##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

Washington, D.C. 20549




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Form 10-K



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|                                             |  |                                                                                             
|-------------------------------------------- |  | --------------------------------------------------------------------------------------------
|þ                                            |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
|                                            
|For the fiscal year ended March 31,
    2003

0-26156

(Commission File Number)


Novadigm, Inc.

(Exact name of registrant as specified in its
charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Delaware                                                           |  | 22-3160347                              
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification No.)

One International Blvd., Mahwah, NJ
07495

(Address of principal executive offices,
including zip code)


(201) 512-1000

(Registrants telephone number, including
area code)


Securities registered pursuant to
Section 12(b) of the Act:

None


Securities registered pursuant to
Section 12(g) of the Act:

Common Stock, $.001 par value


Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the
past
90 days.     þ Yes          o No

Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K.     o

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

The aggregate market value of the
registrants Common Stock held by non-affiliates of the
registrant as of September 30, 2002 (the last business day
of the registrants most recently completed second fiscal
quarter), based upon the closing price of the Common Stock on
that date, as reported on the NASDAQ National Market, was
approximately $28,302,076. Shares of Common Stock held by each
executive officer and director and by each person who owns 10%
or more of the outstanding Common Stock have been excluded in
that such persons may be deemed to be affiliates. This
determination of affiliates status is not necessarily a
conclusive determination for other purposes.

On June 23, 2003, there were 19,157,456
shares of the registrants Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Information required in response to Part III of
Form 10-K (Items 10, 11 and 13) is hereby incorporated
by reference to the specified portions of the registrants
definitive Proxy Statement, to be filed pursuant to
Regulation 14A under the Securities Exchange Act of 1934,
for the Annual Meeting of Stockholders to be held
September 17, 2003.



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TABLE OF CONTENTS



|               |                                                                                                          |  |  |  |  |  |  | 
|-------------- | -------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I        
|               | Item 1. Business                                                                                        
|               | Item 2. Properties                                                                                      
|               | Item 3. Legal Proceedings                                                                               
|               | Item 4. Submission of Matters to a Vote of Securities Holders                                           
|PART II       
|               | Item 5. Market for the Registrants Common Stock and Related Stockholder Matters                        
|               | Item 6. Selected Consolidated Financial Data                                                            
|               | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations           
|               | Item 7A. Quantitative and Qualitative Disclosures About Market Risk                                     
|               | Item 8. Financial Statements and Supplementary Data                                                     
|               | Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure            
|PART III      
|               | Item 10. Directors and Executive Officers of the Registrant                                             
|               | Item 11. Executive Compensation                                                                         
|               | Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters
|               | Item 13. Certain Relationships and Related Transactions                                                 
|               | Item 14. Controls and Procedures                                                                        
|PART IV       
|               | Item 15. Exhibits, Financial Statement Schedule, and Reports on Form 8-K                                
|SIGNATURES    
|CERTIFICATIONS
|EXHIBIT 10.31 
|EXHIBIT 10.32 
|EXHIBIT 10.33 
|EXHIBIT 10.34 
|EXHIBIT 21    
|EXHIBIT 23.1  
|EXHIBIT 23.2  
|EXHIBIT 99.1  
|EXHIBIT 99.2  



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TABLE OF CONTENTS

|               |  |                                                                                                     |    |      |    | 
|-------------- |  | --------------------------------------------------------------------------------------------------- | -- | ---- | -- | 
|               |  |                                                                                                     |    | Page
|               |  |                                                                                                     |    |     
|PART I        
|Item 1.        |  | Business                                                                                            |    |      | 2  | 
|Item 2.        |  | Properties                                                                                          |    |      | 13 | 
|Item 3.        |  | Legal Proceedings                                                                                   |    |      | 13 | 
|Item 4.        |  | Submission of Matters to a Vote of Securities
    Holders                                           |    |      | 14 | 
|PART II       
|Item 5.        |  | Market for the Registrants Common Stock and
    Related Stockholder Matters                        |    |      | 15 | 
|Item 6.        |  | Selected Consolidated Financial Data                                                                |    |      | 15 | 
|Item 7.        |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations           |    |      | 17 | 
|Item 7A.       |  | Quantitative and Qualitative Disclosures about
    Market Risk                                      |    |      | 28 | 
|Item 8.        |  | Financial Statements and Supplementary Data                                                         |    |      | 29 | 
|Item 9.        |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure            |    |      | 30 | 
|PART III      
|Item 10.       |  | Directors and Executive Officers of the Registrant                                                  |    |      | 31 | 
|Item 11.       |  | Executive Compensation                                                                              |    |      | 31 | 
|Item 12.       |  | Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholders Matters |    |      | 31 | 
|Item 13.       |  | Certain Relationships and Related Transactions                                                      |    |      | 32 | 
|Item 14.       |  | Controls and Procedures                                                                             |    |      | 32 | 
|PART IV       
|Item 15.       |  | Exhibits, Financial Statement Schedules, and
    Reports on Form 8-K                                |    |      | 33 | 
|SIGNATURES     |  |                                                                                                     | 35 |     
|CERTIFICATIONS |  |                                                                                                     | 36 |     

Among the marks owned by Novadigm, Inc.,
Novadigm, Novadigm Enterprise Desktop
Manager and Radia are registered trademarks,
and Enterprise Desktop Manager, EDM:
Manager, EDM: Administrator, EDM:
Server, EDM: Client and e-wrap are
trademarks. This filing also includes trademarks of companies
other than Novadigm, Inc.

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Cautionary Note Regarding Forward-Looking
Statements

Because we want to provide you with meaningful
and useful information, this Annual Report on Form 10-K
includes forward-looking statements (as such term is defined in
Section 21E of the Securities Exchange Act of 1934, as
amended) that reflect our current expectations about our future
results, performance, prospects and opportunities. Where
possible, we have attempted to identify these forward-looking
statements by using words such as may,
will, expects, anticipates,
believes, intends,
estimates, could or similar expressions.
These forward-looking statements are based on information
currently available to us and are subject to a number of risks,
uncertainties and other factors that could cause our actual
results, performance, prospects or opportunities to differ
materially from those expressed in, or implied by, these
forward-looking statements. See Item 1.
Business  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 Annual Report on
Form 10-K.




PART I






|        |         
|------- | --------
|Item 1. | Business

The following discussion contains
forward-looking statements that are subject to risks,
uncertainties and other factors, including those discussed under
Risk 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 Cautionary Note Regarding Forward-Looking
Statements.

All references in this Annual Report on
Form 10-K to we, us,
our, Novadigm® and the
Company refer to Novadigm, Inc. and its
subsidiaries.

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.

Background

We target large and medium-size enterprises,
government and public sector organizations and service providers
with numerous user communities, such as corporate employees and
remote/mobile users, as well as customers, partners, suppliers
and consumers beyond the corporate firewall. These enterprises
face the challenge of reducing costs and maintaining high
availability and reliability of software-enabled business
services to thousands or hundreds-of-thousands of computing
devices, across increasingly complex computing

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environments. The software configuration and
change management solutions that we offer them span a number of
IT management categories, including software distribution,
software management, device management, desktop, mobile and
server management, asset management, patch management,
configuration and change management, and infrastructure
management.


Demand for our solutions is fueled by near-term
information technology management needs and major trends:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Enterprise IT priorities.Business expectations and demands on
    IT services continue to escalate while resources continue to be
    constrained. Enterprise IT executives face a multi-faceted
    challenge to constrain or reduce budgets, while at the same time
    improve service delivery, enhance systems security and increase
    development to keep pace with the business. As a result, IT
    organizations are streamlining IT processes and implementing
    automated tools to increase operational efficiency.                                                                                       
|
| | Enterprise IT expansion.One of the key changes underway in the
    enterprise is its transformation from a firewall-enclosed
    environment into an extended enterprise that is reaching out to
    a rapidly growing population of remote/mobile users as well as
    partners and customers via the Internet. Enterprises and
    government agencies are providing new e-services
    requiring the provisioning of applications and content as part
    of new software-enabled services for internal and external
    customers.                                                                                 
|
| | Enterprise IT evolution.The ongoing evolution and adoption of
    information technologies within the enterprise such as new
    operating system versions, servers (such as blade servers),
    directory technologies, business applications and intranets,
    present significant management challenges. For example,
    migrations to the Windows XP platform include a complete and
    continuous rollout of operating system and service packs,
    systems management and application packaging tools, and
    directory server software, as well as new applications and
    upgrades from software providers.

Customers

Our principal customers include enterprises and
organizations with widely deployed and large-scale heterogeneous
networks. As of March 31, 2003, our products had been
licensed directly by us or through distributors to more than 500
customers worldwide.

Our customers include leading public and
commercial Global 1000 enterprises, enterprise outsourcers and
service providers around the world in a wide variety of industry
sectors, such as American Honda Motor Co., Inc. in automotive;
KeyBank National Association in banking; PPG Industries, Inc. in
chemicals; Pitney Bowes Inc. in computer hardware; National
Semiconductor Corporation in electronics; Schlumberger Oilfield
Services in energy; Fluor Corporation in
engineering-construction; Cargill, Incorporated in
food-agricultural services; the U.S. Postal Service in
government; Kindred Healthcare, Inc. in healthcare; The
Prudential Insurance Company of America in insurance; National
Basketball Association in leisure; Owens-Illinois, Inc. in
manufacturing; Reuters Limited in media; EDS in outsourcing
services; Schering-Plough Corporation in pharmaceutical; Cap
Gemini Ernst & Young in professional services; The Gap, Inc,
in retail; British Telecommunications plc. in
telecommunications; J.B. Hunt Transportation Services, Inc. in
transportation; and KeySpan Corporation in utilities.

Strategy

Our objective is to be the leading provider of
solutions for automating the management of software and other
digital assets for medium and large enterprises. Key components
of our strategy to achieve this objective include:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Expanding Our Technology Leadership.We are acknowledged by industry
    analysts for technology vision and leadership, and believe that
    our unique adaptive management technology, together with our
    comprehensive product set and broad platform coverage,
    distinguish our solutions from those of other vendors. We intend
    to continue to develop new products and enhancements to existing
    products that are responsive to the growing configuration and
    change management needs of the marketplace, thereby expanding
    our market opportunities.

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Increasing Our Productivity and Reach of Our
    Channels.We intend to continue our
    focus on increasing productivity and coverage of our direct
    sales channels, leveraging and expanding our relationships with
    outsourcers, service providers and technology partners, and
    developing additional sales and marketing channels serving the
    mid-sized and large enterprise marketplace.                                                                                                                                                                                                                                                                                                                                                  
|
| | Expanding Our Customer Relationships.Our current customer base is comprised
    of public and private sector customers around the world. We
    believe that the strength of our value proposition and ability
    to meet the needs of our customer base, together with the broad
    range of capabilities in our comprehensive solutions,
    increasingly position us to be a strategic provider to our
    customers as they evolve and extend their enterprise IT
    infrastructures. We intend to expand our relationships and
    licenses with existing customers by maintaining our track record
    of successful implementations and high levels of customer
    satisfaction, and by providing additional solutions that meet
    their needs.

Novadigm Solutions

Our Radia products may be used individually or in
standard combinations to provide comprehensive lifecycle
solutions that automate a wide variety of ongoing IT management
activities, such as:



| |   |                                                                                 
| | - | --------------------------------------------------------------------------------
| |  | Server Management                                                               
|
| |  | Desktop Management                                                              
|
| |  | Mobile Management                                                               
|
| |  | Specialty Device Management (ATMs, point-of-sale
    terminals, Internet kiosks)
|
| |  | Operating System Management                                                     
|
| |  | Patch Management                                                                
|
| |  | Application and Content Management                                              
|
| |  | Inventory and Usage Management                                                  

These solutions also facilitate a variety of
major IT projects such as desktop standardization, server
consolidation, software license management, asset management,
application deployment, PC replacement and OS migration, server
provisioning/re-purposing, and software infrastructure security.

In addition, our products may be combined into
custom solutions to support services that are distinctive to our
customers businesses such as Internet subscriptions,
self-service IT management, and just-in-time Web application
delivery.

We believe that our solutions distinguish
themselves in the marketplace because of their depth and
breadth, high automation, reliability and scalability, ease of
deployment and use, and their expandability and flexibility. For
example, a desktop management solution can be easily expanded to
a larger, integrated solution for managing laptops, servers, and
PDAs, or to incorporate management of specialty enterprise
computing devices such as ATMs, point-of-sale terminals or
Internet kiosks. In addition, specialized Radia solutions can be
quickly implemented to enable IT organizations and service
providers to deliver a variety of innovative services offered to
customers across the Internet. In this way, our customers can
implement our individual solutions that each provide immediate
value and serve their current needs, while progressively
building a comprehensive solution that meets future software
change and configuration management needs.

Overall business benefits of our solutions
include:



| |                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Reduced IT costs.Our solutions significantly reduce information technology
    (IT) operating costs and lower total cost of ownership
    (TCO) by streamlining IT management processes from end-to-end
    and eliminating manual installation and administration.
|
| | Business continuity
    assurance.Our solutions improve the
    continuity of software-enabled services by ensuring that the
    underlying software is up-to-date and protected against
    vulnerabilities.                                                      

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| |                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | IT alignment to the
    business.Our solutions accelerate
    deployment and provide continuous adaptive management of
    software, to ensure that IT can quickly, reliably and
    cost-effectively provide the software-enabled services that
    support existing business processes and the innovative services
    required to meet new initiatives.

With our automated, adaptive management
solutions, IT organizations and service providers can respond to
business demands and provide software services quickly, reliably
and cost-effectively to large audiences of employees and
customers, across rapidly changing and increasingly complex
enterprise, wireless and Internet environments.

Products

We offer six policy-based adaptive management
application products with support for major enterprise
platforms, each with versions available for a variety of
platforms including Microsoft Windows, UNIX, Linux and Macintosh
that can be used individually or combined into integrated
solutions. Together with the management application products, we
offer management extensions products that provide additional
functionality. All of our products share a common technology
foundation.

Management Application Products:

|                                   |  |                           |  |                                                                                                                
|---------------------------------- |  | ------------------------- |  | ---------------------------------------------------------------------------------------------------------------
|Function                           |  | Product                   |  | Capability                                                                                                     
|                                   |  |                           |  |                                                                                                                
|Asset Management                   |  | Radia Inventory Manager   |  | Detects, discovers and collects information about
    IT assets                                                
|                                   |  | Radia Usage Manager       |  | Tracks application and software usage information                                                              
|OS Migration and Management        |  | Radia OS Manager          |  | Provisions and manages operating systems                                                                       
|Application and Content Management |  | Radia Application Manager |  | Deploys, updates, repairs and retires
    applications and content                                             
|                                   |  | Radia Software Manager    |  | Provides user self-service management of
    application, content and other software services                  
|Infrastructure Security            |  | Radia Patch Manager       |  | Acquires, assesses, analyzes impact, deploys and
    assures compliance of patches, service packs and hot fixes

Our management extensions products provide
additional capabilities including Web-based administration,
packaging and publishing, and configuration analysis, as well as
support for various open standards, and integration with
third-party management products in categories such as network
and systems management, help desk, source code management,
packaging and migration, directories, databases, license
metering, asset management and security, from a variety of
vendors, including BMC Software, Computer Associates,
Hewlett-Packard Company, IBM/Tivoli, Microsoft, and Oracle.

Our predecessor product, Enterprise Desktop
Manager (EDM), introduced in 1993, continues to provide
policy-based adaptive management of software and content for its
existing customers.

Our products support a wide variety of server and
client platforms typically found in mid to large-enterprise IT
environments, including Microsoft Windows
9X/NT/2000/XP/2003/WinCE/Pocket PC, Palm OS, IBM AIX and OS/2,
Apple Mac and Mac OS X, Compaq Tru64, HP-UX, Novell
NetWare, Linux, Reliant, SGI-IRIX, Sun Solaris and IBM 4690.

During fiscal 2003 we released several new or
enhanced Radia product components and we expect to continue to
release new and enhanced Radia product components on a regular
basis.

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Technology

Our products share a common technology
foundation, which facilitates the rapid implementation of new
products, while eliminating redundant processing and data
activities. It also provides a seamless integration among
product components in Radia solutions, which enables a
significantly higher degree of IT management process automation.
Characteristics of our unique adaptive management technology
include:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Adaptive Configuration Management.Our desired-state process can
    automatically configure any of the device software
    layers  OS, patches, images, applications, content,
    personalities, settings, access entitlements  for
    highly personalized user environments and install them as
    dictated by administrative policies or user preferences. As
    software versions, user requirements and device configurations
    change, the affected software and content is automatically
    differenced using patented techniques, and reconfigured to
    correspond to the desired state, thus eliminating the need for
    manual user or administrator involvement.
|
| | Policy-Based Management.Our policy-based model allows IT
    administrators to efficiently and concisely define entitlements
    controlling the deployment of software and content to devices,
    authorized users or subscribers. Subsequent changes to policies
    and entitlements cause software and content to be automatically
    installed, changed or de-installed for all affected users and
    devices. This highly automated responsiveness to continually
    changing and personalized needs of users and devices is
    essential to managing software and content in large-scale
    enterprise and e-business environments.                                      
|
| | Bandwidth Optimization.Our comprehensive bandwidth management
    capabilities, including multicasting, bandwidth throttling,
    configuration and component differencing, compression, and
    distributed caching, assure optimized use of network resources
    and a minimum of traffic and wait-time for bandwidth-constrained
    networks.                                                                                                                                                                                                                                                                                                                                    
|
| | Architecture.Radias n-tier highly scalable
    architecture enables the management of very large numbers of
    distributed devices and application targets across complex
    global operations, with administration from any point. With this
    flexible component-based architecture, our products can be
    implemented separately and expanded rapidly to meet customer
    needs.                                                                                                                                                                                                                                                                                         
|
| | Configuration Database.Our configuration database contains
    all of the information necessary to manage software and other
    digital assets. Software, hardware and configuration data
    including inventory, usage, digital assets and their component
    manifests, entitlement policies and security and access rules
    for Radia administrators is consolidated and managed cohesively.
    This comprehensive collection of configuration data provides
    visibility and control of the software infrastructure, allows
    comprehensive impact analysis and reporting of IT assets, and
    enables a higher level of automation of operational tasks.              
|
| | Web-based Administration.Radia Management Portal provides
    role-based workflow tasks and dialogs based on IT Infrastructure
    Library (ITIL) industry standards for consistent and secure
    Radia administration and operations. For ease and speed of Radia
    implementation, the Portal discovers newly installed devices on
    the network automatically and enables IT administrators to
    install Radia product components remotely.                                                                                                                                                                                                                                 

We believe that our highly evolved technology
enables our products and solutions to provide significantly more
automation, reliability, scalability, efficiency and
manageability and, ultimately, greater business benefits to our
customers than other products in the marketplace.

Services

To facilitate implementation and integration of
our products, we offer a range of support programs and services
that complement our products.



| |                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Customer Support.Customers who subscribe to our
    maintenance program have access to our technical support
    facilities 24 hours a day, seven days a week via our
    support site, electronic mail and facsimile lines and are
    entitled to receive software updates, maintenance releases and
    documentation

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | for an annual maintenance fee. Our technical
    support centers located in North America and in Europe provide
    telephone support during business hours and 24/7 emergency
    support to customers worldwide. We also offer specialized
    support services, such as our Packaging Lab, which provides
    expertise in the best practices of packaging popular
    applications.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | Customer Groups.We
    provide user forums such as our Customer Advisory Group meetings
    and user conferences in the US and Europe, for customers and
    partners to network with each other and interact directly with
    Novadigm engineers, support staff and executive management.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| | Consulting.Our
    professional services organization in the United States, Canada,
    Great Britain, France and Germany and a growing number of
    Novadigm-certified service providers located throughout Europe,
    Asia, South America, the Middle East and Africa are available to
    consult with customers on project planning and systems
    implementation and integration. The implementation of
    Novadigms products does not require significant
    customization or modification and follows an IT Infrastructure
    Library based 5-step sequence of: gathering and defining the
    requirements and recommended solution; architecting and
    designing the solution; developing the planned infrastructure;
    implementing the solution; and operating/maintaining the
    solution. Consulting services are typically billed on a time and
    materials basis at our then current standard rates.
|
| | Education.We offer
    regional and on-site training courses for the implementation and
    administration of our products. Product training is provided on
    a scheduled basis at our corporate training facilities in
    Mahwah, New Jersey, and in our regional offices in Paris, London
    and Munich, as well as at customer sites throughout the world.
    We also offer custom course development for certain of our
    products. We bill our education services on a per class and per
    student basis.                                                                                                                                                                                                                                                                                                                                                                                                          

Sales, Marketing and Channels

We market our software and services through our
direct sales force and indirect channel partners worldwide. We
manage sales activities in North America, the Pacific Rim and
Latin America (AAA) from our offices in Mahwah, New
Jersey; Emeryville, California; and Chicago, Illinois; and in
Europe, the Middle East and Africa (EMEA) from our
offices located near Paris, France; London, England; and Munich,
Germany. Revenues from our direct sales forces accounted for
approximately 81%, 92% and 86% of our total revenues for fiscal
year 2003, 2002 and 2001, respectively. Revenues from sales to
customers in North America, the Pacific Rim and Latin America
accounted for approximately 48%, 55% and 54% of our total
revenues for fiscal year 2003, 2002 and 2001, respectively.

Our marketing activities are designed to build
market awareness, generate qualified leads, and supply sales
channels with positioning, presentation materials and product
collateral to help generate and develop qualified customer
prospects.

Our direct sales organization is divided into
specialized teams of pre-sales specialists, account managers and
implementation consultants who work together to provide an
integrated selling approach to the customer. Our indirect
channels are based on business arrangements with value-added
resellers (VARs), systems integrators, outsourcers and
distributors that are selected and trained by us to provide
marketing, sales, post-sales support and services for our
products. We also maintain a network of service providers
worldwide that offer our customers services to accelerate their
implementations. These business arrangements are also useful to
us in identifying new products and product enhancements that are
responsive to customer and market requirements. We believe that
we have been successful in minimizing marketing conflicts
between our worldwide direct and indirect sales channels.

We participate in the beta programs and
partnering programs of market leaders, including
Hewlett-Packard, Microsoft and IBM. We continue to seek to
expand our existing technology, marketing and selling
relationships, and to establish new such relationships.

In June 2000, we entered into a strategic
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 provider markets. This agreement is
scheduled to terminate on June 30,

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2003. In November 2002, we and HP signed an HP
OpenView Solution Alliance agreement, under which we expect to
continue key aspects of the prior agreement. (See Part I,
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations).


In November 2002, we and HP OpenView announced a
special program for Radia to be the replacement product for HP
OpenViews server software management products
IT Administrator (ITA) and Software
Distributor (SD) products. We and HP collaborated to
enhance Radia functionality and HP OpenView integration so that
ITA and SD customers would still receive the same levels of
interoperability between Radia and HP OpenView products that
they had received with their HP OpenView products.

We and HP have a cooperative sales model, which
provides a process for introducing each companys sales
representatives into targeted accounts. This sales model is
supplemented by joint educational and marketing initiatives. In
addition to sales cooperation, a number of HP services
consultants are Novadigm-certified consultants.

In 2001, HP Managed Services (HPMS),
HPs outsourcing division, selected Radia as an offering to
its trade customers in support of various desktop and
infrastructure outsourcing solutions provided by HP. Novadigm
provides HPMS with product, product expertise, technical and
sales training. HPMS provides its customers with implementation
and support services.

Financial Information about Geographic
Areas

For additional financial information regarding
our foreign and domestic operations and sales, see Item 7.
Managements Discussion and Analysis of Financial
Condition and Results of Operation and Note 11 to our
Consolidated Financial Statements included in this Annual Report.

Product Development

Since our inception, we have focused on, and made
substantial investments in, product development. In fiscal 2003,
2002 and 2001, our total research and development expenses were
approximately $10 million, $10 million and
$9 million, respectively. To date, we have not capitalized
any software development costs.

