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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(MARK ONE)

For The Fiscal Year Ended December 31, 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 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. Yes  x    No  ¨

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 30, 2004, 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 National Market on such date, was $100,154,223. This calculation does not reflect a determination that certain persons are affiliates of the Registrant for any other purposes.

The number of shares of the Registrant’s common stock outstanding on March 9, 2005 was 20,618,672.

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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, Neoforma Success Tracker and the Neoforma logo are some of our trademarks or service marks. Other trademarks or trade names appearing in this Annual Report on Form 10-K are the property of their respective owners.

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PART I

FORWARD LOOKING STATEMENTS

This report contains statements that involve expectations, plans or intentions (such as those relating to future business or financial results, new features or services, or management strategies). These statements are forward-looking and are subject to risks and uncertainties, so actual results may vary materially. You can identify these forward-looking statements by words such as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan” and other similar expressions. You should consider our forward-looking statements in light of the risks discussed under the heading “Factors That May Affect Future Operating Results” below, as well as our consolidated financial statements, related notes, and the other financial information appearing elsewhere in this report and our other filings with the Securities and Exchange Commission. We assume no obligation to update any forward-looking statements.

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 supply chain management solutions are designed to enable efficient collaboration among hospitals and their suppliers, helping them to reduce operational inefficiencies, lower costs and improve their financial health. The healthcare supply chain has a number of characteristics, including its large size, high degree of fragmentation, reliance on disparate technologies and data sources, 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 hospitals and suppliers. 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 comprehensive solutions make it easier for the participants in the healthcare supply chain, principally hospitals, group purchasing organizations, or GPOs, and suppliers, 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, reduce costs, increase revenue and improve capital allocation.

We serve more than 1,600 customers, including many of the nation’s leading hospitals and suppliers. We have a contractual relationship with Novation, LLC, VHA Inc., University HealthSystem Consortium, or UHC, and Healthcare Purchasing Partners International, LLC, or HPPI, under which these organizations have agreed to use us as their exclusive e-commerce provider for supply chain management. Novation is the supply chain management company for VHA, an alliance of not-for profit hospitals, health systems and their affiliates, and UHC, an alliance of academic medical centers and associate members. We currently generate a significant majority of our business through our Novation, VHA and UHC relationships. The hospital members of VHA and UHC utilize Marketplace@Novation^®, an online healthcare supply exchange, to access e-commerce services and information tools that allow them to improve their order management and contract management processes. We also have contracts with VHA and UHC to sell and market data management services to their member healthcare organizations. As of December 31, 2004, VHA and UHC beneficially owned 42.4% and 10.5%, respectively, of our outstanding common stock.

In addition, we have a contractual relationship with Consorta, Inc., a group purchasing and resource management company, to sell and market data and order management services to its member healthcare organizations.

Our core strategy is to help hospitals operate more effectively and improve their financial health. Our principal focus, therefore, is on helping our hospital and GPO customers address the inefficiencies in the

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healthcare supply chain by providing a valuable combination of technology, information and services. We believe our success with our hospital and GPO customers will help drive our success with our supplier customers. We utilize our existing relationships with hospitals and strategic partners, and seek new relationships with key participants in the healthcare supply chain, to provide additional opportunities to sell our solutions and to develop and sell new products and services into that customer base. Our solutions are focused on the healthcare supply chain, and we will continue to work to address broader and deeper areas of this supply chain to help hospitals improve their financial health.

We were incorporated in California in 1996 and reincorporated in Delaware in 1998. Our headquarters is located at 3061 Zanker Road, San Jose, CA 95134, and our telephone number is (408) 468-4000. Our Web site is www.neoforma.com. We are not including the information contained on our Web site as a part of, nor incorporating it by reference into, this Annual Report on Form 10-K. Through our Web site, we make available, free of charge, 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 well as other materials, as soon as reasonably practicable after such materials are electronically filed with or furnished to the Securities and Exchange Commission.

Recent Developments

On January 11, 2005, we announced that we had retained Merrill Lynch & Co. as our financial advisor to assist us in evaluating our strategic alternatives, including a possible sale of the company or merger transaction, to achieve greater stockholder value. We anticipate that any such change in control transaction will require the consent of VHA and UHC. We cannot assure you that any particular alternative will be pursued or that any transaction will occur, or if any transaction does occur, on what terms such transaction might be consummated.

On January 26, 2005, we announced that, in connection with our decision to evaluate strategic alternatives, Novation and we each had engaged independent consultants to assess the technology, information, services and pricing provided by us to Novation, VHA, UHC and their member hospitals under our exclusive outsourcing agreement, and that, although we believe the current quarterly maximum payment under the outsourcing agreement is reasonable, Novation had advised us that its assessment could result in a formal request to reduce the quarterly maximum payment.

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. 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 materials management or information systems or other technology in which hospitals and suppliers have invested 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 organizations in 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, participants in the healthcare supply chain 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 lead to slower, error-prone transactions for all participants, higher costs for hospitals and increased overhead for suppliers. 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 two percent to 10% of total spending in the industry.

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

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malpractice insurance costs, intense pressure to increase patient safety initiatives 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.

Our Customers and Solutions

We deliver 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. Our customers principally consist of hospitals, GPOs and suppliers. We offer our customers solutions to address several main areas in the healthcare supply chain, including order management, contract management, data management, market intelligence and materials management.

We offer our hospital customers solutions to address:

We offer our GPO customers solutions to address:

We offer our supplier customers solutions to address:

Our solutions are designed to enable hospitals, GPOs and suppliers 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 solutions are designed to complement and augment our customers’ existing supply chain business processes, and we offer these solutions individually or jointly. Our principal focus is on helping our hospital and GPO customers address the inefficiencies in the healthcare supply chain to empower them with the strategic information they need to operate their supply chain more effectively.

Hospitals and Group Purchasing Organizations

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

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GPOs and supply management companies encounter a variety of purchasing and contracting challenges, including lengthy contracting processes, difficulties associated with providing accurate and timely contract information to their member healthcare organizations, reduced levels of contract compliance due to off-contract buying, incomplete member purchase history data and delayed supplier sales reporting. Through our solutions, GPOs and supply management companies can (i) provide information on their negotiated contracts to their hospital customers in a timelier manner, (ii) improve the quality and accuracy of their contract and related product information, (iii) gain access to detailed information regarding contract utilization, buying patterns and purchasing history and (iv) improve their ability to verify the accuracy of fee, sales and revenue information. As a result, our solutions enable GPOs and supply management companies to improve their service offerings to their customers and reduce their operating costs.

