================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                _________________

                                    FORM 10-K

(Mark One)

   |X|       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
             EXCHANGE ACT OF 1934

                    For the fiscal year ended March 31, 2004

                                       OR

   |_|       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
             EXCHANGE ACT OF 1934

                   For the transition period from          to

                        Commission file number: 000-32967

                               ___________________

                             HPL TECHNOLOGIES, INC.
             (Exact Name of Registrant as Specified in Its Charter)

                    Delaware                            77-0550714
          (State of Incorporation)         (I.R.S. Employer Identification No.)

        2033 Gateway Place, Suite 400,
              San Jose, California                           95110
    (Address of Principal Executive Offices)               (Zip Code)

                                 (408) 437-1466
              (Registrant's telephone number, including area code)

              Securities registered under Section 12(b)of the Act:

                                      None
              Securities registered under Section 12(g)of the Act:

                         Common Stock, $0.001 Par Value
                                (Title of Class)

                               ___________________



                                      -1-
<PAGE>



         Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|

         Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|

         Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 under the Securities Exchange Act of 1934). Yes |_| No
|X|

           The aggregate market value of the shares of the registrant's common
stock held by non-affiliates of the registrant (all stockholders other than
officers, directors and 5% or greater stockholders) as of September 30, 2003 was
$3,577,044 (based upon an average of the closing bid and asked price of $0.24
per share as of such date, as reported in the "pink sheets" published by Pink
Sheets LLC).

         As of June 30, 2004, the registrant had outstanding 31,274,623 shares
of common stock.


<TABLE>
<CAPTION>
                               TABLE OF CONTENTS
<S>        <C>                                                                                                  <C>
                       PART I

Item 1     Business                                                                                              4


Item 2     Properties                                                                                            15


Item 3     Legal Proceedings                                                                                     15


Item 4     Submission of Matters to a Vote of Security Holders                                                   17


                       PART II

Item 5     Market for Registrant's Common Stock and Related Stockholder Matters                                  18


Item 6     Selected Financial Data                                                                               18


Item 7     Management's Discussion and Analysis of Financial Condition and Results of Operations                 20


Item 7A    Quantitative and Qualitative Disclosures about Market Risk                                            40


Item 8     Financial Statements and Supplementary Data                                                           42


Item 9     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                  70


Item 9A    Controls and Procedures                                                                               70


                      PART III

Item 10    Directors and Executive Officers of the Registrant                                                    71



                                      -2-
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Item 11    Executive Compensation                                                                                71


Item 12    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters        74


Item 13    Certain Relationships and Related Transactions                                                        76


Item 14    Principal Accountant Fees and Services                                                                76



                       PART IV

Item 15    Exhibits, Financial Statement Schedules, and Reports on Form 8-K                                      77


</TABLE>




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PART I

GENERAL

FORWARD-LOOKING STATEMENTS

         This report contains forward-looking statements that involve
substantial risks and uncertainties. In some cases you can identify these
statements by forward-looking words such as "anticipate," "believe," "could,"
"estimate," "expect," "intend," "may," "should," "will," and "would" or similar
words. You should read statements that contain these words carefully because
they may discuss our future expectations, contain projections of our future
results of operations or of our financial condition or state other
"forward-looking" information. However, there may be events in the future that
we are not able to accurately predict or control. The factors listed in Item 7
under the caption "Risk Factors," as well as any cautionary language in this
report, provide examples of risks, uncertainties and events that may cause our
actual results to differ materially from the expectations we describe in our
forward-looking statements. You should be aware that the occurrence of any of
the events described in these risk factors and elsewhere in this report could
have a material adverse effect on our business, financial condition and results
of operations.

ITEM 1.  BUSINESS

OVERVIEW

         We are focused on a single objective - to maximize yield potential in
every phase of the semiconductor product lifecycle, from process technology
development, through design, and into manufacturing and test. By combining our
proven, configurable enterprise software platforms and proprietary TestChip
Intellectual Property ("TestChip IP"), we enable manufacturers of semiconductors
and flat panel displays to quickly identify and correct yield-limiting factors
in their design, technology development and manufacturing processes. We provide
one of the industry's most comprehensive yield optimization solutions.

         We have principally conducted business as Heuristic Physics
Laboratories, Inc. ("HPLI"), a California corporation, since 1989. HPLI merged
on July 30, 2001 with a wholly-owned subsidiary of HPL Technologies, Inc., a
newly organized Delaware corporation (sometimes referred to in this report as
"HPL", the "Company", "we", "our" or "us"), and each outstanding share of HPLI
common stock was converted into 1.7 shares of HPL common stock. As a result of
the merger, HPLI effectively reincorporated into Delaware and we adopted a
holding company structure. Unless we specify otherwise, all references to the
Company and HPL in this report refer to HPL and its subsidiaries. Our principal
executive offices are located at 2033 Gateway Place, Suite 400, San Jose,
California 95110 and our telephone number is (408) 437-1466.

         In July 2002, our Audit Committee initiated an investigation into
financial and accounting irregularities involving revenue reported during prior
periods. Based on the investigation, we discovered that a material amount of
revenue was improperly recognized during 2001 and 2002, primarily in connection
with fictitious sales to an international distributor. Accordingly, we restated
our previously issued financial statements as of and for the years ended March
31, 2002 and 2001. During the investigation, Y. David Lepejian, the Company's
former President and Chief Executive Officer, was removed from all positions
with the Company. In addition, the Vice President of Administration and the
Chief Financial Officer of the Company were replaced. None of these former
officers participated in the preparation or oversight of the restatement of our
financial statements or any other financial information or reports since the
date of their respective departures. Subsequent to his termination, Mr. Lepejian
entered into a consent decree with the SEC and has pleaded guilty to one count
of wire fraud. The Company is a party to numerous lawsuits relating to these
events. See Item 3 -- Legal Proceedings.


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INDUSTRY BACKGROUND

Semiconductor Industry

         The semiconductor product development process can be grouped into three
broad stages: 1) process technology development, 2) design and 3) manufacturing.
These stages are described below:

         1)       Process Technology Development. Semiconductor production
                  begins with the development of "process technology," during
                  which a semiconductor fabricator determines device
                  characteristics and assesses the yield impact on manufacturing
                  margins. Based on the results of the assessment, physical
                  "design rules" and electrical "process parameters" are created
                  to assure that products can be reliably produced in a given
                  fabrication facility. These design rules and process
                  parameters guide the product design process in the second
                  stage of product development, described below.

         2)       Design. The second stage of semiconductor development is
                  product design. Design requires complex software to place and
                  connect individual electrical components (transistors) to
                  construct the functionality of a product. A leading-edge
                  design can call for millions of transistors and
                  interconnections on a square centimeter of silicon. To
                  manufacture a semiconductor product that functions properly,
                  it must be designed with exact precision and expressly for a
                  given semiconductor process technology, described above.

         3)       Manufacturing. The third step in the semiconductor development
                  process is manufacturing. Manufacturing requires hundreds of
                  individual processing steps to form patterned layers of
                  material on a wafer which create transistors and connect them
                  to form the desired electronic circuitry or function.
                  Additionally, the manufacturing process includes packaging and
                  testing of the individual chips themselves. In the case of new
                  technology, interactions among the various wafer fabrication
                  processes and/or the design frequently cause new types of
                  defects and new sources of failure. Constant and accurate
                  measurement and inspection are required to find defects and
                  eliminate defect sources during wafer manufacturing as well as
                  assembly and test processes. The early detection and
                  subsequent resolution of yield problems can result in
                  significant cost savings to the manufacturer.

         We believe that two fundamental semiconductor industry trends have
aligned to create a significant opportunity for us. The first trend is the
continuing fragmentation of the semiconductor development chain. The industry
has evolved from classic semiconductor companies (integrated device
manufacturers, or IDMs) that were once self-contained with full technology
development, design, and manufacturing capabilities contained within one company
into an industry of specialized companies with sub-market segments. Over the
past twenty years, this outsourcing trend has given birth to many large and
growing industry niches including assembly and test subcontractors, Electronic
Design Automation ("EDA") companies, pure-play wafer foundries, and intellectual
property ("IP") providers. The success of foundries has enabled fabless
companies engaged in design and sales/marketing, but not manufacturing, to
develop and flourish.

         The second trend is the increasing complexity of process technologies
that accompanies each new technology node, or smaller chip features, such as
90nm and 65nm (known as "nodes"). Process variations and defects that were once
a concern for manufacturing only are now having significant impact on design,
and new process modules required for advanced device structures are affecting
designs in unanticipated ways. For example, low capacitance interconnects and
resolution enhancement technologies introduced at the 130nm technology node have
necessitated dramatic changes in how circuit topologies are formed. Redundant
connections ("vias") between metal lines and optical proximity correction
("OPC") techniques have become mandatory for 130nm devices. These effects were
not fully comprehended during the transition to 130nm,

                                      -5-
<PAGE>

and as the industry moves to more advanced technology nodes (90nm, 65nm, 45nm),
the interdependency between technology development, semiconductor design and
manufacturing will continue to intensify.

         As the semiconductor industry continues to fragment, tighter linkages
between the different stages of the semiconductor development chain are becoming
more critical. Because of these two pervasive and divergent trends, we are in a
unique position to provide product solutions that bridge the technology
development, design, and manufacturing worlds with tools, data, and IP to
optimize yields and accelerate time-to-volume. Point solutions are emerging to
solve problems in this growing solution space, referred to as Design for
Manufacturing ("DFM"). We have a unique combination of products, IP, and
expertise to provide high-value, yield-focused, comprehensive solutions in the
DFM segment.

Importance of Yield

         Yield is a measurement of the efficiency of a product development
process. Specifically, yield is the percentage of properly functioning devices
produced at each stage in the manufacturing process. Improvement of yield or
"yield learning" is often challenging and involves the continual identification
and resolution of the root causes of failure in the design and manufacturing
process. New products built with newer, less mature semiconductor manufacturing
processes often start with very low yields because fabrication procedures and
device technologies are not yet fully optimized. During the transition from
early fabrication to volume production, yield improvements can be achieved, but
are often difficult as production equipment and processes are stressed to
maximize throughput. Even as production volumes increase, yield may often fall
as new production equipment is brought on-line and test programs are enhanced to
reduce test escapes.

         Yield improvement is a multi-faceted challenge as thousands of factors
in the semiconductor production process may affect yield. These factors
contribute to yield loss based on the sensitivity and margin of the design and
manufacturing. By definition, failures are either random or systematic in
nature. Random failures are typically caused by arbitrary particles introduced
into the fabrication process, causing circuit faults such as a bridge between
two adjacent metal lines. Systematic failures emanate from non-random sources
such as equipment or environmental changes, and design sensitivity or material
property variations. Due to yield learning, each successive generation of
semiconductors becomes somewhat less sensitive to existing failure modes but
remain susceptible to new failure modes. This creates a constant need to capture
and analyze more data to improve yields. The sheer volume of data, and the
amount of complex analysis required, has become an impediment to improving the
yield learning curve. To identify factors that affect yield in a new process,
semiconductor companies must collect and analyze an immense (and growing) amount
of data that is generated throughout the semiconductor product development
lifecycle, often from several worldwide locations and, increasingly, from supply
chain partners. In any semiconductor fabrication facility, there are likely to
be as many as 50 different sets and formats of data produced, each with
thousands of individual parameters that need to be tracked. While this data
provides important clues to yield enhancement, the efficient collection,
correlation and analysis across the various data sets presents a substantial
challenge for the semiconductor industry.

         High yield is an essential requirement for a profitable semiconductor
business, especially during the introduction of new products. Selling prices and
profit margins are typically higher in the early stages of a new semiconductor
product lifecycle. Just a small acceleration along the yield learning curve can
create disproportionately greater revenue and profitability. Another benefit of
fast yield ramp-up is the increased revenue that is associated with the measured
speed of microprocessors, application specific integrated circuits ("ASICs") and
telecom devices. High parametric yield enables parts to operate at higher
frequencies and subsequently command higher selling prices. As the product
lifecycles advance, high yield can accelerate cost reductions and maximize
efficiency gains. These factors make it essential that semiconductor companies
monitor and maintain yield on an ongoing basis throughout the entire product
lifecycle. In today's volatile markets where capacity utilization rates
fluctuate, yield improvement remains fundamental to business success.

                                      -6-
<PAGE>

Given the immense costs of a semiconductor fabrication facility and the
economics of production efficiency, the rate of yield learning is a critical
component in the profitability of any semiconductor company.

Flat Panel Industry

         Continued innovation in the flat panel display ("FPD") industry is
driving the proliferation of liquid crystal display ("LCD") applications in
entertainment and communication devices such as cell phones, digital cameras,
and computer and television monitors, as well as other fields such as
industrial, automotive, and aviation.

         The latest estimates by DisplaySearch predict the global FPD market
(including AM-LCD) will grow 140% to $62 billion by the end of 2006. The
projected demand for LCD-TVs, forecasted to be at a 76.5% compound annual growth
rate, is the future growth driver for the FPD market with about 189 million
units expected to be shipped by 2006. Manufacturing cost reductions, faster
ramp, faster return on investment, and high yields are the drivers for yield
management solutions.

         The move to new FPD substrate sizes (i.e. generations 6 and 7) is
expected to reduce manufacturing costs. In addition, the improvements in
manufacturing processes are focused on cost reduction with the introduction of
new processes in the thin film transistor ("TFT") array, color filter, liquid
crystal and module process. However, these new changes present significant
manufacturing and yield challenges. FPD yield management solutions empower
engineers to solve yield related problems by aggregating all yield-relevant data
and providing them with sophisticated analysis techniques.

         Currently, most FPD yield management tools are internally developed.
The integration of these tools is a significant challenge for FPD manufacturers
and a significant driving force for commercial yield management tools that are
scalable, collaborative, open, reliable and extensible.

HPL PRODUCTS AND TECHNOLOGY

         HPL provides an integrated suite of yield enhancement software
solutions that enables customers to optimize yields in all three stages of
semiconductor development: process technology development, design and
manufacturing. Derived from years of experience working with leading
semiconductor manufacturing companies, HPL has embedded much of the industry's
best practices directly into our yield optimization products. HPL's yield
optimization software delivers high-impact business results by reducing the time
to high yield through streamlined data analysis and enhancing collaboration
among process technology development, design and manufacturing.

Odyssey(TM)

       Odyssey is a production-proven defect and yield data management solution.
Odyssey and its predecessors are in use at over seventy manufacturing sites
worldwide. Odyssey delivers results efficiently and reliably, leveraging
error-correcting processes to assure users of maximum up-time. It has an open
and equipment vendor-neutral architecture that supports most inspection, review
and classification tools with a full range of charting, wafer mapping, statistic
analysis and lot dispositioning solutions. Odyssey is easy to use and
provides high productivity with its all-in-one graphical user interface ("GUI").
Odyssey simplifies and automates in-line defect analysis, reducing cycle
times and enabling engineers to address other critical yield-limiting issues.

                                      -7-
<PAGE>


     Odyssey also efficiently correlates different data types to quickly deduce
the root cause of manufacturing problems. Advanced Data Mining algorithms
uncover hidden correlations, and easy-to-use templates automate daily and
repetitive analyses at preset intervals. Odyssey includes several optional
additional powerful analysis modules including:

         Metrology, which collects and analyzes data from inline production
equipment. Metrology captures measurements such as resistivity, critical
dimension, wafer flatness, and oxide and etch rate monitors;

         Parametric, which analyzes data collected from inline Wafer Electrical
Test and end of line Wafer Acceptance Test automatic test equipment. Standard
support is included for systems such as Agilent and Keithley testers;

         BIN, which utilizes final wafer sort (chip probe) data, collected with
Automated Test Equipment from companies such as Teradyne, Advantest, Credence,
LTX and Agilent, and permits users to correlate final yield with all other data
types to help identify causes of yield loss;

         BIT, which analyzes failing bit signatures, failing patterns per die
and per wafer, and graphically overlays failure data with defect data; and

         WIP, which encompasses process flow, tool and route information
collected by Manufacturing Execution Systems, such as PROMIS(TM),
FACTORYworks(TM), WorkStream(TM) and SiView(TM). A key feature of this module is
that it permits the user to investigate problems found in other data domains and
identify the tool or tool group which may be the source of the problem, thereby
saving significant fab engineering time in diagnosing yield problems.


Workflows

         Workflows provide a development environment for rapid implementation of
both interactive applications and/or sophisticated reporting for virtually any
data from a wafer fabrication, packaging, or test step in the manufacturing
process. Applications developed using this environment are estimated to be
generated 3 to 15 times faster than traditional techniques. This allows
customers to react to yield problems and deploy solutions very rapidly. Workflow
can be used with HPL, customer developed and third party systems.

Memory YIELDirector

         Memory YIELDirector ("MYD") accelerates yield learning and problem
resolution for DRAM, SRAM and Flash memory arrays on semiconductor devices. MYD
automates analysis of fab and test data for all memory types including embedded
memory. Using powerful analysis algorithms, MYD automatically descrambles and
classifies failing bitmaps into unique signatures, and correlates them with
in-line defect inspection data to determine defect "kill" ratios. MYD also helps
correlate bitmap failures with fatal defects (defects that cause failures in the
device) to isolate the root causes of failure mechanisms in memories.

YieldProjectorTM

         YieldProjector enables design engineers to improve the projected yield
of a design before it ever reaches the manufacturing process. YieldProjector
simulates the yield impact of a wide-range of random defects on a design's
layout, based on statistical information from similar manufacturing process. It
calculates the probable number of fatal defects on each layer of the design
along with the projected yield of that layer. YieldProjector graphically
highlights yield-limiters in the design layout so design engineers can compare
various layout options and critical feature usage to improve a design's immunity
to random manufacturing defects. This significantly increases yield and speeds
time to volume production.

                                      -8-
<PAGE>

Recipe Management and Editing ("RME")

         RME is a universal enterprise solution that facilitates the management
and control of process recipes from a central repository. Process recipes are
used to control the program process and metrology tools at every step in a
semiconductor manufacturing process. RME dramatically reduces product scrap,
improves yield and increases productivity of semiconductor fabs. A patented
off-line editing module allows engineers to edit process recipes at their desk
or anywhere on the corporate intranet without sacrificing security or increasing
tool downtime.

Odyssey-FPD

         Odyssey-FPD is a yield optimization solution built specifically for the
unique challenges of flat panel display manufacturers. Odyssey-FPD leverages our
highly scalable Odyssey platform. This enables FPD customers to integrate
relevant manufacturing data, including defect, parametric and test, into a
seamless and powerful yield optimization environment.

         Odyssey-FPD is the industry's first yield management platform,
providing the information control backbone of fab-wide data. It is the first to
gather, integrate and leverage all yield, process and test-floor related data
into an automated, customizable and easy to use data collection, analysis and
reporting system. The benefits to customers are numerous, but relate primarily
to accelerated yield learning rates and reduced time to corrective action for
yield and process excursions. With its "analysis recorder" automated
functionality and an enterprise development toolkit, production lots are
dispositioned more quickly, increasing productivity; excursions are identified
in real time, and engineering resources are freed from repetitive tasks,
enabling them to concentrate on corrective actions.

TestChip Technologies Products and Services

         Our TestChip products address the needs of semiconductor companies in
many aspects of process technology development, design and manufacturing.
Developing process technology is a lengthy process that frequently takes 18-24
months, and requires a number of expert resources to design and validate each
process step followed by process qualification. The complexity of smaller chip
features, such as 90 nm and 65 nm (known as "nodes"), requires a large number of
devices and circuits that measure not only each process step, but also the
integrated process behavior and performance. This increasing complexity, coupled
with smaller chip sizes, is causing semiconductor producers to adopt yield
solutions such as those offered by our TestChip products.

     HPL's TestChip products provide capabilities to accelerate semiconductor
process technology development to the 65nm node and beyond. Additionally, for
advanced technology nodes, these products provide new and innovative methods for
semiconductor manufacturing process characterization and monitoring. We have
deployed advanced semiconductor process technologies using our TestChip
solutions at leading IDMs. Semiconductor manufacturers have used TestChip
solutions for more than 8 years, at 7 technology nodes and across multiple
process technologies, such as CMOS, BiCMOS, Radio Frequency ("RF"), Analog and
others. HPL has successfully completed TestChip projects for technology nodes
from 350nm to 45nm.

         The TestChip product line consists of a library of proprietary IP,
supplemented by software products, and services, each of which are described
more fully below. HPL will also customize the TestChip Technology IP and
services to better enable project success.

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TestChip Technology Development IP

         Our proprietary TestChip IP contains over 1,500 elements to address the
full breadth of advanced CMOS technology development concerns, including 193nm
lithography, copper and low-k interconnect integration, and advanced transistor
development. Our TestChip IP also contains elements for improving yield in test
structures, non-volatile memory, Silicon-on-Insulator ("SOI"), high-power
devices, Silicon-Germanium, and RF devices. From this IP, we can produce GDSII,
HTML documentation and test programs, all generated from a common database
resulting in consistent and high quality results.

TestChip TechXpress Array Product Family

         Our TestChip TechXpress array products alleviate many issues involved
in sub-130nm technology development and monitoring. Traditional methods allow a
limited number of devices and circuits to be used for identifying and resolving
process and yield issues. Our TechXpress array products dramatically increase
the number of devices and circuits that can be used, thereby resulting in more
effective identification, diagnosis and resolution of process and yield issues.

         The TechXpress Array Family comprises three powerful products:
TDSRAMTM, TDROMTM and TDAnalogTM.

         TDSRAM: The TDSRAM can be used for bitcell development and process
qualification. The TDSRAM bit is designed to measure key process parameters and
is intentionally more sensitive to variations and yield issues than a
conventional SRAM design. The TDSRAM can also be used to measure defect
densities during volume manufacturing.

         TDROM: The TDROM measures process excursion and design rule skews,
making it ideally suited for process characterization and monitoring. The higher
number of circuits built within a specific TDROM provide a more dramatic
increase in spatial resolution than is possible with traditional test
structures.

         TDAnalog: The TDAnalog is unique in its ability to measure the
intrinsic electrical properties of the process. It produces a parametric
response that provides a finer resolution of the measurement. TDAnalog can be
used, among other things, for via resistance measurements and FET matching
effects measurements.

         Some of the specific use cases for the array family products are
bitcell development, process qualification, systematic yield loss diagnosis,
process characterization and process monitoring. Customers use results derived
from the arrays to correlate yield and analyze failures electrically and
physically.

TestChip Design & Verification Platform

         The TestChip Design & Verification Platform is used to accelerate the
specification, design, test and debugging of test structures and large
technology development testchips. The platform consists of a web-based
application for specifications capture, revision control and project management,
a layout compiler, an HTML documentation and test program generator, and a
secure layout viewer integrated with the compiler and documentation.

SALES AND MARKETING

         We rely on our direct sales force, distributors and sales agents to
market our products to the semiconductor and flat panel display manufacturing
markets. Our direct sales efforts have focused primarily on licensing our
software products and TestChip technologies to IDMs, foundries, fabless
semiconductor design companies and flat panel display manufacturers. Our direct
sales force operates out of our headquarters in San Jose, California and our
facilities in Boston, Massachusetts; Austin, Texas; Plano, Texas; Yokohama,
Japan; Hsin Chu, Taiwan; and Aix-en-Provence, France.


                                      -10-
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         Our sales and marketing personnel also focus on developing our
relationships with industry partners, which include semiconductor original
equipment manufacturers ("OEMs") who bundle our products in their hardware.
These joint-marketing relationships provide us with access to the customer bases
of these OEMs. We intend to continue to expand our industry relationships in the
future.

RESEARCH AND DEVELOPMENT

         The market for DFM and yield optimization is characterized by rapid
technological development and product innovation. We believe that timely
development of new products and enhancements to existing products are necessary
to maintain our competitive position. Accordingly, we devote a significant
portion of our human and financial resources to research and development
programs and seek to maintain close relationships with customers to remain
responsive to their needs.

         The complexity of DFM and yield optimization requires domain expertise
in physical integrated circuit ("IC") design and fabrication as well as software
development. Today, we employ a staff of software development engineers focused
on the development of yield-optimization software products. Our team also
encompasses a core group of engineers and technicians with extensive education,
experience and expertise in the semiconductor domain. Virtually every discipline
associated with the lifecycle of an IC is represented at our company, including
device physics, product design, product engineering, yield engineering, failure
analysis engineering, fab management, process engineering and testing.

COMPETITION

         The worldwide market for productivity-enhancement tools and systems for
semiconductor companies is highly competitive and characterized by rapidly
changing technologies. We face direct competition from semiconductor companies
that have developed or have the ability to develop their own proprietary
yield-optimization tools and systems, as well as third-party providers of
yield-management software and services.

         We have found that the tools and systems against which our products and
services most often compete are those that semiconductor companies have created
in-house as part of a specific fabrication process or through a dedicated
development group. We must overcome a tendency that some producers may have to
resist outside solutions.

         The third-party providers that compete in the market for
yield-optimization tools are, generally, divisions of larger semiconductor
equipment OEMs, such as KLA-Tencor, or smaller private companies, such as Yield
Dynamics. Additionally, PDF Solutions provides service-based solutions where HPL
products can also be used. The success of our business or other businesses like
ours might prompt increased competition. As a result, we must continue to
improve existing products, develop new products and protect our innovations
through intellectual property laws in order to continue to differentiate our
product offerings.

         Significant factors in our target market's choice of
productivity-enhancement software include its performance, ease of use,
reliability, price, compatibility with existing systems, installed base and
technical service and support. While price is an important competitive factor,
we believe that customers will choose the most effective productivity software,
even if it is more expensive, because of the added profitability from better
production yield.

INTELLECTUAL PROPERTY

         Our future success and competitive position depends heavily upon our
continued ability to develop new proprietary technology while protecting our
existing intellectual property. To protect our products and their underlying
technology, and to prevent competitors from using our technology in their
products, we use a combination of patents, trade secrets and copyrights.


                                      -11-
<PAGE>


As of March 31, 2004, we held eight U.S. patents and one Taiwan patent,
expiring at different  times between 2013 and 2024, and had thirteen U.S. patent
applications and sixteen foreign patent applications pending. We expect that, if
granted,  the duration of these patents will be 20 years from the date of filing
the  application.  We continue to  vigilantly  pursue  U.S.  and foreign  patent
filings.   We  have  additional  patent  applications  that  we  are  developing
internally and may file in the future.

         There is no assurance that any of our current or future patent
applications will result in patents, and our existing or future patents may be
circumvented, declared invalid or challenged as to scope or ownership. For these
and other reasons, we may not realize any competitive advantage from our
existing patents and any patents that we may be granted in the future.
Furthermore, others may develop technologies that are similar or superior to our
proprietary technologies or design around any patents that we may hold. To the
extent that others are able to obtain patents that overlap with our technologies
or processes, we may be required to license these patents. If we are unable to
license these patents or obtain licenses on acceptable terms, we may need to
alter our products or discontinue selling them altogether. In addition, we have
not secured patent protection in foreign countries and we cannot be certain that
the steps we take to prevent misappropriation of our intellectual property
abroad will be effective, or that the application of foreign laws to technology
developed abroad will not adversely affect the validity or enforceability of our
U.S. patents.

         Much of our intellectual property has not been patented or is not
patentable. Accordingly, we have historically protected our non-patented
intellectual property as a trade secret. Trade secret protection is in many ways
inferior to patent protection. Others may reverse-engineer our non-patented
technologies and lawfully use any underlying technology that is discovered in
this process. We typically enter into confidentiality agreements with
prospective customers, distributors and business partners prior to disclosing
material proprietary information. These agreements prohibit unauthorized use and
disclosure of our trade secrets and other proprietary information. We currently
require all of our employees to enter into similar agreements. While we believe
that these agreements provide a measure of protection of our intellectual
property, they may be declared invalid or unenforceable, or we may not have the
resources to seek enforcement in the event of a breach. Additionally, courts
only protect trade secrets from misappropriation to the extent that we have
taken reasonable steps to protect the confidentiality of these trade secrets. It
is possible that a court would find our trade-secret protection practices
inadequate and therefore declare portions of our trade secrets unprotected from
misappropriation.

         Much of our source code is written by programmers and engineers in the
Republic of Armenia. We generally rely on U.S. and Armenian copyright law and
international treaties for protection of our software source code, software
object code, training materials and user manuals created by our employees. While
U.S. copyright law protects the expression of an idea, it does not protect the
idea itself from being copied. As a result, others may be able to glean valuable
concepts and methods from our copyrighted material and lawfully use these ideas
and methods in a competing product or venture by simply changing the manner of
expression. In an effort to protect our software from misappropriation, we do
not typically divulge our source code to customers or vendors, although we have
placed our source code in escrow in connection with certain transactions.

