##### Table of Contents









UNITED STATES SECURITIES AND EXCHANGE
COMMISSION

WASHINGTON, D.C. 20549




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Form 10-K



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|  |                                                                                           
|- | ------------------------------------------------------------------------------------------
|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) 
     OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31,
2002

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., Suite 200,
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

The aggregate market value of the voting stock
held by non-affiliates of the registrant, based upon the closing
price of the Common Stock on May 30, 2002, as reported on
Nasdaq National Market was approximately $99,982,292. 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 May 30, 2002, there were 20,776,738
shares of the registrants Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The registrant has incorporated by reference into
Part III of this Form 10-K portions of its Proxy Statement
for the Annual Meeting of Stockholders, which is scheduled to be
held September 13, 2002.



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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 Financial Data                                                              
|                                                | Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                | Overview                                                                                     
|                                                | Critical Accounting Policies                                                                 
|                                                | 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                      
|                                                | Item 13. Certain Relationships and Related Transactions                                      
|PART IV                                        
|                                                | Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K                     
|SIGNATURES                                     
|SIGNATURES                                     
|CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
|EXHIBIT INDEX                                  
|EXHIBIT 10.21                                  
|EXHIBIT 10.22                                  
|EXHIBIT 10.23                                  
|EXHIBIT 10.24                                  
|EXHIBIT 10.25                                  
|EXHIBIT 10.26                                  
|EXHIBIT 10.27                                  
|EXHIBIT 10.28                                  
|EXHIBIT 10.29                                  
|EXHIBIT 10.30                                  
|EXHIBIT 21                                     
|EXHIBIT 23                                     
|EXHIBIT 99.1                                   



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TABLE OF CONTENTS

|           |  |                                                                                           |    |      |    | 
|---------- |  | ----------------------------------------------------------------------------------------- | -- | ---- | -- | 
|           |  |                                                                                           |    | Page
|           |  |                                                                                           |    |     
|PART I    
|Item 1.    |  | Business                                                                                  |    |      | 2  | 
|Item 2.    |  | Properties                                                                                |    |      | 12 | 
|Item 3.    |  | Legal Proceedings                                                                         |    |      | 12 | 
|Item 4.    |  | Submission of Matters to a Vote of Securities
    Holders                                 |    |      | 12 | 
|PART II   
|Item 5.    |  | Market for the Registrants Common Stock and
    Related Stockholder Matters              |    |      | 13 | 
|Item 6.    |  | Selected Financial Data                                                                   |    |      | 14 | 
|Item 7.    |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |    |      | 16 | 
|Item 7A.   |  | Quantitative and Qualitative Disclosures about
    Market Risk                            |    |      | 29 | 
|Item 8.    |  | Financial Statements and Supplementary Data                                               |    |      | 29 | 
|Item 9.    |  | Changes in and Disagreements with Accountants on
    Accounting and Financial Disclosure  |    |      | 29 | 
|PART III  
|Item 10.   |  | Directors and Executive Officers of the Registrant                                        |    |      | 30 | 
|Item 11.   |  | Executive Compensation                                                                    |    |      | 30 | 
|Item 12.   |  | Security Ownership of Certain Beneficial Owners
    and Management                        |    |      | 30 | 
|Item 13.   |  | Certain Relationships and Related Transactions                                            |    |      | 30 | 
|PART IV   
|Item 14.   |  | Exhibits, Financial Statement Schedules, and
    Reports on Form 8-K                      |    |      | 31 | 
|SIGNATURES |  |                                                                                           | 33 |     

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 those of Novadigm, Inc.

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Cautionary Note Regarding Forward-Looking
Statements

Because we want to provide you with more
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. 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 7.
Managements Discussion and Analysis of Financial Condition
and Results of Operations  Risk Factors for a
description of these and other risks, uncertainties and factors.

You should not place undue reliance on any
forward-looking statements. We undertake no obligation to
publicly update or revise any forward-looking statements,
whether as a result of new information, future events, changed
circumstances or any other reason after the date of this 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
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations  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 and market software that automates
configuration and change management of digital assets 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 adaptive management solutions enable
enterprises to manage the discovery, inventory, packaging,
deployment, configuration, repair, update and removal of digital
assets  software and content  on computing
devices such as servers, desktops, laptops, PDAs, automated
teller machines, point-of-sale terminals and Internet kiosks.
Our suite of integrated products, built with our proprietary
e-wrap technology, work seamlessly together as the only
end-to-end solution that can efficiently, reliably and scalably
manage the full range of todays software and content,
running on a wide range of computing devices, personalized for
one individual or millions of users, across virtually any
network.

Our products utilize our e-wrap technology with
its unique desired-state process to automate the deployment and
management of software and content across complex
environments  ensuring that the right software
components are always available to the right users at the right
time, without requiring administrative or user intervention.
E-wrap technologys patented fractional differencing
technique deploys only the minimal software and content items
necessary for updates and corrections, minimizing network impact
and speeding delivery. In addition, e-wrap technology utilizes a
dynamic, policy-driven management approach, which leverages
enterprise directory services and databases to govern the
provisioning and ongoing management of software and content.

With our e-wrap technology solutions,
IT professionals, software vendors and service providers
can manage digital assets with policy-based capabilities that
enable adaptive configuration and change manage-

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ment of individual applications or entire
portfolios of software and content throughout the extended
supply chain of publishers, service providers,
enterprise IT and users or subscribers.


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 Lockheed Martin Corporation in
aerospace, 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. Navy and Marine Corps in
government, Kindred Healthcare, Inc. in healthcare, The
Prudential Insurance Company of America in insurance,
Owens-Illinois, Inc. in manufacturing, Reuters Limited in media,
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.

Background

Our target market includes large and medium-size
enterprises, government 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.

Our target prospects in this market face the
challenges of offering software-enabled services, while reducing
costs and maintaining high availability and reliability of
digital assets on thousands to hundreds-of-thousands of
computing devices, across heterogeneous environments and
networks.

We are involved in markets that are variously
called software management, device management, desktop and
server management, asset management and configuration and change
management. Gartner Dataquest estimates the core markets of
desktop management, software distribution, help desk, problem
management, asset management and change management will grow
from $2.5B in 2001 to $4.7B in 2005, almost a 17% CAGR. We also
serve growth markets where change and configuration management
provides significant value, including automated teller machines,
point-of-sale, Internet kiosks, telecom and other specialty
devices.

Demand for our solutions is fueled by two major
information technology trends:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 management
    evolution.The ongoing evolution and
    adoption of information technologies within the enterprise such
    as new operating system platforms, directory technologies,
    business applications and intranets, present significant
    management challenges. For example, migrations to the Windows
    XP platform includes a complete and continuous rollout of
    operating system and service packs, systems management and
    application packaging tools, directory server software, as well
    as new applications and upgrades from software providers.

The Novadigm Solution

We provide unique configuration and change
management solutions that automatically adapt to meet the
demands of rapidly changing and increasingly complex
IT infrastructures. With our automated, adaptive management
solutions IT organizations and service providers can offer
a range of services from personalized software for individual
end users to configuring software-enabled services on web
servers handling millions of personalized transactions. The
following highlights the distinctive capabilities of
Novadigms solutions:



| |   |                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Automation of the packaging, configuration
    analysis, discovery, targeting, deployment, updating, repair and
    removal of the full range of todays software and content,
    including shrink-wrapped and custom-

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| |   |                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | built applications written in any language or
    composed of any type of distributed component, virus protection
    files, operating systems, registry keys, icons, embedded links,
    digital information, graphics, and full motion video                          
|
| |  | Across virtually any kind of network using a
    variety of protocols, including existing enterprise LANs, WANs,
    VANs, intranets, extranets and the Internet, as well as wireless
    networks and utilizing a variety of authentication and security
    techniques
|
| |  | To the widest range of enterprise computing
    devices, including PCs, UNIX workstations, Apple
    Macintoshs and mobile devices; file, application and Web
    servers; automated teller machines, point-of-sale terminals and
    Internet kiosks.                 

We believe that our solutions meet the
requirements of todays enterprises and service providers
for solutions that automate the end-to-end lifecycle management
process for software, content and other digital assets across
large-scale networks. In addition, we believe that our solutions
meet the requirements of enterprises transforming to new
business models such as providing financial services to
customers over the Web, or migrating corporate
IT infrastructures to new operating platforms such as
Microsoft Windows XP.

We believe that our customer implementations have
proven our solutions to be cost-effective, scalable to hundreds
of thousands of users, able to reliably deploy software and
content, and highly adaptable to each customers
applications, user audiences and computing platforms. We also
believe that our policy-driven solutions support the dynamic and
rapidly changing requirements of the customers business.

Technology

Our products  Enterprise Desktop
Manager (EDM) and the Radia® suite of
products  share a common e-wrap technology
architecture and desired-state automation approach that
automatically determines which software and content components
are required for each individual user at the time of a
configuration update.

The following are key attributes of our e-wrap
technology:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Desired-State
    Automation.Our desired-state approach
    discovers the actual state of each device and/or
    users software, configuration and content and compares
    this in real-time with its desired state. If there
    is a difference between the two, our differencing technology
    automatically determines the precise component-level changes
    that are required and sends only those changes to the
    users computer. Using this approach, we believe that
    components are deployed and updated significantly faster, more
    efficiently, and with higher levels of reliability, adaptability
    and scalability than conventional non-desired-state products.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | Adaptive Configuration
    Management.Our e-wrap technology can
    automatically configure software packages and content for highly
    personalized user environments and install them as dictated by
    administrative policies or user preferences. As program
    versions, user environments and preferences change, the affected
    users actual state is automatically differenced and
    reconfigured to correspond to the desired state of operation,
    thus eliminating the need for manual user or administrator
    involvement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | Policy-Based
    Management.Our products use
    policy-based access models to allow IT administrators to
    efficiently and concisely define entitlements controlling the
    deployment of software and content to authorized users or
    subscribers. For example, within the enterprise, an
    IT administrator may implement a policy permitting access
    to certain financial databases only to a selected workgroup
    within an organizations finance department. In an
    e-commerce environment, subscribers would be automatically
    provided with software and content based on their entitlement in
    the customer database, without any additional activity required
    by an administrator. Subsequent changes to policies and
    entitlements cause software and content to be automatically
    installed, changed or de-installed for all affected users, again
    without any administrator intervention. This seamless
    integration between changing entitlements and automated
    provisioning is essential to meeting the personalized needs of
    users and subscribers in large-scale enterprise and e-business
    environments.

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Bandwidth Optimization.E-wrap technology optimizes the use of
    network resources through comprehensive bandwidth management
    capabilities, which include multicasting, bandwidth throttling,
    configuration and component differencing, compression, and
    distributed caching. Our differencing processes calculate the
    precise changes needed to bring the software or content into its
    desired-state, assuring a minimum of network traffic and
    wait-time for bandwidth-constrained networks.                          
|
| | Rapid Deployment and Ease of
    Use.In addition to the shared
    architecture of our product suite, the flexible nature of its
    distributed object technology, and the ease of defining desired
    state, e-wrap technology includes a variety of capabilities to
    ensure rapid deployment of complete software and content
    management solutions. Once installed, our solutions can be
    operated by a very small team of administrators to rapidly
    deploy and automatically manage large numbers of software and
    content.

We believe that our e-wrap technology solutions
establish a new standard for adaptive configuration and change
management, and provide its customers with the most effective
means for managing the next generation of e-business
applications and digital content, over both enterprise networks
and the Internet. Our unique technology completely automates the
deployment and ongoing change management requirements of
distributed software and content, ensures the necessary
scalability to support the high and growing numbers of computing
devices, and significantly reduces costs by eliminating manual
installation and administration. We believe that these
advancements result in faster deployments, lower total cost of
ownership (TCO), and higher levels of personalization,
reliability, scalability, and auditability, which are key
competitive factors for enterprises today and in the future.

Architecture

Our e-wrap technology provides the entire
Novadigm product suite with a shared set of foundation
components, which are installed in varying combinations in
customer and provider networks. These components consist of:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Management Servers.Server-based components containing a
    distributed multi-domain object repository that synchronizes
    distributed objects  application components, computer
    configurations, policy relationships  across the
    network. Multiple management servers may be deployed in
    n-tier configurations across enterprise and Internet
    networks as desired to support large numbers of users and large
    volumes of software and content, to optimize limited network
    connections, and to allow for distributed administration.
|
| | Managed Clients.Lightweight components resident on
    managed computing devices that communicate with our management
    servers to identify, obtain, install, repair and delete software
    or content. Operating as an extension of standard PC or Internet
    operating environments, the managed client automatically
    discovers current managed computer contents and synchronizes
    application versions with new or updated configurations residing
    on the management server.                                                                   
|
| | Administrators.Components resident on the
    administrators desktop used to manage the
    object-repository and the engine. The administrator component
    contains a variety of graphical tools and utility programs used
    by customer administrators and technical staff to publish
    software and content components, specify policies and
    entitlements for users and control the overall operation of the
    management servers and managed client components.                                                                                   

These foundation components can be distributed
across a variety of computing platforms:

|                   |  |                                                                                                                      
|------------------ |  | ---------------------------------------------------------------------------------------------------------------------
|Component          |  | Platforms                                                                                                            
|                   |  |                                                                                                                      
|Management Servers |  | Windows XP, 2000, and NT, AIX, HP-UX, MVS,
    Solaris, Novell, OS/2, Linux                                          
|Managed Clients    |  | Windows (XP, 2000, NT, 98, 95, 3.1), OS/2, AIX,
    HP-UX, Solaris, Novell, Macintosh, NCR/ GIS, SGI Irix, SCO, Linux

Communication between components is supported
through a variety of protocols, including TCP/IP, HTTP, SNA,
IPX, and NetBIOS.

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Integration

Another key capability of our e-wrap technology
is that it can be easily extended by us, our customers and
partners, without programming, to manage any customer-defined or
industry-standard software component (including C, C++, Visual
Basic, Java, ActiveX, CORBA, Component object model, and
JavaScript) or content format (such as registry directory,
Hypertext mark-up language, extensible mark-up language,
multi-media, full motion video and animation). The benefit of
this approach is that it enables us and our customers and
partners to quickly deploy emerging technologies and manage
rapidly proliferating kinds of software and content across
diverse and evolving platforms.

Specialized management extensions and adapters
offer our product integration capability with third party
products without requiring special application programming
interfaces or third party vendor coding. We currently provide a
variety of management extensions and adapters including:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Network/Systems Management
    Frameworks.Our software and content
    management capabilities are integrated directly with the event,
    security and performance management environments of
    Hewlett-Packard Companys (Hewlett-Packard) HP
    OpenView, Microsoft Corporations (Microsoft)
    Microsoft Operations Management (MOM), International
    Business Machines Corporation (IBM)/ Tivoli Systems
    Tivoli Management Framework and the Tivoli Enterprise Console
    and Computer Associates International, Inc.s
    (Computer Associates) CA Unicenter.           
|
| | Security and Policy/
    Entitlement.Our policy management
    environment integrates with lightweight directory access
    protocol (LDAP) based directory servers, such as
    Microsoft Active Directory, Novell Inc.s
    (Novell) NDS and other vendor LDAP servers, as well
    as with Microsoft NT Domain Manager, Computer Associates ACF2
    and Top Secret, and Oracle Corporation (Oracle),
    Sybase, Inc. (Sybase) and Microsoft SQL-based
    databases, to enable single source points of control for user
    authentication, access policies and subscriber entitlement.
|
| | Problem/ Help Desk
    Management.Our dynamic change and
    configuration management facilities are integrated with problem
    management environments such as Peregrine Systems, Inc.s
    Remedy AR System to integrate problem tracking and inventory
    discovery data.                                                                                                                                                                                                                                                                                                                      
|
| | Custom-Built Application
    Management.Configuration management
    models for custom software developed in-house using Rational
    Software Corporations ClearCase and Merant plc.s
    PVCS are integrated directly into the distribution process,
    enabling changes in all phases of application development to be
    synchronized with deployment across pilot groups and throughout
    the entire enterprise once development is complete.                                                                                                                                             
|
| | Application Deployment Packaging and Component
    Analysis.Our extensive packaging
    capabilities encompass native UNIX and Windows packages in
    addition to integrating with packaging tools such as Wise
    Solutions, Inc.s Package Studio. Component analysis can be
    performed on Radia - and 3rd party-produced packages to detect,
    analyze and avoid potential conflicts among Radia-managed
    applications before they are deployed throughout the enterprise.                                                                                                              
|
| | OS Imaging and Migration.Our comprehensive configuration and
    change management capabilities include large-scale automation of
    the OS migration process and rapid provisioning of servers,
    desktops, laptops and other devices through seamless integration
    with leading OS imaging and personality migration tools.                                                                                                                                                                                                                                                                  

Products

Our products, built upon our core e-wrap
technology foundation, provide the extended enterprise with an
integrated configuration and change management solution that
covers the extended enterprise software and content management
needs such as:



| |   |                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------
| |  | Inventory of target configurations and
    pre-deployment impact analysis.                            
|
| |  | Package MSI (Microsoft Windows
    Installer) and non-MSI applications (e.g. UNIX
    applications).

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| |   |                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Deploy software and content across enterprise
    networks.                                                                                                                                           
|
| |  | Manage software and content and continuously
    configure desktop, server, mobile and remote devices 
    automatically.                                                                            
|
| |  | Distribute shrink-wrap software packages over the
    Web and enable self-service web servers to install, update and
    maintain software as a service subscriptions.                              
|
| |  | Embed just-in-time management into new extranet
    and commerce-based services, allowing services to be configured
    in real-time and to synchronize components with the latest
    system updates.

