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, 2005

                                       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)


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         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, 2004 was
$11,359,716 (based upon an average of the closing bid and asked price of $0.57
per share as of such date, as reported in the "Pink Sheets" published by Pink
Sheets LLC).

         As of May 31, 2005, the registrant had outstanding 38,768,065 shares of
common stock.

                                TABLE OF CONTENTS
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                       PART I

Item 1     Business                                                                                              4


Item 2     Properties                                                                                            16


Item 3     Legal Proceedings                                                                                     16


Item 4     Submission of Matters to a Vote of Security Holders                                                   18


                       PART II

Item 5     Market for Registrant's Common Stock, Related Stockholder Matters and Issuer Purchases of Equity      19

           Securities

Item 6     Selected Financial Data                                                                               19


Item 7     Management's Discussion and Analysis of Financial Condition and Results of Operations                 21


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                  67


Item 9A    Controls and Procedures                                                                               67
</TABLE>

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                      PART III

Item 10    Directors and Executive Officers of the Registrant                                                    69


Item 11    Executive Compensation                                                                                69


Item 12    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters        72


Item 13    Certain Relationships and Related Transactions                                                        73


Item 14    Principal Accountant Fees and Services                                                                73


                       PART IV

Item 15    Exhibits and Financial Statement Schedules                                                            74

</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.

         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.


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.

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         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, 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.

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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. 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.

                                       6
<PAGE>


         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, improved return on investment, and higher yields driven by yield
management solutions will enhance the performance of FPD manufacturers.

         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. These new changes present significant manufacturing
and yield management 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 by
FPD manufacturers. The development and integration of these yield management
tools is a significant challenge for FPD manufacturers and a significant driving
force for implementing 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 its 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,
statistical 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.

         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
analysis modules including:

         Metrology, which collects and analyzes data from inline production
         equipment. Metrology captures measurements such as resistivity,
         critical dimensions, 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;

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         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.


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.

DSSA Sentry

         DSSA Sentry is a new production-proven tool that employs defect spatial
signature analysis ("DSSA") algorithms to automatically classify the
distributions of defects found on semiconductor wafers. These distributions
appear visually as streaks, lines or other noticeable patterns of defects and
usually cause large yield loss. By detecting these patterns or signatures early
in the process, potential yield killers can be caught and the problem sources
rapidly identified and fixed. Critical signatures like CMP and handling
scratches, photo-lithography induced repeaters, and streaks are easily detected
by the DSSA sentry tool. Production use has shown a signature capture rate of
over 80%, compared to the typical manual review process which captures only
about 5% of actual fab signatures. Consequently, DSSA Sentry offers users a high
ROI by finding more yield killers earlier in the process.

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.

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Cell Designer

         Cell Designer addresses the core issue of Design for Manufacturability
("DFM"): predicting the electrical performance of a circuit manufactured on
silicon in a specific process. Starting from a circuit's layout level
representation, calibrated process simulation accurately predicts the effects of
lithography, etch and process variability to obtain physical predictions for
circuit performance and yield. Utilizing tight integration between process and
circuit simulation environments, Cell Designer enables rapid, what-if analysis
and fast, interactive operation. Cell Designer can be applied to a wide variety
of design styles, including memory, standard cell and custom logic. Designers
using Cell Designer may produce better, more accurate and better yielding
circuits than previously possible. We market and sell Cell Designer under an
exclusive agreement with Sequoia Design Systems, Inc., the developer of the
product.

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 FPD 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 tailored to the FPD industry's yield management needs
and provides the information control backbone of fab-wide data. It gathers,
integrates and leverages 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 characterize 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 eight years, at seven technology nodes

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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 and
TestChip circuits, supplemented by powerful 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.

TestChip Technology Development IP & Chip Sets

         Our proprietary TestChip IP contains over 1,500 standard module
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 Technology Platforms

         Our TestChip TechXpress(TM) array technology platforms 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(TM) array
platforms 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(TM) Array Family comprises three powerful technology
platforms: TDSRAMTM, TDROMTM and TDParametricTM. From these technology platforms
HPL has generated over twenty different unique TestChip solutions that span the
entire semiconductor lifecycle, each targeted at solving specific problems
encountered at the various stages of process life cycle. TestChip Solutions are
grouped into four chip sets that are used by process integration and yield
engineers to target specific tasks found at each stage of the process life
cycle. The chips sets are classified as, ToolBox (for early materials and litho
characterization), RaceTrack (for technology development, process integration
and primary parameter characterization), OnRamp (for parametric, systematic and
random defectivity based Yield Ramp) and Expressway (for parametric and
systematic yield monitoring).

         Within each chip set are test vehicles that target all key areas of
nanometer-era Front-End-of-Line (FEOL) and Back-End-of-Line (BEOL) process
integration and yield ramp, and have proven effectiveness from 180nm to 45nm.
The TestChip solutions are sold as "chip sets" combined with a powerful software
analysis tool called TestChip Advantage(TM). TestChip Advantage(TM) has analysis
modules customized to each of the unique TestChip solutions that enable the
customer to quickly turn large amounts of TestChip data into actionable
information for development and debug of their processes.

         TDSRAM: The TDSRAM is 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.

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<PAGE>

         TDParametric: The TDParametric array 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.
TDParametric 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 Advantage(TM)

         TestChip Advantage(TM) is a sophisticated analysis and data reduction
software based on our yield management software. Engineers can extract answers
from the wafer test data using this software, saving them invaluable time by
automating tedious analysis setup and by providing customized novel viewing of
the experiments that HPL provides for yield understanding and root cause yield
loss assessment. Using the TestChip Advantage(TM) templates and database, we
capture the knowledge and intent of the various experiments during the design
phase. Yield engineers are able to access the wafer results (both historical and
current) to analyze process issues and shifts prior to product yield loss.

         TestChip Advantage(TM) allows the customer to view results grouped by
experiment type, by layer, and by figures of merit. Both bit map and parametric
data are available with the ability to do statistical analysis of parameters
over multiple wafers and lots. Trend Analysis is also available between wafers /
lots including spatial analysis of failures within a die or across wafer.
TestChip Advantage(TM) also enables the customer to do split lot analysis and to
classify wafers based on different process equipment used. The software supports
customization by the user using advanced data mining features. These
capabilities allow fast wafer level analysis, all accessible from a
user-friendly menu system, which in turn enables trend monitoring and
identification of potential yield hits.

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 semiconductor IDMs, foundries and
flat panel display manufacturers. Our direct sales force operates out of our
headquarters in San Jose, California and our facilities in Bedford,
Massachusetts; Austin, Texas; Plano, Texas; Yokohama, Japan; Hsin Chu, Taiwan;
and Aix-en-Provence, France.

         Our sales and marketing personnel also focus on developing our
relationships with industry partners, which include semiconductor original
equipment manufacturers ("OEMs") who can 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.

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<PAGE>

         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.

         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. As of
March 31, 2005, we held ten U.S. patents and five Taiwan patents, expiring at
different times between 2013 and 2025, had two pending U.S. patents, and eight
U.S. patent applications and twelve foreign patent applications in process. 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 the issuance of 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, our competitors 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.

                                       12
<PAGE>

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 all foreign
countries for all equivalent U.S. patents we hold 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 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.

EMPLOYEES

         As of April 30, 2005, we employed approximately 218 employees worldwide
with 75 in the United States, 120 in Armenia and 23 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.

DIRECTORS AND OFFICERS

         The following table sets forth the directors and officers of the
Company, their ages and positions as of May 31, 2005:

<TABLE>
<CAPTION>
<S>                                             <C>           <C>

                    Name                             Age                           Position
------------------------------------------------ ----------   ------------------------------------------------------

Cary D. Vandenberg                                      49    President and Chief Executive Officer
Michael P. Scarpelli                                    38    Chief Financial Officer, Senior Vice President of
                                                              Administration and Secretary
Elias Antoun                                            48    Director, Chairman of the Board
Lawrence Kraus                                          42    Director
Dr. Yervant Zorian                                      49    Director
Dr. Victor Boksha                                       44    Vice President of Business Development
Dean Frazier                                            45    Vice President of Marketing
Brian Gordon                                            47    Vice President of Software Engineering
Dr. Greg Yeric                                          47    Chief Technologist
</TABLE>

                                       13
<PAGE>

     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, legal, contracts, 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 is President and Chief Executive Officer of
Genesis Microchip, Inc. and a member of its board of directors since November
2004. Mr. Antoun joined our Board of Directors in August 2000 and serves as a
member of our audit and compensation committees. Prior to this, he was President
and Chief Executive Officer of Pixim, Inc. of Mountain View, California, a
semiconductor solutions provider for video imaging from March 2004 to November
2004. From February 2000 to August 2003, he was President and Chief Executive
Officer of MediaQ, Inc., a provider of semiconductor solutions which was
acquired by NVIDIA Corporation in August 2003. From March 1998 to January 2000,
Mr. Antoun served as Executive Vice President, Consumer Products Division at LSI
Logic. 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. 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.

                                       14
<PAGE>

         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 intellectual property 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 a 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. From 2002 to
2004, Mr. Frazier was a founder of EMASYS Corporation, a developer of business
intelligence software for IC companies. He served as VP of Engineering &
Operations for Chameleon Systems, a venture-funded fabless IC company, from 2001
to 2002; as Director of Design Technology for Chips & Technologies, which was
acquired by Intel, from 1991 to 2000; and has held various marketing and
engineering roles at Seattle Silicon (1987-1990) and Motorola (1982-1987). 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. 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.
         DR. GREG YERIC. Dr. Greg Yeric joined HPL in February 2002 through the
acquisition of TestChip Technologies, where he had worked since September 1997.
Dr. Yeric has been our Chief Technologist since August 2004, responsible for
HPL's technical guidance for yield management, technology development IP, and
DFM solutions. Over the last 8 years at HPL and TestChip, Dr. Yeric has been
instrumental in the execution of technology development and yield enhancement
programs across each technology node, from 0.35um through 45nm and over a
spectrum of process technologies (CMOS, SOI, Mixed-Signal). Prior to joining
HPL, he was with Motorola's Advanced Products Research and Development
Laboratories and was a technologist driving CMOS process shrink initiatives with
an emphasis on interconnect characterization and reliability, as well as
developing CMOS platform process integration methodologies for logic,
microprocessor, and NVM technologies from June 1993 to September 1997. He has a
Ph.D. in Electrical Engineering from the University of Texas at Austin and is an
author of numerous technical publications and a regular speaker at technical
industry events.

                                       15
<PAGE>

ITEM 2.  PROPERTIES

         The following table sets forth the Company's principal properties as of
May 31, 2005. We believe that our existing facilities are adequate for our
current needs
<TABLE>
<CAPTION>
<S>                            <C>                             <C>                            <C>

                                    Square Expiration of
        Location                          Footage                       Lease Term                          Uses
------------------------------  ----------------------------   -----------------------------   ------------------------------------

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
Plano, Texas                                         18,302    March 2006                      Offices
San Jose, California                                 12,500    December 2005                   Executive offices
Yerevan, Armenia                                     18,772    December 2009                   Offices; research and development
Yokohama, Japan                                       2,444    April 2006                      Offices

</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 our independent auditors in the United States
District Court for the Northern District of California. The lawsuits were
consolidated into a single action (the "Securities Class Action"), which alleged
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.

         On March 11, 2005, the United States District Court for the Northern
District of California granted final approval of the Securities Class Action
settlement. On April 13, 2005, the period for appeals expired, and the
settlement is now final. We issued 5,319,613 new shares of common stock on May
11, 2005, in consideration for the settlement of the Securities Class Action.

         Former shareholders of Covalar Technologies Group, Inc., which was
acquired by us in February 2002, brought suit in the District Court of Dallas
County, Texas, against our independent auditors and the managing underwriter in
our initial public offering, in connection with claims relating to the
acquisition (the "Covalar Action"). On April 26, 2004, the Company and our
former President and Chief Executive Officer were named as defendants in this
action. On July 13, 2004, we signed a settlement and release agreement with the
plaintiffs in the Covalar Action contingent on the settlement of the Securities
Class Action. Pursuant to this settlement agreement, we placed 2,000,000 shares
in escrow in October 2004. On December 20, 2004, the court issued an order
dismissing us without prejudice from the Covalar Action, pursuant to the
Company's settlement agreement with the plaintiffs. On April 15, 2005, we
authorized the release of 1,000,000 shares from escrow to the former Covalar
shareholders. The remaining 1,000,000 shares will remain in escrow until October
2006. During this period, we have an option to acquire these shares at $1.00 per
share. If we do not exercise our option by October 13, 2006, the shares will be
released to the former shareholders.