EMPLOYEES

         As of March 31, 2004, we employed approximately 220 employees worldwide
with 73 in the United States, 126 in Armenia and 21 in four other locations
around the world. None of our employees are represented by a labor union or are
subject to a collective bargaining agreement. We believe that our relationship
with our employees is good.


                                      -12-
<PAGE>


DIRECTORS AND OFFICERS

         The following table sets forth the directors and officers of the
Company, their ages and positions as of May 31, 2004:


<TABLE>
<CAPTION>
Name                                                Age                                      Position
------------------------------------------------ ----------   ----------------------------------------------------------------------
<S>                                                <C>        <C>
Cary D. Vandenberg                                      48    President and Chief Executive Officer
Michael P. Scarpelli                                    37    Chief Financial Officer, Senior Vice President of Administration and
                                                              Secretary
Elias Antoun                                            47    Director, Chairman of the Board
Lawrence Kraus                                          41    Director
Dr. Yervant Zorian                                      48    Director
William Lamkin III                                      60    Senior Vice President Sales & Global Customer Support
Dr. Victor Boksha                                       43    Vice President of Business Development
Dean Frazier                                            44    Vice President of Marketing
Brian Gordon                                            46    Vice President of Software Engineering

</TABLE>

         CARY D. VANDENBERG.  Mr. Vandenberg joined the Company in May 2003 as
President and Chief Executive Officer.  Prior to joining HPL, Mr. Vandenberg was
Vice President of Strategic Business Development at Communicant Semiconductor
Technologies AG, a European based semiconductor foundry. He worked at
Communicant from July 2001 to May 2003 and during this period he was responsible
for the design kit and modeling group, corporate partnerships, and the
e-business strategy.  Mr. Vandenberg has over 20 years of management experience
in software and semiconductor companies including positions at Sequencia, Inc.
(President & CEO), JENOPTIK INFAB Intrack, Inc. (President), and PROMIS Systems
Corporation Ltd. (Vice President).  Mr. Vandenberg holds a Bachelor of Science
degree in commerce from Santa Clara University.

         MICHAEL P. SCARPELLI. Mr. Scarpelli has been our Chief Financial
Officer, Treasurer, Senior Vice President of Administration and Secretary since
July 2002. In these roles, he is principally responsible for the Company's
worldwide finance function including accounting, financial systems and
facilities. Mr. Scarpelli joined the Company in January 2002 as Vice President
of Corporate Development, responsible for the oversight of the Company's mergers
and acquisitions function. Prior to joining HPL, Mr. Scarpelli was an auditor
with PricewaterhouseCoopers LLP since 1989 and an audit partner since 1998. Mr.
Scarpelli received his Bachelor of Arts degree in economics from the University
of Western Ontario and is a Certified Public Accountant and a Chartered
Accountant.

         ELIAS ANTOUN. Mr. Antoun joined our Board of Directors in August 2000
and serves as a member of our audit and compensation committees. Mr. Antoun is
President and Chief Executive Officer of Pixum, Inc. of Mountain View,
California, a semiconductor solutions provider for video imaging. Prior to this,
he was President and Chief Executive Officer of MediaQ, Incorporated, a provider
of semiconductor solutions which was acquired by NVIDIA Corporation (Nasdaq:
NVDA) in August 2003. From March 1998 to January 2000, Mr. Antoun served as
Executive Vice President, Consumer Products Division at LSI Logic. Mr. Antoun
served as President of LSI Logic K.K., a Japanese subsidiary of LSI Logic, from
January 1996 to March 1998. Mr. Antoun has served as the Chairman of the Board
since July 2002. Mr. Antoun's term expires at the next election of directors.

         LAWRENCE KRAUS. Mr. Kraus is a co-founder of the Company and has served
as a member of the board of directors of the Company's principal operating
subsidiary, HPLI, since its formation in 1989. From February 2001 to September
2002, Mr. Kraus served as HPLI's Vice President of Strategic Marketing. Mr.
Kraus previously served as HPLI's Director of Hardware Development from May 1989
to January 1995 and as the Vice President and General Manager of HPLI's hardware
divisions until their sale to Credence Systems Corporation in June 1998. With
the sale of the hardware divisions to Credence, Mr. Kraus joined Credence as a
Director of Operations and served in that capacity until February 2001.


                                      -13-
<PAGE>

Mr.  Kraus is  currently a manager of hardware development at Advantest
America, Inc. Mr. Kraus was elected to our board of directors in August 2000 and
his term expires at the next election of directors.

     DR. YERVANT ZORIAN. Dr. Zorian has served as Vice President and Chief
Scientist at Virage Logic Corporation since June 2000. He previously was the
Chief Technology Advisor at LogicVision and a Distinguished Member of the
Technical Staff at Bell Laboratories, Lucent Technologies. Dr. Zorian has
chaired several Institute of Electrical and Electronic Engineering ("IEEE")
symposiums and workshops. He currently serves as the editor and chief emeritus
of IEEE Design & Test of Computers and is the Vice President of IEEE Computer
Society. He has authored four books, received several best paper awards and
holds twelve U.S. patents in the area of test technology. Dr. Zorian is an
honorary doctor of the National Academy of Science, Armenia, and is a Fellow of
IEEE. Mr. Zorian was elected to our board of directors in August 2000 and his
term expires at the next election of directors.

         WILLIAM LAMKIN III. Mr. Lamkin joined HPL in September 2003 as the
Senior Vice President of Global Sales and Global Customer Support and has
overall responsibility for global sales and customer support activities. He has
over 15 years experience marketing software products and services specifically
to the semiconductor and flat panel industries. He spent over 10 years with
PROMIS Systems Corp., most recently managing the Asia Pacific Region while
residing in Singapore. PRI Automation, a supplier of material transport systems
and software to semiconductor manufacturers, acquired Promis Systems Corp. and
Mr. Lamkin was promoted to Vice President of Global Software Sales. He has held
the position of Vice President of Marketing and Sales at both Camstar Systems
and Realtime Performance, both suppliers of software and services to the
semiconductor industry. Previously he performed various local and national sales
management duties at software divisions of Xerox and General Electric. He holds
a Bachelors of Arts degree in political science from the University of South
Florida.

         DR. VICTOR BOKSHA. Dr. Boksha joined HPL in November 2003 as the Vice
President of Business Development and is currently focused on building new
products and industry relationships in the emerging Design for Manufacturing
(DFM) market. Dr. Boksha is a semiconductor industry veteran, with an extensive
background in lithography, RET and TCAD. He brings to HPL almost 25 years of
technology and business experience in high-volume mask and wafer manufacturing,
simulation, equipment design, advanced lithography development, yield
improvement and venture investments. Recently, he worked with Cadence Design
Systems on a new DFM business opportunity and also advised a leading silicon IP
provider on technology strategy. Previously he worked for OPC Technologies,
which was acquired by Mentor Graphics, and brought RET capabilities to the
Calibre product line. Prior to OPC, he worked for Technology Modeling Associates
(TMA), which is currently part of Synopsys. He holds an M.Sc. degree in
Management from MIT Sloan School and a Ph.D degree in laser microlithography
from Belarus Academy of Science.

         DEAN FRAZIER. Mr. Frazier joined HPL in March 2004 as the Vice
President of Marketing. Mr. Frazier is responsible for worldwide marketing
activities at HPL. He has over twenty years of semiconductor industry experience
in IC design, semiconductor process development and EDA software. Most recently,
Mr. Frazier was a founder of EMASYS Corporation, a developer of business
intelligence software for IC companies. He has also served as VP of Engineering
& Operations for Chameleon Systems, a venture-funded fabless IC company; as
Director of Design Technology for Chips & Technologies which was acquired by
Intel; and has held various marketing and engineering roles at Seattle Silicon
and Motorola. Mr. Frazier holds a Bachelor of Science degree in Chemical
Engineering from Stanford University.

          BRIAN GORDON. Mr. Gordon joined HPL in September 2003 as the Vice
President of Software Development and is responsible for the development of all
software products at HPL. He has more than 20 years experience in the design,
development and implementation of mission-critical enterprise software for
manufacturing. From 1984 to 2003 Mr. Gordon was Chief Technology Officer at
Camstar Systems, a leading provider of enterprise manufacturing performance
management systems for semiconductor, electronics, life sciences, and other
global industrial manufacturers.

                                      -14-
<PAGE>

     In  this  role he was  the  Chief  Architect  responsible  for the  design,
development, delivery and support of all software products. Prior to Camstar, he
was the founder of a successful  consulting practice,  developing  manufacturing
and accounting software for midrange customers.  His work has been patented, and
he has also published many technical articles.


ITEM 2.  PROPERTIES

         The following table sets forth the Company's principal properties as of
May 31, 2004. We believe that our existing facilities are adequate for our
current needs.

<TABLE>
<CAPTION>
                                          Square                      Expiration of
Location                                  Footage                       Lease Term                             Uses
------------------------------  ----------------------------   -----------------------------  --------------------------------------

                             <c>                            <c>                           <c>
Austin, Texas                                        25,140    February 2006                  Offices
Bedford, Massachusetts                               12,050    October 2005                   Offices; research and development
Chennai, India                                        2,097    March 2007                     Offices
HsinChu, Taiwan                                       1,636    May 2006                       Offices
Yokohama, Japan                                       2,444    April 2006                     Offices
San Jose, California                                 12,500    December 2005                  Executive offices
Plano, Texas                                         18,302    March 2006                     Offices
Yerevan, Armenia                                     18,772    December 2004                  Offices; research and development

</TABLE>


ITEM 3.  LEGAL PROCEEDINGS

         Between July 31, 2002 and November 15, 2002, several class-action
lawsuits were filed against the Company, certain current and former officers and
directors of the Company, and the Company's independent auditors in the United
States District Court for the Northern District of California. The lawsuits were
consolidated into a single action (the "Securities Action"), which alleges that
the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act
of 1934, Rule 10b-5 promulgated thereunder, and Sections 11, 12(a)(2) and 15 of
the Securities Act of 1933 by making a series of material misrepresentations as
to the financial condition of the Company during the class period of July 31,
2001 to July 19, 2002. The plaintiffs are generally seeking to recover
compensatory damages, costs and expenses incurred, interest and such other
relief as the court may deem appropriate. The parties have stipulated to extend
the time to respond to the consolidated complaint until August 16, 2004.

         We have signed a memorandum of understanding (the "MOU") with the lead
plaintiffs that resolves the Securities Action. Under the MOU, we
would issue common stock to the class. Final settlement is contingent on several
conditions, including execution of a formal settlement agreement and court
approval.

         Five shareholders of the Company have brought suit in the District
Court of Dallas County, Texas, against the Company's independent auditors and
the managing underwriter in the Company's initial public offering, in connection
with claims relating to the Company's acquisition of Covalar Technologies Group,
Inc. in February 2002 (the "Covalar Action"). On April 26, 2004, the Company and
the Company's former President and Chief Executive Officer were named as
defendants in this action. Our response to the amended petition is currently due
August 2, 2004. Subject to a reservation of rights, we have accepted the
underwriter's request to indemnify the underwriter in connection with the
Company's initial public offering and to advance expenses in this matter. While
we had obtained insurance to cover its obligation to indemnify and advance
expenses to the underwriter, the insurer has raised certain defenses to
coverage. Even if coverage is afforded, however, coverage for these

                                      -15-
<PAGE>

     indemnification obligations is subject to a sub-limit of $1,000,000 and may
be exhausted by payments of defense costs and settlements in the Securities
Action. On June 3, 2004, an associate judge granted the auditors' and
underwriter's motions for summary judgment. The plaintiffs have appealed this
ruling and a hearing is currently scheduled for August 20, 2004. On June 9,
2004, the Company's independent auditors filed a responsible third party
petition against the Company and Company's former President and CEO. The third
party petition does not seek affirmative relief but instead was filed for
purposes of apportioning fault in jury findings. We have accepted service of the
third party petition, and our response to the third party petition has been
extended until thirty days after the hearing on plaintiffs' notice of appeal of
the associate judge's decision on the summary judgment motions.

         On July 13, 2004 we signed a settlement and release agreement with the
plaintiffs in the Covalar Action pursuant to which we have agreed to issue the
plaintiffs additional shares of common stock, which will be placed in escrow
pending final approval of the settlement in the Securities Action.

     Based on the terms of the above settlements, we determined that a liability
related to the Securities Action and the Covalar Action was probable and that
the value was reasonably estimable. Accordingly, we have recorded a non-cash
long term liability of approximately $7.9 million in our consolidated financial
statements as of March 31, 2004, representing management's estimate of the value
of the 7 million shares of common stock that we have agreed to issue under the
MOU and the Covalar Action settlement. This liability was calculated by
utilizing a valuation based on both the income and market approaches as of March
31, 2004, consistent with the Company's assessment of goodwill impairment. This
liability will be revalued quarterly until the actual effective date of the
settlements.

         We are also a nominal defendant in consolidated stockholder derivative
lawsuits pending in Superior Court in the County of Santa Clara, California.
These lawsuits, which were filed between July 31, 2002 and December 31, 2002,
assert derivative claims on behalf of the Company against certain current and
former officers and directors of the Company and the Company's independent
auditors. The consolidated complaint asserts claims for insider trading, breach
of fiduciary duties, breach of contract, professional negligence and unjust
enrichment, and seeks damages suffered by the Company, treble damages for the
sale of shares, costs and expenses of these actions and such other relief as the
court may deem appropriate. The parties have stipulated to extend the time to
respond to the consolidated derivative complaint until July 16, 2004, and are
continuing to negotiate a potential resolution of this action.

         On May 22, 2003, five former shareholders of FabCentric, Inc., which
was acquired by the Company in December 2001, sued the Company, the Company's
former President and Chief Executive Officer and former Chief Financial Officer,
and the Company's independent auditors in a lawsuit pending in Superior Court in
the County of Santa Clara, California. This lawsuit alleges claims for fraud,
negligent misrepresentation, breach of warranties and covenants, breach of
contract, and negligence, and seeks rescission or, alternatively, damages, costs
and expenses. On October 31, 2003, the plaintiffs filed an amended Complaint
adding the managing underwriter in the Company's initial public offering and the
Company's current Chief Financial Officer as defendants. The underwriter and
auditors have filed demurrers, which are scheduled to be heard on September 28,
2004. The parties have stipulated to extend the time for the other defendants to
respond to the amended complaint until September 7, 2004. The plaintiffs served
inspection demands on the defendants on June 25, 2004.

         Additionally, in April 2003, UBS PaineWebber, Inc. filed suit against
the Company in the Supreme Court of the State of New York, County of New York
(the "New York Action") alleging tortious interference of contract and a
violation of the Uniform Commercial Code. This action relates to the transfer of
shares of HPL common stock putatively pledged to UBS PaineWebber, Inc. by Y.
David Lepejian, the Company's former President and Chief Executive Officer, and
his spouse and sought, among other things, mandatory injunctive relief requiring
HPL to affect the transfer of the subject stock. We moved to dismiss the New
York Action. In May 2003, we filed an interpleader action in United States
District Court for the Northern District of California relating to the stock in

                                      -16-
<PAGE>

question in the New York Action (the "California Action"). Mr. Lepejian and UBS
PaineWebber have been engaged in an NASD arbitration proceeding regarding the
pledge of the shares. The interpleader action and the New York action were
voluntarily dismissed without prejudice by the Company and UBS PaineWebber,
respectively. On or about October 1, 2003, UBS PaineWebber filed suit in
Delaware Chancery Court which essentially re-stated the claims originally
asserted in the New York action (the "Delaware Action"). On June 22, 2004, we
and UBS PaineWebber signed a settlement agreement and mutual release whereby the
parties dismissed the New York Action, the California Action and the Delaware
Action with prejudice at no cost to the Company.

         Additionally, Twin City Fire Insurance Company (the Company's
first-layer "D&O" insurance carrier) filed a declaratory relief action on
October 6, 2003, in Superior Court in the County of Santa Clara, California,
against the Company, the Company's former President and Chief Executive Officer,
the Company's former Chief Financial Officer, and other former and current
officers and directors of the Company seeking a determination that no coverage
is afforded the defendants under Twin City's policy, which follows form to the
Company's primary D&O policy issued by Executive Risk Indemnity Inc. Executive
Risk has already agreed to pay its policy limits for the Securities Actions,
exhausting the limits of the Company's primary D&O policy. We filed an amended
cross-complaint on June 14, 2004 in the Twin City action, seeking a declaration
that Twin City and the Company's other excess D&O insurance carriers, National
Union and St. Paul, are obligated to indemnify the Company for losses in
connection with the Securities Actions and that Twin City has breached its
insurance contract by not paying the defendants' defense expenses on a current
basis. On June 21, 2004, the Superior Court granted Twin City's unopposed motion
to file a Third Amended Complaint alleging two additional declaratory-relief
causes of actions based on two policy exclusions. We intend to oppose the claims
made in the Third Amended Complaint.

         Except as noted above, all of the aforementioned matters are in the
early stages other than the settled actions as discussed above. As a
result, we believe that no additional amount above the $7.9 million discussed
above should be accrued for these matters under Statement of Financial
Accounting Standard ("SFAS") No. 5, "Accounting for Contingencies," because we
are currently unable to evaluate the likelihood of an unfavorable outcome or
estimate the amount or range of potential loss, if any, of the unsettled
actions.

         Any adverse resolution of the aforementioned litigation could have a
material effect on our financial condition, results of operations or cash flows.
We are investigating a number of alternatives, including informal and formal
restructuring, which potentially may dilute shareholder equity but could
mitigate any material adverse effect on our financial condition or results of
operations that might otherwise result from an unfavorable resolution of these
lawsuits.


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         None.



                                      -17-
<PAGE>

PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

         On September 30, 2002, our common stock was delisted from the Nasdaq
National Market. Since that time, no established public trading market has
existed for our common stock and shares of our common stock are neither listed
on any national securities exchange nor presently traded on any public stock
exchange or in any other public market. Although quotations for shares of our
common stock may be obtained through the over-the-counter "pink sheets"
maintained by Pink Sheets LLC (a centralized quotation service that collects and
publishes market maker quotes for over-the-counter securities), because
secondary market activity for shares of our common stock has been limited and
sporadic, such quotations may not accurately reflect the price or prices at
which purchasers or sellers would currently be willing to purchase or sell
shares of our common stock. The following table shows the range of high and low
closing bid prices for our common stock for the periods indicated, as reported
on the Nasdaq National Market under the symbol "HPLA" for the period July 30,
2001, the date of our initial public offering, to September 30, 2002, and in the
Pink Sheets under the symbol "HPLA.PK" for the period October 1, 2002 through
March 31, 2004. The quotations on the Pink Sheets reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.

<TABLE>
<CAPTION>

Fiscal 2003                                                                      High            Low
---------------------------------------------------------------------------- -------------- --------------

                                                                         <c>            <c>
First Quarter                                                                $       16.26  $        9.59
Second Quarter                                                               $       15.80  $       13.10
Third Quarter                                                                $        0.11  $        0.02
Fourth Quarter                                                               $        0.20  $        0.02
</TABLE>

<TABLE>
<CAPTION>
Fiscal 2004                                                                      High            Low
---------------------------------------------------------------------------- -------------- --------------

                                                                         <c>            <c>
First Quarter                                                                $        0.25  $        0.11
Second Quarter                                                               $        0.26  $        0.12
Third Quarter                                                                $        0.30  $        0.18
Fourth Quarter                                                               $        0.36  $        0.20
</TABLE>


         As of June 30, 2004, there were approximately 138 holders of record of
our common stock and 31,274,623 shares of common stock outstanding. No dividends
have been paid on our common stock since inception, and we do not anticipate
paying any dividends in the foreseeable future.

RECENT SALES OF UNREGISTERED SECURITIES

         On June 30, 2003 we issued 396,826 shares of common stock, with an
aggregate value of $50,000 pursuant to an earn-out provision in our purchase
agreement with Defect & Yield Management, Inc. This offering was exempt from
registration under Rule 506, promulgated under the Act.

                                      -18-
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

         The selected consolidated financial data set forth below should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," and the consolidated financial statements of HPL and
the notes to the consolidated financial statements included elsewhere in this
annual report on Form 10-K. The consolidated statement of operations data for
the years ending March 31, 2004, 2003 and 2002 and the consolidated balance
sheet data at March 31, 2004 and 2003 are derived from the audited financial
statements included in this annual report on Form 10-K. The consolidated
statement of operations data for the years ending March 31, 2001 and 2000 and
the consolidated balance sheet data at March 31, 2002, 2001 and 2000 are derived
from audited financial statements for the periods not included in this annual
report on Form 10-K. Our historical results are not necessarily indicative of
results to be expected in future periods.

Statement of Operations Data:

<TABLE>
<CAPTION>
                                                                                 Years Ended March 31,
                                                              2004          2003           2002           2001          2000
                                                          ------------- -------------- -------------  ------------- --------------
                                                                          (in thousands, except per share data)
<S>                                                       <C>           <C>            <C>            <C>           <C>
Revenues:
Software licenses                                            $   4,799      $   5,281     $   1,614       $  3,159      $   3,039
Consulting services, maintenance and other                       7,902         10,311         2,899          1,156            665
                                                          ------------- -------------- -------------  ------------- --------------
Total revenues                                                  12,701         15,592         4,513          4,315          3,704
                                                          ------------- -------------- -------------  ------------- --------------
Cost of revenues:
Software licenses                                                  507            656           587            133              9
Consulting services, maintenance and other (1)                   3,131          3,808           507            243            259
                                                          ------------- -------------- -------------  ------------- --------------
Total cost of revenues                                           3,638          4,464         1,094            376            268
                                                          ------------- -------------- -------------  ------------- --------------
Gross profit                                                     9,063         11,128         3,419          3,939          3,436
                                                          ------------- -------------- -------------  ------------- --------------
Operating expenses:
Research and development (1)                                     6,384         10,515         6,118          3,349          2,851
Sales, general and administrative (1)                           13,604         19,788         9,285          4,329          3,155
Legal settlement expense                                         7,900              -             -              -              -
Goodwill impairment                                                  -         30,570             -              -              -
Stock-based compensation                                           315          1,047         3,547          2,369            580
Amortization of intangible assets                                1,327          1,494           294            137            148
                                                          ------------- -------------- -------------  ------------- --------------
Total operating expenses                                        29,530         63,414        19,244         10,184          6,734
                                                          ------------- -------------- -------------  ------------- --------------
Loss from operations                                           (20,467)       (52,286)      (15,825)        (6,245)        (3,298)
Interest income (expense) and other, net                           213            468           908           (190)          (248)
                                                          ------------- -------------- -------------  ------------- --------------
Loss before income taxes                                       (20,254)       (51,818)      (14,917)        (6,435)        (3,546)
Provision for income taxes                                          89              -             -              -              -
                                                          ------------- -------------- -------------  ------------- --------------
Net loss                                                     $ (20,343)     $ (51,818)    $ (14,917)      $ (6,435)     $  (3,546)
                                                          ============= ============== =============  ============= ==============

Net loss per share-basic and diluted                         $   (0.65)     $   (1.69)    $   (0.62)      $  (0.37)     $   (0.21)
Shares used in per share computations:
Basic and diluted                                               31,145         30,645        24,038         17,496         17,068

_______________________________________________________________

(1)     Excludes the following stock-based
        compensation charges:
          Cost of revenues                                   $       -      $      18     $      39       $     60      $       2
          Research and development                                 113            414           692            296             96
          Sales, general administrative                            202            615         2,816          2,013            482
                                                          ------------- -------------- -------------  ------------- --------------
                                                             $     315      $   1,047     $   3,547       $  2,369      $     580
                                                          ============= ============== =============  ============= ==============
</TABLE>


                                      -19-
<PAGE>


Consolidated Balance Sheet Data:
<TABLE>
<CAPTION>
                                                                                        March 31,
                                                              2004          2003           2002           2001          2000
                                                          ------------- -------------- -------------  ------------- --------------
                                                                                       (in thousands)
<S>                                                       <C>           <C>            <C>            <C>           <C>
Cash, cash equivalents and short-term investments             $ 10,210       $ 21,741      $ 47,109          $ 989          $ 178
Working capital (deficit)                                        3,393         13,525        35,062         (7,169)        (2,090)
Total assets                                                    44,865         60,385       101,308          5,455          5,031
Long-term debt, less current portion                                39            130           280            295          1,857
Total stockholders' equity (deficit)                          $ 26,042       $ 46,032      $ 82,316       $ (6,748)      $ (2,727)
</TABLE>


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

         The following discussion should be read in conjunction with Item 1:
Business; Item 6: Selected Financial Data; and Item 8: Financial Statements and
Supplementary Data. This discussion and analysis contains forward-looking
statements that involve risks, uncertainties and assumptions. Our actual results
may differ materially from those anticipated in these forward-looking statements
as a result of certain factors, including, but not limited to, those set forth
under "Risk Factors" and elsewhere in this report. HPL undertakes no obligation
to update any forward-looking statement to reflect events after the date of this
report.

OVERVIEW

         We provide comprehensive yield-optimization solutions to the
semiconductor industry and flat-panel display manufacturers. We license our
software products and sell related services through our direct sales force,
distributors, sales agents and semiconductor equipment manufacturers ("OEMs")
that bundle our software with their hardware.

         On April 10, 2002, we acquired all of the outstanding capital stock of
Defect & Yield Management, Inc., a Delaware corporation ("DYM"). DYM is engaged
in the sale and support of manufacturing floor defect data management software.
In connection with the acquisition, we paid the shareholders $2.0 million in
cash, issued 967,260 shares of HPL common stock and agreed to assume stock
options to purchase up to 82,740 shares of HPL's common stock. The total value
of the transaction was $17.1 million. We issued in June 2003 an additional
396,826 shares of common stock with a value of $50,000 in the aggregate to the
former DYM stockholders to satisfy the earn-out provisions in the merger
agreement. The acquisition provided the Company access to an installed customer
base in over 70 facilities worldwide, complementary technology and a highly
skilled workforce.


                                      -20-
<PAGE>


         In each of the last three fiscal years, a relatively small number of
customers have accounted for a large portion of our revenues, and the
composition of our major customers has changed from year to year. This is
because we currently have a limited sales force, our products have a lengthy
sales cycle and we recognize relatively large license revenues upon entering
into perpetual licensing agreements. We had three, three and four end customers
that individually accounted for at least 10% of our revenues in the years ended
March 31, 2004, 2003 and 2002, respectively. In the aggregate, these end
customers accounted for 42%, 61% and 66% of our revenues in the years ended
March 31, 2004, 2003 and 2002, respectively.


         From July 2002 until today, as a result of our investigation into
financial and accounting irregularities which ultimately lead to a restatement
of our financial statements for the years ended March 31, 2001 and 2002, and the
litigation discussed in the Liquidity and Capital Resources section below, we
experienced a significant period of transition. In our year ending March 31,
2003, senior management was focused on determining the impact of the financial
restatement on our business going forward, integrating previously acquired
businesses and cutting costs to reflect the level of sales activities we were
experiencing. In our year ended March 31, 2004, we began to hire a new
management team, filling five senior positions with the hiring of a new Chief
Executive Officer, Senior Vice President of Sales, Vice President of Software
Development, Vice President of Marketing and Vice President of Business
Development. With the new management team in place, we have shifted our focus
and resources in order to better integrate our yield analysis software
capabilities with our TestChip solutions to better compete in the DFM market
segment with our unique product offerings. This has resulted in a decrease in
our revenue in the year ended March 31, 2004 from the year ended March 31, 2003
and an operating loss of $20.5 million, which includes $10.8 million in non-cash
charges ($7.9 million in settlement shares, $ 2.6 million in
depreciation and amortization and $0.3 million in stock based compensation), in
the year ended March 31, 2004. At March 31, 2004, we have $10.2 million in cash
and cash equivalents.

         As of March 31, 2004, we had an accumulated deficit of $98.0 million.
Since going public in 2001, we have not achieved profitability on a quarterly or
annual basis. As we continue to build our customer base and further develop new
products, we expect to continue to incur net operating losses at least through
our year ending March 31, 2005. We will need to generate significantly higher
revenues in order to support research and development, sales and marketing and
general and administrative expenses, and to achieve and maintain profitability.
Our ability to generate higher revenues may continue to be impacted by our
litigation, the capital spending trends of our potential and current customers
in the semiconductor industry, the time to market of our new products and our
ability to compete in our market segment. See Liquidity and Capital Resources
below.

