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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Commission File Number: 0-26156

Novadigm, Inc.

One International Blvd., Mahwah, NJ 07495

(201) 512-1000

     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 þ          No o

      On November 11, 2002 there were 19,409,730 shares of the Registrant’s Common Stock outstanding.

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NOVADIGM, INC.

INDEX

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PART I.     FINANCIAL INFORMATION

NOVADIGM, INC.

See accompanying Notes to Condensed Consolidated Financial Statements.

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NOVADIGM, INC.

See accompanying Notes to Condensed Consolidated Financial Statements.

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NOVADIGM, INC.

See accompanying Notes to Condensed Consolidated Financial Statements.

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NOVADIGM, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1.     Basis of Presentation

      The accompanying unaudited Condensed Consolidated Financial Statements of Novadigm, Inc. and Subsidiaries (“Novadigm” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The Company has continued to follow the accounting policies set forth in the consolidated financial statements included in its fiscal 2002 Annual Report on Form 10-K for our fiscal year ended March 31, 2002 filed with the Securities and Exchange Commission (“SEC”). In the opinion of management, the interim financial information provided herein reflects all adjustments (consisting of normal and recurring adjustments) necessary for a fair presentation of the Company’s consolidated financial position as of September 30, 2002, the results of operations for the three and six month periods ended September 30, 2002 and 2001 and cash flows for the six months ended September 30, 2002 and 2001. The results of operations for the three and six months ended September 30, 2002 are not necessarily indicative of the results to be expected for the full year.

2.     Earnings (Loss) Per Share

      Basic EPS is calculated by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted EPS is calculated by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding for the period adjusted to reflect potentially dilutive securities. Common equivalent shares were excluded from the calculations of loss per share for the six month period ended September 30, 2002 and the three and six month periods ended September 30, 2001 because the effect of including such shares in the computation would be anti-dilutive. At September 30, 2002, the Company had approximately 5.7 million outstanding stock options, which could potentially dilute basic earnings per share in the future.

      The following table reconciles net earnings (loss) and share amounts used to calculate basic earnings (loss) per share and diluted earnings (loss) per share.

3.     Recently Issued Accounting Pronouncements

      In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement No. 141, Business Combinations, (“SFAS 141”) and Statement No. 142, Goodwill and Other Intangible Assets (“SFAS 142”) and in August 2001 the FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-lived Assets (“SFAS 144”). SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated or completed after June 30, 2001. We adopted the provisions of SFAS 141

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

upon issuance. SFAS 141 also specifies criteria that intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. SFAS 142 requires, commencing April 1, 2002, that goodwill and intangible assets with indefinite useful lives no longer be amortized. Instead, they will be tested for impairment at least annually in accordance with the provisions of SFAS 142. SFAS 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS 144.

      We had unamortized identifiable intangible assets in the amount of approximately $5.4 million at March 31, 2002, all of which were subject to the provisions of SFAS 142. In connection with the adoption of SFAS 142, we evaluated our intangible assets and determined that our intangible assets have definite useful lives and, accordingly, we continue to amortize the balance over the remaining estimated useful lives. We also evaluated the remaining useful lives of our intangible assets that will continue to be amortized and have determined that no revision to the useful lives will be required. We had no intangible assets with indefinite useful lives as March 31, 2002.

      As of September 30, 2002, we have only one intangible asset relating to the cost of intellectual property acquired in October 2001 amounting to approximately $3.9 million. The future minimum amortization of this acquired intellectual property is estimated to be approximately $334 thousand per quarter and is expected to be fully amortized by December 2004.

      Total amortization of intangible assets for the quarter ended September 30, 2002, was approximately $333 thousand, all of which has been classified as cost of license as the cost of acquired intellectual property that is embedded into our Radia product suite.

      In June 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement Obligations (“SFAS 143”). SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. This Statement amends FASB Statement No. 19, Financial Accounting and Reporting by Oil and Gas Producing Companies, and it applies to all entities. We are required to adopt SFAS 143, effective for calendar year 2003. We do not expect the adoption of SFAS 143 to have a material impact on our future consolidated operations or financial position, as we are now constituted.

      Effective April 1, 2002, the Company also adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. SFAS No. 144 requires companies to separately report discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The adoption of SFAS No. 144 had no impact on the Company’s consolidated financial statements because the impairment assessment under SFAS No. 144 is largely unchanged from SFAS No. 121. The provisions of this statement for assets held for sale or other disposal generally are required to be applied prospectively to newly initiated disposal activities and, therefore, will depend on future actions initiated by management.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS 146”). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity” (including Certain Costs Incurred in a Restructuring). We are required to adopt SFAS 146, effective January 1, 2003. We do not expect the adoption of SFAS 146 to have a material impact on our future consolidated operations or financial position, as we are now constituted.

4.     Derivative Financial Instruments

      Effective April 1, 2001, the Company adopted Statements of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. This Statement requires the recognition of all derivative instruments as either assets or liabilities in the consolidated balance sheet, and the periodic adjustment of those instruments to fair value. The classification of gains and losses resulting from changes in the fair values of derivatives is dependent on the intended use of the derivative and its resultant designation.

      We have instituted a hedging program that we expect will reduce our exposure to exchange losses in the future. The program includes a company policy of denominating contracts in the currency of the subsidiary and the use of foreign exchange options and forward contracts to hedge exposed positions.

      During the second quarter of fiscal 2003, the Company’s European operations entered into a foreign currency option transaction to sell (put option) US dollars to GBP (call) amounting to $1,667,000, the strike price being 1.5815. The option expiration date is April 11, 2003. The Company’s primary purpose for entering into this transaction is to cover an exchange gain or loss on USD denominated receivable in the books of its subsidiary. The premium paid on the transaction is ratably charged to earnings over the life of the contract and the gain or loss on the transaction is recognized in earnings in the period in which the gain or loss arises.

5.     Contingencies

      The Company is engaged in certain legal and administrative proceedings.

      On July 6, 2001, Beck Systems, Inc. filed a complaint against Novadigm, Inc. and two of its customers in the United States District Court for the Northern District of Illinois, alleging infringement of two patents held by Beck Systems. The customers have been dismissed from the lawsuit. Beck Systems alleges that Novadigm’s infringement relates to the manufacture and marketing of its EDM and Radia products. Management believes that the Company has meritorious defenses and the Company is vigorously defending itself. However, due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of the litigation, particularly in cases such as this where sophisticated factual issues must be assessed and complex technical issues must be decided.

