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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                   FORM 10-K
(MARK ONE)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
   SECURITIES EXCHANGE ACT OF 1934
                    FOR THE FISCAL YEAR ENDED MARCH 31, 1998
 
                                       OR
 
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
 
                        COMMISSION FILE NUMBER: 0-26156
 
                                 NOVADIGM, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
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                      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)                              (ZIP CODE)
</TABLE>
 
                                 (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
                                (TITLE OF CLASS)
 
     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. [X] Yes [ ] No
 
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (sec. 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 10K. [X]
 
     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 29,
1998, as reported on Nasdaq National Market was approximately $44,401,000.
Shares of Common Stock held by each executive officer and director and by each
person who owns 5% 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 29, 1998, there were 17,470,823 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 24, 1998.
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                               TABLE OF CONTENTS
 
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PART I
  Item 1.  Business.........................................    3
  Item 2.  Properties.......................................   13
  Item 3.  Legal Proceedings................................   13
  Item 4.  Submission of Matters to a Vote of Securities
           Holders..........................................   13
PART II
  Item 5.  Market for the Registrant's Common Stock and
           Related Stockholder Matters......................   14
  Item 6.  Selected Financial Data..........................   15
  Item 7.  Management's Discussion and Analysis of Financial
           Condition and Results of Operations..............   16
  Item 8.  Financial Statements and Supplementary Data......   24
  Item 9.  Changes in and Disagreements with Accountants on
           Accounting and Financial Disclosure..............   24
PART III
  Item 10. Directors and Executive Officers of the
           Registrant.......................................   25
  Item 11. Executive Compensation...........................   25
  Item 12. Security Ownership of Certain Beneficial Owners
           and Management...................................   25
  Item 13. Certain Relationships and Related Transactions...   25
PART IV
  Item 14. Exhibits, Financial Statement Schedule, and
           Reports on Form 8-K..............................   26
SIGNATURES..................................................   28
POWER OF ATTORNEY...........................................   29
</TABLE>
 
     "Novadigm" and "Novadigm Enterprise Desktop Manager" are registered
trademarks of Novadigm, Inc., and "Enterprise Desktop Manager," "EDM: Manager,"
"EDM: Administrator," "EDM: Server," "EDM: Client," "Cybervalet," and "Radia"
are trademarks of Novadigm, Inc. This filing also includes trademarks of
companies other than of Novadigm, Inc.
 
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                                     PART I
 
     This report includes a number of forward-looking statements which reflect
the Company's current views with respect to future events and financial
performance. These forward-looking statements are subject to certain risks and
uncertainties, including those discussed below, that could cause actual results
to differ materially from historical results or those anticipated. In this
report, the words "anticipates," "believes," "expects," "intends," "future" and
similar expressions identify forward-looking statements. Readers are cautioned
not to place undue reliance on these forward-looking statements and are advised
to review the risks and uncertainties set forth under "Business Risks" in Part
II, Item 7.
 
ITEM 1. BUSINESS
 
     Novadigm, Inc. ("Novadigm" or the "Company") is a provider of distributed
software management solutions for medium and large-scale enterprises. The
Company markets and sells an integrated suite of products that automatically
deploys, updates, and maintains distributed software across a wide variety of
networks, servers and devices. Novadigm's customers include Fortune 2000
Information Technology ("IT") driven organizations in the financial services,
transportation, telecommunications, healthcare, and utilities industries;
government agencies; large independent software vendors; and IT service
providers.
 
     The Company's products include the Enterprise Desktop Manager(TM)("EDM"), a
client/server-based deployment environment that centrally controls software
configurations on distributed PCs, and Radia(TM) ("RADIA"), an internet-based
software distribution and management environment that enables subscriber
initiated "self-service" updates of desktop or web-based applications. Both
products use the Company's patented "desired-state" automation technologies to
ensure that the right components of software are always available to the right
users, at the right time, without requiring administrative or user intervention.
These advancements reduce the time-to-market and total-cost-of-ownership of
managing distributed software.
 
BACKGROUND
 
     Novadigm's distributed software management solutions address a market
commonly characterized as Electronic Software Distribution ("ESD"), a large,
well-defined and rapidly growing segment of the systems management marketplace.
This market, which is estimated by industry analysts to grow to $3.3 billion by
the year 2001, describes a class of software that deploys application
components, including its data, programs, files, content and objects, across
local-area networks ("LANs"), wide-area networks ("WANs"), virtual area networks
("VANs") and the world-wide web ("WWW"). ESD software also includes the
requirement for installing the desktop software and the embedded links that
distributed users require to operate these applications on their personal
computers ("PCs"), mobile laptops/devices, or network computers ("NCs").
 
     Recently popularized with the introduction of "Internet Push", ESD software
has evolved over the last decade as an integral component of the IT management
infrastructure for enterprises, application vendors, and internet service
providers for whom use of software or software-based services is a critical
aspect of their business. ESD solutions address the strategic computing
requirements of these organizations to:
 
          Reduce the Total-Cost-of-Ownership of Managing PCs and Laptops. With
     industry analysts estimating that IT is investing as much as $10,000 per
     desktop per year in administering distributed PC and remote laptop software
     configurations, including operating system migrations, shrink-wrap tools
     deployment, and business application support, the demand for ESD automation
     that reduces overall support costs has escalated.
 
          Deploy Business-critical Client/Server and E-Commerce Applications.
     With the applications that now represent the key competitive and business
     advantages of the enterprise moving out of the back office, onto the
     desktop, and into the home, the need for ESD solutions that enhance the
     overall efficiency, reliability, availability and serviceability of these
     applications provide significant improvements on shortening the
     time-to-market.
 
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          Ensure Year 2000 Software Compliance and Update. With the majority of
     the installed application portfolio requiring maintenance updates that
     ensure Year 2000 compliance, ESD solutions that can inventory current
     contents and deploy updates become essential to Year 2000 project leaders.
 
          Manage New Intranet/Extranet Services. With new web-enabled services
     that rely on up-to-the-minute updates of content for service subscribers,
     ESD solutions provide a central vehicle for managing the dynamic
     configuration changes required to keep the service current.
 
     Increasingly the software being managed in these environments is sold,
distributed and changed on a "subscription service" basis for potentially
thousands or millions of users, each with their own unique configuration
dependencies. The more business-critical the applications are, the more
frequently they need to be updated. To support this new management paradigm, a
new breed of ESD solutions is now required to reduce the complexity of deploying
and administering rapidly changing distributed software configurations, thereby
increasing the reliability, serviceability and availability of these strategic
software assets.
 
     To respond to this demand, many vendors have introduced ESD products to the
marketplace. Typically provided as operating environment plug-in utilities for
PC operating systems, Web browsers, LAN administration suites, or
network/systems management frameworks, these tools generally combine
point-to-point file transfer technology together with an automated scheduling
program that directs file distribution "events". For transfers targeted at
specific network nodes, they employ a procedural "scripting" language to perform
the customized installation procedures at the identified destination. As a
result, the implementation of these products is heavily dependent upon an
administrator who must create or modify lists of specific users and
corresponding files to be sent to such users, and who must script programs to
control and customize the installation of the files once they reach their
identified destination.
 
     In small, relatively simple networks with low rates of change, this
"event-based" approach is an improvement over manual software installation.
However, the time, complexity and cost of coding and implementing the lists and
scripts required to account for each configuration dependency increases
dramatically across large-scale networks. To increase transport success rates,
systems administrators are required to manually perform the configuration,
change and policy activities needed to prepare the lists and scripts required
for file transfer control and installation. However, these "semi-automated"
activities become impracticable to perform properly when applied to computing
environments that include thousands of users deployed across widely dispersed
geographical locations with platforms, network protocols, applications, systems
software and databases that may vary significantly within a particular location
or user group.
 
     In view of these fundamental limitations of traditional ESD products and
with the widespread introduction of new complex business-critical client/server
and internet applications, the Company believes that the requirements for
software management technologies that effectively address the "end-to-end"
process of tracking, configuring, deploying, securing and changing software and
content across large-scale networks is now a required enabling technology for
comprehensive ESD automation. This technology must be fast, scalable, reliable
and highly adaptable to the customer's existing base of installed computing
platforms and applications (internally developed, purchased and e-commerce
software) to support the dynamic and rapidly changing requirements of the
business.
 
THE NOVADIGM SOLUTION
 
     Novadigm offers a faster, more highly scalable, reliable and adaptable
software management solution than traditional ESD tools, providing medium and
large-scale enterprises with a unique suite of products that automates the
"end-to-end" process of deploying, configuring, tracking and changing all types
of distributed software. The Company's products allow IT professionals and IT
service providers to effectively manage complex software configurations across
any large-scale public and private network using whatever service provider
policies are to be enacted for controlling the distribution of software or
content. The following are key attributes of the Novadigm solution that
distinguish it from other software management products:
 
          Desired-State Automation. Novadigm provides a unique, automated engine
     that compares the current "actual-state" of each distributed software
     configuration with a "desired model" of what an
 
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     individual user, workgroup, department, or internet consumer's software
     configuration should look like. The resulting differences determine what
     updates are required, triggering an automated, granular change process for
     installing applications on distributed servers and desktops based on
     current user configuration requirements, available versions and access
     policy entitlements.
 
          Adaptive Configuration Management. Novadigm's products can
     automatically distribute customized software packages to unique client
     environments and install them as dictated by administrative policies. As
     program versions and client environments change, the affected client's
     "actual-state" is differenced and reconfigured to correspond to the
     desired-state of operation automatically, thus reducing the administrative
     change processes to the simple updating of a desired-state model that
     continuously verifies the accuracy and updates client configurations
     without manual intervention.
 
          Policy-based controls and auditability. Novadigm's products use
     policy-based access models to allow customers to efficiently and concisely
     define entitlements controlling the deployment of software to authorized
     clients. For example, an IT administrator may implement a policy permitting
     access to certain financial databases only to a selected workgroup within
     an organization's finance department. Changes to policies implemented or
     derived from external sources cause components to be automatically
     installed or de-installed on all affected clients. Administrative control
     over any object can be distributed as appropriate to designated users
     across a customer organization, thus ensuring that only authorized persons
     can change usage policies or application components.
 
          Scalability and performance. Novadigm's patented "fractional
     differencing" technology automatically calculates the effects of policy,
     component and client environment changes upon each client platform, and in
     connection with each calculation, automatically transports only the changed
     software components for each client. By using an object-level differencing
     calculations, Novadigm's products eliminate the need for manual listing and
     scripting activities required by traditional ESD approaches, where
     administrators must either calculate and program the effect of changes on
     each desktop, or assume that all changes must be sent to every desktop,
     with resulting impact on network traffic (as well as on reliability and
     auditability, since that assumption is usually incorrect). The differencing
     process calculates the precise changes needed by each desktop, allowing
     components to be automatically "cached" at multiple locations and
     transported using a combination of network protocols simultaneously to
     further optimize network performance.
 
     The Company believes that its technology and products establish a new
standard for software management that provide its customers with an effective
means for managing the next generation of client/server and internet
applications on a large-scale. The Company also believes that the technology
embodied in its products provides significant improvements over the list/script
approach used by competitive vendors of ESD products. These improvements include
the complete automation of the deployment and ongoing change management
requirements of distributed software, enhanced scalability to support the high
number of servers and desktops found in large organizations and significant
reductions in cost through elimination of manual installation and administration
procedures. These advancements result in higher levels of speed, reliability,
serviceability and auditability.
 
THE NOVADIGM STRATEGY
 
     The Company's objective is to be the leading provider of distributed
software management solutions to medium and large organizations that are
deploying new software into their client/server and Internet computing
environments. Key components of the Company's strategy are to focus on:
 
          Maintaining Technology Leadership in ESD Automation. The Company has
     developed and patented unique "desired-state" management and "fractional
     differencing" technologies that the Company believes distinguish its
     products from those of other vendors. The Company's products are object-
     oriented throughout and incorporate patented technologies to enable the
     highly automated, scaleable infrastructure that is required to manage the
     initial deployment and ongoing maintenance of software. The Company plans
     to continue to invest significant resources in research and development,
     both to
 
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     enhance the features and functionality of its existing product base and to
     develop new products, particularly products that address the unique
     requirements of internet software and content management.
 
          Establishing Market Share Leadership in the Enterprise. The Company's
     comprehensive management infrastructure and patented technologies are key
     requirements for medium and large organizations with complex network
     computing environments and thousands or tens of thousands of users and
     consumers requiring ESD services. The Company's customer base is
     predominantly based in the Fortune 2000. The Company's strategy is to
     continue to concentrate on exploiting its product strengths in the high-end
     of the enterprise computing marketplace and to develop new enhancements and
     new products that are responsive to the software management needs of these
     organizations.
 
          Increasing its Customer Implementation Leadership Position for
     Managing the "Next Generation" of Business-critical Applications,
     particularly in Financial Services. The Company's products use a
     sophisticated change and configuration management engine that is a key
     enabling technology for organizations deploying software that must be
     updated frequently to align it to dynamic business requirements. These
     characteristics are inherent to the new class of client/server and
     commerce-based business applications, particularly in the financial
     services industry, where content distributed to ATMs for example now
     represents the competitive sales advantage and/or core customer service
     interface. The Company's strategy is to identify, cultivate and promote its
     product offerings to address the specific requirements of managers of these
     types of applications.
 
          Build Strategic Partnerships with Complementary Product, Channel and
     Service Providers. In order to penetrate the global market for software
     management, the Company has established a worldwide direct field sales
     organization to develop relationships with its customer and prospect base.
     To complement these efforts, the Company has also cultivated relationships
     with selected indirect sales channels of original equipment manufacturers
     ("OEMs"), service-oriented value added resellers ("VARs") and systems
     integrators, distributors and smaller resellers. The Company's strategy
     intends to expand these indirect channels of distribution, with particular
     emphasis on partnerships that promote the Company's products as part of
     broader product and systems integration service offerings both domestically
     and internationally.
 
