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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

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).     Yes o          No þ

      On August 11, 2003 there were 19,129,604 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 Consolidated Financial Statements.

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NOVADIGM, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying Notes to Consolidated Financial Statements.

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NOVADIGM, INC.

See accompanying Notes to Consolidated Financial Statements.

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NOVADIGM, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      The accompanying unaudited 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 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 Annual Report on Form 10-K for the fiscal year ended March 31, 2003, as 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 June 30, 2003, and its results of operations and cash flows for the three-month period ended June 30, 2003. The results of operations for the three months ended June 30, 2003 are not necessarily indicative of the results to be expected for the full year. Certain prior year amounts have been reclassified to conform to the current period presentation.

      In December 2002, Statement of Financial Accounting Standards (“SFAS”) No. 148, Accounting for Stock Based Compensation — Transition and Disclosure, an amendment to FASB Statement No. 123 was issued. SFAS No. 148 amended SFAS No. 123, Accounting for Stock-Based Compensation to provide alternative methods of transition for a voluntary change to the fair-value-based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 related to disclosures about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The disclosure provisions of SFAS No. 148 are applicable to both interim and annual financial statements ending after December 15, 2002.

      SFAS No. 123, permits companies to (i) recognize as expense the fair value of stock-based awards, or (ii) continue to apply the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations (“APB 25”), and provide pro forma net income and earnings per share disclosures for employee stock option grants as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company continues to apply the provisions of APB 25 and provide the pro forma disclosures in accordance with the provisions of SFAS No.’s 123 and 148 to its Stock Option and Incentive Plan. Under APB 25, the Company has not recorded any stock-based employee and director compensation cost associated with its stock option plan, as all options granted under the plan had an exercise price equal to the market value of the underlying common stock on the date of grant.

      The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to its stock option plan:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The weighted average fair values of options granted during the quarters ended June 30, 2003 and 2002 was $1.83 and $5.25, respectively.

      The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants during the three months ended June 30, 2003 and 2002: average risk-free interest rates of 1.1% and 1.9%, respectively; expected dividend yields of 0%, expected lives of options of 5.0 years, and expected volatility of 105% and 103%, respectively.

      Basic earnings per share (“EPS”) is calculated by dividing income (loss) 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 (loss) available to common stockholders by the weighted average number of shares of common stock outstanding for the period. Common equivalent shares were excluded from the calculations of the Company’s diluted loss per share for the three-month period ended June 30, 2003 and 2002, because the effect of including such shares in the computation would be anti-dilutive. At June 30, 2003 and 2002, the Company had outstanding stock options to purchase approximately 5.1 million shares and 5.7 million shares, respectively, of the Company’s Common Stock, which could potentially dilute basic EPS in the future (see “Note 8. Stock Option Exchange Program” for additional information regarding these stock options).

      In April 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (“SFAS 149”). SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. The Company is required to adopt SFAS 149 for new contracts and certain hedging designated instruments after June 30, 2003, and certain provisions of SFAS 149 as it relates to Statement No. 133 Implementation Issues are effective for fiscal quarters that began prior to June 15, 2003. The Company does not expect SFAS 149 to have a material impact on its future consolidated results of operations or financial position.

      In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“SFAS 150”). SFAS 150 revises the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. SFAS 150 requires that those instruments be classified as liabilities in statements of financial position. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

otherwise is effective for interim periods beginning after June 15, 2003. The Company does not expect SFAS 150 to have a material impact on its future consolidated operations or financial position.

      In November 2002, the FASB issued Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. The Interpretation elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. It also clarifies that, at the time a company issues a guarantee, that company must recognize an initial liability for the fair value, or market value, of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and initial measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002, regardless of the guarantor’s fiscal year-end. The Company was required to adopt the disclosure requirements in this Interpretation for financial statements for interim or annual periods ending after December 15, 2002. The adoption of this Interpretation on December 31, 2002 has not had a material impact on the Company’s consolidated financial position or results of operations.

      On July 6, 2001, Beck Systems, Inc. filed a complaint against the Company and two of the Company’s 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 manufacture and marketing of its EDM and Radia products infringe on the Beck Systems patents. The Company believes it has meritorious defenses and is defending this suit vigorously. Any unfavorable outcome of this litigation could have a material adverse impact on the Company’s business, consolidated financial condition and results of operations.

      The Company’s management expects to incur substantial fees defending the Beck Systems lawsuit. The Company’s insurance company has paid the defense costs for the period after April 1, 2002, and now asserts that the Company has exhausted its coverage. In the event the Company needs to take additional charges or set aside additional reserves for defense costs due to the ongoing uncertainty of additional insurance coverage, any such action could have a material adverse impact on the Company’s business, consolidated financial condition and results of operations in future periods.