      The insurance carrier contractually responsible for coverage of the Beck Systems lawsuit was placed in rehabilitation by order of a Pennsylvania court. Under the rehabilitation procedure, the court oversees the carrier’s business activities. The Company has been advised that the court approved the carrier’s payment of the Company’s defense costs for the period after April 1, 2002 and the Company is waiting for payment to be made. Recently, the carrier filed a Petition for Liquidation. A hearing will be scheduled to address that petition and the outcome of that hearing could result in the carrier going out of business, and if that contingency happens the insurance coverage may not be available to pay for any future defense costs or for all prior defense costs.

      Management expects to incur substantial fees on defense of the Beck Systems litigation. In the event insurance coverage is not available, and certainly in the event of any unfavorable outcome of this litigation, either could have an adverse impact on our business, financial condition and results of operations in future periods.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      In connection with the Beck litigation, we have, as of September 30, 2002, set aside a reserve totaling approximately $676,000 to cover the defense costs for which the Company believes it will have to pay.

6.     Certain Relationships and Related Transactions

      In July 2002, upon the authorization of the Audit Committee of our Board of Directors, we repurchased, at a 50% discount to the then current market value of our stock, 494,977 shares of our common stock owned by Albion J. Fitzgerald, our Chairman and Chief Executive Officer. The repurchase of 353,536 shares resulted in the payment of a $700,000 margin loan from a financial institution, and the repurchase of 141,441 shares resulted in the retirement of a personal loan from Novadigm to Mr. Fitzgerald in the amount of $280,054. As a result of these repayments, there are no loans outstanding from Novadigm to Mr. Fitzgerald.

      In July 1996, we loaned Robert B. Anderson, a Director and our Executive Vice President and Managing Director of Europe, Middle East and Africa, an aggregate amount of $226,450 for the purchase of shares of our common stock. The full recourse loan was originally due and payable on July 21, 2000, bore interest at a rate of 6.04% and was secured by shares of the Company’s common stock. In July 2001, the maturity date of the loan was extended until July 21, 2002 with interest at the rate of 6.04% per annum, and in April 2002, we extended the maturity date until October 21, 2002 with interest at the rate of 2.88% per annum. In January 1997, we loaned Mr. Anderson $38,000 to pay income taxes. That loan was extended until January 15, 2002, with interest at the rate of 5.90% per annum, and in April 2002, the loan was extended until October 21, 2002, with interest at the rate of 2.73% per annum. In October 2002, we notified Mr. Anderson that these loans were immediately due and payable. Pursuant to a plan adopted by the Compensation Committee in August 2001, the Company accrued performance bonuses in the fourth fiscal quarter of 2002 and the first and second fiscal quarters of 2003 for Mr. Anderson for satisfaction of his performance objectives totaling $204,000 as of September 30, 2002. In November 2002, the Compensation Committee authorized Novadigm to negotiate and enter into a management retention agreement with Mr. Anderson pursuant to which we would pay Mr. Anderson an aggregate of $450,000, with $250,000 payable immediately, $100,000 payable on January 1, 2003, and $100,000 payable on April 1, 2003, provided that Mr. Anderson has remained continuously employed with Novadigm through these dates. In addition, under the terms of the agreement, Mr. Anderson is required to repay all retention bonuses previously paid to him under the agreement if, prior to October 1, 2005, (i) he voluntarily terminates his employment with Novadigm or (ii) Novadigm terminates his employment for reasons relating to dishonesty or misconduct or, subject to certain conditions, a failure to substantially perform his duties as an employee of Novadigm. In November 2002, Mr. Anderson repaid all amounts owing to Novadigm under these notes from the after-tax proceeds of the accrued performance bonuses and retention agreement payment described above.

      In April 2000, we loaned $830,068 to Wallace D. Ruiz, our Chief Financial Officer and Treasurer, to permit his exercise of an expiring option to purchase 130,000 shares of our common stock. The full recourse promissory note, dated April 17, 2000, bore interest at a rate of 6.46% per annum, was secured by shares of our common stock, and was originally due and payable on April 17, 2001. In April 2001, the Board of Directors agreed to extend the due date of the loan until April 17, 2002, at an interest rate of 4.63% per annum. During our fiscal year ended March 31, 2002, Mr. Ruiz made payments in the amount of $313,000 against the outstanding balance. In April 2002, the Board of Directors agreed to extend the maturity date of the remaining balance of the loan until October 21, 2002, at an interest rate of 2.88% per annum.

      In October 2001, the Company loaned $197,406 to Mr. Ruiz, to permit his exercise of an expiring option to purchase 35,000 shares of the Company’s common stock. The full recourse promissory note, dated October 1, 2001, bore interest at the rate of 3.58% per annum, was secured by shares of the Company’s common stock and was due and payable on October 1, 2002.

      At September 30, 2002, outstanding principal and accrued interest under the loans to Mr. Ruiz totaled $824,615, all of which became due and payable in October 2002. As of the date of the filing of this Quarterly

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Report on Form 10-Q, the outstanding balance remains unpaid. We have notified Mr. Ruiz that these notes are immediately due and payable. As of the due date of the loans, the value of the underlying collateral securing the loans was $252,000. Separately, Mr. Ruiz has retained counsel and asserted claims against Novadigm arising out of his allegation that Novadigm inappropriately prohibited Mr. Ruiz from selling the shares issued upon exercise of options. We are currently engaged in discussion with Mr. Ruiz and his attorneys concerning these matters. In addition, during the quarter ended September 30, 2002, we set aside a bad debt reserve of $568,485 relating to the unpaid loans from Mr. Ruiz. The reserve reflected the unpaid amounts owing under the loans less the value of the collateral securing the loans.

7.     Reclassifications

      Certain prior year amounts have been reclassified to conform to the current year’s presentation, specifically;

	•	$30 thousand and $154 thousand for the three months and six months ended September 30, 2001, respectively, for reimbursements for out-of-pocket expenses, previously recorded in cost of maintenance and services in the accompanying condensed consolidated financial statement of operations, to maintenance and service revenue, and
	•	A reduction of $155 thousand and $9 thousand for the three months and six months ended September 30, 2001, respectively, for the allowance of doubtful accounts previously recorded in sales and marketing expense in the accompanying condensed consolidated financial statement of operations, to general and administrative expense.

