Common Stock has underperformed
the equally weighted index of the common stocks of the comparable companies
relative to most of the ratios and comparisons analyzed.
    
 
     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
                                       26
<PAGE>   32
 
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.
 
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 [471,007] shares of Company Common
Stock outstanding, held by 21 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 [3.8946] shares of Stac Common Stock held by Stac
stockholders on the Record Date (the "Distribution Ratio"). 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
                                       27
<PAGE>   33
 
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 450 holders of record of the Company Common Stock
and approximately 6,471,007 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.
 
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
 
     The declaration of the Distribution dividend by the Stac Board is
conditioned upon, among other things, the receipt of a ruling from the IRS or a
favorable opinion from PricewaterhouseCoopers LLP as to the tax-free nature of
the Distribution, although the Stac Board may waive receipt of the ruling or the
opinion as a condition to consummation of the Distribution. See "-- Conditions;
Termination." The IRS has not issued a ruling letter and there can be no
assurance that the IRS will issue a ruling prior to the Distribution.
 
     On April 16, 1998, Stac requested a private ruling from the IRS 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.
 
     As of the date hereof, the IRS has not issued a ruling letter, and there
can be no assurance that the IRS will issue a favorable ruling in response to
Stac's request. Moreover, even if such a ruling is obtained, it should be noted
that private letter rulings, while generally binding on the IRS, are subject to
certain factual representations and assumptions. If such factual representations
and assumptions were incorrect in any
 
                                       28
<PAGE>   34
 
material respect, the ability to rely on such a ruling would be jeopardized.
However, Stac is not aware of any facts or circumstances that would cause such
representations and assumptions to be untrue.
 
     If a timely ruling is not issued by the IRS, the Stac Board may decide to
effect the Distribution in reliance on a favorable opinion of
PricewaterhouseCoopers LLP or to delay the Distribution until the IRS has
granted the requested ruling. A tax opinion, in addition to being subject to
certain factual representations and assumptions (as in the case of a ruling), is
not binding on the IRS and merely reflects the best judgment of the author.
 
     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. See "RISK
FACTORS -- Tax Risks of the Distribution."
 
     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."
    
 
                                       29
<PAGE>   35
 
     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) receipt by
Stac of an IRS ruling or a favorable opinion of PricewaterhouseCoopers LLP that,
for U.S. federal income tax purposes, the Distribution will not result in
recognition of taxable income or loss by Stac or its stockholders; (iii) 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; (iv) receipt of any necessary consents to the Distribution from
third parties, except for those the failure of which to obtain would not have a
material adverse effect on the Company or Stac; (v) no pending order, injunction
or decree preventing the consummation of the Distribution; (vi) 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 (vii) 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.
 
                                       30
<PAGE>   36
 
                      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 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 the Distribution on such options. The Stac Board
intends to make an adjustment to such options within 30
                                       31
<PAGE>   37
 
   
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 SHARING AGREEMENT
 
     Prior to the Distribution Date, Stac and the Company will enter into a Tax
Sharing 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.
 
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 $4.2 million to the Company, representing
payment in full for all amounts due to the Company from Stac as of September 1,
1998. Stac will pay to the Company prior to the Distribution any additional
amounts due to the Company as of October 31, 1998 and 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
    
                                       32
<PAGE>   38
 
   
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.
 
                                       33
<PAGE>   39
 
                       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, 1996
and 1997 and for each of the three years in the period ended September 30, 1997
and the unaudited financial statements as of June 30, 1998 and for the nine
months ended June 30, 1997 and 1998 included herein. Financial information as of
September 30, 1993 and 1994 and for each of the two years in the period 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 September 30, 1993 and 1994, as of June
30, 1998, for the years ended September 30, 1993 and 1994 and for the nine
months ended June 30, 1997 and 1998 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>
                                                                                       NINE MONTHS
                                                YEAR ENDED SEPTEMBER 30,              ENDED JUNE 30,
                                      --------------------------------------------   ----------------
                                       1993     1994     1995     1996      1997      1997     1998
                                      ------   ------   ------   -------   -------   ------   -------
<S>                                   <C>      <C>      <C>      <C>       <C>       <C>      <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................  $5,472   $5,666   $7,342   $12,894   $14,226   $8,991   $16,513
Cost of revenues....................   2,116    2,302    2,841     5,095     4,762    2,955     5,142
                                      ------   ------   ------   -------   -------   ------   -------
Gross margin........................   3,356    3,364    4,501     7,799     9,464    6,036    11,371
Operating expenses:
Research and development............   1,008      564      551     1,641     2,985    1,873     4,066
Sales and marketing.................   1,222      813    1,097     1,677     2,224    1,585     2,438
General and administrative..........     447      379      492       889     1,203      851     1,737
                                      ------   ------   ------   -------   -------   ------   -------
Operating income....................     679    1,608    2,361     3,592     3,052    1,727     3,130
Interest income.....................                                            16        7        14
                                      ------   ------   ------   -------   -------   ------   -------
Provision for income taxes..........     275      661      947     1,441     1,235      699     1,292
                                      ------   ------   ------   -------   -------   ------   -------
Net income..........................  $  404   $  947   $1,414   $ 2,151   $ 1,833   $1,035   $ 1,852
                                      ======   ======   ======   =======   =======   ======   =======
Net income per share, basic(1)......  $ 0.07   $ 0.16   $ 0.24   $  0.36   $  0.30   $ 0.17   $  0.29
Net income per share, diluted.......  $ 0.07   $ 0.16   $ 0.24   $  0.36   $  0.30   $ 0.17   $  0.27
Weighted average shares outstanding,
  basic.............................   6,000    6,000    6,000     6,000     6,100    6,075     6,282
Weighted average shares outstanding,
  diluted...........................   6,000    6,000    6,000     6,000     6,174    6,075     6,782
BALANCE SHEET DATA:
Cash................................  $   --   $   --   $   --   $    --   $   480            $    69
Total assets........................   1,172    1,583    2,254     2,611     5,898              8,773
Working capital (deficit)...........    (143)    (193)    (223)     (383)    3,520              4,770
Total stockholders' equity(2).......      --       --       --        --     4,622              6,682
</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.
    
 
                                       34
<PAGE>   40
 
          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.
 
                                       35
<PAGE>   41
 
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>
                                                                                    NINE MONTHS
                                                                                       ENDED
                                                     YEAR ENDED SEPTEMBER 30,         JUNE 30,
                                                     ------------------------      --------------
                                                     1995      1996      1997      1997      1998
                                                     ----      ----      ----      ----      ----
                                                                                    (UNAUDITED)
<S>                                                  <C>       <C>       <C>       <C>       <C>
Revenues...........................................  100%      100%      100%      100%      100%
Cost of revenues...................................   39        39        33        33        31
                                                     ---       ---       ---       ---       ---
Gross margin.......................................   61        61        67        67        69
                                                     ---       ---       ---       ---       ---
Research and development...........................    7        13        21        21        25
Sales and marketing................................   15        13        16        18        15
General and administrative.........................    7         7         8         9        10
                                                     ---       ---       ---       ---       ---
Total operating expenses...........................   29        33        45        48        50
                                                     ---       ---       ---       ---       ---
Operating income...................................   32        28        22        19        19
Interest income....................................   --        --        --        --        --
                                                     ---       ---       ---       ---       ---
Income before income taxes.........................   32        28        22        19        19
Provision for income taxes.........................   13        11         9         8         8
                                                     ---       ---       ---       ---       ---
Net income.........................................   19        17        13        11        11
                                                     ===       ===       ===       ===       ===
</TABLE>
 
  Comparison of Results of Operations -- Nine Months Ended June 30, 1997 and
1998
 
     Revenues. Revenues from sales of semiconductors and licenses of software
libraries increased 84% from $9.0 million for the nine months ended June 30,
1997 to $16.5 million for the same period of 1998. The increase in revenues from
1997 to 1998 was due primarily to increased sales of the Company's data
compression processors to Quantum, an OEM provider of digital linear tape
("DLT") tape drives, and manufacturers of high-speed network equipment. The
majority of semiconductor sales during the nine-month periods ended June 30,
1997 and 1998 were from shipments of data compression processors to Quantum.
 
     Gross Margin. Cost of revenues consists primarily of the costs of
purchasing completed semiconductors manufactured by third party foundries to the
Company's specifications for resale by the Company. Gross margins were 67% for
the nine months ended June 30, 1997 and 69% for the same period of 1998. The
increase in gross margin percent from 1997 to that of 1998 was due to shipments
of higher speed data compression processors in the 1998 period that carry higher
gross margins than the processors shipped in the 1997 period, and an increase in
licenses of the Company's software libraries which carry a relatively high gross
margin.
 
     Research and Development. The costs of research and development consist
primarily of salaries, employee benefits, overhead, outside contractors and
non-recurring engineering fees related to design and development of new
semiconductor products and maintenance of the Company's software libraries. Such
expenses increased 117% from $1.9 million for the nine months ended June 30,
1997 to $4.1 million for the same period of 1998. The increase in research and
development costs was due to the Company's adding personnel and retaining
outside contractors to develop new products that 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 consist primarily of
salaries, commissions and benefits paid to sales and marketing personnel, and of
consulting, market communications and overhead expenses. Such expenses increased
by 54% from $1.6 million for the nine months ended June 30, 1997 to
 
                                       36
<PAGE>   42
 
$2.4 million for the same period of 1998. The increase in marketing and sales
expense from 1997 to 1998 was 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 consist
primarily of salaries for administrative and corporate services personnel, as
well as legal and other professional fees. Such expenses increased by 104% from
$0.9 million for the nine months ended June 30, 1997 to $1.7 million for the
same period of 1998. The increase in general and administrative expenses from
1997 to 1998 was due primarily to the addition of executive management personnel
and increased legal and accounting costs. Management does not anticipate a
material increase in future general and administrative costs as a result of
Hi/fn replacing the allocated services from Stac through increased staffing and
the procurement of outside resources and services.
    
 
  Comparison of Results of Operations -- Years Ended September 30, 1995, 1996
and 1997
 
     Revenues. Revenues from sales of semiconductors and licenses of software
libraries increased 10% to $14.2 million in 1997 compared to 1996 revenues, and
increased 76% to $12.9 million in 1996 from revenues of $7.3 million in 1995.
The increase in revenues in each of 1997 and 1996 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 70%, 43% and 35% of revenues in each
of 1997, 1996 and 1995 respectively.
 
   
     Gross Margin. Gross margins were 67% in 1997, 61% in 1996 and 61% in 1995.
The increase in gross margins in 1997 from those of 1996 and 1995 was due to
shipments of higher speed data compression processors in 1997 that carry higher
gross margins than the processors shipped in 1996 and 1995 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 $3.0
million for 1997, $1.6 million for 1996 and $0.6 million for 1995, an increase
of 82% in 1997 from 1996 and an increase of 198% in 1996 from 1995. 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 $2.2 million in
1997, $1.7 million in 1996 and $1.1 million in 1995. The increases in marketing
and sales expenses in 1997 over those of 1996 and in 1996 expense over those of
1995 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 $1.2
million in 1997, $0.9 million in 1996 and $0.5 million in 1995. The increase in
1997 expenses over those of 1996 and in 1996 expenses over those of 1995 were
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.
                                       37
<PAGE>   43
 
     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.
 
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 the nine months ended June 30, 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,
                                    1997          1998         1998
                                ------------    ---------    --------
<S>                             <C>             <C>          <C>         <C>
Revenues......................     6,265          5,236       5,012
Gross margin..................     4,163          3,674       3,534
Operating income..............     1,551          1,051         528
Net income....................       931            630         291
</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 and June 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.
 
                                       38
<PAGE>   44
 
   
There can be no assurances that growth of sales to network equipment companies
will continue. See "RISK FACTORS -- Risks Associated with Emerging VPN Market."
    
 
LIQUIDITY AND CAPITAL RESOURCES
 
     From inception, the Company has depended upon Stac for financing its
operations and capital requirements. For the fiscal years ended September 30,
1995 and 1996, the Company's net cash provided by operating activities was
$1,372,000 and $3,761,000, respectively. During the same respective periods,
$63,000 and $223,000 were used for the purchase of property and equipment and
$1,394,000 and $1,996,000 were 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 fiscal year ending September 30, 1997, the Company's net cash provided
by operating activities was $2,000,000. The issuance of Company Common Stock
provided $169,000, and $901,000 was used for the purchase of property and
equipment.
 
     For the nine months ended June 30, 1998, the Company's net cash provided by
operating activities was $2,573,000. The issuance of Company Common Stock
provided $208,000, and $484,000 was used for the purchase of property and
equipment.
 
   
     For the year ended September 30, 1997, the Company generated $2.0 million
of cash from operations, which was comprised primarily of net income of $1.8
million (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.
    
 
   
     On September 28, 1998, Stac paid $4.2 million to the Company, representing
payment in full for all amounts due to the Company from Stac as of September 1,
1998. Stac also loaned $5.0 million to the Company pursuant to a short-term loan
described more fully below. Prior to the Distribution, Stac will pay any
additional amounts due to the Company 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 the Company arise from
transfers of cash from Hi/fn to 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 $9.0 million in cash,
including the proceeds of the $5.0 million 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
    
 
                                       39
<PAGE>   45
 
   
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 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. 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. 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.
    
 
   
     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
    
 
                                       40
<PAGE>   46
 
   
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. If the
Company determines that its business is at material risk of disruption due to
the 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
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.
 
     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
 
                                       49
<PAGE>   55
 
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.
    
 
   
     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
    
                                       50
<PAGE>   56
 
   
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 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.
    
 
                                       51
<PAGE>   57
 
   
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
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.
 
                                       52
<PAGE>   58
 
     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 June 30, 1998, the Company's research and development staff consisted
of 27 employees. The Company's research and development expenditures totaled
$4.0 million in the first 9 months of fiscal 1998 and $3.0 million in the fiscal
year ended September 30, 1997, representing 24.6% 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.
 
     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
 
                                       53
<PAGE>   59
 
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.
 
     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
                                       54
<PAGE>   60
 
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 June 30, 1998, Hi/fn employed a total of 53 full-time employees and 3
part-time contractors. Of the total number of employees, 27 were employed in
research and development, 17 in sales and marketing, 7 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.
                                       55
<PAGE>   61
 
     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 two directors: Gary W. Clow and
Douglas L. Whiting. Upon consummation of the Distribution, the Company Board is
expected to be comprised of five directors, who will be elected prior to the
Distribution. Such directors will serve until the next Annual Meeting of
Stockholders of the Company and until their respective successors have been duly
elected and qualified.
 
     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>
Gary W. Clow..........................  Chairman                    43
Douglas L. Whiting....................  Chief Technology Officer    42
</TABLE>
 
     Gary W. Clow has been Chairman of the Board of Directors of the Company
since November 1996. He also has served as Chairman of the Board of Directors
and Chief Executive Officer of Stac since March 1992 and a director since 1983.
Mr. Clow also served as President of Stac from 1986 through 1996. Mr. Clow
received an M.A.S. in Computer Systems from Florida Atlantic University and an
M.S. in Electrical Engineering from the California Institute of Technology.
 
     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.
 
COMMITTEES OF THE BOARD OF DIRECTORS
 
     AUDIT COMMITTEE. Prior to the Distribution, the Company Board will
establish an Audit Committee of at least two non-employee directors. 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. Prior to the Distribution, the Company Board will
establish a Compensation Committee of at least two non-employee directors. 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 $     per year for
serving on the Company Board and an additional $          for each meeting
attended (other than committee meetings). An additional $          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.
    
 
                                       57
<PAGE>   63
 
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>
William R. Walker.................  Vice President, Acting Chief Executive    57
                                    Officer, Acting President, Chief
                                    Financial Officer and Corporate
                                    Secretary
Stephen A. Farnow.................  Vice President of Operations              49
Thomas F. Griffin.................  Vice President of Sales                   41
Robert A. Monsour.................  Vice President of Marketing               43
</TABLE>
 
   
     William R. Walker has served as Vice President and Chief Financial Officer
of the Company since November 1997. He has been the Company's Acting Chief
Executive Officer and Acting President since July 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 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 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.
 
     Thomas F. Griffin has been Vice President of Sales since joining the
Company in April 1998. From 1996 to 1998, he was Vice President of Sales and
Marketing at Cartesian Data, Inc., a supplier of storage devices. From 1994 to
1996, Mr. Griffin was Business Development Manager at Quantum Corporation. Mr.
Griffin holds a B.S. in Chemical Engineering from University of California,
Berkeley.
 
     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.
 
                                       58
<PAGE>   64
 
EXECUTIVE COMPENSATION
 
     The following table sets forth certain information concerning compensation
for the fiscal year ended September 30, 1997 received by the Chief Executive
Officer and the only other executive officer of the Company whose compensation
exceeded $100,000 for that year (the "Named Executive Officers"). No other
executive officer of the Company meets the definition of "highly compensated"
within the meaning of the executive compensation disclosure rules of the
Commission.
 
                           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)...................   1997      150,000      30,000          0         300,000
Stephen A. Farnow,.......................   1997      100,000      12,600          0          72,000
  Vice President of Operations
</TABLE>
 
- ---------------
(1) Mr. Collmeyer served as President and Chief Executive Officer of the Company
    until July 2, 1998.
 
                           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,
1997 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>
Arthur J. Collmeyer....   300,000          19.6%           $0.60         11/22/06      $113,202     $286,866
Stephen A. Farnow......    72,000           4.7%           $0.60              (2)      $ 27,168     $ 68,848
</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.
 
(2) Mr. Farnow was granted an option to purchase 60,000 shares of Company Common
    Stock at a price of $0.60 each, which expires on November 22, 2006, and was
    granted an additional option to purchase 12,000 shares of Company Common
    Stock at a price of $0.60 each, which expires on May 22, 2007.
 
                                       59
<PAGE>   65
 
            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, 1997, and the unexercised options held and the value thereof at
that date, for each of the Named Executive Officers.
 
