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     February 9, 2005 Correspondence

February 9, 2005

VIA EDGAR

Securities and Exchange
Commission
Division of Corporation Finance
450 Fifth Street, N.W.
Washington, D.C. 20549
Attn:
Mr. Patrick N. Enunwaonye

     Re:
     hi/fn, inc.

     Form 10-K for the fiscal year ended September 30, 2004

     SEC File No. 000-24765

Dear Division of
Corporation Finance:

        The
following comprises the Company’s responses to comments dated January 14, 2005 by the
Division of Corporation Finance (the “Staff”) of the Securities and
Exchange Commission (the “Commission”) with respect to the Company’s
annual report on Form 10-K for the fiscal year ended September 30, 2004. Each of the
Staff’s comments has been reproduced in italics for convenience of reference. The
Company’s response appears in normal typeface following each comment.

        Capitalized
terms used but not defined herein have the meanings given to them in the Form 10-K. Page
number references in the Company’s responses are to pages of the Form 10-K.

January 14, 2005 Staff
Comments

Form 10-K

Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations – Page 17

Critical Accounting Policies – Page 19

          1.

          We see your critical accounting policy regarding revenue recognition.
          However, the disclosure merely repeats the policies from your
          significant accounting policies footnote with little elaboration. Please
          expand in future filings to describe the specific factors that in your view
          make it critical. Discuss the nature of estimates and uncertainties
          about those estimates inherent to your revenue recognition policy,
          including how you make those estimates. Discuss how different assumptions,
          methods or conditions might affect your financial statements.

Securities and Exchange Commission

February 9, 2005
Page 2

The
Company acknowledges the Staff’s comments regarding the Company’s critical
accounting policy with respect to revenue recognition. The Company’s future filings
of its Annual Report on Form 10-K will include the reasons that the policy is considered
critical and expand its discussions
regarding estimates and uncertainties and the basis for any such estimates. Furthermore,
the Company will include discussion regarding the effect that different assumptions,
methods or conditions may have on our financial statements.

Results of Operations

Net Revenue – Page 21

          2.

          Revise and expand future filings to explain the events and circumstances that
          caused revenue to increase. For example, discuss whether the increase
          was attributable to changes in prices, volume, product mix or the
          introduction of new products or services. For guidance, please see Release
          No. 33-8350, “Commission Guidance Regarding Management’s
          Discussion and Analysis of Financial Condition and Results of Operations”
          (December 19, 2003).

The
Company acknowledges the Staff’s comments and will incorporate in future filings,
commencing with its Quarterly Report on Form 10-Q for the period ending December 31, 2004,
more detail regarding events and circumstances that cause revenue to increase.

Liquidity and Capital
Resources – Page 25

          3.

          In future filings expand to describe the reasons for the increases and
          decreases in the various components of working capital cited as
          impacting cash flow from operations. In general, when you describe the effects
          of changes in working capital on cash flow from operations, the reasons
          for these changes should also be described.

The
Company acknowledges the Staff’s comments and will incorporate in future filings,
commencing with its Quarterly Report on Form 10-Q for the period ended December 31, 2004,
more detailed descriptions of the reasons for increases and decreases in the various
components of working capital and other cash flow components.

          4.

          As a related matter, we note the significant inventory and accounts
          receivable balances at September 30, 2004. Please discuss these balances
          and their related turnover/collection rates on a comparative basis and
          the reasons for the significant increases in the current year. Also, explain
          the basis of your conclusions regarding the recoverability of inventory
          and accounts receivable as of the most recent balance sheet date.

Securities and Exchange Commission

February 9, 2005
Page 3

Inventory
– Year-End Balance: The Company’s inventory balance at September 30, 2004
reflects an increase of $1.7 million over the inventory balance as of September 30, 2003.
The components of net inventory are as follows:

     September 30,

     2004

     2003

     Original inventory cost

     $   4,244,000

     $   3,108,000

     Write-down for excess inventory
       (2,193,000
        )
       (2,753,000
        )

        Net inventory
     $   2,051,000

     $     355,000

Each
period, we compare the units in our ending inventory to forecast sales for the following
twelve (12) months. These forecasts are prepared by our sales department and reviewed for
reasonableness through comparisons to our historical sales and current customer orders.
Once excess inventory is written off, it is not revalued. Our gross margin benefits from
the sales of written down inventory and its impact is disclosed in MD&A in periods
where any such benefits are realized.

