ALBERT E. SISTO EMPLOYMENT AGREEMENT

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

1.   Duties and Scope of Employment .

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

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

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

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

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

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

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

3.   Compensation .

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

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

(c)   Performance Shares .

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

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

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

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

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

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

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

The number of performance shares to be earned for achievement of a deal price per share of common stock greater than minimum threshold and less than base threshold will be determined on a linear basis based on the number of performance shares that can be earned based on achievement of the minimum threshold and base threshold. Similarly, the number of performance shares to be earned for achievement of deal price per share of common stock greater than the base threshold and less than target threshold will be determined on a linear basis based on the number of performance shares that can be earned based on achievement of the base threshold and tar