CRITICAL ACCOUNTING POLICIES

         The discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect our reported assets, liabilities, revenues
and expenses, and our related disclosure of contingent assets and liabilities.
On an on-going basis, we evaluate our estimates, including those related to
revenue recognition, goodwill and identifiable, separately recorded intangible
assets, litigation, contingent liabilities and income taxes. We base our
estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. Our estimates then form the
basis of judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.

         We believe the following critical accounting policies and the related
judgments and estimates significantly affect the preparation of our consolidated
financial statements:

Revenue Recognition

         Revenue recognition rules are very complex, and certain judgments
affect the application of our revenue policy. The amount and timing of our
revenue is difficult to predict, and any shortfall in revenue or delay in
recognizing revenue could cause our operating results to vary significantly from
quarter to quarter. In addition to determining our results of operations for a
given period, our revenue recognition determines the timing of certain expenses,
such as commissions, royalties and other variable expenses.

                                      -21-
<PAGE>


         We derive revenues principally from the sale of software licenses,
software maintenance contracts and consulting services. We offer two types of
licenses: perpetual and time-based. Perpetual licenses have no expiration date,
while time-based licenses require renewal. Our software product licenses provide
a narrowly defined subset of features for a given customer. The customer may
acquire additional licenses to extend the functionality of our products as its
technologies and facilities change or if it wishes to use additional features of
our software for its production process. Our licenses usually limit the number
of people who can use the software at a given time.

         Revenues from software licenses are generally recognized upon the
execution of a binding agreement and delivery of the software, provided that:
the fee is fixed or determinable; vendor-specific objective evidence exists to
allocate a portion of the total license fee to any undelivered elements of the
arrangement; collection is reasonably assured; and the agreement does not
contain customer acceptance clauses. If customer acceptance clauses exist,
revenues are recognized upon customer acceptance and all other revenue
recognition criteria are met.

         If consulting or other services sold in connection with the software
license are essential to the functionality of the software or involve
significant production, customization or modification of software, we recognize
revenue on either a percentage-of-completion or completed contract basis. For
the percentage-of-completion method, we recognize revenues using labor hours
incurred as the measure of progress against the total labor hours estimated for
completion of the project. We consider a project completed after all contractual
obligations are met. At times, an unbilled accounts receivable balance can exist
which comprises revenue recognized in advance of contractual billings. We make
provisions for estimated contract losses in the period in which the loss becomes
probable and can be reasonably estimated. Estimates of total labor hours or
expected losses on contracts are subject to judgment and actual amounts may
differ significantly from those estimates.

         For contracts with multiple obligations (e.g., deliverable and
undeliverable products, post-contract support and other services), we allocate
revenues to the undelivered element of the contract based on objective evidence
of its fair value. This objective evidence is the sales price of the element
when sold separately or the renewal rate specified in the agreement for
licensing arrangements with terms of one year or greater that include
post-contract customer support and software updates. We recognize revenues
allocated to undelivered products when the criteria for software license
revenues set forth above are met. Revenues from time-based software licenses are
generally recognized ratably over the period of the licenses. Determining
whether objective evidence of fair value exists is subject to judgment and
resulting fair values used in determining the value of the undelivered elements
is also subject to judgment and estimates.

         Software maintenance revenues are recognized ratably over the term of
the maintenance period, which is generally one year. Our software maintenance
includes product maintenance updates, Internet-based technical support and
telephone support. Revenues derived from our consulting services are recognized
as the services are performed. Revenues derived from software development
projects are recognized on a completed contract basis.

         We also derive revenues from the sale of software licenses, maintenance
and post-contract support services through our distributors. Revenues from sales
made through our distributors for which the distributors have return rights are
recognized when the distributors have sold the software licenses or service to
their customers and the criteria for revenue recognition under SOP 97-2, as
amended, are met. Revenues from maintenance and post-contract support services
sold through our distributors are recognized ratably over the contract period.

         Amounts invoiced to our customers in excess of recognized revenues are
recorded as deferred revenues. The timing and amounts invoiced to customers can
vary significantly depending on specific contract terms and can therefore have a
significant impact on deferred revenues in any given period.

                                      -22-
<PAGE>


Goodwill and Intangible Assets

         Consideration paid in connection with acquisitions is required to be
allocated to the acquired assets, including certain identifiable intangible
assets, goodwill, and liabilities acquired. Acquired assets and liabilities are
recorded based on our estimate of fair value, which requires significant
judgments, including those with respect to future estimated cash flows and
discount rates. For identifiable intangible assets that we separately record, we
are required to estimate the useful life of the assets and recognize their cost
as an expense over the useful lives. We use the straight-line method to amortize
long-lived assets, except goodwill, which results in an equal amount of expense
in each period.

         We assess the impairment of identifiable intangibles and long-lived
assets whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. Furthermore, we assess the impairment of goodwill
at least annually. Factors we consider important which could trigger an
impairment review include the following:

     o significant underperformance relative to historical or projected future
       operating results;
     o significant changes in the manner of our use of the acquired assets or
       the strategy for our overall business;
     o significant negative industry or economic trends;
     o significant decline in our stock price for a sustained period;
     o market capitalization relative to net book value; and
     o a current expectation that, more likely than not, a long-lived asset will
       be sold or otherwise disposed of significantly before the end of its
       previously estimated useful life.

         When one or more of the above indicators of impairment occurs we
estimate the value of long-lived assets and intangible assets to determine
whether there is an impairment. We measure any impairment based on the projected
discounted cash flow method, which requires us to make several estimates
including the estimated cash flows associated with the asset, the period over
which these cash flows will be generated and a discount rate commensurate with
the risk inherent in our current business model. These estimates are subjective
and if we made different estimates, it could materially impact the estimated
fair value of these assets and the conclusions we reached regarding an
impairment. We identified triggering events in the second, third and fourth
quarter of our year ended March 31, 2003 which required us to perform the first
step of the analysis.

         The first and second steps of the two-step process are as follows:

Step 1 - We compare the fair value of our reporting units to the carrying value,
including goodwill. For each reporting unit where the carrying value, including
goodwill, exceeds the unit's fair value, we proceed on to Step 2. If a unit's
fair value exceeds the carrying value, no further analysis is performed and no
impairment charge is necessary. We measure fair value by weighing equally our
projected five year discounted cash flows with a terminal value discounted to
the measurement date (the "Income Approach") and looking at comparable public
companies and the multiples at which they trade, based on their trailing twelve
months revenue and forward looking twelve months revenue compared to our
comparable revenue to determine our market value (the "Market Approach").

Step 2 - We perform an allocation of the fair value of the reporting unit to our
identifiable tangible and non-goodwill intangible assets and liabilities. This
derives an implied fair value for the reporting unit's goodwill. We then compare
the implied fair value of the reporting unit's goodwill with the carrying amount
of the reporting unit's goodwill. If the carrying amount of the reporting unit's
goodwill is greater than the implied fair value of its goodwill, an impairment
charge would be recognized for the excess.

                                      -23-
<PAGE>


         At March 31, 2003, we performed Step 1 as of March 31, 2003 and
determined that goodwill was impaired. We then performed Step 2 and determined
that a $30.6 million impairment charge was required in the three months ended
March 31, 2003. During 2004, we continued to test for impairment on an annual
basis and determined that there was no impairment in goodwill.

Litigation

         Management's estimated range of liability related to some of the
pending litigation is based on claims for which our management can estimate the
amount and range of loss. Because of the uncertainties related to our insurance
coverage and indemnification obligations we have provided to various parties who
are defendants and the amount and range of potential losses, if any, related to
litigation, management is currently unable to make a reasonable estimate of the
total liability that could result from an unfavorable outcome of all of the
litigation. As of March 31, 2004, we have tentatively settled the Securities
Action and the Covalar Action. These settlements require the Company to issue 7
million shares of HPL common stock which have been valued in a manner consistent
with our calculation for the impairment of goodwill at $7.9 million.
Accordingly, we have accrued this non-cash cost in our financial statements as
of March 31, 2004. This liability will be revalued quarterly until the effective
date of the settlements. As additional information becomes available on our
other pending litigation, we will assess the potential liability related to
these matters and create and/or revise our estimates. Such revisions in
estimates of the potential liability could materially impact our results of
operation and financial condition. Any resolution of the litigation could
materially affect our financial resources and liquidity. See Liquidity and
Capital Resources below.

Income Taxes

         We are required to estimate our income taxes in each of the
jurisdictions in which we operate as part of the process of preparing our
consolidated financial statements. This process involves estimating our actual
current tax exposure, together with assessing temporary differences resulting
from differing treatment of items, such as deferred revenue, for tax and
accounting purposes. These differences result in deferred tax assets and
liabilities. We then assess the likelihood that our net deferred tax assets will
be recovered from future taxable income and, to the extent we believe that
recovery is not likely, we must establish a valuation allowance. We currently
have a full valuation allowance on our gross deferred tax assets. In the event
our future taxable income is expected to be sufficient to utilize our deferred
tax assets, an adjustment to the valuation allowance will be made, increasing
income in the period in which such determination is made.

Stock-based compensation

         We account for our employee stock option plans using the intrinsic
value method described in Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations. Under
APB Opinion No. 25, deferred stock compensation is recorded for the difference,
if any, between an option's exercise price and the fair value of the underlying
common stock on the grant date of the option. As permitted by SFAS No. 123,
"Accounting for Stock-Based Compensation," we adopted the "disclosure only"
alternative described in SFAS No. 123 for its employee stock plans.

         We account for stock issued to non-employees in accordance with the
provisions of SFAS No. 123 and Emerging Issues Task Force Consensus ("EITF") No.
96-18 "Accounting for Equity Instruments that Are Issued to Other than Employees
For Acquiring, or in Conjunction with Selling, Goods or Services." Under SFAS
No. 123 and EITF No. 96-18, stock options and warrants issued to non-employees
are accounted for at their fair value calculated using the Black-Scholes option
pricing model.

                                      -24-
<PAGE>


         Compensation expense resulting from employee and non-employee stock
options are amortized to expense using an accelerated approach over the term of
the options in accordance with Financial Accounting Standards Board
Interpretation ("FIN") No. 28, "Accounting for Stock Appreciation Rights and
Other Variable Stock Option or Award Plans."

RECENT ACCOUNTING PRONOUNCEMENTS

     In December 2003, the SEC issued Staff Accounting Bulletin (SAB) No. 104,
REVENUE RECOGNITION (SAB No. 104), which codifies, revises and rescinds certain
sections of SAB No. 101, REVENUE RECOGNITION, in order to make this interpretive
guidance consistent with current authoritative accounting and auditing guidance
and SEC rules and regulations. The changes noted in SAB No. 104 did not have a
material impact upon our financial position, cash flows or results of
operations.

         On March 31, 2004, the FASB issued a proposed Statement, "Share-Based
Payment, an amendment of FASB Statements Nos. 123 and 95," that addresses the
accounting for share-based payment transactions in which an enterprise receives
employee services in exchange for either equity instruments of the enterprise
or, liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
The proposed statement would eliminate the ability to account for share-based
compensation transactions using Accounting Principles Board, or APB, Opinion No.
25, "Accounting for Stock Issued to Employees," and generally would require that
such transactions be accounted for using a fair-value-based method and
recognized as expenses in our consolidated statement of income. The proposed
standard would require the modified prospective method be used, which would
require that the fair value of new awards granted from the beginning of the year
of adoption plus unvested awards at the date of adoption be expensed over the
vesting period. In addition, the proposed statement encourages companies to use
the "binomial" approach to value stock options, which differs from the
Black-Scholes option pricing model, that we currently use to determine the fair
value of our options. The proposed standard is recommending that the effective
date for public companies be fiscal years beginning after December 15, 2004. The
changes under this proposed standard will not have a material impact upon our
financial position or cash flows, but may have a material impact on our results
of operations, depending on the amount of stock options we grant in future
periods.


                                      -25-
<PAGE>

RESULTS OF OPERATIONS

         The following table sets forth statement of operations data for the
periods indicated as a percentage of total revenues.

<TABLE>
<CAPTION>
                                                                           Year ended March 31,
                                                        -----------------------------------------------------------
                                                             2004                 2003                  2002
                                                        ---------------       --------------        --------------
<S>                                                    <C>                   <C>                    <C>
Revenues:
Software licenses                                                   38 %                 34 %                  36 %
Consulting services, maintenance and other                          62 %                 66 %                  64 %
                                                        ---------------       --------------        --------------
Total revenues                                                     100 %                100 %                 100 %
                                                        ---------------       --------------        --------------

Cost of revenues:
Software licenses                                                    4 %                  4 %                  13 %
Consulting services, maintenance and other                          25 %                 24 %                  11 %
                                                        ---------------       --------------        --------------
Total cost of revenues                                              29 %                 28 %                  24 %
                                                        ---------------       --------------        --------------

Gross profit                                                        71 %                 72 %                  76 %
                                                        ---------------       --------------        --------------
Operating expenses:
Research and development                                            50 %                 67 %                 136 %
Sales, general and administrative                                  107 %                127 %                 206 %
Legal settlement expense                                            62 %                  - %                   - %
Goodwill impairment                                                  - %                196 %                   - %
Stock based compensation                                             3 %                  7 %                  79 %
Amortization of intangible assets                                   10 %                 10 %                   7 %
                                                        ---------------       --------------        --------------
Total operating expenses                                           232 %                407 %                 428 %
                                                        ---------------       --------------        --------------

Loss from operations                                              (161)%               (335)%                (352)%
                                                        ===============       ==============        ==============
</TABLE>


Comparison of years ended March 31, 2004 and 2003

         Revenues. Total revenues decreased to $12.7 million in the year ended
March 31, 2004 from $15.6 million in the year ended March 31, 2003, or a
decrease of 19%. Our sales cycle for the license of our software products has
historically been very long. Our products are new and our customers spend a
significant amount of time evaluating our products. Customer purchase orders
typically include integration and installation services, rights of return and
acceptance criteria. As such, we defer a significant amount of our license
revenue until integration and installation services are complete, rights of
return lapse and final acceptance occurs. The amount of our license revenue is
currently at levels that have resulted in no meaningful trend from period to
period. Our ability to sell our products in the future may also be affected by
declines in capital spending by potential customers in the semiconductor
industry.

         Product sales were highly concentrated, with 42% of total revenues in
the year ended March 31, 2004 coming from three customers and 61% of total
revenues in the year ended March 31, 2003 coming from four customers.

         Software license revenue decreased to $4.8 million in the year ended
March 31, 2004, from $5.3 million in the year ended March 31, 2003, or a
decrease of 9%. Software license revenue in the year ended March 31, 2004
includes $2.2 million in deferred revenue from March 31, 2002 which was accepted
in the year ended March 31, 2004. Software license revenue in the year ended
March 31, 2003 includes $4.6 million in revenue deferred as a result of our
financial restatement in the year ended March 31, 2002 as customer acceptance
was received in the period.

                                      -26-
<PAGE>


         Consulting services, maintenance and other revenues decreased to $7.9
million in the year ended March 31, 2004, down from $10.3 million in the year
ended March 31, 2003, or a decrease of 23%. The decrease was due to customer
delays in providing layout design specifications for custom services work and
verifying silicon testing results as well as a shift in focus from low-margin,
higher-volume services work to high-margin, lower-volume services work.

         Gross profit. As a percentage of revenues, gross profit decreased to
71% in the year ended March 31, 2004 to 72% in the year ended March 31, 2003.
The modest decline was primarily due to the above variances in revenue from
period to period and changes in cost of revenues. In addition, in the year ended
March 31, 2004, we expensed $491,000 in deferred costs relating to the sale of a
software license recognized in the period.This additional expense was partially
offset by increased margins in our service business as a result of a shift in
focus as noted above. Gross profit has been and will continue to be affected by
a variety of factors, the most important of which is the relative mix of
revenues among software licenses, maintenance fees and consulting services.

         Research and development. Research and development expenses represented
50% of revenues in the year ended March 31, 2004 compared to 67% of revenues in
the year ended March 31, 2003. Actual costs decreased to $6.4 million in the
year ended March 31, 2004, down from $10.5 million for the year ended March 31,
2003. This decrease was primarily attributable to the cost-cutting measures
commenced in September 2002 and continued through December 2003. Salaries and
related benefits of research and development engineers represent the single
largest component of our research and development expenses. We expect our
research and development costs to remain relatively stable for the foreseeable
future.

         Sales, general and administrative. Sales, general and administrative
expenses in the year ended March 31, 2004 were $13.6 million, or 107% of
revenues, compared to $19.8 million, or 127% of revenues in the year ended March
31, 2003. The decrease in costs was primarily due to decreases in staff,
professional fees and costs associated with litigation and the restatement of
our financial statements. Legal and professional fees associated with litigation
and the restatement of our financial statements were approximately $2.7 million
and $3.9 million during years ended March 31, 2004 and 2003, respectively. We
expect the level of legal fees to decline significantly in fiscal 2005 as our
pending legal matters are resolved.

         Legal settlement expense. In the year ended March 31, 2004,
we were able to reasonably estimate the cost of the potential settlement of the
Securities Action and the Covalar Action, and as such, we accrued $7.9 million,
our estimate of the value of the stock to be issued in connection with such
settlement.. The liability will be revalued quarterly until the effective date
of the settlements. See Liquidity and Capital Resource below.

         Goodwill impairment. The Company operates within one reporting unit as
defined by SFAS 142. Therefore, goodwill is not allocated within the Company, as
it is considered enterprise goodwill. During the fourth quarter of the year
ended March 31, 2003, the Company determined that there were indicators of
impairment to the carrying value of goodwill, principally as a result of
reducing its revenue forecast given the then current economic environment in the
semiconductor industry. The Company performed its annual impairment review for
goodwill and other intangible assets on March 31, 2003 and recorded a charge of
$30.6 million relating to goodwill impairment, which is recorded as a component
of operating income in the accompanying consolidated statement of operations.
The amount of goodwill impairment was based on the fair value of the Company,
representing its only reporting unit utilizing a valuation based on both the
discounted cash flow and market approach. At March 31, 2004 we performed an
impairment test and determined that there was no further impairment in goodwill.
Future goodwill impairment tests may result in charges to earnings if the
Company determines that goodwill has been further impaired.

                                      -27-
<PAGE>


         Stock-based compensation. Stock-based compensation expense in the year
ended March 31, 2004 was $315,000, compared with $1.0 million in the year ended
March 31, 2003. Stock-based compensation expense in the year ended March 31,
2004 decreased from the previous year primarily as a result of decreases in
staff related to acquisitions, which resulted in the reversal of previously
expensed stock-based compensation which was not earned by the terminated
employees.

         Amortization of intangible assets. Amortization of intangible assets
was $1.3 million in the year ended March 31, 2004, compared to $1.5 million in
the year ended March 31, 2003. This decrease in amortization is due to certain
intangible assets being fully amortized prior to fiscal 2004.

         Interest income (expense) and other, net. Interest income, net of
interest and other expenses for the year ended March 31, 2004 and 2003 were
$213,000 and $468,000, respectively. This decrease was due to less interest
income from lower average balances of cash, cash equivalents and short-term
investments and lower interest rates on cash balances during the year ended
March 31, 2004.

         Provision for income taxes. In the years ended March 31, 2004 and 2003,
we incurred operating losses for which we have recorded valuation allowances for
the full amount of our net deferred tax assets, because the future realization
of the deferred tax assets was not likely as of March 31, 2003 and 2002. In the
year ended March 31, 2004, the provision for income tax in the amount of $89,000
resulted from foreign income tax withholding.

Comparison of years ended March 31, 2003 and 2002

         Revenues. Total revenues increased to $15.6 million in the year ended
March 31, 2003 from $4.5 million in the year ended March 31, 2002, or an
increase of 245%. Our sales cycle for the license of our software products has
historically been very long. Our products are new and our customers spend a
significant amount of time evaluating our products. Customer purchase orders
typically include integration and installation services, rights of return and
acceptance criteria. As such, we defer a significant amount of our license
revenue until integration and installation services are complete, rights of
return lapse and final acceptance occurs. Approximately 75% of this increase is
attributable to increased consulting revenue from our acquisition of Covalar.
The amount of our license revenue is currently at levels that have resulted in
no meaningful trend from period to period. Our ability to sell our products in
the future may also be affected by the current decline in capital spending by
potential customers in the semiconductor industry.

         Product sales were highly concentrated, with 61% of total revenues in
the year ended March 31, 2003 coming from three customers and 66% of total
revenues in the year ended March 31, 2002 coming from four customers.

         Software license revenue increased to $5.3 million in the year ended
March 31, 2003, from $1.6 million in the year ended March 31, 2002, or an
increase of 227%. This increase was due to greater customer acceptance of the
Company's product during the year ended March 31, 2003. Software license revenue
in the year ended March 31, 2003 relates primarily to previously deferred
revenue for which the revenue was recognized in the current year as final
customer acceptances were received on previously delivered software.
Approximately $380,000 of software license revenue in the year ended March 31,
2002 relates to an arbitration settlement of royalties due from a customer.

         Consulting services, maintenance and other revenues increased to $10.3
million in the year ended March 31, 2003, up from $2.9 million in the year ended
March 31, 2002, or an increase of 256%. These increases were due to an increase
in consulting services related to our acquisition of Covalar and an increase in
maintenance fees from a greater number of customers, both existing customers and
those from our acquisitions.

                                      -28-
<PAGE>


         Gross profit. As a percentage of revenues, gross profit decreased to
72% for the year ended March 31, 2003 from 76% for the year ended March 31, 2002
as service revenue as a percentage of total revenue increased in the year. Gross
profit has been and will continue to be affected by a variety of factors, the
most important of which is the relative mix of revenues among software licenses,
maintenance fees and consulting services.

         Research and development. Research and development expenses represented
67% of revenues in the year ended March 31, 2003 compared to 136% of revenues in
the year ended March 31, 2002. Actual costs increased to $10.5 million for the
year ended March 31, 2003, up from $6.1 million for the year ended March 31,
2002. This increase in absolute terms is primarily attributable to the increase
of software engineers related to acquisitions. Salaries and related benefits of
research and development engineers represent the single largest component of our
research and development expenses.

         Sales, general and administrative. Sales, general and administrative
expenses for the year ended March 31, 2003 were $19.8 million, or 127% of
revenues, compared to $9.3 million, or 206% of revenues in the year ended March
31, 2002. The increase in costs was primarily due to increases in staff,
professional fees and the headcount increases related to acquisitions, and legal
and professional fees associated with litigation and the restatement of our
financial statements.

         Goodwill impairment. The Company operates within one reporting unit as
defined by SFAS 142. Therefore, goodwill is not allocated within the Company, as
it is considered enterprise goodwill. During the fourth quarter of the year
ended March 31, 2003, the Company determined that there were indicators of
impairment to the carrying value of goodwill, principally as a result of
reducing its revenue forecast given the then current economic environment in the
semiconductor industry. The Company performed its annual impairment review for
goodwill and other intangible assets on March 31, 2003 and recorded a charge of
$30.6 million relating to goodwill impairment, which is recorded as a component
of operating income in the accompanying consolidated statement of operations.
The amount of goodwill impairment was based on the fair value of the Company,
representing its only reporting unit utilizing a valuation based on both the
discounted cash flow and market approach. Future goodwill impairment tests may
result in charges to earnings if the Company determines that goodwill has been
further impaired.

         Stock-based compensation. Stock-based compensation expense for the year
ended March 31, 2003 was $1.0 million, compared to $3.5 million for the year
ended March 31, 2002. Stock-based compensation expense in the year ended March
31, 2003 decreased from the previous year primarily as a result of our reduction
in workforce on September 30, 2002, which resulted in the reversal of previously
expensed stock-based compensation which was not earned by the terminated
employees.

         Amortization of intangible assets. Amortization of intangible assets
was $1.5 million in the year ended March 31, 2003, compared to $294,000 in the
year ended March 31, 2002. This increase in amortization resulted from the
acquisitions of Defect & Yield Management in the first quarter of fiscal 2003
and a full year amortization of the intangible assets related to the
acquisitions of FabCentric and Covalar, which were completed in the year ended
March 31, 2002.

         Interest income (expense) and other, net. Interest income, net of
interest and other expenses for the year ended March 31, 2003, was $468,000,
compared with net income of $908,000, for the year ended March 31, 2002. This
decrease was due to less interest income from lower average balances of cash,
cash equivalents and short-term investments and lower interest rates on cash
balances during the year ended March 31, 2003.

         Provision for income taxes. In the years ended March 31, 2003 and 2002,
we incurred operating losses for which we have recorded valuation allowances for
the full amount of our net deferred tax assets, because the future realization
of the deferred tax assets was not likely as of March 31, 2003 and 2002.

                                      -29-
<PAGE>


LIQUIDITY AND CAPITAL RESOURCES

         Our financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. Accordingly, the financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amount and classification of liabilities that
might be necessary if we are unable to continue as a going concern. We have
experienced net losses and negative cash flows since going public in July 2001
and, as of March 31, 2004, we had an accumulated deficit of $98.0 million. We
expect to have a net operating loss in our year ending March 31, 2005. For the
year ending March 31, 2004, cash used in operations and to fund capital
expenditures was $9.7 million. Such conditions raise doubt about our ability to
continue as a going concern unless we increase our revenues or raise additional
capital. At March 31, 2004, we had approximately $10.2 million in cash and cash
equivalents and short-term investments after repaying $1.5 million to retire our
secured convertible debenture and the receipt of $1.2 million in income tax
refunds from our amendment of prior year tax returns. Our current operating plan
for the year ending March 31, 2005 projects that cash available from planned
revenue combined with the $10.2 million on hand at March 31, 2004 will be
adequate to fund operations through March 31, 2005. There can be no assurances
that the current cash on hand combined with the projected revenues will be
adequate to sustain operations through March 31, 2005. Our future cash position
will be adversely affected by slow or diminished revenue growth, research and
development expenses, additional sales and marketing costs and higher general
and administrative expenses, such as professional fees associated with the
litigation. If additional funds are required, there is no assurance that the
Company will be able to raise such funds on term acceptable to the Company, or
at all, until all of our pending litigation discussed below is resolved.

         Net cash used in operating activities for the year ended March 31, 2004
was approximately $9.4 million, compared to $23.8 million used in operating
activities for the year ended March 31, 2003 and $12.4 million used in operating
activities in the year ended March 31, 2002. Our cash used in operations for the
years ended March 31, 2004, 2003, and 2002 was primarily due to our net loss,
adjusted for certain non-cash items including depreciation and amortization,
goodwill impairment, stock-based compensation and deferred revenue.

         Net cash used in investing activities was $1.4 million for the year
ended March 31, 2004 compared to $7.1 million provided by investing activities
for the year ended March 31, 2003 and $27.4 million used in investing activities
for the year ended March 31, 2002. The cash used in investing activities for the
year ended March 31, 2004 consisted primarily of purchases of marketable
securities. The cash inflows from investing activities for the year ended March
31, 2003 consisted primarily of proceeds from sales of marketable securities.
Our investing activities for the year ended March 31, 2002 consisted primarily
of the acquisitions of Tyecin, FabCentric and Covalar, purchases of marketable
securities, and equipment purchases.

         Net cash used in financing activities was $1.8 million for the year
ended March 31, 2004, mainly due to the repayment of our $1.5 million secured
convertible debenture in May 2003. Net cash provided by financing activities was
$1.1 million for the year ended March 31, 2003, mainly due to the additional
amount received from our former Chief Executive Officer in connection with
fictitious sales transactions. Net cash provided by financing activities was
$71.7 million for the year ended March 31, 2002, primarily from our initial
public offering completed in August 2001, amounts received from our former Chief
Executive Officer, and proceeds from exercise of stock options, partially offset
by the repayment of notes payable and capital lease obligations.

                                      -30-
<PAGE>
         Future payments due under debt and lease obligations as of March 31,
2004 are as follows (in thousands):

<TABLE>
<CAPTION>
                                                  Capital Lease          Operating
           Year Ending March 31,                   Obligations (1)         Leases             Total
           ------------------------------------- -----------------  -----------------  -----------------
           <S>                                   <C>                <C>                <C>
           2005                                                98              1,356              1,454
           2006                                                27              1,048              1,075
           2007                                                13                 20                 33
                                                 -----------------  -----------------  -----------------
                                                 $            138   $          2,424   $          2,562
                                                 =================  =================  =================
-----------------------------------
<FN>
(1)      From 2004 to 2007, we are required to make interest payments totaling
         $8,000 for capital leases obligations; this interest component is
         included in the commitment schedule above.
</FN>
</TABLE>

         Between July 31, 2002 and November 15, 2002, several class-action
lawsuits were filed against the Company, certain current and former officers and
directors of the Company, and the Company's independent auditors in the United
States District Court for the Northern District of California. The lawsuits were
consolidated into a single action (the "Securities Action"), which alleges that
the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act
of 1934, Rule 10b-5 promulgated thereunder, and Sections 11, 12(a)(2) and 15 of
the Securities Act of 1933 by making a series of material misrepresentations as
to the financial condition of the Company during the class period of July 31,
2001 to July 19, 2002. The plaintiffs are generally seeking to recover
compensatory damages, costs and expenses incurred, interest and such other
relief as the court may deem appropriate. The parties have stipulated to extend
the time to respond to the consolidated complaint until August 16, 2004.