We anticipate that we will continue to commit
substantial resources to research and development, as we believe
that our future success depends in large part on our ability to
maintain and enhance the functionality of our current line of
products and to develop and introduce new products that keep
pace with technological developments, achieve market acceptance
and respond to an ever-expanding range of customer requirements.
We intend to enhance our existing product offerings and to
introduce new products for the enterprise software and
configuration management market. Although we expect to develop
certain of our new products and product enhancements internally,
we may also acquire technology and/or products from third
parties or consultants.

Competition

The market for software change and configuration
management for large and medium enterprises is intense, complex
and rapidly changing. We have competitors who include some
limited software management capabilities with other IT
management tools, and other competitors who provide software
management capabilities primarily focused on particular devices
and/or types of software, e.g., servers, or operating systems,
or patches.

Our competitors today include several large
companies  Computer Associates, IBM/ Tivoli,
Microsoft and Novell  and a number of smaller
companies including Altiris, LANDesk, Marimba, ON Technology,
Opsware and Xcellenet. We believe that we compete on the basis
of our:



| |   |                                                                                                                                            
| | - | -------------------------------------------------------------------------------------------------------------------------------------------
| |  | experience, expertise and long-term focus on the
    software configuration and change management needs of large and
    medium enterprises

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| |   |                                                                                                                                                          
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | acknowledged depth and breadth of our end-to-end
    technology and solutions which make them particularly effective
    in complex environments         
|
| |  | widely demonstrated ability to support customers
    in achieving success and in realizing immediate and long-term
    operational and financial benefits
|
| |  | proven ability to innovate and deliver new
    capabilities and solutions to address the evolving needs of our
    large and medium-size customers.      

Intellectual Property and Other Proprietary
Rights

In December 1996 and in September 2001, we were
issued patents from the U.S. Patent Office for key components of
our desired-state management process used in our software and
content management products. In addition, we have acquired an
additional three patents through the acquisition of the
technology purchased in October 2001 (see Item 7.
Managements Discussion and Analysis of Financial
Condition and Results of Operations; Contractual Obligations and
Commitments). We also rely on a combination of copyright
and trademark laws, trade secrets, confidentiality procedures,
contractual provisions and technical measures to protect our
proprietary rights in our products.

We believe, however, that given the rapid pace of
technological change in the industry, factors such as the
technical expertise, knowledge and innovative skill of our
management and technical personnel, our name recognition, the
timeliness and quality of the support services we provide and
our ability to offer frequent product enhancements and to
develop, introduce and market new products are more significant
in maintaining our competitive technology leadership position.

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.

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, and our operating
results vary due to seasonality.Our
quarterly operating results have fluctuated in the past and are
expected to fluctuate significantly in the future, due to a
number of factors, including, among others, the size and timing
of customer orders, the timing and market acceptance of our new
products, the level and pricing of international sales, foreign
currency exchange rates, changes in the level of operating
expenses, 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

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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.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.

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 7. 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.

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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 52% of our revenues in
fiscal 2003 was 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 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
Item 3. 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.

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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. In order 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 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.

Employees

As of March 31, 2003, we had a total of 286
full-time employees, including 91 in customer support and
services, 78 in sales and marketing, 70 in research and
development and 47 in general and administration. A total of
219 employees are based in the United States and
67 employees are based in Europe. None of our employees are
represented by a labor union. We have not experienced work
stoppages and consider our relations with employees to be good.

Available Information

Our annual reports on Form 10-K, quarterly
reports on Form 10-Q, and current reports on Form 8-K,
and any amendments to these reports filed pursuant to
Sections 13(a) and 15(d) of the Securities Exchange Act of
1934 are made available free of charge through our website at
www.novadigm.com as soon as is reasonably practicable
after such reports are filed with, or furnished to, the SEC.
None of the information posted on our website is incorporated by
reference into this Annual Report.

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|        |           
|------- | ----------
|Item 2. | Properties

Our corporate headquarters is located in Mahwah,
New Jersey. We conduct our Americas, Asia and Australia
operations (AAA) principally out of leased
facilities in Mahwah, New Jersey; Chicago, Illinois; Emeryville,
California; and Alpharetta, Georgia. Our European headquarters
is located outside of Paris, France. We conduct our Europe,
Middle East and Africa (EMEA) operations principally
out of leased facilities in locations near Paris, France; Munich
Germany; and London, England.

As of March 31, 2003, we leased the
following facilities:

|                |  |         |        |            |  |             |          |               |  |   |           |  |  |                                                                                                                                                                                  
|--------------- |  | ------- | ------ | ---------- |  | ----------- | -------- | ------------- |  | - | --------- |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                |  |         |        |            |  | Approx.     |          |              
|                |  | Approx. |        | Lease      |  | Current     |          |              
|Location        |  | Sq. Ft. |        | Expiration |  | Annual Cost |          | Principal Use
|                |  |         |        |            |  |             |          |              
|Mahwah, NJ      |  |         | 56,773 |            |  |             | 6/30/06  |               |  | $ | 1,416,000 |  |  | Corporate headquarters, North American customer
    training center, customer support center, product development
    and engineering and eastern sales and professional services
|Emeryville, CA  |  |         | 5,238  |            |  |             | 3/31/07  |               |  | $ | 258,000   |  |  | Marketing and western sales and professional
    services                                                                                                                        
|Chicago, IL     |  |         | 3,137  |            |  |             | 6/30/04  |               |  | $ | 63,000    |  |  | Midwest sales and professional services                                                                                                                                          
|Alpharetta, GA  |  |         | 3,293  |            |  |             | 12/31/07 |               |  | $ | 49,000    |  |  | Southeast sales and professional services                                                                                                                                        
|Paris, France   |  |         | 8,730  |            |  |             | 10/31/04 |               |  | $ | 174,000   |  |  | European customer training and customer support
    centers, European administration and France sales and
    professional services                                              
|Odiham, England |  |         | 3,200  |            |  |             | 12/31/04 |               |  | $ | 106,000   |  |  | UK sales and professional services                                                                                                                                               
|Munich, Germany |  |         | 3,730  |            |  |             | 7/31/03  |               |  | $ | 18,000    |  |  | German sales and professional services                                                                                                                                           

We believe that our current facilities are
adequate for our needs and will be adequate to meet our needs
for the foreseeable future.






|        |                  
|------- | -----------------
|Item 3. | Legal Proceedings

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.

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, 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 it 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 Novadigm, Inc. 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
due 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,

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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 will repay to us all of the approximately $838,000
in outstanding principal and accrued interest on loans owed by
him to Novadigm 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
Note 10 to our Consolidated Financial Statements included
herein.







|        |                                                          
|------- | ---------------------------------------------------------
|Item 4. | Submission of Matters to a Vote of
    Securities Holders

We did not submit any matter to a vote of our
security holders during the quarter ended March 31, 2003.

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PART II




Item 5.     Market
for the Registrants Common Stock and Related Stockholder
Matters

Our Common Stock has been traded on the NASDAQ
National Market since our initial public offering on
July 13, 1995 under the symbol NVDM. The
following table sets forth, for the periods indicated, the high
and low sales prices per share for our Common Stock on the
NASDAQ National Market:

|                                     |  |      |       |     |  |   |      | 
|------------------------------------ |  | ---- | ----- | --- |  | - | ---- | 
|                                     |  | High |       | Low
|                                     |  |      |       |    
|Fiscal Year Ended March 31, 2003     |  |      |       |     |  |   |      | 
|First Quarter                        |  | $    | 8.20  |     |  | $ | 5.54 | 
|Second Quarter                       |  |      | 7.20  |     |  |   | 1.57 | 
|Third Quarter                        |  |      | 3.31  |     |  |   | 1.40 | 
|Fourth Quarter                       |  |      | 2.56  |     |  |   | 1.60 | 
|                                    
|Fiscal Year Ended March 31,
    2002 |  |      |       |     |  |   |      | 
|First Quarter                        |  | $    | 11.25 |     |  | $ | 4.13 | 
|Second Quarter                       |  |      | 11.95 |     |  |   | 7.09 | 
|Third Quarter                        |  |      | 10.10 |     |  |   | 6.91 | 
|Fourth Quarter                       |  |      | 11.10 |     |  |   | 7.34 | 

As of June 23, 2003, the last reported sale
price of our Common Stock was $2.56 per share and there
were approximately 99 holders of record of our Common
Stock. We believe there are currently approximately 2,950
beneficial owners of our Common Stock.

We have never paid cash dividends on our Common
Stock. We currently intend to retain earnings, if any, for use
in our business and we do not anticipate paying any cash
dividends in the foreseeable future.




Item 6.     Selected
Consolidated Financial Data

The selected consolidated statement of
operations data for the year ended March 31, 2003 and
consolidated balance sheet data as of March 31, 2003, have
been derived from Consolidated Financial Statements included in
this Annual Report that have been audited by KPMG LLP,
independent auditors. The selected consolidated statement of
operations data for the years ended March 31, 2002 and 2001
and consolidated balance sheet data as of March 31, 2002
has been derived from Consolidated Financial Statements included
in this Annual Report that were audited by Arthur Andersen LLP.
The selected statement of operations data for the years ended
March 31, 2000 and 1999 and balance sheet data as of
March 31, 2001, 2000 and 1999 have been derived from
audited Consolidated Financial Statements not included
herein.

This data should be read in conjunction with
our Consolidated Financial Statements and related notes and
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations.

Certain prior year amounts have been
reclassified to conform to the current years
presentation.

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Selected Consolidated Statement of Operations
Data

|                                                   |                                                         |                                       |         |        |        |      |        |        |        |      |        |        |        |   |        |        |        |   |        |        |        | 
|-------------------------------------------------- | ------------------------------------------------------- | ------------------------------------- | ------- | ------ | ------ | ---- | ------ | ------ | ------ | ---- | ------ | ------ | ------ | - | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                                   |                                                         |                                      
|                                                   |                                                         | Year Ended March 31,                 
|                                                   |                                                         |                                      
|                                                   |                                                         | 2003                                  |         | 2002   |        | 2001 |        | 2000   |        | 1999
|                                                   |                                                         |                                       |         |        |        |      |        |        |        |     
|                                                   |                                                         |                                      
|                                                   |                                                         | (in thousands, except per share data)
|Revenues:                                          |                                                         |                                       |         |        |        |      |        |        |        |      |        |        |        |   |        |        |        |   |        |       
|                                                   | Licenses                                                |                                       | $       | 29,494 |        |      | $      | 39,158 |        |      | $      | 31,247 |        |   | $      | 27,978 |        |   | $      | 20,743 |       
|                                                   | Maintenance and services                                |                                       |         | 25,964 |        |      |        | 23,792 |        |      |        | 19,266 |        |   |        | 16,790 |        |   |        | 11,446 |       
|                                                   |                                                         |                                       |         |        |        |      |        |        |        |      |        |        |        |   |        |        |        |   |        |       
|                                                   |                                                         | Total revenues                        |         |        | 55,458 |      |        |        | 62,950 |      |        |        | 50,513 |   |        |        | 44,768 |   |        |        | 32,189 | 
|                                                   |                                                         |                                       |         |        |        |      |        |        |        |      |        |        |        |   |        |        |        |   |        |       
|Operating Expenses:                                |                                                         |                                       |         |        |        |      |        |        |        |      |        |        |        |   |        |        |        |   |        |       
|                                                   | Cost of licenses  amortization of
    intangible asset |                                       |         | 1,335  |        |      |        | 611    |        |      |        |       |        |   |        |       |        |   |        |       |       
|                                                   | Cost of maintenance and services                        |                                       |         | 14,233 |        |      |        | 12,102 |        |      |        | 9,345  |        |   |        | 5,395  |        |   |        | 4,479  |       
|                                                   | Sales and marketing                                     |                                       |         | 26,398 |        |      |        | 27,509 |        |      |        | 23,884 |        |   |        | 21,261 |        |   |        | 15,718 |       
|                                                   | Research and development                                |                                       |         | 10,049 |        |      |        | 10,423 |        |      |        | 9,003  |        |   |        | 6,126  |        |   |        | 4,936  |       
|                                                   | General and administrative                              |                                       |         | 12,109 |        |      |        | 11,046 |        |      |        | 10,355 |        |   |        | 7,474  |        |   |        | 5,939  |       
|                                                   | Amortization of intangible                              |                                       |         | 2,018  |        |      |        | 8,072  |        |      |        | 6,046  |        |   |        |       |        |   |        |       |       
|                                                   |                                                         |                                       |         |        |        |      |        |        |        |      |        |        |        |   |        |        |        |   |        |       
|                                                   |                                                         | Total operating expenses              |         |        | 66,142 |      |        |        | 69,763 |      |        |        | 58,633 |   |        |        | 40,256 |   |        |        | 31,072 | 
|                                                   |                                                         |                                       |         |        |        |      |        |        |        |      |        |        |        |   |        |        |        |   |        |       
|Operating income (loss)                            |                                                         |                                       | (10,684 | )      |        |      | (6,813 | )      |        |      | (8,120 | )      |        |   | 4,512  |        |        |   | 1,117  |       
|Interest income, net                               |                                                         |                                       | 384     |        |        |      | 775    |        |        |      | 1,703  |        |        |   | 1,122  |        |        |   | 934    |       
|Other income (expense), net                        |                                                         |                                       | (783    | )      |        |      | (220   | )      |        |      | 2,054  |        |        |   | (64    | )      |        |   | (269   | )     
|                                                   |                                                         |                                       |         |        |        |      |        |        |        |      |        |        |        |   |        |        |        |   |        |       
|Income (loss) before provision for income taxes    |                                                         |                                       | (11,083 | )      |        |      | (6,258 | )      |        |      | (4,363 | )      |        |   | 5,570  |        |        |   | 1,782  |       
|Provision for income taxes                         |                                                         |                                       | 645     |        |        |      | 11     |        |        |      | 233    |        |        |   | 427    |        |        |   | 25     |       
|                                                   |                                                         |                                       |         |        |        |      |        |        |        |      |        |        |        |   |        |        |        |   |        |       
|Net income (loss)                                  |                                                         | $                                     | (11,728 | )      |        | $    | (6,269 | )      |        | $    | (4,596 | )      |        | $ | 5,143  |        |        | $ | 1,757  |       
|                                                   |                                                         |                                       |         |        |        |      |        |        |        |      |        |        |        |   |        |        |        |   |        |       
|Basic net income (loss) per share                  |                                                         | $                                     | (0.60   | )      |        | $    | (0.31  | )      |        | $    | (0.23  | )      |        | $ | 0.28   |        |        | $ | 0.10   |       
|                                                   |                                                         |                                       |         |        |        |      |        |        |        |      |        |        |        |   |        |        |        |   |        |       
|Weighted average basic common shares outstanding   |                                                         |                                       | 19,672  |        |        |      | 19,953 |        |        |      | 19,711 |        |        |   | 18,185 |        |        |   | 17,580 |       
|                                                   |                                                         |                                       |         |        |        |      |        |        |        |      |        |        |        |   |        |        |        |   |        |       
|Diluted net income (loss) per share                |                                                         | $                                     | (0.60   | )      |        | $    | (0.31  | )      |        | $    | (0.23  | )      |        | $ | 0.25   |        |        | $ | 0.10   |       
|                                                   |                                                         |                                       |         |        |        |      |        |        |        |      |        |        |        |   |        |        |        |   |        |       
|Weighted average diluted common shares outstanding |                                                         |                                       | 19,672  |        |        |      | 19,953 |        |        |      | 19,711 |        |        |   | 20,558 |        |        |   | 18,384 |       
|                                                   |                                                         |                                       |         |        |        |      |        |        |        |      |        |        |        |   |        |        |        |   |        |       

Selected Consolidated Balance Sheet
Data

|                                                                |  |                      |        |      |  |      |        |      |  |      |        |  |  |   |        |  |  |   |        | 
|--------------------------------------------------------------- |  | -------------------- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                                                |  |                     
|                                                                |  | Year Ended March 31,
|                                                                |  |                     
|                                                                |  | 2003                 |        | 2002 |  | 2001 |        | 2000 |  | 1999
|                                                                |  |                      |        |      |  |      |        |      |  |     
|                                                                |  |                     
|                                                                |  | (in thousands)      
|Cash, cash equivalents and short-term marketable
    securities |  | $                    | 29,420 |      |  | $    | 25,775 |      |  | $    | 27,162 |  |  | $ | 25,018 |  |  | $ | 21,536 | 
|Restricted cash                                                 |  |                      | 150    |      |  |      |       |      |  |      |       |  |  |   |       |  |  |   |       | 
|Working capital                                                 |  |                      | 22,693 |      |  |      | 29,161 |      |  |      | 30,809 |  |  |   | 29,040 |  |  |   | 20,993 | 
|Total assets                                                    |  |                      | 51,436 |      |  |      | 60,523 |      |  |      | 66,705 |  |  |   | 48,567 |  |  |   | 36,079 | 
|Deferred revenue                                                |  |                      | 12,235 |      |  |      | 10,542 |      |  |      | 11,887 |  |  |   | 8,900  |  |  |   | 6,577  | 
|Long-term liabilities                                           |  |                      | 71     |      |  |      | 1,298  |      |  |      |       |  |  |   |       |  |  |   |       | 
|Stockholders equity                                            |  |                      | 27,651 |      |  |      | 36,755 |      |  |      | 44,385 |  |  |   | 31,480 |  |  |   | 23,262 | 

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Item 7.     Managements
Discussion and Analysis of Financial Condition and Results of
Operations

You should read the following discussion and
analysis along with our audited consolidated financial
statements and related notes included in this Annual Report on
Form 10-K. The following discussion and analysis contains
forward-looking statements that are subject to risks,
uncertainties and other factors, including those discussed under
Item 1. Business  Risk 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
Cautionary Note Regarding Forward-Looking
Statements.

Overview

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

Our total revenues for the fiscal years ended
March 31, 2003, 2002 and 2001 were $55.5 million,
$63.0 million and $50.5 million, respectively. We
incurred operating losses of $10.7 million,
$6.8 million and $8.1 million for the fiscal years
2003, 2002 and 2001, respectively. We incurred net losses of
$11.7 million, $6.3 million and $4.6 million for
the fiscal years 2003, 2002 and 2001, respectively. Amortization
of intangible assets for the fiscal years March 31, 2003,
2002 and 2001 was $3.4 million, $8.7 million and
$6.0 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
Note 2 of the Notes to the Consolidated Financial
Statements included in this Annual Report. In many cases, the
accounting treatment of a particular transaction is specifically
dictated by generally accepted accounting principles, 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 to 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

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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 due within 90 days.
These guaranteed sublicense fees are applied against sublicense
fees reported by the reseller in relicensing our products to
end-users. In fiscal 2003, 2002 and 2001, $0, $250 thousand, and
$0, respectively, were recognized in guaranteed sublicense fees.
As of March 31, 2003, an immaterial balance of the
guaranteed sublicense fees recognized by us had yet to be 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 never 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 our historical experience, which indicates that we are
capable of honoring our warranties. 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.
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

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counsel and insurance advisors and make use of
estimates and assumptions as to probable outcomes in
establishing the allowances (see Item 3. Legal
Proceedings).


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 March 31, 2003 and 2002. This valuation
allowance was recorded given the losses we have incurred through
March 31, 2003 and the uncertainties regarding our future
operating profitability and taxable income, which require
significant judgment by our management (see Note 6 to our
Consolidated Financial Statements).

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 52%, 45% and 47% of our total revenues
outside the United States for fiscal 2003, 2002 and 2001,
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.

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. Revenue by and total assets by geographic area
for the years ended March 31, 2003, 2002 and 2001 are
presented below (in thousands):

|                |      |         |   |        |        |  |   |        |        | 
|--------------- | ---- | ------- | - | ------ | ------ |  | - | ------ | ------ | 
|                |      |         |   | Total 
|                |      | Revenue |   | Assets
|                |      |         |   |       
|March 31, 2003: |      |         |   |        |        |  |   |       
|                | AAA  |         | $ | 26,682 |        |  | $ | 35,793 |       
|                | EMEA |         |   | 28,776 |        |  |   | 15,643 |       
|                |      |         |   |        |        |  |   |       
|                |      | Total   |   | $      | 55,458 |  |   | $      | 51,436 | 
|                |      |         |   |        |        |  |   |       
|March 31, 2002: |      |         |   |        |        |  |   |       
|                | AAA  |         | $ | 34,434 |        |  | $ | 43,095 |       
|                | EMEA |         |   | 28,516 |        |  |   | 17,428 |       
|                |      |         |   |        |        |  |   |       
|                |      | Total   |   | $      | 62,950 |  |   | $      | 60,523 | 
|                |      |         |   |        |        |  |   |       
|March 31, 2001: |      |         |   |        |        |  |   |       
|                | AAA  |         | $ | 27,375 |        |  | $ | 55,177 |       
|                | EMEA |         |   | 23,138 |        |  |   | 11,528 |       
|                |      |         |   |        |        |  |   |       
|                |      | Total   |   | $      | 50,513 |  |   | $      | 66,705 | 
|                |      |         |   |        |        |  |   |       

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All period references in the discussion
below and in the remainder of Item 7 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 revenues represented by the
respective line items in our consolidated statements of
operations.

|                    |                                                   |                          |  |       |       |      |  |       |       |  |  |       |       | 
|------------------- | ------------------------------------------------- | ------------------------ |  | ----- | ----- | ---- |  | ----- | ----- |  |  | ----- | ----- | 
|                    |                                                   |                         
|                    |                                                   | Years Ended March 31,   
|                    |                                                   |                         
|                    |                                                   | 2003                     |  | 2002  |       | 2001
|                    |                                                   |                          |  |       |       |     
|Revenues:           |                                                   |                          |  |       |       |      |  |       |       |  |  |      
|                    | Licenses                                          |                          |  | 53.2  | %     |      |  | 62.2  | %     |  |  | 61.9  | %    
|                    | Maintenance and services                          |                          |  | 46.8  |       |      |  | 37.8  |       |  |  | 38.1  |      
|                    |                                                   |                          |  |       |       |      |  |       |       |  |  |      
|                    |                                                   | Total revenues           |  |       | 100.0 |      |  |       | 100.0 |  |  |       | 100.0 | 
|                    |                                                   |                          |  |       |       |      |  |       |       |  |  |      
|Operating expenses: |                                                   |                          |  |       |       |      |  |       |       |  |  |      
|                    | Cost of licenses-amortization of intangible asset |                          |  | 2.4   |       |      |  | 1.0   |       |  |  |      |      
|                    | Cost of maintenance and services                  |                          |  | 25.7  |       |      |  | 19.2  |       |  |  | 18.5  |      
|                    | Sales and marketing                               |                          |  | 47.6  |       |      |  | 43.7  |       |  |  | 47.3  |      
|                    | Research and development                          |                          |  | 18.1  |       |      |  | 16.6  |       |  |  | 17.8  |      
|                    | General and administrative                        |                          |  | 21.8  |       |      |  | 17.5  |       |  |  | 20.5  |      
|                    | Amortization of intangible assets                 |                          |  | 3.6   |       |      |  | 12.8  |       |  |  | 12.0  |      
|                    |                                                   |                          |  |       |       |      |  |       |       |  |  |      
|                    |                                                   | Total operating expenses |  |       | 119.2 |      |  |       | 110.8 |  |  |       | 116.1 | 
|                    |                                                   |                          |  |       |       |      |  |       |       |  |  |      
|                    | Operating loss                                    |                          |  | (19.2 | )     |      |  | (10.8 | )     |  |  | (16.1 | )    
|                    | Interest income, net                              |                          |  | 0.7   |       |      |  | 1.2   |       |  |  | 3.4   |      
|                    | Other income (expense), net                       |                          |  | (1.4  | )     |      |  | (0.3  | )     |  |  | 4.1   |      
|                    |                                                   |                          |  |       |       |      |  |       |       |  |  |      
|                    | Loss before provision for income taxes            |                          |  | (19.9 | )     |      |  | (9.9  | )     |  |  | (8.6  | )    
|                    | Provision for income taxes                        |                          |  | 1.2   |       |      |  |      |       |  |  | 0.5   |      
|                    |                                                   |                          |  |       |       |      |  |       |       |  |  |      
|                    | Net loss                                          |                          |  | (21.1 | )%    |      |  | (9.9  | )%    |  |  | (9.1  | )%   
|                    |                                                   |                          |  |       |       |      |  |       |       |  |  |      



| |                                                             
| | ------------------------------------------------------------
| | Comparison of Fiscal Years Ended
    March 31, 2003 and 2002

Revenues

Total revenuesfor
our fiscal year ended March 31, 2003 were
$55.5 million compared to $63.0 million for the
previous fiscal year, a decrease of approximately
$7.5 million or 11.9%. The decrease in total revenues in
the current year compared to last year was due to lower license
revenue. One customer, Electronic Data Systems Corp. (EDS),
accounted for approximately 20% of our total revenues for the
year ended March 31, 2003, and approximately 16% of our
total revenues for the year ended March 31, 2002. We expect
EDS to continue to be an important contributor to revenues for
the foreseeable future.

