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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

For The Quarterly Period Ended June 30, 2004

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

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 whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes  x    No  ¨

The number of shares of the Registrant’s common stock outstanding on August 2, 2004 was 20,073,295.

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PART I. FINANCIAL INFORMATION

Item 1. Unaudited Condensed Consolidated Financial Statements

NEOFORMA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)

(unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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NEOFORMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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NEOFORMA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

The accompanying notes are an integral part of these consolidated financial statements.

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NEOFORMA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS

Neoforma, Inc. (the Company) provides supply chain management solutions for the healthcare industry. The Company utilizes a combination of technology, information and services to help the participants in the healthcare supply chain, principally hospitals, suppliers and group purchasing organizations (GPOs), to reduce operational inefficiencies and lower costs.

Since inception, the Company has incurred significant losses and, as of June 30, 2004, had an accumulated deficit of $724.3 million. The Company’s future long-term capital needs will depend significantly on the rate of growth of its business, the timing of its expanded service offerings, the success of these service offerings once they are launched and the Company’s ability to adjust its operating expenses to an appropriate level if the growth rate of its business is slower than it expects. Any projections of future long-term cash needs and cash flows are subject to substantial uncertainty. If available funds and cash generated from operations are insufficient to satisfy its long-term liquidity requirements, the Company may seek to sell additional equity or debt securities, obtain additional lines of credit, curtail expansion of its services, including reductions in its staffing levels and related expenses, or potentially liquidate selected assets. The Company cannot be certain that additional financing will be available on favorable terms if and when required, or at all.

The condensed consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These unaudited condensed consolidated financial statements and notes should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 filed with the SEC. In the opinion of management, the unaudited condensed consolidated financial statements reflect all adjustments, consisting only of recurring adjustments, necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the periods indicated. The results of operations for interim periods are not necessarily indicative of the results that may be expected for future quarters or the year ending December 31, 2004.

2. RECLASSIFICATIONS

Certain reclassifications have been made to the historical unaudited condensed consolidated financial statements to conform to the 2004 presentation. These reclassifications had no impact on the Company’s previously reported financial position, net loss or cash flows.

3. REVENUE

Application of EITF No. 01-9

In November 2001, the Emerging Issues Task Force (EITF) reached a consensus on EITF Abstract No. 01-9, “Accounting for Consideration Given by a 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.

On July 26, 2000, the Company issued equity consideration to VHA Inc. and University HealthSystem Consortium (UHC) in connection with the Company’s outsourcing and operating agreement, as amended from time to time (the Outsourcing Agreement), entered into with Novation, LLC, VHA, UHC and Healthcare Purchasing Partners International, LLC (HPPI) on May 24, 2000 (see Note 9). The Company capitalized this consideration when measurement dates occurred. The final measurement date occurred during the quarter ended March 31, 2004. The portion of the consideration that was capitalized at the time of issuance is being amortized over the five-year estimated life of the arrangement. The remaining consideration, which was capitalized as earned, is being amortized over the term of the arrangements that resulted in the consideration being earned, typically two to three years. As a result of the application of EITF No. 01-9, the Company has classified amortization associated with this equity consideration as an offset against gross related party revenue from those parties. This treatment results in non-cash amortization of partnership costs being offset against gross related party revenue up to the lesser of gross related party revenue or amortization of partnership costs in any period. Any amortization of partnership costs in excess of gross related party revenue in any period is classified as an operating expense. The following table

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summarizes the impact that the application of EITF No. 01-9 had on the Company’s condensed consolidated statements of operations (in thousands):

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 condensed consolidated statements of cash flows. Under EITF No. 01-9, the Company accounts for the fees paid by Novation under the terms of the Outsourcing Agreement as if they were 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 gross related party revenue is reported as a cash flow from financing activities in the Company’s condensed consolidated statements of cash flows.

Revenue by Customer Category

The Company’s principal sources of revenue, by customer category, are (i) healthcare providers and GPOs, (ii) suppliers and (iii) other. Healthcare provider and GPO revenue primarily consists of revenue from hospitals and from GPOs, including from Novation under the Outsourcing Agreement. Supplier revenue includes revenue from both manufacturers and distributors. Other revenue consists of all revenue from entities other than healthcare providers, GPOs and suppliers, including the software license revenue generated by the Company’s August 2001 agreement with Global Healthcare Exchange, LLC (GHX), as well as revenue generated under various agreements whereby the Company is entitled to a share of revenue generated by those entities. Revenue by customer category was as follows:

Percentage of Total Revenue

4. BASIC AND DILUTED NET LOSS PER SHARE

Basic net loss per share is computed using the weighted average number of shares of common stock outstanding. Diluted net loss per share is the same as basic net loss per share for all periods presented because the effect of any potentially dilutive securities is excluded, as the securities are anti-dilutive due to the Company’s net losses in each of these periods. The total number of weighted average common stock equivalents, such as options, warrants and unvested restricted stock, that are excluded from the diluted loss per share calculation was 1.3 million, 1.0 million, 1.4 million and 916,000 shares for the three months ended June 30, 2003 and 2004, and the six months ended June 30, 2003 and 2004, respectively.