Order Management

Neoforma Order Management Solution, or Neoforma OMS

We address the day-to-day order management aspect of the healthcare supply chain with Neoforma OMS. Neoforma OMS streamlines healthcare supply purchasing by simplifying and automating day-to-day activities. Combining Web-based functionality, discrepancy management tools and connectivity, Neoforma OMS is designed to generate significant savings for hospitals and their suppliers through increased electronic transactions and by helping to resolve order discrepancies faster. In addition, Neoforma OMS provides hospitals and their suppliers with valuable information to help them reduce supply chain costs. For VHA and UHC member hospitals, we deliver Neoforma OMS as part of Marketplace@Novation, and we receive payment from Novation for the services we provide to these hospitals. We also sell Neoforma OMS to members of Consorta and to hospitals that are not members of VHA, UHC or Consorta.

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

Neoforma OMS provides hospitals with electronic access to a broad group of suppliers, as well as the ability to support multiple document types, enabling hospitals to increase automation and accuracy. Broader connectivity to suppliers enables hospitals to conduct more of their supply transactions electronically, creating significant time and cost savings.

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In 2004, we introduced pharmacy supply analysis reporting tools to enable VHA and UHC member hospitals to efficiently manage their increasing pharmacy costs. These reports, which are available through both Neoforma OMS and Neoforma CMS, help hospitals verify that invoice and contract prices match, identify contract opportunities, maximize their contract tiers and obtain failure-to-supply refunds.

Contract Management

Neoforma Contract Management Solution, or Neoforma CMS

Neoforma CMS is a Web-based solution that enables hospitals to reduce supply costs through improved utilization of contracts, fewer price discrepancies and faster, better-informed decision-making. We deliver Neoforma CMS to VHA and UHC member hospitals as part of Marketplace@Novation, and we receive payment from Novation for the services we provide to these hospitals.

The key components and benefits of Neoforma CMS provided to VHA and UHC hospitals through Marketplace@Novation include:

In 2004, we introduced pharmacy supply analysis reporting tools to enable VHA and UHC member hospitals to efficiently manage their increasing pharmacy costs. These reports, which are available through both Neoforma OMS and Neoforma CMS, help hospitals verify that invoice and contract prices match, identify contract opportunities, maximize their contract tiers and obtain failure-to-supply refunds.

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Data Management

Neoforma Data Management Solution, or Neoforma DMS

For hospitals, Neoforma DMS includes a data cleansing, spend intelligence and maintenance solution that enables hospitals to significantly improve the accuracy of their item and vendor master data files. Hospitals typically have large amounts of item and vendor data stored in their MMIS or ERP systems. They are challenged by out-of-date product information, duplicate entries, inaccurately entered information, obsolete item and vendor records, incorrect prices and incorrect part numbers. Furthermore, the item data typically have poor descriptions and are often poorly categorized or not categorized at all. For hospitals, these issues increase the potential to overspend when an order is placed, lead to price and item discrepancies that require intervention and resolution with their suppliers. In addition, these issues make it difficult for users to source products and hamper their ability to perform meaningful spending analysis to prioritize their cost reduction efforts. Neoforma DMS cleanses, normalizes, enriches and categorizes MMIS master data. With improved item and vendor master files, hospitals can improve the return on their investment in MMIS and ERP systems, analyze variations in pricing and product orders, generate valuable reports on supply spend, better analyze product utilization and standardize products to reduce supply costs. We have contracts with VHA, UHC and Consorta to sell and market Neoforma DMS to their member healthcare organizations. We sell Neoforma DMS to VHA and UHC member healthcare organizations under contracts separate from our Marketplace@Novation agreements.

For GPOs, Neoforma DMS cleanses and categorizes contract and related product information that they publish to their member healthcare organizations.

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

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Materials Management

Neoforma Materials Management Solution, or Neoforma MMS

Neoforma MMS enables hospitals to manage inventory and requisitions, issue purchase orders, receive products and manage other components of the materials management process. In comparison to conventional materials management information systems, Neoforma MMS is designed to offer hospitals superior flexibility, process control and ease of use. At this time, we are supporting those hospitals using Neoforma MMS, but we are not actively selling Neoforma MMS as a standalone offering to new customers.

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

Marketplace@Novation

We develop, implement and support supply chain management solutions for Marketplace@Novation, an online healthcare supply exchange provided by Novation for VHA and UHC member hospitals and their

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suppliers. Marketplace@Novation utilizes Neoforma OMS and Neoforma CMS, as well as pharmacy supply analysis tools that help VHA and UHC hospitals reduce total pharmacy spend by identifying contract opportunities and more effectively managing their contract purchases. The payments we receive from Novation in connection with Marketplace@Novation currently account for the substantial majority of our fees, and we anticipate that this will continue for the foreseeable future.

In order to cross-sell our other solutions, we leverage our relationships with Novation hospitals and their suppliers that have contracted with us to use Marketplace@Novation.

Suppliers

Suppliers, both manufacturers and distributors, face intense competition and margin pressures. Our supply chain management solutions help suppliers (i) reduce their operating expenses by automating manual processes, reducing transaction costs, providing contract management services and making their customers more efficient, (ii) improve cash flow by reducing days sales outstanding, or DSO, (iii) increase their service levels to their hospital customers, (iv) increase their revenue by increasing the efficiency of their sales people and by more efficiently utilizing direct and indirect channel resources and (v) gain visibility regarding market share.

Market Intelligence

Neoforma sells market intelligence offerings to medical-surgical and pharmaceutical manufacturers that sell through distributors.

HPIS Market Intelligence

We provide market intelligence reporting to medical-surgical manufacturers and distributors. HPIS Market Intelligence helps these suppliers identify market opportunities, measure market share and evaluate sales force performance and management. The team in our HPIS Market Intelligence business unit acquires detailed, transactional data from the leading medical-surgical distributor members of the Health Industry Distributors Association, or HIDA, and then aggregates, normalizes, indexes and reports on this transactional data. Healthcare manufacturers and distributors use this standardized and customized critical market intelligence to develop strategies to optimize their market performance.

For manufacturers, HPIS Market Intelligence provides:

For distributors, HPIS Market Intelligence provides:

Neoforma Pharmaceutical Market Intelligence

We also provide market intelligence reporting to pharmaceutical manufacturers. Neoforma Pharmaceutical Market Intelligence helps pharmaceutical manufacturers gain key strategic insights into their sales volume, market share and contract compliance. Currently, we provide these reports to pharmaceutical manufacturers that sell products through the Novation contract portfolio within the VHA and UHC member hospital base. We are

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seeking to expand our GPO and hospital relationships to provide these strategic insights to pharmaceutical manufacturers that sell products through other contract portfolios and to other hospitals.

