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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

Commission File Number: 0-26156

Novadigm, Inc.

One International Blvd., Mahwah, NJ 07495

(201) 512-1000

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

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

      On February 11, 2003 there were 19,302,010 shares of the Registrant’s Common Stock outstanding.

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INDEX

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PART I.     FINANCIAL INFORMATION

Item 1.     Consolidated Financial Statements

NOVADIGM, INC.

See accompanying Notes to Consolidated Financial Statements.

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NOVADIGM, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying Notes to Consolidated Financial Statements.

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NOVADIGM, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying Notes to Consolidated Financial Statements.

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NOVADIGM, INC.

1.     Basis of Presentation

      The accompanying unaudited Consolidated Financial Statements of Novadigm, Inc. and Subsidiaries (collectively “Novadigm” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The Company has continued to follow the accounting policies set forth in the consolidated financial statements included in its fiscal 2002 Annual Report on Form 10-K for its fiscal year ended March 31, 2002 filed with the Securities and Exchange Commission (“SEC”). In the opinion of management, the interim financial information provided herein reflects all adjustments (consisting of normal and recurring adjustments) necessary for a fair presentation of the Company’s consolidated financial position as of December 31, 2002, results of operations for the three and nine month periods ended December 31, 2002 and 2001 and cash flows for the nine months ended December 31, 2002 and 2001. The results of operations for the three and nine months ended December 31, 2002 are not necessarily indicative of the results to be expected for the full year. Certain prior year amounts have been reclassified to conform to the current years presentation (see Note 7).

2.     Loss Per Share

      Basic EPS is calculated by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted EPS is calculated by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding for the period adjusted to reflect potentially dilutive securities. Common equivalent shares were excluded from the calculations of the Company’s loss per share for the three and nine months period ended December 31, 2002 and 2001, because the effect of including such shares in the computation would be anti-dilutive. At December 31, 2002, the Company had outstanding stock options to purchase approximately 5.5 million shares of the Company’s common stock, which could potentially dilute basic EPS in the future.

      The following table reconciles net loss and share amounts used to calculate basic and diluted loss per share.

3.     Recently Issued Accounting Pronouncements

      In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement No. 141, Business Combinations, (“SFAS 141”) and Statement No. 142, Goodwill and Other Intangible Assets (“SFAS 142”) and in August 2001 the FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-lived Assets (“SFAS 144”). SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated or completed after June 30, 2001. The Company adopted the provisions of SFAS 141 upon issuance. SFAS 141 also specifies criteria that intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. SFAS 142 requires, commencing April 1, 2002, that goodwill and intangible assets with indefinite useful lives no longer

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

be amortized. Instead, they will be tested for impairment at least annually in accordance with the provisions of SFAS 142. SFAS 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS 144.

      As of December 31, 2002, the Company has only one intangible asset relating to the cost of intellectual property acquired in October 2001 amounting to approximately $3.9 million. The future minimum amortization of this acquired intellectual property is estimated to be approximately $334 thousand per quarter and is expected to be fully amortized by December 2004.

      Total amortization of intangible assets for the three and nine months ended December 31, 2002, was approximately $334 thousand and $1,001 thousand, respectively, all of which has been classified as cost of license as the cost of acquired intellectual property that is embedded into the Company’s Radia product suite.

      In June 2001, the FASB issued Statement No. 143, Accounting for Asset Retirement Obligations (“SFAS 143”). SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset, except for certain obligations of lessees. This Statement amends FASB Statement No. 19, Financial Accounting and Reporting by Oil and Gas Producing Companies, and it applies to all entities. The Company is required to adopt SFAS 143, effective for fiscal year 2004. The Company does not expect the adoption of SFAS 143 to have a material impact on its future consolidated operations or financial position, as it is now constituted.

      Effective April 1, 2002, the Company adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to undiscounted future net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. SFAS No. 144 requires companies to separately report discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, or abandonment, or in a distribution to owners) or is classified as held for sale. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The adoption of SFAS No. 144 had no impact on the Company’s consolidated financial statements because the impairment assessment under SFAS No. 144 is largely unchanged from SFAS No. 121. The provisions of this statement for assets held for sale or other disposal generally are required to be applied prospectively to newly initiated disposal activities and, therefore, will depend on future actions initiated by management.