      The outcome of litigation is inherently uncertain, however, particularly in cases such as this where sophisticated factual issues must be assessed and complex technical issues must be decided. As a result, the Company cannot accurately predict the ultimate outcome of the Beck Systems litigation. In the event the Company is unsuccessful in defending this claim, the Company could be liable for economic and other damages and may be forced to incur ongoing licensing expenses or to change how it designs, manufactures and markets its products. While the Company is unable at this time to estimate the range of the potential liability that would result from an unsuccessful defense, the Company believes that the liability could have an adverse impact on its business, consolidated financial condition and results of operations in future periods. In addition, the Company expects to continue to incur substantial fees to defend the Beck Systems litigation. While the Company has received insurance proceeds to cover part of its defense costs, the insurance proceeds will not be sufficient to cover all of the Company’s defense costs nor will they be sufficient to cover its liability in the event that the Company’s defense is unsuccessful.

      In April 2000, the Company loaned $830,068 to Wallace D. Ruiz, the Company’s Chief Financial Officer and Treasurer, to permit his exercise of an expiring option to purchase 130,000 shares of the Company’s 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 the Company’s Common Stock and was originally due and payable on April 17, 2001. In April 2001, the Company’s Board of Directors agreed to extend the due date of the loan

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

until April 17, 2002, at an interest rate of 4.63% per annum. During the Company’s 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.

      In September 2002, Mr. Ruiz asserted claims against the Company related to his inability to exercise expiring options and sell the underlying shares of Novadigm Common Stock during certain times in 1999, 2000 and 2001 due to insider trading restrictions imposed by the Company at those times and related to the loans made to him by the Company to allow Mr. Ruiz to exercise those options, as described above.

      The Company’s Board of Directors appointed one of its outside directors to serve as a special independent committee of the Board with the authority to investigate Mr. Ruiz’s claims and recommend appropriate action on the Company’s behalf. The special committee retained independent counsel to assist with that investigation and to represent the Company’s interests in the matter. After reporting the results of its investigation and its recommendations to the Company’s Board of Directors, the special committee was authorized to negotiate a settlement with Mr. Ruiz. The special committee and the Board of Directors unanimously approved the terms of the settlement reached with Mr. Ruiz.

      On May 16, 2003, Novadigm reached an agreement to settle the previously disclosed claims that had been asserted against Novadigm by Mr. Ruiz. Under the terms of the settlement, Novadigm paid Mr. Ruiz approximately $1,080,000 and Mr. Ruiz repaid to the Company all of the outstanding principal and accrued interest on loans owed by him to Novadigm through a cash payment of approximately $838,000 and the surrender to the Company of 126,000 shares of Novadigm Common Stock pledged against repayment of the loans. In connection with the settlement of this claim, the Company recorded a charge of $1.1 million in its fiscal 2003 consolidated statement of operations. Novadigm also entered into an Amended and Restated Employment Agreement with Mr. Ruiz providing for, among other things, an increase in Mr. Ruiz’s base salary to $225,000 from $210,000 and the payment to Mr. Ruiz of a retention bonus of $450,000, subject to a two-year vesting schedule.

      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 loss to comprehensive loss for the three-month periods ended June 30, 2003 and 2002:

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      On May 29, 2003, the Company announced the commencement of a voluntary stock option exchange program giving non-executive employees the opportunity to exchange outstanding options for the right to receive new options at a later date. The opportunity to exchange outstanding options is scheduled to expire on August 22, 2003. The Company’s Board of Directors determined that, because most of the existing options have exercise prices significantly higher than the current market price per share of its Common Stock, the existing options no longer have sufficient value to motivate and retain its employees. Neither the Company’s executive officers nor its directors are eligible to participate in this option exchange program.

      Employees who tender options for exchange will be granted, at their election, either: (i) new options to purchase three-fourths of the number of shares as the options tendered and accepted for exchange and that have the same vesting schedules as those of the tendered options or (ii) new options to purchase the same number of shares as those tendered options and that have vesting schedules that are 18 months longer than those of the tendered options. The Company plans to grant the new options on or about the first business day that is at least six months and one day following the date of cancellation of the options accepted for exchange. The exercise price of the new options will be equal to the fair market value of one share of the Company’s Common Stock on the new option grant date. The Company currently expects the new option grant date to be on or about February 23, 2004.

      Options to purchase 4,191,063 shares of the Company’s Common Stock, with a weighted average exercise price of $6.74 per share and a range of $1.70 to $24.63 per share, are held by employees eligible to participate in the stock option exchange program.

      The stock option exchange program has been designed to comply with FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation. Accordingly, the Company expects there will be no compensation charges as a result of the stock option exchange program. The terms and conditions of the stock option exchange program are contained in a Tender Offer Statement on Schedule TO that the Company filed with the Securities and Exchange Commission on May 29, 2003, and amendments thereto.