Our core adaptive management
applications  the Radia Application Manager, Radia
Software Manager, Radia Inventory Manager and Enterprise Desktop
Manager  are available individually, with a variety
of optional add-on components, or combined in solution suites
for server management, desktop management, mobile management and
e-commerce terminal management. We believe our solutions address
the unique configuration and change management requirements of
desktops, laptops, servers, handheld and specialty devices for
the entire extended enterprise.

Radia Application
Manager A change and
configuration management tool that enables enterprise IT
organizations and service providers to deploy self-managing
software to employees, affiliates, partners and customers over
wired and wireless networks without user or administrator
intervention. Administrators control deployments, updates,
repairs and removals through policy-based entitlements.

Radia Software
Manager A change and
configuration management tool that enables enterprise IT
organizations and service providers to offer self-service
software and content management over wired and wireless
networks. Administrators control access to software and content
through policy-based entitlements, while users can download,
update, and repair software and content through a self-service
Web-based catalog.

Radia Inventory
Manager A policy-driven,
digital asset discovery and reporting tool that automatically
gathers information about software and hardware configurations
for computing devices anywhere in the extended enterprise and
consolidates the results into Web-based reports.

Enterprise Desktop
Manager A change and
configuration management tool that enables IT organizations to
centrally manage infrastructure, productivity and application
software and content within enterprise WAN and LAN networks and
across dialup/remote connections.

During fiscal 2002 we released eleven new or
enhanced Radia product components. At the end of fiscal 2002 the
Radia product family consisted of a total of twenty-two product
components. We expect to continue to release new and enhanced
Radia product components going forward.

Our future success will depend in large part on
our ability to develop and introduce new products that keep pace
with technological developments, achieve market acceptance and
respond to constantly evolving customer requirements. Any
failure by us to anticipate or respond adequately to
technological developments and customer requirements, or any
significant delays in product development or introduction, could
result in a loss of competitiveness and could materially and
adversely affect our operating results. There can be no
assurance that any of the new products we plan to introduce will
in fact be completed, or completed on time, or ultimately
brought to market, or if brought to market, gain market
acceptance.

Customers and Applications

Our principal customers include enterprises and
organizations with widely deployed and heterogeneous networks.
As of March 31, 2002, our products had been licensed
directly by us or through distributors to more than 460
customers worldwide.

Our products manage a broad range of software and
content for its customers, including business-critical
applications such as enterprise resource planning (ERP) software
from SAP AG, Oracle, and PeopleSoft, Inc. and sales force
automation software from companies such as Siebel Systems, Inc.;
digital content found on new e-commerce terminals such as
automated teller machines, Internet kiosks and point-of-sale
terminals including full motion video and animation; e-business/
e-commerce applications from BroadVision, Inc. and

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Commerce One; personal productivity tools,
browsers, virus checkers and utilities such as those from
Microsoft, Netscape Communications Corp., Lotus Development
Corporation, Network Associates, Inc. and Symantec Corporation;
and just-in-time applications including applets, supply chain
systems, and e-commerce sales interfaces for Web-based
consumers. Our customers also use our products to facilitate
upgrades of operating systems and/or migrations to new operating
systems such as Microsoft Windows XP, as well as to deploy
patches to help ensure existing software is virus inoculated.


During 2002 and 2001, one customer, Electronic
Data Systems Corporation (EDS), accounted for
approximately 16% and 12%, respectively, of our total revenues.
During 2000, one customer, Amdahl Corporation
(Amdahl), accounted for approximately 14% of total
revenues.

The Novadigm Strategy

Our objective is to expand our position as a
leading provider of change and configuration management
solutions for the extended enterprise. Key components of our
strategy include:



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Maintaining Technology Leadership.We believe that our unique e-wrap
    technology with desired-state automation and patented fractional
    differencing technologies together with its integrated product
    set and broad platform coverage distinguish its solutions from
    those of other vendors. We will continue to develop enhancements
    to existing products as well as new products that are responsive
    to the configuration and change management needs of the
    marketplace, thereby extending our coverage, market reach and
    business opportunities.
|
| | Increasing Market Share.Our current customer base is comprised
    of over 460 public and private sector customers around the
    world. Our strategy is to continue to increase our customer base
    and market share by exploiting our competitive technology
    strengths, continuing to expand our sales and marketing channels
    in the mid-sized and large enterprise marketplace, and
    developing additional selling channels and partnerships where
    appropriate.                                                                                               
|
| | Expanding Customer Relationships.We believe that our value in meeting
    the needs of its growing customer base, together with the broad
    range of adaptive configuration and change management
    capabilities in its integrated product line, positions it to be
    a provider of strategic solutions to its customers as they
    evolve and extend their enterprise IT infrastructures. Our
    strategy is to expand our relationships and licenses with
    existing customers by providing additional technology solutions
    which meet their needs.               

Sales, Marketing and Channels

We market our software and services through our
direct sales force and indirect channel partners worldwide. In
the U.S., we manage sales activities from our offices in Mahwah,
New Jersey, Emeryville, California, and Chicago, Illinois; and
in Europe from our offices located near Paris, France, London,
England, and Munich, Germany. For fiscal 2002, revenues from
direct and indirect sales accounted for 92% and 8%,
respectively, of total revenues, and revenues from North America
and international sales accounted for 55% and 45%, respectively,
of total revenues.

Our marketing activities are designed to build
market awareness, generate qualified leads, and to 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 that 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 which 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 who offer our customers complementary 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.

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We participate in the beta programs and
partnering programs of the industrys market leaders,
including Hewlett-Packard, Microsoft, Silicon Graphics, Inc.,
Compaq Computer Corporation and IBM. We intend to continue to
expand these technology, marketing and selling relationships.

In June 2000, we entered into a strategic
alliance 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. As part of the
strategic alliance Hewlett-Packard became an equity owner of us
acquiring 940,000 shares of our common stock and a warrant for
an additional 250,000 shares of common stock. In addition to the
alliance agreement, we have integrated and jointly market our
products with Hewlett-Packard and provide customers the
opportunity to replace Hewlett-Packards desktop and server
inventory, distribution and application management products with
our Radia products and services (See Part I,
Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations).

Customer Service and Support

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

Customer Support and Product
Maintenance.Customers who subscribe
to our fee-based maintenance program have access to our
technical support facilities 24 hours a day, seven days a
week via our Internet site, electronic mail and facsimile lines
and are entitled to receive software updates, maintenance
releases and documentation for an annual maintenance fee. Our
technical support center located in North America provides
routine support 8 a.m.  8 p.m. (EST)
Monday through Friday (holidays excepted) and emergency support
24 hours a day, seven days a week to customers worldwide.
Our technical support center located in Europe provides routine
support 8 a.m.  8 p.m. (CET).

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 the
world are available to consult with customers on project
planning and systems implementation and integration. Consulting
services are typically billed on a time and materials basis.

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.

Revenues from maintenance and services accounted
for 37% of fiscal 2002 total revenues.

Product Development

Since our inception, we have focused on, and made
substantial investments in, product development. In fiscal 2002,
our total research and development expenses were approximately
$10.4 million. To date, we have not capitalized any
software development costs.

We anticipate that we will continue to commit
substantial resources to research and development, believing
that its future success depends in large part on its ability to
maintain and enhance the functionality of its 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 acquire technology and/or products from third parties or
consultants when considerations of time or cost dictate.

If the next release of the Radia products, or any
potential new products and enhancements do not achieve market
acceptance, or if for technological or other reasons we are
unable to develop, introduce and sell our

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products in a timely manner, our business,
financial condition and results of operations will be materially
and adversely affected.


Competition

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



| |                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Framework SD
    Vendors.These competitors include IBM
    (Tivoli Software) and Computer Associates who offer software
    distribution tools as part of their enterprise frameworks. We
    compete against the specific software distribution tools offered
    with their frameworks.
|
| | Desktop Management Suite Vendors.These competitors include vendors such
    as Microsoft and Intel Corporation, who offer software
    distribution tools as part of a desktop administration package.                                                                                   
|
| | Software Distribution Vendors.These competitors include companies
    such as Altiris, Inc., Marimba, Inc. and ON Technology
    Corporation in the desktop and server market segment; and, in
    the mobile market segment, Xcellenet, Inc.                                            

We believe that we compete effectively with all
of these vendors in our target market on the basis of our proven
end-to-end solution and broader product line for software and
content management. Additionally, we believe our other
technology and business differentiators include: comprehensive
features/ functions; patented technologies including fractional
differencing, desired-state automation and adaptive
configuration management; broader platform coverage and support
for industry standards; higher product implementation success
rates; extensive implementation and support services; and
broader sales channels. We differentiate our products in the
market based on customer results that have proven our solutions
are capable of end-to-end deployment and management of software
and content faster, across larger and more diverse environments,
with higher reliability and greater adaptability than other
similar products.

However, there can be no assurance that we will
be able to continue to compete effectively in the software
management market or that our profitability or financial
performance will not be adversely affected by increased
competition. Many of our competitors have longer operating
histories, and many have significantly greater financial,
technical, sales, marketing and other resources, as well as
greater name recognition and larger customer installed bases.
Moreover, there can be no assurance that either existing or new
competitors will not develop products that are superior to our
products or other technologies offering significant advantages
over our technology, which could have a material adverse effect
on our business, financial condition and results of operation.

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 its desired-state management process used in our
software and content management products. There can be no
assurance that we will develop additional proprietary
technologies that are patentable, that any issued patent will
provide us with any competitive advantages or will not be
challenged by third parties, or that the patents of others will
not have an adverse effect on our ability to do business.
Moreover, there can be no assurance that protective measures
taken by us will prevent misappropriation of our proprietary
technology, and such measures may not preclude competitors from
developing products with features similar to those of our
products. Furthermore, effective copyright and trade secret
protection may be limited or unavailable under the laws of
certain foreign jurisdictions. 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.

Although we believe that our products and
trademarks do not infringe upon the proprietary rights of third
parties, there can be no assurance that third parties will not
assert infringement claims against us with respect to current or
future products. Any such claims, whether with or without merit,
could be time-consuming, result in costly litigation, cause
product shipment delays or require us to enter into royalty or
license

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agreements, provided such agreements were
available on reasonable terms or at all. (See Part I,
Item 3. Legal Proceedings).


Defense of any lawsuit or failure to obtain any
required license could have a material, adverse effect on our
business, operating results and financial condition. 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.

Employees

As of March 31, 2002, we had a total of 302
full-time employees, including 89 in customer support and
services, 82 in product development, 84 in sales and marketing
and 47 in general and administration. A total of
239 employees are based in the United States and
63 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.

Executive Officers of the Registrant

Our executive officers are as follows:

|                     |  |     |    |          |  |                                                           |  |  |      | 
|-------------------- |  | --- | -- | -------- |  | --------------------------------------------------------- |  |  | ---- | 
|Name                 |  | Age |    | Position |  | Officer since                                            
|                     |  |     |    |          |  |                                                          
|Albion J. Fitzgerald |  |     | 54 |          |  | Chairman of the Board and Chief Executive Officer         |  |  | 1992 | 
|Gerald M. Labie      |  |     | 58 |          |  | President, Chief Operating Officer and Director           |  |  | 2001 | 
|Robert B. Anderson   |  |     | 47 |          |  | Executive Vice President, Secretary and Director          |  |  | 1992 | 
|Joseph J. Fitzgerald |  |     | 40 |          |  | Vice President, Chief Technology Officer                  |  |  | 1992 | 
|Wallace D. Ruiz      |  |     | 51 |          |  | Vice President, Treasurer and Chief Financial
    Officer |  |  | 1995 | 

Albion J. Fitzgeraldco-founded Novadigm in February 1992
and has served as Chairman since that time. He has also been the
Chief Executive Officer since 1995. Mr. Fitzgerald has
previously served as Chief Technology Officer and President. In
May 1990, Mr. Fitzgerald founded Fitzgerald Associates,
Novadigms predecessor, and served as the chief architect
in the development of the desired-state management and
fractional differencing technologies that are the basis for all
Novadigm products.

Gerald M. Labiejoined Novadigm in April 2001 as
President and Chief Operating Officer. In September 2001,
Mr. Labie became a Director. From 2000 until joining
Novadigm, Mr. Labie was a partner with Core Strategies,
Inc., a market development firm serving IT organizations. From
1997 to the time he joined Core Strategies, Mr. Labie was
employed at Tech Data Corporation, a worldwide provider of IT
products and services. Mr. Labie initially served as
President and Managing Director of Tech Datas European
Operations and later as Senior Vice President of Marketing.

Robert B. Andersonjoined Novadigm in June 1992 as Vice
President, Chief Financial Officer, Secretary and as a Director.
He currently serves as Executive Vice President of European
Operations, Secretary and as a Director.

Joseph J. Fitzgeraldco-founded Novadigm in February 1992.
Since that time he has served as Director of Development, Vice
President of Development and as of May 2001 as Chief Technology
Officer. Mr. Fitzgerald is the brother of Albion Fitzgerald.

Wallace D. Ruizjoined Novadigm in May 1995 as Vice
President, Treasurer and Chief Financial Officer. Mr. Ruiz
is a certified public accountant. Mr. Ruiz is the
brother-in-law of Albion Fitzgerald.

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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, Chicago, Illinois and Emeryville,
California. We occupy approximately 65,563 square feet at
our Mahwah facilities, principally for product development,
customer training and support, east coast sales and technical
support and general administration; approximately
6,830 square feet at our Emeryville facility principally
for marketing and west coast sales and technical support; and
approximately 3,137 square feet at our Chicago facility
principally for midwest sales and technical support. Our
European headquarters is located outside of Paris, France, where
we conduct our Europe, Middle East and Africa (EMEA)
operations. Our leased facility in France is comprised of
approximately 8,730 square feet and is used principally for
training and telephone support of our European customers, sales
and technical support of our French customers and administrative
support to our European operations. We also have leased sales
and technical support offices near London, England
(approximately 3,200 square feet) and near Munich, Germany
(approximately 3,730 square feet). 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. Beck
Systems alleges that our infringement relates to the manufacture
and marketing of our EDM and Radia products. Beck Systems seeks
an injunction and damages. We intend to defend this suit
vigorously. However, due to the inherent uncertainties of
litigation, we cannot accurately predict the ultimate outcome of
this litigation, particularly in cases such as this where
sophisticated factual issues must be assessed and complex
technical issues must be decided. Any unfavorable outcome of
this litigation could have a material adverse impact on our
business, financial condition and results of operations.

On December 4, 2001, we announced we were
required to pay an arbitration award arising out of a dispute
related to an employment agreement between us and a former
executive. Subsequently we settled the dispute for a total of
$1.1 million (including reimbursement of fees) and recorded
such amount as a one-time charge to our results of operations in
the quarter ended December 31, 2001.




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, 2002.

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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 Nasdaq symbol NVDM. The
following table sets forth, for the periods indicated, the high
and low sales prices for our common stock as reported by Nasdaq:

|                                     |                |      |   |       |  |  |   |       | 
|------------------------------------ | -------------- | ---- | - | ----- |  |  | - | ----- | 
|                                     |                | High |   | Low  
|                                     |                |      |   |      
|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  | 
|Fiscal Year Ended March 31,
    2001 |                |      |   |       |  |  |   |      
|                                    
|                                     | First Quarter  |      | $ | 20.88 |  |  | $ | 10.00 | 
|                                     | Second Quarter |      |   | 23.38 |  |  |   | 9.44  | 
|                                     | Third Quarter  |      |   | 14.00 |  |  |   | 5.13  | 
|                                     | Fourth Quarter |      |   | 9.19  |  |  |   | 4.16  | 

As of May 30, 2002, the last reported sale
price of our common stock was $7.10 per share and there were
approximately 95 holders of record of our common stock. We
believe there are approximately 3,900 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.

The following table provides information as of
March 31, 2002 related to our equity compensation plans in
effect at that time:

|                                                               |       |                            |           |                      |  |                      |       |      |  |  |           |           | 
|-------------------------------------------------------------- | ----- | -------------------------- | --------- | -------------------- |  | -------------------- | ----- | ---- |  |  | --------- | --------- | 
|                                                               |       |                            |           |                      |  | Number of Securities
|                                                               |       | Number of Securities       |           | Weighted-average     |  | Remaining Available 
|                                                               |       | to be issued Upon Exercise |           | Exercise Price of    |  | for Future Issuance 
|                                                               |       | of Outstanding Options,    |           | Outstanding Options, |  | Under Equity        
|Plan Category                                                  |       | Warrants and Rights        |           | Warrants and Rights  |  | Compensation Plans  
|                                                               |       |                            |           |                      |  |                     
|Equity Compensation Plans approved by Security
    Holders     |       |                            | 4,497,318 |                      |  | $                    | 6.07  |      |  |  | 1,148,411 |          
|Equity Compensation Plans not approved by
    Security Holders |       |                            | 1,249,974 |                      |  |                      | 10.51 |      |  |  | 50,026    |          
|                                                               |       |                            |           |                      |  |                      |       |      |  |  |           |          
|                                                               | Total |                            |           | 5,747,292            |  |                      | $     | 7.04 |  |  |           | 1,198,437 | 
|                                                               |       |                            |           |                      |  |                      |       |      |  |  |           |          

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, in June 2000 and
again in August 2001. In November 2001, the Board of Directors
authorized and reserved an additional 100,000 shares for
issuance under the 1999 Plan. 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 the 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, 2002, 1,299,974 options have been granted
pursuant to this plan, net of cancellations.

