UNITED STATES

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q
       |X|  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
             EXCHANGE ACT OF 1934

                  For the quarterly period ended June 30, 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                   (408) 437-1466
(Address of Principal Executive Offices)   (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

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

         As of July 31, 2005, the registrant had 41,207,277 outstanding shares
of common stock.


                                       1
<PAGE>



                                TABLE OF CONTENTS



                         PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>

<S>     <C>
Item 1   Condensed Consolidated Financial Statements (unaudited):

         Condensed Consolidated Statements of Operations for the three months ended June 30, 2005 and 2004.......................3

         Condensed Consolidated Balance Sheets as of June 30, 2005 and March 31, 2005............................................4

         Condensed Consolidated Statements of Cash Flow for the three months ended June 30, 2005 and 2004........................5

         Notes to Condensed Consolidated Financial Statements....................................................................6

Item 2   Management's Discussion and Analysis of Financial Condition and Results of Operations..................................13

Item 3   Quantitative and Qualitative Disclosures about Market Risk............................................................ 27

Item 4   Controls and Procedures................................................................................................29

                           PART II - OTHER INFORMATION

Item 1   Legal Proceedings......................................................................................................31

Item 2   Unregistered Sales of Equity Securities and Use of Proceeds............................................................31

Item 6   Exhibits...............................................................................................................31

</TABLE>






























                                       2
<PAGE>




PART I - FINANCIAL INFORMATION

ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

                                                                                     Three months ended June 30,
                                                                              -----------------------------------------
                                                                                     2005                 2004
                                                                              -------------------- --------------------
<S>                                                                           <C>                  <C>

Revenues:
Software licenses                                                                   $         583         $      1,358
Consulting services, maintenance and other                                                  2,302                1,803
                                                                              -------------------- --------------------
Total revenues                                                                              2,885                3,161
                                                                              -------------------- --------------------
Cost of revenues:
Software licenses                                                                              43                   61
Consulting services, maintenance and other                                                    567                  719
                                                                              -------------------- --------------------
Total cost of revenues                                                                        610                  780
                                                                              -------------------- --------------------
Gross profit                                                                                2,275                2,381
                                                                              -------------------- --------------------
Operating expenses:
Research and development (1)                                                                1,675                1,590
Sales, general and administrative (1)                                                       2,407                2,076
Legal settlement expense (Note 2)                                                               -                1,200
Stock-based compensation                                                                        6                   11
Amortization of intangible assets                                                               -                  332
                                                                              -------------------- --------------------
Total operating expenses                                                                    4,088                5,209
                                                                              -------------------- --------------------
Loss from operations                                                                 $     (1,813)        $     (2,828)
Interest income and other income                                                               11                   61
Interest expense                                                                               (1)                  (3)
                                                                              -------------------- --------------------
Net loss before income taxes                                                         $     (1,803)        $     (2,770)
Provision for (benefit from) income taxes                                                      17                 (149)
                                                                              -------------------- --------------------
Net loss                                                                             $     (1,820)        $     (2,621)
                                                                              ==================== ====================

Net loss per share basic and diluted:                                                $      (0.05)        $      (0.08)
                                                                              ==================== ====================

Shares used in per share calculations basic and diluted:                                   34,403               31,275
                                                                              ==================== ====================
___________

(1)  Excludes the following stock based
     compensation charges:

Research and development                                                              $         4          $         2
Sales, general and administrative                                                               2                    9
                                                                              -------------------- --------------------
                                                                                      $         6          $        11
                                                                              ==================== ====================
</TABLE>

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

                                       3
<PAGE>


                             HPL Technologies, Inc.
                           Consolidated Balance Sheets
                      (In thousands, except per share data)
                                   (unaudited)
<TABLE>
<CAPTION>
                                                                                                  June 30,          March 31,
                                                                                                   2005              2005
                                                                                             -----------------  ----------------
<S>                                                                                         <C>                 <C>
ASSETS
Current assets:
Cash and cash equivalents                                                                        $      1,136       $     1,185
Short-term investments                                                                                    267             2,061
Accounts receivable, net of allowances of $100 and $100, respectively                                   1,736             1,311
Unbilled accounts receivable                                                                              164               102
Prepaid expenses and other current assets                                                                 776             1,187
                                                                                             -----------------  ----------------

Total current assets                                                                                    4,079             5,846
Property and equipment, net                                                                               760               847
Goodwill                                                                                               27,754            27,754
Other assets                                                                                              315               355
                                                                                             -----------------  ----------------
Total assets                                                                                     $     32,908       $    34,802
                                                                                             =================  ================


LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable                                                                                 $      1,118       $       901
Accrued liabilities                                                                                     1,808             6,867
Deferred revenue                                                                                        2,126             1,687
Capital lease obligations - current portion                                                                19                26
                                                                                             -----------------  ----------------
Total current liabilities                                                                               5,071             9,481
Capital lease obligations - net of current portion                                                          8                13
Legal settlement liability (Note 2)                                                                         -             8,370
                                                                                             -----------------  ----------------
Total liabilities                                                                                       5,079            17,864
                                                                                             -----------------  ----------------

Contingencies and Commitments (Note 2)
Stockholders' equity :
Preferred stock, $0.001 par value, 10,000 shares authorized, no shares issued                               -                 -
    and outstanding at June 30, 2005 and March 31, 2005
Common stock, $0.001 par value; 75,000 shares authorized; 39,206 and 31,447
   shares issued and outstanding at June 30, 2005 and March 31, 2005,
   respectively                                                                                            42                32
Additional paid-in capital                                                                            136,878           124,181
Deferred stock-based compensation                                                                         (13)              (19)
Accumulated deficit                                                                                  (109,290)         (107,470)
Accumulated other comprehensive loss                                                                      212               214
                                                                                             -----------------  ----------------
Total stockholders' equity                                                                             27,829            16,938
                                                                                             -----------------  ----------------
Total liabilities and stockholders' equity                                                       $     32,908       $    34,802
                                                                                             =================  ================
</TABLE>

