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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 February 11, 2004 there were 19,270,821 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.

CONSOLIDATED BALANCE SHEETS

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.

1.     Basis of Presentation

      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 of America and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Except as set forth in Note 4 hereof, 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 consolidated 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 December 31, 2003, its results of operations for the three and nine month periods ended December 31, 2003 and 2002 and its cash flows for the nine months ended December 31, 2003 and 2002. The Company’s results of operations for the three and nine months ended December 31, 2003 are not necessarily indicative of the results to be expected for the full year or future periods. Certain prior period amounts have been reclassified to conform to the current period presentation.

2.     Stock Based Compensation

      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 amended 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 were 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 No. 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 No. 25 and provide the pro forma disclosures in accordance with the provisions of SFAS Nos. 123 and 148 with respect to option grants. Under APB No. 25, the Company has not recorded any stock-based employee or director compensation cost associated with its stock option plans, as all options granted under the plans had an exercise price equal to the market value of the underlying common stock on the date of grant.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      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 (in thousands, except per share data):

      The weighted average fair values of options granted during the quarters ended December 31, 2003 and 2002 was $2.04 and $1.55, respectively. The weighted average fair values of options granted during the nine-month periods ended December 31, 2003 and 2002 was $1.99 and $3.52, 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 made during the three-months ended December 31, 2003 and 2002: average risk-free interest rate of 1.0% and 1.4%, respectively; expected dividend yield of 0%, expected lives of options of 5.0 years, and expected volatility of 68% and 103%, respectively. The following weighted-average assumptions were used for grants made during the nine-months ended December 31, 2003 and 2002: average risk-free interest rate of 1.0% and 1.7%, respectively; expected dividend yield of 0%, expected lives of options of 5.0 years, and expected volatility of 91% and 103%, respectively.

3.     Basic and Diluted Loss Per Share

      Basic loss per share (“EPS”) is calculated by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted EPS is calculated by dividing net loss by the weighted average number of shares of common stock outstanding for the period, adjusted to reflect the dilutive impact of potential shares of common stock outstanding during the period. Stock options were excluded from the calculations of the Company’s diluted loss per share for the three and nine-month periods ended December 31, 2003 and 2002 because the effect of including such shares in the computation would be anti-dilutive. At December 31, 2003 and 2002, the Company had outstanding stock options to purchase approximately 3.2 million shares and 5.3 million shares, respectively, of the Company’s Common Stock, which could potentially dilute basic EPS in the future (see “Note 7. Stock Option Exchange Program” for additional information regarding stock options).

4.     Recently Issued Accounting Pronouncements

      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 No. 149”). SFAS No. 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 No. 149 for new contracts and certain hedging designated instruments after June 30, 2003, and certain provisions of SFAS No. 149 as it relates to Statement No. 133 Implementation Issues are effective for fiscal quarters that began

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

prior to June 15, 2003. The adoption of SFAS No. 149 did not have a material impact on the Company’s 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 No. 150”). SFAS No. 150 revises the accounting for certain financial instruments that, under previous guidance, issuers could account for as equity. SFAS No. 150 requires that those instruments be classified as liabilities in statements of financial position. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for interim periods beginning after June 15, 2003. The adoption of SFAS No. 150 did not have a material impact on the Company’s consolidated results of 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 did not have a material impact on the Company’s consolidated results of operations or financial position.

5.     Contingencies

      On December 11, 2003, the Company settled its patent dispute with Beck Systems, Inc. Both parties dismissed with prejudice their claims in the patent infringement lawsuit originally brought by Beck Systems against Novadigm in July 2001. Under the settlement agreement, Novadigm agreed to pay Beck Systems $2,654,600 in three installments of $954,600, $900,000 and $800,000 in the third quarter of fiscal years 2004, 2005 and 2006, respectively. Novadigm recognized a settlement expense in the quarter ending December 31, 2003 for the present value of the three payments. In December 2003, Novadigm paid the initial installment of $954,600 to Beck Systems. The second payment of $900,000 is accrued and classified under accrued liabilities and the present value of the third payment amounting to $770,000 is accrued and classified under long-term liabilities.