Our data are aggregated from a variety of pharmaceutical wholesalers and purchased data sources and are delivered to manufacturers in a series of Web-based and offline reports that include:

These reports deliver visibility down to the hospital facility level, enabling pharmaceutical manufacturers to maximize the impact of their contracting and sales efforts.

Order Management

Neoforma OMS

Many of the key components of Neoforma OMS for suppliers are similar to the key components for hospitals, including connectivity, online discrepancy management tools, online order status and on-demand reports. We deliver Neoforma OMS both as part of and separate from Marketplace@Novation agreements. Many of the key benefits to suppliers are also similar to the key benefits for hospitals, including:

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

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Contract Management

Neoforma CMS

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 that sell to VHA and UHC member hospitals and to hospital customers that are members of VHA and UHC and participate in Novation’s purchasing program. Using Neoforma CMS, suppliers can reduce contract and marketing administration costs through more effective communication and fewer price discrepancies with their customers. We deliver Neoforma CMS as part of Marketplace@Novation.

Many of the key components of Neoforma CMS for suppliers are similar to the key components for hospitals, including a contract catalog, an online product catalog, online collaboration and on-demand reports. The online collaboration component of Neoforma CMS is currently available only on a limited basis, but we are seeking ways to expand the availability of this functionality. Many of the key benefits of Neoforma CMS for suppliers are also similar to the key benefits for hospitals, including:

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

Neoforma CMS for Contract and Rebate Management Services and Reporting

In addition to the offering described above, we provide contract and rebate management services and sales reporting services primarily to medical-surgical manufacturers that sell through distributors. Our Neoforma CMS for Contract and Rebate Management Services and Reporting includes tools for manufacturers to improve sales operations by validating rebate payments from distributors, analyzing sales tracing data from distributors, maximizing contract compliance, tracking sales through GPO contracts and managing accruals and rebate processing activities. Manufacturers use these services to keep track of products sold through distributors and across a range of distributors and to improve the management of the contract pricing and rebate processes with their distributors.

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The key components and benefits of Neoforma CMS for Contract and Rebate Management Services and Reporting to suppliers include:

Materials Management

Neoforma MMS

In addition to providing Neoforma MMS directly to hospitals, we provide Neoforma MMS to suppliers that either resell it to their hospital customers to support their inventory management or use it to provide fully outsourced inventory management services. Suppliers leverage browser-based and handheld inventory management capabilities to facilitate streamlined consignment tracking and replenishment, in addition to outsourced hospital inventory management. At this time, we are supporting those customers using Neoforma MMS, but we are not actively selling Neoforma MMS as a standalone offering.

Many of the key components of Neoforma MMS for suppliers are similar to the key components for hospitals, including the ability to have end-to-end materials management, a Web-based approach, point-of-use control over inventory and a healthcare focus. Many of the key benefits to suppliers are also similar to the key benefits to hospitals, including:

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The key components and benefits of Neoforma MMS unique to suppliers include:

Strategic Relationships

In 2000, we entered into a 10-year strategic relationship with Novation, the supply chain management company for VHA and UHC. Novation is an established healthcare industry participant, and we believe that this relationship has been, and will continue to be, instrumental to our success. Novation, VHA and UHC named us as the exclusive e-commerce provider for their members, and we developed Marketplace@Novation for their use. VHA is a provider alliance of more than 2,200 not-for-profit hospitals, health systems and their affiliates. It comprises approximately 25% of the nation’s community hospitals. UHC is an alliance of 90 academic medical centers and 123 associate members that represent approximately 76% of the academic medical centers in the United States. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Strategic Relationships” for further discussion of our relationships with VHA, UHC and Novation.

In August 2001, we entered into a three-year agreement, which we subsequently renewed for one year in August 2004, with Global Healthcare Exchange, LLC, or 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 is majority owned by a number of manufacturers and distributors to the healthcare industry.

In March 2004, we entered into a three-year agreement with UHC designating us as the preferred provider of supply chain data cleansing and maintenance services to the UHC hospital membership base. In connection with this agreement, we offer Neoforma DMS to UHC hospital members and have developed joint sales and marketing plans with UHC to support this relationship. In June 2004, we entered into a similar, three-year agreement with VHA, designating us as a provider of supply chain data cleansing and maintenance services to the VHA hospital membership base. In connection with this agreement, we offer Neoforma DMS to VHA member hospitals and collaborate with VHA to educate their member hospitals about the benefits of Neoforma DMS.

In January 2005, we entered into a three-year agreement with Consorta, Inc., a group purchasing and resource management company, to provide supply chain data management and order management services to the Consorta membership base. Consorta named us as the preferred provider of these solutions to their members, and Neoforma DMS and Neoforma OMS are the only data and order management solutions that are currently endorsed by Consorta. We had previously entered into two data management agreements with Consorta in 2004 to cleanse, classify, enrich and maintain the Consorta Contract Catalog. Consorta is a cooperative of 13 shareholder healthcare systems, including more than 520 hospitals, representing 60% of all Catholic hospitals in the United States.

Marketing, Sales and Service

The marketing teams within our company lead our efforts to understand our customers and how our solutions can address their needs. These teams gather customer, partner and market input and prioritize our product development and service initiatives. Our outbound marketing activities include traditional and Internet-based vehicles such as direct mail advertising, Web-based seminars, sponsorships and tradeshows. We also utilize a variety of public relations initiatives, including continuing to develop relationships with business, healthcare, Internet and technology media and industry analysts. These activities aim to increase awareness of

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our brand, to attract new customers to our solutions and to educate our customers on how to optimize their use of our solutions. We intend to continue to invest in these areas because we believe a deep understanding of our customers and their business processes, as well as their awareness of our offerings, is crucial to the success of our business and is a key differentiator for us.

We sell our solutions to hospitals and suppliers through a direct field sales force. The sales force consists of hospital specialists, who primarily target the hospital market to sell our solutions, and supplier specialists, who focus on the sale of our solutions to manufacturers and distributors. Our field sales force has significant experience in the sale of medical products, medical equipment and supply chain and information 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 provide for joint and cross-selling and marketing of our solutions. For example, under our strategic relationships with Novation, VHA, UHC and Consorta, the sales forces and account managers of these organizations actively promote our supply chain management solutions to hospitals and suppliers, which significantly aids in our selling and marketing efforts. We plan to expand the number and scope of our strategic relationships, including channel relationships, to support the sale of our solutions.