     To support the Company's market leadership objective, the Company intends
to utilize multiple products, services and distribution channels to create
compelling value propositions for those segments of the ESD market which
represent the best match of market opportunity to Novadigm's unique
capabilities.
 
PRODUCTS
 
     Novadigm's distributed software management product line includes the
Enterprise Desktop Manager(TM) ("EDM"), a client/server-based deployment
environment that continually controls distributed software configurations on
distributed PCs and laptops according to IT access policies, and Radia(TM)
("RADIA"), an internet-based software distribution and management environment
that enables subscriber initiated "self-service" updates of desktop software and
web-based applications. Both products leverage the Company's patented
"desired-state" automation platform, a distributed management engine that
automatically determines which software components are required for each
individual user at the time of a configuration update. This engine dynamically
synchronizes three activities:
 
          Desktop Discovery Process. A facility that dynamically audits user
     desktop contents on an on-demand basis, creating inventory summaries of the
     hardware and software contents of individual users, workgroups, or
     departments for use in updating configurations.
 
          Policy Management Authentication. A facility that dynamically
     determines access policy entitlements to applications or services by job
     function, geographic differences and/or hardware configurations.
 
          Application Version Verification. A facility that dynamically
     determines the current available versions of applications or services and
     updates to content that have occurred since the system was deployed.
 
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     Using this "desired-state" engine, EDM and RADIA rapidly and precisely
compare the current "actual state" of each of these three dimensions with the
"desired model" of what an individual user, workgroup, department, or internet
consumer's software configuration should look like. The resulting differences
dynamically determine what updates are required, allowing software, content and
application providers to deploy software-based applications without building in
pre-configured packages to support different policies and supported
environments. Without this restriction, services can be distributed faster, more
reliably and with higher levels of adaptability than traditional ESD products.
 
  EDM
 
     Novadigm's EDM enables centralized software deployment and a management
environment for IT organizations to distribute, configure, update, and maintain
business-critical software in their desired-state across thousands of desktops
and servers. The product reduces the administrative overhead required to manage
distributed software by allowing IT managers to use a centralized model of the
policies and configurations to deploy any individual system (the desired state),
and then to compare, install and/or remove needed components on each node on the
network. These facilities enable fast, reliable deployment of software while
dramatically reducing the network traffic. As a result, EDM enables a variety of
solutions for large and medium sized enterprises, including:
 
          Automatic Deployment of Business-critical Applications. EDM enables
     automatic deployment of business-critical applications including internally
     developed client/server applications and purchased applications from major
     vendors, such as SAP AG, Siebel Systems, Inc., The Baan Company, Oracle
     Corporation, and PeopleSoft, Inc. EDM ensures the rapid enterprise-wide
     distribution and high availability of these applications through their
     frequent change cycles by re-configuring the software components on
     desktops and servers to ensure that versions are synchronized and
     operational.
 
          Continuous Configuration of Business-critical Devices. EDM facilitates
     continuous configuration across a variety of devices, including clerical
     desktops, field agent laptops, and consumer commerce storefronts such as
     Automated Teller Machines ("ATMs"). EDM ensures that the software that
     represent the core sales and customer service interfaces are deployed
     reliably and adapt according to the changing needs of the business,
     including geographic, marketing, and individual consumer service
     personalization support.
 
          Audit and Compliance of Year 2000 Desktop Applications. EDM enables
     year 2000 applications including the central inventory and reporting of
     desktop software contents and the automatic deployment and re-configuration
     of the software once a new "Year 2000 compliant" version is introduced.
     EDM's desired-state engine ensures the accuracy and reliability of these
     activities across more than 17 different types of desktop operating
     environments.
 
     EDM supports the needs of organizations with heterogeneous platforms and
large numbers of desktops and servers. The product is in its fourth release, and
is used at more than 170 organizations in 17 countries supporting the unique
software management requirements of a variety of industries, including banking,
insurance, utilities, brokerage, government, technology, telecommunications,
retail, transportation and manufacturing.
 
  RADIA
 
     Novadigm's RADIA provides corporate intranet, extranet and Internet service
providers with the capabilities to rapidly deploy user-initiated "self-service"
management infrastructures that control the distribution of packaged software
and e-commerce applications across the Web. By constructing a RADIA-powered web
site, IT managers can provide policy-based access to a wide range of desktop
software, allowing end users to install, update, and repair their own desktops
automatically without administrative support. RADIA also allows users to
"subscribe" to an application or service through a system that automatically
personalizes, adapts, and delivers software-based services in the right
configuration each time it is accessed.
 
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     By using the flexibility of the Internet and the power of Novadigm's
"desired-state" engine, RADIA provides an easy-to-use, fast, and convenient
vehicle for distributing software to a wide audience of distributed users that
may include employees, partners, prospects and customers. The solutions enabled
from this foundation include:
 
          Customized Software Malls for Managing Vendor Packages. Radia enables
     customized software malls to maintain a range of vendor packages including
     standard desktop office suites, browsers, tools and utilities such as those
     from Microsoft Corporation ("Microsoft"), Netscape Communication Corp.
     ("Netscape"), Lotus Development Corporation, Network Associates, Inc.
     ("Network Associates") and Symantec Corporation. RADIA provides a
     customized directory-based listing for each authorized subscriber that
     identifies the software packages available for deployment on the desktop as
     well as the current status of those already installed. Updates and repairs
     automatically invoke Novadigm's patented adaptive configuration and
     fractional differencing technologies to deliver the required component
     changes.
 
          Just-in-time Configuration of Java and Commerce-based Applications.
     Radia deploys just-in-time applications including applets, supply chain
     systems, and transactive content for systems that represent online sales
     interfaces for Web-based consumers. RADIA ensures that each authorized
     service subscriber is configured, verified and updated with component
     changes to the software residing on their desktops each time the service is
     accessed. Updates are configured in the background prior to application
     execution to ensure timely and accurate service levels.
 
          Revisable Content Management for Subscription-based Services. Radia
     manages revisable content, including applications with content links,
     custom research, and "pushed" updates that require the personalized
     delivery of new service versions. RADIA provides a customized catalog for
     each authorized subscriber to browse, subscribe and invoke content packages
     that dynamically configure themselves based on user-supplied parameters.
     Updates are delivered automatically based on the subscriber's current
     service requirements.
 
     RADIA supports the needs of any organization that uses the Internet as a
standard vehicle for corporate, partner and customer communication. The product
was released in November 1997 and now includes two application components, the
Radia Software Manager and the Radia Application Manager.
 
     Both EDM and RADIA operate from a common set of management platforms; a
distributed, object-oriented environment that is comprised of two major
components:
 
          "Management Servers". A foundation that includes a central server with
     publishers/administrators to configure it and a set of distributed staging
     servers to "fan-out" the distribution process. The central server is a
     multi-domain object repository and engine that synchronizes distributed
     objects; application components, desktop configurations, policy
     relationships, across the network. Using an EDM or RADIA Administrator,
     this repository is configured to include the packages, policies and
     configuration requirements necessary to automatically manage the transfer
     of objects to and from Novadigm-managed servers and client desktops.
 
          "Client Subscribers". A lightweight desktop-resident component that
     communicates with Novadigm's Management Servers to identify, distribute and
     install configuration changes for distributed software or content.
     Operating as an extension of standard PC or Internet operating
     environments, the Client Subscriber automatically discovers current desktop
     contents and synchronizes application versions with new or updated
     configurations residing on the Management Server.
 
     The components are distributed across a variety of computing platforms:
 
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Management Servers                 Windows NT, AIX, HP-UX, MVS, SUN,
                                   Novell, OS/2
Client Subscribers                 Windows (3.1+, 95), Windows NT,
                                   OS/2, AIX, HP-UX, SUN, Novell,
                                   Macintosh,
</TABLE>
 
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          Communication between components is supported through a variety of
     protocols, including TCP/IP, SNA, IPX, and NetBIOS.
 
     Extensions for the platform, called "Adapters," allow customers, systems
integrators and application vendors to encapsulate their own custom development,
systems management and desktop management tools into the Novadigm management
infrastructure. Adapters are now available for:
 
          Network/Systems Management Frameworks. Novadigm's best of breed
     software distribution and management capabilities are integrated directly
     with the event, security and performance management environments of
     International Business Machines Corporation ("IBM")/Tivoli Systems Inc.'s
     ("Tivoli") TME10, Computer Associates International, Inc.'s ("Computer
     Associates") Unicenter, and Hewlett-Packard Company's ("Hewlett-Packard")
     OpenView.
 
          Industry Standards. Novadigm's policy management environment is
     integrated with lightweight directory access protocol ("LDAP") based
     directory servers and desktop discovery processes with desktop management
     interface ("DMI") to enable single source points of control for access
     policies and inventory management.
 
          Problem/Help Desk Management. Novadigm's dynamic desktop configuration
     management facilities are integrated with problem management environments
     such as Remedy Corporation's AR system to integrate problem tracking and
     inventory discovery data.
 
          LAN/Desktop Management. Novadigm's policy-based deployment is
     integrated with local area discovery and distribution facilities of
     Microsoft's SMS, Intel's LAN Desk, and IBM's CID.
 
          Application Management. Development environment configuration
     management models for Rational Software Corporation's ClearCase and
     Intersolv, Inc.'s PVCS are integrated directly to the distribution process,
     enabling development changes to be synchronized with deployment.
 
     The flexibility of Novadigm's object-oriented architecture allows these
processes to be easily integrated as objects in Novadigm's Management Server and
automatically integrated into Novadigm's "desired-state" software management
process without requiring special application programming interface ("API's") or
third party vendor coding.
 
CUSTOMERS AND APPLICATIONS
 
     The Company's principal customers include medium to large business
organizations with widely deployed and complex client/server and internet
computing environments. As of March 31, 1998, the Company's EDM products had
been licensed directly by the Company or through distributors to 174 customers.
 
     During fiscal 1998, the Company had two customers, each of whom accounted
for over ten percent of the total revenues. Amdahl Corporation ("Amdahl"), an
OEM and distributor of the Company's products (see "Sales and Marketing"),
accounted for approximately 31% of total revenues for fiscal 1998 and Electronic
Data Systems Corp. ("EDS") accounted for approximately 10% of total revenues for
fiscal 1998.
 
SALES AND MARKETING
 
     The Company markets its software and services through its direct sales
force and indirect channels comprised of OEMs, VARs, and systems integrators, in
North America, Europe, the Pacific Rim, South America and South Africa. The
Company's North American direct sales and worldwide indirect sales activities
are managed from the Company's offices in Mahwah, New Jersey and Emeryville,
California; and its European direct sales activities are managed from the
Company's facilities in Paris, France. For fiscal 1998, revenues from direct and
indirect sales accounted for 64% and 36%, respectively, of total revenues, and
revenues from domestic and international sales accounted for 54% and 46%,
respectively, of total revenues. The Company expects direct sales and
international sales to increase as a percentage of total revenues.
 
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     The Company's direct sales activities have emphasized improvements in the
identification and generation of qualified prospective customer leads at the
beginning phase of the sales cycle through concentration on directed direct mail
and teleprospecting activities. The leads generated from the telemarketing
process are given to the Company's sales organization, which is divided into
specialized teams of pre-sales specialists, account managers and post sales
service consultants that work together to provide an integrated "solution
selling" approach to the customer. The Company's indirect channel organization
is based on business arrangements with OEMs, VARs, systems integrators and
distributors which are selected and trained by the Company to provide marketing,
sales, post-sale support and service for the Company's products. These business
arrangements are also useful to the Company in identifying product enhancements
and developments that are responsive to customer and market requirements. The
Company believes that it has been successful in minimizing marketing conflicts
between its direct and indirect sales channels.
 
     In June 1995, the Company entered into a seven-year, non-exclusive OEM and
distribution agreement with Amdahl. Under the agreement, Amdahl can sublicense
EDM throughout the world as part of its bundled solution and sublicense EDM
stand-alone to a limited worldwide market. Novadigm agreed to provide limited
technical support and training. The agreement required Amdahl to pay the Company
$8 million in non-refundable, guaranteed sublicense fees and bundled support in
quarterly installments during the first year of the agreement, fiscal 1996; and
$4 million in the last quarter of both fiscal 1997 and fiscal 1998. The
agreement was amended in March 1997, instead requiring Amdahl to pay $2 million
in non-refundable, guaranteed sublicense fees and bundled support in the last
quarter of fiscal 1997; minimum additional sublicense fees of $2 million during
fiscal 1998; and minimum additional sublicense fees of $3 million in both fiscal
1999 and fiscal 2000. In the event of a change of control of the Company, the
amended agreement allows Amdahl the right to terminate the agreement and recover
unused guaranteed sublicense fees at the time of termination to the extent they
were also outstanding on March 31, 1997. There can be no assurance that Amdahl
will extend this agreement in subsequent years. The Company recognized no
guaranteed sublicense fees from Amdahl in fiscal 1998.
 
     The Company to date has concentrated on establishing a market for its
products in North America, Europe, Japan, South Africa, South America, Australia
and Korea. The marketing activities of the Company are designed to generate
qualified leads and to supply the Company's sales channels with positioning,
presentation materials, and product collateral to help generate and develop
qualified customer prospects. Lead generation activities include seminars, trade
shows, direct mailings, advertising and public relations activities.
 
CUSTOMER SERVICE AND SUPPORT
 
     To facilitate implementation and integration of its products, the Company
offers a range of support programs and services that complement the Company's
automated software management products.
 