      On April 1, 2001, the Company adopted Statement 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.

      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 (“USD”) to British Pounds (call) amounting to $1,667,000, with a strike price of $1.5815. The option expiration date was April 11, 2003. The Company’s primary purpose for entering into this transaction is to cover an exchange gain or loss on a USD denominated receivable on the books of one of its foreign subsidiaries. The premium paid on the transaction was ratably charged to operations over the life of the contract and the gain or loss on the transaction was recognized in earnings in the period in which the gain or loss arises. During fiscal 2003, the Company recorded a gain of $8 thousand related to this option transaction. For the three-month period ended June 30, 2003, the Company recorded a gain of $2 thousand related to this option transaction. This contract expired on April 11, 2003. As of June 30, 2003, there are no outstanding derivative financial instruments.

      The Company’s standard license agreement generally provides its customers with a performance warranty on its software products for a six-month period. Such warranties are accounted for in accordance with SFAS

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

No. 5, Accounting for Contingencies. To date, the Company has not incurred any costs related to warranty obligations.

      The Company’s product license and services agreements include a limited indemnification provision for claims from third-parties relating to the Company’s intellectual property. Such indemnification provisions are accounted for in accordance with SFAS No. 5. The indemnification is limited to the amount paid by the customer. To date, claims under such indemnification provisions have not been significant.

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      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) 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 but these words are not the exclusive way of identifying these statements. 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. Except as expressly required by the federal securities laws, 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 develop, market and support software solutions that automate configuration and change management of digital assets, such as operating systems, applications, content and configuration settings, for enterprise information technology (“IT”) organizations, service providers, outsourcers and software content providers. By automating the management of digital assets, our customers can provide their employees, partners and customers with software-enabled services quickly and reliably at reduced costs.

      Our Radia family of software products and related services provide comprehensive solutions that automate configuration and change management for software and other digital assets throughout their operating lifecycles on a wide range of enterprise computing devices, including servers, desktops, laptops, handhelds and specialty computing devices such as automated-teller machines (ATMs), point-of-sale terminals and Internet kiosks. Our suite of integrated products, built with our proprietary technology, work seamlessly together as an end-to-end solution that can efficiently, reliably and scalably manage the full range of today’s software and content, personalized for one individual or millions of users.

      Our customers include leading public and commercial Global 1000 enterprises, outsourcers and service providers around the world.

      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 also 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.

      Our total revenues for the three-month periods ended June 30, 2003 and 2002 were $11.2 million and $11.1 million, respectively. We incurred operating losses of $3.0 million and $6.5 million for the three-month periods ended June 30, 2003 and 2002, respectively. We incurred net losses of $3.1 million and $6.9 million for the three-month periods ended June 30, 2003 and 2002, respectively. Amortization of intangible assets for the three months period ended June 30, 2003 and 2002 was $334 thousand and $2.4 million, respectively.

Critical Accounting Policies

      The following discussion of critical accounting policies represents our attempt to bring to the attention of readers of this report those accounting policies 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. It is not intended to be a comprehensive list of all of our significant accounting policies, which are more fully described in our Consolidated Financial

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

      Revenue recognition. We recognize revenue in accordance with the provisions of Statement of Position No. 97-2, Software Revenue Recognition as amended by Statement of Position No. 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions. We generate license revenues from licensing the rights to use our software products to end-users and sublicense fees from resellers. We also generate maintenance and service revenues from providing renewable support and software update rights services (maintenance) and from consulting and training activities performed for license customers.

      Revenues from perpetual software license agreements are recognized upon shipment of the software if evidence of an arrangement exists, pricing is fixed and determinable, and collectibility is probable. Shipment of the software is generally performed by the physical delivery of a CD or by electronic delivery of the licensed software. Evidence of an arrangement generally takes the form of a software license agreement signed by the customer and by us. In the case of an existing license customer, additional orders may come in the form of an addendum to the software license agreement, a purchase order, order letter, or similar authorizing document from the customer. We evaluate whether the software transaction has a fixed and determinable price. A key factor in this evaluation is the payment terms in relation to our experience with the customer or with a similar class of customers. Generally, software transactions have terms of less than one year and have no unresolved acceptance criteria or similar contingency. If an acceptance period is required, revenues are recognized upon the earlier of customer acceptance or the expiration of the acceptance period. We evaluate the probability of collection based upon the creditworthiness of the customer.