         We have signed a memorandum of understanding (the "MOU") with the lead
plaintiffs that resolves the Securities Action. Under the MOU, we
would issue common stock to the class. Final settlement is contingent on several
conditions, including execution of a formal settlement agreement and court
approval.

         Five shareholders of the Company have brought suit in the District
Court of Dallas County, Texas, against the Company's independent auditors and
the managing underwriter in the Company's initial public offering, in connection
with claims relating to the Company's acquisition of Covalar Technologies Group,
Inc. in February 2002 (the "Covalar Action"). On April 26, 2004, the Company and
the Company's former President and Chief Executive Officer were named as
defendants in this action. Our response to the amended petition is currently due
August 2, 2004. Subject to a reservation of rights, we have accepted the
underwriter's request to indemnify the underwriter in connection with the
Company's initial public offering and to advance expenses in this matter. While
we had obtained insurance to cover its obligation to indemnify and advance
expenses to the underwriter, the insurer has raised certain defenses to
coverage. Even if coverage is afforded, however, coverage for these
indemnification obligations is subject to a sub-limit of $1,000,000 and may be
exhausted by payments of defense costs and settlements in the Securities Action.
On June 3, 2004, an associate judge granted the auditors' and underwriter's
motions for summary judgment. The plaintiffs have appealed this ruling and a
hearing is currently scheduled for August 20, 2004. On June 9, 2004, the
Company's independent auditors filed a responsible third party petition against
the Company and Company's former President and Chief Executive Officer. The
third party petition does not seek affirmative relief but instead was filed for
purposes of apportioning fault in jury findings. We have accepted service of the
third party petition, and our response to the third party petition has been
extended until thirty days after the hearing on plaintiffs' notice of appeal of
the associate judge's decision on the summary judgment motions.

         On July 13, 2004 we signed a settlement and release agreement with the
plaintiffs in the Covalar Action pursuant to which we have agreed to issue the
plaintiffs additional shares of common stock, which will be placed in escrow
pending final approval of the settlement in the Securities Action.

                                      -31-
<PAGE>

         Based on the terms of the above settlements, we determined that a
liability related to the Securities Action and the Covalar Action was probable
and that the value was reasonably estimable. Accordingly, we have recorded a
non-cash long term liability of approximately $7.9 million in our consolidated
financial statements as of March 31, 2004, representing management's estimate of
the value of the 7 million shares of common stock that we have agreed to issue
under the MOU and the Covalar Action settlement. This liability was calculated
by utilizing a valuation based on both the income and market approaches as of
March 31, 2004, consistent with the Company's assessment of goodwill impairment.
This liability will be revalued quarterly until the actual effective date of the
settlements.

         We are also a nominal defendant in consolidated stockholder derivative
lawsuits pending in Superior Court in the County of Santa Clara, California.
These lawsuits, which were filed between July 31, 2002 and December 31, 2002,
assert derivative claims on behalf of the Company against certain current and
former officers and directors of the Company and the Company's independent
auditors. The consolidated complaint asserts claims for insider trading, breach
of fiduciary duties, breach of contract, professional negligence and unjust
enrichment, and seeks damages suffered by the Company, treble damages for the
sale of shares, costs and expenses of these actions and such other relief as the
court may deem appropriate. The parties have stipulated to extend the time to
respond to the consolidated derivative complaint until July 16, 2004, and are
continuing to negotiate a potential resolution of this action.

         On May 22, 2003, five former shareholders of FabCentric, Inc., which
was acquired by the Company in December 2001, sued the Company, the Company's
former President and Chief Executive Officer and former Chief Financial Officer,
and the Company's independent auditors in a lawsuit pending in Superior Court in
the County of Santa Clara, California. This lawsuit alleges claims for fraud,
negligent misrepresentation, breach of warranties and covenants, breach of
contract, and negligence, and seeks rescission or, alternatively, damages, costs
and expenses. On October 31, 2003, the plaintiffs filed an amended Complaint
adding the managing underwriter in the Company's initial public offering and the
Company's current Chief Financial Officer as defendants. The underwriter and
auditors have filed demurrers, which are scheduled to be heard on September 28,
2004. The parties have stipulated to extend the time for the other defendants to
respond to the amended complaint until September 7, 2004. The plaintiffs served
inspection demands on the defendants on June 25, 2004.

        Additionally, in April 2003, UBS PaineWebber, Inc. filed suit against
the Company in the Supreme Court of the State of New York, County of New York
(the "New York Action") alleging tortious interference of contract and a
violation of the Uniform Commercial Code. This action relates to the transfer of
shares of HPL common stock putatively pledged to UBS PaineWebber, Inc. by Y.
David Lepejian, the Company's former President and Chief Executive Officer, and
his spouse and sought, among other things, mandatory injunctive relief requiring
HPL to affect the transfer of the subject stock. We moved to dismiss the New
York Action. In May 2003, we filed an interpleader action in United States
District Court for the Northern District of California relating to the stock in
question in the New York Action (the "California Action"). Mr. Lepejian and UBS
PaineWebber have been engaged in an NASD arbitration proceeding regarding the
pledge of the shares. The interpleader action and the New York action were
voluntarily dismissed without prejudice by the Company and UBS PaineWebber,
respectively. On or about October 1, 2003, UBS PaineWebber filed suit in
Delaware Chancery Court which essentially re-stated the claims originally
asserted in the New York action (the "Delaware Action"). On June 22, 2004, we
and UBS PaineWebber signed a settlement agreement and mutual release whereby the
parties dismissed the New York Action, the California Action and the Delaware
Action with prejudice at no cost to the Company.

                                      -32-
<PAGE>
         Additionally, Twin City Fire Insurance Company (the Company's
first-layer "D&O" insurance carrier) filed a declaratory relief action on
October 6, 2003, in Superior Court in the County of Santa Clara, California,
against the Company, the Company's former President and Chief Executive Officer,
the Company's former Chief Financial Officer, and other former and current
officers and directors of the Company seeking a determination that no coverage
is afforded the defendants under Twin City's policy, which follows form to the
Company's primary D&O policy issued by Executive Risk Indemnity Inc. Executive
Risk has already agreed to pay its policy limits for the Securities Actions,
exhausting the limits of the Company's primary D&O policy. We filed an amended
cross-complaint on June 14, 2004 in the Twin City action, seeking a declaration
that Twin City and the Company's other excess D&O insurance carriers, National
Union and St. Paul, are obligated to indemnify the Company for losses in
connection with the Securities Actions and that Twin City has breached its
insurance contract by not paying the defendants' defense expenses on a current
basis. On June 21, 2004, the Superior Court granted Twin City's unopposed motion
to file a Third Amended Complaint alleging two additional declaratory-relief
causes of actions based on two policy exclusions. We intend to oppose the claims
made in the Third Amended Complaint.

         Except as noted above, all of the aforementioned matters are in the
early stages other than the settled actions as discussed above. As a
result, we believe that no additional amount above the $7.9 million discussed
above should be accrued for these matters under Statement of Financial
Accounting Standard ("SFAS") No. 5, "Accounting for Contingencies," because we
are currently unable to evaluate the likelihood of an unfavorable outcome or
estimate the amount or range of potential loss, if any, of the unsettled
actions.

         Any adverse resolution of the aforementioned litigation could have a
material effect on our financial condition, results of operations or cash flows.


                                  RISK FACTORS

RISKS ASSOCIATED WITH OUR BUSINESS

We need to increase revenues, reduce costs or raise additional capital to fund
our operating activities for the next twelve months.

         We currently are able to pay our debts and meet our obligations as they
become due, and we believe that our existing capital resources will be
sufficient to satisfy our current and projected funding requirements through
March 31, 2005. Although these estimates reflect our current expectations, it is
possible that our actual expenditures could exceed these estimates, or that our
revenues could fall short of expectations, which, in either case, would shorten
the time during which we could fund our operations. We intend to seek additional
funding to support our future operations through public or private sales of our
equity or debt securities. However, our pending securities litigation raises
uncertainty regarding the financial condition and long term viability of the
Company. Until these matters are resolved, it is unlikely that the Company will
be able to raise additional capital on terms acceptable to the Company, or at
all. If we are unable to obtain additional funds to support our operations, we
may need to reduce or curtail our operations, and you may lose your investment
in our company.

                                      -33-
<PAGE>


We expect to issue shares of common stock in settlement of our pending
litigation matters and any such issuances could be highly dilutive to our
existing investors.

         We are currently attempting to settle our pending litigation matters
and, in an effort to preserve operating capital, we expect to issue shares of
common stock to the plaintiffs in these actions. We recently entered into
tentative settlements in the Securities Action and the Covalar Action whereby we
have agreed to issue 7 million shares of common stock to the plaintiffs. Any
settlement of our other pending litigation matters will likely result in
additional stock issuances, which could be dilutive to our existing stockholders
and could depress our stock price.

An investment in our securities is highly speculative.

         We have sustained a substantial decline in the value of our securities
since announcing the accounting and financial inaccuracies in our previously
filed financial statements and our securities have been delisted from the Nasdaq
National Market System. We have also been named in a number of lawsuits. The
ultimate cost and effect of these matters on the financial condition, results of
operations, customer relations and management of the Company is unknown at this
time. If the Company is unsuccessful in defending itself in these actions, we
may face significant damage awards that could materially impair our liquidity
and results of operations. In addition, the Company is investigating informal
and formal restructuring alternatives which potentially may dilute shareholder
equity. Accordingly, an investment in our securities is highly speculative and
should not be made unless you are prepared to lose your entire investment.

The restatement of our financial statements and pending securities litigation
may raise concerns among our customers regarding our long-term stability. These
concerns may adversely affect future sales.

         Customers who purchase our software products make a significant
long-term investment in our technology. Our products often become an integral
part of each installed fabrication facility and our customers look to us to
provide continuing support, enhancements and new versions of our products.
Because of the long-term nature of an investment in yield optimization software,
customers are often concerned about the stability of their suppliers. Our
restatement and the pending securities litigation may cause current and
potential customers concern over our stability and these concerns may cause us
to lose sales. Any loss in sales could adversely affect our results of
operations, further deepening concern among current and potential customers.

Although we have an obligation to indemnify our officers and directors and
underwriters, we may not have insurance coverage available for this purpose and
may be forced to pay these indemnification costs directly.

         Our charter and bylaws require that we indemnify our directors and
officers to the fullest extent provided by applicable law. In addition, the
Underwriting Agreement with our underwriters for our initial public offering
requires us to indemnify the underwriters in certain instances. Although we have
purchased directors and officers liability insurance to fund such obligations,
our insurance carriers have notified us that coverage may not be available. If
our insurance carriers are able to deny coverage, we would be forced to bear
these indemnification costs directly, which could be substantial and may have an
adverse effect on our results of operations and liquidity.

Our stock is currently only traded in the over the counter market.

         Our stock is currently traded in the over the counter market or "pink
sheets." Stocks trading in this market typically suffer significantly lower
volume (liquidity) and lower share prices.

                                      -34-
<PAGE>

We currently have only three directors and believe we will have difficulty
attracting qualified candidates to serve on our board. Our failure to add
additional directors could adversely impact the management of our company, our
compliance with securities laws and our future exchange listing eligibility.

         Since July 2002, two of our directors resigned from the board of
directors of the Company, leaving only three directors. We have begun searching
for candidates to fill these vacancies. However, in light of the restatement of
our financial statements and the pending securities litigation, we believe we
will have difficulty attracting qualified individuals to serve on our board. Our
inability to attract and retain qualified independent directors may adversely
affect the quality of our management and may make it more difficult for us to
comply with corporate governance requirements of the securities exchanges, such
as Nasdaq and those imposed by the Securities and Exchange Commission pursuant
to the Sarbanes-Oxley Act of 2002.

The semiconductor industry has experienced downturns in the past and any future
downturns could adversely affect our revenues and operating results.

         Our business depends in part on the economic health of our customers:
IDMs, or integrated device manufacturers, fabless semiconductor companies, and
semiconductor equipment OEMs, or original equipment manufacturers. The
semiconductor industry is prone to periods of oversupply resulting in
significantly reduced capital expenditures. As a result of slowdowns, some
semiconductor manufacturers have postponed or canceled capital expenditures for
previously planned expansions or new fabrication facility construction projects,
resulting in a substantial decline in worldwide semiconductor capital
expenditures.

         Current conditions and future downturns could affect the willingness of
semiconductor companies to purchase our yield-optimization products and services
or to purchase equipment from semiconductor equipment OEMs that have embedded
our software in their products. Significant downturns could materially and
adversely affect our business and operating results. In addition, we expect to
continue increasing our investment in engineering, research and development, and
marketing, which limits our ability to reduce expenses during such downturns.

In any particular period, we derive a substantial portion of our revenues from a
small number of customers, and our revenues may decline significantly if any
major customer cancels or delays a purchase of our products.

         In each of the years ended March 31, 2004, 2003, and 2002, customers
that individually accounted for at least 10% of our revenues together
represented 42%, 61% and 66% of our revenues, respectively, and in each of these
years, there was substantial change among the companies that represented our
largest customers. In the year ended March 31, 2004, sales to three customers
accounted for 18%, 12% and 12%, respectively, of our revenues. Because we derive
most of our revenues from a few customers and because our existing customers'
needs for additional products are based on intermittent events, such as the
introduction of new technologies or processes, building of new facilities or the
need to increase capacity of existing facilities, our largest customers change
from period to period. Delays or failures in selling new licenses to existing or
new customers would cause significant period-to-period changes in our operating
results, which may result in our failure to meet market expectations. We may
also incur significant expense and devote management attention to the pursuit of
potentially significant license revenues, but ultimately fail to secure these
revenues.

                                      -35-
<PAGE>

We must continually replace the revenues generated from the sale of licenses and
one-time orders to maintain and grow our business.

         Over the past year, we have generated the bulk of our revenues from
sales of one-time customer orders. These licenses and orders produce large
amounts of revenues in the periods in which the license fees are recognized and
are not necessarily indicative of a commensurate level of revenues from the same
customers in future periods. Achieving period-to-period growth will depend
significantly on our ability to expand the number of users of our products
within our customers' organizations, license additional software to our
customers and attract new customers. We may not be successful in these sales
efforts and, consequently, revenues in any future period may not match that of
prior periods.

We have a long and variable sales cycle, which can result in uncertainty and
delays in generating additional revenues and results in potentially significant
fluctuations in revenues from period to period.

         Because our yield optimization software and services are often
unfamiliar to our prospective customers, it can take a significant amount of
time and effort to explain the benefits of our products. This means that we may
spend substantial time and management attention on potential licenses that are
not consummated, thereby foregoing other opportunities. In addition, due to the
nature of fabrication facility deployment and the extended time required to
bring a fabrication facility to full capacity, capital expenditures vary greatly
during this time. Accordingly, we may be unable to predict accurately the timing
of any significant future sales of software licenses, which has significantly
affected, and will continue to significantly affect quarterly operating results.
In addition to the previously discussed risk resulting from our restatement of
previously issued financial statements, factors that could cause our revenues
and operating results to vary from period to period include:

         o    large sales unevenly spaced over time;
         o    timing of new products and product enhancements by us and our
              competitors;
         o    the cyclical nature of the semiconductor industry;
         o    changes in our customers' development schedules, expenditure
              levels and product support requirements; and
         o    incurrence of sales and marketing and research and development
              expenses that may not generate revenues until subsequent quarters.

         As a result, we believe that period-to-period comparisons of our
results of operations are not necessarily meaningful and may not be accurate
indicators of future performance. These factors may cause our operating results
to be below market expectations in some future quarters, which could cause the
market price of our stock to decline.

We may not succeed in developing new products and our operating results may
decline as a result.

         Our customers and competitors operate in rapidly evolving markets that
are characterized by introduction of new technologies and more complex designs,
shorter product life cycles and disaggregation of the industry into new
subsectors. For example, ever smaller geometries are being used in
semiconductors and new materials are being employed to enhance performance. We
must continually create new software and add features and functionality to our
existing software products to keep pace with these changes in the semiconductor
industry. Specifically, we need to focus our research and development to:

         o    interface with new semiconductor producing hardware and systems
              that others develop;
         o    remain competitive with companies marketing third party yield
              management software and consulting services;
         o    continue developing new software modules that are attractive to
              existing customers, many of which have purchased perpetual
              licenses and are under no ongoing obligation to make future
              purchases from us; and
         o    attract new customers to our software.

                                      -36-
<PAGE>

         Maintaining and capitalizing on our current competitive strengths will
require us to invest heavily in research and development, marketing, and
customer service and support. Although we intend to devote substantial
expenditures to product development, we may not be able to create new products
in a timely manner that adequately meet the needs of our existing and potential
customers. A failure to do so would adversely affect our competitive position
and would result in lower sales and a decline in our profitability.

Our competitors generally have greater resources and our failure to effectively
compete against other companies could impair our growth and profitability.

         We target IDMs, fabless semiconductor companies, foundries and
semiconductor equipment OEMS. The tools and systems against which our products
and services most commonly compete are those that semiconductor companies have
created in house. In order to grow our business, we must convince these
producers of the benefit of an outside solution. The third party providers
against whom we compete are, generally, divisions of larger semiconductor
equipment OEMs, such as KLA-Tencor. These companies can compete on the basis of
their greater financial, engineering and manufacturing resources, and their
long-standing relationships with the same companies we are targeting. If we
cannot compete successfully against these forms of competition, the growth of
our business will be impaired.

Errors in our products or the failure of our products to conform to
specifications could hurt our reputation and result in our customers demanding
refunds or asserting claims against us for damages.

         Because our software products are complex, they could contain errors or
"bugs" that can be detected at any point in a product's lifecycle. We have a
team dedicated to detecting errors in our products prior to their release in
order to enable our software developers to remedy any such errors. In the past
we have discovered errors in some of our products and have experienced delays in
the delivery of our products because of these errors. In addition, we have
software engineers and developers who participate in the maintenance and support
of our products and assist in detecting and remedying errors after our products
are sold. These delays and replacements have principally related to new product
releases. Detection of any significant errors may result in:

         o the loss of, or delay in, market acceptance and sales of our
           products;
         o the delay or loss of revenues;
         o diversion of development resources;
         o injury to our reputation; or
         o increased maintenance and warranty costs.

         Any of these problems could harm our business and operating results. If
our products fail to conform to specifications, customers could demand a refund
for the purchase price or assert claims for damages. Liability claims could
require us to spend significant time and money in litigation or to pay
significant damages. Any such claims, whether or not successful, could seriously
damage our reputation and our business.

                                      -37-
<PAGE>


We may incur non-cash charges resulting from acquisitions and equity issuances,
which could harm our operating results.

         We incurred a $7.9 million charge related to our estimated cost of
settling the Securities Action and Covalar Action based on the estimated value
of the 7 million shares of our stock we agreed to issue in the year ended March
31, 2005. We may incur additional charges related to settling these matters as
we revalue the accrual for issuances quarterly until the shares are actually
issued.

         We incurred a $30.6 million goodwill impairment charge in the fourth
quarter of our year ended March 31, 2003. We will continue to incur charges to
reflect amortization and any future impairment of identified intangible assets
acquired in connection with our acquisitions of FabCentric, Covalar and DYM, and
we may make other acquisitions or issue additional stock or other securities in
the future that could result in further accounting charges. In the future, we
may incur additional impairment charges related to the goodwill already
recorded, as well as goodwill arising out of any future acquisitions. Current
and future accounting charges like these could result in significant losses and
delay our achievement of net income.

Our cost reduction initiatives may adversely affect the morale and performance
of our personnel and our ability to hire new personnel.

         In connection with our effort to streamline operations, reduce costs
and bring our staffing and structure in line with industry standards, we
restructured our organization on September 27, 2002, with substantial reductions
in our workforce. There have been and may continue to be substantial costs
associated with the workforce reductions, including severance and other employee
related costs, and our restructuring plan may yield unanticipated consequences,
such as attrition beyond our planned reduction in workforce. As a result of
these reductions, our ability to respond to unexpected challenges may be
impaired and we may be unable to take advantage of new opportunities.

         In addition, many of the employees who were terminated possessed
specific knowledge or expertise that may prove to have been important to our
operations. In that case, their absence may create significant difficulties.
This personnel reduction may also subject us to the risk of litigation, which
may adversely impact our ability to conduct our operations and may cause us to
incur significant expense.

Terrorist activities and resulting military and other actions could adversely
affect our business

         Terrorist attacks in New York, Pennsylvania and Washington, D.C. in
September 2001 disrupted commerce throughout the United States and other parts
of the world. The continued threat of terrorism within the United States and
abroad, and the potential for military action and heightened security measures
in response to such threats, may cause significant disruption to commerce
throughout the world. To the extent that such disruptions result in delays or
cancellations of customer orders, a general decrease in corporate spending, or
our inability to effectively market, sell or operate our services and software,
our business and results of operations could be materially and adversely
affected.

Key employees

         Our employees are vital to our success, and our key management,
engineering and other employees are difficult to replace. We generally do not
have employment contracts with our key employees. Further, we do not maintain
key person life insurance on any of our employees. The expansion of high
technology companies worldwide has increased the demand and competition for
qualified personnel. If we are unable to retain key personnel, or if we are not
able to attract, assimilate or retain additional highly qualified employees to
meet our needs in the future, our business and operations could be harmed. These
factors could seriously harm our business.

                                      -38-
<PAGE>


RISKS RELATED TO OUR INTERNATIONAL OPERATIONS

Our business could be harmed by political or economic instability in the
Republic of Armenia.

         Some of our software products are largely developed, produced,
delivered and supported from our facilities in the Republic of Armenia. Changes
in the political or economic conditions in Armenia and the surrounding region,
such as fluctuations in exchange rates, the imposition of currency transfer
restrictions or limitations, or the adoption of burdensome trade or tax
policies, procedures, rules, regulations or tariffs, could adversely affect our
ability to develop new products and take advantage of Armenia's low labor and
production costs, and to otherwise conduct business effectively in Armenia.

         Armenia voted for independence in 1991 and adopted its current
constitution in 1995. Laws protecting property (including intellectual property)
are not well established and may be difficult to enforce. In recent years,
Armenia has suffered significant political and economic instability. Any future
political and economic instability could interfere with our ability to retain or
recruit employees, significantly increase the cost of our operations, or result
in regulatory restrictions on our business, making it difficult for us to
maintain our business in Armenia or disrupting our Armenian operations. Any
significant increase in the costs of our Armenian operations (whether due to
inflation, imposition of additional taxes or other causes) would diminish, and
could eliminate their current cost-advantages. Furthermore, we cannot assure you
that restrictive foreign relations laws or policies on the part of Armenia or
the United States will not constrain our ability to operate effectively in both
countries. If we lose or choose to terminate any part of our Armenian operation,
replacements could be costly and we could experience delays in our product
development, thereby harming our competitive position and adversely affecting
our results of operations.

Our expansion into international markets may result in higher costs and could
reduce our operating margins due to the higher costs of international sales.

         Our current strategy for growth includes further expansion in Asia,
Europe, and other international markets. To effectively further this strategy,
we must find additional partners to sell our products in international markets
and expand our direct international sales presence. We would likely incur higher
sales costs by expanding our direct sales staff abroad, but we might not realize
corresponding increases in revenues or profitability. Furthermore, we may be
forced to share sales revenues with distributors or other sales partners abroad
in order to successfully penetrate foreign markets. Even if we successfully
expand our direct and indirect international sales efforts, we cannot be certain
that we will be able to create or increase international market penetration or
demand for our products.

Problems with international business operations could adversely affect our
sales.

         Sales to customers located outside the United States accounted for
approximately 53%, 36% and 30% of our revenues in the years ended March 31,
2004, 2003 and 2002, respectively. We anticipate that sales to customers located
outside the United States will represent a significant portion of our total
revenues in future periods. In addition, many of our customers rely on third
party foundries operating outside of the United States. Accordingly, our
operations and revenues are subject to a number of risks associated with foreign
commerce, including the following:

                                      -39-
<PAGE>

     o   managing foreign distributors;
     o   maintaining relationships with foreign distributors;
     o   staffing and managing foreign branch offices;
     o   political and economic instability abroad;
     o   foreign currency exchange fluctuations;
     o   changes in tax laws and tariffs;
     o   timing and availability of export licenses;
     o   inadequate protection of intellectual property rights in some
         countries; and
     o   obtaining governmental approvals for certain technologies.

         Any of these factors could result in decreased sales to international
customers and domestic customers that use foreign fabrication facilities.

         Our accounts receivable from international customers are generally
outstanding longer than our domestic receivables and, as a result, we may need a
proportionately greater amount of working capital to support our international
sales.

INTELLECTUAL PROPERTY RELATED RISKS

Our success depends in part on our ability to protect our intellectual property,
and any inability to do so could cause our business material harm.

         Our success depends in significant part on our intellectual property.
While we have attempted to protect our intellectual property through patents,
copyrights, or the maintenance of trade secrets, there can be no assurance that
these measures will successfully protect our technology or that competitors will
not be able to develop similar technology independently. It is possible, for
example, that the claims we are allowed on any of our patents will not be
sufficiently broad to protect our technology. In addition, patents issued to us
could be challenged, invalidated or circumvented and the rights granted under
those patents might not provide us with any significant competitive advantage.
The laws of some foreign countries do not protect our intellectual property as
effectively as the laws of the United States. Also, our source code developed in
Armenia may not receive the same copyright protection that it would receive if
it was developed in the United States. As we increase our international
presence, we expect that it will become more difficult to monitor the
development of competing products that may infringe on our rights as well as
unauthorized use of our products.

Our operating results would suffer if we were subject to a protracted
intellectual property infringement claim or one with a significant damages
award.

         Litigation regarding intellectual property rights frequently occurs in
the software industry. We may be subject to infringement claims as the number of
competitors in our industry segment grows. While we are unaware of any claims
that our products infringe on the intellectual property rights of others, such
claims may arise in the future. Regardless whether these claims have merit, they
could:

     o be costly to defend;
     o divert senior management's time, attention and resources;
     o cause product shipment delays; and
     o require us to enter into costly licensing or royalty
       arrangements.
                                      -40-
<PAGE>

         Any of these potential results of intellectual property infringement
claims could limit our ability to maintain our business and negatively affect
our operating results.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         In the normal course of business, our financial position is subject to
a variety of risks, including market risk associated with interest rate and
foreign currency exchange movements. We regularly assess these risks and have
established policies and business practices to protect against these and other
exposures. As a result, we do not anticipate material potential losses in these
areas.

         Interest Rate Risk

         We invest excess cash in debt instruments of the U.S. Government and
its agencies, and in high quality corporate issuers and, limit the amount of
credit exposure to any one issuer. Our investments in fixed rate securities may
have their fair market value adversely impacted due to a rise in interest rates.
We believe that a change in long-term interest rates would not have a material
effect on our business, financial condition, results of operations or cash flow.
Our cash and cash equivalents consist of cash and highly liquid money market
instruments with original or remaining maturities of 90 days or less. Because of
the short maturities of these instruments, a sudden change in market interest
rates would not have a material impact on the fair value of the portfolio, but
it may cause the amount of income we derive to vary from period to period. A
hypothetical 10% increase in interest rates would result in an approximate
$3,000 decrease in the fair value of our available-for-sale securities as of
March 31, 2004.

         Foreign Exchange Risk

         Our sales are primarily denominated in U.S. dollars and, as a result,
we have relatively little exposure to foreign currency exchange risk with
respect to revenues. Our sales through our Japanese subsidiary, which
represented approximately 7.2% of total revenues in the year ended March 31,
2004, are denominated in yen. A 10% adverse change in yen exchange rates would
not have had a material impact on revenues for the year ended March 31, 2004.
Additionally, our exposure to foreign exchange rate fluctuations arises in part
from inter-company accounts, which can be denominated in the functional currency
of the foreign subsidiary. As exchange rates vary when the accounts are
translated, results may vary from expectations and adversely impact earnings.
The effect of foreign exchange rate fluctuations in the year ended March 31,
2004 was not material.

