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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

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

One International Blvd., Suite 200, Mahwah, NJ 07495

(201) 512-1000

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

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

      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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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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      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:

      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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      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.

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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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      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:

      Albion J. Fitzgerald co-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. Labie joined 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. Anderson joined 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. Fitzgerald co-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. Ruiz joined 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:

      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:

      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