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The following table presents the calculation of basic and diluted net loss per share (in thousands, except per share amounts):

5. STOCK-BASED COMPENSATION

At June 30, 2004, the Company had three stock-based employee compensation plans. The Company accounts for these plans under the recognition and measurement principles of Accounting Principles Board Opinion (APB) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. The Company calculated the fair value of each option grant and stock purchase right on the dates of grant using the Black-Scholes option-pricing model as prescribed by Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” using the following assumptions:

The following table illustrates the effect on net loss and net loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation (in thousands, except per share data):

Restricted Stock

During the three months ended June 30, 2003 and 2004 and the six months ended June 30, 2003 and 2004, in connection with the award of restricted stock to employees and officers, the Company recorded deferred compensation of $0, $61,000, $320,000 and $6.6 million, respectively, representing the fair value of the underlying common stock at the dates of grant. The restrictions on the stock lapse on various dates through May 2006 and are subject to the continuous employment of the employees and officers with the Company through those dates. These amounts are presented as a reduction of stockholders’ equity and are being amortized over the periods from the date of grant through the vesting date on an accelerated basis. Amortization of deferred compensation is reversed for any amounts recognized on shares of restricted stock that do not vest due to employee terminations or employee attrition. During the three months ended June 30, 2003 and 2004 and the six months ended June 30, 2003 and 2004, the Company recorded $0, $140,000, $144,000 and $187,000, respectively, in reductions of the deferred compensation as a result of employee terminations and the

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resulting forfeiture of restricted stock. The Company recorded gross amortization of deferred compensation related to these shares of $503,000, $1.3 million, $1.0 million and $1.7 million during the three months ended June 30, 2003 and 2004 and the six months ended June 30, 2003 and 2004, respectively.

6. PROPERTY AND EQUIPMENT

Property and equipment are stated at cost and are depreciated on a straight-line basis over the estimated useful lives of the assets, ranging from two to four years. Leasehold improvements are amortized, using the straight-line method, over the shorter of the lease term or the useful lives of the improvements. Repairs and maintenance costs are expensed as incurred. When property and equipment is retired or otherwise disposed of, the cost and accumulated depreciation are relieved from the accounts and the net gain or loss is included in the determination of income.

Purchased software is capitalized at cost when purchased and amortized over the license period commencing once the software is placed in service. Direct costs to place purchased software into service are capitalized as part of the asset. In accordance with Statement of Position No. 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,” costs incurred to develop software for use in operations are capitalized. Such costs, incurred during the application development stage, include external direct costs of materials and services and internal direct payroll and payroll related costs. During the three and six months ended June 30, 2004, capitalized software development costs related to new functionality for the Company’s solutions offered to its customers.

As of December 31, 2003 and June 30, 2004, property and equipment consisted of the following (in thousands):

7. WRITE-OFF OF STOCKHOLDER NOTES RECEIVABLE

During the three months ended June 30, 2004, the Company wrote off two notes receivable from stockholders, with an aggregate carrying value of $5.0 million, consisting of one note from a former executive officer of the Company and another from a former employee. These notes were issued in connection with the early exercise of employee stock option grants in fiscal 1999 and were collateralized by, among other things, the shares issued upon exercise of the options. Once the notes became due, the Company actively pursued collection using all reasonable efforts to collect the outstanding balances. Upon exhausting all such efforts in June 2004, the Company determined that these two notes were no longer collectible and, as such, the Company reclaimed all shares of common stock collateralizing the notes, totaling 71,250 shares, and wrote off the remaining balances. The fair value of the common stock on the date it was reclaimed by the Company and the resulting net write-off amount were as follows:

As of June 30, 2004, the Company had $203,000 of remaining notes receivable from stockholders outstanding. The remaining notes outstanding consist of several notes due in January 2005 from current and former employees of the Company. The Company intends to vigorously pursue collection on these stockholder notes receivable when and as they become due.