      We allocate revenue on software arrangements involving multiple elements to each element based on their relative fair values. Our determination of fair value of each element is based on vendor specific objective evidence (“VSOE”). We analyze all of the elements of the software arrangement and determine if they have sufficient VSOE to allocate revenue to maintenance, consulting and training components. Accordingly, assuming all other revenue recognition criteria are met, license 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 is generally recognized ratably over the term of the support, typically twelve months, and revenue allocated to consulting and training elements generally is recognized as the services are performed. If evidence of the fair value for 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 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. No guaranteed sublicense fees were recognized in the quarter ended June 30, 2003 nor were there any guaranteed sublicense fees recognized in the fiscal year ended March 31, 2003. As of June 30, 2003, a substantial majority of all such guaranteed sublicense fees recognized by us have been placed with end users or forfeited by the reseller.

      Our standard software license agreement provides for a limited warranty that we are the owner of the licensed products and that the licensed products will operate substantially in accordance with the functionality

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      Allowance for doubtful accounts. Our 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. From time to time, in the course of business, we find ourselves obliged to protect our proprietary intellectual property which may involve litigation. Conversely, at times, we find we are the target of litigation and need to defend ourselves from alleged claims by third parties, including claims that we have infringed upon other’s intellectual property. We file patents to protect our intellectual property. Further, we have established policies and procedures to protect our intellectual property as well as to avoid infringing upon the intellectual property of others, and we routinely purchase insurance to reduce our risk of the cost of litigation. We regularly evaluate the status of pending litigation and the recoverability of possible losses. 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 (see “Litigation” below).

      Valuation allowance against deferred 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 as of June 30, 2003. This valuation allowance was recorded given the losses we have incurred through June 30, 2003 and the uncertainties regarding our future operating profitability and taxable income, 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 55% and 62% of our total revenues outside the United States for the quarter ended June 30, 2003 and June 30, 2002, respectively, a significant portion of which was in Europe. The Euro conversion did 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 Area Information

      We market our products and related services to customers in North America, the Pacific Rim, and Latin America (“AAA”), and to Europe, the Middle East and Africa (“EMEA”). We license our products outside the United States through wholly-owned subsidiaries and authorized distributors that act as resellers and service providers within a geographic segment. We ship from the United States directly to all end-users regardless of their location and do not sell products directly to our international subsidiaries. Consulting and training services are generally supplied by our wholly-owned subsidiaries and authorized distributors in the geographic segment. Our chief operating decision-maker receives and reviews information relating to revenues

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      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.

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 Consolidated Statements of Operations (unaudited):

      Total revenues for our fiscal quarter ended June 30, 2003 were $11.2 million compared to $11.1 million for the same quarter of the previous fiscal year. The increase in total revenues in the current fiscal year quarter over the same quarter of the prior fiscal year was due entirely to the increase in maintenance revenue. Revenue

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      License revenues were $4.4 million for the quarter ended June 30, 2003 compared to $4.7 million for the same quarter of the previous fiscal year. The decrease in license revenues in the current fiscal year quarter as compared to the prior fiscal year quarter was due primarily to the general slowdown in corporate IT spending and changing buying behaviors resulting in a 41% decrease in our overall average selling price (ASPs) per transaction in the current fiscal year quarter compared to the same quarter of the prior fiscal year. License revenue from North American customers were 54% higher and license revenue from European customers were 40% lower in the current year quarter compared to the same quarter of the prior fiscal year.

      Maintenance and service revenues were $6.8 million in the current fiscal year quarter compared to $6.3 million in the same quarter of the previous fiscal year. Maintenance revenue increased 27% in the current fiscal year quarter over the prior fiscal year quarter due to the continual high renewal rate by our customers. Consulting revenue decreased in the current fiscal year quarter by 22% as compared to the same quarter in the prior fiscal year. This decrease is due primarily to lower billings associated with the EDS-Navy Marine Corp. Intranet (NMCI) project of approximately $950 thousand in the current fiscal year quarter compared to the same quarter of the prior fiscal year offset by the $384 thousand increase in higher billings to our European customers in the current fiscal year quarter compared to the same quarter of the prior fiscal year.

      Cost of licenses is 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 $334 thousand per quarter and is expected to be fully amortized by December 2004. Other cost of licenses consists of costs of the media and tapes on which the product is delivered. Such costs are not material and are included in research and development expenses in the accompanying consolidated statements of operations.

      Cost of maintenance and services includes the direct costs of customer support, update and upgrade rights (“maintenance”), and the direct and indirect costs of providing consulting services and training (“professional services”) to our customers. Cost of maintenance and services consists 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 was $3.2 million in the quarter ended June 30, 2003 compared to $3.6 million in the quarter ended June 30, 2002, a 10% decrease. The decrease in the cost of maintenance and services in the current fiscal year quarter as compared to the same quarter of the prior fiscal year is due to the decrease use of third party consultants of $112 thousand due primarily to the lower EDS-NMCI project billings, lower customer billings of $39 thousand for travel and expenses associated with the lower consulting services revenues recognized in the current fiscal year quarter, and lower travel costs of $196 thousand in North America due to the lower consulting services revenues recognized in the current fiscal year quarter. 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.