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. 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. Additionally, we utilize a value documentation team that currently assists our hospital customers in identifying and documenting actual dollar cost savings and other value received through the use of our solutions. We believe a commitment to providing a consistently superior customer experience, coupled with highly dependable, reliable systems, is and will continue to be an important differentiator for us.

Architecture, Product Development and Support

We intend to continue to expand and enhance the functionality of our solutions. 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 that increase utility and value for hospitals, GPOs and suppliers.

Our architecture group is responsible for establishing our solutions architecture and corporate technology strategy. The product development and support group is responsible for defining, validating and translating customer needs into products and services. In addition to building product specifications, this group also builds detailed technical specifications, configuring and developing technology solutions, testing and supporting these applications for our production environment. Depending on the number and complexity of current development projects underway, our staff is augmented using both independent contractors and consulting firms.

Currently, we are developing additional enterprise and supply chain analytics capabilities as a part of our solutions infrastructure. These capabilities will provide enhanced business intelligence and supply chain management information to 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.

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For the years ended December 31, 2002, 2003 and 2004, our product development expenses were $17.2 million, $18.6 million and $16.9 million, respectively.

Proprietary Rights and Licensing

Our success and ability to compete depend on our ability to develop and maintain the proprietary aspects of our technology and confidential information. We rely on a combination of patent, copyright, trademark and trade secret laws and contractual restrictions to establish and protect the proprietary aspects of our technology. We seek to protect our software, both its object and source code, as well as our documentation and other written materials, under trade secret and copyright laws. In addition, we seek to avoid wrongful disclosure and use of our intellectual property by restricting access to our source code and other confidential information by implementing technical security precautions and by requiring employees and consultants with access to our proprietary information to execute confidentiality agreements with us. We have also applied for three patents covering various aspects of our proprietary technology, including our Neoforma Success Tracker^™ customer value tool.

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 solutions 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, parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary without authorization. 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 or work around 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, market intelligence and materials management, and the breadth of our customer base, which includes hospitals, GPOs and suppliers, we have a diverse set of competitors that compete with portions of our overall offering. To best serve our customers, we sometimes partner in one segment of the market with our competitors, while competing with them in others. We believe that, as our capabilities grow, we will continue to find areas of opportunity for collaboration with, as well as encounter competition from, 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, GPO and supplier customers is important to our success.

Some of our current and potential competitors include:

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Companies in our market that compete to provide services to hospitals do so based on existing relationships, brand recognition, ability to integrate product offerings, level of bias—or perceived bias—toward particular hospitals or GPOs, cost, ease of use and convenience, number of suppliers with which hospitals can conduct business and communicate and customer service.

Companies in our market that compete to provide services to suppliers do so based on existing relationships, brand recognition, number of hospitals using their services and the volume of their purchases, level of bias—or perceived bias—toward particular suppliers, compatibility with suppliers’ existing sales and distribution methods, cost, functionality, ease of use and convenience, quality and reliability of their services and ability to integrate their services with suppliers’ existing systems.

Competition is likely to intensify as our market matures. As competitive conditions intensify, our competitors may enter into strategic or commercial relationships with larger, more established healthcare, medical products or Internet companies or with each other, secure services and products from suppliers on more favorable terms, devote greater resources to marketing and promotional campaigns, secure exclusive arrangements with hospitals that impede our sales and/or devote substantially more resources to Web site and systems development and research and development.

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 quickly to market forces, undertake more extensive marketing campaigns for their brands and services and/or make more attractive offers to hospitals, GPOs 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, GPO and supplier customer base or retain our current hospital, GPO and supplier customers. We may not be able to compete successfully against our competitors, and competition could seriously harm our revenue, operating margins and/or market share.

Employees

As of December 31, 2004, we had 300 full-time employees, including 52 in sales and marketing, 59 in services, 93 in product development, 50 in operations and 46 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.

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As of December 31, 2004, our executive, administrative and operating offices were located in 116,000 square feet of office space located in San Jose, California under a sublease scheduled to expire in March 2007. We occupy 84,300 square feet of this facility. In February 2002, we entered into a sublease with a corporation, under which they subleased 20,000 square feet of this facility for the first year, increasing to 31,700 square feet for the remaining term of the sublease, which ran through February 2005. As of December 31, 2004, this corporation had not elected to extend their sublease on the 31,700 square feet of space and, as a result, management is actively marketing the space with the intent to sublease some or all of that space. In addition, management is currently assessing our internal space needs to determine if we will require some portion of that space based on our future operating plans.

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

In July 2001, we, along with Merrill Lynch, Pierce, Fenner & Smith, Bear Stearns and FleetBoston Robertson Stephens, which were certain of the underwriters of our initial public offering, or IPO, as well as our chairman and chief executive officer, Robert Zollars, and our 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 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 underwriters solicited and received “undisclosed compensation” from investors in exchange for allocations of stock in our 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 our stock. We 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 our 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 us. On July 15, 2002, we, 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 our motion to dismiss. On October 9, 2002, all of the individual defendants, including Messrs. Zollars and Ruegsegger, were dismissed from the action without prejudice. On June 30, 2003, our 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. We have agreed to undertake other responsibilities under the proposed settlement, including agreeing to assign away, not assert, or release certain potential claims we may have against its underwriters. Any direct financial impact of the proposed settlement is expected to be borne by our insurers. On February 15, 2005, the Court issued an order preliminarily approving the proposed settlement and scheduling a hearing to determine whether to finally approve the settlement. We are unable to determine whether or when the settlement will be approved or finalized. Due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of the lawsuits.

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 IPO. 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.

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.”

Holders of Record

As of March 9, 2005, there were approximately 369 holders of record of our common stock. This number includes an estimate of a 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.

SELECTED FINANCIAL DATA

The selected Consolidated Balance Sheets data as of December 31, 2003 and 2004, and the selected Consolidated Statements of Operations data for each of the years ended December 31, 2002, 2003 and 2004, have been derived from our audited financial statements appearing in this Annual Report on Form 10-K. The selected Consolidated Balance Sheets data as of December 31, 2000, 2001 and 2002, and the selected Consolidated Statements of Operations data for the years ended December 31, 2000 and 2001, are derived from our audited financial statements not included in this Form 10-K. When you read this selected consolidated

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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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FORWARD LOOKING STATEMENTS

This report contains statements that involve expectations, plans or intentions (such as those relating to future business or financial results, new features or services, or management strategies). These statements are forward-looking and are subject to risks and uncertainties, so actual results may vary materially. You can identify these forward-looking statements by words such as “may,” “will,” “should,” “expect,” “anticipate,” “believe,” “estimate,” “intend,” “plan” and other similar expressions. You should consider our forward-looking statements in light of the risks discussed under the heading “Factors That May Affect Future Operating Results” below, as well as our consolidated financial statements, related notes, and the other financial information appearing elsewhere in this report and our other filings with the Securities and Exchange Commission. We assume no obligation to update any forward-looking statements.