      Novadigm is also subject to certain other legal proceedings and claims which have arisen in the ordinary course of business and which have not been fully adjudicated. The Company currently believes that the ultimate outcome of these matters will not have a material adverse effect on its business, results of operations or financial condition.

      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 consolidated financial statements. SFAS 130 requires that unrealized losses from the Company’s foreign currency translation adjustments be included in other comprehensive income (loss).

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following presents a reconciliation of net loss to comprehensive loss for the three-month and nine-month periods ended December 31, 2003 and 2002 (in thousands):

      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 expired on August 22, 2003. The Company’s Board of Directors determined that, because most of the existing options had exercise prices significantly higher than the current market price per share of its Common Stock, the existing options no longer had sufficient value to motivate and retain the Company’s employees. Neither the Company’s executive officers nor its directors were eligible to participate in this option exchange program.

      Employees who tendered 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 which 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 which 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 February 26, 2004. 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 that new option grant date.

      Options to purchase approximately 4.2 million 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, were held by employees eligible to participate in the stock option exchange program.

      As of December 31, 2003, options to purchase approximately 2.3 million shares of the Company’s Common Stock, with a weighted average exercise price of $8.87 per share and an exercise price range of $2.33 per share to $24.63 per share, had been tendered as part of this program.

      On, or about, February 26, 2004, options to purchase approximately 2.2 million shares of the Company’s Common Stock are expected to be issued to employees that participated in the stock option exchange program.

      The stock option exchange program was 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.

      The Company follows Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities in accounting for any derivatives. This Statement requires the recognition of all derivative instruments as either assets or liabilities in the consolidated balance sheet, and the periodic

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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. As of December 31, 2003, there were 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 Statement of Financial Accounting Standards No. 5, Accounting for Contingencies (“SFAS No. 5”). To date, no claims under such indemnification provisions have been made.

      The Company’s product license and services agreements include an 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 requires the Company to pay any damages and costs which may be assessed against the Company’s customers and includes legal fees incurred and the cost of a suitable replacement. To date, no claims under such indemnification provisions have been made.

      On February 4, 2004, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), with Hewlett-Packard Company (“HP”), pursuant to which Norton Acquisition Corporation, a wholly-owned subsidiary of HP, will merge with and into the Company (the “Merger”), and the Company will become a wholly-owned subsidiary of HP. Directors and executive officers, and certain related stockholders, who together hold approximately 31% of the Company Common Stock have entered into voting agreements with HP and the Company (the “Voting Agreements”), pursuant to which they have agreed to vote their shares of the Company’s Common Stock in favor of the Merger.

      Pursuant to the Merger Agreement, each outstanding share of the Company’s common stock will be exchanged for the right to receive $6.10 in cash without interest. Each option to acquire the Company’s Common Stock outstanding as of the close of the merger (a) held by a person who becomes an employee of HP upon consummation of the Merger will be assumed by HP, in which case the option will convert into an option to acquire common stock of HP and (b) held by a person who does not become an employee of HP upon consummation of the Merger will convert into the right to receive, in cash, with respect to each share subject to the option, the excess if any, of $6.10 over the exercise price per share of the option.

      The Merger is conditioned upon, among other things, approval by the Company’s stockholders, clearance under applicable antitrust laws and other customary conditions. The Company currently expects that the Merger will be consummated by April 2004.

      The Company expects costs associated with the merger with Hewlett-Packard to be approximately $1,250 thousand in the quarter ending March 31, 2004. In the event the Merger is not completed in the quarter ended March 31, 2004, the costs are expected to be approximately $850 thousand.