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

                                       4
<PAGE>

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

                                                                                          Three months ended June 30,
                                                                                      -------------------------------------
                                                                                             2005               2004
                                                                                      ------------------- -----------------
<S>                                                                                  <C>                    <C>

Cash flows from operating activities:
   Net loss                                                                                 $     (1,820)     $     (2,621)
     Adjustments to reconcile net loss to net cash used in
      operating activities:
         Depreciation and amortization                                                               147               596
         Legal settlement expense                                                                      -             1,200
         Loss (gain) on sale of property and equipment                                                (1)                -
         Stock-based compensation                                                                      6                11
     Changes in assets and liabilities, net of effects from acquisitions:
         Accounts receivable                                                                        (424)              (23)
         Unbilled accounts receivable                                                                (63)             (142)
         Prepaid expenses and other current assets                                                   411               187
         Other assets                                                                                 40                 7
         Accounts payable                                                                            217              (715)
         Accrued liabilities                                                                        (725)              (35)
         Other liabilities                                                                             -               (65)
         Deferred revenue                                                                            439               (38)
                                                                                      ------------------- -----------------
             Net cash used in operating activities                                                (1,773)           (1,638)
                                                                                      ------------------- -----------------

Cash flows from investing activities:
   Acquisition of property and equipment                                                             (60)             (226)
   Cash proceeds from the sale of property and equipment                                               1                 -
   Sale of short-term investments                                                                  1,794             2,300
   Purchase of short-term investments                                                                  -              (538)
                                                                                      ------------------- -----------------
             Net cash used in investing activities                                                 1,735             1,536
                                                                                      ------------------- -----------------

Cash flows from financing activities:
   Issuance of common stock                                                                            2                 -
   Principal payments on capital lease obligations                                                   (12)              (39)
                                                                                      ------------------- -----------------
             Net cash used in financing activities                                                   (10)              (39)
                                                                                      ------------------- -----------------
   Effect of exchange rate changes on cash and cash equivalents                                       (1)              (48)
                                                                                      ------------------- -----------------

   Net decrease in cash and cash equivalents                                                         (49)             (189)
   Cash and cash equivalents at beginning of period                                                1,185             2,408
                                                                                      ------------------- -----------------
   Cash and cash equivalents at end of period                                                $     1,136       $     2,219
                                                                                      =================== =================

Supplemental disclosures of cash flow information:
   Interest paid                                                                             $         -       $         2
   Income taxes paid                                                                         $        10       $        11

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

                                       5
<PAGE>


                             HPL Technologies, Inc.
         Notes to unaudited Condensed Consolidated Financial Statements

NOTE 1.  GENERAL

         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 June 30, 2005, had an accumulated
deficit of $109.3 million. The Company expects to have a net operating loss in
the year ending March 31, 2006. For the three months ended June 30, 2005, cash
used in operations and to fund capital expenditures was $1.8 million.
Management's plans for the Company to continue as a going concern include
increases in revenues or raising additional capital or debt financing. At June
30, 2005, the Company had approximately $1.4 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 $1.4 million on hand at June 30, 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.  LEGAL PROCEEDINGS

         Between July 31, 2002 and November 15, 2002, several class-action
lawsuits were filed against the Company, certain current and former officers and
directors of the Company, and the Company's independent auditors in the United
States District Court for the Northern District of California. The lawsuits were
consolidated into a single action (the "Securities 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 shares of common stock on
May 11, 2005, in consideration for the settlement of the Securities Class Action
and an additional 335,594 shares of common stock on June 30, 2005 under the
anti-dilution provision of the Securities Class Action settlement.

         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

                                       6
<PAGE>

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 of common stock 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 of common stock 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 of common stock will be released to the
former shareholders of Covalar.

         As part of the Company's initial public offering, the Company signed an
underwriting agreement, which contained an indemnification 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 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 payment
of $425,000. 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. The
dates for answers by the Company and the Company's former CEO and CFO have been
extended by stipulation.

           On or about June 24, 2005, the Company entered into a settlement
agreement with the FabCentric plaintiffs pursuant to which the FabCentric
plaintiffs agreed to settle with the Company and the Company's former CEO and
CFO in consideration of their participation in the Securities Class Action
settlement and 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 Company issued the 2,100,000 shares of common stock into escrow on
June 30, 2005 subject to release after an order finding the settlement to be in
good faith has been entered and become final. The settling parties' motion for a
determination of good faith settlement is scheduled to be heard on August 30,
2005. The underwriter's motion for judgment on pleadings based on the release in
the Company's Securities Class Action settlement is also scheduled to be heard
on August 30, 2005.

         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.
The consolidated complaint asserted claims for insider trading, breach of
fiduciary duties, breach of contract, professional negligence and unjust

                                       7
<PAGE>

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, approved the
settlement of the derivative actions. The Company's contribution to plaintiffs'
attorney's fees of $950,000 was fully funded by the Company's excess
directors and officers liability insurance ("D&O insurance").

         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 Action
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 the
unlawful conduct of Y. David Lepejian, the Company's former President and Chief
Executive Officer. The Superior Court, in a ruling issued on January 12, 2005,
held that the 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 ruling was denied on February
22, 2005 and an amended order was issued on March 9, 2005.

        On August 1, 2005, the Company sought leave to file a Third Amended
Cross-Complaint, adding a claim against Twin City for bad faith for, among other
reasons, its refusal to pay defense expenses on a current basis. On August 4,
the Company filed a motion for summary adjudication that Twin City breached its
duty to pay its insureds' defense expenses on a current basis and that two of
Twin City's three alleged defenses to coverage fail as a matter of law.

         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 in connection with the 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.

         Following the Company's dismissal from the FabCentric Action, the only
remaining litigation in which the Company is a party is its 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 the Company's control, the

                                       8
<PAGE>

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.