<TABLE>
<CAPTION>
                                                                             NUMBER OF
                                                                            SECURITIES        VALUE OF
                                                                            UNDERLYING       UNEXERCISED
                                                                            UNEXERCISED     IN-THE-MONEY
                                                                            OPTIONS AT       OPTIONS AT
                                                                            FISCAL YEAR      FISCAL YEAR
                                                                              END(#)          END($)(1)
                                      SHARES ACQUIRED        VALUE         EXERCISABLE/     EXERCISABLE/
                NAME                  ON EXERCISE(#)     REALIZED($)(2)    UNEXERCISABLE    UNEXERCISABLE
                ----                  ---------------    --------------    -------------    -------------
<S>                                   <C>                <C>               <C>              <C>
Arthur J. Collmeyer.................      150,000            $0.00           0/150,000       $0/$210,000
Stephen A. Farnow...................       36,000            $0.00            0/36,000       $ 0/$50,400
</TABLE>
 
- ---------------
(1) Calculated by determining the difference between the fair market value of
    the securities underlying the options at September 30, 1997 ($2.00 per share
    as determined by the Company Board) and the exercise price of the options.
 
(2) Mr. Collmeyer and Mr. Farnow 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 and stockholders to, among other things, increase the number of Company
Common Stock shares reserved for issuance pursuant to the 1996 Plan to
1,949,900. As of August 1, 1998, 482,806 shares had been issued upon exercise of
stock options granted under the 1996 Plan, 858,395 shares were subject to
options granted under the 1996 Plan and 608,699 shares were available for future
grants. Unless terminated sooner, the 1998 Plan will terminate automatically in
November 2006.
 
     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
 
                                       60
<PAGE>   66
 
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 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
    
 
                                       61
<PAGE>   67
 
   
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.
    
 
   
     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
                                       62
<PAGE>   68
 
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.
 
CHANGE OF CONTROL ARRANGEMENTS
 
   
     Prior to the Distribution, the Company will enter into a Change of Control
Agreement with each of William R. Walker, the Company's Vice President and Chief
Financial Officer, Stephen A. Farnow, the Company's Vice President of
Operations, and Robert A. Monsour, the Company's Vice President of Marketing.
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.
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.
    
 
                                       63
<PAGE>   69
 
   
     Prior to the Distribution, the Company will enter into a Change of Control
Agreement with each of its directors pursuant to which, upon a change of control
of the Company, the 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 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,
                                       64
<PAGE>   70
 
   
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 Sharing 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).
 
   
     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 $4.2 million to the Company, representing
payment in full for all amounts due to the Company from Stac as of September 1,
1998. Stac will pay to the Company prior to the Distribution any additional
amounts due to the Company as of October 31, 1998 and will pay to the Company on
or prior to December 31, 1998 and 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)
December 31, 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.
 
                                       65
<PAGE>   71
 
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 November 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........................   611,872          9.5%
One Microsoft Way
Redmond, WA 98052-6399
Gary W. Clow(2)..............................   373,756          5.8%
Robert W. Johnson(3).........................   439,727          6.8%
Douglas L. Whiting(4)........................   344,042          5.3%
Arthur J. Collmeyer..........................
Stephen A. Farnow............................
Robert A. Monsour............................
William R. Walker............................
</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.
    
 
   
(2) Includes 4,504 shares held of record by Mr. Clow's minor daughter, of which
    Mr. Clow disclaims beneficial ownership.
    
 
   
(3) Includes 437,736 shares held by the Robert W. Johnson Revocable Trust, of
    which Dr. Johnson is Trustee.
    
 
   
(4) Includes 344,402 shares held by the Whiting Family Trust, of which Mr.
    Whiting serves as Trustee.
    
 
                                       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, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
September 30, 1997, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements 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
June 5, 1998
 
                                       F-1
<PAGE>   78
 
                                  HI/FN, INC.
 
                                 BALANCE SHEET
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                               SEPTEMBER 30,
                                                              ----------------     JUNE 30,
                                                               1996      1997        1998
                                                              ------    ------    -----------
                                                                                  (UNAUDITED)
<S>                                                           <C>       <C>       <C>
Current assets:
  Cash......................................................  $   --    $  480      $   69
  Accounts receivable, net..................................   1,181     1,823       1,946
  Due from parent...........................................      --     1,507       3,792
  Inventories...............................................     708       409         255
  Deferred income taxes.....................................     333       385         526
  Prepaid expenses and other current assets.................       6       192         273
                                                              ------    ------      ------
          Total current assets..............................   2,228     4,796       6,861
  Property and equipment, net...............................     361       959       1,123
  Deferred income taxes.....................................      18        95         127
  Other assets..............................................       4        48         562
                                                              ------    ------      ------
                                                              $2,611    $5,898      $8,673
                                                              ======    ======      ======
 
                            LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................  $  600    $  660      $  947
  Due to parent.............................................   1,481        --          --
  Accrued expenses and other current liabilities............     530       616       1,144
                                                              ------    ------      ------
          Total current liabilities.........................   2,611     1,276       2,091
                                                              ------    ------      ------
Commitments (Note 7)
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; 15,000,000 shares
     authorized; 280,799 and 478,507 shares issued and
     outstanding at September 30, 1997 and June 30, 1998,
     respectively...........................................      --        --          --
  Paid-in capital...........................................      --     2,783       2,991
  Note receivable from stockholder..........................      --        --        (100)
  Retained earnings.........................................      --     1,833       3,685
                                                              ------    ------      ------
Total stockholders' equity..................................      --     4,622       6,582
                                                              ------    ------      ------
                                                              $2,611    $5,898      $8,673
                                                              ======    ======      ======
</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>
                                                                             NINE MONTHS ENDED
                                               YEAR ENDED SEPTEMBER 30,          JUNE 30,
                                             ----------------------------    -----------------
                                              1995      1996       1997       1997      1998
                                             ------    -------    -------    ------    -------
                                                                                (UNAUDITED)
<S>                                          <C>       <C>        <C>        <C>       <C>
Revenues...................................  $7,342    $12,894    $14,226    $8,991    $16,513
Cost of revenues...........................   2,841      5,095      4,762     2,955      5,142
                                             ------    -------    -------    ------    -------
Gross margin...............................   4,501      7,799      9,464     6,036     11,371
                                             ------    -------    -------    ------    -------
Operating expenses:
Research and development...................     551      1,641      2,985     1,873      4,066
Sales and marketing........................   1,097      1,677      2,224     1,585      2,438
General and administrative.................     492        889      1,203       851      1,737
                                             ------    -------    -------    ------    -------
Total operating expenses...................   2,140      4,207      6,412     4,309      8,241
                                             ------    -------    -------    ------    -------
Operating income...........................   2,361      3,592      3,052     1,727      3,130
Interest income............................      --         --         16         7         14
                                             ------    -------    -------    ------    -------
Income before income taxes.................   2,361      3,592      3,068     1,734      3,144
Provision for income taxes.................     947      1,441      1,235       699      1,292
                                             ------    -------    -------    ------    -------
Net income.................................  $1,414    $ 2,151    $ 1,833    $1,035    $ 1,852
                                             ======    =======    =======    ======    =======
 
Net income per share, basic................  $  .24    $   .36    $   .30    $  .17    $   .29
                                             ======    =======    =======    ======    =======
Net income per share, diluted..............  $  .24    $   .36    $   .30    $  .17    $   .27
                                             ======    =======    =======    ======    =======
Weighted average shares outstanding,
  basic....................................   6,000      6,000      6,100     6,075      6,282
                                             ======    =======    =======    ======    =======
Weighted average shares outstanding,
  diluted..................................   6,000      6,000      6,174     6,075      6,782
                                             ======    =======    =======    ======    =======
</TABLE>
 
                See accompanying notes to financial statements.
                                       F-3
<PAGE>   80
 
                                  HI/FN, INC.
 
                            STATEMENT OF CASH FLOWS
                                 (IN THOUSANDS)
 
   
<TABLE>
<CAPTION>
                                                                            NINE MONTHS ENDED
                                             YEAR ENDED SEPTEMBER 30,            JUNE 30,
                                           -----------------------------    ------------------
                                            1995       1996       1997       1997       1998
                                           -------    -------    -------    -------    -------
                                                                               (UNAUDITED)
<S>                                        <C>        <C>        <C>        <C>        <C>
Cash flows from operating activities:
  Net income.............................  $ 1,414    $ 2,151    $ 1,833    $ 1,035    $ 1,852
  Adjustments required to reconcile net
     income to net cash provided by
     operating activities:
     Depreciation and amortization.......       43         68        303        124        560
     Provision (benefit) for deferred
       income taxes......................       68       (190)      (129)       192       (173)
     Changes in assets and liabilities:
     Accounts receivable.................     (920)       546       (642)    (1,172)      (123)
     Inventories.........................      195       (554)       299        384        154
     Prepaid expenses and other current
       assets............................        3         (5)      (186)      (310)       (81)
     Other assets........................        3          1        (44)        (7)      (854)
     Accounts payable....................      139        409         60       (402)       287
     Due to parent for general and
       administrative allocations........      492        889        420        315        423
     Accrued expenses and other current
       liabilities.......................      (65)       446         86         85        528
                                           -------    -------    -------    -------    -------
          Net cash provided (used) by
            operating activities.........    1,372      3,761      2,000        244      2,573
                                           -------    -------    -------    -------    -------
Cash flows from investing activities:
  Purchases of property and equipment....      (63)      (223)      (901)      (612)      (484)
                                           -------    -------    -------    -------    -------
          Net cash used by investing
            activities...................      (63)      (223)      (901)      (612)      (484)
                                           -------    -------    -------    -------    -------
Cash flows from financing activities:
  Issuance of common stock...............       --         --        169         45        208
  Net transfer of funds from (to)
     parent..............................       85     (1,542)      (788)       858     (2,708)
  Dividends to Parent Company............   (1,394)    (1,996)        --         --         --
                                           -------    -------    -------    -------    -------
          Net cash provided (used) by
            financing activities.........   (1,309)    (3,538)      (619)       903     (2,500)
                                           -------    -------    -------    -------    -------
Net increase (decrease) in cash and cash
  equivalents............................       --         --        480        535       (411)
Cash and cash equivalents at beginning of
  year...................................       --         --         --         --        480
                                           -------    -------    -------    -------    -------
Cash and cash equivalents at end of
  period.................................  $    --    $    --    $   480    $   535    $    69
                                           =======    =======    =======    =======    =======
Supplemental non-cash financing
  activities:
  Issuance of preferred stock for net
     assets contributed..................  $    --    $    --    $ 2,620    $ 2,620    $    --
                                           =======    =======    =======    =======    =======
  Settlement of interdivisional
     accounts............................  $   (20)   $  (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, 1994........      --   $    --      --    $   --     $   --    $    --    $    --
Dividends to Parent Company..........      --        --      --        --         --     (1,414)    (1,414)
Net income...........................      --        --      --        --         --      1,414      1,414
                                       ------   -------   -----    ------     ------    -------    -------
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 (unaudited)....     197        --      --        --        208         --        208
Note receivable from stockholder
  (unaudited)........................      --        --      --        --       (100)        --       (100)
Net income (unaudited)...............      --        --      --        --         --      1,852      1,852
                                       ------   -------   -----    ------     ------    -------    -------
Balance at June 30, 1998
  (unaudited)........................     478   $    --   6,000    $    6     $2,891    $ 3,685    $ 6,582
                                       ======   =======   =====    ======     ======    =======    =======
</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.
   INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED JUNE 30, 1997 AND 1998,
                     AND AS OF JUNE 30, 1998 IS UNAUDITED.)
 
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 years ended September 30, 1995 and 1996, Hi/fn conducted
business as a division of Stac. For the fiscal year ended September 30, 1997 and
for the nine month periods ended June 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 at September 30, 1996 reflects 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 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 5). 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, Hi/fn participates 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 and June 30, 1998 represent cash amounts in Hi/fn accounts that had yet
to be liquidated by payment obligations, or transferred to Stac. 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.
 
     Balance sheet amounts at September 30, 1996 for accounts receivable,
inventory and accounts payable represent allocations based on specific
identification of the underlying items. Property and equipment, deferred income
taxes, other current and non-current assets, and accrued expenses and other
current liabilities were primarily allocated based on specific identification
and in other cases allocation methodologies influenced largely by proportioning
head counts. At September 30, 1997 and June 30, 1998, all balance sheet amounts
except the due from parent account are the result of specific identification.
 
   
     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
    
                                       F-6
<PAGE>   83
                                  HI/FN, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
      (TABLE AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS.
   INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED JUNE 30, 1997 AND 1998,
                     AND AS OF JUNE 30, 1998 IS UNAUDITED.)
 
   
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 year ended September 30, 1997 and nine
month periods ended June 30, 1997 and 1998, general and administrative
allocations totaled $420,000, $315,000 and $423,000, respectively. As more fully
described in Notes 2 and 4, 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.
    
 
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.
 
  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.
 
                                       F-7
<PAGE>   84
                                  HI/FN, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
      (TABLE AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS.
   INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED JUNE 30, 1997 AND 1998,
                     AND AS OF JUNE 30, 1998 IS UNAUDITED.)
 
  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 $43,000, $68,000, and $303,000 in fiscal 1995, 1996, and
1997, respectively, and $124,000 and $560,000 for the nine months ended June 30,
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 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 June 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
contigently 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 5) represents a primary equity
security, it is included in the calculation of basic earnings per share. Net
income
 
                                       F-8
<PAGE>   85
                                  HI/FN, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
      (TABLE AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS.
   INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED JUNE 30, 1997 AND 1998,
                     AND AS OF JUNE 30, 1998 IS UNAUDITED.)
 
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 year ended September 30, 1997 and nine months ended June
30, 1998, respectively, is presented below. Earnings per share for the years
ended September 30, 1995 and 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>
 
NINE MONTHS ENDED JUNE 30, 1998
 
<TABLE>
<CAPTION>
                                                                        PER-SHARE
                                             NET INCOME     SHARES       AMOUNT
                                             ----------     ------      ---------
<S>                                          <C>           <C>          <C>
Net Income.................................    $1,852
Basic EPS..................................                6,282,000      $0.29
Dilutive Securities........................                  500,000
                                                           ---------
Diluted EPS................................                6,782,000      $0.27
                                                           =========
</TABLE>
 
  Unaudited interim periods
 
     The interim financial data as of June 30, 1998 and for the nine months
ended June 30, 1997 and June 30, 1998 is unaudited; however, in the opinion of
the Company, the interim data includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of the results for
the interim periods.
 
  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.
 
NOTE 3 -- COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS:
 
<TABLE>
<CAPTION>
                                                    SEPTEMBER 30,
                                                   ----------------    JUNE 30,
                                                    1996      1997       1998
                                                   ------    ------    --------
<S>                                                <C>       <C>       <C>
Accounts receivable:
  Trade receivables..............................  $1,340    $1,873     $2,087
  Less allowance for doubtful accounts...........    (159)      (50)      (141)
                                                   ------    ------     ------
                                                   $1,181    $1,823     $1,946
                                                   ======    ======     ======
</TABLE>
 
                                       F-9
<PAGE>   86
                                  HI/FN, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
      (TABLE AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS.
   INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED JUNE 30, 1997 AND 1998,
                     AND AS OF JUNE 30, 1998 IS UNAUDITED.)
 
     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, 1996 and 1997 and at June 30, 1998, one customer accounted for
45%, 89% and 78%, 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 1995, 1996, 1997
nor in the nine month periods ended June 30, 1997 and 1998.
 
   
<TABLE>
<CAPTION>
                                                    SEPTEMBER 30,
                                                   ---------------    JUNE 30,
                                                   1996      1997       1998
                                                   -----    ------    --------
<S>                                                <C>      <C>       <C>
Property and equipment:
  Computer equipment.............................  $ 484    $1,093     $1,356
  Furniture and fixtures.........................     94       172        339
  Leasehold improvements.........................    132        81         87
  Office equipment...............................    113        43         92
                                                   -----    ------     ------
                                                     823     1,389      1,874
  Less accumulated depreciation..................   (462)     (430)      (751)
                                                   -----    ------     ------
                                                   $ 361    $  959     $1,123
                                                   =====    ======     ======
Accrued expenses and other current liabilities:
  Deferred revenue...............................  $ 256    $  323     $  575
  Compensation and employee benefits.............    171       288        461
  Other..........................................    103         5        108
                                                   -----    ------     ------
                                                   $ 530    $  616     $1,144
                                                   =====    ======     ======
</TABLE>
    
 
NOTE 4 -- 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,
                                                     ------------------------
                                                     1995     1996      1997
                                                     ----    ------    ------
<S>                                                  <C>     <C>       <C>
Current tax expense:
  Federal..........................................  $747    $1,386    $1,159
  State............................................   132       245       205
                                                     ----    ------    ------
                                                      879     1,631     1,364
                                                     ----    ------    ------
Deferred tax expense (benefit):
  Federal..........................................    59      (162)     (109)
  State............................................     9       (28)      (20)
                                                     ----    ------    ------
                                                       68      (190)     (129)
                                                     ----    ------    ------
                                                     $947    $1,441    $1,235
                                                     ====    ======    ======
</TABLE>
 
                                      F-10
<PAGE>   87
                                  HI/FN, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
      (TABLE AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS.
   INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED JUNE 30, 1997 AND 1998,
                     AND AS OF JUNE 30, 1998 IS UNAUDITED.)
 
     The principal components of deferred income tax assets are as follows:
 
<TABLE>
<CAPTION>
                                                              SEPTEMBER 30,
                                                              --------------
                                                              1996     1997
                                                              -----    -----
<S>                                                           <C>      <C>
Revenue recognition.........................................  $102     $260
Depreciation and amortization...............................    18       95
Inventory valuation accounts................................   155       82
Bad debts allowance.........................................    64       20
Other.......................................................    12       23
                                                              ----     ----
                                                              $351     $480
                                                              ====     ====
</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,
                                                     ------------------------
                                                     1995     1996      1997
                                                     ----    ------    ------
<S>                                                  <C>     <C>       <C>
Amount computed at statutory Federal rate of 34%...  $803    $1,221    $1,043
State income taxes, net of Federal benefit.........   141       216       184
Expenses not deductible for tax purposes...........     3         4         8
                                                     ----    ------    ------
                                                     $947    $1,441    $1,235
                                                     ====    ======    ======
</TABLE>
 
NOTE 5 -- 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 June 30, 1998, no such dividends have been declared.
 