         As part of our initial public offering, we signed an underwriting
agreement, which contained provisions in favor of our underwriters. The managing
underwriter was named as a defendant in the Covalar Action and the FabCentric
Action described below. Subject to a reservation of rights, we have accepted the
underwriter's request to indemnify the underwriter in connection with our
initial public offering and to advance expenses in the Covalar Action. The
underwriter's legal counsel submitted bills totaling $850,000 through December
31, 2003, which we had accrued. On April 11, 2005, we entered into a settlement

                                       16
<PAGE>

and release  agreement with the underwriter for a total of $425,000, which
is to be paid on or before August 11, 2005. Accordingly,  during the three month
period  ended March 31,  2005,  we reduced  the  accrual  related to the Covalar
Action.

         On May 22, 2003, five former shareholders of FabCentric, Inc., which we
acquired in December 2001, sued us, our former President and Chief Executive
Officer and former Chief Financial Officer, and our independent auditors in a
lawsuit pending in Superior Court in the County of Santa Clara, California (the
"FabCentric Action"). The plaintiffs subsequently added the managing underwriter
in our initial public offering and our current Chief Financial Officer as
defendants. This lawsuit alleges claims for fraud, negligent misrepresentation,
breach of warranties and covenants, breach of contract, negligence, and
violations of the California Corporations Code and seeks rescission or,
alternatively, damages, costs and expenses. After several rounds of demurrers,
the auditors and the underwriters filed answers to the fourth amended complaint
in May 2005. Answers by the Company and our former CEO and CFO have been
extended by stipulation.

         On February 17, 2005, we participated in a mediation session with the
FabCentric plaintiffs. On February 23, 2005, the FabCentric plaintiffs agreed in
principle to settle with us and our former CEO and CFO by participating in the
HPL Parties' settlement in the Securities Class Action, in addition to receiving
2,100,000 shares of common stock from us, $500,000 in cash from our insurer,
Twin City Fire Insurance Company ("Twin City"), and 25% of the net recovery, if
any, from Twin City in the litigation described below. The parties are preparing
the settlement documentation. The Company anticipates issuing the 2,100,000 new
shares of common stock to the FabCentric plaintiffs along with an additional
336,387 shares to the plaintiffs in the Securities Class Action pursuant to an
anti-dilution provision following the Superior Court's determination that the
settlement was made in good faith.

         We were also a nominal defendant in consolidated stockholder derivative
lawsuits filed between July 31, 2002 and December 31, 2002, in Superior Court in
the County of Santa Clara, California. These lawsuits asserted derivative claims
on behalf of us against our current and former officers and directors and our
independent auditors. The consolidated complaint asserted claims for insider
trading, breach of fiduciary duties, breach of contract, professional negligence
and unjust enrichment, and sought 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. On April 6, 2005, the Superior
Court in the County of Santa Clara, California, approved the settlement of the
derivative actions. Our contribution to plaintiffs' attorney's fees of $950,000,
which was our only contribution to the settlement, was fully funded by our
excess directors and officers liability insurance ("D&O") policies.

         Additionally, Twin City (our first-layer excess D&O carrier) filed a
declaratory relief action on October 6, 2003, in Superior Court in the County of
Santa Clara, California, against us, our former President and Chief Executive
Officer, our 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 Class
Action, exhausting the limits of the primary D&O policy. We filed a Second
Amended Cross-Complaint on September 29, 2004, seeking a declaration that Twin
City and our other excess D&O insurance carriers, National Union Fire Insurance
Company ("National Union") and St. Paul Mercury Insurance Company ("St. Paul"),
are obligated to indemnify us for losses in connection with the Securities Class
Actions and related litigation and that Twin City has breached its insurance
contract by not paying the defendants' defense expenses on a current basis.

                                       17
<PAGE>

         On January 11, 2005, we argued cross-motions for summary adjudication,
in the Twin City matter. The parties sought a declaration regarding whether
exclusionary language in our D&O liability insurance application excluded
coverage for insureds that did not have knowledge of Y. David Lepejian's
unlawful conduct. The Superior Court, in a ruling issued on January 12, 2005,
held that this exclusionary language did not preclude coverage for insureds who
did not have knowledge of the unlawful conduct, including the Company. Twin
City's motion to reconsider the Superior Court's January 12, 2005 ruling was
denied on February 22, 2005 and an amended order was issued on March 9, 2005.

         We intend to continue to oppose the remaining claims made in the Third
Amended Complaint filed by Twin City and to seek coverage under Twin City's
policy. To date, Twin City has advanced or agreed to advance, subject to a
reservation of rights, a total of $900,000 under a reservation of rights to fund
our settlements of the Securities Class Action and the FabCentric Action.

         On December 21, 2004, National Union, our third-layer excess D&O
carrier, paid $1,000,000 into escrow in exchange for a full policy release. St.
Paul, our fourth-layer excess D&O carrier has similarly paid $125,000 into
escrow in exchange for a full policy release The proceeds have now been used to
settle the consolidated derivative action and for legal defense costs.

         As of December 31, 2004, we had accrued $9.1 million relating to the
9,756,000 new shares of common stock we had agreed to issue to settle the above
actions. On March 31, 2005, we reduced the accrual to $8.4 million reflecting
the estimated value of our common stock. Accordingly, there was a $730,000
reduction in legal settlement expenses in the three month period ended March 31,
2005.

         Following our dismissal from the FabCentric Action, the only remaining
litigation in which we are a party will be our claim against Twin City discussed
above. This matter is in the early stages of litigation and accordingly it may
ultimately be resolved on a basis different than currently estimated. Because
there could be many factors that enter into the ultimate resolution of this
matter which are not within our control, we are not able to estimate the maximum
potential financial exposure to litigate this matter or the potential financial
benefit to us should it be resolved successfully. The resolution of the Twin
City litigation could have a material effect on our financial condition, results
of operations or cash flows.



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

         None.















                                       18
<PAGE>

PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND
         ISSUER PURCHASES OF EQUITY SECURITIES

         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
in the Pink Sheets under the symbol "HPLA.PK." 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.


Fiscal 2005                     High            Low
-------------------------- -------------- --------------

First Quarter              $        0.70  $        0.14
Second Quarter             $        0.86  $        0.45
Third Quarter              $        0.66  $        0.51
Fourth Quarter             $        0.93  $        0.55


Fiscal 2004                     High            Low
-------------------------  -------------- --------------

First Quarter              $        0.25  $        0.11
Second Quarter             $        0.26  $        0.12
Third Quarter              $        0.30  $        0.18
Fourth Quarter             $        0.36  $        0.20

         As of May 31, 2005 there were approximately 136 holders of record of
our common stock and 38,768,065 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

         In April, 2005 we issued 2,000,000 shares of common stock, pursuant to
the settlement of the Covalar Action - see Item 3 Legal Proceedings. This
offering was exempt from registration under Section 4(2) of the Act. In May
2005, we issued 5,319,613 shares of common stock pursuant to the settlement of
the Securities Class Action - see Item 3 Legal Proceedings. These securities
constituted exempted securities under Section 3(a)(10) of the Act and were not
registered for issuance pursuant to Section 5 of the Act.


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

                                       19
<PAGE>

the years ending March 31, 2005, 2004 and 2003 and the consolidated balance
sheet data at March 31, 2005 and 2004 are derived from the audited financial
statements included elsewhere in this annual report on Form 10-K. The
consolidated statement of operations data for the years ending March 31, 2002
and 2001 and the consolidated balance sheet data at March 31, 2003, 2002 and
2001 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,
<S>                                                      <C>            <C>            <C>            <C>           <C>

                                                              2005          2004           2003           2002          2001
                                                          ------------- -------------- -------------  ------------- --------------
                                                                             (in thousands, except per share data)

Revenues:
Software licenses                                              $ 3,176        $ 4,799       $ 5,281        $ 1,614        $ 3,159
Consulting services, maintenance and other                       6,593          7,902        10,311          2,899          1,156
                                                          ------------- -------------- -------------  ------------- --------------
Total revenues                                                   9,769         12,701        15,592          4,513          4,315
                                                          ------------- -------------- -------------  ------------- --------------
Cost of revenues:
Software licenses                                                   96            507           656            587            133
Consulting services, maintenance and other (1)                   2,752          3,131         3,808            507            243
                                                          ------------- -------------- -------------  ------------- --------------

Total cost of revenues                                           2,848          3,638         4,464          1,094            376
                                                          ------------- -------------- -------------  ------------- --------------
Gross profit                                                     6,921          9,063        11,128          3,419          3,939
                                                          ------------- -------------- -------------  ------------- --------------
Operating expenses:
Research and development (1)                                     6,590          6,384        10,515          6,118          3,349
Sales, general and administrative (1)                            8,264         13,604        19,788          9,285          4,329
Legal settlement expense                                           470          7,900             -              -              -
Goodwill impairment                                                  -              -        30,570              -              -
Stock-based compensation                                            45            315         1,047          3,547          2,369
Amortization of intangible assets                                1,181          1,327         1,494            294            137
                                                          ------------- -------------- -------------  ------------- --------------
Total operating expenses                                        16,550         29,530        63,414         19,244         10,184
                                                          ------------- -------------- -------------  ------------- --------------
Loss from operations                                            (9,629)       (20,467)      (52,286)       (15,825)        (6,245)
Interest income and other income                                   138            252           617          1,104             62
Interest expense                                                    (3)           (39)         (149)          (196)          (252)
                                                          ------------- -------------- -------------  ------------- --------------
Loss before income taxes                                        (9,494)       (20,254)      (51,818)       (14,917)        (6,435)
Provision for income taxes                                         (71)            89             -              -              -
                                                          ------------- -------------- -------------  ------------- --------------
Net loss                                                       $(9,423)      $(20,343)    $ (51,818)      $(14,917)       $(6,435)
                                                          ============= ============== =============  ============= ==============

Net loss per share basic and diluted                           $ (0.30)      $  (0.65)    $   (1.69)      $  (0.62)       $ (0.37)
Shares used in per share computations:
Basic and diluted                                               31,332         31,145        30,645         24,038         17,496

<FN>

----------------------------------------------------------
(1)     Excludes the following stock-based compensation
        charges:
          Cost of revenues                                        $  -          $   -       $    18        $    39        $    60
          Research and development                                  15            113           414            692            296
          Sales, general administrative                             30            202           615          2,816          2,013
                                                          ------------- -------------- -------------  ------------- --------------
                                                                  $ 45          $ 315       $ 1,047        $ 3,547        $ 2,369
                                                          ============= ============== =============  ============= ==============
</FN>
</TABLE>


                                       20
<PAGE>

Consolidated Balance Sheet Data:
<TABLE>
<CAPTION>

                                                                                         March 31,
<S>                                                       <C>           <C>            <C>            <C>           <C>

                                                              2005          2004           2003           2002          2001
                                                          ------------- -------------- -------------  ------------- --------------
                                                                                       (in thousands)

Cash, cash equivalents and short-term investments             $  3,246       $ 10,210      $ 21,741       $ 47,109        $   989
Working capital (deficit) (1)                                   (3,635)         3,393        13,525         35,062         (7,169)
Total assets                                                    34,802         44,865        60,385        101,308          5,455
Long-term debt, less current portion                                13             39           130            280            295
Total stockholders' equity (deficit)                          $ 16,938       $ 26,042      $ 46,032       $ 82,316        $(6,748)

<FN>

         (1)  Included in working capital in 2005, 2004 and 2003 is a non-cash
              liability of $4,335,000 relating to advances from our former CEO
              which were reclassified to equity on the settlement of our
              litigation - See Item 3. Legal Proceedings.
</FN>
</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. Forward-looking
statements are often, though not always identified by words and phrases such as
"expect", "believe", "should", and "will". 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, and sales agents.

         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 two, three, and three end customers
that individually accounted for at least 10% of our revenues in the years ended
March 31, 2005, 2004 and 2003, respectively. In the aggregate, these end
customers accounted for 34%, 42%, and 61% of our revenues in the years ended
March 31, 2005, 2004 and 2003, 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 ended March 31,
2003, senior management was focused on determining the impact of the financial

                                       21
<PAGE>

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 years ended March 31, 2005 and March 31, 2004 from the year
ended March 31, 2003. In the year ended March 31, 2005 we experienced an
operating loss of $9.4 million. At March 31, 2005, we have $3.2 million in cash
and cash equivalents and short-term investments.