NOTE 3.  LOSS PER SHARE

         Basic net loss per share is computed by dividing the net loss for the
period by the weighted average number of shares of common stock outstanding
during the period, less shares outstanding that are subject to repurchase.
Diluted net loss per share is computed by dividing the net loss for the period
by the weighted average number of shares and potential shares of common stock
outstanding during the period. The calculation of diluted net loss per share
excludes shares of potential common stock if their effect is anti-dilutive.
Potential common stock consists of shares of common stock that are incremental
common shares issuable upon the exercise of stock options and warrants, computed
using the treasury stock method.


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

                                                 Three months ended June 30,
                                              ---------------------------------
                                                  2005              2004
                                              ----------------  ---------------
  Outstanding stock options                       6,782            7,152
  Shares issuable under warrants                     --              138
                                              ----------------  ---------------
    Total                                         6,782            7,290
                                              ================  ===============

NOTE 4.  CONCENTRATION OF CREDIT RISK

         Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash, cash
equivalents, short-term investments, unbilled receivables, accounts receivable
and a note receivable. Cash and cash equivalents are deposited with financial
institutions that management believes are credit worthy. The Company performs
ongoing credit evaluations of its customers' financial condition and generally
requires no collateral from its customers. At June 30, 2005, the Company's top
three customers accounted for 42%, 28% and 12% of the Company's accounts
receivable and unbilled receivables combined. At June 30, 2004, the Company's
top five customers accounted for 17%, 13%, 12 %, 12%, and 12% of the Company's
accounts receivable and unbilled receivables combined.

                                       9
<PAGE>

NOTE 5.  COMPREHENSIVE LOSS

         Other comprehensive loss consists of gains and losses that are not
recorded in the statements of operations but instead are recorded directly to
stockholders' equity. For the three months ended June 30, 2005 and 2004, total
comprehensive loss was $1.8 million and $2.7 million, respectively. The
difference between net loss and comprehensive loss for the three months ended
June 30, 2005, was the result of the foreign currency translation gains and the
net unrealized gains and losses on available for sale securities in the
aggregate amount of net loss of $9,000 and net gain of $6,000, respectively. The
difference between net loss and comprehensive loss for the three months ended
June 30, 2004, is the result of foreign currency translation gains and losses
and the net unrealized gains and losses on available for sale securities in the
aggregate amount of net loss of $34,000 and net loss of $14,000, respectively.



NOTE 6.  BANK LOAN

         On July 21, 2005, the Company entered into a short-term loan agreement
with a bank to borrow up to $3,000,000 at the rate of prime plus 4.0%. The
Company is obligated to repay the facility on or before November 30, 2005. The
Company has granted the bank a continuing first priority security interest in
all of the Company's assets, including its equipment, contract rights, cash and
intellectual property, as collateral for the loan.


NOTE 7.  ACCRUED LIABILITIES

         Accrued liabilities consist of the following (in thousands):

                                         June 30, 2005          March 31, 2005
                                      -------------------    ------------------
Payroll and related expenses            $    839                 $    807
Professional fees                            320                      383
Other accrued expenses                       649                    1,342
Amounts received from HPL's former
  Chief Executive Officer                     --                    4,335
                                      -------------------    ------------------
Total                                   $  1,808                 $  6,867
                                      ===================    ==================

NOTE 8.  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.

                                       10
<PAGE>

         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:

<TABLE>
<CAPTION>
                                                                             Three months ended June 30,
                                                                        -------------------------------------
                                                                             2005                2004
                                                                        ----------------   ------------------
<S>                                                                     <C>               <C>
Net loss, as reported                                                    $       (1,820)    $         (2,621)
Add: Stock-based employee compensation expense included in reported
   net loss                                                                           6                   11
Deduct: Stock-based employee compensation determined under fair value
   based method for all awards                                                     (104)                (181)
                                                                        ----------------   ------------------
Pro forma net loss, fair value method for all stock-based awards                 (1,918)               (2,791)
                                                                        ================   ==================
Basic and diluted net loss per share:

As reported                                                              $        (0.05)    $          (0.08)

Pro forma net loss, fair value method for all stock-based awards         $        (0.06)    $          (0.09)
</TABLE>


NOTE 9.  SEGMENT AND GEOGRAPHIC INFORMATION

         The Company has determined that it has one reportable business segment:
the sale of yield optimization software and services used in the design,
fabrication and testing of semiconductors and flat panel displays.

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

                                     June 30, 2005          June 30, 2004
                                  --------------------    -------------------
Korea                                  $    1,122            $      --
Taiwan                                        672                  473
United States                                 631                1,167
Japan                                         310                  422
Rest of World                                 150                1,099
                                  --------------------    -------------------
Total                                  $    2,885           $    3,161
                                  ====================    ===================

         For the three months ended June 30, 2005 the Company derived revenue
from two customers which comprised 40% and 17% of the Company's total revenues,
respectively.

         For the three months ended June 30, 2004, the Company derived revenue
from five customers which comprised 18%, 18%, 14%, 14% and 11% of the Company's
total revenues, respectively.

NOTE 10.  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
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 June 30, 2005 and has never
had to make a payment under such indemnification provisions.

                                       11
<PAGE>

         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 June 30, 2005.

NOTE 11.  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 after 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
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 operations or cash flows.

                                       12
<PAGE>

         In June 2005, the FASB issued SFAS No. 154, Accounting Changes and
Error Corrections. This Statement replaces Accounting Principles Board Opinion
("APB") No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes
in Interim Financial Statements. SFAS No. 154 applies to all voluntary changes
in accounting principle, and changes the requirements for accounting for and
reporting of a change in accounting principle. SFAS No. 154 requires
retrospective application to prior periods' financial statements of a voluntary
change in accounting principle unless it is impracticable. In contrast, APB No.
20 previously required that most voluntary changes in accounting principle be
recognized by including in net income of the period of the change the cumulative
effect of changing to the new accounting principle. The provisions of this
Statement will be effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005. The Statement does not
change the transition provisions of any existing accounting pronouncements,
including those that are in a transition phase as of the effective date of this
Statement. Adoption of this Statement will not have any immediate effect on the
Company's consolidated financial statements, and we will apply this guidance
prospectively.