NOTE 6 -- 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 1,499,900 shares of Hi/fn common stock were reserved for issuance
pursuant to nonqualified and incentive stock options and restricted stock
awards. Shares reserved for under the 1996 Plan represent 20% of Hi/fn equity on
a fully diluted basis. Subsequent to September 30, 1997, the number of shares
authorized for issuance under the 1996 Plan was increased by 450,000, resulting
in a total of 1,949,900 shares reserved for issuance. 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,
 
                                      F-11
<PAGE>   88
                                  HI/FN, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
      (TABLE AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS.
   INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED JUNE 30, 1997 AND 1998,
                     AND AS OF JUNE 30, 1998 IS UNAUDITED.)
 
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.
 
     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...................................    366,000        $2.19
  Options exercised.................................   (197,708)       $2.17
  Options canceled..................................    (32,517)       $0.60
                                                      ---------
Balance at June 30, 1998............................  1,012,638        $1.29
                                                      =========
</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 JUNE 30, 1998
Price Range
$0.60.....................................    557,638        8.57          $0.60
$1.20-$2.00...............................    235,500        9.24          $1.88
$2.25-$3.00...............................    219,500        9.73          $2.41
                                            ---------
                                            1,012,638        8.98          $1.29
                                            =========
</TABLE>
 
                                      F-12
<PAGE>   89
                                  HI/FN, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
      (TABLE AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS.
   INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED JUNE 30, 1997 AND 1998,
                     AND AS OF JUNE 30, 1998 IS UNAUDITED.)
 
     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 JUNE 30, 1998
Price Range
$0.60.................................................  140,520      $0.60
                                                        =======
</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
the nine months ended June 30, 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      NINE MONTHS
                                                     SEPTEMBER 30,   ENDED JUNE 30,
                                                         1997             1998
                                                     -------------   --------------
<S>                                                  <C>             <C>
Net income:
As reported........................................     $1,833           $1,852
                                                        ======           ======
Pro forma..........................................     $1,683           $1,635
                                                        ======           ======
Net income per share, basic:
As reported........................................     $  .30           $  .29
                                                        ======           ======
Pro forma..........................................     $  .28           $  .26
                                                        ======           ======
Net income per share, diluted:
As reported........................................     $ 0.30           $  .27
                                                        ======           ======
Pro forma..........................................     $ 0.27           $  .24
                                                        ======           ======
</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; for the nine months ended June 30, 1998:
dividend yield of 0.0%, risk free interest rate of 5.70%, expected volatility of
250%, and expected life of 1.1 years
 
                                      F-13
<PAGE>   90
                                  HI/FN, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
      (TABLE AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS.
   INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED JUNE 30, 1997 AND 1998,
                     AND AS OF JUNE 30, 1998 IS UNAUDITED.)
 
NOTE 7 -- 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>
  1998..............................  $  327
  1999..............................     921
  2000..............................     820
  2001..............................     750
  2002..............................     750
Thereafter..........................   2,187
                                      ------
                                      $5,755
                                      ======
</TABLE>
 
     Included in future minimum lease payments are amounts associated with a new
facility lease entered into in November 1997. Rent expense under operating
leases was approximately $40,000, $50,000, and $113,000, in fiscal 1995, 1996,
and 1997, respectively, and $61,000 and $229,000 for the nine months ended June
30,1997 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 8 -- SIGNIFICANT CUSTOMERS:
 
     A significant portion of the Company's revenues has been derived from sales
to major OEM's. Two customers accounted for 35% and 19% of fiscal 1995 revenues,
respectively. 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 65% of revenues for the nine months ended June 30, 1997
and 64% of revenues for the nine months ended June 30, 1998.
 
NOTE 9 -- SUBSEQUENT EVENTS:
 
     In November 1997, the Company entered into a non-cancelable operating lease
providing for current and expansion facilities for its corporate offices in Los
Gatos, California. The term of this lease runs through August 2005, with an
option for renewal through 2010. Future minimum lease payments associated with
this lease are included in the schedule in Note 7.
 
     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 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.
 
                                      F-14
<PAGE>   91
                                  HI/FN, INC.
 
                   NOTES TO FINANCIAL STATEMENTS (CONTINUED)
      (TABLE AMOUNTS IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS.
   INFORMATION WITH RESPECT TO THE NINE MONTHS ENDED JUNE 30, 1997 AND 1998,
                     AND AS OF JUNE 30, 1998 IS UNAUDITED.)
 
   
NOTE 10 -- SUBSEQUENT EVENT (UNAUDITED):
    
 
   
     In September 1998, Stac loaned $5,000,000 to the Company pursuant to a
short-term loan. The loan is due and payable on September 30, 1999 and may be
repaid in whole or part without penalty. The loan bears interest at the prime
rate plus 0.5% per annum, payable quarterly. The loan is secured by a first
priority security interest in all of the Company's assets, including the
Company's intellectual property.
    
 
                                      F-15
<PAGE>   92
 
                                  HI/FN, INC.
 
                                  SCHEDULE II
 
                 VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
                  FOR THE THREE YEARS ENDED SEPTEMBER 30, 1997
                                 (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, 1995(a)......      60            --           133            --             193
  Year ended September 30, 1996(a)......     193            --           (34)           --             159
  Year ended September 30, 1997.........     159          (109)           --            --              50
 
DEDUCTED FROM INVENTORY
Reserve for inventory obsolescence:
  Year ended September 30, 1995(a)......     107            --            16            --             123
  Year ended September 30, 1996(a)......     123            --           265            --             388
  Year ended September 30, 1997.........     388          (183)           --            --             205
</TABLE>
 
- ---------------
(a) Activity represents changes in period end allocations of consolidated
balances.
<PAGE>   93
 
                                    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>   94
 
     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>   95
 
     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>   96
 
                                                                         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>   97
 
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>   98
 
          (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>   99
 
     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>   100
 
                                                                        ANNEX II
 
                                                          BYLAWS
 
                                                            OF
 
                                                       HI/FN, INC.
 
                                                 (A DELAWARE CORPORATION)
 
                                      II-1
<PAGE>   101
 
                                                          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>   102
 
     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>   103
 
     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>   104
 
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>   105
 
     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>   106
 
     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>   107
 
     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>   108
 
     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>   109
 
     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>   110
 
     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>   111
 
                                  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>   112
 
     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>   113
 
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>   114
 
     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>   115
 
             (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>   116
 
          (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>   117
 
                                   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>   118
 
                                                                       ANNEX III
 
                                  HI/FN, INC.
 
                           1996 EQUITY INCENTIVE PLAN
                           ADOPTED NOVEMBER 21, 1996
 
            (AS AMENDED AND RESTATED EFFECTIVE NOVEMBER [19], 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>   119
 
          (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>   120
 
          (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>   121
 
        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 one million four hundred
     and ninety-nine thousand nine hundred (1,949,900) 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>   122
 
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>   123
 
             (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>   124
 
          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>   125
 
     (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>   126
 
     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>   127
 
           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>   128
 
        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>   129
 
     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>   130
 
     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>   131
 
                                                                        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>   132
 
     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>   133
 
                                   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: October 15, 1998                   By:     /s/ ROBERT A. MONSOUR
    
                                            ------------------------------------
 
   
                                          Name: Robert A. Monsour
    
   
                                          Its:    Vice President of Marketing
    

<PAGE>   1

                                         ***** Text Omitted and Filed Separately
                                               Confidential Treatment Requested
                                               Under 17 C.F.R. Sections 200.80,
                                               200.83 and 240.24b-2.
                                                                    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 lic

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

[*****]
</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>

***** Confidential Treatment Requested.

                                      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>   
[*****]                      LZS221-C/LZS221-68           3.0                   9-Mar-93

[*****]                      1988 Technology                                    1-Jun-88

[*****]                      LZS221-C                     3.0/4.0               1-Mar-95

[*****]                      LZS221-C/68                  4.0/3.0               7-Mar-95

[*****]                      LZS221-86                    3.0                   10-Dec-92

[*****]                      DCS221                                             10-Jul-89

[*****]                      LZS221-C                     3.0                   15-May-96

[*****]                      LZS-C/86/68/386                                    21-Oct-94

[*****]                      DCS221                                             10-Oct-90

[*****]                      LZS221-68 & 960              3.0/3.0               28-Jul-94

[*****]                      LZS221-C                     3.0                   29-Sep-95

[*****]                      LZS221-C                                           4-May-93

[*****]                      DCS221                                             16-Feb-90

[*****]                      DCS221-68                                          21-Nov-91

[*****]                      LZS221-86                    3.0                   31-Aug-92

[*****]                      LZS221-86                    3.0                   25-Sep-95

[*****]                      LZS221-68                    3.0                   15-Sep-94

[*****]                      DCS221                                             31-May-90
- -----------------------------------------------------------------------------------------------------------
</TABLE>

*****Confidential Treatment Requested

                                      A-11



<PAGE>   16

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
CUSTOMER                     PRODUCT                      VERSION               SIGNED
- -----------------------------------------------------------------------------------------------------------
<S>                          <C>                          <C>                   <C>   

[*****]                      DCS221                                             11-Jun-90

[*****]                      DCS221-386                   1.0                   26-Sep-94

[*****]                      LZS221-86                                          12-Jul-93

[*****]                      RS3T/DCS221                                        4-Oct-89

[*****]                      LZS221-C                     3.0                   1-Apr-95

[*****]                      LZS221-C                     3.0                   13-Jul-94

[*****]                      DCS221                                             12-Jul-90

[*****]                      DCS221-VAX                                         20-May-91

[*****]                      DCS221                                             24-May-90

[*****]                      LZS221-68                    3.0                   24-Feb-95

[*****]                      No Info

[*****]                      RS3T ECC                                           4-Nov-92

[*****]                      LZS221-C                     3.0                   21-Nov-95

[*****]                      LZS221-C                     3.0/4.0               10-Mar-95

[*****]                      LZS221-C                     4.0                   27-Feb-95

[*****]                      LZS221-960                   4.0                   1-Jun-95

[*****]                      LZS221-C                                           1-Jun-93

[*****]                      HLZS                                               28-Mar-96

[*****]                      LZS221-C                     3.0                   10-May-96

[*****]                      C Source QIC122              3.0                   25-Nov-91

[*****]                      LZS221-C                     3.0                   1-Feb-95

[*****]                      LZS221-68                    3.0                   27-Sep-95

[*****]                      LZS221-86                                          13-Sep-93

[*****]                      DCS221-386                                         19-Dec-94

[*****]                      DCS221-68                                          6-Sep-91

[*****]                      LZS221-C                     3.0                   19-Aug-94

[*****]                      DCS221                                             7-Jul-89

[*****]                      LZS221-C                     3.0                   6-Jul-94

[*****]                      DCS221                                             27-Feb-91

[*****]                      LZS221-68                    3.0                   26-Oct-96

[*****]                      LZS221-68                    3.0

[*****]                      LZS221-86                    decomp only           26-Jul-95

[*****]                      LZS221-C                     3.0                   26-Mar-96
- -----------------------------------------------------------------------------------------------------------
</TABLE>

*****Confidential Treatment Requested

                                      A-12




<PAGE>   17


<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
CUSTOMER                     PRODUCT                      VERSION               SIGNED
- -----------------------------------------------------------------------------------------------------------
<S>                          <C>                          <C>                   <C>   

[*****]                      LZS221-86                    3.0                   1-Apr-96

[*****]                      DCS221                                             28-Feb-90

[*****]                      LZS221-C                     3.0                   1-Sep-95

[*****]                      DCS221-68                                          6-Aug-91

[*****]                      LZS221-960                   4.0                   31-Jan-95

[*****]                      LZS221-C                     3.0                   25-Sep-95

[*****]                      LZS221-C/68/86               4.0/3.0/3.0           2-Feb-95

[*****]                      LZS221-C/DCS221-386                                3-Dec-93

[*****]                      LZS221-C                     3.0                   30-Nov-94

[*****]                      LZS221-C                     3.0                   29-Apr-95

[*****]                      LZS221-86                    2.0                   14-Jun-95

[*****]                      LZS221-C                     3.0                   5-Sep-95

[*****]                      LZS221-C                     3.0                   12-Dec-95

[*****]                      LZS221-C                     3.0                   13-Mar-96

[*****]                      1987 Technology                                    11-Jun-87

[*****]                      DCS221                                             8-May-90

[*****]                      DCS221                                             24-Jul-89

[*****]                      2.02 DCS221-86                                     15-Feb-91

[*****]                      DCS221-386                                         25-Jul-91

[*****]                      DCS221                                             20-Jul-90

[*****]                      LZS221-68                    3.0                   21-Nov-94

[*****]                      LZS221-C                     3.0                   17-Jun-96

[*****]                      LZS221-86 Custom                                   21-Dec-92

[*****]                      DCS221                                             11-Jul-90

[*****]                      LZS221-C                     3.0                   26-Oct-94

[*****]                      LZS221-86                    2.0                   21-Jun-95

[*****]                      DCS221                                             14-Feb-89

[*****]                      LZS221-68                    3.0                   20-Sep-94

[*****]                      LZS221-C                     3.0                   10-Jan-96

[*****]                      LZS221-C                     3.0                   10-Nov-95

[*****]                      LZS221-C                     3.0                   27-Sep-96

[*****]                      LZS221-C                     3.0                   10-Oct-96

[*****]                      LZS221-C                     3.0                   10-Oct-96
- -----------------------------------------------------------------------------------------------------------
</TABLE>

*****Confidential Treatment Requested

                                      A-13


<PAGE>   18



                        CLOSED ROYALTY LICENSE AGREEMENTS


<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
CUSTOMER                     PRODUCT                      VERSION               SIGNED
- -----------------------------------------------------------------------------------------------------------
<S>                          <C>                          <C>                   <C>   
[*****]                      LZS221-68                    3.0                   20-Aug-92

[*****]                      LZS221-68                    3.0                   18-Apr-94

[*****]                      LZS221-C                     3.0                   14-Jul-95

[*****]                      LZS221-86                                          15-May-92

[*****]                      LZS221-960                   3.0                   1-Mar-95

[*****]                      RS3T                                               19-Oct-93

[*****]                      LZS221-86                                          5-Jan-93

[*****]                      LZS221-68                    3.0                   27-Mar-95

[*****]                      LZS221-68                    3.0                   14-Nov-94

[*****]                      DCS221-68                                          1-Jun-92

[*****]                      DCS221-386                                         22-Feb-95

[*****]                      DCS221-68                                          17-Oct-92

[*****]                      LZS21-960                    3.0                   9-Sep-94

[*****]                      LZS221-86                    3.0                   28-Jul-94

[*****]                      DSC-386/LZS-C                                      6-Jun-94

[*****]                      LZS-960 & LZS-68             4.0/2.0               25-Apr-95

[*****]                      DCS221-386                                         8-Oct-93

[*****]                      LZS221-86                                          4-Nov-92

[*****]                      LZS221-86                    3.0                   11-Nov-94

[*****]                      LZS221-86                    3.0                   22-Aug-94

[*****]                      LZS221-86/C                  3.0/3.0               23-Jun-95

[*****]                      DCS221-386, LZS221-86                              10-Jan-94

[*****]                      LZS221-86                    3.0                   3-Feb-95

[*****]                      LZS221-86                                          1-Feb-93

[*****]                      LZS221-86                    3.0                   12-Oct-94

[*****]                      LZS221-C                     ?                     25-Jul-94

[*****]                      LZS221-86                    3.0                   28-Feb-95

[*****]                      LZS221-86                    3.0                   29-Sep-94

[*****]                      LZS221-C                     4.0                   24-Nov-94

[*****]                      LZS221-68                    2.0                   1-Feb-95
- -----------------------------------------------------------------------------------------------------------
</TABLE>

*****Confidential Treatment Requested


                                      A-14


<PAGE>   19



<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
CUSTOMER                     PRODUCT                      VERSION               SIGNED
- -----------------------------------------------------------------------------------------------------------
<S>                          <C>                          <C>                   <C>   
[*****]                      LZS221-68                    3.0                   9-Oct-95

[*****]                      LZS221-86                                          6-Jan-93

[*****]                      LZS221-86                    3.0                   10-Jul-92
- -----------------------------------------------------------------------------------------------------------

</TABLE>

                      CLOSED V4 ROYALTY LICENSE AGREEMENTS


<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
CUSTOMER                     PRODUCT                      VERSION               SIGNED
- -----------------------------------------------------------------------------------------------------------
<S>                          <C>                          <C>                   <C>   

[*****]                      LZS-C/MPPC-C                 4.0                   1-Sep-95

[*****]                      LZS-C/68                     custom                29-Sep-95

[*****]                      DCS-386                      1.0                   1-Dec-95

[*****]                      LZS-C/MPPC-C                 4.0                   1-Dec-95

[*****]                      LZS-C                        4.0                   6-Dec-95

[*****]                      LZS-C                        4.0                   22-Dec-95

[*****]                      LZS-C                        4.0                   1-Feb-96

[*****]                      LZS-68                       3.0                   8-Mar-96

[*****]                      LZS-C                        4.0                   22-Mar-96

[*****]                      LZS-68                       3.0                   1-Apr-96

[*****]                      LZS-C/68                     4.0/5.0               8-May-96

[*****]                      LZS-C/68                     4.0/5.0               11-Jun-96

[*****]                      LZS-C                        4.0                   1-Jul-96

[*****]                      LZS-68                       3.0                   22-Jul-96

[*****]                      LZS-C                        4.0                   13-Aug-96

[*****]                      LZS-68/960, MPPC-C, Mum      5.0/4.0/4.0/1.0       27-Aug-96

[*****]                      LZS-C                        4.0                   11-Sep-96

[*****]                      LZS-C (Modified)             4.0                   19-Sep-96

[*****]                      LZS-C/MPPC-C                 4.0/4.0               30-Sep-96

[*****]                      LZS221-960                   4.0                   29-Aug-96

[*****]                      LZS221-68                    5.0                   1-Oct-96
- -----------------------------------------------------------------------------------------------------------
</TABLE>

*****Confidential Treatment Requested

                                      A-15


<PAGE>   20



                    CLOSED MOTOROLA PATENT LICENSE AGREEMENTS

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
CUSTOMER                     PRODUCT                      VERSION               SIGNED
- -----------------------------------------------------------------------------------------------------------
<S>                          <C>                          <C>                   <C>   
[*****]                      MOTCOMP                      na                    08-Mar-96

[*****]                      MOTCOMP                      na                    31-Jan-96

[*****]                      MOTCOMP                      na                    23-Apr-96
- -----------------------------------------------------------------------------------------------------------
</TABLE>


                                OTHER AGREEMENTS

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
CUSTOMER                     PRODUCT                      VERSION               SIGNED
- -----------------------------------------------------------------------------------------------------------
<S>                          <C>                          <C>                   <C>   

[*****]                      MPPC                         All                   16-Feb-96
- -----------------------------------------------------------------------------------------------------------
</TABLE>

*****Confidential Treatment Requested

                                      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
                                          **** Text Omitted and Filed Separately
                                               Confidential Treatment Requested
                                               Under 17 C.F.R. Sections 200.80,
                                               200.83 and 240.24b-2.