      Sales and marketing expenses consist primarily of salaries, related benefits, commissions, travel, consultant fees, trade shows, seminars, promotions, public relations, user conferences and other costs associated with our sales and marketing efforts. Sales and marketing expenses in the quarter ended June 30, 2003 were $5.7 million compared to $6.2 million in the same period of the prior fiscal year, representing a 9% decrease. The lower expense was primarily due to lower marketing expenses of approximately $400 thousand due to the timing of our European User Group conference to be held in the second quarter of the current fiscal year compared to the first quarter of the prior fiscal year; the delay in marketing events attended this year compared to the prior fiscal year; a decrease in public relations expenses from the reduction in media programs; and lower recruiting costs of $117 thousand due to a reduction in hiring. We expect sales and

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      Research and development expenses consist primarily of salaries, related benefits, consultant fees and other costs associated with our research and development efforts, quality assurance, technical publications, engineering and technical product management. Research and development expenses were $2.3 million in the quarter ended June 30, 2003 compared to $2.6 million in the same period of the prior fiscal year, representing an 11% decrease. Research and development expenses decreased in the quarter of the current fiscal year compared to the same quarter of the prior fiscal year due primarily to a decrease in headcount of 8 employees. We have been able to contain our research and development costs while continuing to support current products and develop new products such as the Radia Patch Manager announced in June 2003. Although we anticipate that we will continue to invest resources to further enhance and develop our products, we do not anticipate significant growth in research and development expense in the foreseeable future.

      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 $2.6 million in the quarter ended June 30, 2003 compared to $2.8 million in the same period of the prior fiscal year, representing a 6% decrease. The decrease in general and administrative expenses in the fiscal 2004 quarter was primarily due to the reduction in legal fees associated with a patent infringement lawsuit (see “Part II, Item 1. Legal Proceedings”). General and administrative expenses may increase in future periods depending upon pending litigation.

      Amortization of intangible assets. In June 2000, we entered into an alliance agreement with Hewlett-Packard to integrate, market and sell our software and content management products with Hewlett-Packard’s HP OpenView management solutions for the enterprise and service providers markets. As part of the agreement, we issued 940,000 shares of our common stock to Hewlett-Packard and a warrant for an additional 250,000 shares of our common stock. Both the shares issued and the warrant contained restrictions. In addition to the alliance agreement, and for a fee of $2.5 million, Hewlett-Packard was provided a one-year, limited license to upgrade certain existing customers to our Radia product. The fair value of the equity issued, less the cash received from Hewlett-Packard, or $16.1 million, was recorded as an intangible asset at June 30, 2000, and was amortized over the initial term of the agreement. The asset was completely amortized as of June 30, 2002.

      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 $80 thousand in the quarter ended June 30, 2003 compared to $111 thousand in the same quarter of the prior fiscal year, representing a decrease of $31 thousand, or 28%. Interest income decreased for the period ended June 30, 2003 due primarily to lower interest rates on a generally lower average balance of cash, cash equivalents and marketable securities.

      Other expense, net consists primarily of the cost of foreign exchange gains and losses and miscellaneous corporate expenses. Net other expense was $105 thousand in the quarter ended June 30, 2003 compared to $324 thousand in the same quarter of the previous fiscal year, representing a decrease of $219 thousand, or 68%. For the period ended June 30, 2003 and 2002 the expense is primarily comprised of a net foreign exchange loss of $34 thousand and $324 thousand, respectively and other non-operating gains/losses.

      Provision for income taxes for the quarter ended June 30, 2003 was $24 thousand compared to $165 thousand in the same quarter of the prior fiscal year. The current fiscal year quarter tax expense represents estimated tax payments for fiscal 2003 and the tax provision for last year was due to foreign tax on a profit earned by a European subsidiary.

Liquidity and Capital Resources

      As of June 30, 2003, we had approximately $26.8 million in cash and cash equivalents and short-term marketable securities. Net cash used in operating activities for the quarter ended June 30, 2003 and 2002 was $2.4 million and $0.7 million, respectively. Cash used in operations for the quarter ended June 30, 2003 was primarily due to the reported net loss of $3.1 million; the decrease of deferred revenue of $1.4 million primarily

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      Effective March 31, 2003, billings to customers, whether the associated revenue was recognized currently or deferred, are included in the accounts receivable balance if unpaid by the balance sheet date. Previously we reported the balance of accounts receivable net of the amount of revenue deferred. Correspondingly, the deferred revenue balance was reduced by the same amount. For the quarter ended June 30, 2002, both the accounts receivable balance and the deferred revenue balance were increased by $5.7 million to conform to the present year presentation.