8.     Comprehensive Income (Loss)

      Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (“SFAS 130”) establishes standards for the reporting and display of comprehensive income (loss) and its components in a full set of financial statements. SFAS 130 requires that unrealized losses from the Company’s foreign currency translation adjustments be included in other comprehensive income (loss).

      The following presents a reconciliation of net income (loss) to comprehensive income (loss) for the three and six-month periods ended September 30, 2001 and 2002:

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

      Because we want to provide you with more meaningful and useful information, this Quarterly Report on Form 10-Q includes forward-looking statements (as such term is defined in Section 21E of the Securities Exchange Act of 1934, as amended) that reflect our current expectations about our future results, performance, prospects and opportunities. We have attempted to identify these forward-looking statements by using words such as “may,” “will,” “expects,” “anticipates,” “believes,” “intends,” “estimates,” “could” or similar expressions. These forward-looking statements are based on information currently available to us and are subject to a number of risks, uncertainties and other factors that could cause our actual results, performance, prospects or opportunities to differ materially from those expressed in, or implied by, these forward-looking statements. See “Risk Factors” for a description of these and other risks, uncertainties and factors.

      You should not place undue reliance on any forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason after the date of this Quarterly Report on Form 10-Q.

Overview

      We are a leading provider of configuration and change management solutions for enterprise and Internet computing environments that enable organizations to reduce software management costs, speed time-to-market, expand marketing channels and open new sources of revenue. Our principal customers include the information technology (“IT”) organizations of large and medium-size enterprises and government organizations, service providers, outsourcers and software content providers with digital assets on thousands to hundreds-of-thousands of computing devices, across heterogeneous environments and networks. Our products — Enterprise Desktop Manager^TM (EDM) and the Radia® suite of products — share a common e-wrap^TM technology architecture and desired-state automation approach that automatically determines which software and content components are required for each individual user at the time of a configuration update.

      We have three primary sources of revenue. License revenue is generated from licensing the rights to use our software products to end-users and from sublicense fees from resellers of our software products. We generate maintenance revenues from providing renewable support and software update rights to license customers. Lastly, we earn revenue from consulting and training activities performed for license customers. We recognize revenue in accordance with the provisions of Statement of Position (“SOP”) No. 97-2, “Software Revenue Recognition” as amended by SOP 98-9.

Critical Accounting Policies

      The SEC recently issued disclosure guidance for “critical accounting policies”. The SEC defines “critical accounting policies” as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.

      The following is not intended to be a comprehensive list of all of our accounting policies. Our significant accounting policies are more fully described in our Consolidated Financial Statements incorporated in our Form 10-K filing for the fiscal year ended March 31, 2002. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States of America, with no need for management’s judgment in their application. There are also areas in which management’s judgment in selecting an available alternative would not produce a materially different result.

      We have identified the following as accounting policies critical to us: revenue recognition, allowance for doubtful accounts, allowance for litigation and valuation allowance against deferred income tax assets.

      Revenue recognition. We recognize revenue in all transactions involving the licensing of software products in accordance with the provisions of SOP 97-2, “Software Revenue Recognition” as amended by SOP 98-9. Most of our licensing transactions are on a perpetual basis, and revenue is recognized upon delivery of the software if evidence of an arrangement exists, pricing is fixed and determinable and collectibility is

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      We allocate revenue on software transactions involving multiple elements to each element based on the relative fair values of the elements. Our software transactions frequently involve multiple elements, most commonly bundled maintenance and services. Our determination of fair value of each element in multiple element-arrangements is based on vendor specific objective evidence (VSOE). We analyze all of the elements and determine whether we have sufficient VSOE to allocate revenue to maintenance, consulting and training components included in multiple-element arrangements. Accordingly, assuming all other revenue recognition criteria are met, revenue is recognized upon delivery using the residual method in accordance with SOP 98-9, where the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue. The revenue allocated to licenses generally is recognized upon delivery of the products. The revenue allocated to maintenance generally is recognized ratably over the term of the support, typically 12 months, and revenue allocated to consulting and training elements generally is recognized as the services are performed. If evidence of the fair value for all undelivered elements does not exist, all revenue from the arrangement is deferred until such evidence exists or until all elements are delivered.

      We enter into reseller arrangements that typically provide for sublicense fees payable to us based on a percentage of list price. Reseller arrangements may include non-refundable payments in the form of guaranteed sublicense fees. Guaranteed sublicense fees from resellers are recognized as revenue upon shipment of the master copy of all software to which the guaranteed sublicense fees relate if we believe the reseller is creditworthy and if the terms of the agreement are such that the payment obligation is not subject to price adjustment, is non-cancelable and non-refundable and is due within 90 days. These guaranteed sublicense fees are applied against sublicense fees reported by the reseller in relicensing our products to end-users. $250 thousand, $0 and $1.2 million in guaranteed sublicense fees were recognized in fiscal years 2002, 2001 and 2000, respectively. As of March 31, 2002, a substantial majority of all such guaranteed sublicense fees recognized by us have been placed with end users or forfeited by the reseller.

      Allowance for doubtful accounts. The allowance for doubtful accounts is established for estimated losses resulting from the inability of our customers to pay. The allowance is regularly evaluated, by customer and in the aggregate, for adequacy taking into consideration past experience, credit quality, age of the receivable balances, and current economic conditions. The use of different estimates or assumptions could produce different allowance balances.

      Allowance for litigation. In the ordinary course of business, we become involved in litigation. (See “Part II, Item 1. Legal Proceedings”). Because we develop intellectual property and market products derived from that intellectual property, we find ourselves engaged, from time to time, in litigation to protect our proprietary intellectual property, or conversely to defend ourselves from alleged claims by third parties that we have infringed upon other’s intellectual property. In the protection of our intellectual property, we file patents for our intellectual property and we maintain policies and procedures to protect our intellectual property and to avoid infringing upon others. We routinely purchase insurance to reduce our risk to such litigation. We regularly evaluate the status of pending litigation and its recoverability through insurance. An allowance is established for amounts that we estimate to be unrecoverable. We rely on opinions of our legal counsel and insurance advisors and make use of estimates and assumptions as to probable outcomes in establishing the allowances.