The
lead-time for product orders with our manufacturers range from 20 to 23 weeks. The Company
determines purchase quantities based upon backlog orders as well as forecasts provided by
customers. The long lead-time, coupled with minimum order quantities, results in
fluctuations in inventory balances, depending upon the scheduled delivery dates from the
manufacturers and to customers. Additionally, also contributing to the increase in the
inventory balance year over year were products that were introduced in late fiscal 2003
and in fiscal 2004 or for which customer production is increasing, accounting for
approximately $1.1 million of net inventory at September 30, 2004.

The
inventory turnover rates, calculated on a year-over-year basis, were 9.5 times in fiscal 2004
and 11.5 times in fiscal 2003. As of September 30, 2004, the Company had 1.3 inventory months-on-hand.
 Based upon the Company’s
analysis and excess and obsolete inventory provision as of September 30, 2004, it is the Company’s opinion
that there is minimal risk, if any, that the inventory would be subject to additional
excess and obsolete inventory provision requirements.

Accounts
Receivable – Year-End Balance: The Company’s accounts receivable balance at
September 30, 2004 of $5.7 million reflects an increase of $2.9 million over the accounts
receivable balance as of September 30, 2003.

This
increase is primarily a result of increased revenues. The comparative days sales
outstanding, year-over-year, remains relatively flat at 49 and 48 days, for fiscal years
2004 and 2003, respectively. The Company’s standard terms are net thirty days and the
outstanding receivable balance at the end of each respective period is primarily comprised
of billings during the last month of the quarter.

Securities and Exchange Commission

February 9, 2005
Page 4

We
supplementally advise the Staff that our customers are comprised of very large companies
with strong financial positions who, in the past, have made timely payments. To date,
substantially all of the balances outstanding at September 30, 2004 have been collected.

Financial Statements

Note 2. Summary of
Significant Accounting Principles and Policies – Page 44

Revenue Recognition
– Page 46

          5.

          Explain the nature of any installation or post shipment obligations and how
          they affect your revenue recognition. Are sales subject to customer
          acceptance provisions? If so, how does this impact revenue recognition
          on sales? In this regard, we see that “evaluation boards” are offered
          to customers. Supplementally explain your accounting and presentation of
          these demonstration systems. Tell us how you determine inventory
          impairment. We may have additional comments after reviewing your response.

Our
revenues are derived from the sale of both hardware and software. We supplementally advise
the Staff that our standard terms of sale do not include any customer acceptance
provisions and that our hardware products do not require any installation or include any
post shipment obligations. We also advise the Staff that our software products do not
include any customer acceptance clauses and the only post shipment obligation is
post-contract support (“PCS”). A more detailed discussion regarding the nature
of our products is included in our response to your comment # 6.

Prior
to purchasing the Company’s hardware processors, potential customers
evaluate our product and, if feasibility is determined, subsequently design our processors into their
end products. Customers may purchase software design kits (“SDK”s) from the
Company for use in their evaluation and/or design. While the purchase of an SDK is
optional, most customers purchase them in order to expedite the evaluation and design
processes. Customers who obtain SDKs from the Company are also provided evaluation boards.
No revenue is recognized until the SDK and evaluation boards are delivered. SDKs also
include twelve months of PCS. As there is no vendor
specific objective evidence of the fair value of the support and since the support period
is only for a period of twelve months, all revenue related to the sale of SDKs and related
evaluation boards are recognized ratably over the service period as software revenues.

In
addition to providing evaluation boards with SDKs, the Company utilizes evaluation boards
for our own testing and demonstration purposes. The Company’s policy is to expense evaluation
boards at the time of purchase and, accordingly, they are not carried as inventory and are
not subject to inventory impairment. Revenue related to the sale of SDKs was
approximately $147,000, $354,000 and $273,000 for the years ended September 30, 2004, 2003
and 2002, respectively.

Securities and Exchange Commission

February 9, 2005
Page 5

          6.