You should read the following Management’s Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the consolidated financial statements and the related notes that appear elsewhere in this document.

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 supply chain management solutions are designed to enable efficient collaboration among hospitals and their suppliers, helping them to reduce operational inefficiencies, lower costs and improve their financial health. The healthcare supply chain has a number of characteristics, including its large size, high degree of fragmentation, reliance on disparate technologies and data sources, 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 hospitals and suppliers. 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 comprehensive solutions make it easier for the participants in the healthcare supply chain, principally hospitals, GPOs and suppliers, 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, reduce costs, increase revenue and improve capital allocation.

Evaluation of Strategic Alternatives

In early January 2005, we announced that we had retained Merrill Lynch & Co. as our financial advisor to assist us in evaluating our strategic alternatives, including a possible sale of the company or merger transaction, to achieve greater stockholder value. We anticipate that any such change in control transaction will require the consent of VHA and UHC. We cannot assure you that any particular alternative will be pursued or that any transaction will occur, or if any transaction does occur, on what terms such transaction might be consummated.

Strategic Relationships

In 2000, we entered into the 10-year Outsourcing Agreement with VHA, UHC, Novation and HPPI. Under the Outsourcing Agreement, we agreed to build and 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.

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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 to purchase 3.1 million shares of our common stock 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 since 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. As of December 31, 2004, VHA and UHC beneficially owned 42.4% and 10.5%, respectively, of our outstanding common stock.

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:

In April 2001, we entered into a revolving credit agreement with VHA, which subsequently was amended. This line of credit was not utilized in 2004 and, as of December 31, 2004, the line expired.

During the years ended December 31, 2002, 2003 and 2004, the fees paid to us by Novation totaled $68.8 million, $69.2 million and $61.0 million, respectively. The fees paid to us by Novation in each of the last ten quarters, including the quarter ended December 31, 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.

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In March 2004, we entered into a three-year agreement with UHC designating us as the preferred provider of supply chain data cleansing and maintenance services to the UHC hospital membership base. In connection with this agreement, we offer Neoforma DMS to UHC hospital members, and have developed joint sales and marketing plans with UHC to support this relationship. In June 2004, we entered into a similar, three-year agreement with VHA, designating us as a provider of supply chain data cleansing and maintenance services to the VHA hospital membership base. In connection with this agreement, we offer Neoforma DMS to VHA member hospitals and collaborate with VHA to educate their member hospitals about the benefits of Neoforma DMS.

In late January 2005, we announced that, in connection with our decision to evaluate strategic alternatives, Novation and we each had engaged independent consultants to assess the technology, information, services and pricing provided by us to Novation, VHA, UHC and their member hospitals under our exclusive outsourcing agreement, and that, although we believe the current quarterly maximum payment under the outsourcing agreement is reasonable, Novation had advised us that its assessment could result in a formal request to reduce the quarterly maximum payment.

In January 2005, we entered into a three-year agreement with Consorta to provide supply chain data management and order management services to the Consorta membership base. Consorta named us as the preferred provider of these solutions to their members, and Neoforma DMS and Neoforma OMS are the only data and order management solutions that are currently endorsed by Consorta. We had previously entered into two data management agreements with Consorta in 2004 to cleanse, classify, enrich and maintain the Consorta Contract Catalog. Consorta is a cooperative of 13 shareholder healthcare systems, including more than 520 hospitals, representing 60% of all Catholic hospitals in the United States.

Acquisitions

In July 2002, we acquired MedContrax, Inc. and Med-ecorp, Inc. out of bankruptcy proceedings for an aggregate purchase price of $1.5 million. MedContrax and Med-ecorp offered subscription-based services that identified market opportunities, measured market shares and evaluated sales force performance and management, as well as provided subscription-based contract management and administration products and services. In December 2002, we acquired Revelocity Corporation for an aggregate purchase price of $2.2 million. Revelocity was a developer of Web-based software products that provided supply chain management capabilities for hospitals and healthcare suppliers to help them streamline procurement processes, manage inventories, track project and patient costs, leverage bar-coding efficiencies in internal distribution and share replenishment demand information. We accounted for each transaction using the purchase method of accounting and, accordingly, the purchase prices were allocated to the tangible and intangible assets acquired and liabilities assumed on the basis of their respective estimated fair values on their acquisition dates. See Note 8 to the Notes to Consolidated Financial Statements for further discussion related to these acquisitions.

Other Matters

Since inception, we have incurred significant losses and, as of December 31, 2004, had an accumulated deficit of $753.9 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 supply chain management solutions for the healthcare industry. To address these risks, we must, among other things, expand our customer base, diversify our sources of revenue, 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.

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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. These solutions include Neoforma OMS, Neoforma CMS, Neoforma CMS for Contract and Rebate Management Services and Reporting, Neoforma DMS, HPIS Market Intelligence, Neoforma Pharmaceutical Market Intelligence and Neoforma MMS.

Related Party Revenue.    Related party revenue consists of fees paid by Novation under the fee level provisions of the Outsourcing Agreement, as amended, in connection with Neoforma OMS and Neoforma CMS that we provide as part of Marketplace@Novation, and hospital implementation fees earned by us when VHA and UHC member hospitals that have contracted with us are connected to Marketplace@Novation.

Hospital implementation fees are generated from VHA and UHC member hospitals that pay a one-time fee for implementation services when we connect them to Marketplace@Novation. Upon completion of the connection to Marketplace@Novation, we recognize the implementation fees ratably over the period of our agreement with the hospitals, which is typically two to three years.

As a result of the application of Emerging Issues Task Force Abstract, or 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, our reported related party revenue does not reflect the level of fees received from related parties for those services. See Note 3 to the Notes to Consolidated Financial Statements for further discussion of the impact of the application of EITF No. 01-9 on our reported revenue.

Non-Related Party Revenue.    Non-related party revenue consists primarily of services fees, subscription fees, transaction-based fees and software license fees related to the sale and support of our solutions. Revenue is recognized when evidence of an arrangement exists, delivery has occurred, fees are fixed or determinable and collection is probable.