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

         Certain parts of this Quarterly Report on Form 10-Q, including the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Legal Proceedings," may contain forward-looking statements that
involve risks and uncertainties. Statements that are not historical fact are
forward-looking statements within the meaning of the Federal securities laws.
Forward-looking statements are often, though not always, identified by words and
phrases such as "expect", "believe", "should", and "will". Readers should refer
to the information under the caption "Risk Factors" in this Quarterly Report
concerning certain factors that could cause our actual results to differ
materially from the results anticipated in such forward-looking statements and
in our most recent Annual Report on Form 10-K filed with the Securities and
Exchange Commission.

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 the three months ended June 30, 2005 and 2004, a relatively small
number of customers accounted for a large portion of our revenue, and the
composition of these customers changes from period to period. This is because
our products have a lengthy sales cycle and are characterized by large license
fees or engagement contracts. During the three months ended June 30, 2005 and
2004, two and five customers accounted for 57% and 75% of our revenues,
respectively.

         At June 30, 2005, we had $1.4 million in cash, cash equivalents and
short-term investments and an accumulated deficit of $109.3 million. As we
continue to strive 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 support research and development, sales and marketing and general and
administrative expenses, and to achieve and maintain profitability. Our ability
to generate higher revenues may continue to be impacted by our litigation as
discussed in Note 2 to the Condensed Consolidated Financial Statements, the

                                       13
<PAGE>

capital spending trends of our potential and current customers in the
semiconductor industry, the lead time to get our new products to market and our
ability to compete in our market segment. See "Liquidity and Capital Resources"
below.

CRITICAL ACCOUNTING POLICIES

         The discussion and analysis of our financial condition and results of
operations are based upon our condensed 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, 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. It is difficult to predict the
amount and timing of our revenue 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.

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

         If consulting or other services sold in connection with the software
license are essential to the functionality of the software or involve
significant production, customization or modification of software, we recognize
revenue on either a percentage-of-completion or completed contract basis. For
the percentage-of-completion method, we recognize revenues using labor hours
incurred as the measure of progress against the total labor hours estimated for
completion of the project. We consider a project completed after all contractual
obligations are met. At times, an unbilled accounts receivable balance can exist
which comprises revenue recognized in advance of contractual billings. We make

                                       14
<PAGE>

provisions for estimated contract losses in the period in which the loss becomes
probable and can be reasonably estimated. Estimates of total labor hours or
expected losses on contracts are subject to judgment and actual amounts may
differ significantly from those estimates.

         For contracts with multiple obligations (e.g., deliverable and
undeliverable products, post-contract support and other services), we allocate
revenues to the undelivered element of the contract based on the vendor specific
objective evidence of its fair value. This vendor specific 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 vendor specific 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
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:

                                       15
<PAGE>

     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.

         We continued to test for impairment on a quarterly basis and determined
that there was no impairment in goodwill at June 30, 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.

                                       16
<PAGE>


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 our 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
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

                                       17
<PAGE>

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 operations or cash flows.

         In June 2005, the FASB issued SFAS No. 154, Accounting Changes and
Error Corrections. This Statement replaces Accounting Principles Board Opinion
("APB") No. 20, Accounting Changes and SFAS No. 3, Reporting Accounting Changes
in Interim Financial Statements. SFAS No. 154 applies to all voluntary changes
in accounting principle, and changes the requirements for accounting for and
reporting of a change in accounting principle. SFAS No. 154 requires
retrospective application to prior periods' financial statements of a voluntary
change in accounting principle unless it is impracticable. In contrast, APB No.
20 previously required that most voluntary changes in accounting principle be
recognized by including in net income of the period of the change the cumulative
effect of changing to the new accounting principle. The provisions of this
Statement will be effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005. The Statement does not
change the transition provisions of any existing accounting pronouncements,
including those that are in a transition phase as of the effective date of this
Statement. Adoption of this Statement will not have any immediate effect on our
consolidated financial statements, and we will apply this guidance
prospectively.


RESULTS OF OPERATIONS

Comparison of the three months ended June 30, 2005 and 2004

         Revenues. Total revenues decreased to $2.9 million in the three months
ended June 30, 2005 from $3.2 million in the three months ended June 30, 2004,
or a decrease of 9%. Our sales cycle for the license of our software products
has historically been very long as our customers spend a significant amount of
time evaluating our products. Customer purchase orders typically include
integration and installation services 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, and our ability to sell our products in
the future may be adversely affected by our financial condition.

         Our revenues in all periods were highly concentrated, with 57% of total
revenues in the three months ended June 30, 2005 coming from two customers, and
75% of total revenues in the three months ended June 30, 2004 coming from five
customers.

                                       18
<PAGE>

         Software license revenue decreased to $583,000 in the three months
ended June 30, 2005 from $1.4 million in the three months ended June 30, 2004.
The decrease in our license revenue during the three months ended June 30, 2005
is primarily due to a lower volume of license sales and the deferral of
approximately $300,000 in license fees.

         Consulting services, maintenance and other revenues increased slightly
to $2.3 million in the three months ended June 30, 2005, up from $1.8 million in
the three months ended June 30, 2004, or an increase of 28%. The increase was
primarily due to a new customer order in the current period.

         Gross profit. As a percentage of revenues, gross profit increased to
78% for the three months ended June 30, 2005 from 75% for the three months ended
June 30, 2004. The increase in gross profit percentage is a result of higher
margin consulting services in the three months ended June 30, 2005 versus the
three months ended June 30, 2004. 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
58% of revenues in the three months ended June 30, 2005, compared to 50% of
revenues in the three months ended June 30, 2004. Actual costs increased to $1.7
million for the three months ended June 30, 2005, from $1.6 million for the
three months ended June 30, 2004, primarily due to an increase in research and
development activities for new products. Salaries and related benefits of
research and development engineers represent the single largest component of our
research and development expenses. We expect our research and development
expenses to remain relatively stable for the foreseeable future.