         As of March 31, 2005, we had an accumulated deficit of $107.5 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, 2006. We will need to generate significantly higher
revenues in order to sustain our operations and to achieve and maintain
profitability. Our ability to generate higher revenues may continue to be
impacted by our previous 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 AND ESTIMATES

         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.

         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.

                                       22
<PAGE>

         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 if 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 elements of the contract based on vendor specific
objective evidence of their 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.

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

                                       23
<PAGE>

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.

         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 and 2005, we continued to test for impairment on an
annual basis and determined that there was no further impairment in goodwill.

                                       24
<PAGE>

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. As of March 31, 2005, we have settled the Securities
Action, the Covalar Action and (in principal) the Fabcentric Action. These
settlements require the Company to issue approximately 9,755,207 shares of HPL
common stock which have been valued at $8.4 million in a manner consistent with
our measurement of potential goodwill impairment. Accordingly, we have accrued
this non-cash cost in our financial statements as of March 31, 2005.

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 currently 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 currently 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 currently 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.

         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." Pursuant to FAS 123(R), and
commencing with fiscal 2007, we will be required to record compensation expense
for all share-based payment transaction, as described below.

RECENT ACCOUNTING PRONOUNCEMENTS

         In September 2004, the EITF delayed the effective date for the
recognition and measurement guidance previously discussed under EITF Issue No.
03-01, "The Meaning of Other-Than-Temporary Impairment and Its Application to

                                       25
<PAGE>

Certain Investments" ("EITF 03-01") as included in paragraphs 10-20 of the
proposed statement. The proposed statement will clarify the meaning of
other-than-temporary impairment and our application to investments in debt and
equity securities, in particular investments within the scope of FASB Statement
No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and
investments accounted for under the cost method. We will evaluate the impact of
EITF 03-01 once the final guidance is issued.

         In December 2004, the FASB issued SFAS No. 123 (R), Share-Based Payment
("SFAS 123(R)"), an amendment of SFAS No. 123 and SFAS No. 95 Statement of Cash
Flows. The statement eliminates the ability to account for share-based
compensation transactions using APB No. 25 and requires that the cost of
share-based payment transactions (including those with employees and
non-employees) be recognized in the financial statements. SFAS No. 123(R)
applies to all share-based payment transactions in which an entity acquires
goods or services by issuing its shares, share options, or other equity
instruments or by incurring liabilities based on the price of an entity's shares
or that require settlement by the issuance of equity instruments. In March 2005,
the SEC issued Staff Accounting Bulletin (SAB)107 ("SAB 107") which expresses
views of the SEC staff regarding the application of SFAS No. 123(R). Among other
things, SAB 107 provides interpretive guidance related to the interaction
between SFAS No. 123(R) and certain SEC rules and regulations, as well as
provides the SEC staff's views regarding the valuation of share-based payment
arrangements for public companies. In April 2005, the SEC amended the compliance
dates for SFAS 123(R) to provide that the provisions of this statement will be
effective for fiscal years beginning after June 15, 2005. We will adopt SFAS
123(R) as of the beginning of our 2007 fiscal year. Although we are currently
assessing the application of SFAS No. 123(R), we believe that the adoption of
this statement will have a material impact on our results of operations,
depending on the amount of stock options we grant in future periods.

         In December 2004, the FASB issued FASB Staff Position ("FSP") No.
109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004 ("FSP No. 109-2"). FSP
No. 109-2 provides guidance under SFAS No. 109, Accounting for Income Taxes
("SFAS No. 109"), with respect to recording the potential impact of the
repatriation provisions of the American Jobs Creation Act of 2004 (the "Jobs
Act") on enterprises' income tax expense and deferred tax liability. FSP No.
109-2 states that an enterprise is allowed time beyond the financial reporting
period of enactment of the Jobs Act to evaluate the effect of the Jobs Act on
its plan for reinvestment or repatriation of foreign earnings for purposes of
applying SFAS No. 109. The Jobs Act was enacted on October 22, 2004. We do not
believe that the adoption of FSP No.109-2 will have a material effect on our
financial position, results of operation or cash flows.

         In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Non-monetary Assets, an amendment of APB Opinion No. 20, Accounting for
Non-monetary Transactions." The amendments made by this Statement are based on
the principle that exchanges of non-monetary assets should be measured based on
the fair value of the assets exchanged. This Statement also eliminates the
exception for non-monetary exchanges of similar productive assets and replaces
it with a broader exception for exchanges of non-monetary assets that do not
have commercial substance. We are required to adopt the provisions of this
Statement beginning April 1, 2006 for all non-monetary asset exchanges and will
apply its provisions prospectively upon adoption. We do not believe this will
have a material impact on our consolidated financial statements.

                                       26
<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,
                                                        ------------------------------------------------------------------
<S>                                                     <C>                   <C>                  <C>
                                                             2005                 2004                  2003
                                                        ---------------       --------------        --------------

Revenues:
Software licenses                                                   33 %                 38 %                  34 %
Consulting services, maintenance and other                          67 %                 62 %                  66 %
                                                        ---------------       --------------        --------------
Total revenues                                                     100 %                100 %                 100 %
                                                        ---------------       --------------        --------------

Cost of revenues:
Software licenses                                                    1 %                  4 %                   4 %
Consulting services, maintenance and other                          28 %                 25 %                  24 %
                                                        ---------------       --------------        --------------
Total cost of revenues                                              29 %                 29 %                  28 %
                                                        ---------------       --------------        --------------
Gross profit                                                        71 %                 71 %                  72 %
                                                        ---------------       --------------        --------------
Operating expenses:
Research and development                                            67 %                 50 %                  67 %
Sales, general and administrative                                   85 %                107 %                 127 %
Legal settlement expense                                             5 %                 62 %                   - %
Goodwill impairment                                                  - %                  - %                 196 %
Stock based compensation                                             0 %                  3 %                   7 %
Amortization of intangible assets                                   12 %                 10 %                  10 %
                                                        ---------------       --------------        --------------
Total operating expenses                                           169 %                232 %                 407 %
                                                        ---------------       --------------        --------------
Loss from operations                                               (99)%               (161)%                (335)%
                                                        ===============       ==============        ==============
</TABLE>


Comparison of years ended March 31, 2005 and 2004

         Revenues. Total revenues decreased to $9.8 million in the year ended
March 31, 2005 from $12.7 million in the year ended March 31, 2004, or a
decrease of 23%. 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 34% of total revenues in
the year ended March 31, 2005 coming from two customers and 42% of total
revenues in the year ended March 31, 2004 coming from three customers.

         Software license revenue decreased to $3.2 million in the year ended
March 31, 2005, from $4.8 million in the year ended March 31, 2004, or a
decrease of 34%. 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.

                                       27
<PAGE>

         Consulting services, maintenance and other revenues decreased to $6.6
million in the year ended March 31, 2005, down from $7.9 million in the year
ended March 31, 2004, or a decrease of 17%. The decrease was principally due to
a reduced level of orders from one of our largest customers, as we have shifted
in focus from lower-margin, higher-volume services work to high-margin,
lower-volume services work with this customer.

         Gross profit. As a percentage of revenues, gross profit remained
constant at 71% year-over-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, 2005 compared to 50% of revenues in
the year ended March 31, 2004. Actual costs increased slightly to $6.6 million
in the year ended March 31, 2005, up from $6.4 million for the year ended March
31, 2004. This increase was primarily attributable to the development of new
products. Salaries and related benefits of research and development engineers
represent the single largest component of our research and development expenses.
In the year ended March 31, 2005, salaries and related benefits comprised of
$4.2 million of the total research and development expenses compared to $3.9
million in the year ended March 31, 2004. 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, 2005 were $8.3 million, or 85% of revenues,
compared to $13.6 million, or 107% of revenues in the year ended March 31, 2004.
The decrease in costs was primarily due to decreases in staff, professional fees
and costs associated with litigation. Salary costs decreased to $4.7 million for
the year ended March 31, 2005 compared to $6.2 million for the year ended March
31, 2004. Legal and professional fees associated with the litigation were
approximately $800,000 and $2.7 million during years ended March 31, 2005 and
2004, respectively. The $800,000 is net of $492,000 in legal fees funded by D&O
insurance proceeds and a reversal of $425,000 in legal accruals. We expect our
legal fees to continue to decrease in future periods as the litigation
proceedings are resolved.

         Legal settlement expense. At March 31, 2005, we were able to reasonably
estimate the cost of the potential settlement of the Securities Action, the
Covalar Action and the Fabcentric Action. As such, we increased the accrual by
$470,000 bringing our total estimated legal settlement expense to $8.4 million
from $7.9 million in the year ended March 31, 2004, which amount represents our
estimate of the value of the common stock to be issued in connection with such
settlements. At December 31, 2004, we had accrued $9.1 million for estimated
potential settlement. Accordingly, there was a $730,000 reduction in legal
settlement expenses in the three month period ended March 31, 2005. See
"Liquidity and Capital Resource" below.

         Goodwill impairment. At March 31, 2005 and March 31, 2004 we performed
an impairment test and determined that there was no impairment in goodwill.
Future goodwill impairment tests may result in charges to earnings if the
Company determines that goodwill has been impaired.

         Stock-based compensation. Stock-based compensation expense in the year
ended March 31, 2005 was $45,000, compared with $315,000 in the year ended March
31, 2004. Stock-based compensation expense in the year ended March 31, 2005
decreased from the previous year primarily as a result of decreases in staff
from prior acquisitions, which resulted in the reversal of previously expensed
stock-based compensation which was not earned by the terminated employees, and
that certain stock-based compensation expenses became fully amortized during
fiscal 2005.

                                       28
<PAGE>

         Amortization of intangible assets. Amortization of intangible assets
was $1.2 million in the year ended March 31, 2005, compared to $1.3 million in
the year ended March 31, 2004. Other intangible assets were fully amortized at
March 31, 2005.

         Interest income and other income. Interest income for the year ended
March 31, 2005 and 2004 was $138,000 and $252,000, respectively. This decrease
was due to less interest income from lower average balances of cash, cash
equivalents and short-term investments, during the year ended March 31, 2005.

         Interest Expense. Interest expense for the year ended March 31, 2005
and 2004 was $3,000 and $39,000, respectively. The decrease in interest expense
was due to a reduction of interest paid on equipment and furniture under capital
lease obligations.

         Provision for income taxes. In the years ended March 31, 2005 and 2004,
we incurred net operating losses resulting in net deferred taxes. 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 determined
to be not likely as of March 31, 2005 and 2004. In the year ended March 31,
2005, the provision for income tax in the amount of $(71,000) was due to a tax
benefit of $178,000 that resulted from a tax refund from the State of California
net of a $107,000 provision for foreign income taxes.

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%.

         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.

         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 higher-margin, lower-volume services work.

         Gross profit. As a percentage of revenues, gross profit decreased
slightly to 71% in the year ended March 31, 2004 from 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.

                                       29
<PAGE>

         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.

         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 common 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 Resources" 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.

         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 and other income. Interest income for the year ended
March 31, 2004 and 2003 was $252,000 and $617,000, respectively. This decrease
was due to less interest income from lower average balances of cash, cash
equivalents and short-term investments, during the year ended March 31, 2004.

                                       30
<PAGE>

         Interest Expense. Interest expense for the year ended March 31, 2004
and 2003 was $39,000 and $149,000, respectively. The decrease in interest
expense was due to a reduction of interest paid on equipment and furniture under
capital lease obligations.

         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, 2004 and 2003. In the
year ended March 31, 2004, the provision for income tax in the amount of $89,000
resulted from foreign income tax withholding.


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, 2005, we had an accumulated deficit of $107.5 million. We
expect to have a net operating loss in our year ending March 31, 2006. For the
year ended March 31, 2005, cash used in operations and to fund capital
expenditures was $7.2 million. Such conditions raise doubt about our ability to
continue as a going concern and our independent registered public accounting
firm has included a going concern uncertainty paragraph in their report, which
is included in this Form 10-K. At March 31, 2005, we had approximately $3.2
million in cash and cash equivalents and short-term investments. Our current
operating plan for the year ending March 31, 2006 projects that cash available
from planned revenue combined with the $3.2 million on hand at March 31, 2005
will not be adequate to fund operations through March 31, 2006. 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. We need to raise additional capital or we will be forced to
curtail or cease operations. There is no assurance that the Company will be able
to raise such funds on terms acceptable to the Company, or at all.

