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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(MARK ONE)

For The Fiscal Year Ended December 31, 2002

For The Transition Period From ________________ To ________________

Commission File No. 000-28715

NEOFORMA, INC.

(Exact name of the Registrant as Specified in its Charter)

(408) 468-4000

(The 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, $0.001 Par Value Per Share

(Title of Class)

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the 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.  ¨

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

As of June 28, 2002, the aggregate market value of the Registrant’s voting stock held by non-affiliates of the Registrant, based on the closing price for the Registrant’s common stock on The Nasdaq Stock Market on such date, was $96,988,380. This calculation does not reflect a determination that certain persons are affiliates of the Registrant for any other purposes.

The number of shares of common stock outstanding on March 26, 2003 was 18,763,455.

Portions of the Registrant’s definitive Proxy Statement for its Annual Meeting of Stockholders scheduled to be held in May 2003 are incorporated by reference into this report on Form 10-K.

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TABLE OF CONTENTS

Neoforma, Neoforma.com, Neoforma Order Management Solution, Neoforma OMS, Neoforma Contract Management Solution, Neoforma CMS, Neoforma Data Management Solution, Neoforma DMS, Neoforma Materials Management Solution, Neoforma MMS, NeoConnect, Healthcare Products Information Services, HPIS, Med-ecom, Medcontrax and the Neoforma logo are some of our trademarks or service marks. Other trademarks or trade names appearing in this annual report are the property of their respective owners.

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PART I

We make many statements in this annual report, such as statements regarding our plans, objectives, expectations and intentions, that are 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. We may identify these statements by the use of words such as “will,” “may,” “might,” “could,” “should,” “believe,” “expect,” “anticipate,” “intend,” “plan,” “predict,” “project,” “estimate,” “potential,” “continue” and similar expressions. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those we discuss in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors That May Affect Future Operating Results” and elsewhere in this annual report. You should carefully review the risks described in other documents we file from time to time with the Securities and Exchange Commission. The forward-looking statements contained herein speak only as of the date of this annual report, and we caution you not to rely on these statements without also considering the risks and uncertainties associated with these statements and our business that are addressed in this annual report. We undertake no obligation to publicly release any revisions to the forward-looking statements to reflect circumstances or events after the date of this report.

ITEM 1.    Business

Our Company

We are a leading provider of supply chain management solutions for the healthcare industry. Through a combination of technology, information and services, our Web-based supply chain management solutions are designed to enable effective collaboration among hospitals and suppliers, helping them to reduce operational inefficiencies and lower costs. The healthcare supply chain has a number of characteristics, including its large size, high degree of fragmentation, reliance on disparate technologies, dependence on manual processes and highly complex pricing structures, that have led to major inefficiencies. These inefficiencies lead to slower transactions and increased overhead and costs for suppliers and hospitals. In addition, the participants in the healthcare industry are under significant competitive and cost pressures and are seeking ways to increase efficiencies in their supply chain to improve their overall margins. Our Web-based solutions make it easier for the participants in the healthcare supply chain, principally hospitals, suppliers and group purchasing organizations, or GPOs, to improve communication, receive comprehensive and accurate information, improve day-to-day operations, accelerate order and contract implementations, enhance strategic planning and gain organization-wide visibility into supply chain activities. Using our solutions, these organizations can improve efficiencies, increase revenue, reduce costs and improve capital allocation.

We currently offer the following solutions:

Through our Healthcare Products Information Services, or HPIS, business unit, we also offer Market Intelligence Services and through our Med-ecom business unit, we offer Contract Management and Administration Services.

We serve over 1,200 customers, including many of the nation’s leading hospitals and suppliers. We have an exclusive relationship with Novation, LLC, the supply chain management company for its owners, VHA Inc. and University HealthSystem Consortium, or UHC, in connection with which we currently generate the significant

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majority of our business. These hospitals and Novation utilize Marketplace@Novation^™, a Web-based supply chain management e-commerce and information solution that includes Neoforma Order Management Solution, or Neoforma OMS, and Neoforma Contract Management Solution, or Neoforma CMS.

We were incorporated in California in 1996 and reincorporated in Delaware in 1998. Our headquarters are located at 3061 Zanker Road, San Jose, CA 95134, and our telephone number is (408) 468-4000. Our Website is www.neoforma.com. We are not including the information contained on our Website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K. As of December 15, 2002, we began making available free of charge through our Website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.

Recent Developments

On December 19, 2002, we extended the maturity date of our $25 million revolving credit agreement with VHA through December 31, 2004 and changed the interest rate from a fixed rate of 10% to a floating rate of the prime rate plus 2.75%.

On December 23, 2002, we acquired substantially all of the assets of Revelocity Corporation, a developer of Web-based software products that provide rapidly deployable supply chain management capabilities for hospitals and healthcare suppliers that help them streamline procurement processes, manage inventories, track project and patient costs, leverage bar-coding efficiencies in internal distribution and share replenishment demand information.

Industry Background

The healthcare supply chain has a number of characteristics, including its large size, high degree of fragmentation, reliance on disparate technologies, dependence on manual processes and highly complex pricing structures, that have led to major inefficiencies. In the U.S. alone, healthcare organizations spend billions on supplies every year. Supply chain costs represent the second largest expenditure category and approximately 25% to 30% of the average hospital’s operating expenses. There are thousands of suppliers selling to numerous healthcare provider sites, including approximately 5,800 hospitals in the United States. The technology investments made by hospitals and suppliers have been in materials management or information systems that generally do not communicate with each other either within an organization or between organizations. Hospitals generally have made fewer technology investments in supply chain initiatives as compared to other industries and their technologies are often out-of-date. As a result, many hospitals and their suppliers remain reliant on manual processes, primarily phone, fax and paper. In addition, healthcare supply chain participants frequently use complicated purchasing contracts and trade agreements, often negotiated by a GPO or supply management company, to facilitate the purchase of goods and services, adding another stakeholder and layer of complexity to the industry. Discrepancies in price, miscommunication and inaccurate or missing information on materials lead to slower transactions for all participants, increased overhead for suppliers and higher costs for hospitals. An industry study, which we co-sponsored, entitled “The Value of eCommerce in the Healthcare Supply Chain,” dated June 2001, estimated that these inefficiencies result in overall waste of 2% to 10%.

Participants in the healthcare industry are also under significant competitive and cost pressures. For example, hospitals are faced with reduced Medicare and third-party payor reimbursement rates, increasing malpractice insurance costs, intense pressure to increase patient safety initiatives, reduced investment income and new legislation requiring increased investment in technology. Suppliers are faced with an increasingly competitive environment and growing margin pressures, as well as a need to support the financial and operational health of their hospital customers. These industry participants are seeking ways to improve efficiencies in their supply chain to increase overall margins.

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Our Solutions

We deliver Web-based supply chain management solutions, utilizing a combination of technology, information and services, to enable effective collaboration among hospitals and suppliers, helping them to reduce operational inefficiencies and lower costs. We deliver these solutions as component parts of our customers’ marketplace offerings, such as Marketplace@Novation, or as a solution suite designed to improve the supply chain processes of large integrated delivery networks, or IDNs, and stand-alone hospitals and their suppliers.

Our Solution Suite

Our Web-based solution suite is designed to enable hospitals and suppliers to improve communication, receive comprehensive and accurate information, improve day-to-day operations, accelerate order and contract implementations and enhance strategic planning across organizational boundaries. Our solution suite is designed to complement and augment our customers’ existing supply chain business processes.

For our hospital customers, we offer:

For our supplier customers, we offer:

Through HPIS, we also offer Market Intelligence Services, and through Med-ecom, we offer Contract Management and Administration Services, to suppliers.

Hospital Solution Suite

Hospital supply expenditures represent approximately 25% to 30% of the average hospital budget and the second largest expenditure category behind labor. Our supply chain management solutions help hospitals streamline their supply chain and reduce their supply costs by (i) automating manual, paper-based processes, (ii) increasing contract utilization and (iii) providing better visibility into pricing.

Neoforma Order Management Solution

Neoforma OMS streamlines healthcare supply purchasing by simplifying and automating day-to-day activities. By combining Web-based functionality, discrepancy management tools and connectivity to suppliers, Neoforma OMS is designed to generate significant savings for hospitals through increased electronic transactions, online collaboration and by helping to resolve discrepancies faster. In addition, Neoforma OMS provides hospitals with valuable information to help them reduce supply chain costs.

The key components of Neoforma OMS and the benefits to hospitals include:

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Neoforma Contract Management Solution

Neoforma CMS is a Web-based system that enables hospitals to reduce supply costs through improved contract optimization, fewer price discrepancies and faster, better-informed decision-making.

The key components of Neoforma CMS and the benefits to hospitals include:

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Neoforma Data Management Solution

Neoforma Data Management Solution, or Neoforma DMS, is a data cleansing and maintenance solution that enables hospitals to significantly improve the accuracy of their item master and vendor master data files. Hospitals typically have large amounts of data stored in their MMIS and are challenged by out-of-date product information, duplicate entries, inaccurately entered information, obsolete records, incorrect prices and incorrect part numbers. These issues increase the potential for overspending when an order is placed. Neoforma DMS uses cross-referencing functionality to cleanse and normalize MMIS’ data. With improved item and vendor master files, hospitals can analyze past variations in pricing and product orders, generate valuable reports and better standardize products and prices to reduce supply costs. We currently offer Neoforma DMS in connection with our alliances with AristoMed, Inc. and Inobis, LLC.

The key components of Neoforma DMS and the benefits to hospitals include:

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Neoforma Materials Management Solution

Neoforma Materials Management Solution, or Neoforma MMS, enables hospitals to manage inventory, conduct requisitioning, issue purchase orders and manage other components of the materials management process. Neoforma MMS is designed to offer superior flexibility, process control, ease of use and ease of implementation as compared to conventional materials management information systems. Neoforma MMS consists primarily of the solutions we acquired from Revelocity in December 2002.

The key components of Neoforma MMS and the benefits to hospitals include:

Supplier Solution Suite

In the current healthcare environment, suppliers, both manufacturers and distributors, face increasing competition and growing margin pressures. Our supply chain management solutions help suppliers (i) reduce their expenses by automating manual processes, reducing transaction costs and providing contract management services, (ii) improve cash flow by decreasing accounts receivable aging, or days sales outstanding, or DSO, (iii) increase their service levels to their hospital customers and (iv) increase their revenue by increasing the efficiency of their sales people and more efficiently utilizing direct and indirect channel resources.

Neoforma Order Management Solution

Neoforma OMS enables suppliers to connect electronically to their hospital customers to streamline their fulfillment processes, reducing expenses and DSO. Using Web-based functionality, Neoforma OMS allows suppliers to keep their data synchronized with the data of their hospital customers, resolve order discrepancies quickly and facilitate streamlined inventory tracking and replenishment. Manufacturers can use Neoforma OMS to optimize their production and inventory levels by utilizing reports on products sold to hospitals through distributors.

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The key components of Neoforma OMS and the benefits to suppliers include:

Neoforma Contract Management Solution

Neoforma CMS provides a secure, online environment that allows suppliers to communicate contract and product information with hospital customers and to collaborate with hospitals on new contract setup and price changes. Neoforma CMS is currently available for use by supplier customers that have contracts with Novation and hospital customers that are members of VHA and UHC. Using Neoforma CMS, suppliers can reduce contract and marketing administration costs through more effective communication and fewer price discrepancies with their customers.

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The key components of Neoforma CMS and the benefits to suppliers include:

Neoforma Market Intelligence Services

We provide Market Intelligence Services to both manufacturers and distributors. These services are offered to our supplier customers through HPIS. We initiated our Market Intelligence Services capabilities in connection with the acquisition of substantially all of the assets of MedContrax, Inc. and Med-ecorp, Inc. in July 2002. HPIS offers services that help suppliers identify market opportunities, measure market share and evaluate sales force performance and management. We acquire detailed, transactional data from the leading medical-surgical distributor members of the Health Industry Distributors Association, or HIDA, and then aggregate, normalize, index and report on this transactional data for suppliers. Healthcare manufacturers and distributors use this standardized and customized critical market intelligence to develop strategies to optimize their market performance.

Our Market Intelligence Services provide distributors:

Our Market Intelligence Services provide manufacturers:

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Neoforma Contract Management and Administration Services

We provide Contract Management and Administration Services primarily to healthcare manufacturers. These services are offered to our customers through Med-ecom. We initiated our Contract Management and Administration Services capabilities in connection with the acquisition of substantially all of the assets of MedContrax and Med-ecorp in July 2002. Services include the retrieval and preparation of manufacturer and distributor data to allow sales tracing and charge-back processing. Manufacturers use these services to keep track of products sold and to improve the management of the contract pricing and rebate processes with their distributors.

Our Contract Management and Administration Services provide:

Our Customers

Our supply chain management solutions suite is designed to deliver significant cost savings to our hospital, supplier, GPO and supply management company customers, the key stakeholders in the healthcare supply chain.

Hospitals

Our hospital customers include independent hospitals and IDNs. We currently offer to our hospital customers Neoforma OMS, Neoforma CMS, Neoforma DMS and Neoforma MMS.