          Supplementally and in detail, explain the nature of your product or products.
          Do you sell hardware and software separately or together? If together,
          how do you allocate revenue to these elements? Are customers provided
          with a right to receive additional software products free or at a reduced price?
          Does your fee also cover PCS or other service elements?

The
accounting for SDKs is discussed in the Company’s response to
comment #5 above.

The
Company’s primary product lines are of two general categories: hardware (processors)
and product software. These products are sold separately. A discussion of the nature of the
products and the related accounting considerations is as
follows:

Processors:
The Company’s processor customers are original equipment manufacturers who
purchase our processors for integration into their end product. A customer or a
distributor initiates the purchase cycle with the submission of a purchase order. Delivery
is made either directly to the customer or to its manufacturing subcontractor who
assembles their end products. Revenues and the related cost of sales from distributor
purchases are deferred until the units are sold to the end customer as these distributors
have a right to return unsold products and the Company is not able to reasonably estimate
these returns. Hifn does not have any formal acceptance provisions with its direct
customers. Processor purchases are stand-alone in nature. In other words, there are no
associated software, installation or post shipment obligations associated with purchases
of the processors. Software and hardware are sold separately.

Product
Software: The Company sells software that its customers integrate into their own
products in object code format. License agreements are as follows:

Annual
licenses include a license fee for a term, generally one year, and include rights to
unspecified future upgrades, when and if available, and PCS during the term of the
agreement. The license to use the software and PCS are renewable annually at a stated
renewal rate. Due to the short term of the agreements, the license fees related to these
arrangements are recognized ratably over the term of the agreement in accordance with TPA
5100.53.

Perpetual
licenses typically include a license fee for the software and PCS,
generally for a period of one year from the date of purchase of the software.
The customer has the option to purchase PCS for subsequent
years at the price stated in the license agreement. The consideration paid is allocated
between the license fee, which is recognized immediately, and the related PCS,
which is recognized ratably over the period in which PCS
is provided based on the stated renewal rate. In these arrangements, the Company does not
provide its customers with a right to receive additional product software free or at a
reduced price.

          7.

          With respect to contract revenue, please tell us more about your licensing
          and engineering services  arrangements. Describe the significant terms of
          typical arrangements in sufficient detail so that we can  understand the
          basis for your policies. Revise future filings to explain your revenue
          recognition,  referencing accounting guidance is not sufficient.

Securities and Exchange Commission

February 9, 2005
Page 6

In
the last three years, the Company entered into two arrangements, with an aggregate
contract value of $275,000, which involved the code customization for customers. In both
instances, the relevant arrangements outlined the customization work to be done,
defined milestone metrics and set the fee for such services. As the work involved
modification and customization the Company applied the guidance in accordance with Statement of Position 97-2,
“Software Revenue Recognition,” paragraph 74. This guidance requires that in cases where it is determined
that significant production, modification or customization is required by the arrangement,
the guidance in Accounting Research Bulletin No. 45, “Long-Term Construction-Type
Contracts,” or Statement of Position 81-1 (“SOP 81-1”), “Accounting
for Performance of Construction-Type and Certain Production-Type Contracts,” be
applied.

Revenue
on contract arrangements to modify and customize code based upon the client’s
specifications is recognized on a percentage-of-completion basis in accordance with SOP
81-1. The percentage of completion is determined based upon actual cost of labor performed
to date compared with the estimated total cost of labor for the arrangement. Estimates of
total contract revenues and costs are monitored during the term of the contract. In the
arrangements mentioned above, given the short time frame of the development services,
percentage-of-completion approximated milestone measures. Accordingly, revenue was
recognized upon milestone delivery. The Company does not enter into these arrangements as
a standard practice but may do so from time to time depending upon customer demand and the
Company’s ability to perform and deliver the work.

Note 8 – Stock
Options and Employee Benefits – Page 53

Voluntary Stock Option
Exchange – Page 53

          8.

          Supplementally tell us your accounting for the canceling of stock options and
          issuing new option awards in June 2002. Clarify what you mean by
          “the voluntary stock exchange was accounted for as a modification of
          stock option award for purposes of the fair valu