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Item 6.     Selected
Financial Data

You should read the following selected
consolidated financial data along with Managements
Discussion and Analysis of Financial Condition and Results of
Operations and our consolidated financial statements and
related notes included in this Annual Report on Form 10-K.
We derived the consolidated statement of operations data for the
years ended March 31, 2000, 2001 and 2002 and the
consolidated balance sheet data as of March 31, 2001 and
2002 from our consolidated financial statements that have been
audited by Arthur Andersen LLP, independent public accountants,
included in this Annual Report on Form 10-K. We derived the
consolidated statement of operations data for the years ended
March 31, 1998 and 1999 and the consolidated balance sheet
data as of March 31, 1998, 1999 and 2000 from our audited
consolidated financial statements that are not included in this
Annual Report on Form 10-K.

NOVADIGM, INC.

SELECTED CONSOLIDATED FINANCIAL DATA

(Amounts in thousands, except per share
amounts)


|                                                                               |                                   |                          |        |        |        |      |        |        |        |      |        |        |        |   |        |        |        |   |         |        |        | 
|------------------------------------------------------------------------------ | --------------------------------- | ------------------------ | ------ | ------ | ------ | ---- | ------ | ------ | ------ | ---- | ------ | ------ | ------ | - | ------ | ------ | ------ | - | ------- | ------ | ------ | 
|                                                                               |                                   |                         
|                                                                               |                                   | Year Ended March 31,    
|                                                                               |                                   |                         
|                                                                               |                                   | 2002                     |        | 2001   |        | 2000 |        | 1999   |        | 1998
|                                                                               |                                   |                          |        |        |        |      |        |        |        |     
|Consolidated Statement of Operations
    Data:                                 |                                   |                          |        |        |        |      |        |        |        |      |        |        |        |   |        |        |        |   |         |       
|Revenues                                                                       |                                   |                          |        |        |        |      |        |        |        |      |        |        |        |   |        |        |        |   |         |       
|                                                                               | Licenses                          |                          | $      | 39,158 |        |      | $      | 31,247 |        |      | $      | 27,978 |        |   | $      | 20,743 |        |   | $       | 15,728 |       
|                                                                               | Maintenance and services          |                          |        | 23,365 |        |      |        | 19,199 |        |      |        | 16,750 |        |   |        | 11,319 |        |   |         | 7,667  |       
|                                                                               |                                   |                          |        |        |        |      |        |        |        |      |        |        |        |   |        |        |        |   |         |       
|                                                                               |                                   | Total revenues           |        |        | 62,523 |      |        |        | 50,446 |      |        |        | 44,728 |   |        |        | 32,062 |   |         |        | 23,395 | 
|                                                                               |                                   |                          |        |        |        |      |        |        |        |      |        |        |        |   |        |        |        |   |         |       
|Operating Expenses:                                                            |                                   |                          |        |        |        |      |        |        |        |      |        |        |        |   |        |        |        |   |         |       
|                                                                               | Cost of maintenance and services  |                          |        | 11,675 |        |      |        | 9,278  |        |      |        | 5,355  |        |   |        | 4,352  |        |   |         | 6,971  |       
|                                                                               | Sales and marketing               |                          |        | 27,127 |        |      |        | 25,934 |        |      |        | 21,912 |        |   |        | 16,274 |        |   |         | 14,680 |       
|                                                                               | Research and development          |                          |        | 10,423 |        |      |        | 9,003  |        |      |        | 6,126  |        |   |        | 4,936  |        |   |         | 6,843  |       
|                                                                               | General and administrative        |                          |        | 11,323 |        |      |        | 8,305  |        |      |        | 6,823  |        |   |        | 5,383  |        |   |         | 4,964  |       
|                                                                               | Amortization of intangible assets |                          |        | 8,683  |        |      |        | 6,046  |        |      |        |       |        |   |        |       |        |   |         |       |       
|                                                                               |                                   |                          |        |        |        |      |        |        |        |      |        |        |        |   |        |        |        |   |         |       
|                                                                               |                                   | Total operating expenses |        |        | 69,231 |      |        |        | 58,566 |      |        |        | 40,216 |   |        |        | 30,945 |   |         |        | 33,458 | 
|                                                                               |                                   |                          |        |        |        |      |        |        |        |      |        |        |        |   |        |        |        |   |         |       
|Operating income (loss)                                                        |                                   |                          | (6,708 | )      |        |      | (8,120 | )      |        |      | 4,512  |        |        |   | 1,117  |        |        |   | (10,063 | )     
|Interest income, net                                                           |                                   |                          | 775    |        |        |      | 1,703  |        |        |      | 1,122  |        |        |   | 934    |        |        |   | 1,185   |       
|Other income (expense), net                                                    |                                   |                          | (325   | )      |        |      | 2,054  |        |        |      | (64    | )      |        |   | (269   | )      |        |   | (207    | )     
|                                                                               |                                   |                          |        |        |        |      |        |        |        |      |        |        |        |   |        |        |        |   |         |       
|Income (loss) before provision (benefit) for
    income taxes                  |                                   |                          | (6,258 | )      |        |      | (4,363 | )      |        |      | 5,570  |        |        |   | 1,782  |        |        |   | (9,085  | )     
|Provision (benefit) for income taxes                                           |                                   |                          | 11     |        |        |      | 233    |        |        |      | 427    |        |        |   | 25     |        |        |   | (68     | )     
|                                                                               |                                   |                          |        |        |        |      |        |        |        |      |        |        |        |   |        |        |        |   |         |       
|Net income (loss)                                                              |                                   | $                        | (6,269 | )      |        | $    | (4,596 | )      |        | $    | 5,143  |        |        | $ | 1,757  |        |        | $ | (9,017  | )     
|                                                                               |                                   |                          |        |        |        |      |        |        |        |      |        |        |        |   |        |        |        |   |         |       
|Earnings (loss) per share  basic                                              |                                   | $                        | (0.31  | )      |        | $    | (0.23  | )      |        | $    | 0.28   |        |        | $ | 0.10   |        |        | $ | (0.52   | )     
|                                                                               |                                   |                          |        |        |        |      |        |        |        |      |        |        |        |   |        |        |        |   |         |       
|Weighted average common shares
    outstanding  basic                         |                                   |                          | 19,953 |        |        |      | 19,711 |        |        |      | 18,185 |        |        |   | 17,580 |        |        |   | 17,392  |       
|                                                                               |                                   |                          |        |        |        |      |        |        |        |      |        |        |        |   |        |        |        |   |         |       
|Earnings (loss) per share  diluted                                            |                                   | $                        | (0.31  | )      |        | $    | (0.23  | )      |        | $    | 0.25   |        |        | $ | 0.10   |        |        | $ | (0.52   | )     
|                                                                               |                                   |                          |        |        |        |      |        |        |        |      |        |        |        |   |        |        |        |   |         |       
|Weighted average common and common equivalent
    shares outstanding  diluted |                                   |                          | 19,953 |        |        |      | 19,711 |        |        |      | 20,558 |        |        |   | 18,384 |        |        |   | 17,392  |       
|                                                                               |                                   |                          |        |        |        |      |        |        |        |      |        |        |        |   |        |        |        |   |         |       

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|                                 |                           |                 |   |        |  |      |   |        |  |      |   |        |  |  |   |        |  |  |   |        | 
|-------------------------------- | ------------------------- | --------------- | - | ------ |  | ---- | - | ------ |  | ---- | - | ------ |  |  | - | ------ |  |  | - | ------ | 
|                                 |                           |                
|                                 |                           | As of March 31,
|                                 |                           |                
|                                 |                           | 2002            |   | 2001   |  | 2000 |   | 1999   |  | 1998
|                                 |                           |                 |   |        |  |      |   |        |  |     
|Consolidated Balance Sheet Data: |                           |                 |   |        |  |      |   |        |  |      |   |        |  |  |   |        |  |  |   |       
|                                 | Cash and cash equivalents |                 | $ | 25,775 |  |      | $ | 20,592 |  |      | $ | 3,670  |  |  | $ | 8,124  |  |  | $ | 4,431  | 
|                                 | Working capital           |                 |   | 29,161 |  |      |   | 30,809 |  |      |   | 29,041 |  |  |   | 20,994 |  |  |   | 17,326 | 
|                                 | Total assets              |                 |   | 54,715 |  |      |   | 59,932 |  |      |   | 44,380 |  |  |   | 33,376 |  |  |   | 28,276 | 
|                                 | Deferred revenue          |                 |   | 4,499  |  |      |   | 5,113  |  |      |   | 4,712  |  |  |   | 3,873  |  |  |   | 2,518  | 
|                                 | Stockholders equity      |                 |   | 36,990 |  |      |   | 44,150 |  |      |   | 31,715 |  |  |   | 23,263 |  |  |   | 20,044 | 

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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 are a leading provider of software and
configuration management solutions for enterprise and Internet
computing environments that enable organizations to reduce
software management costs, speed time-to-market, expand
marketing channels and open new sources of revenue. Our
principal customers include the information technology
(IT) organizations of large and medium-size
enterprises and government organizations, service providers,
outsourcers and software content providers with digital assets
on thousands to hundreds-of-thousands of computing devices,
across heterogeneous environments and networks. We were
incorporated in Delaware in February 1992. Through September
1993, our primary efforts were devoted to product development.
In October 1993, Version 1.0 of the Enterprise Desktop
Manager (EDM) was released for general availability.
Version 2.0 was released in February 1994, Version 3.0
in June 1995, and the final version, 4.0 was released in October
1997. In November 1997, we released Radia Software Manager, a
publisher managed, Internet-based software and content
management solution. In November 1998, we announced the general
availability of Radia Version 2.0 as well as the Radia
Application Manager, a subscriber managed, Internet-based
software and content management solution. In December 2000, we
followed with the release of Radia Inventory Manager, a
policy-driven, digital asset inventory tool that automatically
discovers information about hardware and software, and
consolidates the results into Web-based reports. We continue to
develop the Radia product family, adding new features,
applications and platforms. In October 2001, Radia Management
Suite 3.0 was released.

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




Critical Accounting Policies

We believe our critical accounting policies to be
revenue recognition, allowance for doubtful accounts and
valuation allowance against deferred income tax assets.

Revenue recognition.As discussed above and in note 1 to the consolidated
financial statements, we recognize revenue in all transactions
involving the licensing of software products in accordance with
the provisions of SOP No. 97-2, Software Revenue
Recognition as amended by SOP No. 98-9. Most of our
licensing transactions are on a perpetual basis and revenue is
recognized upon shipment of the software if evidence of an
arrangement exists, pricing is fixed and determinable, and
collectibility is probable. Shipment of the software is
generally performed by the physical delivery of a CD or by
electronic delivery of the licensed software. Evidence of an
arrangement generally takes the form of a software license
agreement signed by the customer and by us. In the case of an
existing license customer, additional orders may come in the
form of an addendum to the software license agreement, a
purchase order, order letter, or similar authorizing document
from the customer. We evaluate whether the software transaction
has a fixed and determinable price. A key factor in this
evaluation is the payment terms in relation to our experience
with the customer or with a similar class of customers.
Generally, software transactions have terms of less than one
year and have no unresolved acceptance criteria or similar
contingency. If an acceptance period is required, revenues are
recognized upon

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

We enter into reseller arrangements that
typically provide for sublicense fees payable to us based on a
percentage of list price. Reseller arrangements may include
non-refundable payments in the form of guaranteed sublicense
fees. Guaranteed sublicense fees from resellers are recognized
as revenue upon shipment of the master copy of all software to
which the guaranteed sublicense fees relate if 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. $250 thousand, $0 and $1.2 million in guaranteed
sublicense fees were recognized in 2002, 2001 and 2000,
respectively. As of March 31, 2002, a substantial majority
of all such guaranteed sublicense fees recognized by us have
been placed with end users or forfeited by the reseller.

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

Valuation allowance against deferred income
tax assets.We recognize deferred tax
assets and liabilities based upon differences between the
financial statement carrying amounts and the tax bases of assets
and liabilities. We regularly review the deferred tax assets for
recoverability and establish a valuation allowance. We provided
a valuation allowance of $15.3 million against our entire
net deferred tax asset as of March 31, 2002. This valuation
allowance was recorded given the losses we have incurred through
March 31, 2002 and the uncertainties regarding our future
operating profitability and taxable income, all of which require
significant management judgments.

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.

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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 statements of operations.

|                                                    |                                   |                          |       |      |       |      |       |      |       |  |      |      |       | 
|--------------------------------------------------- | --------------------------------- | ------------------------ | ----- | ---- | ----- | ---- | ----- | ---- | ----- |  | ---- | ---- | ----- | 
|                                                    |                                   |                         
|                                                    |                                   | Years Ended March 31,   
|                                                    |                                   |                         
|                                                    |                                   | 2002                     |       | 2001 |       | 2000
|                                                    |                                   |                          |       |      |       |     
|Revenues:                                           |                                   |                          |       |      |       |      |       |      |       |  |      |     
|                                                    | Licenses                          |                          |       | 62.6 | %     |      |       | 61.9 | %     |  |      | 62.6 | %    
|                                                    | Maintenance and services          |                          |       | 37.4 |       |      |       | 38.1 |       |  |      | 37.4 |      
|                                                    |                                   |                          |       |      |       |      |       |      |       |  |      |     
|                                                    |                                   | Total revenues           |       |      | 100.0 |      |       |      | 100.0 |  |      |      | 100.0 | 
|                                                    |                                   |                          |       |      |       |      |       |      |       |  |      |     
|Operating expenses:                                 |                                   |                          |       |      |       |      |       |      |       |  |      |     
|                                                    | Cost of maintenance and services  |                          |       | 18.6 |       |      |       | 18.4 |       |  |      | 12.0 |      
|                                                    | Sales and marketing               |                          |       | 43.4 |       |      |       | 51.4 |       |  |      | 49.0 |      
|                                                    | Research and development          |                          |       | 16.7 |       |      |       | 17.8 |       |  |      | 13.7 |      
|                                                    | General and administrative        |                          |       | 18.1 |       |      |       | 16.5 |       |  |      | 15.2 |      
|                                                    | Amortization of intangible assets |                          |       | 13.9 |       |      |       | 12.0 |       |  |      |     |      
|                                                    |                                   |                          |       |      |       |      |       |      |       |  |      |     
|                                                    |                                   | Total operating expenses |       |      | 110.7 |      |       |      | 116.1 |  |      |      | 89.9  | 
|                                                    |                                   |                          |       |      |       |      |       |      |       |  |      |     
|Operating income (loss)                             |                                   |                          | (10.7 | )    |       |      | (16.1 | )    |       |  | 10.1 |     
|Interest income, net                                |                                   |                          | 1.2   |      |       |      | 3.4   |      |       |  | 2.5  |     
|Other income (expense), net                         |                                   |                          | (0.5  | )    |       |      | 4.0   |      |       |  | (0.1 | )   
|                                                    |                                   |                          |       |      |       |      |       |      |       |  |      |     
|Income (loss) before provision for income
    taxes |                                   |                          | (10.0 | )    |       |      | (8.7  | )    |       |  | 12.5 |     
|Provision for income taxes                          |                                   |                          |      |      |       |      | 0.5   |      |       |  | 1.0  |     
|                                                    |                                   |                          |       |      |       |      |       |      |       |  |      |     
|Net income (loss)                                   |                                   |                          | (10.0 | )%   |       |      | (9.2  | )%   |       |  | 11.5 | %   
|                                                    |                                   |                          |       |      |       |      |       |      |       |  |      |     

Comparison of Fiscal Years Ended
March 31, 2002 and 2001

Revenues

Total revenuesincreased 23.9% in 2002 to
$62.5 million.

License revenuesincreased 25.3% to $39.2 million
in 2002. License revenues represented 62.6% of our total
revenues in 2002 compared to 61.9% of our total revenues in
2001. This increase in license revenues in 2002 over the prior
year was primarily the result of closing a greater number of
contracts at a higher average contract size. 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 21.7% to $23.4 million.
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 EDS contract for the
Navy Marine Corps Intranet project as well as higher license
activity in 2002. In addition, maintenance services increased in
2002 over the prior year due to an expanding customer base.

During 2002, one customer, EDS, accounted for
approximately 16% of our total revenue.

Operating expenses

Cost of maintenance and servicesincludes the costs of providing
customer support and update rights and consulting and training
services to our customers. These costs consist primarily of
payroll and benefits, travel and lodging expenses, third party
consulting fees and allocated overhead. Cost of maintenance and
services increased by 25.8% to $11.7 million in 2002. The
gross margin of maintenance and services was 50% in 2002,

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slightly lower than the 51.7% of the prior year.
The primary reason for the lower gross margin in 2002 as
compared to the prior year is the faster growth rate of
consulting and training services compared to maintenance.
Consulting and training services require higher staffing levels
than maintenance operations and therefore have a lower gross
margin. We expect the cost of maintenance and services to
increase in 2003 in absolute dollar terms and we expect the
gross margin of maintenance and services to remain approximately
the same as the 2002 level.