                                                                    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
<TABLE>
<CAPTION>
                                  ATTACHMENT A
- -------------------------------------------------------------------------------------------------------------------
                                                                                       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

- -------------------------------------------------------------------------------------------------------------------
[*****]

</TABLE>

***** Confidential Treatment Requested. 

                                      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 10.4

                             DISTRIBUTION AGREEMENT

                                     between

                                   STAC, INC.

                                       and

                                   HI/FN, INC.

                                   dated as of

                                November __, 1998



<PAGE>   2

                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                                   PAGE
                                                                                                                   ----
<S>                                                                                                                <C>
ARTICLE I.  DEFINITIONS..........................................................................................    2  
                                                                                                                    
SECTION 1.01. GENERAL............................................................................................    2
SECTION 1.02. TERMS DEFINED ELSEWHERE IN AGREEMENT...............................................................   10
                                                                                                                    
ARTICLE II.  ASSUMPTION AND SATISFACTION OF LIABILITIES..........................................................   10
                                                                                                                    
SECTION 2.01. ASSUMPTION AND SATISFACTION OF LIABILITIES.........................................................   10
                                                                                                                    
ARTICLE III.  THE DISTRIBUTION...................................................................................   11
                                                                                                                    
SECTION 3.01. COOPERATION PRIOR TO THE DISTRIBUTION..............................................................   11
SECTION 3.02. STAC BOARD ACTION; CONDITIONS PRECEDENT TO THE DISTRIBUTION........................................   11
SECTION 3.03. THE DISTRIBUTION...................................................................................   12
SECTION 3.04. CASH IN LIEU OF FRACTIONAL SHARES..................................................................   13
                                                                                                                    
ARTICLE IV.  INDEMNIFICATION.....................................................................................   13
                                                                                                                    
SECTION 4.01. INDEMNIFICATION BY STAC............................................................................   13
SECTION 4.02. INDEMNIFICATION BY HI/FN...........................................................................   14
SECTION 4.03. INSURANCE PROCEEDS.................................................................................   15
SECTION 4.04. PROCEDURE FOR INDEMNIFICATION......................................................................   15
SECTION 4.05. REMEDIES CUMULATIVE................................................................................   19
SECTION 4.06. SURVIVAL OF INDEMNITIES............................................................................   19
                                                                                                                    
ARTICLE V.  CERTAIN ADDITIONAL MATTERS...........................................................................   19
                                                                                                                    
SECTION 5.01. HI/FN BOARD........................................................................................   19
SECTION 5.02. EMPLOYEE MATTERS...................................................................................   20
SECTION 5.03. CERTIFICATE AND BYLAWS.............................................................................   20
                                                                                                                    
ARTICLE VI.  ACCESS TO INFORMATION AND SERVICES..................................................................   21
                                                                                                                    
SECTION 6.01. PROVISION OF CORPORATE RECORDS.....................................................................   21
SECTION 6.02. ACCESS TO INFORMATION..............................................................................   21
SECTION 6.03. PRODUCTION OF WITNESSES............................................................................   22
SECTION 6.04. REIMBURSEMENT......................................................................................   22
SECTION 6.05. RETENTION OF RECORDS...............................................................................   23
SECTION 6.06. CONFIDENTIALITY....................................................................................   23
SECTION 6.07. PRIVILEGED MATTERS.................................................................................   24
                                                                                                                    
ARTICLE VII.  INSURANCE..........................................................................................   27
                                                                                                                    
SECTION 7.01. POLICIES AND RIGHTS INCLUDED WITHIN THE HI/FN ASSETS...............................................   27
SECTION 7.02. POST-DISTRIBUTION DATE CLAIMS......................................................................   27
SECTION 7.03. ADMINISTRATION AND RESERVES........................................................................   28
SECTION 7.04. AGREEMENT FOR WAIVER OF CONFLICT AND SHARED DEFENSE................................................   29
                                                                                                                    
ARTICLE VIII. MISCELLANEOUS......................................................................................   29
                                                                                                                    
SECTION 8.01. COMPLETE AGREEMENT; CONSTRUCTION...................................................................   29
SECTION 8.02. EXPENSES...........................................................................................   30
SECTION 8.03. GOVERNING LAW......................................................................................   30
SECTION 8.04. NOTICES............................................................................................   30
SECTION 8.05. AMENDMENTS.........................................................................................   31
</TABLE>



                                       2
<PAGE>   3

<TABLE>
<S>                                                                                                                 <C>
SECTION 8.06. SUCCESSORS AND ASSIGNS.............................................................................   31
SECTION 8.07. TERMINATION........................................................................................   31
SECTION 8.08. SUBSIDIARIES.......................................................................................   31
SECTION 8.09. NO THIRD-PARTY BENEFICIARIES.......................................................................   31
SECTION 8.10. TITLES AND HEADINGS................................................................................   32
SECTION 8.11. EXHIBITS AND SCHEDULES.............................................................................   32
SECTION 8.12. LEGAL ENFORCEABILITY...............................................................................   32
SECTION 8.13. ARBITRATION OF DISPUTES............................................................................   32
                                                                                                                 
</TABLE>



                                       3
<PAGE>   4

                             DISTRIBUTION AGREEMENT

          This DISTRIBUTION 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 and subsidiary of Stac ("Hi/fn").

                                    RECITALS

          WHEREAS, Stac (i) directly and through subsidiaries other than Hi/fn,
designs, develops, markets and supports high-performance distributed business
systems recovery software solutions for enterprise customers (as more
specifically defined herein, the "Retained Business") and (ii) through Hi/fn,
Stac's OEM networking products subsidiary, designs, develops and markets
semiconductor and software solutions to improve the efficiency, security and
manageability of networks and to enhance the storage capacity of
high-capacity/high-speed storage devices (the "Hi/fn Business");

          WHEREAS, Stac previously assigned to Hi/fn, and Hi/fn previously
assumed, the assets and liabilities relating to the Hi/fn Business pursuant to
an Assignment, Assumption and License Agreement dated as of November 21, 1996
between Stac and Hi/fn (the "Assignment Agreement");

          WHEREAS, Stac and Hi/fn previously entered into a Cross License
Agreement dated as of November 21, 1996 (the "Cross License Agreement"), which
provides for Hi/fn's licensing back to Stac certain intellectual property rights
in technologies transferred to Hi/fn under the Assignment Agreement and Stac's
licensing to Hi/fn certain additional technologies;



                                       1
<PAGE>   5

          WHEREAS, Stac previously purchased 6,000,000 shares of Preferred
Series A Stock, $.001 per share, of Hi/fn ("Hi/fn Preferred Stock") pursuant to
a Stock Purchase Agreement dated as of November 21, 1996 (the "Stock Purchase
Agreement");

          WHEREAS, the Board of Directors of Stac has determined that it is in
the best interests of Stac and the stockholders of Stac to separate Hi/fn from
Stac and, in order to effect such separation, to convert all shares of Hi/fn
Preferred Stock into shares of common stock, $.001 par value per share, of Hi/fn
("Hi/fn Common Stock"), and thereafter to distribute all of the outstanding
shares of Hi/fn Common Stock held by Stac to the holders of Stac Common Stock
(the "Distribution") in the ratio of one share of Hi/fn Common Stock for every
____ shares of Stac Common Stock held by Stac stockholders on the Distribution
Record Date (the "Distribution Ratio"); and

          WHEREAS, in connection with the Distribution, Stac and Hi/fn have
determined that it is necessary and desirable to set forth the principal
corporate transactions required to effect the Distribution, and to set forth the
agreements that will govern certain matters following the Distribution.

          NOW, THEREFORE, in consideration of the mutual agreements, provisions
and covenants contained in this Agreement, the parties hereby agree as follows:

                                   ARTICLE I.

                                   DEFINITIONS

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



                                       2
<PAGE>   6

          Action: Any action, claim, suit, arbitration, inquiry, proceeding or
investigation by or before any court, any governmental or other regulatory or
administrative agency or commission or any arbitration tribunal.

          Affiliate: With respect to any specified Person, any other Person
directly or indirectly controlling or controlled by, or under direct or indirect
common control with, such specified Person. For purposes of this definition,
"control," when used with respect to any Person, means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" shall have meanings correlative to the foregoing.
Notwithstanding the foregoing, (i) the Affiliates of Stac shall not include
Hi/fn, the Hi/fn Subsidiaries or any other Person which would be an Affiliate of
Stac by reason of Stac's ownership of the capital stock of Hi/fn prior to the
Distribution or the fact that any officer or director of Hi/fn or any of the
Hi/fn Subsidiaries shall also serve as an officer or director of Stac, and (ii)
the Affiliates of Hi/fn shall not include Stac or any other Person which would
be an Affiliate of Hi/fn by reason of Stac's ownership of capital stock of Hi/fn
prior to the Distribution or the fact that any officer or director of Hi/fn or
any of the Hi/fn Subsidiaries shall also serve as an officer or director of
Stac.

          Agent: The distribution agent appointed by Stac to distribute the
Hi/fn Common Stock pursuant to the Distribution.

          Commission: The Securities and Exchange Commission.



                                       3
<PAGE>   7

          Distribution Date: The date determined by the Stac Board as the date
on which the Distribution shall be effected, which Distribution Date is
contemplated by the Stac Board to occur on or about November 19, 1998.

          Distribution Record Date: The date established by the Stac Board as
the date for taking a record of the Holders of Stac Common Stock entitled to
participate in the Distribution, which Distribution Record Date has been
established as November 1, 1998.

          Employee Benefits Allocation Agreement: The Employee Benefits and
Other Employment Matters Allocation Agreement between Stac and Hi/fn, which
agreement shall be entered into on or prior to the Distribution Date in
substantially the form of Exhibit A attached hereto.

          Exchange Act: The Securities Exchange Act of 1934, as amended.

          Hi/fn Assets: The assets of the Hi/fn Group, including without
limitation (i) assets relating to the Hi/fn Business, determined on a basis
consistent with the determination of assets included on the Hi/fn Pro Forma
Balance Sheet, (ii) all of the assets expressly allocated to Hi/fn or the Hi/fn
Subsidiaries under this Agreement or the Related Agreements and (iii) any other
assets of the Hi/fn Group relating to the Hi/fn Business.

          Hi/fn Board: The Board of Directors of Hi/fn.

          Hi/fn Books and Records: The books and records (including computerized
records) of Hi/fn and the Hi/fn Subsidiaries and all books and records owned by
Stac which relate to the Hi/fn Business or are necessary to operate the Hi/fn
Business, including, without limitation, all such books and records relating to
Hi/fn Employees, all files relating to any Action being assumed by Hi/fn as part
of the Hi/fn Liabilities, original corporate minute books, stock ledgers 



                                       4
<PAGE>   8

and certificates and corporate seals, and all licenses, leases, agreements and
filings, relating to Hi/fn, the Hi/fn Subsidiaries or the Hi/fn Business (but
not including the Stac Books and Records, provided that Hi/fn shall have access
to, and have the right to obtain duplicate copies of, the Stac Books and Records
in accordance with the provisions of Article VI).

          Hi/fn Bylaws: The Bylaws of Hi/fn, substantially in the form of
Exhibit B, to be in effect at the Distribution Date.

          Hi/fn Certificate: The Restated Certificate of Incorporation of Hi/fn,
substantially in the form of Exhibit C, to be in effect at the Distribution
Date.

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

          Hi/fn Employees: All of the employees of Hi/fn at the time of the
Distribution.

          Hi/fn Group: Hi/fn and the Hi/fn Subsidiaries, collectively.

          Hi/fn Liabilities: (i) All of the Liabilities of the Hi/fn Group
under, or to be retained or assumed by Hi/fn or any of the Hi/fn Subsidiaries
pursuant to, this Agreement or any of the Related Agreements, (ii) all
Liabilities for payment of outstanding drafts of Stac attributable to the Hi/fn
Business existing as of the Distribution Date, (iii) all Liabilities arising out
of or in connection with any of the Hi/fn Assets or the Hi/fn Business,
determined on a basis consistent with the determination of the Liabilities of
Hi/fn included on the Hi/fn Pro Forma Balance Sheet, and (iv) all Liabilities
arising out of or in connection with any claims made by former Hi/fn officers 
or employees, whether brought against Stac or Hi/fn.

          Hi/fn Policies: All Policies, current or past, which are owned or
maintained by or on behalf of Stac or any of its Affiliates or predecessors,
which relate to the Hi/fn Business but do 



                                       5
<PAGE>   9

not relate to the Retained Business, and which Policies are either maintained by
the Hi/fn Group or assignable to the Hi/fn Group.

          Hi/fn Projected Balance Sheet: The Projected Consolidated Balance
Sheet for Hi/fn as of November 19, 1998 attached hereto as Exhibit D.

          Hi/fn Subsidiaries: All Subsidiaries of Hi/fn at the time of the
Distribution.

          Holders: The holders of record of Stac Common Stock as of the
Distribution Record Date.

          Insurance Proceeds: Those moneys (i) received by an insured from an
insurance carrier or (ii) paid by an insurance carrier on behalf of the insured,
in either case net of any applicable premium adjustment, retrospectively-rated
premium, deductible, retention, cost or reserve paid or held by or for the
benefit of such insured.

          Insured Claims: Those Liabilities that, individually or in the
aggregate, are covered within the terms and conditions of any of the Policies,
whether or not subject to deductibles, co-insurance, uncollectability or
retrospectively-rated premium adjustments, but only to the extent that such
Liabilities are within applicable Policy limits, including aggregates.

          Liabilities: Any and all debts, liabilities and obligations, absolute
or contingent, matured or unmatured, liquidated or unliquidated, accrued or
unaccrued, known or unknown, whenever arising, including all costs and expenses
relating thereto, and including, without limitation, those debts, liabilities
and obligations arising under any law, rule, regulation, Action, threatened
Action, order or consent decree of any governmental entity or any award of any
arbitrator of any kind, and those arising under any contract, commitment or
undertaking.

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



                                       6
<PAGE>   10

          Person: Any individual, corporation, partnership, association, trust,
estate or other entity or organization, including any governmental entity or
authority.

          Policies: Insurance policies and insurance contracts of any kind
relating to the Hi/fn Business or the Retained Business as conducted prior to
the Distribution Date, including without limitation primary and excess policies,
comprehensive general liability policies, automobile and workers' compensation
insurance policies, directors' and officers' insurance, employment practices
insurance and self-insurance and captive insurance company arrangements,
together with the rights, benefits and privileges thereunder.

          Privileges: All privileges that may be asserted under applicable law,
including, without limitation, privileges arising under or relating to the
attorney-client relationship (including but not limited to the attorney-client
and work product privileges), the accountant-client privilege, and privileges
relating to internal evaluative processes.

          Privileged Information: All Information as to which Stac, Hi/fn or any
of their Subsidiaries are entitled to assert the protection of a Privilege.

          Related Agreements: All of the agreements, instruments,
understandings, assignments or other arrangements which are entered into in
connection with the transactions contemplated hereby and which are set forth in
a writing, including, without limitation, (i) the Employee Benefits Allocation
Agreement, (ii) the Tax Sharing Agreement and (iii) the Transitional Services
Agreement.

          Retained Assets: The assets of Stac other than the Hi/fn Assets,
including without limitation (i) assets relating to the Retained Business,
determined on a basis consistent with the determination of assets included on
the Stac Projected Balance Sheet, (ii) all of the assets 



                                       7
<PAGE>   11

expressly allocated to Stac under this Agreement or the Related Agreements, and
(iii) any other assets of Stac and its Affiliates relating to the Retained
Business.

          Retained Business: The businesses conducted by Stac pursuant to or
utilizing the Retained Assets, including without limitation the business of
designing, developing, marketing and supporting high-performance distributed
business systems recovery software solutions for enterprise customers, which
implement Stac's lossless data compression technologies.

          Retained Employees: The individuals employed by Stac and not Hi/fn on
the Distribution Date.

          Retained Liabilities: (i) All of the Liabilities arising out of or in
connection with the Retained Assets or the Retained Business, determined on a
basis consistent with the determination of the Liabilities of Stac included on
the Stac Projected Balance Sheet, (ii) all of the Liabilities of Stac under, or
to be retained or assumed by Stac pursuant to, this Agreement or any of the
Related Agreements, (iii) all Liabilities for the payment of outstanding
drafts of Stac attributable to the Retained Business existing as of the
Distribution Date, and (iv) all Liabilities arising out of or in connection 
with any claims made by former Stac officers or employees, whether brought 
against Stac or Hi/fn.

          Retained Policies: All Policies, current or past, which are owned or
maintained by or on behalf of Stac (or any of its predecessors) which relate to
the Retained Business but do not relate to the Hi/fn Business.

          Shared Policies: All Policies, current or past, which are owned or
maintained by or on behalf of Stac or its predecessors which relate to both the
Retained Business and the Hi/fn Business, and all other Policies not
constituting Hi/fn Policies or Retained Policies.

          Stac Board: The Board of Directors of Stac.