     The Company provides all customers with telephone hotline, fax and E-mail
access to its technical support staff, with additional support provided by the
Company's OEM's, VARs and systems integrators. The Company's technical support
staff not only provides assistance in diagnosing problems, but works closely
with customers to address systems implementation and integration issues and
assists in increasing the efficiency of their enterprise systems. The Company
also maintains a comprehensive solution-based web site of technical information
on EDM and Radia. In addition, through the web site, the Company has the ability
to download maintenance, submit problem reports and enhancements, and
participate in a user discussion forum.
 
     The Company offers regional and on-site training programs covering object
technologies and EDM and Radia implementation strategies to its customers,
OEM's, VARs and systems integrators.
 
     The Company's professional services organization and a growing number of
independent EDM and Radia service providers are available to consult with
customers on project planning and systems implementation and integration.
Revenues from services accounted for 33% of fiscal 1998 total revenues.
 
                                       10
<PAGE>   11
 
PRODUCT DEVELOPMENT
 
     Since its inception, the Company has emphasized and made substantial
investments in product development. In fiscal 1998, the Company's total research
and development expenses were approximately $6.8 million. To date, the Company
has not capitalized any software development costs.
 
     The Company anticipates that it will continue to commit substantial
resources to research and development. The Company believes that its future
success will depend 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. The
Company intends to enhance its existing product offerings and to introduce new
products for the enterprise systems management market. The Company's new product
development effort is focused on products which address the unique requirements
of the internet environment. In developing these new products and product
enhancements, the Company makes extensive use of its own development tools and
object-oriented technology. Although the Company expects to develop certain of
its new products and product enhancements internally, the Company may acquire
technology and/or products from third parties or consultants when considerations
of time or cost dictate.
 
     If the next release of EDM, RADIA or any potential new products and
enhancements do not achieve market acceptance, or if for technological or other
reasons, the Company is unable to develop, introduce and sell its products in a
timely manner, the Company's business, financial condition and results of
operations will be materially and adversely affected.
 
COMPETITION
 
     Competition in the ESD market is diverse and rapidly changing. While a
variety of vendors have offered some forms of ESD solutions with their
offerings, the current and prospective closest competitors of the Company today
fall into three categories:
 
          Network/Systems Management Framework Vendors. These competitors
     include IBM/Tivoli, Computer Associates, and Hewlett-Packard, who offer
     traditional "list/script-based" ESD tools as part of their enterprise
     frameworks.
 
          LAN/Desktop Management Suite Vendors. These competitors include
     vendors like Microsoft, Intel and Network Associates, who offer
     workgroup-based ESD tools as part of a LAN administration package.
 
          Internet Push ESD Vendors. These competitors include start-ups like
     Marimba Inc., ("Marimba") and BackWeb Technologies, Inc. ("BackWeb") who
     provide push distribution technologies as plug-in components for Netscape
     and Micorsoft browsers.
 
     The Company believes that it competes effectively with all of these vendors
in its target market on the basis of its broader product line for software
management, desired-state technological innovation, unique adaptive
configuration functionality, higher product implementation success rates, better
end-user support and price. The Company differentiates its products in the
market based on results that have proven its products are capable of
distributing and managing software faster, with higher reliability and greater
adaptability.
 
     However, there can be no assurance that the Company will be able to
continue to compete effectively in the software management market or that its
profitability or financial performance will not be adversely affected by
increased competition. Many of the Company's competitors have longer operating
histories than does the Company, 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 the Company's products or other technologies offering
significant advantages over the Company's technology, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.
 
                                       11
<PAGE>   12
 
INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS
 
     In December 1996, the Company was issued a patent from the U.S. Patent
Office for the "desired-state" management process and "fractional differencing"
technologies used in the Company's software management products. There can be no
assurance that the Company will develop additional proprietary technologies that
are patentable, that any issued patent will provide the Company 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 the Company's ability to do
business. Moreover, there can be no assurance that protective measures taken by
the Company will prevent misappropriation of its proprietary technology, and
such measures may not preclude competitors from developing products with
features similar to those of the Company's products. Furthermore, effective
copyright and trade secret protection may be limited or unavailable under the
laws of certain foreign jurisdictions. The Company also relies on a combination
of copyright and trademark laws, trade secrets, confidentiality procedures,
contractual provisions and technical measures to protect its proprietary rights
in its products.
 
     Although the Company believes that its 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 the Company 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 the Company to enter into royalty or license
agreements, provided such agreements were available on reasonable terms or at
all.
 
     Defense of any lawsuit or failure to obtain any required license could have
a material, adverse effect on the Company's business, operating results and
financial condition. The Company believes, however, that given the rapid pace of
technological change in the industry, factors such as the technical expertise,
knowledge and innovative skill of the Company's management and technical
personnel, the Company's name recognition, the timeliness and quality of the
support services it provides and its ability to offer frequent product
enhancements and to develop, introduce and market new products are more
significant in maintaining the Company's competitive technology leadership
position.
 
EMPLOYEES
 
     As of March 31, 1998, the Company had a total of 159 full-time employees,
including 44 in product development, 91 in sales and marketing, 24 in general
and administration. A total of 130 employees are based in the United States and
29 employees are based in Europe. The Company announced a reorganization after
the close of fiscal 1998 which reduced the total number of full-time employees
to 144. None of the Company's employees is represented by a labor union. The
Company has not experienced work stoppages and considers its relations with its
employees to be good.
 
EXECUTIVE OFFICERS OF THE REGISTRANT
 
     The executive officers of the Company are as follows:
 
<TABLE>
<CAPTION>
              NAME                AGE                POSITION                OFFICER SINCE
              ----                ---                --------                -------------
<S>                               <C>    <C>                                 <C>
Albion J. Fitzgerald............  50     Chairman of the Board and Chief         1992
                                         Executive Officer
Michael R. Carabetta............  49     President and Chief Operating           1998
                                         Officer
Robert B. Anderson..............  43     Executive Vice President,               1992
                                         Secretary and Director
Joseph J. Fitzgerald............  36     Vice President, Development             1992
Philip J. Myers.................  39     Vice President, Marketing               1993
Wallace D. Ruiz.................  47     Vice President, Treasurer and           1995
                                         Chief Financial Officer
</TABLE>
 
                                       12
<PAGE>   13
 
     Albion J. Fitzgerald co-founded the Company in February 1992, serving as
Chairman since that time, and currently as Chief Executive Officer and
President. Mr. Fitzgerald has previously served as Chief Technology Officer. In
May 1990, Mr. Fitzgerald founded Fitzgerald Associates, the Company's
predecessor, and served as the chief architect in the development of EDM
technology.
 
     Michael R. Carabetta joined the Company in February 1998 as President and
Chief Operating Officer. From 1994 until joining the Company, Mr. Carabetta was
Vice President and General Manager of the Amdahl Corporation. He was responsible
for Amdahl's Open Enterprise Systems division and later responsible for the A+
software and services business unit. From 1983 to 1994, Mr. Carabetta was with
Digital Equipment Corporation, serving first as Product Line Manager and later
as Vice President, Financial & Cross Industry Applications.
 
     Robert B. Anderson joined the Company in June 1992 and currently serves as
Executive Vice President, Secretary and as a director. From 1990 to 1992, Mr.
Anderson served as Senior Vice President at Stratagem, an investment banking
firm specializing in mergers, acquisitions and divestitures in the software
industry.
 
     Joseph J. Fitzgerald co-founded the Company in February 1992. Since that
time he has served as Director of Development, and as of June 1996, Vice
President of Development. Mr. Fitzgerald is the brother of Albion Fitzgerald.
 
     Philip J. Myers joined the Company in December 1993 as Vice President,
Marketing after having supported the Company's initial product launch as a
marketing consultant since October 1992. From November 1991 through December
1993 Mr. Myers was President of Marketing Strategic Services, a marketing
consulting firm.
 
     Wallace D. Ruiz joined the Company in May 1995 as Vice President, Treasurer
and Chief Financial Officer. From September 1993 until joining the Company, he
was Vice President, Treasurer and Chief Financial Officer of Unisa Holdings,
Inc., a designer, marketer, and retailer of women's fashion footwear. From June
1989 until August 1993, Mr. Ruiz was employed as Vice President and Chief
Financial Officer of L. Luria & Son, Inc., a publicly held retail chain. He is
the brother-in-law of Albion Fitzgerald.
 
ITEM 2. PROPERTIES
 
     The Company conducts its operations in North America principally out of its
facilities in Mahwah, New Jersey and Emeryville, California; and in Western
Europe out of its facilities in Paris, France. The Company occupies
approximately 26,911 square feet at its New Jersey facilities, which are used
principally for product development, east coast sales, marketing and support,
and general administration; and approximately 3,463 square feet at its
California facilities, which are used principally for west coast sales,
marketing and support. The Company's facilities in France are comprised of
approximately 8,729 square feet and are used to support the Company's European
operations. The Company also has sales and support offices in Dallas, Texas; Los
Angeles, California; Odiham, England; Munich, Germany; and Brussels, Belgium.
 
ITEM 3. LEGAL PROCEEDINGS
 
     On March 3, 1997, the Company sued Marimba, Inc. for infringement of the
Company's U.S. Patent No. 5,581,764 (the "764 Patent") in the U.S. District
Court for the Northern District of California. The Company alleges that
Marimba's Castanet Software product infringes the "764 Patent." On May 2, 1997,
Marimba filed an answer to the Company's complaint and a counterclaim, denying
the Company's allegations and seeking a declaration that the "764 Patent" is
invalid, not infringed, and unenforceable. Discovery in the case is currently
underway.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
 
     Not applicable.
 
                                       13
<PAGE>   14
 
                                    PART II
 
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
 
     The Company's stock has been traded on the Nasdaq National Market since the
Company's 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 the Company's common stock as reported by Nasdaq:
 
<TABLE>
<CAPTION>
                                                            HIGH        LOW
                                                            ----        ---
<S>                                                         <C>         <C>
FISCAL YEAR ENDED MARCH 31, 1997
First Quarter.............................................  $21 3/4     $12
Second Quarter............................................  $15         $ 5 1/2
Third Quarter.............................................  $12 1/8     $ 5
Fourth Quarter............................................  $ 9 1/8     $ 3 7/8
 
FISCAL YEAR ENDED MARCH 31, 1998
First Quarter.............................................  $ 5 1/2     $ 3 1/8
Second Quarter............................................  $ 7 7/16    $ 3 5/16
Third Quarter.............................................  $ 7         $ 3 11/16
Fourth Quarter............................................  $ 4 5/8     $ 3 5/16
</TABLE>
 
     As of March 31, 1998, there were approximately 115 holders of record of the
Company's common stock.
 
     The Company has never paid cash dividends on its common stock. The Company
currently intends to retain earnings, if any, for use in its business and does
not anticipate paying any cash dividends in the foreseeable future. In addition,
the Company is prohibited from paying dividends under its revolving line of
credit agreement.
 
                                       14
<PAGE>   15
 
ITEM 6. SELECTED FINANCIAL DATA
 
     The following selected financial data should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Consolidated Financial Statements and Notes to Consolidated
Financial Statements and other financial information included elsewhere in the
report.
 
                                 NOVADIGM, INC.
                      SELECTED CONSOLIDATED FINANCIAL DATA
                (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                               YEAR ENDED MARCH 31,
                                                --------------------------------------------------
                                                 1994       1995      1996       1997       1998
                                                -------   --------   -------   --------   --------
<S>                                             <C>       <C>        <C>       <C>        <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues
  Licenses....................................  $ 1,044   $  8,488   $18,775   $ 12,117   $ 15,728
  Services....................................       82        840     6,241     10,261      7,667
                                                -------   --------   -------   --------   --------
          Total revenues......................    1,126      9,328    25,016     22,378     23,395
                                                -------   --------   -------   --------   --------
Operating Expenses:
  Cost of services............................       34        344     2,630      6,275      6,971
  Sales and marketing.........................    2,347      5,706    10,961     17,123     14,680
  Research and development....................    3,222      3,338     4,426      6,212      6,843
  General and administrative..................      474      1,392     3,230      4,979      4,964
  Compensation charge related to escrow
     shares(1)................................       --     18,900        --         --         --
  Restructuring charge(2).....................       --         --        --      1,829         --
                                                -------   --------   -------   --------   --------
          Total operating expenses............    6,077     29,680    21,247     36,418     33,458
                                                -------   --------   -------   --------   --------
Operating income (loss).......................   (4,951)   (20,352)    3,769    (14,040)   (10,063)
Interest income and other, net................       52        122     1,428      1,597        978
                                                -------   --------   -------   --------   --------
Income (loss) before provision (benefit) for
  income taxes................................   (4,899)   (20,230)    5,197    (12,443)    (9,085)
Provision (benefit) for income taxes..........       --         --       160         59        (68)
                                                -------   --------   -------   --------   --------
Net income (loss).............................  $(4,899)  $(20,230)  $ 5,037   $(12,502)  $ (9,017)
                                                =======   ========   =======   ========   ========
Earnings (loss) per share -- basic............  $ (0.38)  $  (1.40)  $  0.30   $  (0.72)  $  (0.52)
                                                =======   ========   =======   ========   ========
Weighted average common shares outstanding --
  basic.......................................   13,060     14,424    16,566     17,409     17,392
                                                =======   ========   =======   ========   ========
Earnings (loss) per share -- diluted..........  $ (0.38)  $  (1.40)  $  0.28   $  (0.72)  $  (0.52)
                                                =======   ========   =======   ========   ========
Weighted average common and common equivalent
  shares outstanding -- diluted...............   13,060     14,424    17,928     17,409     17,392
                                                =======   ========   =======   ========   ========
</TABLE>
 
<TABLE>
<CAPTION>
                                                                    AS OF MARCH 31,
                                                     ---------------------------------------------
                                                      1994     1995     1996      1997      1998
                                                     ------   ------   -------   -------   -------
<S>                                                  <C>      <C>      <C>       <C>       <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents..........................  $2,249   $1,012   $13,361   $ 7,984   $ 4,431
Working capital....................................   2,091    3,879    29,831    24,983    17,326
Total assets.......................................   3,148    6,560    50,132    36,342    28,876
Deferred revenue...................................     248      871     4,509       946     2,518
Stockholders' equity...............................   2,220    4,066    42,522    29,800    20,044
</TABLE>
 
---------------
(1) Represents a non-recurring, non-cash compensation charge incurred upon the
    achievement of certain cash flow requirements under an escrow arrangement
    imposed on founder's shares in connection with the Company's public offering
    on the Vancouver Stock Exchange in September 1992.
 