As of December 31, 2002, we had agreements with 929 VHA, UHC and Healthcare Purchasing Partners International, LLC, or HPPI, a GPO owned by VHA and UHC, member hospitals to participate in Marketplace@Novation, which includes Neoforma OMS and Neoforma CMS. The number of hospital customers that participate in Marketplace@Novation represents an increase of 272 hospitals over the 657 customers we had as of December 31, 2001. Our agreements with these hospitals name us as the hospitals’ e-commerce provider and require each hospital to conduct 50% of its available purchasing through Marketplace@Novation within a specified time period.

We also have hospitals that utilize Neoforma OMS through Canadian Health Marketplace, a subsidiary of Medbuy Corporation, a medical GPO in Canada. Further, we have hospital customers that utilize Neoforma DMS and Neoforma MMS, including hospitals that are not members of VHA or UHC.

Suppliers

Our supplier customers include manufacturers and distributors that sell to hospitals and represent a broad range of product categories, including medical supplies, surgical supplies, pharmaceuticals, diagnostic imaging products, laboratory products, capital equipment, dietary and food products and business products. We currently offer to our supplier customers Neoforma OMS and Neoforma CMS as well as our Market Intelligence Services and Contract Management and Administration Services. Our supplier customers include many of the leading manufacturers and distributors in the United States.

As of December 31, 2002, we had agreements with 287 suppliers to participate in Marketplace@Novation. The number of supplier customers that participate in Marketplace@Novation represents an increase of

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116 suppliers over the 171 customers we had as of December 31, 2001. Our supplier customers that participate in Marketplace@Novation utilize Neoforma OMS and/or Neoforma CMS. We also have supplier customers that utilize our Market Intelligence Services and Contract Management and Administration Services, including customers that do not participate in Marketplace@Novation.

Group Purchasing Organizations and Supply Management Companies

Similar to other members of the healthcare supply chain, GPOs and supply management companies encounter a variety of purchasing and contract management challenges, including off-contract buying, inadequate purchasing history data, delayed reporting and lengthy contracting processes. Through our solutions, our GPO and supply management company partners can gain access to detailed information regarding contracts, buying patterns, purchasing history, transactions and pricing. As a result, these GPOs and supply management companies are able to reduce overhead and product and price discrepancies, enabling them to focus on offering additional services and increasing the quality and/or number of contracts they offer to their members for supplier products.

Our current GPO and supply chain management company customers are Novation and Medbuy. We generate the significant majority of our business in connection with our exclusive relationship with Novation and its owners, VHA and UHC. Novation is a leading supply management company in healthcare and serves the purchasing needs of approximately 2,400 member healthcare organizations of VHA and UHC. Novation manages more than $21 billion in annual purchases for VHA, UHC and HPPI, and the hospitals that utilize Novation and HPPI contracts purchase approximately $40 billion in total supplies annually. Medbuy is one of the largest national medical GPOs in Canada. Medbuy members purchase approximately $162 million (USD) annually under Medbuy contracts. Collectively, these GPOs have agreements with approximately 500 manufacturers and distributors. Although we believe that our relationship with Medbuy will provide important access to the Canadian market, this relationship has developed more slowly than we initially anticipated and to date we have not recognized any revenue in connection with the relationship.

Our Strategic Partners

We enter into alliances with select supply chain, technology and service partners to increase the quality, completeness and adoption of our solutions. We have entered into alliances in the following areas:

Supply Chain Partners

Our supply chain partners are leaders in the healthcare industry and represent healthcare institutions in the United States and Canada. These organizations have partnered with us to help them deliver supply chain management solutions to their members. We believe that alliances with established healthcare supply chain participants accelerate the adoption of our solutions.

We have entered into strategic relationships with Novation and Medbuy, the owners of Marketplace@Novation and Canadian Health Marketplace, respectively. Both are established healthcare industry participants.

Marketplace@Novation is owned by Novation and its owners, VHA and UHC. In 2000, we entered into a ten-year relationship with Novation, VHA and UHC, in which these organizations named us as the exclusive e-commerce solution they offer to VHA and UHC members. VHA is a nationwide network of more than 2,200 community-owned healthcare organizations and their physicians. It comprises approximately 26% of the nation’s community hospitals. UHC is an alliance of 88 academic medical centers and 110 associate members that represent approximately 76% of the academic medical centers in the United States.

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Canadian Health Marketplace is owned by Medbuy, which represents more than 20% of the Canadian healthcare market, measured in active beds for acute, pediatric and long-term care. In 2000, we entered into a ten-year strategic relationship with Medbuy to jointly develop a comprehensive Internet solution for the Canadian healthcare market. The agreement names us as Medbuy’s exclusive provider of an Internet e-commerce solution for the procurement of products and services.

Technology Partners

Our technology partners provide complementary software and/or services that help our customers maximize the value of our solutions through deeper connectivity, enhanced content, and improved integration. We intend to continue to seek new technology partners to increase the quality of our solutions.

Our current technology partners are Global Healthcare Exchange, LLC, or GHX, Lawson Software and PeopleSoft, Inc.

We have entered into an agreement with GHX to provide connectivity to GHX’s supplier customers to help our hospital customers more quickly realize the benefits of e-commerce and minimize the costs of connectivity and information exchange. GHX was formed by five leading manufacturers to the healthcare industry: Abbott Laboratories, Baxter International, Inc., GE Medical Systems, Johnson & Johnson and Medtronic, Inc.

We have entered into agreements with Lawson and PeopleSoft to integrate their materials and enterprise management applications with our solutions, particularly Neoforma OMS. We expect to continue to enter into new relationships with software providers that offer enterprise systems to hospitals and suppliers, with the intent of leveraging deeper integration with these systems to enhance the value of both our partners’ offerings and our solutions for the customers we serve.

Service Partners

Our current service partners offer value-added services that help our customers prepare and implement our supply chain solutions by providing data cleansing and maintenance and implementation services. We intend to continue to seek new service partner relationships to enhance the quality and breadth of our solutions.

We have entered into agreements with AristoMed and Inobis, under which we utilize the services of these organizations in connection with Neoforma DMS.

Marketing, Sales and Service

Our marketing organization leads our efforts to know and understand our customers. Led by product marketing, this group gathers customer, partner and market input, prioritizes our solutions development initiatives and documents customer successes and best practices. Our marketing programs include traditional and Internet-based marketing initiatives, such as seminars via the Internet, to increase awareness of our brand, to attract new hospital and supplier customers to our solutions and to educate our customers on how to optimize their use of our solutions. These programs include a variety of public relations initiatives, such as participation in industry conferences and trade shows and ongoing relationships with healthcare, Internet and technology media and industry analysts. We intend to continue to invest in this area, because we believe a deep understanding of our customers and their business processes is critical to the success of our business.

We sell our solutions to healthcare suppliers and hospitals through a direct field sales force. The sales force consists of hospital specialists who primarily target the hospital market to sell our solution suite and supplier specialists who focus on the sale of our solution suite to manufacturers and distributors. Our field sales force has significant experience in the sale of medical products, medical equipment and supply chain and information

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technology systems to healthcare customers. We plan to continue to grow and develop our sales force as we expand the breadth of our solutions portfolio and our hospital and supplier customer base.

Our relationships with a number of our strategic partners include joint and cross selling and marketing of our solutions. For example, under our strategic relationship with Novation, VHA and UHC, the sales forces of these organizations actively promote our supply chain management solutions to hospitals and suppliers, which significantly aids in our selling and marketing efforts.

We provide extensive customer service and support for our hospital and supplier customers. Once a customer has signed an agreement with us, our customer care team manages the customer experience from implementation through ongoing support. Our services include technical integration and interfaces, data mapping and cleansing, Web-based training and 24x7 call center support. Some of our customers leverage premium service offerings also provided by our services group, including on-site training and monitoring of just-in-time orders. In addition to our centralized service and support resources, we employ a team of field-based account managers to work closely with our hospital and supplier customers at their facilities, where appropriate. We believe a commitment to a consistently superior customer experience, coupled with highly dependable, reliable systems, is and will continue to be an important differentiator for us.

Our sales, marketing and services group consisted of 67 full-time employees as of December 31, 2002.

Architecture, Product Development and Support

We intend to continue to expand and enhance the functionality of our solution suite. We have invested in architecture, product development and support and management resources to enhance the technical infrastructure that supports our increasing volumes of data and customer usage. We intend to continue to augment our existing solutions and release quarterly updates that increase utility and value for healthcare manufacturers, distributors, hospitals and GPOs.

Our architecture group is responsible for the definition of our architecture, development of our infrastructure and execution of our technology strategy. The product development and support group is responsible for translating customer needs into detailed technical specifications, configuring and developing technology solutions and testing and supporting these applications for a high-availability production environment.

Currently, we are developing additional enterprise and supply chain analytics capabilities as a part of our solutions infrastructure. These capabilities will provide demand, contract and procurement collaboration services for our customers and partners in support of committed purchasing and supplier relationships.

For both our current and future product development activities, we plan to continue to leverage commercially available technology from new and existing partners to accelerate product delivery and minimize development risk. For example, our agreements with i2 Technologies, Inc., PeopleSoft, Lawson and BEA Systems, Inc. enhance our ability to achieve our technical strategy while taking advantage of innovations in areas best served by commercial vendors.

As of December 31, 2002, we had approximately 61 full-time employees dedicated to providing our solutions to customers in the architecture, product development and support groups. Depending on the number and complexity of current development projects underway, our staff is augmented using both independent contractors and consulting firms.

Proprietary Rights and Licensing

Our success and ability to compete depend on our ability to develop and maintain the proprietary aspects of our technology. We rely on a combination of copyright, trademark and trade secret laws and contractual

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restrictions to establish and protect the proprietary aspects of our technology. We seek to protect the source code for our software, documentation and other written materials under trade secret and copyright laws. In addition, we seek to avoid disclosure of our intellectual property by restricting access to our source code and by requiring employees and consultants with access to our proprietary information to execute confidentiality agreements with us.

We rely on technology that we license from third parties, including software that is integrated with internally developed software and used in our solutions to perform key functions. Such product licenses may expose us to increased risks, including risks associated with the assimilation of new products, the diversion of resources away from the development of our products, the inability to generate revenue from new products sufficient to offset associated acquisition costs and the maintenance of uniform, effective products. If we are unable to continue to license any of this software on commercially reasonable terms, we will face delays in releases of our services until we can identify, license or develop and integrate equivalent technology into our current technology. These delays, if they occur, could seriously harm our business.

Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary. Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets and to determine the validity and scope of the proprietary rights of others. Any resulting litigation could result in substantial costs and/or diversion of resources and could seriously harm our business. In addition, the laws of some foreign countries do not protect proprietary rights to the same extent as do the laws of the United States.

Our success and ability to compete also depend on our ability to operate without infringing upon the proprietary rights of others. In the event of a successful claim of infringement against us and our failure or inability to license the infringed technology, our business could be seriously harmed.

Competition

The market for supply chain management solutions in healthcare is rapidly evolving and highly competitive. Because of the breadth of our solutions, which include order management, contract management, data management and materials management, we have a diverse set of competitors that compete with portions of our overall offering. To best serve our customers, we sometimes partner with our competitors in one segment of the market while competing with them in others. We believe that as our solution suite grows, we will continue to find areas of opportunity for both partnership and competition with other companies in the market that target a segment of the overall healthcare supply chain. Our ability to manage these relationships to benefit our hospital, supplier and GPO customers is important to our success.

Our current and potential competitors include:

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We believe that companies in our market compete to provide services to hospitals based on:

We believe that companies in our market compete to provide services to suppliers based on:

Competition is likely to intensify as our market matures. As competitive conditions intensify, competitors may:

Our current and potential competitors’ services may achieve greater market acceptance than ours. Our current and potential competitors may have longer operating histories in the healthcare supply chain market, greater name recognition, larger customer bases or greater financial, technical and/or marketing resources than we do. As a result of these factors, our competitors and potential competitors may be able to respond more

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quickly to market forces, undertake more extensive marketing campaigns for their brands and services and make more attractive offers to hospitals and suppliers, potential employees and strategic partners. In addition, new technologies may increase competitive pressures. We cannot be certain that we will be able to expand our hospital and supplier base or retain our current hospital and supplier customers. We may not be able to compete successfully against our competitors, and competition could seriously harm our revenue, operating margins and market share.

Employees

As of December 31, 2002, we had 253 full-time employees, including 67 in sales, marketing and services, 61 in product development, 87 in operations and 38 in general and administrative functions. Our future success will depend, in part, on our ability to attract, train, retain, integrate and motivate highly qualified sales, technical and management personnel. Our employees are not represented by any collective bargaining unit and we have never experienced a work stoppage. We believe our relations with our employees are good. We also use independent contractors and consultants to support our services, primarily in product development and operations.

ITEM 2.    Properties

As of December 31, 2002, our executive, administrative and operating offices were located in approximately 116,000 square feet of office space located in San Jose, California under a sublease scheduled to expire in March 2007. We occupy approximately 84,300 square feet of this facility. In February 2002, we subleased approximately 20,000 square feet to a corporation for a term of one year, after which this corporation will sublease a total of approximately 31,700 square feet for the following two years.