         Net cash used in operating activities for the year ended March 31, 2005
was approximately $6.7 million, compared to $9.4 million used in operating
activities for the year ended March 31, 2004 and $23.8 million used in operating
activities in the year ended March 31, 2003. Our cash used in operations for the
years ended March 31, 2005, 2004, and 2003 was primarily due to our net loss,
adjusted for certain non-cash items including depreciation and amortization,
legal settlement expense, goodwill impairment, stock-based compensation and
deferred revenue.

         Net cash provided by investing activities was $5.2 million for the year
ended March 31, 2005 compared to $3.7 million used in investing activities for
the year ended March 31, 2004 and $7.1 million provided by investing activities
for the year ended March 31, 2003. The cash provided by investing activities for
the year ended March 31, 2005 consisted primarily of sale of marketable
securities to fund current operations. The cash used in investing activities for
the year ended March 31, 2004 consisted primarily of the purchase of marketable
securities and the cash provided by investing activities for the year ended
March 31, 2003 consisted primarily of proceeds from sale of marketable
securities.

         Net cash used in financing activities was $50,000 for the year ended
March 31, 2005, mainly due to the principal payments on capital lease
obligations. Net cash used in financing activities was $1.8 million for the year

                                       31
<PAGE>

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.


Future payments due under debt and lease obligations as of March 31, 2005 are as
follows (in thousands):
<TABLE>
<CAPTION>

                                                              Capital Lease Operating
           <S>                                   <C>               <C>                <C>

           Year Ending March 31,                 Obligations (1)         Leases             Total
           ------------------------------------- -----------------  -----------------  -----------------

           2006                                          $     27          $   1,243          $   1,270
           2007                                                13                135                148
           2008 to 2010                                         -                316                316
                                                 -----------------  -----------------  -----------------
                                                 $             40   $          1,694   $          1,734
                                                 =================  =================  =================
<FN>

(1)      From Fiscal 2006 to Fiscal 2007, we are required to make interest payments totaling $1,400 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 our independent auditors in the United States
District Court for the Northern District of California. The lawsuits were
consolidated into a single action (the "Securities Class Action"), which alleged
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.

         On March 11, 2005, the United States District Court for the Northern
District of California granted final approval of the Securities Class Action
settlement. On April 13, 2005, the period for appeals expired, and the
settlement is now final. We issued 5,319,613 new shares of common stock on May
11, 2005, in consideration for the settlement of the Securities Class Action.

         Former shareholders of Covalar Technologies Group, Inc., which was
acquired by us in February 2002, brought suit in the District Court of Dallas
County, Texas, against our independent auditors and the managing underwriter in
our initial public offering, in connection with claims relating to the
acquisition (the "Covalar Action"). On April 26, 2004, the Company and our
former President and Chief Executive Officer were named as defendants in this
action. On July 13, 2004, we signed a settlement and release agreement with the
plaintiffs in the Covalar Action contingent on the settlement of the Securities
Class Action. Pursuant to this settlement agreement, we placed 2,000,000 shares
in escrow in October 2004. On December 20, 2004, the court issued an order
dismissing us without prejudice from the Covalar Action, pursuant to the
Company's settlement agreement with the plaintiffs. On April 15, 2005, we
authorized the release of 1,000,000 shares from escrow to the former Covalar
shareholders. The remaining 1,000,000 shares will remain in escrow until October
2006. During this period, we have an option to acquire these shares at $1.00 per
share. If we do not exercise our option by October 13, 2006, the shares will be
released to the former shareholders.

         As part of our initial public offering, we signed an underwriting
agreement, which contained provisions in favor of our underwriters. The managing
underwriter was named as a defendant in the Covalar Action and the FabCentric
Action described below. Subject to a reservation of rights, we have accepted the
underwriter's request to indemnify the underwriter in connection with our
initial public offering and to advance expenses in the Covalar Action. The
underwriter's legal counsel submitted bills totaling $850,000 through December
31, 2003, which we had accrued. On April 11, 2005, we entered into a settlement

                                       32
<PAGE>

and release agreement with the underwriter for a total of $425,000, which is to
be paid on or before August 11, 2005. Accordingly, during the three month period
ended March 31, 2005, we reduced the accrual related to the Covalar Action.

         On May 22, 2003, five former shareholders of FabCentric, Inc., which we
acquired in December 2001, sued us, our former President and Chief Executive
Officer and former Chief Financial Officer, and our independent auditors in a
lawsuit pending in Superior Court in the County of Santa Clara, California (the
"FabCentric Action"). The plaintiffs subsequently added the managing underwriter
in our initial public offering and our current Chief Financial Officer as
defendants. This lawsuit alleges claims for fraud, negligent misrepresentation,
breach of warranties and covenants, breach of contract, negligence, and
violations of the California Corporations Code and seeks rescission or,
alternatively, damages, costs and expenses. After several rounds of demurrers,
the auditors and the underwriters filed answers to the fourth amended complaint
in May 2005. Answers by the Company and our former CEO and CFO have been
extended by stipulation.

         On February 17, 2005, we participated in a mediation session with the
FabCentric plaintiffs. On February 23, 2005, the FabCentric plaintiffs agreed in
principle to settle with us and our former CEO and CFO by participating in the
HPL Parties' settlement in the Securities Class Action, in addition to receiving
2,100,000 shares of common stock from us, $500,000 in cash from our insurer,
Twin City Fire Insurance Company ("Twin City"), and 25% of the net recovery, if
any, from Twin City in the litigation described below. The parties are preparing
the settlement documentation. The Company anticipates issuing the 2,100,000 new
shares of common stock to the FabCentric plaintiffs along with an additional
336,387 shares to the plaintiffs in the Securities Class Action pursuant to an
anti-dilution provision following the Superior Court's determination that the
settlement was made in good faith.

         We were also a nominal defendant in consolidated stockholder derivative
lawsuits filed between July 31, 2002 and December 31, 2002, in Superior Court in
the County of Santa Clara, California. These lawsuits asserted derivative claims
on behalf of us against our current and former officers and directors and our
independent auditors. The consolidated complaint asserted claims for insider
trading, breach of fiduciary duties, breach of contract, professional negligence
and unjust enrichment, and sought 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. On April 6, 2005, the Superior
Court in the County of Santa Clara, California, approved the settlement of the
derivative actions. Our contribution to plaintiffs' attorney's fees of $950,000,
which was our only contribution to the settlement, was fully funded by our
excess directors and officers liability insurance ("D&O") policies.

         Additionally, Twin City (our first-layer excess D&O carrier) filed a
declaratory relief action on October 6, 2003, in Superior Court in the County of
Santa Clara, California, against us, our former President and Chief Executive
Officer, our 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 Class
Action, exhausting the limits of the primary D&O policy. We filed a Second
Amended Cross-Complaint on September 29, 2004, seeking a declaration that Twin
City and our other excess D&O insurance carriers, National Union Fire Insurance
Company ("National Union") and St. Paul Mercury Insurance Company ("St. Paul"),
are obligated to indemnify us for losses in connection with the Securities Class
Actions and related litigation and that Twin City has breached its insurance
contract by not paying the defendants' defense expenses on a current basis.

                                       33
<PAGE>

         On January 11, 2005, we argued cross-motions for summary adjudication,
in the Twin City matter. The parties sought a declaration regarding whether
exclusionary language in our D&O liability insurance application excluded
coverage for insureds who did not have knowledge of Y. David Lepejian's unlawful
conduct. The Superior Court, in a ruling issued on January 12, 2005, held that
this exclusionary language did not preclude coverage for insureds that did not
have knowledge of the unlawful conduct, including the Company. Twin City's
motion to reconsider the Superior Court's January 12, 2005 ruling was denied on
February 22, 2005 and an amended order was issued on March 9, 2005.

         We intend to continue to oppose the remaining claims made in the Third
Amended Complaint filed by Twin City and to seek coverage under Twin City's
policy. To date, Twin City has advanced or agreed to advance, subject to a
reservation of rights, a total of $900,000 under a reservation of rights to fund
our settlements of the Securities Class Action and the FabCentric Action.

         On December 21, 2004, National Union, our third-layer excess D&O
carrier, paid $1,000,000 into escrow in exchange for a full policy release. St.
Paul, our fourth-layer excess D&O carrier has similarly paid $125,000 into
escrow in exchange for a full policy release. The proceeds have now been used to
settle the consolidated derivative action and for legal defense costs.

         As of December 31, 2004, we had accrued $9.1 million relating to the
9,756,000 new shares of common stock we had agreed to issue to settle the above
actions. On March 31, 2005, we reduced the accrual to $8.4 million reflecting
the estimated value of our common stock. Accordingly, there was a $730,000
reduction in legal settlement expenses in the three month period ended March 31,
2005.

         Following our dismissal from the FabCentric Action, the only remaining
litigation in which we are party will be our claim against Twin City discussed
above. This matter is in the early stages of litigation and accordingly it may
ultimately be resolved on a basis different than currently estimated. Because
there could be many factors that enter into the ultimate resolution of this
matter which are not within our control, we are not able to estimate the maximum
potential financial exposure to litigate this matter or the potential financial
benefit to us should it be resolved successfully. The resolution of the Twin
City 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 or 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, but we believe that our existing capital resources will not be
sufficient to satisfy our current and projected funding requirements through
March 31, 2006. We intend to seek additional funding to support our future
operations through public or private sales of our equity or debt securities. 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. These factors raise substantial doubt as to our ability to continue as
a going concern, and our independent registered public accounting firm has
included a going concern uncertainty paragraph in their report, which is
included in this Form 10-K

                                       34
<PAGE>

An investment in our securities is highly speculative.

         Our stock price has been highly volatile and there has been only
limited trading volume (liquidity) in our common stock, which is currently
traded on the over-the-counter market or the "pink sheets". Historically, our
stock price has been subject to significant changes in value as we make material
announcements regarding our company or results of operations and we expect this
volatility will continue for the foreseeable future. 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.

Our financial condition 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
current weak financial condition and the going-concern basis on which our
financial statements have been prepared 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.

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.

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, we have had only three directors. We have begun
searching for candidates to fill these vacancies. However, in light of our
financial position, 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.

                                       35
<PAGE>

         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, 2005, 2004, and 2003, customers
that individually accounted for at least 10% of our revenues together
represented 34%, 42%, and 61% 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, 2005, sales to two customers
accounted for 18% and 16%, 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.

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 a significant amount 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:

                                       36
<PAGE>

         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.

         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.

                                       37
<PAGE>

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.

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

         We have incurred $8.4 million in charges related to our estimated cost
of settling the Securities Action, Covalar Action and Fabcentric Action based on
the estimated value of the 9,755,207 shares of our stock we have 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.

     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.

                                       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 59%, 53%, and 36% of our revenues in the years ended March 31,
2005, 2004 and 2003, 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:

     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.

                                       39
<PAGE>

         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.

         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.

                                       40
<PAGE>

         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 not result in a material
decrease in the fair value of our available-for-sale securities as of March 31,
2005.

         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 11.4% of total revenues in the year ended March 31,
2005, are denominated in yen. A 10% adverse change in yen exchange rates would
have had a 1.1% impact on revenues for the year ended March 31, 2005.
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,
2005 was a loss of approximately $116,000 to the Company.