(2) See Note 9 of Notes to Consolidated Financial Statements.
 
                                       15
<PAGE>   16
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
 
     This Management's Discussion and Analysis of Financial Condition and
Results of Operations includes a number of forward-looking statements which
reflect the Company's current views with respect to future events and financial
performance. Such forward looking statements include, but are not limited to the
last sentences of the first and second paragraphs under "Revenue," the sentences
in the third paragraph under "Revenue" regarding international sales, the last
sentences of "Cost of services," "Sales and marketing," "Research and
development" and "General and administrative," the statements under "Year 2000
compliance" and the last paragraph under "Liquidity and capital resources."
These forward looking statements are subject to certain risks and uncertainties,
including those discussed under "Business Risks" below, that could cause actual
results to differ materially from historical or anticipated results.
 
OVERVIEW
 
     The Company designs, markets and supports an automated solution to software
management in medium and large organizations with complex distributed computing
environments. The Company was incorporated in February 1992. Through September
1993, the Company's primary efforts were devoted to product development. In
October 1993, Version 1.0 of Enterprise Desktop Manager(TM) ("EDM") was released
for general availability. Since its first release, the Company has continued to
develop EDM by adding new features, applications and platforms. Version 2.0 of
EDM was released in February 1994, Version 3.0 in June 1995, and Version 4.0 was
released in October 1997. In November 1997, the Company released its newest
product, RADIA(TM), an internet-based software and content management solution.
 
     The Company generates license revenues from licensing the rights to use its
software products to end users and sublicense fees from resellers (including
certain guaranteed sublicense fees). The Company also generates service revenues
from consulting and training activities performed for license customers and
revenue from support and software update rights (maintenance).
 
     Revenues from perpetual software license agreements are recognized as
revenue upon shipment of the software if there are no significant post-delivery
obligations, payment is due within one year and collectibility is probable. If
an acceptance period is required, revenues are recognized upon the earlier of
customer acceptance or the expiration of the acceptance period. The Company
enters into reseller arrangements that typically provide for sublicense fees
payable to the Company based on a percent of the Company's list price. Reseller
arrangements may include an initial non-refundable payment 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 there are no significant post-delivery
obligations, 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. The Company recognized
approximately $0.4 million in guaranteed sublicense fees under all such
agreements in 1998, approximately $3.9 million in 1997, and approximately $8.3
million in 1996.
 
     Revenues for maintenance are recognized ratably over the term of the
support period. If maintenance is included in a license agreement, such services
are unbundled from the license fee at their fair market value based on the value
established by independent sale of such maintenance to customers. Consulting
revenues are primarily related to implementation services performed under
separate service arrangements related to the installation of the Company's
software products. Such services generally do not include customization or
modification of the underlying software code. If included in a license
agreement, such services are unbundled at their fair market value based on the
value established by the independent sale of such services to customers.
Revenues from consulting and training services are recognized as services are
performed.
 
     ALL PERIOD REFERENCES IN THE DISCUSSION BELOW ARE TO FISCAL PERIODS OF THE
COMPANY BASED ON ITS FISCAL YEAR ENDING MARCH 31.
 
                                       16
<PAGE>   17
 
RESULTS OF OPERATIONS
 
     For the periods indicated, the following table sets forth the percentage of
total revenues represented by the respective line items in the Company's
statements of operations.
 
<TABLE>
<CAPTION>
                                                               YEARS ENDED MARCH 31,
                                                              -----------------------
                                                              1996     1997     1998
                                                              -----    -----    -----
<S>                                                           <C>      <C>      <C>
REVENUES:
  Licenses..................................................   75.0%    54.1%    67.2%
  Services..................................................   25.0     45.9     32.8
                                                              -----    -----    -----
          Total revenues....................................  100.0    100.0    100.0
                                                              -----    -----    -----
OPERATING EXPENSES:
  Cost of services..........................................   10.5     28.0     29.8
  Sales and marketing.......................................   43.8     76.5     62.7
  Research and development..................................   17.7     27.8     29.3
  General and administrative................................   12.9     22.2     21.2
  Restructuring charge......................................     --      8.2       --
                                                              -----    -----    -----
          Total operating expenses..........................   84.9    162.7    143.0
                                                              -----    -----    -----
Operating income (loss).....................................   15.1    (62.7)   (43.0)
                                                              -----    -----    -----
Interest income and other, net..............................    5.7      7.1      4.2
                                                              -----    -----    -----
Income (loss) before provision (benefit) for income taxes...   20.8    (55.6)   (38.8)
Provision (benefit) for income taxes........................    0.6      0.3     (0.3)
                                                              -----    -----    -----
Net income (loss)...........................................   20.2%   (55.9)%  (38.5)%
                                                              =====    =====    =====
</TABLE>
 
REVENUES
 
     The Company generates revenues principally from licensing the rights to use
its software products to end users and from sublicense fees reported to the
Company by resellers, including certain guaranteed sublicense fees. The Company
also generates service revenues from consulting and training activities
performed for license customers and maintenance revenues from support and
software update rights. Service revenues accounted for 32.8% of total revenues
in 1998, 45.9% in 1997 and 25.0% in 1996, respectively. The Company expects
service revenues as a percentage of total revenues to decline in 1999 as a
result of its emphasis on licensing activities.
 
     The Company's total revenues in 1998 increased by $1.0 million to $23.4
million, an increase of 4.5% over 1997. Total revenues decreased $2.6 million to
$22.4 million, a decrease of 10.5% from 1996. License revenues increased $3.6
million in 1998 as compared to 1997 due primarily to the increase in closing
license contracts in Europe. License revenues declined by $6.6 million in 1997
as compared to 1996 due primarily to a decline in revenue from the reseller
channel, particularly Amdahl, which provided less guaranteed sublicense fees in
1997 compared to 1996; higher levels of competition from systems management
framework vendors causing customers to be cautious, resulting in smaller average
contracts as more customers purchased initial pilot licenses rather than larger
enterprise-wide licenses; and slowness in the European market. The decline in
service revenues of $2.6 million in 1998 as compared to 1997 is due to the
expiration of the Company's agreement with IBM in March 1997, partially offset
by higher maintenance fees associated with a growing installed base and higher
fees from services performed by the Company's professional services staff. The
higher service revenues in 1997 as compared with 1996 is primarily due to the
Company's agreement with IBM which provided $5.1 million and $2.9 million in
services revenues in 1997 and 1996, respectively, representing 23% and 12% of
the Company's total revenues for the respective periods, higher maintenance fees
associated with a growing installed base and higher fees from services performed
by the Company's professional services staff. Although the Company expects
maintenance revenues to grow moderately throughout the next fiscal year, overall
service revenues are not expected to grow due to the Company's emphasis on
licensing activities with service partners who require minimal services from the
Company.
 
                                       17
<PAGE>   18
 
     International revenues were $10.7 million, $4.1 million and $5.2 million in
1998, 1997 and 1996, respectively. International revenues increased $6.6 million
in 1998 over 1997 due primarily to license contracts closed in Europe during the
year. In March 1997 the Company initiated a restructuring program which among
other things resulted in reorganizing the management of the European operations;
reacquiring of distribution rights in the United Kingdom (UK); and opening
offices and hiring sales personnel in Germany and Belgium. The Company plans to
continue to develop international sales, through its direct sales force in
Europe and through its indirect sales channels elsewhere. International revenues
decreased in 1997 compared to 1996 primarily due to slowness in the European
market and the incomplete sell-through of the guaranteed sublicense fees from
the foreign distributors. The Company believes that international sales will
continue to grow in terms of dollars though not increase in terms of percentage
of total revenue. The Company has signed agreements with distributors in
Australia, Brazil, Japan, Korea, South Africa and Spain. The Company's European
subsidiary offers marketing and technical support to the Company's indirect
channel partners and sells directly to the European market.
 
     During 1998, two customers, Amdahl and EDS, accounted for approximately 31%
and 10% of total revenues, respectively. During 1997, two customers, IBM and
Amdahl, accounted for approximately 23% and 16% of total revenues, respectively.
During 1996, two customers, Amdahl and IBM, accounted for approximately 40% and
12% of total revenues, respectively.
 
     The Company typically ships its products following a fully executed license
agreement and acceptance of a purchase order, and, as a result, has little or no
backlog.
 
OPERATING EXPENSES
 
     Cost of services. Cost of services includes the direct and indirect costs
of providing training, technical support and consulting services to the
Company's customers. Cost of services consists primarily of payroll and benefits
for field engineers and support personnel, other related overhead and third
party consulting fees. Cost of services were $7.0 million in 1998, $6.3 million
in 1997 and $2.6 million in 1996, or 90.9%, 61.2% and 42.1% of the related
service revenues for these periods, respectively. The increases in the cost of
services in both 1998 and 1997 over the prior years were due primarily to higher
staffing levels of the professional services and customer support organizations
necessary to serve the growing installed base of customers. In addition, outside
consultants were contracted in 1998 to develop training and course material. The
Company reorganized its technical services department after the close of 1998,
reducing staff and redefining service packages. As a result, the Company expects
cost of services to decrease in 1999 both as a percentage of service revenues
and in absolute dollars.
 
     Sales and marketing. Sales and marketing expenses consist primarily of
salaries, related benefits, commissions, travel and other costs associated with
the Company's sales and marketing efforts. Sales and marketing expenses were
$14.7 million, $17.1 million and $11.0 million in 1998, 1997, and 1996,
respectively. As a percentage of total revenues in 1998, 1997 and 1996, sales
and marketing expenses represented 62.7%, 76.5% and 43.8%, respectively. The
dollar decrease in 1998 from 1997 was primarily the result of the restructuring
program initiated in March 1997, which among other things included the closing
of sales, support and marketing offices, revamping marketing programs and the
reorganization of sales and marketing organizations. The dollar increase in 1997
over 1996 was due to an increase in the number of employees in both the domestic
and international sales organizations and the marketing department; overhead and
other costs related to the increase in employees; launching of marketing
programs including a nation-wide seminar series and the development of a
website; and an increase in the allowance for doubtful accounts. The Company
expects sales and marketing expenses to increase in 1999 compared to 1998 due to
the licensing programs put into place.
 
     Research and development. Research and development expenses consist
primarily of salaries, related benefits, consultant fees and other costs
associated with the Company's research and development efforts. Research and
development expenses were $6.8 million, $6.2 million, and $4.4 million in 1998,
1997 and 1996, respectively. As a percentage of total revenues in 1998, 1997 and
1996, research and development expenses represented 29.3%, 27.8%, and 17.7%,
respectively. The dollar increase in 1998 was due primarily to salary
 
                                       18
<PAGE>   19
 
increases and the contracting of consultants to assist with the introduction and
release of EDM version 4.0 and RADIA. The dollar increase in research and
development expenses in 1997 as compared to 1996 was due primarily to increases
in the number of employees and related expenses to support the continued
enhancement, design and development of the Company's software products, quality
assurance and documentation. The Company believes that a significant investment
in research and development activities is essential to provide for the Company's
future growth, particularly research and development relating to the Company's
internet activities. Though the Company anticipates that it will continue to
invest resources to further enhance and develop its products, the Company does
not anticipate significant growth in research and development expense in 1999.
 
     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 establishment of a
working model. Amounts which could have been capitalized under this statement
were immaterial in all periods presented. Therefore, the Company has expensed
all software development costs as incurred.
 
     General and administrative. General and administrative expenses consist
primarily of salaries, related benefits, travel and fees for professional
services such as consulting, legal, accounting and recruiting fees. General and
administrative expenses were $5.0 million, $5.0 million, and $3.2 million in
1998, 1997 and 1996, respectively. As a percentage of total revenues in 1998,
1997 and 1996, general and administrative expenses represented 21.2%, 22.2%, and
12.9%, respectively. The increase in the dollar amount of expenses in 1997 as
compared to 1996 is due to an increase in the number of employees and expansion
of the Company's facilities to support the Company's growth. The Company expects
general and administrative expenses to remain at approximately the same level in
1999 as 1998.
 
     Restructuring charge. The Company implemented a restructuring program
during the fourth quarter of 1997 to more closely align the Company's operating
expenses with its revenue model, and recorded a charge of $1.8 million related
to restructuring costs during this period. The program terminated or relocated
29 employees, principally in the sales and marketing departments, causing the
closing of five regional sales offices and the Chicago-based marketing office,
the restructuring of European operations, and the integration of North American
channels marketing into the existing North American sales and services
organization. The restructuring program was completed during 1998.
 
     Interest income and other, net. Interest income and other, net is comprised
primarily of interest income earned on the Company's cash equivalents and
investments. Interest income was $1.0 million, $1.6 million, and $1.4 million in
1998, 1997 and 1996, respectively. The decline of interest income in 1998 as
compared to 1997 is due primarily to lower average balances of cash and
marketable securities during 1998. Interest income increased from 1996 to 1997
due primarily to higher average balances and interest.
 