We also lease facilities in three other locations in the United States. The total square footage under these leases is approximately 30,000, and these leases expire on various dates through December 2005.

ITEM 3.    Legal Proceedings

In July 2001, we, along with Merrill Lynch, Pierce, Fenner & Smith, Bear Stearns and FleetBoston Robertson Stephens, certain of the underwriters of our initial public offering, or IPO, or the Underwriter Defendants, as well as our Chairman and Chief Executive Officer, Robert J. Zollars, and our former Chief Financial Officer, Frederick Ruegsegger, or the Individual Defendants, were named as defendants in two securities class action lawsuits filed in federal court in the Southern District of New York (No. 01 CV 6689 and No. 01 CV 6712) on behalf of those who purchased our common stock from January 24, 2000 to December 6, 2000.

These actions have since been consolidated and a consolidated amended complaint was filed in the Southern District of New York on April 24, 2002. The amended complaint alleges that the Underwriter Defendants solicited and received “undisclosed compensation” from investors in exchange for allocations of stock in the IPO, and that some investors in the IPO agreed with the Underwriter Defendants to buy additional shares in the aftermarket to artificially inflate the price of our stock. We and the Individual Defendants are named in the suits pursuant to Section 11 of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, for allegedly failing to disclose in our IPO registration statement and prospectus that the Underwriter Defendants had entered into the arrangements described above. The amended complaint seeks unspecified damages.

Similar suits against approximately 300 other issuers and their underwriters have been consolidated into a single coordinated proceeding in the Southern District of New York, or the IPO Allocation Litigation. On October 9, 2002, the Individual Defendants were dismissed from the action without prejudice.

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On July 1, 2002, the Underwriter Defendants moved to dismiss all of the IPO Allocation Litigation complaints against them, including the action involving us. On July 15, 2002, we and the Individual Defendants, along with the other non-Underwriter Defendants in the coordinated cases, also moved to dismiss the litigation. On February 19, 2003, the court denied those motions on all issues relevant to us. Discovery in the litigation, which had been stayed pending a ruling on the motions to dismiss, has commenced, and we are continuing to defend against the action vigorously. Because of the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of the litigation.

ITEM 4.    Submission of Matters to a Vote of Security Holders

None.

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PART II

Price Range of Common Stock

Our common stock has been traded on The Nasdaq National Market under the symbol NEOF since January 24, 2000, the date of our initial public offering. Prior to that time, there was no public market for our common stock.

The following table sets forth the high and low sales prices for our common stock as reported on The Nasdaq National Market for the periods indicated and reflects our 1-for-10 reverse stock split effected on August 27, 2001.

The market price of our common stock has fluctuated significantly in the past and is likely to fluctuate in the future. In addition, the market prices of securities of other technology companies, particularly Internet-related companies, have been highly volatile. See Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors That May Affect Future Operating Results.

Recent Sales of Unregistered Securities

On December 23, 2002, we completed the acquisition of substantially all of the assets of Revelocity. In connection with this acquisition, we issued 61,063 shares of our common stock to Revelocity at closing in reliance upon an exemption from the registration requirements of the Securities Act of 1933 provided by Section 4(2) of such Act. We did not utilize any underwriters in connection with this acquisition.

Holders of Record

As of March 26, 2003, there were approximately 482 holders of record of our common stock. This number does not include a significant number of stockholders for whom shares were held in a nominee or street name.

Dividends

We have never declared or paid any cash dividends on our capital stock and do not anticipate paying cash dividends in the foreseeable future. We currently intend to retain future earnings, if any, to fund the expansion and growth of our business. Payment of future dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including our financial condition, operating results, current and anticipated cash needs and plans for expansion. In addition, the terms of some of our credit facilities prohibit us from paying cash dividends on our capital stock without the prior consent of the lender.

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SELECTED FINANCIAL DATA

The selected consolidated balance sheet data as of December 31, 2001 and 2002, and the selected consolidated statement of operations data for each of the years ended December 31, 2000, 2001 and 2002, have been derived from our audited financial statements appearing in this Form 10-K. The selected consolidated balance sheet data as of December 31, 1998, 1999 and 2000, and the selected consolidated statement of operations data for the years ended December 31, 1998 and 1999, are derived from our audited financial statements not included in this Form 10-K. When you read this selected consolidated financial data, it is important that you also read the consolidated financial statements and related notes included in this Form 10-K, as well as the section of this report entitled Management’s Discussion and Analysis of Financial Condition and Results of Operations. Historical results are not necessarily indicative of future results.

See Note 2 to the Notes to Consolidated Financial Statements for an explanation of the determination of the number of shares used in computing per share amounts.

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The following discussion of our financial condition and results of operations should always be read in conjunction with our consolidated financial statements and related notes. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed in Factors That May Affect Future Operating Results and elsewhere in this report.

Overview

We are a leading provider of supply chain management solutions for the healthcare industry. Through a combination of technology, information and services, our Web-based solutions are designed to enable effective collaboration among hospitals and suppliers, helping them to reduce operational inefficiencies and lower costs. The healthcare supply chain has a number of characteristics, including its large size, high degree of fragmentation, reliance on disparate technologies, dependence on manual processes and highly complex pricing structures, that have led to major inefficiencies. These inefficiencies lead to slower transactions and increased overhead and costs for suppliers and hospitals. In addition, the participants in the healthcare industry are under significant competitive and cost pressures and are seeking ways to improve efficiencies in their supply chain to improve overall margins. Our Web-based solutions make it easier for the participants in the healthcare supply chain, principally hospitals, suppliers and GPOs, to improve communication, receive comprehensive and accurate information, improve day-to-day operations, accelerate order and contract implementations, enhance strategic planning and gain organization-wide visibility into supply chain activities.

Our operations have grown significantly since inception. We have significantly increased the number of customers, both hospitals and suppliers, that use our solutions, and we have introduced new and enhanced solutions to offer to these customers. Because of the growth in usage and adoption of Marketplace@Novation, we have generated increasing levels of marketplace volume related to Marketplace@Novation. However, as a result of our adoption of Emerging Issues Task Force Abstract No. 01-9, or EITF No. 01-9, our reported marketplace revenue does not reflect the level of fees we receive from related parties for these marketplace services. As a result of the application of EITF No. 01-9, we offset the amortization of capitalized partnership costs resulting from the equity consideration provided to related parties against the fees received from those related parties, thereby resulting in an offset of the related party revenue reported (see Note 3 to the Notes to Consolidated Financial Statements for further discussion of the application of EITF No. 01-9). From inception through fiscal 2001, our operating expenses increased substantially, primarily due to charges related to impairment of assets held for divestiture, write-down of non-marketable investments and impairment of intangibles, as well as increases in amortization of partnership costs relating to our outsourcing and operating agreement, or the Outsourcing Agreement, effective May 24, 2000, with Novation, VHA, UHC and HPPI. In fiscal 2002, however, operating expenses decreased significantly from fiscal 2001 due to improved operational execution and use of our resources, reduced amortization of intangibles, an increase in related party fees that was offset by amortization of partnership costs, a reduced level of charges associated with the write-down of non-marketable investments and also because there were no impairments of intangibles or assets held for divestiture.

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Strategic Relationship

In connection with the Outsourcing Agreement, we issued approximately 4.6 million shares of our common stock to VHA, representing approximately 36% of our then outstanding common stock, and approximately 1.1 million shares of our common stock to UHC, representing approximately 9% of our then outstanding common stock. We also issued warrants to VHA and UHC, allowing VHA and UHC the opportunity to earn up to approximately 3.1 million and approximately 800,000 additional shares of our common stock, respectively, over a four-year period by meeting specified performance targets. These performance targets are based upon the historical purchasing volume of VHA and UHC member healthcare organizations that sign up to use Marketplace@Novation, which is available only to the patrons and members of VHA, UHC and HPPI. The targets increase annually to a level equivalent to total healthcare organizations representing $22 billion of combined purchasing volume at the end of 2004. These issuances of our common stock and warrants to purchase our common stock to VHA and UHC were approved by our stockholders on July 26, 2000.

Under the Outsourcing Agreement, we have agreed to provide specific functionality to Marketplace@Novation. Novation has agreed to act as our exclusive agent to negotiate agreements with suppliers to offer their equipment, products, supplies and services through marketplaces sponsored by Novation or HPPI, including Marketplace@Novation. VHA, UHC, HPPI and Novation have each agreed not to develop or promote any other Internet-based exchange for the acquisition or disposal of products, supplies, equipment or services by healthcare provider organizations.

In October 2000, we and VHA agreed to amend our common stock and warrant agreement to provide for the cancellation of the performance warrant to purchase approximately 3.1 million shares of our common stock. In substitution for the warrant, we issued to VHA approximately 3.1 million shares of our restricted common stock. On January 25, 2001, we and UHC agreed to amend our common stock and warrant agreement to provide for the cancellation of the remaining unexercised portion of the performance warrant to purchase up to 563,957 shares of our common stock. In substitution for the warrant, we issued to UHC 563,957 shares of our restricted common stock. Both VHA’s and UHC’s restricted shares are subject to forfeiture if the performance targets contained in their original warrants are not met.

In January 2001, we amended and restated the Outsourcing Agreement, or the Amended Outsourcing Agreement. Under the terms of the Amended Outsourcing Agreement, Novation agreed to increase the minimum fee level to us under the Outsourcing Agreement, which minimum fee level is based on a percentage of marketplace volume processed through Marketplace@Novation. The fee level is determined based on a tiered fee structure under which the incremental fee per dollar of transaction volume decreases as the marketplace volume processed through Marketplace@Novation increases. This structure results in a higher blended fee percentage at lower volume levels and a lower blended fee percentage at higher volume levels. Under the terms of the Amended Outsourcing Agreement, the payments Novation is required to make are subject to quarterly maximums, above which additional marketplace volume does not result in additional fees from Novation. These maximums were based on a predetermined schedule that provided for increasing dollar amounts through 2002. Beginning in 2003 through the remaining term of the Amended Outsourcing Agreement, these maximums were to be calculated based on Novation’s financial performance, as defined. The Amended Outsourcing Agreement also included modifications to revenue sharing provisions under which we agreed to share specified fees we receive for products and services sold through or related to our current and future marketplaces. We agreed to share with Novation revenue related to transactions through Marketplace@Novation and from other current or future marketplaces as well as revenue related to the distribution or licensing of software and other technology solutions. We are not required to share revenue related to current or future marketplaces sponsored by other GPOs, except for specified types of purchases. For the term of the Amended Outsourcing Agreement, we are not required to share with Novation revenue related to any of the above transactions in any quarter until we have achieved specified minimum transaction fees related to Marketplace@Novation transactions. To date, no revenue sharing has occurred under the Amended Outsourcing Agreement. The Amended Outsourcing Agreement also includes modifications to certain supplier recruitment and supplier implementation provisions.

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In September 2001, we amended the Amended Outsourcing Agreement. Pursuant to this amendment to the Amended Outsourcing Agreement, or Amendment, all parties agreed to expand the definition of marketplace volume to include supply chain data captured for Marketplace@Novation member purchases when the purchase was not facilitated by our connectivity solution. As a result, we are able to provide our customers within Marketplace@Novation with information relating to all purchases made by hospitals from suppliers that have agreed to provide this transaction data as part of their participation in Marketplace@Novation. The Amendment accelerates our ability to capture critical supply chain data and enables us to capture important purchasing information without first requiring full adoption of our connectivity services.

In September 2002, we further amended and restated the Amended Outsourcing Agreement. As stated above, the payments that Novation is required to make are subject to quarterly maximums. These quarterly maximums were based on a predetermined fee schedule through 2002. Among other changes, this revision to the Amended Outsourcing Agreement, or Revised Amended Outsourcing Agreement, reduced the quarterly maximums for the third and fourth quarters of 2002. In the third and fourth quarters of 2002, the fees we received from Novation were limited to these revised maximums. In addition, fees in certain periods prior to the effective date of the Revised Amended Outsourcing Agreement were limited to the maximums in place in those periods. Beginning in 2003, the quarterly maximums for a given year are now based on Novation’s estimated financial performance, as defined, for that year. In the third quarter of each year, the quarterly maximums for the third and fourth quarters of that year are subject to adjustment based on any revisions to Novation’s estimated full year financial performance for that year. Any difference in the calculated quarterly maximums for the year that results from differences between Novation’s estimated and actual financial performance for that year will increase or decrease the quarterly maximums in the subsequent year. For 2003, based on our expectations regarding the levels of marketplace volume that will be processed through Marketplace@Novation, we expect that the fees we earn from Novation will continue to be limited to the quarterly maximums. As a result, based on these expectations for 2003, marketplace volume above a certain level will not result in incremental fees being paid by Novation because of the maximums. In 2001 and 2002, the fees paid to us by Novation totaled $24.6 million and $68.8 million, respectively (see Note 3 to the Notes to Consolidated Financial Statements for further discussion of the application of EITF No. 01-9). We currently expect the rate of growth, if any, and the absolute dollar growth, if any, in the fees we receive from Novation in 2003 to be significantly less than we experienced from 2001 to 2002. We currently expect that the fees paid by Novation for the first six months of 2003, on an annualized basis, will represent a slight increase from the $68.8 million paid by Novation in 2002. Additionally, under the Revised Amended Outsourcing Agreement, the scope of Novation’s rights to view data from any customer that was limited to data from Novation and HPPI sponsored marketplaces only. Also, Novation now only has the exclusive right to recruit suppliers for Novation and HPPI sponsored marketplaces and not for any other current or future marketplaces. From time to time, we and Novation have discussed further amendments to our outsourcing agreement, and any such amendment could affect future fees under this agreement.