         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 as 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, 2005                      44

Consolidated Balance Sheets at March 31, 2005 and 2004                                                                    45

Consolidated Statements of Cash Flows for each of the three years in the period ended March 31, 2005                      46

Consolidated Statements of Stockholders' Equity (Deficit) for each of the three years in the period ended March 31, 2005  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, 2005                                               67

</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, 2005 and 2004, and the results of
their operations and their cash flows for each of the three years in the period
ended March 31, 2005 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 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
June 27, 2005


                                       43
<PAGE>


                             HPL Technologies, Inc.
                      Consolidated Statements of Operations
                    (In thousands, except per share amounts)
<TABLE>
<CAPTION>

                                                                              Year ended March 31,
<S>                                                            <C>                <C>                 <C>
                                                                    2005               2004                2003
                                                               ---------------    ----------------    ----------------
Revenues:
  Software licenses                                                   $ 3,176             $ 4,799             $ 5,281
  Consulting services, maintenance and other                            6,593               7,902              10,311
                                                               ---------------    ----------------    ----------------
Total revenues                                                          9,769              12,701              15,592
                                                               ---------------    ----------------    ----------------

Cost of revenues:
  Software licenses                                                        96                 507                 656
  Consulting services, maintenance and other (1)                        2,752               3,131               3,808
                                                               ---------------    ----------------    ----------------
Total cost of revenues                                                  2,848               3,638               4,464
                                                               ---------------    ----------------    ----------------
Gross profit                                                            6,921               9,063              11,128
                                                               ---------------    ----------------    ----------------
Operating expenses:
  Research and development (1)                                          6,590               6,384              10,515
  Sales, general and administrative (1)                                 8,264              13,604              19,788
  Legal settlement expense (Note 16)                                      470               7,900                   -
  Goodwill impairment                                                       -                   -              30,570
  Stock-based compensation                                                 45                 315               1,047
  Amortization of intangible assets                                     1,181               1,327               1,494
                                                               ---------------    ----------------    ----------------
Total operating expenses                                               16,550              29,530              63,414
                                                               ---------------    ----------------    ----------------
Loss from operations                                                   (9,629)            (20,467)            (52,286)
Interest income and other income                                          138                 252                 617
Interest expense                                                           (3)                (39)               (149)
                                                               ---------------    ----------------    ----------------
Loss before income taxes                                               (9,494)            (20,254)            (51,818)
Provision for (benefit from) income taxes                                 (71)                 89                   -
                                                               ---------------    ----------------    ----------------

Net loss                                                             $ (9,423)           $(20,343)          $ (51,818)
                                                               ===============    ================    ================

Net loss per share basic and diluted:                                $  (0.30)            $ (0.65)          $  ( 1.69)
                                                               ===============    ================    ================

Shares used in per share calculations basic and diluted:               31,332              31,145              30,645
                                                               ===============    ================    ================
<FN>
----------------------------------------------------------
(1) Excludes the following stock-based compensation charges:

Cost of revenues                                                         $  -               $   -             $    18
Research and development                                                   15                 113                 414
Sales, general and administrative                                          30                 202                 615
                                                               ---------------    ----------------    ----------------
                                                                         $ 45               $ 315             $ 1,047
                                                               ===============    ================    ================
</FN>

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>


                                       44
<PAGE>


                             HPL Technologies, Inc.
                           Consolidated Balance Sheets
                      (In thousands, except per share data)
<TABLE>
<CAPTION>

                                                                                                         March 31,
<S>                                                                                        <C>                <C>

                                                                                                2005                 2004
                                                                                            ----------------------------------
ASSETS
Current assets:
  Cash and cash equivalents                                                                      $  1,185             $  2,408
  Short-term investments                                                                            2,061                7,802
  Accounts receivable, net of allowances of $100 and $100, respectively                             1,311                2,888
  Unbilled accounts receivable                                                                        102                    4
  Prepaid expenses and other current assets                                                         1,187                  940
                                                                                            -----------------------------------
Total current assets                                                                                5,846               14,042
Property and equipment, net                                                                           847                1,308
Goodwill                                                                                           27,754               27,754
Other intangible assets, net                                                                            -                1,181
Other assets                                                                                          355                  580
                                                                                            -----------------------------------
Total assets                                                                                     $ 34,802             $ 44,865
                                                                                            ===================================


LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable                                                                                  $ 901              $ 2,085
  Accrued liabilities                                                                               6,867                6,579
  Deferred revenue                                                                                  1,687                1,894
  Capital lease obligations - current portion                                                          26                   91
                                                                                            -----------------------------------
Total current liabilities                                                                           9,481               10,649
Capital lease obligations net of current portion                                                       13                   39
Legal settlement liability (Note 16)                                                                8,370                7,900
Other liabilities                                                                                       -                  235
                                                                                            -----------------------------------
Total liabilities                                                                                  17,864               18,823
                                                                                            -----------------------------------

Contingencies and Commitments (Notes 9 and 16)

Stockholders  equity :
Preferred stock, $0.001 par value, 10,000 shares authorized, no shares issued
 and outstanding at March 31, 2005 and 2004                                                             -                    -
Common stock, $0.001 par value; 75,000 shares authorized; 31,447 and 31,275
 shares issued and outstanding at March 31, 2005 and 2004                                              32                   32
Additional paid-in capital                                                                        124,181              124,205
Deferred stock-based compensation                                                                     (19)                (129)
Accumulated deficit                                                                              (107,470)             (98,047)
Accumulated other comprehensive gain (loss)                                                           214                  (19)
                                                                                            -----------------------------------
Total stockholders' equity                                                                         16,938               26,042
                                                                                            -----------------------------------
Total liabilities and stockholders' equity                                                       $ 34,802             $ 44,865
                                                                                            ===================================


The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                       45
<PAGE>

                             HPL Technologies, Inc.
                      Consolidated Statements of Cash Flows
                                 (In thousands)
<TABLE>
<CAPTION>

                                                      -------------------------------------------
                                                          2005           2004          2003
                                                      -------------------------------------------
<S>                                                    <C>             <C>            <C>
Cash flows from operating activities:
Net loss                                                   $  (9,423)     $ (20,343)    $ (51,818)
 Adjustments to reconcile net loss to net cash
  used in operating activities:
    Depreciation and amortization                              2,121          2,598         3,218
    Legal settlement expense                                     470          7,900             -
    Goodwill impairment                                            -              -        30,570
    Forgiveness of note                                          150            150           150
    Loss on disposal of property & equipment                      17              -             -
    Stock-based compensation                                      45            315         1,047
 Changes in assets and liabilities, net of effects
  from acquisitions:
    Accounts receivable                                        1,577         (1,328)          (47)
    Unbilled accounts receivable                                 (98)           615           164
    Prepaid expenses and other current assets                   (247)         2,266           687
    Other assets                                                  75              1            15
    Accounts payable                                          (1,184)           743        (1,398)
    Accrued liabilities                                          288           (175)       (1,068)
    Other liabilities                                           (235)          (279)         (225)
    Deferred revenue                                            (207)        (1,881)       (5,054)
                                                       -------------------------------------------
 Net cash used in operating activities                        (6,651)        (9,418)      (23,759)
                                                       -------------------------------------------
Cash flows from investing activities:
  Acquisition of property and equipment                         (506)          (263)         (397)
  Proceeds on disposal of  property and equipment                 10              -             -
  Issuance of notes receivable                                     -              -          (450)
  Acquisitions, net of cash acquired                               -              -        (2,012)
  Purchase of short-term investments                            (538)       (15,681)      (22,378)
  Sale of short-term investments                               6,279         12,263        32,319
                                                      -------------------------------------------
 Net cash provided by (used in) investing activities           5,245         (3,681)        7,082
                                                      -------------------------------------------
Cash flows from financing activities:
  Repayments of convertible debenture                             -         (1,500)            -
  Issuance of common stock                                       41              9           166
  Principal payments on capital lease obligations               (91)          (338)         (397)
  Amounts received from HPL's former Chief
   Executive Officer                                              -              -         1,300
                                                     -------------------------------------------
 Net cash provided by (used in) financing activities            (50)        (1,829)        1,069
                                                     -------------------------------------------
Effect of exchange rate changes on cash and
 cash equivalents                                               233            (14)          160
                                                     -------------------------------------------
Net decrease in cash and cash equivalents                    (1,223)       (14,942)      (15,448)
Cash and cash equivalents at beginning of period              2,408         17,350        32,798
                                                     -------------------------------------------
Cash and cash equivalents at end of period                  $ 1,185        $ 2,408      $ 17,350
                                                     ===========================================
Supplemental disclosures of cash flow information:
  Interest paid                                             $     5        $   187       $    22
  Income taxes paid                                         $    21        $    10       $ 1,749
  Income taxes refunded                                     $   180        $ 1,237       $     -
Supplemental disclosure of non-cash investing
 and financing activities:
Acquisition of property and equipment under capital
  lease obligations                                         $    -         $   172       $   391
Issuance of common stock and options assumed in
  connection with acquisitions                              $    -         $     -       $14,178


The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                       46
<PAGE>

                             HPL Technologies, Inc.
                 Consolidated Statements of Stockholders' Equity
                                 (In thousands)
<TABLE>
<CAPTION>
                                                                                                          Accumulated
                                                   Common Stock     Additional   Deferred                   other         Total
                                                  --------------     paid-in   stock-based  Accumulated comprehensive  stockholders'
                                                  Shares   Amount    capital   compensation   deficit       income        equity
                                                 -------  --------   --------- ------------  ----------- ------------  -------------
<S>                                             <C>       <C>       <C>        <C>            <C>          <C>           <C>

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 acquisitions                         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 and options assumed 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

Components of comprehensive loss:
 Net loss                                               -       -           -          -          (9,423)          -         (9,423)
 Unrealized gain on available for sale securities       -       -           -          -               -        (16)            (16)
 Foreign currency translation adjustment                -       -           -          -               -        249             249
                                                                                                                           ---------
Total comprehensive loss                                                                                                     (9,190)
                                                                                                                           ---------
xercise of stock options for cash                     172       -          41          -               -          -              41
Stock-based compensation                                -       -         (65)       110               -          -              45
                                                   -------  --------  ---------- ------------  ----------- ------------  -----------
Balances as of March 31, 2005                      31,447    $ 32    $ 124,181  $    (19)      $ (107,470)     $ 214        $ 16,938
                                                  ========  ======== =========== ============  =========== ============  ===========

The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>

                                       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, 2005, had an accumulated
deficit of $107.5 million. The Company expects to have a net operating loss in
the year ending March 31, 2006. For the year ended March 31, 2005, cash used in
operations and to fund capital expenditures was $7.2 million. Management's plans
for the Company to continue as a going concern include increases in revenues and
raising additional capital or debt financing. At March 31, 2005, the Company had
approximately $3.2 million in cash and cash equivalents and short-term
investments. The Company's current operating plan for the year ending March 31,
2006 projects that cash available from planned revenue combined with the $3.2
million on hand at March 31, 2005 will not be adequate to fund operations
through March 31, 2006. There is no assurance that equity or debt financing
would be available to the Company or, if available, under terms that would be
acceptable to the Company.


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.

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:

                                       48
<PAGE>

(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 vendor
specific objective evidence of their fair value. This objective evidence is the
sales price of the elements 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.

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

                                       49
<PAGE>

         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, 2005, 2004 and 2003.
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 as accumulated other comprehensive
income(loss).

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 $940,000, $1.3 million and $1.7 million
for the years ended March 31, 2005, 2004 and 2003, 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.

         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 $1.2 million, $1.3 million
and $1.5 million for the years ended March 31, 2005, 2004 and 2003,
respectively.

                                       50
<PAGE>

         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 has one reporting unit. 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 the
expense line item to which they relate. The net loss for the year ended March
31, 2005 was $116,000. The amount for the year ended March 31, 2004 and 2003 was
not significant.

                                       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 $1,300,
$13,000, $18,000 for the years ended March 31, 2005, 2004 and 2003,
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,
                                                                          ---------------------------------------------
<S>                                                                      <C>              <C>           <C>
                                                                               2005           2004           2003
                                                                          ---------------  ------------  --------------
Net loss, as reported                                                     $       (9,423)  $   (20,343)  $     (51,818)
Add: Stock-based employee compensation expense included in reported net
   loss                                                                               45           315           1,047
Deduct: Stock-based employee compensation determined under fair value
   based method for all awards                                                      (542)         (251)         (1,045)
                                                                          ---------------  ------------  --------------
Pro forma net loss, fair value method for all stock-based awards          $       (9,920)  $   (20,279)  $     (51,816)
                                                                          ===============  ============  ==============
Basic and diluted net loss per share:

As reported                                                               $        (0.30)  $     (0.65)  $       (1.69)

Pro forma net loss, fair value method for all stock-based awards          $        (0.32)  $     (0.65)  $       (1.69)
</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 and accounts receivable. 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 probable credit losses. The Company applies judgment as
to its ability to collect outstanding receivables based primarily on
management's evaluation of the customer's financial condition and past
collection history and records a specific allowance when required in
management's judgment. In addition, the Company records a general allowance
based on the length of time other receivables are past due.

         At March 31, 2005, receivables from the Company's Japanese distributor
and one domestic customer accounted for 29% and 10% of accounts receivable and
unbilled receivables combined, respectively. 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.