License revenueswere $29.5 million in the year
ended March 31, 2003 compared to $39.2 million in the
prior fiscal year, a 24.7% decrease. The decrease in license
revenue for the year ended March 31, 2003 was primarily
attributable to closing 53 fewer contracts as compared with
the prior fiscal year and to generally lower average selling
prices of contracts (ASPs) in fiscal 2003 which was
$309 thousand compared to $366 thousand in the prior fiscal
year. We believe the general slowdown in corporate IT spending
caused a number of contracts that we expected to be closed in
the year ending March 31, 2003 to be postponed into future
periods, and in some cases postponed indefinitely. Our license
revenue in any quarter is often dependent on our ability to
complete one or more large transactions with a limited number of
customers.

Maintenance and service revenueswere $26 million in the year
ended March 31, 2003 compared to $23.8 million in the
prior fiscal year, an increase of 9.1%. Maintenance revenues in
fiscal 2003 were

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approximately 27% higher than the prior year due
primarily to the 25% license revenue growth of fiscal 2002.
Service revenues in fiscal 2003 were approximately 12% or
$1.2 million lower than in the prior fiscal year due to a
reduction of approximately $2.6 million in billings caused
by the completion of the start-up phase of the Navy Marine Corp
Intranet project with EDS, which was partially offset by
approximately $1.2 million of increased billings in Europe.
In compliance with the Emerging Issues Task Force Topic
No. 01-14, Income Statement Characterization of
Reimbursement Received For Out-of-Pocket Expenses
Incurred, reimbursements for out-of-pocket
expenses incurred by our professional services staff are
reported as maintenance and services revenue. Previously we
treated out-of-pocket expenses as an offset to cost
of maintenance and services. Accordingly, $427 thousand was
reclassified to maintenance and services revenue for the year
ended March 31, 2002. The growth of maintenance revenues is
directly associated with our licensing. The sale of new licenses
is essential to grow maintenance revenues.


Operating Expenses

Cost of licensesis
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 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 servicesincludes 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
$14.2 million in the year ended March 31, 2003
compared to $12.1 million in the year ended March 31,
2002. The higher cost of maintenance and services in the year
ended March 31, 2003, as compared to the prior year, was
primarily due to higher compensation expense amounting to
approximately $1.3 million and to higher travel expense
amounting to approximately $833 thousand. Compensation
expense was higher in the current fiscal year as compared to the
prior fiscal year due to increasing the customer support staff
by an average of 4 people, the European professional
services staff by an average of 5 additional consultants
and the North American training staff by 1. Travel expenses
were higher due to additional staff and providing support and
services over a wider geographical area. We expect the cost of
maintenance and services to increase in future quarters to
support the growing demand by customers for our maintenance,
consulting and training services. As discussed in
maintenance and service revenues above, we now
report out-of-pocket expenses billed to customers as
revenue and not as an offset to cost of maintenance and
services. The fiscal years ended March 31, 2002 and 2001
were reclassified to reflect this accounting treatment.

Sales and marketingexpenses 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 year
ended March 31, 2003 were $26.4 million compared to
$27.5 million in the prior year. The 4% decrease in sales
and marketing expenses in the current year as compared to the
prior year was primarily due to lower compensation costs,
primarily commissions and bonuses resulting from lower reported
license revenues in the 2003 fiscal year. In addition,
approximately $382 thousand charged to expense for
increases in the allowance for doubtful accounts in fiscal 2002
was reclassed from sales and marketing expense to general and
administrative expense in order to conform with the present year
presentation (see Note 2 to our Consolidated Financial
Statements). We expect sales and marketing expenses to increase
in future periods to achieve our growth plans.

Research and developmentexpenses 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
$10 million in the year ended March 31, 2003 compared
to $10.4 million in the prior year, a 4% decrease. We have
been able to contain our research and development costs while
continuing to support current products and develop new

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products such as the Radia OS Manager, Radia
Usage Manager and Radia Extension for Windows Installer, all
announced during fiscal 2003 and 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 administrativeexpenses consist primarily of
salaries, related benefits, travel and fees for professional
services such as legal, consulting and accounting. General and
administrative expenses were $12.1 million in the year
ended March 31, 2003 compared to $11.0 million in the
prior year, a 10% increase. The increase in general and
administrative expenses in fiscal 2003 was primarily due to our
providing an allowance of approximately $700 thousand for
the unsecured portion of the outstanding notes due from officers
that were subsequently repaid and for providing $500 thousand
for an accrual of a loss reserve for a claim made by an
executive officer (see Note 10 to the Consolidated
Financial Statements) that was settled in May 2003, partially
offset by a $450 thousand reversal of a French tax
liability due to stock options in France with exercise prices
below current market values. In addition, as mentioned above,
approximately $382 thousand charged to expense for
increases in the allowance for doubtful accounts in fiscal 2002,
was reclassed from sales and marketing expense to general and
administrative expense in order to conform with the present year
presentation (see Note 2 to our Consolidated Financial
Statements). General and administrative expenses may increase in
future periods depending upon the outcome of 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
two years, the initial term of the agreement.

Interest Income, Net

Interest income, netis comprised primarily of interest
income earned on our cash, cash equivalents and marketable
securities reduced by interest expense. Net interest income was
$384 thousand and $775 thousand in the fiscal years
ended March 31, 2003 and 2002, respectively. Interest
income decreased for the year ended March 31, 2003 due
primarily to lower effective interest rates in fiscal 2003 of
approximately 1.68% as compared to approximately 3.25% in fiscal
2002 and on generally lower average balances of cash, cash
equivalents and marketable securities of approximately
$22.8 million in fiscal 2003 as compared to approximately
$25.3 million in fiscal 2002.

Other Income (Expense), Net

Other expense, netconsists primarily of the cost of
foreign exchange gains and losses and miscellaneous corporate
expenses. Net other expense was $783 thousand and
$220 thousand for the years ended March 31, 2003 and
2002, respectively. In fiscal 2003 the expense was primarily
comprised of a net foreign exchange loss primarily within our
European operations of $646 thousand, miscellaneous corporate
expenses and other non-operating gains/ losses. The expense in
fiscal 2002 was primarily comprised of a net foreign exchange
loss of $200 thousand. We have instituted a hedging program that
we believe reduces our exposure to exchange losses in the
future. The program includes a company policy of denominating
contracts in the currency of the subsidiary and the use of
foreign exchange options and forward contracts to hedge exposed
positions.

Income Taxes

Provision for income taxes for our fiscal year
ended March 31, 2003 was $645 thousand compared to
$11 thousand in the prior year. The fiscal 2003 provision
includes an amount we determined may be due on a profit earned
on a transaction in a foreign subsidiary. We believe that the
established reserve will adequately cover all material taxes
which may ultimately be assessed by the foreign taxing
jurisdiction related to this

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matter. As of March 31, 2003, we had federal
and state net operating loss carryforwards of approximately
$41.7 million, which expire commencing 2012 through 2023.
Our ability to utilize the net operating loss carryforwards in
future years may be limited in some circumstances, including
significant changes in ownership interests, due to certain
provisions of the Internal Revenue Code of 1986.




| |                                                             
| | ------------------------------------------------------------
| | Comparison of Fiscal Years Ended
    March 31, 2002 and 2001

Revenues

Total revenues increased 24.6% in fiscal 2002 to
$63.0 million from $50.5 million in fiscal 2001.

License revenuesincreased 25.3% to $39.2 million
in 2002 from $31.2 million in fiscal 2001. License revenues
represented 62.2% of our total revenues in 2002 compared to
61.9% of our total revenues in 2001. The increase in license
revenue for the year ended March 31, 2002 was primarily
attributable to closing 29 more contracts in fiscal 2002 as
compared to the prior year, and to a higher average selling
price (ASPs) of contracts in fiscal 2002 of
$366 thousand compared to $284 thousand in the prior
fiscal year. Demand for our products increased from both new and
existing customers due, we believe, to more effective marketing
programs, better market awareness and creation of marketing
alliances and partnerships.

Maintenance and services revenuesincreased 23.5% to $23.8 million
in fiscal 2002 from $19.3 million in fiscal 2001. This
increase in maintenance and services revenues in 2002 over the
prior year was primarily due to the increased demand for our
consulting services associated with the start-up phase of the
EDS contract for the Navy Marine Corps Intranet project which
was approximately $3.9 million higher in fiscal 2002 than
in the prior fiscal year. In addition, maintenance services
increased in 2002 over the prior year due to an expanding
customer base. During fiscal 2002, 60 new customers licensed our
products. In compliance with the Emerging Issues Task Force
Topic No. 01-14, reimbursements for
out-of-pocket expenses incurred by our professional
services staff are reported as maintenance and services revenue.
Previously we treated out-of-pocket expenses as an
offset to cost of maintenance and services. Accordingly,
$427 thousand and $67 thousand were reclassed for the
year ended March 31, 2002 and 2001, respectively.

During fiscal 2002 and 2001, one customer, EDS,
accounted for approximately 16% and 12% of our total revenues,
respectively.

Operating Expenses

Cost of licensesis
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.
Along with the intellectual property, we acquired furniture and
fixtures, equipment, customer contracts and acquired an office
lease and four employees joined us upon the closing of the
acquisition. The cost of the acquisition was $3.9 million,
net of acquisition costs of $112 thousand. The purchase
price is payable through the issuance of 212,636 shares of
our common stock and payment of $1.7 million in cash. We
will issue 23,626 shares of our common stock and pay
$195 thousand each quarter through December 31, 2003.
We allocated the excess of the purchase price over the fair
value of the tangible net assets acquired to acquired software,
and we are amortizing this amount over three years. Other cost
of licenses consists of 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 servicesincreased by 29.5% to
$12.1 million in fiscal 2002 from $9.3 million in
fiscal 2001. The higher cost of maintenance and services in the
year ended March 31, 2002, as compared to the prior year,
was primarily due to higher compensation expense amounting to
approximately $2.2 million caused by additional headcount
in the customer telephone support organization and professional
services organization to provide for the growing customer base
and an increase in cost of $300 thousand related to the
utilization of third party service providers.

Sales and marketingexpenses increased 15.2% to
$27.5 million in fiscal 2002 from $23.9 million in
fiscal 2001. The increase in 2002 over the previous year was
primarily the result of higher marketing expenses for trade
shows, public relations, user conferences and other marketing
programs, as well as higher commission

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expense associated with the recording of higher
revenue. During 2002, we created a new sales organization to
manage and grow our alliances and partnerships, and additional
sales management was brought on in 2002 to strengthen our sales
efforts. Effective with fiscal 2003, increases to the allowance
for doubtful accounts are charged to general and administrative
expense. Previously, we reported these charges as sales and
marketing expense. Accordingly, $382 thousand and
$2 million were reclassed for the year ended March 31,
2002 and 2001, respectively (see Note 2 to our Consolidated
Financial Statements).


Research and developmentexpenses increased 15.8% to
$10.4 million in fiscal 2002. The increase in research and
development expenses in 2002 as compared to the previous year
was primarily due to the ongoing development of new products
which provide additional functionality and ease of use and
operate on additional platforms. During 2002, we released a new
version of Radia, Version 3.0, as well as announced eleven
new products.

General and administrativeexpenses increased 6.7% to
$11.0 million in fiscal 2002. The increase in fiscal 2002
as compared with fiscal 2001 was due primarily to providing
approximately $1.1 million associated with a settlement of
an arbitration dispute with a former employee, higher legal fees
associated with the arbitration dispute as well as other
litigation and higher compensation costs due to expanding our
corporate management and administrative staff. (See Item 3.
Legal Proceedings.)

Amortization of intangible assetswas $8.1 and $6.0 million in
fiscal 2002 and 2001, respectively, and consisted of a charge to
earnings for the non-cash amortization of the intangible asset
acquired in the alliance agreement with Hewlett-Packard.
Amortization expense in fiscal 2002 was greater than fiscal 2001
due to having a full year of amortization.

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, which is scheduled to terminate on June 30,
2003, 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
two years, the initial term of the agreement.

Interest Income, Net

Interest income, netwas $775 thousand in 2002 as
compared to $1.7 million in 2001. Interest income, net
decreased in 2002 as compared to 2001 due primarily to lower
interest rates. Interest income, net is dependent upon our
average net cash and investment balances and market interest
rates.

Other Income (Expense), Net

Other income (expense), netwas an expense of $220 thousand
in 2002. It was primarily comprised of a net foreign exchange
loss of $200 thousand, miscellaneous corporate expenses and
other non-operating gains/ losses. The other income (expense) in
the prior year was income of $2.1 million. The prior year
income included royalties of $2.2 million recognized from a
settlement of the infringement litigation with Marimba, Inc. in
November 2000.

Income Taxes

We recorded a provision for income taxes of
approximately $11 thousand in 2002 for foreign income taxes
and approximately $233 thousand in 2001 for federal and
state taxes and foreign taxes. As of March 31, 2002, we had
federal and state net operating loss carryforwards of
approximately $29 million, which expire commencing 2012
through 2023. Our ability to utilize the net operating loss
carryforwards in future years may be limited in some
circumstances, including significant changes in ownership
interests, due to certain provisions of the Internal Revenue
Code of 1986.

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Liquidity and Capital Resources

As of March 31, 2003, we had approximately
$29.4 million in cash and cash equivalents and short-term
marketable securities. Net cash provided by operating activities
in 2003, 2002 and 2001 was $4.3 million, $1.6 million,
and $1.8 million, respectively. Cash was provided by
operations for the year ended March 31, 2003 primarily from
a decrease in accounts receivable of $10.0 million due to lower
reported revenues; depreciation and amortization expense of
$4.7 million; an increase in deferred revenue of
$1.7 million due to the increase in maintenance revenue in
2003 as a result of an increase in license revenues in fiscal
2002; and an increase of $1.2 million in accounts payable
and accrued liabilities due to the provision we made for foreign
taxes in the amount of approximately $703 thousand and due to
the timing of vendor payments not paid at the close of fiscal
2003. The cash provided by operations for the year ended
March 31, 2003 was partially offset by the net loss of
$11.7 million and the decrease of $1.2 million in
accrued payroll and other compensation due to lower sales
commissions and bonuses payable as a result of lower reported
revenues. If we continue to incur losses in future periods, we
expect cash to be used in, rather than provided by, operations.

As of March 31, 2002, we had approximately
$25.8 million in cash, cash equivalents and marketable
securities. Net cash provided by operations for the year ended
March 31, 2002 was due primarily to depreciation and
amortization expense of $10 million; the decrease in
deferred revenues of approximately $1.3 million due primarily to
the loss of sublicense customers because of the non-renewal of a
partner agreement; the decrease in other assets of $543 thousand
primarily due to an overpayment of sales tax; partially offset
by the reported net loss of $6.3 million and the $416
thousand decrease in accounts payable and accrued liabilities
due primarily to open invoices paid closer to the closing date
in March 31, 2002 than in the prior year. The cash provided
by operating activities in 2001 was primarily due to
depreciation and amortization of $6.8 million; an increase
of $1 million in accounts payable and accrued liabilities
due to the timing of payments made in fiscal 2002 for open
invoices at March 31, 2001; an increase of
$1.5 million in accrued payroll and compensation associated
with reporting higher revenues; partially offset by the increase
of $5.6 million in the accounts receivable balance, net of
the allowance for doubtful accounts which in turn, was due to
the increasing revenues and to the net loss of $4.6 million.

Effective with fiscal 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 year ended
March 31, 2002, both the accounts receivable balance and
the deferred revenue balance were increased by $6 million
to conform to the present year presentation.

Net cash used in investing activities in fiscal
2003 was $15.5 million and is due primarily to the net
reinvestment of $13.8 million of surplus cash into
marketable securities. In addition, we purchased property and
equipment of $953 thousand in fiscal 2003 and made installment
payments of $780 thousand in fiscal 2003 for the intellectual
property we acquired in October 2001 (see Note 3 to our
Consolidated Financial Statements). Net cash provided by
investing activities in fiscal 2002 was $4.9 million and
was primarily a result of the net redemptions of marketable
securities of $6.6 million to provide additional cash for
operating activities as well as the purchase of property and
equipment of $1.3 million and installment payments of $390
thousand for the intellectual property we acquired in October
2001. Net cash provided by investing activities in fiscal 2001
was $13.2 million due primarily to the net reinvestment of
$14.8 million of surplus cash into marketable securities.
In addition, we purchased property and equipment of
$1.5 million in fiscal 2001.

Property and equipment expenditures were
$953,000, $1,277,000, and $1,548,000 for fiscal 2003, 2002 and
2001, respectively. The relatively lower expenditures in fiscal
2003 was due to the decrease in our headcount during fiscal 2003
as well as the expansion of our headquarters in Mahwah, NJ in
fiscal 2002. We had no material commitments to purchase property
and equipment at March 31, 2003.

Net cash used in financing activities in fiscal
2003 and 2002 was $0.7 million and $1.4 million and
was primarily due to the repurchase of our shares of Common
Stock offset by the proceeds from the sales of common stock and
exercise of stock options. Net cash provided by financing
activities in 2001 was $2 million

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and was due primarily to proceeds from the sales
of common stock and exercise of stock options offset by the
purchase of our Common Stock.


From time to time our Board of Directors
authorizes the repurchase of our outstanding Common Stock.
During fiscal 2003, we spent approximately $1.8 million to
repurchase approximately 877,841 shares. In addition, we
repurchased 494,977 shares from Mr. Albion Fitzgerald,
our Chairman and Chief Executive Officer, in the amount of
$980,054 (see Note 10. Related Party
Transactions). At March 31, 2003, the remaining
authorization for all stock repurchases was approximately
53,700 shares. In May 2003, our Board of Directors
increased the number of shares authorized for repurchase by an
additional 500,000 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 experience growth in the
future, we anticipate that our operating and investing
activities may use cash. To the extent we have uninsured
litigation and related costs, we will use available cash
resources. We may decide to raise additional funds, through
public or private debt or equity financing, to fund future
growth or continuing operations, take advantage of expansion or
acquisition opportunities, develop new products or compete
effectively in the marketplace. However, additional funds may
not be available to us on commercially reasonable terms, or at
all, when we require them, and any additional capital raised
through the sale of equity or equity-linked securities could
result in dilution to our existing stockholders.

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. At
March 31, 2003, no amounts were due and outstanding under
this revolving line of credit.

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 March 31, 2003, 141,758 shares of our Common Stock had
been issued and payments totaling $1.2 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, $1.3 million and $1.7 million was
included in accrued liabilities as of March 31, 2003 and
2002, respectively, and $1.3 million is reflected as
long-term liability as of March 31, 2002. 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 (see Note 10. Related Party
Transactions).

In May 2003, we reached an agreement to settle
certain previously disclosed claims that had been asserted
against us by Wallace D. Ruiz, our Chief Financial Officer and
Treasurer. 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. Novadigm also entered into an Amended
and Restated Employment

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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 (see Note 10. Related Party Transactions
and Note 12. Subsequent Events).


The following table summarizes our contractual
obligations as of March 31, 2003. This table should be read
in conjunction with the accompanying notes to our consolidated
financial statements (in thousands):

|                             |       |         |     |                  |  |   |       |       | 
|---------------------------- | ----- | ------- | --- | ---------------- |  | - | ----- | ----- | 
|                             |       | Notes   |     |                 
|Fiscal Year Ending March 31, |       | Payable |     | Operating Leases
|                             |       |         |     |                 
|2004                         |       | $       | 686 |                  |  | $ | 2,223 |      
|2005                         |       |         |    |                  |  |   | 2,009 |      
|2006                         |       |         |    |                  |  |   | 1,787 |      
|2007                         |       |         |    |                  |  |   | 715   |      
|2008                         |       |         |    |                  |  |   | 52    |      
|                             |       |         |     |                  |  |   |       |      
|                             | Total |         | $   | 686              |  |   | $     | 6,786 | 
|                             |       |         |     |                  |  |   |       |      

The notes payable represents the associated cash
payments in connection with the intellectual property acquired
in October 2001 and an amount due to an officer related to his
management retention agreement. In addition, we will issue
23,626 shares of our Common Stock each quarter through
December 31, 2003 related to the acquired intellectual
property.

Related Party Transactions

For financial information regarding Related Party
Transactions, see Note 10 to our Consolidated Financial
Statements included in this Annual Report.

Recent Accounting Pronouncements

In June 2002, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (SFAS
146). SFAS 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF)
Issue No. 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a
Restructuring). We were required to adopt SFAS 146, effective
January 1, 2003. SFAS No. 146 will be applied
prospectively and will depend on future actions taken by us.

In December 2002, the FASB issued Statement of
Financial Accounting Standards No. 148, Accounting for
Stock-Based Compensation  Transition and
Disclosure  an amendment of FASB Statement
No. 123(SFAS 148). SFAS 148 amends FASB
Statement 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, this Statement
amends the disclosure requirements of Statement 123 to require
prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based
employee compensation and the effect of the method used on
reported results. We are required to adopt the disclosure
provisions of SFAS 148, for annual financial statements for the
fiscal year ended 2003 and for interim financial statements
effective April 1, 2003. The required disclosures under
SFAS 123, as amended by SFAS 148, are included in the
notes to our 2003 consolidated financial statements.

In April 2003, the FASB issued Statement of
Financial Accounting Standards No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities(SFAS 148). SFAS 148 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. We are required to adopt this statement for new
contracts and certain hedging designated instruments after
June 30, 2003, and certain provisions of this Statement as
it relates to Statement 133 Implementation Issues are effective
for fiscal

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quarters that began prior to June 15, 2003.
We do not expect this Statement to have a material impact on our
future consolidated 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. This Statement requires that those instruments be
classified as liabilities in statements of financial position.
This Statement 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. We do not expect this Statement to have a material impact
on our future consolidated operations or financial position.

In January 2002, the EITF issued EITF Issue
No. 01-14, Income Statement Characterization of
Reimbursement Received For Out-of-Pocket Expenses
Incurred. EITF Issue No. 01-14 requires
reimbursements received for out-of-pocket expenses incurred be
characterized as revenue in the Statement of Operations. Upon
application, comparative financial statements for prior periods
should be reclassified to conform to the current classification.
We adopted the provisions of EITF Issue No. 01-14 effective
April 1, 2002, as required. Accordingly, we reclassified
reimbursements for out-of-pocket expenses in the amount of $427
thousand and $67 thousand previously recorded in cost of
maintenance and services in the accompanying consolidated
financial statement of operations to maintenance and service
revenue for the years ended March 31, 2002 and 2001,
respectively. In fiscal 2003, reimbursements for out-of-pocket
expenses of $211 thousand were included in maintenance and
service revenues. There was no effect on either our consolidated
operating loss or net loss for fiscal 2002 or 2001.

