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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------

                                   FORM 10-K
                            ------------------------

     [X]   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
        SECURITIES EXCHANGE ACT OF 1934

                    FOR THE FISCAL YEAR ENDED MARCH 31, 2001

                                    0-26156
                            (COMMISSION FILE NUMBER)

                                 NOVADIGM, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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<S>                                            <C>
                   DELAWARE                                      22-3160347
       (STATE OR OTHER JURISDICTION OF                        (I.R.S. EMPLOYER
        INCORPORATION OR ORGANIZATION)                      IDENTIFICATION NO.)
</TABLE>

              ONE INTERNATIONAL BLVD., SUITE 200, MAHWAH, NJ 07495
          (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)

                                 (201) 512-1000
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
                                      NONE

          SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                         COMMON STOCK, $.001 PAR VALUE

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  [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 10-K.  [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 June 1,
2001, as reported on Nasdaq National Market was approximately $154,912,000.
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 June 1, 2001, there were 20,276,635 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 14, 2001.

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                               TABLE OF CONTENTS

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                                   PART I
Item 1.   Business....................................................    1
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.................   25
Item 9.   Changes in and Disagreements with Accountants on Accounting
          and Financial Disclosure....................................   25

                                  PART III

Item 10.  Directors and Executive Officers of the Registrant..........   26
Item 11.  Executive Compensation......................................   26
Item 12.  Security Ownership of Certain Beneficial Owners and
          Management..................................................   26
Item 13.  Certain Relationships and Related Transactions..............   26

                                  PART IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form
          8-K.........................................................   27

SIGNATURES............................................................   29

POWER OF ATTORNEY.....................................................   30
</TABLE>

     Among the marks owned by Novadigm, Inc., "Novadigm," "Novadigm Enterprise
Desktop Manager" and "Radia" are registered trademarks, and "Enterprise Desktop
Manager," "EDM: Manager," "EDM: Administrator," "EDM: Server," "EDM: Client,"
and "e-wrap" are trademarks. This filing also includes trademarks of companies
other than those of Novadigm, Inc.
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     This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These statements include, among others, statements
concerning our future operations, financial condition and prospects, and our
business strategies. The words "Believe", "Anticipate", "Expect", "Intend",
"Future", and other similar expressions generally identify forward-looking
statements. These forward-looking statements are subject to substantial risks
and uncertainties that could cause our future business, financial condition, or
results of operations to differ materially from historical results or currently
anticipated results. Investors should carefully review the information contained
under the caption "Business Risks" in "Managements Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in, or incorporated
in, this report.

                                     PART I

ITEM 1. BUSINESS

OVERVIEW

     Novadigm(R), Inc. ("Novadigm" or the "Company") designs, develops and
markets software that automates the management of digital assets for enterprise
information technology ("IT") organizations, service providers, outsourcers and
software content providers. Novadigm's solutions enable organizations to expand
service offerings and generate new revenue streams by speeding deployment and
automating the management of software-enabled services for employees, partners
and customers, while at the same time reducing management costs and ensuring
customer satisfaction.

     Our solutions enable enterprises to manage the discovery, deployment,
configuration, repair, update and removal of digital assets -- software and
content -- on computing devices such as servers, desktops, laptops, handhelds,
ATMs, point-of-sale terminals and Internet kiosks. By automating the management
of digital assets, our customers can provide their employees, partners, and
customers with software-enabled services quickly and reliably at reduced costs.
Novadigm's suite of integrated products, built with our proprietary e-wrap(TM)
technology, work seamlessly together as the only end-to-end solution that can
efficiently, reliably and scalably manage the full range of today's software and
content, running on a wide range of computing devices, personalized for
individual users, across virtually any network.

     Our customers include Global 1000 companies, government agencies, large
independent software vendors and service providers around the world. We have
customers in a wide variety of industry sectors such as: aerospace, automotive,
banking, computers, consumer products, e-commerce, education, electronics,
energy, engineering-construction, entertainment, financial services, government,
healthcare, insurance, manufacturing, news-media, pharmaceutical, professional
services, retail, telecommunications, transportation, utilities and the emerging
service providers segment.

     Among our customers are industry leaders such as, 7-Eleven Inc., IntesaBci,
Belastingdienst Automaliserings (Dutch tax authority), British
Telecommunications plc., Commerce One, The Gap, Inc., Inland Revenue Service (UK
tax authority), Lockheed Martin Corporation, Motorola, Inc., Northwest Airlines
Corporation, Phillips Petroleum Company, The Prudential Insurance Company of
America, Raytheon Company, Reuters Limited, Safeway, Inc., Schlumberger Oilfield
Services, Siemens AG, Telstra Corporation, U.S. Postal Service, Wells Fargo Bank
and Yasuda Fire and Marine.

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

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     With Novadigm's e-wrap technology, IT professionals, software vendors and
service providers can manage digital assets with policy-based capabilities that
enable automated management of individual applications or entire portfolios of
software and content throughout the extended supply chain of publishers, service
providers, enterprise IT and users or subscribers.

BACKGROUND

     Our target market includes large and medium-size enterprises, government
organizations and service providers facing the challenges of offering
software-enabled services, while reducing costs and maintaining high
availability and reliability of digital assets on thousands to
hundreds-of-thousands of computing devices, across heterogeneous environments
and networks.

     Novadigm's automated software and content management solutions serve a
number of related and overlapping markets that the continuing extension of the
enterprise is drawing together. These markets incorporate numerous user
communities, including corporate employees, remote/mobile users, as well as
customers, partners, suppliers and consumers beyond the corporate firewall.

     Industry analysts present one view of our market, commonly characterized as
Electronic Software Distribution ("ESD"), a large segment of the systems
management marketplace that arose in the early 1990's. The ESD market as a whole
is expected by International Data Corporation ("IDC") to grow from $1.95 billion
in 1999 to approximately $4.89 billion by the year 2004.

     ESD is generally used to describe a broad class of software tools that
attempt to meet one or more of the business requirements to deploy
infrastructure, business applications and personal productivity software within
the enterprise and across the Internet. In the Internet space, emerging market
segments, which are often categorized within ESD, include Internet Application
Management and the Internet Services Management ("ISM") market.

     ESD includes a wide range of technology solutions that focus on one or more
types of software or content (such as operating systems, productivity tools,
business-critical software, graphical documents, etc.), one or more kinds of
wired or wireless networks, and one or more audiences (such as in-house
employees, remote/ mobile workers, Internet users, trading partners, etc.). As
semi-automated tools based on older technologies, most ESD products are
low-powered, platform-specific, specialized for a certain type of software or
user environment, limited in scalability, and typically enforce standardization
at the expense of user personalization. These approaches are often
labor-intensive, error-prone and non-replicable (i.e., any changes in software,
user configuration or environment require a great deal of manual rework). As a
result, they cannot be scaled across large implementations, cannot deliver the
application deployment speed required in the current world of e-business, exact
high implementation and operational costs, and, at enterprise scale, suffer a
significant failure rate -- pegged at 75% by Gartner Inc., a leading IT analyst
firm, for enterprise management frameworks. What limits these solutions
competitively is the degree of usability, flexibility, level of automation,
scalability, and reliability which they provide, and the range of software and
content, computing devices, and environments that they can effectively manage.

     Novadigm's solution is more comprehensive than ESD products -- the metrics
(based on today's ESD functions) used to characterize the market opportunity for
ESD do not fully encompass Novadigm's end-to-end management capabilities, and
thereby understate the opportunity for us. Novadigm's market opportunity is much
larger than the opportunity defined by the ESD market today.

     Another way to view our market opportunity is to consider the number of
computing devices such as servers, laptops, desktops, handhelds, ATMs,
point-of-sale terminals, Internet kiosks and other specialized computing devices
owned and serviced by enterprises and government agencies. According to IDC, a
provider of technology industry analysis and market data, the total number of
shipments of PCs, laptops and servers from 1998 through 2004 is projected to be
848 million, 223 million and 30 million respectively; and the total number of
handhelds shipped from 2000 through 2004 is projected to be 107 million units,
for a total of 1.2 billion units. These computing devices are made operational
by digital assets -- operating systems, applications and content -- that make it
possible for them to function as useful tools for the end-user. The cost

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of managing these devices creates a huge market opportunity for Novadigm. For
example, if the cost to manage each device were as little as $200 per year, the
total cost to the organizations deploying these devices would exceed $240
billion. Novadigm solutions cost effectively ensure that all the digital assets
that reside on all these computing devices are maintained in their desired state
according to policies governing users and devices, thereby resulting in high
reliability and availability on any scale.

     Demand for Novadigm's solutions is also fueled by two major industry
trends:

          Internet transformation. One of the key changes underway in the
     enterprise is its transformation from a firewall-enclosed environment into
     an extended enterprise that is reaching out to a rapidly growing population
     of remote/mobile users as well as partners and customers via the Internet.
     Enterprises and government agencies are providing new "e-services"
     requiring the provisioning of applications and content as part of new
     software-enabled services for internal and external customers.

          Enterprise technology evolution. The ongoing evolution and adoption of
     information technologies within the enterprise such as new operating system
     platforms, directory technologies, business applications and intranets,
     present significant management challenges. For example, migrations to the
     Windows 2000 platform includes a complete and continuous rollout of
     operating system and service packs, systems management and application
     packaging tools, directory server software, as well as new applications and
     upgrades from software providers.

Because business and technology transformations must proceed in carefully
managed steps, and given the complexity of the IT and software environments of
most enterprises with their heavy investments in existing technologies, Novadigm
believes that automated software and content management solutions that can
provide an evolutionary bridge from existing to emerging technologies are a
critical competitive factor in today's software-intensive enterprises.

THE NOVADIGM SOLUTION

     We provide a unique set of software and content management solutions. We
believe our e-wrap technology solutions meet the need for end-user
personalization of each user or computing device, particularly in the midst of
large-scale, synchronized deployments across enterprises and the Internet. The
following highlights the distinctive capabilities of Novadigm's e-wrap
technology solutions:

     - Automation of the discovery, targeting deployment, configuration,
       updating, repair and removal of the full range of today's software and
       content, including shrink-wrapped and custom-built applications written
       in any language or composed of any type of distributed component, virus
       protection files, operating systems, registry keys, icons, embedded
       links, digital information, graphics, and full motion video

     - Across virtually any kind of network using a variety of protocols,
       including existing enterprise LANs, WANs, VANs, intranets, extranets and
       the Internet, as well as wireless networks and utilizing a variety of
       authentication and security techniques

     - To the widest range of enterprise computing devices, including PCs, UNIX
       workstations, Apple Macintosh's and mobile devices; file, application and
       Web servers; ATMs, point-of-sale terminals and Internet kiosks.

     We believe that Novadigm's technology meets the requirement of today's
extended enterprises for solutions that automate the end-to-end process of
managing software and content across large-scale networks. We believe that our
customer implementations have proven our solutions to be cost-effective,
scalable to hundreds of thousands of users, able to reliably deploy software and
content, and highly adaptable to each customer's applications, user audiences
and computing platforms. We also believe that our policy-driven solutions
support the dynamic and rapidly changing requirements of the business.

     In addition, we believe that Novadigm solutions meet the requirements of
enterprises transforming to new business models such as offering financial
services to customers over the web, or migrating corporate infrastructures
servicing internal employees to new operating platforms such as Microsoft
Windows 2000. Our
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solutions provide the capability for customers to manage existing infrastructure
and applications, while implementing new technologies, thereby facilitiating a
smooth transition of IT infrastructure that is transparent to the user
community.

TECHNOLOGY

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

     The following are key attributes of Novadigm's e-wrap technology:

          Desired-State Automation. Novadigm's desired-state approach discovers
     the "actual state" of each corporate user's, workgroup's, department's, or
     Internet-based consumer's software, configurations and content and compares
     this in real-time with its "desired state." If there is a difference
     between the two, Novadigm's differencing technology automatically
     determines the precise component-level changes that are required and sends
     only those changes to the user's computer. Using this approach, we believe
     that components are deployed and updated significantly faster, more
     efficiently, and with higher levels of reliability, adaptability and
     scalability than conventional non-desired-state ESD products.

          Adaptive Configuration Management. Novadigm's e-wrap technology can
     automatically configure software packages and content for highly
     personalized user environments and install them as dictated by
     administrative policies or user preferences. As program versions, user
     environments and preferences change, the affected user's actual-state is
     automatically differenced and reconfigured to correspond to the
     desired-state of operation, thus eliminating the need for manual user or
     administrator involvement.

          Policy-Based Management. Novadigm's products use policy-based access
     models to allow IT administrators to efficiently and concisely define
     entitlements controlling the deployment of software to authorized users or
     subscribers. For example, within the enterprise, an IT administrator may
     implement a policy permitting access to certain financial databases only to
     a selected workgroup within an organization's finance department. In an
     e-commerce environment, subscribers would be automatically provided with
     software and content based on their entitlement in the customer database,
     without any additional activity required by an administrator. Subsequent
     changes to policies and entitlements cause software and content to be
     automatically installed, changed or de-installed for all affected users,
     again without any administrator intervention. This seamless integration
     between changing entitlements and automated provisioning is essential to
     meeting the personalized needs of subscribers in large-scale enterprise and
     e-business environments.

          Bandwidth Optimization. E-wrap technology optimizes the use of network
     resources through comprehensive bandwidth management capabilities, which
     include multicasting, bandwidth throttling, configuration and component
     differencing, compression, and distributed caching. Novadigm's differencing
     processes calculate the precise changes needed to bring the software or
     content into its desired-state, assuring a minimum of network traffic and
     wait-time for bandwidth-constrained networks. Novadigm's distributed object
     infrastructure allows components to be "cached" at multiple locations and
     automatically provided to a user as needed, transparently and efficiently,
     using a combination of network protocols and offline media simultaneously
     to further optimize network performance.

          Rapid Deployment and Ease of Use. In addition to the shared
     architecture of Novadigm's product suite, the flexible nature of its
     distributed object technology, and the ease of defining desired state,
     e-wrap technology includes a variety of capabilities to ensure rapid
     deployment of complete software and content management solutions. Once
     installed, Novadigm's solutions can be operated by a very small team of
     administrators to rapidly deploy and automatically manage large numbers of
     software and content.

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

ARCHITECTURE

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

          Management Servers. Server-based components containing a distributed
     multi-domain object repository that synchronizes distributed
     objects -- application components, computer configurations, policy
     relationships -- across the network. This repository is configured with a
     variety of automated and graphical tools to include the packages, policies
     and configuration requirements necessary to automatically manage the
     transfer of objects to and from other Novadigm-managed servers and client
     computers. Multiple management servers may be deployed in "n-tier"
     configurations across enterprise and Internet networks as desired to
     support large numbers of users and large volumes of software and content,
     to optimize limited network connections, and to allow for distributed
     administration.