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

                                       53
<PAGE>

during the period. 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):

<TABLE>
<CAPTION>

                                                                                   Years ended March 31,
                                                                        ---------------------------------------------
<S>                                                                    <C>             <C>            <C>
                                                                            2005           2004            2003
                                                                        -------------- --------------  --------------
     Numerator:
     Net loss                                                           $      (9,423) $     (20,343)  $     (51,818)
                                                                        -------------- --------------  --------------
     Denominator:
             Weighted average common shares outstanding--basic and
               diluted                                                         31,332         31,145          30,645
                                                                        -----------------------------  --------------
     Net loss per common share--basic and diluted                        $      (0.30) $       (0.65)  $       (1.69)
                                                                        ============== ==============  ==============
</TABLE>


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

<TABLE>
<CAPTION>
                                                                                          March 31,
                                                                         --------------------------------------------
<S>                                                                      <C>           <C>             <C>
                                                                             2005          2004            2003
                                                                         ------------- --------------  --------------

     Outstanding stock options                                                  6,771          6,730           1,136
     Convertible debenture (Note 8)                                                 -              -           1,032
     Shares issuable under warrants                                                 -            138             138
     Shares contingently issuable upon legal settlement (Note 16)               9,756          7,000               -
                                                                         ------------- --------------  --------------
     Total                                                                     16,527         13,868           2,306
                                                                         ============= ==============  ==============
</TABLE>

Reclassifications

         Certain amounts in the 2004 financial statements have been reclassified
to conform with the 2005 presentation. Certain auction rate securities have been
reclassified from cash equivalents to short-term investments. Auction rate
securities are variable rate bonds tied to short-term interest rates with
maturities on the face of the securities in excess of 90 days. Auction rate
securities have interest rate resets through a modified Dutch auction, at
predetermined short-term intervals, usually every 7, 28 or 35 days. They trade
at par and are callable at par on any interest payment date at the option of the
issuer. Interest paid during a given period is based upon the interest rate
determined during the prior auction.

          Although these securities are issued and rated as long-tem bonds, they
are priced and traded as short-term instruments because of the liquidity
provided through the interest rate reset. Based on the Company s ability either
to liquidate the holdings or to roll the investment over to the next reset
period, the Company had historically classified some or all of these instruments
as cash equivalents if the period between interest rate resets was 90 days or
less.

           The Company accounts for our marketable securities in accordance with
SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities.
Such investments are classified as available for sale and are reported at fair

                                       54
<PAGE>

value in the Company s balance sheets. The short-term nature and structure, the
frequency with which the interest rate resets and the ability to sell auction
rate securities at par and at our discretion indicates that such securities
should more appropriately be classified as short-term investments with the
intent of meeting the Company s short-term working capital requirements.

          Based upon the Company s re-evaluation of these securities, the
Company reclassified as short-term investments any auction rate securities
previously classified as cash equivalents for each of the periods presented in
the consolidated balance sheets. This resulted in a reclassification from cash
and cash equivalents to short-term investments of $2.3 million on the March 31,
2004 consolidated balance sheet. In addition, purchases of short-term and
long-term investments and sales of short-term investments included in the
consolidated statements of cash flows have been revised to reflect the purchase
and sale of auction rate securities during the periods presented. This resulted
in a decrease in cash used in investing activities by $2.3 million for the year
ended March 31, 2004. These reclassifications had no impact on the previously
reported net income or cash flows from operations.


RECENT ACCOUNTING PRONOUNCEMENTS

         In September 2004, the EITF delayed the effective date for the
recognition and measurement guidance previously discussed under EITF Issue No.
03-01, "The Meaning of Other-Than-Temporary Impairment and Its Application to
Certain Investments" ("EITF 03-01") as included in paragraphs 10-20 of the
proposed statement. The proposed statement will clarify the meaning of
other-than-temporary impairment and its application to investments in debt and
equity securities, in particular investments within the scope of FASB Statement
No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and
investments accounted for under the cost method. The Company will evaluate the
impact of EITF 03-01 once the final guidance is issued.

         In December 2004, the FASB issued SFAS No. 123 (R), Share-Based Payment
("SFAS 123(R)"), an amendment of SFAS No. 123 and SFAS No. 95 Statement of Cash
Flows. The statement eliminates the ability to account for share-based
compensation transactions using APB No. 25 and requires that the cost of
share-based payment transactions (including those with employees and
non-employees) be recognized in the financial statements. SFAS No. 123(R)
applies to all share-based payment transactions in which an entity acquires
goods or services by issuing its shares, share options, or other equity
instruments or by incurring liabilities based on the price of an entity's shares
or that require settlement by the issuance of equity instruments. In March 2005,
the SEC issued Staff Accounting Bulletin (SAB) 107 ("SAB 107") which expresses
views of the SEC staff regarding the application of SFAS No. 123(R). Among other
things, SAB 107 provides interpretive guidance related to the interaction
between SFAS No. 123(R) and certain SEC rules and regulations, as well as
provides the SEC staff's views regarding the valuation of share-based payment
arrangements for public companies. In April 2005, the SEC amended the compliance
dates for SFAS 123(R) to provide that the provisions of this statement will be
effective for fiscal years beginning June 15, 2005. The Company will adopt SFAS
123(R) as of the beginning of its 2007 fiscal year. Although the Company is
currently assessing the application of SFAS No. 123(R), it believes that the
adoption of this statement will have a material impact on its results of
operations, depending on the amount of stock options it grants in future
periods.

         In December 2004, the FASB issued FASB Staff Position ("FSP") No.
109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004 ("FSP No. 109-2"). FSP
No. 109-2 provides guidance under SFAS No. 109, Accounting for Income Taxes
("SFAS No. 109"), with respect to recording the potential impact of the
repatriation provisions of the American Jobs Creation Act of 2004 (the "Jobs
Act") on enterprises' income tax expense and deferred tax liability. FSP No.
109-2 states that an enterprise is allowed time beyond the financial reporting
period of enactment of the Jobs Act to evaluate the effect of the Jobs Act on
its plan for reinvestment or repatriation of foreign earnings for purposes of

                                       55
<PAGE>

applying SFAS No. 109. The Jobs Act was enacted on October 22, 2004. The Company
does not believe that the adoption of FSP No.109-2 will have a material effect
on its financial position, results of operation or cash flows.

         In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Non-monetary Assets, an amendment of APB Opinion No. 20, Accounting for
Non-monetary Transactions." The amendments made by this Statement are based on
the principle that exchanges of non-monetary assets should be measured based on
the fair value of the assets exchanged. This Statement also eliminates the
exception for non-monetary exchanges of similar productive assets and replaces
it with a broader exception for exchanges of non-monetary assets that do not
have commercial substance. The Company is required to adopt the provisions of
this Statement beginning April 1, 2006 for all non-monetary asset exchanges and
will apply its provisions prospectively upon adoption. The Company does not
believe this statement will have a material impact on its consolidated financial
statements.


NOTE 3.  BUSINESS COMBINATIONS

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, complementary technology and a highly
skilled workforce.

<TABLE>
<CAPTION>

The aggregate purchase price was approximately $17.1 million, summarized as follows (in thousands):
     <S>                                                                                               <C>
       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
                                                                                                         ==============
</TABLE>

<TABLE>
<CAPTION>

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

       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 DYM since April 10, 2002, the date of acquisition.
</TABLE>

                                       56
<PAGE>


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 then current economic environment in the semiconductor industry and
the litigation the Company was undergoing. 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 for
the year ended March 31, 2003. 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. The Company
performed an impairment test at March 31, 2005 and 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):

<TABLE>
<CAPTION>
                                                                                                     March 31,
                                                                                           -------------------------------
                                                                                               2005             2004
                                                                                           --------------  ---------------
        <S>                                                                             <C>               <C>

         Computers, equipment and other                                                    $       3,261   $        3,635
         Furniture and fixtures                                                                      642              485
         Leasehold improvements                                                                      639              633
         Equipment and furniture under capital lease obligations                                     345              752
                                                                                           --------------  ---------------
                                                                                                   4,887            5,505
         Less: Accumulated depreciation                                                           (4,040)          (4,197)
                                                                                           --------------  ---------------
                                                                                           $         847   $        1,308
                                                                                           ==============  ===============

</TABLE>

         At March 31, 2005 and 2004, accumulated depreciation of the property
and equipment under capital leases was $311,000 and $599,000, respectively.


NOTE 6.  INTANGIBLE ASSETS

Intangible assets consist of the following (in thousands):
<TABLE>
<CAPTION>

                                                       March 31, 2005
                                 ------------------    --------------------    ---------------------         -----------------
                                   Amortization          Gross Carrying            Accumulated                 Net Carrying
                                      Period                 Amount                Amortization                   Amount
                                 ------------------    --------------------    ---------------------         -----------------
<S>                               <C>                <C>                     <C>                       <C>

Existing Technology                   3 years          $             2,760     $            (2,760)      $                  -
Modular Library                       3 years                        1,220                  (1,220)                         -
                                                       --- ----------------    --- -----------------     --- -----------------
                                                       $             3,980     $            (3,980)      $                  -
                                                       === ================    === =================     === =================
</TABLE>

<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>

                                       57
<PAGE>




NOTE 7.  ACCRUED LIABILITIES

         Accrued liabilities consist of the following (in thousands):
<TABLE>
<CAPTION>

                                                                                               March 31,
                                                                                    ---------------------------------
                                                                                        2005              2004
                                                                                    --------------   ----------------
<S>                                                                                <C>              <C>

         Payroll and related expenses                                               $         807    $           888
         Professional fees                                                                    383                563
         Other accrued expenses                                                             1,342              1,037
         Amounts received from HPL's former Chief Executive Officer
         (see Note 11)                                                                      4,335              4,335
                                                                                    ---------------------------------
                                                                                    $       6,867    $         6,579
                                                                                    ==============   ================
</TABLE>

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 December 31, 2010. Rent expense for all
operating leases for the years ended March 31, 2005, 2004 and 2003 was $1.1
million, $1.1 million, and $1.5 million, respectively.

         Minimum future lease payments under non-cancelable operating leases and
future minimum payments under capital lease agreements at March 31, 2005 are
included in the table below (in thousands):

<TABLE>
<CAPTION>
                                                                    Payments Due by Fiscal Year
<S>                                   <C>             <C>              <C>            <C>            <C>               <C>
                                       ------------    -------------    ------------    -----------    ------------    -------------
                                          Total            2006            2007            2008           2009             2010
                                       ------------    -------------    ------------    -----------    ------------    -------------

Capital Lease Obligations              $        40     $         27     $        13     $        -      $        -     $          -
Operating Lease Obligations                  1,694            1,243             135            115             115               86
                                       --- --------    --- ---------    --- --------    --- -------    --- --------    -- ----------
Total                                  $     1,734     $      1,270     $       148     $      115      $      115     $         86
                                       ===========     ============     ===========     ==========     ===========     ============
</TABLE>


Guarantees and Indemnifications

         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

                                       58
<PAGE>

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, 2005 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, 2005.


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,
                                           2005             2004
                                        ----------        ---------
     Warrants                                   -             138
     Stock option plans                    10,731          10,903
     Employee stock purchase plans          1,097             947
     Legal settlement (Note 16)             9,756               -
                                       -----------        ---------
                                           21,584          11,988
                                       ===========        =========

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.

         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.