Sales and marketingexpenses consist primarily of
salaries, related benefits, commissions, travel and other costs
associated with sales and marketing efforts such as marketing
programs, trade shows, and lead generation activities. In
addition, the expense for doubtful accounts is included in sales
and marketing expense. Sales and marketing expenses increased
4.6% to $27.1 million. 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 expense
associated with the recording of higher revenue. During 2002, we
created a new sales organization to manage and grow our
alliances and partnerships, also additional sales management was
brought on in 2002 to strengthen our sales efforts. Accordingly,
we expect sales and marketing expenses to increase in 2003
compared to 2002 in absolute dollar terms though not as a
percentage of total revenues.

Research and developmentexpenses consist primarily of
salaries, related benefits, consultant fees and other costs
associated with research and development efforts. Research and
development expenses increased 15.8% to $10.4 million. 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. We
believe that a significant investment in research and
development activities is essential to provide for our future
growth. We anticipate that we will continue to invest resources
to further enhance and develop our products. We anticipate
growth in research and development expense in 2003 though we do
not anticipate that research and development expense will
increase in terms of a percentage of total revenues.

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 we define
as establishment of a working model. Capitalizable amounts are
insignificant and, accordingly, we have expensed all software
development costs as incurred.

General and administrativeexpenses consist primarily of
personnel and travel costs for corporate management, finance and
administration, information systems and human resources, as well
as corporate insurance programs and fees for professional
services such as consulting, legal, accounting and recruiting.
General and administrative expenses increased 43.6% to
$11.3 million in 2002. The increase in 2002 as compared
with 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 (See
Part I, Item 3. Legal Proceedings),
and higher compensation costs due to expanding our corporate
management and administrative staff. We expect general and
administrative expenses to increase in 2003 though we do not
anticipate general and administration expense to increase in
terms of a percentage of total revenues.

Amortization of intangiblewas $8.7 million in 2002 and
consists of (i) a charge to earnings for the non-cash
amortization of the intangible asset acquired in the alliance
agreement with Hewlett-Packard and (ii) an acquisition of
intellectual property in October 2001.

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 $2,500,000, Hewlett-Packard was provided a
one-year, limited license to upgrade certain existing customers
to

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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 will be amortized over the initial term
of the agreement: two years. Included in the warrant is a
provision that reduces the exercise price of the warrant to $0
if Hewlett-Packard attains certain revenue milestones. Should
Hewlett-Packard meet those milestones, the intangible asset will
be adjusted and the new amount will be amortized for the
remainder of the term. We currently do not expect
Hewlett-Packard to meet these milestones.


In October 2001, we acquired the intellectual
property of another company. We will embed this acquired
technology into our Radia product suite. Along with the
intellectual property, we acquired furniture and fixtures,
equipment, customer contracts and an office lease. Four
employees joined us upon the closing of the acquisition. The
cost of the acquisition was $3,894,000, net of acquisition costs
of $114,000. 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 quarterly 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.

We currently expect the amortization expense
relating to these items for 2003 to be approximately
$3.3 million.

Interest income, net

Interest income, netis comprised primarily of interest
income earned on our cash, cash equivalents and investments,
partially offset by our interest expenses. Interest income, net
was $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. We expect our interest income, net to
increase in 2003 because we anticipate that our cash and
investment balances will increase.

Other income (expense)

Other income (expense)was an expense of $325 thousand in
2002. It was primarily comprised of a net foreign exchange loss
of $200 thousand and 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
alternative minimum taxes and foreign taxes. As of
March 31, 2002, we had net deferred tax assets of
approximately $15 million. We have provided a full
valuation allowance due to the uncertainty surrounding the
timing of the realization of the net deferred tax assets. As of
March 31, 2002, we had federal net operating loss
carryforwards of approximately $29 million, which expire in
various periods through 2022. 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, 2001 and 2000

Revenues

Total revenuesincreased 12.8% in 2001 to
$50.4 million.

License revenuesincreased 11.7% to $31.2 million
in 2001. License revenues represented 61.9% of the total
revenues of 2001 compared to 62.6% of the total revenues of
2000. The increase in license revenues in 2001 over the prior
year was the result of closing a greater number of contracts and
a higher average contract size. Demand for our products
increased from both new and existing customers due, we believe,
to more

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effective marketing programs, better market
awareness, expansion of our sales force in North America and
Europe and creation of marketing alliances and partnerships.


Maintenance and service revenuesincreased 14.6% to $19.2 million.
The increase in maintenance and service revenues in 2001 over
the prior year was primarily due to the increased demand for our
consulting and training services associated with higher
licensing activity with new customers and the high rate of
renewal of maintenance contracts by existing customers. The
increase in maintenance revenues in 2001 over 2000 was at a rate
lower than in prior years due to the termination of our
agreement with Amdahl.

During 2001, one customer, EDS, accounted for
approximately 12% of our total revenue. During 2000, Amdahl
accounted for approximately 14% of our total revenue. In
June 1995, we entered into a seven-year, non-exclusive OEM
and distribution agreement with Amdahl. Under the agreement,
Amdahl was able to sublicense EDM throughout the world as part
of its bundled solution and sublicense EDM stand-alone to a
limited worldwide market. We agreed to provide limited technical
support and training. The agreement required Amdahl to pay us
minimum annual royalties. Amdahl failed to meet the minimum
royalty commitment for fiscal 2000 and we terminated the
agreement effective March 31, 2000.

Operating expenses

Cost of maintenance and servicesincreased by 73.2% to
$9.3 million in 2001. The increase in the cost of
maintenance and services in 2001 as compared to 2000 was due
primarily to a faster increase in consulting and training
services which requires higher staffing levels than maintenance
and the increased utilization of third party consulting firms.

Sales and marketingexpenses increased 18.4% to
$25.9 million. The increase in 2001 over the previous year
was primarily the result of higher commission expense associated
with the recording of higher revenue and the continued expansion
of the direct sales force in North America and Europe.

Research and developmentexpenses increased 47.0% to
$9.0 million. The increase in research and development in
2001 as compared to the previous year was primarily due to the
ongoing development of new products which operate on additional
platforms and the development of products to address the
requirements of application service providers (ASPs),
independent software vendors (ISVs) and enterprise information
technology providers for providing software applications to
customers as subscription services. 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 we define as establishment of a working
model. Capitalizable amounts are insignificant and accordingly,
we have expensed all software development costs as incurred.

General and administrativeexpenses increased 21.7% to
$8.3 million in 2001. The increase in 2001 as compared with
2000 was due primarily to $984 thousand of non-recurring legal
costs incurred to settle patent litigation suits in November
2000, as well as higher compensation costs due to expanding our
corporate management and administrative staff.

Amortization of intangiblewas $6.1 million in 2001 and
consisted of a charge to earnings for the non-cash amortization
of the intangible asset acquired in the alliance agreement with
Hewlett-Packard. 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.

Interest income, net

Interest income, netwas $1.7 million in 2001 compared
to $1.1 million in 2000. The increase in interest income,
net in 2001 as compared to 2000, was due primarily to higher
average balances of cash and marketable securities as compared
to the prior year average balances.

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Other income (expense)

Other income
(expense)was income of
$2.1 million in 2001. It was primarily comprised of
$2.2 million recognized in connection with the settlement
of the infringement litigation with Marimba, Inc. in November
2000, partially offset by $85 thousand of miscellaneous
corporate fees. Other income (expense) was an expense of
$64 thousand in 2000. It was primarily comprised of $89 thousand
of bank fees and miscellaneous corporate fees offset by a net
foreign exchange gain of $25 thousand.

Income taxes

We recorded a provision for income taxes of
approximately $233 thousand in 2001 and approximately $427
thousand in 2000 for federal and state alternative minimum taxes
and for foreign taxes. As of March 31, 2001, we had net
deferred tax assets of approximately $12 million. We have
provided a full valuation allowance due to the uncertainty
surrounding the timing of the realization of the net deferred
tax assets. As of March 31, 2001, we had federal net
operating loss carryforwards of approximately $22 million,
which expire in various periods through 2021. 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.

Liquidity and Capital Resources

As of March 31, 2002, we had approximately
$25.8 million in cash and cash equivalents. Net cash
provided by operating activities in 2002, 2001 and 2000 was
$1.2 million, $1.8 million, and $1.5 million,
respectively. Fiscal years 2002 and 2001 reported net losses of
$6.3 million and $4.6 million, respectively, entirely
offset by depreciation and amortization expense of
$10.0 million and $6.8 million, respectively. The cash
provided by operating activities in 2002 was partially offset by
the acquisition of intellectual property in the fiscal year as
well as by decreases in our accounts payable and accrued
liabilities accounts and deferred revenue accounts. The cash
provided by operating activities in 2001 was partially offset by
the increase of $3.0 million in the accounts receivable
balance, net of the allowance for doubtful accounts which in
turn was due to the increasing revenues. In 2000, the cash
provided by operating activities was primarily the result of net
profit and an increase in accounts payable and accrued
liabilities, partially offset by an increase in the accounts
receivable balance.

Property and equipment expenditures were
$1,247,000, $1,541,000, and $1,360,000 for the fiscal years
2002, 2001 and 2000, respectively. We had no material
commitments to purchase property and equipment at March 31,
2002, and we expect purchases of property and equipment to
increase next fiscal year due the expansion of our headquarters
in Mahwah, NJ and to the increase in the number of our employees.

In June 2000, we entered into an alliance
agreement with Hewlett-Packard. 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.
The warrant, which expires on March 31, 2004, contains
restrictions and a provision that reduces the exercise price to
$0 if HP attains certain revenue milestones.

In October 2000, we announced our intention to
repurchase up to 500,000 of the outstanding shares of our common
stock. On August 3, 2001, our Board of Directors increased
the number of shares authorized for repurchase to a total of
550,000 shares. Additionally, in September 2001, the Securities
and Exchange Commission issued temporary regulations easing
restrictions on the repurchases of stock by public companies.
Our Board of Directors authorized the repurchase of up to
another 250,000 shares after the temporary regulations were
issued. During 2002, we spent approximately $3.2 million to
repurchase approximately 368,000 shares. At March 31, 2002,
the remaining authorization for all stock repurchases is
approximately 78,000 shares.

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 has a
term of one year and is renewable on an annual basis. At
March 31, 2002, no amounts were due and outstanding under
this revolving line of credit.

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Our cost for intellectual property acquired in
October 2001 was $3,894,000, net of acquisition costs of
$114,000, and is payable through the issuance of 212,636 shares
of our common stock and payment of $1.7 million over
9 quarters. As of March 31, 2002, 47,252 shares of our
common stock had been issued and payments totaling
$390 thousand 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 balance sheet. Accordingly, $1.7 million is
included in accrued liabilities and $1.3 million is
reflected as long-term liabilities. We have allocated the excess
of the purchase price over the fair value of the tangible net
assets acquired to acquired software and are amortizing this
amount over three years.

At March 31, 2002, we held notes receivable
with a total value of $1.1 million due from executive
officers and shareholders. The notes bear a fair market interest
rate determined at the time the note was written. The notes are
full recourse and are secured by shares of our common stock. The
notes have a term of one year and allow for prepayment. In 2002,
the notes matured and were renewed for a term of six months.
During fiscal 2002, issuers of the notes repaid
$313 thousand of the outstanding balance,
$197 thousand of new notes were issued and
$70 thousand in associated interest was accrued.

The following table summarizes our contractual
obligations as of March 31, 2002. This table should be read
in conjunction with the accompanying notes to our consolidated
financial statements (in thousands):

|                             |       |              |     |                  |  |   |       |       | 
|---------------------------- | ----- | ------------ | --- | ---------------- |  | - | ----- | ----- | 
|                             |       | Note Payable |     | Operating Leases
|                             |       |              |     |                 
|Fiscal year ending March 31, |       |              |     |                  |  |   |       |      
|2003                         |       | $            | 782 |                  |  | $ | 2,194 |      
|2004                         |       |              | 586 |                  |  |   | 2,125 |      
|2005                         |       |              |    |                  |  |   | 1,962 |      
|2006                         |       |              |    |                  |  |   | 1,750 |      
|2007                         |       |              |    |                  |  |   | 701   |      
|                             |       |              |     |                  |  |   |       |      
|                             | Total |              | $   | 1,368            |  |   | $     | 8,732 | 
|                             |       |              |     |                  |  |   |       |      

The note payable represents the associated cash
payments in connection with the intellectual property acquired
in October 2001, as discussed above.

Although it is difficult for us to predict our
future liquidity requirements with certainty, we believe that
our existing cash and cash equivalents, together with cash
generated from operations, will be adequate to finance our
operations for at least the 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. 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.

Risk Factors

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

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

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

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fluctuate significantly in the future due to a
number of factors, including, among others, the size and timing
of customer orders, the timing and market acceptance of our new
products, the level and pricing of international sales, foreign
currency exchange rates, changes in the level of operating
expenses, technological advances and competitive conditions in
the industry. Revenues received from our individual customers
vary significantly based on the size of the product
installation. Customer orders for our products have ranged from
several thousands of dollars to over $10 million, and have
averaged from approximately $200,000 to $400,000. As a result,
our quarterly operating results are likely to be significantly
affected by the number and size of customer orders we are able
to obtain in any particular quarter. In addition, the sales
cycle for our products is lengthy and unpredictable, and may
range from a few months to over a year, depending upon the
interest of the prospective customer in our products, the size
of the order (which may involve a significant commitment of
capital by the customer), the decision-making and acceptance
procedures within the customers organization, the
complexity of implementation and other factors.


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

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

Our business may suffer if we are not able to
keep pace with rapid technological change and successfully
introduce new products.The market for
software and configuration management is characterized by rapid
technological advances, changes in customer requirements and
frequent new product introductions and enhancements. Our future
success will depend in large part on our ability to enhance our
current products and to develop and introduce new products that
keep pace with technological developments, achieve market
acceptance and respond to customer requirements that are
constantly evolving. Responding to rapid technological change
and the need to develop and introduce new products to meet
customers expanding needs will require us to make
substantial investments in research and product development.
During fiscal 2002, among other research and development
expenditures, we allocated research and development funding to
the development of our e-wrap technology to additional platforms
in operating systems and a new version of Radia. We intend to
continue to allocate funding to these development projects
throughout fiscal 2003. If we fail to anticipate or respond
adequately to technological developments and customer
requirements, and in particular advances in client/server
enterprise hardware platforms, internet applications and
platforms, operating systems and systems management
applications, or experience any significant delays in product
development or introduction, we could lose competitiveness and
our operating results could be materially and adversely
affected. There can be no assurance that any product
enhancements or new products we develop will gain market
acceptance.

The failure to develop on a timely basis new
products or product enhancements could cause customers to delay
or refrain from purchasing our existing products and thereby
adversely affect our operating results. If future releases of
new products and enhancements do not achieve market acceptance,
the business, financial condition and results of our operations
will be materially and adversely affected.

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

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



| |                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Framework SD
    Vendors.These competitors include IBM
    (Tivoli Software) and Computer Associates who offer software
    distribution tools as part of their enterprise frameworks. We
    compete against the specific software distribution tools offered
    with their frameworks.
|
| | Desktop Management Suite Vendors.These competitors include vendors such
    as Microsoft and Intel Corporation, who offer software
    distribution tools as part of a desktop administration package.                                                                                   
|
| | Software Distribution Vendors.These competitors include companies
    such as Altiris, Inc., Marimba, Inc. and ON Technology
    Corporation in the desktop and server market segment; and, in
    the mobile market segment, Xcellenet, Inc.                                            

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

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

Our business could be materially affected by
risks related to our international operations.Approximately 45% of our net revenues
in 2002 were derived from our international operations.
International revenues are a significant percentage of our
revenues, and we plan to continue to develop international
sales, primarily through our European operations. Our operations
and financial results could be significantly affected by factors
associated with international operations, such as changes in
foreign currency exchange rates, uncertainties relative to
regional economic circumstances, longer payment cycles, greater
difficulty in accounts receivable

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collection, changes in regulatory requirements
and product localization requirements, as well as by other
factors associated with international activities. 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. To date, we have not engaged in any
foreign exchange hedging transactions and we are therefore
subject to foreign currency risk.


The loss of a major customer could adversely
affect our operating results.During
2002 and 2001, one customer, EDS, accounted for approximately
16% and 12%, respectively, of our total revenues. During 2000,
one customer, Amdahl, accounted for approximately 14% of total
revenues.

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

There can be no assurance that third parties will
not claim infringement with respect to our current or future
products. We expect that software product developers will
increasingly be subject to infringement claims as the number of
products and competitors in their industry segment grows and the
functionality of products in different industry segments
overlaps. Any such claims, with or without merit, could be time
consuming, result in costly litigation, cause product shipment
delays, or require us to enter into royalty or licensing
agreements. Such royalty or licensing agreements, if required,
may not be available on acceptable terms or at all, which could
have a material adverse effect on our business, results of
operations and financial condition (See Part I,
Item 3. Legal Proceedings).

We could be subject to product liability
claims that would adversely affect our
business.The license agreements,
which we enter into with our customers, typically contain
provisions designed to limit exposure to potential product
liability claims. However, the limitation of liability
provisions contained in such license agreements may not be
effective under the laws of certain jurisdictions. The sale and
support of our products entails the risk of claims, and we may
be subject to such claims in the future. A product liability
claim brought against us could have a material adverse effect on
our business, results of operations, and financial condition.

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

If changes in our sales organization are not
effective, our business will be adversely affected.Our future success depends upon the
ability of our sales channels to generate increased revenues. We
have made, and will continue to make, substantial
organizational, management, process and staff changes in our
North American, European, government and alliances sales
organizations to enhance coverage and productivity. If these
changes do not result in increased revenues, our business,
operating results and financial condition will be materially and
adversely affected.