In January 2001, we entered into stock purchase agreements with VHA, UHC and i2 Technologies, under which these entities purchased a total of approximately 1.8 million shares of our common stock at a price of $16.90 per share. We raised a total of $30.5 million prior to costs associated with the sale of the shares, which were $1.1 million, including an advisory fee to our investment bankers.

Acquisitions

In July 2002, we acquired substantially all of the assets of MedContrax, Inc. and Med-ecorp, Inc. in a single transaction. The total purchase price was approximately $1.5 million in cash. The purchase price was allocated to the assets acquired and liabilities assumed on the basis of their respective fair values on the acquisition date. In the allocation of the purchase price, $336,000, $360,000, $340,000, $348,000 and $110,000 were allocated to tangible assets, a proprietary database, developed technology, goodwill and acquired in-process research and development, respectively. The proprietary database and developed technology are being amortized over their estimated useful lives of three years and five years, respectively. Goodwill is not being amortized. The $110,000 allocated to acquired in-process research and development represented the estimated fair value, based on risk-adjusted cash flows related to incomplete research and development projects. At the date of the acquisition, the

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development of these projects had not yet reached technological feasibility, and the research and development in progress had no alternative future use. Accordingly, the $110,000 was expensed as of the acquisition date.

In December 2002, we acquired substantially all of the assets of Revelocity, a developer of Web-based software products that provide rapidly deployable supply chain management capabilities for hospitals and healthcare suppliers that help them streamline procurement processes, manage inventories, track project and patient costs, leverage bar-coding efficiencies in internal distribution and share replenishment demand information. Contingent upon the amount of revenue generated by the acquired business through December 31, 2003, we may issue between approximately 177,000 and 879,000 shares of our common stock in total related to this acquisition. These shares will be valued as earned. Accordingly, the amount of goodwill recognized in this acquisition will be adjusted as additional shares are earned. As of December 31, 2002, approximately 61,000 shares, valued at $618,000, have been issued. In addition to these shares and the shares of the common stock that may be issued based upon revenue generated by the acquired business, the purchase price included forgiveness of a $500,000 note receivable from Revelocity and the assumption of liabilities of $235,000. The purchase price was allocated to the assets acquired and liabilities assumed on the basis of their respective fair values on the acquisition date. In the allocation of the purchase price, $34,000, $2.0 million and $1.1 million were allocated to tangible assets, developed technology and goodwill, respectively. The developed technology is being amortized over its estimated useful life of five years. Goodwill is not being amortized.

Other Matters

Since inception, we have incurred significant losses and, as of December 31, 2002, had an accumulated deficit of $626.3 million. In 2003, we expect that our losses will decrease as compared to fiscal 2002 as a result of several factors. These factors primarily relate to anticipated reductions in non-cash charges, such as amortization of partnership costs, amortization of deferred compensation and write-down of notes receivable, as well as anticipated increases in revenue. As a result of the application of EITF No. 01-9, non-cash amortization of partnership costs is being offset against these fees received from related parties up to the lesser of related party revenue or amortization of partnership costs in any period, resulting in a reduction in the amortization classified as an operating expense (see Note 3 to the Notes to Consolidated Financial Statements for further discussion of the application of EITF No. 01-9).

We have a limited operating history on which to base an evaluation of our business and prospects. You must consider our prospects in light of the risks, expenses and difficulties frequently encountered by companies in the early stages of development, particularly companies in new and rapidly evolving markets such as the market for Web-based supply chain management solutions for the healthcare industry. To address these risks, we must, among other things, expand our customer base, enter into new strategic alliances, increase the functionality of our solutions, implement and successfully execute our business and marketing strategy, respond to competitive developments and attract, retain and motivate qualified personnel. We may not be successful in addressing these risks, and our failure to do so could seriously harm our business.

Critical Accounting Policies and Estimates

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:

Revenue Recognition

We derive our revenue from the solutions we provide to our customers. Marketplace revenue consists of transaction based fees and subscription based fees related to solutions delivered through Marketplace@Novation,

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and reflects revenue related to the services provided through Neoforma OMS and Neoforma CMS. Trading partner services revenue consists of software license fees, Market Intelligence Services fees, Contract Management and Administration Services fees, subscription fees, implementation fees and fees from other value added services, and reflects primarily revenue related to Neoforma DMS, Neoforma MMS, Market Intelligence Services and Contract Management and Administration Services. As described below, significant management judgments must be applied in connection with the revenue recognized in any accounting period.

Marketplace Revenue

Transaction Fees.    Transaction fee revenue represents the negotiated percentage of the purchase price, or marketplace volume, of products in transactions between signed participants in Marketplace@Novation that are either (i) processed by hospitals utilizing Neoforma OMS, or (ii) processed through means other than Neoforma OMS, but for which the transaction data is obtained and processed through Neoforma OMS for the benefit of our customers. The gross marketplace value of a transaction is the price of a product as agreed to by the buyer and the supplier, regardless of whether the transaction occurs through Neoforma OMS, or whether we obtain the transaction data, process it and make it available to the customers who utilize the marketplace. We recognize transaction fees on a net basis, because we do not believe that we act as a principal in connection with orders to be shipped or delivered by a supplier to a purchaser because, among other things, we do not:

Subscription Fees.    Subscription fee revenue is generated from suppliers participating in Marketplace@Novation that pay a monthly, quarterly or annual subscription fee that is not based on marketplace volume. For these suppliers, we recognize their subscription fees ratably over the period of the subscription agreement, as that is the period over which the services are performed. We also generate subscription fees through other agreements with suppliers that participate in Marketplace@Novation that pay a periodic subscription fee calculated as a percentage of their periodic product sales under Novation contracts. We recognize these fees in the period that the contracted products are sold.

EITF No. 01-9.    As a result of the application of EITF No. 01-9, we offset the amortization of capitalized partnership costs resulting from the equity consideration provided to related parties against the fees received from those related parties, thereby resulting in a reduction of the related party revenue reported. As a result, as discussed in Note 3 to the Notes to Consolidated Financial Statements, our reported related party marketplace revenue does not reflect the level of fees received from related parties for those marketplace services.

Trading Partner Services Revenue

Software License Fees.    We apply the provisions of Statement of Position No. 97-2, “Software Revenue Recognition,” as amended, to all transactions involving the sale of software products. We recognize revenue from the sale of software licenses when persuasive evidence of an arrangement exists, the product has been delivered, the fee is fixed and determinable and collection of the resulting receivable is reasonably assured. In fiscal 2002, all of our software license revenue related to a single three-year technology license agreement between GHX and us to license portions of our NeoConnect platform. The revenue received under this agreement is being recognized ratably over the three-year term of the agreement. We anticipate that our recent acquisition of Revelocity will result in increasing software license revenue in future periods.

Market Intelligence Services and Contract Management and Administration Services Fees.    Our Market Intelligence Services and Contract Management and Administration Services agreements provide for the delivery

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of specified reports or other data to our customers. We recognize the fees related to these agreements upon delivery of the reports or, for time-based access to reports or data, over the period of access.

Implementation and Services Fees.    We recognize implementation fees and services fees, where they relate to the implementation or use of our solutions, ratably over the term of the underlying agreement. Revenue generated by implementation and services we perform in connection with the implementation of other solutions, applications or deliverables is recognized upon completion of the services.

Estimating the Allowance for Doubtful Accounts Receivable and Notes Receivable

Our management must make estimates of the collectability of both our accounts receivable and our notes receivable. Management analyzes accounts receivable and historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. As of December 31, 2002, our accounts receivable balance was $2.6 million, net of allowance for doubtful accounts of $259,000. Management also analyzes the financial condition of debtors for which we hold notes receivable. If the financial condition of our customers or debtors were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances might be required. As of December 31, 2002, we had a notes receivable balance of $2.0 million, against which no allowance has been provided.

Estimating Litigation Reserves and Other Accrued Liabilities

Management’s estimate of the liability related to our pending litigation is based on claims and other information known to us and management’s assessment of the probability of loss. As additional information becomes available, we reassess and revise our estimates as appropriate. Revisions in our estimates of the potential liability could materially impact our results of operation and financial position in the period such revisions are made. As of December 31, 2002, we had accrued $91,000 for potential liabilities related to our pending litigation.

Valuation of Goodwill and Intangible Assets

We assess the impairment of intangible assets, which currently consist of capitalized partnership costs and acquired database, developed technology and customer lists, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include the following:

If we determine that the carrying value of an intangible asset may not be recoverable based upon the existence of one or more of the above indicators of impairment, we will measure any impairment based on a projected discounted cash flow method using a discount rate determined by our management to be commensurate with the risk inherent in our current business model. Capitalized partnership costs, net of amortization, and acquisition related intangible assets, net of amortization, amounted to $166.5 million and $2.6 million, respectively, as of December 31, 2002.

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In addition, we assess goodwill for impairment at least annually unless an event or change in circumstance indicates that the carrying value may not be recoverable. Factors we consider important which could trigger an impairment review include the following:

If we determine that the carrying value of goodwill may not be recoverable based upon our annual impairment test or the existence of one or more of the above indicators of impairment, we would determine the fair value of our reporting units utilizing discounted cash flows and relative market multiples for comparable businesses. We would then compare the fair value of each reporting unit to its carrying value. If this evaluation indicated that impairment might exist for the reporting unit, we would then compare the carrying amount of goodwill in the reporting unit to the implied fair value of the goodwill to determine the amount of any impairment loss. Goodwill amounted to $1.4 million at December 31, 2002.

Results of Operations

Year Ended December 31, 2001 as Compared to Year Ended December 31, 2002

Revenue

Marketplace Revenue

Related Party.    Related party marketplace revenue consists of fees paid by Novation for marketplace services. For the years ended December 31, 2001 and 2002, related party marketplace revenue consisted solely of fees paid by Novation to us under the minimum fee level provisions of the Outsourcing Agreement, as amended, during those periods. As a result of the adoption of EITF No. 01-9, amortization of partnership costs resulting from the equity consideration issued to VHA and UHC, the owners of Novation, is classified as an offset against related party revenue, as opposed to being classified as an operating expense, up to the lesser of such related party revenue or amortization of partnership costs in any given period. Due to the offset of approximately $24.6 million and $68.8 million of amortization of partnership costs against related party marketplace revenue for the years ended December 31, 2001 and 2002, respectively, there was no net related party marketplace revenue for either period. See Note 3 to the Notes to Consolidated Financial Statements for further discussion of the application of EITF No. 01-9.

Other.    Other marketplace revenue consists of marketplace revenue received from customers that are not related parties, and consists generally of transaction-based fees and subscription fees. Other marketplace revenue was $1.2 million for the year ended December 31, 2002, an increase from $1.1 million for the year ended December 31, 2001. The increase was primarily due to increased revenue generated from suppliers related to their participation in Marketplace@Novation, partially offset by a decrease of $728,000 in revenue as a result of the divestiture of NeoMD in March 2002.

Trading Partner Services Revenue

Trading Partner Services.    Trading partner services revenue consists of revenue generated from the sale of solutions that are complementary to our marketplace services. Currently, trading partner services revenue

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consists of revenue relating to Market Intelligence Services and Contract Management and Administration Services provided to manufacturers and distributors, revenue relating to the sale of software and technology solutions, revenue relating to Neoforma DMS and revenue from other value added services to our customers. The increase in trading partner services revenue from $1.9 million for the year ended December 31, 2001 to $3.0 million for the year ended December 31, 2002 was primarily due to an increase of $641,000 in revenue related to the sale of a license to GHX to utilize portions of our NeoConnect platform and revenue generated from our new Market Intelligence Services and Contract Management and Administration Services. The Market Intelligence Services and Contract Management and Administration Services were introduced in connection with our acquisition of substantially all of the assets of MedContrax and Med-ecorp in July 2002. These increases were partially offset by a decrease of $1.1 million as a result of the divestiture of the Plan, Auction and U.S. Lifeline, Inc., or USL, operations in 2001. Substantially all of the trading partner services revenue for 2001 was related to FDI Information Resources, LLC, or FDI, part of our Plan operations, and our Auction and USL operations, all of which were divested later in 2001.

Sales of Used Equipment.    Sales of used equipment consisted of the gross revenue generated from the sales of used and refurbished medical equipment that we owned as part of our now divested Auction operations.