         Sales, general and administrative. Sales, general and administrative
expenses for the three months ended June 30, 2005 were $2.4 million, or 83% of
revenues, compared to $2.1 million, or 66% of revenues, in the three months
ended June 30, 2004. The increase in costs was primarily due to an increase in
salary expense for sales and marketing staff and $163,000 in commissions paid to
outside sales representatives for a new customer order received during the three
months ended June 30, 2005.

         Stock-based compensation. Stock-based compensation expense for the
three months ended June 30, 2005 decreased to $6,000, compared with $11,000 for
the three months ended June 30, 2004. The decrease is due to the fact that
stock-based compensation is nearing full amortization.

         Amortization of intangible assets. There was no amortization of
intangible assets in the three months ended June 30, 2005. Amortization of
intangible assets was $332,000 in the three months ended June 30, 2004. Other
intangible assets were fully amortized at March 31, 2005.

         Interest income and other income. Interest income and other income for
the three months ended June 30, 2005, was $11,000, compared to $61,000 for the
three months ended June 30, 2004. The decrease was due to the fact that over the
past year we sold short-term investments to fund current operations.

         Interest expense. Interest expense decreased to $1,000 for the three
months ended June 30, 2005 from $3,000 in the three months ended June 30, 2004.
The decline in interest expense is due to lower interest payments on capital
lease obligations.

         Provision for income taxes. In the three months ended June 30, 2005 and
2004, 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 June 30, 2005
and 2004. Our income tax benefit of $149,000 in the three months ended June 30,
2004 was primarily due to a tax refund resulting from filing an amended income
tax return for the prior year.

                                       19
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

         Our financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the satisfaction of liabilities
in the normal course of business. Accordingly, the financial statements do not
include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amount and classification of liabilities that
might be necessary if we are unable to continue as a going concern. We have
experienced net losses and negative cash flows since going public in July 2001
and, as of June 30, 2005, we had an accumulated deficit of $109.3 million. We
expect to have a net operating loss in our year ending March 31, 2006. For the
three months ended June 30, 2005, cash used in operations and to fund capital
expenditures was $1.8 million. Such conditions raise doubt about our ability to
continue as a going concern unless we increase our revenues or raise additional
capital. At June 30, 2005, we had approximately $1.4 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 $1.4 million in cash and cash equivalents and short-term investments on
hand at June 30, 2005 will not be adequate to fund operations through March 31,
2006. On July 21, 2005, we entered into a short-term loan agreement with a bank
to borrow up to $3.0 million at the rate of prime plus 4.0%. We are obligated to
repay the facility on or before November 30, 2005. We have granted the bank a
continuing first priority security interest in all of our assets, including
equipment, contract rights, cash and intellectual property, as collateral for
the loan. We are continuing to assess all long-term financial options for the
Company. The Company has retained the services of an investment bank to explore
strategic alternatives, including the sale of the Company.

         Net cash used in operating activities was $1.8 million for the three
months ended June 30, 2005, compared to $1.6 million used in operating
activities for the three months ended June 30, 2004. The increase in cash used
was primarily due to an increase in accounts receivable.

         Net cash provided by investing activities was $1.7 million for the
three months ended June 30, 2005, compared to $1.5 million provided by investing
activities for the three months ended June 30, 2004. The cash provided by
investing activities for the three months ended June 30, 2005 and 2004 consisted
primarily of the sale of marketable securities in the amount of $1.7 million and
$2.3 million, respectively.

         Net cash used in financing activities was $10,000 for the three months
ended June 30, 2005. Net cash used in financing activities was $39,000 for the
three months ended June 30, 2004. The decrease was due to lower principal
payments on capital lease obligations.

         We have commitments that will expire at various times through 2010. We
lease offices and certain property and equipment under non-cancelable operating
leases that will expire in 2010 with certain renewal options. Otherwise, we have
no other significant contractual obligations or commitments that were not
recorded in our financial statements. A summary of our contractual commitments
at June 30, 2005 is as follows.

                           Payments Due by Fiscal Year
<TABLE>
<CAPTION>

                                       ------------    -------------    ------------    -----------    ------------    ------------
                                          Total            2006            2007            2008           2009             2010
                                       ------------    -------------    ------------    -----------    ------------    ------------
<S>                                   <C>              <C>              <C>            <C>             <C>             <C>
Capital Lease Obligations              $       28      $         15     $        13     $        -      $        -     $          -
Operating Lease Obligations                 1,332               881             135            115             115               86
                                       ------------     -------------    ------------    ----------    ------------    ------------
Total                                  $    1,360       $       896      $      148     $      115      $      115     $         86
                                       ============     =============    ===========    ===========    ============    ============
</TABLE>

                                       20
<PAGE>


         Overall, we used $1.8 million of cash, cash equivalents, and short-term
investments during the three months ended June 30, 2005. We estimate that we
will continue to use cash through our year ending March 31, 2006 to fund
operating losses.

         We believe our current cash and cash equivalents, our short-term
investments, and our cash flows from operations will not be sufficient to meet
our cash requirements and fund our current operations through at least March 31,
2006. Our future cash position will be adversely affected by slow or diminishing
sales, and the amount of our research and development expenses, sales, marketing
and general and administrative expenses. If additional funds are required, there
is no assurance that the Company will be able to raise such funds on terms
acceptable to the Company, or at all.

                                  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 our Form 10-K filed with the SEC.

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 strategic and 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,

                                       21
<PAGE>

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.

Our ability to attract and retain qualified employees is critical to our
business, and any failure to do so could adversely affect us.

         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.

         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.