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. We are
required to adopt the disclosure requirements in the
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 our consolidated financial position or
results of operations.






|         |                                                               
|-------- | --------------------------------------------------------------
|Item 7A. | Quantitative and Qualitative Disclosures
    About Market Risk

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

The majority of our operations are based in the
U.S. and, 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, whose currencies 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

28



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##### Table of Contents



that fluctuations in the value of foreign
currencies will not have a material adverse effect on our
business, operating results, revenues or financial condition. To
date, the impact of fluctuations in these currencies resulted in
net transaction gains (losses) of ($646) thousand, ($200)
thousand and $4 thousand in fiscal 2003, 2002 and 2001,
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. 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 March 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 less than one year.






|        |                                                
|------- | -----------------------------------------------
|Item 8. | Financial Statements and Supplementary
    Data

Our Financial Statements and Supplementary Data
required by this item are set forth at the pages indicated in
Part IV Item 15 (a) (1) and (2).

29



---



##### Table of Contents








|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements With
    Accountants on Accounting and Financial Disclosure

See our Current Report on Form 8-K, filed
with the Commission on July 2, 2002, pertaining to changes
in our certifying accountants.

30



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##### Table of Contents






PART III






|         |                                                       
|-------- | ------------------------------------------------------
|Item 10. | Directors and Executive Officers of the
    Registrant

Information required by this item is incorporated
by reference from the sections captioned Election of
Directors, Other Executive Officers and
Section 16(a) Beneficial Ownership Reporting
Compliance to be contained in our definitive proxy
statement related to our Annual Meeting of Stockholders to be
held September 17, 2003, to be filed by us with the
Securities and Exchange Commission within 120 days of the
end of our fiscal year pursuant to General Instruction G
(3) of Form 10-K (the Proxy Statement).






|         |                       
|-------- | ----------------------
|Item 11. | Executive Compensation

The information required by this item is
incorporated by reference from the section captioned
Executive Compensation and Other Matters to be
contained in the Proxy Statement.






|         |                                                                                                        
|-------- | -------------------------------------------------------------------------------------------------------
|Item 12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholders
    Matters

The information required by this item other than
Equity Compensation Plan Information, is incorporated by
reference from the sections captioned Beneficial Security
Ownership of Management and Certain Beneficial Owners to
be contained in the Proxy Statement.

The following table provides information as of
March 31, 2003 related to our equity compensation plans in
effect at that time:

|                                                               |       |                   |           |                  |  |                     |      |      |  |  |         |         | 
|-------------------------------------------------------------- | ----- | ----------------- | --------- | ---------------- |  | ------------------- | ---- | ---- |  |  | ------- | ------- | 
|                                                               |       | Number of         |           | Weighted-        |  |                    
|                                                               |       | Securities to be  |           | Average Exercise |  | Number of          
|                                                               |       | Issued Upon       |           | Price of         |  | Securities         
|                                                               |       | Exercise of       |           | Outstanding      |  | Remaining Available
|                                                               |       | Outstanding       |           | Options,         |  | for Future Issuance
|                                                               |       | Options, Warrants |           | Warrants and     |  | Under Equity       
|Plan Category                                                  |       | and Rights        |           | Rights           |  | Compensation Plans 
|                                                               |       |                   |           |                  |  |                    
|Equity Compensation Plans approved by Security
    Holders     |       |                   | 4,341,480 |                  |  | $                   | 5.95 |      |  |  | 257,693 |        
|Equity Compensation Plans not approved by
    Security Holders |       |                   | 971,083   |                  |  |                     | 9.92 |      |  |  | 328,917 |        
|                                                               |       |                   |           |                  |  |                     |      |      |  |  |         |        
|                                                               | Total |                   |           | 5,312,563        |  |                     | $    | 6.66 |  |  |         | 586,610 | 
|                                                               |       |                   |           |                  |  |                     |      |      |  |  |         |        

Equity Compensation Plans Not Approved by
Security Holders

In October 1999, our Board of Directors adopted
and approved the 1999 Nonstatutory Stock Option Plan (the
1999 Plan) and reserved 500,000 shares of Common
Stock for issuance under the 1999 Plan. The Board of Directors
authorized and reserved an additional 250,000 shares for
issuance under the 1999 Plan in February 2000, again in June
2000 and in August 2001. In November 2001, the Board of
Directors authorized and reserved an additional 100,000 shares
for issuance under the 1999 Plan. In April 2003, our Board of
Directors authorized and reserved an additional 2,000,000 shares
for issuance under the 1999 Plan (which shares are not reflected
in the above table). Neither the 1999 Plan nor any of the
amendments to the 1999 Plan were submitted to our stockholders
for approval. The purposes of the 1999 Plan are to attract and
retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to employees,
new officers, directors and consultants and to promote the
success of our business. Under the 1999 Plan, officers and
directors are limited to grants at the time of initial service.
Option terms may not exceed ten years from the date of grant and
the 1999 Plan will continue in effect until October 25,
2009 unless terminated sooner. As of March 31, 2003,
options to purchase 1,021,083 shares of our Common Stock had
been granted pursuant to this plan, net of cancellations.

31



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##### Table of Contents



Stock Option Exchange

On May 29, 2003, we announced the
commencement of a voluntary stock option exchange program giving
our 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
expires on July 31, 2003. Our Board of Directors determined
that, because most of the existing options have exercise prices
significantly higher than the current market price per share of
our Common Stock, the existing options no longer have sufficient
value to motivate and retain our employees. Neither our
executive officers nor our 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. We
plan 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 our common stock on the new option grant date.
We currently expect the new option grant date to be on or about
February 2, 2004.

Options to purchase 4,191,063 shares of Novadigm
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.

The stock option exchange program has been
designed to comply with FASB Interpretation No. 44,
Accounting for Certain Transactions Involving Stock
Compensation. Accordingly, we expect 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 we filed with the Securities and Exchange
Commission on May 29, 2003, and amendments thereto.






|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

The information required by this item is
incorporated by reference from the section captioned
Certain Relationships and Related Transactions to be
contained in the Proxy Statement.






|         |                        
|-------- | -----------------------
|Item 14. | Controls and Procedures

Evaluation of disclosure controls and
procedures.Within 90 days prior
to the date of filing of this report, we carried out an
evaluation, under the supervision and with the participation of
our management, including 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 our
disclosure controls and procedures are effective for gathering,
analyzing and disclosing the information we are required to
disclose in the reports we file under the Securities Exchange
Act of 1934, within the time periods specified in the SECs
rules and forms. It should be noted that the design of any
control system is based in part upon certain assumptions about
the likelihood of future events. There can be no assurance that
any design will succeed in achieving its stated goals under all
potential future conditions nor that any evaluation of controls
will detect all control issues and instances of fraud, if any.

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

32



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##### Table of Contents






PART IV




Item 15.     Exhibits,
Financial Statement Schedule, and Reports on
Form 8-K

(a) The following documents are filed as a
part of this Form:

|   |  |                                                                                                                          |  |             |       | 
|-- |  | ------------------------------------------------------------------------------------------------------------------------ |  | ----------- | ----- | 
|   |  |                                                                                                                          |  | Page Number
|   |  |                                                                                                                          |  |            
|1. |  | Consolidated Financial Statements:                                                                                       |  |             |       | 
|   |  | Independent Auditors Report                                                                                             |  |             | F-2   | 
|   |  | Information Regarding Predecessor Independent
    Accountants Report                                                    |  |             | F-2-1 | 
|   |  | Consolidated Balance Sheets  March 31,
    2003 and 2002                                                                |  |             | F-3   | 
|   |  | Consolidated Statements of Operations and
    Comprehensive Loss  For the Years Ended March 31,
    2003, 2002 and 2001 |  |             | F-4   | 
|   |  | Consolidated Statements of Stockholders
    Equity  For the Years Ended March 31, 2003, 2002 and
    2001              |  |             | F-5   | 
|   |  | Consolidated Statements of Cash Flows 
    For the Years Ended March 31, 2003, 2002 and 2001                            |  |             | F-6   | 
|   |  | Notes to Consolidated Financial Statements                                                                               |  |             | F-7   | 
|2. |  | Consolidated Financial Statement Schedule:                                                                               |  |             |       | 
|   |  | For the Years Ended March 31, 2003, 2002 and 2001:                                                                       |  |             |       | 
|   |  | II  Valuation and Qualifying Accounts                                                                                   |  |             | S-1   | 

Additional schedules are not required under the
related schedule instructions or are inapplicable, and therefore
have been omitted.

3.  Exhibits

| |       |  |  |                                                                                                                                                                     
| | ----- |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3.1   |  |  | Certificate of Incorporation of Registrant, as
    amended.(1)                                                                                                      
| | 3.2   |  |  | Bylaws of Registrant, as amended.(1)                                                                                                                                
| | 10.4  |  |  | 1992 Stock Option Plan, as amended and form of
    Stock Option Agreement. (4)                                                                                     
| | 10.5  |  |  | 1995 Employee Stock Purchase Plan and form of
    Subscription Agreement. (1)                                                                                      
| | 10.10 |  |  | Form of Indemnification Agreement entered into
    between Registrant and its officers and directors. (1)                                                          
| | 10.11 |  |  | Management Retention Agreement dated
    August 17, 1998 by and between the registrant and
    Robert B. Anderson. (5)                                             
| | 10.13 |  |  | Facility lease dated as of March 14, 1997,
    by and between Crossroad Developers Associates, LLC and the
    Registrant.(2)                                       
| | 10.14 |  |  | Employment Agreement effective as of
    April 1, 1997 by and between the Registrant and
    Wallace D. Ruiz. (2)                                                  
| | 10.18 |  |  | Security Agreement dated April 27, 2000
    between the Registrant and Albion Fitzgerald. (7)                                                                      
| | 10.19 |  |  | Security Agreement dated April 17, 2000
    between the Registrant and Wallace Ruiz. (7)                                                                           
| | 10.20 |  |  | Alliance Agreement dated June 30, 2000
    between the Registrant and Hewlett-Packard Company.(6)                                                                   
| | 10.21 |  |  | Employment Agreement effective as of
    April 16, 2001 by and between the Registrant and
    Gerald M. Labie. (8)                                                 
| | 10.22 |  |  | Promissory Note dated April 27, 2002 between
    the Registrant and Albion Fitzgerald. (8)                                                                         
| | 10.23 |  |  | Promissory Note dated April 17, 2002 between
    the Registrant and Wallace Ruiz. (8)                                                                              
| | 10.24 |  |  | Second Amendment dated July 1, 2001 to
    Facility lease dated as of March 14, 1997, by and between
    Crossroad Developers Associates, LLC and the Registrant.(8)

33



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##### Table of Contents



| |       |  |  |                                                                                                                                                                        
| | ----- |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10.25 |  |  | Third Amendment dated February 1, 2002 to
    Facility lease dated as of March 14, 1997, by and between
    Crossroad Developers Associates, LLC and the Registrant.(8)
| | 10.26 |  |  | Promissory Note dated January 15, 2002
    between the Registrant and Robert Anderson. (8)                                                                            
| | 10.27 |  |  | Loan Agreement dated March 12, 2002 between
    the Registrant and Fleet National Bank.(8)                                                                             
| | 10.28 |  |  | 1999 Stock Option Plan. (8)                                                                                                                                           
| | 10.29 |  |  | 2000 Stock Option Plan. (8)                                                                                                                                           
| | 10.30 |  |  | Security Agreement dated October 1, 2001
    between the Registrant and Wallace Ruiz. (8)                                                                             
| | 10.31 |  |  | First Amendment to the Novadigm, Inc. 1999
    Nonstatutory Stock Option Plan.                                                                                        
| | 10.32 |  |  | Retention Agreement effective as of
    November 8, 2002 by and between the Registrant and
    Robert B. Anderson.                                                    
| | 10.33 |  |  | Amended and restated Employment Agreement
    effective April 1, 2003 by and between the Registrant and
    Wallace D. Ruiz.                                          
| | 10.34 |  |  | Settlement Agreement effective May 16, 2003
    by and between the Registrant and Wallace D.
    Ruiz.                                                                
| | 21    |  |  | Subsidiaries of the Registrant.                                                                                                                                        
| | 23.1  |  |  | Consent of KPMG, LLP.                                                                                                                                                  
| | 23.2  |  |  | Information Regarding Consent of Arthur Andersen
    LLP                                                                                                               
| | 99.1  |  |  | Certification of the Chief Executive Officer
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                            
| | 99.2  |  |  | Certification of the Chief Financial Officer
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                            



---



| |   |                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------
| |  | This exhibit is a management contract or
    compensatory plan or arrangement required to be filed as an
    exhibit to this Form 10-K.



| |     |                                                                                                                                                                                               
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Incorporated by reference to exhibit filed with
    the Registrants Registration Statement on Form S-1
    (Reg. No. 33-92746), as declared effective by the
    Commission on July 13, 1995.
|
| | (2) | Incorporated by reference to exhibit filed with
    the Registrants Annual Report on Form 10-K for the
    fiscal year ended March 31, 1997.                                                 
|
| | (3) | Incorporated by reference to exhibit filed with
    the Registrants Annual Report on Form 10-K for the
    fiscal year ended March 31, 1998.                                                 
|
| | (4) | Incorporated by reference to exhibit filed with
    the Registrants Registration Statement on Form S-8
    (file No. 333-67877).                                                             
|
| | (5) | Incorporated by reference to exhibit filed with
    the Registrants Annual Report on Form 10-K for the
    fiscal year ended March 31, 1999.                                                 
|
| | (6) | Incorporated by reference to exhibit filed with
    the Registrants current report on Form 8-K dated
    July 19, 2000.                                                                      
|
| | (7) | Incorporated by reference to exhibit filed with
    the Registrants Annual Report on Form 10-K for the
    fiscal year ended March 31, 2001.                                                 
|
| | (8) | Incorporated by reference to exhibit filed with
    the Registrants Annual Report on Form 10-K for the
    fiscal year ended March 31, 2002.                                                 

(b) Reports on Form 8-K:

We did not file any current reports on
Form 8-K during the quarter ended March 31, 2003.

34



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on June 30, 2003.



| |               
| | --------------
| | NOVADIGM, INC.



| |     |                    
| | --- | -------------------
| | By: | /s/ WALLACE D. RUIZ

| |                                                 
| | ------------------------------------------------
| |                                                 
| | Wallace D. Ruiz                                 
| | Vice President, Treasurer and                   
| | Chief Financial Officer                         
| | (Principal Financial and Accounting
    Officer)

Pursuant to the requirements of the Securities
Act of 1934, this Report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the date indicated:

|                                                   |  |                                                                                                        |  |               |  |     
|-------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------ |  | ------------- |  | ----
|                                                   |  | Signature                                                                                              |  | Title         |  | Date
|                                                   |  |                                                                                                        |  |               |  |     
|/s/ ALBION J. FITZGERALDAlbion J. Fitzgerald       |  | Chairman of the Board and Chief Executive
    Officer
    (Principal Executive Officer)                |  | June 30, 2003
|                                                  
|/s/ WALLACE D. RUIZWallace D. Ruiz                 |  | Vice President, Treasurer and Chief Financial
    Officer (Principal Financial and Accounting Officer) |  | June 30, 2003
|                                                  
|/s/ ROBERT B. ANDERSONRobert B. Anderson           |  | Executive Vice President, Secretary
    and Director                                                   |  | June 30, 2003
|                                                  
|/s/ GERALD M. LABIEGerald M. Labie                 |  | President, Chief Operating Officer
    and Director                                                    |  | June 30, 2003
|                                                  
|/s/ ROBERT H. FORNEYRobert H. Forney               |  | Director                                                                                               |  | June 30, 2003
|                                                  
|/s/ DEBORAH DOYLE MCWHINNEYDeborah Doyle McWhinney |  | Director                                                                                               |  | June 30, 2003
|                                                  
|/s/ H. KENT PETZOLDH. Kent Petzold                 |  | Director                                                                                               |  | June 30, 2003

35



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##### Table of Contents






CERTIFICATIONS

I, Albion J. Fitzgerald, certify that:



| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this annual report on Form 10-K of Novadigm, Inc.;                                                                                                                                                                                                                                                                          
|
| | 2.     Based on my
    knowledge, this annual report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this annual
    report;
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this annual report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this annual report;                       
|
| | 4.     The
    registrants other certifying officer and I are responsible
    for establishing and maintaining disclosure controls and
    procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and we have:                                                                                                        



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



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



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



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



| |                                                                     
| | --------------------------------------------------------------------
| | /s/ ALBION J. FITZGERALD                                            
| | _________________________________________ 
     Albion J. Fitzgerald
| | Chairman of the Board and                                           
| | Chief Executive Officer                                             

Date: June 30, 2003

36



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##### Table of Contents



I, Wallace D. Ruiz, certify that:



| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     I have reviewed
    this annual report on Form 10-K of Novadigm, Inc.;                                                                                                                                                                                                                                                                          
|
| | 2.     Based on my
    knowledge, this annual report does not contain any untrue
    statement of a material fact or omit to state a material fact
    necessary to make the statements made, in light of the
    circumstances under which such statements were made, not
    misleading with respect to the period covered by this annual
    report;
|
| | 3.     Based on my
    knowledge, the financial statements, and other financial
    information included in this annual report, fairly present in
    all material respects the financial condition, results of
    operations and cash flows of the registrant as of, and for, the
    periods presented in this annual report;                       
|
| | 4.     The
    registrants other certifying officer and I are responsible
    for establishing and maintaining disclosure controls and
    procedures (as defined in Exchange Act Rules 13a-14 and
    15d-14) for the registrant and we have:                                                                                                        



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                



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



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and



| |                                                                                                                                                            | 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and | 



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



| |                                                          
| | ---------------------------------------------------------
| | /s/ WALLACE D. RUIZ                                      
| |                                                          
| | Wallace D. Ruiz                                          
| | Vice President, Treasurer and Chief Financial
    Officer

Date: June 30, 2003

37



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##### Table of Contents



NOVADIGM, INC.

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                                      |  |      |       | 
|--------------------------------------------------------------------- |  | ---- | ----- | 
|                                                                      |  | Page
|                                                                      |  |     
|Independent Auditors Report                                          |  |      | F-2   | 
|Information Regarding Predecessor Independent
    Accountants Report |  |      | F-2-1 | 
|Consolidated Balance Sheets                                           |  |      | F-3   | 
|Consolidated Statements of Operations and
    Comprehensive Loss      |  |      | F-4   | 
|Consolidated Statements of Stockholders
    Equity                   |  |      | F-5   | 
|Consolidated Statements of Cash Flows                                 |  |      | F-6   | 
|Notes to Consolidated Financial Statements                            |  |      | F-7   | 

F-1



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INDEPENDENT AUDITORS REPORT

The Stockholders and Board of Directors

Novadigm, Inc.


We have audited the accompanying consolidated
balance sheet of Novadigm, Inc. and subsidiaries as of
March 31, 2003 and the related consolidated statements of
operations, comprehensive loss, stockholders equity and
cash flows for the year then ended, as listed in the
accompanying index. In connection with our audit of the 2003
consolidated financial statements, we also have audited the 2003
consolidated financial statement schedule as listed in
item 15 of the Companys Form 10-K. These
consolidated financial statements and consolidated financial
statement schedule are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements and consolidated financial
statement schedule based on our audit. The 2002 and 2001
consolidated financial statements and consolidated financial
statement schedule of Novadigm, Inc. and subsidiaries as listed
in item 15 of the Companys Form 10-K were
audited by other auditors who have ceased operations. Those
auditors expressed an unqualified opinion on those consolidated
financial statements and consolidated financial statement
schedule, before the restatement described in Note 2 to the
consolidated financial statements, in their report dated
April 22, 2002.

We conducted our audit in accordance with
auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.

In our opinion, the 2003 consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Novadigm, Inc. and
subsidiaries as of March 31, 2003, and the results of their
operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, the related 2003
consolidated financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as
a whole, presents fairly, in all material respects, the
information set forth therein.

As discussed above, the consolidated financial
statements of Novadigm, Inc. and subsidiaries as of
March 31, 2002 and for the years ended March 31, 2002
and 2001 were audited by other auditors who have ceased
operations. As described in Note 2, in 2003 the Company
adopted the provisions of Emerging Issues Task Force 01-14,
Income Statement Characterization of Reimbursements Received
for Out-of-Pocket Expenses Incurred, which requires
reclassification of comparative financial statements for prior
periods. Accordingly, the amounts in the 2002 and 2001
consolidated financial statements relating to such
reimbursements have been reclassified to comply with
EITF 01-14. In addition, as described in Note 2, the
2002 and 2001 consolidated financial statements have been
further reclassified to conform to the 2003 presentation. We
audited the adjustments described in Note 2 that were
applied to restate the 2002 and 2001 consolidated financial
statements. In our opinion, such adjustments for 2002 and 2001
are appropriate and have been properly applied. However, we were
not engaged to audit, review, or apply any procedures to the
2002 and 2001 consolidated financial statements of Novadigm,
Inc. and subsidiaries other than with respect to such
adjustments and, accordingly, we do not express an opinion or
any other form of assurance on the 2002 and 2001 consolidated
financial statements taken as a whole.

KPMG LLP

Short Hills, New Jersey

April 23, 2003, except as to Note 12,
which is as of May 29, 2003


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INFORMATION REGARDING PREDECESSOR INDEPENDENT
ACCOUNTANTS REPORT

THE FOLLOWING REPORT IS A COPY OF A PREVIOUSLY
ISSUED REPORT BY ARTHUR ANDERSEN LLP (ANDERSEN). THE
REPORT HAS NOT BEEN REISSUED BY ANDERSEN NOR HAS ANDERSEN
CONSENTED TO ITS INCLUSION IN THIS ANNUAL REPORT ON
FORM 10-K. AS DESCRIBED IN NOTE 2, THE CONSOLIDATED
FINANCIAL STATEMENTS HAVE BEEN REVISED TO REFLECT CERTAIN
RECLASSIFICATIONS TO THE 2002 AND 2001 CONSOLIDATED FINANCIAL
STATEMENTS. THE ANDERSEN REPORT REFERS TO THE CONSOLIDATED
BALANCE SHEET AS OF MARCH 31, 2001 AND THE CONSOLIDATED
STATEMENTS OF OPERATIONS, COMPREHENSIVE LOSS, AND CASH FLOWS FOR
THE YEAR ENDED MARCH 31, 2000 WHICH ARE NO LONGER INCLUDED
IN THE ACCOMPANYING FINANCIAL STATEMENTS.

Report of Previous Independent Public Accountants

TO NOVADIGM, INC.:

We have audited the accompanying consolidated
balance sheets of Novadigm, Inc. (a Delaware corporation) and
subsidiaries as of March 31, 2002 and 2001, and the related
consolidated statements of operations, comprehensive income
(loss), stockholders equity and cash flows for each of the
three years in the period ended March 31, 2002. These
consolidated financial statements and the schedule referred to
below are the responsibility of Novadigms management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with
auditing standards generally accepted in the United States.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Novadigm, Inc. and
subsidiaries as of March 31, 2002 and 2001, and the results
of their operations and their cash flows for each of the three
years in the period ended March 31, 2002 in conformity with
accounting principles generally accepted in the United States.

Our audits were made for the purpose of forming
an opinion on the basic financial statements taken as a whole.
The accompanying schedule listed in the index to financial
statements is presented for purposes of complying with the
Securities and Exchange Commissions rules and is not a
part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in our audits of
the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to
be set forth therein in relation to the basic financial
statements taken as a whole.



| |                    
| | -------------------
| | ARTHUR ANDERSEN LLP

Roseland, New Jersey

April 22, 2002


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NOVADIGM, INC.