Operating Expenses

Cost of Equipment Sold.    Cost of equipment sold consisted solely of the costs of owned inventory of used medical equipment held for sale as part of our now divested Auction operations.

Cost of Services.    Cost of services consists primarily of the costs to perform hospital and supplier implementation activities as well as the costs to obtain data for our solutions. These expenditures consist primarily of technology costs, software licenses, salaries and other personnel expenses for our services personnel and fees for independent contractors and consultants. Cost of services decreased from $13.5 million for the year ended December 31, 2001 to $8.5 million for the year ended December 31, 2002. The decrease was due to the fact that in the latter half of 2001 and into 2002, our services group utilized fewer contractors and consultants resulting in a reduction of our costs relating to contractors and consultants by $2.7 million in 2002. Additionally, the number of full time employees in our services group decreased from 49 at the beginning of 2001 to 18 as of December 31, 2001, and subsequently increased to 28 as of December 31, 2002. As a result, payroll related expenses decreased by $1.4 million during 2002 as compared to 2001. We expect our cost of services to increase slightly in future periods as we continue to connect both hospitals and suppliers to our solutions and support and service an increasing number of customers on our solutions.

Operations.    Operations expenses consist primarily of expenditures for the operation and maintenance of our solutions and our technology infrastructure, including customer service. These expenditures consist primarily of technology costs, software licenses, salaries and other personnel expenses for our operations personnel and fees for independent contractors and consultants. Operations expenses increased from $15.7 million for the year ended December 31, 2001 to $20.4 million for the year ended December 31, 2002. The increase was primarily due to a $5.0 million increase in depreciation expense allocated to operations relating to assets which were placed into service during the year ended December 31, 2002. We expect our operations expenses to continue to increase as we expand our operating infrastructure and add content and functionality to our solutions.

Product Development.    Product development expenses consist primarily of personnel expenses, fees to consultants and contractors and technology costs associated with the development and enhancement of our solutions and functionality. Product development expenses increased from $16.9 million for the year ended December 31, 2001 to $17.2 million for the year ended December 31, 2002. The increase was primarily due to increased depreciation of fixed assets allocated to product development. We believe that continued investment in product development is critical to attaining our strategic objectives and, as such, we intend to continue to invest in this area. As a result, we expect product development expenses to increase slightly in future periods.

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Selling and Marketing.    Selling and marketing expenses consist primarily of salaries, commissions, advertising, promotions and related marketing costs. Selling and marketing expenses decreased from $28.6 million for the year ended December 31, 2001 to $12.8 million for the year ended December 31, 2002. The decrease was primarily due to reduced selling and marketing personnel costs, as well as a reduction of $8.8 million in the amortization of deferred compensation associated with selling and marketing personnel. We focused the majority of our resources in 2002 on product development and implementation and integration efforts. As a result, selling and marketing costs were at lower levels in 2002 as compared to 2001, and headcount in our selling and marketing groups decreased from 99 at the beginning of 2001 to 49 as of December 31, 2001 and 39 as of December 31, 2002. We do not expect selling and marketing costs to remain at these reduced levels in future periods. We recognize that selling and marketing efforts are key to establishing ourselves as a leader in our industry and in branding our products and, as a result, we intend to continue to invest further in selling and marketing activities in 2003. We expect selling and marketing costs to increase during 2003.

General and Administrative.    General and administrative expenses consist of expenses for executive and administrative personnel, facilities, professional services and other general corporate activities. General and administrative expenses decreased from $16.1 million for the year ended December 31, 2001 to $14.7 million for the year ended December 31, 2002. The decrease was primarily due to a $2.0 million reduction in amortization of deferred compensation in 2002 as compared to 2001, partially offset by increased costs associated with the prior year audits conducted in 2002 in conjunction with the restatement of our 2000 and 2001 financial statements. We expect general and administrative expenses to increase slightly during 2003 as we make investments, primarily in personnel, to support our growth.

Amortization of Intangibles.    We amortize intangibles on a straight-line basis over a period of three to five years. Amortization of intangibles decreased from $30.1 million for the year ended December 31, 2001 to $90,000 for the year ended December 31, 2002. During the fourth quarter of 2001, we wrote down the intangible assets related to our acquisition of Pharos Technologies, Inc. and substantially all of the intangible assets relating to the acquisition of EquipMD, Inc., operated as NeoMD, as a result of our plans to divest these non-core assets. As a result of our divestiture of these assets, we no longer incur amortization expenses related to Pharos and NeoMD. During 2002, we recorded intangible assets, other than goodwill, of $2.7 million in connection with the acquisition of substantially all of the assets of MedContrax, Med-ecorp and Revelocity. The amortization of intangibles of $90,000 for the year ended December 31, 2002 related to these assets.

Amortization of Partnership Costs.    Amortization of partnership costs represents the amortization of the shares of our common stock issued to certain strategic partners. As of December 31, 2002, capitalized partnership costs represented common stock and restricted common stock issued to VHA and UHC in connection with entering into the Outsourcing Agreement with those entities and with Novation. We initially issued warrants to VHA and UHC, but subsequently canceled these warrants and issued restricted common stock in substitution for the canceled warrants. The value of the common stock issued is being amortized over a five-year estimated useful life. The restricted common stock issued in substitution for the warrants is being valued, and the related valuation is being capitalized, as the shares are earned. The capitalized partnership costs relating to the restricted common stock are being amortized over the term of the agreement with the healthcare organizations that resulted in the shares being earned, generally two to three years. Amortization of partnership costs classified as an operating expense decreased from $50.8 million for the year ended December 31, 2001 to $9.4 million for the year ended December 31, 2002. The decrease in amortization expense is the result of the increase in fees received from related parties as, under EITF No. 01-9, amortization of partnership costs is classified as an offset against related party revenue, as opposed to being classified as an operating expense, up to the lesser of such related party revenue or amortization of partnership costs in any given period. We offset approximately $24.8 million and $69.5 million of amortization of partnership costs against related party revenue for the years ended December 31, 2001 and 2002, respectively. The amortization of partnership costs reported as an operating expense is reflected as an adjustment to reconcile net loss to cash from operating activities in the Consolidated Statements of Cash Flows. Under EITF No. 01-9, we account for the fees being paid by Novation under the terms of the Outsourcing Agreement and subsequent amendments as if they were payments made for the equity

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consideration we provided to VHA and UHC as opposed to payments for services. As a result, the amortization of partnership costs that is offset against related party revenue is reported as a cash flow from financing activities in our Consolidated Statements of Cash Flows.

Including the amortization offset against related party revenue under EITF No. 01-9, amortization of partnership costs increased from approximately $75.7 million to $78.8 million for the years ended December 31, 2001 and 2002, respectively. This increase was due to the fact that there were incremental partnership costs capitalized during fiscal 2001 and 2002. See Note 3 to the Notes to Consolidated Financial Statements for further discussion of the application of EITF No. 01-9. See “Liquidity and Capital Resources” for a further discussion of the Outsourcing Agreement and the related cash and accounting implications.

Amortization of Deferred Compensation.    Deferred compensation represents the aggregate difference, at the date of grant, between the cost to the employee of equity-based compensation and the estimated fair value of the underlying equity instrument. In the case of stock options, deferred compensation is calculated as the difference between the exercise price of the option and the fair value of the underlying stock on the date the option was granted. We amortize deferred compensation from stock option grants on an accelerated basis over the vesting period of the underlying options, generally four years. In connection with the grant of stock options to employees during fiscal 1998, 1999 and 2000, we recorded deferred compensation of $65.2 million. Amortization of deferred compensation is reversed for any amounts recognized on options that do not vest due to employee terminations or employee attrition. During the years ended December 31, 2001 and 2002, we recorded $2.4 million and $244,000, respectively, in reductions of deferred compensation. We recorded amortization of this deferred compensation, net of reversals relating to forfeitures, of $7.7 million and $3.4 million during the years ended December 31, 2001 and 2002, respectively.

In connection with the assumption of certain stock options granted to employees of EquipMD prior to our acquisition of EquipMD in April 2000, we recorded deferred compensation of $23.1 million, representing the difference between the estimated fair value of the common stock for accounting purposes and the option exercise price of these options at the date of announcement of the acquisition. This amount was presented as a reduction of stockholders’ equity and was being amortized over the vesting period of the applicable options using an accelerated method of amortization. During the years ended December 31, 2001 and 2002, we recorded $4.9 million and $1.2 million, respectively, in reductions of this deferred compensation as a result of employee terminations and employee attrition in this business, which we divested in March 2002. We recorded amortization of this deferred compensation, net of reversals relating to forfeitures, related to these options of $8.4 million and $51,000 during the years ended December 31, 2001 and 2002, respectively. We no longer employ any EquipMD employees due to the divestiture of the EquipMD assets. As such, we do not have any remaining deferred compensation related to these employees and we will no longer be incurring amortization expenses relating to this deferred compensation in future periods.

In late 2001 and in the first half of 2002, in connection with the award of restricted stock to certain employees and officers, we recorded deferred compensation of $3.9 million, which represents the fair value of the underlying common stock at the date of grant. The restrictions on the stock lapse on various dates through February 16, 2004, subject to the continuous employment of the employees and officers with Neoforma through those dates. This amount is presented as a reduction of stockholders’ equity and will be amortized ratably over the period from the date of grant through the vesting date using the straight line method of amortization. We recorded amortization of deferred compensation related to these shares of $146,000 and $2.3 million during the years ended December 31, 2001 and 2002, respectively.

The remaining total deferred compensation of $2.6 million at December 31, 2002 is expected to be amortized as follows: $2.5 million during fiscal 2003 and $100,000 during fiscal 2004. The amortization expense relates to options and restricted stock awarded to employees and officers in all operating expense categories. The amount of deferred compensation has been separately allocated to these categories in the consolidated statement of operations.

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Write-Off of Purchased Software.    During the years ended December 31, 2001 and 2002, we recorded charges of $1.5 million and $458,000, respectively, to write off purchased software licenses that we were no longer utilizing.

Write-Off of Acquired In-Process Research and Development.    For the year ended December 31, 2002, we recorded a charge of $110,000 to write off acquired in-process research and development in connection with the MedContrax and Med-ecorp acquisition in July 2002.

Restructuring.    Restructuring costs consist primarily of severance payments resulting from the streamlining and reorganizing of our operations and the divestitures of certain operations. Restructuring costs also include accrued rent relating to idle facilities. There was no such write-off during the year ended December 31, 2001.

In December 2000, we recorded a restructuring charge of $691,000 in connection with our decision to divest the Auction and USL operations. Of the $691,000, $160,000 related to the severance of 24 employees and the remainder related to idle facilities and related costs. The operations were sold in 2001. Of the employees terminated, 16 were from selling and marketing and 8 were from operations. During the year ended December 31, 2001, we recorded an additional restructuring charge of $600,000, of which $539,000 related to a revision of our estimate of the time required to sublease idle facilities of the Auction operations and $61,000 related to severance costs for employees of the Auction operations. There were no additional restructuring charges related to these operations during the year ended December 31, 2002.

In December 2001, we recorded a restructuring charge of $350,000 in connection with our decision to divest the assets of EquipMD. Of the $350,000, $311,000 related to the severance of 7 employees and $39,000 related to idle facilities and related costs. Of the employees terminated, all 7 were from selling and marketing. During the year ended December 31, 2002, we reversed $68,000 of restructuring accruals, because we determined that restructuring costs would be less than originally anticipated. EquipMD was sold in the first quarter of 2002. No restructuring charges related to these operations were recorded during the year ended December 31, 2002.

Impairment of Intangibles.    Impairment of intangibles represents the reduction of the carrying value of our investment in Pharos to our estimate of its fair market value as of December 31, 2001. During fiscal 2001, we were unsuccessful in our efforts to identify a buyer for the technology we acquired as part of our acquisition of Pharos. In addition, in the fourth quarter of 2001, we terminated our use of the technology acquired. Based on these factors, we concluded that the carrying value of the intangible assets was not recoverable as of December 31, 2001. As a result, we recorded an impairment charge of $11.9 million during the fourth quarter of 2001 to write off these intangible assets.

Impairment of Assets Held for Divestiture.    Impairment of assets held for divestiture consists of impairment charges that are the direct result of pending divestitures of certain of our operations and relate to any charges required to adjust the carrying value of the assets to be divested to the net realizable value.

During the fourth quarter of 2001, we obtained board approval to explore strategic alternatives for the divestiture of our NeoMD operations to continue to maintain our focus on delivering core customer solutions and to increase our resource commitment to the acute care business. These operations consisted primarily of the assets of EquipMD. As a result, we recorded a charge of $81.1 million to write down these assets to the estimated net realizable disposal value. There were no such impairment charges recorded in 2002.

Write-Down of Non-Marketable Investments.    Pointshare, Inc. notified us in September 2001 that it was in the process of selling its remaining assets and winding down its operations. Pointshare was a privately held business-to-business administration services company in which we invested $3.0 million in March 2000. Based on our subsequent discussions with Pointshare’s management, we felt that it was highly unlikely that we would recover any material portion of our initial investment. As such, we wrote off our $3.0 million investment in Pointshare during the third quarter of 2001. During fiscal 2002, we received $211,000 from the bankruptcy

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trustee for Pointshare, which is recorded as a credit to write-down of non-marketable investments in our consolidated statement of operations in 2002.