Services fees are primarily generated from suppliers, GPOs and healthcare providers that purchase HPIS Market Intelligence, Neoforma Pharmaceutical Market Intelligence, Neoforma DMS and Neoforma CMS for Contract and Rebate Management Services and Reporting. Services fees relating to market intelligence services and contract rebate management and reporting services are received for the delivery of specified reports or other data. We recognize the services fees related to these agreements upon delivery of the reports or, for time-based access to reports or data, over the period we provide that access to the customer under the agreement. As our data cleansing services are generally provided on a project basis, with most projects taking in excess of 90 days to complete, and given the inherent risks with regards to estimating costs, we recognize services fees paid by providers and GPOs related to these types of agreements upon project completion.

Subscription-based fees are generated from suppliers that pay a monthly, quarterly or annual subscription fee that is not based on marketplace volume in connection with the services we provide as part of Neoforma

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OMS and Neoforma CMS. For these suppliers, we recognize these 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. For the majority of these suppliers, their Novation contract sales information is generally not available for approximately 90 days after the products are sold. For these suppliers, we utilize estimates of their Novation contract sales as a basis for recognizing revenue. As our estimation process is based on historical Novation contract sales data for each supplier, and as those estimates are updated monthly, we believe that we have adequately demonstrated the ability to reasonably estimate the basis for these fees for revenue recognition purposes. As such, we recognize the revenue in the period that the contracted products are sold. We also generate subscription fees through agreements with hospitals in connection with the services we provide as part of Neoforma OMS.

Transaction-based fees are generated from transactions processed through our NeoConnect connectivity solution between signed hospital and supplier participants in Marketplace@Novation in conjunction with the services we provide as part of Neoforma OMS and Neoforma CMS. The fee is a negotiated percentage of the purchase price, or marketplace volume, of products in transactions. We recognize revenue for transaction fees on a net basis, as we do not believe that we act as a principal in connection with orders to be shipped or delivered by a supplier to a buyer because, among other things, we do not: (i) establish the prices of products paid by buyers; (ii) take title to products to be shipped from the supplier to the buyer, nor do we take title to or assume the risk of loss of products prior to or during shipment; (iii) bear the credit and collections risk of the buyer to the supplier; or (iv) bear the risk that the product will be returned.

Software license fees are generated primarily from suppliers and healthcare providers that license Neoforma MMS, either directly via the purchase of a license to the software or by entering into a subscription agreement with us whereby we provide them access to a hosted version of the software. We also generated software license revenue related to a technology license agreement we entered into in August 2001 with GHX. The revenue related to this agreement was recognized ratably over the three-year term of the agreement. We apply the provisions of Statement of Position, or SOP, 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 or determinable and collection of the resulting receivable is probable. For contracts with multiple obligations—such as license, maintenance and other services—revenue is allocated to each component of the contract using the residual method based on the price when sold separately. We recognize revenue allocated to maintenance fees, including amounts allocated from product revenue, for ongoing customer support and product updates ratably over the period of the maintenance contract. Payments for maintenance fees are generally made in advance and are non-refundable. For revenue allocated to consulting services, and consulting services sold separately, such as training, we recognize revenue as the related services are performed. Revenue from hosted services is recognized as the services are performed.

Amortization Period of Capitalized Partnership Costs

Capitalized partnership costs consist of the fair value of common stock and restricted common stock issued and capitalized in connection with our Outsourcing Agreement, as amended, with Novation, VHA, UHC and HPPI. See Note 15 to the Notes to Consolidated Financial Statements for further discussion of both the Outsourcing Agreement, as amended, and the related stock that has been issued and capitalized.

The initial shares of common stock issued to VHA and UHC in connection with the Outsourcing Agreement were capitalized at their fair value on the date of issuance and are being amortized ratably over the estimated useful life of the agreement. At the time of issuance, management estimated the useful life of the 10-year agreement to be five years for accounting purposes. The primary basis for the original five-year estimate was the

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significant risk associated with whether this new relationship would continue for the full 10-year term of the agreement in the form in which it was originally contemplated. We believed that this was a significant risk due to a number of reasons, including:

Management periodically assesses the useful life of this asset to ensure that any changes in our relationship with Novation, VHA and UHC, or any changes in the broader market conditions, that may impact the useful life of the agreement, are factored into our estimate of the useful life of the agreement and the resulting amortization. As of December 31, 2004, management continued to believe that the initial estimated useful life of the agreement of five years was appropriate given a number of factors, including: (i) the evaluation of our strategic alternatives that is in process, (ii) the independent assessments being undertaken by Novation and us with regard to the technology, information, services and pricing being provided by us under the Fourth Amended Agreement, (iii) the high level of future functionality deliverables and service levels required of us under the terms of the Fourth Amended Agreement, (iv) the increasing competitive landscape for Novation, VHA and UHC, and (v) the ongoing scrutiny of the GPO industry.

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, 2004, our total accounts receivable balance, including a $5.3 million related party receivable from Novation, was $8.4 million, net of allowance for doubtful accounts of $208,000. We collected the $5.3 million from Novation in January 2005. Management also analyzes the financial condition of debtors for which we hold notes receivable based on all available information. 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, 2004, our notes receivable balance was $1.1 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, 2004, we had accrued $58,000 for potential liabilities related to potential or 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:

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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 identifiable intangible assets, net of amortization, amounted to $41.0 million and $1.4 million, respectively, as of December 31, 2004.

In addition, we assess goodwill for impairment at least annually and whenever an event or change in circumstance indicates that the carrying value may not be recoverable. Important factors which could trigger an impairment review include the following possibilities:

If we were to 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 unit utilizing discounted cash flows and relative market multiples for comparable businesses. We would then compare the fair value of our reporting unit to its carrying value. If this evaluation were to indicate 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 $1.7 million at December 31, 2004.

Results of Operations

Overview

We generate the substantial majority of our fees in connection with our relationship with Novation, VHA, UHC and their member hospitals. However, as a result of the application of EITF No. 01-9, our total revenue does not reflect the importance of, and the fees generated from, this relationship. In 2002, 2003 and 2004, we eliminated 100%, 99% and 100%, respectively, of the fees we generated from Novation and their member hospitals and the resultant gross related party revenue (see Note 3 to the Notes to Consolidated Financial Statements for further discussion of the impact of the application of EITF No. 01-9). It is important to consider both our total revenue and gross related party revenue when evaluating our business.