          Managed Clients. Lightweight components resident on managed computers
     that communicate with Novadigm's management servers to identify, obtain,
     install, repair and delete software or content. Operating as an extension
     of standard PC or Internet operating environments, the managed client
     automatically discovers current managed computer contents and synchronizes
     application versions with new or updated configurations residing on the
     management server.

          Administrators. Components resident on the administrator's desktop
     used to manage the object-repository and the engine. The administrator
     component contains a variety of graphical tools and utility programs used
     by customer administrators and technical staff to publish software and
     content components, specify policies and entitlements for users and control
     the overall operation of the management servers and managed client
     components.

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

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                COMPONENT                                  PLATFORMS
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Management Servers.......................  Windows 2000, Windows NT, AIX, HP-UX,
                                           MVS, Solaris, Novell, OS/2, Linux
Managed Clients..........................  Windows 2000, Windows (3.1, 95, 98, NT),
                                           OS/2, AIX, HP-UX, Solaris, Novell,
                                           Macintosh, NCR/GIS, SGI Irix, SCO, Linux
</TABLE>

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

INTEGRATION

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

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     Specialized Adapters offer Novadigm product integration capability with
third party products without requiring special application programming
interfaces or third party vendor coding. We currently provide a variety of
Adapters including:

          Network/Systems Management Frameworks. Novadigm's software and content
     management capabilities are integrated directly with the event, security
     and performance management environments of Hewlett-Packard Company's
     ("Hewlett-Packard") HP OpenView, International Business Machines
     Corporation ("IBM")/Tivoli Systems Tivoli Management Framework and the
     Tivoli Enterprise Console and Computer Associates International, Inc.'s
     ("Computer Associates") CA Unicenter.

          Security and Policy/Entitlement. Novadigm's policy management
     environment integrates with lightweight directory access protocol
     ("LDAP")-based directory servers, such as Microsoft Active Directory,
     Novell Inc.'s ("Novell") NDS and other vendor LDAP servers, as well as with
     Microsoft NT Domain Manager, Computer Associates ACF2 and Top Secret, and
     Oracle Corporation ("Oracle"), Sybase, Inc. ("Sybase") and Microsoft
     SQL-based databases, to enable single source points of control for user
     authentication, access policies and subscriber entitlement.

          Problem/Help Desk Management. 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.

          Custom-Built Application Management. Configuration management models
     for custom software developed in-house using Rational Software
     Corporation's ClearCase and Merant plc.'s PVCS are integrated directly into
     the distribution process, enabling changes in all phases of application
     development to be synchronized with deployment across pilot groups and
     throughout the entire enterprise once development is complete.

PRODUCTS

          Novadigm products, built upon Novadigm's core e-wrap technology
     foundation, consist of:

          RADIA APPLICATION MANAGER -- A solution enabling enterprise and
     Internet application providers to deploy self-managing software to
     subscribers (employees, affiliates, partners and customers) over intranets,
     extranets and the Internet without subscriber or administrator involvement.
     Providers can select, install/deinstall and update their software and
     content automatically on a scheduled or just-in-time basis transparently to
     subscribers.

          RADIA SOFTWARE MANAGER -- A solution enabling self-service software
     and content management for knowledge workers within the extended
     enterprise, as well as to subscribers selecting software and content from
     Internet-based providers. Subscribers can select, install/deinstall and
     update their own elective software and content automatically or on-demand
     without provider involvement.

          RADIA INVENTORY MANAGER -- A policy-driven, digital asset discovery
     and reporting tool that automatically gathers information about software
     and hardware configurations in the field and consolidates the results into
     Web-based reports. Radia Inventory Manager increases manageability of
     enterprise digital assets by maintaining current inventory information
     collected automatically across LAN, Internet and dial-up links.

          ENTERPRISE DESKTOP MANAGER -- A solution which enables IT
     organizations to centrally manage infrastructure, productivity and
     application software and content within enterprise WAN and LAN networks and
     across dialup/remote connections.

          RADIA FOR SERVICE PROVIDERS -- A solution enabling enterprise IT
     providers and Internet management and application service providers (ISPs,
     MSPs, ASPs) to deploy self-managing software to subscribers over intranets,
     extranets and the Internet without subscriber or administrator involvement.
     This solution expands the infrastructure options available to providers
     from a simple two-tier model, in which software is hosted on the service
     provider web server and accessed by thin client browsers, to

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     flexible, multi-tier infrastructures in which provider-managed components
     can be hosted anywhere from the service provider site to the subscriber
     desktop.

          RADIA FOR RETAIL -- A solution enabling retailers to manage software,
     applications and data across all points of distributed retail
     operations--from corporate desktops to remote in-store servers and POS
     terminals to Internet kiosks.

     We believe these products provide the extended enterprise with an
integrated solution that covers the full range of software and content
management needs for one or more applications:

     - Centrally deploying business applications across enterprise networks and
       continuously configure desktop applications and content -- automatically.

     - Distributing shrink-wrap software packages over the Web and enabling
       self-service web servers for installing, updating and maintaining
       versions.

     - Embedding just-in-time management into new extranet and commerce-based
       services -- allowing them to be configured in real-time to synchronize
       components with the latest system updates.

     We have announced our intention to deliver additional Radia products. We
expect to release the Radia products, which are currently in various stages of
customer testing, in the near future.

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

CUSTOMERS AND APPLICATIONS

     Our principal customers include enterprises and organizations with widely
deployed and heterogeneous networks. As of March 31, 2001, Novadigm's products
had been licensed directly by us or through distributors to approximately 400
customers worldwide.

     These customers are medium to large enterprises or government agencies that
need to inventory, deploy and manage digital assets (software, applications and
multimedia content) in widely distributed, heterogeneous IT environments, with a
large population of computing devices (connected desktops, mobile laptops,
servers, handhelds, ATMs, point-of-sale terminals, Internet kiosks and other
specialized industry devices). These customers require proven solutions that can
address scale, speed, reliability, complexity, and ever-changing business, user
or software configurations.

     Customers include 7-Eleven, Inc., AGF Informatique, Ameren Services, Inc.,
IntesaBci, Bass Hotels & Resorts, Inc., British Columbia Hydro and Power
Authority, Bechtel Group, Inc., Belastingdienst Automaliserings (Dutch tax
authority), The Boeing Company, British Telecommunications plc., Brookhaven
National Laboratory, California Department of Transportation, Cap Gemini UK
plc., Circuit City Stores, Commerce One, Credit Lyonnais, Dai-ichi Kangyo Bank,
Deloitte & Touche, dvg Hannover, Electronic Data Systems Corporation ("EDS"),
ESPN, Inc., GEICO, Group Health Cooperative of Puget Sound, Fluor Corporation,
The Gap, Inc., Hewlett-Packard Company, Inland Revenue Service (UK tax
authority), J.B. Hunt Transportation Services, Kaiser Permanente, KeyBank
National Association, KeySpan Corporation, Lam Research Corporation, Lawrence
Livermore National Laboratory, Lockheed Martin Corporation, Longs Drug Stores
Corporation, Macromedia, Inc., Matsushita Electric Industrial Co., Ltd., MCI
WorldCom, Metropolitan Life Insurance Company, Molex Incorporated, Motorola,
Inc., Nationwide Mutual Insurance Company, NBA Properties, Inc. (the National
Basketball Association), Nissho Iwai, Northwest Airlines Corporation, Norwich
Union Group Services, Ltd., Owens-Illinois Inc., Phillips Petroleum Company, PNC
Bank National Association, PPG Industries, Inc., Progressive Casualty Insurance
Company, Prudential Assurance, The Prudential Insurance Company of America,
Raytheon Company, Reuters Limited, The Reynolds & Reynolds
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Company, Royal & Sun Alliance Insurance Group, Safeway, Inc., Schlumberger
Oilfield Services, Siemens AG, The St. Paul Companies, Sybase, Inc., Telstra
Corporation, U.S. Postal Service, Vodafone AirTouch, plc., Wells Fargo &
Company, Yasuda Fire and Marine and Zurich Financial Services.

     Novadigm's products manage a broad range of software and content for its
customers, including e-business/e-commerce applications from BroadVision, Inc.
and Commerce One; business critical applications such as enterprise resource
planning (ERP) software from SAP AG, Oracle, and PeopleSoft, Inc. and sales
force automation software from companies such as Siebel Systems, Inc.; digital
content found on new e-commerce terminals such as ATMs, Internet kiosks and POS
terminals including full motion video and animation; personal productivity
tools, browsers, virus checkers and utilities such as those from Microsoft,
Netscape Communications Corp., Lotus Development Corporation, Network
Associates, Inc. and Symantec Corporation; and just-in-time applications
including applets, supply chain systems, and e-commerce sales interfaces for
Web-based consumers. Our customers also use Novadigm's products to upgrade
operating systems and/or migrate to new operating systems such as Microsoft
Windows 2000, as well as to deploy patches to help ensure existing software is
virus inoculated.

     During fiscal 2001, we had one customer which accounted for over 10% of the
total revenues. EDS a leading global services company, accounted for
approximately 12% of total revenues for fiscal 2001.

THE NOVADIGM STRATEGY

     Novadigm's objective is to expand its position as a leading provider of
automated software and content management solutions for the extended enterprise.
Key components of our strategy include:

          Maintaining Technology Leadership. Novadigm believes that its unique
     e-wrap technology with desired-state management and patented fractional
     differencing technologies together with its integrated product set and
     broad platform coverage distinguish its solutions from those of other
     vendors. We will continue to develop enhancements to existing products as
     well as new products that are responsive to the software and content
     management needs of the marketplace, thereby extending our coverage, market
     reach and business opportunities.

          Increasing Market Share. Novadigm's current customer base is comprised
     of approximately 400 public and private sector customers around the world.
     Our strategy is to continue to increase our customer base and market share
     by exploiting our competitive technology strengths, continuing to expand
     our sales and marketing channels in the mid-sized and large enterprise
     marketplace, and developing additional selling channels and partnerships
     where appropriate.

          Expanding Customer Relationships. Novadigm believes that its value in
     meeting the needs of its growing customer base, together with the broad
     range of software and content management capabilities in its integrated
     product line, positions it to be a provider of strategic solutions to its
     customers as they extend their enterprise infrastructures to include
     Internet-based applications and services. Novadigm's strategy is to expand
     its relationships and licenses with existing customers by providing
     additional product solutions, which facilitate rapid deployment of new
     e-business infrastructures and applications.

SALES, MARKETING AND CHANNELS

     Novadigm markets its software and services through its direct sales force
and indirect channels comprised of value added resellers ("VARs"), systems
integrators, outsourcers and distributors, in North America, Europe, the Pacific
Rim, South America, Middle East and Africa. Novadigm's sales activities in the
America's and the Pacific Rim, consisting of Australia and Asia ("AAA"), are
managed from our offices in Mahwah, New Jersey, Emeryville, California, and
Chicago, Illinois; and sales activities for Europe, the Middle East and Africa
("EMEA") are managed from Novadigm's centers located near Paris, France, London,
England, and Munich, Germany. For fiscal 2001, revenues from direct and indirect
sales accounted for 86% and 14%, respectively, of total revenues, and revenues
from North America and rest-of-world sales accounted for 54% and 46%,
respectively, of total revenues.

                                        8
<PAGE>   11

     Novadigm's direct sales activities have emphasized improvements in
identifying and generating qualified prospective customer leads at the beginning
phase of the sales cycle through concentrating on direct marketing and
teleprospecting activities. The leads generated from the telemarketing process
are given to our 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 selling approach to the customer. Our
indirect channels are based on business arrangements with VARs, systems
integrators, outsourcers and distributors which are selected and trained by us
to provide marketing, sales, post-sale support and services for our products. We
also maintain a network of service providers worldwide who offer our customers
complementary services to accelerate their implementations. These business
arrangements are also useful to Novadigm in identifying product enhancements and
developments that are responsive to customer and market requirements. We believe
that we have been successful in minimizing marketing conflicts between our
direct and indirect sales channels.

     Novadigm to date has concentrated on establishing a market for its products
in North America, Europe, Middle East, Australia, Japan, South Africa and South
America. Novadigm's marketing activities are designed to build market awareness
and generate qualified leads and to supply sales channels with positioning,
presentation materials, and product collateral to help generate and develop
qualified customer prospects. Awareness and lead generation activities include
seminars, trade shows, direct mailings, advertising and public relations
activities, including Internet-based seminars and promotions.

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

     In June 1995, Novadigm entered into a seven-year, non-exclusive original
equipment manufacturer ("OEM") and distribution agreement with Amdahl
Corporation ("Amdahl"). Under the agreement, Amdahl was able to sublicense EDM
throughout the world as part of its bundled solution and sublicense EDM stand-
alone to a limited worldwide market. Novadigm agreed to provide limited
technical support and training. The agreement required Amdahl to pay Novadigm
minimum annual royalties. Amdahl did not to meet the minimum royalty commitment
for fiscal 2000 and we terminated the agreement effective March 31, 2000.

     In June 2000 Novadigm and Hewlett-Packard entered into a strategic alliance
to integrate, market and sell the Company's software and content management
products with Hewlett-Packard's HP OpenView management solutions for the
enterprise and service provider markets. As part of the strategic alliance
Hewlett-Packard became an equity owner of Novadigm acquiring 940,000 shares of
Novadigm's common stock and a warrant for an additional 250,000 shares of common
stock. In addition to the alliance agreement, Novadigm and Hewlett-Packard have
integrated and jointly market their products and provide customers the
opportunity to replace Hewlett-Packard's HP OpenView Desktop Administrator
("DTA") products and services with Novadigm's Radia products and services (See
"Part I, Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations").

CUSTOMER SERVICE AND SUPPORT

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

     Customer Support and Product Maintenance. Customers who subscribe to our
maintenance program have access to our technical support facilities and are
entitled to receive software updates, maintenance releases for an annual
maintenance fee equivalent to 18% of the license. Technical Support is available
24 hours a day, seven days a week via our Internet site, electronic mail, and
facsimile lines. Our technical support center located in North America provides
routine support 8 a.m. - 8 p.m. (EST) Monday through Friday (holidays excepted)
and emergency support 24x7 to customers worldwide. Our technical support center
located in Europe provides routine support 8:00 a.m. - 8:00 p.m. (CET). Updates,
documentation and on-line problem reporting are available around the clock on
our technical website.