During the fourth quarter of 2001, we wrote off our $5.4 million investment in CarePortal.com, LLC, formerly known as IntraMedix, LLC, a privately held corporation. Due to uncertainties regarding the financial position of CarePortal, the resulting decline in the value of this investment and our belief that the decline in value was other than temporary in nature, we concluded that the investment in CarePortal had no future realizable value as of December 31, 2001.

In December 2002, we received notice from Attainia, Inc. that it had completed a round of financing at an offering price less than the cost per share of our investment in Attainia. As such, we wrote down our investment in Attainia by $662,000 during the year ended December 31, 2002.

Write-Down of Note Receivable.    In September 2002, we entered into a confidential settlement agreement with Med-XS Solutions, Inc. and Med-XS Asset Services, Inc., or Med-XS, to settle the suit we had filed against Med-XS, and the subsequent counterclaim filed by Med-XS against us, in connection with their failure to make payments to us under a $2.4 million promissory note executed as partial payment for their purchase of our now divested subsidiary, General Asset Recovery, LLC, or GAR, part of our Auction operations. We wrote down the note receivable by $1.1 million in the third quarter of 2002 to reflect the collectible value of the note based on the terms of the settlement agreement.

Net (Gain)/Loss on Divested Businesses.    Net gain on divested businesses during the year ended December 31, 2001 consisted of the net gain realized as a result of the divestitures of the USL, FDI and GAR operations during that period. The gain on divested businesses is calculated by reducing the consideration paid to us for the divested operations by the net book value of all assets and liabilities transferred with the divested operations. The divestiture of USL resulted in a gain of $307,000 on the sale of the net assets, the divestiture of FDI resulted in a loss of $1.1 million on the sale of the net assets and the divestiture of the GAR operations resulted in a gain of $872,000 on the sale of the net assets. The resulting net gain on divested businesses during the year ended December 31, 2001 was $55,000. During the year ended December 31, 2002, the loss on divested businesses consisted of a loss of $59,000 incurred as a result of the sale of the NeoMD operations.

Other Income (Expense).    Other income (expense) consists of interest and other income and expense. Interest income for the year ended December 31, 2002 was $516,000 compared to $769,000 for the year ended December 31, 2001. Interest expense increased from $685,000 for the year ended December 31, 2001 to $1.7 million for the year ended December 31, 2002. The increase in interest expense was primarily due to a reduction in capitalized interest from $1.1 million during the year ended December 31, 2001 to $674,000 during the year ended December 31, 2002. Total interest incurred during the years ended December 31, 2001 and 2002, before capitalized interest, was $1.8 million and $2.4 million, respectively. Capitalized interest related to purchased software being configured for use in our solutions which was not yet placed in service. The increase in our total interest costs was due to an increase in average borrowings outstanding during 2002 compared to 2001 under our line of credit with VHA. Other income was $271,000 for the year ended December 31, 2001 and other expense was $60,000 for the year ended December 31, 2002. Other income during the year ended December 31, 2001 was primarily the result of the forgiveness of $500,000 of debt under our note payable to the original owner of the GAR business.

Income Taxes.    As of December 31, 2002, we had federal and state net operating loss carryforwards of $362.0 million and $261.0 million, respectively, which will be available to reduce future taxable income. These net operating loss carryforwards expire on various dates through 2022. A valuation allowance has been recorded for the entire deferred tax asset as a result of uncertainties regarding the realization of the asset due to our lack of earnings history. Federal and state tax laws impose significant restrictions on the amount of the net operating loss carryforwards that we may utilize in a given year.

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Year Ended December 31, 2000 as Compared to Year Ended December 31, 2001

Revenue

Marketplace Revenue

Related Party.    Related party marketplace revenue consists of fees paid by Novation for marketplace services. For the years ended December 31, 2000 and 2001, related party marketplace revenue consisted solely of fees paid by Novation to us under the minimum fee level provisions of the Outsourcing Agreement, as amended, during those periods. As a result of the adoption of EITF No. 01-9, amortization of partnership costs resulting from the equity consideration issued to VHA and UHC, the owners of Novation, is classified as an offset against related party revenue, as opposed to being classified as an operating expense, up to the lesser of such related party revenue or amortization of partnership costs in any given period. Due to the offset of approximately $81,000 and $24.6 million of amortization of partnership costs against related party marketplace revenue for the years ended December 31, 2000 and 2001, respectively, there was no net related party marketplace revenue for either period. See Note 3 to the Notes to Consolidated Financial Statements for further discussion of the application of EITF No. 01-9.

Other.    Other marketplace revenue consists of marketplace revenue received from customers that are not related parties and generally consists of transaction-based fees and subscription fees. Other marketplace revenue was $1.1 million for the year ended December 31, 2001, a decrease from $1.3 million for the year ended December 31, 2000. The decrease was primarily due to the elimination of our Shop services in 2001, partially offset by an increase in revenue from our NeoMD marketplace and from the initiation of supplier paid fees related to Marketplace@Novation.

Trading Partner Services Revenue

Trading Partner Services.    Trading partner services revenue consists of revenue generated from the sale of solutions that are complementary to our marketplace services. Historically, trading partner services revenue consisted of the following: setup fees to digitize product information; subscription and transaction based fees for management and disposition of used medical equipment through our now divested asset recovery service, known as Auction; sponsorship fees paid by suppliers to feature their brands and products on our now divested Plan service; license fees from the sale of software tools and related technical information; and services revenue for implementation and consulting services paid by users of our solutions. The decrease in trading partner services revenue from $4.5 million for the year ended December 31, 2000 to $1.6 million for the year ended December 31, 2001 was primarily due to reduced revenue from the USL business as a result of the sale of USL in April 2001; reduced revenue from our other Plan operations as a result of the sale of those operations to Attainia in April 2001; and reduced transaction fee revenue from our asset recovery services as a result of the sale of the Auction operations in September 2001. These reductions were partially offset by revenue relating to the sale of a license to GHX to utilize portions of our NeoConnect platform.

Sales of Used Equipment.    Sales of used equipment consisted of the gross revenue generated from the sales of used and refurbished medical equipment that we owned as part of our Auction service. We had total sales of used equipment of $250,000 for the year ended December 31, 2001, a decrease from $4.6 million for the year ended December 31, 2000. The decrease was due to our reduced focus on the Auction operations and its sale in September 2001.

Operating Expenses

Cost of Equipment Sold.    Cost of equipment sold consists solely of the costs of owned inventory of used medical equipment held for sale as part of our Auction operations. Cost of equipment sold decreased from $3.5 million for the year ended December 31, 2000 to $216,000 for the year ended December 31, 2001.

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Cost of Services.    Cost of services consists primarily of the costs to perform hospital and supplier implementation activities as well as the costs to obtain data for our solutions. These expenditures consist primarily of technology costs, software licenses, salaries and other personnel expenses for our services personnel and fees for independent contractors and consultants. Cost of services increased from $7.7 million for the year ended December 31, 2000 to $13.5 million for the year ended December 31, 2001. The increase was due to the fact that the services group was created early in fiscal 2000, resulting in minimal costs for a significant portion of that period as the group was still building its operations. Additionally, in 2001, the services organization significantly expanded both the quantity and the scope of the implementations and services it provides to our customers, resulting in further increased costs in 2001.

Operations.    Operations expenses consist primarily of expenditures for the operation and maintenance of our solutions and our technology infrastructure, including customer service. These expenditures consist primarily of technology costs, software licenses, salaries and other personnel expenses for our operations personnel and fees for independent contractors and consultants. Operations expenses increased from $14.0 million for the year ended December 31, 2000 to $15.7 million for the year ended December 31, 2001. The increase was primarily due to an increase in operations personnel related costs partially offset by a decrease of $1.4 million in amortization of deferred compensation.

Product Development.    Product development expenses consist primarily of personnel expenses, fees to consultants and contractors and technology costs associated with the development and enhancement of our solutions and functionality. Product development expenses decreased from $24.8 million for the year ended December 31, 2000 to $16.9 million for the year ended December 31, 2001. The decrease was primarily due to reduced costs relating to product development personnel, specifically with respect to contractors and consultants, and a decrease of $2.0 million in amortization of deferred compensation.

Selling and Marketing.    Selling and marketing expenses consist primarily of salaries, commissions, advertising, promotions and related marketing costs. Selling and marketing expenses decreased from $51.5 million for the year ended December 31, 2000 to $28.6 million for the year ended December 31, 2001. The decrease was primarily due to reduced selling and marketing personnel costs and a resulting reduction in expenses related to travel and attendance at trade shows and a $3.9 million decrease in amortization of deferred compensation allocated to selling and marketing. During 2001, we focused more of our available resources on marketplace implementation and integration efforts and product development. As a result, selling and marketing costs were at significantly lower levels in 2001 as compared with 2000. Selling and marketing headcount at December 31, 2000 and 2001 was 99 and 48, respectively.

General and Administrative.    General and administrative expenses consist of expenses for executive and administrative personnel, facilities, professional services and other general corporate activities. General and administrative expenses decreased from $22.9 million for the year ended December 31, 2000 to $16.1 million for the year ended December 31, 2001. The decrease was primarily due to a reduction of $7.1 million in amortization of deferred compensation associated with administrative personnel, including finance, accounting and administrative personnel. Also, in 2000 we incurred costs resulting from preparations for our initial public offering, which occurred in January 2000.

Amortization of Intangibles.    We have historically amortized intangible assets on a straight-line basis over a period of three to seven years. Amortization of intangibles increased from $26.6 million for the year ended December 31, 2000 to $30.1 million for the year ended December 31, 2001. The increase was primarily the result of a full year of amortization on the EquipMD intangible assets in fiscal 2001, as opposed to only eight months of amortization taken in fiscal 2000 as a result of the acquisition closing at the end of April 2000. This was offset by the fact that we incurred reduced amortization from the USL and FDI intangible assets as a result of the divestitures of those operations during the second quarter of 2001. Additionally, we incurred significantly reduced amortization relating to GAR and National Content Liquidators, Inc., or NCL, intangible assets as a result of the write-down we took on the Auction operations in the fourth quarter of 2000 in preparation for the sale of the Auction operations and because we amortized the reduced intangible assets for only a portion of the year as a result of the closing of the sale of the Auction operations during the third quarter of 2001. During the fourth quarter of 2001, we wrote down the Pharos intangible assets and effectively all of the intangible assets relating to the acquisition of EquipMD as a result of our discontinuation of the use of the Pharos technology and our plans to divest the EquipMD business.

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Amortization of Partnership Costs.    Amortization of partnership costs represents the amortization of the shares of our common stock issued to certain strategic partners. As of December 31, 2001, capitalized partnership costs represented common stock, warrants and restricted stock issued to VHA and UHC in connection with entering into the Outsourcing Agreement with those entities and with Novation. We initially issued warrants to VHA and UHC, but subsequently canceled these warrants and issued them restricted common stock in substitution for the canceled warrants. The value of the common stock issued is being amortized over a five-year estimated useful life. The restricted common stock issued in substitution for the warrants is being valued, and the related valuation is being capitalized, as the shares are earned. The capitalized partnership costs relating to the restricted common stock are being amortized over the term of the agreement with the healthcare organizations that resulted in the shares being earned, generally two to three years. Amortization of partnership costs classified as an operating expense increased from $29.4 million for the year ended December 31, 2001 to $50.8 million for the year ended December 31, 2002. The increase from fiscal 2000 was primarily the result of the amortization of a full year of partnership costs compared to approximately five months for the year ended December 31, 2000, as the Outsourcing Agreement did not become effective until late July 2000. In addition, we capitalized incremental partnership costs during fiscal 2001 as VHA and UHC earned a portion of the restricted stock.

The increase in amortization expense was partially offset by the increase in fees received from related parties as, under EITF No. 01-9, amortization of partnership costs is classified as an offset against related party revenue, as opposed to being classified as an operating expense, up to the lesser of such related party revenue or amortization of partnership costs in any given period. We offset approximately $81,000 and $24.8 million of amortization of partnership costs against related party revenue for the years ended December 31, 2000 and 2001, respectively. The amortization of partnership costs reported as an operating expense is reflected as an adjustment to reconcile net loss to cash from operating activities in the Consolidated Statements of Cash Flows. Under EITF No. 01-9, we account for the fees being paid by Novation under the terms of the Outsourcing Agreement and subsequent amendments as if they were payments made for the equity consideration we provided to VHA and UHC as opposed to payments for services. As a result, the amortization of partnership costs that is offset against related party revenue is reported as a cash flow from financing activities in our Consolidated Statements of Cash Flows. Including the amortization offset against related party revenue under EITF No. 01-9, amortization of partnership costs increased from approximately $29.5 million to $75.7 million for the years ended December 31, 2000 and 2001, respectively.