                                       22
<PAGE>

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 three months ended June 30, 2005 and 2004, customers
that individually accounted for at least 10% of our revenues together
represented 57% and 75% of our revenues, respectively, and in each of these
periods, there was substantial change among the companies that represented our
largest customers. In the three months ended June 30, 2005, sales to two
customers accounted for 40% and 17%, 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 could 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 cause 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. Factors that could cause our revenues and operating results to vary
from period to period include:

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

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

                                       23
<PAGE>

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.

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 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. 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. 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.

                                       24
<PAGE>

         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.

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.


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,

                                       25
<PAGE>

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 78%, and 63% of our revenues in the three months ended June 30,
2005 and 2004, 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.

         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

                                       26
<PAGE>

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 of 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 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rate Risk

         We invest excess cash in debt instruments of the U.S. Government and
its agencies, and in high quality corporate issuers and limit, the amount of
credit exposure to any one issuer. Our investments in fixed rate securities may
have their fair market value adversely impacted due to a rise in interest rates.
We believe that a change in long-term interest rates would not have a material
effect on our business, financial condition, results of operations or cash flow.
Our cash and cash equivalents consist of cash and highly liquid money market
instruments with original or remaining maturities of 90 days or less. Because of
the short maturities of these instruments, a sudden change in market interest
rates would not have a material impact on the fair value of the portfolio, but
it may cause the amount of income we derive to vary significantly 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
June 30, 2005.

Foreign Exchange Risk

         Our foreign 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 5% of total revenues for the three months ended June
30, 2005, are denominated in Yen. A 10% adverse change in Yen exchange rates
would not have had a material impact on revenues for the three months ended June
30, 2005. Additionally, our exposure to foreign exchange rate fluctuations
arises in part from inter-company accounts which can be denominated in the

                                       27
<PAGE>

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 for the three months
ended June 30, 2005 was not material.

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


                                       28
<PAGE>


ITEM 4.  CONTROLS AND PROCEDURES

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 Quarterly
Report on Form 10-Q, 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.

Limitations on the Effectiveness of Controls

         Our management, including our Chief Executive Officer and Chief
Financial Officer, does not expect that our disclosure controls or our internal
controls will prevent all errors and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within HPL have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of a simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the control. The design of any system of
controls also is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions; over time,
controls may become inadequate because of changes in conditions, or the degree
of compliance with the policies or procedures may deteriorate. Because of the
inherent limitations in a cost-effective control system, misstatements due to
error or fraud may occur and not be detected.

Scope of the Controls Evaluation

         At the end of the period covered by this report (the "Evaluation
Date"), the Company's Chief Executive Officer and Chief Financial Officer
carried out an evaluation of the effectiveness of the Company's disclosure
controls and procedures. The evaluation of our disclosure controls included a
review of disclosure controls implemented by HPL and the effect of the controls
on the information generated for use in this Quarterly Report on Form 10-Q. In
the course of the controls evaluation, we sought to identify data errors,
weaknesses in the control process or acts of fraud and to confirm that
appropriate corrective action, including process improvements, if any, were
being undertaken. This type of evaluation will be done on a quarterly basis so
that the conclusions concerning controls effectiveness can be reported in our
quarterly reports on Form 10-Q and our Annual Report on Form 10-K. The overall
goals of these various evaluation activities are to monitor our disclosure
controls and to make modifications as necessary; our intent in this regard is
that the disclosure controls will be maintained as dynamic systems that change
(with improvements and corrections) as conditions warrant.

                                       29
<PAGE>

         Among other matters, we sought in our evaluation to determine whether
there were any significant deficiencies or material weaknesses in our disclosure
controls, or whether we had identified any acts of fraud involving personnel who
have a significant role in our disclosure controls. This information was
important both for the controls evaluation generally and because the Section 302
certifications of the Chief Executive Officer and the Chief Financial Officer
require that the Chief Executive Officer and the Chief Financial Officer
disclose that information to our board's audit committee and to our independent
auditors and to report on related matters in this section of the Quarterly
Report on Form 10-Q. We also sought to deal with other controls matters in the
controls evaluation and, in each case if a problem was identified, we considered
what revision, improvement, and/or correction to make in accordance with our
ongoing procedures. In accordance with SEC requirements, the Chief Executive
Officer and the Chief Financial Officer note that, since the date of the
controls evaluation to the date of this Quarterly Report on Form 10-Q, there
have been no significant changes in disclosure controls or in other factors that
could significantly affect our disclosure controls, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Conclusions

         Based upon the disclosure controls evaluation, our Chief Executive
Officer and our Chief Financial Officer have concluded that, subject to the
limitations noted above, our disclosure controls are effective to ensure that
material information relating to HPL is made known to management, including our
Chief Executive Officer and Chief Financial Officer, particularly during the
period when our periodic reports are being prepared, and that our disclosure
controls are effective to provide reasonable assurance that our financial
statements are fairly presented in conformity with generally accepted accounting
principles. There were no significant changes in the Company's disclosure
controls, or to the Company's knowledge, in other factors that could
significantly affect the Company's disclosure controls and procedures subsequent
to the Evaluation Date.


                                       30
<PAGE>


         PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

         The information set forth in Note 2 to the Condensed Consolidated
Financial Statements appearing in this report is incorporated herein by
reference.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

         On April 13, 2005, the Company issued 5,319,613 shares of common stock
in settlement of the Securities Class Action.

         On June 30, 2005, the Company issued 2,100,000 shares of common stock
into escrow in settlement of FabCentric Action, and issued an additional 335,594
shares of common stock under the anti-dilution provision of the Securities Class
Action settlement.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K


(a) Exhibits:
<TABLE>
<CAPTION>

Exhibit                                                         Description
Number
------------  ----------------------------------------------------------------------------------------------------------------
<S>           <C>

       10.1   Employment Amendment Letter from HPL Technologies, Inc. to Cary Vandenberg, dated June 13, 2005.
       10.2   Employment Amendment Letter from HPL Technologies, Inc. to Michael Scarpelli, dated June 13, 2005.
       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

</TABLE>


                                       31
<PAGE>


                                    SIGNATURE

         Pursuant to the requirements 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.