                                        9
<PAGE>   12

     Consulting. Our professional services organization in the United States,
Canada, Great Britain, France and Germany and a growing number of
Novadigm-certified service providers located throughout Europe, Asia, South
America, the Middle East and Africa are available to consult with customers on
project planning and systems implementation and integration. Consulting services
are typically billed on a time and materials basis.

     Education. We offer regional and on-site training courses for the
implementation and administration of our products. Product training is provided
on a scheduled basis at our corporate training facilities in Mahwah, New Jersey,
and in our regional offices in Paris, London and Munich, as well as at customer
sites throughout the world. We also offer custom course development for certain
of our products. We bill our education services on a per class and per student
basis.

     Revenues from maintenance and services accounted for 38% of fiscal 2001
total revenues.

PRODUCT DEVELOPMENT

     Since its inception, Novadigm has focused on, and made substantial
investments in, product development. In fiscal 2001, Novadigm's total research
and development expenses were approximately $9 million. To date, Novadigm has
not capitalized any software development costs.

     Novadigm anticipates that it will continue to commit substantial resources
to research and development, believing that its future success depends in large
part on its ability to maintain and enhance the functionality of its current
line of products and to develop and introduce new products that keep pace with
technological developments, achieve market acceptance and respond to an
ever-expanding range of customer requirements. Novadigm intends to enhance our
existing product offerings and to introduce new products for the enterprise and
Internet software and content management market. Our new product development
effort is focused on products which address the unique requirements of the
extended enterprise. In developing these new products and product enhancements,
we make extensive use of our own development tools and object-oriented
technology. Although we expect to develop certain of our new products and
product enhancements internally, we may acquire technology and/or products from
third parties or consultants when considerations of time or cost dictate.

     If the next release of the Radia products, or any potential new products
and enhancements do not achieve market acceptance, or if for technological or
other reasons Novadigm is unable to develop, introduce and sell its products in
a timely manner, Novadigm's business, financial condition and results of
operations will be materially and adversely affected.

COMPETITION

     Competition in the software and content management market is diverse and
rapidly changing. While a variety of vendors have offered some form of ESD, ISM
or similar solutions with their offerings, the closest competitors of Novadigm
today fall into four categories:

          Network/Systems Management Framework Vendors. These competitors
     include IBM/Tivoli and Computer Associates, who offer conventional ESD
     tools as part of their enterprise frameworks.

          LAN/Desktop Management Suite Vendors. These competitors include
     vendors such as Microsoft and Intel Corporation, who offer workgroup-based
     conventional ESD tools as part of a LAN administration package.

          Internet ESD Vendors. These competitors (also known as ISM providers)
     include companies such as Marimba, Inc., originally "push" technology
     companies that have redefined themselves to take advantage of the Internet
     services market.

          Mobile Management Suite Vendors. These competitors include XcelleNet,
     Inc.

     Novadigm believes that it competes effectively with all of these vendors in
its target market on the basis of its proven end-to-end solution and broader
product line for software and content management. Additionally,

                                        10
<PAGE>   13

we believe our other technology and business differentiators include:
comprehensive e-wrap technology capabilities, patented fractional differencing,
desired-state innovation, adaptive configuration functionality, higher product
implementation success rates, extensive customer support and broader sales
channels. Novadigm differentiates its products in the market based on customer
results that have proven its solutions are capable of end-to-end distribution
and management of software and content faster, across larger and more diverse
environments, with higher reliability and greater adaptability than other
similar products.

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

INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS

     In December 1996, Novadigm was issued a patent from the U.S. Patent Office
for key components of its desired-state management process used in Novadigm's
software and content management products. There can be no assurance that we will
develop additional proprietary technologies that are patentable, that any issued
patent will provide us with any competitive advantages or will not be challenged
by third parties, or that the patents of others will not have an adverse effect
on our ability to do business. Moreover, there can be no assurance that
protective measures taken by Novadigm will prevent misappropriation of its
proprietary technology, and such measures may not preclude competitors from
developing products with features similar to those of Novadigm's products.
Furthermore, effective copyright and trade secret protection may be limited or
unavailable under the laws of certain foreign jurisdictions. We also rely on a
combination of copyright and trademark laws, trade secrets, confidentiality
procedures, contractual provisions and technical measures to protect our
proprietary rights in our products.

     Although Novadigm 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 Novadigm 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 Novadigm 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 our business, operating results and financial
condition. We believe, however, that given the rapid pace of technological
change in the industry, factors such as the technical expertise, knowledge and
innovative skill of our management and technical personnel, our name
recognition, the timeliness and quality of the support services we provide and
our ability to offer frequent product enhancements and to develop, introduce and
market new products are more significant in maintaining our competitive
technology leadership position.

EMPLOYEES

     As of March 31, 2001, Novadigm had a total of 262 full-time employees,
including 47 in customer support and services, 73 in product development, 103 in
sales and marketing, 39 in general and administration. A total of 211 employees
are based in the United States and 51 employees are based in Europe. None of our
employees are represented by a labor union. Novadigm has not experienced work
stoppages and considers its relations with its employees to be good.

                                        11
<PAGE>   14

EXECUTIVE OFFICERS OF THE REGISTRANT

     Novadigm's executive officers are as follows:

<TABLE>
<CAPTION>
                NAME                   AGE                      POSITION                    OFFICER SINCE
                ----                   ---                      --------                    -------------
<S>                                    <C>    <C>                                           <C>
Albion J. Fitzgerald.................  53     Chairman of the Board and Chief Executive         1992
                                              Officer
Gerald M. Labie......................  57     President and Chief Operating Officer             2001
Robert B. Anderson...................  46     Executive Vice President, Secretary and           1992
                                              Director
Joseph J. Fitzgerald.................  39     Vice President, Chief Technology Officer          1992
Wallace D. Ruiz......................  50     Vice President, Treasurer and Chief               1995
                                              Financial Officer
Robert B. Sims.......................  58     Vice President and General Counsel                2001
</TABLE>

     Albion J. Fitzgerald co-founded Novadigm in February 1992, serving as
Chairman since that time, and currently as Chief Executive Officer. Mr.
Fitzgerald has previously served as Chief Technology Officer and President. In
May 1990, Mr. Fitzgerald founded Fitzgerald Associates, Novadigm's predecessor,
and served as the chief architect in the development of the desired-state
management and fractional differencing technologies that are the basis of both
EDM and Radia.

     Gerald M. Labie joined Novadigm in April 2001 as President and Chief
Operating Officer. From 2000 until joining Novadigm, Mr. Labie was a partner
with Core Strategies, Inc., a market development firm serving IT organizations.
From 1997 to the time he joined Core Strategies, Mr. Labie was employed at Tech
Data Corporation, a worldwide provider of IT products and services. Mr. Labie
initially served as President and Managing Director of Tech Data's European
Operations and later as Senior Vice President of Marketing. From 1989 until
1997, Mr. Labie was with Corporate Software, Inc., holding various executive
positions in sales, marketing and general management including Senior Vice
President, North America and Senior Vice President, Europe.

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

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

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

     Robert B. Sims joined Novadigm in February 2001 as Vice President and
General Counsel. He has served as President and Chief Executive Officer of
Counselcor, L.L.C., a consulting firm providing mediation and business, legal
and human resources services to small and start-up companies since 1997 and as a
Director of Raytech Corporation, a NYSE company, since 1986; and as Senior Vice
President, General Counsel and Secretary of Summagraphics Corporation, a
high-tech Nasdaq company from 1984 to 1996.

                                        12
<PAGE>   15

ITEM 2. PROPERTIES

     Novadigm's corporate headquarters is located in Mahwah, New Jersey.
Novadigm conducts its Americas, Asia and Australia operations principally out of
leased facilities in Mahwah, Chicago, Illinois and Emeryville, California.
Novadigm occupies approximately 64,617 square feet at its Mahwah facilities,
principally for product development, customer training and support, east coast
sales and technical support and general administration; approximately 5,238
square feet at its Emeryville facility, principally for marketing and west coast
sales and technical support; and approximately 3,137 square feet at its Chicago
facility principally for Midwest sales and technical support. Novadigm's EMEA
headquarters are located outside of Paris, France. Novadigm's leased facility in
France is comprised of approximately 8,729 square feet and is used principally
for training and telephone support of European customers, sales and technical
support of French customers and administrative support to our European
operations. Novadigm also has leased sales and technical support offices near
London, England (approximately 3,200 square feet) and near Munich, Germany
(approximately 3,730 square feet). We believe that our current facilities are
adequate for our needs and will be adequate to meet our needs for the
foreseeable future.

ITEM 3. LEGAL PROCEEDINGS

     Not applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

     Not applicable.

                                        13
<PAGE>   16

                                    PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

     Novadigm's stock has been traded on the Nasdaq National Market since our
initial public offering on July 13, 1995 under the Nasdaq symbol NVDM. The
following table sets forth, for the periods indicated, the high and low sales
prices for Novadigm's common stock as reported by Nasdaq:

<TABLE>
<CAPTION>
                                                              HIGH          LOW
                                                              -----        -----
<S>                                                           <C>          <C>
FISCAL YEAR ENDED MARCH 31, 2000
First Quarter...............................................  $  10        $6 1/2
Second Quarter..............................................  $14 3/4      $8 1/8
Third Quarter...............................................  $24 1/2      $12 1/2
Fourth Quarter..............................................  $26 1/2      $  15
FISCAL YEAR ENDED MARCH 31, 2001
First Quarter...............................................  $20 7/8      $  10
Second Quarter..............................................  $23 3/8      $9 7/16
Third Quarter...............................................  $  14        $5 1/8
Fourth Quarter..............................................  $9 3/16      $4 5/32
</TABLE>

     As of June 1, 2001, there were approximately 84 holders of record of
Novadigm's common stock. We believe there are approximately 3,600 beneficial
owners of our common stock.

     We have never paid cash dividends on our common stock. We currently intend
to retain earnings, if any, for use in our business and we do not anticipate
paying any cash dividends in the foreseeable future.

                                        14
<PAGE>   17

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,
                                                 -------------------------------------------------
                                                   1997       1998      1999      2000      2001
                                                 --------   --------   -------   -------   -------
<S>                                              <C>        <C>        <C>       <C>       <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues
  Licenses.....................................  $ 12,117   $ 15,728   $20,743   $27,978   $31,247
  Maintenance and services.....................    10,261      7,667    11,319    16,750    19,199
                                                 --------   --------   -------   -------   -------
          Total revenues.......................    22,378     23,395    32,062    44,728    50,446
                                                 --------   --------   -------   -------   -------
Operating Expenses:
  Cost of maintenance and services.............     6,275      6,971     4,352     5,355     9,278
  Sales and marketing..........................    17,123     14,680    16,274    21,912    25,934
  Research and development.....................     6,212      6,843     4,936     6,126     9,003
  General and administrative...................     4,979      4,964     5,383     6,823     8,305
  Amortization of intangible...................        --         --        --        --     6,046
  Restructuring charge.........................     1,829         --        --        --        --
                                                 --------   --------   -------   -------   -------
          Total operating expenses.............    36,418     33,458    30,945    40,216    58,566
                                                 --------   --------   -------   -------   -------
Operating income (loss)........................   (14,040)   (10,063)    1,117     4,512    (8,120)
Interest income and other, net.................     1,597        978       665     1,058     1,586
Other income...................................        --         --        --        --     2,171
                                                 --------   --------   -------   -------   -------
Income (loss) before provision (benefit) for
  income taxes.................................   (12,443)    (9,085)    1,782     5,570    (4,363)
Provision (benefit) for income taxes...........        59        (68)       25       427       233
                                                 --------   --------   -------   -------   -------
Net income (loss)..............................  $(12,502)  $ (9,017)  $ 1,757   $ 5,143   $(4,596)
                                                 ========   ========   =======   =======   =======
Earnings (loss) per share-basic................  $  (0.72)  $  (0.52)  $  0.10   $  0.28   $ (0.23)
                                                 ========   ========   =======   =======   =======
Weighted average common shares
  outstanding-basic............................    17,409     17,392    17,580    18,185    19,711
                                                 ========   ========   =======   =======   =======
Earnings (loss) per share-diluted..............  $  (0.72)  $  (0.52)  $  0.10   $  0.25   $ (0.23)
                                                 ========   ========   =======   =======   =======
Weighted average common and common equivalents
  shares outstanding-diluted...................    17,409     17,392    18,384    20,558    19,711
                                                 ========   ========   =======   =======   =======
</TABLE>

<TABLE>
<CAPTION>
                                                                   AS OF MARCH 31,
                                                   -----------------------------------------------
                                                    1997      1998      1999      2000      2001
                                                   -------   -------   -------   -------   -------
<S>                                                <C>       <C>       <C>       <C>       <C>
CONSOLIDATED BALANCE SHEET DATA:
  Cash and cash equivalents......................  $ 7,984   $ 4,431   $ 8,124   $ 3,670   $20,592
  Working capital................................  $24,983   $17,326   $20,994   $29,041   $30,809
  Total assets...................................  $36,342   $28,876   $33,376   $44,380   $59,932
  Deferred revenue...............................  $   946   $ 2,518   $ 3,873   $ 4,712   $ 5,113
  Stockholders' equity...........................  $29,800   $20,044   $23,263   $31,715   $44,150
</TABLE>

                                        15
<PAGE>   18

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

     This report contains forward-looking statements within the meaning of
section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical results or anticipated results, including those set forth under
"Business Risks" under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in, or incorporated by
reference into, this report.

OVERVIEW

     Novadigm designs, markets and supports technology solutions that
efficiently and reliably deliver, update and maintain software and content
across the extended enterprise. Our principal customers include medium to large
organizations with widely deployed and heterogeneous networks with thousands to
hundreds-of-thousands of computing devices. Novadigm was incorporated in
February 1992. Through September 1993, our primary efforts were devoted to
product development. In October 1993, Version 1.0 of EDM was released for
general availability. Since its first release, Novadigm 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, Novadigm released Radia Software
Manager, a publisher managed, Internet-based software and content management
solution. In November 1998, Novadigm announced the general availability of Radia
Version 2.0 as well as the Radia Application Manager, a subscriber managed,
Internet-based software and content management solution. Novadigm followed with
the release of Radia Inventory Manager in December 2000, a policy-driven,
digital asset inventory tool that automatically discovers information about
hardware and software, and consolidates the results into Web-based reports.
Novadigm announced its latest release of its suite of Radia products, Release
2.1 in January 2001.

     We generate license revenues from licensing the rights to use our software
products to end users and sublicense fees from resellers. We also generate
maintenance and service revenues from providing renewable support and software
update rights services (maintenance) and from consulting and training activities
performed for license customers.