                                       8
<PAGE>   12

          Stac Books and Records: The books and records (including computerized
records) of Stac and all books and records owned by Hi/fn which relate to the
Retained Business or are necessary to operate the Retained Business, including,
without limitation, all such books and records relating to Retained Employees,
all files relating to any Action pertaining to the Retained Liabilities,
original corporate minute books, stock ledgers and certificates and corporate
seals, and all licenses, leases, agreements and filings, relating to Stac or the
Retained Business (but not including the Hi/fn Books and Records, provided that
Stac shall have access to, and shall have the right to obtain duplicate copies
of, the Hi/fn Books and Records in accordance with the provisions of Article
VI).

          Stac Common Stock: The common stock, par value $.001 per share, of
Stac.

          Stac Projected Balance Sheet: The Projected Consolidated Balance Sheet
for Stac as of November 19, 1998 attached hereto as Exhibit E.

          Stac Group: Stac and the Stac Subsidiaries, collectively.

          Stac Subsidiaries: All Subsidiaries of Stac at the time of the
Distribution.

          Subsidiary: With respect to any Person, (a) any corporation of which
at least a majority in interest of the outstanding voting stock (having by the
terms thereof voting power under ordinary circumstances to elect a majority of
the directors of such corporation, irrespective of whether or not at the time
stock of any other class or classes of such corporation shall have or might have
voting power by reason of the happening of any contingency) is at the time,
directly or indirectly, owned or controlled by such Person, by one or more
Subsidiaries of such Person, or by such Person and one or more of its
Subsidiaries, or (b) any non-corporate entity in which such Person, one or more
Subsidiaries of such Person, or such Person and one or more Subsidiaries of



                                       9
<PAGE>   13

such Person, directly or indirectly, at the date of determination thereof, has
at least majority ownership interest.

          Tax Sharing Agreement: The Tax Sharing Agreement between Hi/fn and
Stac, which agreement shall be entered into on or prior to the Distribution Date
in substantially the form of Exhibit F attached hereto.

          Transitional Services Agreements: The Transitional Services Agreement
between Hi/fn and Stac, which agreement shall be entered into on or prior to the
Distribution Date in substantially the form of Exhibit G attached hereto.

          Section 1.02. Terms Defined Elsewhere in Agreement.

          Each of the following terms is defined in the Section set forth
opposite such term:


<TABLE>
<CAPTION>
          Term                                                          Section
          ----                                                          -------
<S>                                                                     <C>
          Assignment Agreement                                          Recitals

          Consents                                                      3.01(c)

          Cross License Agreement                                       Recitals

          Distribution                                                  Recitals

          Distribution Ratio                                            Recitals

          Hi/fn                                                         Recitals

          Hi/fn Business                                                Recitals

          Hi/fn Indemnitees                                             4.01

          Indemnifiable Losses                                          4.02

          Indemnifying Party                                            4.03

          Indemnitee                                                    4.03

          Information                                                   6.02

          Stac                                                          Recitals

          Stac Indemnitees                                              4.02

          Stock Purchase Agreement                                      Recitals

          Third-Party Claim                                             4.04(a)
</TABLE>



                                   ARTICLE II.

                   ASSUMPTION AND SATISFACTION OF LIABILITIES

          Section 2.01. Assumption and Satisfaction of Liabilities. Except as
set forth in 



                                       10
<PAGE>   14

the Employee Benefits Allocation Agreement, the Tax Sharing Agreement or the
other Related Agreements, effective as of and after the Distribution Date, (a)
Hi/fn shall, and/or shall cause the Hi/fn Subsidiaries to, assume, pay, perform
and discharge in due course all of the Hi/fn Liabilities and (b) Stac shall pay,
perform and discharge in due course all of the Retained Liabilities.

                                  ARTICLE III.

                                THE DISTRIBUTION

          Section 3.01. Cooperation Prior to the Distribution.

          (a) Stac and Hi/fn shall cooperate in preparing, filing with the
Commission and causing to become effective any registration statements or
amendments thereof which are necessary to effect the Distribution or that may be
appropriate to reflect the establishment of, or amendments to, any employee
benefit plans and other plans contemplated by the Employee Benefits Allocation
Agreement.

          (b) Stac and Hi/fn shall take all such action as may be necessary or
appropriate under the securities or blue sky laws of states or other political
subdivisions of the United States in connection with the transactions
contemplated by this Agreement and the Related Agreements.

          (c) Stac and Hi/fn shall use all reasonable efforts to obtain any
third-party consents or approvals necessary or desirable in connection with the
transactions contemplated hereby ("Consents").

          (d) Stac and Hi/fn will use all reasonable efforts to take, or cause
to be taken, all actions, and to do, or cause to be done, all things necessary
or desirable under applicable law, to consummate the transactions contemplated
under this Agreement and the Related Agreements.

          Section 3.02. Stac Board Action; Conditions Precedent to the
Distribution. The 



                                       11
<PAGE>   15

Stac Board shall, in its discretion, establish any appropriate procedures in
connection with the Distribution. In no event shall the Distribution occur
unless the following conditions shall have been satisfied:

          (a) the Hi/fn Board, comprised as contemplated by Section 5.01, shall
have been elected, and the Hi/fn Certificate and Hi/fn Bylaws shall have been
adopted and shall be in effect;

          (b) Stac and Hi/fn shall have obtained all Consents, the failure of
which to obtain would, in the determination of the Stac Board, have a material
adverse effect on Stac or Hi/fn;

          (c) the Registration Statement on Form 10 under the Exchange Act filed
by Hi/fn shall have been declared effective by the Commission;

          (d) the Hi/fn Common Stock shall have been approved for quotation and
trading on Nasdaq subject to official notice of issuance;

          (e) Hi/fn shall have obtained and delivered to 750 University, LLC, 
the landlord under its headquarters lease, a letter of credit in an amount and 
with such other terms that upon completion of the Distribution, the Lease 
Guaranty dated as of November 17, 1997 made by Stac in favor or 750 University, 
LLC will terminate in accordance with its terms; and

          (f) Stac and Hi/fn shall have entered into the Related Agreements;
provided, however, that (i) any such condition may be waived by the Stac Board
in its sole discretion, and (ii) the satisfaction of such conditions shall not
create any obligation on the part of Stac or any other party hereto to effect
the Distribution or in any way limit Stac's power of termination set forth in
Section 8.07 or alter the consequences of any such termination from those
specified in such Section.

          Section 3.03. The Distribution. On the Distribution Date, subject to
the conditions and rights of termination set forth in this Agreement, Stac shall
deliver to the Agent a share certificate representing all of the then
outstanding shares of Hi/fn Common Stock owned by 



                                       12
<PAGE>   16

Stac and shall instruct the Agent to distribute, on or as soon as practicable
following the Distribution Date, such Hi/fn Common Stock to the Holders in
accordance with the Distribution Ratio. Hi/fn agrees to provide all share
certificates that the Agent shall require in order to effect the Distribution.

          Section 3.04. Cash in Lieu of Fractional Shares. No certificate or
scrip representing fractional shares of Hi/fn Common Stock shall be issued as
part of the Distribution, and in lieu thereof, each holder of Stac Common Stock
who would otherwise be entitled to receive a fractional share of Hi/fn Common
Stock will receive cash for such fractional share. Stac shall instruct the Agent
to determine the number of whole shares and fractional shares of Hi/fn Common
Stock allocable to each holder of record of Stac Common Stock as of the
Distribution Record Date. Stac shall instruct the Agent to aggregate all such
fractional shares into whole shares and sell the whole shares obtained thereby
in the open market as soon as practicable following the Distribution Date at
then prevailing prices on behalf of Holders who otherwise would be entitled to
receive fractional share interests and to distribute to each such Holder such
Holder's ratable share of the proceeds of such sale as soon as practicable after
the Distribution Date. Stac shall bear the costs of commissions incurred in
connection with such sales.

                                   ARTICLE IV.

                                 INDEMNIFICATION

          Section 4.01. Indemnification by Stac. Except as otherwise expressly
set forth in a Related Agreement, Stac shall indemnify, defend and hold harmless
Hi/fn and each of the Hi/fn Subsidiaries, and each of their respective
directors, officers, employees, agents and Affiliates and each of the heirs,
executors, successors and assigns of any of the foregoing (the "Hi/fn



                                       13
<PAGE>   17

Indemnitees") from and against the Retained Liabilities and any and all losses,
Liabilities, damages, including, without limitation, the costs and expenses of
any and all Actions, threatened Actions, demands, assessments, judgments,
settlements and compromises relating to the Retained Liabilities and attorneys'
fees and any and all expenses whatsoever reasonably incurred in investigating,
preparing or defending against any such Actions or threatened Actions
(collectively, "Hi/fn Indemnifiable Losses" and, individually, a "Hi/fn
Indemnifiable Loss") of the Hi/fn Indemnitees arising out of or due to the
failure or alleged failure of Stac or any of its Affiliates prior to or after
the Distribution Date to pay, perform or otherwise discharge in due course any
of the Retained Liabilities.

          Section 4.02. Indemnification by Hi/fn. Except as otherwise expressly
set forth in a Related Agreement, Hi/fn shall indemnify, defend and hold
harmless Stac and each of its directors, officers, employees, agents and
Affiliates and each of the heirs, executors, successors and assigns of any of
the foregoing (the "Stac Indemnitees") from and against the Hi/fn Liabilities
and any and all losses, Liabilities, damages, including, without limitation, the
costs and expenses of any and all Actions, threatened Actions, demands,
assessments, judgments, settlements and compromises relating to the Hi/fn
Liabilities and attorneys' fees and any and all expenses whatsoever reasonably
incurred in investigating, preparing or defending against any such Actions or
threatened Actions (collectively, "Stac Indemnifiable Losses" and, individually,
a "Stac Indemnifiable Loss") of the Stac Indemnitees arising out of or due to
the failure or alleged failure of Hi/fn or any of its Affiliates prior to or
after the Distribution Date to pay, perform or otherwise discharge in due course
any of the Hi/fn Liabilities. The "Hi/fn Indemnifiable Losses" and the "Stac
Indemnifiable Losses" are collectively referred to as the "Indemnifiable
Losses."



                                       14
<PAGE>   18

          Section 4.03. Insurance Proceeds. The amount which any party (an
"Indemnifying Party") is or may be required to pay to any other Person (an
"Indemnitee") pursuant to Section 4.01 or Section 4.02 shall be reduced
(including, without limitation, retroactively) by any Insurance Proceeds or
other amounts actually recovered by or on behalf of such Indemnitee in reduction
of the related Indemnifiable Loss. If an Indemnitee shall have received the
payment required by this Agreement from an Indemnifying Party in respect of an
Indemnifiable Loss and shall subsequently actually receive Insurance Proceeds,
or other amounts in respect of such Indemnifiable Loss as specified above, then
such Indemnitee shall pay to such Indemnifying Party a sum equal to the greater
of (i) the amount of such Insurance Proceeds or other amounts actually received
and (ii) the amount of the payment previously made by the Indemnifying Party in
respect of the Indemnifiable Loss.

          Section 4.04. Procedure for Indemnification.

          (a) Except as may be set forth in a Related Agreement, if an
Indemnitee shall receive notice or otherwise learn of the assertion by a Person
(including, without limitation, any governmental entity) who is not a party to
this Agreement or to any of the Related Agreements of any claim or of the
commencement by any such Person of any Action (a "Third-Party Claim") with
respect to which an Indemnifying Party may be obligated to provide
indemnification pursuant to this Agreement, such Indemnitee shall give such
Indemnifying Party written notice thereof promptly after becoming aware of such
Third-Party Claim; provided that the failure of any Indemnitee to give notice as
required by this Section 4.04 shall not relieve the Indemnifying Party of its
obligations under this Article IV, except to the extent that such Indemnifying
Party is prejudiced by such failure to give notice. Such notice shall describe
the Third-Party Claim in 



                                       15
<PAGE>   19

reasonable detail, and shall indicate the amount (estimated if necessary) of the
Indemnifiable Loss that has been or may be sustained by such Indemnitee.

          (b) An Indemnifying Party may elect to defend or to seek to settle or
compromise, at such Indemnifying Party's own expense and by such Indemnifying
Party's own counsel, any Third-Party Claim, provided that the Indemnifying Party
must confirm in writing that it agrees that the Indemnitee is entitled to
indemnification hereunder in respect of such Third-Party Claim. Within 30 days
of the receipt of notice from an Indemnitee in accordance with Section 4.04(a)
(or sooner, if the nature of such Third-Party Claim so requires), the
Indemnifying Party shall notify the Indemnitee of its election whether to assume
responsibility for such Third-Party Claim (provided that if the Indemnifying
Party does not so notify the Indemnitee of its election within 30 days after
receipt of such notice from the Indemnitee, the Indemnifying Party shall be
deemed to have elected not to assume responsibility for such Third-Party Claim),
and such Indemnitee shall cooperate in the defense or settlement or compromise
of such Third-Party Claim. After notice from an Indemnifying Party to an
Indemnitee of its election to assume responsibility for a Third-Party Claim,
such Indemnifying Party shall not be liable to such Indemnitee under this
Article IV for any legal or other expenses (except expenses approved in advance
by the Indemnifying Party) subsequently incurred by such Indemnitee in
connection with the defense thereof; provided that if the defendants in any such
claim include both the Indemnifying Party and one or more Indemnitees and in
such Indemnitees' reasonable judgment a conflict of interest between such
Indemnitees and such Indemnifying Party exists in respect of such claim, such
Indemnitees shall have the right to employ separate counsel and in that event
the reasonable fees and expenses of such separate counsel (but not more than one
separate counsel 



                                       16
<PAGE>   20

reasonably satisfactory to the Indemnifying Party) shall be paid by such
Indemnifying Party. If an Indemnifying Party elects not to assume responsibility
for a Third-Party Claim (which election may be made only in the event of a good
faith dispute that a claim was inappropriately tendered under Section 4.01 or
4.02, as the case may be), the Indemnitee may defend or (subject to the
following sentence) seek to compromise or settle such Third-Party Claim.
Notwithstanding the foregoing, an Indemnitee may not settle or compromise any
claim without prior written notice to the Indemnifying Party, which shall have
the option within ten days following the receipt of such notice (i) to
disapprove the settlement and assume all past and future responsibility for the
claim, including reimbursing the Indemnitee for prior expenditures in connection
with the claim, or (ii) to disapprove the settlement and continue to refrain
from participation in the defense of the claim, in which event the Indemnifying
Party shall have no further right to contest the amount or reasonableness of the
settlement if the Indemnitee elects to proceed therewith, or (iii) to approve
the amount of the settlement, reserving the Indemnifying Party's right to
contest the Indemnitee's right to indemnity, or (iv) to approve and agree to pay
the settlement. In the event the Indemnifying Party makes no response to such
written notice from the Indemnitee, the Indemnifying Party shall be deemed to
have elected option (ii).

          (c) If an Indemnifying Party chooses to defend or to seek to
compromise any Third-Party Claim, the Indemnitee shall make available to such
Indemnifying Party any personnel and any books, records or other documents
within its control or which it otherwise has the ability to make available that
are necessary or appropriate for such defense.

          (d) Notwithstanding anything else in this Section 4.04 to the
contrary, an Indemnifying Party shall not settle or compromise any Third-Party
Claim unless such settlement 



                                       17
<PAGE>   21

or compromise contemplates as an unconditional term thereof the giving by such
claimant or plaintiff to the Indemnitee of a written release from all liability
in respect of such Third-Party Claim (and provided further that such settlement
may not provide for any non-monetary relief by Indemnitee without the written
consent of Indemnitee). In the event the Indemnitee shall notify the
Indemnifying Party in writing that such Indemnitee declines to accept any such
settlement or compromise, such Indemnitee may continue to contest such
Third-Party Claim, free of any participation by such Indemnifying Party, at such
Indemnitee's sole expense. In such event, the obligation of such Indemnifying
Party to such Indemnitee with respect to such Third-Party Claim shall be equal
to (i) the costs and expenses of such Indemnitee prior to the date such
Indemnifying Party notifies such Indemnitee of the offer to settle or compromise
(to the extent such costs and expenses are otherwise indemnifiable hereunder)
plus (ii) the lesser of (A) the amount of any offer of settlement or compromise
which such Indemnitee declined to accept and (B) the actual out-of-pocket amount
such Indemnitee is obligated to pay subsequent to such date as a result of such
Indemnitee's continuing to pursue such Third-Party Claim.

          (e) Any claim on account of an Indemnifiable Loss which does not
result from a Third-Party Claim shall be asserted by written notice given by the
Indemnitee to the applicable Indemnifying Party. Such Indemnifying Party shall
have a period of 15 days after the receipt of such notice within which to
respond thereto. If such Indemnifying Party does not respond within such 15-day
period, such Indemnifying Party shall be deemed to have refused to accept
responsibility to make payment. If such Indemnifying Party does not respond
within such 15-day period or rejects such claim in whole or in part, such
Indemnitee shall be free to pursue such remedies as may be available to such
party under applicable law or under this Agreement.



                                       18
<PAGE>   22

          (f) In addition to any adjustments required pursuant to Section 4.03,
if the amount of any Indemnifiable Loss shall, at any time subsequent to the
payment required by this Agreement, be reduced by recovery, settlement or
otherwise, the amount of such reduction, less any expenses incurred in
connection therewith, shall promptly be repaid by the Indemnitee to the
Indemnifying Party.

          (g) In the event of payment by an Indemnifying Party to any Indemnitee
in connection with any Third-Party Claim, such Indemnifying Party shall be
subrogated to and shall stand in the place of such Indemnitee as to any events
or circumstances in respect of which such Indemnitee may have any right or claim
relating to such Third-Party Claim against any claimant or plaintiff asserting
such Third-Party Claim. Such Indemnitee shall cooperate with such Indemnifying
Party in a reasonable manner, and at the cost and expense of such Indemnifying
Party, in prosecuting any subrogated right or claim.

          Section 4.05. Remedies Cumulative. The remedies provided in this
Article IV shall be cumulative and shall not preclude assertion by any
Indemnitee of any other rights or the seeking of any and all other remedies
against any Indemnifying Party.

          Section 4.06. Survival of Indemnities. The obligations of each of
Hi/fn and Stac under this Article IV shall survive the sale or other transfer by
it of any assets or businesses or the assignment by it of any Liabilities with
respect to any Indemnifiable Loss of the other related to such assets,
businesses or Liabilities.

                                   ARTICLE V.