Date:  August 15, 2005             By:     /s/ CARY D. VANDENBERG

                                   --------------------------------------------
                                   Cary D. Vandenberg
                                   President and Chief Executive Officer



                                       32
<PAGE>




         EXHIBIT INDEX
<TABLE>
<CAPTION>

Exhibit
Number                                                          Description
------------  ----------------------------------------------------------------------------------------------------------------
<S>           <C>
       10.1   Employment Amendment Letter from HPL Technologies, Inc. to Cary Vandenberg, dated June 13, 2005.
       10.2   Employment Amendment Letter from HPL Technologies, Inc. to Michael Scarpelli, dated June 13, 2005.
       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

</TABLE>


                                       33
<PAGE>



                                                                   Exhibit 10.1
June 13, 2005


Mr. Cary D. Vandenberg

         Re:      Amendment of Terms of Employment

Dear Cary:

         The Board of Directors of HPL Technologies, Inc. (the "Company" or
"HPL") is considering certain strategic alternatives, including, among others,
the possibility of a Corporate Transaction, as defined below. In order to retain
your continued services to the Company on an at-will basis and your support and
assistance in completing such a transaction, the Company hereby agrees to amend
the terms of your letter agreement, dated April 29, 2003 (the "Agreement") in
the following respects if you remain in the continuous employment of the Company
through the completion or consummation of any such transaction:

1. Paragraph 6 of the Agreement is amended in its entirety to read as follows:

                  "6. If the Company, or its successor or assigns, terminates
         your employment without cause (as defined below) or if you resign for
         good reason (as defined below), you will receive all wages earned,
         including accrued but unused vacation in accordance with HPL's vacation
         policy. In addition, HPL will pay you severance in the form of an
         immediate lump sum in the amount of six months of your then current
         salary, less applicable tax withholding, and commencing six months from
         the date of your termination, you shall receive six monthly payments at
         your rate of salary at the time of termination, less applicable tax
         withholding ("Continuation Payments"). HPL will also pay for your COBRA
         benefits for a twelve month period. In addition, if your unvested
         options have not been accelerated pursuant to the Company's Amended and
         Restated 2001 Equity Incentive Plan (the "Plan") as a result of a
         Corporate Transaction (as defined in Section 10.2(a) of the Plan) or
         are not otherwise fully exercisable at the date of termination or
         resignation, you shall be entitled to accelerated vesting of 50% of
         your unvested option's under the Plan. You agree that this shall
         constitute the only benefits, payments, severance or other amounts that
         you shall be entitled to receive upon termination of employment, and
         you hereby acknowledge and agree that receipt of those benefits shall
         be expressly conditioned upon your execution of a general release of
         claims against the Company in a form acceptable to HPL. This paragraph
         of the Agreement supersedes Section 1.2 of the Employee Inventions and
         Confidentiality Agreement.

                  For purposes of this Agreement, "cause" shall mean the
         occurrence of one or more of the following: (i) your conviction of a
         felony or a crime involving moral turpitude or dishonesty; (ii) your
         participation in a fraud or act of deceit or dishonesty against the
         Company or its stockholders; (iii) your intentional and material damage
         to the Company's property; (iv) your willful or continuing neglect of
         your duties (following notice); (v) a material breach by you of this
         Agreement, the Company's written policies, or the Employee Inventions
         and Confidentiality Agreement that is not remedied by you within 14
         days of written notice of such breach from the Company.

                                       34
<PAGE>

                  For purposes of this Agreement, "good reason" shall mean (i) a
         material reduction in your duties, including removal as President and
         Chief Executive Officer of HPL, or a change in your reporting
         relationship such that you no longer report directly to the Board of
         Directors; (ii) any reduction in your base salary and target bonus
         (other than in connection with a general decrease in the salary of all
         executive officers of the Company without your consent); (iii) a
         material breach by HPL of any of its obligations hereunder after
         providing HPL with reasonable written notice of such breach and the
         opportunity to cure same within 14 days of receipt of the notice; (iv)
         a requirement by HPL that you relocate your principal office to a
         facility more than 50 miles from HPL's current headquarters; or (v)
         failure of any successor to assume this agreement."

2. A new paragraph 6.A is added to the Agreement as follows:

                  "6.A. If during the course of your employment by HPL the
         Company successfully completes a Corporate Transaction, you shall be
         entitled to receive a special one-time bonus in the amount of six
         months of your then current salary, less applicable tax withholding."

3.       If the Company is not successful in completing a Corporate Transaction
         within one year of the date hereof, Section 2 of this letter shall be
         null and void and of no further force and effect. Notwithstanding
         anything to the contrary in this letter, the Company shall be under no
         obligation to pursue a Corporate Transaction and may accept or reject
         any offer with respect to a Corporate Transaction in its sole and
         absolute discretion.

4.       All other terms of the Agreement to the extent not inconsistent with
         the amendments in this letter shall remain in full force and effect.

         If the foregoing proposal meets with your approval, please signify your
agreement by signing, dating and returning the enclosed copy of this letter at
your earliest convenience. We appreciate your support and continued service to
HPL.