      In the event the merger with Hewlett-Packard is not consummated, the Merger Agreement requires that the Company pay Hewlett-Packard a termination fee of $4.8 million if, among other things: (1) an acquisition proposal has been publicly proposed by any person (other than Hewlett-Packard or its affiliates) or such other communication to the Company regarding an acquisition proposal, (2) the Merger Agreement is thereafter terminated because the merger has not been consummated by August 3, 2004, the Company’s stockholders fail to approve the merger proposal at the special meeting or Novadigm breaches its representations, warranties or covenants in the Merger Agreement, (3) within 12 months following the termination of the Merger Agreement, Novadigm enters into an agreement providing for, or completes, an acquisition (as defined in the Merger Agreement) by a third party; (4) the merger agreement is terminated by Hewlett-

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Packard because the Company’s board of directors or any of its committees makes an adverse recommendation change or other triggering event occurs; or (5) Novadigm terminates the Merger Agreement in order to enter into an acquisition agreement in connection with a superior offer.

      For copies of the Merger Agreement and the form of Voting Agreement, see the Company’s current report on Form 8-K dated February 4, 2004, as filed with the Securities and Exchange Commission.

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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 risks, uncertainties and other 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 No. 98-9.

      Our total revenues for the three and nine-month periods ended December 31, 2003 were $17.5 million and $41.7 million, respectively. Our total revenues for the three and nine-month periods ended December 31, 2002 were $11.3 million and $38.8 million, respectively. We incurred operating losses of $2.2 million and $7.3 million for the three and nine-month periods ended December 31, 2003, respectively. We incurred operating losses of $4.8 million and $11.2 million for the three and nine-month periods ended December 31, 2002, respectively. We incurred net losses of $2.2 million and $7.2 million for the three and nine-month periods ended December 31, 2003, respectively. We incurred net losses of $5.3 million and $12.1 million for the three and nine-month periods ended December 31, 2002, respectively.

      On February 4, 2004, we entered into an Agreement and Plan of Merger (the “Merger Agreement”), with Hewlett-Packard Company (“HP”), pursuant to which Norton Acquisition Corporation, a wholly–owned subsidiary of HP, will merge with and into us (the “Merger”), and we will become a wholly–owned subsidiary of HP. Our directors and executive officers, and certain related stockholders, who

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      Pursuant to the Merger Agreement, each of our outstanding shares of Common Stock will be exchanged for the right to receive $6.10 in cash without interest. Each option to acquire our Common Stock outstanding as of the close of the merger (a) held by a person who becomes an employee of HP upon consummation of the Merger will be assumed by HP, in which case the option will convert into an option to acquire common stock of HP and (b) held by a person who does not become an employee of HP upon consummation of the Merger will convert into the right to receive, in cash, with respect to each share subject to the option, the excess, if any, of $6.10 over the exercise price per share of the option.

      The Merger is conditioned upon, among other things, approval by our stockholders, clearance under applicable antitrust laws and other customary conditions. We currently expect that the Merger will be consummated by April 2004.

      For copies of the Merger Agreement and the form of Voting Agreement, see our current report on Form 8-K dated February 4, 2004, as filed with the Securities and Exchange Commission.

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 Statements incorporated in our Annual Report on Form 10-K for the fiscal year ended March 31, 2003. 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 the selection of an available alternative policy would not produce a materially different result.

      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) to, 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 licensing 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

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      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 or nine-months ended December 31, 2003 nor were there any guaranteed sublicense fees recognized in the fiscal year ended March 31, 2003. As of December 31, 2003, all but an immaterial amount of all such guaranteed sublicense fees recognized by us had 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 described in the documentation provided with the products for a period of six months. This standard software license agreement does not provide for price protection. This standard software license agreement does not provide for a right-of-return except if our products are found to be infringing on another’s intellectual property rights, a court issues a final injunction and we are unable to secure a license for a customer or replace or modify the customer’s infringing software so that it is no longer infringing. In that case, the customer is entitled to return the licensed product. To date, we have not had to pay, perform or otherwise compensate a customer under a warranty or indemnification. There is no provision for estimated returns, because none are anticipated. There is no warranty reserve due to the fact that our historical experience shows no costs have been incurred for warranty. There is no provision for price protection, because it is not offered.