                           CERTAIN ADDITIONAL MATTERS

          Section 5.01. Hi/fn Board. Hi/fn and Stac shall take all actions which
may be 



                                       19
<PAGE>   23

required to constitute, effective as of the Distribution Date, the board of
directors of Hi/fn with the persons listed on Schedule 1.01(a).

          Section 5.02. Employee Matters.

          (a) On the Distribution Date, except to the extent retained or assumed
by Stac under this Agreement, the Employee Benefits Allocation 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, the Employee Benefits Allocation Agreement or any other agreement
relating to the Distribution, Stac shall retain or assume, as the case may be,
responsibility as employer for the Retained Employees.

          (b) Hi/fn shall cause all of the Hi/fn Employees to resign, effective
as of the Distribution Date, from all positions as officers or employees of Stac
in which they serve. Stac shall cause all of the Retained Employees to resign,
effective as of the Distribution Date, from all positions as officers or
employees of Hi/fn or any of its Subsidiaries in which they serve.

          Section 5.03. Certificate and Bylaws. On or prior to the Distribution
Date, Hi/fn shall adopt the Hi/fn Certificate and the Hi/fn Bylaws, and shall
file the Hi/fn Certificate with the Secretary of State of the State of Delaware.

          Section 5.04. Termination of Lease Guaranty. Hi/fn shall take all 
actions necessary, including without limitation delivering a letter of credit 
in the amount of $1,956,456 to 750 University, LLC, to satisfy the condition 
set forth at Section 3.02(e).

                                       20
<PAGE>   24

                                   ARTICLE VI.

                       ACCESS TO INFORMATION AND SERVICES

          Section 6.01. Provision of Corporate Records.

          (a) Except as may otherwise be provided in a Related Agreement, Stac
shall arrange as soon as practicable following the Distribution Date for the
transportation (at Hi/fn's cost) to Hi/fn of the Hi/fn Books and Records in its
possession, except to the extent such items are already in the possession of
Hi/fn or a Hi/fn Subsidiary. The Hi/fn Books and Records shall be the property
of Hi/fn, but shall be available to Stac for review and duplication until Stac
shall notify Hi/fn in writing that such records are no longer of use to Stac.

          (b) Except as otherwise provided in a Related Agreement, Hi/fn shall
arrange as soon as practicable following the Distribution Date for the
transportation (at Stac's cost) to Stac of the Stac Books and Records in its
possession, except to the extent such items are already in the possession of
Stac. The Stac Books and Records shall be the property of Stac, but shall be
available to Hi/fn for review and duplication until Hi/fn shall notify Stac in
writing that such records are no longer of use to Hi/fn.

          Section 6.02. Access to Information. Except as otherwise provided in a
Related Agreement, from and after the Distribution Date, Stac shall afford to
Hi/fn and its authorized accountants, counsel and other designated
representatives reasonable access (including using reasonable efforts to give
access to persons or firms possessing information) and duplicating rights during
normal business hours to all records, books, contracts, instruments, computer
data and other data and information relating to pre-Distribution operations
(collectively, "Information") within Stac's possession insofar as such access is
reasonably required by Hi/fn for 



                                       21
<PAGE>   25

the conduct of its business, subject to appropriate restrictions for classified
or Privileged Information. Similarly, except as otherwise provided in a Related
Agreement, Hi/fn shall afford to Stac and its authorized accountants, counsel
and other designated representatives reasonable access (including using
reasonable efforts to give access to persons or firms possessing information)
and duplicating rights during normal business hours to Information within
Hi/fn's possession, insofar as such access is reasonably required by Stac for
the conduct of its business, subject to appropriate restrictions for classified
or Privileged Information. Information may be requested under this Article VI
for the legitimate business purposes of either party, including, without
limitation, audit, accounting, claims (including claims for indemnification
hereunder), litigation and tax purposes, as well as for purposes of fulfilling
disclosure and reporting obligations and for performing this Agreement and the
transactions contemplated hereby.

          Section 6.03. Production of Witnesses. At all times from and after the
Distribution Date, each of Hi/fn and Stac shall use reasonable efforts to make
available to the other, upon written request, its and its Subsidiaries'
officers, directors, employees and agents as witnesses to the extent that such
persons may reasonably be required in connection with any Action.

          Section 6.04. Reimbursement. Except to the extent otherwise
contemplated in any Related Agreement, a party providing Information or witness
services to the other party under this Article VI shall be entitled to receive
from the recipient, upon the presentation of invoices therefor, payments of such
amounts, relating to supplies, disbursements and other out-of-pocket expenses
(at cost) and direct and indirect expenses of employees who are witnesses or
otherwise furnish assistance (at cost), as may be reasonably incurred in
providing such 



                                       22
<PAGE>   26

Information or witness services.

          Section 6.05. Retention of Records. Except as otherwise required by
law or agreed to in a Related Agreement or otherwise in writing, each of Stac
and Hi/fn may destroy or otherwise dispose of any of the Information, which is
material Information and is not contained in other Information retained by Stac
or Hi/fn, as the case may be, at any time after the seventh anniversary of this
Agreement, provided that, prior to such destruction or disposal, (a) it shall
provide no less than 90 or more than 120 days prior written notice to the other,
specifying in reasonable detail the Information proposed to be destroyed or
disposed of and (b) if a recipient of such notice shall request in writing prior
to the scheduled date for such destruction or disposal that any of the
Information proposed to be destroyed or disposed of be delivered to such
requesting party, the party proposing the destruction or disposal shall promptly
arrange for the delivery of such of the Information as was requested at the
expense of the party requesting such Information.

          Section 6.06. Confidentiality. Each of Stac and its Subsidiaries on
the one hand, and Hi/fn and its Subsidiaries on the other hand, shall hold, and
shall cause its consultants and advisors to hold, in strict confidence, all
Information concerning the other in its possession or furnished by the other or
the other's representatives pursuant to this Agreement (except to the extent
that such Information has been (i) in the public domain through no fault of such
party or (ii) later lawfully acquired from other sources by such party), and
each party shall not release or disclose such Information to any other person,
except its auditors, attorneys, financial advisors, rating agencies, bankers and
other consultants and advisors, unless compelled to disclose by judicial or
administrative process or, as reasonably advised by its counsel or by other
requirements 



                                       23
<PAGE>   27

of law, or unless such Information is reasonably required to be disclosed in
connection with (x) any litigation with any third-parties or litigation between
Stac and the Hi/fn Group, (y) any contractual agreement to which Stac or the
Hi/fn Group are currently parties, or (z) in exercise of either party's rights
hereunder.

          Section 6.07. Privileged Matters. Stac and Hi/fn recognize that legal
and other professional services that have been and will be provided prior to the
Distribution Date have been and will be rendered for the benefit of both the
Stac Group and the Hi/fn Group and that both the Stac Group and the Hi/fn Group
should be deemed to be the client for the purposes of asserting all Privileges.
To allocate the interests of each party in the Privileged Information, the
parties agree as follows:

          (a) Stac shall be entitled, in perpetuity, to control the assertion or
waiver of all Privileges in connection with Privileged Information which relates
solely to the Retained Business, whether or not the Privileged Information is in
the possession of or under the control of Stac or Hi/fn. Stac shall also be
entitled, in perpetuity, to control the assertion or waiver of all Privileges in
connection with Privileged Information that relates solely to the subject matter
of any claims constituting Retained Liabilities, now pending or which may be
asserted in the future, in any lawsuits or other proceedings initiated against
or by Stac, whether or not the Privileged Information is in the possession of or
under the control of Stac or Hi/fn.

          (b) Hi/fn shall be entitled, in perpetuity, to control the assertion
or waiver of all Privileges in connection with Privileged Information which
relates solely to the Hi/fn Business, whether or not the Privileged Information
is in the possession of or under the control of Stac or Hi/fn. Hi/fn shall also
be entitled, in perpetuity, to control the assertion or waiver of all Privileges



                                       24
<PAGE>   28

in connection with Privileged Information which relates solely to the subject
matter of any claims constituting Hi/fn Liabilities, now pending or which may be
asserted in the future, in any lawsuits or other proceedings initiated against
or by Hi/fn, whether or not the Privileged Information is in the possession of
Hi/fn or under the control of Stac or Hi/fn.

          (c) Stac and Hi/fn agree that they shall have a shared Privilege, with
equal right to assert or waive, subject to the restrictions in this Section
6.07, with respect to all Privileges not allocated pursuant to the terms of
Sections 6.07(a) and (b). All Privileges relating to any claims, proceedings,
litigation, disputes or other matters which involve both Stac and Hi/fn in
respect of which Stac and Hi/fn retain any responsibility or liability under
this Agreement shall be subject to a shared Privilege.

          (d) No party may waive any Privilege which could be asserted under any
applicable law, and in which the other party has a shared Privilege, without the
consent of the other party, except to the extent reasonably required in
connection with any litigation with third-parties or as provided in subsection
(e) below. Consent shall be in writing, or shall be deemed to be granted unless
written objection is made within 20 days after notice upon the other party
requesting such consent.

          (e) In the event of any litigation or dispute between a member of the
Stac Group and a member of the Hi/fn Group, either party may waive a Privilege
in which the other party has a shared Privilege, without obtaining the consent
of the other party, provided that such waiver of a shared Privilege shall be
effective only as to the use of Information with respect to the litigation or
dispute between the Stac Group and the Hi/fn Group, and shall not operate as a
waiver of the shared Privilege with respect to third-parties.



                                       25
<PAGE>   29

          (f) If a dispute arises between the parties regarding whether a
Privilege should be waived to protect or advance the interest of either party,
each party agrees that it shall negotiate in good faith, shall endeavor to
minimize any prejudice to the rights of the other party, and shall not
unreasonably withhold consent to any request for waiver by the other party. Each
party specifically agrees that it will not withhold consent to waiver for any
purpose except to protect its own legitimate interests.

          (g) Upon receipt by any party of any subpoena, discovery or other
request which arguably calls for the production or disclosure of Information
subject to a shared Privilege or as to which the other party has the sole right
hereunder to assert a Privilege, or if any party obtains knowledge that any of
its current or former directors, officers, agents or employees have received any
subpoena, discovery or other requests which arguably calls for the production or
disclosure of such Privileged Information, such party shall promptly notify the
other party of the existence of the request and shall provide the other party a
reasonable opportunity to review the Information and to assert any rights it may
have under this Section 6.07 or otherwise to prevent the production or
disclosure of such Privileged Information.

          (h) The transfer of the Hi/fn Books and Records and the Stac Books and
Records and other Information between the Stac Group and the Hi/fn Group is made
in reliance on the agreement of Stac and Hi/fn, as set forth in Sections 6.06
and 6.07, to maintain the confidentiality of Privileged Information and to
assert and maintain all applicable Privileges. The access to information being
granted pursuant to Sections 6.01 and 6.02, the agreement to provide witnesses
and individuals pursuant to Section 6.03 and the transfer of Privileged
Information between the Stac Group and the Hi/fn Group pursuant to this
Agreement shall not be deemed a 



                                       26
<PAGE>   30

waiver of any Privilege that has been or may be asserted under this Agreement or
otherwise.

                                  ARTICLE VII.

                                    INSURANCE

          Section 7.01. Policies and Rights Included Within the Hi/fn Assets.
Without limiting the generality of the definition of the Hi/fn Assets, the Hi/fn
Assets shall include (a) any and all rights of an insured party under each of
the Shared Policies, specifically including rights of indemnity and the right to
be defended by or at the expense of the insurer, with respect to all injuries,
losses, liabilities, damages and expenses incurred or claimed to have been
incurred on or prior to the Distribution Date by any party in or in connection
with the conduct of the Hi/fn Business or, to the extent any claim is made
against Hi/fn or any of its Subsidiaries, the Retained Business, and which
injuries, losses, liabilities, damages and expenses may arise out of insured or
insurable occurrences or events under one or more of the Shared Policies;
provided, however, that nothing in this Section 7.01 shall be deemed to
constitute (or to reflect) the assignment of the Shared Policies, or any of
them, to Hi/fn, and (b) the Hi/fn Policies.

          Section 7.02. Post-Distribution Date Claims. If, subsequent to the
Distribution Date, any person, corporation, firm or entity shall assert a claim
against Hi/fn or any Hi/fn Subsidiary with respect to any injury, loss,
liability, damage or expense incurred or claimed to have been incurred on or
prior to the Distribution Date in or in connection with the Distribution or the
conduct of the Hi/fn Business or, to the extent any claim is made against Hi/fn
or any of its Subsidiaries, the Retained Business, and which injury, loss,
liability, damage or expense may arise out of insured or insurable occurrences
or events under one or more of the Shared Policies, Stac shall at the time such
claim is asserted be deemed to assign, without need of further 



                                       27
<PAGE>   31

documentation, to Hi/fn any and all rights of an insured party under the
applicable Shared Policy with respect to such asserted claim, specifically
including rights of indemnity and the right to be defended by or at the expense
of the insurer; provided, however, that nothing in this Section 7.02 shall be
deemed to constitute (or to reflect) the assignment of the Shared Policies, or
any of them, to Hi/fn.

          Section 7.03. Administration and Reserves.

          (a) Notwithstanding the provisions of Article II, but subject to any
contrary provisions of any Related Agreement, from and after the Distribution
Date:

               (i) Hi/fn shall be entitled to any reserves established by Stac,
or the benefit of reserves held by any insurance carrier, with respect to the
Hi/fn Liabilities; and

               (ii) Stac shall be entitled to any reserves established by Stac,
or the benefit of reserves held by any insurance carrier, with respect to the
Retained Liabilities.

          (b) Insurance Premiums. [Hi/fn shall have the right but not the
obligation to pay the premiums, to the extent that Stac does not pay premiums
with respect to Retained Liabilities (retrospectively-rated or otherwise), with
respect to Shared Policies and the Hi/fn Policies, as required under the terms
and conditions of the respective Policies, whereupon Stac shall forthwith
reimburse Hi/fn for that portion of such premiums paid by Hi/fn as are
attributable to the Retained Liabilities. Stac shall provide continued coverage
under its director and officer liability insurance policy for a period of not
less than three years, with a policy limit of not less than Five Million Dollars
($5,000,000), for acts which took place or were alleged to have taken place
prior to the Distribution Date covering persons who were directors and officers
of Stac prior to the Distribution Date. Fifty percent of the additional
premiums, if any, for such coverage 



                                       28
<PAGE>   32

shall be reimbursed by Hi/fn within 15 days of the Distribution Date.]

          (c) Allocation of Insurance Proceeds. Insurance Proceeds received with
respect to claims, costs and expenses under the Policies shall be paid to Hi/fn
with respect to the Hi/fn Liabilities and to Stac with respect to the Retained
Liabilities. Payment of the allocable portions of indemnity costs of Insurance
Proceeds resulting from the liability policies will be made to the appropriate
party upon receipt from the insurance carrier. In the event that the aggregate
limits on any Shared Policies are exceeded, the parties agree to provide an
equitable allocation of Insurance Proceeds received after the Distribution Date
based upon their respective bona fide claims. The parties agree to use their
best efforts to cooperate with respect to insurance matters.

          Section 7.04. Agreement for Waiver of Conflict and Shared Defense. In
the event that Insured Claims of both Hi/fn and Stac exist relating to the same
occurrence, Hi/fn and Stac agree to jointly defend and to waive any conflict of
interest necessary to the conduct of that joint defense. Nothing in this Section
7.04 shall be construed to limit or otherwise alter in any way the indemnity
obligations of the parties to this Agreement, including those created by this
Agreement, by operation of law or otherwise.

                                  ARTICLE VIII.

                                  MISCELLANEOUS

          Section 8.01. Complete Agreement; Construction. This Agreement,
including the Schedules and Exhibits and the Related Agreements and other
agreements and documents referred to herein, shall constitute the entire
agreement between the parties with respect to the subject matter hereof and
thereof and shall supersede all previous negotiations, commitments and writings
with respect to such subject matter. Notwithstanding any other provisions in
this


                                       29
<PAGE>   33

Agreement to the contrary, in the event and to the extent that there shall be a
conflict between the provisions of this Agreement and the provisions of the
Related Agreements, the Related Agreements shall control.

          Section 8.02. Expenses. Except as otherwise set forth in this
Agreement or any Related Agreement, all costs and expenses in connection with
the preparation, execution, delivery and implementation of this Agreement, the
Distribution and with the consummation of the transactions contemplated by this
Agreement shall be charged to the party for whose benefit the expenses are
incurred, with any expenses which cannot be allocated on such basis to be split
equally between the parties.

          Section 8.03. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California, without regard
to the principles of conflicts of laws thereof.

          Section 8.04. Notices. All notices and other communications hereunder
shall be in writing and shall be delivered by hand, mailed by registered or
certified mail (return receipt requested) to the parties at the addresses below
(or at such other addresses for a party as shall be specified by like notice) or
sent by facsimile to the numbers listed below with confirmation of transmission,
and shall be deemed given on the date on which such notice is received:

         To Hi/fn:

                  Hi/fn, Inc.
                  750 University Avenue
                  Los Gatos, CA 95302
                  (408) 399-3501 (fax)
                  Attention: William Walker



                                       30
<PAGE>   34

         To Stac:

                  Stac, Inc.
                  12636 High Bluff Drive, 4th Floor
                  San Diego, CA 92130
                  (619) 794-4572
                  Attention:  John Witzel

          Section 8.05. Amendments. This Agreement may not be modified or
amended except by an agreement in writing signed by the parties.

          Section 8.06. Successors and Assigns. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the parties
and their respective successors and permitted assigns. The parties acknowledge
and agree that any party into which Stac or Hi/fn merges or which acquires all
or substantially all of Stac's or Hi/fn's assets in a sale transaction would
constitute a permitted assign for purposes of this Section 8.06.

          Section 8.07. Termination. This Agreement may be terminated and the
Distribution abandoned at any time prior to the Distribution Date by and in the
sole discretion of the Stac Board without the approval of Hi/fn or of Stac's
stockholders. In the event of such termination, no party shall have any
liability to any other party pursuant to this Agreement.

          Section 8.08. Subsidiaries. Each of the parties hereto shall cause to
be performed, and hereby guarantees the performance of, all actions, agreements
and obligations set forth herein to be performed by any Subsidiary of such party
which is contemplated to be a Subsidiary of such party on and after the
Distribution Date.