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

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

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

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards
Board (FASB) issued Statements of Financial
Accounting Standards No. 141, Business Combinations
(SFAS No. 141) and No. 142, Goodwill and Other
Intangible Assets (SFAS No. 142). SFAS
No. 141 changes the accounting for business combinations,
requiring that all business combinations be accounted for using
the purchase method and that intangible assets be recognized as
assets apart from goodwill if they arise from contractual or
other legal rights, or if they are separable or capable of being
separated from the acquired entity and sold, transferred,
licensed, rented or exchanged. SFAS No. 141 is effective
for all business combinations initiated after June 30,
2001. SFAS No. 142 specifies the financial accounting and
reporting for acquired goodwill and other intangible assets.
Goodwill and intangible assets that have indefinite useful lives
will not be amortized but rather will be tested at least
annually for impairment. SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001.

SFAS No. 142 requires that the useful lives
of intangible assets acquired on or before June 30, 2001,
be reassessed and the remaining amortization periods adjusted
accordingly. Previously recognized intangible assets deemed to
have indefinite lives shall be tested for impairment. Goodwill
recognized on or before June 30, 2001, shall be assigned to
one or more reporting units and shall be tested for impairment
as of the beginning of the fiscal year in which SFAS
No. 142 is initially applied in its entirety.

We have not fully assessed the potential impact
of the adoption of SFAS No. 142, which is effective for us
as of April 1, 2002. The reassessment of intangible assets
must be completed during the first quarter of fiscal 2003 and
the assignment of goodwill to reporting units, along with
completion of the first step of the transitional goodwill
impairment tests, must be completed during the first six months
of our fiscal year 2003. Total amortization of intangible assets
for the year ended March 31, 2002 was approximately $8.7
million.

In October 2001, the FASB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS 144), which
supercedes SFAS 121 and certain provisions of APB Opinion
No. 30, Reporting Results of Operations 
Reporting the Effects of Disposal of a Segment of a Business and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. SFAS 144 requires that long-lived
assets to be disposed of by sale, including discontinued
operations, be measured at the lower of carrying

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amount or fair value less cost to sell, whether
reported in continuing operations or in discontinued operations.
SFAS 144 also broadens the reporting requirements of
discontinued operations to include all components of an entity
that have operations and cash flows that can be clearly
distinguished, operationally and for financial reporting
purposes, from the rest of the entity. The provisions of
SFAS 144 are effective beginning after April 1, 2002.
We are currently in the process of assessing the effects of
implementing the new standard.


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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 do have foreign-based
operations where transactions are denominated in foreign
currencies and are subject to market risk with respect to
fluctuations in the relative value of currencies. These
currencies have been relatively stable to somewhat devaluing
against the U.S. dollar for the past several years. Foreign
currency fluctuations have not had a material impact
historically on our revenues or results of operations.
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. There can be no assurance that
European currencies will remain stable relative to the U.S.
dollar or that future 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 ($200) thousand,
$4 thousand and $25 thousand in 2002, 2001 and 2000,
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, 2002, our cash and cash
equivalents consisted primarily of demand deposits and money
market funds held by large institutions in the U.S., and our
short-term investments were invested in corporate debt maturing
in less than 90 days.




Item 8.     Financial
Statements and Supplementary Data

Our Financial Statements and Supplementary Data
required by this item are set forth at the pages indicated at
Item 14(a).




Item 9.     Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure

None.

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PART III




Item 10.     Directors
and Executive Officers of the Registrant

Information required by this item concerning
Novadigms directors is incorporated by reference from the
section captioned Election of Directors to be
contained in our definitive proxy statement related to our
Annual Meeting of Stockholders to be held September 13,
2002, 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). The
information required by this item concerning executive officers
is set forth in Part I, Item 1 of this Report. The
information required by this item concerning compliance with
Section 16(a) of the Exchange Act is incorporated by
reference from the section captioned Section 16(a)
Beneficial Ownership Reporting Compliance to be contained
in 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

The information required by this item is
incorporated by reference from the section captioned
Beneficial Security Ownership of Management and Certain
Beneficial Owners to be contained in the Proxy Statement.




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.

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PART IV




Item 14.     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.  Financial Statements:                                                                                                         |  |        |     | 
|Report of Independent Public Accountants                                                                                          |  |        | F-2 | 
|Consolidated Balance Sheets  As of
    March 31, 2002 and 2001                                                                   |  |        | F-3 | 
|Consolidated Statements of Operations and
    Comprehensive Income (Loss)  For the Years Ended
    March 31, 2002, 2001 and 2000 |  |        | F-4 | 
|Consolidated Statements of Stockholders
    Equity  For the Years Ended March 31, 2002, 2001
    and 2000                       |  |        | F-5 | 
|Consolidated Statements of Cash Flows 
    For the Years Ended March 31, 2002, 2001 and 2000                                     |  |        | F-6 | 
|Notes to Consolidated Financial Statements                                                                                        |  |        | F-7 | 

2.     Financial
Statement Schedule:

|                                                       |  |  |     | 
|------------------------------------------------------ |  |  | --- | 
|For the Years Ended March 31, 2002, 2001 and
    2000: |  |  |     | 
|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.                                                               
| | 3.  | 2*        |  | Bylaws of Registrant, as amended.                                                                                         
| | 10. | 4****     |  | 1992 Stock Option Plan, as amended and form of
    Stock Option Agreement.                                               
| | 10. | 5*        |  | 1995 Employee Stock Purchase Plan and form of
    Subscription Agreement.                                                
| | 10. | 10*       |  | Form of Indemnification Agreement entered into
    between Registrant and its officers and directors.                    
| | 10. | 11*****   |  | Management Retention Agreement dated
    August 17, 1998 by and between the registrant and Robert B.
    Anderson.       
| | 10. | 13**      |  | Facility lease dated as of March 14, 1997,
    by and between Crossroad Developers Associates, LLC and the
    Registrant.
| | 10. | 14**      |  | Employment Agreement effective as of
    April 1, 1997 by and between the Registrant and Wallace D.
    Ruiz.            
| | 10. | 18******* |  | Security Agreement dated April 27, 2000
    between the Registrant and Albion Fitzgerald.                                
| | 10. | 19******* |  | Security Agreement dated April 17, 2000
    between the Registrant and Wallace Ruiz.                                     
| | 10. | 20******  |  | Alliance Agreement dated June 30, 2000
    between the Registrant and Hewlett-Packard Company.                            
| | 10. | 21        |  | Employment Agreement effective as of
    April 16, 2001 by and between the Registrant and Gerald M.
    Labie.           
| | 10. | 22        |  | Promissory Note dated April 27, 2002 between
    the Registrant and Albion Fitzgerald.                                   

31



---



##### Table of Contents



| |     |    |  |                                                                                                                                                                     
| | --- | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10. | 23 |  | Promissory Note dated April 17, 2002 between
    the Registrant and Wallace Ruiz.                                                                                  
| | 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.   
| | 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.
| | 10. | 26 |  | Promissory Note dated January 15, 2002
    between the Registrant and Robert Anderson.                                                                             
| | 10. | 27 |  | Loan Agreement dated March 12, 2002 between
    Registrant and Fleet National Bank.                                                                                 
| | 10. | 28 |  | 1999 Stock Option Plan.                                                                                                                                            
| | 10. | 29 |  | 2000 Stock Option Plan.                                                                                                                                            
| | 10. | 30 |  | Security Agreement dated October 1, 2001
    between Registrant and Wallace Ruiz.                                                                                  
| | 21  |    |  | Subsidiaries of Registrant.                                                                                                                                         
| | 23  |    |  | Consent of Arthur Andersen LLP.                                                                                                                                     
| | 99. | 1  |  | Letter of the Company confirming receipt of
    Arthur Andersen LLPs representations concerning audit
    quality controls.                                        



---



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



| |   |                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | Incorporated by reference to exhibit filed with
    Registrants Registration Statement on Form S-1 (Reg.
    No. 33-92746), as declared effective by the Commission on
    July 13, 1995.



| |    |                                                                                                                                          
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------
| | ** | Incorporated by reference to exhibit filed with
    Registrants Annual Report on Form 10-K for the fiscal
    year ended March 31, 1997.



| |     |                                                                                                                                          
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------
| | *** | Incorporated by reference to exhibit filed with
    Registrants Annual Report on Form 10-K for the fiscal
    year ended March 31, 1998.



| |      |                                                                                                                              
| | ---- | -----------------------------------------------------------------------------------------------------------------------------
| | **** | Incorporated by reference to exhibit filed with
    Registrants Registration Statement on Form S-8 (file
    No. 333-67877).



| |       |                                                                                                                                          
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------
| | ***** | Incorporated by reference to exhibit filed with
    Registrants Annual Report on Form 10-K for the fiscal
    year ended March 31, 1999.



| |        |                                                                                                                     
| | ------ | --------------------------------------------------------------------------------------------------------------------
| | ****** | Incorporated by reference to exhibit filed with
    Registrants current report on Form 8-K dated
    July 19, 2000.



|        |                                                                                                                                          
|------- | -----------------------------------------------------------------------------------------------------------------------------------------
|******* | Incorporated by reference to exhibit filed with
    Registrants Annual Report on Form 10-K for the fiscal
    year ended March 31, 2001.

(b)     Reports on
Form 8-K:

We did not file any current reports on
Form 8-K during the fourth quarter of 2002.

32



---



##### 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.



| |               
| | --------------
| | Novadigm, Inc.



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

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

Date: June 11, 2002

33



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##### Table of Contents






SIGNATURES

Pursuant to the requirements of the Securities
Act of 1934, this Report has been signed below on June 11,
2002 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 11, 2002
|                                                  
|/s/ WALLACE D. RUIZWallace D. Ruiz                 |  | Vice President, Treasurer and Chief Financial
    Officer (Principal Financial and Accounting Officer) |  | June 11, 2002
|                                                  
|/s/ ROBERT B. ANDERSONRobert B. Anderson           |  | Executive Vice President, Secretary and Director                                                       |  | June 11, 2002
|                                                  
|/s/ GERALD M. LABIEGerald M. Labie                 |  | President, Chief Operating Officer and Director                                                        |  | June 11, 2002
|                                                  
|/s/ ROBERT H. FORNEYRobert H. Forney               |  | Director                                                                                               |  | June 11, 2002
|                                                  
|/s/ DEBORAH DOYLE MCWHINNEYDeborah Doyle McWhinney |  | Director                                                                                               |  | June 11, 2002
|                                                  
|/s/ H. KENT PETZOLDH. Kent Petzold                 |  | Director                                                                                               |  | June 11, 2002

34



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##### Table of Contents



NOVADIGM, INC.

INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS

|                                                                          |  |      |     | 
|------------------------------------------------------------------------- |  | ---- | --- | 
|                                                                          |  | Page
|                                                                          |  |     
|Report of Independent Public Accountants                                  |  |      | F-2 | 
|Consolidated Balance Sheets                                               |  |      | F-3 | 
|Consolidated Statements of Operations and
    Comprehensive Income (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



---



##### Table of Contents



REPORT OF 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


F-2



---



##### Table of Contents



NOVADIGM, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share
data)


|                                         |                                                                                                      |                                                                                        |        |           |        |   |        |         |        | 
|---------------------------------------- | ---------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------- | ------ | --------- | ------ | - | ------ | ------- | ------ | 
|                                         |                                                                                                      | March 31,                                                                              |        | March 31,
|                                         |                                                                                                      | 2002                                                                                   |        | 2001     
|                                         |                                                                                                      |                                                                                        |        |          
|ASSETS                                  
|Current assets:                          |                                                                                                      |                                                                                        |        |           |        |   |        |        
|                                         | Cash and cash equivalents                                                                            |                                                                                        | $      | 25,775    |        |   | $      | 20,592  |       
|                                         | Short-term marketable securities                                                                     |                                                                                        |        |          |        |   |        | 6,570   |       
|                                         | Accounts receivable, net of allowance for
    doubtful accounts of $1,992 in 2002 and $2,388 in 2001 |                                                                                        |        | 18,669    |        |   |        | 18,179  |       
|                                         | Prepaid expenses and other current assets                                                            |                                                                                        |        | 1,144     |        |   |        | 1,250   |       
|                                         |                                                                                                      |                                                                                        |        |           |        |   |        |        
|                                         |                                                                                                      | Total current assets                                                                   |        |           | 45,588 |   |        |         | 46,591 | 
|                                         | Property and equipment, net                                                                          |                                                                                        |        | 2,625     |        |   |        | 2,705   |       
|                                         | Intangible assets, net                                                                               |                                                                                        |        | 5,412     |        |   |        | 10,089  |       
|                                         | Other assets                                                                                         |                                                                                        |        | 1,090     |        |   |        | 547     |       
|                                         |                                                                                                      |                                                                                        |        |           |        |   |        |        
|                                         |                                                                                                      | $                                                                                      | 54,715 |           |        | $ | 59,932 |        
|                                         |                                                                                                      |                                                                                        |        |           |        |   |        |        
|LIABILITIES AND STOCKHOLDERS
    EQUITY
|Current liabilities:                     |                                                                                                      |                                                                                        |        |           |        |   |        |        
|                                         | Accounts payable                                                                                     |                                                                                        | $      | 2,697     |        |   | $      | 3,547   |       
|                                         | Accrued liabilities                                                                                  |                                                                                        |        | 3,828     |        |   |        | 1,664   |       
|                                         | Accrued payroll and other compensation                                                               |                                                                                        |        | 5,403     |        |   |        | 5,458   |       
|                                         | Deferred revenue                                                                                     |                                                                                        |        | 4,499     |        |   |        | 5,113   |       
|                                         |                                                                                                      |                                                                                        |        |           |        |   |        |        
|                                         |                                                                                                      | Total current liabilities                                                              |        |           | 16,427 |   |        |         | 15,782 | 
|                                         |                                                                                                      |                                                                                        |        |           |        |   |        |        
|Long term liabilities                    |                                                                                                      |                                                                                        | 1,298  |           |        |   |       |        
|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  19,946 shares as of
    March 31, 2002 and 19,902 shares as of March 31, 2001 |        |           | 20     |   |        |         | 20     | 
|                                         | Additional paid-in capital                                                                           |                                                                                        |        | 92,487    |        |   |        | 90,300  |       
|                                         | Treasury stock, 722 shares as of March 31,
    2002 and 353 shares as of March 31, 2001, at cost     |                                                                                        |        | (5,880    | )      |   |        | (2,711  | )     
|                                         | Stockholders notes receivable                                                                        |                                                                                        |        | (1,091    | )      |   |        | (1,137  | )     
|                                         | Accumulated deficit                                                                                  |                                                                                        |        | (47,513   | )      |   |        | (41,244 | )     
|                                         | Accumulated other comprehensive loss                                                                 |                                                                                        |        | (1,033    | )      |   |        | (1,078  | )     
|                                         |                                                                                                      |                                                                                        |        |           |        |   |        |        
|                                         |                                                                                                      | Total stockholders equity                                                             |        |           | 36,990 |   |        |         | 44,150 | 
|                                         |                                                                                                      |                                                                                        |        |           |        |   |        |        
|                                         |                                                                                                      | $                                                                                      | 54,715 |           |        | $ | 59,932 |        
|                                         |                                                                                                      |                                                                                        |        |           |        |   |        |        

The accompanying notes to consolidated financial
statements are

an integral part of these consolidated balance
sheets.


F-3



---



##### Table of Contents



NOVADIGM, INC.