      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 likelihood of possible losses. An allowance is established for losses that we can estimate and are deemed to be probable. 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

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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 primarily by geographic area as disclosed below. We do not operate separate lines of business with respect to any products. Accordingly, we do not prepare discrete financial information with respect to separate products and we do not have separately reportable segments as defined by SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. Revenues by geographic area for the three and nine-month periods ended December 31, 2003 and 2002 were as follows (in thousands):

      The following table presents total asset information by geographic area at December 31, 2003 and 2002 (in thousands):

      All period references in the remainder of this Item 2 are to interim 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 Consolidated Statements of Operations (unaudited):

      Total revenues for our third quarter ended December 31, 2003 were $17.5 million compared to $11.3 million for the same quarter of the previous year, an increase of approximately 56%. The increase in total revenues in the current year quarter compared to the same quarter of the prior year was primarily due to an increase in license revenue of approximately $5.1 million. The increase in license revenue was due to closing 12 additional contracts at a $112 thousand higher average selling price in the third quarter as compared to the same quarter of the prior year. We also closed two significant contracts in the current year quarter which totaled approximately $3.2 million. Maintenance and service revenues were $7.8 million in the quarter ended December 31, 2003 compared to $6.7 million in the comparable quarter of the prior year, an increase of approximately 17%. Maintenance revenues in the current year’s quarter were 22% higher over the same quarter of the prior year due primarily to the high rates of renewals by our customers and an increased customer base. Service revenues in the current year’s quarter were 7% higher than those in the same quarter of the prior year due to the hiring of additional engineers in Europe, which enabled us to serve the increased demand for our services. Total revenues for the nine-month period ended December 31, 2003 were $41.7 million compared to $38.8 million for the same period of the previous year. The increase in total revenues in the nine-month period ended December 31, 2003 compared to the same nine-month period of the prior year was due to an increase in maintenance revenue of approximately $3.1 million due to the increase in our customer base that is subscribing to maintenance services. Service revenues decreased by 2% in the nine-month period ended December 31, 2003 compared to the same period of the prior year. The decrease was due primarily to lower billings associated with the NMCI project which was approximately $1.7 million higher in the prior year period over the same period this year offset by the $1 million increase in service revenues in Europe due to the increased demand for our services and the increase of approximately $800 thousand in

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      License revenues were $9.7 million in the quarter ended December 31, 2003 compared to $4.6 million in the same quarter of the prior year. The increase in license revenues in the fiscal year quarter ended December 31, 2003 as compared to the prior year quarter was due primarily to the introduction of new products increase in license revenues experienced in our North American & European operations. License revenues for the nine-month period ended December 31, 2003 were $19.8 million as compared to $19.9 million, a decrease of approximately 0.5% primarily due to a decrease in our overall average selling price as a result of fewer larger contracts closed in the first six months of the current fiscal year offset by the increase in license revenues experienced by our North American and European operations in the third quarter of the current fiscal year.

      Maintenance and service revenues were $7.8 million in the quarter ended December 31, 2003 compared to $6.7 million in the comparable quarter of the prior year, an increase of approximately 17%. Maintenance revenues in the current year’s quarter were 22% higher over the same quarter of the prior year due primarily to the high rates of renewals by our customers and increased customer base. Service revenues in the current year’s quarter were 7% higher than those in the same quarter of the prior year due to the hiring of additional engineers in Europe, which enabled us to meet the increased demand for our services. The $99 thousand increase in service revenues in Europe in the current year quarter was partially offset by the $17 thousand decrease in North American service revenues due to the lower billings associated with the EDS Navy Marine Corp. Intranet (NMCI) project which were approximately $373 thousand higher in the prior year period over the same period this year offset by the increased demand for our services from our increased customer base. Maintenance and service revenues in the nine-month period ended December 31, 2003 were $22.0 million compared to $18.9 million in the comparable period of the prior year, a 16% increase. The increase was due entirely to higher maintenance revenues partially offset by lower service revenues. The approximate 26% increase in maintenance revenues in the nine-month period ended December 31, 2003 compared to the same period of the prior year was due primarily to a continued high renewal rate by our customers and an increase in our customer base subscribing to maintenance. Service revenues decreased by 2% in the nine-month period ended December 31, 2003 compared to the same period of the prior year. The decrease was due primarily to lower billings associated with the NMCI project which was approximately $1.7 million higher in the prior year period over the same period this year offset by the $1 million increase in service revenues in Europe due to the increased demand for our services and the increase of approximately $800 thousand in North American service revenues from two large enterprise customers that were recorded in the current nine-month period ended December 31, 2003.