         While our sales are generally denominated in U.S. dollars, our
international subsidiaries' books and records are maintained in the local
currency. As a result, our financial statements are remeasured in U.S. dollars
using a combination of current and historical exchange rates. The functional
currencies of our foreign subsidiaries are their local currencies. We translate
certain assets and liabilities to U.S. dollars at the current exchange rate as
of the applicable balance sheet date. Revenues and expenses are translated at
the average exchange rates prevailing during the period. Adjustments resulting
from the translation of the foreign subsidiaries' financial statements are
recorded in accumulated other comprehensive income (loss) in stockholders'
equity.

                                      -41-
<PAGE>





ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                   Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
<S>                                                                                                                      <C>

Consolidated Financial Statements:

Report of  Independent  Registered Public Accounting Firm                                                                 43

Consolidated Statements of Operations for each of the three years in the period ended March 31, 2004                      44

Consolidated Balance Sheets at March 31, 2004 and 2003                                                                    45

Consolidated Statements of Cash Flows for each of the three years in the period ended March 31, 2004                      46

Consolidated Statements of Stockholders' Equity (Deficit) for each of the three years in the period
ended March 31, 2004                                                                                                      47

Notes to Consolidated Financial Statements                                                                                48


Financial Statement Schedules:

All schedules are omitted because they are not applicable or the required
information is shown in the Consolidated Financial Statements or Notes thereto.

Supplementary Financial Data:

Quarterly Financial Data (unaudited) for the two years ended March 31, 2004                                               69
</TABLE>



                                      -42-
<PAGE>


             Report of Independent Registered Public Accounting Firm



To the Board of Directors and Stockholders
of HPL Technologies, Inc.:


In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of HPL
Technologies and its subsidiaries at March 31, 2004 and 2003, and the results of
their operations and their cash flows for each of the three years in the period
ended March 31, 2004 in conformity with accounting principles generally accepted
in the United States of America. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedules based on
our audits. We conducted our audits of these statements in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards 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 our opinion.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.


PricewaterhouseCoopers LLP
--------------------------------------------------------------------------------
San Jose, California
July 2, 2004, except for the fourth and fifth paragraphs
of Note 16, as to which the date is July, 13, 2004

                                      -43-
<PAGE>

                             HPL Technologies, Inc.
                      Consolidated Statements of Operations
                    (In thousands, except per share amounts)
<TABLE>
<CAPTION>
                                                                                        Year ended March 31,
                                                                      ----------------------------------------------------------
                                                                           2004                2003                  2002
                                                                     ---------------     ---------------       ----------------
<S>                                                                   <C>           <C>  <C>            <C>    <C>
Revenues:
Software licenses                                                          $   4,799          $    5,281            $     1,614
Consulting services, maintenance and other                                     7,902              10,311                  2,899
                                                                      ---------------     ---------------       ----------------
Total revenues                                                                12,701              15,592                  4,513
                                                                      ---------------     ---------------       ----------------

Cost of revenues:
Software licenses                                                                507                 656                    587
Consulting services, maintenance and other (1)                                 3,131               3,808                    507
                                                                      ---------------     ---------------       ----------------

Total cost of revenues                                                         3,638               4,464                  1,094
                                                                      ---------------     ---------------       ----------------
Gross profit                                                                   9,063              11,128                  3,419
                                                                      ---------------     ---------------       ----------------
Operating expenses:
Research and development (1)                                                   6,384              10,515                  6,118
Sales, general and administrative (1)                                         13,604              19,788                  9,285
Legal settlement expense (Note 16)                                             7,900                   -                      -
Goodwill impairment                                                                -              30,570                      -
Stock-based compensation                                                         315               1,047                  3,547
Amortization of intangible assets                                              1,327               1,494                    294
                                                                      ---------------     ---------------       ----------------

Total operating expenses                                                      29,530              63,414                 19,244
                                                                      ---------------     ---------------       ----------------
Loss from operations                                                       $ (20,467)         $  (52,286)           $   (15,825)
Interest income (expense) and other, net                                         213                 468                    908
                                                                      ---------------     ---------------       ----------------
Loss before income taxes                                                   $ (20,254)         $  (51,818)           $   (14,917)
Provision for income taxes                                                        89                   -                      -
                                                                      ---------------     ---------------       ----------------

Net loss                                                                   $ (20,343)         $  (51,818)           $   (14,917)
                                                                      ===============     ===============       ================

Net loss per share - basic and diluted:                                    $   (0.65)         $    (1.69)           $     (0.62)
                                                                      ===============     ===============       ================

Shares used in per share calculations - basic and diluted:                    31,145              30,645                 24,038
                                                                      ===============     ===============       ================

(1) Excludes the following stock-based compensation charges:

Cost of revenues                                                           $       -                $ 18            $        39
Research and development                                                         113                 414                    692
Sales, general and administrative                                                202                 615                  2,816
                                                                      ---------------     ---------------       ----------------
                                                                           $     315          $    1,047            $     3,547
                                                                      ===============     ===============       ================
</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                      -44-
<PAGE>
                             HPL Technologies, Inc.
                           Consolidated Balance Sheets
                      (In thousands, except per share data)
<TABLE>
<CAPTION>
                                                                                                         March 31,
                                                                                            -----------------------------------
                                                                                                2004                 2003
                                                                                            --------------      ---------------
<S>                                                                                        <C>           <C>    <C>
ASSETS
Current assets:
Cash and cash equivalents                                                                        $  4,708             $ 17,350
Short-term investments                                                                              5,502                4,391
Accounts receivable, net of allowances of $100 and $100, respectively                               2,888                1,560
Unbilled accounts receivable                                                                            4                  619
Prepaid expenses and other current assets                                                             940                3,206
                                                                                            --------------      ---------------
Total current assets                                                                               14,042               27,126
Property and equipment, net                                                                         1,308                2,316
Goodwill                                                                                           27,754               27,704
Other intangible assets, net                                                                        1,181                2,508
Other assets                                                                                          580                  731
                                                                                            --------------      ---------------
Total assets                                                                                     $ 44,865             $ 60,385
                                                                                            ==============      ===============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable                                                                                 $  2,085             $  1,342
Accrued liabilities                                                                                 6,579                6,754
Deferred revenue                                                                                    1,894                3,667
Capital lease obligations - current portion                                                            91                  338
Convertible debenture                                                                                   -                1,500
                                                                                            --------------      ---------------
Total current liabilities                                                                          10,649               13,601
Capital lease obligations - net of current portion                                                     39                  130
Deferred revenue                                                                                        -                  108
Legal settlement liability (Note 16)                                                                7,900                    -
Other liabilities                                                                                     235                  514
                                                                                            --------------      ---------------
Total liabilities                                                                                  18,823               14,353
                                                                                            --------------      ---------------

Contingencies and Commitments (Notes 8, 9 and 16)
Stockholders' equity :
Preferred stock, $0.001 par value, 10,000 shares authorized, no shares issued
 and outstanding at March 31, 2004 and 2003                                                             -                    -
Common stock, $0.001 par value; 75,000 shares authorized; 31,275 and 30,810
shares issued and outstanding at March 31, 2004 and 2003                                               32                   31
Additional paid-in capital                                                                        124,205              124,590
Deferred stock-based compensation                                                                    (129)                (887)
Accumulated deficit                                                                               (98,047)             (77,704)
Accumulated other comprehensive gain (loss)                                                           (19)                   2
                                                                                            --------------      ---------------
Total stockholders' equity                                                                         26,042               46,032
                                                                                            --------------      ---------------
Total liabilities and stockholders' equity                                                       $ 44,865             $ 60,385
                                                                                            ==============      ===============
</TABLE>

              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                      -45-
<PAGE>


                             HPL Technologies, Inc.
                      Consolidated Statements of Cash Flows
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                                           Year ended March 31,
                                                                        -----------------------------------------------------------
                                                                              2004                2003                 2002
                                                                        ------------------  ------------------   ------------------
<S>                                                                      <C>               <C>                  <C>
Cash flows from operating activities:
Net loss                                                                        $ (20,343)          $ (51,818)           $ (14,917)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization                                                       2,598               3,218                  779
Legal settlement expense                                                            7,900                   -                    -
Goodwill impairment                                                                     -              30,570                    -
Forgiveness of note                                                                   150                 150                    -
Allowance for doubtful accounts                                                         -                   -                  (63)
Accreted interest expense                                                               -                   -                   25
Stock-based compensation                                                              315               1,047                3,547
Loss on disposal of property and equipment                                              -                   -                    -
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable                                                                (1,328)                (47)               1,806
Unbilled accounts receivable                                                          615                 164                 (393)
Prepaid expenses and other current assets                                           2,266                 687               (2,472)
Other assets                                                                            1                  15                  (64)
Accounts payable                                                                      743              (1,398)                (261)
Accrued liabilities                                                                  (175)             (1,068)                 607
Other liabilities                                                                    (279)               (225)                (344)
Deferred revenue                                                                   (1,881)             (5,054)                (662)
                                                                        ------------------------------------------------------------
Net cash provided by (used in) operating activities                                (9,418)            (23,759)             (12,412)
                                                                        ------------------------------------------------------------

Cash flows from investing activities:
Acquisition of property and equipment                                                (263)               (397)                (633)
Issuance of notes receivable                                                            -                (450)              (3,045)
Repayment of notes receivable                                                           -                   -                2,745
Acquisitions, net of cash acquired                                                      -              (2,012)             (12,095)
Purchase of short-term investment                                                 (13,381)            (22,378)             (20,666)
Sales of short-term investments                                                    12,263              32,319                6,306
                                                                         -----------------------------------------------------------

Net cash provided by (used in) investing activities                                (1,381)              7,082              (27,388)
                                                                         -----------------------------------------------------------

Cash flows from financing activities:
Repayments of convertible debenture                                                (1,500)                  -                    -
Proceeds from issuance of notes payable and line of credit                              -                   -                   84
Repayments of notes payable and line of credit                                          -                   -                 (284)
Issuance of common stock                                                                9                 166               69,048
Principal payments on capital lease obligations                                      (338)               (397)                (144)
Amounts received from HPL's former Chief Executive Officer                              -               1,300                3,035
                                                                          ----------------------------------------------------------
Net cash provided by (used in) financing activities                                (1,829)              1,069               71,739
                                                                          ----------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents                          (14)                160                 (130)
                                                                          ----------------------------------------------------------
Net increase (decrease) in cash and cash equivalents                              (12,642)            (15,448)              31,809
Cash and cash equivalents at beginning of period                                   17,350              32,798                  989
                                                                          ----------------------------------------------------------
Cash and cash equivalents at end of period                                        $ 4,708            $ 17,350             $ 32,798
                                                                         ===========================================================

Supplemental disclosures of cash flow information:
Interest paid                                                                       $ 187                $ 22                $ 202
Income taxes paid                                                                    $ 10             $ 1,749                $ 793
Income taxes refunded                                                             $ 1,237                   -                    -
Supplemental disclosure of non-cash investing and financing activities:
   Acquisition of property and equipment under capital
   lease obligations                                                                $ 172               $ 391                $ 461
   Issuance of common stock and options assumed in connection with
   acquisitions                                                                         -            $ 14,178             $ 33,592
</TABLE>
              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                      -46-
<PAGE>


                             HPL Technologies, Inc.
            Consolidated Statements of Stockholders' Equity (Deficit)
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                                                          Accumulated      Total
                                                                 Additional     Deferred                     other     stockholders'
                                               Common Stock       paid-in     stock-based    Accumulated  comprehensive   equity
                                             Shares    Amount     capital     compensation     deficit     gain(loss)    (deficit)
                                             ------    -------    ---------   -------------   ---------    -----------   -----------
<S>                                         <C>         <C>        <C>            <C>           <C>            <C>        <C>
Balances as of March 31, 2001                17,828     $ 18          5,715          (1,512)    (10,969)            -     $  (6,748)
Components of comprehensive loss:
  Net loss                                        -        -              -               -     (14,917)            -       (14,917)
   Unrealized loss on available for sale
   securities                                     -        -              -               -          -            (49)          (49)
   Foreign currency translation adjustment        -        -              -               -          -           (130)         (130)
                                                                                                                            --------
      Total comprehensive loss                                                                                              (15,096)
                                                                                                                            --------
Issuance of stock options to employees            -        -           3,863          (3,863)        -              -             -
Issuance of stock options to non-employees        -        -             162              -          -              -           162
Stock-based compensation                          -        -               -           3,385         -              -         3,385
Issuance of common stock in public offering
and exercise options                          9,387        9          69,039               -         -              -        69,048
Issuance of common stock and options
assumed in connection with acquisitions       2,185        2          33,590          (2,027)        -              -        31,565
                                             ------     -----      ---------    -------------  ---------    -----------    ---------
Balances as of March 31, 2002                29,400     $ 29       $ 112,369          (4,017)    (25,886)        (179)     $ 82,316

Components of comprehensive loss:
  Net loss                                        -        -              -               -     (51,818)             -     (51,818)
   Unrealized gain on available for sale
   securities                                     -        -              -               -          -             69            69
   Foreign currency translation adjustment        -        -              -               -          -            112           112
                                                                                                                           ---------
      Total comprehensive loss                                                                                              (51,637)
                                                                                                                           ---------
Exercise of stock options for cash              443         1           165               -          -              -           166
Issuance of common stock and options assumed
in connection
with acquisition                                967         1         14,177            (38)         -              -        14,140
Stock-based compensation                          -         -         (2,121)         3,168          -              -         1,047
                                             -------    ------      ---------    -------------  ---------    -----------   ---------
Balances as of March 31, 2003                30,810      $ 31      $ 124,590         $ (887)  $ (77,704)          $ 2       $ 46,032

Components of comprehensive loss:
  Net loss                                        -         -              -              -     (20,343)            -       (20,343)
   Unrealized gain on available for sale
   securities                                     -         -              -              -           -            (7)           (7)
   Foreign currency translation adjustment        -         -              -              -           -           (14)          (14)
                                                                                                                           ---------
     Total comprehensive loss                                                                                               (20,364)
                                                                                                                           ---------
Exercise of stock options for cash               68        -               9              -           -             -             9
Issuance of common stock in connection
with acquisitions                               397        1              49              -           -             -            50
Stock-based compensation                          -        -            (443)           758           -             -           315
                                             ------    ------      ---------    -------------  ---------    -----------    ---------
Balances as of March 31, 2004                31,275     $ 32       $ 124,205         $ (129)  $ (98,047)        $ (19)     $ 26,042
                                             ======    ======      =========    ============= ===========   ===========    =========
</TABLE>
              The accompanying notes are an integral part of these
                       consolidated financial statements.

                                      -47-
<PAGE>


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.  NATURE OF OPERATIONS AND GOING CONCERN

         HPL Technologies, Inc. ("HPL" or the "Company") is engaged in the sale,
support and providing of services related to the yield optimization software it
designs for companies involved in the design, fabrication and testing of
semiconductors and flat panel displays.

         The accompanying financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business; and, accordingly, the financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amount and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern. The Company has experienced net losses and negative cash flows
since going public in July 2001 and, as of March 31, 2004, had an accumulated
deficit of $98.0 million. The Company expects to have a net operating loss in
the year ending March 31, 2005. For the year ending March 31, 2004, cash used in
operations and to fund capital expenditures was $9.7 million. Management's plans
for the Company to continue as a going concern include increases in revenues or
raising additional capital. At March 31, 2004, the Company had approximately
$10.2 million in cash and cash equivalents and short-term investments. The
Company's current operating plan for the year ending March 31, 2005 projects
that cash available from planned revenue combined with the $10.2 million on hand
at March 31, 2004 will be adequate to fund operations through March 31, 2005.
Future capital requirements will be affected by slow or diminished revenue
growth, additional research and development and sales and marketing costs, and
higher general and administrative costs, including costs related to the
litigation matters described in Note 16. There can be no assurances that the
current cash on hand combined with the projected revenues will be adequate to
sustain operations through March 31, 2005. If new funding is required, there is
no assurance that funds would be available to the Company or, if available,
under terms that would be acceptable to the Company, and management is not
certain that it will be able to raise additional capital until the litigation
and other uncertainties described in Note 16 are resolved.


NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation

         The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries after the elimination of
intercompany balances and transactions.

Use of estimates

         The preparation of financial statements in conformity with generally
accepted accounting principles in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements. These estimates may affect the amounts of assets and
liabilities reported in the balance sheet, the disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenue and expense during the periods presented. Actual amounts may differ
from those estimates.

                                      -48-
<PAGE>


Revenue recognition

         The Company recognizes revenue in accordance with the provisions of
Statement of Position ("SOP") 97-2, "Software Revenue Recognition," as amended
by SOP 98-4, SOP 98-9 and Staff Accounting Bulletin No. 104, "Revenue
Recognition in Financial Statements" issued by the Securities and Exchange
Commission. The Company's revenues are primarily derived from three sources: (i)
software license revenue, derived primarily from sales to end users; (ii)
maintenance revenue, derived primarily from providing post-contract customer
support and software updates to end users; and (iii) consulting services
revenues derived from providing design and test services, training and
consulting services to end users.

         If the consulting or other services sold in connection with a software
license are essential to the functionality of the software, the Company
recognizes revenue on either a percentage-of-completion or completed contract
basis. For the percentage-of-completion method, the Company recognizes revenues
using labor hours incurred as the measure of progress against the total labor
hours estimated for completion. The Company considers a project completed after
all contractual obligations are met. Unbilled accounts receivable comprises
revenue recognized in advance of contractual billings.

         Provisions for estimated contract losses are recognized in the period
in which the loss becomes probable and can be reasonably estimated. When the
services sold are not essential to the functionality of the software, the
Company recognizes revenues from software licenses upon delivery of the software
and execution of a binding agreement with the customer, provided that the fee is
fixed or determinable, collection is reasonably assured and there are no
customer acceptance clauses. When customer acceptance clauses exist, revenues
are recognized upon customer acceptance.

         For contracts with multiple obligations (e.g., deliverable and
undeliverable products, post-contract support and other services), the Company
allocates revenues to the undelivered element of the contract based on objective
evidence of its fair value. This objective evidence is the sales price of the
element when sold separately or the renewal rate specified in the agreement for
licensing arrangements with terms of one year or more that include post-contract
customer support and software updates. The Company recognizes revenues allocated
to undelivered products when all of the other criteria for revenue recognition
have been met.

         Revenues for time-based software licenses for periods of one year or
less are recognized ratably over the term of the contract. When the contract
term is greater than one year and there is a stated renewal rate, which is
substantive, in the arrangement for maintenance and post-contract support
services, the Company recognizes the license fee upon delivery of the software
assuming all other revenue recognition criteria have been met.

         Revenues from maintenance and post-contract support services are
recognized ratably over the contractual period. Payments for maintenance and
support services are generally made in advance and are non-refundable. Revenues
from training and consulting services are recognized as the related services are
performed. Customer advances and billed amounts due from customers in excess of
revenue recognized are recorded as deferred revenue.

         The Company also derives revenues from the sale of its software
licenses, maintenance and post-contract support services through distributors.
Revenues from sales made through distributors which have return rights are
recognized when the distributors have sold the software licenses or service to
their customers and the criteria for revenue recognition under SOP 97-2, as
amended, are met. Revenues from maintenance and post-contract support services
sold through distributors are recognized ratably over the contractual period.
Revenues derived from software development projects are recognized on a
completed contract basis.

         Deferred revenue includes advance payments received for maintenance and
support services and license revenues received or due under the terms of the
contracts for which customer acceptance has not been received.

                                      -49-
<PAGE>


Cost of revenues

         Cost of revenues consists primarily of expenses directly related to the
cost of media on which a product is delivered, third party software royalties,
product fulfillment costs, and direct customer service, consulting and support
costs such as salaries and related expenses.

Software development costs

         Costs related to the research, design and development of software
products are generally expensed as incurred. Software development costs are
capitalized beginning when a product's technological feasibility has been
established through the time of general release of the product. Based on the
Company's product development process, technological feasibility is established
upon the completion of a working model. Costs eligible for capitalization,
incurred after achieving technological feasibility and before general release of
its product, were not material in the years ended March 31, 2004, 2003 and 2002.
Accordingly, all software development costs have been charged to research and
development expense in the accompanying consolidated statements of operations.

Cash, cash equivalents and short-term investments

         The Company invests its excess cash in debt instruments of the US
Government and its agencies, and high-quality corporate issuers. The Company
considers all highly liquid investments with an original or remaining maturity
of three months or less at the date of purchase to be cash equivalents.
Short-term investments are classified as securities available-for-sale and are
reported at fair value based on quoted market prices as of the balance sheet
date. Realized gains or losses and declines in value judged to be other than
temporary, if any, are determined on the specific identification method and are
reflected in other income or loss. Net unrealized gains or losses, net of tax,
are recorded directly in stockholders' equity (deficit) as other comprehensive
income.

Property and equipment

         Property and equipment are stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, as follows:

        Computers and equipment                 3 years
        Furniture, fixtures and other           3 to 7 years


         Computers and equipment acquired under capital leases are amortized
over the shorter of the lease term or the useful life of the asset. Leasehold
improvements are amortized using the straight-line method over the shorter of
the remaining lease term or the estimated useful life of the improvement. Repair
and maintenance costs are expensed as incurred. When property and equipment are
retired or otherwise disposed of, the cost and accumulated depreciation are
relieved from the accounts and the net gain or loss is included in the
determination of income or loss.

         Depreciation expense totaled $1.3 million, $1.7 million and $485,000
for the years ended March 31, 2004, 2003 and 2002, respectively.

Goodwill and intangible assets

         Goodwill is stated at fair value and intangible assets are stated at
cost less accumulated amortization. Intangible assets are amortized on a
straight line basis over the estimated useful life. Goodwill is not amortized,
but rather is subject to at least an annual assessment for impairment.

                                      -50-
<PAGE>

         Intangible assets acquired in business combinations consist primarily
of purchased technology and customer backlog and are being amortized on a
straight-line basis over their estimated useful life which ranges from six
months to three years. Amortization expense totaled $1.3 million, $1.5 million
and $294,000 for the years ended March 31, 2004, 2003 and 2002, respectively.

         The Company periodically reviews the carrying value of acquired
intangible assets, including goodwill, to determine whether impairment may
exist. Statement of Financial Accounting Standards No. 142 ("SFAS 142"),
"Goodwill and Other Intangible Assets," requires that goodwill and certain
intangible assets be assessed for impairment using fair value measurement
techniques. Specifically, goodwill impairment is determined using a two-step
process. The first step of the goodwill impairment test is used to identify
potential impairment by comparing the fair value of a reporting unit with its
carrying amount, including goodwill. The Company measures fair value by weighing
equally its projected five year discounted cash flows with a terminal value
discounted to the measurement date (the "Income Approach") and looking at
comparable public companies and the multiples they trade at based on their
trailing twelve months revenue and forward looking twelve months revenue
compared to our comparable revenue to determine our market value (the "Market
Approach"). If the fair value of a reporting unit exceeds its carrying amount,
goodwill of the reporting unit is considered not impaired and the second step of
the impairment test is unnecessary. If the carrying amount of a reporting unit
exceeds its fair value, the second step of the goodwill impairment test is
performed to measure the amount of impairment loss, if any. The second step of
the goodwill impairment test compares the implied fair value of the reporting
unit's goodwill with the carrying amount of that goodwill. If the carrying
amount of the reporting unit's goodwill exceeds the implied fair value of that
goodwill, an impairment loss is recognized in an amount equal to that excess.
The implied fair value of goodwill is determined in the same manner as the
amount of goodwill recognized in a business combination. That is, the fair value
of the reporting unit is allocated to all of the assets and liabilities of that
unit (including any unrecognized intangible assets) as if the reporting unit had
been acquired in a business combination and the fair value of the reporting unit
was the purchase price paid to acquire the reporting unit. The impairment test
for other intangible assets not subject to amortization consists of a comparison
of the fair value of the intangible asset with its carrying value. If the
carrying value of the intangible asset exceeds its fair value, an impairment
loss is recognized in an amount equal to that excess. For intangible assets
subject to amortization, to the extent the fair value of the intangible asset,
determined based upon the estimated future cash inflows on a discounted basis
attributable to the asset, less estimated future cash outflows on a discounted
basis, are less than the carrying amount, an impairment loss is recognized. The
determination of impairment of goodwill and other intangible assets requires
significant judgment and management estimates.

Long-lived assets

         The Company monitors events and changes in circumstances that could
indicate the carrying amounts of long-lived assets may not be recoverable. When
such events or changes in circumstances are present, the Company assesses the
recoverability of long-lived assets by determining whether the carrying value of
the assets will be recovered through non-discounted expected future cash flows.
If the assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets.

Foreign currency translation

         The functional currencies for the Company's international subsidiaries
are the local currencies. These international subsidiaries' financial statements
are translated to United States dollars using period-end rates of exchange for
assets and liabilities, and the average rates of exchange for the year for
revenues and expenses. Translation gains (losses) are recorded in accumulated
other comprehensive income (loss) in stockholders' equity (deficit). Net gains
and losses resulting from foreign exchange transactions are included in other
income (loss), net and were not significant in any of the periods presented.

                                      -51-
<PAGE>

Income taxes

         Deferred tax assets and liabilities are recognized for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on temporary differences between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. A
valuation allowance is recorded to reduce deferred tax assets to an amount whose
realization is more likely than not.

Advertising expense

         Advertising costs are included in sales, general and administrative
expenses and are expensed as incurred. Advertising expense totaled $13,000,
$18,000 and $105,000 for the years ended March 31, 2004, 2003 and 2002,
respectively.

Stock-based compensation

         The Company accounts for its employee stock option plans using the
intrinsic value method described in Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees" and related interpretations.
Under APB Opinion No. 25, deferred stock compensation is recorded for the
difference, if any, between an option's exercise price and the fair value of the
underlying common stock on the grant date of the option. As permitted by SFAS
No. 123, "Accounting for Stock-Based Compensation," the Company has adopted the
"disclosure only" alternative described in SFAS No. 123 for its employee stock
plans.

         The Company accounts for stock issued to non-employees in accordance
with the provisions of SFAS No. 123 and Emerging Issues Task Force Consensus
("EITF") No. 96-18, "Accounting for Equity Instruments that Are Issued to Other
than Employees For Acquiring, or in Conjunction with Selling, Goods or
Services." Under SFAS No. 123 and EITF No. 96-18, stock options and warrants
issued to non-employees are accounted for at their fair value calculated using
the Black-Scholes option pricing model.

         Compensation expense resulting from employee and non-employee stock
options is amortized to expense using an accelerated approach over the term of
the options in accordance with Financial Accounting Standards Board
Interpretation ("FIN") No. 28, "Accounting for Stock Appreciation Rights and
Other Variable Stock Option or Award Plans."

         In December 2002, the FASB issued SFAS 148, "Accounting for Stock Based
Compensation - Transition and Disclosure" which provides for two additional
transition methods for entities that voluntarily adopt the fair value method of
recording expenses when accounting for stock based compensation. We have chosen
not to voluntarily adopt the fair value method of accounting for employee stock
option grants at this time.

         If compensation cost had been determined in accordance with SFAS
No.123, net loss and net loss per share would have been changed to the pro forma
amounts indicated below:

                                      -52-
<PAGE>

<TABLE>
<CAPTION>
                                                                                           March 31,
                                                                          ---------------------------------------------
                                                                               2004          2003            2002
                                                                          -------------  ------------    --------------
<S>                                                                       <C>            <C>             <C>
Net loss, as reported                                                     $  (20,343)     $ (51,818)      $ (14,917)
Add: Stock-based employee compensation expense included in reported
   net loss                                                                      315          1,047           3,547
Deduct: total stock-based compensation determined under fair value
   based method for all awards                                                  (251)        (1,045)         (4,944)
                                                                          -----------    ------------    --------------
Pro forma net loss, fair value method for all stock-based awards          $  (20,279)     $ (51,816)      $ (16,314)

                                                                          ===========     ============   ==============
Basic and diluted net loss per share:

As reported                                                               $   (0.65)      $   (1.69)      $   (0.62)

Pro forma net loss, fair value method for all stock-based awards          $   (0.65)      $   (1.69)      $   (0.68)
</TABLE>


Concentration of credit risk

         Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash, cash
equivalents and short-term investments, accounts receivable and unbilled
receivables. Cash, cash equivalents and short-term investments are managed by
financial institutions that management believes are credit worthy.

         The Company performs ongoing credit evaluations of its customers'
financial condition, generally requires no collateral from its customers and
maintains allowances for potential credit losses.

         At March 31, 2004, receivables from two domestic, two international
customers, and the Company's Japanese distributor accounted for 21%, 14%, 18%,
18% and 11% of accounts receivable and unbilled receivables combined,
respectively. At March 31, 2003, receivables from the Company's two domestic
customers accounted for 45%, 12% of accounts receivable and unbilled receivables
combined, respectively.