     Revenues from perpetual software license agreements are recognized as
revenue upon shipment of the software if evidence of an arrangement exists,
pricing is fixed and determinable, 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. We enter into reseller arrangements that typically provide
for sublicense fees payable to Novadigm based on a percent of our list price.
Reseller arrangements may include non-refundable payments in the form of
guaranteed sublicense fees. Guaranteed sublicense fees from resellers are
recognized as revenue upon shipment of the master copy of all software to which
the guaranteed sublicense fees relate if the reseller is creditworthy and if the
terms of the agreement are such that the payment obligation is not subject to
price adjustment, is non-cancelable and non-refundable and due within 90 days.
These guaranteed sublicense fees are applied against sublicense fees reported by
the reseller in relicensing Novadigm's products to end-users. Novadigm
recognized no guaranteed sublicense fees in fiscal 2001, approximately $1.2
million in guaranteed sublicense fees under all such agreements in fiscal 2000,
and approximately $5.4 million in fiscal 1999. As of March 31, 2001, 98% of all
such guaranteed sublicense fees recognized by Novadigm were placed with end
users or forfeited by the reseller.

     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 Novadigm'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.

                                        16
<PAGE>   19

     ALL PERIOD REFERENCES IN THE DISCUSSION BELOW AND IN THE REMAINDER OF ITEM
7 ARE TO FISCAL PERIODS BASED ON OUR FISCAL YEAR ENDING MARCH 31.

RESULTS OF OPERATIONS

     For the periods indicated, the following table sets forth the percentage of
total revenues represented by the respective line items in our statements of
operations.

<TABLE>
<CAPTION>
                                                               YEARS ENDED MARCH 31,
                                                              -----------------------
                                                              2001     2000     1999
                                                              -----    -----    -----
<S>                                                           <C>      <C>      <C>
REVENUES:
  Licenses..................................................   61.9%    62.6%    64.7%
  Maintenance and services..................................   38.1     37.4     35.3
                                                              -----    -----    -----
          Total revenues....................................  100.0    100.0    100.0
                                                              -----    -----    -----
OPERATING EXPENSES:
  Cost of maintenance and services..........................   18.4     12.0     13.6
  Sales and marketing.......................................   51.4     49.0     50.7
  Research and development..................................   17.8     13.7     15.4
  General and administrative................................   16.5     15.2     16.8
  Amortization of intangible................................   12.0       --       --
                                                              -----    -----    -----
          Total operating expenses..........................  116.1     89.9     96.5
                                                              -----    -----    -----
Operating income (loss).....................................  (16.1)    10.1      3.5
Interest income and other, net..............................    3.1      2.4      2.1
Other income................................................    4.3       --       --
                                                              -----    -----    -----
Income (loss) before provision for income taxes.............   (8.7)    12.5      5.6
Provision for income taxes..................................    0.5      1.0      0.1
                                                              -----    -----    -----
Net income (loss)...........................................   (9.2)%   11.5%     5.5%
                                                              =====    =====    =====
</TABLE>

REVENUES

     We generate revenues principally from licensing the rights to use our
software products to end-users and from sublicense fees reported to us by
resellers. We also generate maintenance and service revenues from providing
renewable support and software update rights services and from consulting and
training activities performed for license customers. Maintenance and service
revenues accounted for 38.1% in 2001, 37.4% in 2000, and 35.3% in 1999,
respectively. We expect maintenance and service revenues to increase both as a
percentage of total revenues and in terms of absolute dollars in 2002 as
compared to 2001 as a result of our increasing customer base.

     Total revenues were $50.4 million, $44.7 million and $32.1 million in 2001,
2000 and 1999, respectively. Total revenues increased 12.8% in 2001 over 2000
and increased 39.5% in 2000 over 1999.

     License revenues were $31.2 million, $28.0 million and $20.7 million in
2001, 2000 and 1999, respectively. License revenues increased 11.7% in 2001 over
2000 and increased 34.9% in 2000 over 1999. The increases in license revenues,
in both 2001 and 2000 as compared to the previous years, were primarily the
result of closing a greater number of contracts and a higher average contract
size. Demand for our products have increased from both new and existing
customers due to more effective marketing programs, better market awareness,
expansion of our sales force in North America and Europe and creation of
marketing alliances and partnerships.

     Maintenance and service revenues were $19.2 million, $16.8 million and
$11.3 million in 2001, 2000 and 1999, respectively. Maintenance and service
revenues increased 14.6% in 2001 over 2000 and increased 48.0% in 2000 compared
to 1999. The increase in maintenance and service revenues in both 2001 and 2000
as compared to the previous years was primarily due to the increased demand for
our consulting and training services associated with higher licensing activity
with new customers and the high rate of renewal of

                                        17
<PAGE>   20

maintenance contracts by existing customers. The increase in maintenance
revenues in 2001 over 2000 was at a rate lower than in prior years due to the
termination of our agreement with Amdahl (See "Part I, Item 1, Sales, Marketing
and Channels").

     During 2001, only one customer, EDS, accounted for more than 10% of our
total revenue. During 2001, EDS accounted for $6.1 million or approximately 12%
of total revenues. During 2000, only one customer, Amdahl, accounted for more
than 10% of our total revenue. During 2000 Amdahl accounted for $6.1 million or
approximately 14% of total revenues. During 1999, two customers, Amdahl and
Esoft Ltd., accounted for approximately 17% and 12% of total revenues,
respectively.

     We typically ship our products following a fully executed license
agreement, and acceptance of a purchase order, and, as a result, have little or
no backlog.

OPERATING EXPENSES

     Cost of maintenance and services includes the direct costs of customer
support and update rights, and the direct and indirect costs of providing
training, technical support and consulting services to our customers. Cost of
maintenance and services consists primarily of payroll and benefits for field
engineers and support personnel, travel and lodging expenses, third party
consulting fees, and other related overhead. Cost of maintenance and services
was $9.3 million, $5.4 million and $4.4 million in 2001, 2000 and 1999,
respectively. The cost of maintenance and services increased 73.2% in 2001 as
compared to 2000 and increased 23.0% in 2000 over 1999. The reason for the
increase in 2001 as compared to 2000 was due primarily to a faster increase in
consulting and training services which requires higher staffing levels than
maintenance and the increased utilization of third party consulting firms. The
reason for the increase in 2000 over 1999 was primarily due to increasing
headcount to meet the growing demand for our services. We expect the cost of
maintenance and services to increase in 2002 as a percentage of total revenues
and in absolute dollar terms.

     Sales and marketing expenses consist primarily of salaries, related
benefits, commissions, travel and other costs associated with sales and
marketing efforts. Sales and marketing expenses were $25.9 million, $21.9
million and $16.3 million in 2001, 2000 and 1999, respectively. Sales and
marketing expenses increased 18.4% in 2001 over 2000 and increased 34.6% in 2000
as compared to 1999. The increase in both 2001 and 2000 over the previous years
was primarily the result of higher commission expense associated with the
recording of higher revenue and the continued expansion of the direct sales
force in North America and Europe. We expect sales and marketing expenses to
increase in 2002 compared to 2001 in absolute dollar terms though not in terms
of a percentage of total revenues.

     Research and development expenses consist primarily of salaries, related
benefits, consultant fees and other costs associated with research and
development efforts. Research and development expenses were $9.0 million, $6.1
million, and $4.9 million in 2001, 2000 and 1999, respectively. Research and
development expenses increased 47.0% in 2001 as compared to 2000 and increased
24.1% in 2000 over 1999. The increase in research and development in both 2001
and 2000 as compared to the previous years was primarily due to the ongoing
development of new products which operate on additional platforms and the
development of products to address the requirements of application service
providers (ASPs), independent software vendors (ISVs) and enterprise information
technology providers for providing software applications to customers as
subscription services. We believe that a significant investment in research and
development activities is essential to provide for our future growth,
particularly research and development relating to our Internet activities. We
anticipate that we will continue to invest resources to further enhance and
develop our products, and we anticipate growth in research and development
expense in 2002 though we do not anticipate that research and development
expense will increase in terms of a percentage of total revenues.

     Under the provisions of Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," software development costs are capitalized upon the establishment of
technological feasibility, which we define as establishment of a working model.
Amounts which could have been capitalized under this statement were immaterial
in all periods presented. Therefore, we have expensed all software development
costs as incurred.

                                        18
<PAGE>   21

     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 $8.3
million, $6.8 million and $5.4 million in 2001, 2000 and 1999, respectively.
General and administrative expenses increased 21.7% in 2001 over 2000 and 26.8%
in 2000 as compared to 1999. The increase in 2001 as compared with 2000 was due
primarily to $984 thousand of non-recurring legal costs incurred to settle
patent litigation suits in November 2000, as well as higher compensation costs
due to expanding our corporate management and administrative staff. The increase
in general and administrative expenses in 2000 over 1999 was due primarily to
higher legal fees associated with our patent infringement suits as well as
expansion of the corporate administrative staff. We expect general and
administrative expenses to increase in 2002 though we do not anticipate general
and administration expense to increase in terms of a percentage of total
revenues.

     Amortization of intangible consists of a charge to earnings for the noncash
amortization of the intangible asset acquired in the alliance agreement with
Hewlett-Packard. At June 2000, we entered into an alliance agreement with
Hewlett-Packard to integrate, market and sell our software and content
management products with Hewlett-Packard's HP OpenView management solutions for
the enterprise and service providers markets. As part of the agreement, we
issued 940,000 shares of common stock to Hewlett-Packard and a warrant for an
additional 250,000 shares of common stock. Both the shares issued and the
warrant contained restrictions. In addition to the agreement, and for a fee of
$2,500,000, Hewlett-Packard was provided a one-year, limited license to upgrade
certain existing customers to our Radia product. The fair value of the equity
issued, less the cash received from Hewlett-Packard, or $16.1 million, was
recorded as an intangible asset at June 30, 2000, and will be amortized over the
initial term of the agreement, two years. Included in the warrant is a provision
that reduces the exercise price of the warrant to $0 if Hewlett-Packard attains
certain revenue milestones. Should Hewlett-Packard meet those milestones, the
intangible asset will be adjusted and the new amount will be amortized for the
remainder of the term. The amortization expense for 2001 was $6 million. The
amortization expense for 2002 is expected to be $8.1 million unless otherwise
adjusted as described above for the attainment of the revenue milestones.

INTEREST INCOME AND OTHER, NET

     Interest income and other, net is comprised primarily of interest income
earned on our cash, cash equivalents and investments partially offset by banking
fees, foreign exchange transaction gains and/or losses and other fees and
expenses. Interest income and other, net was $1.6 million, $1.1 million and $0.7
million in 2001, 2000 and 1999, respectively. Interest income and other, net
increased 49.9% in 2001 as compared to 2000 and increased 59.1% in 2000 as
compared to 1999. The increase of interest income and other, net in 2001 as
compared to 2000, and 2000 as compared to 1999, is due primarily to higher
average balances of cash and marketable securities as compared to the prior year
average balances.

OTHER INCOME

     Other income is comprised of $2.2 million recognized in connection with the
settlement of the infringement litigation with Marimba, Inc. in November 2000.

INCOME TAXES

     We recorded a provision for income taxes of approximately $233 thousand in
2001 and approximately $427 thousand in 2000 for federal and state alternative
minimum taxes and for foreign taxes and an income tax benefit of $25 thousand in
1999 for state taxes. As of March 31, 2001, we had net deferred tax assets of
approximately $12 million. We have provided a full valuation allowance due to
the uncertainty surrounding the timing of the realization of the net deferred
tax assets. As of March 31, 2001, we had federal net operating loss
carryforwards of approximately $22 million, which expire in various periods
through 2021. Our ability to utilize the net operating loss carryforwards in
future years may be limited in some circumstances, including significant changes
in ownership interests, due to certain provisions of the Internal Revenue Code
of 1986.

                                        19
<PAGE>   22

INFLATION

     The effects of inflation on our financial position has not been significant
to date.

LIQUIDITY AND CAPITAL RESOURCES

     As of March 31, 2001 we had approximately $27.2 million in cash, cash
equivalents and short-term investments. Net cash provided by operating
activities in 2001 and 2000 was $1.8 million and $1.5 million, respectively. In
2001, the cash provided by operating activities was primarily the result of net
profit before amortization expense and an increase in accounts payable and
accrued liabilities. In 2000, the cash provided by operating activities was
primarily the result of net profit and an increase in accounts payable and
accrued liabilities. The cash provided by operating activities in both years was
partially reduced by an increase in the accounts receivable balance. The
accounts receivable balance, net of the allowance for doubtful accounts
increased $2.6 million to $18.2 million as of March 31, 2001 and increased $7.0
million to $15.5 million as of March 31, 2000. The increase in accounts
receivable in both years was primarily due to the higher revenues.

     Property and equipment expenditures were $1,541,000, $1,360,000 and
$520,000 for the fiscal years 2001, 2000 and 1999, respectively. We had no
material commitments to purchase property and equipment at March 31, 2001 and we
expect purchases of property and equipment to increase next fiscal year due to
the expected increase in the number of employees.

     In June 2000, we entered into an alliance agreement with Hewlett-Packard.
As part of the agreement the Company issued 940,000 shares of common stock to
Hewlett-Packard and a warrant for an additional 250,000 shares of common stock,
resulting in cash proceeds of $2.5 million.

     In October 2000, we announced our intention to repurchase up to 500,000 of
our outstanding common shares. As of March 31, 2001, $2,711,000 was expended to
repurchase 353,000 common shares. We expect to purchase additional shares of our
common stock in the next fiscal year.

     In December 1994, we entered into an unsecured revolving line of credit
agreement with a bank. Through September 30, 2000, we had a revolving line of
credit that permitted unsecured borrowings up to $1.0 million. The line of
credit has expired and was not renewed. We are currently reviewing our banking
relationships and alternatives.

     Although it is difficult for us to predict future liquidity requirements
with certainty, we believe that our existing cash and marketable securities
balances, together with cash from operations will be adequate to finance our
operations for at least the next twelve months. Although operating activities
may provide cash in certain periods, to the extent we experience growth in the
future, we anticipate that our operating and investing activities may use cash.
Consequently, any such future growth may require us to obtain additional equity
or debt financing, which may not be available on commercially reasonable terms
or which may be dilutive.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     Our financial instruments consist of cash and cash equivalents, short-term
investments, trade accounts and contracts receivable and accounts payable. We
consider investments in highly liquid instruments purchased with a remaining
maturity of 90 days or less at the date of purchase to be cash equivalents. Our
exposure to market risk for changes in interest rates relates primarily to our
short-term investments and short-term obligations. As a result, we do not expect
fluctuations in interest rates to have a material impact on the fair value of
these securities. We do not use derivative financial instruments in our
investment portfolio.