CONSOLIDATED BALANCE SHEETS

|                                         |                                                                                                                                                     |                                            |    |           |        |  |       |         |        | 
|---------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | -- | --------- | ------ |  | ----- | ------- | ------ | 
|                                         |                                                                                                                                                     | March 31,                                  |    | March 31,
|                                         |                                                                                                                                                     | 2003                                       |    | 2002     
|                                         |                                                                                                                                                     |                                            |    |          
|                                         |                                                                                                                                                     |                                           
|                                         |                                                                                                                                                     | (in thousands, except per                 
|                                         |                                                                                                                                                     | share data)                               
|ASSETS                                  
|Current assets:                          |                                                                                                                                                     |                                            |    |           |        |  |       |        
|                                         | Cash and cash equivalents                                                                                                                           |                                            | $  | 15,666    |        |  | $     | 25,775  |       
|                                         | Restricted cash                                                                                                                                     |                                            |    | 150       |        |  |       |        |       
|                                         | Short-term marketable securities                                                                                                                    |                                            |    | 13,760    |        |  |       |        |       
|                                         | Accounts receivable, net of allowance for
    doubtful accounts of $1,097 and $1,992 at March 31, 2003
    and 2002, respectively                   |                                            |    | 15,656    |        |  |       | 24,712  |       
|                                         | Prepaid expenses and other current assets                                                                                                           |                                            |    | 1,175     |        |  |       | 1,144   |       
|                                         |                                                                                                                                                     |                                            |    |           |        |  |       |        
|                                         |                                                                                                                                                     | Total current assets                       |    |           | 46,407 |  |       |         | 51,631 | 
|                                         | Property and equipment, net                                                                                                                         |                                            |    | 2,182     |        |  |       | 2,625   |       
|                                         | Intangible assets, net                                                                                                                              |                                            |    | 2,059     |        |  |       | 5,412   |       
|                                         | Other assets                                                                                                                                        |                                            |    | 788       |        |  |       | 855     |       
|                                         |                                                                                                                                                     |                                            |    |           |        |  |       |        
|                                         |                                                                                                                                                     | Total assets                               |    | $         | 51,436 |  |       | $       | 60,523 | 
|                                         |                                                                                                                                                     |                                            |    |           |        |  |       |        
|                                        
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current liabilities:                     |                                                                                                                                                     |                                            |    |           |        |  |       |        
|                                         | Accounts payable                                                                                                                                    |                                            | $  | 3,598     |        |  | $     | 2,697   |       
|                                         | Accrued liabilities                                                                                                                                 |                                            |    | 3,670     |        |  |       | 3,828   |       
|                                         | Accrued payroll and other compensation                                                                                                              |                                            |    | 4,211     |        |  |       | 5,403   |       
|                                         | Deferred revenue                                                                                                                                    |                                            |    | 12,235    |        |  |       | 10,542  |       
|                                         |                                                                                                                                                     |                                            |    |           |        |  |       |        
|                                         |                                                                                                                                                     | Total current liabilities                  |    |           | 23,714 |  |       |         | 22,470 | 
|                                         |                                                                                                                                                     |                                            |    |           |        |  |       |        
|Long-term liabilities                    |                                                                                                                                                     |                                            | 71 |           |        |  | 1,298 |        
|Commitments and contingencies            |                                                                                                                                                     |                                            |    |           |        |  |       |        
|Stockholders equity:                    |                                                                                                                                                     |                                            |    |           |        |  |       |        
|                                         | Preferred stock, $0.001 par value
    Authorized  5,000 shares Issued  none                                                                       |                                            |    |          |        |  |       |        |       
|                                         | Common stock, $0.001 par value
    Authorized  30,000 shares Issued 
    19,247 and 20,668 shares as of March 31, 2003 and
    2002, respectively |                                            |    | 19        |        |  |       | 20      |       
|                                         | Additional paid-in capital                                                                                                                          |                                            |    | 86,314    |        |  |       | 92,487  |       
|                                         | Treasury stock, 0 and 722 shares as of
    March 31, 2003 and 2002,
    respectively, at cost                                                       |                                            |    |          |        |  |       | (5,880  | )     
|                                         | Stockholders notes receivable                                                                                                                      |                                            |    | (233      | )      |  |       | (1,326  | )     
|                                         | Accumulated deficit                                                                                                                                 |                                            |    | (59,241   | )      |  |       | (47,513 | )     
|                                         | Accumulated other comprehensive income (loss)                                                                                                       |                                            |    | 792       |        |  |       | (1,033  | )     
|                                         |                                                                                                                                                     |                                            |    |           |        |  |       |        
|                                         |                                                                                                                                                     | Total stockholders equity                 |    |           | 27,651 |  |       |         | 36,755 | 
|                                         |                                                                                                                                                     |                                            |    |           |        |  |       |        
|                                         |                                                                                                                                                     | Total liabilities and stockholders equity |    | $         | 51,436 |  |       | $       | 60,523 | 
|                                         |                                                                                                                                                     |                                            |    |           |        |  |       |        

The accompanying notes to consolidated financial
statements are an integral part

of these consolidated balance sheets.


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NOVADIGM, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                                   |                                                         |                                       |         |        |        |      |        |        |        |   |        |        |        | 
|-------------------------------------------------- | ------------------------------------------------------- | ------------------------------------- | ------- | ------ | ------ | ---- | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                                   |                                                         |                                      
|                                                   |                                                         | For the Years Ended March 31,        
|                                                   |                                                         |                                      
|                                                   |                                                         | 2003                                  |         | 2002   |        | 2001
|                                                   |                                                         |                                       |         |        |        |     
|                                                   |                                                         |                                      
|                                                   |                                                         | (in thousands, except per share data)
|Revenues:                                          |                                                         |                                       |         |        |        |      |        |        |        |   |        |       
|                                                   | Licenses                                                |                                       | $       | 29,494 |        |      | $      | 39,158 |        |   | $      | 31,247 |       
|                                                   | Maintenance and services                                |                                       |         | 25,964 |        |      |        | 23,792 |        |   |        | 19,266 |       
|                                                   |                                                         |                                       |         |        |        |      |        |        |        |   |        |       
|                                                   |                                                         | Total revenues                        |         |        | 55,458 |      |        |        | 62,950 |   |        |        | 50,513 | 
|                                                   |                                                         |                                       |         |        |        |      |        |        |        |   |        |       
|Operating expenses:                                |                                                         |                                       |         |        |        |      |        |        |        |   |        |       
|                                                   | Cost of licenses  amortization of
    intangible asset |                                       |         | 1,335  |        |      |        | 611    |        |   |        |       |       
|                                                   | Cost of maintenance and services                        |                                       |         | 14,233 |        |      |        | 12,102 |        |   |        | 9,345  |       
|                                                   | Sales and marketing                                     |                                       |         | 26,398 |        |      |        | 27,509 |        |   |        | 23,884 |       
|                                                   | Research and development                                |                                       |         | 10,049 |        |      |        | 10,423 |        |   |        | 9,003  |       
|                                                   | General and administrative                              |                                       |         | 12,109 |        |      |        | 11,046 |        |   |        | 10,355 |       
|                                                   | Amortization of intangible                              |                                       |         | 2,018  |        |      |        | 8,072  |        |   |        | 6,046  |       
|                                                   |                                                         |                                       |         |        |        |      |        |        |        |   |        |       
|                                                   |                                                         | Total operating expenses              |         |        | 66,142 |      |        |        | 69,763 |   |        |        | 58,633 | 
|                                                   |                                                         |                                       |         |        |        |      |        |        |        |   |        |       
|Operating loss                                     |                                                         |                                       | (10,684 | )      |        |      | (6,813 | )      |        |   | (8,120 | )     
|Interest income, net                               |                                                         |                                       | 384     |        |        |      | 775    |        |        |   | 1,703  |       
|Other income (expense), net                        |                                                         |                                       | (783    | )      |        |      | (220   | )      |        |   | 2,054  |       
|                                                   |                                                         |                                       |         |        |        |      |        |        |        |   |        |       
|Loss before provision for income taxes             |                                                         |                                       | (11,083 | )      |        |      | (6,258 | )      |        |   | (4,363 | )     
|Provision for income taxes                         |                                                         |                                       | 645     |        |        |      | 11     |        |        |   | 233    |       
|                                                   |                                                         |                                       |         |        |        |      |        |        |        |   |        |       
|Net loss                                           |                                                         | $                                     | (11,728 | )      |        | $    | (6,269 | )      |        | $ | (4,596 | )     
|                                                   |                                                         |                                       |         |        |        |      |        |        |        |   |        |       
|Basic net loss per share                           |                                                         | $                                     | (0.60   | )      |        | $    | (0.31  | )      |        | $ | (0.23  | )     
|                                                   |                                                         |                                       |         |        |        |      |        |        |        |   |        |       
|Weighted average basic common shares outstanding   |                                                         |                                       | 19,672  |        |        |      | 19,953 |        |        |   | 19,711 |       
|                                                   |                                                         |                                       |         |        |        |      |        |        |        |   |        |       
|Diluted net loss per share                         |                                                         | $                                     | (0.60   | )      |        | $    | (0.31  | )      |        | $ | (0.23  | )     
|                                                   |                                                         |                                       |         |        |        |      |        |        |        |   |        |       
|Weighted average diluted common shares outstanding |                                                         |                                       | 19,672  |        |        |      | 19,953 |        |        |   | 19,711 |       
|                                                   |                                                         |                                       |         |        |        |      |        |        |        |   |        |       

CONSOLIDATED STATEMENTS OF COMPREHENSIVE
LOSS

|                   |                                         |                               |         |       |  |      |        |    |  |   |        |      |  
|------------------ | --------------------------------------- | ----------------------------- | ------- | ----- |  | ---- | ------ | -- |  | - | ------ | ---- | -
|                   |                                         |                              
|                   |                                         | For the Years Ended March 31,
|                   |                                         |                              
|                   |                                         | 2003                          |         | 2002  |  | 2001
|                   |                                         |                               |         |       |  |     
|                   |                                         |                              
|                   |                                         | (in thousands)               
|Net loss           |                                         | $                             | (11,728 | )     |  | $    | (6,269 | )  |  | $ | (4,596 | )   
|                   | Foreign currency translation adjustment |                               |         | 1,825 |  |      |        | 45 |  |   |        | (739 | )
|                   |                                         |                               |         |       |  |      |        |    |  |   |        |     
|Comprehensive loss |                                         | $                             | (9,903  | )     |  | $    | (6,224 | )  |  | $ | (5,335 | )   
|                   |                                         |                               |         |       |  |      |        |    |  |   |        |     

The accompanying notes to consolidated financial
statements are an integral part

of these consolidated financial statements.


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##### Table of Contents



NOVADIGM, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY

|                          |                                                                                     |                |        |            |   |          |    |               |   |             |        |               |   |               |        |        |   |   |        |        |   |   |         |         |   |   |        |       |   |   |        |         |  
|------------------------- | ----------------------------------------------------------------------------------- | -------------- | ------ | ---------- | - | -------- | -- | ------------- | - | ----------- | ------ | ------------- | - | ------------- | ------ | ------ | - | - | ------ | ------ | - | - | ------- | ------- | - | - | ------ | ----- | - | - | ------ | ------- | -
|                          |                                                                                     |                |        |            |   |          |    |               |   |             |        | Accumulated   |   |              
|                          |                                                                                     | Common Stock   |        | Additional |   |          |    | Stockholders |   |             |        | Other         |   | Total        
|                          |                                                                                     |                |        | Paid-in    |   | Treasury |    | Notes         |   | Accumulated |        | Comprehensive |   | Stockholders
|                          |                                                                                     | Shares         |        | Amount     |   | Capital  |    | Stock         |   | Receivable  |        | Deficit       |   | Income (Loss) |        | Equity
|                          |                                                                                     |                |        |            |   |          |    |               |   |             |        |               |   |               |        |       
|                          |                                                                                     |               
|                          |                                                                                     | (in thousands)
|Balance at March 31, 2000 |                                                                                     |                | 18,590 |            |   | $        | 19 |               |   | $           | 68,683 |               |   | $             |       |        |   | $ | (235   | )      |   | $ | (36,648 | )       |   | $ | (339   | )     |   | $ | 31,480 |        
|                          | Exercise of stock options and purchases of shares
    under the stock purchase plan |                |        | 725        |   |          |    |              |   |             |        | 3,323         |   |               |        |       |   |   |        |       |   |   |         |        |   |   |        |      |   |   |        | 3,323   |  
|                          | Issuance of common stock for the strategic
    alliance                             |                |        | 940        |   |          |    | 1             |   |             |        | 18,294        |   |               |        |       |   |   |        |       |   |   |         |        |   |   |        |      |   |   |        | 18,295  |  
|                          | Purchase of treasury stock                                                          |                |        | (353       | ) |          |    |              |   |             |        |              |   |               |        | (2,711 | ) |   |        |       |   |   |         |        |   |   |        |      |   |   |        | (2,711  | )
|                          | Foreign currency translation adjustment                                             |                |        |           |   |          |    |              |   |             |        |              |   |               |        |       |   |   |        |       |   |   |         |        |   |   |        | (739  | ) |   |        | (739    | )
|                          | Loans to stockholders and accrued interest                                          |                |        |           |   |          |    |              |   |             |        |              |   |               |        |       |   |   |        | (1,137 | ) |   |         |        |   |   |        |      |   |   |        | (1,137  | )
|                          | Net loss                                                                            |                |        |           |   |          |    |              |   |             |        |              |   |               |        |       |   |   |        |       |   |   |         | (4,596  | ) |   |        |      |   |   |        | (4,596  | )
|                          |                                                                                     |                |        |            |   |          |    |               |   |             |        |               |   |               |        |        |   |   |        |        |   |   |         |         |   |   |        |       |   |   |        |        
|Balance at March 31, 2001 |                                                                                     |                | 19,902 |            |   |          | 20 |               |   |             | 90,300 |               |   |               | (2,711 | )      |   |   | (1,372 | )      |   |   | (41,244 | )       |   |   | (1,078 | )     |   |   | 43,915 |        
|                          | Exercise of stock options and purchases of shares
    under the stock purchase plan |                |        | 367        |   |          |    |              |   |             |        | 1,713         |   |               |        |       |   |   |        |       |   |   |         |        |   |   |        |      |   |   |        | 1,713   |  
|                          | Issuance of common stock for the acquisition of
    intellectual property           |                |        | 46         |   |          |    |              |   |             |        | 474           |   |               |        |       |   |   |        |       |   |   |         |        |   |   |        |      |   |   |        | 474     |  
|                          | Purchase of treasury stock                                                          |                |        | (369       | ) |          |    |              |   |             |        |              |   |               |        | (3,169 | ) |   |        |       |   |   |         |        |   |   |        |      |   |   |        | (3,169  | )
|                          | Foreign currency translation adjustment                                             |                |        |           |   |          |    |              |   |             |        |              |   |               |        |       |   |   |        |       |   |   |         |        |   |   |        | 45    |   |   |        | 45      |  
|                          | Loans to stockholders and accrued interest                                          |                |        |           |   |          |    |              |   |             |        |              |   |               |        |       |   |   |        | (267   | ) |   |         |        |   |   |        |      |   |   |        | (267    | )
|                          | Repayments of stockholder loans                                                     |                |        |           |   |          |    |              |   |             |        |              |   |               |        |       |   |   |        | 313    |   |   |         |        |   |   |        |      |   |   |        | 313     |  
|                          | Net loss                                                                            |                |        |           |   |          |    |              |   |             |        |              |   |               |        |       |   |   |        |       |   |   |         | (6,269  | ) |   |        |      |   |   |        | (6,269  | )
|                          |                                                                                     |                |        |            |   |          |    |               |   |             |        |               |   |               |        |        |   |   |        |        |   |   |         |         |   |   |        |       |   |   |        |        
|Balance at March 31, 2002 |                                                                                     |                | 19,946 |            |   |          | 20 |               |   |             | 92,487 |               |   |               | (5,880 | )      |   |   | (1,326 | )      |   |   | (47,513 | )       |   |   | (1,033 | )     |   |   | 36,755 |        
|                          | Exercise of stock options and purchases of shares
    under the stock purchase plan |                |        | 198        |   |          |    |              |   |             |        | 719           |   |               |        |       |   |   |        |       |   |   |         |        |   |   |        |      |   |   |        | 719     |  
|                          | Issuance of common stock for the acquisition of
    intellectual property           |                |        | 95         |   |          |    |              |   |             |        | 949           |   |               |        |       |   |   |        |       |   |   |         |        |   |   |        |      |   |   |        | 949     |  
|                          | Purchase of treasury stock                                                          |                |        | (1,019     | ) |          |    |              |   |             |        |              |   |               |        | (2,069 | ) |   |        | 280    |   |   |         |        |   |   |        |      |   |   |        | (1,789  | )
|                          | Issuance of treasury stock for the exercise of
    stock options                    |                |        | 27         |   |          |    |              |   |             |        | (15           | ) |               |        | 122    |   |   |        |        |   |   |         |         |   |   |        |       |   |   |        | 107     |  
|                          | Retirement of treasury stock                                                        |                |        |           |   |          |    | (1            | ) |             |        | (7,826        | ) |               |        | 7,827  |   |   |        |       |   |   |         |        |   |   |        |      |   |   |        |        |  
|                          | Foreign currency translation adjustment                                             |                |        |           |   |          |    |              |   |             |        |              |   |               |        |       |   |   |        |       |   |   |         |        |   |   |        | 1,825 |   |   |        | 1,825   |  
|                          | Repayments of stockholder loans                                                     |                |        |           |   |          |    |              |   |             |        |              |   |               |        |       |   |   |        | 235    |   |   |         |        |   |   |        |      |   |   |        | 235     |  
|                          | Reserve for stockholder loans                                                       |                |        |           |   |          |    |              |   |             |        |              |   |               |        |       |   |   |        | 578    |   |   |         |        |   |   |        |      |   |   |        | 578     |  
|                          | Net loss                                                                            |                |        |           |   |          |    |              |   |             |        |              |   |               |        |       |   |   |        |       |   |   |         | (11,728 | ) |   |        |      |   |   |        | (11,728 | )
|                          |                                                                                     |                |        |            |   |          |    |               |   |             |        |               |   |               |        |        |   |   |        |        |   |   |         |         |   |   |        |       |   |   |        |        
|Balance at March 31, 2003 |                                                                                     |                | 19,247 |            |   | $        | 19 |               |   | $           | 86,314 |               |   | $             | 0      |        |   | $ | (233   | )      |   | $ | (59,241 | )       |   | $ | 792    |       |   | $ | 27,651 |        
|                          |                                                                                     |                |        |            |   |          |    |               |   |             |        |               |   |               |        |        |   |   |        |        |   |   |         |         |   |   |        |       |   |   |        |        

The accompanying notes to consolidated financial
statements are an integral part

of these consolidated financial statements.


F-5



---



##### Table of Contents



NOVADIGM, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                                                                                                                                                                                            |                                                                                    |                                                                      |                                                         |         |        |         |        |         |        |        |        |         |        |        | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------- | -------------------------------------------------------------------- | ------------------------------------------------------- | ------- | ------ | ------- | ------ | ------- | ------ | ------ | ------ | ------- | ------ | ------ | 
|                                                                                                                                                                                                                            |                                                                                    |                                                                     
|                                                                                                                                                                                                                            |                                                                                    | For the Years Ended March 31,                                       
|                                                                                                                                                                                                                            |                                                                                    |                                                                     
|                                                                                                                                                                                                                            |                                                                                    | 2003                                                                 |                                                         | 2002    |        | 2001   
|                                                                                                                                                                                                                            |                                                                                    |                                                                      |                                                         |         |        |        
|                                                                                                                                                                                                                            |                                                                                    |                                                                     
|                                                                                                                                                                                                                            |                                                                                    | (amounts in thousands)                                              
|Cash flows from operating
    activities:                                                                                                                                                                                   |                                                                                    |                                                                      |                                                         |         |        |         |        |         |        |        |        |        
|                                                                                                                                                                                                                            | Net loss                                                                           |                                                                      | $                                                       | (11,728 | )      |         | $      | (6,269  | )      |        | $      | (4,596  | )     
|                                                                                                                                                                                                                            | Adjustments to reconcile net loss to net cash
    provided by operating activities |                                                                      |                                                         |         |        |         |        |         |        |        |        |         |       
|                                                                                                                                                                                                                            |                                                                                    | Depreciation and amortization                                        |                                                         |         | 4,741  |         |        |         | 10,010 |        |        |         | 6,768  |       
|                                                                                                                                                                                                                            |                                                                                    | Increase in allowance for shareholder notes                          |                                                         |         | 578    |         |        |         |       |        |        |         |       |       
|                                                                                                                                                                                                                            |                                                                                    | (Decrease) increase in allowance for doubtful
    accounts           |                                                         |         | (895   | )       |        |         | (396   | )      |        |         | 636    |       
|                                                                                                                                                                                                                            |                                                                                    | Decrease (increase) in accounts receivable                           |                                                         |         | 9,951  |         |        |         | 636    |        |        |         | (6,211 | )     
|                                                                                                                                                                                                                            |                                                                                    | (Increase) decrease in prepaid expenses and other
    current assets |                                                         |         | (31    | )       |        |         | 106    |        |        |         | (113   | )     
|                                                                                                                                                                                                                            |                                                                                    | Increase in intangible assets                                        |                                                         |         |       |         |        |         | (114   | )      |        |         | (340   | )     
|                                                                                                                                                                                                                            |                                                                                    | Decrease (increase) in other assets                                  |                                                         |         | 67     |         |        |         | (543   | )      |        |         | 226    |       
|                                                                                                                                                                                                                            |                                                                                    | Increase (decrease) in accounts payable and
    accrued liabilities  |                                                         |         | 1,174  |         |        |         | (416   | )      |        |         | 1,019  |       
|                                                                                                                                                                                                                            |                                                                                    | Increase in long-term liabilities                                    |                                                         |         | 71     |         |        |         |       |        |        |         |       |       
|                                                                                                                                                                                                                            |                                                                                    | (Decrease) increase in accrued payroll and other
    compensation    |                                                         |         | (1,192 | )       |        |         | (55    | )      |        |         | 1,519  |       
|                                                                                                                                                                                                                            |                                                                                    | Increase (decrease) in deferred revenue                              |                                                         |         | 1,693  |         |        |         | (1,344 | )      |        |         | 2,854  |       
|                                                                                                                                                                                                                            |                                                                                    | Increase in restricted cash                                          |                                                         |         | (150   | )       |        |         |       |        |        |         |       |       
|                                                                                                                                                                                                                            |                                                                                    |                                                                      |                                                         |         |        |         |        |         |        |        |        |        
|                                                                                                                                                                                                                            |                                                                                    |                                                                      | Net cash provided by operating activities               |         |        | 4,279   |        |         |        | 1,615  |        |         |        | 1,762  | 
|                                                                                                                                                                                                                            |                                                                                    |                                                                      |                                                         |         |        |         |        |         |        |        |        |        
|Cash flows from investing
    activities:                                                                                                                                                                                   |                                                                                    |                                                                      |                                                         |         |        |         |        |         |        |        |        |        
|                                                                                                                                                                                                                            | Acquisition of intellectual property                                               |                                                                      |                                                         | (780    | )      |         |        | (390    | )      |        |        |        |       
|                                                                                                                                                                                                                            | Purchases of property and equipment                                                |                                                                      |                                                         | (953    | )      |         |        | (1,277  | )      |        |        | (1,548  | )     
|                                                                                                                                                                                                                            | Proceeds from the sales of property and equipment                                  |                                                                      |                                                         | 8       |        |         |        | 30      |        |        |        | 7       |       
|                                                                                                                                                                                                                            | Purchases of held-to-maturity securities                                           |                                                                      |                                                         | (40,770 | )      |         |        | (39,969 | )      |        |        | (54,001 | )     
|                                                                                                                                                                                                                            | Proceeds from redemptions of held-to-maturity
    securities                       |                                                                      |                                                         | 27,010  |        |         |        | 46,539  |        |        |        | 68,779  |       
|                                                                                                                                                                                                                            |                                                                                    |                                                                      |                                                         |         |        |         |        |         |        |        |        |        
|                                                                                                                                                                                                                            |                                                                                    |                                                                      | Net cash (used in) provided by investing
    activities |         |        | (15,485 | )      |         |        | 4,933  |        |         |        | 13,237 | 
|                                                                                                                                                                                                                            |                                                                                    |                                                                      |                                                         |         |        |         |        |         |        |        |        |        
|Cash flows from financing
    activities:                                                                                                                                                                                   |                                                                                    |                                                                      |                                                         |         |        |         |        |         |        |        |        |        
|                                                                                                                                                                                                                            | Net proceeds from the sale of common stock and
    exercise of options             |                                                                      |                                                         | 826     |        |         |        | 1,713   |        |        |        | 3,323   |       
|                                                                                                                                                                                                                            | Proceeds from the Hewlett-Packard alliance
    agreement                           |                                                                      |                                                         |        |        |         |        |        |        |        |        | 2,500   |       
|                                                                                                                                                                                                                            | Loans to stockholders, net of repayments                                           |                                                                      |                                                         | 235     |        |         |        | 46      |        |        |        | (1,137  | )     
|                                                                                                                                                                                                                            | Purchases of treasury stock                                                        |                                                                      |                                                         | (1,789  | )      |         |        | (3,169  | )      |        |        | (2,711  | )     
|                                                                                                                                                                                                                            |                                                                                    |                                                                      |                                                         |         |        |         |        |         |        |        |        |        
|                                                                                                                                                                                                                            |                                                                                    |                                                                      | Net cash (used in) provided by financing                |         |        | (728    | )      |         |        | (1,410 | )      |         |        | 1,975  | 
|                                                                                                                                                                                                                            |                                                                                    |                                                                      |                                                         |         |        |         |        |         |        |        |        |        
|Effect of foreign currency exchange rates on
    changes in cash and cash equivalents                                                                                                                                       |                                                                                    |                                                                      | 1,825                                                   |         |        |         | 45     |         |        |        | (52    | )      
|                                                                                                                                                                                                                            |                                                                                    |                                                                      |                                                         |         |        |         |        |         |        |        |        |        
|Net (decrease) increase in cash and cash
    equivalents                                                                                                                                                                    |                                                                                    |                                                                      | (10,109                                                 | )       |        |         | 5,183  |         |        |        | 16,922 |        
|Cash and cash equivalents at the beginning of the
    year                                                                                                                                                                  |                                                                                    |                                                                      | 25,775                                                  |         |        |         | 20,592 |         |        |        | 3,670  |        
|                                                                                                                                                                                                                            |                                                                                    |                                                                      |                                                         |         |        |         |        |         |        |        |        |        
|Cash and cash equivalents at the end of the
    year                                                                                                                                                                        |                                                                                    | $                                                                    | 15,666                                                  |         |        | $       | 25,775 |         |        | $      | 20,592 |        
|                                                                                                                                                                                                                            |                                                                                    |                                                                      |                                                         |         |        |         |        |         |        |        |        |        
|Supplemental disclosure of cash flow
    information:                                                                                                                                                                       |                                                                                    |                                                                      |                                                         |         |        |         |        |         |        |        |        |        
|Cash paid for income taxes                                                                                                                                                                                                  |                                                                                    | $                                                                    |                                                        |         |        | $       | 11     |         |        | $      | 3      |        
|Non-cash financing activity:                                                                                                                                                                                                |                                                                                    |                                                                      |                                                         |         |        |         |        |         |        |        |        |        
|Issuance of common stock in connection with the
    acquisition of intellectual property (94,504 and 47,254 shares
    issued as of March 31, 2003 and 2002, respectively, 70,878
    shares issuable as of March 31, 2003) |                                                                                    | $                                                                    | 949                                                     |         |        | $       | 474    |         |        | $      |       |        
|Issuance of 940,000 shares of common stock in
    connection with the Alliance Agreement with Hewlett-Packard                                                                                                               |                                                                                    | $                                                                    |                                                        |         |        | $       |       |         |        | $      | 18,295 |        
|Purchase of treasury stock in exchange of
    shareholder loan  141,441 shares                                                                                                                                             |                                                                                    | $                                                                    | 280                                                     |         |        | $       |       |         |        | $      |       |        
|Retirement of treasury stock 
    1,714,403 shares                                                                                                                                                                         |                                                                                    | $                                                                    | 7,827                                                   |         |        | $       |       |         |        | $      |       |        