     Income taxes. The Company recorded an income tax benefit of $0.1 million in
1998 associated with state tax refunds. The Company recorded a provision for
income taxes of approximately $0.1 million and $0.2 million in 1997 and 1996,
respectively, associated with federal and state alternative minimum taxes. As of
March 31, 1998, the Company had net deferred tax assets of approximately $8.5
million. The Company has 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, 1998, the Company had federal net operating loss
carryforwards of approximately $17.1 million, which expire in various periods
through 2013. 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.
 
YEAR 2000 COMPLIANCE
 
     Many currently installed computer systems and software products are unable
to distinguish 21st century dates from 20th century dates. Beginning in the year
2000, these date code fields will need to distinguish 21st century dates from
20th century dates. The Company is aware that some of its internal systems are
not Year 2000 compliant and the Company is in the process of assessing the
impact of replacing or upgrading these systems. The Company does not believe
that the cost to replace or upgrade its systems to be Year 2000
                                       19
<PAGE>   20
 
compliant will have a material adverse effect on the Company's business,
operating results and financial condition. The Company also believes that the
newest version of its products are Year 2000 compliant. Therefore, the Company
believes that the Year 2000 will not have a material adverse effect on the
Company's business, operating results and financial condition. See "Risk
Factors -- Year 2000 Implications".
 
NEW ACCOUNTING PRONOUNCEMENTS
 
     In June 1997, Statement of Financial Accounting Standard ("SFAS") No. 131,
"Disclosures about Segments of an Enterprise and Related Information," was
issued. SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders which is
currently not required. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The Company
is required to adopt this standard during its 1999 fiscal year.
 
     In June 1997, SFAS No. 130 "Reporting Comprehensive Income," was issued.
SFAS No. 130 establishes standards for reporting and disclosure of comprehensive
income and its components in a full set of general-purpose financial statements.
This statement requires that all items that are required to be recognized under
accounting standards as components of comprehensive income be reported. This
standard will be adopted in the first quarter of the Company's 1999 fiscal year.
 
     In October 1997 the American Institute of Certified Public Accounts
("AICPA") issued Statement of Position ("SOP") 97-2, "Software Revenue
Recognition" which supersedes SOP 91-1. SOP 97-2 generally requires revenue
earned on software arrangements involving multiple elements, such as additional
software products, upgrades or enhancements, rights to exchange or return
software, post contract customer support, or services, including elements
deliverable only on a when-and-if-available basis, to be allocated to the
various elements of such sale based on "vendor-specific objective evidence of
fair values" allocable to each such element. The Company adopted SOP 97-2 for
software transactions entered into beginning January 1, 1998. Such adoption did
not have a material effect on the timing of the Company's revenue recognition
and it did not have a material impact on its results of operations for the year
ended March 31, 1998.
 
INFLATION
 
     The effects of inflation on the Company's financial position has not been
significant to date.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     In 1998 and 1997, net cash used in operating activities was $7.7 million
and $9.1 million, respectively, and was due primarily to the net loss in each
year. Net cash provided by operating activities in 1996 was $6.6 million
primarily as a result of net income. The accounts receivable balance, net of the
allowance for doubtful accounts increased $1.6 million to $6.4 million as of
March 31, 1998. The increase in accounts receivable was due to the higher
revenues during 1998 and the lower allowance for doubtful accounts at March 31,
1998. As of March 31, 1998, the Company did not have any material commitments
for capital expenditures.
 
     In July 1995, the Company completed a public offering in the United States
of 2,875,000 shares of common stock (which included 500,000 shares sold by
stockholders) at $15 per share, resulting in net proceeds to the Company of
approximately $32.2 million, after offering costs. The Company received
approximately $0.4 million and $1.0 million in 1998 and 1997, respectively, from
employee optionees who exercised options under the Company's stock option plan.
 
     In May 1996, the Board of Directors approved the repurchase of up to
500,000 shares of the Company's common stock. As of March 31, 1998, the Company
had repurchased 500,000 shares, expending approximately $3.1 million. The
repurchased shares have been accounted for as treasury stock.
 
     In December 1994, the Company entered into an unsecured revolving line of
credit agreement with a bank. The agreement has been renewed annually and at
March 31, 1998 the available line of credit was
                                       20
<PAGE>   21
 
$1.0 million, expiring in September 1998. Borrowings bear interest at the bank's
reference rate (8.5% as of March 31, 1998). The agreement has a number of
financial covenants which the Company is required to meet. The Company had no
outstanding borrowings under the agreement as of March 31, 1998.
 
     Although it is difficult for the Company to predict future liquidity
requirements with certainty, the Company believes that its existing cash and
marketable securities balances, together with cash from operations and amounts
available under the Company's revolving line of credit, will be adequate to
finance its operations for at least the next twelve months.
 
BUSINESS RISKS
 
     History of Operating Losses. The Company has reported an operating loss for
every quarter since its incorporation in February 1992 except for the four
consecutive quarters of fiscal 1996. The Company believes it will continue to
incur operating losses and net losses at least through the first half of 1999.
There can be no assurance that the Company will be able to achieve profitability
on a quarterly or annual basis in the future.
 
     Restructuring Programs. The restructuring program implemented by the
Company in the last quarter of 1997 and the reorganization initiated at the
close of 1998 may not be adequate to bring the Company to profitability. The
reorganization of the sales and marketing, technical services and the European
operations may not be successful in better aligning the Company's operating
expenses with its revenue model. The termination of sales and support personnel
in connection with the reorganization may negatively affect the Company's
licensing efforts which could result in declining total revenues. If the
restructuring program and reorganization are inadequate, future charges may be
incurred.
 
     Retention of Executives and Key Employees. The Company's future success
depends upon the contributions of its executives and key employees. The
inability to retain executives and certain key employees in research and
development and sales and marketing could have a significant adverse affect on
the Company's ability to implement its restructuring program, develop new
products and versions of its products and market and sell its products in the
marketplace. The loss of the services of one or more of the Company's executives
or key employees could have a material adverse effect on the Company's operating
results. The Company also believes its future success will depend in large part
upon its ability to attract and retain additional highly skilled personnel.
 
     Fluctuations in Quarterly Results; Seasonality. The Company's quarterly
operating results have fluctuated in the past and are expected to fluctuate
significantly in the future due to a number of factors, including, among others,
the size and timing of customer orders, the timing and market acceptance of new
products by the Company, the level and pricing of international sales, foreign
currency exchange rates, changes in the level of operating expenses,
technological advances and new product introductions by the Company's
competitors and competitive conditions in the industry. Revenues received from
individual customers of the Company vary significantly based on the size of the
product installation. Customer orders for the Company's products have ranged
from $25,000 to over $4 million, and have averaged several hundred thousand
dollars. As a result, the Company's quarterly operating results are likely to be
significantly affected by the number and size of customer orders the Company is
able to obtain in any particular quarter. In addition, the sales cycle for the
Company's 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 the
Company's 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.
 
     The Company generally ships orders as received and as a result typically
has 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, the Company has recognized the
substantial majority of its quarterly license revenues in the last weeks or week
of each quarter. In addition, because the Company's 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.
                                       21
<PAGE>   22
 
     The Company's operating results are also expected to vary significantly due
to seasonal trends. Historically, the Company has realized a greater percentage
of its annual revenues in its fourth quarter, and a lower percentage in the
first and second quarters. The Company believes that this seasonality is in part
a result of efforts of the Company's 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 the Company's customers, which tend to concentrate spending
activity at calendar year-end, have had, and may continue to have, a seasonal
influence in the Company's quarterly operating results. The Company expects that
its operating results will continue to fluctuate in the future as a result of
these and other factors, and that seasonality may increase if the Company's
efforts to expand its international sales are successful. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business-Sales and Marketing".
 
     Rapid Technological Change and Introduction of New Products. The market for
ESD products is characterized by rapid technological advances, changes in
customer requirements and frequent new product introductions and enhancements.
The Company's future success will depend in large part on the Company's ability
to enhance its 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 the Company to make substantial
investments in research and product development. During 1998, among other
research and development expenditures, the Company allocated research and
development funding to the development of its most recent release of EDM,
version 4.0, as well as the development of products for the internet
environment, in particular Radia. The Company intends to continue to allocate
funding to these development projects throughout 1999. Any failure by the
Company 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 any significant delays in product
development or introduction, could result in a loss of competitiveness or could
materially and adversely affect the Company's operating results. There can be no
assurance that any product enhancements or new products developed by the Company
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 the
Company's existing products and thereby adversely affect the Company's operating
results. If future releases of new products and enhancements do not achieve
market acceptance, the Company's business, financial condition and results of
operations will be materially and adversely affected. See "Business-Products."
 
     Software products as complex as those offered by the Company may contain
undetected errors or failures that, despite significant testing by the Company,
are discovered only after a product has been installed and used by customers.
Although the Company's business has not been materially and adversely affected
by any such errors to date, there can be no assurance that errors will not be
found in the Company's products in the future. Such errors could cause delays in
product introductions and shipments, require design modifications, result in
loss of or delay in market acceptance of the Company's products, or loss of
existing customers, any of which could adversely affect the Company's business,
financial condition and results of operation.
 
     Competition. Competition in the ESD market is rapidly evolving. Current and
prospective competitors of the Company generally fall into three categories:
 
          Network/Systems Management Framework Vendors. These competitors
     include IBM/Tivoli, Computer Associates, and Hewlett-Packard, who offer
     traditional "list/script-based" ESD tools as part of their enterprise
     frameworks.
 
          LAN/Desktop Management Suite Vendors. These competitors include
     vendors like Microsoft, Intel, and Network Associates, who offer
     workgroup-based ESD tools as part of a LAN administration package.
 
                                       22
<PAGE>   23
 
          Internet Push ESD Vendors. These competitors include start-ups like
     Marimba, BackWeb and infrastructure suppliers like Netscape and Microsoft
     who provide push distribution technologies as plug-in components for their
     browsers.
 
     Many of the Company's competitors have longer operating histories than the
Company, and many may have significantly greater financial, technical, sales,
marketing and other resources, as well as greater name recognition and larger
installed customer bases. The Company's current and future competitors could
introduce products with more features, greater functionality and lower prices
than the Company's products. These competitors could also bundle existing or new
products with other, more established products in order to compete with the
Company. The Company's focus on software management products may be a
disadvantage in competing with vendors that offer a broader range of products.
Moreover, as the software management market develops, a number of companies with
significantly greater resources than those of the Company could attempt to
increase their presence in this market by acquiring or forming strategic
alliances with competitors or business partners of the Company. There can be no
assurance that the Company will be able to compete successfully or that
competition will not have a material adverse effect on the Company's business,
operating results or financial condition. See "Business-Competition."
 
     Volatility. The market for the Company's common stock is highly volatile.
The trading price of the Company's common stock could be subject to wide
fluctuations in response to quarterly variations in operating and financial
results, announcements of technological innovations or new products by the
Company or its competitors, changes in prices of the Company's or its
competitors' products and services, changes in product mix, change in the
Company's revenue and revenue growth rates for the Company 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 the Company does business or relating to the Company specifically have
resulted, and could in the future result in, an immediate and adverse effect on
the market price of the Company's common stock. In addition, the stock 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 the Company's common stock.
 
     Risks Related to International Revenues. In 1998 and 1997, approximately
46% and 18% of the Company's net revenues were derived from its international
operations. International revenues increased significantly in 1998 compared to
1997 and the Company plans to continue to develop international sales, primarily
through its European operations. The Company's 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 collection, changes in regulatory requirements
and product localization requirements, as well as by other factors associated
with international activities.
 
     Customer Concentration. During 1998, two customers, Amdahl and EDS,
accounted for approximately 31% and 10% of total revenues, respectively. During
1997, two customers, IBM and Amdahl, accounted for approximately 23% and 16% of
total revenues, respectively. During 1996, two customers, Amdahl and IBM,
accounted for approximately 40% and 12% of total revenues, respectively. In June
1995, the Company entered into a seven-year, non-exclusive OEM and distribution
agreement with Amdahl. Under the agreement Amdahl can sublicense EDM throughout
the world as part of their bundled solution and sublicense EDM stand-alone to a
limited worldwide market. Novadigm agreed to provide limited technical support
and training. The agreement required Amdahl to pay the Company $8 million in
non-refundable, guaranteed sublicense fees and bundled support in quarterly
installments during the first year of the agreement, 1996; and $4 million in the
last quarter of both 1997 and 1998. The agreement was amended in March 1997,
instead requiring Amdahl to pay $2 million in non-refundable, guaranteed
sublicense fees in the last quarter of 1997; minimum additional sublicense fees
of $2 million during 1998; and minimum additional sublicense fees of $3 million
in both 1999 and 2000. In the event of a change of control of the Company, the
amended agreement allows Amdahl the right to terminate the agreement and recover
unused guaranteed sublicense fees at the time of the termination, to the extent
they were also outstanding at March 31, 1997. There can be no
                                       23
<PAGE>   24
 
assurance that Amdahl will extend this agreement in subsequent years. The
Company recognized no revenue from guaranteed sublicense fees from Amdahl in
1998. Although the Company believes that its dependence on its relationship with
Amdahl may become less significant over time as the Company expands the number
of companies participating in its indirect marketing channels, the disruption of
the Company's relationship with Amdahl could materially and adversely affect the
Company's operating results and financial condition.
 