CONSOLIDATED STATEMENTS OF
OPERATIONS

(In thousands, except per share
amounts)


|                                                                               |                                   |                               |        |        |        |      |        |        |        |   |        |        |        | 
|------------------------------------------------------------------------------ | --------------------------------- | ----------------------------- | ------ | ------ | ------ | ---- | ------ | ------ | ------ | - | ------ | ------ | ------ | 
|                                                                               |                                   |                              
|                                                                               |                                   | For the Years Ended March 31,
|                                                                               |                                   |                              
|                                                                               |                                   | 2002                          |        | 2001   |        | 2000
|                                                                               |                                   |                               |        |        |        |     
|Revenues:                                                                      |                                   |                               |        |        |        |      |        |        |        |   |        |       
|                                                                               | Licenses                          |                               | $      | 39,158 |        |      | $      | 31,247 |        |   | $      | 27,978 |       
|                                                                               | Maintenance and services          |                               |        | 23,365 |        |      |        | 19,199 |        |   |        | 16,750 |       
|                                                                               |                                   |                               |        |        |        |      |        |        |        |   |        |       
|                                                                               |                                   | Total revenues                |        |        | 62,523 |      |        |        | 50,446 |   |        |        | 44,728 | 
|                                                                               |                                   |                               |        |        |        |      |        |        |        |   |        |       
|Operating expenses:                                                            |                                   |                               |        |        |        |      |        |        |        |   |        |       
|                                                                               | Cost of maintenance and services  |                               |        | 11,675 |        |      |        | 9,278  |        |   |        | 5,355  |       
|                                                                               | Sales and marketing               |                               |        | 27,127 |        |      |        | 25,934 |        |   |        | 21,912 |       
|                                                                               | Research and development          |                               |        | 10,423 |        |      |        | 9,003  |        |   |        | 6,126  |       
|                                                                               | General and administrative        |                               |        | 11,323 |        |      |        | 8,305  |        |   |        | 6,823  |       
|                                                                               | Amortization of intangible assets |                               |        | 8,683  |        |      |        | 6,046  |        |   |        |       |       
|                                                                               |                                   |                               |        |        |        |      |        |        |        |   |        |       
|                                                                               |                                   | Total operating expenses      |        |        | 69,231 |      |        |        | 58,566 |   |        |        | 40,216 | 
|                                                                               |                                   |                               |        |        |        |      |        |        |        |   |        |       
|Operating income (loss)                                                        |                                   |                               | (6,708 | )      |        |      | (8,120 | )      |        |   | 4,512  |       
|Interest income, net                                                           |                                   |                               | 775    |        |        |      | 1,703  |        |        |   | 1,122  |       
|Other income (expense), net                                                    |                                   |                               | (325   | )      |        |      | 2,054  |        |        |   | (64    | )     
|                                                                               |                                   |                               |        |        |        |      |        |        |        |   |        |       
|Income (loss) before provision for income
    taxes                            |                                   |                               | (6,258 | )      |        |      | (4,363 | )      |        |   | 5,570  |       
|Provision for income taxes                                                     |                                   |                               | 11     |        |        |      | 233    |        |        |   | 427    |       
|                                                                               |                                   |                               |        |        |        |      |        |        |        |   |        |       
|Net income (loss)                                                              |                                   | $                             | (6,269 | )      |        | $    | (4,596 | )      |        | $ | 5,143  |       
|                                                                               |                                   |                               |        |        |        |      |        |        |        |   |        |       
|Earnings (loss) per share  basic                                              |                                   | $                             | (0.31  | )      |        | $    | (0.23  | )      |        | $ | 0.28   |       
|                                                                               |                                   |                               |        |        |        |      |        |        |        |   |        |       
|Weighted average common shares
    outstanding  basic                         |                                   |                               | 19,953 |        |        |      | 19,711 |        |        |   | 18,185 |       
|                                                                               |                                   |                               |        |        |        |      |        |        |        |   |        |       
|Earnings (loss) per share  diluted                                            |                                   | $                             | (0.31  | )      |        | $    | (0.23  | )      |        | $ | 0.25   |       
|                                                                               |                                   |                               |        |        |        |      |        |        |        |   |        |       
|Weighted average common and common equivalent
    shares outstanding  diluted |                                   |                               | 19,953 |        |        |      | 19,711 |        |        |   | 20,558 |       
|                                                                               |                                   |                               |        |        |        |      |        |        |        |   |        |       

CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME (LOSS)

(In thousands)


|                            |                                   |                               |        |      |  |      |        |      |   |   |       |      |  
|--------------------------- | --------------------------------- | ----------------------------- | ------ | ---- |  | ---- | ------ | ---- | - | - | ----- | ---- | -
|                            |                                   |                              
|                            |                                   | For the Years Ended March 31,
|                            |                                   |                              
|                            |                                   | 2002                          |        | 2001 |  | 2000
|                            |                                   |                               |        |      |  |     
|Net income (loss)           |                                   | $                             | (6,269 | )    |  | $    | (4,596 | )    |   | $ | 5,143 |     
|                            | Cumulative translation adjustment |                               |        | 45   |  |      |        | (739 | ) |   |       | (171 | )
|                            |                                   |                               |        |      |  |      |        |      |   |   |       |     
|Comprehensive income (loss) |                                   | $                             | (6,224 | )    |  | $    | (5,335 | )    |   | $ | 4,972 |     
|                            |                                   |                               |        |      |  |      |        |      |   |   |       |     

The accompanying notes to consolidated financial
statements are

an integral part of these consolidated financial
statements.


F-4



---



##### Table of Contents



NOVADIGM, INC.






CONSOLIDATED STATEMENTS OF STOCKHOLDERS
EQUITY


(In thousands)


|                          |                                                                                     |              |        |            |   |          |    |              |  |             |        |               |  |               |        |        |   |   |        |        |   |   |         |        |   |   |        |      |   |   |        |        |  
|------------------------- | ----------------------------------------------------------------------------------- | ------------ | ------ | ---------- | - | -------- | -- | ------------ |  | ----------- | ------ | ------------- |  | ------------- | ------ | ------ | - | - | ------ | ------ | - | - | ------- | ------ | - | - | ------ | ---- | - | - | ------ | ------ | -
|                          |                                                                                     |              |        |            |   |          |    |              |  |             |        | Accumulated   |  |              
|                          |                                                                                     | Common Stock |        | Additional |   |          |    | Stockholders |  |             |        | Other         |  | Total        
|                          |                                                                                     |              |        | Paid-in    |   | Treasury |    | Notes        |  | Accumulated |        | Comprehensive |  | Stockholders
|                          |                                                                                     | Shares       |        | Amount     |   | Capital  |    | Stock        |  | Receivable  |        | Deficit       |  | Income (loss) |        | Equity
|                          |                                                                                     |              |        |            |   |          |    |              |  |             |        |               |  |               |        |       
|Balance at March 31, 1999 |                                                                                     |              | 17,838 |            |   | $        | 11 |              |  | $           | 65,476 |               |  | $             | (265   | )      |   | $ |       |        |   | $ | (41,791 | )      |   | $ | (168   | )    |   | $ | 23,263 |       
|                          | Exercise of stock options and purchases of shares
    under the stock purchase plan |              |        | 752        |   |          |    | 8            |  |             |        | 3,207         |  |               |        | 265    |   |   |        |       |   |   |         |       |   |   |        |     |   |   |        | 3,480  |  
|                          | Foreign currency translation adjustment                                             |              |        |           |   |          |    |             |  |             |        |              |  |               |        |       |   |   |        |       |   |   |         |       |   |   |        | (171 | ) |   |        | (171   | )
|                          | Net income                                                                          |              |        |           |   |          |    |             |  |             |        |              |  |               |        |       |   |   |        |       |   |   |         | 5,143  |   |   |        |     |   |   |        | 5,143  |  
|                          |                                                                                     |              |        |            |   |          |    |              |  |             |        |               |  |               |        |        |   |   |        |        |   |   |         |        |   |   |        |      |   |   |        |       
|Balance at March 31, 2000 |                                                                                     |              | 18,590 |            |   |          | 19 |              |  |             | 68,683 |               |  |               |       |        |   |   |       |        |   |   | (36,648 | )      |   |   | (339   | )    |   |   | 31,715 |       
|                          | 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 | )      |   |   | (1,137 | )      |   |   | (41,244 | )      |   |   | (1,078 | )    |   |   | 44,150 |       
|                          | 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 | )      |   | $ | (1,091 | )      |   | $ | (47,513 | )      |   | $ | (1,033 | )    |   | $ | 36,990 |       
|                          |                                                                                     |              |        |            |   |          |    |              |  |             |        |               |  |               |        |        |   |   |        |        |   |   |         |        |   |   |        |      |   |   |        |       

The accompanying notes to consolidated financial
statements are

an integral part of these consolidated financial
statements.


F-5



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##### Table of Contents



NOVADIGM, INC.

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(Amounts in thousands, except share
data)


|                                                                                                                                                                  |                                                                                                   |                                                                      |                                                         |         |        |        |        |         |        |        |        |         |        |        |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------- | ------------------------------------------------------- | ------- | ------ | ------ | ------ | ------- | ------ | ------ | ------ | ------- | ------ | ------ | -
|                                                                                                                                                                  |                                                                                                   |                                                                     
|                                                                                                                                                                  |                                                                                                   | For the Years Ended March 31,                                       
|                                                                                                                                                                  |                                                                                                   |                                                                     
|                                                                                                                                                                  |                                                                                                   | 2002                                                                 |                                                         | 2001    |        | 2000  
|                                                                                                                                                                  |                                                                                                   |                                                                      |                                                         |         |        |       
|Cash flows from operating
    activities:                                                                                                                         |                                                                                                   |                                                                      |                                                         |         |        |        |        |         |        |        |        |        
|                                                                                                                                                                  | Net income (loss)                                                                                 |                                                                      | $                                                       | (6,269  | )      |        | $      | (4,596  | )      |        | $      | 5,143   |       
|                                                                                                                                                                  | Adjustments to reconcile net income
    (loss) to net cash provided by operating
    activities  |                                                                      |                                                         |         |        |        |        |         |        |        |        |         |       
|                                                                                                                                                                  |                                                                                                   | Depreciation and amortization                                        |                                                         |         | 10,010 |        |        |         | 6,768  |        |        |         | 862    |       
|                                                                                                                                                                  |                                                                                                   | (Decrease) increase in allowance for doubtful
    accounts           |                                                         |         | (396   | )      |        |         | 636    |        |        |         | 969    |       
|                                                                                                                                                                  |                                                                                                   | Increase in accounts receivable                                      |                                                         |         | (94    | )      |        |         | (3,625 | )      |        |         | (7,927 | )     
|                                                                                                                                                                  |                                                                                                   | Decrease (increase) in prepaid expenses and
    other current assets |                                                         |         | 106    |        |        |         | (113   | )      |        |         | (159   | )     
|                                                                                                                                                                  |                                                                                                   | Increase in intangible asset                                         |                                                         |         | (114   | )      |        |         | (340   | )      |        |         |       |       
|                                                                                                                                                                  |                                                                                                   | (Increase) decrease in other assets                                  |                                                         |         | (543   | )      |        |         | 226    |        |        |         | 93     |       
|                                                                                                                                                                  |                                                                                                   | (Decrease) increase in accounts payable and
    accrued liabilities  |                                                         |         | (416   | )      |        |         | 1,019  |        |        |         | 691    |       
|                                                                                                                                                                  |                                                                                                   | (Decrease) increase in accrued payroll and other
    compensation    |                                                         |         | (55    | )      |        |         | 1,519  |        |        |         | 1,022  |       
|                                                                                                                                                                  |                                                                                                   | (Decrease) increase in deferred revenue                              |                                                         |         | (614   | )      |        |         | 268    |        |        |         | 839    |       
|                                                                                                                                                                  |                                                                                                   |                                                                      |                                                         |         |        |        |        |         |        |        |        |        
|                                                                                                                                                                  |                                                                                                   |                                                                      | Net cash provided by operating activities               |         |        | 1,615  |        |         |        | 1,762  |        |         |        | 1,533  |  
|                                                                                                                                                                  |                                                                                                   |                                                                      |                                                         |         |        |        |        |         |        |        |        |        
|Cash flows from investing
    activities:                                                                                                                         |                                                                                                   |                                                                      |                                                         |         |        |        |        |         |        |        |        |        
|                                                                                                                                                                  | Acquisition of intellectual property                                                              |                                                                      |                                                         | (390    | )      |        |        |        |        |        |        |        |       
|                                                                                                                                                                  | Purchases of property and equipment                                                               |                                                                      |                                                         | (1,247  | )      |        |        | (1,541  | )      |        |        | (1,360  | )     
|                                                                                                                                                                  | Purchases of held-to-maturity securities                                                          |                                                                      |                                                         | (39,969 | )      |        |        | (54,001 | )      |        |        | (49,015 | )     
|                                                                                                                                                                  | Proceeds from redemptions of held-to-maturity
    securities                                      |                                                                      |                                                         | 46,539  |        |        |        | 68,779  |        |        |        | 41,079  |       
|                                                                                                                                                                  |                                                                                                   |                                                                      |                                                         |         |        |        |        |         |        |        |        |        
|                                                                                                                                                                  |                                                                                                   |                                                                      | Net cash provided by (used in) investing
    activities |         |        | 4,933  |        |         |        | 13,237 |        |         |        | (9,296 | )
|                                                                                                                                                                  |                                                                                                   |                                                                      |                                                         |         |        |        |        |         |        |        |        |        
|Cash flows from financing
    activities:                                                                                                                         |                                                                                                   |                                                                      |                                                         |         |        |        |        |         |        |        |        |        
|                                                                                                                                                                  | Net proceeds from the sale of common stock and
    exercise of options                            |                                                                      |                                                         | 1,713   |        |        |        | 3,323   |        |        |        | 3,480   |       
|                                                                                                                                                                  | Proceeds from the Hewlett-Packard alliance
    agreement                                          |                                                                      |                                                         |        |        |        |        | 2,500   |        |        |        |        |       
|                                                                                                                                                                  | Loans to stockholders, net of repayments                                                          |                                                                      |                                                         | 46      |        |        |        | (1,137  | )      |        |        |        |       
|                                                                                                                                                                  | Purchases of treasury stock                                                                       |                                                                      |                                                         | (3,169  | )      |        |        | (2,711  | )      |        |        |        |       
|                                                                                                                                                                  |                                                                                                   |                                                                      |                                                         |         |        |        |        |         |        |        |        |        
|                                                                                                                                                                  |                                                                                                   |                                                                      | Net cash (used in) provided by financing                |         |        | (1,410 | )      |         |        | 1,975  |        |         |        | 3,480  |  
|                                                                                                                                                                  |                                                                                                   |                                                                      |                                                         |         |        |        |        |         |        |        |        |        
|Effect of exchange rate on changes in cash                                                                                                                        |                                                                                                   |                                                                      | 45                                                      |         |        |        | (52    | )       |        |        | (171   | )      
|                                                                                                                                                                  |                                                                                                   |                                                                      |                                                         |         |        |        |        |         |        |        |        |        
|Net increase (decrease) in cash and cash
    equivalents                                                                                                          |                                                                                                   |                                                                      | 5,183                                                   |         |        |        | 16,922 |         |        |        | (4,454 | )      
|Cash and cash equivalents at the beginning of the
    period                                                                                                      |                                                                                                   |                                                                      | 20,592                                                  |         |        |        | 3,670  |         |        |        | 8,124  |        
|                                                                                                                                                                  |                                                                                                   |                                                                      |                                                         |         |        |        |        |         |        |        |        |        
|Cash and cash equivalents at the end of the
    period                                                                                                            |                                                                                                   | $                                                                    | 25,775                                                  |         |        | $      | 20,592 |         |        | $      | 3,670  |        
|                                                                                                                                                                  |                                                                                                   |                                                                      |                                                         |         |        |        |        |         |        |        |        |        
|Supplemental disclosure of cash flow
    information:                                                                                                             |                                                                                                   |                                                                      |                                                         |         |        |        |        |         |        |        |        |        
|Cash paid for income taxes                                                                                                                                        |                                                                                                   | $                                                                    | 11                                                      |         |        | $      | 3      |         |        | $      | 293    |        
|Non-cash financing activity:                                                                                                                                      |                                                                                                   |                                                                      |                                                         |         |        |        |        |         |        |        |        |        
|Issuance of common stock in connection with the
    acquisition of intellectual property (47,000 shares issued,
    166,000 shares issuable as of March 31, 2002) |                                                                                                   | $                                                                    | 2,135                                                   |         |        | $      |       |         |        | $      |       |        
|Issuance of 940,000 shares of common stock in
    connection with the Alliance Agreement with Hewlett-Packard                                                     |                                                                                                   | $                                                                    |                                                        |         |        | $      | 18,295 |         |        | $      |       |        

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.

NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS

March 31, 2002

1.     The
Company

Novadigm, Inc. was incorporated in Delaware in
February 1992. Novadigm, Inc. and its subsidiaries
(Novadigm or the Company) designs,
markets and supports 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
maintains wholly owned subsidiaries in France, Germany and the
United Kingdom to 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 its 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.

Use of
Estimates

The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

Reclassifications

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

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. If an

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NOVADIGM, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

acceptance period is required, revenues are
recognized upon the earlier of customer acceptance or the
expiration of the acceptance period. The Company allocates
revenue on software arrangements involving multiple elements to
each element based on the relative fair values of the elements.
The Companys determination of fair value of each element
in multiple element-arrangements is based on vendor specific
objective evidence (VSOE). The Company has analyzed all of the
elements and determined it has sufficient VSOE to allocate
revenue to maintenance, consulting and training components
included in multiple-element arrangements. Accordingly, assuming
all other revenue recognition criteria are met, revenue is
recognized upon delivery using the residual method in accordance
with SOP 98-9, where the fair value of the undelivered
elements is deferred and the remaining portion of the
arrangement fee is recognized as revenue. The revenue allocated
to licenses generally is recognized upon delivery of the
products. The revenue allocated to maintenance 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 2002, 2001 and
2000, $250 thousand, $0 and $1.2 million, respectively,
were recognized in guaranteed sublicense fees. As of
March 31, 2002, a substantial majority of all such
guaranteed sublicense fees recognized by Novadigm were placed
with end users or forfeited by the reseller.

Cost of licenses consist 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 services includes the
direct and indirect costs of providing technical support and
consulting and training services to our customers. 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.

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

Cash
Equivalents

The Company considers all highly liquid
investments purchased with an original maturity of three months
or less to be cash equivalents. At March 31, 2002, the
Company held approximately $20.4 million of commercial
paper with a variety of large companies.

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, 2002, approximately 15% of accounts receivable
was concentrated with one customer

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##### Table of Contents



NOVADIGM, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

who is a large company that the Company has
determined as creditworthy. As of March 31, 2001,
approximately 29% of accounts receivable was concentrated with
one customer who is a large, well-established company that the
Company has determined as 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 to
maturity and are carried at amortized cost.

The Company had $0 and $6.6 million of
held-to-maturity securities at March 31, 2002 and 2001,
respectively.