The accompanying notes to consolidated financial
statements are an integral part

of these consolidated financial statements.


F-6



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##### Table of Contents



NOVADIGM, INC.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

1.     The
Company

Novadigm, Inc. was incorporated in Delaware in
February 1992. Novadigm, Inc. and its subsidiaries
(Novadigm or the Company) design, market
and support technology solutions that efficiently and reliably
deliver, update and maintain software and content across the
extended enterprise. The Companys principal customers
include medium-to-large organizations with widely deployed and
heterogeneous networks with thousands to hundreds-of-thousands
of computing devices. The Company has wholly-owned subsidiaries
in France, Germany and the United Kingdom that act as sales and
service offices to the European marketplace. The Company is
subject to a number of risks, including a history of operating
losses, dependence on key individuals, potential competition
from larger and more established companies, customer
concentration and the ability to penetrate the market with new
products.

2.     Summary of
Significant Accounting Policies



| |                            
| | ---------------------------
| | Principles of Consolidation

The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries.
Intercompany accounts and transactions have been eliminated.



| |                                      
| | -------------------------------------
| | Translation of Foreign
    Currencies

The functional currency of the Companys
subsidiaries is the local currency. Accordingly, all assets and
liabilities are translated into U.S. dollars at current
exchange rates as of the respective balance sheet date. Revenue
and expense items are translated at the average rates prevailing
during the period. Translation adjustments and the effects of
exchange rate changes on intercompany transactions of a
long-term investment nature are included in stockholders
equity in the consolidated balance sheets. Gains and losses
resulting from foreign currency transactions denominated in a
currency other than the functional currency are included in net
income or loss. For the fiscal years ended 2003, 2002 and 2001,
net foreign currency transaction gains (losses) amounted to
($646) thousand, ($200) thousand and $4 thousand,
respectively, which is reflected in other income (expense), net
in the consolidated statements of operations.



| |                 
| | ----------------
| | Use of Estimates

The preparation of consolidated financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management of
the Company to make a number of estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period.
Significant items subject to such estimates and assumptions
include the carrying amount of property and equipment;
intangible assets; valuation allowance for doubtful accounts;
valuation allowance on deferred assets; allowance for
litigation; and valuation of derivative instruments. Actual
results could differ from those estimates.

F-7



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##### Table of Contents



NOVADIGM, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                  
| | -----------------
| | Reclassifications

The following prior year amounts have been
reclassified to conform to the current year presentation. These
reclassifications have no effect on net income (in thousands):

|                                                                           |  |            |        |             |  |            |        |         |  |  |        |  
|-------------------------------------------------------------------------- |  | ---------- | ------ | ----------- |  | ---------- | ------ | ------- |  |  | ------ | -
|                                                                           |  | Prior to   |        |             |  | After     
|                                                                           |  | Adjustment |        | Adjustments |  | Adjustment
|                                                                           |  |            |        |             |  |           
|Consolidated balance sheet as of
    March 31, 2002                        |  |            |        |             |  |            |        |         |  |  |        |  
|Accounts receivable, net                                                   |  |            | 18,669 |             |  |            | 6,043  | (1)     |  |  | 24,712 |  
|Other assets                                                               |  |            | 1,090  |             |  |            | (235   | )(2)    |  |  | 855    |  
|Deferred revenue                                                           |  |            | 4,499  |             |  |            | 6,043  | (1)     |  |  | 10,542 |  
|Stockholders notes receivable                                             |  |            | 1,091  |             |  |            | 235    | (2)     |  |  | 1,326  |  
|Consolidated statement of operations for the
    year ended March 31, 2002 |  |            |        |             |  |            |        |         |  |  |        |  
|Maintenance and service revenue                                            |  |            | 23,365 |             |  |            | 427    | (3)     |  |  | 23,792 |  
|Cost of license  amortization of
    intangible assets                    |  |            |       |             |  |            | 611    | (4)     |  |  | 611    |  
|Cost of maintenance and services                                           |  |            | 11,675 |             |  |            | 427    | (3)     |  |  | 12,102 |  
|Sales and marketing                                                        |  |            | 27,127 |             |  |            | 382    | (5)     |  |  | 27,509 |  
|General and administrative                                                 |  |            | 11,323 |             |  |            | (277   | )(5)(6) |  |  | 11,046 |  
|Amortization of intangible                                                 |  |            | 8,683  |             |  |            | (611   | )(4)    |  |  | 8,072  |  
|Other income (expense), net                                                |  |            | (325   | )           |  |            | 105    | (6)     |  |  | (220   | )
|Consolidated statement of operations for the
    year ended March 31, 2001 |  |            |        |             |  |            |        |         |  |  |        |  
|Maintenance and service revenue                                            |  |            | 19,199 |             |  |            | 67     | (3)     |  |  | 19,266 |  
|Cost of maintenance and services                                           |  |            | 9,278  |             |  |            | 67     | (3)     |  |  | 9,345  |  
|Sales and marketing                                                        |  |            | 25,934 |             |  |            | (2,050 | )(5)    |  |  | 23,884 |  
|General and administrative                                                 |  |            | 8,305  |             |  |            | 2,050  | (5)(6)  |  |  | 10,355 |  



---



|    |                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Reclassification of billings to increase accounts
    receivable related to deferred revenues in the accompanying
    consolidated balance sheet.                                                                                                                                                                                                                                  
|   
|(2) | Reclassification of stockholders notes from
    other assets to stockholders notes receivable in the
    accompanying consolidated balance sheet.                                                                                                                                                                                                                                
|   
|(3) | Reclassification of out-of-pocket expenses
    previously recorded in cost of maintenance and services to
    maintenance and service revenue as per EITF No. 01-14,
    Income Statement Characterization of Reimbursement Received
    For Out-of-Pocket Expenses Incurredin the
    accompanying consolidated statements of operations.                                       
|   
|(4) | Reclassification of amortization of intangible
    asset acquired with the intellectual property purchased in
    October 2001. The acquired intellectual property is embedded in
    the Companys product suite, thus this amortization cost is
    reclassified from amortization of intangible to cost of license
    in the accompanying consolidated statement of operations.
|   
|(5) | Reclassification of provision for doubtful
    accounts from sales and marketing to general and administrative
    in the accompanying consolidated statement of operations.                                                                                                                                                                                                       
|   
|(6) | Reclassification of other miscellaneous corporate
    expenses from other income (expenses) to general and
    administrative expenses in the accompanying consolidated
    statement of operations. The amount in fiscal 2001 was
    immaterial.                                                                                                                                 

F-8



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##### Table of Contents



NOVADIGM, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |         
| | --------
| | Revenues

The Company recognizes 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. The Company generates license
revenues from licensing the rights to use its software products
to end users and sublicense fees from resellers. The Company
also generates 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 the Company. 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. The Company evaluates whether the software
transaction has a fixed and determinable price. A key factor in
this evaluation is the payment terms in relation to the
Companys 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. The Company
evaluates the probability of collection based upon the
creditworthiness of the customer.

The Company allocates revenue on software
arrangements involving multiple elements to each element based
on its relative fair value. The Companys determination of
fair value of each element is based on vendor specific objective
evidence (VSOE). The Company analyzes all of the elements of the
software arrangement and determines if it has 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.

The Company enters into reseller arrangements
that typically provide for sublicense fees payable to the
Company 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 due
within 90 days. These guaranteed sublicense fees are applied
against sublicense fees reported by the reseller in relicensing
the Companys products to end-users. In 2003, 2002 and
2001, $0, $250 thousand, and $0, respectively, were
recognized in guaranteed sublicense fees. As of March 31,
2003, an immaterial balance of the guaranteed sublicense fees
recognized by the Company had yet to be placed with end-users or
forfeited by the reseller.

The Companys standard software license
agreement provides for a limited warranty that it is 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 the Companys products are found to be infringing

F-9



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##### Table of Contents



NOVADIGM, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

on anothers intellectual property rights, a
court issues a final injunction and the Company is 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, the Company has never 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 Companys historical experience which indicates that
it is capable of honoring its warranties. There is no provision
for price protection, because it is not offered.

Cost of licenses  amortization of
intangible asset includes the amortization of the intangible
asset acquired with intellectual property acquired in October
2001.

Cost of maintenance and services includes the
direct and indirect costs of providing technical support and
consulting and training services to our customers. The Company
has a professional services organization that offers
supplemental staff resources for product installation,
deployment and implementation, and project management activities
solely to customers that license the Companys software
products. The professional services organization does not modify
or customize the licensed products, rather it assists the
customer with configuration, installation and deployment of the
licensed products in the customers IT environment. In
those few instances where customers have required an
insignificant modification or customization to the licensed
products, the specifications of the change are contracted for by
the customer and revenue is deferred until the modified product
is delivered and accepted. The Company has established standard
daily charges which it offers to its customers in connection
with license sales and on a stand-alone basis. These rates
establish VSOE of fair value and are the basis by which revenue
earned is measured. Cost of maintenance and services consists
primarily of payroll and benefits for field engineers and
support personnel, other related overhead and third party
consulting fees.

The Company has a network of
certified or approved service providers. These
service providers offer supplemental staff resources for product
installation, deployment and implementation, and project
management services for customers who license the Companys
software products. Depending on the customers preference
and the Companys availability, service providers may
contract directly with the Companys customer to perform
the needed services, or where the Company contracts directly
with the customer for the performance of the services, the
Company may subcontract the service provider on an hourly or
daily basis to perform the needed services. If the service
provider contracts directly with the Companys customer,
neither revenue nor expense is recognized by the Company. Where
the Company contracts directly with the customer and
subcontracts with a service provider to perform the services,
revenue is recognized as the work is performed and accepted, and
expense is recognized as incurred.

Deferred revenue primarily relates to
maintenance, consulting and training services which have been
paid by the customers prior to the performance of those services.



| |                 
| | ----------------
| | Cash Equivalents

Cash equivalents consist of overnight repurchase
agreements, commercial paper, corporate notes and certificates
of deposit with an initial term of less than three months. The
Company considers all highly liquid investments purchased with
an original maturity of three months or less to be cash
equivalents. At March 31, 2003 and 2002, the Company held
approximately $19.5 million and $20.4 million,
respectively, of commercial paper with a variety of large
companies.



| |                
| | ---------------
| | Restricted Cash

Restricted cash represents a certificate of
deposit placed by the Company with its bank for issuance of
letters of credit to the Companys lessor for office space.

F-10



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NOVADIGM, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                              
| | -----------------------------
| | Concentrations of Credit Risk

Financial instruments that potentially subject
the Company to a concentration of credit risk consist
principally of temporary cash investments, marketable securities
and accounts receivable. The Company has investment policies
that restrict placement of cash investments and marketable
securities to financial institutions evaluated as highly
creditworthy. The Company generally does not require collateral
on trade accounts receivable as its customer base consists of
large, well-established companies and governmental entities. As
of March 31, 2003 and 2002, approximately 22% and 15%,
respectively, of accounts receivable were concentrated with one
customer which is a large company that the Company has
determined is creditworthy.



| |                      
| | ---------------------
| | Marketable Securities

Marketable securities, which are composed of
commercial paper, government and government-backed notes and
corporate notes, are classified as held-to-maturity.
Held-to-maturity securities represent those securities that the
Company has both a positive intent and ability to hold the
security until maturity.

A decline in the market value of any
held-to-maturity security below cost that is deemed to be other
than temporary results in a reduction in carrying amount to fair
value. The impairment is charged to operations and a new cost
basis for the security is established.

Premiums and discounts are amortized over the
life of the related held-to-maturity security as an adjustment
to yield using the effective-interest method. Dividend and
interest income are recognized when earned.

The Company had $13.8 million and $0 of
held-to-maturity securities at March 31, 2003 and 2002,
respectively.

Proceeds from redemption of held-to-maturity
securities were approximately $27.0 million,
$46.5 million and $68.8 million in fiscal years 2003,
2002 and 2001, respectively.



| |                                        
| | ---------------------------------------
| | Fair Value of Financial
    Instruments

The carrying amounts of the Companys
financial instruments, including cash and cash equivalents,
marketable securities, accounts receivable and accounts payable
approximate their fair values.



| |                       
| | ----------------------
| | Property and Equipment

Property and equipment are stated at historical
cost and consists of the following at March 31, (in
thousands):

|                                                |  |      |        |      |  |   |        |  
|----------------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | -
|                                                |  | 2003 |        | 2002
|                                                |  |      |        |     
|Computer equipment and software                 |  | $    | 7,946  |      |  | $ | 7,203  |  
|Furniture and fixtures                          |  |      | 909    |      |  |   | 844    |  
|Leasehold improvements                          |  |      | 1,434  |      |  |   | 1,297  |  
|                                                |  |      |        |      |  |   |        |  
|                                                |  |      | 10,289 |      |  |   | 9,344  |  
|Less: Accumulated depreciation and amortization |  |      | (8,107 | )    |  |   | (6,719 | )
|                                                |  |      |        |      |  |   |        |  
|                                                |  | $    | 2,182  |      |  | $ | 2,625  |  
|                                                |  |      |        |      |  |   |        |  

F-11



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##### Table of Contents



NOVADIGM, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Depreciation and amortization are provided using
the straight-line method over the estimated useful lives of the
assets as follows:

|                                |  |                                                            
|------------------------------- |  | -----------------------------------------------------------
|Computer equipment and software |  | 3 years                                                    
|Furniture and fixtures          |  | 5 years                                                    
|Leasehold improvements          |  | 5 years (lesser of lease term or estimated
    useful life)

Depreciation and amortization related to property
and equipment amounted to $1.4 million, $1.3 million
and $722 thousand for fiscal 2003, 2002 and 2001,
respectively.



| |                  
| | -----------------
| | Intangible Assets

|                              |                                         |                        |   |              |        |              |  |          |  |  |   |         |         |   |   |       |       | 
|----------------------------- | --------------------------------------- | ---------------------- | - | ------------ | ------ | ------------ |  | -------- |  |  | - | ------- | ------- | - | - | ----- | ----- | 
|                              |                                         |                       
|                              |                                         | As of March 31, 2003  
|                              |                                         |                       
|                              |                                         |                        |   | Weighted     |        |             
|                              |                                         | Gross                  |   | Average      |        |              |  | Net     
|                              |                                         | Carrying               |   | Amortization |        | Accumulated  |  | Carrying
|                              |                                         | Amount                 |   | Period       |        | Amortization |  | Amount  
|                              |                                         |                        |   |              |        |              |  |         
|                              |                                         |                       
|                              |                                         | (dollars in thousands)
|Amortizing intangible assets: |                                         |                        |   |              |        |              |  |          |  |  |   |         |         |   |   |      
|                              | Strategic Alliance with Hewlett-Packard |                        | $ | 16,136       |        |              |  | 2.0 yrs  |  |  | $ | (16,136 | )       |   | $ |      |      
|                              | Acquired Software Costs                 |                        |   | 4,005        |        |              |  | 3.0 yrs  |  |  |   | (1,946  | )       |   |   | 2,059 |      
|                              |                                         |                        |   |              |        |              |  |          |  |  |   |         |         |   |   |      
|                              |                                         | Total                  |   | $            | 20,141 |              |  |          |  |  |   | $       | (18,082 | ) |   | $     | 2,059 | 
|                              |                                         |                        |   |              |        |              |  |          |  |  |   |         |         |   |   |      

|                              |                                         |                        |   |              |        |              |  |          |  |  |   |         |         |   |   |       |       | 
|----------------------------- | --------------------------------------- | ---------------------- | - | ------------ | ------ | ------------ |  | -------- |  |  | - | ------- | ------- | - | - | ----- | ----- | 
|                              |                                         |                       
|                              |                                         | As of March 31, 2002  
|                              |                                         |                       
|                              |                                         |                        |   | Weighted     |        |             
|                              |                                         | Gross                  |   | Average      |        |              |  | Net     
|                              |                                         | Carrying               |   | Amortization |        | Accumulated  |  | Carrying
|                              |                                         | Amount                 |   | Period       |        | Amortization |  | Amount  
|                              |                                         |                        |   |              |        |              |  |         
|                              |                                         |                       
|                              |                                         | (dollars in thousands)
|Amortizing intangible assets: |                                         |                        |   |              |        |              |  |          |  |  |   |         |         |   |   |      
|                              | Strategic Alliance with Hewlett-Packard |                        | $ | 16,136       |        |              |  | 2.0 yrs  |  |  | $ | (14,118 | )       |   | $ | 2,018 |      
|                              | Acquired Software Costs                 |                        |   | 4,005        |        |              |  | 3.0 yrs  |  |  |   | (611    | )       |   |   | 3,394 |      
|                              |                                         |                        |   |              |        |              |  |          |  |  |   |         |         |   |   |      
|                              |                                         | Total                  |   | $            | 20,141 |              |  |          |  |  |   | $       | (14,729 | ) |   | $     | 5,412 | 
|                              |                                         |                        |   |              |        |              |  |          |  |  |   |         |         |   |   |      

The Companys net intangible asset at
March 31, 2003, $2.1 million, is attributable to the
Companys acquisition of intellectual property from another
organization in October 2001. The cost of 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 common stock and payment of
$1.7 million over nine quarters. As of March 31, 2003,
141,758 shares of common stock had been issued and payments
totaling approximately $1.2 million have been made. The
Company will issue 23,626 shares and make a cash payment of
$195 thousand each quarter through December 31, 2003.
The value of the shares to be issued and cash to be paid in the
amount of $1.3 million is included in accrued liabilities
in the accompanying March 31, 2003 consolidated balance
sheet. The Company allocated the excess of the purchase price
over the fair value of the tangible net assets acquired to
acquired software and is amortizing this amount over three years
and is included in cost of licenses  amortization of
intangible assets in the accompanying consolidated statement of
operations.

In June 2000, the Company entered into an
alliance agreement with Hewlett-Packard to integrate, market and
sell its 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, the Company issued 940,000 shares of its Common Stock
to Hewlett-Packard and a warrant for an additional 250,000
shares of the Companys Common Stock. Both the shares
issued and the warrant contained

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##### Table of Contents



NOVADIGM, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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 the Companys 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
two years, the initial term of the agreement (see Note 9 to
the Consolidated Financial Statements).

Amortization expense related to these two
intangible assets was $3.4 million and $8.7 million
for the years ended March 31, 2003 and 2002, respectively.
The future minimum amortization with respect to intangible
assets is estimated to be approximately $334 thousand per
quarter and is expected to be fully amortized by December 2004.



| |                  
| | -----------------
| | Long-Lived Assets

In accordance with Statement of Financial
Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, which was adopted on April 1, 2002, the
Company monitors events or changes in circumstances that may
indicate carrying amounts of its long-lived assets may not be
recoverable. When such events or changes in circumstances are
present, the Company assesses the recoverability of its assets
by determining whether the carrying amount of its assets will be
recovered through undiscounted, expected future cash flows.
Should the Company determine that the carrying values of
specific long-lived assets are not recoverable, the Company
would record a charge to operations to reduce the carrying value
of such assets to their fair values. The Company considers
various valuation factors, principally discounted cash flows, to
assess the fair values of long-lived assets.





| |                           
| | --------------------------
| | Software Development Costs

Under the provisions of Statement of Financial
Accounting Standards No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise
Marketed, software development costs are capitalized upon
the establishment of technological feasibility, which the
Company defines as the establishment of a working model.
Capitalized software development costs require a continuing
assessment of their recoverability. This assessment requires
considerable judgment by management with respect to various
factors including, but not limited to, anticipated future gross
product revenues, estimated economic lives and changes in
software and hardware technology. Amounts which could have been
capitalized under this statement, after consideration of the
above factors, were immaterial to the Companys results of
operations and financial position. Therefore, the Company has
expensed all software development costs and included those costs
in research and development expenses in the accompanying
consolidated statements of operations.





| |                                         
| | ----------------------------------------
| | Basic and Diluted Net Loss per
    Share

Basic net loss per share is calculated by
dividing the net loss by the weighted average number of shares
of common stock outstanding during the period. Diluted net loss
per share is calculated by dividing the net loss by the weighted
average number of common shares outstanding for the period
adjusted to reflect the dilutive impact of potential common
shares outstanding during the period.