     Year 2000 Implications. Many currently installed computer systems and
software products are unable to distinguish 21st century dates from 20th century
dates. Beginning in the year 2000, these date code fields will need to
distinguish 21st century dates from 20th century dates, and, as a result, many
companies' software and computer systems may need to be upgraded or replaced in
order to comply with such "Year 2000" requirements. The Company is aware that
some of its internal systems are not Year 2000 compliant and the Company is in
the process of assessing the impact of replacing or upgrading these systems. The
Company has on occasion warranted, and generally represents to its customers,
that the newer version of its products, EDM version 4.0 and RADIA, are free from
Year 2000 defects. There can be no assurance that the Company's products are
Year 2000 compliant, or that the Company's products will not be integrated with,
or otherwise interact with, non-compliant software. The foregoing could expose
the Company to claims from its customers and result in the loss of or delay in
market acceptance of the Company's products, increased service and warranty
costs to the Company and payment by the Company of compensatory or other
damages, any of which events could have a material adverse effect on the
Company's business, operating results and financial condition. Although the
Company believes that the cost to replace or upgrade its internal systems to be
Year 2000 compliant will not have a material adverse effect on its business, the
failure of any third-party systems to operate properly with regard to the Year
2000 and thereafter could have a material adverse effect on the Company's
business, results of operations and financial condition. Furthermore, the
purchasing patterns of potential customers may be affected by Year 2000 issues
as companies expend significant resources to correct their current systems for
Year 2000 compliance.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
     The Financial Statements and Supplementary Data of the Company 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
 
     Not applicable.
 
                                       24
<PAGE>   25
 
                                    PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
     Information required by this item concerning the Company's directors is
incorporated by reference from the section captioned "Election of Directors"
contained in the Company's Proxy Statement related to the Annual Meeting of
Stockholders to be held September 24, 1998, to be filed by the Company with the
Securities and Exchange Commission within 120 days of the end of the Company's
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 "Compliance with Section
16(a) of the Exchange Act" 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" 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" 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" contained in
the Proxy Statement.
 
                                       25
<PAGE>   26
 
                                    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:
 
<TABLE>
<CAPTION>
                                                                  PAGE NUMBER
                                                                  -----------
    <S>                                                           <C>
     1. Financial Statements:
         Report of Independent Public Accountants...............      F-2
         Consolidated Balance Sheets -- As of March 31, 1998 and      F-3
          1997..................................................
         Consolidated Statements of Operations -- For the Three       F-4
         Years Ended March 31, 1998, 1997 and 1996..............
         Consolidated Statements of Stockholders' Equity -- For       F-5
         the Three Years Ended March 31, 1998, 1997 and 1996....
         Consolidated Statements of Cash Flows -- For the Three       F-6
         Years Ended March 31, 1998, 1997 and 1996..............
         Notes to Consolidated Financial Statements.............      F-7
     2. Financial Statement Schedule: For the Years Ended March
        31, 1998, 1997 and 1996:
         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.
        10.1*+     OEM Software Licensing and Distribution Agreement dated June
                   13, 1995 between the Registrant and Amdahl Corporation.
                   (originally filed as Exhibit 10.8)
        10.2**+    Amendment 1 to the OEM Software Licensing and Distribution
                   Agreement dated June 13, 1995 between the Registrant and
                   Amdahl Corporation.
        10.3**+    Amendment 2 to OEM Software Licensing and Distribution
                   Agreement dated June 13, 1995 between the Registrant and
                   Amdahl Corporation.
        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.
        10.6*      Employment Agreement dated as of August 10, 1992 by and
                   between H. Kent Petzold and the Registrant.
        10.7*      Deferred Compensation Agreement dated as of August 10, 1992,
                   as amended, by and between H. Kent Petzold and the
                   Registrant.
        10.8*      Stock Option Agreement and Notice of Stock Option Grant
                   dated as of August 10, 1992 by and between H. Kent Petzold
                   and the Registrant.
        10.9*      Amendment to Employment Agreement and Stock Option
                   Agreements dated as of May 18, 1995 by and among H. Kent
                   Petzold and the Registrant, and Albion J. Fitzgerald,
                   Shannon Ruiz, Joseph J. Fitzgerald and Brian J. McAlister.
        10.10*     Form of Indemnification Agreement entered into between
                   Registrant and its officers and directors.
        10.11**    Change of Control Agreement entered into between Registrant
                   and Stuart Jacobson.
        10.12      Loan Agreement dated August 1, 1997 between the Registrant
                   and Coast Commercial Bank.
        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.
        10.15      Offer Letter dated February 9, 1998 by and between the
                   Registrant and Michael Carabetta.
</TABLE>
 
                                       26
<PAGE>   27
 
<TABLE>
<S>        <C>
10.16      Separation Agreement and Mutual Release by and between the Registrant and Stuart Jacobson.
10.17      Agreement dated February 1998 by and between the Registrant and Stuart Jacobson.
21.1*      Subsidiary of Registrant.
23.1       Consent of Arthur Andersen LLP.
24.1       Power of Attorney (see page 29).
27.1       Financial Data Schedule.
</TABLE>
 
     (b) Reports on Form 8-K:
 
        None.
 
     (c) Exhibits. See Item 14(a)(3) above.
 
     (d) Financial Statement Schedule. See Item 14(a)(2) above.
---------------
 * Incorporated by reference to exhibits 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 exhibits filed with Registrant's Annual Report
   on Form 10-K for the fiscal year ended March 31, 1997.
 
 + Confidential treatment has been granted with respect to certain portions of
   this exhibit. Omitted portions have been filed separately with the Securities
   and Exchange Commission.
 
                                       27
<PAGE>   28
 
                                   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.
                                          (Registrant)
 
                                          By:      /s/ WALLACE D. RUIZ
 
                                            ------------------------------------
                                                      Wallace D. Ruiz
                                               Vice President, Treasurer and
                                                  Chief Financial Officer
                                            (Principal Financial and Accounting
                                                           Officer)
 
Date: June 24, 1998
 
                                       28
<PAGE>   29
 
                               POWER OF ATTORNEY
 
     KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Wallace D. Ruiz, as his
attorney-in-fact, with full power of substitution, for him in any and all
capacities, to sign any and all amendments to this Report on Form 10-K, and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission.
 
     Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed below on June 24, 1998 by the following persons on behalf of the
Registrant and in the capacities and on the date indicated:
 
<TABLE>
<CAPTION>
                       SIGNATURE                                      TITLE                   DATE
                       ---------                                      -----                   ----
<S>                                                       <C>                             <C>
 
                /s/ ALBION J. FITZGERALD                    Chairman of the Board and     June 24, 1998
--------------------------------------------------------     Chief Executive Officer
                  Albion J. Fitzgerald                    (Principal Executive Officer)
 
                  /s/ WALLACE D. RUIZ                     Vice President, Treasurer and   June 24, 1998
--------------------------------------------------------     Chief Financial Officer
                    Wallace D. Ruiz                          (Principal Financial and
                                                               Accounting Officer)
 
                 /s/ ROBERT B. ANDERSON                     Executive Vice President,     June 24, 1998
--------------------------------------------------------      Secretary and Director
                   Robert B. Anderson
 
              /s/ DEBORAH DOYLE MCWHINNEY                            Director             June 24, 1998
--------------------------------------------------------
                Deborah Doyle McWhinney
 
                  /s/ H. KENT PETZOLD                                Director             June 24, 1998
--------------------------------------------------------
                    H. Kent Petzold
</TABLE>
 
                                       29
<PAGE>   30
 
                                 NOVADIGM, INC.
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Independent Public Accountants....................  F-2
Consolidated Balance Sheets.................................  F-3
Consolidated Statements of Operations.......................  F-4
Consolidated Statements of Stockholders' Equity.............  F-5
Consolidated Statements of Cash Flows.......................  F-6
Notes to Consolidated Financial Statements..................  F-7
</TABLE>
 
                                       F-1
<PAGE>   31
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
TO NOVADIGM, INC.:
 
     We have audited the accompanying consolidated balance sheets of Novadigm,
Inc. (a Delaware corporation) and subsidiary as of March 31, 1998 and 1997, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended March 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. 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 evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Novadigm, Inc. and
subsidiary as of March 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended March 31,
1998 in conformity with generally accepted accounting principles.
 
     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 statement schedules is the responsibility of the Company's
management and 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 27, 1998
 
                                       F-2
<PAGE>   32
 
                                 NOVADIGM, INC.
 
                          CONSOLIDATED BALANCE SHEETS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                              MARCH 31,    MARCH 31,
                                                                1998         1997
                                                              ---------    ---------
<S>                                                           <C>          <C>
Current assets:
  Cash and cash equivalents.................................  $  4,431     $  7,984
  Short-term marketable securities..........................    14,534       18,205
  Accounts receivable, net of allowance for doubtful
     accounts of $770 in 1998 and $1,302 in 1997............     6,352        4,732
  Prepaid expenses and other current assets.................       841          604
                                                              --------     --------
          Total current assets..............................    26,158       31,525
  Property and equipment, net...............................     1,763        1,586
  Long-term marketable securities...........................        --        2,529
  Other assets..............................................       955          702
                                                              --------     --------
                                                              $ 28,876     $ 36,342
                                                              ========     ========
 
                        LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................  $  2,094     $  1,540
  Accrued liabilities.......................................     1,578          433
  Accrued payroll and other compensation....................     2,642        2,229
  Accrued restructuring costs...............................        --        1,394
  Deferred revenue..........................................     2,518          946
                                                              --------     --------
          Total current liabilities.........................     8,832        6,542
                                                              --------     --------
Commitments and contingencies
Stockholders' equity:
  Preferred stock, $0.001 par value
     Authorized -- 5,000 shares
     Outstanding -- none....................................        --           --
  Common stock, $0.001 par value
     Authorized -- 30,000 shares
     Outstanding -- 17,471 shares in 1998 and 17,316 shares
      in 1997...............................................        11           11
  Additional paid-in capital................................    66,087       65,859
  Accumulated deficit.......................................   (43,548)     (34,531)
  Treasury stock, 410 shares in 1998, 231 shares in 1997....    (2,527)      (1,543)
  Cumulative translation adjustment.........................        21            4
                                                              --------     --------
          Total stockholders' equity........................    20,044       29,800
                                                              --------     --------
                                                              $ 28,876     $ 36,342
                                                              ========     ========
</TABLE>
 
The accompanying notes to consolidated financial statements are an integral part
                     of these consolidated balance sheets.
 
                                       F-3
<PAGE>   33
 
                                 NOVADIGM, INC.
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                               FOR THE YEARS ENDED MARCH 31,
                                                              -------------------------------
                                                                1998        1997       1996
                                                              --------    --------    -------
<S>                                                           <C>         <C>         <C>
Revenues:
  Licenses..................................................  $ 15,728    $ 12,117    $18,775
  Services..................................................     7,667      10,261      6,241
                                                              --------    --------    -------
          Total revenues....................................    23,395      22,378     25,016
                                                              --------    --------    -------
Operating expenses:
  Cost of services..........................................     6,971       6,275      2,630
  Sales and marketing.......................................    14,680      17,123     10,961
  Research and development..................................     6,843       6,212      4,426
  General and administrative................................     4,964       4,979      3,230
  Restructuring charge......................................        --       1,829         --
                                                              --------    --------    -------
          Total operating expenses..........................    33,458      36,418     21,247
                                                              --------    --------    -------
Operating income (loss).....................................   (10,063)    (14,040)     3,769
Interest income and other, net..............................       978       1,597      1,428
                                                              --------    --------    -------
Income (loss) before provision (benefit) for income taxes...    (9,085)    (12,443)     5,197
Provision (benefit) for income taxes........................       (68)         59        160
                                                              --------    --------    -------
Net income (loss)...........................................  $ (9,017)   $(12,502)   $ 5,037
                                                              ========    ========    =======
Earnings (loss) per share -- basic..........................  $   (.52)   $   (.72)   $   .30
                                                              ========    ========    =======
Weighted average common shares outstanding -- basic.........    17,392      17,409     16,566
                                                              ========    ========    =======
Earnings (loss) per share -- diluted........................  $   (.52)   $   (.72)   $   .28
                                                              ========    ========    =======
Weighted average common and common equivalent shares
  outstanding -- diluted....................................    17,392      17,409     17,928
                                                              ========    ========    =======
</TABLE>
 
The accompanying notes to consolidated financial statements are an integral part
                  of these consolidated financial statements.
                                       F-4
<PAGE>   34
 
                                 NOVADIGM, INC
 
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                 NOTES
                                COMMON STOCK     ADDITIONAL    RECEIVABLE                             CUMULATIVE        TOTAL
                               ---------------    PAID-IN         FROM       ACCUMULATED   TREASURY   TRANSLATION   STOCKHOLDERS'
                               SHARES   AMOUNT    CAPITAL     STOCKHOLDERS     DEFICIT      STOCK     ADJUSTMENT       EQUITY
                               ------   ------   ----------   ------------   -----------   --------   -----------   -------------
<S>                            <C>      <C>      <C>          <C>            <C>           <C>        <C>           <C>
Balance at March 31, 1995....  14,827    $ 8      $31,457        $(325)       $(27,066)    $    --       $ (8)        $  4,066
Initial public offering of
  common stock, net of
  issuance costs of $3,424...  2,375       2       32,199           --              --          --         --           32,201
Exercise of stock options....    200       1        1,221           --              --          --         --            1,222
Foreign currency translation
  adjustment.................     --      --           --           --              --          --         (4)              (4)
Net income...................     --      --           --           --           5,037          --         --            5,037
                               ------    ---      -------        -----        --------     -------       ----         --------
Balance at March 31, 1996....  17,402     11       64,877         (325)        (22,029)         --        (12)          42,522
Exercise of stock options....    145      --          982           --              --          --         --              982
Purchases of treasury
  stock......................   (231)     --           --           --              --      (1,543)        --           (1,543)
Reduction of notes
  receivable.................     --      --           --          325              --          --         --              325
Foreign currency translation
  adjustment.................     --      --           --           --              --          --         16               16
Net loss.....................     --      --           --           --         (12,502)         --         --          (12,502)
                               ------    ---      -------        -----        --------     -------       ----         --------
Balance at March 31, 1997....  17,316     11       65,859           --         (34,531)     (1,543)         4           29,800
Exercise of stock options....    334      --          387           --              --          --         --              387
Purchases of treasury
  stock......................   (269)     --           --           --              --      (1,535)        --           (1,535)
Sales of treasury stock......     90      --         (159)          --              --         551         --              392
Foreign currency translation
  adjustment.................     --      --           --           --              --          --         17               17
Net loss.....................     --      --           --           --          (9,017)         --         --           (9,017)
                               ------    ---      -------        -----        --------     -------       ----         --------
Balance at March 31, 1998....  17,471    $11      $66,087        $  --        $(43,548)    $(2,527)      $ 21         $ 20,044
                               ======    ===      =======        =====        ========     =======       ====         ========
</TABLE>
 