8. RECENT ACCOUNTING PRONOUNCEMENTS

In April 2004, the EITF issued Statement No. 03-06, “Participating Securities and the Two-Class Method Under FASB Statement No. 128, Earnings Per Share.” EITF No. 03-06 addresses a number of questions regarding the computation of earnings per share by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company when, and if, it declares dividends on its common stock. The statement also provides further guidance in applying the two-class method of calculating earnings per share, clarifying what constitutes a participating security and how to apply the two-class method of computing earnings per share once it is determined that a security is participating, including how to allocate undistributed earnings to such a security. EITF No. 03-06 is effective for fiscal periods beginning after June 30, 2004. The Company does not believe that the adoption of this statement will have a material impact on its financial position, results of operations or cash flows.

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9. RELATED PARTY TRANSACTIONS

In 2000, the Company entered into a 10-year strategic Outsourcing Agreement with VHA, UHC, Novation and HPPI. Under the Outsourcing Agreement, the Company agreed to provide specific functionality to Marketplace@Novation^®, Novation’s e-commerce marketplace. Novation agreed to act as the Company’s 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 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 July 2000, in connection with the Outsourcing Agreement, the Company issued 4.6 million and 1.1 million shares of its common stock to VHA and UHC, respectively. The Company also issued warrants to VHA and UHC, allowing VHA and UHC the opportunity to earn up to 3.1 million and 752,000 additional shares of the Company’s common stock, respectively, over a four-year period by meeting specified performance targets. These performance targets were based upon the historical purchasing volume of VHA and UHC member healthcare organizations that signed up to use Marketplace@Novation. In October 2000, the Company exchanged VHA’s warrant for 3.1 million restricted shares of the Company’s common stock and, in January 2001, the Company exchanged the unexercised portion of UHC’s performance warrant to purchase 564,000 shares of the Company’s common stock for 564,000 restricted shares of the Company’s common stock. VHA and UHC have earned all of the restricted shares. If the performance targets had not been met, VHA’s and UHC’s restricted shares would have been subject to forfeiture.

The Company has amended and restated the Outsourcing Agreement from time to time. Under the current agreement, the Fourth Amended and Restated Outsourcing and Operating Agreement (Fourth Amended Agreement), effective August 2003:

During the three months ended June 30, 2003 and 2004 and the six months ended June 30, 2003 and 2004, the fees paid to the Company by Novation totaled $18.0 million, $15.3 million, $36.0 million and $30.5 million, respectively. The fees paid to the Company by Novation in each of the last eight quarters, including the quarter ended June 30, 2004, were limited by the quarterly maximums in those periods. Based on the levels of marketplace volume the Company is currently achieving, the Company expects that the fees it earns from Novation will continue to be limited by the quarterly maximums, above which additional volume will not result in increased fees.

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10. CONTINGENCIES

Litigation

In July 2001, the Company, along with Merrill Lynch, Pierce, Fenner & Smith, Bear Stearns and FleetBoston Robertson Stephens (certain of the underwriters of the Company’s initial public offering (IPO)), as well as the Company’s Chairman and Chief Executive Officer, Robert Zollars, and its former Chief Financial Officer, Frederick Ruegsegger, 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 shares of the Company’s 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 underwriters solicited and received “undisclosed compensation” from investors in exchange for allocations of stock in the Company’s IPO, and that some investors in the IPO allegedly agreed with the underwriters to buy additional shares in the aftermarket to artificially inflate the price of the Company’s stock. The Company and Messrs. Zollars and Ruegsegger 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 the Company’s IPO registration statement and prospectus that the underwriters had entered into the arrangements described above. The complaints seek unspecified damages. Approximately 300 other issuers and their underwriters have had similar suits filed against them, all of which are included in a single coordinated proceeding in the Southern District of New York. On July 1, 2002, the underwriter defendants moved to dismiss all of the IPO allocation litigation complaints against them, including the action involving the Company. On July 15, 2002, the Company, along with the other non-underwriter defendants in the coordinated cases, also moved to dismiss the litigation. Those motions were fully briefed on September 13 and September 27, 2002, respectively, and in February 2003, the Court denied the Company’s motion to dismiss. On October 9, 2002, all of the individual defendants, including Mr. Zollars and Mr. Ruegsegger, were dismissed from the action without prejudice. On June 30, 2003, the Company’s board of directors approved a proposed settlement for this matter, which is part of a larger global settlement between the issuers and plaintiffs. The acceptance of the settlement by the plaintiffs is contingent on a number of factors, including the percentage of issuers who approve the proposed settlement. The Company has agreed to undertake other responsibilities under the proposed settlement, including agreeing to assign away, not assert, or release certain potential claims the Company may have against its underwriters. Any direct financial impact of the proposed settlement is expected to be borne by the Company’s insurers. In June 2004, an agreement of settlement was submitted to the court for preliminary approval. The Company is unable to determine whether or when the settlement will be approved or finalized. Due to the inherent uncertainties of litigation however, the Company cannot accurately predict the ultimate outcome of the lawsuits.