      Cost of licenses is the amortization of the intangible asset acquired with the intellectual property purchased in October 2001 and royalties paid to third parties for which we resell their products. The acquired intellectual property is embedded into our Radia product suite and its fair value is amortized on a straight-line basis to cost of licenses over a three-year period. The amortization is approximately $334 thousand per quarter and is expected to be fully amortized by December 2004. In the third quarter, we became a reseller of certain third party software products to our customers. The cost of acquiring these products for resale amounted to approximately $93 thousand for the three and nine-month periods ended December 31, 2003. 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 and update 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

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      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 for the quarter ended December 31, 2003 were $7.7 million as compared to $6.5 million in the same period of the prior year. The increase in sales and marketing expenses in the quarter ended December 31, 2003 compared to the same period of the prior year was primarily due to $1.2 million higher compensation costs for commissions and bonuses resulting from higher reported revenue in the quarter ended December 31, 2003. Sales and marketing expenses for the nine-month period ended December 31, 2003 were $19.6 million compared to $20.0 million in the same period of the prior year. The decrease in the current nine-month period as compared to the same nine-month period of the prior year was due to approximately $857 thousand lower marketing expense partially offset by $498 thousand higher sales expense. The lower marketing expense is primarily due to $582 thousand lower marketing program costs and $133 thousand lower compensation expense. The higher sales expense was primarily due to the higher commissions paid in the quarter ended December 31, 2003.

      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 December 31, 2003 compared to $2.4 million in the same period of the prior year. Research and development expenses for the nine-month period ended December 31, 2003 were $6.8 million, compared to $7.6 million in the same period of the prior fiscal year, an 11% decrease. The decrease in the three and nine-month periods ended December 31, 2003, as compared to the same periods in the prior year, was due primarily to four and eight fewer full time equivalent employees in the current year periods, respectively. We have been able to contain our research and development costs while continuing to support current products and develop new products and additional functionality, such as enhancing our Radia Server Management Solution with data center capabilities.

      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 $2.9 million in the quarter ended December 31, 2003 compared to $3.4 million in the same period of the prior year, a 15% decrease. General and administrative expenses for the nine-month period ended December 31, 2003 were $8.2 million compared to $9.2 million in the same period of the prior year, a 10% decrease. The decrease in general and administrative expenses in the three-month period ended December 31, 2003 as compared to the same period of the prior year was primarily due to our providing an allowance in the prior year period of $500 thousand for an accrual of a loss reserve for a claim made by an executive officer. The decrease in general and administrative expenses in the nine-month period ended December 31, 2003 as compared to the same period of the prior year was primarily due to our providing an allowance in the prior year period of $616 thousand for the unsecured portion of the outstanding notes due from officers and due to the allowance in the prior year period of $500 thousand for an accrual of a loss reserve for a claim made by an executive officer.

      Settlement expense. In December 2003, we settled our patent dispute with Beck Systems, Inc. Both parties dismissed with prejudice their claims against each other in the patent infringement lawsuit originally brought by Beck Systems against us in July 2001. Under the settlement agreement, we agreed to pay Beck Systems $2,654,600 in three installments of $954,600, $900,000 and $800,000 in the third quarter of fiscal years 2004, 2005 and 2006, respectively. We recognized a settlement expense in the quarter ending December 31, 2003 for the present value of the three payments.