                                       59
<PAGE>

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

<TABLE>
<CAPTION>

                                                   2005                           2004                            2003
                                       ------------------------------ ------------------------------  ------------------------------
<S>                                    <C>            <C>             <C>            <C>              <C>             <C>
                                                         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
-------------------------------------  -------------- --------------- --------------  --------------  --------------  --------------
Outstanding at beginning of year               6,730  $         0.77          1,490   $        4.40           8,650   $        2.18
   Granted and assumed upon
     acquisitions                                974            0.38          7,296            0.24             238           10.40
   Exercised                                    (172)           0.24            (68)           0.14            (443)           0.38
   Forfeited                                    (761)           1.15         (1,988)           1.59          (6,955)           2.10
                                       --------------                 --------------                  --------------
Outstanding at end of year                     6,771            0.68          6,730            0.77           1,490            4.40
                                       ============== =============== ==============  ==============  ==============  ==============
Options exercisable at end of year             2,592                            840                             873
Shares available for grant                     4,092                          4,399                           9,997

</TABLE>

        The following table summarizes information regarding options outstanding
and exercisable as of March 31, 2005:

<TABLE>
<CAPTION>
                                                             Options Outstanding                         Options Exercisable
                                              ---------------------------------------------------  ---------------------------------
<S>                                          <C>            <C>                  <C>               <C>              <C>
                                                             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
--------------------------------------------  -------------- ------------------- ----------------  ---------------  ----------------
$0.04 -- $0.22                                          538                5.26  $          0.14              308   $          0.08
$0.23 -- $0.24                                        4,286                8.46             0.24            1,595              0.24
$0.25 -- $0.29                                        1,001                8.95             0.28              167              0.27
$0.30 -- $0.97                                          508                8.33             0.53              165              0.35
$0.98 -- $3.97                                          222                6.09             3.47              197              3.46
$3.98 -- $13.87                                         216                6.35            10.18              161             10.24
                                              --------------                                       ---------------
                                                      6,771                8.12  $          0.68            2,592   $          1.10
                                              ============== =================== ================  ===============  ================
</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, 2005, 2004 and 2003 was $0.22,
$0.15, and $6.05 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:


                                       60
<PAGE>

                                                    Stock Options
                                    -------------------------------------------
Years ended March 31,                    2005           2004           2003
----------------------------------- -------------  -------------  -------------
Expected volatility                       85%            85%            85%
Weighted average risk free
  interest rate                         3.37%          2.47%          3.90%
Expected life                         5 years        5 years        5 years
Expected dividend yield                     -              -              -




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. No shares were issued in the years ended March
31, 2005, 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, in the
year ended March 31, 2005, 2004 and 2003, the Company has not recorded deferred
stock-based compensation as the grant prices were equal to the market prices on
the date of grant which is the deemed fair value of the Company's common stock
for accounting purposes. In connection with the acquisition 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 $45,000, $315,000, and $1,047,000 for the years ended March 31, 2005, 2004
and 2003, respectively.


NOTE 11.  RELATED PARTY

         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, 2005, the
balance due on the loan was $300,000. 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.

                                       61
<PAGE>

         During fiscal 2003 and 2002, the former President and Chief Executive
Officer of the Company had deposited approximately $4,335,000 into the Company's
bank accounts which amounts were purported to have represented proceeds from the
payment of accounts receivable related to fictitious sales transactions. As part
of the former President and Chief Executive Officer's settlement in the
derivative actions in April 2005, he released the Company from any claim to
these funds, extinguishing and liability the Company may have had with regards
to these funds. Accordingly, in the first quarter of fiscal 2006, the amount has
been reclassified from accrued liabilities to additional paid-in-capital as part
of shareholders' equity.


NOTE 12.  FAIR VALUE OF FINANCIAL INSTRUMENTS

         The estimated fair value of financial instruments has been determined
using available market information. 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.

         The following is a summary of cash, cash equivalents and short-term
investments (in thousands):

                                            March 31, 2005
                            ----------------------------------------------------
                                               Gross       Gross
                                Amortized   Unrealized   Unrealized    Estimated
                                  Cost         Gains      (Losses)    Fair Value
                            ------------ ------------- ------------ ------------
Checking and savings        $     1,178  $          --  $        --  $     1,178
Money market funds                    7             --           --            7
Corporate debt securities         2,067             --          (6)        2,061
                            ------------ ------------- ------------ ------------
                            $     3,251  $          --  $       (6)  $     3,246
                            ============ ============= ============ ============
Included in:
 Cash and cash equivalents                                           $     1,185
 Short-term investments                                                    2,061
                                                                    ------------
                                                                     $     3,246
                                                                    ============

                                             March 31, 2004
                            ----------------------------------------------------
                                               Gross       Gross
                                Amortized   Unrealized   Unrealized    Estimated
                                  Cost         Gains      (Losses)    Fair Value
                            ------------ ------------- ------------ ------------
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                                           $     2,408
 Short-term investments                                                    7,802
                                                                    ------------
                                                                     $    10,210
                                                                    ============

                                       62
<PAGE>

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, 2005, 2004, and 2003.

NOTE 14.  INCOME TAXES

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

                                                             March 31,
                                                  ------------------------------
                                                     2005            2004
                                                  -------------- ---------------
Deferred tax assets:
 Net operating loss and credit carry forwards     $    26,502    $     24,772
 Other accruals                                         9,521           8,137
                                                  -------------- ---------------
Gross deferred tax assets                              36,024          32,909
Valuation allowance                                   (36,024)        (32,479)
                                                  -------------- ---------------
Net deferred tax assets                           $        --    $        430
                                                  ============== ===============
Deferred tax liabilities:
 Intangible assets                                         --            (430)
                                                  -------------- ---------------
Net deferred tax liabilities                      $        --    $       (430)
                                                  ============== ===============

         Based on the available objective evidence, management believes it is
more likely than not that the net deferred tax assets at March 31, 2005 and 2004
will not be fully realizable. Accordingly, the Company has applied a full
valuation allowance against its net deferred tax assets as of March 31, 2005 and
2004. The net change in valuation allowance for the years ended March 31, 2005
and 2004 was an increase of $1.5 million and an increase of $6.7 million
respectively.

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

                                                     March 31
                                      ------------------------------------------
                                          2005            2004         2003
                                      --------------   -----------  ------------
Tax at federal statutory rate            (34.0)%       (34.0)%       (34.0)%
State, net of federal benefit             (2.9)         (2.4)         (3.8)
Other                                     (3.3)          0.1          (0.2)
Option compensation                        0.1           0.6           0.8
Valuation allowance                       39.3          36.1          37.4
                                  --------------   -----------  ------------
Provision for income taxes                (0.8)%         0.4%          0.2%
                                  ==============   ===========  ============

         At March 31, 2005, the Company had approximately $65.0 million of
Federal and $15.0 million of State net operating loss carryforwards available to
reduce future taxable income which will begin to expire in 2012 for Federal and
2010 for state tax purposes, respectively.

         The Company has research credit carryforwards of approximately $3.0
million and $1.0 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.

                                       63
<PAGE>

         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
$235,000 as of March 31, 2005, and $166,000 as of March 31, 2004.

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

                                 Years ended March 31,
                        -------------------------------------------
                            2005           2004          2003
                        -------------  ------------- --------------
     United States       $      3,993   $      5,557  $       9,869
     Japan                      2,486          3,352          2,820
     Rest of Asia               2,936          2,120          1,672
     Europe                       354          1,672          1,231
                        -------------  ------------- --------------
                         $      9,769   $     12,701  $      15,592
                        =============  ============= ==============


         For the year ended March 31, 2005, the Company derived revenue from two
customers which comprised of 18% and 16% of the Company's total revenues,
respectively.

         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.


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 Class Action"), which alleged
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.

         On March 11, 2005, the United States District Court for the Northern
District of California granted final approval of the Securities Class Action
settlement. On April 13, 2005, the period for appeals expired, and the
settlement is now final. The Company issued 5,319,613 new shares of common stock
on May 11, 2005, in consideration for the settlement of the Securities Class
Action.

                                       64
<PAGE>

         Former shareholders of Covalar Technologies Group, Inc., which was
acquired by the Company in February 2002, 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 acquisition (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. On July 13, 2004, the Company signed a
settlement and release agreement with the plaintiffs in the Covalar Action
contingent on the settlement of the Securities Class Action. Pursuant to this
settlement agreement, the Company placed 2,000,000 shares in escrow in October
2004. On December 20, 2004, the court issued an order dismissing the Company
without prejudice from the Covalar Action, pursuant to the Company's settlement
agreement with the plaintiffs. On April 15, 2005, the Company authorized the
release of 1,000,000 shares from escrow to the former Covalar shareholders. The
remaining 1,000,000 shares will remain in escrow until October 2006. During this
period, the Company has an option to acquire these shares at $1.00 per share. If
the Company does not exercise its option by October 13, 2006, the shares will be
released to the former shareholders.

         As part of the Company's initial public offering, the Company signed an
underwriting agreement, which contained a provision in favor of its
underwriters. The managing underwriter was named as a defendant in the Covalar
Action and the FabCentric Action described below. Subject to a reservation of
rights, the Company accepted the underwriter's request to indemnify the
underwriter in connection with the Company's initial public offering and to
advance expenses in the Covalar Action. The underwriter's legal counsel
submitted bills totaling $850,000 through December 31, 2003, which the Company
had accrued. On April 11, 2005, the Company entered into a settlement and
release agreement with the underwriter for a total of $425,000, which is to be
paid on or before August 11, 2005. Accordingly, during the three month period
ended March 31, 2005, the Company reduced the accrual related to the Covalar
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 (the "FabCentric Action"). The plaintiffs
subsequently added the managing underwriter in the Company's initial public
offering and the Company's current Chief Financial Officer as defendants. This
lawsuit alleges claims for fraud, negligent misrepresentation, breach of
warranties and covenants, breach of contract, negligence, and violations of the
California Corporations Code and seeks rescission or, alternatively, damages,
costs and expenses. After several rounds of demurrers, the auditors and the
underwriters filed answers to the fourth amended complaint in May 2005. Answers
by the Company and the Company's former CEO and CFO have been extended by
stipulation.

         On February 17, 2005, the FabCentric plaintiffs and the Company
participated in a mediation session. On February 23, 2005, the FabCentric
plaintiffs agreed in principle to settle with the Company and the Company's
former CEO and CFO by participating in the HPL Parties' settlement in the
Securities Class Action, in addition to receiving 2,100,000 shares of common
stock from the Company, $500,000 in cash from the Company's insurer, Twin City
Fire Insurance Company ("Twin City"), and 25% of the net recovery, if any, from
Twin City in the litigation described below. The parties are preparing the
settlement documentation. The Company anticipates issuing the 2,100,000 new
shares of common stock to the FabCentric plaintiffs along with an additional
336,387 shares to the plaintiffs in the Securities Class Action pursuant to an
anti-dilution provision following the Superior Court's determination that the
settlement was made in good faith.

         The Company was also a nominal defendant in consolidated stockholder
derivative lawsuits filed between July 31, 2002 and December 31, 2002, in
Superior Court in the County of Santa Clara, California. These lawsuits asserted
derivative claims on behalf of the Company against certain current and former
officers and directors of the Company and the Company's independent auditors.

                                       65
<PAGE>

The consolidated complaint asserted claims for insider trading, breach of
fiduciary duties, breach of contract, professional negligence and unjust
enrichment, and sought 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. On April 6, 2005, the Superior Court in the County
of Santa Clara, California, approved the settlement of the derivative actions.
The Company's contribution to plaintiffs' attorney's fees of $950,000, which was
the Company's only contribution to the settlement, was fully funded by its
excess directors and officers liability insurance ("D&O") policies.

         Additionally, Twin City (the Company's first-layer excess 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 Class Action, exhausting the limits of the
primary D&O policy. The Company filed a Second Amended Cross-Complaint on
September 29, 2004, seeking a declaration that Twin City and the Company's other
excess D&O insurance carriers, National Union Fire Insurance Company ("National
Union") and St. Paul Mercury Insurance Company ("St. Paul"), are obligated to
indemnify the Company for losses in connection with the Securities Class Actions
and related litigation and that Twin City has breached its insurance contract by
not paying the defendants' defense expenses on a current basis.

         On January 11, 2005, the Company argued cross motions for summary
adjudication in the Twin City matter. The parties sought a declaration regarding
whether exclusionary language in the Company's D&O liability insurance
application excluded coverage for insureds that did not have knowledge of Y.
David Lepejian's unlawful conduct. The Superior Court, in a ruling issued on
January 12, 2005, held that this exclusionary language did not preclude coverage
for insureds who did not have knowledge of the unlawful conduct, including the
Company. Twin City's motion to reconsider the Superior Court's January 12, 2005
ruling was denied on February 22, 2005 and an amended order was issued on March
9, 2005.

         The Company intends to continue to oppose the remaining claims made in
the Third Amended Complaint filed by Twin City and to seek coverage under Twin
City's policy. To date, Twin City has advanced or agreed to advance, subject to
a reservation of rights, a total of $900,000 under a reservation of rights to
fund settlements of the Securities Class Action and the FabCentric Action.

         On December 21, 2004, National Union, the Company's third-layer excess
D&O carrier, paid $1,000,000 into escrow in exchange for a full policy release.
The Company has dismissed National Union from its coverage action. St. Paul, the
Company's fourth-layer excess D&O carrier has similarly paid $125,000 subsequent
to December 31, 2004 into escrow in exchange for a full policy release and the
Company has dismissed St. Paul from its coverage action. The proceeds were used
to settle the consolidated derivative action and for legal defense costs.