      Net cash used in investing activities in the quarter ended June 30, 2003 was $1.0 million and is due primarily to our net reinvestment of $0.7 million of surplus cash in marketable securities. In addition, we purchased property and equipment of $166 thousand and made installment payments of $195 thousand for the intellectual property we acquired in October 2001. Net cash used in investing activities in the quarter ended June 30, 2002 was $10.2 million and is due primarily to the purchase of held-to-maturity securities of $9.5 million of surplus cash in marketable securities as well as the purchase of property and equipment of $0.5 million and installment payments of $195 thousand for the intellectual property we acquired in October 2001.

      Property and equipment expenditures were $166 thousand and $473 thousand for the quarters ended June 30, 2003 and 2002, respectively. The relatively lower expenditures in the current fiscal year quarter was due to the decrease in our headcount. In June 2003, we committed approximately $460 thousand to license and install human resources and financial systems.

      Net cash used in financing activities in the quarter ended June 30, 2003 was $0.3 million and was primarily due to the repurchase of our shares of Common Stock. Net cash provided by financing activities in the quarter ended June 30, 2002 was $0.4 million and was due primarily to proceeds from the sale of common stock and exercise of stock options.

      From time to time our Board of Directors authorizes the repurchase of our outstanding Common Stock. During the quarter ended June 30, 2003, we spent approximately $556 thousand to repurchase approximately 239,000 shares, including the repurchase of 126,000 shares of common stock from an executive officer in connection with a settlement agreement (see “Note 6. Certain Relationships and Related Party Transactions”). In May 2003, our Board of Directors increased the number of shares authorized for repurchase by an additional 500,000 shares. At June 30, 2003, the remaining authorization for all stock repurchases was approximately 441,000 shares.

      Although it is difficult for us to predict our future liquidity requirements with certainty, 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

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Contractual Obligations and Commitments

      In March 2002, we entered into an unsecured revolving line of credit agreement with a bank providing for borrowings of up to $1.0 million. The line of credit expired in March 2003 and was not renewed, and we are currently reviewing our banking relationships and alternatives.

      In June 2003, we committed $460 thousand to license and install human resources and financial systems.

      Our cost for intellectual property acquired in October 2001 was $3.9 million, net of acquisition costs of $112 thousand, and is payable through the issuance of 212,636 shares of our Common Stock and payment of $1.7 million over 9 quarters through December 2003. As of June 30, 2003, 165,384 shares of our Common Stock had been issued and payments totaling approximately $1.4 million had been made. We will issue 23,626 shares and make a cash payment of $195 thousand quarterly through December 31, 2003. The value of our shares to be issued and cash to be paid have been accrued in the accompanying consolidated balance sheet. Accordingly, $0.9 million and $1.3 million was included in accrued liabilities as of June 30, 2003 and March 31, 2003, respectively. The fair value of the acquired software costs is being amortized over the estimated useful life of the software, which is three years.

      In November 2002, we entered into a management retention agreement with Mr. Anderson, pursuant to which we agreed to 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 those 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. We are currently amortizing the retention bonus payment over the retention period. The unamortized balance is classified under prepaid expenses and other current assets and other long-term assets in our accompanying financial statements.

      On May 16, 2003 we entered into an Amended and Restated Employment Agreement with Mr. Ruiz providing for, among other things, an increase in Mr. Ruiz’s base salary to $225,000 from $210,000 and the payment to Mr. Ruiz of a retention bonus of $450,000, subject to a two-year vesting schedule. Under the terms of the agreement, Mr. Ruiz is required to repay all retention bonuses previously paid to him under the agreement if, prior to May 16, 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. We are currently amortizing the retention bonus payment over the retention period. The unamortized balance is classified under prepaid expenses and other current assets and other long-term assets in our accompanying financial statements.

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

      On July 6, 2001, Beck Systems, Inc. filed a complaint against us and two of our 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 our manufacture and marketing of our EDM and Radia products infringe on the Beck Systems patents. We believe that we have meritorious defenses, and we are defending this suit vigorously.

      Our management expects to incur substantial fees defending the Beck Systems lawsuit. Our insurance company has paid the defense costs for the period after April 1, 2002, and now asserts that we have exhausted the coverage. In the event we need to take additional charges or set aside additional reserves for defense costs due to the ongoing uncertainty of additional insurance coverage, any such action could have a material adverse impact on our business, consolidated financial condition and results of operations in future periods.