Accumulated other comprehensive income (loss)

         Accumulated other comprehensive income (loss) consists of gains and
losses that are not recorded in the statements of operations but instead are
recorded directly to stockholders' equity. The Company's components of
accumulated other comprehensive income (loss) include net unrealized gain (loss)
on available-for-sale securities and the cumulative foreign currency translation
adjustment.

Net loss per share

         Basic net loss per share is computed by dividing the net loss for the
period by the weighted average number of shares of common stock outstanding
during the period, less shares outstanding that are subject to repurchase.
Diluted net loss per share is computed by dividing the net loss for the period
by the weighted average number of shares and potential shares of common stock
outstanding during the period. The calculation of diluted net loss per share
excludes shares of potential common stock if their effect is anti-dilutive.
Potential common stock consists of shares of common stock that are incremental
common shares issuable upon the exercise of stock options and warrants, computed
using the treasury stock method, and shares issuable upon conversion of the
convertible debenture, computed using the if-converted method. The following
table presents the calculation of net loss per common share--basic and diluted
(in thousands, except for per share data):

                                      -53-
<PAGE>

<TABLE>
<CAPTION>
                                                                           Years ended March 31,
                                                               ---------------------------------------------
                                                                    2004           2003            2002
                                                               -------------  --------------  --------------
     <S>                                                       <C>            <C>              <C>

     Numerator:
     Net loss                                                  $    (20,343)    $  (51,818)     $   (14,917)
                                                               -------------  --------------    ------------
     Denominator:
             Weighted average common shares
             outstanding - basic and diluted                         31,145         30,645           24,038
                                                               -------------   --------------   -------------
     Net loss per common share--basic and diluted              $      (0.65)    $    (1.69)     $     (0.62)
                                                               ==============  ==============   ==============
</TABLE>

         The total number of shares excluded from the calculation of diluted net
loss per share are detailed in the table below (in thousands):

<TABLE>
<CAPTION>

                                                                                 March 31,
                                                                --------------------------------------------
                                                                     2004          2003            2002
                                                                ------------- --------------  --------------
     <S>                                                        <C>           <C>             <C>
     Outstanding stock options                                      6,730          1,136           7,782
     Convertible debenture (Note 8)                                    --          1,032           1,032
     Shares issuable under warrants                                   138            138             138
     Contingent shares issuable to former Covalar
       stockholders                                                    --             --             600
     Shares issuable upon legal settlement (Note 17)                7,000             --              --
                                                                 ------------ --------------  -------------
     Total                                                         13,868          2,306           9,552
                                                                 ============ ==============  =============
</TABLE>

RECENT ACCOUNTING PRONOUNCEMENTS

     In December 2003, the SEC issued Staff Accounting Bulletin (SAB) No. 104,
REVENUE RECOGNITION (SAB No. 104), which codifies, revises and rescinds certain
sections of SAB No. 101, REVENUE RECOGNITION, in order to make this interpretive
guidance consistent with current authoritative accounting and auditing guidance
and SEC rules and regulations. The changes noted in SAB No. 104 did not have a
material impact upon our financial position, cash flows or results of
operations.

     On March 31, 2004, the FASB issued a proposed Statement, "Share-Based
Payment, an amendment of FASB Statements Nos. 123 and 95," that addresses the
accounting for share-based payment transactions in which an enterprise receives
employee services in exchange for either equity instruments of the enterprise
or, liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
The proposed statement would eliminate the ability to account for share-based
compensation transactions using Accounting Principles Board, or APB, Opinion No.
25, "Accounting for Stock Issued to Employees," and generally would require that
such transactions be accounted for using a fair-value-based method and
recognized as expenses in our consolidated statement of income. The proposed
standard would require the modified prospective method be used, which would
require that the fair value of new awards granted from the beginning of the year
of adoption plus unvested awards at the date of adoption be expensed over the
vesting period. In addition, the proposed statement encourages companies to use
the "binomial" approach to value stock options, which differs from the
Black-Scholes option pricing model, that we currently use to determine the fair
value of our options. The proposed standard is recommending that the effective
date for public companies be fiscal years beginning after December 15, 2004. The
changes under this proposed standard will not have a material impact upon our
financial position or cash flows, but may have a material impact on our results
of operations, depending on the amount of stock options we grant in future
periods.
                                      -54-
<PAGE>

NOTE 3.  BUSINESS COMBINATIONS

Tyecin-Innotech Corporation

         On October 4, 2001, the Company acquired all of the outstanding shares
of Tyecin-Innotech Corporation ("Tyecin"), a corporation organized under the
laws of Japan, that was engaged in the business of providing software support
and services to manufacturing companies for approximately $789,000 in cash. The
transaction was accounted for using the purchase method of accounting. The
purchase price was allocated to tangible net assets acquired of approximately
$708,000 and goodwill of approximately $81,000. The acquisition provides the
Company with an experienced workforce in Japan and will help support existing
and future customers in Japan.

FabCentric, Inc.

         In January and March 2001, in conjunction with the potential
acquisition of FabCentric Inc. ("FabCentric"), the Company loaned $750,000 to
FabCentric in exchange for unsecured notes receivable bearing interest at the
rate of 8% per annum.

         The Company resumed discussions and on December 5, 2001, the Company
acquired FabCentric, a company engaged in the business of software development
and sales to semiconductor companies. In connection with the acquisition, the
Company issued 703,355 shares of common stock and assumed options to acquire
23,231 shares of its common stock. The transaction was accounted for using the
purchase method of accounting. The acquisition gives the Company access to
FabCentric's customer base, complementary technology and a highly skilled
workforce.

         The purchase price is summarized as follows (in thousands):
<TABLE>
<CAPTION>
       <S>                                                                <C>
       Fair market value of common stock                                   $          8,032
       Fair market value of options assumed                                             223
       Acquisition related costs                                                        250
                                                                           -----------------
       Total consideration                                                 $          8,505
                                                                           =================
</TABLE>


         The purchase price allocation is as follows (in thousands):
<TABLE>
<CAPTION>
       <S>                                                                <C>
       Tangible assets acquired                                               $         685
       Intangible assets acquired                                                       660
       Deferred compensation                                                            106
       Goodwill                                                                      10,750
       Liabilities assumed                                                           (3,696)
                                                                            ----------------
          Total                                                               $       8,505
                                                                            ================
</TABLE>


         Deferred compensation recorded in connection with the acquisition will
be amortized over the remaining term of the options assumed, generally less than
four years. Intangible assets acquired will be amortized over their estimated
useful life of six months to three years (weighted-average useful life of 2.36
years).

                                      -55-
<PAGE>


Covalar Technologies Group, Inc.

         On February 15, 2002, the Company acquired Covalar Technologies Group,
Inc. ("Covalar"), a design yield optimization and productivity improvement
software company which offers solutions to semiconductor companies which include
testing, analysis and advanced circuit design. In connection with the
acquisition, the Company issued 1,481,566 shares of its common stock, paid $10.0
million in cash and assumed options to purchase 418,434 shares of the Company's
common stock. The Company had reserved 600,000 shares of its common stock to be
issued to Covalar shareholders if certain revenue targets were achieved in the
twelve months following the closing of the acquisition on February 15, 2002. The
revenue targets were not met during the earn-out period and accordingly the
reserved shares were unreserved. The transaction was accounted for using the
purchase method of accounting. The acquisition of Covalar allows the Company to
offer its customers a complete end-to-end software and related services solution
from design through manufacturing, gain a broader customer base and
relationships, and provide the Company with a highly skilled workforce.

         The purchase price is summarized as follows (in thousands):

Cash                                                              $      10,000
Fair market value of common stock                                        20,531
Fair market value of options assumed                                      4,806
Acquisition related costs                                                   675
                                                                     -----------
Total                                                             $      36,012
                                                                     ===========


         The allocation of the purchase price to assets acquired
and liabilities assumed is as follows (in thousands):

       Tangible assets acquired                                    $      3,882
       Intangible assets acquired                                         2,330
       Deferred compensation                                              1,921
       Goodwill                                                          31,209
       Liabilities assumed                                               (2,187)
       Unfavorable leases assumed                                        (1,143)
                                                                    ------------
       Total                                                       $      36,012
                                                                    ============

         Deferred compensation recorded in connection with the merger will be
amortized over the remaining term of the options assumed generally less than
four years. Acquired intangible assets will be amortized over their estimated
useful life of six months to three years (weighted-average useful life of 2.85
years).

Defect & Yield Management, Inc.

         On April 10, 2002, the Company acquired all of the outstanding common
and preferred shares of Defect & Yield Management, Inc. ("DYM"), a defect
analysis and yield optimization software company offering software solutions to
semiconductor companies. The results of DYM have been included in the
consolidated financial statements from April 10, 2002, the acquisition date. In
connection with the acquisition, the Company issued 967,260 shares of its common
stock, paid $2.0 million in cash and assumed options to purchase up to 82,740
shares of the Company's common stock. In June 2003, as part of an earn-out, the
Company issued to the former DYM shareholders an additional 396,826 shares in
the aggregate, valued at $50,000. The transaction was accounted for using the
purchase method of accounting. The acquisition of DYM provides the Company
access to an installed customer base in over 70 facilities worldwide,
complementary technology and a highly skilled workforce.

                                      -56-
<PAGE>

         The aggregate purchase price was approximately $17.1 million, is
summarized as follows (in thousands):

       Cash                                                        $      2,000
       Fair market value of common stock                                 13,474
       Fair market value of options assumed                                 704
       Acquisition related costs                                            943
                                                                     -----------
       Total                                                       $     17,121
                                                                     ===========

         The allocation of the purchase price to assets acquired
and liabilities assumed is as follows (in thousands):

       Tangible assets acquired                                    $        665
       Intangible assets acquired                                         1,300
       Deferred compensation                                                 38
       Goodwill                                                          16,545
       Liabilities assumed                                               (1,427)
                                                                     -----------
       Total                                                       $     17,121
                                                                     ===========

         The Company has included the results of operations of the acquired
entities beginning as of the respective acquisition dates.

         The following unaudited pro forma revenues, net loss and net loss per
share data for the year ended March 31, 2003 is based on the historical
financial statements of the Company and DYM. The pro forma data reflects the
consolidated results of operations as if the merger with DYM occurred at the
beginning of each of the year indicated and includes the amortization of
intangible assets and deferred compensation. The pro forma financial data
presented are not necessarily indicative of the Company's results of operations
that might have occurred had the transaction been completed at the beginning of
the year specified, and do not purport to represent what the Company's
consolidated results of operations might be for any future period.

                              (Unaudited Pro Forma)
                    (in thousands except for per share data)

                                                            Year Ended
                                                           March 31, 2003
                                                         -----------------
       Revenues                                           $       15,711
       Net loss                                           $      (51,824)
       Net loss per share--basic and diluted              $        (1.69)
       Shares used in computing per share
         amounts--basic and diluted                               30,671

NOTE 4.  GOODWILL IMPAIRMENT

         The Company operates within one reporting unit as defined by SFAS 142.
Therefore, goodwill is not allocated within the Company as it is considered
enterprise goodwill. During the fourth quarter of the year ended March 31, 2003,
the Company determined that there were indicators of impairment to the carrying
value of goodwill, principally as a result of reducing its revenue forecast
given the current economic environment in the semiconductor industry. The
Company performed its annual impairment review for goodwill and other intangible
assets and recorded a charge of $30.6 million relating to goodwill, which is
recorded as a component of operating income in the accompanying consolidated
statement of operations. The amount of goodwill impairment was based on the fair
value of the Company, representing its only reporting unit utilizing a valuation
based on both the Income Approach and Market Approach.

                                      -57-
<PAGE>

The Company performed and impairment test at March 31, 2004 and determined
that there was no impairment. Future goodwill impairment tests may result in
charges to earnings if the Company determines that goodwill has been impaired.


NOTE 5.  PROPERTY AND EQUIPMENT

  Property and equipment consists of the following (in thousands):

                                                             March 31,
                                                  ------------------------------
                                                       2004            2003
                                                  --------------  --------------

    Computers, equipment and other                $    3,635      $    3,213
    Furniture and fixtures                               485             530
    Leasehold improvements                               633             622
    Leased equipment and furniture                       752             905
                                                  --------------  --------------
                                                       5,505           5,270
    Less: Accumulated depreciation                    (4,197)         (2,954)
                                                  --------------  --------------
                                                   $   1,308      $    2,316
                                                  ==============  ==============

         At March 31, 2004 and 2003, accumulated depreciation on the leased
property and equipment was $599,000 and $504,000, respectively.


NOTE 6.  INTANGIBLE ASSETS

Intangible assets consist of the following (in thousands):

         The estimated future amortization of intangible assets for the year
ending March 31, 2005 is $1,181,000.

<TABLE>
<CAPTION>
                                                                                       March 31, 2004
                                                              ----------------------------------------------------------------
                                           Amortization           Gross Carrying         Accumulated            Net Carrying
                                               Period                  Amount            Amortization             Amount
                                           -----------------  --------------------- -------------------- ---------------------
<S>                                        <C>                <C>                    <C>                  <C>
Existing technology                             3 years                     $ 2,760             $ (1,935)                $ 825
Modular library                                 3 years                       1,220                 (864)                  356
                                                               --------------------- -------------------- ---------------------
                                                                            $ 3,980             $ (2,799)              $ 1,181
                                                               ===================== ==================== =====================
</TABLE>

<TABLE>
<CAPTION>
                                                                                         March 31, 2003
                                                              ----------------------------------------------------------------
                                             Amortization           Gross Carrying         Accumulated          Net Carrying
                                               Period                  Amount              Amortization            Amount
                                           -----------------  --------------------- -------------------- ---------------------
<S>                                         <C>                <C>                   <C>                  <C>
Existing technology                             3 years                     $ 2,760             $ (1,015)              $ 1,745
Modular library                                 3 years                       1,220                 (457)                  763
                                                               --------------------- -------------------- ---------------------
                                                                            $ 3,980             $ (1,472)              $ 2,508
                                                               ===================== ==================== =====================
</TABLE>


                                       -58-
<PAGE>

NOTE 7.  ACCRUED LIABILITIES

  Accrued liabilities consist of the following (in thousands):

                                                           March 31,
                                                  ------------------------------
                                                       2004            2003
                                                  --------------  --------------

    Payroll and related expenses                   $         888   $         819
    Professional fees                                        528             563
    Other accrued expenses                                   872           1,037
    Amounts received from HPL's former
      Chief Executive Officer (see Note 11)                4,291           4,335
                                                   -----------------------------
                                                   $       6,579   $       6,754
                                                  ==============  ==============

NOTE 8.  CONVERTIBLE DEBENTURE

         In February 2000, the Company issued a $1.5 million convertible
debenture. The debenture bore interest at the rate of 8% per annum. This
debenture was convertible at any time at the option of the holder to common
stock of the Company, at a conversion price of $1.45 per share. The debenture,
if not converted, was due on February 15, 2005. The note provided that if the
Company completes its initial public offering, the holder had the right to
demand repayment. The debenture was repaid in full on May 13, 2003, along with
accrued interest of $164,000.

NOTE 9.  COMMITMENTS

         The Company leases its facilities under operating lease agreements that
expire at various dates through March 15, 2007. Rent expense for all operating
leases for the years ended March 31, 2004, 2003 and 2002 was $1.1 million, $1.5
million and $652,000, respectively.

         Minimum future lease payments under non-cancelable operating leases and
future minimum payments under capital lease agreements at March 31, 2004 are
included in the table below (in thousands):

<TABLE>
<CAPTION>
                                                                     Payment Due by Fiscal Year
                                      Total                 2005              2006         2007         2008         2009
                                ------------------------------------------------------------------------------------------
<S>                              <C>                  <C>                    <C>            <C>          <C>         <C>

Capital Lease Obligations                 $   138           $    98           $    40        $ -          $ -         $ -
Operating Lease Obligations               $ 2,460           $ 1,392           $ 1,068        $ -          $ -         $ -
                                ------------------------------------------------------------------------------------------

Total                                     $ 2,598           $ 1,490           $ 1,108        $ -          $ -         $ -
                                ==========================================================================================
</TABLE>


Guarantees and Indemnifications

         In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires that a guarantor
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee or indemnification. FIN 45
also requires additional disclosure by a guarantor in its interim and annual
financial statements about its obligations under certain guarantees and
indemnifications. The initial recognition and measurement provisions of FIN 45
are applicable for guarantees issued or modified after December 31, 2002. The
disclosure requirements of FIN 45 are effective for financial statements of
interim or annual periods ending after December 15, 2002. The Company adopted
the recognition and measurement provisions of FIN 45 prospectively to guarantees
issued or modified after December 31, 2002, and the adoption did not have a
material impact on its financial position or results of operations. The
following is a summary of the agreements that the Company has determined are
within the scope of FIN 45:
                                      -59-
<PAGE>


         The Company's Amended and Restated Certificate of Incorporation (the
"Certificate") provides that, except to the extent prohibited by the Delaware
General Corporation Law (the "DGCL"), the Company's directors and officers shall
not be personally liable to the Company or its stockholders for monetary damages
for any breach of fiduciary duty as a director or officer. The Certificate
eliminates the personal liability of directors and officers to the fullest
extent permitted by the DGCL and, together with the Company's Bylaws (the
"Bylaws"), provides that the Company shall fully indemnify 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 such person is or was a director or
officer of the Company, or is or was serving at the request of the Company as a
director or officer of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding ("Expenses"). Additionally, the Company has entered into
indemnification agreements with its directors and officers pursuant to which the
Company is required to indemnify its officers and directors and advance any and
all Expenses. These agreements have no term and the maximum potential amount of
future payments HPL could be required to make under these indemnification
agreements is unlimited. Except as noted below, no claims for indemnification
have been made against the Company.

         To limit the Company's exposure to indemnification claims by directors
and officers, the Company obtained in July 2001 four directors and officers
liability insurance policies with aggregate limits of $20 million. The validity
of these policies is being contested with respect to coverage for the Company
and Mr. Lepejian, the Company's former President and Chief Executive Officer. In
February 2003, the Company obtained two new directors and officers' liability
insurance policies with aggregate policy limits of $10 million. These two new
policies exclude claims relating to prior acts, including the acts giving rise
to the previous restatement of the Company's financial statements.

         Certain of the Company's current and former directors and officers have
been named as defendants in the litigation described in Note 16. Furthermore,
one or more of the Company's former officers have given testimony in connection
with investigations being conducted by the SEC and the Department of Justice.
Except for our former Chief Financial Officer, who has requested advancement of
expenses in connection with her deposition before the SEC, no other directors or
former officers have requested indemnification from the Company. However, if the
Company is unable to settle its litigation, it expects all of the defendant
directors and officers will demand indemnification and advancement of expenses
under their respective indemnification agreements. Because management is not
currently able to evaluate the likelihood of an unfavorable outcome or an
estimate of the amount or range of potential loss, management cannot determine
the estimated fair value of these obligations and, accordingly, the Company has
recorded no liability for these obligations at March 31, 2004.

                                      -60-
<PAGE>


         The Company is also obligated to provide indemnification to the
underwriters in its initial public offering pursuant to an Underwriting
Agreement, dated July 30, 2001, by and among the Company, UBS Warburg LLC, Dain
Rauscher Wessels, Wit SoundView Corporation and Adams Harkness & Hill, Inc., as
representatives of the several underwriters (the "Underwriting Agreement"). In
October 2002, UBS Warburg was named as a defendant in a lawsuit relating to the
Company's issuance of stock in the acquisition of Covalar Technologies Group,
Inc. Pursuant to the Underwriting Agreement, UBS Warburg demanded that the
Company indemnify it in connection with this matter and advance its litigation
expenses. While the Company had obtained insurance to cover its obligation to
indemnify and advance UBS Warburg's expenses, the insurer has not yet taken a
position as to whether such obligations are covered under the policy. If it does
not contest coverage, however, coverage for these indemnification obligations is
subject to a sub-limit of $1,000,000. Because management is not currently able
to evaluate the likelihood of an unfavorable outcome or an estimate of the
amount or range of potential loss, management cannot determine the estimated
fair value of these obligations and, according, the Company has recorded no
liability for these obligations at March 31, 2004.

         The Company includes standard intellectual property indemnification
clauses in its software license agreements. Pursuant to these provisions, HPL
holds harmless and agrees to defend the indemnified party, generally HPL's
business partners and customers, in connection with certain patent, copyright or
trade secret infringement claims by third parties with respect to HPL's
products. The term of the indemnification provisions is generally for the term
of the license agreement and the applicable statute of limitations. The Company
believes the estimated fair value of these obligations is minimal. HPL has
recorded no liabilities for these obligations as of March 31, 2004 and has never
had to make a payment under such indemnification provisions.

         The Company generally warrants that its software products will perform
in all material respects in accordance with its standard published
specifications in effect at the time of delivery of the licensed products to the
customer for a period of 90 days following delivery. If necessary, HPL would
provide for the estimated cost of product warranties based on specific warranty
claims and claim history. The Company has incurred no significant expense under
its product warranties to date and, as a result, the Company believes the
estimated fair value of these warranties is minimal. The Company has recorded no
liabilities for these warranties as of March 31, 2004.

NOTE 10.  CAPITAL STOCK

Common stock

      The Company has reserved the following shares of authorized but
unissued common stock for future issuance (in thousands):

                                                           March 31,
                                                 -------------------------------
                                                      2004            2003
                                                 --------------- ---------------
  Conversion of outstanding convertible
    debenture (Note 8)                                   --           1,032
  Warrants                                              138             138
                                                 --------------- ---------------
  Stock option plans                                  0,903          10,971
  Employee stock purchase plans                         947             797
                                                 --------------- ---------------
                                                     11,988          12,938
                                                 =============== ===============

Warrants

         The Company has outstanding at March 31, 2004 warrants to acquire
137,652 shares of HPL common stock at an exercise price of $1.45 per share.
These warrants expire in August 2004.

Stock option plans

         In May 2001, the Company adopted its 2001 Equity Incentive Plan (the
"Plan") and reserved a total of 12,750,000 shares of its common stock for
issuance to directors, employees and consultants under the Plan. Options granted
under the Plan expire 10 years from the date of grant and generally vest over a
four-year period. Under the Plan, eligible employees and consultants who own
less than ten percent of voting power of all classes of stock, can receive
options to purchase shares of the Company's common stock at a price no less than
100% and 85% of the fair value on the grant date for incentive stock options and
non-statutory stock options, respectively. Those eligible employees and
consultants who own more than ten percent of voting power of all classes of
stock can receive options to purchase shares of the Company's common stock at a
price no less than 110% of the fair value on the grant date for incentive stock
options and nonqualified stock options.

                                      -61-
<PAGE>

         Prior to the adoption of the Plan, the Company's subsidiary, HPLI
adopted the 1998 Stock Option Plan (the "1998 Plan"). All options outstanding
under the 1998 Plan were exchanged for substitute options granted under the Plan
in connection with HPLI's merger with the Company. No new options have been
granted under the 1998 Plan since that time. HPLI has also granted a stock
option to an employee to purchase up to 1,632,000 shares of HPLI common stock at
an exercise price of $0.02 per share and were fully vested. This option was
exercised in the year ended March 31, 2002.

         In connection with the acquisitions of FabCentric and Covalar in the
year ended March 31, 2002, the Company assumed the options granted under the
FabCentric and Covalar option plans totaling 441,665 HPL options. These options
have similar terms as the Company's Plan.

         In connection with the acquisition of DYM in the year ended March 31,
2003, the Company assumed the options granted under the DYM option plan totaling
82,740 HPL options. These options have similar terms as the Company's Plan.

         The following table summarizes information with respect to stock option
activity:

<TABLE>
<CAPTION>
                                                   2004                           2003                            2002
                                       ------------------------------ ------------------------------  ------------------------------
                                                         Weighted                       Weighted                        Weighted
                                                          Average                        Average                         Average
                                           Shares        Exercise         Shares        Exercise         Shares          Exercise
Years ended March 31,                      (000's)         Price          (000's)         Price          (000's)          Price
-------------------------------------  -------------- --------------- --------------  --------------  --------------  --------------
<S>                                   <C>             <C>             <C>             <C>             <C>             <C>
Outstanding at beginning of year               1,490  $         4.40          8,650   $        2.18           7,431   $        0.22
   Granted and assumed upon
     acquisitions                              7,296            0.24            238           10.40           2,222            7.81
   Exercised                                     (68)           0.14           (443)           0.38            (759)           0.15
   Forfeited                                  (1,987)           1.59         (6,955)           2.10            (244)           0.10
                                       --------------                 --------------                  --------------
Outstanding at end of year                     6,730            0.77          1,490            4.40           8,650            2.18
                                       ============== =============== ==============  ==============  ==============  ==============
Options exercisable at end of year               840                            873                           3,195
Shares available for grant                     4,399
</TABLE>


         The following table summarizes information regarding options
outstanding and exercisable as of March 31, 2004:
<TABLE>
<CAPTION>

                                                             Options Outstanding                         Options Exercisable
                                              ---------------------------------------------------  ---------------------------------
                                                              Weighted Average      Weighted                            Weighted
                                                 Number           Remaining          Average           Number           Average
                                               Outstanding    Contractual Life       Exercise        Exercisable        Exercise
Range of Exercise Prices                          (000's)          (Years)            Price           (000's)            Price
--------------------------------------------  -------------- ------------------- ----------------  ---------------  ----------------
<S>                                           <C>              <C>       <C>     <C>              <C>               <C>
$0.04-- $0.20                                           309                4.36  $          0.08              309   $          0.08
$0.24-- $0.24                                         5,070                9.46             0.24               --              0.00
$0.25-- $6.50                                         1,160                8.44             1.49              431              2.62
$9.59-- $12.86                                          177                7.36            11.29               92             11.56
$12.98-- $12.98                                           6                7.92            12.98                4             12.98
$13.87-- $13.87                                           8                7.92            13.87                4             13.87
                                              --------------                                       ---------------
                                                      6,730                8.99  $          0.77              840   $          2.78
                                              ============== =================== ================  ===============  ================
</TABLE>


         Pro forma information regarding net loss per share is required by SFAS
No. 123, as if the Company had accounted for its employee stock options under
the fair value method of SFAS No. 123. The weighted average fair value of
options granted for the years ended March 31, 2004, 2003 and 2002 was $0.15,
$6.05 and $6.73, respectively. The fair value of each option grant was estimated
on the date of grant using the Black-Scholes option pricing model and the
following weighted average assumptions:

                                      -62-
<PAGE>


<TABLE>
<CAPTION>
                                                                                    Stock Options                   Employee Stock
                                                                                                                    Purchase Plan
                                                                      -------------------------------------------  -----------------
Years ended March 31,                                                     2004           2003           2002             2002
--------------------------------------------------------------------- -------------  -------------  -------------  -----------------
<S>                                                                   <C>             <C>            <C>            <C>
Expected volatility                                                             85%            85%            85%                85%
Weighted average risk free interest rate                                      2.47%          3.90%          3.96%              3.50%
Expected life                                                              5 years        5 years        5 years          0.5 years
Expected dividend yield                                                         --             --             --                 --
</TABLE>
>
Employee stock purchase plans

         The 2001 Employee Stock Option Purchase Plan and the 2001 Foreign
Employee Stock Purchase Plan (the "ESPP") were adopted by the Company's Board of
Directors on May 22, 2001. A total of 660,000 shares of common stock may be
purchased under the ESPP. Subject to the terms of the ESPP, the number of shares
of common stock reserved and available for issuance pursuant to the ESPP will
automatically increase on March 1 of each year until and including March 1, 2011
by a number of shares equal to the lesser of (i) 150,000, (ii) one percent of
the number of shares of all classes of common stock outstanding on that date of,
or (iii) a lesser number determined by the Board of Directors or a committee
appointed by the Board of Directors. Qualified employees can elect to have up to
15 percent (30 percent for the Company's employees in the Republic of Armenia)
of their annual earnings withheld, up to $25,000 in any calendar year, or
portion of a calendar year, included in an offering period. No more than 1,500
shares can be purchased on any purchase date by an individual employee.

         The purchase price of the stock is 85% of the lower of the fair market
value at the beginning of the twenty-four month offering period or at the end of
each six-month purchase period. For the year ended March 31, 2002, 12,845 shares
were issued under the ESPP. No shares were issued in the year ended March 31,
2004 and 2003, as the Company suspended the plans on July 19, 2002.