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      Valuation allowance against deferred income tax assets. We recognize deferred tax assets and liabilities based upon differences between the financial statement carrying amounts and the tax bases of assets and liabilities. We regularly review the deferred tax assets for recoverability and establish a valuation allowance. We have provided a valuation allowance against our entire net deferred tax assets. This valuation allowance was recorded given the losses we have incurred through September 30, 2002 and the uncertainties regarding our future operating profitability and taxable income, all of which require significant judgment by our management.

Euro Currency

      On January 1, 1999, certain countries of the European Union established fixed conversion rates between their existing currencies and one common currency, the Euro. The Euro then began to trade on currency exchanges and to be used in business transactions. Beginning in January 2002, new Euro-denominated currencies were issued. The existing local currencies were withdrawn from circulation in July 2002. We derived approximately 45% of our total revenues outside the United States for fiscal 2002, a significant portion of which was in Europe. We derived approximately 49% of our total revenues for the three months ended September 30, 2002 and approximately 52% of our total revenues for the six months ended September 30, 2002 outside the United States. We believe the Euro conversion will not have a material effect on our consolidated financial position or results of operations. (See “Part I, Item 3. Qualitative and Quantitative Disclosures about Market Risk”).

Geographic Segment Information

      The Company conducts operations in North and South America and the Pacific Rim (“AAA”), and Europe, the Middle East and Africa (“EMEA”). The Company’s international license revenue represents products shipped from the United States directly to end-users outside the United States. All other revenue is supplied by the Company’s operations in the United States and internationally. The Company does not sell products directly to its international subsidiaries. The chief operating decision-maker of the Company receives and reviews information relating to segment revenues primarily by geographic area. Revenue by and total assets by geographic area for the three and six-month periods ended September 30, 2002 and 2001 are presented below.

      The following table presents total asset information by geographic area at September 30, 2002 and 2001.

      All period references in the discussion below and in the remainder of this Item 2 are to fiscal periods based on our fiscal year ending March 31.

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Results of Operations

      For the periods indicated, the following table sets forth the percentage of total revenue represented by the respective line items in our condensed consolidated statements of operations (unaudited):

      Total revenues for our second fiscal quarter ended September 30, 2002 were $16.5 million compared to $15.3 million for the same quarter of the previous year, an increase of approximately 8%. The increase in total revenues in the current year quarter compared to the same quarter last year is due to higher license revenue. Total revenues for the six-month period ended September 30, 2002 were $27.6 million compared to $30.2 million for the same period of the previous year. The decrease in total revenues in the current six-month period compared to the same six-month period last year is due to lower license revenue. During the quarter ended September 30, 2002, two customers, Electronic Data Systems Corp. and America On-Line, accounted for approximately 23% and 11% of our total revenues, respectively. In the six-month period ended September 30, 2002, one customer, Electronic Data Systems Corp., accounted for approximately 21% of our total revenues.

      License revenues were $10.6 million in the quarter ended September 30, 2002 compared to $9.1 million in the same quarter last year, a 16% increase. The increase in license revenue for the quarter ended September 30, 2002 was primarily attributable to closing contracts with a higher average price. License revenues in the six-month period ended September 30, 2002 were $15.3 million or compared to $18.2 million in the same period last year, a decrease of 16%. The decrease in license revenue in the current six-month period ended September 30, 2002 was due entirely to the lower license revenue in the first quarter of the current fiscal year as compared to the same quarter of the prior year. The general slowdown in corporate IT spending in North America combined with changes made to our North America sales force to improve its effectiveness had a negative short-term impact in the first quarter of the current fiscal year causing the decrease in the current six-month period. Those changes included turnover of management and sales personnel, as well as improvements to sales processes. We believe the increase in license revenue in the second quarter of the current fiscal year compared with the same quarter last year is attributable to closing more large

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      Maintenance and service revenues were $6.0 million in the quarter ended September 30, 2002 compared to $6.2 million in the comparable quarter last year, a decrease of 4%. Maintenance revenues in the current quarter were 20% higher over the same quarter last year due primarily to the 24% license revenue growth of fiscal 2002. Service revenues in the current quarter were lower 30% from the same quarter last year due to the lower billings associated with the Navy Marine Corp Intranet project partially offset by increased billings in Europe. Maintenance and service revenues in the six-month period ended September 30, 2002 were $12.3 million compared to $12.0 million in the comparable period last year, a 2% increase. The increase was due entirely to higher maintenance revenues partially offset by lower service revenues. In compliance with the Emerging Issues Task Force Topic No. 01-14, reimbursements for “out-of-pocket” expenses incurred by our professional services staff are reported as maintenance and services revenue. Previously we treated “out-of-pocket” expenses as an offset to cost of maintenance and services. Accordingly, $30 thousand and $154 thousand were reclassed for the quarter and six-month period ended September 30, 2001, respectively.

      Cost of licenses includes the amortization of the intangible asset acquired with the intellectual property purchased in October 2001. The acquired intellectual property is embedded into our Radia product suite. The fair value of the intangible asset acquired is being amortized to cost of licenses over three years. This amortization is approximately $333 thousand per quarter and is expected to be fully amortized by December 2004.

      Cost of maintenance and services includes the direct costs of customer support and update rights, and the direct and indirect costs of providing training, maintenance and technical support and consulting services to our customers. Cost of maintenance and services consist primarily of payroll, related benefits, and travel for field engineers and support personnel, other related overhead and third-party consulting fees. Cost of maintenance and services were $3.3 million for the quarter ended September 30, 2002 compared to $2.9 million for the quarter ended September 30, 2001. Cost of maintenance and services for the six-month period ended September 30, 2002 was $6.9 million compared to $5.9 million for the same period last year. The higher cost of maintenance and services in the quarter and six-month period ended September 30, 2002, as compared to the same periods of the prior year, was primarily due to an increase in compensation costs due to additional headcount in the customer support and professional services organizations. We expect the cost of maintenance and services to increase in future quarters to support the growing demand by customers for our maintenance, consulting and training services. As discussed in “maintenance and service revenues” above, we reported “out-of-pocket” expenses billed to customers as revenue and not as an offset to cost of maintenance and services. The quarter and six-month periods ended September 30, 2001 were adjusted to reflect this accounting treatment.