Since our inception and as our operations have grown, the fees we receive from customers and our recognized revenue have generally increased. In 2004, however, although our recognized revenue increased, the fees we received from customers decreased as a result of an $8.2 million scheduled reduction in the maximum payments from Novation under the terms of the Fourth Amended Agreement. The quarterly maximum limits on

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the payments we receive from Novation were, in the aggregate, $70.8 million in 2002, decreasing to $69.2 million in 2003 and decreasing again to $61.0 million in 2004. As a result of these changes, and because we achieved the quarterly maximum payments in the third and fourth quarters of 2002 and in each quarter of 2003 and 2004, our gross related party revenue, prior to the offset by gross amortization of partnership costs under the application of EITF No. 01-9, increased from $69.5 million in 2002 to $70.0 million in 2003 and then decreased to $61.8 million in 2004. Because of the impact of the application of EITF No. 01-9, our net related party revenue in 2002, 2003 and 2004 was $0, $825,000 and $0, respectively. There are no further decreases in the Novation payments scheduled pursuant to the terms of the Fourth Amended Agreement, as beginning in 2004, the quarterly maximum payment became $15.3 million through the expiration of the initial term of the agreement in March 2010.

When factoring in our non-related party revenue in 2002, 2003 and 2004 of $4.3 million, $10.2 million and $12.7 million, respectively, our reported total revenue increased 159% from 2002 to 2003 and increased an additional 15% from 2003 to 2004. Because of the impact of EITF No. 01-9 on our related party revenue, our total revenue growth has been primarily a result of increases in non-related party revenue. In 2004 as compared to 2003, this growth in non-related party revenue was primarily due to increases in revenue from solutions we sell to suppliers, including HPIS Market Intelligence and Neoforma Pharmaceutical Market Intelligence, and from sales of Neoforma DMS to hospitals and GPOs. Although our non-related party revenue grew 24% in 2004 as compared to 2003, our rate of growth, particularly related to solutions we sell to suppliers, was less than we anticipated.

Although our annual non-related party revenue has increased in each of the past two years, our quarterly non-related party revenue has fluctuated as a result of the size and timing of the completion of Neoforma DMS projects and the relative immaturity of certain of our offerings. We expect this trend to continue for certain of our non-related party revenue streams and, potentially, for total non-related party revenue as a whole.

Also in 2005, we expect that the fees we generate in connection with our related party relationship and, as a result, our gross related party revenue, will not be fully offset by amortization of partnership costs. This expectation is based on the fact that, under the current estimated useful life of capitalized partnership costs, the significant majority of the capitalized partnership costs resulting from the initial shares provided to VHA and UHC will be fully amortized in July 2005. As a result, amortization of partnership costs in the second half of 2005 is expected to be significantly lower than in prior periods. Based on the current quarterly maximum payment from Novation of $15.3 million, this reduced offset will result in significant growth in related party revenue and total revenue in 2005 as compared to prior periods. We and Novation have engaged independent consultants to assess the technology, information services and pricing we provide under the Fourth Amended Agreement, and Novation has informed us that its assessment could result in a formal request to reduce the quarterly maximum payments under the Fourth Amended Agreement.

While our revenue has increased over the last three years, our operating expenses have decreased over that same period. In 2002, we incurred total operating expenses of $85.2 million, of which $11.5 million related to amortization of intangibles assets, amortization of partnership costs, write-off of purchased software, restructuring, write-down of non-marketable investments, loss on divested business, write-off of acquired in-process research and development, write-down of notes receivable and abandoned acquisition costs. In 2003, total operating expenses decreased by $8.7 million to $76.5 million, primarily as a result of a $9.5 million decrease in these previously mentioned operating expenses to $2.0 million. In addition to the impact of these changes, we experienced increases in selling and marketing and product development expenses and decreases in cost of services, operations and general and administrative expenses. In 2004, total operating expenses decreased by $2.2 million to $74.3 million, primarily due to a $7.8 million decrease in depreciation and amortization of property and equipment and the capitalization of $5.8 million of software development costs, which were partially offset by a $4.1 million write-off of stockholder notes receivable and a $5.5 million increase in amortization of partnership costs. The decrease in depreciation and amortization of property and equipment was due to certain large software licenses that were fully depreciated as of December 31, 2003. The increase in

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amortization of partnership costs was driven by the decrease in the amount offset against related party revenue in 2004, which was the result of the decrease in gross related party revenue caused by the $8.2 million scheduled reduction in the quarterly maximum payment from Novation in 2004. Further, amortization of deferred compensation decreased from $5.8 million in 2002 to $2.1 million in 2003, but increased to $4.0 million in 2004 due to the amortization resulting from company-wide restricted stock grants issued in 2004.

In 2005, we expect to continue to invest in our operations, including headcount, to increase our non-related party revenue and to enhance the functionality related to Marketplace@Novation. Our results will continue to be impacted by the amount of capitalized software developments costs in each quarter as well as the gross amortization of partnership costs and the amount of the offset of these partnership costs against related party revenue. Currently, we expect a decrease in amortization of partnership costs classified as an operating expense due to an expected decrease in gross amortization of partnership costs in 2005, as the significant majority of the capitalized partnership costs resulting from the initial shares provided to VHA and UHC will have been fully amortized in July 2005 based on the current estimated useful life.

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For the Years Ended December 31, 2002, 2003 and 2004

Revenue

Related Party Revenue.    Gross related party revenue consists of fees paid by Novation under the fee level provisions of the Outsourcing Agreement, as amended, and hospital implementation fees earned by us when VHA and UHC member hospitals that have contracted with us are connected to Marketplace@Novation. 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 gross related party revenue, as opposed to being classified as an operating expense, up to the lesser of such gross related party revenue or gross amortization of partnership costs in any given period. This offset of gross amortization of partnership costs against gross related party revenue results in net related party revenue, if any. In 2002, 2003 and 2004, gross related party revenue was $69.5 million, $70.0 million and $61.8 million. In all quarters during 2002 and 2004, gross related party revenue was less than the gross amortization of partnership costs and, as a result, there was no net related party revenue in either of these years. Gross related party revenue was offset by $69.5 million and $61.8 million of gross amortization of partnership costs in 2002 and 2004, respectively. In 2003, the fees paid by Novation and by VHA and UHC member hospitals exceeded the gross amortization of partnership costs in certain quarters, resulting in $825,000 of net related party revenue for the year. See Note 3 to the Notes to Consolidated Financial Statements for further discussion of the impact of the application of EITF No. 01-9. During the remaining term of the Fourth Amended Agreement, the quarterly maximums on the fees we may earn from Novation currently total $15.3 million per quarter and $61.0 million per year. As we expect gross amortization of partnership costs to be less than gross related party revenue in 2005, we expect net related party revenue to increase in 2005.