Deferred stock-based compensation

         In connection with the granting of stock options to employees, the
Company recorded deferred stock-based compensation, net of cancellations,
totaling approximately $0, $0, and $3,863,000 for the years ended March 31,
2004, 2003 and 2002, respectively. This amount represents the difference between
the exercise price at which the stock options were granted and the deemed fair
value of the Company's common stock for accounting purposes on the date of
grant. In connection with the acquisitions of FabCentric and Covalar in the year
ended March 31, 2002, the Company recorded deferred compensation totaling
$2,027,000. In connection with the acquisitions of DYM in the year ended March
31, 2003, the Company recorded deferred compensation totaling $38,000. These
amounts are included as a component of stockholders' equity and, in accordance
with the method described in FIN No. 28, are being amortized on an accelerated
basis by charging to operations over the vesting period of the options, which is
generally four years. Accordingly, this resulted in an expense of $315,000,
$1,047,000 and $3,547,000 for the years ended March 31, 2004, 2003 and 2002,
respectively.

NOTE 11.  RELATED PARTY

         During fiscal 2001, the Company sold certain software and maintenance
to a company that is affiliated with a director of HPL for approximately
$300,000. The Company recognized no revenue in this transaction in the 2001
financial statements. In fiscal 2002, the Company purchased certain unrelated
software products from this affiliated company for approximately $700,000. The
Company has not deployed the software purchased and therefore expensed the
amount paid for such software in the period purchased in its financial
statements.
                                      -63-
<PAGE>

The Company recognized approximately $0, $40,000 and $8,000 in revenue related
to this affiliate in the years ended March 31, 2004, 2003 and 2002,
respectively, on unrelated transactions.

         In October 2001, the Company acquired all of the outstanding capital
stock of Tyecin for approximately $789,000 in cash. At the time of the
acquisition, Tyecin was a 90% owned subsidiary of Innotech Corporation. A former
director of HPL was the president of Innoquest Corporation and served on the
board of directors of Innotech Corporation, the parent corporation to Innoquest
Corporation.

         In the fourth quarter of fiscal 2002 and the first quarter of fiscal
2003, the Company provided a loan to an officer of the Company for an aggregate
sum of $750,000 pursuant to his employment arrangement. On January 1, 2004, the
balance due on the loan was $450,000. The loan is collateralized by a second
deed of trust on the officer's home and bears interest at a rate equal to the
higher of: (i) 6%, or (ii) the short-term "applicable federal rate" (assuming
semi-annual compounding) as periodically published by the Internal Revenue
Service. The employment arrangement provides that 20% of the principal sum and
accrued interest will be forgiven annually over a period of five years,
commencing on the first anniversary of the officer's employment, provided that
he remains continuously employed by the Company during that time.

         In the third quarter of fiscal 2002, the Company advanced to an
employee $2,745,000 to pay withholding taxes due upon exercise of a stock option
to purchase 1,632,000 shares of the Company's common stock. The loan, which
bears interest at a rate of 5% per annum and is due on September 21, 2003, was
collateralized by 1.3 million shares of Company's common stock held by the
employee. The principal balance of $2,745,000 and accrued interest were repaid
in total during the quarter ended March 31, 2002.

         During fiscal 2002, the former President and Chief Executive Officer of
the Company had deposited approximately $3,035,000 into the Company's bank
accounts which were purported to have represented proceeds from the payment of
accounts receivable related to fictitious sales transactions. An additional
$1,300,000 was deposited by this individual for this purpose in June 2002.
Although these amounts are included in accrued liabilities, the Company does not
expect it will be required to repay this sum because the Company believes it has
offsetting claims against its former President and Chief Executive Officer.

         During fiscal 2002, the Company entered into several transactions with
Selastar Corporation ("Selastar"), a Japanese company owned by former employees
of the Company's Japanese subsidiary and a former member of the Company's board
of directors. These transactions included a $5.0 million payment to Selastar.
Approximately $1.2 million was returned to the Company prior to March 31, 2002.
Selastar retained approximately $600,000 as reimbursement of expenses and
payment for fixed asset purchases. In addition, the Company paid Selastar
approximately $300,000 as reimbursement of expenses in fiscal 2002. The Company
also paid Selastar $600,000 of which $545,000 was paid back to the Company in
fiscal 2002.

NOTE 12.  FAIR VALUE OF FINANCIAL INSTRUMENTS

         The estimated fair value of financial instruments has been determined
using available market information and appropriate valuation methodologies.
However, considerable judgment is necessarily required in interpreting market
data to develop estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that the Company would
realize in a current market exchange.

         Cash, cash equivalents, accounts receivable, notes receivable and
accounts payable are carried at cost, which approximates their fair value
because of the short maturities of these instruments. The Company's short-term
investments are reported at fair value.

                                      -64-
<PAGE>

         The following is a summary of cash, cash equivalents and short-term
investments (in thousands):
<TABLE>
<CAPTION>
                                                                                         March 31, 2004
                                                                       ----------------------------------------------------
                                                                                       Gross         Gross
                                                                        Amortized    Unrealized    Unrealized    Estimated
                                                                          Cost         Gains        (Losses)    Fair Value
                                                                       ------------ ------------- ------------ ------------
     <S>                                                              <C>          <C>            <C>          <C>
     Checking and savings                                              $     2,160  $         --  $        --  $     2,160
     Money market funds                                                        248            --           --          248
     Municipal bonds - taxable                                               2,300            --           --        2,300
     Corporate debt securities                                               3,867             9           --        3,876
     US Government agencies                                                  1,625             1           --        1,626
                                                                       ------------ ------------- ------------ ------------
                                                                       $    10,200  $         10  $        --  $    10,210
                                                                       ============ ============= ============ ============

     Included in:
        Cash and cash equivalents                                                                              $     4,708
        Short-term investments                                                                                       5,502
                                                                                                               ------------
                                                                                                               $    10,210
                                                                                                               ============
</TABLE>

<TABLE>
<CAPTION>
                                                                                   March 31, 2003
                                                                -----------------------------------------------------
                                                                                 Gross         Gross
                                                                  Amortized    Unrealized    Unrealized    Estimated
                                                                    Cost         Gains        (Losses)    Fair Value
                                                                ------------ ------------- ------------ -------------
     <S>                                                       <C>           <C>          <C>           <C>
     Checking and savings                                       $       567  $         --  $        --  $        567
     Money market funds                                              10,914            --           --        10,914
     Commercial paper                                                 5,870            --           (1)        5,869
     Municipal bonds - taxable                                        1,145            --           --         1,145
     Corporate debt securities                                        1,713             1            9         1,723
     US Government agencies                                           1,512            11                      1,523
                                                                 ----------- ------------- ------------ -------------
                                                                $    21,721  $         12  $         8  $     21,741
                                                                ============ ============= ============ =============

     Included in:
        Cash and cash equivalents                                                                       $     17,350
        Short-term investments                                                                                 4,391
                                                                                                        -------------
                                                                                                        $     21,741
                                                                                                        =============
</TABLE>


NOTE 13.  EMPLOYEE BENEFIT PLAN

         The Company has a 401(k) Profit Sharing Plan (the "Profit Sharing
Plan") qualified under Section 401(k) of the Internal Revenue Code of 1986. Each
eligible employee may elect to contribute up to the maximum IRS annual deferral
amount. The Company, at the discretion of its board of directors, may match
employee contributions to the Profit Sharing Plan or make contributions to the
Profit Sharing Plan for all eligible employees. The Company has elected not to
make matching or other contributions to the Profit Sharing Plan for the years
ended March 31, 2004, 2003, and 2002.

NOTE 14.  INCOME TAXES

         The Company's deferred tax assets (liabilities) consist of the
following (in thousands):

                                      -65-
<PAGE>


<TABLE>
<CAPTION>
                                                                                                 March 31,
                                                                                       ------------------------------
                                                                                           2004            2003
                                                                                       -------------- ---------------
    <S>                                                                               <C>            <C>

     Deferred tax assets:
        Net operating loss and credit carry forwards                                   $      24,772  $       22,321
        Other accruals                                                                         8,137           4,466
                                                                                       -------------- ---------------
     Gross deferred tax assets                                                                32,909          26,787
     Valuation allowance                                                                     (32,479)        (25,811)
                                                                                       -------------- ---------------
     Net deferred tax assets                                                           $         430  $          976
                                                                                       ============== ===============

     Deferred tax liabilities:
        Intangible assets                                                                       (430)           (948)
        Change of accounting methods                                                              --             (28)
                                                                                       -------------- ---------------
     Net deferred tax liabilities                                                      $        (430)  $        (976)
                                                                                       ============== ===============
</TABLE>


         Based on the available objective evidence, management believes it is
more likely than not that the net deferred tax assets at March 31, 2004 and 2003
will not be fully realizable. Accordingly, the Company has applied a full
valuation allowance against its net deferred tax assets as of March 31, 2004 and
2003.

         Reconciliation of the statutory federal income tax to the Company's
effective tax is as follows:

<TABLE>
<CAPTION>
                                                                                         March 31
                                                                         ------------------------------------------
                                                                             2004            2003         2002
                                                                         --------------   -----------  ------------
     <S>                                                                <C>              <C>           <C>
     Tax at federal statutory rate                                               (34.0)%       (34.0)%       (34.0)%
     State, net of federal benefit                                                (2.4)         (3.8)         (5.8)
     Other                                                                         0.1          (0.2)         (4.6)
     Option compensation                                                           0.6           0.8           9.5
     Valuation allowance                                                          36.1          37.2          34.9
                                                                         --------------   -----------  ------------
     Provision for income taxes                                                    0.4%          0.0%          0.0%
                                                                         ==============   ===========  ============
</TABLE>

         At March 31, 2004, the Company had approximately $61.3 million of
Federal and $12.3 million of State net operating loss carryforwards available to
reduce future taxable income which will begin to expire in 2013 for Federal and
2005 for state tax purposes, respectively. The State of California has suspended
the utilization of tax loss carryforwards through 2005.

         The Company has research credit carryforwards of approximately $2.4
million and $1.2 million for Federal and state income tax purposes,
respectively. If not utilized, the Federal carryforward will expire in various
amounts beginning in 2009. The California credit can be carried forward
indefinitely.

         The Internal Revenue Code limits the use of net operating loss and tax
credit carryforwards in certain situations where changes occur in the stock
ownership of a company. In the event the Company has had a change in ownership,
utilization of the carryforwards could be restricted.

NOTE 15.  SEGMENT AND GEOGRAPHIC INFORMATION

         The Company has determined that it has one reportable business segment:
the sale of yield optimization software used in the design, fabrication and
testing of semiconductors and flat panel displays. The Company has a facility in
the Republic of Armenia, which has fixed assets with a net book value of
$166,000 as of March 31, 2004, and $169,000 as of March 31, 2003.

                                      -66-
<PAGE>

         The following is a geographic breakdown of the Company's revenues by
destination for the following periods (in thousands):

<TABLE>
<CAPTION>
                                                                                    Years ended March 31,
                                                                          -------------------------------------------
                                                                              2004           2003          2002
                                                                          -------------  ------------- --------------
    <S>                                                                  <C>            <C>           <C>
     United States                                                        $      5,941   $      9,948  $       3,181
     Japan                                                                       3,339          2,820            666
     France                                                                        419            365            643
     Rest of the world                                                           3,002          2,459             23
                                                                          -------------  ------------- --------------
                                                                          $     12,701   $     15,592  $       4,513
                                                                          =============  ============= ==============
</TABLE>

         For the year ended March 31, 2004, the Company derived revenue from
three customers which comprised 18%, 12% and 12% of the Company's total
revenues, respectively.

         For the year ended March 31, 2003, the Company derived revenue from
three customers which comprised 29%, 17% and 15% of the Company's total
revenues, respectively.

         For the year ended March 31, 2002, the Company derived revenue from
four customers which comprised 24%, 18%, 14% and 10% of the Company's total
revenues, respectively.

NOTE 16.  CONTINGENCIES

         Between July 31, 2002 and November 15, 2002, several class-action
lawsuits were filed against the Company, certain current and former officers and
directors of the Company, and the Company's independent auditors in the United
States District Court for the Northern District of California. The lawsuits were
consolidated into a single action (the "Securities Action"), which alleges that
the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act
of 1934, Rule 10b-5 promulgated thereunder, and Sections 11, 12(a)(2) and 15 of
the Securities Act of 1933 by making a series of material misrepresentations as
to the financial condition of the Company during the class period of July 31,
2001 to July 19, 2002. The plaintiffs are generally seeking to recover
compensatory damages, costs and expenses incurred, interest and such other
relief as the court may deem appropriate. The parties have stipulated to extend
the time to respond to the consolidated complaint until August 16, 2004.

         The Company has signed a memorandum of understanding (the "MOU") with
the lead plaintiffs that tentatively rsolves the Securities Action. Under the
MOU, the Company would issue common stock to the class. Final settlement is
contingent on several conditions, including execution of a formal settlement
agreement and court approval.

         Five shareholders of the Company have brought suit in the District
Court of Dallas County, Texas, against the Company's independent auditors and
the managing underwriter in the Company's initial public offering, in connection
with claims relating to the Company's acquisition of Covalar Technologies Group,
Inc. in February 2002 (the "Covalar Action"). On April 26, 2004, the Company and
the Company's former President and Chief Executive Officer were named as
defendants in this action. The Company's response to the amended petition is
currently due August 2, 2004. Subject to a reservation of rights, the Company
has accepted the underwriter's request to indemnify the underwriter in
connection with the Company's initial public offering and to advance expenses in
this matter. While the Company had obtained insurance to cover its obligation to
indemnify and advance expenses to the underwriter, the insurer has raised
certain defenses to coverage. Even if coverage is afforded, however, coverage
for these indemnification obligations is subject to a sub-limit of $1,000,000
and may be exhausted by payments of defense costs and settlements in the
Securities Action. On June 3, 2004, an associate judge granted the auditors' and
underwriter's motions for summary judgment. The Plaintiffs have appealed this
ruling and a hearing is currently scheduled for August 20, 2004. On June 9,
2004, the Company's independent auditors filed a responsible third party
petition against the Company and Company's former President and Chief Executive
Officer. The third party petition does not seek affirmative relief but instead
was filed for purposes of apportioning fault in jury findings.

                                      -67-
<PAGE>

The Company has accepted service of the third party petition, and its response
to the third party petition has been extended until thirty days after the
hearing on plaintiffs' notice of appeal of the associate judge's decision on the
summary judgment motions.

         On July 13, 2004 the Company signed a settlement and release agreement
with the plaintiffs in the Covalar Action pursuant to which the Company has
agreed to issue the plaintiffs additional shares of common stock, which will be
placed in escrow pending the final approval of the settlement in the Securities
Action.

         Based on the terms of the above settlements, the Company determined
that a liability related to the Securities Action and the Covalar Action was
probable and that the value was reasonably estimable. Accordingly, the Company
has recorded a non-cash long term liability of approximately $7.9 million in its
consolidated financial statements as of March 31, 2004, representing
management's estimate of the value of the 7 million shares of common stock that
the Company has agreed to issue under the MOU and the Covalar Action settlement.
This liability was calculated by utilizing a valuation based on both the income
and market approaches as of March 31, 2004, consistent with the Company's
assessment of goodwill impairment. This liability will be revalued quarterly
until the actual effective date of the settlements.

         The Company is also a nominal defendant in consolidated stockholder
derivative lawsuits pending in Superior Court in the County of Santa Clara,
California. These lawsuits, which were filed between July 31, 2002 and December
31, 2002, assert derivative claims on behalf of the Company against certain
current and former officers and directors of the Company and the Company's
independent auditors. The consolidated complaint asserts claims for insider
trading, breach of fiduciary duties, breach of contract, professional negligence
and unjust enrichment, and seeks damages suffered by the Company, treble damages
for the sale of shares, costs and expenses of these actions and such other
relief as the court may deem appropriate. The parties have stipulated to extend
the time to respond to the consolidated derivative complaint until July 16,
2004, and are continuing to negotiate a potential resolution of this action.

         On May 22, 2003, five former shareholders of FabCentric, Inc., which
was acquired by the Company in December 2001, sued the Company, the Company's
former President and Chief Executive Officer and former Chief Financial Officer,
and the Company's independent auditors in a lawsuit pending in Superior Court in
the County of Santa Clara, California. This lawsuit alleges claims for fraud,
negligent misrepresentation, breach of warranties and covenants, breach of
contract, and negligence, and seeks rescission or, alternatively, damages, costs
and expenses. On October 31, 2003, the plaintiffs filed an amended Complaint
adding the managing underwriter in the Company's initial public offering and the
Company's current Chief Financial Officer as defendants. The underwriter and
auditors have filed demurrers, which are scheduled to be heard on September 28,
2004. The parties have stipulated to extend the time for the other defendants to
respond to the amended complaint until September 7, 2004. The plaintiffs served
inspection demands on the defendants on June 25, 2004.

         Additionally, in April 2003, UBS PaineWebber, Inc. filed suit against
the Company in the Supreme Court of the State of New York, County of New York
(the "New York Action") alleging tortious interference of contract and a
violation of the Uniform Commercial Code. This action relates to the transfer of
shares of HPL common stock putatively pledged to UBS PaineWebber, Inc. by Y.
David Lepejian, the Company's former President and Chief Executive Officer, and
his spouse and sought, among other things, mandatory injunctive relief requiring
HPL to affect the transfer of the subject stock. The Company moved to dismiss
the New York Action. In May 2003, the Company filed an interpleader action in
United States District Court for the Northern District of California relating to
the stock in question in the New York Action (the "California Action"). Mr.
Lepejian and UBS PaineWebber have been engaged in an NASD arbitration proceeding
regarding the pledge of the shares. The interpleader action and the New York
action were voluntarily dismissed without prejudice by the Company and UBS
PaineWebber, respectively. On or about October 1, 2003, UBS PaineWebber filed
suit in Delaware Chancery Court which essentially re-stated the claims
originally asserted in the New York action (the "Delaware Action").

                                      -68-
<PAGE>

On June 22, 2004, the Company and UBS PaineWebber signed a settlement agreement
and mutual release whereby the parties dismissed the New York Action, the
California Action and the Delaware Action with prejudice at no cost to the
Company.

         Additionally, Twin City Fire Insurance Company (the Company's
first-layer "D&O" insurance carrier) filed a declaratory relief action on
October 6, 2003, in Superior Court in the County of Santa Clara, California,
against the Company, its former President and Chief Executive Officer, its
former Chief Financial Officer, and other former and current officers and
directors of the Company seeking a determination that no coverage is afforded
the defendants under Twin City's policy, which follows form to the Company's
primary D&O policy issued by Executive Risk Indemnity Inc. Executive Risk has
already agreed to pay its policy limits for the Securities Actions, exhausting
the limits of the Company's primary D&O policy. The Company filed an amended
cross-complaint on June 14, 2004 in the Twin City action, seeking a declaration
that Twin City and the Company's other excess D&O insurance carriers, National
Union and St. Paul, are obligated to indemnify the Company for losses in
connection with the Securities Actions and that Twin City has breached its
insurance contract by not paying the defendants' defense expenses on a current
basis. On June 21, 2004, the Superior Court granted Twin City's unopposed motion
to file a Third Amended Complaint alleging two additional declaratory-relief
causes of actions based on two policy exclusions. The Company intends to oppose
the claims made in the Third Amended Complaint.

         Except as noted above, all of the aforementioned matters are in the
early stages other then the tentatively settled actions as discussed above. As a
result, the Company believes that no additional amount above the $7.9 million
discussed above should be accrued for these matters under Statement of Financial
Accounting Standard ("SFAS") No. 5, "Accounting for Contingencies," because we
are currently unable to evaluate the likelihood of an unfavorable outcome or
estimate the amount or range of potential loss, if any, of the unsettled
actions.

         Any adverse resolution of the aforementioned litigation could have a
material effect on the Company's financial condition, results of operations or
cash flows.


                          Supplementary Financial Data
                           Quarterly Data (Unaudited)

<TABLE>
<CAPTION>
                                                                                        For the Quarters Ended
                                                                    ----------------------------------------------------------------
(in thousands, except per share amounts)                              March 31,     December 31,     September 30,      June 30,
Year ended March 31, 2003                                               2003            2002              2002            2002
------------------------------------------------------------------  -------------- ----------------  ---------------  --------------
<S>                                                                <C>            <C>               <C>               <C>
Revenues                                                            $       3,582  $         5,248   $        4,483   $       2,279
Gross profit (loss)                                                         2,018            3,806            3,635           1,669
Net loss                                                                  (34,526)          (2,756)          (6,886)         (7,650)
Net loss per share--basic and diluted:                               $      (1.12) $         (0.09)  $        (0.22)  $       (0.25)
Shares used in computing per share amounts--basic and diluted:             30,796           30,784           30,777          30,410
</TABLE>

<TABLE>
<CAPTION>
                                                                                        For the Quarters Ended
                                                                    ----------------------------------------------------------------
(in thousands, except per share amounts)                              March 31,      December 31,    September 30,      June 30,
Year ended March 31, 2004                                               2004             2003            2003             2003
------------------------------------------------------------------  --------------  --------------- ----------------  --------------
<S>                                                                 <C>             <C>             <C>               <C>
Revenues                                                            $      3,827   $        3,518  $         3,284   $       2,072
Gross profit                                                               2,586            2,889            2,337           1,250
Net loss                                                                  (9,307)          (2,232)          (3,438)         (5,366)
Net loss per share--basic and diluted:                               $     (0.30)  $        (0.07) $         (0.11)  $       (0.17)
Shares used in computing per share amounts--basic and diluted:            31,274           31,269           31,222          30,814
</TABLE>

         Included in the net loss for the quarter ended March 31, 2003 is a
non-cash charge of $30.6 million related to the impairment of goodwill in the
quarter.

         Included in the net loss for the quarter ended March 31, 2004 is a
non-cash charge of $7.9 million related to the legal settlement estimated
expense.

                                      -69-
<PAGE>


ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

         None.


ITEM 9A.  CONTROLS AND PROCEDURES

         CEO and CFO Certifications

         Filed as an exhibit to this Annual Report on Form 10-K are
certifications of the Chief Executive Officer and the Chief Financial Officer.
The certifications are required in accordance with Section 302 of the
Sarbanes-Oxley Act of 2002. This section of the Annual Report on Form 10-K
contains the information concerning the controls evaluation referred to in the
Section 302 certifications and this information should be read in conjunction
with the Section 302 certifications for a more complete understanding of the
topics presented.

Disclosure Controls and Internal Controls

         Disclosure controls are procedures that are designed with the objective
of ensuring that information required to be disclosed in our reports filed under
the Securities Exchange Act of 1934, or the Exchange Act, such as this Annual
Report on Form 10-K, is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms. Disclosure controls are
also designed with the objective of ensuring that such information is
accumulated and communicated to our management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure. Internal controls are procedures which are
designed with the objective of providing reasonable assurance that our
transactions are properly authorized, our assets are safeguarded against
unauthorized or improper use and our transactions are properly recorded and
reported, all to permit the preparation of our financial statements in
conformity with generally accepted accounting principles.

         We maintain disclosure controls and procedures. In response to recent
legislation and proposed regulations, we reviewed our internal control structure
and our disclosure controls and procedures. As disclosed in our Form 10-K/A
filed on November 8, 2002, the restatement of our March 31, 2002 and 2001
financial statements occurred as a result of material weaknesses in our system
of internal controls and its operation. Starting in July 2002, we took measures
to strengthen and ensure compliance with our internal controls to help prevent
similar events from occurring again. These weaknesses have been discussed with
our audit committee. The internal controls specifically addressed by us involve
our sales order fulfillment and revenue recognition procedures, cash receipts
and disbursements procedures and our segregation of duties. In addition, we have
reviewed the qualifications and training of our management and employees and
determined that they are sufficient to allow them to fulfill their assigned
roles.

                                      -70-
<PAGE>

PART III.

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

         The information concerning our directors and executive officers
required by this Item is incorporated by reference to the section in Item 1 of
this report entitled "Directors and Officers."

Section 16(a) Beneficial Ownership Reporting Compliance

         Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors and persons who own more than 10% of the
Company's Common Stock (collectively, "Reporting Persons") to file reports of
ownership and changes in ownership with the SEC on a periodic basis. Reporting
Persons are required by SEC regulations to furnish the Company with copies of
all Section 16(a) forms they file. Based solely on a review of the copies of
such forms provided to the Company, we believe that with respect to the year
ended March 31, 2004, all of the Reporting Persons complied with the applicable
filing requirements.

Code of Ethics

         We have adopted a code of ethics that applies to its directors,
officers and employees. A copy of the code of ethics is available on our website
at www.hpl.com. Any waiver of or amendments to our code of ethics will be posted
to our website.

ITEM 11.  EXECUTIVE COMPENSATION

Summary Compensation Table

         The following table sets forth certain summary information concerning
the compensation paid by the Company to its Chief Executive Officers and each
executive officer of the Company for the year ended March 31, 2004 ( "named
executive officers") for the three most recent fiscal years.

<TABLE>
<CAPTION>
                                                                                                      Long-term
                                                                                                    Compensation
                                                                                                   ---------------
                                                                      Annual Compensation            Securities
Name and                                                     -----------------------------------     Underlying         All Other
Principal Position(s)                             Year             Salary        Bonus/Commission    Options (#)      Compensation
------------------------------------------   ----------------  ----------------  ----------------- ---------------  ---------------
<S>                                               <C>          <C>              <C>                 <C>               <C>
Cary D. Vandenberg(1)                                   2004   $       244,856   $        100,000            925,000   $        --
   President and
     Chief Executive Officer

Michael P. Scarpelli (2)
   Chief Financial Officer,                             2004           250,000             50,000            450,000       186,000
        Senior Vice President-                          2003           242,466             50,000                 --       187,225
        Administration, and                             2002            56,250                 --            325,000            --
       Secretary

 William Lamkin III(3)                                  2004            98,830              4,840            350,000            --
   Senior Vice President-
      Sales & Global Customer Support

 Brian Gordon(4)                                        2004           101,522                 --            350,000            --
   Vice President of Software
      Engineering

 Y. David Lepejian (5)                                  2003            70,037                                               8,025
   Former President and                                 2002           174,980                                               9,066
      Chief Executive Officer

 Thomas A. Tomasetti(6)                                 2003                --                                             229,000
   Former President and
      Chief Executive Officer

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

                                       -71-
<PAGE>


<FN>
     (1) Mr. Vandenberg joined the Company in May 2003

     (2) Mr. Scarpelli joined the Company in January 2002 as our Vice President
         of Corporate Development. In July 2002, Mr. Scarpelli was appointed
         Chief Financial Officer of the Company. Mr. Scarpelli was awarded the
         bonus as part of an executive retention bonus arrangement. The amounts
         in "All Other Compensation" relate to the forgiveness of $150,000 in
         principal and accrued interest of $36,000 and $37,225 in 2004 and 2003,
         respectively on a $750,000 loan Mr. Scarpelli received as part of his
         original employment agreement with the Company. All of Mr. Scarpelli's
         options granted in fiscal 2002 were cancelled in fiscal 2003.

     (3) Mr. Lamkin joined the Company in September 2003.

     (4) Mr. Gordon joined the Company in September 2003.

     (5)"All Other Compensation" for Mr. Lepejian consists of premiums paid by the Company for his term life insurance policy. Mr.
         Lepejian was terminated as an employee and officer of the Company on July 19, 2002.

     (6) Mr. Tomasetti served as our interim President and Chief Executive
         Officer from August 2002 through March 2003 pursuant to a consulting
         agreement between the Company and The Brenner Group, his employer. "All
         Other Compensation" represents the consulting fees we paid to The
         Brenner Group.
</FN>
</TABLE>

Fiscal 2003 Stock Option Grants

     The Company granted no stock options in fiscal 2003 to the named executive
officers.

Aggregated Option Exercises in Last Fiscal Year

         The following table sets forth certain information with respect to the
exercise of options during the last fiscal year and the value of options held by
the named executive officers as of the end of fiscal 2004.