      Sales and marketing expenses consist primarily of salaries, related benefits, commissions, travel, consultant fees, and other costs associated with our sales and marketing efforts. Sales and marketing expenses for the quarter ended September 30, 2002 were $7.1 million as compared to $6.8 million in the same period last year. The 5% increase in the sales and marketing expenses in the current year quarter as compared to the same period last year was primarily due to higher compensation costs resulting from higher reported revenues in the quarter and to the costs incurred in the quarter for the training program of the North America sales force. Sales and marketing expenses for the six-month period ended September 30, 2002 were $13.4 million, essentially unchanged from the same period last year. We expect sales and marketing expenses to increase in future periods to support our sales plans.

      Research and development expenses consist primarily of salaries, related benefits, consultant fees and other costs associated with our research and development efforts. Research and development expenses were $2.6 million in the quarter ended September 30, 2002 compared to $2.5 million in the same period last year, a 2% increase. Research and development expenses for the six-month periods ended September 30, 2002 and September 30, 2001 were $5.2 million and $5.1 million, respectively, a 1% increase. We have been able to

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      General and administrative expenses consist primarily of salaries, related benefits, travel and fees for professional services such as legal, consulting and accounting. General and administrative expenses were $3.0 million in the quarter ended September 30, 2002 compared to $2.9 million in the same period last year, a 5% increase. The increase in general and administrative expenses in the quarter of the current fiscal year is primarily due to providing an allowance of approximately $616 thousand for the unsecured portion of the outstanding notes due from officers (See Note 6 to the Consolidated Financial Statements), the increase of the allowance for litigation by $176 thousand (See “Part II, Item 1. Legal Proceedings”), partially offset by the $450 thousand adjustment of a French tax liability accrual associated with the issuance of stock options. General and administrative expenses for the six-month period ended September 30, 2002 were $5.8 million compared to $5.6 million in the same period of last year. General and administrative expenses may increase in future quarters depending upon the outcome of pending litigation and the availability of insurance coverage, and the resolution of the notes in default due from executive officers.

      Interest income, net is comprised primarily of interest income earned on our cash, cash equivalents and marketable securities reduced by interest expense. Net interest income was $112,000 and $223,000 for the quarter and six-month period ended September 30, 2002, respectively, compared to $224,000 and $553,000 for the same periods of last year, respectively. Interest income decreased for the quarter and six-month periods ended September 30, 2002 due primarily to lower effective interest rates on balances of cash, cash equivalents and marketable securities.

      Other income/expense, net consists primarily of the cost of foreign exchange gains and losses and miscellaneous corporate expenses. Net other income/expense was an expense of $109,000 and $433,000 for the quarter and six-month period ended September 30, 2002, respectively, compared to income of $67,000 and $15,000 for the same periods of last year, respectively. We have instituted a hedging program that we expect will reduce our exposure to exchange losses in the future. The program includes a company policy of denominating contracts in the currency of the subsidiary and the use of foreign exchange options and forward contracts to hedge exposed positions.

      Provision for income taxes for the quarter ended September 30, 2002 is $43,000 compared to $0 in the same quarter of last year. The tax provision for the six months ended September 30, 2002 is $208,000 compared to $0 in the same six month period last year. The provision in both the quarter and the six-month period are due to providing an income tax provision for profits earned in European jurisdictions.

Liquidity and Capital Resources

      Cash, cash equivalents and marketable securities at September 30, 2002 was $22.2 million, a decrease of $3.6 million from the fiscal year ended March 31, 2002. Cash used in operations for the six-month period ended September 30, 2002 was $3.8 million compared to cash used in operations of $2.4 million for the same six-month period last year. The increase in cash used in operations for the six-month period ended September 30, 2002 is primarily due to the greater reported net loss ($3.6 million greater) and a decrease in the amortization expense ($1.4 million less) partially offset by accounts receivable not increasing above September 30, 2001 levels (an increase of $3.2 million).

      As of September 30, 2002, we had net working capital of $25.7 million compared to $29.6 million at the same date last year. The decline in working capital is primarily attributable to lower net accounts receivable balance.

      Property and equipment expenditures for the six-months ended September 30, 2002 were $639 thousand compared to $663 thousand for the same period of last year. We had no material commitments to purchase property and equipment at September 30, 2002, and we expect that other purchases of property and equipment throughout the remainder of the current fiscal year to be at a rate constant with those in the prior fiscal year.

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      During the quarter ended September 30, 2002, the Company expended approximately $1.5 million to repurchase approximately 767,000 shares of its common stock. Of these shares, approximately 495,000 shares were repurchased in a private transaction with our Chief Executive Officer, as described below, and the balance of 272,000 shares we repurchased in the open market.

          Lease Obligations

      We lease facilities and vehicles under non-cancelable operating leases. Future minimum lease payments are as follows (in thousands):

      The lease obligation disclosure above, for Fiscal 2003, represents a six-month period from October 1, 2002, through March 31, 2003. Rent expense for the years ended March 31, 2002, 2001 and 2000, was $2.2 million, $1.5 million and $1.1 million, respectively.

      We believe that our existing cash, cash equivalents and marketable securities will be adequate to finance our operations for at least the next 12 months. Although operating activities may provide cash in certain periods, to the extent we experience growth in the future, we anticipate that our operating and investing activities may use cash. To the extent we have uninsured litigation and related costs, we will use available cash resources. We may decide to raise additional funds, through public or private debt or equity financing, to fund future growth or continuing operations, take advantage of expansion or acquisition opportunities, develop new products or compete effectively in the marketplace. However, additional funds may not be available to us on commercially reasonable terms, or at all, when we require them, and any additional capital raised through the sale of equity or equity-linked securities could result in dilution to our existing stockholders.

          Litigation

      Management expects to incur substantial fees defending the Beck Systems lawsuit described in Note 5 to the Condensed Consolidated Financial Statements. The insurance company has advised the Company that it will pay defense costs for the period after April 1, 2002, which through September 30, 2002 amounted to approximately $936,000. In the event the Company has to make a payment in that amount, or if in the future the Company needs to take additional charges or set aside additional reserves for defense costs due to the ongoing uncertainty of insurance coverage, any such action could have an adverse impact on our business, financial condition and results of operations in future periods.

          Related Party Transactions

      In July 2002, upon the authorization of the Audit Committee of our Board of Directors, we repurchased, at a 50% discount to the then current market value of our stock, 494,977 shares of our common stock owned by Albion J. Fitzgerald, our Chairman and Chief Executive Officer. The repurchase of 353,536 shares resulted in the payment of a $700,000 margin loan from a financial institution, and the repurchase of 141,441 shares resulted in the retirement of a personal loan from Novadigm to Mr. Fitzgerald in the amount of $280,054. As a result of these repayments, there are no loans outstanding from Novadigm to Mr. Fitzgerald.