         As of March 31, 2004, the Company had accrued $7.9 million relating to
its estimated value of the shares to be issued to settle the above actions. In
the three month period ended June 30, 2004, the Company increased the accrual by
$1.2 million to $9.1 million based on new information in the period. On March
31, 2005, the Company reduced the accrual to $8.4 million reflecting the
estimated value of the Company common stock to be issued in the settlement which
the Company measured in a manner consistent with the measurement of potential
goodwill impairment. For the year ended March 31, 2005, the legal settlement
expense was $470,000.

         Following the Company's dismissal from the FabCentric Action, the only
remaining litigation in which the Company is a party will be its claim against

                                       66
<PAGE>

Twin City discussed above. This matter is in the early stages of litigation and
accordingly it may ultimately be resolved on a basis different than currently
estimated. Because there could be many factors that enter into the ultimate
resolution of this matter which are not within the Company's control, the
Company is not able to estimate the maximum potential financial exposure to
litigate this matter or the potential financial benefit to the Company should it
be resolved successfully. The resolution of the Twin City 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
                                                                    ----------------------------------------------------------------
<S>                                                                <C>             <C>              <C>              <C>
(in thousands, except per share amounts)                              March 31,     December 31,     September 30,      June 30,
Year ended March 31, 2005                                               2005            2004              2004            2004
------------------------------------------------------------------  -------------- ----------------  ---------------  --------------
Revenues                                                            $       1,961  $         2,857   $        1,790   $       3,161
Gross profit                                                                1,534            1,977            1,029           2,381
Net loss                                                                   (1,714)          (1,826)          (3,262)         (2,621)
Net loss per share--basic and diluted:                              $       (0.05) $         (0.07)  $        (0.10)  $       (0.08)
Shares used in computing per share amounts--basic and diluted:             31,424           31,354           31,275          31,275

</TABLE>

<TABLE>
<CAPTION>
                                                                                        For the Quarters Ended
                                                                    ----------------------------------------------------------------
<S>                                                                 <C>             <C>             <C>               <C>
(in thousands, except per share amounts)                              March 31,      December 31,    September 30,      June 30,
Year ended March 31, 2004                                               2004             2003            2003             2003
------------------------------------------------------------------  --------------  --------------- ----------------  --------------
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, 2005 is a
non-cash charge reversal of $730,000 related to the revaluation of the legal
settlement accrual.

         Included in the net loss for the quarter ended June 30, 2004 is a
non-cash charge of $1.2 million related to the legal settlement estimated
expense.

         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.

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

         None.

ITEM 9A.  CONTROLS AND PROCEDURES

         CEO and CFO Certifications

                                       67
<PAGE>

         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.

         With the participation of the principal executive officer and the
principal financial officer, our management has evaluated of our disclosure
controls and procedures (as defined in the Securities Exchange Act of 1934,
Rules 13a-15(e), as of the end of the period covered by this report. Based on
that evaluation, our principal executive officer and principal financial officer
have concluded that our disclosure controls and procedures are effective as of
the end of the period covered by this report to ensure that material information
relating to HPL and its consolidated subsidiaries is made know to them.

         Additionally, there were no changes in our internal control over
financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that
occurred during the fiscal quarter ended March 31, 2005, that have materially
affected, or are reasonably likely to materially affect our internal control
over financial reporting.

                                       68
<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, 2005, all of the Reporting Persons complied with the applicable
filing requirements.

Code of Ethics

         We have adopted a code of ethics that applies to our 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 over the last three fiscal years to its
Chief Executive Officers and the four most highly compensated executive officers
of the Company for the year ended March 31, 2005 ("named executive officers").

<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)                               2005   $       275,000   $             --                 --   $           --
   President and                                     2004           244,856            100,000            925,000               --
     Chief Executive Officer                         2003                 --                --                 --               --

Michael P. Scarpelli (2)
   Chief Financial Officer,                          2005           251,200                 --                 --          177,000
        Senior Vice President-                       2004           250,000             50,000            450,000          186,000
        Administration, and                          2003           242,466             50,000                 --          187,225
        Secretary

 Brian Gordon (3)                                    2005           175,000             20,697                 --               --
   Vice President of Software                        2004           101,522                 --            350,000               --
      Engineering

 Dean Frazier (4)                                    2005           175,000                 --                                  --
       Vice President of Marketing                   2004             7,965                 --            350,000               --

 Victor Boksha (5)                                   2005           150,000             11,715                                  --
        Vice President of Business                   2004            54,038                 --            250,000               --
          Development

</TABLE>

                                       69
<PAGE>

--------------------------------------------------------------------------------
     (1) Mr. Vandenberg joined the Company in May 2003.

     (2) Mr. Scarpelli was awarded the bonus payable in 2003 and 2004 as part of
         an executive retention arrangement. The amounts in "All Other
         Compensation" relate to the forgiveness of $150,000 in principal and
         accrued interest of $27,000, $36,000, and $37,225 in 2005, 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. Gordon joined the Company in September 2003.

     (4) Mr. Frazier joined the Company in March 2004.

     (5) Mr. Boksha joined the Company in November 2003.


Fiscal 2005 Stock Option Grants

The Company granted no stock options in fiscal 2005 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 2005. No options were
exercised in the last fiscal year.

<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>
Cary D. Vandenberg                       --          $    --          346,875           578,125       $ 166,500         $  277,500
Michael P. Scarpelli                     --               --          168,750           281,250          81,000            135,000
Dean Frazier                             --               --           87,500           263,000          37,625            113,090
Brian Gordon                             --               --          131,250           218,750          63,000            105,000
Greg Yeric                               --               --          134,828           160,963          51,970             75,000
Victor Boksha                            --               --           78,125           171,875          36,719             80,781

<FN>

(1)      The value of the in-the-money options represents the difference between
         (A) $0.72, our closing stock price on March 31, 2005 (the last trading
         day of fiscal 2005), and (B) the respective exercise price for each
         option, multiplied by the number of shares of Common Stock underlying
         each respective option.
</FN>
</TABLE>

                                       70
<PAGE>

Employment Arrangements

         In December 2001, we entered into an employment agreement, which is
terminable at-will, with Michael Scarpelli, our Chief Financial Officer. This
agreement provided for 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 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 through each respective payment
date, and (3) certain severance benefits. Currently, Mr. Scarpelli is entitled
to receive severance payments equal to six months' of base salary if his
employment is terminated without cause (as defined), provided, however, that
this severance benefit will increase to 18 months' base salary if a "corporate
transaction" (as defined) occurs on or before June 12, 2006 and Mr. Scarpelli's
employment is subsequently terminated without cause. Additionally, Mr. Scarpelli
is entitled to receive a one-time bonus equal to nine months' base salary if the
Company completes a "corporate transaction" on or before June 12, 2006.

         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 for an annual base salary of $275,000 and an
annual bonus payable in an amount and at the discretion of the board. In
addition, if Mr. Vandenberg's employment is terminated without "cause", or if he
resigns for "good reason" (each as defined), then he will be entitled to receive
severance payments equal to one year of base salary, one year of COBRA benefits
coverage, and acceleration of vesting of one-half of his stock option awards (to
the extent that the options are then not fully vested). Additionally, Mr.
Vandenberg is entitled to receive a one-time bonus equal to six months' base
salary if the Company completes a "corporate transaction" on or before June 12,
2006.

         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 target bonus of $25,000 based upon individual performance,
 and an annual target bonus of $15,000 based on overall company performance. In
 addition, if Mr. Gordon's employment is terminated without cause, then he will
 be entitled to receive a severance payment equal to three months base pay.

         In March 2004, we entered into an employment agreement, which is
terminable at-will, with Dean Frazier, our Vice President of Marketing. This
agreement provides for an annual base salary of $175,000 and an annual target
bonus of $40,000 based on individual performance. In addition, if Mr. Frazier's
employment is terminated without cause, then he will be entitled to receive
severance payments equal to three months of base salary and three months of
COBRA benefits coverage.

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.

                                       71
<PAGE>

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. Options to purchase a total of 37,500 shares of common stock 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 May 31, 2005
(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, 2005
Name and Address                        --------------------------------------------------------      Percent
of Beneficial Owner +                       Shares (#)         Options (#)         Total (#)        of Class (1)
--------------------------------------  ----------------    ----------------   -----------------  ------------------
<S>                                     <C>                 <C>                <C>                 <C>
Synopsys, Inc.
 700 East Middlefield Road
  Mountain View, CA 94043                   6,239,128                   --        6,239,128           15.6%
Lawrence Kraus                              3,924,250                7,500        3,931,750            9.9%
Dr. Yervant Zorian                            782,500               15,000          797,500            2.0%
Elias Antoun                                  400,000              100,170          500,170            1.2%
Cary D. Vandenberg                                 --              423,958          423,958            1.1%
Michael P. Scarpelli                               --              206,250          206,250            0.5%
Brian Gordon                                       --              160,417          160,417            0.4%
Greg Yeric                                         --              156,446          156,446            0.4%
Dean Frazier                                       --              113,020          113,020            0.3%
Victor Boksha                                      --               98,958           98,958            0.2%
All directors and executive officers
  as a group(7 persons)                     5,106,750            1,281,719        6,388,469           16.0%
<FN>

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

</TABLE>


     (1) Applicable percentage of ownership is based on approximately
         38,768,065, shares of Common Stock outstanding as of May 31, 2005,
         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, 2005 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.

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, 2005.

                                       72
<PAGE>

<TABLE>
<CAPTION>
                                                                                                        Number of securities
                                                                                                       remaining available for
                                         Number of securities to be         Weighted-average            future issuance under
                                          issued upon exercise of            exercise price           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                                       6,638,818   $                     0.61                          5,189,347

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

Total                                                     6,638,818   $                     0.61                          5,189,347
                                        ----------------------------  ---------------------------  ---------------------------------
<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 underlie 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, 2005, 4,092,192 and 1,097,155 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>


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, 2005 and 2004 (in thousands). No other types of services
including tax or other advisory services, were provided by our principal
accounting firm during that time.


         Type of Fees                   2005              2004
         ------------------------ -----------------  ----------------
         Audit Fees (1)             $           271   $           282
                                    ===============   ===============

(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.

                                       73
<PAGE>


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, 2005 prior to the commencement of the audit.


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, 2005 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)     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)

                                       74
<PAGE>

       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 Brian Gordon, dated August 26, 2003. (6)

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

      10.10   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)

      10.11   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)

      10.12   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)

      10.13   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)

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

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

      10.16   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.

                                       75
<PAGE>

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

(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, 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.



(c)      Not Applicable

</TABLE>


                                       76
<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: June 29, 2005                 By:   /s/ Cary D Vandenberg
                                    --------------------------------------------
                                           Cary D. Vandenberg
                                           President and Chief Executive Officer


                                       77
<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                             June 29, 2005
----------------------------------------
          Cary D. Vandenberg              (Principal Executive Officer)

       /s/ Michael P. Scarpelli           Chief Financial Officer                                           June 29, 2005
----------------------------------------
         Michael P. Scarpelli             (Principal Financial and Accounting Officer)

           /s/ Elias Antoun               Director                                                          June 29, 2005
----------------------------------------
             Elias Antoun

          /s/ Lawrence Kraus              Director                                                          June 29, 2005
----------------------------------------
            Lawrence Kraus

        /s/ Dr. Yervant Zorian            Director                                                          June 29, 2005
----------------------------------------
          Dr. Yervant Zorian
</TABLE>

                                       78
<PAGE>



                                  EXHIBIT INDEX
<TABLE>
<CAPTION>

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 Brian Gordon, dated August 26, 2003. (6)

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

      10.10    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)

      10.11    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)

      10.12    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)

      10.13    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)

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

                                       79
<PAGE>

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

      10.16    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.


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

(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.


</TABLE>

                                       80
<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 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


                                       81
<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 June 27, 2005, relating to the financial statements,
which appears in this Form 10-K.

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

San Jose, California
June 28, 2005

                                       82
<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:   June 29, 2005                 By:  /s/ Cary D. Vandenberg
       ----------------                   ---------------------------------
                                           Cary D. Vandenberg
                                           President and Chief Executive Officer



                                       83
<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:   June 29, 2005                     By:    /s/ Michael P. Scarpelli
       ---------------                         ---------------------------------
                                                 Michael P. Scarpelli
                                                 Chief Financial Officer


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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: June 29, 2005
                                          /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.


                                       85
<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: June 29, 2005
                                                   /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.


                                       86
<PAGE>