Non-Related Party Revenue.    Non-related party revenue includes revenue earned from non-related party healthcare providers, GPOs and suppliers, including revenue from solutions sold to VHA and UHC member hospitals outside the scope of the Fourth Amended Agreement or previous versions of the agreement. The increases in non-related party revenue in 2004 as compared to 2003 and in 2003 as compared to 2002 were due to increases in revenue generated from suppliers as well as from providers and GPOs, and were partially offset by decreases in other revenue. Non-related party revenue by customer category was as follows:

The increases in non-related party revenue from providers and GPOs during 2003 as compared to 2002 and during 2004 as compared to 2003 were primarily due to increases in revenue related to our data cleansing services.

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The increase in non-related party revenue from suppliers during 2003 as compared to 2002 was primarily due to increases in revenue from Neoforma OMS for suppliers related to their participation in Marketplace@Novation and increases in revenue related to HPIS Market Intelligence, Neoforma Pharmaceutical Market Intelligence, Neoforma CMS for Contract Rebate Management Services and Reporting, and Neoforma MMS. HPIS Market Intelligence and Neoforma CMS for Contract Rebate Management Services and Reporting were introduced in connection with our acquisition of substantially all of the assets of MedContrax and Med-ecorp in July 2002. Neoforma MMS was introduced in connection with our acquisition of substantially all of the assets of Revelocity in December 2002. The increase in non-related party revenue from suppliers during 2004 as compared to 2003 was a result of increases in revenue related to HPIS Market Intelligence, Neoforma Pharmaceutical Market Intelligence and Neoforma OMS. These increases were partially offset by a decrease in revenue related to Neoforma MMS for suppliers, which was larger during 2003, as compared to 2004, as a result of a large license sale to a single supplier that occurred during 2003. For 2002, a supplier represented 13% of our total revenue and represented less than 10% of total revenue for 2003 and 2004.

The decrease in other non-related party revenue during 2003 as compared to 2002 was a result of the divestiture of our EquipMD, Inc. operations in March 2002. The decrease in other non-related party revenue during 2004 as compared to 2003 primarily related to our technology license with GHX. The revenue from GHX related to a $3.5 million technology license sold to GHX in 2001. We had been recognizing this revenue 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 had accounted for $282,000 of revenue on a quarterly basis. In August 2004, this license revenue was fully recognized. For 2002, 2003 and 2004, GHX represented 27%, 10% and 6%, respectively, of our total revenue.

Operating Expenses

Cost of Services

Cost of services consists primarily of the costs to perform hospital and supplier implementation activities and Neoforma DMS services for hospitals and GPOs, as well as direct 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, consultants and companies to which we outsource services. The decrease in cost of services from 2002 to 2003 was primarily due to a decrease in payroll related costs of $1.2 million resulting from a decrease in bonus levels and a $910,000 decrease in allocable expenses, including depreciation and amortization of deferred compensation, allocated to cost of services. This decrease was partially offset by an increase in fees paid for outsourced services utilized to support increased revenue in 2003. The increase in cost of services from 2003 to 2004 was primarily due to a $2.5 million increase in costs allocated to cost of services, including depreciation expense and amortization of deferred compensation, and a $2.2 million increase in payroll and related expenses. The increase in costs allocated to cost of services and the payroll and related expenses resulted from an increase in headcount in the cost of services group from 30 as of December 31, 2003 to 59 as of December 31, 2004. At the end of 2003, we made the decision to perform data cleansing services for hospital and GPO customers in-house as opposed to outsourcing such services, and increased our headcount in 2004 to do so. While our payroll and related expenses increased accordingly, our costs related to outsourced services decreased by $1.0 million in 2004 as compared to 2003.

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Operations

Operations expenses consist primarily of expenditures for the operation and maintenance of 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 paid to independent contractors and consultants. The decrease in operations expenses from 2002 to 2003 was primarily due to a $2.3 million decrease in payroll related costs, which was driven by a decrease in bonus levels and a decrease in headcount in the operations group from 79 as of December 31, 2002 to 54 as of December 31, 2003. The lower headcount in operations for 2003 was primarily the result of an internal reorganization in early 2003 in which a significant portion of our resources were reallocated to more directly customer-facing positions. The decrease in operations expenses was partially offset by a $1.6 million increase in costs allocated to operations in 2003 versus 2002, which primarily consisted of depreciation. The decrease in operations expenses from 2003 to 2004 was primarily due to a $7.8 million decrease in depreciation expense allocated to operations as a result of certain large software licenses acquired in 2000 that were fully depreciated as of December 31, 2003.

Product Development

Product development expenses consist primarily of personnel expenses, fees to consultants and contractors and technology costs associated with the development, maintenance and enhancement of our solutions. The increase in product development expenses from 2002 to 2003 was due primarily to an increase in payroll and related expenses resulting from an increase in headcount in the product development group from 61 as of December 31, 2002 to 80 as of December 31, 2003. The decrease in product development expenses from 2003 to 2004 was primarily the result of the capitalization of $5.8 million of product development costs, including consultant, contractor, payroll and payroll related expenses, related to the development of internal use software in 2004. In accordance with SOP 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 2004, capitalized software development costs related to new functionality for our solutions offered to our customers. Excluding the impact of the capitalization of these costs, there was a $2.0 million increase in consultant and contractor expenses and $1.0 million increase in payroll and related expenses for 2004 as compared to 2003. Prior to 2004, neither the qualifying internal costs incurred to develop software for use in operations, nor the useful lives of the software developed, were material and, accordingly, such costs were expensed as incurred.

Selling and Marketing

Selling and marketing expenses consist primarily of salaries and commissions for sales and marketing personnel, as well as advertising, promotions and other related marketing costs. Selling and marketing expenses increased from 2002 to 2003 primarily due to an increase in payroll related costs of $3.8 million resulting from

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an increase in headcount for the selling and marketing groups from 39 as of December 31, 2002 to 65 as of December 31, 2003. Additionally, our increased sales and marketing efforts in 2003, which included updating our corporate image and increasing the promotion of our solutions in early 2003, resulted in an increase in travel and entertainment and other advertising costs of $1.5 million from 2002. The decrease in selling and marketing expenses for 2004 as compared to 2003 related primarily to a decrease in payroll and related expenses of $2.4 million. There was also a decrease of $1.0 million in 2004 as compared to 2003 in costs allocated to selling and marketing, including depreciation expense and amortization of deferred compensation, and a decrease of $653,000 in travel and entertainments costs over the same period. These decreases were largely driven by a decrease in headcount in the selling and marketing groups from 65 as of December 31, 2003 to 52 as of December 31, 2004.

General and Administrative