                                                     Sincerely,


                                                     Elias Antoun
                                                     Chairman of the Board


APPROVED and AGREED
This 13th day of June, 2005


/s/ Cary D. Vandenberg
----------------------
Cary D. Vandenberg



                                       35
<PAGE>


                                                                   Exhibit 10.2
June 13, 2005


Mr. Michael P. Scarpelli

         Re:      Amendment of Terms of Employment

Dear Mike:

         The Board of Directors of HPL Technologies, Inc. (the "Company" or
"HPL") is considering certain strategic alternatives, including, among others,
the possibility of a Corporate Transaction, as defined below. In order to retain
your continued services to the Company on an at-will basis and your support and
assistance in completing such a transaction, the Company hereby agrees to amend
the terms of your letter agreement, dated December 9, 2001, as modified by a
letter, dated August 6, 2002 (together, the "Agreement") in the following
respects if you remain in the continuous employment of the Company through the
completion or consummation of any such transaction:

1.       Paragraph 3 of the letter, dated August 6, 2002, is deleted in its
         entirety, and notwithstanding anything to the contrary in the
         Agreement, replaced by the following:

              "3. If the Company, or its successor or assigns, terminates your
              employment without cause (as defined in the letter agreement,
              dated December 9, 2001) you will receive all wages earned,
              including accrued but unused vacation in accordance with HPL's
              vacation policy. In addition, HPL will pay you severance in the
              form of an immediate lump sum in the amount of six months of your
              then current salary at the time of termination, less applicable
              tax withholding ("Lump Sum Payment"), and commencing six months
              from the date of your termination, you shall receive twelve
              monthly payments at your rate of salary at the time of
              termination, less applicable tax withholding. You agree that this
              paragraph shall constitute the only benefits, payments, severance
              or other amounts that you shall be entitled to receive upon
              termination of employment, and you hereby acknowledge and agree
              that receipt of those benefits shall be expressly conditioned upon
              your execution of a general release of claims against the Company
              in a form acceptable to HPL."

2. A new Paragraph 4 is added to the letter, dated August 6, 2002, as follows:

              "4. Special Bonus. If during the course of your employment by HPL
              the Company successfully completes a Corporate Transaction (as
              defined in Section 10.2(a) of the Company's Amended and Restated
              2001 Equity Incentive Plan (the "Plan")), you shall be entitled to
              receive a special one-time bonus in the amount of nine months of
              your then current salary, less applicable tax withholding."

3. Section 3 of the letter agreement, dated December 9, 2001, is deleted in its
entirety.

                                       36
<PAGE>

4.       Section 5 of the letter agreement, dated December 9, 2001, is hereby
         deleted in its entirety and replaced by the following:

              "5. Corporate Transaction. Upon completion of a Corporate
              Transaction, all outstanding principal and interest on the Loan
              will be immediately forgiven, subject to your immediate remittance
              of all applicable withholding taxes on the forgiven amounts."

5.       The words "the Option" in the fourth line of Section 7 of the letter
         agreement, dated December 9, 2001, is deleted and replaced by the words
         "any options granted to you by the Company pursuant to the Plan".

6.       If the Company is not successful in completing a Corporate Transaction
         within one year of the date hereof, Section 2 of this letter and the
         second sentence of new Paragraph 3 (except for the Lump Sum Payment)
         set forth in Section 1 of this letter, shall be null and void and of no
         further force and effect. Notwithstanding anything to the contrary in
         this letter, the Company shall be under no obligation to pursue a
         Corporate Transaction and may accept or reject any offer with respect
         to a Corporate Transaction in its sole and absolute discretion.

7.       All other terms of the Agreement to the extent not inconsistent with
         the amendments in this letter shall remain in full force and effect.

         If the foregoing proposal meets with your approval, please signify your
agreement by signing, dating and returning the enclosed copy of this letter at
your earliest convenience. We appreciate your support and continued service to
HPL.

                                                     Sincerely,


                                                     Elias Antoun
                                                     Chairman of the Board


APPROVED and AGREED
This 13th day of June, 2005


/s/ Michael P. Scarpelli
------------------------
Michael P. Scarpelli


                                       37
<PAGE>


                                                                   Exhibit 31.1


                                  CERTIFICATION

I, Cary D. Vandenberg, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of HPL Technologies, Inc.;

2. Based on my knowledge, this 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 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 officers 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(s) 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 the registrant's board of
directors (or persons performing the equivalent functions):

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

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

Date:  August 15, 2005


/s/ Cary D. Vandenberg
----------------------
Cary D. Vandenberg
President and Chief Executive Officer




                                       38
<PAGE>



                                                                   Exhibit 31.2

                                  CERTIFICATION

I, Michael P. Scarpelli, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of HPL Technologies, Inc.;

2. Based on my knowledge, this 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 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 officers 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(s) 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 the registrant's board of
directors (or persons performing the equivalent functions):

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

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

Date:  August 15, 2005



/s/ Michael P. Scarpelli
------------------------
Michael P. Scarpelli
Chief Financial Officer

                                       39
<PAGE>




                                                                   Exhibit 32.1


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

         Each of the undersigned hereby certifies that, in accordance with 18
U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, in his capacity as an officer of HPL Technologies, Inc. that this
quarterly report on Form 10-Q (the "Report") fully complies with the
requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934,
and that the information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of HPL
Technologies, Inc.


Date:   August 15, 2005
                                          /s/ CARY D. VANDENBERG
                                          -------------------------------------
                                          Cary D. Vandenberg
                                          President and Chief Executive Officer

The foregoing certification (the "Certification") is being furnished solely
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsection (a) and
(b) of Section 1350, Chapter 63 of Title 18, United States Code). A signed
original of the Certification has been provided to the Company and will be
retained by the Company in accordance with Rule 12b-11(d) of the Act and
furnished to the Securities and Exchange Commission or its staff upon request.



                                       40
<PAGE>


                                                                   Exhibit 32.2

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

         Each of the undersigned hereby certifies that, in accordance with 18
U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, in his capacity as an officer of HPL Technologies, Inc. that this
quarterly report on Form 10-Q (the "Report") fully complies with the
requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934,
and that the information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of HPL
Technologies, Inc.


Date:   August 15, 2005
                                              /s/ MICHAEL P. SCARPELLI
                                          -------------------------------------
                                              Michael P. Scarpelli
                                              Chief Financial Officer

The foregoing certification (the "Certification") is being furnished solely
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (subsection (a) and
(b) of Section 1350, Chapter 63 of Title 18, United States Code). A signed
original of the Certification has been provided to the Company and will be
retained by the Company in accordance with Rule 12b-11(d) of the Act and
furnished to the Securities and Exchange Commission or its staff upon request.


                                       41
<PAGE>