Proceeds from redemption of held-to-maturity
securities were approximately $46.5 and $68.8 million in
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 is stated at historical
cost and consists of the following at March 31, (in
thousands):

|                                                |  |      |        |      |  |   |        |  
|----------------------------------------------- |  | ---- | ------ | ---- |  | - | ------ | -
|                                                |  | 2002 |        | 2001
|                                                |  |      |        |     
|Company cars                                    |  | $    |       |      |  | $ | 95     |  
|Computer equipment and software                 |  |      | 7,203  |      |  |   | 6,073  |  
|Furniture and fixtures                          |  |      | 844    |      |  |   | 725    |  
|Leasehold improvements                          |  |      | 1,297  |      |  |   | 1,204  |  
|                                                |  |      |        |      |  |   |        |  
|                                                |  |      | 9,344  |      |  |   | 8,097  |  
|Less: Accumulated depreciation and amortization |  |      | (6,719 | )    |  |   | (5,392 | )
|                                                |  |      |        |      |  |   |        |  
|                                                |  | $    | 2,625  |      |  | $ | 2,705  |  
|                                                |  |      |        |      |  |   |        |  

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                                                    
|Company cars                    |  | 4 years                                                    
|Furniture and fixtures          |  | 5 years                                                    
|Leasehold improvements          |  | 5 years (lesser of lease term or estimated useful
    life)

Intangible
Assets

The Companys net intangible asset at
March 31, 2002, $5.4 million, is attributable to the
strategic alliance entered into between the Company and
Hewlett-Packard Company (Hewlett-Packard) in June
2000 (see Note 9) and to the Companys acquisition of
intellectual property from another organization in October 2001.
The intangible asset acquired with the Hewlett-Packard strategic
alliance is being amortized

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##### Table of Contents



NOVADIGM, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

over the initial term of the agreement, two
years, using the straight-line method and is expected to be
fully amortized by June 2002.

The cost of intellectual property acquired in
October 2001, was $3,894,000, net of acquisition costs of
$114,000, and is payable through the issuance of
212,636 shares of common stock and payment of
$1.7 million over 9 quarters. As of March 31,
2002, 47,252 shares of common stock have been issued and
payments totaling $390 thousand were made. The Company will
issue 23,626 shares and make a cash payment of
$195 thousand quarterly through December 31, 2003. The
value of the shares to be issued and cash to be paid have been
accrued in the accompanying balance sheet. Accordingly,
$1.7 million is included in accrued liabilities and
$1.3 million is reflected as long-term liabilities. 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.

Amortization expense was $8.7 and
$6.1 million for the year ended March 31, 2002 and
2001, respectively.

Long-Lived
Assets

Novadigm follows the provisions of Statement of
Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-lived Assets
(SFAS 121). SFAS 121 requires, among other
things, that an entity review its long-lived assets and certain
related intangibles for impairment whenever changes in
circumstances indicate that the carrying amount of an asset may
not be fully recoverable. Novadigm does not believe that any
such events or changes in circumstances have occurred.

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.

Earnings per
Share

Basic earnings per share (EPS) is
calculated by dividing income (loss) available to common
shareholders by the weighted average number of shares of common
stock outstanding during the period. Diluted EPS is calculated
by dividing income (loss) available to common shareholders
by the weighted average number of common shares outstanding for
the period adjusted to reflect the impact of common stock
equivalent securities, if dilutive.

For the years ended March 31, 2002 and 2001,
the impact of common stock equivalent securities of 1,202,000
and 1,916,000, respectively, have been excluded from dilutive
EPS as their inclusion would have been anti-dilutive.

F-10



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##### Table of Contents



NOVADIGM, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In accordance with SFAS 128, the following table
reconciles income and share amounts used to calculate basic
earnings (loss) per share and diluted earnings
(loss) per share (in thousands, except for per share data):

|                                        |                                                                                |                               |       |        |   |      |       |        |   |   |      |        | 
|--------------------------------------- | ------------------------------------------------------------------------------ | ----------------------------- | ----- | ------ | - | ---- | ----- | ------ | - | - | ---- | ------ | 
|                                        |                                                                                |                              
|                                        |                                                                                | For the Years Ended March 31,
|                                        |                                                                                |                              
|                                        |                                                                                | 2002                          |       | 2001   |   | 2000
|                                        |                                                                                |                               |       |        |   |     
|Numerator:                              |                                                                                |                               |       |        |   |      |       |        |   |   |      |       
|                                        | Net income (loss)  basic and diluted                                          |                               | $     | (6,269 | ) |      | $     | (4,596 | ) |   | $    | 5,143  | 
|                                        |                                                                                |                               |       |        |   |      |       |        |   |   |      |       
|Denominator:                            |                                                                                |                               |       |        |   |      |       |        |   |   |      |       
|                                        | Weighted average number of common shares
    outstanding  basic               |                               |       | 19,953 |   |      |       | 19,711 |   |   |      | 18,185 | 
|                                        | Incremental shares from assumed conversion of
    options                      |                               |       |       |   |      |       |       |   |   |      | 2,373  | 
|                                        |                                                                                |                               |       |        |   |      |       |        |   |   |      |       
|                                        | Weighted average common and common equivalent
    shares outstanding  diluted |                               |       | 19,953 |   |      |       | 19,711 |   |   |      | 20,558 | 
|                                        |                                                                                |                               |       |        |   |      |       |        |   |   |      |       
|Earnings (loss) per share 
    basic   |                                                                                | $                             | (0.31 | )      |   | $    | (0.23 | )      |   | $ | 0.28 |       
|                                        |                                                                                |                               |       |        |   |      |       |        |   |   |      |       
|Earnings (loss) per share 
    diluted |                                                                                | $                             | (0.31 | )      |   | $    | (0.23 | )      |   | $ | 0.25 |       
|                                        |                                                                                |                               |       |        |   |      |       |        |   |   |      |       

Recently
Issued Accounting Pronouncements

In June 2001, the Financial Accounting Standards
Board issued Statements of Financial Accounting Standards
No. 141, Business Combinations (SFAS
No. 141) and No. 142, Goodwill and Other
Intangible Assets (SFAS No. 142). SFAS
No. 141 changes the accounting for business combinations,
requiring that all business combinations be accounted for using
the purchase method and that intangible assets be recognized as
assets apart from goodwill if they arise from contractual or
other legal rights, or if they are separable or capable of being
separated from the acquired entity and sold, transferred,
licensed, rented or exchanged. SFAS No. 141 is effective
for all business combinations initiated after June 30,
2001. SFAS No. 142 specifies the financial accounting and
reporting for acquired goodwill and other intangible assets.
Goodwill and intangible assets that have indefinite useful lives
will not be amortized but rather will be tested at least
annually for impairment. SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001.

SFAS No. 142 requires that the useful lives
of intangible assets acquired on or before June 30, 2001 be
reassessed and the remaining amortization periods adjusted
accordingly. Previously recognized intangible assets deemed to
have indefinite lives shall be tested for impairment. Goodwill
recognized on or before June 30, 2001, shall be assigned to
one or more reporting units and shall be tested for impairment
as of the beginning of the fiscal year in which SFAS
No. 142 is initially applied in its entirety.

The Company has not fully assessed the potential
impact of the adoption of SFAS No. 142, which is effective
for the Company as of April 1, 2002. The reassessment of
intangible assets must be completed during the first quarter of
fiscal 2003 and the assignment of goodwill to reporting units,
along with completion of the first step of the transitional
goodwill impairment tests, must be completed during the first
six months of fiscal 2003. Total amortization of intangible
assets for the year ended March 31, 2002 was approximately
$8.7 million.

In October 2001, The FSAB issued SFAS
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets (SFAS 144), which
supercedes SFAS 121 and certain provisions of APB Opinion
No. 30, Reporting Results of Operations 
Reporting the Effects of Disposal of a Segment of a Business and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. SFAS 144 requires that long-lived
assets to be disposed of by sale, including discontinued
operations, be measured at the lower of carrying amount or fair
value less cost to sell, whether reported in continuing
operations or in discontinued operations. SFAS 144 also
broadens the reporting requirements of discontinued operations
to include all components of

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##### Table of Contents



NOVADIGM, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

an entity that have operations and cash flows
that can be clearly distinguished, operationally and for
financial reporting purposes, from the rest of the entity. The
provisions of SFAS 144 are effective beginning after
April 1, 2002. The Company is currently in the process of
assessing the effects of implementing the new standard.

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 fiscal 2002, 2001 and 2000
(in thousands) was approximately $2,209, $1,490 and $1,106,
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, |  |   |       | 
|2003                  |  | $ | 2,194 | 
|2004                  |  |   | 2,125 | 
|2005                  |  |   | 1,962 | 
|2006                  |  |   | 1,750 | 
|2007                  |  |   | 701   | 
|                      |  |   |       | 
|                      |  | $ | 8,732 | 
|                      |  |   |       | 

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
ended March 31, 2002 and 2001, approximately $543,000 and
$226,000, respectively, of this amount has been recognized in
license revenue.

The Company is engaged in certain legal and
administrative proceedings. While management believes the
outcome of these proceedings will not be unfavorable, any
unfavorable outcome of this litigation could have an adverse
impact on our business, financial condition and results of
operations.

4.     Common
Stock

In July of 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, 2002, the Company has
expended approximately $9.0 million to repurchase 1,222,000
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 8). 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
approximately 47,000 shares had been issued by March 31,
2002.

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 amended (the
1992 Plan). The 2000 Plan permits the Company to
grant incentive stock options to

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##### Table of Contents



NOVADIGM, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

employees and officers of the Company and
nonstatutory stock options to eligible employees, officers,
directors and consultants. Incentive 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 options are granted at no less than 85% of
fair market value at the date of grant. As of March 31,
2002, no options were 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 four years). A total of
1,500,000 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 will be 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, 2002,
2,089,916 options have been granted pursuant to the 2000 plan,
net of cancellations.

The terms and provision 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 a total of 5,019,000 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, in June 2000 and
again in August 2001. In November 2001, the Board of Directors
authorized and reserved an additional 100,000 shares for
issuance under the 1999 Plan. 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, 2002, 1,299,974 options
have been granted pursuant to this plan, net of cancellations.

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

|                          |           |             |       |             |   |   |      |       | 
|------------------------- | --------- | ----------- | ----- | ----------- | - | - | ---- | ----- | 
|                          |           |             |       | Weighted   
|                          |           | Options     |       | Average    
|                          |           | Outstanding |       | Grant Price
|                          |           |             |       |            
|Balance at March 31, 1999 |           |             | 3,685 |             |   | $ | 4.35 |      
|                          | Granted   |             |       | 1,477       |   |   |      | 11.41 | 
|                          | Exercised |             |       | (738        | ) |   |      | 4.50  | 
|                          | Canceled  |             |       | (331        | ) |   |      | 4.73  | 
|                          |           |             |       |             |   |   |      |      
|Balance at March 31, 2000 |           |             | 4,093 |             |   | $ | 6.85 |      
|                          | Granted   |             |       | 1,149       |   |   |      | 9.91  | 
|                          | Exercised |             |       | (633        | ) |   |      | 4.70  | 
|                          | Canceled  |             |       | (627        | ) |   |      | 8.31  | 
|                          |           |             |       |             |   |   |      |      
|Balance at March 31, 2001 |           |             | 3,982 |             |   | $ | 7.82 |      
|                          | Granted   |             |       | 2,217       |   |   |      | 5.74  | 
|                          | Exercised |             |       | (273        | ) |   |      | 4.49  | 
|                          | Canceled  |             |       | (107        | ) |   |      | 10.15 | 
|                          |           |             |       |             |   |   |      |      
|Balance at March 31, 2002 |           |             | 5,819 |             |   | $ | 7.04 |      
|                          |           |             |       |             |   |   |      |      

F-13



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##### Table of Contents



NOVADIGM, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

At March 31, 2002, 2,752,846 options are
vested and exercisable and 57,170 shares of common stock are
reserved for future issuance under these Plans. The weighted
average exercise price of exercisable options at March 31,
2002 is $6.78 per share.

The following table summarizes the information
above about options outstanding and options exercisable at
March 31, 2002 (in thousands, except per share amounts):

|             |                 |             |  |                |       |                |  |          |       |          |  |  |            |  |  |  |       |  |  |   |       | 
|------------ | --------------- | ----------- |  | -------------- | ----- | -------------- |  | -------- | ----- | -------- |  |  | ---------- |  |  |  | ----- |  |  | - | ----- | 
|             |                 |             |  |               
|             |                 | Outstanding |  | Exercisable   
|             |                 |             |  |               
|             |                 |             |  | Weighted       |       |                |  | Weighted
|             |                 |             |  | Weighted       |       | Average        |  |          |       | Average 
|Option Price |                 |             |  | Average        |       | Contractual    |  |          |       | Exercise
|Range        |                 | Number      |  | Exercise Price |       | Life Remaining |  | Number   |       | Price   
|             |                 |             |  |                |       |                |  |          |       |         
|             | $ 2.79  $ 6.95 |             |  |                | 3,125 |                |  | $        | 4.28  |          |  |  | 7.03 Years |  |  |  | 1,736 |  |  | $ | 4.26  | 
|             | $ 6.98  $17.25 |             |  |                | 2,587 |                |  |          | 9.71  |          |  |  | 8.35 Years |  |  |  | 964   |  |  |   | 10.52 | 
|             | $18.00  $24.63 |             |  |                | 107   |                |  |          | 21.10 |          |  |  | 8.09 Years |  |  |  | 53    |  |  |   | 20.98 | 
|             |                 |             |  |                |       |                |  |          |       |          |  |  |            |  |  |  |       |  |  |   |       | 
|             |                 |             |  |                | 5,819 |                |  |          |       |          |  |  |            |  |  |  | 2,753 |  |  |   |       | 
|             |                 |             |  |                |       |                |  |          |       |          |  |  |            |  |  |  |       |  |  |   |       | 

On May 17, 1995, the 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 Common
Stock was 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 trade day of the period.
Approximately 92,000 shares were purchased by employees under
the Purchase Plan in fiscal 2002 and 2001 and approximately
30,000 shares were purchased during fiscal 2000. At
March 31, 2002, Novadigm has reserved approximately 630,000
shares for future issuance.

In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards No. 123 (SFAS 123),
Accounting for Stock-Based Compensation, which
establishes a fair value-based method of accounting for
stock-based compensation plans and requires additional
disclosures for those companies who elect not to adopt the new
method of accounting. In accordance with the provisions of
SFAS 123, Novadigm applies APB Opinion 25 and related
interpretations in accounting for its stock option and stock
purchase plans. Had compensation cost for these plans been
determined consistent with SFAS 123, Novadigms net
income (loss) and earnings (loss) per share would have
resulted in the following pro forma amounts indicated in the
table below (in thousands, except for per share amounts):

|                            |                       |      |   |         |   |      |   |         |   |  |   |       | 
|--------------------------- | --------------------- | ---- | - | ------- | - | ---- | - | ------- | - |  | - | ----- | 
|                            |                       | 2002 |   | 2001    |   | 2000
|                            |                       |      |   |         |   |     
|Net income (loss)           |                       |      |   |         |   |      |   |         |   |  |   |      
|                            | As reported           |      | $ | (6,269  | ) |      | $ | (4,596  | ) |  | $ | 5,143 | 
|                            | Pro forma             |      | $ | (12,549 | ) |      | $ | (10,079 | ) |  | $ | 2,463 | 
|Net income (loss) per share |                       |      |   |         |   |      |   |         |   |  |   |      
|                            | As reported  basic   |      | $ | (0.31   | ) |      | $ | (0.23   | ) |  | $ | 0.28  | 
|                            | As reported  diluted |      | $ | (0.31   | ) |      | $ | (0.23   | ) |  | $ | 0.25  | 
|                            | Pro forma  basic     |      | $ | (0.63   | ) |      | $ | (0.51   | ) |  | $ | 0.14  | 
|                            | Pro forma  diluted   |      | $ | (0.63   | ) |      | $ | (0.51   | ) |  | $ | 0.12  | 

The weighted average fair values of options
granted during fiscal 2002, 2001 and 2000 were $3.81, $9.08 and
$8.40, 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 2002, 2001 and 2000:

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##### Table of Contents



NOVADIGM, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

risk free interest rates ranged from 3.9% to
6.4%, expected dividend yields of 0%, expected lives of
5.0 years and expected volatility of 79%, 136% and 92% for
2002, 2001 and 2000, respectively.