      In April 2002, the FASB issued Statement No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections (“SFAS 145”). SFAS 145 updates, clarifies and simplifies existing accounting pronouncements. SFAS 145 rescinds Statement 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in Opinion 30 will now be used to classify those gains and losses because Statement 4 has been rescinded. Statement 44 was issued to establish accounting requirements for the effects of transition to the provisions of the Motor Carrier Act of 1980. Because the transition has been completed, Statement 44 is no longer necessary.

      SFAS 145 amends Statement 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

This amendment is consistent with the FASB’s goal of requiring similar accounting treatment for transactions that have similar economic effects. SFAS 145 also makes technical corrections to existing pronouncements. While those corrections are not substantive in nature, in some instances, they may change accounting practice. The Company is required to adopt SFAS 145, effective for fiscal year 2004. The Company does not expect the adoption of SFAS 145 to have a material impact on its future consolidated operations or financial position, as it is now constituted.

      In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS 146”). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity” (including Certain Costs Incurred in a Restructuring). The Company is required to adopt SFAS 146, effective January 1, 2003. The Company does not expect the adoption of SFAS 146 to have a material impact on its future consolidated operations or financial position, as it is now constituted.

      In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No. 123 (“SFAS 148”). SFAS 148 amends FASB Statement No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company is required to adopt SFAS 148, for annual financial statements for the fiscal year ending 2003 and for interim financial statements effective April 1, 2003. The Company does not expect the adoption of SFAS 148 to have a material impact on its future consolidated operations or financial position, as it is now constituted.

4.     Derivative Financial Instruments

      Effective April 1, 2001, the Company adopted Statements of Financial Accounting Standards No. 133 “Accounting for Derivative Instruments and Hedging Activities”. This Statement requires the recognition of all derivative instruments as either assets or liabilities in the consolidated balance sheet, and the periodic adjustment of those instruments to fair value. The classification of gains and losses resulting from changes in the fair values of derivatives is dependent on the intended use of the derivative and its resultant designation.

      The Company has instituted a hedging program that it expects will reduce its exposure to exchange losses in the future. The program includes a company policy of denominating contracts in the currency of the subsidiary and the use of foreign exchange options and forward contracts to hedge exposed positions.

      During the second quarter of fiscal 2003, the Company’s European operations entered into a foreign currency option transaction to sell (put option) US dollars to GBP (call) amounting to $1,667,000, with a strike price of $1.5815. The option expiration date is April 11, 2003. The Company’s primary purpose for entering into this transaction is to cover an exchange gain or loss on a USD denominated receivable in the books of its subsidiary. The premium paid on the transaction is ratably charged to earnings over the life of the contract and the gain or loss on the transaction is recognized in earnings in the period in which the gain or loss arises.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

5.     Contingencies

      The Company is engaged in certain legal and administrative proceedings.

      On July 6, 2001, Beck Systems, Inc. filed a complaint against Novadigm and two of its customers in the United States District Court for the Northern District of Illinois, alleging infringement of two patents held by Beck Systems. The customers have been dismissed from the lawsuit. Beck Systems alleges that Novadigm’s manufacture and marketing of its EDM and Radia products infringes on the Beck Systems patents. The Company believes that it has meritorious defenses and is defending this suit vigorously.

      The outcome of litigation is inherently uncertain, however, particularly in cases such as this where sophisticated factual issues must be assessed and complex technical issues must be decided. As a result, the Company cannot accurately predict the ultimate outcome of the Beck Systems litigation. In the event the Company is unsuccessful in defending this claim, it could be liable for economic and other damages and may be forced to incur ongoing licensing expenses or to change how it designs, manufactures and markets its products. While the Company is unable at this time to estimate the range of the potential liability that would result from an unsuccessful defense, the Company believes that the liability could have an adverse impact on its business, financial condition and results of operations in future periods. In addition, the Company expects to incur substantial legal fees to defend the Beck Systems litigation. While the Company has received insurance proceeds to cover part of its defense costs, the Company believes it is likely that insurance proceeds will not be sufficient to cover all of its defense costs or to cover its liability in the event that its defense is unsuccessful.

      See Note 6 for a discussion of a contingency for a related party.

6.     Certain Relationships and Related Transactions

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