The accompanying notes to consolidated financial statements are an integral part
                   of these consolidated financial statements
 
                                       F-5
<PAGE>   35
 
                                 NOVADIGM, INC.
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (AMOUNTS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                               FOR THE YEARS ENDED MARCH 31,
                                                              -------------------------------
                                                               1998        1997        1996
                                                              -------    --------    --------
<S>                                                           <C>        <C>         <C>
Cash flows from operating activities:
  Net income (loss).........................................  $(9,017)   $(12,502)   $  5,037
  Adjustments to reconcile net income (loss) to net cash
     (used in) provided by operating activities --
     Depreciation and amortization..........................    1,104         946         510
     Increase (decrease) in allowance for doubtful
       accounts.............................................     (532)      1,302          --
     Decrease in restricted cash............................       --          --         300
     Decrease (increase) in accounts receivable.............   (1,088)      1,849      (3,357)
     Decrease (increase) in prepaid expenses and other
       current assets.......................................     (237)        453        (765)
     Increase in other assets...............................     (253)       (428)       (213)
     Increase in accounts payable and accrued liabilities...    1,699         301         617
     Increase in accrued payroll and other compensation.....      413         800         861
     Increase (decrease) in accrued restructuring costs.....   (1,394)      1,394          --
     Increase (decrease) in deferred revenue................    1,572      (3,563)      3,638
     Decrease in notes receivable from stockholders.........       --         325          --
                                                              -------    --------    --------
          Net cash (used in) provided by operating
            activities......................................   (7,733)     (9,123)      6,628
                                                              -------    --------    --------
Cash flows from investing activities:
  Purchases of property and equipment.......................   (1,281)     (1,230)     (1,443)
  Purchases of held-to-maturity securities..................  (17,752)    (20,338)    (36,101)
  Proceeds from redemptions of held-to-maturity
     securities.............................................   23,952      25,859       9,846
                                                              -------    --------    --------
          Net cash provided by (used in) investing
            activities......................................    4,919       4,291     (27,698)
                                                              -------    --------    --------
Cash flows from financing activities:
  Net proceeds from the sale of common stock and exercise of
     warrants and options...................................      387         982      33,423
  Purchases of treasury stock...............................   (1,535)     (1,543)         --
  Sales of treasury stock...................................      392          --          --
                                                              -------    --------    --------
          Net cash (used in) provided by financing
            activities......................................     (756)       (561)     33,423
                                                              -------    --------    --------
Effect of exchange rate on changes in cash..................       17          16          (4)
                                                              -------    --------    --------
Net increase (decrease) in cash and cash equivalents........   (3,553)     (5,377)     12,349
Cash and cash equivalents at the beginning of the period....    7,984      13,361       1,012
                                                              -------    --------    --------
Cash and cash equivalents at the end of the period..........  $ 4,431    $  7,984    $ 13,361
                                                              =======    ========    ========
Supplemental disclosure of cash flow activity:
Cash paid for interest......................................  $    18    $      2    $      2
Cash paid for income taxes..................................  $    --    $     --    $    115
</TABLE>
 
The accompanying notes to consolidated financial statements are an integral part
                  of these consolidated financial statements.
 
                                       F-6
<PAGE>   36
 
                                 NOVADIGM, INC.
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 1998
 
1. THE COMPANY
 
     Novadigm, Inc. (the "Company") was incorporated in Delaware in February
1992. The Company designs, markets and supports an automated solution to
software management in medium and large organizations with complex distributed
computing environments.
 
     Prior to 1994, the Company's primary efforts related to completing the
development of its software products, designing and implementing a marketing
program and obtaining financing to support its operations. In September 1992,
the Company completed a public offering of its common stock on the Vancouver
Stock Exchange. During the second quarter of fiscal 1994, the Company commenced
commercial sales of its products. In the first quarter of fiscal 1995, the
Company established a wholly-owned subsidiary, Novadigm Europe SARL, in France
to act as a sales and service office to the European marketplace. In July 1995,
the Company completed a public offering of its common stock on the Nasdaq
National Market. 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 subsidiary. Intercompany accounts and transactions have
been eliminated.
 
  Translation of Foreign Currencies
 
     The functional currency of the Company's subsidiary 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.
Cumulative translation gains and losses are reported as a separate component of
stockholders' equity.
 
  Use of Estimates
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect 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." The Company
generates license revenues from licensing the rights to use its software
products to end users and sublicense fees from resellers (including certain
guaranteed sublicense fees). The Company also generates service revenues from
consulting and training activities performed for license customers and
maintenance revenue from support and software update rights.
 
     Revenues from perpetual software license agreements are recognized upon
shipment of the software if there are no significant post-delivery obligations,
payment is due within one year and collectibility is probable.
 
                                       F-7
<PAGE>   37
                                 NOVADIGM, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 1998
 
If an acceptance period is required, revenues are recognized upon the earlier of
customer acceptance or the expiration of the acceptance period. The Company
enters into reseller arrangements that typically provide for sublicense fees
payable to the Company based on a percentage of the Company's list price.
Reseller arrangements may include an initial non-refundable payment 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 there are no significant post-delivery
obligations, 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. The Company recognized $0.4
million, $3.9 million and $8.3 million in guaranteed sublicense fees under all
such agreements in 1998, 1997 and 1996, respectively.
 
     Revenues for maintenance are recognized ratably over the term of the
support period. If maintenance is included in a license agreement, such amounts
are unbundled from the license fee at their fair market value based on the value
established by independent sales of such maintenance to customers. Consulting
revenues are primarily related to implementation services performed under
separate service arrangements related to the installation of the Company's
software products. Such services generally do not include customization or
modification of the underlying software code. If included in a license
agreement, such services are unbundled at their fair market value based on the
value established by the independent sale of such services to customers.
Revenues from consulting and training services are recognized as services are
performed.
 
     Cost of licenses consist of media and tapes on which 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 services includes the direct and indirect costs of providing
training, technical support and consulting services to the Company's customers.
Cost of 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 other
professional services which have been paid by the customers prior to the
performance of those services.
 
  Cash and Cash Equivalents
 
     The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
 
  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 these investments to financial institutions
evaluated as highly creditworthy. The Company generally does not require
collateral on trade accounts receivable as the Company's customer base consists
of large, well-established companies and governmental entities. As of March 31,
1998 and 1997, approximately 46% and 40%, respectively, of accounts receivable
are concentrated with 2 customers who are large, well-established companies that
the Company has determined are creditworthy.
 
  Marketable Securities
 
     In April 1994, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115"). In accordance
 
                                       F-8
<PAGE>   38
                                 NOVADIGM, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 1998
 
with SFAS 115, the Company's 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.
 
     Held-to maturity securities at March 31, 1998 (in thousands) are summarized
as follows:
 
<TABLE>
<CAPTION>
                                                          MATURITIES OF
                                                         ONE YEAR OR LESS
                                                         ----------------
<S>                                                      <C>
U.S. government and government backed securities.......      $ 1,497
Commercial paper.......................................       12,041
Corporate notes........................................          996
                                                             -------
                                                             $14,534
                                                             =======
</TABLE>
 
     Proceeds from redemption of held-to-maturity securities were approximately
$24.0 million in 1998. At March 31, 1998, approximately $2.0 million of
held-to-maturity securities with original maturities of three months or less
were included in cash and cash equivalents.
 
  Fair Value of Financial Instruments
 
     The carrying amounts of the Company's financial instruments, including cash
and cash equivalents, 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):
 
<TABLE>
<CAPTION>
                                                            1998       1997
                                                           -------    -------
<S>                                                        <C>        <C>
Computer equipment and software..........................  $ 3,201    $ 2,520
Furniture and fixtures...................................    1,126        697
Leasehold improvements...................................      357        302
                                                           -------    -------
                                                             4,684      3,519
Less: Accumulated depreciation and amortization..........   (2,921)    (1,933)
                                                           -------    -------
                                                           $ 1,763    $ 1,586
                                                           =======    =======
</TABLE>
 
     Depreciation and amortization are provided using the straight-line method
over the estimated useful lives of the assets as follows:
 
<TABLE>
    <S>                                 <C>
    Computer equipment and software     3 years
    Furniture and fixtures              5 years
    Leasehold improvements              5 years (lesser of lease term or estimated useful
                                        life)
</TABLE>
 
  Long-Lived Assets
 
     The Company has adopted 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. As a result of its review, the Company does not believe
that any impairment currently exists related to its long-lived assets.
 
                                       F-9
<PAGE>   39
                                 NOVADIGM, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 1998
 
  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 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
 
     In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128")
which requires the presentation of basic earnings per share ("Basic EPS") and
diluted earnings per share ("Diluted EPS"). Basic EPS is calculated by dividing
income 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 available to common shareholders by the weighted average number
of common shares outstanding for the period adjusted to reflect potentially
dilutive securities. The Company has implemented SFAS 128 as of March 31, 1998
and, in accordance with the pronouncement, has restated prior year amounts.
 
     In accordance with SFAS 128, the following table reconciles income and
share amounts used to calculate basic earnings per share and diluted earnings
per share.
 
<TABLE>
<CAPTION>
                                               FOR THE YEARS ENDED MARCH 31,
                                               ------------------------------
                                                1998        1997       1996
                                               -------    --------    -------
<S>                                            <C>        <C>         <C>
Numerator:
Net income (loss) -- basic and diluted.......  $(9,017)   $(12,502)   $ 5,037
                                               -------    --------    -------
Denominator:
Weighted average number of common shares
  outstanding -- basic.......................   17,392      17,409     16,566
Incremental shares from assumed conversion of
  options....................................       --          --      1,362
Weighted average common and common equivalent
  shares outstanding -- diluted..............   17,392      17,409     17,928
                                               =======    ========    =======
Earnings (loss) per share -- basic...........  $  (.52)   $   (.72)   $   .30
                                               =======    ========    =======
Earnings (loss) per share -- diluted.........  $  (.52)   $   (.72)   $   .28
                                               =======    ========    =======
</TABLE>
 
3. REVOLVING LINE OF CREDIT AGREEMENT
 
     The Company entered into a $1.0 million unsecured revolving line of credit
agreement with a bank which expires in September 1998. Borrowings bear interest
at the bank's reference rate (8.5% as of March 31, 1998). The agreement includes
a provision that prohibits the Company from paying dividends and requires the
Company to meet certain financial covenants. As of March 31, 1998, the Company
had no outstanding borrowings under the agreement.
 
                                      F-10
<PAGE>   40
                                 NOVADIGM, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 1998
 
4. 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 1998, 1997 and 1996 was approximately $928,000, $659,000 and $534,000,
respectively.
 
     During 1997, the Company entered into an amendment of the lease for its
headquarters. Under the amendment, the Company extended the lease term for its
original leased space and entered into a commitment for additional space. Future
minimum commitments under all facility leases are as follows (in thousands):
 
<TABLE>
<CAPTION>
       YEAR ENDING MARCH 31,
       ---------------------
<S>                                   <C>
     1999...........................  $  871
     2000...........................     580
     2001...........................     180
     2002...........................     110
     2003 and thereafter............      --
                                      ------
                                      $1,741
                                      ======
</TABLE>
 
     The Company is contingently liable with respect to lawsuits and other
matters which arise in the normal course of business. Management believes that
the outcome of such contingencies will not have a material adverse effect on the
Company's financial position or results of operations.
 
5. COMMON STOCK
 
     In July of 1995, the Company completed a public offering in the United
States of 2,875,000 shares of common stock (which included 500,000 shares sold
by stockholders) at $15 per share, resulting in net proceeds to the Company of
approximately $32.2 million after offering costs. The Company's shares trade on
the Nasdaq National Market.
 
     In May of 1996, the Board of Directors approved the repurchase of up to
500,000 shares of the Company's common stock. As of March 31, 1998, the Company
repurchased 500,000 shares, expending approximately $3.1 million. Approximately
90,000 of these shares were resold by the Company in fiscal 1998 for the
exercise of employee stock options.
 
6. STOCK OPTIONS AND STOCK PURCHASE PLAN
 
     Under the Company's 1992 Stock Option Plan, as amended (the "Plan"), the
Board of Directors may grant incentive and nonqualified stock options to
employees, 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
the Company'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. Option
terms may not exceed five years and vesting is determined by the Board of
Directors for each individual grant (generally 4 years). The Plan will continue
in effect until June 9, 2002, unless terminated sooner. During fiscal 1997, the
shareholders approved an amendment to the Plan increasing the number of shares
of common stock reserved for issuance under the Plan to 4,700,000 shares.
 