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      Amortization of intangible. In June 2000, we entered into an alliance agreement with Hewlett-Packard Company 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 on a straight line basis 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 $40 thousand and $162 thousand for the three and nine-month periods ended December 31, 2003, respectively, compared to $79 thousand and $302 thousand for the same periods of the prior year, respectively. Interest income decreased for the three and nine-month periods ended December 31, 2003 due primarily to lower average interest rates on lower average 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 non-operating corporate expenses. Net other income was $37 thousand and $42 thousand for the three and nine-month periods ended December 31, 2003, respectively, compared to a net expense of $34 thousand and $467 thousand for the same periods of last year, respectively. The increase in other income/ expense in the three and nine-month periods ended December 31, 2003 was due primarily to net foreign exchange gains in the current year periods compared to net foreign exchange losses in the prior year periods. Net foreign exchange gain for the three-months ended December 31, 2003 was $91 thousand compared to a gain of $25 thousand for the same period of the prior year. Net foreign exchange gain for the nine-months ended December 31, 2003 was $245 thousand compared to a loss of $330 thousand for the same period of the prior year. These net foreign exchange gains in the current year periods compared to losses in the prior year periods is due to fluctuations in foreign currency rates.

      Provision for income taxes for the quarter ended December 31, 2003 was $81 thousand compared to $553 thousand in the same quarter of the prior year. The tax provision for the nine-months ended December 31, 2003 was $105 thousand compared to $761 thousand in the same nine-month period of the prior year. The current fiscal year tax expense is primarily an accrual of $69 thousand for estimated taxes due on the profit earned by a European subsidiary and the amount of state taxes paid. The primary reason for the higher tax provision in the last year periods as compared to the same periods this year is in the quarter ended December 31, 2002, the Company determined that tax on a profit earned on a transaction in a foreign subsidiary may require an additional provision. The Company estimated the potential tax and accordingly, adjusted the contingency reserve in the quarter ended December 31, 2002 by increasing it by $550,000.

Liquidity and Capital Resources

      As of December 31, 2003, we had approximately $21.7 million in cash and cash equivalents and short-term marketable securities, compared to approximately $29.4 million as of March 31, 2003. Net cash used in operating activities for the nine months ended December 31, 2003 was $7.1 million as compared to cash provided by operating activities for the same nine-month period last year of $325 thousand. Cash used in operations for the nine months ended December 31, 2003 was primarily due to the reported net loss of $7.2 million; a reduction of deferred revenue of $2 million due to the renewal of annual maintenance which is lower in the second half of the year fiscal year as compared to the first half of the fiscal year when renewals typically occur; a $1.7 million increase in prepaid expenses and other current assets balance due to the renewal of our annual directors and officers liability insurance and to the payment of a retention bonus to an executive officer; a $746 thousand decrease in the allowance for doubtful accounts due to better collections that reduced the days sales outstanding to 83 days at December 31, 2003 from 85 days at March 31, 2003; a decrease of $169 thousand in accrued payroll and other compensation due primarily to the expiration of the claim run out from an expired benefits plan; and an increase of $123 thousand in other assets due primarily to the recording

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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 December 31, 2002, both the accounts receivable balance and the deferred revenue balance were increased by $5.5 million to conform to the current year presentation.

      Net cash provided by investing activities in the nine-month period ended December 31, 2003 was $10.7 million and is due primarily to the net redemption of $12.8 million of marketable securities to fund operations and have available cash balances. Property and equipment purchases were $1.5 million, which included approximately $485 thousand for the acquisition of corporate IT systems and approximately $94 thousand related expenses which were capitalized. In addition, we made installment payments of $585 thousand for the intellectual property we acquired in October 2001. Net cash used in investing activities in the nine-month period ended December 31, 2002 was $11.8 million and is due primarily to the net purchase of held-to-maturity securities of $10.4 million as well as the purchase of property and equipment of $777 thousand and installment payments of $586 thousand for the intellectual property we acquired in October 2001.

