A network management system (NMS) and method is arranged for monitoring, controlling and managing a network that includes a set of interconnected network elements (NEs). A management agent in each NE interacts with the NMS on behalf of the NE. The system and method utilizes (a) a behavior transition model based on NE status or “health” indicators for passive monitoring, (b) a status updating mechanism with adjustable or “tunable” parameters based on operating conditions, (c) a derivation procedure for correlating ripple effects, and (d) an early-warning model for proactive management.