      The outcome of litigation is inherently uncertain, however, particularly in cases such as this where sophisticated factual issues must be assessed and complex technical issues must be decided. As a result, we cannot accurately predict the ultimate outcome of the Beck Systems litigation. In the event we are unsuccessful in defending this claim, we could be liable for economic and other damages and we may be forced to incur ongoing licensing expenses or to change how we design, manufacture and market our products. While we are unable at this time to estimate the range of the potential liability that would result from an unsuccessful defense, we believe that the liability could have an adverse impact on our business, consolidated financial condition and results of operations in future periods. In addition, we expect to continue to incur substantial fees to defend the Beck Systems litigation. While we have received insurance proceeds to cover part of our defense costs, the insurance proceeds will not be sufficient to cover all of our defense costs nor will they be sufficient to cover our liability in the event that our defense is unsuccessful.

Related Party Transactions

      For financial information regarding Related Party Transactions, see Note 6 to our Consolidated Financial Statements included in this Quarterly Report.

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 and the market price of our Common Stock.

      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 fiscal 1999 and the second and fourth quarters of fiscal 2003. We may not be able to achieve or sustain profitability on a quarterly or annual basis in the future. If we continue to incur losses, our operations may use available cash reserves.

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      Our business may be adversely affected by economic, market and political conditions. Our revenue growth and profitability depend on the overall demand for computer software and services, particularly in the sectors in which we offer products. Because our sales are primarily to corporate and government customers, our business depends on general economic, market and political conditions. The general weakening of the global economy and of business conditions has resulted in delays, decreases and cancellations of customer purchases. If economic and market conditions do not improve, our business will continue to be adversely affected.

      Our quarterly results are subject to significant fluctuations due to many factors. 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, resolution of pending litigation, 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 the structure of our sales commission and bonus plans, 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 the beginning and end of calendar years, 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.

      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 plan to continue to make, substantial organizational, management, process and staff changes in our North American, European, government and alliances sales organizations to enhance coverage and productivity. These changes may not be effective.

      The loss of a major customer or partner could adversely affect our operating results. One customer, Electronic Data Systems Corp. (EDS), accounted for approximately 10% and 18% of our total revenues for the three-month periods ended June 30, 2003 and 2002, respectively. During fiscal 2003, 2002 and 2001, one customer, EDS, accounted for approximately 20%, 16% and 12% of our total revenues, respectively. If revenues from EDS decline, our business could be adversely affected. Furthermore, if an order from another large customer does not occur or is deferred, or a relationship with a partner terminates, our revenue could be reduced and we may be unable to proportionately reduce our operating expenses.

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      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, but we may not be able to obtain additional financing on favorable terms, if at all. Further, if we issue equity or equity-linked securities, our current stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those 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, respond to competitive pressures or unanticipated requirements or otherwise support our operations (see “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources”).

      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, in particular advances in client/server enterprise hardware platforms, internet applications and platforms, operating systems and systems management applications, or if we experience any significant delays in product development or introduction, we could lose competitiveness. Any product enhancements or new products we develop may not gain market acceptance.

      Our failure to develop on a timely basis new products or product enhancements could cause customers to delay or refrain from purchasing our existing products.

      Intense competition in the markets in which we operate could adversely affect us. We may not be able to compete effectively in the software management market, and our profitability or financial performance could be adversely affected by increased competition. Competition in the markets we serve is diverse and rapidly changing. 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.

      Our business could be materially affected by risks related to our international operations. Approximately 58% of our overall revenue in the current fiscal year quarter was derived from our international operations and approximately 52% of our revenues in fiscal 2003 were derived from our international operations. Accordingly, our operations and financial results could be significantly affected by factors associated with international operations, such as fluctuations in foreign currency exchange rates, uncertainties relative to regional economic circumstances, longer payment cycles, greater difficulty in accounts receivable collection, complexities of foreign tax laws and regulations and the potential for adverse tax consequences, changes in regulatory requirements and product localization requirements and difficulty in staffing and managing international operations. A majority of our international revenues and costs have been denominated in foreign currencies. We believe that an increasing portion of our international revenues and costs will be denominated in foreign currencies in the future.

      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, or result in loss of or delay in market acceptance of our products or loss of existing customers.

      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

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      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 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.

      Third parties have claimed, and may in the future 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. See “Part 2, Item 1. Legal Proceedings” for a discussion of potential adverse consequences of an ongoing legal proceeding in which it is alleged that our products infringe on patents held by another entity.

      The loss of key executives and employees could adversely affect us. Our future success depends upon the contributions of executives and key employees. The loss of 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 and new versions of our products and to market and sell 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.

      Our ability to effectively grow depends on our ability to improve our operational systems. We have expanded our operations 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. To manage growth effectively, we must implement and improve our operational systems, procedures and controls on a timely basis.

      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.