FIN 45

In the normal course of business to facilitate sales of its products, the Company indemnifies other parties, including customers and parties to other transactions with the Company, with respect to certain matters. The Company has agreed to hold the other party harmless against losses arising from a breach of representations or covenants, or out of intellectual property infringement or other claims made against them. These agreements may limit the time within which an indemnification claim can be made and the amount of the claim. In addition, the Company has entered into indemnification agreements with its officers and directors, and the Company’s bylaws contain similar indemnification obligations to the Company’s agents.

It is not possible to determine the Company’s maximum potential liability under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement. Historically, the Company has not made any payments under these agreements.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Management’s Discussion and Analysis of Financial Condition and Results of Operations section should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes appearing elsewhere in this report. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. In many cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “potential,” “intend” or “continue,” or comparable terminology. These forward-looking statements include our expectations about our operating results and strategic relationships. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including, but not limited to, those presented below under the caption “Factors That May Affect Future Operating Results” and elsewhere in this report. We undertake no obligation to update any forward-looking statements for any reason, except as required by law, even if new information becomes available or other events occur in the future.

Company Background

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 efficient 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, which have led to major inefficiencies. These inefficiencies lead to slower, error-prone 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.

Strategic Relationships

In 2000, we entered into a 10-year strategic outsourcing and operating agreement, or Outsourcing Agreement, with VHA Inc., University HealthSystem Consortium, or UHC, Novation, LLC and Healthcare Purchasing Partners International, LLC, or HPPI. Under the Outsourcing Agreement, we agreed to provide specific functionality to Marketplace@Novation, Novation’s e-commerce marketplace. Novation 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 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 July 2000, in connection with the Outsourcing Agreement, we issued 4.6 million and 1.1 million shares of our common stock to VHA and UHC, respectively. We also issued warrants to VHA and UHC, allowing VHA and UHC the opportunity to earn up to 3.1 million and 752,000 additional shares of our common stock, respectively, over a four-year period by meeting specified performance targets. These performance targets were based upon the historical purchasing volume of VHA and UHC member healthcare organizations that signed up to use Marketplace@Novation. In October 2000, we exchanged VHA’s warrant for 3.1 million restricted shares of our common stock and, in January 2001, we exchanged the unexercised portion of UHC’s performance warrant to purchase 564,000 shares of our common stock for 564,000 restricted shares of our common stock. VHA and UHC have earned all of the restricted shares. If the performance targets had not been met, VHA’s and UHC’s restricted shares would have been subject to forfeiture.

We have amended and restated the Outsourcing Agreement from time to time. Under the current agreement, the Fourth Amended and Restated Outsourcing and Operating Agreement, or Fourth Amended Agreement, effective August 2003:

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year ended December 31, 2003. Beginning in the first quarter of fiscal 2004, the quarterly maximum payment became $15.25 million in each quarter through the expiration of the initial term of the Fourth Amended Agreement in March 2010. Under previous versions of the Outsourcing Agreement, the quarterly maximums were dependent on revenue generated by Novation;

During the three months ended June 30, 2003 and 2004 and the six months ended June 30, 2003 and 2004, the fees paid to us by Novation totaled $18.0 million, $15.3 million, $36.0 million and $30.5 million, respectively. The fees paid to us by Novation in each of the last eight quarters, including the quarter ended June 30, 2004, were limited by the quarterly maximums in those periods. Based on the levels of marketplace volume we are currently achieving, we expect that the fees we earn from Novation will continue to be limited by the quarterly maximums, above which additional volume will not result in increased fees. As a result, we expect to receive $61.0 million in fees from Novation in 2004.

Other Matters

Since inception, we have incurred significant losses and, as of June 30, 2004, had an accumulated deficit of $724.3 million. 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.

Results of Operations

Overview

In the six months ended June 30, 2004 as compared to the six months ended June 30, 2003, our total revenue increased 22%, from $5.1 million to $6.3 million. Over the same period, our net loss decreased 7%, from $34.0 million to $31.6 million.