     The majority of our operations are based in the U.S. and, accordingly, the
majority of our transactions are denominated in U.S. dollars. However, we do
have foreign-based operations where transactions are denominated in foreign
currencies and are subject to market risk with respect to fluctuations in the
relative value of currencies. These currencies have been relatively stable to
devaluing against the U.S. dollar for the past several years. Foreign currency
fluctuations have not had a material impact historically on our revenues or
results of operations. Currently, we have operations in the United Kingdom,
France and Germany and conduct

                                        20
<PAGE>   23

transactions in the local currency of each location. Although we currently
derive no material revenues from highly inflationary economies, we are expanding
our presence in international markets outside Europe, including the Pacific Rim
and Latin America, whose currencies have tended to fluctuate more relative to
the U.S. dollar. There can be no assurance that European currencies will remain
stable relative to the U.S. dollar or that future fluctuations in the value of
foreign currencies will not have a material adverse effect on our business,
operating results, revenues and financial condition. To date, the impact of
fluctuations in these currencies resulted in transaction gains (losses) of $4
thousand, $25 thousand and ($65) thousand in 2001, 2000 and 1999, respectively.

     Our interest income is sensitive to changes in the general level of U.S.
interest rates, particularly since the majority of our investments are in
short-term instruments. Due to the nature of our short-term investments, we have
concluded that we do not have material market risk exposure. Our investment
policy requires us to invest funds in excess of current operating requirements
in obligations of the U.S. government and its agencies, investment grade state
and local government obligations securities of U.S. corporations rated A1 or P1
by Standard & Poors or the Moody's equivalents, and/or money market funds,
deposits or notes issued or guaranteed by U.S. commercial banks meeting certain
credit rating and net worth requirements.

     At March 31, 2001, our cash and cash equivalents consisted primarily of
demand deposits and money market funds held by large institutions in the U.S.,
and our short-term investments were invested in corporate debt maturing in less
than 90 days.

BUSINESS RISKS

     History of Operating Losses. We have reported an operating loss for every
quarter since our incorporation in February 1992 except for the four consecutive
quarters of 1996 and 2000, and the last three-quarters of 1999. There can be no
assurance that we will be able to sustain profitability on a quarterly or annual
basis in the future.

     Fluctuations in Quarterly Results; Seasonality. Our 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 our new products,
the level and pricing of international sales, foreign currency exchange rates,
changes in the level of operating expenses, technological advances and
competitive conditions in the industry. Revenues received from our individual
customers vary significantly based on the size of the product installation.
Customer orders for our products have ranged from $25,000 to over $4 million,
and have averaged from approximately $200,000 to $400,000. As a result, our
quarterly operating results are likely to be significantly affected by the
number and size of customer orders we are able to obtain in any particular
quarter. In addition, the sales cycle for our products is lengthy and
unpredictable, and may range from a few months to over a year, depending upon
the interest of the prospective customer in our products, the size of the order
(which may involve a significant commitment of capital by the customer), the
decision-making and acceptance procedures within the customer's organization,
the complexity of implementation and other factors.

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

     Our operating results are also expected to vary significantly due to
seasonal trends. Historically, we have realized a greater percentage of our
annual revenues in the fourth quarter, and a lower percentage in the first and
second quarters. We believe that this seasonality is in part a result of efforts
of our direct sales personnel to meet annual sales quotas, and in part a result
of lower international revenues in the summer months when many businesses in
Europe experience lower sales. In addition, capital budgets of our customers,
which tend to
                                        21
<PAGE>   24

concentrate spending activity at calendar year-end, have had, and may continue
to have, a seasonal influence in our quarterly operating results. We expect that
our operating results will continue to fluctuate in the future as a result of
these and other factors, and that seasonality may increase if our efforts to
expand our international sales are successful.

     Rapid Technological Change and Introduction of New Products. The market for
software management and ESD products is characterized by rapid technological
advances, changes in customer requirements and frequent new product
introductions and enhancements. Our future success will depend in large part on
our ability to enhance our current products and to develop and introduce new
products that keep pace with technological developments, achieve market
acceptance and respond to customer requirements that are constantly evolving.
Responding to rapid technological change and the need to develop and introduce
new products to meet customers' expanding needs will require us to make
substantial investments in research and product development. During 2001, among
other research and development expenditures, we allocated research and
development funding to the development of Novadigm's e-wrap technology to
additional platforms in operating systems. We intend to continue to allocate
funding to these development projects throughout 2002. If we fail to anticipate
or respond adequately to technological developments and customer requirements,
and in particular advances in client/server enterprise hardware platforms,
internet applications and platforms, operating systems and systems management
applications, or any significant delays in product development or introduction,
this could result in a loss of competitiveness or could materially and adversely
affect our operating results. There can be no assurance that any product
enhancements or new products we develop will gain market acceptance.

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

     Software products as complex as those offered by Novadigm may contain
undetected errors or failures that, despite our significant testing, are
discovered only after a product has been installed and used by customers.
Although our 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 our
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 our products, or loss of existing customers, any of which
could adversely affect the business, financial condition and results of our
operations.

     Competition in the software and content management market is diverse and
rapidly changing. While a variety of vendors have offered some form of ESD, ISM
or similar solutions with their offerings, the closest competitors of Novadigm
today fall into four categories:

          Network/Systems Management Framework Vendors. These competitors
     include IBM/Tivoli and Computer Associates, who offer conventional ESD
     tools as part of their enterprise frameworks.

          LAN/Desktop Management Suite Vendors. These competitors include
     vendors such as Microsoft Intel Corporation, who offer workgroup-based
     conventional ESD tools as part of a LAN administration package.

          Internet ESD Vendors. These competitors (also known as ISM providers)
     include companies such as Marimba, Inc., originally "push" technology
     companies that have redefined themselves to take advantage of the Internet
     services market.

          Mobile Management Suite Vendors. These competitors include XcelleNet,
     Inc.

     Novadigm believes that it competes effectively with all of these vendors in
its target market on the basis of its proven end-to-end solution and broader
product line for software and content management. Additionally, we believe our
other technology and business differentiators include: comprehensive e-wrap
technology capabilities, patented fractional differencing, desired-state
innovation, adaptive configuration functionality, higher product implementation
success rates, extensive customer support and broader sales channels.

                                        22
<PAGE>   25

Novadigm differentiates its products in the market based on customer results
that have proven its solutions are capable of end-to-end distribution and
management software and content faster, across larger and more diverse
environments, with higher reliability and greater adaptability than other
similar products.

     However, there can be no assurance that we will be able to continue to
compete effectively in the software management market or that its profitability
or financial performance will not be adversely affected by increased
competition. Many of our competitors have longer operating histories and many
may have significantly greater financial, technical, sales, marketing and other
resources, as well as greater name recognition and larger installed customer
bases. Our current and future competitors could introduce products with more
features, greater functionality and lower prices than our products. These
competitors could also bundle existing or new products with other, more
established products in order to compete with us. Our focus on software and
content management products may be a disadvantage in competing with vendors that
offer a broader range of products. Moreover, as the software and content
management market develops, a number of companies with significantly greater
resources than those of Novadigm could attempt to increase their presence in
this market by acquiring or forming strategic alliances with competitors or
business partners of ours. There can be no assurance that we will be able to
compete successfully or that competition will not have a material adverse effect
on our business, operating results or financial condition.

     Volatility. The market for Novadigm's common stock is highly volatile. The
trading price of our stock has been and could in the future be subject to wide
fluctuations in response to quarterly variations in operating and financial
results, announcements of technological innovations or new products by us or our
competitors, changes in prices to Novadigm's or our competitors' products and
services, changes in product mix, change in our revenue and revenue growth rates
for us as a whole or for individual geographic areas, products or product
categories, as well as other events or factors. Statements or changes in
opinions, ratings, or earnings estimates made by brokerage firms or industry
analysts relating to the market in which we do business or relating to us
specifically have resulted, and could in the future result in, an immediate and
adverse effect on the market price of our common stock. In addition, the 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 our common stock. In the past, securities class
action litigation has often been brought against a company following periods of
volatility in the market price of its securities. We may in the future be the
target of similar litigation. Securities litigation could result in substantial
costs and divert management's attention and resources, which could have material
adverse effect on our business, operating results and financial condition.

     Risks Related to International Revenues. In both 2001 and 2000,
approximately 47% of our net revenues were derived from our international
operations. International revenues are a significant percentage of our revenues
and we plan to continue to develop international sales, primarily through our
European operations. Our operations and financial results could be significantly
affected by factors associated with international operations, such as changes in
foreign currency exchange rates, uncertainties relative to regional economic
circumstances, longer payment cycles, greater difficulty in accounts receivable
collection, changes in regulatory requirements and product localization
requirements, as well as by other factors associated with international
activities. A majority of our international revenues and costs have been
denominated in foreign currencies. We believe that an increasing portion of our
international revenues and costs will be denominated in foreign currencies in
the future. In addition, although we cannot predict the potential consequences
to our business as a result of the adoption of the Euro as a common currency in
Europe, the transition to the Euro presents a number of risks, including
increased competition from European firms as a result of pricing transparency.
To date, we have not engaged in any foreign exchange hedging transactions and we
are therefore subject to foreign currency risk.

     Customer Concentration. During 2001, one customer, EDS, accounted for
approximately 12% of our total revenues. During 2000, one customer, Amdahl,
accounted for approximately 14% of total revenues. During 1999, two customers,
Amdahl and Esoft, accounted for approximately 17% and 12% of total revenues,
respectively. In June 1995, Novadigm entered into a seven-year, non-exclusive
OEM and distribution agreement with Amdahl. Under the agreement, Amdahl was able
to sublicense EDM throughout the world as
                                        23
<PAGE>   26

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 Novadigm minimum annual
royalties. Amdahl did not meet the minimum royalty commitment for fiscal 2000
and we terminated the agreement effective March 31, 2000. Though the termination
of the OEM and distribution agreement with Amdahl resulted in a decline in
maintenance revenues from Amdahl, we do not believe it had any material long
term effect on our total revenues.

     Dependence on Proprietary Technology; Risks of Infringement. Our success
will be heavily dependent upon proprietary technology. We rely primarily on a
combination of copyright and trademark laws, trade secrets, confidentiality
procedures and contractual provisions to protect our proprietary rights. We seek
to protect our software, documentation and other written materials under trade
secret and copyright laws, which provide only limited protection. Despite these
precautions taken by us, it may be possible for unauthorized third parties to
copy aspects of our current or future products or to obtain and use information
that either regards as proprietary. In particular, we may provide our respective
licensees with access to our proprietary information underlying its licensed
applications. There can be no assurance that such means of protecting their
proprietary rights will be adequate or that their competitors will not
independently develop similar or superior technology. Policing unauthorized use
of software is difficult and, while we are able to determine the extent to which
piracy of our software products exists, software piracy can be expected to be a
persistent problem. In addition, the laws of some foreign countries do not
protect the proprietary rights of Novadigm to the same extent as do the laws of
the United States. Litigation may be necessary in the future to enforce their
intellectual property rights, to protect trade secrets or to determine the
validity and scope of the proprietary rights of others. Such litigation could
result in substantial costs and diversion of resources and could have a material
adverse effect on the business, results of operations, and financial condition
of any or all of Novadigm.

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

     Product Liability. The license agreements, which we enter with our
customers, typically contain provisions designed to limit exposure to potential
product liability claims. It is possible, however, that the limitation of
liability provisions contained in such license agreements may not be effective
under the laws of certain jurisdictions. Although we have not experienced any
product liability claims to date, the sale and support of our products may
entail the risk of such claims, and there can be no assurance that we will not
be subject to such claims in the future. A product liability claim brought
against Novadigm could have a material adverse effect on our respective
businesses, results of operations, and financial condition.

     Retention of Executives and Key Employees. Our future success depends upon
the contributions of our 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 our ability to develop new
products and versions of our products and market and sell those products in the
marketplace. The loss of the services of one or more of our executives or key
employees could have a material adverse effect on our operating results. We also
believe our future success will depend in large part upon our ability to attract
and retain additional highly skilled personnel.

     Improving Operational Systems to Grow the Business. We have expanded our
operations rapidly since inception. We intend to continue to expand in the
foreseeable future to pursue existing and potential market opportunities. This
rapid growth places a significant demand on management and operational
resources. In order to manage growth effectively, we must implement and improve
our operational systems, procedures and

                                        24
<PAGE>   27

controls on a timely basis. If we fail to implement and improve these systems,
our business, operating results and financial condition will be materially
adversely affected.

     Potential Future Acquisitions. We may acquire other businesses in the
future, which would complicate our management tasks. We may need to integrate
widely dispersed operations that have different and unfamiliar corporate
cultures. These integration efforts may not succeed or may distract management's
attention from existing business operations. Our failure to successfully manage
future acquisitions could adversely affect our business. Existing stockholders
may be diluted if we finance the acquisitions by issuing equity securities.

     Future Capital Requirements. We expect the cash on hand, cash equivalents
and commercial credit facilities to meet our working capital and capital
expenditure needs for at least the next 12 months. After that time, we may need
to raise additional funds and we cannot be certain that we would be able to
obtain additional financing on favorable terms, if at all. Further, if we issue
equity securities, stockholders may experience additional dilution or the new
equity securities may have rights, preferences or privileges senior to those of
existing holders of common stock. If we cannot raise funds, if needed, on
acceptable terms, we may not be able to develop or enhance our products, take
advantage of future opportunities or respond to competitive pressures or
unanticipated requirements, which could have a material adverse effect on our
business, operating results and financial condition.

RECENT ACCOUNTING PRONOUNCEMENTS

     In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued SOP 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." We adopted
SOP 98-1 effective January 1, 1999. Such adoption did not have a significant
effect on our results of operations.

     In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities." In June
1999, the FASB issued Statement of Financial Accounting Standards No. 137,
"Accounting for Derivative Instruments and Hedging Activities" -- Deferral of
the Effective Date of FASB Statement No. 133, which defers for one year the
effective date of Statement 133. As a result of the deferral provisions of
Statement 137, Statement 133 is now effective for our fiscal year 2001. Such
adoption did not have a significant impact on our results of operations or
financial position.

     In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin No. 101, "Revenue Recognition SAB 101", which provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements. We adopted the provisions of SAB 101 for all transactions during the
year ending March 31, 2001. The application of SAB 101 did not have a material
impact on our results of operations or our financial position.