      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, and changes 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 us or by brokerage firms or industry analysts

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Item 3.     Qualitative and Quantitative 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, accordingly, the majority of our transactions are denominated in U.S. dollars. However, we 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. Currently, we have operations in the United Kingdom, France and Germany and conduct transactions in the local currency of each location. 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. 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, the offsetting of revenues and expenses in the same currency to create natural hedges and the use of foreign exchange options and forward contracts to hedge net exposed positions. There can be no assurance that fluctuations in the value of foreign currencies will not have a material adverse effect on our business, operating results, revenues or financial condition. The impact of fluctuations in these currencies resulted in net transaction losses of $33 thousand and $324 thousand in the quarters ended June 30, 2003 and 2002, respectively.

      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 June 30, 2003, 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 securities represented investments in corporate debt with an initial maturity period of less than 91 days.

Item 4.     Controls and Procedures

      We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and 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, as of June 30, 2003, our disclosure controls and procedures were effective to provide reasonable assurance that the information we are required to disclose in the reports we file or submit under the

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      Any control system, no matter how well designed and operated, can provide only reasonable (not absolute) assurance that its objectives will be met. Furthermore, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

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PART II.     OTHER INFORMATION

      On July 6, 2001, Beck Systems, Inc. filed a complaint against us and two of our 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 our manufacture and marketing of our EDM and Radia products infringe on the Beck Systems patents. We believe that we have meritorious defenses, and we are defending this suit vigorously.

      Our management expects to incur substantial fees defending the Beck Systems lawsuit. Our insurance company has paid the defense costs for the period after April 1, 2002, and now asserts that we have exhausted the coverage. In the event we need to take additional charges or set aside additional reserves for defense costs due to the ongoing uncertainty of additional insurance coverage, any such action could have a material adverse impact on our business, consolidated financial condition and results of operations in future periods.

      The outcome of litigation is inherently uncertain, however, particularly in cases such as this where sophisticated factual issues must be assessed and complex technical issues must be decided. As a result, we cannot accurately predict the ultimate outcome of the Beck Systems litigation. In the event we are unsuccessful in defending this claim, we could be liable for economic and other damages and we may be forced to incur ongoing licensing expenses or to change how we design, manufacture and market our products. While we are unable at this time to estimate the range of the potential liability that would result from an unsuccessful defense, we believe that the liability could have an adverse impact on our business, consolidated financial condition and results of operations in future periods. In addition, we expect to continue to incur substantial fees to defend the Beck Systems litigation. While we have received insurance proceeds to cover part of our defense costs, the insurance proceeds will not be sufficient to cover all of our defense costs nor will they be sufficient to cover our liability in the event that our defense is unsuccessful.

      Additionally, on May 16, 2003 we reached an agreement to settle certain previously disclosed employment-related claims against us by Wallace D. Ruiz, Chief Financial Officer and Treasurer. These claims were related to Mr. Ruiz’s inability to exercise expiring options and sell the underlying shares of our Common Stock during certain times in 1999, 2000 and 2001 due to insider trading restrictions imposed by us at those times and related to certain loans made to him by us to allow Mr. Ruiz to exercise those options. Our Board of Directors established a special independent committee which retained independent counsel, investigated Mr. Ruiz’ claims and negotiated a settlement on behalf of Novadigm, Inc. The special committee and the Board unanimously approved the terms of the settlement reached with Mr. Ruiz. Under the terms of the settlement, we paid Mr. Ruiz approximately $1,080,000 and Mr. Ruiz rapid us all of the approximately $838,000 in outstanding principal and accrued interest on loans owed by him to us through a cash payment of approximately $542,000 and the surrender to the company of 126,000 shares of our common stock pledged by Mr. Ruiz against repayment of the loans. The amounts paid under the settlement agreement were provided for in fiscal 2003. In addition, we entered into an amended employment agreement with Mr. Ruiz providing for, among other things, an increase in Mr. Ruiz’s base salary from $210,000 to $225,000 and the payment to Mr. Ruiz of a retention bonus of $450,000, subject to a two-year vesting schedule. The retention bonus will be recognized as compensation expense as it is earned over the two-year term of the agreement. For a description of the loans to Mr. Ruiz, see “Item 2. Part I. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Related Party Transactions.”

      None

      None

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      None

      None

      (a) Exhibits

	Exhibit 31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) (section 302 of the Sarbanes-Oxley Act of 2002)
	Exhibit 31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) (section 302 of the Sarbanes-Oxley Act of 2002)
	Exhibit 32.1	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
	Exhibit 32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).

      (b) Reports on Form 8-K

      We filed a current report on Form 8-K dated April 23, 2003, as amended by a Form 8-K/ A filed on April 25, 2003, to furnish information relating to our announcement of our operating results for our quarter and fiscal year ended March 31, 2003 (pursuant to Items 7, 9 and 12 of Form 8-K).

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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: August 14, 2003

	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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EXHIBIT INDEX