Costs of Strategic Partnership.    Costs of strategic partnership represents the investment banking, legal and accounting fees incurred by us in connection with entering into the Outsourcing Agreement with Novation, VHA and UHC in 2000. Such costs amounted to $9.3 million in fiscal 2000.

Amortization of Deferred Compensation.    Deferred compensation represents the aggregate difference, at the date of grant, between the cost to the employee of equity based compensation and the estimated fair value for accounting purposes of the underlying equity instrument. In the case of stock options, deferred compensation is calculated as the difference between the exercise price of the option and the fair value of the underlying stock on the date the option was granted. We amortize deferred compensation from stock option grants on an accelerated basis over the vesting period of the underlying options, generally four years. In connection with the grant of stock options to employees during fiscal 1998, 1999 and 2000, we recorded deferred compensation of $65.2 million. Amortization of deferred compensation is reversed for any amounts recognized on options that do not vest due to employee terminations and employee attrition. During the years ended December 31, 2000 and 2001, we recorded $8.4 million and $2.4 million, respectively, in reductions of deferred compensation. We recorded amortization of this deferred compensation, net of reversals relating to forfeitures, of $21.5 million and $7.7 million during the years ended December 31, 2000 and 2001, respectively.

In connection with the assumption of certain stock options granted to employees of EquipMD prior to our acquisition of EquipMD, we recorded deferred compensation of $23.1 million, representing the difference between the estimated fair value of the common stock for accounting purposes and the option exercise price of

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these options at the date of announcement of the acquisition. This amount is presented as a reduction of stockholders’ equity and is being amortized over the vesting period of the applicable options using an accelerated method of amortization. During the years ended December 31, 2000 and 2001, we recorded $0 and $4.9 million, respectively, in reductions of this deferred compensation as a result of employee terminations and employee attrition. We recorded amortization, net of reversals relating to forfeitures, of $9.0 million and $8.4 million during the years ended December 31, 2000 and 2001, respectively.

In December 2001, in connection with the award of restricted stock to certain employees and officers, we recorded deferred compensation of $3.6 million, representing the fair value of the underlying common stock at the date of grant. The restrictions on the stock lapse on June 30, 2003 for the officers and on February 16, 2004 for the other employees, subject to continuous employment with Neoforma through those dates. This amount is presented as a reduction of stockholders’ equity and will be amortized ratably over the period from the date of grant through the vesting date using the straight line method of amortization. We recorded amortization of deferred compensation related to these shares of $146,000 during the year ended December 31, 2001.

Write-Off of Purchased Software.    During the years ended December 31, 2000 and 2001, we recorded charges of $3.9 million and $1.5 million, respectively, to write off purchased software licenses that we were no longer utilizing.

Write-Off of Acquired In-Process Research and Development.    During the year ended December 31, 2000, we recorded charges of $1.9 million and $15.0 million to write off acquired in-process research and development in connection with the Pharos acquisition and the EquipMD acquisition, respectively. There were no such write-offs during the year ended December 31, 2001.

Abandoned Acquisition Costs.    Abandoned acquisition costs in 2000 consisted primarily of legal, accounting, investment banking and other costs incurred as a result of the termination of the Agreement and Plan of Merger, dated March 30, 2000, between Neoforma and Eclipsys Corporation and the Agreement and Plan of Merger, dated March 30, 2000, between Neoforma and Healthvision, Inc. Abandoned acquisition costs were $2.7 million for the year ended December 31, 2000. There were no such costs during the year ended December 31, 2001.

Restructuring.    Restructuring costs consist primarily of severance payments resulting from the streamlining and reorganizing of our operations and the divestitures of certain operations. Restructuring costs also include accrued rent relating to idle facilities.

During the first half of 2000, we recorded a restructuring charge of $2.1 million. This charge was the result of a reorganization and streamlining of operations undertaken to focus on two key global markets, IDNs and hospitals, and physician practices. The entire restructuring charge was related to the reduction in workforce of 80 individuals. All 80 employees were terminated under this plan during 2000, of which 35 were in selling and marketing, 4 were in general administration, 16 were in product development, 20 were in operations and 5 were in service delivery. In December 2000, we recorded a restructuring charge of $691,000 in connection with our decision to divest our Auction and USL operations. Of the $691,000, $160,000 related to severance of 24 employees and the remainder related to idle facilities and related costs.

In June 2001, we recorded an additional restructuring charge of $600,000, of which $539,000 related to a revision of our estimate of the time required to sublease idle facilities of the Auction operations and $61,000 related to severance costs for employees of the Auction operations.

In December 2001, we recorded a restructuring charge of $350,000 in connection with the decision to divest the EquipMD subsidiary. Of the $350,000, $311,000 related to anticipated severance of 7 employees and $39,000 related to idle facilities and related costs.

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Impairment of Intangibles.    Impairment of intangibles represents the reduction of the carrying value of our investment in Pharos to our current estimate of its fair market value as of December 31, 2001. During fiscal 2001, we were unsuccessful in our efforts to identify a buyer for the technology we acquired as part of our acquisition of Pharos. In addition, in the fourth quarter of 2001, we terminated our use of the technology acquired. Based on these factors, we concluded that the carrying value of the intangible assets was not recoverable as of December 31, 2001. As a result, we recorded an impairment charge of $11.9 million during the fourth quarter of 2001 to write off these intangible assets.

Impairment of Assets Held for Divestiture.    Impairment of assets held for divestiture consists of impairment charges that are the direct result of pending divestitures of certain of our operations and relate to any charges required to adjust the carrying value of the assets to be divested to the net realizable value.

In the fourth quarter of 2000, our management, working with our board of directors, finalized a plan to refocus our operations on building and managing private Internet marketplaces for our trading partners. As part of this process, we announced our intention to divest two of our operations that were not aligned with that strategy. The operations to be divested were our Auction operations, which consisted primarily of GAR and the assets acquired from NCL, as well as our USL subsidiary. In accordance with this plan, we wrote down the assets of both operations to the estimated net realizable disposal value based on the activity through December 31, 2000. The impairment of assets held for divestiture for the year ended December 31, 2000 consisted of a $13.3 million reduction in the net realizable disposal value of these assets.

During the fourth quarter of 2001, to continue to maintain our focus on delivering core customer solutions and to increase our resource commitment to the acute care business, we obtained board approval to begin exploring strategic alternatives for the divestiture of our NeoMD operations. These operations consisted primarily of the assets of EquipMD. As a result, we recorded a charge of $81.1 million to write down these assets to the estimated net realizable disposal value.

Write-Down of Non-Marketable Investments.    Pointshare notified us in September 2001 that it was in the process of selling its remaining assets and winding down its operations. Pointshare was a privately held business-to-business administration services company in which we invested $3.0 million in March 2000. Based on our subsequent discussions with Pointshare’s management, we felt that it was highly unlikely that we would recover any material portion of our initial investment. As such, we wrote off our $3.0 million investment in Pointshare during the third quarter of 2001.

During the fourth quarter of 2001, we wrote off our $5.4 million investment in CarePortal. Due to uncertainties regarding the financial position of CarePortal, the resulting decline in the value of this investment and our belief that the decline in value was other than temporary in nature, we concluded that our investment in CarePortal had no future realizable value as of December 31, 2001.

Net (Gain)/Loss on Divested Businesses.    Net (gain)/loss on divested businesses consists of the net gain realized as a result of the divestitures of the USL, FDI and Auction operations during the year ended December 31, 2001. The gain or loss on divested businesses is calculated by reducing the consideration paid to us for the divested operations by the net book value of all assets and liabilities transferred with the divested operations. The divestiture of USL resulted in a gain of $307,000, the divestiture of FDI resulted in a loss of $1.1 million and the divestiture of the Auction operations resulted in a gain of $872,000. The resulting net gain on divested businesses during the year ended December 31, 2001 was $55,000.

Other Income (Expense).    Other income (expense) consists of interest and other income and expense. Interest income decreased from $4.7 million for the year ended December 31, 2000 to $769,000 for the year ended December 31, 2001. The decrease in interest income was due to the decrease in our average net cash and cash equivalents balance as a result of our utilization of cash to fund our operations in fiscal 2000 and 2001. Interest expense decreased from $1.4 million for the year ended December 31, 2000 to $685,000 for the year

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ended December 31, 2001. The decrease in interest expense was due primarily to the fact that we capitalized interest of $1.1 million in 2001 related to purchased software being configured for use in our solutions which was not yet placed in service. Total interest incurred in 2001 before capitalized interest was $1.8 million. Other income increased from $29,000 for the year ended December 31, 2000 to $271,000 for the year ended December 31, 2001. This increase in other income was primarily the result of the forgiveness of $500,000 of debt under our note payable to the original owner of the GAR business in 2001.

Income Taxes.    Due to losses since inception, we have not recorded any income tax provision for 2000 or 2001.

Liquidity and Capital Resources

In January 2000, we completed our IPO and issued 805,000 shares of our common stock at an initial public offering price of $130.00 per share. Net cash proceeds to us from the IPO were approximately $95.3 million. From our inception until our IPO, we financed our operations primarily through private sales of preferred stock through which we raised net proceeds of $88.5 million.

In January 2001, we completed a $30.5 million private round of financing in which we sold 1,804,738 shares of our common stock at $16.90 per share to three strategic investors, VHA, UHC and i2 Technologies.

In April 2001, we entered into a $25.0 million revolving credit agreement with VHA. Under this credit agreement, as amended in February 2002 and December 2002, we are able to borrow funds until December 31, 2004, up to an amount based on a specified formula dependent on the gross volume of transactions through Marketplace@Novation. Funds that we borrow under this credit agreement bear interest at the prime rate plus 2.75% per year and are secured by substantially all of our assets. All amounts outstanding under this line of credit, both principal and interest, are due and payable on December 31, 2004, if not repaid sooner. In the event that we (i) sell any of our stock as part of an equity financing, (ii) obtain funding in connection with a debt financing or other lending transaction that is either unsecured or subordinate to the lien of VHA under the credit agreement or (iii) enter into a debt financing or other lending transaction secured by assets we owned as of the date we entered into the credit agreement, then the maximum of $25.0 million we could potentially borrow under the credit agreement will be reduced by an amount equal to the cash proceeds we receive from any of these transactions. As of December 31, 2002, we had outstanding borrowings of $14.0 million under the line of credit and $11.0 million remaining available under the terms of the agreement.

In May 1999, Comdisco provided us with a $2.0 million subordinated loan to provide working capital. We agreed to pay Comdisco principal and interest at a rate of 12.5% per annum in 36 equal monthly installments, commencing in July 1999. This loan is secured by all of our assets. This note was paid off in full during 2002.

In July 1999, Comdisco provided us with a $2.5 million loan and lease facility to finance computer hardware and software equipment. Amounts borrowed to purchase hardware bear interest at 9% per annum and are payable in 48 monthly installments consisting of interest only payments for the first nine months and principal and interest payments for the remaining 39 months, with a balloon payment of the remaining principal payable at maturity. Amounts borrowed to purchase software bear interest at 8% per annum and are payable in 30 monthly installments consisting of interest only payments for the first four months and principal and interest payments for the remaining 26 months, with a balloon payment of the remaining principal payable at maturity. The computer equipment purchased with the proceeds of the loans secures this facility. As of December 31, 2002, we had outstanding borrowings of $352,000 under this facility.

In August 1999, in connection with the GAR acquisition, we issued a promissory note in the principal amount of $7.8 million payable monthly over five years bearing interest at a rate of 7% per year. In July 2001, we modified the terms of this promissory note in exchange for the release of the security interest the note holder had in the assets of the GAR operations. In accordance with the revised terms of the note, we repaid $750,000 of

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the balance of the note in August 2001 and an additional $500,000 was forgiven by the note holder. The remaining balance due on the promissory note is to be paid in equal monthly installments, with interest accruing at 7% per year, over the subsequent 30 months. As of December 31, 2002, the outstanding balance on the note was $1.2 million.

As part of the acquisition of EquipMD, we assumed a note payable in the amount of $1.8 million, which is related to EquipMD’s purchase of Central Point Services LLC. The note bore interest at a rate of 7.5% per year and was payable in eight quarterly installments, after which the unpaid principal balance and accrued interest became due and payable in January 2002. This note was paid off in full during 2002.

In July 2000, as compensation for the advisory services rendered in connection with the terminated Healthvision and Eclipsys mergers, our Outsourcing Agreement and our acquisition of EquipMD, we entered into a promissory note with our investment banker for these transactions in the amount of $6.0 million. The note was payable in quarterly payments of $1.5 million, commencing on January 1, 2001. In April 2001, we amended the terms of the note such that the remaining balance was payable in two installments: the first $2.0 million payable in May 2001 and the remaining $2.5 million payable in April 2002. At December 31, 2002, the remaining balance on the note was $2.5 million. We intend to pay the remaining balance in the first half of 2003.

In July 2000, as part of the acquisition of certain assets of NCL, we issued a promissory note to each of the four principals of NCL in the amount of $62,500 each. These notes were payable in 24 equal monthly installments, with the first payment due on August 15, 2000. As of December 31, 2002, all amounts due against this commitment had been paid.