          Section 8.09. No Third-Party Beneficiaries. Except for the provisions
of Article IV relating to Indemnitees, this Agreement is solely for the benefit
of the parties hereto and their respective Subsidiaries and Affiliates and
should not be deemed to confer upon third-parties any 



                                       31
<PAGE>   35

remedy, claim, Liability, reimbursement, claim of action or other right in
excess of those existing without reference to this Agreement.

          Section 8.10. Titles and Headings. Titles and headings to sections
herein are inserted for the convenience of reference only and are not intended
to be a part of or to affect the meaning or interpretation of this Agreement.

          Section 8.11. Exhibits and Schedules. The Exhibits and Schedules shall
be construed with and as an integral part of this Agreement to the same extent
as if the same had been set forth verbatim herein.

          Section 8.12. Legal Enforceability. Any provision of this Agreement
which is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof. Any such
prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction. Without prejudice
to any rights or remedies otherwise available to any party hereto, each party
hereto acknowledges that damages would be an inadequate remedy for any breach of
the provisions of this Agreement and agrees that the obligations of the parties
hereunder shall be specifically enforceable.

          Section 8.13. Arbitration of Disputes.

          (a) Any controversy or claim arising out of this Agreement, or any
breach of this Agreement, including any controversy relating to a determination
of whether specific assets constitute Hi/fn Assets or Retained Assets or whether
specific Liabilities constitute Hi/fn Liabilities or Retained Liabilities, shall
be settled by arbitration in accordance with the Rules of the American
Arbitration Association then in effect, as modified by this Section 8.13 or by
the further 



                                       32
<PAGE>   36

agreement of the parties.

          (b) Such arbitration shall be conducted in San Diego, California.

          (c) Any judgment upon the award rendered by the arbitrators may be
entered in any court having jurisdiction thereof. The arbitrators shall have the
authority to award to the prevailing party its attorneys' fees and costs
incurred in such arbitration. The arbitrators shall not, under any
circumstances, have any authority to award punitive, exemplary or similar
damages, and may not, in any event, make any ruling, finding or award that does
not conform to the terms and conditions of this Agreement.

          (d) Nothing contained in this Section 8.13 shall limit or restrict in
any way the right or power of a party at any time to seek injunctive relief in
any court and to litigate the issues relevant to such request for injunctive
relief before such court (i) to restrain the other party from breaching this
Agreement or (ii) for specific enforcement of this Section 8.13. The parties
agree that any legal remedy available to a party with respect to a breach of
this Section 8.13 will not be adequate and that, in addition to all other legal
remedies, each party is entitled to an order specifically enforcing this Section
8.13.

          (e) The parties hereby consent to the jurisdiction of the federal
courts located in San Diego, California for all purposes under this Agreement.

          (f) Neither party nor the arbitrators may disclose the existence or
results of any arbitration under this Agreement or any evidence presented during
the course of the arbitration without the prior written consent of both parties,
except as required to fulfill applicable disclosure and reporting obligations,
or as otherwise required by law.

          (g) Except as provided in Section 8.13(c), each party shall bear its
own costs 



                                       33
<PAGE>   37

incurred in the arbitration. If either party refuses to submit to arbitration
any dispute required to be submitted to arbitration pursuant to this Section
8.13, and instead commences any other proceeding, including, without limitation,
litigation, then the party who seeks enforcement of the obligation to arbitrate
shall be entitled to its attorneys' fees and costs incurred in any such
proceeding.

          IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the day and year first above written.

                                            STAC, INC.


                                            By:_________________________________
                                            Name:_______________________________
                                            Title:______________________________


                                            HI/FN, INC.


                                            By:_________________________________
                                            Name:_______________________________
                                            Title:______________________________



                                       34

<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 listed below (the "Accounting
Services"). 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.

          Accounting Services shall consist of the type, quality and level of
accounting services provided by Stac to Hi/fn prior to the Distribution. These
services shall include the processing of Hi/fn transactions for sales orders,
sales invoicing, accounts receivable collection, trade accounts payable, payroll
processing, entry of general ledger journal entries, cash management,
reconciliation of accounts and cash balances, preparation of financial
statements in accordance with instructions from Hi/fn, maintenance of accounting
software used by Stac for the Accounting Services at the time of Distribution,
assisting Hi/fn management in preparation of budgets and forecasts using Excel
workbook models, assisting Hi/fn management in analysis of operations, assisting
Hi/fn in audits of Hi/fn's financial statements and other financial records, and
such other duties as may be expressly agreed to in writing by the parties. Hi/fn
may decline any or all of these 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.



<PAGE>   2

          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 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 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.



                                       2
<PAGE>   3

          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:

                  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.



                                       3
<PAGE>   4

          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.

          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>   1
                                                                    EXHIBIT 10.8


                                   HI/FN, INC.

                            INDEMNIFICATION AGREEMENT

        This Indemnification Agreement ("Agreement") is effective as of _______,
1998 by and between hi/fn, inc., a Delaware corporation (the "Company"), and
______________ ("Indemnitee").

        WHEREAS, the Company desires to attract and retain the services of
highly qualified individuals, such as Indemnitee, to serve the Company and its
related entities;

        WHEREAS, in order to induce Indemnitee to continue to provide services
to the Company, the Company wishes to provide for the indemnification of, and
the advancement of expenses to, Indemnitee to the maximum extent permitted by
Delaware law;

        WHEREAS, the Company and Indemnitee recognize the continued difficulty
in obtaining liability insurance for the Company's directors, officers,
employees, agents and fiduciaries, the significant increases in the cost of such
insurance and the general reductions in the coverage of such insurance;

        WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting directors, officers,
employees, agents and fiduciaries to expensive litigation risks at the same time
as the availability and coverage of liability insurance has been severely
limited;

        WHEREAS, the Company and Indemnitee desire to continue to have in place
the additional protection provided by an indemnification agreement and to
provide indemnification and advancement of expenses to the Indemnitee to the
maximum extent permitted by Delaware law; and

        WHEREAS, in view of the considerations set forth above, the Company
desires that Indemnitee shall be indemnified and advanced expenses by the
Company as set forth herein;

        NOW, THEREFORE, the Company and Indemnitee hereby agree as set forth
below.

     1. Certain Definitions.

        (a) "Change in Control" shall mean, and shall be deemed to have occurred
if, on or after the date of this Agreement, (i) any "person" (as such term is
used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as
amended), other than a trustee or other fiduciary holding securities under an
employee benefit plan of the Company acting in such capacity or a corporation
owned directly or indirectly by the stockholders of the Company in substantially
the same proportions as their ownership of stock of the Company, becomes the
"beneficial owner" (as defined in Rule 13d-3 under said Act), directly or
indirectly, of securities of the Company representing more than 50% of the total
voting power represented by the Company's then outstanding Voting Securities,
(ii) during any period of two consecutive years, individuals who at the
beginning of such period constitute the Board of Directors of the Company and
any new director whose election by the Board of Directors or nomination for
election by the Company's stockholders was approved by a



<PAGE>   2

vote of at least two thirds (2/3) of the directors then still in office who
either were directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any reason to
constitute a majority thereof, or (iii) the stockholders of the Company approve
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 (either by
remaining outstanding or by being converted into Voting Securities of the
surviving entity) at least 80% of the total voting power represented by the
Voting Securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation, or the stockholders of the
Company approve a plan of complete liquidation of the Company or an agreement
for the sale or disposition by the Company of (in one transaction or a series of
related transactions) all or substantially all of the Company's assets.



        (b) "Claim" shall mean with respect to a Covered Event: any threatened,
pending or completed action, suit, proceeding or alternative dispute resolution
mechanism, or any hearing, inquiry or investigation that Indemnitee in good
faith believes might lead to the institution of any such action, suit,
proceeding or alternative dispute resolution mechanism, whether civil, criminal,
administrative, investigative or other. 

        (c) References to the "Company" shall include, in addition to the
Company, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger to which the Company (or any
of its wholly owned subsidiaries) is a party which, if its separate existence
had continued, would have had power and authority to indemnify its directors,
officers, employees, agents or fiduciaries, so that if Indemnitee is or was a
director, officer, employee, agent or fiduciary of such constituent corporation,
or is or was serving at the request of such constituent corporation as a
director, officer, employee, agent or fiduciary of another corporation,
partnership, joint venture, employee benefit plan, trust or other enterprise,
Indemnitee shall stand in the same position under the provisions of this
Agreement with respect to the resulting or surviving corporation as Indemnitee
would have with respect to such constituent corporation if its separate
existence had continued.

        (d) "Covered Event" shall mean any event or occurrence related to the
fact that Indemnitee is or was a director, officer, employee, agent or fiduciary
of the Company, or any subsidiary of the Company, or is or was serving at the
request of the Company as a director, officer, employee, agent or fiduciary of
another corporation, partnership, joint venture, trust or other enterprise, or
by reason of any action or inaction on the part of Indemnitee while serving in
such capacity.

        (e) "Expenses" shall mean any and all expenses (including attorneys'
fees and all other costs, expenses and obligations incurred in connection with
investigating, defending, being a witness in or participating in (including on
appeal), or preparing to defend, to be a witness in or to participate in, any
action, suit, proceeding, alternative dispute resolution mechanism, hearing,
inquiry or investigation), judgments, fines, penalties and amounts paid in
settlement (if such settlement is approved in advance by the Company, which
approval shall not be unreasonably withheld), actually and reasonably incurred,
of any Claim and any federal, state, local or foreign 



                                      -2-
<PAGE>   3

taxes imposed on the Indemnitee as a result of the actual or deemed receipt of
any payments under this Agreement.

        (f) "Expense Advance" shall mean a payment to Indemnitee pursuant to
Section 3 of Expenses in advance of the settlement of or final judgement in any
action, suit, proceeding or alternative dispute resolution mechanism, hearing,
inquiry or investigation which constitutes a Claim. 

        (g) "Independent Legal Counsel" shall mean an attorney or firm of
attorneys, selected in accordance with the provisions of Section 2(d) hereof,
who shall not have otherwise performed services for the Company or Indemnitee
within the last three years (other than with respect to matters concerning the
rights of Indemnitee under this Agreement, or of other indemnitees under similar
indemnity agreements).

        (h) References to "other enterprises" shall include employee benefit
plans; references to "fines" shall include any excise taxes assessed on
Indemnitee with respect to an employee benefit plan; and references to "serving
at the request of the Company" shall include any service as a director, officer,
employee, agent or fiduciary of the Company which imposes duties on, or involves
services by, such director, officer, employee, agent or fiduciary with respect
to an employee benefit plan, its participants or its beneficiaries; and if
Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to
be in the interest of the participants and beneficiaries of an employee benefit
plan, Indemnitee shall be deemed to have acted in a manner "not opposed to the
best interests of the Company" as referred to in this Agreement.

        (i) "Reviewing Party" shall mean, subject to the provisions of Section
2(d), any person or body appointed by the Board of Directors in accordance with
Delaware law to review the Company's obligations hereunder and under Delaware
law, which may include a member or members of the Company's Board of Directors,
Independent Legal Counsel or any other person or body not a party to the
particular Claim for which Indemnitee is seeking indemnification.

        (j) "Section" refers to a section of this Agreement unless otherwise
indicated.

        (k) "Voting Securities" shall mean any securities of the Company that
vote generally in the election of directors.

     2. Indemnification.

        (a) Indemnification of Expenses. Subject to the provisions of Section
2(b) below, the Company shall indemnify Indemnitee for Expenses to the fullest
extent permitted by Delaware law if Indemnitee was or is or becomes a party to
or witness or other participant in, or is threatened to be made a party to or
witness or other participant in, any Claim (whether by reason of or arising in
part out of a Covered Event), including all interest, assessments and other
charges paid or payable in connection with or in respect of such Expenses.

        (b) Review of Indemnification Obligations. Notwithstanding the
foregoing, in the event any Reviewing Party shall have determined (in a written
opinion, in any case in which

                                      -3-
<PAGE>   4

Independent Legal Counsel is the Reviewing Party) that Indemnitee is not
entitled to be indemnified hereunder under Delaware law, (i) the Company shall
have no further obligation under Section 2(a) to make any payments to Indemnitee
not made prior to such determination by such Reviewing Party, and (ii) the
Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees to
reimburse the Company) for all Expenses theretofore paid in indemnifying
Indemnitee; provided, however, that if Indemnitee has commenced or thereafter
commences legal proceedings in a court of competent jurisdiction to secure a
determination that Indemnitee is entitled to be indemnified hereunder under
Delaware law, any determination made by any Reviewing Party that Indemnitee is
not entitled to be indemnified hereunder under Delaware law shall not be binding
and Indemnitee shall not be required to reimburse the Company for any Expenses
theretofore paid in indemnifying Indemnitee until a final judicial determination
is made with respect thereto (as to which all rights of appeal therefrom have
been exhausted or lapsed). Indemnitee's obligation to reimburse the Company for
any Expenses shall be unsecured and no interest shall be charged thereon.

        (c) Indemnitee Rights on Unfavorable Determination; Binding Effect. If
any Reviewing Party determines that Indemnitee substantively is not entitled to
be indemnified hereunder in whole or in part under Delaware law, Indemnitee
shall have the right to commence litigation seeking an initial determination by
the court or challenging any such determination by such Reviewing Party or any
aspect thereof, including the legal or factual bases therefor, and, subject to
the provisions of Section 15, the Company hereby consents to service of process
and to appear in any such proceeding. Absent such litigation, any determination
by any Reviewing Party shall be conclusive and binding on the Company and
Indemnitee.

        (d) Selection of Reviewing Party; Change in Control. If there has not
been a Change in Control, any Reviewing Party shall be selected by the Board of
Directors, and if there has been such a Change in Control (other than a Change
in Control which has been approved by a majority of the Company's Board of
Directors who were directors immediately prior to such Change in Control), any
Reviewing Party with respect to all matters thereafter arising concerning the
rights of Indemnitee to indemnification of Expenses under this Agreement or any
other agreement or under the Company's Certificate of Incorporation or Bylaws as
now or hereafter in effect, or under any other Delaware law, if desired by
Indemnitee, shall be Independent Legal Counsel selected by Indemnitee and
approved by the Company (which approval shall not be unreasonably withheld).
Such counsel, among other things, shall render its written opinion to the
Company and Indemnitee as to whether and to what extent Indemnitee would be
entitled to be indemnified hereunder under Delaware law and the Company agrees
to abide by such opinion. The Company agrees to pay the reasonable fees of the
Independent Legal Counsel referred to above and to indemnify fully such counsel
against any and all expenses (including attorneys' fees), claims, liabilities
and damages arising out of or relating to this Agreement or its engagement
pursuant hereto. Notwithstanding any other provision of this Agreement, the
Company shall not be required to pay Expenses of more than one Independent Legal
Counsel in connection with all matters concerning a single Indemnitee, and such
Independent Legal Counsel shall be the Independent Legal Counsel for any or all
other Indemnitees unless (i) the Company otherwise determines or (ii) any
Indemnitee shall provide a written statement setting forth in detail a
reasonable objection to such Independent Legal Counsel representing other
Indemnitees.


                                      -4-
<PAGE>   5

        (e) Mandatory Payment of Expenses. Notwithstanding any other provision
of this Agreement other than Section 10 hereof, to the extent that Indemnitee
has been successful on the merits or otherwise, including, without limitation,
the dismissal of an action without prejudice, in defense of any Claim,
Indemnitee shall be indemnified against all Expenses incurred by Indemnitee in
connection therewith.

     3. Expense Advances.

        (a) Obligation to Make Expense Advances. Upon receipt of a written
undertaking by or on behalf of the Indemnitee to repay such amounts if it shall
ultimately be determined that the Indemnitee is not entitled to be indemnified
therefor by the Company, the Company shall make Expense Advances to Indemnitee.

        (b) Form of Undertaking. Any written undertaking by the Indemnitee to
repay any Expense Advances hereunder shall be unsecured and no interest shall be
charged thereon.

        (c) Determination of Reasonable Expense Advances. The parties agree that
for the purposes of any Expense Advance for which Indemnitee has made written
demand to the Company in accordance with this Agreement, all Expenses included
in such Expense Advance that are certified by affidavit of Indemnitee's counsel
as being reasonable shall be presumed conclusively to be reasonable.

     4. Procedures for Indemnification and Expense Advances.

        (a) Timing of Payments. All payments of Expenses (including without
limitation Expense Advances) by the Company to the Indemnitee pursuant to this
Agreement shall be made to the fullest extent permitted by Delaware law as soon
as practicable after written demand by Indemnitee therefor is presented to the
Company, but in no event later than forty-five (45) business days after such
written demand by Indemnitee is presented to the Company, except in the case of
Expense Advances, which shall be made no later than twenty (20) business days
after such written demand by Indemnitee is presented to the Company.

        (b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition
precedent to Indemnitee's right to be indemnified or Indemnitee's right to
receive Expense Advances under this Agreement, give the Company notice in
writing as soon as practicable of any Claim made against Indemnitee for which
indemnification will or could be sought under this Agreement. Notice to the
Company shall be directed to the Chief Executive Officer of the Company at the
address shown on the signature page of this Agreement (or such other address as
the Company shall designate in writing to Indemnitee). In addition, Indemnitee
shall give the Company such information and cooperation as it may reasonably
require and as shall be within Indemnitee's power. 

        (c) No Presumptions; Burden of Proof. For purposes of this Agreement,
the termination of any Claim by judgment, order, settlement (whether with or
without court approval) or conviction, or upon a plea of nolo contendere, or its
equivalent, shall not create a presumption that Indemnitee did not meet any
particular standard of conduct or have any particular belief or that a court has
determined that indemnification is not permitted by this Agreement or Delaware
law. In 



                                      -5-
<PAGE>   6
addition, neither the failure of any Reviewing Party to have made a
determination as to whether Indemnitee has met any particular standard of
conduct or had any particular belief, nor an actual determination by any
Reviewing Party that Indemnitee has not met such standard of conduct or did not
have such belief, prior to the commencement of legal proceedings by Indemnitee
to secure a judicial determination that Indemnitee should be indemnified under
this Agreement or Delaware law, shall be a defense to Indemnitee's claim or
create a presumption that Indemnitee has not met any particular standard of
conduct or did not have any particular belief. In connection with any
determination by any Reviewing Party or otherwise as to whether the Indemnitee
is entitled to be indemnified hereunder, the burden of proof shall be on the
Company to establish that Indemnitee is not so entitled. 