      In July 1996, we loaned Robert B. Anderson, a Director and our Executive Vice President and Managing Director of Europe, Middle East and Africa, an aggregate amount of $226,450 for the purchase of shares of

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      In April 2000, we loaned $830,068 to Wallace D. Ruiz, our Chief Financial Officer and Treasurer, to permit his exercise of an expiring option to purchase 130,000 shares of our common stock. The full recourse promissory note, dated April 17, 2000, bore interest at a rate of 6.46% per annum, was secured by shares of our common stock, and was originally due and payable on April 17, 2001. In April 2001, the Board of Directors agreed to extend the due date of the loan until April 17, 2002, at an interest rate of 4.63% per annum. During our fiscal year ended March 31, 2002, Mr. Ruiz made payments in the amount of $313,000 against the outstanding balance. In April 2002, the Board of Directors agreed to extend the maturity date of the remaining balance of the loan until October 21, 2002, at an interest rate of 2.88% per annum.

      In October 2001, the Company loaned $197,406 to Mr. Ruiz, to permit his exercise of an expiring option to purchase 35,000 shares of the Company’s common stock. The full recourse promissory note, dated October 1, 2001, bore interest at the rate of 3.58% per annum, was secured by shares of the Company’s common stock and was due and payable on October 1, 2002.

      At September 30, 2002, outstanding principal and accrued interest under the loans to Mr. Ruiz totaled $824,615, all of which became due and payable in October 2002. As of the date of the filing of this Quarterly Report on Form 10-Q, the outstanding balance remains unpaid. We have notified Mr. Ruiz that these notes are immediately due and payable. As of the due date of the loans, the value of the underlying collateral securing the loans was $252,000. Separately, Mr. Ruiz has retained counsel and asserted claims against Novadigm arising out of his allegation that Novadigm inappropriately prohibited Mr. Ruiz from selling the shares issued upon exercise of options. We are currently engaged in discussion with Mr. Ruiz and his attorneys concerning these matters. In addition, during the quarter ended September 30, 2002, we set aside a bad debt reserve of $568,485 relating to the unpaid loans from Mr. Ruiz. The reserve reflected the unpaid amounts owing under the loans less the value of the collateral securing the loans.

Risk Factors

      You should carefully consider the risks and uncertainties described below because they could materially and adversely affect our business, financial condition, operating results and prospects.

      We have a history of operating losses and we may not be able to achieve or sustain profitability in the future. We have reported an operating loss for every quarter since our incorporation in February 1992 except for the four consecutive quarters in each of fiscal 1996 and fiscal 2000, the last three quarters of 1999 and the

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      Our quarterly results are subject to significant fluctuations due to many factors, and our operating results vary due to seasonality. Our quarterly operating results have fluctuated in the past and are expected to fluctuate significantly in the future, due to a number of factors, including, among others, the size and timing of customer orders, the timing and market acceptance of our new products, the level and pricing of international sales, foreign currency exchange rates, changes in the level of operating expenses, technological advances and competitive conditions in the industry. Revenues received from our individual customers vary significantly based on the size of the product installation. Customer orders for our products have ranged from several thousands of dollars to over $10 million. As a result, our quarterly operating results are likely to be significantly affected by the number and size of customer orders we are able to obtain in any particular quarter. In addition, the sales cycle for our products is lengthy and unpredictable, and may range from a few months to over a year, depending upon the interest of the prospective customer in our products, the size of the order (which may involve a significant commitment of capital by the customer), the decision-making and acceptance procedures within the customer’s organization, the complexity of implementation and other factors.

      We generally ship orders as received and as a result typically have little or no backlog. Quarterly revenues and operating results therefore depend upon the volume and timing of orders received during the quarter, which are difficult to forecast. Historically, we have recognized the substantial majority of our quarterly license revenues in the last weeks or week of each quarter. In addition, because our expenditure levels for product development and other operating expenses are based in large part on anticipated revenues, a substantial portion of which are not typically generated until the end of each quarter, the timing and amount of revenues associated with orders have caused, and may continue to cause, significant variations in operating results from quarter to quarter.

      Our operating results are also expected to vary significantly due to seasonal trends. Historically, we have realized a greater percentage of our annual revenues in the third and fourth fiscal quarters, and a lower percentage in the first and second fiscal quarters. We believe that this seasonality is in part a result of efforts of our direct sales personnel to meet annual sales quotas, and in part a result of lower international revenues in the summer months when many businesses in Europe experience lower sales. In addition, capital budgets of our customers, which tend to concentrate spending activity at calendar year-end, have had, and may continue to have, a seasonal influence in our quarterly operating results. We expect that our operating results will continue to fluctuate in the future as a result of these and other factors, and that seasonality may increase if our continued efforts to expand our international sales are successful.

      Our business may suffer if we are not able to keep pace with rapid technological change and successfully introduce new products. The market for software and configuration management is characterized by rapid technological advances, changes in customer requirements and frequent new product introductions and enhancements. Our future success will depend in large part on our ability to enhance our current products and to develop and introduce new products that keep pace with technological developments, achieve market acceptance and respond to customer requirements that are constantly evolving. Responding to rapid technological change and the need to develop and introduce new products to meet customers’ expanding needs will require us to make substantial investments in research and product development. If we fail to anticipate or respond adequately to technological developments and customer requirements, and in particular advances in client/server enterprise hardware platforms, internet applications and platforms, operating systems and systems management applications, or experience any significant delays in product development or introduction, we could lose competitiveness and our operating results could be materially and adversely affected. There can be no assurance that any product enhancements or new products we develop will gain market acceptance.

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      The failure to develop on a timely basis new products or product enhancements could cause customers to delay or refrain from purchasing our existing products and thereby adversely affect our operating results.

      Problems with our software could materially affect our business. Software products as complex as those offered by us may contain undetected errors or failures that, despite our significant testing, are discovered only after a product has been installed and used by customers. Such errors could cause delays in product introductions and shipments, require design modifications, result in loss of or delay in market acceptance of our products, or loss of existing customers, any of which could adversely affect the business, financial condition and results of our operations.