                                      F-11
<PAGE>   41
                                 NOVADIGM, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 1998
 
     The following table summarizes the option activity (in thousands, except
per share amounts):
 
<TABLE>
<CAPTION>
                                                                       WEIGHTED
                                                         OPTIONS        AVERAGE
                                                       OUTSTANDING    GRANT PRICE
                                                       -----------    -----------
<S>                                                    <C>            <C>
Balance at March 31, 1996............................     2,557         $15.82
  Granted............................................     3,109         $ 5.32
  Exercised..........................................      (108)        $ 6.06
  Canceled...........................................    (2,485)        $ 6.21
                                                         ------         ------
Balance at March 31, 1997............................     3,073         $ 5.23
  Granted............................................     1,325         $ 4.04
  Exercised..........................................      (341)        $ 1.76
  Canceled...........................................      (706)        $ 5.43
                                                         ------         ------
Balance at March 31, 1998............................     3,351         $ 5.05
                                                         ======         ======
</TABLE>
 
     At March 31, 1998, 1,144,000 options are vested and exercisable and
4,001,000 shares of common stock are reserved for future issuance under the
Plan. The weighted average exercise price of exercisable options at March 31,
1998 is $4.90 per share.
 
     During fiscal 1997, the Company canceled 1,945,000 options with prices
ranging from $6.88 to $28.38 that had been granted prior to October 1996 and
replaced them with 1,945,000 options at $5.25 each, which was the market price
at the date of repricing. The effect of this transaction is treated as a
cancellation of the old options and the grant of new options in accordance with
the provisions of the Plan. The new options had the vesting period extended by
three months.
 
     On May 17, 1995 the Board of Directors adopted the Company'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
75,000 shares and 45,000 shares were purchased by employees under the Purchase
Plan in fiscal 1998 and 1997, respectively. At March 31, 1998, the Company has
reserved approximately 863,000 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. The Company adopted SFAS 123 in fiscal 1997 and in accordance with
the provisions of SFAS. 123, the Company applies APB Opinion 25 and related
interpretations in accounting for its stock option and stock purchase plans. Had
compensation cost for
 
                                      F-12
<PAGE>   42
                                 NOVADIGM, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 1998
 
these plans been determined consistent with SFAS 123, the Company's net loss and
loss per share would have resulted in the following pro forma amounts indicated
in the table below:
 
<TABLE>
<CAPTION>
                                                         FOR THE YEARS ENDED
                                                              MARCH 31,
                                                         --------------------
                                                           1998        1997
                                                         --------    --------
<S>                                                      <C>         <C>
Net loss (in thousands):
As reported............................................  $ (9,017)   $(12,502)
Pro forma..............................................  $(14,681)   $(20,526)
Net loss per share -- basic and diluted:
As reported............................................  $   (.52)   $   (.72)
Pro forma..............................................  $   (.84)   $  (1.18)
</TABLE>
 
     Because the SFAS 123 method of accounting has not been applied to options
granted prior to April 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
 
     The weighted average fair values of options granted during fiscal 1998 and
1997 were $3.04 and $5.32, respectively. The options outstanding at March 31,
1998, have exercise prices between $3.31 and $8.25, with a weighted average
exercise price of $5.05 and a weighted average remaining contractual life of 3.0
years.
 
     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 1998 and 1997: risk free interest rates
ranged from 6.1% to 6.4%, expected dividend yields of 0%, expected lives of 5.0
years and expected volatility of 94%.
 
7. 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 enacted tax laws and
rates applicable to the periods in which taxes become payable.
 
     The components of the provision (benefit) for income taxes are as follows
(in thousands):
 
<TABLE>
<CAPTION>
                                                        FOR THE YEARS ENDED
                                                             MARCH 31,
                                                        --------------------
                                                        1998    1997    1996
                                                        ----    ----    ----
<S>                                                     <C>     <C>     <C>
Current U.S. Federal..................................  $ (0)   $(12)   $112
State and local.......................................   (68)     71      48
                                                        ----    ----    ----
          Total Current...............................  $(68)     59     160
                                                        ----    ----    ----
Deferred U.S. Federal.................................    --      --      --
State and local.......................................    --      --      --
                                                        ----    ----    ----
          Total Deferred..............................    --      --      --
                                                        ----    ----    ----
Foreign...............................................    --      --      --
Provision (benefit) for income taxes..................  $(68)   $ 59    $160
                                                        ====    ====    ====
</TABLE>
 
                                      F-13
<PAGE>   43
                                 NOVADIGM, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 1998
 
The components of the net deferred tax asset at March 31, 1998 and 1997 are as
follows (in thousands):
 
<TABLE>
<CAPTION>
                                                            1998       1997
                                                           -------    -------
<S>                                                        <C>        <C>
Deferred tax assets:
  Net operating loss carryforwards.......................  $ 6,864    $ 3,257
  Other operating reserves...............................      525        160
  Accrued liabilities and other..........................      325        943
  Tax credit carryforwards...............................      423        323
  Restructuring charge...................................       --        340
  Depreciation...........................................      322        222
                                                           -------    -------
          Total deferred tax assets......................    8,459      5,245
Valuation allowance......................................   (8,459)    (5,245)
                                                           -------    -------
          Net deferred tax asset.........................  $    --    $    --
                                                           =======    =======
</TABLE>
 
     As of March 31, 1998 the Company has net operating loss carryforwards for
federal income tax reporting purposes of approximately $17.1 million. These
carryforwards expire in various periods through 2013. 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.
 
     The provision (benefit) for income taxes for the years ended March 31
differs from the statutory U.S. Federal income tax rate due to the following:
 
<TABLE>
<CAPTION>
                                                              1998     1997
                                                              -----    -----
<S>                                                           <C>      <C>
Provision (benefit) at U.S. statutory rate..................  (35.0)%  (35.0)%
State income taxes, net of federal benefit..................   (0.7)     0.4
Change in valuation allowance...............................   35.0     35.1
                                                              -----    -----
                                                               (0.7)%    0.5%
                                                              =====    =====
</TABLE>
 
8. MAJOR CUSTOMERS AND INTERNATIONAL SALES
 
     During 1998, two customers, Amdahl and EDS, accounted for approximately 31%
and 10% of total revenues, respectively. During 1997, two customers, IBM and
Amdahl, accounted for approximately 23% and 16% of total revenues, respectively.
During 1996, two customers, Amdahl and IBM, accounted for approximately 40% and
12% of total revenues, respectively. The Company's agreement with IBM expired in
March 1997.
 
     In June 1995, the Company entered into a seven-year, non-exclusive OEM and
distribution agreement with Amdahl. Under the agreement, Amdahl can sublicense
EDM throughout the world as part of its bundled solution and sublicense EDM
stand-alone to a limited worldwide market. Novadigm agreed to provide limited
technical support and training. The agreement required Amdahl to pay the Company
$8 million in non-refundable, guaranteed sublicense fees and bundled support in
quarterly installments during the first year of the agreement, fiscal 1996; and
$4 million in the last quarter of both fiscal 1997 and fiscal 1998. The
agreement was amended in March 1997, instead requiring Amdahl to pay $2 million
in non-refundable, guaranteed sublicense fees and bundled support in the last
quarter of fiscal 1997; minimum additional sublicense fees of $2 million during
fiscal 1998; and minimum additional sublicense fees of $3 million in both fiscal
1999 and fiscal 2000. In the event of a change of control of the Company, the
amended agreement allows Amdahl the right to terminate the agreement and recover
unused guaranteed sublicense fees at the time of termination, to the extent they
were also outstanding on March 31, 1997. There can be no assurance that
 
                                      F-14
<PAGE>   44
                                 NOVADIGM, INC.
 
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 1998
 
Amdahl will extend this agreement in subsequent years. The Company recognized no
guaranteed sublicense fees from Amdahl in fiscal 1998, $1.8 million in fiscal
1997 and $7.4 million in fiscal 1996.
 
     Export sales, consisting of sales to customers in foreign countries, were
45.6%, 18.4%, and 20.7% of total revenues in 1998, 1997 and 1996 respectively.
 
     Geographic information for the fiscal years ended March 31, 1998, 1997 and
1996 are as follows.
 
<TABLE>
<CAPTION>
                                  REVENUES                OPERATING INCOME (LOSS)          IDENTIFIABLE ASSETS
                         ---------------------------   -----------------------------   ---------------------------
                          1998      1997      1996       1998       1997      1996      1998      1997      1996
                         -------   -------   -------   --------   --------   -------   -------   -------   -------
<S>                      <C>       <C>       <C>       <C>        <C>        <C>       <C>       <C>       <C>
United States..........  $22,727   $21,885   $24,397   $ (7,467)  $ (9,980)  $ 5,886   $26,972   $37,152   $53,048
Europe.................    3,590     1,880     1,691     (2,596)    (4,060)   (2,117)    2,958     1,630     2,026
Eliminations...........   (2,922)   (1,387)   (1,072)        --         --        --    (1,054)   (2,440)   (4,942)
                         -------   -------   -------   --------   --------   -------   -------   -------   -------
         Total
           Company.....  $23,395   $22,378   $25,016   $(10,063)  $(14,040)  $ 3,769   $28,876   $36,342   $50,132
                         =======   =======   =======   ========   ========   =======   =======   =======   =======
</TABLE>
 
     In fiscal 1995, the Company established a wholly-owned subsidiary in France
that acts as a sales representative for the Company's operations in Europe. Most
license agreements are entered into between the parent company and its
customers, and most license and service fees are paid directly to the parent
company. United States operations include revenues and results of operations in
the United States, as well as export revenues from all customers recognized on a
worldwide basis. The subsidiary's revenues consist primarily of commission
payments from the parent company for services performed for the benefit of the
parent company at a rate of 50% of European sales. Such payments are eliminated
in the consolidated financial statements. Identifiable assets are those assets
that can be directly associated with a particular geographic area and
subsidiary.
 
9. RESTRUCTURING CHARGE
 
     The Company recorded a $1.8 million restructuring charge in fiscal 1997 to
reflect reorganization of the North American and European sales and marketing
organizations.
 
     The significant provisions included in the restructuring charge (in
thousands) were:
 
<TABLE>
<S>                                                           <C>
Reorganization of European sales channel and organization...  $1,015
Reorganization of U.S. sales and marketing, including
  severance and office closings.............................     814
                                                              ------
                                                              $1,829
                                                              ======
</TABLE>
 
     The restructuring charge included severance for the termination of 29
employees, the costs to close and consolidate five regional sales offices and
the Chicago-based marketing office, and the costs to realign distribution
channels in Europe. As of March 31, 1997, no material payments had been made
under the restructuring program. During fiscal 1998, the above restructuring
charges were paid in full.
 
                                      F-15
<PAGE>   45
 
                                                                     SCHEDULE II
 
                                 NOVADIGM, INC.
 
                       VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                BALANCE AT    ADDITIONS                    BALANCE AT
                                                BEGINNING     CHARGED TO    RECOVERIES       END OF
                CLASSIFICATION                  OF PERIOD     OPERATIONS    (WRITEOFFS)      PERIOD
                --------------                  ----------    ----------    -----------    ----------
<S>                                             <C>           <C>           <C>            <C>
Allowance for Doubtful Accounts
Year Ended:
  March 31, 1996..............................    $   --        $  344        $  (344)       $   --
  March 31, 1997..............................        --         1,278             25         1,302
  March 31, 1998..............................     1,302           553         (1,085)          770
</TABLE>
 
                                       S-1
<PAGE>   46
 
                                 EXHIBIT INDEX
 
<TABLE>
<S>        <C>
 3.1*      Certificate of Incorporation of Registrant, as amended.
 3.2*      Bylaws of Registrant, as amended.
10.1*+     OEM Software Licensing and Distribution Agreement dated June
           13, 1995 between the Registrant and Amdahl Corporation.
           (originally filed as Exhibit 10.8)
10.2**+    Amendment 1 to the OEM Software Licensing and Distribution
           Agreement dated June 13, 1995 between the Registrant and
           Amdahl Corporation.
10.3**+    Amendment 2 to OEM Software Licensing and Distribution
           Agreement dated June 13, 1995 between the Registrant and
           Amdahl Corporation.
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.
10.6*      Employment Agreement dated as of August 10, 1992 by and
           between H. Kent Petzold and the Registrant.
10.7*      Deferred Compensation Agreement dated as of August 10, 1992,
           as amended, by and between H. Kent Petzold and the
           Registrant.
10.8*      Stock Option Agreement and Notice of Stock Option Grant
           dated as of August 10, 1992 by and between H. Kent Petzold
           and the Registrant.
10.9*      Amendment to Employment Agreement and Stock Option
           Agreements dated as of May 18, 1995 by and among H. Kent
           Petzold and the Registrant, and Albion J. Fitzgerald,
           Shannon Ruiz, Joseph J. Fitzgerald and Brian J. McAlister.
10.10*     Form of Indemnification Agreement entered into between
           Registrant and its officers and directors.
10.11**    Change of Control Agreement entered into between Registrant
           and Stuart Jacobson
10.12      Loan Agreement dated August 1, 1997 between the Registrant
           and Coast Commercial Bank.
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.
10.15      Offer Letter dated February 9, 1998 by and between the
           Registrant and Michael Carabetta.
10.16      Separation Agreement and Mutual Release by and between the
           Registrant and Stuart Jacobson.
10.17      Agreement dated February 1998 by and between the Registrant
           and Stuart Jacobson.
21.1*      Subsidiary of Registrant.
23.1       Consent of Arthur Andersen LLP.
24.1       Power of Attorney (see page 29)
27.1       Financial Data Schedule.
</TABLE>
 
---------------
 * Incorporated by reference to exhibits 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 exhibits filed with Registrant's Annual Report
   on Form 10-K for the fiscal year ended March 31, 1997.
 
 + Confidential treatment has been granted with respect to certain portions of
   this exhibit. Omitted portions have been filed separately with the Securities
   and Exchange Commission.