                                      -72-
<PAGE>


<TABLE>
<CAPTION>
                                                                   Number of Shares Underlying           Value of Unexercised
                                                                      Unexercised Options               in-the-money Options
                                    Shares                            at Fiscal Year-End (#)           at Fiscal Year-End (1) ($)
                                  Acquired on       Value       --------------------------------  ----------------------------------
Name                              Exercise (#)    Realized ($)    Exercisable     Unexercisable     Exercisable      Unexercisable
------------------------------  --------------  --------------  --------------- ----------------  --------------- ------------------
<S>                               <C>           <C>               <C>            <C>               <C>              <C>

Y. David Lepejian                      50,000   $          --               --               --   $           --  $              --
Cary D. Vandenberg                         --              --               --          925,000               --                 --
Michael P. Scarpelli                       --              --               --          450,000               --                 --
William Lamkin, III                        --              --               --          350,000               --                 --
Brian Gordon                               --              --               --          350,000               --                 --

--------------------
<FN>

(1)      The value of the in-the-money options represents the difference between
         (A) $0.21, our closing stock price on March 31, 2004 (the last trading
         day of fiscal 2004), and (B) the respective exercise price for each
         option, multiplied by the number of shares of Common Stock underlying
         each respective option.
</FN>
</TABLE>

Employment Arrangements

         In April 2003, we entered into an employment agreement, which is
terminable at-will, with Cary D. Vandenberg, our President and Chief Executive
Officer. This agreement provided Mr. Vandenberg with an annual base salary of
$275,000, an annual bonus payable at the discretion of the board. The employment
agreement also provided that Mr. Vandenberg during his first twelve months of
employment can earn the following bonuses:

         a. A signing bonus of $100,000. However, the signing bonus is repayable
            on a prorated basis if within the first twelve months of the
            employment Mr. Vandenberg resigns his employment with HPL or its
            successors or assigns, or (2) the employment is terminated by the
            Company for "cause" as defined.
         b. A bonus of $75,000 payable within 90 days of a Company and court
            approved settlement of all outstanding Federal securities litigation
            and state derivative actions, provided that such settlement is
            reached before the first anniversary of Mr. Vandenberg's start date
            with the Company, and provided further, such bonus is approved as
            part of the court approved settlement referenced above or as part of
            a court approved restructuring.
         c. In addition, Mr. Vandenberg is entitled to such annual performance
            bonuses as the Board may in its discretion approval.

         In August 2003, we entered into an employment agreement, which is
terminable at-will, with William Lamkin, III, our Senior Vice President of Sales
and Marketing. This agreement provided Mr. Lamkin with an annual base salary of
$175,000 and quarterly commission payments based on the Company's defined
commission plan.

         In August 2003, we entered into an employment agreement, which is
 terminable at-will, with Brian Gordon, our Vice President of Software
 Engineering. This agreement provided Mr. Gordon with an annual base salary of
 $175,000, an annual bonus of $25,000 based upon personal objectives and
 milestones to be determined within 60 days of employment, and an annual bonus
 of $15,000 based on milestone achievements for the company. All bonuses will be
 paid on a pro-rata basis during the fiscal year.

         In December 2001, we entered into an employment agreement, which is
terminable at-will, with Michael Scarpelli, our Chief Financial Officer. This
agreement provided Mr. Scarpelli with an annual base salary of $225,000, an
annual bonus payable at the discretion of the board and a loan of $750,000. The
loan bears interest at a rate equal to the higher of: (i) 6%, or (ii) the
short-term "applicable federal rate" as periodically published by the Internal
Revenue Service. The employment arrangement provides that 20% of the principal

                                      -73-
<PAGE>

sum and accrued interest will be forgiven annually over a period of five years,
commencing on the first anniversary of the officer's employment, provided that
he remains continuously employed by the Company during that time. The agreement
further provides that if Mr. Scarpelli is terminated without "cause" (as
defined), or there is a "corporate transaction" (as defined), all outstanding
principal and interest on the loan will be immediately forgiven. This agreement
was subsequently amended in August 2002 to provide Mr. Scarpelli with: (1) an
increase in annual base salary to $250,000; (2) a retention bonus of $100,000,
payable 50% on January 18, 2003 and 50% on July 18, 2003, so long as Mr.
Scarpelli remains an employee of the Company on each respective payment date,
and (3) a severance arrangement in which he will be entitled to a severance
payment of 50% of his base annual salary in the event he is terminated or not
offered a comparable position in the event of a "corporate transaction," as
defined.

Compensation Committee Interlocks and Insider Participation

         The Compensation Committee currently consists of Messrs Antoun and
Zorian. No member of the Compensation Committee or executive officer of the
Company has a relationship that would constitute an interlocking relationship
with any executive officers or directors of another entity.

DIRECTOR COMPENSATION

         Each non-employee director of the Company receives $10,000 annually and
$500 for each meeting of the board of directors, or any committee of the board
of directors, he attends. In addition, each non-employee director is eligible to
receive an annual option grant to purchase up to 7,500 shares of Common Stock,
at an exercise price equal to the fair market value of the stock on the date of
grant. 37,500 shares of stock options were granted to our directors in fiscal
2004, 15,000 of which related to fiscal 2003 awards issued in fiscal 2004.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
          RELATED STOCKHOLDER MATTERS

         The following table sets forth certain information, as of June 30, 2004
(unless otherwise indicated below), with respect to the beneficial ownership of
the outstanding Common Stock by: (i) each stockholder known by the Company to be
the beneficial owner of more than 5% of the outstanding Common Stock; (ii) each
director or nominee; (iii) each of the named executive officers; and (iv) all
current executive officers and directors as a group. Unless otherwise indicated
below, each stockholder has sole voting and sole investment power with respect
to all shares beneficially owned, subject to community property laws, if
applicable.

<TABLE>
<CAPTION>
                                                                Shares Beneficially Owned and Shares Underlying
                                                              Options Exercisable Within 60 days of May 31, 2004
Name and Address                                            --------------------------------------------------------    Percent
of Beneficial Owner +                                            Shares (#)         Options (#)         Total (#)      of Class (1)
----------------------------------------------------------- -------------------  ------------------ ---------------- --------------
<S>                                                         <C>                  <C>                 <C>              <C>

Synopsys, Inc.                                                       6,239,128                  --        6,239,128          19.95%
700 East Middlefield Road
Mountain View, CA 94043
----------------------------------------------------------- -------------------  ------------------ ---------------- --------------
Lawrence Kraus                                                       3,924,250                  --        3,924,250          12.55%

Y. David Lepejian(2)                                                 3,614,000                  --        3,614,000          11.56%
   1357 Lakeshore Circle - Bldg. #12
     San Jose, CA 95131

Dr. Yervant Zorian                                                     782,500                  --          782,500           2.50%
Elias Antoun                                                           400,000              85,170          485,170           1.55%
Cary D. Vandenberg                                                          --                  --               --             --
Michael P. Scarpelli                                                        --                  --               --             --
William Lamkin, III                                                         --                  --               --             --
Brian Gordon                                                                --                  --               --             --

All directors and executive officers as a group (7
   persons)                                                          5,106,750              85,170        5,191,920          16.60%

                                      -74-
<PAGE>

--------------------------
<FN>
+        Unless indicated otherwise, the address of each beneficial owner is HPL Technologies, Inc. 2033 Gateway Place, Suite 400,
         San Jose, California 95110.

     (1) Applicable percentage of ownership is based on approximately 31,274,623
         shares of Common Stock outstanding as of June 30, 2004, together with
         applicable stock options for such stockholder. Beneficial ownership is
         determined in accordance with the rules of the Securities and Exchange
         Commission. Shares of common stock subject to options currently
         exercisable or exercisable within 60 days of May 31, 2004 are deemed
         outstanding for computing the percentage of ownership of the person
         holding such stock options, but are not deemed outstanding for
         computing the percentage of any other person.

     (2) Mr. Lepejian has served notice of exercise of a stock option to
         purchase up to 2,670,000 shares of common stock previously issued by
         HPLI. The Company has refused to issue the shares as the options were
         cancelled on his termination from employment. 884,000 shares of Mr.
         Lepejian's total shares were represented to have been sold by Mr.
         Lepejian to a third party in December 2002. However, the certificates
         are still registered in Mr. Lepejian's name and we have no support for
         such sales.
</FN>
</TABLE>

Equity Compensation Plan Information

         The Company maintains the 2001 Equity Incentive Plan (the "2001 Plan"),
the 2001 Employee Stock Purchase Plan (the "ESPP") and the 2001 Foreign Employee
Stock Purchase Plan (the "Foreign ESPP"), pursuant to which it may grant equity
awards to eligible persons. The following table sets forth certain information
regarding the 2001 Plan, the ESPP and the Foreign ESPP as of March 31, 2004.

<TABLE>
<CAPTION>
                                                                                                          Number of securities
                                                                                                         remaining available for
                                          Number of securities to be         Weighted-average             future issuance under
                                           issued upon exercise of          exercise price of           equity compensation plans
                                            outstanding options,            outstanding options,           (excluding securities
Plan category                              warrants and rights (1)         warrants and rights (1)     reflected in first column)(2)
--------------------------------------- ----------------------------  ---------------------------  ---------------------------------
<S>                                    <C>                            <C>                           <C>

Equity compensation plans approved by
   security holders                                       6,503,473   $                     0.65                          5,346,294

Equity compensation plans not
   approved by security holders                                  --                           --                                 --
                                        ----------------------------  ---------------------------  ---------------------------------

Total                                                     6,503,473   $                     0.65                          5,346,294
                                        ----------------------------  ---------------------------  ---------------------------------
-----------------------
<FN>
     (1)      The Company has assumed certain stock option awards in connection
              with three acquisitions completed through the end of fiscal 2003.
              A total of 524,405 shares of Company common stock underly the
              assumed options, with a weighted-average exercise price of
              approximately $4.28 per share. No further awards will be made
              under the plans governing the assumed awards. Statistics regarding
              the assumed options are not included in the above table.

     (2)      At March 31, 2004, 4,399,139 and 947,155 shares of Common Stock
              were available for future issuance under the 2001 Plan and the
              ESPPs, respectively. The ESPPs contain an evergreen provision that
              provides for an annual share increase on March 1 of each year,
              until and including March 1, 2011, equal to the least of: (i)
              150,000, (ii) 1% of the number of shares of Common Stock
              outstanding on that date, or (iii) a lesser number determined by
              the administrator.
</FN>
</TABLE>

                                      -75-
<PAGE>


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         None
ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

         The following table presents the fees for audit and other services
provided by our principal accounting firm, PricewaterhouseCoopers LLP, for the
years ended March 31, 2004 and 2003 (in thousands):


         Type of Fees                      2004              2003
         ---------------------------- -----------------  ----------------

         Audit Fees (1)               $            282   $         1,352
         Audit-Related Fees (2)                     --               104
         Tax Fees (3)                              --                126
         All Other Fees (4)                         --                --
                                      -----------------  ----------------

         Total                        $            282   $         1,582
                                      =================  ================
--------------------

(1)      Audit Fees include professional services rendered by
         PricewaterhouseCoopers LLP, the member firms of PricewaterhouseCoopers,
         and their respective affiliates (collectively,
         "PricewaterhouseCoopers") for the audit of HPL's annual financial
         statements and review of financial statements or services that are
         normally provided in connection with statutory and regulatory filings
         or engagements for that fiscal year.

(2)      Audit-Related Fees include assurance and related services by
         PricewaterhouseCoopers that are reasonably related to the performance
         of the audit or review of HPL's financial statements and are not
         reported under paragraph (1) above. During 2003 the fees principally
         relate to the filing of the Company's restated 10K-A.

(3)      Tax Fees include professional services rendered by
         PricewaterhouseCoopers for tax compliance, tax advice, and tax
         planning.

(4)      All Other Fees include services provided by PricewaterhouseCoopers,
         other than the services reported in paragraphs (1) through (3) of this
         section.

Audit Committee's Pre-Approval Policies and Procedures

      On June 25, 2003, our Board of Directors adopted a new Audit Committee
Charter that, among other things, requires the Audit Committee to pre-approve
the rendering by our independent auditor of audit or permitted non-audit
services. The Chair of the Audit Committee may pre-approve the rendering of
services on behalf of the Committee, provided the matter is then presented to
the full Committee at the next scheduled meeting. Our Audit Committee approved
the audit fees for audit of our consolidated financial statements for the year
ended March 31, 2004 prior to the commencement of the audit.

                                      -76-
<PAGE>

PART IV

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a) Financial Statements:

         Financial Statements for the three years ended March 31, 2004 are
included in Item 8. All schedules are omitted because they are not applicable or
the required information is shown in the financial statements or notes thereto.

(b) Reports on Form 8-K:

         The Registrant furnished a Current Report on Form 8-K on February 13,
2004, reporting the results of operations for the third fiscal quarter.

(c) Exhibits:

         The following exhibits are incorporated by reference or filed as part
of this report.


<TABLE>
<CAPTION>
Exhibit                                                            Description
Number
------------  ----------------------------------------------------------------------------------------------------------------------
<S>          <C>
        3.1   Amended and Restated Certificate of Incorporation of Registrant.  (1)

        3.2   Bylaws of Registrant.  (1)

        4.1   Form of Common Stock Certificate.  (1)

       10.1   2001 Amended and Restated Equity Incentive Plan. (1)

       10.2   2001 Amended and Restated Employee Stock Purchase Plan. (1)

       10.3   HPL Technologies, Inc. 2001 Foreign Subsidiary Employee Stock Purchase Plan, as amended. (2)

       10.4   Form of Officer and Director Indemnification Agreement. (1)

       10.5   Employment Offer Letter from HPL Technologies, Inc. to Michael P. Scarpelli, dated December 4, 2001. (3)

       10.6   Employment Amendment Letter from HPL Technologies, Inc. to Michael P. Scarpelli, dated August 6, 2002. (1)

       10.7   Employment Amendment Letter from HPL Technologies, Inc. to Cary D. Vandenberg, dated April 23, 2003. (5)

       10.8   Employment Offer Letter from HPL Technologies, Inc. to William Lamkin III, dated August 22, 2003. (6)

       10.9   Employment Offer Letter from HPL Technologies, Inc. to Brian Gordon, dated August 26, 2003. (6)

                                      -77-
<PAGE>


      10.10   Real property lease dated August 19, 1998 by and between Heuristic Physics Laboratories, Inc. and Spieker Properties,
              L.P., (San Jose, California). (1)

      10.11   Industrial Lease Agreement, dated as of November 17, 2000, between Research Interchange One L.P., a Texas Limited
              Partnership and Testchip Technologies, Inc., a Texas Corporation. (4)

      10.12   First Amendment, dated as of March 28, 2001, to Industrial Lease Agreement, dated as of November 17, 2000, between
              Research Interchange One L.P., a Texas Limited Partnership and Testchip Technologies, Inc., a Texas Corporation. (4)

      10.13   Second Amendment, dated June 6, 2001, to Industrial Lease Agreement, dated as of November 17, 2000, between Research
              Interchange One L.P., a Texas Limited Partnership and Testchip Technologies, Inc., a Texas Corporation. (4)

      10.14   Third Amendment, dated October 1, 2001, to Industrial Lease Agreement, dated as of November 17, 2000, between
              Research Interchange One L.P., a Texas Limited Partnership and Testchip Technologies, Inc., a Texas Corporation. (4)

      10.15   Lease Agreement, dated June 1, 2000, between Jackson-Shaw Technology Center II, LTD and Testchip Technologies, Inc.
              (4)

      10.16   Amendment, dated August 7, 2000, to Lease Agreement, dated June 1, 2000, between Jackson-Shaw Technology Center, II,
              LTD. and Testchip Technologies. (4)

      10.17   Modification and Ratification of Lease, dated October 31, 2001, between Jackson-Shaw Technology Center II, LTD. and
              Testchip Technologies. (4)

       21.1   Subsidiaries of the registrant.

       23.1   Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm.

       24.1   Powers of Attorney.  (Contained on Signature Page)

       31.1   Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

       31.2   Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

       32.1   Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

       32.2   Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


------------------------
<FN>

(1)      Incorporated by reference from our Registration Statement on Form S-1 filed with the Commission May 29, 2001, as amended
         (Registration No. 333-61810).

(2)      Incorporated by reference from our Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.

(3)      Incorporated by reference from our Quarterly Report on Form 10-Q for the quarter ended December 31, 2001.

                                      -78-
<PAGE>


(4)      Incorporated by reference from our Annual Report on Form 10-K for the year ended March 31, 2003.


(5)      Incorporated by reference from our Annual Report on Form 10-Q for the quarter ended June 30, 2003.

(6)      Incorporated by reference from our Annual Report on Form 10-Q for the quarter ended  September 30, 2003.

</FN>
</TABLE>

                                      -79-
<PAGE>


                                    SIGNATURE

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.


                                  HPL Technologies, Inc.


Dated: July 14 , 2004             By:     /s/ Cary D Vandenberg
                                  ----------------------------------------------
                                          Cary D. Vandenberg
                                          President and Chief Executive Officer



                                      -80-
<PAGE>




                        POWERS OF ATTORNEY AND SIGNATURES

         KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Cary D. Vandenberg and Michael P.
Scarpelli as his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this report, and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorney-in-fact and agent or his substitute may lawfully do or
cause to be done by virtue hereof.

         Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signature                                                         Title                                          Date
----------------------------------------  ------------------------------------------------------  ----------------------------------
<S>                                       <C>                                                      <C>

        /s/ Cary D. Vandenberg            President and Chief Executive Officer                             July 14 , 2004
----------------------------------------
          Cary D. Vandenberg              (Principal Executive Officer)

       /s/ Michael P. Scarpelli           Chief Financial Officer                                           July 14, 2004
----------------------------------------
         Michael P. Scarpelli             (Principal Financial and Accounting Officer)

           /s/ Elias Antoun               Director                                                          July 14, 2004
----------------------------------------
             Elias Antoun

          /s/ Lawrence Kraus              Director                                                          July 14, 2004
----------------------------------------
            Lawrence Kraus

        /s/ Dr. Yervant Zorian            Director                                                          July 14, 2004
----------------------------------------
          Dr. Yervant Zorian
</TABLE>



                                      -81-
<PAGE>


<TABLE>
<CAPTION>
                                  EXHIBIT INDEX

Exhibit
Number                                                              Description
------------   ---------------------------------------------------------------------------------------------------------------------
<S>            <C>
        3.1    Amended and Restated Certificate of Incorporation of Registrant. (1)

        3.2    Bylaws of Registrant. (1)

        4.1    Form of Common Stock Certificate. (1)

       10.1    2001 Amended and Restated Equity Incentive Plan. (1)

       10.2    2001 Amended and Restated Employee Stock Purchase Plan. (1)

       10.3    HPL Technologies, Inc. 2001 Foreign Subsidiary Employee Stock Purchase Plan, as amended. (2)

       10.4    Form of Officer and Director Indemnification Agreement.  (1)

       10.5    Employment Offer Letter from HPL Technologies, Inc. to Michael P. Scarpelli, dated December 4, 2001.  (3)

       10.6    Employment Amendment Letter from HPL Technologies, Inc. to Michael P. Scarpelli, dated August 6, 2002. (1)

       10.7    Employment Amendment Letter from HPL Technologies, Inc. to Cary D. Vandenberg, dated April 23, 2003. (5)

       10.8    Employment Offer Letter from HPL Technologies, Inc. to William Lamkin III, dated August 22, 2003.
       10.9    Employment Offer Letter from HPL Technologies, Inc. to Brian Gorden, dated August 26, 2003. (6)

      10.10    Real property lease dated August 19, 1998 by and between Heuristic Physics Laboratories, Inc. and Spieker
               Properties, L.P., (San Jose, California). (1)

      10.11    Industrial Lease Agreement, dated as of November 17, 2000, between Research Interchange One L.P., a Texas Limited
               Partnership and Testchip Technologies, Inc., a Texas Corporation. (4)

      10.12    First Amendment, dated as of March 28, 2001, to Industrial Lease Agreement, dated as of November 17, 2000, between
               Research Interchange One L.P., a Texas Limited Partnership and Testchip Technologies, Inc., a Texas Corporation. (4)

      10.13    Second Amendment, dated June 6, 2001, to Industrial Lease Agreement, dated as of November 17, 2000, between Research
               Interchange One L.P., a Texas Limited Partnership and Testchip Technologies, Inc., a Texas Corporation. (4)

      10.14    Third Amendment, dated October 1, 2001, to Industrial Lease Agreement, dated as of November 17, 2000, between
               Research Interchange One L.P., a Texas Limited Partnership and Testchip Technologies, Inc., a Texas Corporation. (4)

                                      -82-
<PAGE>


      10.15    Lease Agreement, dated June 1, 2000, between Jackson-Shaw Technology Center II, LTD and Testchip Technologies, Inc.
               (4)

      10.16    Amendment, dated August 7, 2000, to Lease Agreement, dated June 1, 2000, between Jackson-Shaw Technology Center, II,
               LTD. and Testchip Technologies. (4)

      10.17    Modification and Ratification of Lease, dated October 31, 2001, between Jackson-Shaw Technology Center II, LTD. and
               Testchip Technologies. (4)

       21.1    Subsidiaries of the registrant.

       23.1    Consent of PricewaterhouseCoopers LLP, Independent Registered Public Accounting Firm.

       24.1    Powers of Attorney.  (Contained on Signature Page)

       31.1    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

       31.2    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

       32.1    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

       32.2    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

------------------------
<FN>
(1)      Incorporated by reference from our Registration Statement on Form S-1 filed with the Commission May 29, 2001, as amended
         (Registration No. 333-61810).

(2)      Incorporated by reference from our Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.

(3)      Incorporated by reference from our Quarterly Report on Form 10-Q for the quarter ended December 31, 2001.

(4)      Incorporated by reference from our Annual Report on Form 10-K for the year ended March 31, 2002.


(5)      Incorporated by reference from our Annual Report on Form 10-Q for the quarter ended June 30, 2003.

(6)      Incorporated by reference from our Annual Report on Form 10-Q for the quarter ended  September 30, 2003.
</FN>
</TABLE>

                                      -83-
<PAGE>




Exhibit 21.1

                         SUBSIDIARIES OF THE REGISTRANT

Subsidiary Name                                   Jurisdiction of Incorporation
----------------------------------------- --------------------------------------
Heuristic Physics Laboratories, Inc.                               California

FabCentric, Inc.                                                   California

HPL International Ltd.                                             Cayman Island

HPLA Limited Liability Company                                     Armenia

HPL (S) Pte. Ltd                                                   Singapore

HPL Japan KK                                                       Japan

HPL Technologies Private Limited                                   India

HPL Texas, Inc.                                                    Delaware

TestChip Technologies, Inc.                                        Texas

Defect & Yield Management, Inc.                                    Delaware

HPL, Taiwan Inc.                                                   Taiwan



                                      -84-
<PAGE>




                                                                    Exhibit 23.1

            CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

     We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 333-66962 and No. 333-87144) of HPL Technologies,
Inc. of our report dated July 2, 2004, except for the fourth and fifth
parapgraphs of Note 16, as to which the date is July 13, 2004, relating to the
financial statements, which appears in this Form 10-K.

/s/ PricewaterhouseCoopers LLP
----------------------------------------
PricewaterhouseCoopers LLP

San Jose, California
July 13, 2004



                                      -85-
<PAGE>

                                                                    Exhibit 31.1


I, Cary D. Vandenberg, certify that:

     1.  I have reviewed this annual report on Form 10-K of HPL Technologies,
         Inc.;

     2.  Based on my knowledge, this annual report does not contain any untrue
         statement of a material fact or omit to state a material fact necessary
         to make the statements made, in light of the circumstances under which
         such statements were made, not misleading with respect to the period
         covered by this report;

     3.  Based on my knowledge, the financial statements, and other financial
         information included in this annual report, fairly present in all
         material respects the financial condition, results of operations and
         cash flows of the registrant as of, and for, the periods presented in
         this report;

     4.  The registrant's other certifying officer and I are responsible for
         establishing and maintaining disclosure controls and procedures (as
         defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
         registrant and have:

         (a)  Designed such disclosure controls and procedures, or caused such
              disclosure controls and procedures to be designed under our
              supervision, to ensure that material information relating to the
              registrant, including its consolidated subsidiaries, is made known
              to us by others within those entities, particularly during the
              period in which this report is being prepared;

         (b)  Evaluated the effectiveness of the registrant's disclosure
              controls and procedures and presented in this report our
              conclusions about the effectiveness of the disclosure controls and
              procedures, as of the end of the period covered by this report
              based on such evaluation; and

         (c)  Disclosed in this report any change in the registrant's internal
              control over financial reporting that occurred during the
              registrant's most recent fiscal quarter (the registrant's fourth
              fiscal quarter in the case of an annual report) that has
              materially affected, or is reasonably likely to materially affect,
              the registrant's internal control over financial reporting; and

     5.  The registrant's other certifying officer and I have disclosed, based
         on our most recent evaluation of internal control over financial
         reporting, to the registrant's auditors and the audit committee of
         registrant's board of directors (or persons performing the equivalent
         function):

         (a)  All significant deficiencies and material weaknesses in the design
              or operation of internal controls over financial reporting which
              are reasonably likely to adversely affect the registrant's ability
              to record, process, summarize and report financial data; and

         (b)  Any fraud, whether or not material, that involves management or
              other employees who have a significant role in the registrant's
              internal controls over financial reporting.



Date:   July 14, 2004                     By:    /s/ Cary D. Vandenberg
       -----------------                  --------------------------------------
                                          Cary D. Vandenberg
                                          President and Chief Executive Officer



                                      -86-
<PAGE>


                                                                    Exhibit 31.2

I, Michael P. Scarpelli, certify that:

     1.  I have reviewed this annual report on Form 10-K of HPL Technologies,
         Inc.;

     2.  Based on my knowledge, this annual report does not contain any untrue
         statement of a material fact or omit to state a material fact necessary
         to make the statements made, in light of the circumstances under which
         such statements were made, not misleading with respect to the period
         covered by this report;

     3.  Based on my knowledge, the financial statements, and other financial
         information included in this annual report, fairly present in all
         material respects the financial condition, results of operations and
         cash flows of the registrant as of, and for, the periods presented in
         this report;

     4.  The registrant's other certifying officer and I are responsible for
         establishing and maintaining disclosure controls and procedures (as
         defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
         registrant and have:

         (a)  Designed such disclosure controls and procedures, or caused such
              disclosure controls and procedures to be designed under our
              supervision, to ensure that material information relating to the
              registrant, including its consolidated subsidiaries, is made known
              to us by others within those entities, particularly during the
              period in which this report is being prepared;

         (b)  Evaluated the effectiveness of the registrant's disclosure
              controls and procedures and presented in this report our
              conclusions about the effectiveness of the disclosure controls and
              procedures, as of the end of the period covered by this report
              based on such evaluation; and

         (c)  Disclosed in this report any change in the registrant's internal
              control over financial reporting that occurred during the
              registrant's most recent fiscal quarter (the registrant's fourth
              fiscal quarter in the case of an annual report) that has
              materially affected, or is reasonably likely to materially affect,
              the registrant's internal control over financial reporting; and

     5.  The registrant's other certifying officer and I have disclosed, based
         on our most recent evaluation of internal control over financial
         reporting, to the registrant's auditors and the audit committee of
         registrant's board of directors (or persons performing the equivalent
         function):

         (a)  All significant deficiencies and material weaknesses in the design
              or operation of internal controls over financial reporting which
              are reasonably likely to adversely affect the registrant's ability
              to record, process, summarize and report financial data; and

         (b)  Any fraud, whether or not material, that involves management or
              other employees who have a significant role in the registrant's
              internal controls over financial reporting.


Date:   July 14, 2004                          By:    /s/ Michael P. Scarpelli
       ----------------                        -------------------------------
                                                      Michael P. Scarpelli
                                                      Chief Financial Officer



                                      -87-
<PAGE>
                                                                    Exhibit 32.1

                            CERTIFICATION PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

         I, Cary D. Vandenberg, certify, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the
Annual Report of HPL Technologies, Inc. on Form 10-K for the fiscal year ended
March 31, 2004 fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 and that information contained in such
Annual Report on Form 10-K fairly presents in all material respects the
financial condition and results of operations of HPL Technologies, Inc.

Date: July 14, 2004
                                     /s/ Cary D. Vandenberg
                                   ----------------------------------------
                                     Cary D. Vandenberg
                                     President and Chief Executive Officer


A signed original of this written statement required by Section 906 has been
provided to HPL Technologies, Inc. and will be retained by HPL Technologies,
Inc. and furnished to the Securities and Exchange Commission upon request.



                                      -88-
<PAGE>


                                                                    Exhibit 32.2

                            CERTIFICATION PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

         I, Michael P. Scarpelli, certify, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the
Annual Report of HPL Technologies, Inc. on Form 10-K for the fiscal year ended
March 31, 2004 fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 and that information contained in such
Annual Report on Form 10-K fairly presents in all material respects the
financial condition and results of operations of HPL Technologies, Inc.


Date: July 14, 2004
                                               /s/ Michael P. Scarpelli
                                              ---------------------------
                                                   Michael P. Scarpelli
                                                   Chief Financial Officer

A signed original of this written statement required by Section 906 has been
provided to HPL Technologies, Inc. and will be retained by HPL Technologies,
Inc. and furnished to the Securities and Exchange Commission upon request.


                                      -89-
<PAGE>