     In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation -- an interpretation of APB No. 25 ("FIN 44"). FIN 44 clarifies the
application of APB 25 and, among other issues, clarifies the following: the
definition of an employee for purposes of applying APB 25; the criteria for
determining whether a plan qualifies as a non-compensatory plan; the accounting
consequence of various modifications to the terms of the previously fixed stock
options or awards; and the accounting for an exchange of stock compensation
awards in a business combination. FIN 44 is effective July 1, 2000, but certain
conclusions in FIN 44 cover specific events that occurred after either December
15, 1998 or January 12, 2000. The application of FIN 44 has not had a material
impact on our financial position or results of operations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The Financial Statements and Supplementary Data of Novadigm 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.

                                        25
<PAGE>   28

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Information required by this item concerning Novadigm's directors is
incorporated by reference from the section captioned "Election of Directors"
contained in Novadigm's Proxy Statement related to the Annual Meeting of
Stockholders to be held September 14, 2001, to be filed by us with the
Securities and Exchange Commission within 120 days of the end of our fiscal year
pursuant to General Instruction G(3) of Form 10-K (the "Proxy Statement"). The
information required by this item concerning executive officers is set forth in
Part I, Item 1 of this Report. The information required by this item concerning
compliance with Section 16(a) of the Exchange Act is incorporated by reference
from the section captioned "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.

                                        26
<PAGE>   29

                                    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, 2001 and
  2000......................................................   F-3
Consolidated Statements of Operations -- For the Years Ended
  March 31, 2001, 2000 and 1999.............................   F-4
Consolidated Statements of Stockholders' Equity -- For the
  Years Ended March 31, 2001, 2000 and 1999.................   F-5
Consolidated Statements of Cash Flows -- For the Years Ended
  March 31, 2001, 2000 and 1999.............................   F-6
Notes to Consolidated Financial Statements..................   F-7

2. Financial Statement Schedule:
For the Years Ended March 31, 2001, 2000 and 1999:
II -- Valuation and Qualifying Accounts.....................   S-1
</TABLE>

          Additional schedules are not required under the related schedule
     instructions or are inapplicable, and therefore have been omitted.

          3. Exhibits

<TABLE>
    <C>          <S>
     3.1*        Certificate of Incorporation of Registrant, as amended.

     3.2*        Bylaws of Registrant, as amended.

   .104****      1992 Stock Option Plan, as amended and form of Stock Option
                 Agreement.

    10.5*        1995 Employee Stock Purchase Plan and form of Subscription
                 Agreement.

    10.9*        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.

 .1110*****      Management Retention Agreement dated August 17, 1998 by and
                 between the Registrant and Robert B. Anderson.

    10.13**      Facility lease dated as of March 14, 1997, by and between
                 Crossroad Developers Associates, LLC and the Registrant.

    10.14**      Employment Agreement effective as of April 1, 1997 by and
                 between the Registrant and Wallace D. Ruiz.

    10.18        Security Agreement dated April 27, 2000 between the
                 Registrant and Albion Fitzgerald.

    10.19        Security Agreement dated April 17, 2000 between the
                 Registrant and Wallace Ruiz.

 .20*10*****      Alliance Agreement dated June 30, 2000 between the
                 Registrant and Hewlett-Packard Company.

    10.21        Employment Agreement effective as of April 16, 2001 by and
                 between the Registrant and Gerald M. Labie.

    21.1         Subsidiaries of Registrant.

    23.1         Consent of Arthur Andersen LLP.

    24.1         Power of Attorney (see page 29).
</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.

                                        27
<PAGE>   30

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

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

****     Incorporated by reference to exhibits filed with Registrant's
         Registration Statement on Form S-8 (File No. 333-67877).

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

******   Incorporated by reference to exhibits filed with Registrant's
         Registration Statement on Form 8K dated July 19, 2000.

     (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.

                                        28
<PAGE>   31

                                   SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.

                                          NOVADIGM, INC.

                                          By       /s/ WALLACE D. RUIZ

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

Date: June 27, 2001

                                        29
<PAGE>   32

                               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.

                                   SIGNATURES

     Pursuant to the requirements of the Securities Act of 1934, this Report has
been signed below on June 27, 2001 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 Chief   June 27, 2001
-----------------------------------------------------          Executive Officer
                Albion J. Fitzgerald                     (Principal Executive Officer)

                 /s/ WALLACE D. RUIZ                     Vice President, Treasurer and    June 27, 2001
-----------------------------------------------------       Chief Financial Officer
                   Wallace D. Ruiz                         (Principal Financial and
                                                              Accounting Officer)

               /s/ ROBERT B. ANDERSON                      Executive Vice President,      June 27, 2001
-----------------------------------------------------       Secretary and Director
                 Robert B. Anderson

                /s/ ROBERT H. FORNEY                               Director               June 27, 2001
-----------------------------------------------------
                  Robert H. Forney

             /s/ DEBORAH DOYLE MCWHINNEY                           Director               June 27, 2001
-----------------------------------------------------
               Deborah Doyle McWhinney

                 /s/ H. KENT PETZOLD                               Director               June 27, 2001
-----------------------------------------------------
                   H. Kent Petzold
</TABLE>

                                        30
<PAGE>   33

                                 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 and Comprehensive
  Income (Loss).............................................  F-4
Consolidated Statements of Stockholders' Equity.............  F-5
Consolidated Statements of Cash Flows.......................  F-6
Notes to Consolidated Financial Statements..................  F-7
</TABLE>

                                       F-1
<PAGE>   34

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO NOVADIGM, INC.:

     We have audited the accompanying consolidated balance sheets of Novadigm,
Inc. (a Delaware corporation) and subsidiaries as of March 31, 2001 and 2000,
and the related consolidated statements of operations, comprehensive income
(loss), stockholders' equity and cash flows for each of the three years in the
period ended March 31, 2001. These consolidated financial statements and the
schedule referred to below are the responsibility of Novadigm's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

     We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Novadigm,
Inc. and subsidiaries as of March 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
March 31, 2001 in conformity with accounting principles generally accepted in
the United States.

     Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The accompanying schedule listed in the
index to financial statements is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not a part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in our audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.

                                          ARTHUR ANDERSEN LLP

Roseland, New Jersey
April 24, 2001

                                       F-2
<PAGE>   35

                                 NOVADIGM, INC.

                          CONSOLIDATED BALANCE SHEETS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

                                     ASSETS

<TABLE>
<CAPTION>
                                                              MARCH 31,    MARCH 31,
                                                                2001         2000
                                                              ---------    ---------
<S>                                                           <C>          <C>
Current assets:
  Cash and cash equivalents.................................  $ 20,592     $  3,670
  Short-term marketable securities..........................     6,570       21,348
  Accounts receivable, net of allowance for doubtful
     accounts of $2,388 in 2001 and $1,752 in 2000..........    18,179       15,544
  Prepaid expenses and other current assets.................     1,250        1,144
                                                              --------     --------
          Total current assets..............................    46,591       41,706
  Property and equipment, net...............................     2,705        1,894
  Intangible asset, net.....................................    10,089           --
  Other assets..............................................       547          780
                                                              --------     --------
                                                              $ 59,932     $ 44,380
                                                              ========     ========

                        LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable..........................................  $  3,547     $  3,100
  Accrued liabilities.......................................     1,664        1,003
  Accrued payroll and other compensation....................     5,458        3,850
  Deferred revenue..........................................     5,113        4,712
                                                              --------     --------
          Total current liabilities.........................    15,782       12,665
                                                              --------     --------
Commitments and contingencies
Stockholders' equity:
  Preferred stock, $0.001 par value
     Authorized -- 5,000 shares
     Issued -- none.........................................        --           --
  Common stock, $0.001 par value
     Authorized -- 30,000 shares
     Issued -- 19,902 shares in 2001 and 18,590 shares in
      2000..................................................        20           19
  Additional paid-in capital................................    90,300       68,683
  Treasury stock, 353 shares in 2001, 0 shares in 2000......    (2,711)          --
  Stockholders notes receivable.............................    (1,137)          --
  Accumulated deficit.......................................   (41,244)     (36,648)
  Accumulated other comprehensive loss......................    (1,078)        (339)
                                                              --------     --------
          Total stockholders' equity........................    44,150       31,715
                                                              --------     --------
                                                              $ 59,932     $ 44,380
                                                              ========     ========
</TABLE>

The accompanying notes to consolidated financial statements are an integral part
                     of these consolidated balance sheets.
                                       F-3
<PAGE>   36

                                 NOVADIGM, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                              FOR THE YEARS ENDED MARCH 31,
                                                              -----------------------------
                                                               2001       2000       1999
                                                              -------    -------    -------
<S>                                                           <C>        <C>        <C>
REVENUES:
  Licenses..................................................  $31,247    $27,978    $20,743
  Maintenance and services..................................   19,199     16,750     11,319
                                                              -------    -------    -------
          Total revenues....................................   50,446     44,728     32,062
                                                              -------    -------    -------
OPERATING EXPENSES:
  Cost of maintenance and services..........................    9,278      5,355      4,352
  Sales and marketing.......................................   25,934     21,912     16,274
  Research and development..................................    9,003      6,126      4,936
  General and administrative................................    8,305      6,823      5,383
  Amortization of intangible................................    6,046         --         --
                                                              -------    -------    -------
          Total operating expenses..........................   58,566     40,216     30,945
                                                              -------    -------    -------
Operating income (loss).....................................   (8,120)     4,512      1,117
Interest income and other, net..............................    1,586      1,058        665
Other income................................................    2,171         --         --
                                                              -------    -------    -------
Income (loss) before provision for income taxes.............   (4,363)     5,570      1,782
Provision for income taxes..................................      233        427         25
                                                              -------    -------    -------
Net income (loss)...........................................  $(4,596)   $ 5,143    $ 1,757
                                                              =======    =======    =======
Earnings (loss) per share -- basic..........................  $ (0.23)   $  0.28    $  0.10
                                                              =======    =======    =======
Weighted average common shares outstanding -- basic.........   19,711     18,185     17,580
                                                              =======    =======    =======
Earnings (loss) per share -- diluted........................  $ (0.23)   $  0.25    $  0.10
                                                              =======    =======    =======
Weighted average common and common equivalent shares
  outstanding -- diluted....................................   19,711     20,558     18,384
                                                              =======    =======    =======
</TABLE>

             CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                              FOR THE YEARS ENDED MARCH 31,
                                                              -----------------------------
                                                               2001       2000       1999
                                                              -------    -------    -------
<S>                                                           <C>        <C>        <C>
Net income (loss)...........................................  $(4,596)   $ 5,143    $ 1,757
     Cumulative translation adjustment......................     (739)      (171)      (189)
                                                              -------    -------    -------
Comprehensive income (loss).................................  $(5,335)   $ 4,972    $ 1,568
                                                              =======    =======    =======
</TABLE>

The accompanying notes to consolidated financial statements are an integral part
                  of these consolidated financial statements.
                                       F-4
<PAGE>   37

                                 NOVADIGM, INC.

                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                     ACCUMULATED
                                                                                                        OTHER
                              COMMON STOCK     ADDITIONAL              STOCKHOLDERS                 COMPREHENSIVE       TOTAL
                             ---------------    PAID-IN     TREASURY      NOTES       ACCUMULATED      INCOME       STOCKHOLDERS'
                             SHARES   AMOUNT    CAPITAL      STOCK      RECEIVABLE      DEFICIT        (LOSS)          EQUITY
                             ------   ------   ----------   --------   ------------   -----------   -------------   -------------
<S>                          <C>      <C>      <C>          <C>        <C>            <C>           <C>             <C>
BALANCE AT MARCH 31,
  1998.....................  17,471    $11      $66,087     $(2,527)     $    --       $(43,548)       $    21         $20,044
  Exercise of stock options
    and purchase of shares
    under the stock
    purchase plan..........     367     --         (611)      2,262           --             --             --           1,651
  Foreign currency
    translation
    adjustment.............      --     --           --          --           --             --           (189)           (189)
  Net income...............      --     --           --          --           --          1,757             --           1,757
                             ------    ---      -------     -------      -------       --------        -------         -------
BALANCE AT MARCH 31,
  1999.....................  17,838     11       65,476        (265)          --        (41,791)          (168)         23,263
  Exercise of stock options
    and purchase of shares
    under the stock
    purchase plan..........     752      8        3,207         265           --             --             --           3,480
  Foreign currency
    translation
    adjustment.............      --     --           --          --           --             --           (171)           (171)
  Net income...............      --     --           --          --           --          5,143             --           5,143
                             ------    ---      -------     -------      -------       --------        -------         -------
BALANCE AT MARCH 31,
  2000.....................  18,590     19       68,683          --           --        (36,648)          (339)         31,715
  Exercise of stock options
    and purchase of shares
    under the stock
    purchase plan..........     725     --        3,323          --           --             --             --           3,323
  Issuance of common
    stock..................     940      1       18,294          --           --             --             --          18,295
  Purchase of treasury
    stock..................    (353)    --           --      (2,711)          --             --             --          (2,711)
  Foreign currency
    translation
    adjustment.............      --     --           --          --           --             --           (739)           (739)
  Loans to stockholders....      --     --           --          --       (1,137)            --             --          (1,137)
  Net loss.................      --     --           --          --           --         (4,596)            --          (4,596)
                             ------    ---      -------     -------      -------       --------        -------         -------
BALANCE AT MARCH 31,
  2001.....................  19,902    $20      $90,300     $(2,711)     $(1,137)      $(41,244)       $(1,078)        $44,150
                             ======    ===      =======     =======      =======       ========        =======         =======
</TABLE>

The accompanying notes to consolidated financial statements are an integral part
                  of these consolidated financial statements.
                                       F-5
<PAGE>   38