      Net cash used in financing activities in the nine-month period ended December 31, 2003 was $272 thousand and was due to the repurchase of $429 thousand of our shares of Common Stock partially offset by the $157 thousand sale of our Common Stock through the employee stock purchase plan. Net cash used in financing activities in the nine-month period ended December 31, 2002 was $872 thousand and was due to the $1.6 million repurchase of our Common Stock partially offset by $698 thousand in proceeds from the sale of our Common Stock.

      From time to time our Board of Directors authorizes the repurchase of our outstanding Common Stock. In May 2003, our Board of Directors increased the number of shares authorized for repurchase by an additional 500,000 shares. During the quarter ended December 31, 2003, we did not repurchase any shares of our Common Stock. At December 31, 2003, the remaining authorization for all stock repurchases was approximately 391,000 shares. However, in our merger agreement with Hewlett-Packard we agreed not to repurchase any shares of our Common Stock through the closing of the merger.

      We expect costs associated with the merger with Hewlett-Packard to be approximately $1,250 thousand in the quarter ending March 31, 2004. In the event the Merger is not completed in the quarter ended March 31, 2004, the costs are expected to be approximately $850 thousand.

      In the event the merger with Hewlett-Packard is not consummated, the Merger Agreement requires that we pay Hewlett-Packard a termination fee of $4.8 million if, among other things: (1) an acquisition proposal has been publicly proposed by any person (other than Hewlett-Packard or its affiliates) or such other communication to us regarding an acquisition proposal, (2) the Merger Agreement is thereafter terminated because the merger has not been consummated by August 3, 2004, our stockholders fail to approve the merger

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      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 if our merger with Hewlett-Packard is not consummated. 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. Additionally, to the extent we have uninsured litigation and related costs, we will use available cash resources. If our merger with Hewlett-Packard is not consummated, we may need or otherwise 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.

      Our cost for intellectual property acquired in October 2001 was $3.9 million, net of acquisition costs of $112 thousand, which was payable through the issuance of 212,636 shares of our Common Stock and payment of $1.7 million over nine quarters through December 2003. The fair value of the acquired software costs is being amortized on a straight-line basis over the estimated useful life of the software, which is three years and will be fully amortized by December 2004.

      In November 2002, we entered into a management retention agreement with Robert B. Anderson, Executive Vice President, Secretary and Director, 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 the retention bonus 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 Wallace D. Ruiz, Chief Financial Officer and Treasurer, 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 the retention bonus 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, his 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.

      In December, 2003, we settled our patent dispute with Beck Systems, Inc. Both parties dismissed with prejudice their claims against each other in the patent infringement lawsuit originally brought by Beck Systems against us in July 2001. Under the settlement agreement, we agreed to pay Beck Systems $2,654,600 in three installments of $954,600, $900,000 and $800,000 in the third quarter of fiscal years 2004, 2005 and

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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):

Litigation

      In December, 2003, we settled our patent dispute with Beck Systems, Inc. Both parties dismissed with prejudice their claims against each other in the patent infringement lawsuit originally brought by Beck Systems against us in July 2001. Under the settlement agreement, we agreed to pay Beck Systems $2,654,600 in three installments of $954,600, $900,000 and $800,000 in the third quarter of fiscal years 2004, 2005 and 2006, respectively. We recognized a settlement expense in the quarter ending December 31, 2003 for the present value of the three payments. In December 2003, we paid the initial installment of $954,600 to Beck Systems. The second payment of $900,000 is accrued and classified under accrued liabilities and the present value of the third payment amounting to $770,000 is accrued and classified under long-term liabilities.

      We are also subject to certain other legal proceedings and claims which have arisen in the ordinary course of business and which have not been fully adjudicated. We currently believe that the ultimate outcome of these matters will not have a material adverse effect on our business, results of operations or financial condition.

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.