As of December 31, 2002, we had outstanding bank, other borrowings and notes payable of $18.2 million, and we had $23.3 million of cash and cash equivalents and $1.0 million of restricted cash.

Future maturities of principal on the loans and notes payable as of December 31, 2002 are as follows (in thousands):

In connection with our operating lease on our corporate headquarters in San Jose, California, we established a letter of credit in the amount of $2.0 million payable to our landlord to secure our obligations under the lease. Under the terms of the lease, which allow for reductions in the amount of the letter of credit over time as we fulfill our obligations under the lease, we have reduced the letter of credit to $1.0 million at December 31, 2002. The letter of credit is secured by balances in our investment accounts and is classified as restricted cash in our consolidated balance sheets.

In May 2000, as part of the termination of the proposed mergers with Eclipsys and Healthvision, we entered into a strategic commercial relationship with Eclipsys and Healthvision that includes a co-marketing and distribution arrangement between us and Healthvision. Under the terms of the arrangement, we purchased a license to utilize Eclipsys’ eWebIT enterprise application technology to enhance the integration of legacy applications with our e-commerce platform technology. Additionally, we committed to purchase $4.3 million of consulting services from their professional services organizations over a four-year period. We are currently in dispute with Healthvision and Eclipsys over this arrangement regarding our obligation to utilize their services. As of December 31, 2002, we had utilized $1.6 million of these professional services.

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In December 2000, we entered into a three-year software license agreement and a series of related agreements regarding maintenance, consulting and services with i2 Technologies under which we agreed to collaborate with i2 Technologies on product development, marketing, sales and service activities. In connection with the license agreement, we paid i2 Technologies a substantial upfront fee to license certain software for use in our solutions. Pursuant to these agreements, we agreed to share specified revenue with i2 Technologies related to specified services and applications commencing December 2000, and on other marketplace related revenue commencing in fiscal 2002 or upon implementation of their marketplace platform, whichever is later. Additionally, we are entitled to receive a revenue share from i2 Technologies under the agreements for specified products and services sold in the healthcare vertical market.

In October 2000, we entered into a sublease agreement whereby we were subleasing to a corporation approximately 27% of the space in the building which serves as our headquarters. In 2000 and 2001, we received $324,000 and $1.1 million, respectively, in sublease payments from the corporation. In late 2001, this corporation notified us that due to financial difficulties, it would be unable to comply with the terms of its sublease commitment in 2002 and 2003. As a result, we entered into a settlement agreement with the corporation on January 2, 2002 whereby we retained the security deposits and other amounts securing the sublease obligation, received payment of an additional $325,000 from the corporation as a settlement and retained effectively all of the furniture and leasehold improvements present in the subleased space. In addition, the corporation agreed to vacate the facility and release any claim on it as of that date. The funds received from the corporation have been booked as a deposit and will be amortized over the term of the terminated sublease agreement as a reduction in our rent expense each period.

We have future minimum obligations related to non-cancelable operating leases as follows (in thousands):

As discussed in Note 3 to the Notes to Consolidated Financial Statements, we adopted EITF No. 01-9 effective January 1, 2002. As a result of the application of EITF No. 01-9, we have classified certain costs associated with equity consideration provided to VHA and UHC in connection with the Outsourcing Agreement as an offset against related party revenue from VHA, UHC and Novation. This treatment results in the offset of non-cash amortization of partnership costs against related party revenue up to the lesser of such related party revenue or amortization of partnership costs in any period. Any amortization of partnership costs in excess of related party revenue in any period is classified as an operating expense and is reflected as an adjustment to reconcile net loss to cash from operating activities on the Consolidated Statements of Cash Flows. Under EITF No. 01-9, we account for the fees being paid by Novation under the terms of the Outsourcing Agreement as if they were payments made for the equity consideration we provided to VHA and UHC as opposed to payments for services. As a result, the amortization of partnership costs that is offset against related party revenue is reported as a cash flow from financing activities in our Consolidated Statements of Cash Flows.

Net cash used in operating activities was $48.5 million, $70.2 million and $68.2 million for the years ended December 31, 2002, 2001 and 2000, respectively. Net cash used in operating activities for the year ended December 31, 2002 primarily related to cash utilized to fund net losses, which were partially offset by an increase in accrued liabilities and accrued payroll and a decrease in restricted cash. Net cash used by operating activities for the year ended December 31, 2001 primarily related to cash utilized to fund net losses as well as a

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decrease in accounts payable, which were partially offset by increases in accrued liabilities and accrued payroll and deferred revenue and decreases in restricted cash and prepaid expenses and other current assets. Net cash used in operating activities for the year ended December 31, 2000 primarily related to cash utilized to fund net losses and increases in restricted cash, accounts receivable and prepaid expenses and other current assets, which were partially offset by increases in accounts payable and accrued liabilities and accrued payroll and a decrease in other assets.

Net cash used in investing activities was $5.1 million, $3.6 million and $27.1 million for the years ended December 31, 2002, 2001 and 2000, respectively. Net cash used in investing activities for the year ended December 31, 2002 primarily related to the purchase of equipment to operate our solutions, net purchases of marketable investments and cash paid for the acquisitions of MedContrax, Med-ecorp and Revelocity. Net cash used in investing activities for the year ended December 31, 2001 primarily related to the purchase of equipment to operate our solutions, which was partially offset by net sales of marketable investments. Net cash used in investing activities for the year ended December 31, 2000 related to the purchase of equipment to operate our solutions, purchase of non-marketable investments and cash paid in connection with the acquisitions of Pharos, USL, EquipMD and NCL, which were partially offset by net sales of marketable investments.

Net cash provided by financing activities was $62.8 million, $65.3 million and $92.5 million for the years ended December 31, 2002, 2001 and 2000, respectively. Net cash provided by financing activities for the year ended December 31, 2002 primarily related to fees received from Novation under the minimum fee level provisions of the Outsourcing Agreement and collections of notes receivable from stockholders, partially offset by repayments of notes payable. Net cash provided by financing activities for the year ended December 31, 2001 primarily related to related to fees received from Novation under the minimum fee level provisions of the Outsourcing Agreement, net proceeds from common stock issuances and draws on our line of credit, which were partially offset by repayment of notes payable. Net cash provided by financing activities for the year ended December 31, 2000 primarily related to the proceeds from our initial public offering of our common stock in January 2000, partially offset by repayments of notes payable.

We currently anticipate that our available funds, consisting of cash and cash equivalents, combined with those funds we expect to generate in 2003 and funds available to us through our line of credit, will be sufficient to meet our anticipated needs for working capital and capital expenditures through at least the next 12 months. Our future long-term capital needs will depend significantly on the rate of growth of our business, the timing of expanded service offerings, the success of these services once they are launched and our ability to adjust our operating expenses to an appropriate level if the growth rate of our business is slower than expected. Hospitals and suppliers might not accept our business model of providing Web-based supply chain management solutions for the healthcare industry and, as a result, we may not succeed in increasing our revenue and controlling our expenses to the extent necessary to continue to be cash flow positive during 2003 and beyond. Any projections of future long-term cash needs and cash flows are subject to substantial uncertainty. If our available funds and cash generated from operations are insufficient to satisfy our long-term liquidity requirements, or if an event of default occurs under our credit agreement with VHA and we are required to repay all outstanding indebtedness under the credit agreement, we might need to seek additional sources of funding, such as selling additional equity or debt securities or obtaining additional lines of credit. We also might need to curtail expansion of our services, including reductions in our staffing levels and related expenses, or potentially liquidate selected assets. If our management decides that it is in our best interest to raise cash to strengthen our balance sheet, broaden our investor base, increase the liquidity of our stock or for any other reason, we may decide to issue equity or debt, even if all of our current funding sources remain available to us. If we issue additional securities to raise funds, those securities may have rights, preferences or privileges senior to those of the rights of our common stock and our stockholders may experience dilution. We cannot be certain that additional financing will be available to us on favorable terms when required, or at all.

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Recent Accounting Pronouncements

In November 2001, the EITF reached a consensus on EITF No. 01-9, “Accounting for Consideration Given by Vendor to a Customer (Including a Reseller of the Vendor’s Products).” EITF No. 01-9 addresses whether consideration from a vendor to a reseller is (i) an adjustment of the selling prices of the vendor’s products and, therefore, should be classified as an offset against revenue when recognized in the vendor’s statement of operations or (ii) a cost incurred by the vendor for assets or services received from the reseller and, therefore, should be classified as a cost or expense when recognized in the vendor’s statement of operations. EITF No. 01-9 was required to be adopted no later than the first quarter of 2002 and upon adoption, companies were required to retroactively reclassify such amounts in previously issued financial statements to comply with the income statement classification requirements of EITF No. 01-9. On July 26, 2000, we issued equity consideration to VHA and UHC in connection with the Outsourcing Agreement. As a result of the application of EITF No. 01-9, we have reclassified amortization associated with this equity consideration, historically classified as operating expenses, to an offset against related party revenue from those parties. This treatment results in the classification of non-cash amortization of partnership costs as an offset against related party revenue, as opposed to being classified as an operating expense, up to the lesser of such related party revenue or amortization of partnership costs in any period. The following table summarizes the impact the application of EITF No. 01-9 had on our Consolidated Statements of Operations:

As a result of the adoption of EITF No. 01-9, the amortization of partnership costs reported as an operating expense is reflected as an adjustment to reconcile net loss to cash from operating activities in the Consolidated Statements of Cash Flows. Under EITF No. 01-9, we account for the fees paid by Novation under the terms of the Outsourcing Agreement as if they are payments made for the equity consideration provided to VHA and UHC as opposed to payments for services. As a result, the amortization of partnership costs that is offset against related party revenue is reported as a cash flow from financing activities in our Consolidated Statements of Cash Flows. As reclassifications, these changes have no impact on our loss from operations, net loss, net loss per share or total cash flow. See Note 3—Application of EITF No. 01-9—to the Notes to Consolidated Financial Statements for further discussion of the application of EITF No. 01-9.

In July 2001, the Financial Accounting Standards Board, or FASB, issued SFAS No. 142, “Goodwill and Other Intangible Assets,” which became effective for fiscal years beginning after December 15, 2001. SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other acquired intangible assets. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. SFAS No. 142 also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Under SFAS No. 142, goodwill and certain other acquired intangible assets with indefinite lives are no longer subject to amortization but will be tested at least annually for

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impairment. Intangible assets with finite lives will continue to be amortized. The adoption of this pronouncement in 2002 did not have a significant impact on our financial position, results of operations or cash flows.

A reconciliation of previously reported net loss and loss per share to the amounts adjusted for the exclusion of goodwill amortization follows (in thousands, except per share amounts):

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 addresses significant issues relating to the implementation of SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and requires that long-lived assets that are to be disposed of by sale are measured at the lower of book value or fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with operations that (i) can be distinguished from the rest of the entity and (ii) will be eliminated from the ongoing operations of the entity in a disposal transaction. SFAS No. 144 became effective for fiscal years beginning after December 15, 2001 and its provisions are to be applied prospectively. The adoption of this pronouncement in 2002 did not have a significant impact on our financial position, results of operations or cash flows.

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145 rescinds SFAS No. 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in Accounting Principles Board Opinion No. 30 will now be used to classify those gains and losses. SFAS No. 145 also amends SFAS No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. SFAS No. 145 becomes effective for fiscal years beginning after May 15, 2002. We do not expect the adoption of SFAS No. 145 to have a significant impact on our financial position, results of operations and cash flows.

In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 requires that a liability for costs associated with an exit or disposal activity be recognized and measured initially at fair value only when the liability is incurred. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. We do not expect the adoption of SFAS No. 146 to have a significant impact on our financial position, results of operations or cash flows.

In November 2002, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” or FIN 45. FIN 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. It also requires that at all times a company issues a guarantee, the company must recognize an initial liability for the fair market value of the obligations it assumes under that guarantee and must disclose that information in its interim and annual financial statements. The initial recognition and measurement provisions of

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FIN 45 apply on a prospective basis to guarantees issued or modified after December 31, 2002. We are currently evaluating the recognition and measurement provisions of FIN 45.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-based Compensation,” which amends SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on reported net income of an entity’s accounting policy decision with respect to stock-based employee compensation, and requires disclosure about those effects in both annual and interim financial statements. SFAS No. 148 is effective for us in the first quarter of fiscal 2003. We are evaluating the alternative methods of voluntary transition to the fair value method under SFAS No. 148.

In January 2003, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities,” or FIN 46. FIN 46 clarifies the application of Accounting Research Bulletin No. 51 for certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 applies to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the fourth quarter of fiscal 2003 to variable interest entities in which a variable interest is acquired before February 1, 2003. The provisions of FIN 46 require immediate disclosure of certain information if it is reasonably possible that consolidation or disclosure of variable interest entities will be required when FIN 46 becomes effective. We do not expect the adoption of FIN 46 to have a significant impact on our financial position, results of operations and cash flows as we do not currently participate in variable interest arrangements.

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NEOFORMA, INC.

QUARTERLY CONSOLIDATED FINANCIAL DATA

(Unaudited)