      Intense competition in the markets in which we operate could adversely affect us. Competition in the markets we serve is diverse and rapidly changing. While a variety of vendors have offered some form of software distribution, asset management, infrastructure management or similar solutions with their offerings, our closest competitors today fall into the categories below:

	Framework SD Vendors. These competitors include IBM (Tivoli Software) and Computer Associates, which offer software distribution tools as part of their enterprise frameworks. We compete against the specific software distribution tools offered with their frameworks.
	Desktop Management Suite Vendors. These competitors include vendors such as Microsoft and Intel Corporation, which offer software distribution tools as part of desktop administration packages.
	Software Distribution Vendors. These competitors include many smaller companies in the desktop, server and mobile market segments.

      We may not be able to continue to compete effectively in the software management market and our profitability or financial performance could be adversely affected by increased competition. Many of our competitors have longer operating histories, and many have significantly greater financial, technical, sales, marketing and other resources, as well as greater name recognition and larger customer installed bases. Moreover, existing or new competitors may develop products that are superior to our products or may develop other technologies offering significant advantages over our technology.

      The market price and trading volume of our common stock have been volatile and may continue to fluctuate significantly. The market price for our common stock has been highly volatile. The trading price and trading volume of our common stock has been, and could in the future be, subject to wide fluctuations in response to quarterly variations in our operating and financial results, announcements of technological innovations or new products by us or our competitors, changes in prices to our or our competitors’ products and services, changes in product mix, change in our revenue and revenue growth rates for us as a whole or for individual geographic areas, products or product categories, as well as other events or factors. Statements or changes in opinions, ratings, or earnings estimates made by brokerage firms or industry analysts relating to the market in which we do business or relating to us specifically have resulted, and could in the future result in, an immediate and adverse effect on the market price of our common stock. In addition, the Nasdaq National Market has from time to time experienced extreme price and volume fluctuations which have particularly affected the market price for the securities of many high technology companies and which often have been unrelated to the operating performance of these companies. These broad market fluctuations may adversely affect the market price of our common stock. In the past, securities class action litigation has often been brought against a company following periods of volatility in the market price of its securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and divert management’s attention and resources, which could have a material adverse effect on our business, operating results and financial condition.

      Our business could be materially affected by risks related to our international operations. Approximately 49% of our revenues in the quarter ended September 30, 2002 and 52% of our total revenues in fiscal 2003 were derived from our international operations. International revenues are a significant percentage of our total revenues. Our operations and financial results could be significantly affected by factors associated with international operations, such as changes in foreign currency exchange rates, uncertainties relative to regional economic circumstances, longer payment cycles, greater difficulty in accounts receivable collection, changes in

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      The loss of a major customer could adversely affect our operating results. During the quarter ended September 30, 2002, two customers, Electronic Data Systems Corp. and America On-Line, accounted for approximately 23% and 11% of our total revenues, respectively. In the six-month period ended September 30, 2002, one customer, Electronic Data Systems Corp., accounts for approximately 21% of our total revenues. Therefore, if an order from a large customer does not occur or is deferred, our revenue in that quarter could be substantially reduced, and we may be unable to proportionately reduce our operating expenses during a quarter in which this occurs.

      Because we depend on proprietary technology, there are risks of infringement that could materially and adversely affect our results. Our success is heavily dependent upon proprietary technology. We rely primarily on a combination of patents, copyright and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect our proprietary rights. We seek to protect our software, documentation and other written materials under trade secret and copyright laws, which provide only limited protection. It may be possible for unauthorized third parties to copy aspects of our current or future products or to obtain and use information that we regard as proprietary. In particular, we may provide our respective licensees with access to our proprietary information underlying our licensed applications. The means we use to protect our proprietary rights may not be adequate or our competitors may independently develop similar or superior technology. Policing unauthorized use of software is difficult and software piracy can be expected to be a persistent problem. In addition, the laws of some foreign countries do not protect our proprietary rights to the same extent as do the laws of the United States. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of the proprietary rights of others. Such litigation could result in substantial costs and diversion of our resources and could have a material adverse effect on our business, results of operations, and financial condition.

      There can be no assurance that third parties will not claim infringement with respect to our current or future products. We expect that software product developers will increasingly be subject to infringement claims as the number of products and competitors in their industry segment grows and the functionality of products in different industry segments overlap. Any such claims, with or without merit, could be time consuming, result in costly litigation, cause product shipment delays, or require us to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on acceptable terms or at all, which could have a material adverse effect on our business, results of operations and financial condition. (See “Part II, Item 1. Legal Proceedings”)

      We could be subject to product liability claims that would adversely affect our business. The sale and support of our products entails the risk of claims, and we may be subject to such claims in the future. The limitation of liability provisions contained in our license agreements may not be effective under the laws of certain jurisdictions.

      The loss of our executives and key employees could adversely affect us. Our future success depends upon the contributions of our executives and key employees. The inability to retain our executives and certain key employees in research and development and sales and marketing could have a significant adverse effect on our ability to develop new products, versions of our products and the marketing and selling of those products in the marketplace. We also believe our future success will depend in large part upon our ability to attract and retain additional highly skilled personnel.

      If changes in our sales organization are not effective, our business will be adversely affected. Our future success depends upon the ability of our sales channels to generate increased revenues. We have made, and will continue to make, substantial organizational, management, process and staff changes in our North American,

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      Our ability to effectively grow depends on our ability to improve our operational systems. We have expanded our operations rapidly since inception and intend to continue to expand in the foreseeable future to pursue existing and potential market opportunities. This growth places a significant demand on management and operational resources. In order to manage growth effectively, we must implement and improve our operational systems, procedures and controls on a timely basis. If we fail to implement and improve these systems, our business, operating results and financial condition will be materially and adversely affected.

      The success of potential future acquisitions depends on our ability to integrate and manage the additions to our business. We may acquire other businesses in the future, which would complicate our management tasks. We may need to integrate widely dispersed operations that have different and unfamiliar corporate cultures. These integration efforts may not succeed or may distract management’s attention from existing business operations. Our failure to successfully manage future acquisitions could adversely affect our business. Our stockholders may experience dilution of their holdings if we finance these acquisitions by issuing additional shares of our equity securities.

      We may need additional capital in the future, which may not be available or may dilute the ownership of existing stockholders. In the future, we may need or otherwise decide to raise additional funds and we cannot be certain that we will be able to obtain additional financing on favorable terms, if at all. Further, if we issue equity securities, our current stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. If we cannot raise funds, if needed, on acceptable terms, we may not be able to develop or enhance our products, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements.