                                 NOVADIGM, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                             (AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                              FOR THE YEARS ENDED MARCH 31,
                                                             --------------------------------
                                                               2001        2000        1999
                                                             --------    --------    --------
<S>                                                          <C>         <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)........................................  $ (4,596)   $  5,143    $  1,757
  Adjustments to reconcile net income (loss) to net cash
     provided by operating activities-
     Depreciation and amortization.........................     6,768         862         887
     Increase in allowance for doubtful accounts...........       636         969          13
     Increase in accounts receivable.......................    (3,625)     (7,927)     (2,247)
     Increase in prepaid expenses and other current
       assets..............................................      (113)       (159)       (143)
     Increase in intangible asset..........................      (340)         --          --
     Decrease in other assets..............................       226          93          82
     Increase (decrease) in accounts payable and accrued
       liabilities.........................................     1,019         691        (261)
     Increase in accrued payroll and other compensation....     1,519       1,022         186
     Increase in deferred revenue..........................       268         839       1,355
                                                             --------    --------    --------
          Net cash provided by operating activities........     1,762       1,533       1,629
                                                             --------    --------    --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of property and equipment......................    (1,541)     (1,360)       (520)
  Purchases of held-to-maturity securities.................   (54,001)    (49,015)    (31,176)
  Proceeds from redemptions of held-to-maturity
     securities............................................    68,779      41,079      32,298
                                                             --------    --------    --------
          Net cash provided by (used in) investing
            activities.....................................    13,237      (9,296)        602
                                                             --------    --------    --------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net proceeds from the sale of common stock and exercise
     of options............................................     3,323       3,480       1,651
  Proceeds from the Hewlett-Packard alliance agreement.....     2,500          --          --
  Loans to stockholders....................................    (1,137)         --          --
  Purchases of treasury stock..............................    (2,711)         --          --
                                                             --------    --------    --------
          Net cash provided by financing activities........     1,975       3,480       1,651
                                                             --------    --------    --------
Effect of exchange rate on changes in cash.................       (52)       (171)       (189)
                                                             --------    --------    --------
Net increase (decrease) in cash and cash equivalents.......    16,922      (4,454)      3,693
Cash and cash equivalents at the beginning of the period...     3,670       8,124       4,431
                                                             --------    --------    --------
Cash and cash equivalents at the end of the period.........  $ 20,592    $  3,670    $  8,124
                                                             ========    ========    ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for income taxes.................................  $      3    $    293    $     --
NON-CASH FINANCING ACTIVITY:
Issuance of 940,000 shares of common stock in connection
  with the alliance agreement with Hewlett-Packard.........  $ 18,295    $     --    $     --
</TABLE>

The accompanying notes to consolidated financial statements are an integral part
                  of these consolidated financial statements.
                                       F-6
<PAGE>   39

                                 NOVADIGM, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                 MARCH 31, 2001

 1. THE COMPANY

     Novadigm, Inc. ("Novadigm" or the "Company") was incorporated in Delaware
in February 1992. The Company designs, markets and supports technology solutions
that efficiently and reliably deliver, update and maintain software and content
across the extended enterprise. The Company's principal customers include medium
to large organizations with widely deployed and heterogeneous networks with
thousands to hundreds-of-thousands of computing devices.

     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 June 1994, March 1998 and June 1998, the
Company established wholly owned subsidiaries in France, Germany and the United
Kingdom, respectively, to act as sales and service offices to the European
marketplace. The Company is subject to a number of risks, including a history of
operating losses, dependence on key individuals, potential competition from
larger and more established companies, customer concentration and the ability to
penetrate the market with new products.

 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  Principles of Consolidation

     The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. Intercompany accounts and transactions have
been eliminated.

  Translation of Foreign Currencies

     The functional currency of the Company's subsidiaries is its local
currency. Accordingly, all assets and liabilities are translated into U.S.
dollars at current exchange rates as of the respective balance sheet date.
Revenue and expense items are translated at the average rates prevailing during
the period.

  Use of Estimates

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

  Reclassifications

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

  Revenues

     The Company recognizes revenue in accordance with the provisions of
Statement of Position No. 97-2, "Software Revenue Recognition." The Company
generates license revenues from licensing the rights to use its software
products to end users and sublicense fees from resellers. The Company also
generates maintenance and service revenues from providing renewable support and
software update rights services (maintenance) and from consulting and training
activities performed for license customers.

     Revenues from perpetual software license agreements are recognized upon
shipment of the software if evidence of an arrangement exists, pricing is fixed
and determinable, payment is due within one year and

                                       F-7
<PAGE>   40
                                 NOVADIGM, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2001

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 percentage of list
price. Reseller arrangements may include non-refundable payments in the form of
guaranteed sublicense fees. Guaranteed sublicense fees from resellers are
recognized as revenue upon shipment of the master copy of all software to which
the guaranteed sublicense fees relate if the reseller is creditworthy and if the
terms of the agreement are such that the payment obligation is not subject to
price adjustment, is non-cancelable and non-refundable and due within 90 days.
These guaranteed sublicense fees are applied against sublicense fees reported by
the reseller in relicensing our products to end-users. No guaranteed sublicense
fees were recognized in 2001 and $1.2 million and $5.4 million in guaranteed
sublicense fees were recognized under such agreements in 2000 and 1999,
respectively. As of March 31, 2001, 98% of all such guaranteed sublicense fees
recognized by Novadigm were placed with end users or forfeited by the reseller.

     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. Service
revenues are primarily related to consulting services performed under separate
service arrangements related to the installation and implementation of our
software products and the training of customer personnel. 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 the product is
delivered. Such costs are not material and are included in research and
development expenses in the accompanying consolidated statements of operations.

     Cost of maintenance and services includes the direct and indirect costs of
providing technical support and consulting and training services to our
customers. Cost of maintenance and services consists primarily of payroll and
benefits for field engineers and support personnel, other related overhead and
third party consulting fees.

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

  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 cash investments and marketable securities
to financial institutions evaluated as highly creditworthy. The Company
generally does not require collateral on trade accounts receivable as its
customer base consists of large, well-established companies and governmental
entities. As of March 31, 2001, approximately 29% of accounts receivable was
concentrated with one customer who is a large, well-established company that the
Company has determined as creditworthy. As of March 31, 2000, no single customer
accounted for more than 10% of accounts receivable.

                                       F-8
<PAGE>   41
                                 NOVADIGM, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2001

  Marketable Securities

     Marketable securities, which are composed of commercial paper, government
and government-backed notes and corporate notes, are classified as
held-to-maturity. Held-to-maturity securities represent those securities that
the Company has both a positive intent and ability to hold to maturity and are
carried at amortized cost.

     Held-to-maturity securities at March 31, 2001 of approximately $6.6 million
were invested in commercial paper with a variety of large, well-established and
highly rated companies.

     Proceeds from redemption of held-to-maturity securities were approximately
$68.8 million in 2001. At March 31, 2001, approximately $17.6 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, marketable securities, accounts receivable and accounts
payable approximate their fair values.

  Property and Equipment

     Property and equipment is stated at historical cost and consists of the
following at March 31, (in thousands):

<TABLE>
<CAPTION>
                                                            2001       2000
                                                           -------    -------
<S>                                                        <C>        <C>
Company cars.............................................  $    95    $   355
Computer equipment and software..........................    6,073      4,976
Furniture and fixtures...................................      725        624
Leasehold improvements...................................    1,204        608
                                                           -------    -------
                                                             8,097      6,563
Less: Accumulated depreciation and amortization..........   (5,392)    (4,669)
                                                           -------    -------
                                                           $ 2,705    $ 1,894
                                                           =======    =======
</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
Company cars..............................  4 years
Furniture and fixtures....................  5 years
Leasehold improvements....................  5 years (lesser of lease term
                                            or estimated useful life)
</TABLE>

  Intangible Asset

     The Company's intangible asset, net, at March 31, 2001, totaling $10.1
million, is attributable to the strategic alliance entered into between the
Company and Hewlett-Packard Company ("Hewlett-Packard") (see Note 8). This
intangible asset is being amortized over the initial term of the agreement, two
years, using the straight-line method. Accumulated amortization and amortization
expense was $6.1 million as of and for the year ended March 31, 2001.

                                       F-9
<PAGE>   42
                                 NOVADIGM, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2001

  Long-Lived Assets

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

  Software Development Costs

     Under the provisions of Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," software development costs are capitalized upon the establishment of
technological feasibility, which the Company defines as the establishment of a
working model. Capitalized software development costs require a continuing
assessment of their recoverability. This assessment requires considerable
judgment by management with respect to various factors including, but not
limited to, anticipated future gross product revenues, estimated economic lives
and changes in software and hardware technology. Amounts which could have been
capitalized under this statement, after consideration of the above factors, were
immaterial to the Company's results of operations and financial position.
Therefore, the Company has expensed all software development costs and included
those costs in research and development expenses in the accompanying
consolidated statements of operations.

  Earnings per Share

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

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

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

<TABLE>
<CAPTION>
                                                        FOR THE YEARS ENDED MARCH 31,
                                                        -----------------------------
                                                         2001       2000       1999
                                                        -------    -------    -------
<S>                                                     <C>        <C>        <C>
NUMERATOR:
  Net income (loss) -- basic and diluted..............  $(4,596)   $ 5,143    $ 1,757
                                                        -------    -------    -------
DENOMINATOR:
  Weighted average number of common shares
     outstanding -- basic.............................   19,711     18,185     17,580
Incremental shares from assumed conversion of
  options.............................................       --      2,373        804
                                                        -------    -------    -------
  Weighted average common and common equivalent shares
     outstanding -- diluted...........................   19,711     20,558     18,384
                                                        =======    =======    =======
EARNINGS (LOSS) PER SHARE -- BASIC....................  $ (0.23)   $   .28    $   .10
                                                        =======    =======    =======
EARNINGS (LOSS) PER SHARE -- DILUTED..................  $ (0.23)   $   .25    $   .10
                                                        =======    =======    =======
</TABLE>

                                       F-10
<PAGE>   43
                                 NOVADIGM, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2001

 3. COMMITMENTS AND CONTINGENCIES

     The Company has various leases for its facilities under non-cancelable
operating lease agreements. Rent expense incurred under these agreements in
fiscal 2001, 2000 and 1999 (in thousands) was approximately $1,490, $1,106 and
$1,059, respectively.

     During 1997 and 2001, Novadigm entered into amendments of the lease for its
headquarters. Under the amendments, Novadigm increased the total leased space
and extended the lease term for its original leased space. Future minimum
commitments under all facility leases are as follows (in thousands):

<TABLE>
<CAPTION>
                   YEAR ENDING MARCH 31,
                   ---------------------
<S>                                                           <C>
2002........................................................  $2,112
2003........................................................   2,070
2004........................................................   2,022
2005........................................................   1,887
2006........................................................   1,636
                                                              ------
                                                              $9,727
                                                              ======
</TABLE>

     On November 10, 2000, the Company and Marimba, Inc. signed a memorandum of
understanding settling their patent disputes. Though the terms of the settlement
are confidential, it consisted of a cash payment and the signing of the
settlement and patent license agreements. Of the cash received, approximately
$2.2 million is included in other income for the year ended March 31, 2001. The
deferred amount will be recognized as revenue over the expected period of
utilization of the patent license agreement. For the year ended March 31, 2001,
approximately $226,000 of this amount has been recognized in license revenue.

     The Company is engaged in certain legal and administrative proceedings.
Management believes the outcome of these proceedings will not have a material
adverse effect on the Company's consolidated financial position or results of
operations.

 4. COMMON STOCK

     In July of 1995, the Company completed a public offering on the Nasdaq
National Market of 2,875,000 shares of common stock resulting in net proceeds to
the Company of approximately $32.2 million after offering costs.

     In October 2000, the Company announced its intention to repurchase up to
500,000 of its outstanding common shares. As of March 31, 2001, approximately
$2,711,000 was expended to repurchase 353,000 common shares.

     In July 2000, pursuant to the Alliance Agreement with Hewlett-Packard,
Novadigm issued 940,000 shares of its common stock and a warrant for an
additional 250,000 shares (See Note 8).

 5. STOCK OPTIONS AND STOCK PURCHASE PLAN

     At the Annual Meeting of Stockholders in September 2000, the Company's
stockholders adopted and approved the 2000 Stock Option Plan (the "2000 Plan")
and terminated the 1992 Stock Option Plan, as amended (the "1992 Plan"). No
further option grants will be made under the 1992 Plan. The 2000 Plan permits
the Company to grant incentive stock options to employees and officers of the
Company and nonstatutory stock options to eligible employees, officers,
directors and consultants. Incentive options are granted at no less than fair
market value at the date of grant based upon the price per share of Novadigm's
stock on the Nasdaq National Market. Nonqualified options are granted at no less
than 85% of fair market value at the date of grant. Option terms may not exceed
ten years and vesting is determined by the Board of

                                       F-11
<PAGE>   44
                                 NOVADIGM, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2001

Directors for each individual grant (generally four years). A total of 1,500,000
shares of the Company's Common Stock have been reserved for issuance under the
2000 Plan. In addition, an annual increase in the share reserve will be added on
the first day of each fiscal year of the Company, beginning April 1, 2001, equal
to the lesser of (i) 750,000 shares, (ii) three percent (3%) of the total Common
Stock outstanding as of the last day of the prior fiscal year, and (iii) such
amount as may be determined by the Company's Board of Directors.

     The terms and provision of the terminated 1992 Plan were essentially the
same as the 2000 Plan that replaced it. A total of 5,200,000 shares of common
stock were reserved for issuance under the 1992 Plan and a total of 5,019,000
shares were granted net of cancellations.

     In October 1999, the Board of Directors adopted and approved the 1999
Nonstatutory Stock Option Plan (the "1999 Plan") and reserved for issuance under
the 1999 Plan 500,000 shares of common stock. In February 2000, the Board of
Directors authorized and reserved an additional 250,000 shares for issuance
under the 1999 Plan. In June 2000, the Board of Directors authorized and
reserved an additional 250,000 shares for issuance under the 1999 Plan. The
purposes of the 1999 Plan are to attract and retain the best available personnel
for positions of substantial responsibility, to provide additional incentive to
employees, new officers, directors and consultants of the Company and to promote
the success of the Company's business. Under the 1999 Plan, officers and
directors are limited to grants at the time of initial service. Option terms may
not exceed ten years from the date of grant and the 1999 Plan will continue in
effect until October 25, 2009 unless terminated sooner.

     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, 1998............................     3,351          $5.05
  Granted............................................     1,432           4.07
  Exercised..........................................      (309)          4.66
  Canceled...........................................      (789)          5.18
                                                          -----          -----
BALANCE AT MARCH 31, 1999............................     3,685          $4.35
  Granted............................................     1,477          11.41
  Exercised..........................................      (738)          4.50
  Canceled...........................................      (331)          4.73
                                                          -----          -----
BALANCE AT MARCH 31, 2000............................     4,093          $6.85
  Granted............................................     1,149           9.91
  Exercised..........................................      (633)          4.70
  Canceled...........................................      (627)          8.31
                                                          -----          -----
BALANCE AT MARCH 31, 2001............................     3,982          $7.82
                                                          =====          =====
</TABLE>

     At March 31, 2001, 1,771,563 options are vested and exercisable and
3,687,190 shares of common stock are reserved for future issuance under the
Plan. The weighted average exercise price of exercisable options at March 31,
2001 is $6.02 per share.