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,          
|                           |                 |                    
|                           |                 | 2002                |    | 2001 |   | 2000
|                           |                 |                     |    |      |   |     
|Current                    |                 |                     |    |      |   |      |     |    |     |   |     |    
|                           | U.S. Federal    |                     | $  |     |   |      | $   | 90 |     |   | $   | 306 |    
|                           | State and local |                     |    |     |   |      |     | 20 |     |   |     | 24  |    
|                           |                 |                     |    |      |   |      |     |    |     |   |     |    
|                           |                 | Total current       |    | $    |  |      |     | $  | 110 |   |     | $   | 330 | 
|                           |                 |                     |    |      |   |      |     |    |     |   |     |    
|Deferred                   |                 |                     |    |      |   |      |     |    |     |   |     |    
|                           | U.S. Federal    |                     |    |     |   |      |     |   |     |   |     |    |    
|                           | State and local |                     |    |     |   |      |     |   |     |   |     |    |    
|                           |                 |                     |    |      |   |      |     |    |     |   |     |    
|                           |                 | Total deferred      |    |      |  |      |     |    |    |   |     |     |    | 
|                           |                 |                     |    |      |   |      |     |    |     |   |     |    
|Foreign                    |                 |                     | 11 |      |   |      | 123 |    |     |   | 97  |    
|                           |                 |                     |    |      |   |      |     |    |     |   |     |    
|Provision for income taxes |                 | $                   | 11 |      |   | $    | 233 |    |     | $ | 427 |    
|                           |                 |                     |    |      |   |      |     |    |     |   |     |    

The components of the net deferred tax asset at
March 31, 2002 and 2001 are as follows (in thousands):

|                       |                                                               |                           |         |        |        |   |         |       |        | 
|---------------------- | ------------------------------------------------------------- | ------------------------- | ------- | ------ | ------ | - | ------- | ----- | ------ | 
|                       |                                                               | 2002                      |         | 2001  
|                       |                                                               |                           |         |       
|Deferred tax assets:   |                                                               |                           |         |        |        |   |         |      
|                       | Net operating loss carryforwards                              |                           | $       | 11,676 |        |   | $       | 8,877 |       
|                       | Reserves and accruals not yet deductible for tax
    purposes |                           |         | 1,576  |        |   |         | 1,431 |       
|                       | Credit carryforwards                                          |                           |         | 927    |        |   |         | 927   |       
|                       | Amortization of intangible asset                              |                           |         | 680    |        |   |         | 800   |       
|                       | Depreciation                                                  |                           |         | 432    |        |   |         | 412   |       
|                       |                                                               |                           |         |        |        |   |         |      
|                       |                                                               | Total deferred tax assets |         |        | 15,291 |   |         |       | 12,447 | 
|Valuation allowance    |                                                               |                           | (15,291 | )      |        |   | (12,447 | )    
|                       |                                                               |                           |         |        |        |   |         |      
|Net deferred tax asset |                                                               | $                         |        |        |        | $ |        |      
|                       |                                                               |                           |         |        |        |   |         |      

As of March 31, 2002, Novadigm has net
operating loss carryforwards for federal income tax reporting
purposes of approximately $29 million. These carryforwards
expire in various periods through 2022. 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. Approximately
$6 million of the total net operating loss carryforwards
available are generated from operations and approximately
$23 million are generated from the exercise of
non-qualified stock options. A full valuation allowance has been
recorded by the Company in the accompanying financial

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##### Table of Contents



NOVADIGM, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

statements to offset the deferred tax assets as
their future realizability is uncertain considering the
Companys historical operating results.

The provision for income taxes for the years
ended March 31st differs from the statutory
U.S. Federal income tax rate due to the following:

|                                           |  |      |        |      |  |  |        |   
|------------------------------------------ |  | ---- | ------ | ---- |  |  | ------ | --
|                                           |  | 2002 |        | 2001
|                                           |  |      |        |     
|(Benefit) provision at U.S. statutory rate |  |      | (35.00 | )%   |  |  | (35.00 | )%
|State income taxes, net of federal benefit |  |      | (0.50  | )    |  |  | 0.50   |   
|Change in valuation allowance              |  |      | 34.49  |      |  |  | 37.00  |   
|Other                                      |  |      | 1.00   |      |  |  | 2.80   |   
|                                           |  |      |        |      |  |  |        |   
|                                           |  |      | 0.01   | %    |  |  | 5.30   | % 
|                                           |  |      |        |      |  |  |        |   

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 has a term of one year and is renewable on an annual
basis. At March 31, 2002 no amounts were due and
outstanding under the revolving line of credit.

8.     Major
Customers

During fiscal years 2002 and 2001, only one
customer, Electronic Data Systems Corporation (EDS)
accounted for more than 10% of the Companys 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. During fiscal 2000, one
customer, Amdahl Corporation, accounted for approximately 14% 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
contained 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, is being amortized over
the initial term of the agreement, two years. Included in the
warrant is a provision that reduces the exercise price of the
warrant to $0 if Hewlett-Packard attains certain revenue
milestones. Should Hewlett-Packard meet those milestones, the
intangible asset will be adjusted and the new amount will be
amortized for the remainder of the term. The amortization
expense for 2002 was $8.1 million. The amortization expense
for 2001 was approximately $6.1 million. At March 31,
2002, the net balance of this intangible asset was approximately
$2.0 million (See Note 2). 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.     Stockholders
Notes Receivable

At March 31, 2002, the Company held notes
receivable with a total value of $1.1 million due from
executive officers and shareholders. The notes bear a fair
market interest rate determined at the time the note is written.
The notes are full recourse and are secured by shares of the
Companys common stock. The notes have a term of one year
and allow for prepayment. In 2002, the notes matured and were
renewed for a term of six months. During fiscal 2002 issuers of
the notes repaid $313 thousand of the outstanding balance,
$197 thousand of new notes were issued and $70 thousand in
associated interest was accrued.

11.     Industry and
Geographic Segment Information

The Companys software products and related
services are developed and marketed to support heterogeneous
enterprise and Internet computing environments. The Company
markets its products and related services to customers in North
America, the Pacific Rim, and South America (AAA),
and to Europe, the Middle East and Africa (EMEA).
The Companys international revenue represents products
shipped from the United States directly to end-users outside the
United States. The Company does not sell products directly to
its international subsidiaries.

Revenue and total asset information by geographic
area as of and for the year ended:

|                |      |         |   |        |        |  |   |        |        | 
|--------------- | ---- | ------- | - | ------ | ------ |  | - | ------ | ------ | 
|                |      |         |   | Total 
|                |      | Revenue |   | Assets
|                |      |         |   |       
|March 31, 2002: |      |         |   |        |        |  |   |       
|                | AAA  |         | $ | 35,770 |        |  | $ | 39,628 |       
|                | EMEA |         |   | 26,753 |        |  |   | 15,087 |       
|                |      |         |   |        |        |  |   |       
|                |      | Total   |   | $      | 62,523 |  |   | $      | 54,715 | 
|                |      |         |   |        |        |  |   |       
|March 31, 2001: |      |         |   |        |        |  |   |       
|                | AAA  |         | $ | 27,363 |        |  | $ | 51,123 |       
|                | EMEA |         |   | 23,083 |        |  |   | 8,809  |       
|                |      |         |   |        |        |  |   |       
|                |      | Total   |   | $      | 50,446 |  |   | $      | 59,932 | 
|                |      |         |   |        |        |  |   |       
|March 31, 2000: |      |         |   |        |        |  |   |       
|                | AAA  |         | $ | 27,318 |        |  | $ | 35,312 |       
|                | EMEA |         |   | 17,410 |        |  |   | 9,068  |       
|                |      |         |   |        |        |  |   |       
|                |      | Total   |   | $      | 44,728 |  |   | $      | 44,380 | 
|                |      |         |   |        |        |  |   |       

F-17



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##### Table of Contents



NOVADIGM, INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                    
|--- | -----------------------------------
|12. | Selected Quarterly Data (Unaudited)

(In thousands)


|                                       |                          |               |        |           |  |         |        |           |  |          |        |           |  |         |        |           |  |  |        |        |  |  |        |        |  |  |        |        |  |  |        |        | 
|-------------------------------------- | ------------------------ | ------------- | ------ | --------- |  | ------- | ------ | --------- |  | -------- | ------ | --------- |  | ------- | ------ | --------- |  |  | ------ | ------ |  |  | ------ | ------ |  |  | ------ | ------ |  |  | ------ | ------ | 
|                                       |                          |              
|                                       |                          | Quarter Ended
|                                       |                          |              
|                                       |                          |               |        |          
|                                       |                          | 2001          |        | 2002     
|                                       |                          |               |        |          
|                                       |                          | June 30,      |        | Sept. 30, |  | Dec. 31 |        | March 31, |  | June 30, |        | Sept. 30, |  | Dec. 31 |        | March 31,
|                                       |                          | 2000          |        | 2000      |  | 2000    |        | 2001      |  | 2001     |        | 2001      |  | 2001    |        | 2002     
|                                       |                          |               |        |           |  |         |        |           |  |          |        |           |  |         |        |          
|Revenues:                              |                          |               |        |           |  |         |        |           |  |          |        |           |  |         |        |           |  |  |        |        |  |  |        |        |  |  |        |        |  |  |        |       
|Licenses                               |                          |               | 3,791  |           |  |         | 7,998  |           |  |          | 8,314  |           |  |         | 11,144 |           |  |  | 9,087  |        |  |  | 9,074  |        |  |  | 8,632  |        |  |  | 12,365 |       
|Maintenance and services               |                          |               | 4,512  |           |  |         | 4,625  |           |  |          | 4,432  |           |  |         | 5,630  |           |  |  | 5,726  |        |  |  | 6,155  |        |  |  | 6,437  |        |  |  | 5,047  |       
|                                       |                          |               |        |           |  |         |        |           |  |          |        |           |  |         |        |           |  |  |        |        |  |  |        |        |  |  |        |        |  |  |        |       
|                                       | Total revenues           |               |        | 8,303     |  |         |        | 12,623    |  |          |        | 12,746    |  |         |        | 16,774    |  |  |        | 14,813 |  |  |        | 15,229 |  |  |        | 15,069 |  |  |        | 17,412 | 
|Operating expenses:                    |                          |               |        |           |  |         |        |           |  |          |        |           |  |         |        |           |  |  |        |        |  |  |        |        |  |  |        |        |  |  |        |       
|Cost of maintenance and services       |                          |               | 1,705  |           |  |         | 2,141  |           |  |          | 2,179  |           |  |         | 3,253  |           |  |  | 2,858  |        |  |  | 2,866  |        |  |  | 2,806  |        |  |  | 3,145  |       
|Sales and marketing                    |                          |               | 5,580  |           |  |         | 6,119  |           |  |          | 6,568  |           |  |         | 7,667  |           |  |  | 6,731  |        |  |  | 6,641  |        |  |  | 6,827  |        |  |  | 6,928  |       
|Research and development               |                          |               | 2,108  |           |  |         | 2,161  |           |  |          | 2,214  |           |  |         | 2,520  |           |  |  | 2,582  |        |  |  | 2,538  |        |  |  | 2,528  |        |  |  | 2,775  |       
|General and administrative             |                          |               | 1,584  |           |  |         | 1,812  |           |  |          | 2,596  |           |  |         | 2,313  |           |  |  | 2,543  |        |  |  | 3,041  |        |  |  | 2,926  |        |  |  | 2,813  |       
|Amortization of intangibles            |                          |               |       |           |  |         | 2,010  |           |  |          | 2,018  |           |  |         | 2,018  |           |  |  | 2,018  |        |  |  | 2,018  |        |  |  | 2,294  |        |  |  | 2,353  |       
|                                       |                          |               |        |           |  |         |        |           |  |          |        |           |  |         |        |           |  |  |        |        |  |  |        |        |  |  |        |        |  |  |        |       
|                                       | Total operating expenses |               |        | 10,977    |  |         |        | 14,243    |  |          |        | 15,575    |  |         |        | 17,771    |  |  |        | 16,732 |  |  |        | 17,104 |  |  |        | 17,381 |  |  |        | 18,014 | 
|                                       |                          |               |        |           |  |         |        |           |  |          |        |           |  |         |        |           |  |  |        |        |  |  |        |        |  |  |        |        |  |  |        |       
|Operating loss                         |                          |               | (2,674 | )         |  |         | (1,620 | )         |  |          | (2,829 | )         |  |         | (997   | )         |  |  | (1,919 | )      |  |  | (1,875 | )      |  |  | (2,312 | )      |  |  | (602   | )     
|Interest income, net                   |                          |               | 357    |           |  |         | 462    |           |  |          | 473    |           |  |         | 410    |           |  |  | 328    |        |  |  | 224    |        |  |  | 88     |        |  |  | 134    |       
|Other income (loss)                    |                          |               | (31    | )         |  |         | (37    | )         |  |          | 2,107  |           |  |         | 16     |           |  |  | (51    | )      |  |  | 66     |        |  |  | (142   | )      |  |  | (198   | )     
|                                       |                          |               |        |           |  |         |        |           |  |          |        |           |  |         |        |           |  |  |        |        |  |  |        |        |  |  |        |        |  |  |        |       
|Loss before provision for income taxes |                          |               | (2,348 | )         |  |         | (1,195 | )         |  |          | (249   | )         |  |         | (571   | )         |  |  | (1,642 | )      |  |  | (1,584 | )      |  |  | (2,366 | )      |  |  | (666   | )     
|Provision for income taxes             |                          |               | 149    |           |  |         | 27     |           |  |          | 27     |           |  |         | 30     |           |  |  |       |        |  |  |       |        |  |  |       |        |  |  | 11     |       
|                                       |                          |               |        |           |  |         |        |           |  |          |        |           |  |         |        |           |  |  |        |        |  |  |        |        |  |  |        |        |  |  |        |       
|Net loss                               |                          |               | (2,497 | )         |  |         | (1,222 | )         |  |          | (276   | )         |  |         | (601   | )         |  |  | (1,642 | )      |  |  | (1,584 | )      |  |  | (2,366 | )      |  |  | (677   | )     
|                                       |                          |               |        |           |  |         |        |           |  |          |        |           |  |         |        |           |  |  |        |        |  |  |        |        |  |  |        |        |  |  |        |       

F-18



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##### Table of Contents






EXHIBIT INDEX

|        |     |             |  |                                                                                                                                                                     
|------- | --- | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |     |            
|Number  |     | Description
|        |     |            
|        | 3.  | 1*          |  | Certificate of Incorporation of Registrant, as
    amended.                                                                                                         
|        | 3.  | 2*          |  | Bylaws of Registrant, as amended.                                                                                                                                   
|        | 10. | 4****       |  | 1992 Stock Option Plan, as amended and form of
    Stock Option Agreement.                                                                                         
|        | 10. | 5*          |  | 1995 Employee Stock Purchase Plan and form of
    Subscription Agreement.                                                                                          
|        | 10. | 10*         |  | Form of Indemnification Agreement entered into
    between Registrant and its officers and directors.                                                              
|        | 10. | 11*****     |  | Management Retention Agreement dated
    August 17, 1998 by and between the registrant and Robert B.
    Anderson.                                                 
|        | 10. | 13**        |  | Facility lease dated as of March 14, 1997,
    by and between Crossroad Developers Associates, LLC and the
    Registrant.                                          
|        | 10. | 14**        |  | Employment Agreement effective as of
    April 1, 1997 by and between the Registrant and Wallace D.
    Ruiz.                                                      
|        | 10. | 18*******   |  | Security Agreement dated April 27, 2000
    between the Registrant and Albion Fitzgerald.                                                                          
|        | 10. | 19*******   |  | Security Agreement dated April 17, 2000
    between the Registrant and Wallace Ruiz.                                                                               
|        | 10. | 20******    |  | Alliance Agreement dated June 30, 2000
    between the Registrant and Hewlett-Packard Company.                                                                      
|        | 10. | 21          |  | Employment Agreement effective as of
    April 16, 2001 by and between the Registrant and Gerald M.
    Labie.                                                     
|        | 10. | 22          |  | Promissory Note dated April 27, 2002 between
    the Registrant and Albion Fitzgerald.                                                                             
|        | 10. | 23          |  | Promissory Note dated April 17, 2002 between
    the Registrant and Wallace Ruiz.                                                                                  
|        | 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.   
|        | 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.
|        | 10. | 26          |  | Promissory Note dated January 15, 2002
    between the Registrant and Robert Anderson.                                                                             
|        | 10. | 27          |  | Loan Agreement dated March 12, 2002 between
    Registrant and Fleet National Bank.                                                                                 
|        | 10. | 28          |  | 1999 Stock Option Plan.                                                                                                                                            
|        | 10. | 29          |  | 2000 Stock Option Plan.                                                                                                                                            
|        | 10. | 30          |  | Security Agreement dated October 1, 2001
    between Registrant and Wallace Ruiz.                                                                                  
|        | 21  |             |  | Subsidiaries of Registrant.                                                                                                                                         
|        | 23  |             |  | Consent of Arthur Andersen LLP.                                                                                                                                     
|        | 99. | 1           |  | Letter of the Company confirming receipt of
    Arthur Andersen LLPs representations concerning audit
    quality controls.                                        



---



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



| |   |                                                                                                                                                                                           
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | Incorporated by reference to exhibit filed with
    Registrants Registration Statement on Form S-1 (Reg.
    No. 33-92746), as declared effective by the Commission on
    July 13, 1995.



| |    |                                                                                                                                          
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------
| | ** | Incorporated by reference to exhibit filed with
    Registrants Annual Report on Form 10-K for the fiscal
    year ended March 31, 1997.



| |     |                                                                                                                                          
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------
| | *** | Incorporated by reference to exhibit filed with
    Registrants Annual Report on Form 10-K for the fiscal
    year ended March 31, 1998.



| |      |                                                                                                                              
| | ---- | -----------------------------------------------------------------------------------------------------------------------------
| | **** | Incorporated by reference to exhibit filed with
    Registrants Registration Statement on Form S-8 (file
    No. 333-67877).



| |       |                                                                                                                                          
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------
| | ***** | Incorporated by reference to exhibit filed with
    Registrants Annual Report on Form 10-K for the fiscal
    year ended March 31, 1999.



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##### Table of Contents





| |        |                                                                                                                     
| | ------ | --------------------------------------------------------------------------------------------------------------------
| | ****** | Incorporated by reference to exhibit filed with
    Registrants current report on Form 8-K dated
    July 19, 2000.



|        |                                                                                                                                          
|------- | -----------------------------------------------------------------------------------------------------------------------------------------
|******* | Incorporated by reference to exhibit filed with
    Registrants Annual Report on Form 10-K for the fiscal
    year ended March 31, 2001.

(b)     Reports on
Form 8-K:

We did not file any current reports on
Form 8-K during the fourth quarter of 2002.