For the years ended March 31, 2003, 2002 and
2001, the impact of potential common shares of 5,183,000,
1,202,000 and 1,196,000, respectively, have been excluded from
dilutive EPS as their inclusion would have been anti-dilutive.





| |            
| | -----------
| | Derivatives

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

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NOVADIGM, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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.

The Company has instituted a hedging program that
it expects will reduce its 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.

During the second quarter of fiscal 2003, the
Companys European operations entered into a foreign
currency option transaction to sell (put option) US dollars to
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 US dollar denominated receivable on the books of one
of its foreign subsidiaries. The premium paid on the transaction
is ratably charged to operations over the life of the contract
and the gain or loss on the transaction is recognized in
earnings in the period in which the gain or loss arises. During
fiscal 2003, the Company recorded a gain of $8 thousand related
to this option transaction.





| |                             
| | ----------------------------
| | Warranty and Indemnification

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 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.





| |                         
| | ------------------------
| | Stock-based Compensation

At March 31, 2003, the Company has various
stock-based employee compensation plans, which are described
more fully in Note 5. The Company accounts for those plans under
the recognition and measurement provisions of Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees and related interpretations.
Accordingly, no stock option related compensation expense has
been recognized in the consolidated statements of operations, as
all options granted had an exercise price equal to the market
value of the underlying stock on the date of grant. SFAS
No. 123, Accounting for Stock-Based Compensation,
established accounting and disclosure requirements using a
fair-value based method of accounting for stock-based employee
compensation plans. As allowed by SFAS No. 123, the Company
has elected to adopt the disclosure requirements of SFAS
No. 123 and SFAS No. 148, Accounting for Stock
Based Compensation  Transition and Disclosure, an
amendment to FASB Statement No. 123. Awards under the
Companys plans vest over four years. Therefore, the cost
related to stock-based employee compensation included in the
determination of net loss for 2003, 2002 and 2001 is less than
that which would have been recognized if the fair-value based
method had been applied to all awards since the original
effective date of Statement 123. The following table illustrates
the effect on net loss and net loss per share if the fair-value

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##### Table of Contents



NOVADIGM, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

based method had been applied to all outstanding
and unvested awards in each period using the Black-Scholes
option pricing model and the assumptions discussed in
Note 5.

|                                                                                                                                                  |  |                                       |         |      |  |      |         |   |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                                                                                                                  |  |                                      
|                                                                                                                                                  |  | Year Ended March 31,                 
|                                                                                                                                                  |  |                                      
|                                                                                                                                                  |  | 2003                                  |         | 2002 |  | 2001
|                                                                                                                                                  |  |                                       |         |      |  |     
|                                                                                                                                                  |  |                                      
|                                                                                                                                                  |  | (in thousands, except per share data)
|Net loss as reported                                                                                                                              |  | $                                     | (11,728 | )    |  | $    | (6,269  | ) |  | $ | (4,596  | )
|Less: Total stock-based employee compensation
    expense determined under fair-value based method for all awards,
    net of related tax effects |  |                                       | 4,876   |      |  |      | 6,280   |   |  |   | 5,483   |  
|Pro forma loss                                                                                                                                    |  | $                                     | (16,604 | )    |  | $    | (12,549 | ) |  | $ | (10,079 | )
|Basic and diluted loss per share  as
    reported                                                                                                |  | $                                     | (0.60   | )    |  | $    | (0.31   | ) |  | $ | (0.23   | )
|Basic and diluted loss per share  pro forma                                                                                                      |  | $                                     | (0.84   | )    |  | $    | (0.63   | ) |  | $ | (0.51   | )





| |                                     
| | ------------------------------------
| | Recent Accounting
    Pronouncements

In June 2002, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards No. 146, Accounting for Costs
Associated with Exit or Disposal Activities
(SFAS 146). SFAS 146 addresses financial
accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force
(EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs
Incurred in a Restructuring). We were required to adopt
SFAS 146, effective January 1, 2003. SFAS No. 146
will be applied prospectively and will depend on future actions
taken by the Company.

In December 2002, the FASB issued Statement of
Financial Accounting Standards No. 148, Accounting for
Stock-Based Compensation  Transition and
Disclosure  an amendment of FASB Statement
No. 123(SFAS 148). SFAS 148 amends
FASB Statement 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,
this Statement amends the disclosure requirements of
Statement 123 to require prominent disclosures in both
annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect
of the method used on reported results. The Company is required
to adopt the disclosure provisions of SFAS 148, for annual
financial statements for the fiscal year ending 2003 and for
interim financial statements effective April 1, 2003. The
required disclosures under SFAS No. 123, as amended by SFAS
No. 148, are included in the notes to our 2003 consolidated
financial statements.

In April 2003, the FASB issued Statement of
Financial Accounting Standards No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities(SFAS 148). SFAS 148 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 this statement
for new contracts and certain hedging designated instruments
after June 30, 2003 and certain provisions of this
Statement as it relates to Statement 133 Implementation Issues
are effective for fiscal quarters that began prior to
June 15, 2003. The Company does not expect this Statement
to have a material impact on its future consolidated 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 improves the accounting for certain financial
instruments that, under previous guidance, issuers could account
for as equity. This Statement requires that those instruments be
classified as liabilities in statements of financial position.
This Statement is effective for financial instruments entered
into or modified after May 31,

F-15



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##### Table of Contents



NOVADIGM, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

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

In January 2002, the EITF issued EITF Issue
No. 01-14, Income Statement Characterization of
Reimbursement Received For Out-of-Pocket Expenses
Incurred. EITF Issue No. 01-14 requires
reimbursements received for out-of-pocket expenses incurred be
characterized as revenue in the Statement of Operations. Upon,
application, comparative financial statements for prior periods
should be reclassified to conform to the current classification.
The Company adopted the provisions of EITF Issue No. 01-14
effective April 1, 2002, as required. Accordingly, the
Company has reclassified reimbursements for out-of-pocket
expenses in the amount of $427 thousand and $67 thousand
previously recorded in cost of maintenance and services in the
accompanying consolidated financial statement of operations to
maintenance and service revenue for the years ended
March 31, 2002 and 2001, respectively. In fiscal 2003,
reimbursements for out-of-pocket expenses of $211 thousand
were included in maintenance and service revenues. There was no
effect on either the Companys consolidated operating loss
or net loss for fiscal 2002 or 2001.

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
is required to adopt the disclosure requirements in the
Interpretation for financial statements of 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 financial
position or results of operations.

3.     Commitments
and Contingencies

The Company has various leases for its facilities
under non-cancelable operating lease agreements. Rent expense
incurred under these agreements in the fiscal years 2003, 2002
and 2001 was approximately $2.5 million, $2.2 million
and $1.5 million, respectively.

During 1997 and 2001, Novadigm entered into
amendments of the lease for its headquarters. Under the
amendments, Novadigm increased the total leased space and
extended the lease term for its original leased space. Future
minimum commitments under all facility leases are as follows (in
thousands):

|                      |  |   |       | 
|--------------------- |  | - | ----- | 
|Year Ending March 31, |  |  
|                      |  |  
|2004                  |  | $ | 2,223 | 
|2005                  |  |   | 2,009 | 
|2006                  |  |   | 1,787 | 
|2007                  |  |   | 715   | 
|2008                  |  |   | 52    | 
|                      |  |   |       | 
|                      |  | $ | 6,786 | 
|                      |  |   |       | 

On November 10, 2000, the Company and
Marimba, Inc. signed a memorandum of understanding settling
their patent disputes. Although the terms of the settlement are
confidential, it consisted of a cash payment and the signing of
the settlement and patent license agreements. Of the cash
received, approximately $2.2 million was included in other
income for the year ended March 31, 2001. The deferred
amount is being recognized as revenue over the expected period
of utilization of the patent license agreement. For the years

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##### Table of Contents



NOVADIGM, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

ended March 31, 2003 and 2002, approximately
$543 thousand in each fiscal year of this amount has been
recognized in license revenue each year.

In March 2002, the Company 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 the
Company is currently reviewing its banking relationships and
alternatives. At March 31, 2003 and 2002, no amounts were
due and outstanding under this revolving line of credit.

The Companys 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 the Companys Common
Stock and payment of $1.7 million over 9 quarters. As of
March 31, 2003, 141,758 shares of Common Stock had
been issued and payments totaling $1,170 thousand had been made.
The Company will issue 23,626 shares and make a cash payment of
$195 thousand quarterly through December 31, 2003. The
value of shares to be issued and cash to be paid have been
accrued in the accompanying consolidated balance sheet.
Accordingly, $1.3 million and $1.7 million was
included in accrued liabilities as of March 31, 2003 and
2002, respectively, and $1.3 million is reflected as
long-term liability as of March 31, 2002. The fair value of
the acquired software costs is being amortized over the
estimated useful life of the software, which is three years.

In October 2000, the Company announced its
intention to repurchase up to 500,000 of the outstanding shares
of its Common Stock. On August 3, 2001, the Board of
Directors increased the number of shares authorized for
repurchase by an additional 550,000 shares. In September 2001,
the Securities and Exchange Commission issued temporary
regulations easing restrictions on the repurchases of stock by
public companies. The Board of Directors authorized the
repurchase of up to another 250,000 shares after the temporary
regulations were issued. At March 31, 2003, the remaining
authorization for all stock repurchases was approximately 53,700
shares. In May 2003, the Board of Directors increased the number
of shares authorized for repurchase by an additional 500,000
shares.

On July 6, 2001, Beck Systems, Inc. filed a
complaint against Novadigm, Inc. and two of its customers in the
United States District Court for the Northern District of
Illinois, alleging infringement of two patents held by Beck
Systems. The customers have been dismissed from the lawsuit.
Beck Systems alleges that Novadigms manufacture and
marketing of its EDM and Radia products infringes on the Beck
Systems patents. Management believes that the Company has
meritorious defenses and are defending this suit vigorously.
While management believes the outcome of this complaint will not
be unfavorable, any unfavorable outcome of this litigation could
have an adverse impact on the Companys business,
consolidated financial condition and results of operations.

4.     Common
Stock

In July 1995, the Company completed a public
offering on the NASDAQ National Market of 2,875,000 shares
of common stock resulting in net proceeds to the Company of
approximately $32.2 million after offering costs. Since the
public offering and through March 31, 2003, the Company has
expended approximately $11.1 million to repurchase
approximately 2.2 million of its common shares. In July
2000, pursuant to the Alliance Agreement with Hewlett-Packard,
Novadigm issued 940,000 shares of its Common Stock and a
warrant for an additional 250,000 shares (see Note 9).
In October 2001, the Company committed to issue
212,636 shares of common stock in connection with the
acquisition of intellectual property (see Note 2), of which
141,758 shares had been issued by March 31, 2003.

5.     Stock Options
and Stock Purchase Plan

At the Annual Meeting of Stockholders in
September 2000, the Companys stockholders adopted and
approved the 2000 Stock Option Plan (the 2000 Plan)
and terminated the 1992 Stock Option Plan, as

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NOVADIGM, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

amended (the 1992 Plan). The 2000
Plan permits the Company to grant incentive stock options to
employees and officers of the Company and nonstatutory stock
options to eligible employees, officers, directors and
consultants. Incentive stock options are granted at no less than
fair market value at the date of grant based upon the price per
share of Novadigms stock on the NASDAQ National Market.
Nonqualified stock options are granted at no less than 85% of
fair market value at the date of grant. Accordingly, no options
had been granted for less than the fair market value at the date
of grant. Option terms may not exceed ten years and vesting is
determined by the Board of Directors for each individual grant
(generally over four years). A total of 2,692,451 shares of
the Companys Common Stock have been reserved for issuance
under the 2000 Plan. In addition, an annual increase in the
share reserve is added on the first day of each fiscal year of
the Company, beginning April 1, 2001, equal to the lesser
of (i) 750,000 shares, (ii) three percent (3%) of the
total Common Stock outstanding as of the last day of the prior
fiscal year, and (iii) such amount as may be determined by
the Companys Board of Directors. As of March 31,
2003, options to purchase 2,384,758 shares of Common Stock
have been granted pursuant to the 2000 plan, net of
cancellations.

The terms and provisions of the terminated 1992
Plan were essentially the same as the 2000 Plan that replaced
it. A total of 5,200,000 shares of common stock were
reserved for issuance under the 1992 Plan and as of
March 31, 2003 a total of 4,649,000 shares were
granted, net of cancellations.

In October 1999, the Board of Directors adopted
and approved the 1999 Nonstatutory Stock Option Plan (the
1999 Plan) and reserved 500,000 shares of
common stock for issuance under the 1999 Plan. The Board of
Directors authorized and reserved an additional
250,000 shares for issuance under the 1999 Plan in February
2000, again in June 2000 and in August 2001. In November 2001,
the Board of Directors authorized and reserved an additional
100,000 shares for issuance under the 1999 Plan. In April
2003, the Companys Board of Directors authorized and
reserved an additional 2,000,000 shares for issuance under the
1999 Plan. Neither the 1999 Plan nor any of the amendments to
the 1999 Plan were submitted to the Companys stockholders
for approval. The purposes of the 1999 Plan are to attract and
retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to employees,
new officers, directors and consultants of the Company and to
promote the success of the Companys business. Under the
1999 Plan, officers and directors are limited to grants at the
time of initial service. Option terms may not exceed ten years
from the date of grant and the 1999 Plan will continue in effect
until October 25, 2009 unless terminated sooner. As of
March 31, 2003, options to purchase 1,021,083 shares
of Common Stock have been granted pursuant to this plan, net of
cancellations.

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##### Table of Contents



NOVADIGM, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table summarizes the option
activity (in thousands, except per share data):

|                          |  |            |       |                |  |   |       | 
|------------------------- |  | ---------- | ----- | -------------- |  | - | ----- | 
|                          |  | Shares     |       | Weighted      
|                          |  | Underlying |       | Average       
|                          |  | Options    |       | Exercise Price
|                          |  |            |       |               
|Balance at March 31, 2000 |  |            | 3,956 |                |  | $ | 6.63  | 
|Granted                   |  |            | 1,149 |                |  |   | 9.91  | 
|Exercised                 |  |            | (633  | )              |  |   | 4.70  | 
|Canceled                  |  |            | (627  | )              |  |   | 8.31  | 
|                          |  |            |       |                |  |   |       | 
|Balance at March 31, 2001 |  |            | 3,845 |                |  | $ | 7.65  | 
|Granted                   |  |            | 2,217 |                |  |   | 5.74  | 
|Exercised                 |  |            | (273  | )              |  |   | 4.49  | 
|Canceled                  |  |            | (107  | )              |  |   | 10.15 | 
|                          |  |            |       |                |  |   |       | 
|Balance at March 31, 2002 |  |            | 5,682 |                |  | $ | 7.01  | 
|Granted                   |  |            | 465   |                |  |   | 4.44  | 
|Exercised                 |  |            | (112  | )              |  |   | 4.07  | 
|Canceled                  |  |            | (722  | )              |  |   | 8.41  | 
|                          |  |            |       |                |  |   |       | 
|Balance at March 31, 2003 |  |            | 5,313 |                |  | $ | 6.66  | 
|                          |  |            |       |                |  |   |       | 

At March 31, 2003, 3,502,184 options
are vested and exercisable and 586,610 shares of common
stock were reserved for future issuance under these Plans. The
weighted average exercise price of exercisable options at
March 31, 2003 was $6.72 per share.

The following table summarizes the information
above about options outstanding and options exercisable at
March 31, 2003 (in thousands, except per share data):

|                   |  |             |       |                  |  |                  |       |           |  |                  |            |  |  |  |       |  |  |   |       | 
|------------------ |  | ----------- | ----- | ---------------- |  | ---------------- | ----- | --------- |  | ---------------- | ---------- |  |  |  | ----- |  |  | - | ----- | 
|                   |  |             |       |                 
|                   |  | Outstanding |       | Exercisable     
|                   |  |             |       |                 
|                   |  |             |       | Weighted Average |  |                 
|                   |  | Number      |       | Weighted Average |  | Contractual Life |       | Number    |  | Weighted Average
|Option Price Range |  | of Shares   |       | Exercise Price   |  | Remaining        |       | of Shares |  | Exercise Price  
|                   |  |             |       |                  |  |                  |       |           |  |                 
|$1.57-$6.95        |  |             | 2,973 |                  |  | $                | 4.30  |           |  |                  | 6.56 Years |  |  |  | 1,976 |  |  | $ | 4.29  | 
|$6.98-$15.25       |  |             | 2,253 |                  |  |                  | 9.22  |           |  |                  | 7.15 Years |  |  |  | 1,464 |  |  |   | 9.38  | 
|$18.00-$24.63      |  |             | 87    |                  |  |                  | 21.10 |           |  |                  | 7.10 Years |  |  |  | 62    |  |  |   | 21.15 | 
|                   |  |             |       |                  |  |                  |       |           |  |                  |            |  |  |  |       |  |  |   |       | 
|                   |  |             | 5,313 |                  |  | $                | 6.66  |           |  |                  | 6.82 Years |  |  |  | 3,502 |  |  | $ | 6.72  | 
|                   |  |             |       |                  |  |                  |       |           |  |                  |            |  |  |  |       |  |  |   |       | 

The weighted average fair values of options
granted during fiscal 2003, 2002 and 2001 were $3.44, $3.81 and
$9.08, 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 in fiscal 2003, 2002 and 2001: risk-free interest rates
ranged from 2.9% to 4.7%, expected dividend yields of 0%,
expected lives of 5.0 years and expected volatility of
103%, 79% and 136% for 2003, 2002 and 2001, respectively.

On May 17, 1995, the Companys Board of
Directors adopted Novadigms Employee Stock Purchase Plan
(the Purchase Plan), which was approved by the
stockholders at the Companys annual meeting on
November 17, 1995. A total of 1,000,000 shares of the
Companys Common Stock were reserved for issuance under the
Purchase Plan. The Purchase Plan covers substantially all
employees in the United States. The participants purchase
price is the lower of 85% of the closing price on the first
trading day of the six-month trade period or the last trading
day of the period. Approximately 113,000 shares were
purchased by employees during fiscal 2003 and 92,000 shares
were purchased in fiscal 2002 and 2001. At March 31, 2003,
Novadigm has reserved approximately 516,000 shares for
future issuance.

F-19



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##### Table of Contents



NOVADIGM, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

6.     Income
Taxes

The Company accounts for income taxes pursuant to
Statement of Financial Accounting Standards No. 109
(SFAS 109) Accounting for Income Taxes.
SFAS 109 provides for an asset and liability approach to
accounting for income taxes under which deferred income taxes
are provided based upon currently enacted tax laws and rates.

The components of the provision for income taxes
are as follows (in thousands):

|                           |                 |                     |     |      |     |      |    |   |   |   |     |    |     | 
|-------------------------- | --------------- | ------------------- | --- | ---- | --- | ---- | -- | - | - | - | --- | -- | --- | 
|                           |                 |                    
|                           |                 | For the Years Ended
|                           |                 | March 31,          
|                           |                 |                    
|                           |                 | 2003                |     | 2002 |     | 2001
|                           |                 |                     |     |      |     |     
|Current                    |                 |                     |     |      |     |      |    |   |   |   |     |   
|                           | U.S. Federal    |                     | $   | (73  | )   |      | $  |  |   |   | $   | 90 |    
|                           | State and local |                     |     |     |     |      |    |  |   |   |     | 20 |    
|                           |                 |                     |     |      |     |      |    |   |   |   |     |   
|                           |                 | Total current       |     | $    | (73 | )    |    | $ |  |   |     | $  | 110 | 
|                           |                 |                     |     |      |     |      |    |   |   |   |     |   
|Deferred                   |                 |                     |     |      |     |      |    |   |   |   |     |   
|                           | U.S. Federal    |                     |     |     |     |      |    |  |   |   |     |   |    
|                           | State and local |                     |     |     |     |      |    |  |   |   |     |   |    
|                           |                 |                     |     |      |     |      |    |   |   |   |     |   
|                           |                 | Total deferred      |     |      |    |      |    |   |  |   |     |    |    | 
|                           |                 |                     |     |      |     |      |    |   |   |   |     |   
|Foreign                    |                 |                     | 718 |      |     |      | 11 |   |   |   | 123 |   
|                           |                 |                     |     |      |     |      |    |   |   |   |     |   
|Provision for income taxes |                 | $                   | 645 |      |     | $    | 11 |   |   | $ | 233 |   
|                           |                 |                     |     |      |     |      |    |   |   |   |     |   

The components of the net deferred tax asset at
March 31, 2003 and 2002 are as follows (in thousands):

|                       |                                                               |                           |         |        |        |   |         |        |        | 
|---------------------- | ------------------------------------------------------------- | ------------------------- | ------- | ------ | ------ | - | ------- | ------ | ------ | 
|                       |                                                               | 2003                      |         | 2002  
|                       |                                                               |                           |         |       
|Deferred tax assets:   |                                                               |                           |         |        |        |   |         |       
|                       | Net operating loss carryforwards                              |                           | $       | 18,104 |        |   | $       | 11,676 |       
|                       | Reserves and accruals not yet deductible for tax
    purposes |                           |         | 1,125  |        |   |         | 1,576  |       
|                       | Credit carryforwards                                          |                           |         |       |        |   |         | 927    |       
|                       | Amortization of intangible asset                              |                           |         | 11     |        |   |         | 680    |       
|                       | Depreciation                                                  |                           |         | 276    |        |   |         | 432    |       
|                       |                                                               |                           |         |        |        |   |         |       
|                       |                                                               | Total deferred tax assets |         |        | 19,516 |   |         |        | 15,291 | 
|Valuation allowance    |                                                               |                           | (19,516 | )      |        |   | (15,291 | )     
|                       |                                                               |                           |         |        |        |   |         |       
|Net deferred tax asset |                                                               | $                         |        |        |        | $ |        |       
|                       |                                                               |                           |         |        |        |   |         |       

As of March 31, 2003, Novadigm had net
operating loss carryforwards for federal and state income tax
reporting purposes of approximately $42 million as well as
foreign net operating losses of approximately $3.2 million.
These carryforwards expire commencing 2012 through 2023. The
Companys ability to utilize the net operating loss
carryforwards in future years may be limited in some
circumstances, including significant changes in ownership
interests, due to certain provisions of the Internal Revenue
Code of 1986. A full valuation allowance has been recorded by
the Company in the accompanying consolidated financial
statements to offset the deferred tax assets as their future
realizability is uncertain considering the Companys
historical operating results. The Company has not provided
federal income taxes on the undistributed earnings of its
foreign subsidiaries as it is the Companys intention to
permanently reinvest undistributed earnings (approximately
$500 thousand as of March 31, 2003).