        (d) Notice to Insurers. If, at the time of the receipt by the Company of
a notice of a Claim pursuant to Section 4(b) hereof, the Company has liability
insurance in effect which may cover such Claim, the Company shall give prompt
notice of the commencement of such Claim to the insurers in accordance with the
procedures set forth in the respective policies. The Company shall thereafter
take all necessary or desirable action to cause such insurers to pay, on behalf
of the Indemnitee, all amounts payable as a result of such Claim in accordance
with the terms of such policies.

        (e) Selection of Counsel. In the event the Company shall be obligated
hereunder to provide indemnification for or make any Expense Advances with
respect to the Expenses of any Claim, the Company, if appropriate, shall be
entitled to assume the defense of such Claim with counsel approved by Indemnitee
(which approval shall not be unreasonably withheld) upon the delivery to
Indemnitee of written notice of the Company's election to do so. After delivery
of such notice, approval of such counsel by Indemnitee and the retention of such
counsel by the Company, the Company will not be liable to Indemnitee under this
Agreement for any fees or expenses of separate counsel subsequently employed by
or on behalf of Indemnitee with respect to the same Claim; provided that, (i)
Indemnitee shall have the right to employ Indemnitee's separate counsel in any
such Claim at Indemnitee's expense and (ii) if (A) the employment of separate
counsel by Indemnitee has been previously authorized by the Company, (B)
Indemnitee shall have reasonably concluded that there may be a conflict of
interest between the Company and Indemnitee in the conduct of any such defense,
or (C) the Company shall not continue to retain such counsel to defend such
Claim, then the fees and expenses of Indemnitee's separate counsel shall be
Expenses for which Indemnitee may receive indemnification or Expense Advances
hereunder.

     5. Additional Indemnification Rights; Nonexclusivity.

        (a) Scope. The Company hereby agrees to indemnify the Indemnitee to the
fullest extent permitted by Delaware law, notwithstanding that such
indemnification is not specifically authorized by the other provisions of this
Agreement, the Company's Certificate of Incorporation, the Company's Bylaws or
by statute. In the event of any change after the date of this Agreement in any
Delaware law, statute or rule which expands the right of a Delaware corporation
to indemnify a member of its board of directors or an officer, employee, agent
or fiduciary, it is the intent of the parties hereto that Indemnitee shall enjoy
by this Agreement the greater benefits afforded by such change. In the event of
any change in any Delaware law, statute or rule which narrows the right of a


                                      -6-
<PAGE>   7

Delaware corporation to indemnify a member of its board of directors or an
officer, employee, agent or fiduciary, such change, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement, shall
have no effect on this Agreement or the parties' rights and obligations
hereunder except as set forth in Section 10(a) hereof. 

        (b) Nonexclusivity. The indemnification and the payment of Expense
Advances provided by this Agreement shall be in addition to any rights to which
Indemnitee may be entitled under the Company's Certificate of Incorporation, its
Bylaws, any other agreement, any vote of stockholders or disinterested
directors, the General Corporation Law of the State of Delaware, or otherwise.
The indemnification and the payment of Expense Advances provided under this
Agreement shall continue as to Indemnitee for any action taken or not taken
while serving in an indemnified capacity even though subsequent thereto
Indemnitee may have ceased to serve in such capacity.

     6.      No Duplication of Payments. The Company shall not be liable under
this Agreement to make any payment in connection with any Claim made against
Indemnitee to the extent Indemnitee has otherwise actually received payment
(under any insurance policy, provision of the Company's Certificate of
Incorporation, Bylaws or otherwise) of the amounts otherwise payable hereunder.

     7.      Partial Indemnification. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of Expenses incurred in connection with any Claim, but not, however, for
all of the total amount thereof, the Company shall nevertheless indemnify
Indemnitee for the portion of such Expenses to which Indemnitee is entitled. 

     8.      Mutual Acknowledgment. Both the Company and Indemnitee acknowledge
that in certain instances, federal law or applicable public policy may prohibit
the Company from indemnifying its directors, officers, employees, agents or
fiduciaries under this Agreement or otherwise. Indemnitee understands and
acknowledges that the Company has undertaken or may be required in the future to
undertake with the Securities and Exchange Commission to submit the question of
indemnification to a court in certain circumstances for a determination of the
Company's right under public policy to indemnify Indemnitee. 

     9.      Liability Insurance. To the extent the Company maintains liability
insurance applicable to directors, officers, employees, agents or fiduciaries,
Indemnitee shall be covered by such policies in such a manner as to provide
Indemnitee the same rights and benefits as are provided to the most favorably
insured of the Company's directors, if Indemnitee is a director; or of the
Company's officers, if Indemnitee is not a director of the Company but is an
officer; or of the Company's key employees, agents or fiduciaries, if Indemnitee
is not an officer or director but is a key employee, agent or fiduciary.

     10.     Exceptions.  Notwithstanding any other provision of this Agreement,
the Company shall not be obligated pursuant to the terms of this Agreement:


                                      -7-
<PAGE>   8

        (a) Excluded Action or Omissions. To indemnify Indemnitee for Expenses
resulting from acts, omissions or transactions for which Indemnitee is
prohibited from receiving indemnification under this Agreement or Delaware law;
provided, however, that notwithstanding any limitation set forth in this Section
10(a) regarding the Company's obligation to provide indemnification, Indemnitee
shall be entitled under Section 3 to receive Expense Advances hereunder with
respect to any such Claim unless and until a court having jurisdiction over the
Claim shall have made a final judicial determination (as to which all rights of
appeal therefrom have been exhausted or lapsed) that Indemnitee has engaged in
acts, omissions or transactions for which Indemnitee is prohibited from
receiving indemnification under this Agreement or Delaware law. 

        (b) Claims Initiated by Indemnitee. To indemnify or make Expense
Advances to Indemnitee with respect to Claims initiated or brought voluntarily
by Indemnitee and not by way of defense, counterclaim or crossclaim, except (i)
with respect to actions or proceedings brought to establish or enforce a right
to indemnification under this Agreement or any other agreement or insurance
policy or under the Company's Certificate of Incorporation or Bylaws now or
hereafter in effect relating to Claims for Covered Events, (ii) in specific
cases if the Board of Directors has approved the initiation or bringing of such
Claim, or (iii) as otherwise required under applicable law, regardless of
whether Indemnitee ultimately is determined to be entitled to such
indemnification or insurance recovery, as the case may be. 

        (c) Lack of Good Faith. To indemnify Indemnitee for any Expenses
incurred by the Indemnitee with respect to any action instituted (i) by
Indemnitee to enforce or interpret this Agreement, if a court having
jurisdiction over such action determines as provided in Section 13 that each of
the material assertions made by the Indemnitee as a basis for such action was
not made in good faith or was frivolous, or (ii) by or in the name of the
Company to enforce or interpret this Agreement, if a court having jurisdiction
over such action determines as provided in Section 13 that each of the material
defenses asserted by Indemnitee in such action was made in bad faith or was
frivolous. 

        (d) Claims Under Section 16(b). To indemnify Indemnitee for expenses and
the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute; provided, however, that
notwithstanding any limitation set forth in this Section 10(d) regarding the
Company's obligation to provide indemnification, Indemnitee shall be entitled
under Section 3 to receive Expense Advances hereunder with respect to any such
Claim unless and until a court having jurisdiction over the Claim shall have
made a final judicial determination (as to which all rights of appeal therefrom
have been exhausted or lapsed) that Indemnitee has violated said statute.

     11.     Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original.

     12.     Binding Effect; Successors and Assigns. This Agreement shall be
binding upon and inure to the benefit of and be enforceable by the parties
hereto and their respective successors, assigns (including any direct or
indirect successor by purchase, merger, consolidation or otherwise to all or
substantially all of the business or assets of the Company), spouses, heirs and
personal and



                                      -8-
<PAGE>   9

legal representatives. The Company shall require and cause any successor
(whether direct or indirect, and whether by purchase, merger, consolidation or
otherwise) to all, substantially all, or a substantial part, of the business or
assets of the Company, by written agreement in form and substance satisfactory
to Indemnitee, expressly to assume and agree to perform this Agreement in the
same manner and to the same extent that the Company would be required to perform
if no such succession had taken place. This Agreement shall continue in effect
regardless of whether Indemnitee continues to serve as a director, officer,
employee, agent or fiduciary (as applicable) of the Company or of any other
enterprise at the Company's request. 

     13.      Expenses Incurred in Action Relating to Enforcement or
Interpretation. In the event that any action is instituted by Indemnitee under
this Agreement or under any liability insurance policies maintained by the
Company to enforce or interpret any of the terms hereof or thereof, Indemnitee
shall be entitled to be indemnified for all Expenses incurred by Indemnitee with
respect to such action (including without limitation attorneys' fees),
regardless of whether Indemnitee is ultimately successful in such action, unless
as a part of such action a court having jurisdiction over such action makes a
final judicial determination (as to which all rights of appeal therefrom have
been exhausted or lapsed) that each of the material assertions made by
Indemnitee as a basis for such action was not made in good faith or was
frivolous; provided, however, that until such final judicial determination is
made, Indemnitee shall be entitled under Section 3 to receive payment of Expense
Advances hereunder with respect to such action. In the event of an action
instituted by or in the name of the Company under this Agreement to enforce or
interpret any of the terms of this Agreement, Indemnitee shall be entitled to be
indemnified for all Expenses incurred by Indemnitee in defense of such action
(including without limitation costs and expenses incurred with respect to
Indemnitee's counterclaims and cross-claims made in such action), unless as a
part of such action a court having jurisdiction over such action makes a final
judicial determination (as to which all rights of appeal therefrom have been
exhausted or lapsed) that each of the material defenses asserted by Indemnitee
in such action was made in bad faith or was frivolous; provided, however, that
until such final judicial determination is made, Indemnitee shall be entitled
under Section 3 to receive payment of Expense Advances hereunder with respect to
such action. 


     14.      Notice. All notices, requests, demands and other communications
under this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and signed for by the party addressed, on the date of such
delivery, or (ii) if mailed by domestic certified or registered mail with
postage prepaid, on the third business day after the date postmarked. Addresses
for notice to either party are as shown on the signature page of this Agreement,
or as subsequently modified by written notice. 

     15.      Consent to Jurisdiction. The Company and Indemnitee each hereby
irrevocably consent to the jurisdiction of the courts of the State of California
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be commenced, prosecuted and continued only in the State of
California in and for Santa Clara County, which shall be the exclusive and only
proper forum for adjudicating such a claim. 


                                      -9-
<PAGE>   10


     16.      Severability. The provisions of this Agreement shall be severable
in the event that any of the provisions hereof (including any provision within a
single section, paragraph or sentence) are held by a court of competent
jurisdiction to be invalid, void or otherwise unenforceable, and the remaining
provisions shall remain enforceable to the fullest extent permitted by law.
Furthermore, to the fullest extent possible, the provisions of this Agreement
(including without limitation each portion of this Agreement containing any
provision held to be invalid, void or otherwise unenforceable, that is not
itself invalid, void or unenforceable) shall be construed so as to give effect
to the intent manifested by the provision held invalid, illegal or
unenforceable. 

     17.       Choice of Law. This Agreement, and all rights, remedies,
liabilities, powers and duties of the parties to this Agreement, shall be
governed by and construed in accordance with the laws of the State of Delaware
without regard to principles of conflicts of laws. 

     18.       Subrogation. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights. 

     19.        Amendment and Termination. No amendment, modification,
termination or cancellation of this Agreement shall be effective unless it is in
writing signed by both of the parties hereto. No waiver of any of the provisions
of this Agreement shall be deemed to be or shall constitute a waiver of any
other provisions hereof (whether or not similar), nor shall such waiver
constitute a continuing waiver. 

     20.         Integration and Entire Agreement. This Agreement sets forth the
entire understanding between the parties hereto and supersedes and merges all
previous written and oral negotiations, commitments, understandings and
agreements relating to the subject matter hereof between the parties hereto. 

     21.         No Construction as Employment Agreement. Nothing contained in
this Agreement shall be construed as giving Indemnitee any right to be retained
in the employ of the Company or any of its subsidiaries or affiliated entities.


                  [Remainder of page intentionally left blank]




                                      -10-
<PAGE>   11

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

                                   HI/FN, INC.



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

                                           ------------------------------------





                                   AGREED TO AND ACCEPTED

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


                                      -11-

<PAGE>   1
                                         ***** Text Omitted and Filed Separately
                                               Confidential Treatment Requested
                                               Under 17 C.F.R. Sections 200.80.
                                               200.83 and 240.24b-2.


                                                                    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 [*****] 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

***** Confidential Treatment Requested


                                      -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 [*****] 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 [*****] (or its Subsidiaries) involving IBM products which
include compression/decompression functions and which would have the effect of,
or be equivalent to, conveying to [*****] (or its Subsidiaries) a license under
any STAC Licensed Patents. Any such products licensed to [*****] (or its
Subsidiaries) shall be considered IBM Licensed Products only to the extent that
STAC has granted to [*****] a license under the STAC Licensed Patents.




*****Confidential Treatment Requested



                                      -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 [*****] period that immediately precedes the date of such
        acquisition plus [*****]; 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.




*****Confidential Treatment 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: [Sig Illegible]                    By  /s/ M. C. PHELPS, JR.
        -------------------------              -------------------------------
                                                    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: [Sig Illegible]                    By  /s/ M. C. PHELPS, JR.
        -------------------------              -------------------------------
                                                    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

                                   ***** Text Omitted and Filed Separately
                                         Confidential Treatment Requested Under
                                         17 C.F.R. Sections 200.80, 200.83 and
                                         240.24b-2.

                                   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 [*****] period that
        immediately precedes the date of such acquisition plus [*****];
        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 [*****] period that
        immediately


***** Confidential Treatment Requested

                                      -12-
<PAGE>   13
        precedes the date of such acquisition plus [*****]; 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.

***** Confidential Treatment Requested
                                      

                                      -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
[*****] 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,

***** Confidential Treatment Requested


                                      -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/    [SIG]                                     M. C. Phelps, Jr.
- -----------------------                          Vice President


                                         STAC ELECTRONICS, INC.

                                         By: /s/ ROBERT MONSOUR
Witness:                                     --------------------------
                                                 Robert Monsour
/s/    [SIG]                                     Vice President,
- -----------------------                          Business Development

                                      -21-

<PAGE>   1
                              ***** Text Omitted and Filed Separately
                                    Confidential Treatment Requested
                                    Under 17 C.F.R. Sections 200.80,
                                    200.83 and 240.24b-2.

                                                                   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
[*****]. The [*****] shall be paid by Microsoft to Stac in [*****] consecutive
monthly payments of [*****]. Each

*****Confidential Treatment Requested



                                        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
[*****] which shall be applied to royalty payments by Microsoft to Stac of
[*****] of the first [*****] of Net Revenues and [*****] of Net Revenues over
[*****] generated from the sales of such Microsoft Licensed Products covered by
such Other Stac Patent.

*****Confidential Treatment Requested




                                        5
<PAGE>   6
                                                                    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 [*****] 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

*****Confidential Treatment Requested




                                        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


<PAGE>   15
                                                                    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"

                                       15


<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
                              ***** Text Omitted and Filed Separately
                                    Confidential Treatment Requested
                                    Under 17 C.F.R. Sections 200.80,
                                    200.83 and 240.24b-2.

                                                                  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/Signature Illegible                          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>
<S>        <C>

[*****]
</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 [*****] 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.

*****Confidential Treatment Requested


                                       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
                                          *****Text Omitted and Filed Separately
                                               Confidential Treatment Requested
                                               Under 17 C.F.R. Sections 200.80,
                                               200.83 and 240.24b-2.

                                                                   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 [*****] or software sold on media containing
other software sold by [*****], 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

*****Confidential Treatment Requested


                                      -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 [*****] 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 [*****] per
     year. Royalties payable by MOTOROLA to STAC hereunder for all other
     LICENSED MOTOROLA LZS PRODUCTS

*****Confidential Treatment Requested


                                      -6-
                       MOTOROLA CONFIDENTIAL PROPRIETARY
<PAGE>   7

     shall not exceed [*****] 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.

***** Confidential Treatment Requested



                                      -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
[*****] 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 [*****] during the term of
this agreement. Royalties payable by MOTOROLA to STAC hereunder for all other
LICENSED MOTOROLA PRODUCTS shall not exceed [*****] 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 [*****] years of this agreement
shall end [*****] years from the EFFECTIVE DATE.

***** Confidential Treatment Requested



                                      -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 [*****], 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

*****Confidential Treatment Requested


                                      -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 [*****].

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

***** Confidential Treatment Requested



                                      -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
[*****] for the first year of each sublicensee's INDUSTRY AGREEMENT, [*****] for
the second year of each sublicensee's INDUSTRY AGREEMENT, and [*****] 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

***** Confidential Treatment Requested



                                      -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 [*****], 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

***** Confidential Treatment Requested



                                      -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 [*****], 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.

***** Confidential Treatment Requested



                                      -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: /s/Signature Illegible              By: /s/Signature Illegible
    ---------------------------------       ------------------------------------
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 [*****].


                          TABLE I: ANNUAL LICENSE FEE

<TABLE>
<CAPTION>
<S>            <C>
[*****]
</TABLE>


                                    TABLE II:
                           PER UNIT ROYALTY FOR UNITS
                      IN EXCESS OF VOLUME BAND UPPER LIMIT.
<TABLE>
<CAPTION>
                                 NET SALES PRICE
<S>            <C>
[*****]

</TABLE>

***** Confidential Treatment Requested



                                      -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>
<S>                   <C>
[*****]
</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 [*****] from the Current License
Fee Schedule for the prior applicable year. Such updated License Fee Schedule
shall

***** Confidential Treatment Requested




                                      -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
[*****] 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.

***** Confidential Treatment Requested



                                        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 construed as creating a partnership,
joint venture, or other formal business organization of any kind.

9.5  In no event shall either party be liable to the