Under the terms of the Fourth Amended Agreement, the quarterly maximum limits on the payments we receive from Novation decreased from an annual total of $69.2 million in 2003 to $61.0 million in 2004. As a result of this decrease, and because we achieved the quarterly maximum payments from Novation in both the first and second quarters of 2003 and 2004, our gross related party revenue, prior to the offset by amortization of partnership costs under the application of EITF No. 01-9, decreased from $35.1 million in the six months ended June 30, 2003 to $30.9 million in the six months ended June 30, 2004. However, as a result of the application of EITF No. 01-9, under which we offset gross related party revenue by amortization of partnership costs, we eliminated 98% and 100% of gross related party revenue in the six months ended June 30, 2003 and 2004, respectively (see Note 3 to the Notes to Condensed Consolidated Financial Statements for further discussion of the impact of the application of EITF No. 01-9). Based on the levels of marketplace volume we are currently achieving, we expect the fees we earn from Novation will continue to be limited to the quarterly maximums. As a result, and based on the decline in the quarterly maximums, we expect to generate lower gross related party revenue in 2004 as compared to 2003. There are no further decreases in the Novation payments scheduled, as beginning in fiscal 2004, the maximum payment became $15.3 million per quarter through the expiration of the initial term of the Fourth Amended Agreement in March 2010.

Because of the impact of EITF No. 01-9 on our gross related party revenue, our revenue growth has been primarily a result of increases in non-related party revenue. For the six months ended June 30, 2003 as compared to the six months ended June 30, 2004,

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this growth in non-related party revenue was primarily due to increases in revenue from solutions we sell to suppliers and from sales of Neoforma Data Management Solution^™, or Neoforma DMS, to hospitals. In the six months ended June 30, 2003 and 2004, Global Healthcare Exchange, LLC, or GHX, represented 11% and 9%, respectively, of our total revenue. The revenue from GHX relates to a $3.5 million technology license sold to GHX in 2001, which we have been recognizing ratably over the three-year term of the related operating agreement. Since the inception of our agreement with GHX, ratable recognition of this technology license revenue has accounted for $282,000 of revenue on a quarterly basis. In August 2004, this license revenue will be fully recognized and, as such, our revenue related to this agreement will be lower in the second half of fiscal 2004 as compared to the first half, and we will recognize no revenue related to this agreement after August 2004. We expect this resulting reduction in revenue to be offset by growth in our other revenue streams in the second half of 2004.

In 2004 as compared to 2003, we expect our total revenue to continue to grow as a result of increases in non-related party revenue from sales of our solutions to hospital, GPO and supplier customers. In addition, we expect that the fees we generate in connection with the Fourth Amended Agreement in 2004 will be fully offset by amortization of partnership costs, resulting in zero net related party revenue during the year.

In the six months ended June 30, 2004 as compared to the six months ended June 30, 2003, our total operating expenses decreased 1.4%, from $38.6 million to $38.0 million. The decrease in total operating expenses over this period was primarily a result of a $4.6 million decrease in depreciation and amortization of property and equipment and the capitalization of $3.3 million of internal use software development costs, which were partially offset by a $4.1 million write-off of stockholder notes receivable and a $2.3 million increase in amortization of partnership costs. In addition to the impact of these changes, we experienced an increase in cost of services and decreases in our other operating expenses including operations, product development, selling and marketing and general and administrative expenses.

In 2004, although we are making and expect to continue to make investments to support our anticipated growth, we expect total operating expenses to be approximately equal to those incurred in 2003. We expect decreases in operations and selling and marketing expenses will be offset by the write-off of stockholder notes receivable and increases in amortization of partnership costs classified as an operating expense and amortization of deferred compensation, which is reflected within certain of our operating expense categories. The expected reduction in operations expense is the result of less depreciation related to certain large software licenses acquired in 2000 that were fully depreciated as of December 31, 2003. The expected decrease in selling and marketing expenses is primarily due to the decrease in headcount in 2004 as compared to 2003 in these groups. The increase in amortization of partnership costs classified as an operating expense is the result of the anticipated decrease in gross related party revenue as a result of the scheduled decrease in our payments from Novation, which will result in a decrease in the amount of the offset against gross related party revenue. The expected increase in amortization of deferred compensation is the result of company-wide grants of restricted stock issued in February 2004 and the resulting $6.6 million in deferred compensation recorded on the accompanying condensed consolidated balance sheet during the six months ended June 30, 2004. Of the remaining total deferred compensation of $4.9 million at June 30, 2004, we expect $2.4 million to be amortized during the remainder of fiscal 2004. In addition, although the variance in our total product development expenses from the three and six months ended June 30, 2004 as compared to the same periods in 2003 was nominal, there were significant fluctuations within this expense category in these periods. In future periods, we may have greater fluctuations in product development expense based on the amount and nature of our development work and the costs that require capitalization.

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