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##### Table of Contents



NOVADIGM, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The provision for income taxes for the years
ended March 31, 2003 and 2002 differs from the statutory
U.S. Federal income tax rate due to the following (in
thousands):

|                                                               |                     |      |        |      |  |      |        |    |  |   |        |     | 
|-------------------------------------------------------------- | ------------------- | ---- | ------ | ---- |  | ---- | ------ | -- |  | - | ------ | --- | 
|                                                               |                     | 2003 |        | 2002 |  | 2001
|                                                               |                     |      |        |      |  |     
|(Benefit) provision at U.S. statutory rate                     |                     | $    | (3,879 | )    |  | $    | (2,190 | )  |  | $ | (1,527 | )  
|State income taxes, net of federal benefit                     |                     |      |       |      |  |      | (31    | )  |  |   | 22     |    
|Change in valuation allowance                                  |                     |      | 4,225  |      |  |      | 2,158  |    |  |   | 1,615  |    
|Provision for foreign taxes                                    |                     |      | 718    |      |  |      |       |    |  |   | 123    |    
|Recording deferred tax assets prior to valuation
    allowance |                     |      | (419   | )    |  |      |       |    |  |   |       |    
|Other                                                          |                     |      |       |      |  |      | 74     |    |  |   |       |    
|                                                               |                     |      |        |      |  |      |        |    |  |   |        |    
|                                                               | Total tax provision |      | $      | 645  |  |      | $      | 11 |  |   | $      | 233 | 
|                                                               |                     |      |        |      |  |      |        |    |  |   |        |    

7.     Borrowing
Facility

In March 2002, the Company 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 the Company
is currently reviewing its banking relationships and
alternatives. At March 31, 2003 and 2002, no amounts were
due and outstanding under this revolving line of credit.

8.     Major
Customers

During fiscal years 2003, 2002 and 2001, only one
customer, Electronic Data Systems Corporation (EDS)
accounted for more than 10% of the Companys total
revenues. During fiscal year 2003, EDS accounted for
approximately $11.0 million or approximately 20% of total
revenues. During fiscal 2002, EDS accounted for approximately
$10.0 million, or approximately 16% of total revenues.
During 2001, EDS accounted for $6.1 million, or
approximately 12% of total revenues.

9.     Alliance with
Hewlett-Packard

In June 2000, Novadigm and Hewlett-Packard
entered into a strategic alliance to integrate, market and sell
the Companys software and content management products with
Hewlett-Packards HP OpenView management solutions for the
enterprise and service provider markets. In addition to the
alliance agreement, Novadigm and Hewlett-Packard have integrated
and jointly marketed their products and provide their customers
the opportunity to replace Hewlett-Packards HP OpenView
Desktop Administrator (DTA) products and services
with Novadigms Radia products and services.

As part of the agreement with Hewlett-Packard,
the Company issued 940,000 shares of its common stock to
Hewlett-Packard and a warrant for an additional
250,000 shares of its common stock. Both the shares issued
and the warrant contain restrictions. In addition to the
agreement, and for a fee of $2.5 million, Hewlett-Packard
was provided a one-year, limited license to upgrade certain
existing customers to Novadigms Radia product. The fair
value of the equity issued, less the cash received from
Hewlett-Packard and related transaction costs, or
$16.1 million, was recorded as an intangible asset at
June 30, 2000, and was being amortized over the initial
term of the agreement, two years. The amortization expense for
fiscal 2003, 2002 and 2001 was $3.4 million,
$8.1 million and $6.0 million, respectively. At
March 31, 2003, the net balance of this intangible asset
was $0 (see Note 2) and the warrant was vested and
exercisable at a weighted average exercise price of $20.875. The
agreement automatically renewed for an additional year upon
expiration of the initial term.

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##### Table of Contents



NOVADIGM, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

10.     Related Party
Transactions

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

In July 1996, the Company loaned Robert B.
Anderson, the Companys Executive Vice President, Secretary
and Director, an aggregate amount of $226,450 for the purchase
of shares of the Companys Common Stock. The full recourse
loan was originally due and payable on July 21, 2000, bore
interest at a rate of 6.04% and was secured by shares of the
Companys Common Stock. In July 2001, the maturity date of
the loan was extended until July 21, 2002 with interest at
the rate of 6.04% per annum, and in April 2002, the Company
extended the maturity date until October 21, 2002 with
interest at the rate of 2.88% per annum. In January 1997, the
Company loaned Mr. Anderson $38,000 to pay income taxes.
That loan was extended until January 15, 2002, with
interest at the rate of 5.90% per annum, and in April 2002, the
loan was extended until October 21, 2002, with interest at
the rate of 2.73% per annum. In October 2002, the Company
notified Mr. Anderson that these loans were immediately due
and payable. In November 2002, the Company entered into a
management retention agreement with Mr. Anderson, pursuant
to which the Company 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. The Company is
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 the Companys accompanying financial statements.
In November 2002, Mr. Anderson repaid all amounts owing to
Novadigm, under loans extended to him by the Company.

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 Board
of Directors agreed to extend the due date of the loan until
April 17, 2002, at an interest rate of 4.63% per annum.
During 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.

Mr. Ruiz subsequently repaid portions of the
loans. At March 31, 2003, $835,674 in principal and accrued
interest remained unpaid, all of which became due and payable in
October 2002 (see Note 12).

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##### Table of Contents



NOVADIGM, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

11.     Industry and
Geographic Area Information

The Company markets its 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). The Company licenses its products
outside the United States through wholly-owned subsidiaries and
authorized distributors that act as resellers and service
providers within a geographic segment. The Company ships from
the United States directly to all end-users regardless of their
location and does not sell products directly to its
international subsidiaries. Consulting and training services are
generally supplied by the Companys wholly-owned
subsidiaries and authorized distributors in the geographic
segment. The chief operating decision-maker of the Company
receives and reviews information relating to revenues primarily
by geographic area as disclosed below. Revenue by and total
assets by geographic area for the years ended March 31,
2003, 2002 and 2001 are presented below (in thousands):

|                |      |         |   |        |        |  |   |        |        | 
|--------------- | ---- | ------- | - | ------ | ------ |  | - | ------ | ------ | 
|                |      |         |   | Total 
|                |      | Revenue |   | Assets
|                |      |         |   |       
|March 31, 2003: |      |         |   |        |        |  |   |       
|                | AAA  |         | $ | 26,682 |        |  | $ | 35,793 |       
|                | EMEA |         |   | 28,776 |        |  |   | 15,643 |       
|                |      |         |   |        |        |  |   |       
|                |      | Total   |   | $      | 55,458 |  |   | $      | 51,436 | 
|                |      |         |   |        |        |  |   |       
|March 31, 2002: |      |         |   |        |        |  |   |       
|                | AAA  |         | $ | 34,434 |        |  | $ | 43,095 |       
|                | EMEA |         |   | 28,516 |        |  |   | 17,428 |       
|                |      |         |   |        |        |  |   |       
|                |      | Total   |   | $      | 62,950 |  |   | $      | 60,523 | 
|                |      |         |   |        |        |  |   |       
|March 31, 2001: |      |         |   |        |        |  |   |       
|                | AAA  |         | $ | 27,375 |        |  | $ | 55,177 |       
|                | EMEA |         |   | 23,138 |        |  |   | 11,528 |       
|                |      |         |   |        |        |  |   |       
|                |      | Total   |   | $      | 50,513 |  |   | $      | 66,705 | 
|                |      |         |   |        |        |  |   |       

12.     Subsequent
Events

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 due to certain loans made to him by the Company to
allow Mr. Ruiz to exercise those options.

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 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

F-23



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##### Table of Contents



NOVADIGM, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

loans. In connection with the settlement of this
claim, the Company recorded a charge of $1.1 million in the
fiscal 2003 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.

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 expires on
July 31, 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 the Companys 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 1, 2004.

Options to purchase 4,191,063 shares of
Novadigm 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.

F-24



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##### Table of Contents



NOVADIGM, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

13.     Selected
Quarterly Financial Data (unaudited)

|                                                         |                                                         |                                       |        |          |        |           |        |          |        |          |        |          |        |           |        |          |        |   |        |        |        |   |        |       |        |   |        |       |        |   |        |       |        | 
|-------------------------------------------------------- | ------------------------------------------------------- | ------------------------------------- | ------ | -------- | ------ | --------- | ------ | -------- | ------ | -------- | ------ | -------- | ------ | --------- | ------ | -------- | ------ | - | ------ | ------ | ------ | - | ------ | ----- | ------ | - | ------ | ----- | ------ | - | ------ | ----- | ------ | 
|                                                         |                                                         |                                      
|                                                         |                                                         | Quarter Ended                        
|                                                         |                                                         |                                      
|                                                         |                                                         |                                       |        |         
|                                                         |                                                         | 2003                                  |        | 2002    
|                                                         |                                                         |                                       |        |         
|                                                         |                                                         | Mar. 31,                              |        | Dec. 31, |        | Sept. 30, |        | June 30, |        | Mar. 31, |        | Dec. 31, |        | Sept. 30, |        | June 30,
|                                                         |                                                         | 2003                                  |        | 2002     |        | 2002      |        | 2002     |        | 2002     |        | 2001     |        | 2001      |        | 2001    
|                                                         |                                                         |                                       |        |          |        |           |        |          |        |          |        |          |        |           |        |         
|                                                         |                                                         |                                      
|                                                         |                                                         | (in thousands, except per share data)
|REVENUES:                                                |                                                         |                                       |        |          |        |           |        |          |        |          |        |          |        |           |        |          |        |   |        |        |        |   |        |       |        |   |        |       |        |   |        |      
|                                                         | Licenses                                                |                                       | $      | 9,606    |        |           | $      | 4,607    |        |          | $      | 10,552   |        |           | $      | 4,729    |        |   | $      | 12,365 |        |   | $      | 8,632 |        |   | $      | 9,074 |        |   | $      | 9,087 |       
|                                                         | Maintenance and services                                |                                       |        | 7,020    |        |           |        | 6,653    |        |          |        | 5,961    |        |           |        | 6,330    |        |   |        | 5,143  |        |   |        | 6,615 |        |   |        | 6,185 |        |   |        | 5,849 |       
|                                                         |                                                         |                                       |        |          |        |           |        |          |        |          |        |          |        |           |        |          |        |   |        |        |        |   |        |       |        |   |        |       |        |   |        |      
|                                                         |                                                         | Total revenues                        |        |          | 16,626 |           |        |          | 11,260 |          |        |          | 16,513 |           |        |          | 11,059 |   |        |        | 17,508 |   |        |       | 15,247 |   |        |       | 15,259 |   |        |       | 14,936 | 
|                                                         |                                                         |                                       |        |          |        |           |        |          |        |          |        |          |        |           |        |          |        |   |        |        |        |   |        |       |        |   |        |       |        |   |        |      
|OPERATING EXPENSES:                                      |                                                         |                                       |        |          |        |           |        |          |        |          |        |          |        |           |        |          |        |   |        |        |        |   |        |       |        |   |        |       |        |   |        |      
|                                                         | Cost of licenses  amortization of
    intangible asset |                                       |        | 334      |        |           |        | 334      |        |          |        | 333      |        |           |        | 334      |        |   |        | 335    |        |   |        | 276   |        |   |        |      |        |   |        |      |       
|                                                         | Cost of maintenance and services                        |                                       |        | 3,939    |        |           |        | 3,392    |        |          |        | 3,344    |        |           |        | 3,558    |        |   |        | 3,241  |        |   |        | 2,983 |        |   |        | 2,896 |        |   |        | 2,982 |       
|                                                         | Sales and marketing                                     |                                       |        | 6,419    |        |           |        | 6,533    |        |          |        | 7,132    |        |           |        | 6,314    |        |   |        | 7,288  |        |   |        | 6,856 |        |   |        | 6,796 |        |   |        | 6,569 |       
|                                                         | Research and development                                |                                       |        | 2,456    |        |           |        | 2,411    |        |          |        | 2,587    |        |           |        | 2,595    |        |   |        | 2,775  |        |   |        | 2,527 |        |   |        | 2,538 |        |   |        | 2,583 |       
|                                                         | General and administrative                              |                                       |        | 2,883    |        |           |        | 3,396    |        |          |        | 3,031    |        |           |        | 2,799    |        |   |        | 2,505  |        |   |        | 2,908 |        |   |        | 2,904 |        |   |        | 2,729 |       
|                                                         | Amortization of intangible assets                       |                                       |        |         |        |           |        |         |        |          |        |         |        |           |        | 2,018    |        |   |        | 2,018  |        |   |        | 2,018 |        |   |        | 2,018 |        |   |        | 2,018 |       
|                                                         |                                                         |                                       |        |          |        |           |        |          |        |          |        |          |        |           |        |          |        |   |        |        |        |   |        |       |        |   |        |       |        |   |        |      
|                                                         |                                                         | Total operating expenses              |        |          | 16,031 |           |        |          | 16,066 |          |        |          | 16,427 |           |        |          | 17,618 |   |        |        | 18,162 |   |        |       | 17,568 |   |        |       | 17,152 |   |        |       | 16,881 | 
|                                                         |                                                         |                                       |        |          |        |           |        |          |        |          |        |          |        |           |        |          |        |   |        |        |        |   |        |       |        |   |        |       |        |   |        |      
|Operating income (loss)                                  |                                                         |                                       | 595    |          |        |           | (4,806 | )        |        |          | 86     |          |        |           | (6,559 | )        |        |   | (654   | )      |        |   | (2,321 | )     |        |   | (1,893 | )     |        |   | (1,945 | )    
|Interest income, net                                     |                                                         |                                       | 82     |          |        |           | 79     |          |        |          | 112    |          |        |           | 111    |          |        |   | 134    |        |        |   | 88     |       |        |   | 224    |       |        |   | 329    |      
|Other income (expense), net                              |                                                         |                                       | (384   | )        |        |           | 34     |          |        |          | (109   | )        |        |           | (324   | )        |        |   | (145   | )      |        |   | (131   | )     |        |   | 86     |       |        |   | (30    | )    
|                                                         |                                                         |                                       |        |          |        |           |        |          |        |          |        |          |        |           |        |          |        |   |        |        |        |   |        |       |        |   |        |       |        |   |        |      
|Income (loss) before provision for income taxes          |                                                         |                                       | 293    |          |        |           | (4,693 | )        |        |          | 89     |          |        |           | (6,772 | )        |        |   | (665   | )      |        |   | (2,364 | )     |        |   | (1,583 | )     |        |   | (1,646 | )    
|Provision for income taxes                               |                                                         |                                       | (116   | )        |        |           | 553    |          |        |          | 43     |          |        |           | 165    |          |        |   | 11     |        |        |   |       |       |        |   |       |       |        |   |       |      
|                                                         |                                                         |                                       |        |          |        |           |        |          |        |          |        |          |        |           |        |          |        |   |        |        |        |   |        |       |        |   |        |       |        |   |        |      
|Net income (loss)                                        |                                                         | $                                     | 409    |          |        | $         | (5,246 | )        |        | $        | 46     |          |        | $         | (6,937 | )        |        | $ | (676   | )      |        | $ | (2,364 | )     |        | $ | (1,583 | )     |        | $ | (1,646 | )    
|                                                         |                                                         |                                       |        |          |        |           |        |          |        |          |        |          |        |           |        |          |        |   |        |        |        |   |        |       |        |   |        |       |        |   |        |      
|Net income (loss) per basic share(1)                     |                                                         | $                                     | 0.02   |          |        | $         | (0.27  | )        |        | $        | (0.00  | )        |        | $         | (0.34  | )        |        | $ | (0.03  | )      |        | $ | (0.12  | )     |        | $ | (0.08  | )     |        | $ | (0.08  | )    
|                                                         |                                                         |                                       |        |          |        |           |        |          |        |          |        |          |        |           |        |          |        |   |        |        |        |   |        |       |        |   |        |       |        |   |        |      
|Weighted average common shares
    outstanding  basic   |                                                         |                                       | 19,353 |          |        |           | 19,455 |          |        |          | 19,706 |          |        |           | 20,175 |          |        |   | 20,100 |        |        |   | 19,946 |       |        |   | 19,874 |       |        |   | 19,885 |      
|                                                         |                                                         |                                       |        |          |        |           |        |          |        |          |        |          |        |           |        |          |        |   |        |        |        |   |        |       |        |   |        |       |        |   |        |      
|Net income (loss) per diluted share(1)                   |                                                         | $                                     | 0.02   |          |        | $         | (0.27  | )        |        | $        | (0.00  | )        |        | $         | (0.34  | )        |        | $ | (0.03  | )      |        | $ | (0.12  | )     |        | $ | (0.08  | )     |        | $ | (0.08  | )    
|                                                         |                                                         |                                       |        |          |        |           |        |          |        |          |        |          |        |           |        |          |        |   |        |        |        |   |        |       |        |   |        |       |        |   |        |      
|Weighted average common shares
    outstanding  diluted |                                                         |                                       | 19,361 |          |        |           | 19,455 |          |        |          | 20,230 |          |        |           | 20,175 |          |        |   | 20,100 |        |        |   | 19,946 |       |        |   | 19,874 |       |        |   | 19,885 |      
|                                                         |                                                         |                                       |        |          |        |           |        |          |        |          |        |          |        |           |        |          |        |   |        |        |        |   |        |       |        |   |        |       |        |   |        |      



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|    |                                                                                                                                                                                                                                                       
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Basic and diluted net income (loss) per common
    share is computed independently for each quarter. Therefore, the
    sum of the quarters will not necessarily equal the basic and
    diluted net income (loss) per common share for the full year.

F-25



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##### Table of Contents



NOVADIGM, INC.

Schedule II

VALUATION AND QUALIFYING ACCOUNTS

(in thousands)


|                                |                |              |  |               |  |             |  |               |   |  |  |        |   |  |  |       | 
|------------------------------- | -------------- | ------------ |  | ------------- |  | ----------- |  | ------------- | - |  |  | ------ | - |  |  | ----- | 
|                                |                | Balance at   |  | Charged       |  |             |  |              
|                                |                | Beginning of |  | (credited) to |  | Amounts     |  | Balance at   
|Classification                  |                | Period       |  | Operations*   |  | Written-off |  | End of Period
|                                |                |              |  |               |  |             |  |              
|Allowance for Doubtful Accounts |                |              |  |               |  |             |  |               |   |  |  |        |   |  |  |      
|Year Ended:                     |                |              |  |               |  |             |  |               |   |  |  |        |   |  |  |      
|                                | March 31, 2001 |              |  | 1,752         |  |             |  | 2,153         |   |  |  | (1,517 | ) |  |  | 2,388 | 
|                                | March 31, 2002 |              |  | 2,388         |  |             |  | (142          | ) |  |  | (254   | ) |  |  | 1,992 | 
|                                | March 31, 2003 |              |  | 1,992         |  |             |  | (851          | ) |  |  | (44    | ) |  |  | 1,097 | 



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|  |                                                                                                                             
|- | ----------------------------------------------------------------------------------------------------------------------------
|* | Charged (credited)to operations reflect recoveries of amounts previously written
    off or revisions to previous estimates.

S-1



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##### Table of Contents



EXHIBIT INDEX

| |    |     |  |                                                                                                                                                                        
| | -- | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3  | .1  |  | Certificate of Incorporation of Registrant, as
    amended.(1)                                                                                                         
| | 3  | .2  |  | Bylaws of Registrant, as amended.(1)                                                                                                                                   
| | 10 | .4  |  | 1992 Stock Option Plan, as amended and form of
    Stock Option Agreement.(4)                                                                                         
| | 10 | .5  |  | 1995 Employee Stock Purchase Plan and form of
    Subscription Agreement.(1)                                                                                          
| | 10 | .10 |  | Form of Indemnification Agreement entered into
    between Registrant and its officers and directors.(1)                                                              
| | 10 | .11 |  | Management Retention Agreement dated
    August 17, 1998 by and between the registrant and
    Robert B. Anderson.(5)                                                 
| | 10 | .13 |  | Facility lease dated as of March 14, 1997,
    by and between Crossroad Developers Associates, LLC and the
    Registrant.(2)                                          
| | 10 | .14 |  | Employment Agreement effective as of
    April 1, 1997 by and between the Registrant and Wallace D.
    Ruiz.(2)                                                      
| | 10 | .18 |  | Security Agreement dated April 27, 2000
    between the Registrant and Albion Fitzgerald.(7)                                                                          
| | 10 | .19 |  | Security Agreement dated April 17, 2000
    between the Registrant and Wallace Ruiz.(7)                                                                               
| | 10 | .20 |  | Alliance Agreement dated June 30, 2000
    between the Registrant and Hewlett-Packard Company.(6)                                                                      
| | 10 | .21 |  | Employment Agreement effective as of
    April 16, 2001 by and between the Registrant and Gerald M.
    Labie.(8)                                                     
| | 10 | .22 |  | Promissory Note dated April 27, 2002 between
    the Registrant and Albion Fitzgerald.(8)                                                                             
| | 10 | .23 |  | Promissory Note dated April 17, 2002 between
    the Registrant and Wallace Ruiz.(8)                                                                                  
| | 10 | .24 |  | Second Amendment dated July 1, 2001 to
    Facility lease dated as of March 14, 1997, by and between
    Crossroad Developers Associates, LLC and the Registrant.(8)   
| | 10 | .25 |  | Third Amendment dated February 1, 2002 to
    Facility lease dated as of March 14, 1997, by and between
    Crossroad Developers Associates, LLC and the Registrant.(8)
| | 10 | .26 |  | Promissory Note dated January 15, 2002
    between the Registrant and Robert Anderson.(8)                                                                             
| | 10 | .27 |  | Loan Agreement dated March 12, 2002 between
    the Registrant and Fleet National Bank.(8)                                                                             
| | 10 | .28 |  | 1999 Stock Option Plan.(8)                                                                                                                                            
| | 10 | .29 |  | 2000 Stock Option Plan.(8)                                                                                                                                            
| | 10 | .30 |  | Security Agreement dated October 1, 2001
    between the Registrant and Wallace Ruiz.(8)                                                                              
| | 10 | .31 |  | First Amendment to the Novadigm, Inc. 1999
    Nonstatutory Stock Option Plan.                                                                                        
| | 10 | .32 |  | Retention Agreement effective as of
    November 8, 2002 by and between the Registrant and Robert
    B. Anderson.                                                    
| | 10 | .33 |  | Amended and restated Employment Agreement
    effective April 1, 2003 by and between the Registrant and
    Wallace D. Ruiz.                                          
| | 10 | .34 |  | Settlement Agreement effective May 16, 2003
    by and between the Registrant and Wallace D. Ruiz.                                                                    
| | 21 |     |  | Subsidiaries of the Registrant.                                                                                                                                        
| | 23 | .1  |  | Consent of KPMG, LLP.                                                                                                                                                  
| | 23 | .2  |  | Information Regarding Consent of Arthur Andersen
    LLP                                                                                                               
| | 99 | .1  |  | Certification of the Chief Executive Officer
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                            
| | 99 | .2  |  | Certification of the Chief Financial Officer
    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                            



---



| |   |                                                                                                                                        
| | - | ---------------------------------------------------------------------------------------------------------------------------------------
| |  | This exhibit is a management contract or
    compensatory plan or arrangement required to be filed as an
    exhibit to this Form 10-K.



|    |                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Incorporated by reference to exhibit filed with
    the Registrants Registration Statement on Form S-1
    (Reg. No. 33-92746), as declared effective by the
    Commission on July 13, 1995.
|   
|(2) | Incorporated by reference to exhibit filed with
    the Registrants Annual Report on Form 10-K for the
    fiscal year ended March 31, 1997.                                                 



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##### Table of Contents





|    |                                                                                                                                              
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------
|(3) | Incorporated by reference to exhibit filed with
    the Registrants Annual Report on Form 10-K for the
    fiscal year ended March 31, 1998.
|   
|(4) | Incorporated by reference to exhibit filed with
    the Registrants Registration Statement on Form S-8
    (file No. 333-67877).            
|   
|(5) | Incorporated by reference to exhibit filed with
    the Registrants Annual Report on Form 10-K for the
    fiscal year ended March 31, 1999.
|   
|(6) | Incorporated by reference to exhibit filed with
    the Registrants current report on Form 8-K dated
    July 19, 2000.                     
|   
|(7) | Incorporated by reference to exhibit filed with
    the Registrants Annual Report on Form 10-K for the
    fiscal year ended March 31, 2001.
|   
|(8) | Incorporated by reference to exhibit filed with
    the Registrants Annual Report on Form 10-K for the
    fiscal year ended March 31, 2002.