      Our proposed transaction with Hewlett-Packard may adversely affect our results of operations whether or not the merger is completed, and the merger may not be completed on a timely basis or at all. In response to our pending merger transaction with Hewlett-Packard, our customers may defer purchasing decisions or elect to switch to other suppliers due to, among other things, competitive issues and uncertainty about the direction of our product offerings following the merger and our willingness to support and service existing products. Uncertainty surrounding the proposed transaction also may have an adverse effect on employee morale and retention. In addition, focus on the merger and related matters has resulted in, and may continue to result in, the diversion of management attention and resources. Furthermore, the market value of our Common Stock may vary prior to completion of the merger due to market assessments regarding the expected timing of consummation of the merger and the risk that the merger will not be consummated, along with other factors (see “The market price and trading volume of our Common Stock have been volatile and may continue to fluctuate significantly.” below), although there will be no adjustment to the consideration to be received by our stockholders in connection with the merger.

      Due to regulatory or other reasons, the merger may not be completed on the anticipated timetable, and it is possible that the merger will not be completed at all. If the merger is not completed, the price of our Common Stock may decline significantly, as the current market price of our Common Stock reflects a market

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      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.

      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 for licenses 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

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      If on-going 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 14% and 15% of our total revenues for the three and nine-month periods ended December 31, 2003, respectively. During the three-month period ended December 31, 2003, we entered into a license agreement with a large enterprise customer that accounted for 11% of our total revenues. During fiscal 2003, 2002 and 2001, 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 our relationship with Hewlett-Packard or another partner terminates, our revenue could be reduced and we may be unable to proportionately reduce our operating expenses.

      We may need additional capital in the future, which may not be available or may dilute the ownership of existing stockholders. In the future, if our merger with Hewlett-Packard is not consummated, 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 “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 configuration and change 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 configuration and change 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 42% and 48% of our overall revenue in the three and nine-month periods ended December 31, 2003, respectively, was derived from our international operations and approximately 52% of our total revenues for both the three and nine-month periods ended December 31, 2002 was derived from our international

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      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 limitation of liability provisions contained in our license agreements may not be effective under the laws of certain jurisdictions.

      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 the adverse consequences of a legal proceeding in which it was is alleged that our products infringed on patents held by another entity.

      The loss of key executives and employees could adversely affect us. Our 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 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 may continue to expand 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.

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      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 if our merger with Hewlett-Packard is not consummated, 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 relating to the market in which we do business or relating to us specifically, or our failure to meet or exceed our forecasts or analysts’ or “street” expectations, 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. Any such litigation brought against us could result in substantial costs and divert management’s attention and resources.

      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. 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 gain of $91 thousand in the quarter ended December 31, 2003, a net transaction gain of $245 thousand in the nine-month period ended December 31, 2003, a net transaction gain of $25 thousand in the quarter ended December 31, 2002 and a net transaction loss of $330 thousand in the nine-month period ended December 31, 2002.

      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 December 31, 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 not less than 90 days.

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      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 December 31, 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 Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

      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.

      There was not any change in our internal control over financial reporting during the quarter ended December 31, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II.     OTHER INFORMATION

      On December 11, 2003, we settled our patent dispute with Beck Systems, Inc. Both parties dismissed with prejudice their claims against each other in the patent infringement lawsuit originally brought by Beck Systems against us in July 2001. Under the settlement agreement, we agreed to pay Beck Systems $2,654,600 in three installments of $954,600, $900,000 and $800,000 in the third quarter of fiscal years 2004, 2005 and 2006, respectively. We recognized a settlement expense in the quarter ending December 31, 2003 for the present value of the three payments. In December 2003, we paid the initial installment of $954,600 to Beck Systems. The second payment of $900,000 is accrued and classified under accrued liabilities and the present value of the third payment amounting to $770,000 is accrued and classified under long-term liabilities.

      We are also subject to certain other legal proceedings and claims which have arisen in the ordinary course of business and which have not been fully adjudicated. We currently believe that the ultimate outcome of these matters will not have a material adverse effect our business, results of operations or financial condition.

      None

      None

      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 October 27, 2003 to furnish information relating to our announcement of our operating results for our quarter ended September 30, 2003 (pursuant to Item 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.

	NOVADIGM, INC.

	By:	/s/ WALLACE D. RUIZ

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

Dated: February 17, 2004

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EXHIBIT INDEX

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