Item 3.     Quantitative and Qualitative Disclosures about Market Risk

      Our financial instruments consist of cash and cash equivalents, short-term investments, trade accounts and contracts receivable and accounts payable. We consider investments in highly liquid instruments purchased with a remaining maturity of 90 days or less at the date of purchase to be cash equivalents. Our exposure to market risk for changes in interest rates relates primarily to our short-term investments and short-term obligations. As a result, we do not expect fluctuations in interest rates to have a material impact on the fair value of these securities. We do not use derivative financial instruments in our investment portfolio.

      The majority of our operations are based in the U.S. and, historically, the majority of our transactions are denominated in U.S. dollars. However, we do have foreign-based operations where transactions are denominated in foreign currencies and are subject to market risk with respect to fluctuations in the relative value of currencies. This exposure is primarily related to local currency denominated revenue and operating expenses in Australia, Canada, United Kingdom, and the Euro denominated countries. We believe that a natural hedge exists in some local currencies, as local currency denominated revenue will substantially offset the local currency denominated operating expenses. Although we currently derive no material revenues from highly inflationary economies, we are expanding our presence in international markets outside Europe, including the Pacific Rim and Latin America, the currencies of which have tended to fluctuate more relative to the U.S. dollar. For the quarter ended September 30, 2002 the impact of fluctuations in these currencies resulted in net transaction losses of approximately $30 thousand. We have instituted a hedging program that we expect will reduce our exposure to exchange losses in the future. The program includes a company policy of denominating license contracts in the currency of the subsidiary and the use of foreign exchange options and forward contracts to hedge exposed positions. We assess the need to utilize financial instruments to hedge currency exposures on an ongoing basis. As of September 30, 2002, we had one hedging contract outstanding. The contract was purchased by our European subsidiary to hedge a large receivable denominated in a currency other than its functional currency. We do not use derivative financial instruments for speculative trading purposes, nor do we hedge our foreign currency exposure in a manner that entirely offsets the effects of changes in foreign exchange rates. There can be no assurance that future fluctuations in the value of foreign

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      Our interest income is sensitive to changes in the general level of U.S. interest rates, particularly since the majority of our investments are in short-term instruments. However, due to the nature of our short-term investments, we have concluded that we do not have material market risk exposure. Our investment policy requires us to invest funds in excess of current operating requirements in obligations of the U.S. government and its agencies, investment grade state and local government obligations, securities of U.S. corporations rated A1 or P1 by Standard & Poors or the Moody’s equivalents, and/or money market funds, deposits or notes issued or guaranteed by U.S. commercial banks meeting certain credit rating and net worth requirements.

      At September 30, 2002, our cash and cash equivalents consisted primarily of demand deposits and money market funds held by large institutions in the U.S., and our short-term investments were invested in corporate debt with an initial maturity period of less than 90 days.

Item 4.     Controls and Procedures

Evaluation of Controls and Procedures

      Within 90 days prior to the date of filing of this report, we carried out an evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Financial Officer, of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective for gathering, analyzing and disclosing the information we are required to disclose in the reports we file under the Securities Exchange Act of 1934, within the time periods specified in the SEC’s rules and forms.

Changes in Controls and Procedures

      There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation.

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PART II.     OTHER INFORMATION

Item 1.     Legal Proceedings

      On July 6, 2001, Beck Systems, Inc. filed a complaint against Novadigm, Inc. and two of its customers in the United States District Court for the Northern District of Illinois, alleging infringement of two patents held by Beck Systems. The customers have been dismissed from the lawsuit. Beck Systems alleges that Novadigm’s infringement relates to the manufacture and marketing of its EDM and Radia products. We intend to defend this suit vigorously. However, due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of the litigation, particularly in cases such as this where sophisticated factual issues must be assessed and complex technical issues must be decided. The insurance carrier contractually responsible for coverage of this lawsuit was placed in rehabilitation by order of a Pennsylvania court and recently filed a Petition for Liquidation. A hearing will be scheduled to address that petition and, depending on the outcome of that hearing, insurance coverage may not be available. Management expects to incur substantial fees on defense of the Beck Systems litigation. In the event insurance coverage is not available, and certainly in the event of any unfavorable outcome of this litigation, either could have an adverse impact on our business, financial condition and results of operations in future periods.

Item 2.     Changes in Securities

      None

Item 3.     Defaults Upon Senior Securities

      None

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

      The Company held its 2002 Annual Meeting of Stockholders on September 13, 2002. The following matters were approved by the stockholders by the votes indicated below:

Item 5.     Other Information

      None

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Item 6.     Exhibits and Reports on Form 8-K

      (a) Exhibits

      (b) Reports

      On July 2, 2002, Novadigm filed with the Securities and Exchange Commission a Form 8-K Current Report pursuant to the Securities Exchange Act of 1934, as amended, reporting a change in registrant’s certifying accountants from Arthur Andersen LLP to KPMG LLP.

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SIGNATURES

      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.

Dated: November 14, 2002

	NOVADIGM, INC.

	By:	/s/ WALLACE D. RUIZ

	Wallace D. Ruiz
	Vice President, Chief Financial Officer
	and Treasurer
	(principal financial and accounting officer)

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CERTIFICATIONS PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT

I, Albion J. Fitzgerald, certify that:

	1.	I have reviewed this quarterly report on Form 10-Q of Novadigm, Inc.;
	2.	Based on my knowledge, this quarterly 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 quarterly report;
	3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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-14 and 15d-14) for the registrant and we have:

	a)	designed such disclosure controls and procedures 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 quarterly report is being prepared;
	b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
	c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

	5.	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

	a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

	6.	The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

	/s/ ALBION J. FITZGERALD
	Albion J. Fitzgerald
	Chief Executive Officer

Date: November 14, 2002

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I, Wallace D. Ruiz, certify that:

	1.	I have reviewed this quarterly report on Form 10-Q of Novadigm, Inc.;
	2.	Based on my knowledge, this quarterly 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 quarterly report;
	3.	Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly 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-14 and 15d-14) for the registrant and we have:

	a)	designed such disclosure controls and procedures 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 quarterly report is being prepared;
	b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
	c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

	5.	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

	a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

	6.	The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

	/s/ WALLACE D. RUIZ
	Wallace D. Ruiz
	Chief Financial Officer

Date: November 14, 2002

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EXHIBIT INDEX