     On May 17, 1995, the Board of Directors adopted Novadigm's Employee Stock
Purchase Plan (the "Purchase Plan"), which was approved by the stockholders at
the Company's annual meeting on November 17, 1995. A total of 1,000,000 shares
of Common Stock was reserved for issuance under the Purchase Plan. The Purchase
Plan covers substantially all employees in the United States. The participants'
purchase price is the lower of 85% of the closing price on the first trading day
of the six-month trade period or the last

                                       F-12
<PAGE>   45
                                 NOVADIGM, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2001

trade day of the period. Approximately 92,000 shares and 30,000 shares were
purchased by employees under the Purchase Plan in fiscal 2001 and 2000,
respectively. At March 31, 2001, Novadigm has reserved approximately 722,000
shares for future issuance.

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

<TABLE>
<CAPTION>
                                                          2001       2000      1999
                                                        --------    ------    -------
<S>                                                     <C>         <C>       <C>
Net income (loss) (in thousands):
  As reported.........................................  $ (4,596)   $5,143    $ 1,757
  Pro forma...........................................  $(10,079)   $2,463    $(1,312)

Net income (loss) per share
  As reported -- basic................................  $  (0.23)   $ 0.28    $  0.10
  As reported -- diluted..............................  $  (0.23)   $ 0.25    $  0.10
  Pro forma -- basic..................................  $  (0.51)   $ 0.14    $ (0.07)
  Pro forma -- diluted................................  $  (0.51)   $ 0.12    $ (0.07)
</TABLE>

     The weighted average fair values of options granted fiscal 2001, 2000 and
1999 were $9.91, $11.41 and $2.81, respectively. The options outstanding at
March 31, 2001, have exercise prices between $2.83 and $24.63, with a weighted
average exercise price of $7.82 and a weighted average remaining contractual
life of 7.8 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 2001, 2000 and 1999: risk free interest
rates ranged from 6.0% to 6.4%, expected dividend yields of 0%, expected lives
of 5.0 years and expected volatility of 136%, 92% and 90% for 2001, 2000 and
1999, respectively.

 6. INCOME TAXES

     The Company accounts for income taxes pursuant to Statement of Financial
Accounting Standards No. 109 ("SFAS 109") "Accounting for Income Taxes". SFAS
109 provides for an asset and liability approach to accounting for income taxes
under which deferred income taxes are provided based upon enacted tax laws and
rates applicable to the periods in which taxes become payable.

                                       F-13
<PAGE>   46
                                 NOVADIGM, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2001

     The components of the provision for income taxes are as follows (in
thousands):

<TABLE>
<CAPTION>
                                                              FOR THE YEARS ENDED
                                                                   MARCH 31,
                                                              --------------------
                                                              2001    2000    1999
                                                              ----    ----    ----
<S>                                                           <C>     <C>     <C>
Current
  U.S. Federal..............................................  $ 90    $306    $26
  State and local...........................................    20      24     (1)
                                                              ----    ----    ---
          Total current.....................................  $110    $330    $25
                                                              ----    ----    ---
Deferred
  U.S. Federal..............................................    --      --     --
  State and local...........................................    --      --     --
                                                              ----    ----    ---
          Total deferred....................................    --      --     --
                                                              ----    ----    ---
Foreign.....................................................   123      97     --
                                                              ----    ----    ---
Provision for income taxes..................................  $233    $427    $25
                                                              ====    ====    ===
</TABLE>

     The components of the net deferred tax asset at March 31, 2001 and 2000 are
as follows (in thousands):

<TABLE>
<CAPTION>
                                                            2001       2000
                                                          --------    -------
<S>                                                       <C>         <C>
Deferred tax assets:
  Net operating loss carryforwards......................  $  8,877    $ 4,104
  Reserves and accruals not yet deductible for tax
     purposes...........................................     1,431      1,443
  Credit carryforwards..................................       927        423
  Amortization of intangible asset......................       800         --
  Depreciation..........................................       412        302
                                                          --------    -------
          Total deferred tax assets.....................    12,447      6,272
Valuation allowance.....................................   (12,447)    (6,272)
                                                          --------    -------
Net deferred tax asset..................................  $     --    $    --
                                                          ========    =======
</TABLE>

     As of March 31, 2001, Novadigm has net operating loss carryforwards for
federal income tax reporting purposes of approximately $22.2 million. These
carryforwards expire in various periods through 2021. 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. A full valuation
allowance has been recorded by the Company in the accompanying financial
statements to offset the deferred tax assets as their future realizability is
uncertain considering the Company's historical operating results.

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

<TABLE>
<CAPTION>
                                                              2001     2000
                                                              -----    -----
<S>                                                           <C>      <C>
(Benefit) provision at U.S. statutory rate..................  (35.0)%   35.0%
State income taxes, net of federal benefit..................    0.5     (0.2)
Change in valuation allowance...............................   37.0    (29.5)
Other.......................................................    2.8      2.3
                                                              -----    -----
                                                                5.3%     7.6%
                                                              =====    =====
</TABLE>

                                       F-14
<PAGE>   47
                                 NOVADIGM, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2001

 7. MAJOR CUSTOMERS

     During 2001, only one customer, Electronic Data Systems Corporation
("EDS"), accounted for more than 10% of our total revenue. During 2001, EDS
accounted for $6.1 million or approximately 12% of total revenues. During 2000,
one customer, Amdahl Corporation, accounted for approximately 14% total
revenues. During 1999, two customers, Amdahl Corporation and Esoft Ltd.,
accounted for approximately 17% and 12% of total revenues, respectively.

     In June 1995, Novadigm entered into a seven-year, non-exclusive OEM and
distribution agreement with Amdahl. Under the agreement, Amdahl was able to
sublicense EDM throughout the world as part of its bundled solution and
sublicense EDM stand-alone to a limited worldwide market. Novadigm agreed to
provide limited technical support and training. The agreement required Amdahl to
pay Novadigm minimum annual royalties. Amdahl failed to meet the minimum royalty
commitment for fiscal 2000 and we terminated the agreement effective March 31,
2000.

 8. ALLIANCE WITH HEWLETT-PACKARD

     In June 2000, Novadigm and Hewlett-Packard entered into a strategic
alliance to integrate, market and sell the Company's software and content
management products with Hewlett-Packard's HP OpenView management solutions for
the enterprise and service provider markets. In addition to the alliance
agreement, Novadigm and Hewlett-Packard have integrated and jointly market their
products and provide customers the opportunity to replace Hewlett-Packard's HP
OpenView Desktop Administrator ("DTA") products and services with Novadigm's
Radia products and services.

     As part of the agreement with Hewlett-Packard, the Company issued 940,000
shares of common stock to Hewlett-Packard and a warrant for an additional
250,000 shares of common stock. Both the shares issued and the warrant contained
restrictions. In addition to the agreement, and for a fee of $2.5 million,
Hewlett-Packard was provided a one-year, limited license to upgrade certain
existing customers to Novadigm's Radia product. The fair value of the equity
issued, less the cash received from Hewlett-Packard and related transaction
costs, or $16.1 million, was recorded as an intangible asset at June 30, 2000,
is being amortized over the initial term of the agreement, two years. Included
in the warrant is a provision that reduces the exercise price of the warrant to
$0 if Hewlett-Packard attains certain revenue milestones. Should Hewlett-Packard
meet those milestones, the intangible asset will be adjusted and the new amount
will be amortized for the remainder of the term. The amortization expense for
2001 was approximately $6.1 million. The amortization expense for 2002 is
expected to be $8.1 million unless otherwise adjusted as described above for the
attainment of the revenue milestones. At March 31, 2001, the net balance of this
intangible asset was $10.1 million.

 9. STOCKHOLDERS NOTES RECEIVABLE

     During 2001, the Company issued notes to executive officers and
stockholders of Novadigm. The notes dated April 17, 2000 and April 27, 2000,
bear interest at a rate of 6.46% per annum, are secured by shares of the
Company's common stock and are due and payable in one year. The Company has
renewed the notes for another year.

10. INDUSTRY AND GEOGRAPHIC SEGMENT INFORMATION

     The Company's software products and related services are developed and
marketed to support heterogeneous client/server and Internet computing
environments for medium and large-scale enterprises. The Company markets its
products and related services to customers in North America, Europe, the Pacific
Rim, the Middle East, Africa and South America. The Company's international
revenue represents products

                                       F-15
<PAGE>   48
                                 NOVADIGM, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2001

shipped from the United States directly to end-users outside the United States.
The Company does not sell products directly to our international subsidiaries.

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

<TABLE>
<CAPTION>
                                                                       TOTAL
                                                           REVENUE    ASSETS
                                                           -------    -------
<S>                                                        <C>        <C>
March 31, 2001:
  AAA(1).................................................  $27,363    $51,123
  EMEA(2)................................................   23,083      8,809
                                                           -------    -------
          Total..........................................  $50,446    $59,932
                                                           =======    =======

March 31, 2000:
  AAA(1).................................................  $27,318    $35,312
  EMEA(2)................................................   17,410      9,068
                                                           -------    -------
          Total..........................................  $44,728    $44,380
                                                           =======    =======

March 31, 1999:
  AAA(1).................................................  $17,912    $27,125
  EMEA(2)................................................   14,150      6,251
                                                           -------    -------
          Total..........................................  $32,062    $33,376
                                                           =======    =======
</TABLE>

---------------
(1) denotes North America, South America, Asia, Australia and the Pacific Rim

(2) denotes Europe, the Middle East and Africa

                                       F-16
<PAGE>   49
                                 NOVADIGM, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2001

11. SELECTED QUARTERLY DATA (UNAUDITED)

(IN THOUSANDS)

<TABLE>
<CAPTION>
                                                               QUARTER ENDED
                         -----------------------------------------------------------------------------------------
                         JUNE 30,   SEPT. 30,   DEC. 31,   MARCH 31,   JUNE 30,   SEPT. 30,   DEC. 31,   MARCH 31,
                           1999       1999        1999       2000        2000       2000        2000       2001
                         --------   ---------   --------   ---------   --------   ---------   --------   ---------
<S>                      <C>        <C>         <C>        <C>         <C>        <C>         <C>        <C>
REVENUES:
  Licenses.............   $4,175     $ 6,991    $ 7,629     $ 9,183    $ 3,791     $ 7,998    $ 8,314     $11,144
  Maintenance and
     services..........    3,881       4,336      4,449       4,084      4,512       4,625      4,432       5,630
                          ------     -------    -------     -------    -------     -------    -------     -------
          Total
            revenues...    8,056      11,327     12,078      13,267      8,303      12,623     12,746      16,774
OPERATING EXPENSES:
  Cost of maintenance
     and services......    1,161       1,250      1,437       1,507      1,705       2,141      2,179       3,253
  Sales and
     marketing.........    4,019       5,276      5,849       6,768      5,580       6,119      6,568       7,667
  Research and
     development.......    1,189       1,696      1,509       1,732      2,108       2,161      2,214       2,520
  General and
     administrative....    1,588       1,909      1,692       1,634      1,584       1,812      2,596       2,313
  Amortization of
     intangibles.......       --          --         --          --         --       2,010      2,018       2,018
                          ------     -------    -------     -------    -------     -------    -------     -------
          Total
            operating
            expenses...    7,957      10,131     10,487      11,641     10,977      14,243     15,575      17,771
                          ------     -------    -------     -------    -------     -------    -------     -------
Operating income
  (loss)...............       99       1,196      1,591       1,626     (2,674)     (1,620)    (2,829)       (997)
Interest income and
  other, net...........      237         195        309         317        326         425        409         426
Other income...........       --          --         --          --         --          --      2,171          --
                          ------     -------    -------     -------    -------     -------    -------     -------
Income (loss) before
  provision for income
  taxes................      336       1,391      1,900       1,943     (2,348)     (1,195)      (249)       (571)
Provision for income
  taxes................       43          80        102         202        149          27         27          30
                          ------     -------    -------     -------    -------     -------    -------     -------
Net income (loss)......   $  293     $ 1,311    $ 1,798     $ 1,741    $(2,497)    $(1,222)   $  (276)    $  (601)
                          ======     =======    =======     =======    =======     =======    =======     =======
</TABLE>

                                       F-17
<PAGE>   50
                                 NOVADIGM, INC.

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                                 MARCH 31, 2001

                                 NOVADIGM, INC.

                                  SCHEDULE II

                       VALUATION AND QUALIFYING ACCOUNTS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                        BALANCE AT    ADDITIONS                   BALANCE
                                                       BEGINNING OF   CHARGED TO   RECOVERIES     AT END
                   CLASSIFICATION                         PERIOD      OPERATIONS   (WRITEOFFS)   OF PERIOD
                   --------------                      ------------   ----------   -----------   ---------
<S>                                                    <C>            <C>          <C>           <C>
Allowance for Doubtful Accounts
Year Ended:
  March 31, 1999.....................................     $  770        $  556       $  (543)     $  783
  March 31, 2000.....................................        783           978            (9)      1,752
  March 31, 2001.....................................      1,752         2,153        (1,517)      2,388
</TABLE>

                                       S-1
<PAGE>   51

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
  EXHIBIT
    NO.                              DESCRIPTION
-----------                          -----------
<C>          <S>
3.1*         Certificate of Incorporation of Registrant, as amended.
3.2*         Bylaws of Registrant, as amended.
10.4****     1992 Stock Option Plan, as amended and form of Stock Option
             Agreement.
10.5*        1995 Employee Stock Purchase Plan and form of Subscription
             Agreement.
10.9*        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*****   Management Retention Agreement dated August 17, 1998 by and
             between the Registrant and Robert B. Anderson.
10.13**      Facility lease dated as of March 14, 1997, by and between
             Crossroad Developers Associates, LLC and the Registrant.
10.14**      Employment Agreement effective as of April 1, 1997 by and
             between the Registrant and Wallace D. Ruiz.
10.18        Security Agreement dated April 27, 2000 between the
             Registrant and Albion Fitzgerald.
10.19        Security Agreement dated April 17, 2000 between the
             Registrant and Wallace Ruiz.
10.20******  Alliance Agreement dated June 30, 2000 between the
             Registrant and Hewlett-Packard Company.
10.21        Employment Agreement effective as of April 16, 2001 by and
             between the Registrant and Gerald M. Labie.
21.1         Subsidiaries of Registrant.
23.1         Consent of Arthur Andersen LLP.
24.1         Power of Attorney (see page 29).
</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.

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

****    Incorporated by reference to exhibits filed with Registrant's
        Registration Statement on Form S-8 (File No. 333-67877).

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

******  Incorporated by reference to exhibits filed with Registrant's
        Registration Statement on Form 8K dated July 19, 2000.